<PAGE>

                       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, 2000

                          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, 2000, 121,204,429 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 sheet and  consolidated
statement  of  capitalization  of NiSource  Inc.  (an Indiana  corporation)  and
subsidiaries  as  of  June  30,  2000  and  December  31,  1999, and the related
consolidated  statements  of  income, common shareholders' equity and cash flows
for the three, six and twelve month  periods ended June 30, 2000 and 1999. These
consolidated  financial  statements  are   the  responsibility   of   NiSource'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 auditing standards generally
accepted in the United States.  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, 2000 and December 31, 1999, and the results
of their operations  and their  cash flows for the three,  six and twelve  month
periods ended June 30, 2000 and 1999, in  conformity  with accounting principles
generally accepted in the United States.

                               Arthur Andersen LLP

Chicago, Illinois
August 9, 2000

<PAGE>



<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEET

                                                                June 30,           December 31,
(Dollars in thousands)                                            2000                1999
ASSETS                                                        =============       =============

PROPERTY, PLANT AND EQUIPMENT:

 Utility Plant, (including Construction Work in
   Progress of  $273,314 and $283,530, respectively)
<S>                                                           <C>                 <C>
    Electric                                                  $   4,281,479       $   4,237,427
    Gas                                                           2,891,424           2,871,824
    Water                                                           775,345             750,376
    Common                                                          386,765             381,486
                                                              -------------       -------------
                                                                  8,335,013           8,241,113
    Less -Accumulated depreciation and amortization               3,561,806           3,444,311
                                                              -------------       -------------
      Net Utility Plant                                           4,773,207           4,796,802
                                                              -------------       -------------
 Other property, at cost, less accumulated provision for
   depreciation of $66,687 and $52,016, respectively                445,257             427,190
                                                              -------------       -------------
      Total Property, Plant and Equipment                         5,218,464           5,223,992
                                                              -------------       -------------
INVESTMENTS:

 Investments, at equity                                             105,665             118,259
 Investments, at cost                                                57,484              55,851
 Other investments                                                   33,243              32,839
                                                              -------------       -------------
      Total Investments                                             196,392             206,949
                                                              -------------       -------------
CURRENT ASSETS:

 Cash and cash equivalents                                           50,905              43,533
 Accounts receivable, less reserve of  $25,523 and
     $56,414, respectively                                          427,649             390,990
 Other receivables                                                   51,801               6,572
 Fuel adjustment clause                                                  --               4,201
 Gas cost adjustment clause                                          42,085              92,498
 Materials and supplies, at average cost                             65,660              64,530
 Electric production fuel, at average cost                           36,489              31,968
 Natural gas in storage                                              91,317              63,750
 Price risk management assets                                       301,151              90,705
 Prepayments and other                                               46,024              41,884
                                                              -------------       -------------
      Total Current Assets                                        1,113,081             830,631
                                                              -------------       -------------
OTHER ASSETS:

 Regulatory assets                                                  208,484             208,634
 Intangible assets, net of accumulated amortization                 134,186             139,337
 Prepayments and other                                              323,068             289,061
                                                              -------------       -------------
      Total Other Assets                                            665,738             637,032
                                                              -------------       -------------
                                                              $   7,193,675       $   6,898,604
                                                              =============       =============
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEET
                                                                June 30,           December 31,
(Dollars in thousands)                                            2000                1999
CAPITALIZATION AND LIABILITIES                                =============       =============

CAPITALIZATION:

Common shareholders' equity

<S>                                                           <C>                 <C>
  (See accompanying statement)                                $   1,330,559       $   1,353,504
Preferred stocks-
     Northern Indiana Public Service Company:
          Series without mandatory redemption provisions             81,114              81,114
          Series with mandatory redemption provisions                52,480              54,030
     Indianapolis Water Company:
          Series without mandatory redemption provisions              2,517               4,497
Company-obligated mandatorily redeemable
  preferred securities of subsidiary trust holding
  solely Company debentures                                         345,000             345,000
Long-term debt, excluding amounts due within one year             1,915,820           1,975,184
                                                              -------------       -------------
           Total Capitalization                                   3,727,490           3,813,329
                                                              -------------       -------------
CURRENT LIABILITIES:

    Current portion of long-term debt                                74,568             173,721
    Short-term borrowings                                           870,109             679,321
    Accounts payable                                                349,860             277,358
    Dividends declared on common and preferred stocks                33,640              34,535
    Customer deposits                                                30,071              28,736
    Taxes accrued                                                    16,717              42,853
    Interest accrued                                                 34,038              34,157
    Fuel adjustment clause                                            4,236                  --
    Accrued employment costs                                         56,399              60,647
    Price risk management liabilities                               323,544             113,029
    Other                                                            99,155              90,245
                                                              -------------      --------------
      Total Current Liabilities                                   1,892,337           1,534,602
                                                              -------------      --------------
OTHER:

 Deferred income taxes                                              982,921             998,682
 Deferred investment tax credits, being amortized over
   life of related property                                          91,127              94,946
 Deferred credits                                                   121,214              94,058
 Customer advances and contributions in aid of construction         150,842             140,562
 Accrued liability for postretirement benefits                      165,168             157,517
 Other noncurrent liabilities                                        62,576              64,908
                                                              -------------       -------------

      Total Other                                                 1,573,848           1,550,673
                                                              -------------       -------------
COMMITMENTS AND CONTINGENCIES (SEE NOTES)

                                                              $   7,193,675       $   6,898,604
                                                              =============       =============

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

<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share amounts)
                                                       Three Months                  Six Months
                                                      Ended June 30,               Ended June 30,
                                                ------------------------     ------------------------
                                                    2000         1999            2000         1999
                                                ===========  ===========     ===========  ===========
Operating Revenues:
<S>                                             <C>          <C>             <C>          <C>
  Gas                                           $   562,534  $   308,636     $ 1,289,356  $   862,532
  Electric                                          259,177      271,307         514,755      535,749
  Water                                              24,983       24,031          47,896       44,900
  Products and Services                              76,277       71,373         138,513      123,741
                                                -----------  -----------     -----------  -----------
                                                    922,971      675,347       1,990,520    1,566,922
                                                -----------  -----------     -----------  -----------
Cost of Sales:
 Gas costs                                          466,201      225,137         985,106      604,727
 Fuel for electric generation                        56,471       57,630         113,970      115,928
 Power purchased                                      7,029       17,423          15,263       39,473
 Products and Services                               44,537       37,022          79,340       62,611
                                                -----------  -----------     -----------  -----------
                                                    574,238      337,212       1,193,679      822,739
                                                -----------  -----------     -----------  -----------
Operating Margin                                    348,733      338,135         796,841      744,183
                                                -----------  -----------     -----------  -----------
Operating Expenses and Taxes (except income):

  Operation                                         129,047      128,427         263,098      255,450
  Maintenance                                        25,171       21,913          47,614       44,222
  Depreciation and amortization                      84,590       77,593         169,069      150,448
  Taxes (except income)                              20,578       25,225          48,805       53,234
                                                -----------  -----------     -----------  -----------
                                                    259,386      253,158         528,586      503,354
                                                -----------  -----------     -----------  -----------
Operating Income                                     89,347       84,977         268,255      240,829
                                                -----------  -----------     -----------  -----------
Other Income (Deductions):
  Interest expense, net                             (48,533)     (40,314)        (96,143)     (77,002)
  Minority interests                                 (5,000)      (5,668)        (10,041)      (8,376)
  Dividend requirements on preferred stock
    of subsidiaries                                  (2,008)      (2,077)         (4,042)      (4,193)
  Other, net                                          2,510       (2,318)          5,787        4,823
                                                -----------  -----------     -----------  -----------
                                                    (53,031)     (50,377)       (104,439)     (84,748)
                                                -----------  -----------     -----------  -----------
Income Before Income Taxes                           36,316       34,600         163,816      156,081
                                                -----------  -----------     -----------  -----------
Income Taxes                                         12,903       11,656          60,787       56,578
                                                -----------  -----------     -----------  -----------
Net Income                                      $    23,413  $    22,944     $   103,029  $    99,503
                                                ===========  ===========     ===========  ===========
Average common shares outstanding - basic       120,569,530  124,951,321     122,203,747  123,804,922

Basic earnings per average common share         $      0.19  $      0.18     $      0.84  $      0.80
                                                ===========  ===========     ===========  ===========
Diluted earnings per average common share       $      0.18  $      0.18     $      0.81  $      0.80
                                                ===========  ===========     ===========  ===========
Dividends declared per common share             $     0.270  $     0.255     $     0.540  $     0.510
                                                ===========  ===========     ===========  ===========

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


<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF INCOME

                                                                        Twelve Months
                                                                        Ended June 30,
                                                              ---------------------------------
(Dollars in thousands, except for per share amounts)               2000                1999
                                                              =============       =============

Operating Revenues:
<S>                                                           <C>                 <C>
  Gas                                                         $   2,080,274       $   1,440,044
  Electric                                                        1,100,044           1,294,502
  Water                                                             101,379              90,313
  Products and Services                                             286,477             243,089
                                                              -------------       -------------
                                                                  3,568,174           3,067,948
                                                              -------------       -------------
Cost of Sales:
 Gas costs                                                        1,567,837           1,052,847
 Fuel for electric generation                                       247,206             245,560
 Power purchased                                                     47,535             265,751
 Products and Services                                              159,413             120,985
                                                              -------------       -------------
                                                                  2,021,991           1,685,143
                                                              -------------       -------------
Operating Margin                                                  1,546,183           1,382,805
                                                              -------------       -------------
Operating Expenses and Taxes (except income):

  Operation                                                         542,456             460,825
  Maintenance                                                        85,600              78,894
  Depreciation and amortization                                     330,025             280,005
  Taxes (except income)                                              99,140              96,903
                                                              -------------       -------------
                                                                  1,057,221             916,627
                                                              -------------       -------------
Operating Income                                                    488,962             466,178
                                                              -------------       -------------
Other Income (Deductions):
  Interest expense, net                                            (185,758)           (144,361)
  Minority interests                                                (19,358)             (9,439)
  Dividend requirements on preferred stock
    of subsidiaries                                                  (8,183)             (8,436)
  Other, net                                                        (17,066)              8,953
                                                              -------------       -------------
                                                                   (230,365)           (153,283)
                                                              -------------       -------------
Income Before Income Taxes                                          258,597             312,895
                                                              -------------       -------------
Income Taxes                                                         94,657             109,673
                                                              -------------       -------------
Net Income                                                    $     163,940       $     203,222
                                                              =============       =============
Average common shares outstanding - basic                       123,545,434         121,166,275

Basic earnings per average common share                       $        1.32       $        1.67
                                                              =============       =============
Diluted earnings per average common share                     $        1.29       $        1.66
                                                              =============       =============
Dividends declared per common share                           $       1.065       $       1.005
                                                              =============       =============
</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                                             NISOURCE INC.
                                         CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY

                                         -----------------------------------------------------

                                                                                                 Accumulated
                                                             Additional                            Other
                                       Common     Treasury    Paid-In     Retained              Comprehensive          Comprehensive
          Three Months Ended           Shares      Shares     Capital     Earnings     Other       Income      Total       Income
          ------------------         ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------
<S>                                  <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
   Balance, April 1, 1999            $  870,930  $ (459,568) $  171,586  $  788,551  $   (1,474) $    1,590  $1,371,615
Comprehensive Income:
   Net income                                                                22,944                              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)                            (31,626)
Treasury shares acquired                               (983)                                                       (983)
Issued:
   Employee stock purchase plan                         112         267                                             379
   Long-term incentive plan                           2,092          38                    (150)                  1,980
   Bay State Gas Acquisition                            (15)        (34)                                            (49)
   COLCOM Acquisition                                 2,722         939                                           3,661
   Amortization of unearned
       compensation                                                                         648                     648
Equity contract costs                                              (408)                                           (408)
Other                                                                          (767)                               (767)
                                     ----------  ----------  ----------  ----------  ----------  ----------  ----------
   Balance, June 30, 1999            $  870,930  $ (455,640) $  172,388  $  779,102  $     (976) $    3,323  $1,369,127
                                     ==========  ==========  ==========  ==========  ==========  ==========  ==========

   Balance, April 1, 2000            $  870,930  $(491,286)  $  174,349  $  819,589  $  (11,625) $    5,304  $1,367,261
Comprehensive Income:
   Net income                                                                23,413                              23,413  $   23,413
   Other comprehensive income,
       net of tax:
     Gain/loss on available for
         sale securities:
       Unrealized (net of income
           tax of $3)                                                                                    (4)         (4)         (4)
       Realized (net of income
           tax of $191)                                                                                 312         312         312
     Gain/loss on foreign
         currency translation:
       Unrealized                                                                                         9           9           9
       Realized                                                                                           -           -           -
                                                                                                                         ----------
Total Comprehensive Income                                                                                               $   23,730
                                                                                                                         ==========
Dividends:
   Common shares                                                            (32,260)                            (32,260)
Treasury shares acquired                            (31,350)                                                    (31,350)
Issued:
   Employee stock purchase plan                         165         185                                             350
   Long-term incentive plan                           3,854                                                       3,854
   Amortization of unearned
       compensation                                                                       1,112                   1,112
Equity contract costs                                              (939)                                           (939)
Other                                                                        (1,199)                             (1,199)
                                     ----------  ----------  ----------  ----------  ----------  ----------  ----------
   Balance, June 30, 2000            $  870,930  $ (518,617) $  173,595  $  809,543  $  (10,513) $    5,621  $1,330,559
                                     ==========  ==========  ==========  ==========  ==========  ==========  ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHARES

                                       Common     Treasury
          Three Months Ended           Shares      Shares
          ------------------         ----------  ----------
<S>                                  <C>         <C>
   Balance April 1, 1999                147,784     (22,985)
Treasury shares acquired                                (36)
Issued:
   Employee stock purchase plan                          14
   Long-term incentive plan                             104
   Bay State Gas Acquisition                             (1)
   COLCOM Acquisition                                   134
                                     ----------  ----------
   Balance June 30, 1999                147,784     (22,770)
                                     ==========  ==========

   Balance April 1, 2000                147,784     (24,978)
Treasury shares acquired                             (1,839)
Issued:
   Employee stock purchase plan                          21
   Long-term incentive plan                             195
                                     ----------  ----------
   Balance June 30, 2000                147,784     (26,601)
                                     ==========  ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                             NISOURCE INC.
                                         CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY

                                         -----------------------------------------------------

                                                                                                 Accumulated
                                                             Additional                            Other
                                       Common     Treasury    Paid-In     Retained              Comprehensive          Comprehensive
            Six Months Ended           Shares      Shares     Capital     Earnings     Other       Income      Total       Income
            ----------------         ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------
<S>                                  <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
   Balance, January 1, 1999          $  870,930  $ (559,027) $   94,181  $  744,309  $   (1,815) $    1,130  $1,149,708
Comprehensive Income:
   Net income                                                                99,503                              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)                            (63,733)
Treasury shares acquired                           (108,641)                                                   (108,641)
Issued:
   Employee stock purchase plan                         227         593                                             820
   Long-term incentive plan                           3,198         159                    (532)                  2,825
   Bay State Gas Acquisition                        205,881     109,753                                         315,634
   COLCOM Acquisition                                 2,722         939                                           3,661
   Amortization of unearned
       compensation                                                                       1,371                   1,371
Equity contract costs                                           (33,237)                                        (33,237)
Other                                                                          (977)                               (977)
                                     ----------  ----------  ----------  ----------  ----------  ----------  ----------
   Balance, June 30, 1999             $ 870,930  $ (455,640) $  172,388  $  779,102  $     (976) $    3,323  $1,369,127
                                     ==========  ==========  ==========  ==========  ==========  ==========  ==========

   Balance, January 1, 2000          $  870,930  $ (472,553) $  174,405  $  774,425  $    1,111  $    5,186  $1,353,504
Comprehensive Income:
   Net income                                                               103,029                             103,029   $103,029
   Other comprehensive income,
       net of tax:
     Gain/loss on available for
         sale securities:
       Unrealized (net of income
           tax of $571)                                                                                (268)       (268)       (268)
       Realized (net of income
           tax of $191)                                                                                 312         312         312
     Gain/loss on foreign
         currency translation:
       Unrealized                                                                                       391         391         391
       Realized                                                                                           -           -           -
                                                                                                                         ----------
Total Comprehensive Income                                                                                               $  103,464
                                                                                                                         ==========
Dividends:
   Common shares                                                            (65,565)                            (65,565)
Treasury shares acquired                            (65,792)                                                    (65,792)
Issued:
   Employee stock purchase plan                         338         402                                             740
   Long-term incentive plan                          19,390                             (14,061)                  5,329
   Amortization of unearned
       compensation                                                                       2,437                   2,437
Equity contract costs                                            (2,019)                                         (2,019)
Other                                                               807      (2,346)                             (1,539)
                                     ----------  ----------  ----------  ----------  ----------  ----------  ----------
   Balance, June 30, 2000            $  870,930  $ (518,617) $  173,595  $  809,543  $  (10,513) $    5,621  $1,330,559
                                     ==========  ==========  ==========  ==========  ==========  ==========  ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SHARES

                                       Common     Treasury
          Six Months Ended             Shares      Shares
          ----------------           ----------  ----------
<S>                                  <C>         <C>
   Balance January 1, 1999              147,784     (30,254)
Treasury shares acquired                             (3,883)
Issued:
   Employee stock purchase plan                          29
   Long-term incentive plan                             162
   Bay State Gas Acquisition                         11,042
   COLCOM Acquisition                                   134
                                     ----------  ----------
   Balance June 30, 1999                147,784     (22,770)
                                     ==========  ==========

   Balance January 1, 2000              147,784     (23,645)
Treasury shares acquired                             (3,964)
Issued:
   Employee stock purchase plan                          43
   Long-term incentive plan                             965
                                     ----------  ----------
   Balance June 30, 2000                147,784     (26,601)
                                     ==========  ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                   NISOURCE INC.
                                         CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY

                                         -----------------------------------------------------

                                                                                                 Accumulated
                                                             Additional                            Other
                                       Common     Treasury    Paid-In     Retained              Comprehensive          Comprehensive
         Twelve Months Ended           Shares      Shares     Capital     Earnings     Other       Income      Total       Income
         -------------------         ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------
<S>                                  <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
   Balance, July 1, 1998              $ 870,930  $ (456,018) $   90,704  $  698,633  $   (2,962) $    2,602  $1,203,889
Comprehensive Income:
   Net income                                                               203,222                             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)                           (121,692)
Treasury shares acquired                           (214,635)                                                   (214,635)
Issued:
   Employee stock purchase plan                         417       1,125                                           1,542
   Long-term incentive plan                           5,993         159                    (486)                  5,666
   Bay State Gas Acquisition                        205,881     109,753                                         315,634
   COLCOM Acquisition                                 2,722         939                                           3,661
   Amortization of unearned
       compensation                                                                       2,472                   2,472
Equity contract costs                                           (33,237)                                        (33,237)
Other                                                             2,945      (1,061)                              1,884
                                     ----------  ----------  ----------  ----------  ----------  ----------  ----------
   Balance, June 30, 1999             $ 870,930  $ (455,640) $  172,388  $  779,102  $     (976) $    3,323  $1,369,127
                                     ==========  ==========  ==========  ==========  ==========  ==========  ==========

