<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 September 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 October 30, 2000, 121,378,548 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 of NiSource Inc. (an
Indiana  corporation) and subsidiaries as of September 30, 2000 and December 31,
1999, and the related  consolidated  statements of income,  common shareholders'
equity  and cash  flows for the  three,  nine and  twelve  month  periods  ended
September 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 September 30, 2000 and December 31, 1999,  and the
results of their operations and their cash flows for the three,  nine and twelve
month periods ended  September 30, 2000 and 1999, in conformity  with accounting
principles generally accepted in the United States.



                               Arthur Andersen LLP



Chicago, Illinois
October 30, 2000
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet

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

Property, Plant and Equipment:
 Utility Plant, (including Construction Work in
  Progress of  $304,726 and $240,637, respectively)
<S>                                                           <C>                 <C>
    Electric                                                  $   4,307,752       $   4,237,427
    Gas                                                           2,914,506           2,871,824
    Water                                                           788,572             750,376
    Common                                                          385,520             381,486
                                                              -------------       -------------
                                                                  8,396,350           8,241,113
    Less -Accumulated depreciation and amortization               3,622,681           3,444,311
                                                              -------------       -------------
      Net Utility Plant                                           4,773,669           4,796,802
                                                              -------------       -------------
 Other property, at cost, less accumulated provision for
  depreciation of $70,617 and $56,414, respectively                127,841             427,190
                                                              -------------       -------------
      Total Property, Plant and Equipment                         4,901,510           5,223,992
                                                              -------------       -------------
Investments:
 Investments, at equity                                             105,033             118,259
 Investments, at cost                                                60,451              55,851
 Other investments                                                   34,345              32,839
                                                              -------------       -------------
      Total Investments                                             199,829             206,949
                                                              -------------       -------------
Current Assets:
 Cash and cash equivalents                                           51,029              43,533
 Accounts receivable, less reserve of  $22,192 and
   $30,619, respectively                                            393,152             381,818
 Other receivables                                                   32,064              15,744
 Fuel adjustment clause                                                  --               4,201
 Gas cost adjustment clause                                          94,280              86,690
 Materials and supplies, at average cost                             63,752              64,530
 Electric production fuel, at average cost                           26,521              31,968
 Natural gas in storage                                             190,928              63,750
 Price risk management