   Balance, July 1, 1999              $ 870,930  $ (455,640) $  172,388  $  779,102  $     (976) $    3,323  $1,369,127
Comprehensive Income:
   Net income                                                               163,940                             163,940    $163,940
   Other comprehensive income,
       net of tax:
     Gain/loss on available for
         sale securities:
       Unrealized (net of income
           tax of $514)                                                                                (175)       (175)       (175)
       Realized (net of income
           tax of $475)                                                                                 777         777         777
     Gain/loss on foreign
         currency translation:
       Unrealized                                                                                       754         754         754
       Realized                                                                                         942         942         942
                                                                                                                         ----------
Total Comprehensive Income                                                                                               $  166,238
                                                                                                                         ==========
Dividends:
   Common shares                                                           (130,976)                           (130,976)
Treasury shares acquired                            (83,606)                                                    (83,606)
Issued:
   Employee stock purchase plan                         584         893                                           1,477
   Long-term incentive plan                          20,045          29                 (14,100)                  5,974
   Amortization of unearned
       compensation                                                                       4,563                   4,563
Equity contract costs                                            (2,783)                                         (2,783)
Other                                                             3,068      (2,523)                                545
                                     ----------  ----------  ----------  ----------  ----------  ----------  ----------
   Balance, June 30, 2000             $ 870,930  $ (518,617) $  173,595  $  809,543  $  (10,513) $    5,621  $1,330,559
                                     ==========  ==========  ==========  ==========  ==========  ==========  ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

SHARES

                                       Common     Treasury
          Twelve Months Ended          Shares      Shares
          -------------------        ----------  ----------
<S>                                  <C>         <C>
   Balance July 1, 1998                 147,784     (26,750)
Treasury shares acquired                            (7,565)
Issued:
   Employee stock purchase plan                          52
   Long-term incentive plan                             317
   Bay State Gas Acquisition                         11,042
   COLCOM Acquisition                                   134
                                     ----------  ----------
   Balance June 30, 1999                147,784     (22,770)
                                     ==========  ==========

   Balance July 1, 1999                 147,784     (22,770)
Treasury shares acquired                             (4,902)
Issued:
   Employee stock purchase plan                          74
   Long-term incentive plan                             997
                                     ----------  ----------
   Balance June 30, 2000                147,784     (26,601)
                                     ==========  ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       Three Months                   Six Months
                                                      Ended June 30,               Ended June 30,
                                                ------------------------     ------------------------
(Dollars in thousands)                              2000         1999            2000         1999
                                                ===========  ===========     ===========  ===========

Cash flows from operating activities:
<S>                                             <C>          <C>             <C>           <C>
 Net income                                     $    23,413  $    22,944     $   103,029   $   99,503
Adjustments to reconcile net income
  to net cash:
    Depreciation and amortization                    84,590       77,539         169,069      150,448
    Net changes in price risk
         management activities                       (7,902)      (2,593)        (11,041)      (2,746)
    Deferred federal and state
         income taxes, net                           (9,970)      (3,822)        (33,354)     (30,750)
    Deferred investment tax credits, net             (1,910)      (1,920)         (3,819)      (3,807)
    Other, net                                        4,788        6,005          11,119         (279)
 Change in certain assets and liabilities -*
   Accounts receivable, net                           6,787      148,423         (54,129)     129,445
   Other receivables                                (24,873)        (615)        (30,398)      (4,922)
   Natural gas in storage                           (47,611)     (21,261)        (27,567)      30,297
   Accounts payable                                  78,440      (86,359)         76,737     (142,277)
   Taxes accrued                                    (89,850)     (96,598)            805       (2,459)
   Gas cost adjustment clause                        (4,370)      (1,900)         44,817       72,447
   Accrued employment costs                           2,063        4,189          (4,248)     (16,439)
   Other accruals                                    11,448       (3,725)          7,589       27,725
Other, net                                          (29,969)     (16,356)        (18,096)       4,984
                                                -----------  -----------     -----------  -----------
      Net cash provided by
          operating activities                       (4,926)      23,951         230,513      311,170
                                                -----------  -----------     -----------  -----------
Cash flows provided by (used in)
    investing activities:

  Utility construction expenditures                 (73,756)     (77,977)       (125,236)    (136,092)
  Acquisition of businesses,
     net of cash acquired                               (50)    (153,765)            (50)    (716,031)
Proceeds from disposition of assets                      42        2,144          15,632       27,560
Other, net                                           (8,437)     (26,355)        (16,110)     (42,618)
                                                -----------  -----------     -----------  -----------
      Net cash used in investing activities         (82,201)    (255,953)       (125,764)    (867,181)
                                                -----------  -----------     -----------  -----------
Cash flows provided by (used in)
    financing activities:

  Issuance of long-term debt                             --      179,516              --      257,771
  Retirement of long-term debt                     (149,087)    (178,354)       (158,731)    (183,072)
  Change in short-term debt                         269,014      244,020         190,788      (16,350)
  Retirement of preferred shares                       (300)      (1,251)         (3,530)      (1,251)
  Proceeds from Corporate Premium

   Income Equity Securities, net                         --           --              --      334,650
  Issuance of common shares                           4,204        6,121           5,679      323,472
  Acquisition of treasury shares                    (31,350)        (983)        (65,792)    (108,641)
  Cash dividends paid on common shares              (32,699)     (31,846)        (66,004)     (61,826)
  Other, net                                             99          113             213          226
                                                -----------  -----------     -----------  -----------
 Net cash provided by (used in)
     financing activities                            59,881      217,336         (97,377)     544,979
                                                -----------  -----------     -----------  -----------
Net increase (decrease) in cash and
 cash equivalents                                   (27,246)     (14,666)          7,372      (11,032)

Cash and cash equivalents at
   beginning of the period                           78,151       64,482          43,533       60,848
                                                -----------  -----------     -----------  -----------
Cash and cash equivalents at
   end of the period                            $    50,905  $    49,816     $    50,905   $   49,816
                                                ===========  ===========     ===========  ===========

 *Net of effect from acquisitions of businesses.

</TABLE>


<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                        Twelve Months
                                                                        Ended June 30,
                                                              ---------------------------------
(Dollars in thousands)                                             2000                1999
                                                              =============       =============
Cash flows from operating activities:
<S>                                                           <C>                 <C>
 Net income                                                   $     163,940       $     203,222
Adjustments to reconcile net income
 to net cash:
    Depreciation and amortization                                   330,025             280,005
    Net changes in price risk
         management activities                                      (11,938)             (2,746)
    Deferred federal and state
         income taxes, net                                          (10,495)            (10,041)
    Deferred investment tax credits, net                             (7,703)             (7,526)
    Other, net                                                       37,513               1,725
 Change in certain assets and liabilities -*
    Accounts receivable, net                                       (131,066)            100,278
    Other receivables                                               (16,906)             (3,537)
Natural gas in storage                                              (10,959)             (1,767)
    Accounts payable                                                105,480            (104,862)
    Taxes accrued                                                      (450)            (24,769)
    Gas cost adjustment clause                                      (48,290)             53,534
    Accrued employment costs                                         12,443              (5,172)
    Other accruals                                                   16,404              27,410
Other, net                                                          (55,625)            (16,840)
                                                              -------------       -------------
      Net cash provided by
          operating activities                                      372,373             488,914
                                                              -------------       -------------
Cash flows provided by (used in)
    investing activities:

  Utility construction expenditures                                (330,407)           (262,116)
Acquisition of businesses,
     net of cash acquired                                           (21,888)           (716,031)
Proceeds from disposition of assets                                  17,847              29,729
  Other, net                                                        (34,572)            (51,589)
                                                              -------------       -------------
      Net cash used in investing activities                        (369,020)         (1,000,007)
                                                              -------------       -------------
Cash flows provided by (used in)
    financing activities:

  Issuance of long-term debt                                         11,765             298,776
  Retirement of long-term debt                                     (179,616)           (241,130)
  Change in short-term debt                                         376,116             140,435
  Retirement of preferred shares                                     (4,686)             (2,408)
  Proceeds from Corporate Premium

   Income Equity Securities, net                                         --             334,650
  Issuance of common shares                                           7,100             326,989
  Acquisition of treasury shares                                    (83,606)           (214,635)
  Cash dividends paid on common shares                             (129,777)           (118,903)
  Other, net                                                            440                 451
                                                              -------------       -------------
 Net cash provided by (used in)
     financing activities                                            (2,264)            524,225
                                                              -------------       -------------
Net increase (decrease) in cash and
 cash equivalents                                                     1,089              13,132

Cash and cash equivalents at
   beginning of the period                                           49,816              36,684
                                                              -------------       -------------
Cash and cash equivalents at
   end of the period                                          $      50,905       $      49,816
                                                              =============       =============

 *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,  water and
related services to the public for  residential,  commercial and industrial uses
through a number of  regulated  and  non-regulated  subsidiaries.  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  related
services.

         NiSource's  gas  business  is  comprised  primarily  of  regulated  gas
utilities  and gas  transmission  companies  that  operate  throughout  northern
Indiana and New England.  In  addition,  NiSource  expanded  its gas  marketing,
trading  and  storage   operations  with  the  April  1999  acquisition  of  TPC
Corporation,  now renamed  EnergyUSA-TPC Corp. (TPC) and its 1999 acquisition of
Market Hub Partners,  L.P. (MHP). NiSource's electric business is comprised of a
regulated  electric  utility  that  operates in northern  Indiana.  The electric
business also includes wholesale sales and power trading activities.  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."  Collectively,  the Energy and Water Utilities are
referred to as the "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." MHP is subject to regulation by
the Texas Railroad Commission and FERC.

         Non-regulated  energy and  utility-related  products  and  services are
provided through the "Products and Services" subsidiaries. Products and Services
subsidiaries  perform  energy-related  services and offer products in connection
with these services, which include pipeline construction, repair and maintenance
of underground gas and water pipelines, locating and marking utility lines, real
estate development  activity and development and operation of "inside the fence"
cogeneration plants.

         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 February 28, 2000,  NiSource and Columbia Energy Group (CEG) entered
into a merger  agreement  pursuant to which  NiSource  agreed to acquire CEG for
approximately $6 billion,  plus the assumption of approximately  $2.5 billion of
CEG debt. The merger will be accomplished  through the creation of a new holding
company.  Each  NiSource  common share will be exchanged for one common share of
the new holding  company.  Each CEG share will be  exchanged  for $70.00 in cash
plus  $2.60  principal  amount  of a unit  issued  by the  new  holding  company
(consisting  of a zero  coupon  debt  security  coupled  with a  forward  equity
contract)  or, at the  election  of the CEG  shareholder,  $74.00 in new holding
company stock,  based on the average  NiSource share price prior to the closing,
but not more than  4.4848  shares of new  holding  company  stock,  for each CEG
share.  Stock  elections  will be  subject  to  proration  if they are made with
respect to more than 30% of CEG's outstanding shares. No exchange of shares will
occur  unless at least 10% of CEG's  outstanding  shares  elect to exchange  for
shares of the new holding company. The merger is conditioned upon the receipt of
a number  of  approvals.  Approval  of the  NiSource  and CEG  shareholders  was
obtained on June 1 and June 2,  respectively.  As of July 26, 2000,  all actions
needed  from  state  utility  regulatory  commissions  and  from  FERC  had been
received.  The Securities and Exchange  Commission must still approve the merger
under the Public Utility Holding Company Act.

         NiSource has accepted a commitment letter under which certain financial
institutions agreed, under specified  conditions,  to provide up to $6.0 billion
to  finance  the  acquisition  of CEG.  The  commitment  letter  contemplates  a
revolving credit facility expiring in July 2001, with the right to convert loans
outstanding at that time into term loans maturing 364 days thereafter.  NiSource
has  hedged  the  interest  rate  risk  associated  with  $1.1  billion  of  its
anticipated refinancing of such debt.

         CEG,  based in Herndon,  Va.,  is one of the  nation's  leading  energy
services  companies,  with assets of  approximately  $7 billion.  Its  operating
companies engage in virtually all phases of the natural gas business,  including
exploration and production,  transmission,  storage and distribution, as well as
propane and petroleum product sales, electric power generation and retail energy
marketing.  CEG sells  natural  gas to about 2 million  customers  in  Kentucky,
Maryland,  Ohio,  Pennsylvania and Virginia.  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 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.

         On April 1, 1999,  NiSource  acquired  the stock of TPC. As a result of
the TPC acquisition,  NiSource  indirectly owned a 77.3% equity interest in MHP,
which is a leading  developer,  owner and operator of high  deliverability  salt
cavern  natural gas storage  capacity.  In the fourth  quarter of 1999  NiSource
acquired the remaining interests in MHP. The consolidated  financial  statements
and  disclosures  include  operating  results  of TPC from April 1, 1999 and the
consolidated results of MHP from December 1999.

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. Except as discussed below, revenues are recorded as products
and services are delivered.  However,  utility  revenues are billed to customers
monthly on a cycle basis. Effective January 1, 1999, revenues relating to energy
trading  operations are recorded  based upon changes in the fair values,  net of
reserves,  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.

<TABLE>
<CAPTION>
The  approximate  weighted  average  remaining  lives  for major  components  of
electric, gas, and water utility plant are as follows:

         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                            15 years
         Transmission plant                           18 years
         Distribution plant                           34 years
         Other gas plant                              16 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,
2000 and 1999 were as follows:

<TABLE>
<CAPTION>

                                           Three Months               Six Months               Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ---------------------     ---------------------     ---------------------
                                         2000         1999         2000         1999         2000         1999
                                       ========     ========     ========     ========     ========     ========

         <S>                              <C>          <C>          <C>          <C>          <C>          <C>
         Electric                         3.7%         3.7%         3.7%         3.7%         3.7%         3.7%
         Gas                              4.5%         4.3%         4.4%         4.5%         4.5%         4.6%
         Water                            2.3%         2.2%         2.2%         2.1%         2.4%         2.2%
</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 $712.2 million
and $722.8 million at June 30, 2000 and December 31, 1999, 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 $139.4
million and $125.7 million at June 30, 2000 and December 31, 1999, respectively,
is being amortized over a weighted average period of 27 years.  Other intangible
assets,  approximating  $12.1  million  and $12.8  million at June 30,  2000 and
December 31, 1999,  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, 2000 and December 31, 1999,  was  approximately  $17.1 million and $9.9
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, 2000, $100 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 the  Water  Utilities  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 on foreign currency  translation
adjustments (foreign currency).

<TABLE>
<CAPTION>
The accumulated amounts for these components are as follows:

(Dollars in millions)
                      July 1,       January 1,        April 1,       June 30,       January 1,       April 1,        June 30,
                       1998            1999            1999            1999            2000            2000            2000
                   ------------    ------------    ------------    ------------    ------------    ------------    ------------

<S>                  <C>             <C>             <C>             <C>             <C>             <C>             <C>
Securities           $    4.7        $    3.6        $    4.0        $    5.6        $    6.1        $    5.9        $    6.2
Foreign currency     $    2.1        $   (2.5)       $   (2.4)       $   (2.3)       $   (0.9)       $   (0.6)       $   (0.6)
</TABLE>

STATEMENTS OF CASH FLOWS.  Temporary cash investments with an original  maturity
of three months or less are considered to be cash equivalents.

<TABLE>
<CAPTION>
Cash paid during the  periods  reported  for income  taxes and  interest  was as
follows:

                                           Three Months               Six Months               Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ---------------------     ---------------------     ---------------------
(Dollars in thousands)                   2000         1999         2000         1999         2000         1999
                                       ========     ========     ========     ========     ========     ========

<S>                                    <C>          <C>          <C>          <C>          <C>          <C>
Income taxes                           $ 97,604     $ 88,713     $ 98,975     $ 90,178     $124,789     $141,791
Interest, net of amounts capitalized   $ 40,462     $ 41,329     $ 88,006     $ 72,680     $175,372     $134,573
</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. Northern Indiana records any under-recovery or over-recovery 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.

         On August 18, 1999,  the IURC issued a generic  order  (Generic  Order)
which  established  new  guidelines  for the recovery of  purchased  power costs
through  fuel  adjustment  clauses.  The IURC  ruled  that each  utility  had to
establish a "benchmark"  which is the utility's  highest on-system fuel cost per
kilowatt-hour  (kwh) during the most recent annual period.  The IURC stated that
if the weekly  average of a utility's  purchased  power costs were less than the
"benchmark," these costs per kwh should be considered net energy costs which are
presumed  "fuel costs  included in purchased  power." If the weekly average of a
utility's purchased power costs exceeded the "benchmark," the utility would need
to submit additional  evidence  demonstrating the reasonableness of these costs.
The Office of Utility  Consumer  Counselor (OUCC) has appealed the Generic Order
to the  Indiana  Court of  Appeals.  All briefs  have been filed and the case is
pending Court decision.  Northern Indiana applied the Generic Order's guidelines
to purchased power transactions  sought to be recovered for February,  March and
April 2000.

         By an order issued February 23, 2000, the IURC approved the recovery of
Northern  Indiana's  purchased  power  transactions  during  the months of July,
August and September  1999.  Northern  Indiana and the OUCC filed  petitions for
reconsideration of the February 23, 2000 Order.

         On June 30, 2000, Northern Indiana and the OUCC filed a joint motion to
withdraw  petitions  for  reconsideration  and  requested  IURC  approval  of  a
Stipulation  and Agreement  (Agreement).  The  Agreement  establishes a recovery
mechanism for certain purchase power transactions for the months of July, August
and  September  2000 that will be utilized in lieu of the IURC's  Generic  Order
guidelines. The Agreement calls for Northern Indiana to return, by an adjustment
to fuel adjustment clause factors,  $1.8 million to retail ratepayers during the
period from November  2000 through  April 2001. Northern Indiana has established
a  reserve  for  these  amounts.  By  its  order issued August 9, 2000, the IURC
approved  the  Agreement.  Since  the Agreement has been approved, the OUCC will
dismiss, with prejudice, its appeal of the Generic Order.

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 monthly,  quarterly,  semi-annual  or annual
hearing by the state  commissions  and remains in effect for a one month,  three
month, six month or twelve month period. On August 11, 1999, the IURC approved a
flexible  gas cost  adjustment  mechanism  for Northern  Indiana.  Under the new
procedure,  the demand  component of the  adjustment  factor will be determined,
after hearings and IURC approval, and made effective on November 1 of each year.
The  demand  component  will  remain in effect  for one year  until a new demand
component is approved by the IURC.  The  commodity  component of the  adjustment
factor will be determined by monthly filings, which will become effective on the
first day of each calendar month,  subject to refund. The monthly filings do not
require IURC approval but will be reviewed by the IURC during the annual hearing
that will take place regarding the demand component filing.

         If the  statutory  requirement  relating to the level of return for the
gas  utilities is  satisfied,  any  under-recovery  or  over-recovery  caused by
variances between  estimated and actual cost in a given one month,  three month,
six month or twelve  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 also 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 using the LIFO method in June 2000 and December
1999, the estimated replacement cost of gas in storage (current and non-current)
at June 30, 2000 and  December  31, 1999  exceeded the stated LIFO cost by $99.6
million and $48.9 million,  respectively.  Inventory valued using LIFO was $31.9
million and $23.0 million at June 30, 2000 and December 31, 1999,  respectively.
Inventory  valued using the weighted  average  methodology was $59.4 million and
$40.8 million at June 30, 2000 and December 31, 1999, respectively.

ACCOUNTING  FOR  PRICE  RISK  MANAGEMENT  ACTIVITIES.  NiSource  is  exposed  to
commodity  price risk in its natural gas and electric  operations.  A variety of
commodity-based  derivative  financial  instruments  are utilized to reduce this
price risk. When these  derivatives are used to reduce price risk in non-trading
operations such as activities in gas supply for regulated gas utilities, certain
customer  choice  programs for  residential  customers and other retail customer
activity,  gains  and  losses  on these  derivative  financial  instruments  are
deferred as assets and  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
gains or losses as of the  termination  date is deferred and  recorded  when the
associated transaction or forecasted transaction affects earnings.

         NiSource also uses derivative financial  instruments in connection with
trading  activities  at its power  trading and certain gas marketing and trading
operations.  These derivatives,  along with the related physical contracts,  are
recorded at fair value  pursuant to Emerging  Issues Task Force (EITF) Issue No.
98-10,  "Accounting for Energy Trading and Risk Management  Activities." Because
the majority of trading  activities started in 1999, the impact of adopting EITF
Issue No. 98-10 on January 1, 1999 was  insignificant.  Transactions  related to
electric  utility  system load  management do not qualify as a trading  activity
under EITF Issue No. 98-10 and are accounted for on an accrual  basis.  NiSource
refers to this activity as Power Marketing.

IMPACT OF ACCOUNTING STANDARDS.  The Financial Accounting Standards Board (FASB)
has  issued  Statement  of  Financial   Accounting  Standards  (SFAS)  No.  133,
"Accounting for Derivative Instruments and Hedging Activities," in June 1998 and
SFAS   No.   137,   "Accounting   for   Derivative   Instruments   and   Hedging
Activities--Deferral  of the Effective  Date of FASB  Statement No. 133" in June
1999 and SFAS No.  138,  "Accounting  for  Certain  Derivative  Instruments  and
Certain  Hedging  Activities - an amendment of FASB  Statement  No. 133" in June
2000.  Statement No. 133 as amended  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 standard
also suggests in certain circumstances  commodity based contracts may qualify as
derivatives.  Special  accounting within this Statement  generally  provides for
matching of the timing of gain or loss  recognition  of  derivative  instruments
qualifying as a hedge with the  recognition  of changes in the fair value of the
hedged asset or liability  through  earnings,  and requires  that a company must
formally  document,  designate and assess the effectiveness of transactions that
receive  hedge  accounting  treatment.  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.  Unless those specific hedge accounting criteria are met, SFAS No. 133
requires  that changes in  derivatives'  fair value be  recognized  currently in
earnings.

         SFAS No. 133, as amended,  is not effective for NiSource  until January
1, 2001.  SFAS No. 133 must be applied  to (a)  derivative  instruments  and (b)
certain  derivative  instruments  embedded in hybrid contracts.  With respect to
hybrid  instruments,  a company may elect to apply SFAS No. 133, as amended,  to
(1) all hybrid instruments,  (2) only those hybrid instruments that were issued,
acquired or  substantively  modified  after December 31, 1997, or (3) only those
hybrid  instruments that were issued,  acquired or substantively  modified after
December 31, 1998.  NiSource will adopt SFAS No. 133 on January 1, 2001, but has
not yet completed  its  determination  of the impact or method of adoption.  The
fair value of derivatives  used in price risk  management are described in "Risk
Management  Activities." The fair value of these derivatives would be recognized
as assets or  liabilities  on the  balance  sheet  consistent  with the  current
accounting  treatment  for  certain freestanding derivatives. NiSource is in the
process  of projecting the impact of SFAS No. 133 but has not yet quantified the
other  effects  of  adopting  SFAS No. 133 on its financial statements. However,
adoption  of  SFAS  No. 133  could  increase  volatility  in  earnings and other
comprehensive income.

REGULATORY  ASSETS.  The Utilities'  operations are subject to the regulation of
the appropriate state commissions and, in the case of the Energy Utilities,  the
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,
2000, and December 31, 1999, 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.
<PAGE>
<TABLE>
<CAPTION>
Regulatory assets were comprised of the following items:

                                                                June 30,           December 31,
(Dollars in thousands)                                            2000                1999
                                                              =============       =============

<S>                                                           <C>                 <C>
Unamortized reacquisition premium on debt (see Note 16)       $      37,962       $      39,719
Unamortized R. M. Schahfer Unit 17 and Unit 18 carrying
    charges and deferred depreciation (see below)                    56,003              58,111
Bailly scrubber carrying charges and deferred depreciation
    (see below)                                                       7,542               8,010
Deferral of SFAS No. 106 expense not recovered
    (see Note 8)                                                     72,622              75,527
FERC Order No. 636 transition costs                                   9,984              13,728
Regulatory income tax asset, net (see Note 6)                        27,543              24,941
Other                                                                17,328              12,843
                                                              -------------       -------------
                                                                    228,984             232,879
                                                              -------------       -------------
Less: Current portion of regulatory assets                           20,500             24,245
                                                              -------------       -------------
                                                              $     208,484       $     208,634
                                                              =============       =============

</TABLE>

CARRYING  CHARGES AND DEFERRED  DEPRECIATION.  Upon completion of R. M. Schahfer
Units 17 and 18, Northern Indiana  capitalized the carrying charges and deferred
depreciation  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.

         Northern   Indiana  has  capitalized   carrying  charges  and  deferred
depreciation  and certain  operating  expenses  relating to its scrubber service
agreement for its Bailly  Generating  Station 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.

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 $31.9 million and $33.3 million relating to affordable  housing projects
at June 30, 2000 and December 31, 1999, 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 in cash and NiSource  common  shares.  The $237.7
million cash portion was partially financed by the issuance of Corporate Premium
Income Equity Securities (Corporate PIES) and partially financed by the issuance
of the Puttable Reset Securities  (PURS). 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.

<TABLE>
<CAPTION>

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:

                                                                         UNAUDITED

      (Dollars 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>

         On April 1, 1999,  NiSource  acquired the stock of TPC, a Houston-based
natural gas marketing and storage  company,  for  approximately  $150 million in
cash. 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,  including  estimates  with  respect to the tax bases of certain  assets
acquired.  As a  result  of  the  TPC  acquisition,  NiSource  had  an  indirect
investment in the amount of $126.0  million,  representing  a 77.3%  interest in
MHP,  the leading  developer,  owner and  operator of high  deliverability  salt
cavern natural gas storage capacity. During the fourth quarter of 1999, NiSource
purchased  the  remaining  interests  in MHP. On a pro forma basis the impact to
operating  income and net income to the three month,  six month and twelve month
periods ended March 31, 2000 was not significant.

(4)  LITIGATION.  NISOURCE  ENERGY  SERVICES  CANADA LTD.  On October 31,  1996,
NiSource's  subsidiary  NiSource  Energy  Services  Canada  Ltd.  (NESI  Canada)
acquired 70% of the outstanding  shares of Chandler Energy Inc., a gas marketing
and trading company located in Calgary,  Alberta,  and  subsequently  renamed it
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 filed claims in the Canadian  courts against
NiSource,  Capital Markets, NI Energy Services,  Inc. and NESI Canada,  alleging
that  misrepresentations  were made relating to NEMC's  financial  condition and
claiming damages.  In addition,  certain creditors of NEMC, through the Canadian
bankruptcy court,  asserted fraudulent transfer,  breach of contract,  breach of
fiduciary  duty and other  claims on behalf of NEMC  against  NiSource,  Capital
Markets,  NI Energy  Services,  Inc., NESI Canada and the directors of NEMC. The
Court of Queen's Bench of Alberta recently ordered that the latter claims should
proceed to hearing on certain  agreed  liability  issues  (with  proceedings  to
determine  damages,  if  necessary,  to commence  later),  and ordered that such
hearing would be dispositive of all disputes among the parties. 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 will not be material to the  financial
position or results of operations of NiSource.

         POWER  COMPANY OF AMERICA  L.P.  (PCA)  BANKRUPTCY.  On  July 12, 2000,
counsel  for the  trustee  to the Power  Company of  America  Liquidating  Trust
(Trustee),  the  successor of PCA under a plan of  reorganization  demanded that
NESI Power Marketing,  Inc. (NPM) pay $16.1 million, plus interest, and withdraw
its  proof of  claim in the  amount  of $1.6  million  by  filing  an  adversary
proceeding  against  NPM in the  United  States  Bankruptcy  Court  District  of
Connecticut.   The  trustee's  claim  asserted  that  NPM  received   fraudulent
conveyances,  fraudulent transfers,  and preferential transfers during 1998 when
NPM received payments in connection with its consent to the assignment by PCA to
third parties of PCA's  interest in certain power  transactions  for the sale of
electric  power by NPM to PCA and when PCA and NPM  closed out  certain  forward
contracts  between  them for the supply of electric  power  during  various time
periods  between  September  1,  1998 and  March 31,  1999.  These  transactions
occurred  following  NPM's demand for adequate  assurance of future  performance
following a disruption in the over-the-counter market for electric power in late
June and early July 1998 which impaired  PCA's ability to perform.  NPM disputes
any  liability  to the  Trustee  and intends to  vigorously  defend  against any
matters asserted in the adversary proceeding.  Management believes that any loss
relating to PCA will not be material to the  financial  position  and results of
operations of NiSource.

(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 regulations
affect operations as they relate to impacts on air, water and land.

SUPERFUND.  Because several NiSource  subsidiaries are "potentially  responsible
parties" (PRPs) 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 costs 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-six  such  sites.  Initial  sampling  has  been  conducted  at
thirty-three sites.  Investigation activities have been completed at twenty-five
sites and remedial measures have been selected or implemented at eighteen 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 costs  related to the former
manufactured  gas plants,  various  companies that provided  insurance  coverage
which NiSource believed covered costs related to former  manufactured-gas  plant
sites were  approached.  Northern  Indiana  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.  Settlements  have been reached with all insurance
companies.  Additionally,  agreements  have  been  reached  with  other  Indiana
utilities  relating to cost  sharing and  management  of the  investigation  and
remediation  of several  former  manufactured-gas  plant sites at which Northern
Indiana and such utilities or their predecessors were operators or owners.

         BSG  and  Northern  Utilities  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, 2000, a reserve of approximately  $23.7 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 the 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 material  effect on its financial
position or results of operations.

CLEAN AIR ACT.  The Clean Air Act  Amendments  of 1990 (CAAA)  impose  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 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 cannot 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,
including utilities. On May 25, 1999, the United States Court of Appeals for the
D.C.  Circuit issued an order staying the NOx SIP call rule's September 30, 1999
deadline for the state  submittals  until further order of the court. In a March
3, 2000 decision,  the United States Court of Appeals for the D.C. Circuit ruled
largely in favor of EPA's  regional  NOx plan.  The state led group  requested a
hearing of the issue from the full court. On June 22, 2000, the court denied the
rehearing and lifted the stay for the state plan submittals. The states now have
until the end of October 2000 to submit their plans implementing the EPA NOx SIP
Call.  Further legal challenges are expected,  including an appeal to the United
States Supreme Court.  The State of Indiana in February 2000 proposed a moderate
NOx control plan designed to address  Indiana's  ozone  nonattainment  areas and
regional  ozone  transport.  Any NOx emission  limitations  resulting from these
actions could be more restrictive than those imposed on electric utilities under
the  CAAA's  acid  rain NOx  reduction  program  described  above.  NiSource  is
evaluating the court decision and any potential  requirements  that could result
from the rules 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 are  dependent  upon the  outcome of the current  litigation  and the
ultimate control program agreed to by the targeted states and the EPA.  Northern
Indiana is  continuing  its programs to reduce NOx  emissions  and NiSource will
continue to closely monitor developments in this area.

         In a related matter to EPA's NOx SIP call, several  Northeastern states
have filed  petitions  with the EPA under  Section 126 of the Clean Air Act. The
petitions  allege  harm and  request  relief from  sources of  emissions  in the
Midwest that  allegedly  cause or  contribute  to ozone  nonattainment  in their
states.  NiSource is monitoring  EPA's decisions on these petitions and existing
litigation to determine the impact of these  developments on Northern  Indiana's
programs to reduce NOx emissions.

         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 the new rules for
both 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  Northern Indiana'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 standards on its operations will not be known for some time.

         In a letter dated September 15, 1999, the Attorney General of the State
of New  York  alleged  that  Northern  Indiana  violated  the  Clean  Air Act by
constructing a major  modification  of one of its electric  generating  stations
without  obtaining  pre-construction  permits  required  by  the  Prevention  of
Significant  Deterioration (PSD) program. The major modification  allegedly took
place at the R. M. Schahfer Station when, "in approximately 1995-1997,  Northern
Indiana  upgraded  the coal  handling  system  at Unit 14 at the  plant."  While
Northern Indiana is investigating  these allegations,  Northern Indiana does not
believe that the modifications  required  pre-construction  review under the PSD
program and believes that all appropriate permits were acquired.

CARBON  DIOXIDE.  Initiatives  are being discussed both in the United States and
worldwide  to reduce  so-called  "greenhouse  gases" such as carbon  dioxide and
other  by-products  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 state regulations,  NiSource must
obtain  National  Pollutant  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 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 to 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.
Compliance with such standards could be costly and 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,  Indianapolis  Water Company (IWC), 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  allowance for funds used during  construction-equity  (AFUDC) 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.
<PAGE>
<TABLE>
<CAPTION>

The  components  of the net deferred  income tax  liability at June 30, 2000 and
December 31, 1999, were as follows:

                                                                June 30,           December 31,
(Dollars in thousands)                                            2000                1999
                                                              =============       =============

Deferred tax liabilities--
     Accelerated depreciation and other
<S>                                                           <C>                 <C>
     property differences                                     $   1,117,973       $   1,129,011
     AFUDC-equity                                                    29,195              31,274
     Adjustment clauses                                               2,523              16,730
     Other regulatory assets                                         26,554              27,616
     Prepaid pension and other benefits                              64,590              64,853
    Reacquisition premium on debt                                    15,224              15,919
Deferred tax assets--
    Deferred investment tax credits                                 (35,604)            (36,650)
    Removal costs                                                  (177,961)           (171,645)
    Other postretirement/postemployment benefits                    (60,521)            (58,645)
    Other, net                                                      (33,512)            (27,300)
                                                              -------------       -------------
                                                                    948,461             991,163

Less: Deferred income taxes related to current
    assets and liabilities                                          (34,460)             (7,519)
                                                              -------------       -------------
Deferred income taxes--noncurrent                             $     982,921       $     998,682
                                                              =============       =============
</TABLE>

<TABLE>
<CAPTION>

Federal and state income taxes as set forth in the  Consolidated  Statements  of
Income were comprised of the following:

                                           Three Months               Six Months               Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ---------------------     ---------------------     ---------------------
(Dollars in thousands)                   2000         1999         2000         1999         2000         1999
                                       ========     ========     ========     ========     ========     ========
Current income taxes -
<S>                                    <C>          <C>          <C>          <C>          <C>          <C>
Federal                                $ 21,931     $ 15,028     $ 85,393     $ 78,541     $ 98,751     $110,310
State                                     2,852        2,370       12,569       12,594       14,106       16,930
                                       --------     --------     --------     --------     --------     --------
                                         24,783       17,398       97,962       91,135      112,857      127,240
                                       --------     --------     --------     --------     --------     --------
Deferred income taxes, net -
Federal                                  (8,930)      (3,545)     (30,487)     (28,334)     (10,030)      (9,260)
State                                    (1,040)        (277)      (2,868)      (2,416)        (466)        (781)
                                       --------     --------     --------     --------     --------     --------
                                         (9,970)      (3,822)     (33,355)     (30,750)     (10,496)     (10,041)
                                       --------     --------     --------     --------     --------     --------
Deferred investment tax

credits, net                             (1,910)      (1,920)      (3,820)      (3,807)      (7,704)      (7,526)
                                       --------     --------     --------     --------     --------     --------
   Total income taxes                  $ 12,903     $ 11,656     $ 60,787     $ 56,578     $ 94,657     $109,673
                                       ========     ========     ========     ========     ========     ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

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:

                                           Three Months               Six Months               Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ---------------------     ---------------------     ---------------------
(Dollars in thousands)                   2000         1999         2000         1999         2000         1999
                                       ========     ========     ========     ========     ========     ========

<S>                                    <C>          <C>          <C>          <C>          <C>          <C>
 Net income                            $ 23,413     $ 22,944     $103,029     $ 99,503     $163,940     $203,222
 Add - Income taxes                      12,903       11,656       60,787       56,578       94,657      109,673
Dividend requirements on

  preferred stocks of subsidiaries        2,008        2,077        4,042        4,193        8,183        8,436
                                       --------     --------     --------     --------     --------     --------
Income before preferred dividend
  requirements of subsidiaries
  and income taxes                     $ 38,324     $ 36,677     $167,858     $160,274     $266,780     $321,331
                                       ========     ========     ========     ========     ========     ========

Amount derived by multiplying pre-tax
  income by the statutory rate         $ 13,413     $ 12,837     $ 58,750     $ 56,096     $ 93,373     $112,466
Reconciling items multiplied by the
  statutory rate:
   Book depreciation over related tax
    depreciation                            917          968        1,835        1,937        3,832        3,933
   Amortization of deferred investment
    tax credits                          (1,910)      (1,920)      (3,820)      (3,807)      (7,704)      (7,526)
   State income taxes, net of federal
    income tax benefit                      814        1,264        5,302        5,770        8,703       10,224
   Reversal of deferred taxes provided
    at rates in excess of the current
    federal income tax rate                (919)        (721)      (1,838)      (1,442)      (5,853)      (5,372)
   Low-income housing credits            (1,267)      (1,128)      (2,534)      (2,256)      (4,790)      (4,176)
   Nondeductible amounts related to
    amortization of  intangible assets
    and plant acquisition adjustments       619          619        1,238        1,238        2,476        2,496
   Other, net                             1,236         (263)       1,854         (958)       4,620       (2,372)
                                       --------     --------     --------     --------     --------     --------
       Total income taxes              $ 12,903     $ 11,656     $ 60,787     $ 56,578     $ 94,657     $109,673
                                       ========     ========     ========     ========     ========     ========
</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.

<TABLE>
<CAPTION>

The change in the benefit obligation for the years 1999 and 1998 was as follows:

(Dollars in thousands)                                            1999                1998
                                                              =============       =============

<S>                                                           <C>                 <C>
Benefit obligation at beginning of year (January 1,)          $     949,039       $     875,756
Service cost                                                         19,811              17,093
Interest cost                                                        69,610              60,686
Plan amendments                                                          --              14,655
Actuarial (gain) loss                                               (60,108)             38,773
Acquisition of Bay State                                             78,684                 --
Benefits paid                                                       (66,687)            (57,924)
                                                              -------------       -------------
Benefit obligation at end of the year (December 31,)          $     990,349       $     949,039
                                                              =============       =============
</TABLE>

<TABLE>
<CAPTION>

The change in the fair  value of the  plans'  assets for the years 1999 and 1998
was as follows:

(Dollars in thousands)                                            1999                1998
                                                              =============       =============

<S>                                                           <C>                 <C>
Fair value of plan assets at beginning of year (January 1,)   $     987,030       $     924,857
Actual return on plan assets                                        170,814              85,254
Employer contributions                                               42,641              34,843
Acquisition of Bay State                                             92,070                  --
Benefits paid                                                       (66,687)            (57,924)
                                                              -------------       -------------
Plan assets at fair value at end of the year (December 31,)   $   1,225,868       $     987,030
                                                              =============       =============

         The plans' assets are invested primarily in common stocks, bonds and notes.
</TABLE>
<TABLE>
<CAPTION>

The plans' funded status as of December 31, 1999 and 1998 is as follows:

(Dollars in thousands)                                            1999                1998
                                                              =============       =============

<S>                                                           <C>                 <C>
Plan assets in excess of benefit obligation                   $     235,519       $      37,991
Unrecognized net actuarial loss                                    (150,984)            (10,938)
Unrecognized prior service cost                                      55,662              57,193
Unrecognized transition amount                                       22,113              26,813
                                                              -------------       -------------
Prepaid pension costs                                         $     162,310       $     111,059
                                                              =============       =============
</TABLE>

         The benefit  obligation is the present value of future pension  benefit
payments and is based on a plan benefit formula which considers  expected future
salary  increases.  Discount  rates of 7.75% and 7.00% and rates of  increase in
compensation  levels of 4.5% were used to determine the benefit  obligations  at
December 31, 1999 and 1998.

Prepaid  pension  costs were $193.1  million at June 30,  2000 and are  reported
under the captions "Prepayments and Other" in the Consolidated Balance Sheets.

<TABLE>
<CAPTION>

The following  items are the components of provisions for pensions for the three
month, six month and twelve month periods ended June 30, 2000 and June 30, 1999:

                                           Three Months               Six Months               Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ---------------------     ---------------------     ---------------------
(Dollars in thousands)                   2000         1999         2000         1999         2000         1999
                                       ========     ========     ========     ========     ========     ========
<S>                                    <C>          <C>          <C>          <C>          <C>          <C>
Service costs                          $  5,227     $  4,301     $ 10,455     $  9,720     $ 20,546     $ 13,776
Interest costs                           18,876       16,278       37,752       33,492       73,870       50,610
Expected return on plan assets          (28,474)     (22,404)     (54,440)     (45,399)    (104,269)     (69,564)
Amortization of transition obligation     1,472        1,416        2,944        2,895        6,218        4,523
Amortization of prior service costs       1,581        1,571        3,161        3,158        6,513        3,721
Amortization of (gain)/loss                (720)          --       (1,440)          --       (1,440)          --
                                       --------     --------     --------     --------     --------     --------
                                       $ (2,038)    $  1,162     $ (1,568)    $  3,866     $  1,438     $  3,066
                                       ========     ========     ========     ========     ========     ========
</TABLE>

<TABLE>
<CAPTION>

Assumptions  used in the  valuation and  determination  of 2000 and 1999 pension
expense were as follows:

                                                                  2000                 1999
                                                              =============       =============

<S>                                                                   <C>                 <C>
Discount rate                                                         7.75%               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 $0.6 million,  $1.1 million and $2.3
million were made to these plans for the three month, six month and twelve month
periods  ended  June 30,  2000,  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:  NiSource  provides  certain health care and life
insurance benefits for certain retired employees.  The majority of employees may
become  eligible for these  benefits if they reach  retirement age while working
for 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.

<TABLE>
<CAPTION>

The   following   table  sets  forth  the  change  in  the  plans'   accumulated
postretirement benefit obligation (APBO) as of December 31, 1999 and 1998:

(Dollars in thousands)                                            1999                1998
                                                              =============       =============

Accumulated postretirement benefit obligation at
<S>                                                           <C>                 <C>
   beginning of year (January 1,)                             $     240,601       $     223,908
Service cost                                                          5,531               5,249
Interest cost                                                        18,101              15,793
Participant contributions                                             1,204                  --
Plan amendments                                                          --                (283)
Actuarial (gain) loss                                               (17,627)              8,453
Acquisition of Bay State                                             23,205                  --
Benefits paid                                                       (17,116)            (12,519)
                                                              -------------       -------------
Accumulated postretirement benefit obligation
   at end of the year (December 31,)                          $     253,899       $     240,601
                                                              =============       =============
</TABLE>

<TABLE>
<CAPTION>

The change in the fair  value of the plan  assets for the years 1999 and 1998 is
as follows:

(Dollars in thousands)                                            1999                1998
                                                              =============       =============

<S>                                                           <C>                 <C>
Fair value of plan assets at beginning of year (January 1,)   $       2,903       $       2,400
Actual return of plan assets                                          2,521               1,103
Employer contributions                                               13,877              10,637
Participant contributions                                             1,204               1,282
Acquisition of Bay State                                             26,620                  --
Benefits paid                                                       (17,116)            (12,519)
                                                              -------------       -------------
Plan assets at fair value at end of the year (December 31,)   $      30,009       $       2,903
                                                              =============       =============
</TABLE>
<TABLE>
<CAPTION>
Following is the funded  status for  postretirement  benefits as of December 31,
1999 and 1998:

(Dollars in thousands)                                            1999                1998
                                                              =============       =============

<S>                                                           <C>                 <C>
Funded status                                                 $    (223,890)      $    (237,698)
Unrecognized net actuarial gain                                    (106,161)            (87,087)
Unrecognized prior service cost                                       3,550               3,873
Unrecognized transition amount                                      167,322             164,436
                                                              -------------       -------------
Accrued liability for postretirement benefits                 $    (159,179)      $    (156,476)
                                                              =============       =============
</TABLE>

         In order to determine the APBO at December 31, 1999, a discount rate of
7.75% and a pre-Medicare  medical trend rate of 6% to a long-term rate of 5% was
used, and 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.  The  accrued
liability for postretirement benefits was $170.4 million at June 30, 2000.

<TABLE>
<CAPTION>

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, 2000 and June 30,  1999,  include  the  following
components:

                                           Three Months               Six Months               Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ---------------------     ---------------------     ---------------------
(Dollars in thousands)                   2000         1999         2000         1999         2000         1999
                                       ========     ========     ========     ========     ========     ========
<S>                                    <C>          <C>          <C>          <C>          <C>          <C>
Service costs                          $  1,523     $  1,652     $  3,044     $  2,648     $  4,587     $  5,223
Interest costs                            4,979        4,865        9,959        9,375       14,801       17,022
Expected return on plan assets             (579)        (854)      (1,159)      (1,233)        (187)      (1,349)
Amortization of transition obligation     3,216        3,287        6,431        6,328       10,851       12,214
Amortization of prior service costs          86           86          172          172          279          344
Amortization of (gain) loss              (1,414)      (1,220)      (2,826)      (2,396)      (5,986)      (5,357)
                                       --------     --------     --------     --------     --------     --------
                                       $  7,811     $  7,816     $ 15,621     $ 14,894     $ 24,345     $ 28,097
                                       ========     ========     ========     ========     ========     ========
</TABLE>

<TABLE>
<CAPTION>
Assumptions   used  in  the   determination   of  2000  and  1999  net  periodic
postretirement benefit costs were as follows:

                                                                  2000                1999
                                                              =============       =============
<S>                                                           <C>                 <C>
Discount rate                                                         7.75%               7.00%
Rate of increase in compensation levels                               4.50%               4.50%
Assumed annual rate of increase in health care benefits               6.00%               7.00%
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, 2000 by
approximately  $25.6  million,  and  increase  the  aggregate of the service and
interest cost  components of plan costs by  approximately  $1.3 million and $2.6
million  for the three  month and six month  periods  ended June 30,  2000.  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, 2000 by  approximately  $21.1
million,  and decrease the aggregate of the service and interest cost components
of plan costs by approximately $1.0 million and $2.0 million for the three month
and six month  periods  ended June 30, 2000.  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 of NiSource's  Series A Junior  Participating Preferred Shares
           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 issued)

     INDIANAPOLIS WATER COMPANY (IWC) -
          300,000 shares-Cumulative Preferred  -$100 par value

      Note 10 sets forth the preferred stocks which are redeemable solely at the
option of the  issuer,  and Note 11 sets forth the  preferred  stocks  which are
subject to mandatory redemption  requirements or whose redemption is outside the
control of the issuer.

      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,
 (Dollars in thousands, except Redemption Prices)          2000                1999                2000
                                                       =============       =============       =============

NORTHERN INDIANA PUBLIC SERVICE COMPANY:

  CUMULATIVE PREFERRED STOCK -  $100 PAR VALUE -

<S>                                                    <C>                 <C>                 <C>
    4-1/4% series - 209,035 shares outstanding         $      20,903       $      20,903       $      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 -  34,842 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, 2000),
      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% to 5%, 25,166 shares outstanding                        2,517               4,497     $100.00-$105.00
                                                       -------------       -------------
                                                       $      83,631       $      85,611
                                                       =============       =============
</TABLE>

During  the  period  July 1, 1999 to June 30,  2000,  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:

<TABLE>
<CAPTION>

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:


                                                                June 30,           December 31,
(Dollars in thousands)                                            2000                1999
                                                              =============       =============

NORTHERN INDIANA PUBLIC SERVICE COMPANY:
  CUMULATIVE PREFERRED STOCK -$100 PAR VALUE -

<S>                                                           <C>                 <C>
    8.85%  series - 25,000 shares outstanding                 $       2,500       $       3,750
    7-3/4% series - 27,798 shares outstanding                         2,780               2,780
    8.35%  series - 42,000 shares outstanding                         4,200               4,500
  CUMULATIVE PREFERRED STOCK -NO PAR VALUE -

    6.50%  series - 430,000 shares outstanding                       43,000              43,000
                                                              -------------       -------------
                                                              $      52,480       $      54,030
                                                              =============       =============
</TABLE>

<TABLE>
<CAPTION>

The redemption prices at June 30, 2000, as well as sinking fund provisions,  for
the cumulative preferred stocks subject to mandatory redemption requirements, or
whose redemption is outside the control of Northern Indiana, were as follows:

                                                                       Sinking Fund or
    Series            Redemption Price Per Share               Mandatory Redemption Provisions
==============        ==========================              =================================

Cumulative preferred stock -$100 par value -
<S>      <C>          <C>                                     <C>
         8.85%        $100.37, reduced periodically            12,500 shares on or before April 1.

        7-3/4%        $103.88, reduced periodically             2,777 shares on or before December 1;
                                                              noncumulative option to double amount each year.

         8.35%        $103.20, 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.

 Cumulative preferred stock -no par value -
        6.50%         $100.00 on October 14, 2002             430,000 shares on October 14, 2002.
</TABLE>

<TABLE>
<CAPTION>

Sinking  fund   requirements   with  respect  to  redeemable   preferred  stocks
outstanding at June 30, 2000 for each of the twelve month periods  subsequent to
June 30, 2001, were as follows:

                  Twelve Months Ended June 30,       (Dollars in thousands)
                  =========================================================
                  <S>                                            <C>
                  2002                                           $    1,828
                  2003                                           $   44,828
                  2004                                           $      578
                  2005                                           $      878
</TABLE>


         Sinking  fund  payments  due  within  one year are  reported  under the
caption "Other" included in the Current Liabilities in the Consolidated  Balance
Sheet.

(12) COMMON DIVIDEND: NiSource's ability to pay dividends depends primarily 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 earned  surplus or net profits of
Northern Indiana.  At June 30, 2000,  Northern Indiana had approximately  $132.9
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:  The weighted  average shares  outstanding for  diluted
earnings  per share  include the  incremental  effect of the  various  long-term
incentive  compensation  plans  and the  incremental  effect  of  common  shares
associated with the equity forward share purchase contract  calculated under the
reverse  treasury  stock method.  See Note "Equity  Forward Share  Contract" for
description of the contract.

<TABLE>
<CAPTION>

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

(Dollars in thousands, except share amounts)

                                         Three Months              Six Months              Twelve Months
                                         Ended June 30,           Ended June 30,           Ended June 30,
                                    ------------------------  ------------------------  ------------------------
(Dollars in thousands)                   2000         1999         2000         1999         2000         1999
                                    ===========  ===========  ===========  ===========  ===========  ===========

BASIC

Weighted Average Number of Common
<S>                                 <C>          <C>          <C>          <C>          <C>          <C>
    Shares Outstanding              120,569,530  124,951,321  122,203,747  123,804,922  123,545,434  121,166,275
                                    ===========  ===========  ===========  ===========  ===========  ===========

Net Income to be Used to Compute Basic
    Earnings per Share:

Net Income                          $    23,413  $    22,944  $   103,029  $    99,503  $   163,940  $   203,222
                                    ===========  ===========  ===========  ===========  ===========  ===========
Basic Earnings per Average Common

    Share                           $      0.19  $      0.18  $      0.84  $      0.80  $      1.32  $      1.67
                                    ===========  ===========  ===========  ===========  ===========  ===========

DILUTED

Weighted Average Number of Common

    Shares Outstanding              120,569,530  124,951,321  122,203,747  123,804,922  123,545,434  121,166,275
Dilutive Shares                       4,085,406      675,425    4,191,800      560,493    2,742,024      751,312
                                    -----------  -----------  -----------  -----------  -----------  -----------
Weighted Average Shares             124,654,936  125,626,746  126,395,547  124,365,415  126,287,458  121,917,587
                                    ===========  ===========  ===========  ===========  ===========  ===========

Net Income to be Used to Compute
    Diluted Earnings per Share:

Net Income                          $    23,413  $    22,944  $   103,029  $    99,503  $   163,940  $   203,222
                                    ===========  ===========  ===========  ===========  ===========  ===========
Diluted Earnings per Average

    Common Share                    $      0.18  $      0.18  $      0.81  $      0.80  $      1.29  $      1.66

                                    ===========  ===========  ===========  ===========  ===========  ===========
</TABLE>

(14) COMMON SHARES:  As of June 30, 2000 NiSource has  400,000,000 of authorized
common  shares  without par value.  All  references  to numbers of common shares
reported,  including per share amounts and stock option data, have been adjusted
to reflect the two-for-one stock split paid February 20, 1998.

SHARE  PURCHASE  RIGHTS PLAN.  On February  17, 2000,  the Board of Directors of
NiSource  adopted a new Share Purchase Rights Plan which has  substantially  the
same terms as a previously  effective  Share Purchase  Rights Plan.  Each Right,
when  exercisable,  would initially entitle the holder to purchase from NiSource
one one-hundredth of a share of Series A Junior  Participating  Preferred Share,
without  par  value,  at a price of $60 per one  one-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,  2000,
approximately  60.2 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.  As of December 31, 1999,
the counterparty  informed  NiSource that  approximately  5.6 million shares had
been purchased at a weighted average cost of $26.90 per share.  NiSource has the
option to settle with the  counterparty  by means of  physical,  net cash or net
share  settlement.  On a quarterly  basis,  NiSource pays the counterparty a fee
based on the amount paid for common shares  purchased by the  counterparty,  and
the  counterparty  remits  dividends  received on shares owned. All such amounts
paid and remitted  under the contract are reflected in equity  contract costs of
common shareholders'  equity. The net amount was a charge of $0.9 million,  $2.0
million and $2.8 million for the three month, six month and twelve month periods
ended June 30, 2000.

         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,  2000,  the nominal  amount and fair value of the equity
forward  purchase  contract  was  approximately $150 million and a loss of $(46)
million,  respectively.  NiSource's  forward  purchase  contract  is  currently
accounted  for  in  permanent  equity.

         In March 2000, the Emerging Issues Task Force (EITF) released Issue No.
00-07,  "Application  of  EITF  Issue  No.  96-13,  "Accounting  for  Derivative
Financial  Instruments  Indexed to, and Potentially  Settled in, a Company's Own
Stock," to Equity Derivative  Transactions That Contain Certain  Provisions That
Require  Cash  Settlement  if Certain  Events  Outside the Control of the Issuer
Occur." The final consensus in EITF Issue No. 00-07 generally stated that equity
derivative  contracts that contained  provisions  that  implicitly or explicitly
required net cash settlement  outside the control of the company must be treated
as  assets  and  liabilities  and  carried  at fair  value rather than as equity
instruments carried at original cost and reported as part  of permanent  equity,
as provided for in EITF Issue No. 96-13.Similarly,  the  EITF  reached consensus
that equity derivative contracts with any provisions that could require physical
settlement  by  a  cash payment to the counterparty in exchange for the issuer's
shares  should  be  classified  as  temporary equity. For contracts that existed
before  March  16,  2000,  the  provisions  of the consensus shall be applied on
December 31, 2000,  to  those  contracts  that  remain outstanding at that date,
based  on  the  contract  terms  then in place. The applying EITF No. 00-07 will
require  asset/liability  treatment  for  contracts  with  net  cash  settlement
provisions  to  be recalculated  as of December 31, 2000,  and presented on that
date  as  a  cumulative  effect of a change  in   accounting   principles.   Any
reclassification  of amounts  from  permanent  equity to  temporary  equity as a
result of settlement provisions requiring physical cash settlement shall be made
for balance sheets as of and subsequent to December 31, 2000.

         As part of EITF  Issue  No.  00-19,  "Determination  of  Whether  Share
Settlement  is Within the Control of the Issuer for  Purposes of Applying  Issue
No. 96-13," the EITF developed a model governing how certain settlement features
affect the accounting for equity derivative  contracts entered into by a company
with respect to its own stock. The EITF also  tentatively  provided an  extended
transition period for amending existing contracts (June 30, 2001). Consensus has
not  yet  been  reached.  Management  of  NiSource  continues to review possible
amendments to contract provisions with  the  counterparty.  There continue to be
discussions  related  to the accounting for such contracts by the EITF and other
authoritative bodies. NiSource expects  to adopt the  provisions of the ultimate
consensus  within  the  transition  period. However, the ultimate resolution and
impact of the accounting  for the contract will be dependent upon the results of
the review of contract  provisions   with   the  counterparty,  possible  future
changes in authoritative guidance and fluctuations in NiSource's share price.

         (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 provided 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 on April
14,  1999.  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. 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.

         On January  29,  2000,  the Board of  Directors  of  NiSource  approved
certain  additional  amendments  to the 1994 Plan and on June 1, 2000,  the 1994
Plan, as amended and restated,  was approved by  shareholders at the 2000 Annual
Meeting of Shareholders of NiSource. The amended and restated 1994 Plan provides
for the number of common shares subject to the plan to increase from 5.0 million
to 11.0 million,  and permits  contingent stock awards and dividend  equivalents
payable on grants of options,  stock  appreciation  rights  (SARs),  performance
units and contingent stock awards. At June 30, 2000, there were 6,807,836 shares
reserved for future awards under the amended and restated 1994 Plan.

         In connection with the acquisition of BSG (see Note 3), all outstanding
BSG nonqualified  stock options were replaced with NiSource  nonqualified  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 nonqualified  stock options under
the caption "converted."

         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.
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  lapsed on  January  27,  2000 and vested at 116% of the number
awarded,  due to attaining  specific  earnings per share and stock  appreciation
goals.  Restrictions  on shares  awarded  in 1998  lapsed two years from date of
grant and vested at 100% of the number  awarded.  Restrictions on shares awarded
in 2000 lapse  three  years from date of grant and  vesting  may vary from 0% to
200%  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
683,500 and 513,500  restricted shares outstanding at June 30, 2000 and December
31, 1999, 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, subject to immediate vesting
in the event of the director's  death or  disability,  or a change in control of
NiSource.  If a  director's  service on the Board is  terminated  for any reason
other than retirement at or after age seventy,  death or disability,  any common
shares not vested as of the date of termination  are  forfeited.  As of June 30,
2000, 81,500 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 $1.1 million and $0.6 million for the three month,
$2.4  million  and $1.4  million  for the six  month and $4.6  million  and $2.5
million for the twelve month periods ended June 30, 2000 and 1999, respectively.

<TABLE>
<CAPTION>

Had compensation cost for nonqualified 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:

(Dollars in thousands, except per share data)

                                           Three Months               Six Months               Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ---------------------     ---------------------     ---------------------
(Dollars in thousands)                   2000         1999         2000         1999         2000         1999
                                       ========     ========     ========     ========     ========     ========

NET INCOME:
<S>                                    <C>          <C>          <C>          <C>          <C>          <C>

 As reported                           $ 23,413     $ 22,944     $103,029     $ 99,503     $163,940     $203,222
 Pro forma                             $ 22,753     $ 22,540     $101,793     $ 98,695     $161,873     $201,725

EARNINGS PER AVERAGE COMMON SHARE:
 Basic:

   As reported                         $   0.19     $   0.18     $   0.84     $   0.80     $   1.32     $   1.67
   Pro forma                           $   0.18     $   0.18     $   0.83     $   0.79     $   1.27     $   1.66

Diluted:
   As reported                         $   0.18     $   0.18     $   0.81     $   0.80     $   1.30     $   1.66
   Pro forma                           $   0.18     $   0.17     $   0.80     $   0.79     $   1.25     $   1.65
</TABLE>

<TABLE>
<CAPTION>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes  option-pricing  model  with the  following  assumptions  used for
grants in 2000, 1999 and 1998:

                                         2000         1999         1998
                                       ========     ========     ========
<S>                                      <C>          <C>          <C>
Interest Rate                             6.60%        5.87%        5.29%
Expected Dividend Yield                  $1.08        $1.02        $0.96
Expected Life (in years)                  5.4          5.25         5.4
Volatility                               28.98%       15.72%       13.09%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

Changes in  outstanding  shares under  option and SARs for the three month,  six
month and twelve  month  periods  ended June 30,  2000 and June 30, 1999 were as
follows:

                                                              NONQUALIFIED STOCK OPTIONS
                                                -----------------------------------------------------
                                                              Weighted                     Weighted
                                                               Average                      Average
                                                               Option                       Option
           Three Months Ended June 30,             2000         Price           1999         Price
           ===========================          ===========  ===========     ===========  ===========

<S>                                               <C>        <C>               <C>        <C>
Balance, beginning of period                      4,327,956  $     19.76       3,346,163  $     18.63
 Exercised                                         (194,811)       13.59         (97,957)       12.40
 Canceled                                           (20,000)       24.11          (5,000)       29.22
                                                -----------                  -----------
Balance, end of period                            4,113,145  $     20.03       3,243,206  $     18.81
                                                ===========                  ===========
Shares exercisable                                2,983,895  $     19.14       2,644,706  $     16.45
                                                ===========                  ===========
</TABLE>

<TABLE>
<CAPTION>


                                                              NONQUALIFIED STOCK OPTIONS
                                                -----------------------------------------------------
                                                              Weighted                     Weighted
                                                               Average                      Average
                                                               Option                       Option
           Six Months Ended June 30,               2000         Price           1999         Price
           =========================            ===========  ===========     ===========  ===========

<S>                                               <C>        <C>               <C>        <C>
Balance, beginning of period                      3,950,456  $     19.09       2,651,300  $     19.61
 Converted                                               --           --         740,780        15.03
 Granted                                            408,000        18.44              --           --
 Exercised                                         (205,811)       13.73        (142,374)       13.71
 Canceled                                           (39,500)       23.79          (6,500)       29.22
                                                -----------                  -----------
Balance, end of period                            4,113,145  $     20.03       3,243,206  $     18.81
                                                ===========                  ===========
Shares exercisable                                2,983,895  $     19.41       2,644,706  $     16.45
                                                ===========                  ===========
</TABLE>

<TABLE>
<CAPTION>


                                                              NONQUALIFIED STOCK OPTIONS
                                                -----------------------------------------------------
                                                              Weighted                     Weighted
                                                               Average                      Average
                                                               Option                       Option
           Twelve Months Ended June 30,             2000         Price           1999         Price
           ============================         ===========  ===========     ===========  ===========

<S>                                               <C>        <C>               <C>        <C>

Balance, beginning of period                      3,243,206  $     18.81       2,193,600  $     16.79
 Converted                                               --           --         740,780        15.03
 Granted                                          1,152,750        22.41         607,000        29.22
 Exercised                                         (234,811)       13.96        (289,674)       15.44
 Canceled                                           (48,000)       24.51          (8,500)       29.22
                                                -----------                  -----------
Balance, end of period                            4,113,145  $     20.03       3,243,206  $     18.81
                                                ===========                  ===========
Shares exercisable                                2,983,895  $     19.14       2,644,706  $     16.45
                                                ===========                  ===========
Weighted average fair value
 of options granted                             $      3.69                  $      4.28
                                                ===========                  ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

The following table summarizes information about nonqualified stock options:

                        OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF JUNE 30, 2000

                      Options Outstanding                                    Options Exercisable
---------------------------------------------------------------      -----------------------------------
                                          Weighted
                                          Average      Weighted
                                         Remaining     Average                             Weighted
   Range of        Outstanding as of    Contractual    Exercise      Exercisable as of       Average
Exercise Prices      June 30, 2000         Life         Price          June 30, 2000      Exercise Price
---------------    -----------------    -----------    --------      -----------------    --------------

 <S>                       <C>                  <C>      <C>                 <C>                  <C>
 $ 8.53-$12.76               139,500            0.8      $10.35                139,500            $10.35
 $12.77-$19.15             2,123,308            4.9      $16.46              1,715,308            $15.99
 $19.16-$28.74             1,265,337            8.3      $22.83                544,087            $20.48
 $28.75-$29.22               585,000            8.1      $29.22                585,000            $29.22
---------------    -----------------    -----------    --------      -----------------    --------------
                           4,113,145            6.2      $20.03              2,983,895            $19.14
</TABLE>

<TABLE>
<CAPTION>

(16) LONG-TERM DEBT:

                                                                June 30,           December 31,
(Dollars in thousands)                                            2000                1999
                                                              =============       =============

First mortgage bonds -
   Weighted average interest rate of 6.69%  and
   various maturities between April 1, 2002 and
<S>                                                           <C>                 <C>
   July 15, 2028                                              $     171,500       $     183,100

Pollution control notes and bonds-
   Weighted  average  interest rate of 3.91% and
   various maturities between October 1, 2003 and

    April 1, 2019                                                   237,000             237,000

Medium-term notes -
   Weighted average interest rate of 7.12% and
   various maturities between August 15, 2001
   and September 1, 2031                                          1,172,858           1,180,892

Subordinated Debentures -7-3/4%, 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 8.61% and
   various maturities between December 31, 2001
   and December 1, 2018                                             181,761             196,704

Variable bank loans - interest rate of 7.48%, due
   August 7, 2003                                                     5,600              30,600

Unamortized premium and discount on
   long-term debt, net                                               (2,899)             (3,112)
                                                              -------------       -------------
Total long-term debt, excluding amounts due
   within one year                                            $   1,915,820       $   1,975,184
                                                              =============       =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

Sinking fund  requirements  and maturities of long-term debt outstanding at June
30, 2000 for the twelve  month  periods  subsequent  to June 30,  2001,  were as
follows:


                  Twelve Months Ended June 30,       (Dollars in thousands)
                  =========================================================

                  <S>                                            <C>
                  2002                                           $  130,928
                  2003                                           $  113,304
                  2004                                           $  182,692
                  2005                                           $  116,220
</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 have been deferred and are being 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.

         Northern  Indiana 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,
2000,  $139.0  million of these  medium-term  notes had been issued with various
interest rates and maturities.

         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 $3.5 billion at June 30, 2000.

(17) CURRENT PORTION OF LONG-TERM DEBT:

<TABLE>
<CAPTION>

At June 30, 2000 and December 31, 1999,  the current  portion of long-term  debt
due within one year was as follows:
                                                                June 30,           December 31,
(Dollars in thousands)                                            2000                1999
                                                              =============       =============

Medium-term notes--
<S>                                                           <C>                 <C>
   Weighted average interest rate of 5.70%                    $      27,851       $     166,254
Notes payable--
   Weighted average interest rate of 6.74%                           18,717               4,467
Sinking funds due within one year                                     3,000               3,000
Revolving Credit Agreement 5.75%,
   due March 17, 2001                                                25,000                  --
                                                              -------------       -------------
   Total current portion of long-term debt                    $      74,568       $     173,721
                                                              =============       =============
</TABLE>

(18) SHORT-TERM  BORROWINGS:  NiSource and its subsidiaries may borrow under 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, 2000.  NiSource  expects that the 364-day agreements  will 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 working capital requirements and
may be used to support the issuance of commercial paper. At June 30, 2000, there
were no borrowings outstanding under these agreements.

         In addition, various NiSource subsidiaries maintain lines of credit for
up to an  aggregate  of $159.7  million  with  lenders  at either  the  lender's
commercial  prime or market lending rates. As of June 30, 2000, there were $50.8
million of  borrowings  outstanding  under these lines of credit with a weighted
average  interest  rate of 4.85%.  As of  December  31,  1999,  there were $54.1
million of borrowings outstanding under these lines of credit.

         NiSource and its subsidiaries maintain money market lines of credit for
up to $379.5 million. As of June 30, 2000, there were $248.9 million outstanding
under these money market lines of credit with a weighted  average  interest rate
of 7.08%.  At  December  31,  1999,  there were  $156.2  million  of  borrowings
outstanding under these money market lines of credit.

         In  September  1999,  Capital  Markets  issued $160  million PURS in an
underwritten  public  offering.  The PURS are  unsecured  debentures  of Capital
Markets and rank equally with all other  unsecured  and  unsubordinated  debt of
Capital  Markets.  The  PURS  are  subject  to a call  option  under  which  the
underwriters  may  purchase  all of the  outstanding  PURS from the  holders  on
September  28,  2000.  The net  proceeds  from the sale of the PURS and the call
option of $162.4 million were used to refinance short-term indebtedness incurred
in connection with the acquisition of BSG in February 1999.  Until September 28,
2000,  the PURS will accrue  interest  at a rate based on LIBOR plus  1.25%.  On
September  28, 2000,  if the  underwriters  do not  exercise  their call option,
Capital Markets will be obligated to repurchase all of the outstanding  PURS. If
the  underwriters  purchase all of the  outstanding  PURS pursuant to their call
option,  the  interest  rate will be reset to a fixed rate based on then current
market  rates plus a fixed  margin and the PURS will  remain  outstanding  until
2010.

<TABLE>
<CAPTION>

At June 30, 2000 and December 31, 1999, short-term borrowings were as follows:

                                                                June 30,           December 31,
(Dollars in thousands)                                            2000                1999
                                                              =============       =============

Commercial paper--
   Weighted average interest rate of 6.61%
<S>                                                           <C>                 <C>
     at June 30, 2000                                         $     408,000       $     299,565
Notes payable--
   Weighted average interest rate of 6.45%
     at June 30, 2000                                               462,109             379,756
                                                              -------------       -------------
   Total short-term borrowings                                $     870,109       $     679,321
                                                              =============       =============
</TABLE>

(19)   CORPORATE   PREMIUM  INCOME  EQUITY   SECURITIES  AND   COMPANY-OBLIGATED
MANDATORILY  REDEEMABLE  PREFERRED  SECURITIES OF TRUST HOLDING  SOLELY  COMPANY
DEBENTURES In February 1999 NiSource  completed an underwritten  public offering
of  Corporate  PIES.  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.

         The Corporate  PIES were offered as one unit comprised of two separable
instruments.  The  first  component  consists  of stock  purchase  contracts  to
purchase, four years from the date of issuance, common shares at a face value of
$50.  The  second  component  consists  of  mandatorily   redeemable   preferred
securities  (Preferred  Securities)  which  represent  an  undivided  beneficial
ownership  interest in the assets of NIPSCO Capital Trust I (Capital Trust). The
Preferred Securities have a stated liquidation amount of $50. The sole assets of
Capital Trust are subordinated  debentures  (Debentures) of Capital Markets that
earn  interest  at the same  rates as the  Preferred  Securities  to which  they
relate,  and certain  rights under related  guarantees by Capital  Markets.  The
Preferred  Securities  have been  pledged to secure the holders'  obligation  to
purchase common shares under the stock purchase contracts.

         The distributions paid on Preferred  Securities are presented under the
caption "minority  interests" in NiSource's  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 NiSource's  Consolidated Balance Sheet. At June 30, 2000,
there were 6.9 million 5.9% Preferred Securities  outstanding with Capital Trust
assets of $345 million.

(20) OPERATING LEASES:

<TABLE>
<CAPTION>

The  following  is a  schedule,  by years 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, 2000:

                  Twelve Months Ended June 30,       (Dollars in thousands)
                  =========================================================

                  <S>                                             <C>
                  2001                                            $  34,679
                  2002                                               66,540
                  2003                                               31,352
                  2004                                               78,626
                  2005                                               24,322
                  Later years                                       206,189
                                                                  ---------
                  Total minimum payments required                 $ 441,708
                                                                  =========
</TABLE>
<TABLE>
<CAPTION>

The Consolidated  Financial  Statements include rental expense for all operating
leases as follows:

                                                                June 30,            June 30,
(Dollars in thousands)                                            2000                1999
                                                              =============       =============

<S>                                                           <C>                 <C>
Three months ended                                            $      12,372       $      14,891
Six months ended                                              $      24,618       $      24,198
Twelve months ended                                           $      50,697       $      36,366
</TABLE>

 (21)  COMMITMENTS:  NiSource  expects that  approximately  $1.6 billion will be
expended  for  construction  purposes  for the  period  from  January 1, 2000 to
December 31, 2004.  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  Bailly  Generating
Station.  Services  under this  contract  commenced on June 15, 1992 with annual
charges approximating $20 million. The agreement provides that, assuming various
performance standards are met by Pure Air, a termination payment would be due if
Northern  Indiana  terminates 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 approximately $20 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  agreements with
several of NiSource's largest industrial customers,  principally steel mills and
a refinery,  to service a portion of their energy needs.  In order to serves its
customers under the agreements,  Primary, through its subsidiaries,  has entered
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 included in the amount disclosed in the Operating Leases in Note 20.

         Primary has advanced  approximately $64.5 million and $36.6 million, at
June 30,  2000 and  December  31,  1999,  respectively,  to the  lessors  of the
energy-related  projects  discussed  above.  These net  advances are included in
"Other  Receivables"  in the  Consolidated  Balance  Sheet and as a component of
operating activities in the Consolidated Statement of Cash Flows.

(22)  RISK  MANAGEMENT   ACTIVITIES:   NiSource  uses  certain   commodity-based
derivative  financial  instruments  to  manage  certain  risks  inherent  in its
business.  NiSource's  senior  management  takes  an  active  role  in the  risk
management  process and has  developed  policies  and  procedures  that  require
specific  administrative and business functions to assist in the identification,
assessment and control of various risks. The open positions  resulting from risk
management activities are managed in accordance with strict policies which limit
exposure to market risk and require  daily  reporting to management of potential
financial exposure.

         NiSource uses futures  contracts,  options and swaps to hedge a portion
of its price risk associated  with its non-trading  activities in gas supply for
its regulated gas utilities,  certain  customer  choice programs for residential
customers and other retail  customer  activity.  At June 30, 2000,  NiSource had
futures  contracts  representing  the hedge of natural gas sales in the notional
amount of 1.5  billion  cubic feet (BCF)  resulting  in a deferred  loss of $3.3
million.

         NiSource's  trading  operations  include  the  activities  of its power
trading business  and  non-affiliated transactions associated with TPC. NiSource
employs a VaR model to assess the market risk of its energy trading  portfolios.
NiSource estimates  the  one-day  VaR  across all trading  groups which  utilize
derivatives using either Monte Carlo simulation or  variance/covariance at a 95%
confidence level.  Based  on  the results of the VaR analysis,  the daily market
exposure for  power trading on an average,  high and low basis was $0.7 million,
$1.8 million and $0.004 million, $0.5 million, $1.8  million and $0.004  million
and $0.5 million, $1.8 million and $0.004 million for the three month, six month
and twelve month  periods ended June 30, 2000,  respectively.  The daily VaR for
the  gas  trading portfolio on an average,  high and low basis was $3.4 million,
$8.1 million and $0.7 million,  $2.7 million,  $8.1 million and $0.5 million and
$2.4  million,  $8.1 million and $0.4 million for the three month, six month and
twelve month  periods ended June 30, 2000,  respectively.  NiSource  implemented
a VaR methodology in 1999 to introduce additional market  sophistication  and to
recognize the developing complexity of its businesses.

         Unrealized  gains and losses on  NiSource's  portfolio  are recorded as
price risk management  assets and  liabilities.  The market prices used to value
price risk  management  activities  reflect the best  estimate of market  prices
considering  various factors,  including  closing exchange and  over-the-counter
quotations  and  price  volatility  factors  underlying  the  commitments.   The
accompanying Consolidated Balance Sheet reflects price risk management assets of
$309.0  million  and $90.7  million  at June 30,  2000 and  December  31,  1999,
respectively, of  which $301.2 million and $90.7 million were included in "Price
risk  management  assets"  and  $22.8  million  and  $0.0 million were  included
under the caption  "Prepayments  and other" included in the Other Assets at June
30, 2000 and December  31, 1999,  respectively.  The  accompanying  Consolidated
Balance Sheet also reflects  price risk  management  liabilities  (including net
option  premiums) of $335.9  million and $113.0  million of which $323.5 million
and  $113.0  million  were  included  in "Price risk management liabilities" and
$18.4 million and $0.0 million were  included  in "Other noncurrent liabilities"
at June 30, 2000 and December 31, 1999, respectively. Power  trading results are
reflected  on a net basis in the accompanying Consolidated Statements of Income,
consistent  with the guidance in EITF Issue No. 98-10 with respect to the use of
written  options and its settlement methodology with respect to physical forward
sales and purchase contracts. NiSource has recorded as a component  of  electric
revenues a realized  net profit of $4.8 million, $7.6 million and $15.0 million,
for the three  month,  six month and twelve month periods  ended  June 30, 2000,
respectively, and $3.5 million,  $3.6 million and $3.6  million  for  the  three
month, six month and twelve month periods ended June 30, 1999, respectively.


<TABLE>
<CAPTION>
Included  in  these  net  amounts  are  revenues  and costs of sales  related to
physical forward sales and purchase contracts as follows:

                                           Three Months               Six Months               Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ---------------------     ---------------------     ---------------------
(Dollars in thousands)                   2000         1999         2000         1999         2000         1999
                                       ========     ========     ========     ========     ========     ========

<S>                                    <C>          <C>          <C>          <C>          <C>          <C>
Power Trading Revenues                 $ 93,075     $ 44,957     $152,072     $ 44,957     $304,190     $ 44,957
Power Trading Cost of Sales            $ 93,564     $ 46,736     $152,464     $ 46,736     $306,995     $ 46,736
</TABLE>

     Realized  Activities  with respect to gas trading are  reflected on a gross
basis with revenues and costs of goods sold  consistent with the physical nature
of the trades.

<TABLE>
<CAPTION>
The amounts recorded as gas trading revenues and costs of goods sold were as follows:


                                           Three Months               Six Months               Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ---------------------     ---------------------     ---------------------
(Dollars in thousands)                   2000         1999         2000         1999         2000         1999
                                       ========     ========     ========     ========     ========     ========

<S>                                    <C>          <C>          <C>          <C>          <C>          <C>
Gas Trading Revenues                   $370,247     $ 92,158     $656,429     $ 92,158     $954,651     $ 92,158
Gas Trading Cost of Sales              $368,773     $ 91,562     $648,009     $ 91,562     $944,645     $ 91,562
</TABLE>


     In June and August of 2000, NiSource entered into forward starting interest
rate swaps with notional amounts of $600 million and $500 million, respectively,
to hedge the interest  rate risk  exposure  associated  with $1.1 billion of its
anticipated  financing of the CEG acquisition  debt. The swaps have an effective
date of March 30, 2001. The interest rate swaps on $600 million amount terminate
on March  30,  2006,  and the  interest  rate  swap on the $500  million  amount
terminates on March 30, 2011. Gains or losses  associated with the interest rate
swaps will be amortized over the life of the debt.

(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.

<TABLE>
<CAPTION>

The carrying values and estimated fair values of financial  instruments  were as
follows:

                                                     June 30, 2000               December 31,1999
                                                ------------------------     ------------------------
                                                 Carrying     Estimated       Carrying     Estimated
(Dollars in thousands)                            Amount      Fair Value       Amount      Fair Value
                                                ===========  ===========     ===========  ===========
<S>                                             <C>          <C>             <C>          <C>

Investments                                     $    49,658  $    50,977     $    49,064   $   49,352
Long-term debt (including current portion)      $ 1,990,388  $ 1,826,433     $ 2,148,905   $1,992,348
Preferred stock (including current portion)     $   137,639  $   109,110     $   141,469   $  119,702
Company-obligated mandatorily redeemable
   preferred securities of subsidiary trust
   holding solely Company debentures            $   345,000  $   272,985     $   345,000   $  248,831
 </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 natural gas is supplied in 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  portion  of gas and a  substantial  portion  of their
electric industrial deliveries are dependent upon the basic steel industry.

<TABLE>
<CAPTION>

The  following  table shows the basic steel  industry  percentage of gas revenue
(including transportation services) and electric revenue for 2000 and 1999:

                                                              Twelve Months      Twelve Months
                                                              Ended June 30,     Ended June 30,
         Basic Steel Industry                                      2000                1999
         --------------------                                 =============       =============

         <S>                                                           <C>                 <C>
         Gas revenue percentage                                         2%                   2%
         Electric revenue percentage                                   19%                  14%
</TABLE>

 (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 Utilities,  Electric,
Water  and Gas  Marketing  and  Storage.  The  Gas  Utilities  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 and trading  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  and Storage  segment  provides  natural gas  marketing,  trading,
storage 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 development and
operation 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.
NiSource uses income before interest and income taxes as its primary measurement
for  each  of the  reported  segments.  NiSource  makes  decisions  on  finance,
dividends  and taxes at the  corporate  level.  These topics are  addressed on a
consolidated  basis.  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 "Summary of Significant Accounting Policies."

<PAGE>
<TABLE>
<CAPTION>
For the three months ended June 30, 2000

                                                                             Gas            Other
                             Gas                                          Marketing       Products       Corporate &
(Dollars in thousands)    Utilities       Electric          Water         & Storage      & Services      Adjustments       Total
----------------------   -----------     -----------     -----------     -----------     -----------     -----------    -----------

<S>                      <C>             <C>             <C>             <C>             <C>             <C>            <C>
Operating Revenues       $   229,484     $   259,709     $    25,131     $   387,463     $    78,828     $   (57,644)   $   922,971
Other Net                $       327     $        98     $        79     $       455     $     3,882     $    (2,329)   $     2,512
Depreciation and
 Amortization            $    32,379     $    40,043     $     4,293     $     3,010     $     4,056     $       857    $    84,638
Income before Interest
 and Other Charges
 and Income Taxes        $    (6,940)    $    90,826     $     6,227     $     8,691     $     3,435     $   (10,381)   $    91,858
Assets                   $ 2,696,475     $ 2,764,794     $   704,872     $   948,960     $   609,083     $  (530,509)   $ 7,193,675
Capital Expenditures     $    24,929     $    32,788     $     9,863     $     7,893     $     5,578     $        --    $    81,051
Investment in
 Equity-Method Investees $        --     $    --         $        --     $     8,402     $    97,263     $        --    $   105,665
</TABLE>
<TABLE>
<CAPTION>

For the three months ended June 30, 1999

                                                                             Gas            Other
                             Gas                                          Marketing       Products       Corporate &
(Dollars in thousands)    Utilities       Electric          Water         & Storage      & Services      Adjustments       Total
----------------------   -----------     -----------     -----------     -----------     -----------     -----------    -----------

<S>                      <C>             <C>             <C>             <C>             <C>             <C>            <C>
Operating Revenues       $   187,348     $   272,072     $    24,061     $   160,011     $    74,993     $   (43,138)   $   675,347
Other Net                $      (509)    $       210     $       267     $     1,835     $    (4,850)    $       728    $    (2,319)
Depreciation and
 Amortization            $    29,743     $    39,593     $     4,790     $       800     $     2,021     $       646    $    77,593
Income before Interest
 and OtherCharges
 and Income Taxes        $   (11,155)    $    88,915     $     5,871     $       662     $       810     $    (2,444)   $    82,659
Assets                   $ 2,297,127     $ 2,743,524     $   643,283     $   285,977     $   694,450     $  (262,470)   $ 6,401,891
Capital Expenditures     $    25,990     $    41,244     $    10,560     $       277     $     8,333     $        --    $    86,404
Investment in
 Equity-Method Investees $        --     $        --     $        --     $    91,217     $   151,605     $        --    $   242,822
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 2000
                                                                             Gas            Other
                             Gas                                          Marketing       Products       Corporate &
(Dollars in thousands)    Utilities       Electric          Water         & Storage      & Services      Adjustments       Total
----------------------   -----------     -----------     -----------     -----------     -----------     -----------    -----------

<S>                      <C>             <C>             <C>             <C>             <C>             <C>            <C>
Operating Revenues       $   712,136     $   516,093     $    48,081     $   697,040     $   143,769     $  (126,599)   $ 1,990,520
Other Net                $     2,331     $        77     $       227     $       655     $     6,843     $    (4,346)   $     5,787
Depreciation and
 Amortization            $    64,819     $    80,160     $     8,532     $     6,044     $     7,909     $     1,653    $   169,117
Income before Interest
 and Other Charges
 and Income Taxes        $    91,952     $   173,512     $     9,954     $    18,409     $     3,317     $   (23,102)   $   274,042
Assets                   $ 2,696,475     $ 2,764,794     $   704,872     $   948,960     $   609,083     $  (530,509)   $ 7,193,675
Capital Expenditures     $    45,947     $    57,734     $    19,231     $    12,729     $    11,188     $        --    $   146,829
Investment in
 Equity-Method Investees $        --     $        --     $        --     $     8,402     $    97,263     $        --    $   105,665
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
                                                                             Gas            Other
                             Gas                                          Marketing       Products       Corporate &
(Dollars in thousands)    Utilities       Electric          Water         & Storage      & Services      Adjustments       Total
----------------------   -----------     -----------     -----------     -----------     -----------     -----------    -----------

<S>                      <C>             <C>             <C>             <C>             <C>             <C>            <C>
Operating Revenues       $   583,522     $   537,371     $    44,959     $   375,372     $   130,759     $  (105,060)   $ 1,566,923
Other Net                $     1,237     $       338     $       463     $     2,238     $     1,592     $    (1,046)   $     4,822
Depreciation and
 Amortization            $    56,121     $    79,248     $     7,015     $       884     $     5,921     $     1,259    $   150,448
Income before Interest
 and Other Charges
 and Income Taxes        $    77,309     $   162,521     $    10,837     $     1,554     $     3,462     $   (10,032)   $   245,651
Assets                   $ 2,297,127     $ 2,743,524     $   643,283     $   285,977     $   694,450     $  (262,470)   $ 6,401,891
Capital Expenditures     $    52,977     $    67,882     $    16,826     $       318     $    13,282     $        --    $   151,285
Investment in
 Equity-Method Investees $        --     $        --     $        --     $    91,217     $   151,605     $        --    $   242,822
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the twelve months ended June 30, 2000
                                                                             Gas            Other
                             Gas                                          Marketing       Products       Corporate &
(Dollars in thousands)    Utilities       Electric          Water         & Storage      & Services      Adjustments       Total
----------------------   -----------     -----------     -----------     -----------     -----------     -----------    -----------

<S>                      <C>             <C>             <C>             <C>             <C>             <C>            <C>
Operating Revenues       $ 1,210,909     $ 1,102,879     $   101,623     $ 1,093,445     $   296,536     $  (237,219)   $ 3,568,173
Other Net                $     5,256     $       495     $     1,746     $     3,624     $   (16,901)    $   (11,284)   $   (17,064)
Depreciation and
 Amortization            $   124,844     $   159,889     $    16,945     $     8,296     $    15,098     $     5,001    $   330,073
Income before Interest
 and Other Charges
 and Income Taxes        $   134,228     $   374,666     $    28,256     $    16,370     $   (16,066)    $   (65,558)   $   471,896
Assets                   $ 2,696,475     $ 2,764,794     $   704,872     $   948,960     $   609,083     $  (530,509)   $ 7,193,675
Capital Expenditures     $   138,152     $   123,871     $    66,995     $    13,144     $    11,905     $        --    $   354,067
Investment in
 Equity-Method Investees $        --     $        --     $        --     $     8,402     $    97,263     $        --    $   105,665
</TABLE>

<TABLE>
<CAPTION>
For the twelve months ended June 30, 1999
                                                                             Gas            Other
                             Gas                                          Marketing       Products       Corporate &
(Dollars in thousands)    Utilities       Electric          Water         & Storage      & Services      Adjustments       Total
----------------------   -----------     -----------     -----------     -----------     -----------     -----------    -----------

<S>                      <C>             <C>             <C>             <C>             <C>             <C>            <C>
Operating Revenues       $   871,690     $ 1,297,885     $    90,431     $   718,267     $   257,388     $  (167,713)   $ 3,067,948
Other Net                $     3,125     $       718     $       956     $     3,083     $     1,537     $      (468)   $     8,951
Depreciation and
 Amortization            $    94,145     $   158,368     $    11,003     $     1,099     $    13,573     $     1,819    $   280,007
Income before Interest
 and Other Charges
 and Income Taxes        $    99,637     $   353,175     $    26,463     $     4,427     $     7,913     $   (16,484)   $   475,131
Assets                   $ 2,297,127     $ 2,743,524     $   643,283     $   285,977     $   694,450     $  (262,470)   $ 6,401,891
Capital Expenditures     $    86,337     $   129,189     $    45,869     $       689     $    30,304     $        --    $   292,388
Investment in
 Equity-Method Investees $        --     $        --     $        --     $    91,217     $   151,605     $        --    $   242,822
</TABLE>

<TABLE>
<CAPTION>

The following table reconciles  total reportable  segment income before interest
and other charges and income taxes to net income for three month,  six month and
twelve month periods ended June 30, 2000 and 1999:

                                           Three Months               Six Months               Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ---------------------     ---------------------     ---------------------
(Dollars in thousands)                   2000         1999         2000         1999         2000         1999
                                       ========     ========     ========     ========     ========     ========

<S>                                    <C>          <C>          <C>          <C>          <C>          <C>
Total Segment profit (loss)            $ 91,857     $ 82,659     $274,042     $245,652     $471,896     $475,131
Interest expense, net                   (48,533)     (40,314)     (96,143)     (77,002)    (185,758)    (144,361)
Minority interests                       (5,000)      (5,668)     (10,041)      (8,376)     (19,358)      (9,439)
Dividends requirements on
    preferred stock of subsidiaries      (2,008)      (2,077)      (4,042)      (4,193)      (8,183)      (8,436)
                                       --------     --------     --------     --------     --------     --------
Income before income taxes               36,316       34,600      163,816      156,081      258,597      312,895
Less: Income taxes                       12,903       11,656       60,787       56,578       94,657      109,673
                                       --------     --------     --------     --------     --------     --------
Net Income                             $ 23,413     $ 22,944     $103,029     $ 99,503     $163,940     $203,222
                                       ========     ========     ========     ========     ========     ========
</TABLE>

<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

HOLDING COMPANY

         NiSource  Inc.  (NiSource),  formerly  NIPSCO  Industries,  Inc., is an
energy and utility-based holding company headquartered in Merrillville, Indiana,
that provides natural gas, electricity, water and related services to the public
for  residential,  commercial and industrial  uses through a number of regulated
and  non-regulated  subsidiaries.  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's  gas business is  comprised  primarily of regulated
gas utilities and gas transmission  companies that operate  throughout  northern
Indiana and New England.  In  addition,  NiSource  expanded  its gas  marketing,
trading  and  storage   operations  with  the  April  1999  acquisition  of  TPC
Corporation,  now renamed  EnergyUSA-TPC Corp. (TPC) and its 1999 acquisition of
Market Hub Partners,  L.P. (MHP). NiSource's electric business is comprised of a
regulated  electric  utility  that  operates in northern  Indiana.  The electric
business also includes wholesale sales and power trading activities.  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."  Collectively,  the Energy and Water Utilities are
referred to as the "Utilities."

         Non-regulated  energy and  utility-related  products  and  services are
provided through the "Products and Services" subsidiaries. Products and Services
subsidiaries  perform  energy-related  services and offer products in connection
with these services, which include pipeline construction, repair and maintenance
of underground gas and water pipelines, locating and marking utility lines, real
estate development  activity and development and operation of "inside the fence"
cogeneration plants.

         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).

NET INCOME

         Net income  decreased  $39.3  million from the twelve months ended June
30,  1999 to $164.0  million  for the  twelve  months  ended  June 30,  2000 and
increased $3.5 million from the six months ended June 30, 1999 to $103.0 million
for the six months ended June 30, 2000 and increased $0.5 million from the three
months ended June 30, 1999 to $23.4  million for the three months ended June 30,
2000.  Results for the three periods  ended June 30 are not directly  comparable
year  to  year  due  to  the  acquisition  of BSG, TPC and MHP in 1999. NiSource
established its New England  presence when it acquired BSG in February 1999. The
natural gas marketing,  asset  optimization and natural gas storage units of TPC
and MHP were also acquired in 1999.

GAS REVENUES

         The gas revenues  represent the combined  revenues of gas utilities and
gas marketing and storage segments adjusted for intercompany  transactions.  Gas
revenues  were $2.1  billion  for the twelve  months  ended June 30, 2000 (after
elimination  of  intercompany  transmission,  marketing  and storage  revenue of
approximately $219.7 million), an increase of $640.2 million from the comparable
period ended June 30, 1999.  This  increase was  primarily  due to increased gas
revenues from BSG of $228.4 million  reflecting a full twelve months of results,
increased gas marketing,  storage and trading  revenues of $349.9 as a result of
the TPC and MHP  acquisitions  in 1999,  and increased pass through gas costs of
$95.2  million  partially   offset by  decreased  sales to the  residential  and
commercial  customers of the Energy  Utilities  located in northern Indiana as a
result of warmer weather during the period. During the period, gas deliveries in
dekatherms  (dth),  which  include  transportation  services,  increased  due to
increased gas marketing and storage  activities  and inclusion of BSG deliveries
partially offset by decreased  deliveries to the those Energy Utilities  located
in northern  Indiana  (Indiana  Energy  Utilities)  residential  and  commercial
customers reflecting heating degree-days 3% lower than 1999.

     Gas  revenues  were $1.3  billion  for the six months  ended June 30,  2000
(after elimination of intercompany  transmission,  marketing and storage revenue
of  approximately  $118.9  million)  an  increase  of  $426.8  million  from the
comparable  period  ended  June 30,  1999.  This  increase  is  attributable  to
increased gas marketing, storage and trading revenues as a result of the TPC and
MHP acquisitions in 1999, inclusion of a full six months results from BSG in the
2000 period and the  pass-through  of increased  gas costs  partially  offset by
decreased  sales to the  residential  and  commercial  customers  of the Indiana
Energy  Utilities  due to warmer  weather  than  1999.  During the  period,  gas
deliveries  in dth,  which  include  transportation  services,  increased due to
increased gas marketing and storage  activities  and BSG  deliveries,  partially
offset by decreased gas deliveries to the Indiana Energy  Utilities  residential
and commercial customers reflecting heating degree-days 7% lower than 1999.

         Gas  revenues  were $562.5  million for the three months ended June 30,
2000 (after  elimination  of  intercompany  transmission,  marketing and storage
revenue of  approximately  $54.0 million) an increase of $253.9 million from the
comparable  period  ended  June 30,  1999.  This  increase  is  attributable  to
increased gas marketing, storage and trading revenues as a result of the TPC and
MHP  acquisitions  in 1999 and the  pass-through  of  increased  gas  costs  and
increased sales to residential and commercial customers.  During the period, gas
deliveries  in dth,  which  include  transportation  services,  increased due to
increased gas marketing, storage and trading activities and increased deliveries
to residential and commercial customers.

         Large   commercial  and  industrial   customers   continue  to  utilize
transportation  services  provided by the Energy Utilities.  Gas  transportation
customers  purchase much of their gas directly from  producers and marketers and
then pay a  transportation  fee to have  their  gas  delivered  over the  Energy
Utilities'  systems.  The Energy  Utilities  transported  54.3,  122.4 and 236.1
million  dth for others  during  the three  month,  six month and  twelve  month
periods ended June 30, 2000, respectively.

         The basic steel  industry  accounted  for 16% of natural gas  delivered
(including volumes transported) during the twelve months ended June 30, 2000.

<TABLE>
<CAPTION>

The components of the changes in gas revenues are shown in the following table:

                                                               -------------------------------------------
                                                                           Ended June 30, 2000
                                                               -------------------------------------------
                                                                  Three            Six            Twelve
 (Dollars in thousands)                                           Months          Months          Months
                                                               ===========     ===========     ===========
Gas Revenue Changes
    Pass through of net changes in purchased gas costs,
<S>                                                            <C>             <C>             <C>
      gas storage and storage transportation costs             $    37,603     $    63,259     $    95,156
  Changes in sales levels                                              508         (26,667)        (35,147)
  Bay State Gas Acquisition                                             --          81,082         228,379
  Gas transported                                                    3,846           1,522           1,962
  Gas marketing, storage and trading                               211,942         307,628         349,880
                                                               -----------     -----------     -----------
Gas Revenue Change                                             $   253,899     $   426,824     $   640,230
                                                               ===========     ===========     ===========
</TABLE>

GAS COSTS OF SALES

         The gas costs represent the combined costs of the gas utilities and gas
marketing and storage segments adjusted for intercompany  transactions.  The gas
costs increased $515.0 million (48%) to $1.6 billion for the twelve months ended
June 30,  2000  from the  comparable  period  ended  June 30,  1999,  due to the
increased gas costs of $114.3 million for BSG reflecting a full twelve months of
operations,  increased gas marketing,  storage and trading  activities of $344.5
million  as a result  of the TPC and MHP  acquisitions  in 1999,  and  increased
purchased gas costs per dth for the Energy  Utilities.  The average cost for the
Energy  Utilities'  purchased  gas  for the  period,  after  adjustment  for gas
transition  costs billed to transport  customers,  was $3.14 per dth,  excluding
purchased  gas costs of BSG,  as  compared  to $2.41 per dth for the  comparable
period ended June 30, 1999.

         Gas costs increased  $380.4 million (63%) to $985.1 million for the six
months  ended June 30,  2000 from the  comparable  period  ended June 30,  1999,
mainly due to increased gas purchases of $292.7 million related to gas marketing
and  storage  activities  as a result of the TPC and MHP  acquisitions  in 1999,
increased  gas  cost  of  $47.3  million for BSG reflecting a full six months of
operations  and  deliveries  and  increased  gas  costs  per  dth for the Energy
Utilities.  The average cost for the  Energy  Utilities'  purchased  gas for the
period, after adjustment for gas transition costs billed to transport customers,
was $3.16 per dth, excluding purchased  gas  costs  of BSG, as compared to $2.33
per dth for the comparable period ended June 30, 1999.

         Gas costs  increased  $241.1  million  (107%) to $466.2 million for the
three months ended June 30, 2000 from the comparable period ended June 30, 1999,
mainly due to increased gas purchases of $214.2 million related to gas marketing
and storage  activities as a result of the TPC and MHP acquisitions in 1999, and
increased gas costs per dth for the Energy  Utilities.  The average cost for the
Energy  Utilities'  purchased  gas  for the  period,  after  adjustment  for gas
transition costs billed to transport customers, was $4.14 per dth as compared to
$3.13 per dth for the comparable period ended June 30, 1999.

GAS OPERATING MARGIN

         Gas  operating  margin  for the  twelve  months  ended  June  30,  2000
increased $125.2 million to $512.4 million from the comparable period ended June
30, 1999. This increase mainly reflects an increase of $113.6 million reflecting
a  full  twelve  months  of  gas  operating  margin  from  BSG and increased gas
marketing,  storage  and  trading  activities,  partially  offset  by  decreased
deliveries to Indiana Energy  Utilities  residential  and  commercial  customers
reflecting a warmer heating season during the period.

         Gas operating  margin  increased $46.4 million to $304.3 million during
the six months  ended June 30, 2000 from the  comparable  period  ended June 30,
1999.  This increase  mainly  reflects an increase of $33.3  million  reflecting
a full six months of gas operating  margin from BSG and increased gas marketing,
storage  and  trading   activities,  partially offset by decreased deliveries to
Indiana  Energy  Utilities  residential and commercial customers reflecting  the
warmer  heating  season  during  the  first  quarter of 2000 from the comparable
period ended June 30, 1999.

         Gas operating  margin  increased  $12.8 million to $96.3 million during
the three months ended June 30, 2000 from the  comparable  period ended June 30,
1999.  This  increase  mainly  reflects  an  increase  of $12.7  million  of gas
marketing, storage and trading activities.

ELECTRIC REVENUES

         Electric  revenues  were $1.1 billion for the twelve  months ended June
30, 2000 (after  elimination of intercompany  transactions of approximately $2.6
million), a decrease of $194.5 million from the comparable period ended June 30,
1999.  Sales of  electricity  in  kilowatt-hours  (kwh)  decreased  26% from the
comparable period ended June 30, 1999.  Electric revenues  decreased as a result
of  significantly  reduced  non-regulated  wholesale  sales and power  marketing
transactions,  partially  offset  by  increased  electric  sales  to  commercial
customers due to warmer  weather during the third quarter of 1999, and increased
industrial sales.

         Electric revenues were $514.8 million for the six months ended June 30,
2000 (after  elimination of  intercompany  transactions  of  approximately  $1.3
million),  a decrease of $21.0 million from the comparable period ended June 30,
1999. Sales of electricity in kwh decreased 8% from the comparable  period ended
June 30, 1999.  Electric revenues decreased as a result of reduced regulated and
non-regulated  wholesale sales and power marketing transactions partially offset
by increased electric sales to commercial and industrial customers.

         Electric  revenues were $259.2  million for the three months ended June
30, 2000 (after  elimination of intercompany  transactions of approximately $0.6
million), a decrease of $12.1 million from the comparable  period ended June 30,
1999. Sales of electricity in kwh decreased 6% from the comparable  period ended
June 30, 1999.  Electric revenues decreased as a result of reduced regulated and
non-regulated  wholesale  sales and power  marketing  transactions  and  reduced
residential sales partially offset by increased electric sales to commercial and
industrial customers.

         The basic steel industry accounted for 33% of electric sales during the
twelve months ended June 30, 2000.

<TABLE>
<CAPTION>

The  components  of the changes in electric  revenues are shown in the following
table:
                                                               -------------------------------------------
                                                                           Ended June 30, 2000
                                                               -------------------------------------------
                                                                  Three            Six            Twelve
 (Dollars in thousands)                                           Months          Months          Months
                                                               ===========     ===========     ===========
Electric Revenue Changes
<S>                                                            <C>             <C>             <C>

    Pass through of net changes in fuel costs                  $    (2,724)    $    (5,540)    $     2,716
  Changes in sales levels                                           (1,931)          8,261          36,090
  Wholesale sales and power marketing                               (7,475)        (23,716)       (233,265)
                                                               -----------     -----------     -----------
Electric Revenue Change                                        $   (12,130)    $   (20,995)    $  (194,459)
                                                               ===========     ===========     ===========
</TABLE>

ELECTRIC COST OF SALES

         Cost of fuel for electric  generation  increased $1.6 million to $247.2
million for the twelve  months  ended June 30, 2000 from the  comparable  period
ended June 30, 1999. The increase is primarily due to increased generation.  The
average cost per kwh  generated  decreased 5% from the  comparable  period ended
June 30, 1999, to 1.42 cents per kwh, for the twelve months ended June 30, 2000.

         Cost of fuel for electric  generation  decreased $2.0 million to $114.0
million for the six months ended June 30, 2000 from the comparable  period ended
June 30, 1999.  The decrease is  primarily  due to decreased  fuel costs per kwh
generated.  The average cost per kwh generated  decreased 7% from the comparable
period ended June 30, 1999, to 1.37 cents per kwh, for the six months ended June
30, 2000.

         Cost of fuel for electric  generation  decreased  $1.2 million to $56.5
million  for the three  months  ended June 30, 2000 from the  comparable  period
ended June 30, 1999.  The decrease is primarily due to decreased  fuel costs per
kwh  generated.  The  average  cost  per kwh  generated  decreased  7% from  the
comparable  period  ended June 30,  1999,  to 1.37 cents per kwh,  for the three
months ended June 30, 2000.

POWER PURCHASED

         Power  purchased  decreased  $218.2  million to $47.5  million  for the
twelve  months  ended June 30, 2000 from the  comparable  period  ended June 30,
1999. The decrease is a result of decreased  wholesale sales and power marketing
activities.

         Power  purchased  decreased  $24.2  million and $10.4  million to $15.3
million and $7.0 million,  respectively, for the six and three months ended June
30, 2000 from the  comparable  periods  ended June 30,  1999.  The decrease is a
result of decreased cost per kwh, decreased  wholesale sales and power marketing
activities.

ELECTRIC OPERATING MARGIN

         Operating  margin from electric sales increased $22.1 million to $805.3
million for the twelve  months  ended June 30, 2000 from the  comparable  period
ended June 30, 1999. This increase  occurred  mainly due to improved  margins on
wholesale  sales  and  power  marketing  transactions  and  increased  sales  to
commercial and industrial customers offset by decreased residential sales.

         Operating  margin from electric sales  increased $5.2 million to $385.5
million for the six months ended June 30, 2000 from the comparable  period ended
June 30,  1999.  This  increase  occurred  mainly  due to  improved  margins  on
wholesale  sales  and  power  marketing  transactions  and  increased  sales  to
commercial and industrial customers offset by decreased residential sales.

         Operating  margin from electric sales  decreased $0.6 million to $195.7
million  for the three  months  ended June 30, 2000 from the  comparable  period
ended June 30,  1999.  The quarter  results  included a $1.8  million  charge to
earnings due to a change in the  regulatory  mechanism for recovery of purchased
power  costs.  This  decrease  is also due to  decreased  sales  to  residential
customers  partially  offset by improved  margins on  wholesale  sales and power
marketing   transactions  and  increased  sales  to  commercial  and  industrial
customers.

WATER REVENUE

         Water revenues were $101.4 million for the twelve months ended June 30,
2000 (after  elimination of  intercompany  transactions  of  approximately  $0.2
million for the twelve months ended June 30, 2000), an increase of $11.1 million
from the comparable  period ended June 30, 1999. This increase was primarily due
to increased water volumes sold and the increase in base rates for IWC.

         Water  revenues  were $47.9  million for the six months  ended June 30,
2000 (after  elimination of  intercompany  transactions  of  approximately  $0.2
million for the six months ended June 30, 2000),  an increase of $3 million from
the  comparable  period ended June 30, 1999.  This increase was primarily due to
increased water volumes sold and the increase in base rates for IWC.

         Water  revenues  were $24.9 million for the three months ended June 30,
2000 (after  elimination of  intercompany  transactions  of  approximately  $0.1
million for the three  months  ended June 30,  2000),  an increase of $1 million
from the comparable  period ended June 30, 1999. This increase was primarily due
to increased water volumes sold.

<TABLE>
<CAPTION>

The  components  of the  changes in water  revenues  are shown in the  following
table:
                                                               -------------------------------------------
                                                                           Ended June 30, 2000
                                                               -------------------------------------------
                                                                  Three            Six            Twelve
 (Dollars in thousands)                                           Months          Months          Months
                                                               ===========     ===========     ===========
Water Revenue Changes
<S>                                                            <C>             <C>             <C>

  Rate increase                                                $        --     $     1,160     $     5,102
  Changes in sales levels                                              952           1,836           5,964
                                                               -----------     -----------     -----------
Water Revenue Change                                           $       952     $     2,996     $    11,066
                                                               ===========     ===========     ===========
</TABLE>


PRODUCTS AND SERVICES REVENUES

         Products  and  Services  revenues  were  $286.5  million for the twelve
months ended June 30, 2000 (after  elimination of  intercompany  transactions of
approximately  $14.7 million),  an increase of $43.4 million from the comparable
period ended June 30, 1999. This increase  reflects  increased line locating and
marking activity,  increased pipeline construction  activity,  increased revenue
from a new cogeneration  facility,  which began commercial  operations in August
1998, and the inclusion of revenue of BSG's unregulated subsidiaries  commencing
in February 1999.

         Products and Services  revenues were $138.5  million for the six months
ended  June  30,  2000  (after  elimination  of  intercompany   transactions  of
approximately  $6.2  million),  an increase of $14.8 million from the comparable
period ended June 30, 1999.  This increase  reflects  $12.3 million of increased
line locating and marking activity, increased pipeline construction activity and
increased  revenue from the  cogeneration  facility offset by lower revenue from
the energy-related service companies.

         Products and Services  revenues were $76.3 million for the three months
ended  June  30,  2000  (after  elimination  of  intercompany   transactions  of
approximately  $2.9  million),  an increase of $4.9 million from the  comparable
period ended June 30, 1999. This increase  reflects  increased line locating and
marking  activity,  increased  revenue   from  the  cogeneration  facility,  and
increased  pipeline  construction  activity  offset  by  lower  revenue from the
energy-related service companies and lower real estate sales.

<TABLE>
<CAPTION>

The components of the changes in operating revenues at Products and Services are
shown in the following table:

                                                               -------------------------------------------
                                                                           Ended June 30, 2000
                                                               -------------------------------------------
                                                                  Three            Six            Twelve
 (Dollars in thousands)                                           Months          Months          Months
                                                               ===========     ===========     ===========

Products and Services Revenue Changes
<S>                                                            <C>             <C>             <C>
    Pipeline construction                                      $     2,879     $     5,325     $    10,734
    Locate and marking                                               7,033          12,332          16,064
    Cogeneration project                                             3,613           3,068          10,381
    Other                                                           (8,621)         (5,953)          6,208
                                                               -----------     -----------     -----------
Products and Services Revenue Change                           $     4,904     $    14,772     $    43,387
                                                               ===========     ===========     ===========
</TABLE>

PRODUCTS AND SERVICES COST OF SALES

         The cost of sales for Products and Services  increased $38.4 million to
$159.4  million for the twelve  months  ended June 30, 2000 from the  comparable
period  ended June 30, 1999.  This  increase  reflects the  inclusion of cost of
sales from February 1999 for certain  subsidiaries  acquired in connection  with
the BSG  acquisition,  and  increased  pipeline  construction  activity and line
locating and marking activities.

         The cost of sales for Products and Services  increased $16.7 million to
$79.3 million for the six months ended June 30, 2000 from the comparable  period
ended June 30, 1999 mainly due to the increase in the cost of sales for the line
locating and marking subsidiaries and pipeline construction  partially offset by
decreased project costs at the energy-related service subsidiaries.

         The cost of sales for Products and Services  increased  $7.5 million to
$44.5  million  for the three  months  ended June 30,  2000 from the  comparable
period  ended June 30, 1999 mainly due to the  increase in the cost of sales for
the line locating and marking subsidiaries and pipeline  construction  partially
offset by decreased project costs at the energy-related service subsidiaries.

PRODUCTS AND SERVICES OPERATING MARGIN

         Products and Services operating margin increased $5.0 million to $127.1
million for the twelve months ended June 30, 2000, reflecting a new cogeneration
facility,  which began commercial  operations in August 1998, increased pipeline
construction  activity  and the  inclusion  of the  operating  margin of certain
subsidiaries  acquired  in  connection  with the BSG  acquisition,  offset  by a
decrease in line locating and marking subsidiary margin.

         Products and Services  operating margin decreased $2.0 million to $59.2
million  for  the  six  months  ended  June  30,  2000,   reflecting   increased
cogeneration   facility  margin  and  pipeline  construction  activity  and  the
inclusion  of  certain   subsidiaries   acquired  in  connection  with  the  BSG
acquisition  offset by a decrease  in line  locating  and  marking  subsidiary
margin and a decrease in real estate sales activity.

         Products and Services  operating margin decreased $2.6 million to $31.7
million  for  the  three  months  ended  June  30,  2000,  reflecting  increased
cogeneration  facility margin offset by decreased pipeline construction activity
and a decrease in line locating and marking  subsidiary  margin and a decrease
in real estate sales activity.

OPERATING EXPENSES AND TAXES (EXCEPT INCOME)

         Operating  expenses  and taxes (except income) increased $140.6 million
to  $1,057.2  million  for  the  twelve  months  ended  June 30, 2000  from  the
comparable  period  ended  June 30, 1999.  Operating  expenses and taxes (except
income) increased  $25.2 million  to  $528.6  million  for  the six months ended
June 30, 2000  from  the  comparable  period  ended  June 30, 1999.    Operating
expenses and taxes (except  income) increased $6.2 million to $259.4 million for
the three months ended  June 30, 2000  from the comparable period ended June 30,
1999.

         The  operation  and  maintenance   expenses  of  the  Energy  Utilities
increased  $42.7 million to $424.5  million for the twelve months ended June 30,
2000 from the comparable  period ended June 30, 1999. The increase was primarily
due to an increase of $53.2 million of operation  expenses from BSG reflecting a
full twelve months expenses,  increased expenses for distributed  generation and
fuel cell  research  and  development  of $1.9  million and  increased  employee
related  costs of $9.2  million  partially  offset  by a $13  million  insurance
settlement in the 1999 period  related to  manufactured  gas plants site cleanup
costs and decreased operating costs for electric production facilities  of  $2.3
million.  The   unregulated  gas  and  electric  businesses  operation  expenses
increased  $10.2  million  to $18.1 million for the twelve months ended June 30,
2000  primarily  due  to  the inclusion of $12.9 million of TPC operation costs.
Operation  expenses  at the  Water  Utilities  increased  $3.9  million to $50.2
million  for  the  twelve  months ended June 30, 2000 from the comparable period
ended June 30, 1999 due to increased water treatment and employee related costs.
Operation expenses for  Products and Services  increased  $3.6 million to $113.5
million for the twelve months ended June 30, 2000  from  the  comparable  period
ended  June 30, 1999  reflecting  the  inclusion  of  operation expense of BSG's
unregulated subsidiaries from February 1999, and a full year of operation  costs
for a new cogeneration facility which began commercial operation during 1998.

         Operation  expenses  for the twelve  months  ended  June 30,  2000 also
include charges of $13.1 million for professional fees and filing costs incurred
during 1999 in connection with the tender offer for CEG.

         The  operation  and  maintenance   expenses  of  the  Energy  Utilities
increased  $1.2 million to $218.5 million for the six months ended June 30, 2000
from the comparable  period ended June 30, 1999. This increase was primarily due
to increased  operation expenses from BSG of $11.1 million reflecting a full six
months expenses,  partially  offset by decreased  employee related costs of $6.2
million and other decreased  operation  costs.  The unregulated gas and electric
businesses  operation  expenses  increased $5.2 million to $10.5 million for the
six month ended June 30,  2000 from the  comparable  period  ended June 30, 1999
primarily  due to the  inclusion  of a full six months of TPC  operation  costs.
Operation  expenses  at the Water  Utilities  increased  $1.9  million  to $25.3
million for the six months ended June 30, 2000 from the comparable  period ended
June 30, 1999 due to increased  employee related costs.  Operation  expenses for
Products and Services decreased $0.04 million to $56.4 million for the six month
ended June 30, 2000 from the  comparable  period ended June 30, 1999  reflecting
increased  operating  expenses at the  cogeneration  facility and an increase in
line  locating  and  marking  subsidiary  and  pipeline  construction  operation
subsidiaries expenses.

         The  operation  and  maintenance   expenses  of  the  Energy  Utilities
decreased  $0.2  million to $109.6  million for the three  months ended June 30,
2000 from the comparable period ended June 30, 1999. This decrease was primarily
due to decreased  employee  related costs and other  decreased  operation costs.
The  unregulated  gas and electric businesses operation expenses increased  $1.7
million  to  $5.0  million  for  the  three  month  ended June 30, 2000 from the
comparable  period ended June 30, 1999 primarily due to the  inclusion of a full
three months of TPC operation costs. Operation expenses  at the Water  Utilities
increased $0.9 million to $12.5 million for the three months ended June 30, 2000
from the comparable period ended June 30, 1999 due to increased employee related
costs.  Operation  expenses for Products and Services  increased $0.6 million to
$29.0  million  for  the three month  ended  June 30,  2000 from the  comparable
period  ended  June 30, 1999  reflecting  increased  operating  expenses  at the
cogeneration  facility  and  an increase in line locating and marking subsidiary
operation expenses.

         Depreciation  and  amortization  expenses  increased  $50.0  million to
$330.0  million for the twelve  months  ended June 30, 2000 from the  comparable
period ended June 30, 1999, primarily resulting from increased  depreciation and
amortization  expense from BSG of $26.7 million  reflecting a full twelve months
expenses,  increased depreciation and amortization from TPC of $7.3 million as a
result of the  acquisitions  of TPC and  increased  depreciation  expense at the
Energy and Water Utilities due to plant additions.

         Depreciation  and  amortization  expenses  increased  $18.7  million to
$169.1  million  for the six  months  ended  June 30,  2000 from the  comparable
periods ended June 30, 1999, primarily resulting from increased depreciation and
amortization  expense  from BSG of $7.1  million  and  from TPC of $5.2  million
reflecting a full six months expenses and increased  depreciation expense at the
Energy and Water Utilities due to plant additions.

         Depreciation and amortization  expenses increased $7.0 million to $84.6
million for the three  months  ended June 30, 2000 from the  comparable  periods
ended  June 30,  1999,  primarily  resulting  from  increased  depreciation  and
amortization  expense  from  TPC of $2.2  million reflecting a full three months
expenses,  increased  depreciation  and  amortization  expense  from BSG of $1.9
million and increased depreciation expense at the Energy and Water Utilities due
to plant additions.

         Taxes (except  income)  increased $2.2 million to $99.1 million for the
twelve  months ended June 30, 2000,  from the  comparable  period ended June 30,
1999  primarily as the result of the inclusion of a full twelve months  expenses
from BSG, offset by decreased property tax expense at Northern Indiana..

         Taxes (except  income)  decreased $4.4 million to $48.8 million for the
six months ended June 30, 2000 from the  comparable  period ended June 30, 1999,
primarily as the result of decreased property tax expense at Northern Indiana.

         Taxes (except  income)  decreased $4.6 million to $20.6 million for the
three months ended June 30, 2000 from the comparable period ended June 30, 1999,
primarily  as the result of decreased  property tax expense at Northern  Indiana
partially offset by increased expenses from BSG and TPC.

INTEREST EXPENSE, NET

         Interest expense, net increased $41.4 million to $185.8 million for the
twelve months ended June 30, 2000 from the comparable period ended June 30,1999.
This increase reflects the inclusion of a full twelve months of interest expense
from BSG of $22.8  million,  interest  on the  September  1999  issuance of $160
million in Puttable Reset  Securities  (PURS) and increased  interest expense on
higher short-term borrowings.

         Interest expense,  net increased $19.1 million to $96.1 million for the
six months ended June 30, 2000 from the  comparable  periods ended June 30,1999.
This increase  reflects the inclusion of six months of interest charges for BSG,
interest  on the  September  1999  issuance of $160  million in  Puttable  Reset
Securities (PURS) and increased interest expense on higher short-term borrowings

         Interest  expense,  net increased $8.2 million to $48.5 million for the
three months ended June 30, 2000 from the comparable periods ended June 30,1999.
This  increase  reflects the  interest on the  September  1999  issuance of $160
million in Puttable Reset  Securities  (PURS) and increased  interest expense on
higher short-term borrowings

MINORITY INTERESTS

         Minority interest increased $9.9 million and $1.7 million and decreased
$0.7 million for the twelve  months,  six months and three months ended June 30,
2000,  respectively,  from the  comparable  periods  ended  June 30,  1999.  The
increases  for the twelve month and six month  periods  reflect the inclusion of
dividends paid on Company-obligated  mandatorily redeemable Preferred Securities
issued in February 1999.

OTHER, NET

         Other,  net decreased  $26.0 million to a loss of $17.1 million for the
twelve  months  ended June 30, 2000 from the  comparable  period  ended June 30,
1999,  primarily reflecting the impact of adverse economic conditions on certain
equity  investments,   the  most  significant  of  which  was  in  oil  and  gas
development.  NiSource also decided to abandon certain businesses and facilities
that were not consistent with its strategic direction.

     Other, net increased $1.0 million and $4.8 million to $5.8 million and $2.5
million  for the six  months  and  three  months  ended  June 30,  2000 from the
comparable period ended June 30, 1999. This increase reflects improved operating
results from a cogeneration facility equity investment.

INCOME TAXES

         Income taxes  decreased  $15.0  million to $94.7 million for the twelve
months ended June 30, 2000 from the comparable  period ended June 30, 1999. This
decrease is primarily a result of decreased pre-tax income.

     Income taxes  increased  $4.2  million to $60.8  million for the six months
ended  June 30,  2000 from the  comparable  period  ended  June 30,  1999.  This
increase is  primarily  as a result of an increase in pre-tax  income and higher
effective income tax rate.

         Income  taxes  increased  $1.2  million to $12.9  million for the three
months ended June 30, 2000 from the comparable  period ended June 30, 1999. This
increase is  primarily  as a result of an increase in pre-tax  income and higher
effective income tax rate.

         See Notes to  Consolidated  Financial  Statements  for a discussion  of
accounting policies and transactions impacting this analysis.

ENVIRONMENTAL MATTERS

         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 regulations
affect NiSource's operations as they relate to impacts on air, water and land.

         Refer to "Environmental Matters" in the Notes to Consolidated Financial
Statements for information regarding certain environmental issues.

LIQUIDITY AND CAPITAL RESOURCES

         Generally,  cash flow from operations has provided sufficient liquidity
to  meet  current  operating  requirements.  Because  the  utility  and  utility
construction  business  is seasonal  in nature,  commercial  paper is issued for
short-term financing.  As of June 30, 2000 and December 31, 1999, $408.0 million
and $299.6  million  of  commercial  paper was  outstanding,  respectively.  The
weighted average  interest rate on commercial  paper  outstanding as of June 30,
2000 was 6.92%.

         NiSource  and its  subsidiaries  may borrow under 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,
2000.  NiSource  expects  that  the  364-day  agreements  will  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,  2000,  there were no  borrowings  outstanding  under  these
agreements.

         In addition, various NiSource subsidiaries maintain lines of credit for
up to an  aggregate  of $159.7  million  with  lenders  at either  the  lender's
commercial  prime or market lending rates. As of June 30, 2000, there were $33.3
million of  borrowings  outstanding  under these lines of credit with a weighted
average  interest  rate of 7.40%.  As of  December  31,  1999,  there were $54.1
million of borrowings outstanding under these lines of credit.

         NiSource and its subsidiaries maintain money market lines of credit for
up to $379.5 million. As of June 30, 2000, there were $248.9 million outstanding
under these money market lines of credit at a weighted  average interest rate of
7.08%. At December 31, 1999, there were $156.2 million of borrowings outstanding
under these money market lines of credit.

         Eighty  million  dollars in  medium-term  notes were issued in February
1999. 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 Corporate  Premium
Income Equity  Securities  (Corporate  PIES) was completed.  The net proceeds of
approximately  $334.7  million were  primarily  used to refinance the short-term
borrowings  incurred to pay the cash portion of the acquisition cost of BSG, and
repay other short-term  indebtedness.  In September 1999, Capital Markets issued
$160 million of PURS in an  underwritten  public  offering and the  underwriters
acquired a call option to  purchase  the PURS on  September  28,  2000.  The net
proceeds from the sale of the PURS of $162.4 million were also used to refinance
short-term  indebtedness  incurred in connection  with the acquisition of BSG in
February 1999.  See  "Short-Term  Borrowings"  in the Notes to the  Consolidated
Financial  Statements for a description of the Corporate PIES and the PURS. (See
Note 18 and 19)

        On February 28, 2000,  NiSource and Columbia Energy Group (CEG) entered
into a merger  agreement  pursuant to which  NiSource  agreed to acquire CEG for
approximately $6 billion,  plus the assumption of approximately  $2.5 billion of
CEG debt. The merger will be accomplished  through the creation of a new holding
company.  Each  NiSource  common share will be exchanged for one common share of
the new holding  company.  Each CEG share will be  exchanged  for $70.00 in cash
plus  $2.60  principal  amount  of a unit  issued  by the  new  holding  company
(consisting  of a zero  coupon  debt  security  coupled  with a  forward  equity
contract)  or, at the  election  of the CEG  shareholder,  $74.00 in new holding
company stock,  based on the average  NiSource share price prior to the closing,
but not more than  4.4848  shares of new  holding  company  stock,  for each CEG
share.  Stock  elections  will be  subject  to  proration  if they are made with
respect to more than 30% of CEG's outstanding shares. No exchange of shares will
occur  unless at least 10% of CEG's  outstanding  shares  elect to exchange  for
shares of the new holding company. The merger is conditioned upon the receipt of
a number  of  approvals.  Approval  of the  NiSource  and CEG  shareholders  was
obtained on June 1 and June 2,  respectively.  As of July 26, 2000,  all actions
needed  from  state  utility  regulatory  commissions  and  from  FERC  had been
received.  The Securities and Exchange  Commission must still approve the merger
under the Public Utility Holding Company Act.

         NiSource has accepted a commitment letter under which certain financial
institutions agreed, under specified  conditions,  to provide up to $6.0 billion
to  finance  the  acquisition  of CEG.  The  commitment  letter  contemplates  a
revolving credit facility expiring in July 2001, with the right to convert loans
outstanding at that time into term loans maturing 364 days thereafter.  NiSource
has  hedged  the  interest  rate  risk  associated  with  $1.1  billion  of  its
anticipated refinancing of such debt.

         The Energy  Utilities do not anticipate the need to file for retail gas
or  electric  base  rate  increases  in the near  future.  IWC has  agreed  to a
moratorium  on water rate  increases  until 2002.  BSG has a rate  freeze  until
November 2004.

         On January 27, 2000,  the Citizens  Action  Coalition  (CAC), a private
consumer  organization,  filed a petition before the Indiana Utility  Regulatory
Commission  (IURC).  The  petition  does not  seek a  specified  amount  of rate
reduction,  but rather alleges that the existing Northern Indiana electric rates
are "unreasonable and unsafe," and seeks to have the IURC force Northern Indiana
to produce  detailed  financial  calculations  that would  justify its  electric
rates. Northern Indiana intends to oppose the petition on both legal and factual
grounds, and believes that its current rates are just and reasonable as required
by  statute.  On May 17, 2000 the IURC issued an order  agreeing  with  Northern
Indiana that the type of investigation  requested by CAC could only be conducted
by the IURC  itself. As of August 9, 2000, no further orders have been issued in
this proceeding.

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

RISK MANAGEMENT

         Risk  is  an  inherent  part  of  NiSource's   energy   businesses  and
activities.  The extent to which NiSource  properly and effectively  identifies,
assesses, monitors and manages each of the various types of risk involved in its
businesses is critical to its profitability. NiSource seeks to identify, assess,
monitor and manage,  in accordance  with defined  policies and  procedures,  the
following  principal risks involved in NiSource's energy  businesses:  commodity
market risk,  interest rate risk,  credit risk and foreign  currency risk.  Risk
management at NiSource is a  multi-faceted  process with  independent  oversight
that requires  constant  communication,  judgment and  knowledge of  specialized
products and markets.  NiSource's  senior management takes an active role in the
risk management  process and has developed  policies and procedures that require
specific  administrative and business functions to assist in the identification,
assessment  and control of various risks.  In  recognition  of the  increasingly
varied and complex nature of the energy  business,  NiSource's  risk  management
policies  and  procedures  are  evolving  and  subject  to  ongoing  review  and
modification.

         NiSource is exposed to risk through various daily business  activities,
including specific trading risks and non-trading risks. The non-trading risks to
which NiSource is exposed include interest rate risk,  foreign currency risk and
commodity  price  risk  of  its  Energy  Utilities  and  certain  gas  marketing
activities. The market risk resulting from trading activities consists primarily
of commodity price risk.  NiSource's  risk management  policy permits the use of
certain  financial  instruments  to manage its market risk,  including  futures,
forwards,  options  and swaps.  Risk  management  at  NiSource is defined as the
process by which the organization  ensures that the risks to which it is exposed
are the risks to which it desires to be exposed to achieve its primary  business
objectives.  NiSource employs various analytic techniques to measure and monitor
its market risks,  including  value-at-risk (VaR) and instrument  sensitivity to
market factors. VaR represents the potential loss for an instrument or portfolio
from adverse  changes in market  factors,  for a specified  time period and at a
specified confidence level.

TRADING RISKS

COMMODITY MARKET RISK. Market risk refers to the risk that a change in the level
of one or more market prices,  rates,  indices,  volatilities,  correlations  or
other market factors,  such as liquidity,  will result in losses for a specified
position or portfolio. NiSource employs a VaR model to assess the market risk of
its energy  trading  portfolios.  NiSource  estimates the one-day VaR across all
trading groups which utilize  derivatives using either Monte Carlo simulation or
variance/covariance  at a 95% confidence level.  Based on the results of the VaR
analysis,  the daily market  exposure for power trading on an average,  high and
low basis was $0.7 million,  $1.8 million and $0.004 million, $0.5 million, $1.8
million and $0.004 million and $0.5 million, $1.8 million and $0.004 million for
the three  month,  six month and  twelve  month  periods  ended  June 30,  2000,
respectively.  The daily VaR for the gas trading  portfolio on an average,  high
and low basis was $3.4  million,  $8.1 million and $0.7  million,  $2.7 million,
$8.1  million and $0.5 million and $2.4  million,  $8.1 million and $0.4 million
for the three  month,  six month and twelve month  periods  ended June 30, 2000,
respectively.  NiSource  implemented  a VaR  methodology  in 1999  to  introduce
additional market  sophistication and to recognize the developing  complexity of
its businesses.

NON-TRADING RISKS

COMMODITY   MARKET  RISK.   Currently,   commodity  price  risk  resulting  from
non-trading  activities  at the  Energy  Utilities  is  limited,  since  current
regulations  allow  the  Energy  Utilities  to  recoup  any  prudently  incurred
purchased power, 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.  Additionally,  NiSource  enters into certain
sales  contracts  with  customers  based upon a fixed  sales  price and  varying
volumes which are ultimately  dependent upon the customer's supply requirements.
NiSource utilizes derivative financial instruments to reduce the commodity price
risk  based  on  modeling   techniques   to   anticipate   these  future  supply
requirements.

INTEREST  RATE RISK.  NiSource is exposed to interest rate risk as a result from
changes in interest rates on borrowings  under the revolving  credit  agreements
and lines of credit.  These  instruments have interest rates that are indexed to
short-term  market  interest  rates. At June 30, 2000 and December 31, 1999, the
combined borrowings  outstanding under these facilities totaled $870 million and
$679 million, respectively. Based upon average borrowings under these agreements
during  2000 and 1999,  an increase in  short-term  interest  rates of 100 basis
points  (1%) would have  increased  interest  expense by $7.3  million  and $3.7
million for the three months,  $13.8 million and $7.0 million for the six months
and $25.4  million and $14.0  million for the twelve months ending June 30, 2000
and June 30, 1999, respectively.

         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.

CREDIT RISK. Credit risk arises in many of NiSource's  business  activities.  In
sales and trading activities, credit risk arises because of the possibility that
a  counterparty  will not be able or  willing to fulfill  its  obligations  on a
transaction on or before settlement date. In derivative activities,  credit risk
arises when counterparties to derivative contracts, such as interest rate swaps,
are obligated to pay NiSource the positive  fair value or  receivable  resulting
from the  execution  of contract  terms.  Exposure to credit risk is measured in
terms of both  current  and  potential  exposure.  Current  credit  exposure  is
generally  measured by the notional or principal value of financial  instruments
and direct credit substitutes, such as commitments and standby letters of credit
and  guarantees.  Current  credit  exposure  includes the positive fair value of
derivative  instruments.  Because many of NiSource's exposures vary with changes
in market prices, NiSource also estimates the potential credit exposure over the
remaining term of transactions through statistical analyses of market prices. In
determining   exposure,   NiSource  considers   collateral  and  master  netting
agreements,  which are used to reduce individual counterparty risk, primarily in
connection with derivative products.

FOREIGN CURRENCY RISK. NiSource is exposed to foreign currency risk arising from
equity  investments  in  businesses  owned and  operated  in foreign  countries.
Exposures to these  investments are periodically  reviewed by management and are
not material to consolidated results.

         Refer  to  Consolidated   Statement  of  Long-Term  Debt  for  detailed
information related to NiSource's  long-term debt outstanding and "Fair Value of
Financial  Instruments" in Notes to the  Consolidated  Financial  Statements for
current  market  valuation of long-term  debt.  Refer to "Summary of Significant
Accounting  Policies--Accounting  for Price Risk Management Activities" in Notes
to the Consolidated  Financial  Statements for further  discussion of NiSource's
risk management.

         Refer  to "Risk  Management  Activities"  in Notes to the  Consolidated
Financial  Statements for a discussion of commodity-based  derivative  financial
instruments and risk management.

COMPETITION AND REGULATORY CHANGES

         The regulatory frameworks  applicable to the Energy Utilities,  at both
the state and federal levels, are undergoing  fundamental changes. These changes
have  previously  had,  and  will  continue  to have  an  impact  on  NiSource's
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 choice for new products and services,  acquiring  companies which
increase  NiSource's  scale and establishing  subsidiaries  that provide gas and
develop new energy-related  products for residential,  commercial and industrial
customers, including the development of distributed generation technologies.

THE ELECTRIC  INDUSTRY.  At the Federal  level,  the Federal  Energy  Regulatory
Commission  (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. On June 30,
2000, the D. C. Circuit Court of Appeals upheld FERC's open access orders in all
major  respects.   In  1997,  FERC  approved  Northern   Indiana's   open-access
transmission  tariff.  On December 20, 1999, FERC issued a final rule addressing
the formation and operation of Regional  Transmission  Organizations (RTOs). The
rule is intended to eliminate  pricing  inequities in the provision of wholesale
transmission service.  NiSource is committed to joining a RTO. NiSource does not
believe that compliance with the new rules will be material to future  earnings.
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,  NiSource  announced  in 1997 and 1998  that if a
consensus could be reached regarding electric utility restructuring legislation,
NiSource would support a restructuring bill before the Indiana General Assembly.
During 1999,  discussions were held with the other  investor-owned  utilities in
Indiana and with other segments of the Indiana electric  industry  regarding the
technical  and  economic  aspects  of  possible  legislation  leading to greater
customer  choice.  A consensus  was not  reached.  Therefore,  NiSource  did not
support legislation regarding electric  restructuring during the 2000 session of
the Indiana General  Assembly.  During 2000,  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 2001 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 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. The gas cost
incentive  mechanism  will be  reviewed  by  parties to the ARP  proceeding  for
possible  revision.  Phase I of Northern Indiana's Customer Choice Pilot Program
ended on March 31, 1999. This pilot program offered 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 price protection, negotiated sales and services, gas lending
and parking, and new storage services.

         In Massachusetts,  BSG implemented new unbundled rates and services for
all  commercial-industrial  customers in 1993,  and launched one of the nation's
earliest  residential  and small  commercial-industrial  customer  choice  pilot
programs  in  1996.  The  BSG  pilot,   concluded  on  June  1,  2000  when  all
Massachusetts  gas utilities began making unbundled gas service available to all
customer  classes  pursuant to new statewide model terms and conditions that are
currently    awaiting    approval   by   the    Massachusetts    Department   of
Telecommunications and Energy.

         In New Hampshire,  Northern Utilities  introduced unbundled tariffs and
services  for all  commercial-industrial  customers  in 1994.  In 1998,  the New
Hampshire Public Utilities  Commission  (NHPUC) formed a collaborative  group to
investigate the merits of further  unbundling and advise the NHPUC  accordingly.
The  collaborative  group has  recommended  new model terms and  conditions  and
regulations   designed   to   make   unbundled   services   available   to   all
commercial-industrial   customers   statewide   on   November   1,  2000,   with
consideration  of  residential  unbundling at a later date. A hearing before the
NHPUC regarding the recommendations was held in April.

         In Maine,  Northern Utilities  introduced  unbundled rates and services
for large  commercial-industrial  customers  in December  1995 and  expanded the
availability  to all  daily  metered  commercial  and  industrial  customers  on
November 1, 1999. In June 1999 the Maine Public Utilities  Commission  opened an
inquiry  into the  potential  merits of further  regulatory  changes  related to
unbundling.  Comments from all participating  parties were submitted at the time
of the technical  session in July 1999.  This inquiry is intended to investigate
all the key  elements  of full  customer  choice  and will  include  a review of
customer choice programs in Massachusetts and New Hampshire.  Northern Utilities
is currently  awaiting the  Commission's  proposed model terms and conditions as
the next step.

         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
have had and will continue to have significant  positive effects in the next few
years.

IMPACT OF ACCOUNTING STANDARDS

         Refer  to  "Summary  of  Significant  Accounting   Policies--Impact  of
Accounting  Standards" in the Notes to  Consolidated  Financial  Statements  for
information regarding impact of accounting standards not yet adopted.

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 cannot 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  weather,
the federal and state regulatory  environment,  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  (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.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On June 1, 2000, at the Annual Meeting of Shareholders, the shareholders elected
Arthur J. Decio,  Gary L. Neale and Robert J. Welsh to serve as directors  until
the 2003  Annual  Meeting  of  Shareholders.  Directors  whose  terms of  office
continue after the 2000 Annual Meeting of Shareholders are Ian M. Rolland,  John
W. Thompson and Roger A. Young, whose terms expire at the 2002 Annual Meeting of
Shareholders,  and Steven C.  Beering,  Dennis E.  Foster,  James T.  Morris and
Carolyn Y. Woo, whose terms expire at the 2001 Annual Meeting of Shareholders.

<TABLE>
<CAPTION>

         There were no abstentions  or broker  non-votes for any of the nominees
for director.  The number of votes cast for, or withheld,  for each director was
as follows:

                                                    VOTES                               VOTES
                                                   RECEIVED                            WITHHELD

<S>                                               <C>                                 <C>
ARTHUR J. DECIO                                   96,389,067                          2,774,601
GARY L. NEALE                                     96,406,544                          2,757,124
ROBERT J. WELSH                                   96,467,992                          2,695,675
</TABLE>

         Additionally at the Annual Meeting of  Shareholders,  the  shareholders
approved  the merger  agreement  between the Company and  Columbia  Energy Group
which  provides for the formation of a new Delaware  holding  company which will
acquire  Columbia  Energy Group and into which the Company  will be merged.  The
shareholders  also  approved  a change in the name of the new  Delaware  holding
company to NiSource Inc.  which will occur  immediately  following the merger of
the Company into the new holding company. The proposal was approved by a vote of
79,091,253 shares in favor of the proposal,  with 3,377,498 shares voted against
or withheld.

         Also at the Annual Meeting of Shareholders,  the shareholders  approved
an Amended and Restated 1994  Long-Term  Incentive  Plan by a vote of 66,142,495
shares  in favor of the  proposal,  with  16,319,200  shares  voted  against  or
withheld.

ITEM 5.  OTHER INFORMATION.

         None
<PAGE>

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

         Exhibit 10.1 - NiSource Inc. 1994 Long-Term Incentive Plan (Amended and
           Restated) Effective January 1, 2000.

         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 SEC, 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 3, 2000.  All events were reported
         under Item 5, Other  Events.  A report on Form 8-K was filed  April 25,
         2000. All events were reported under Item 5, Other Events.  A report on
         Form 8-K was filed June 13, 2000.  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 11, 2000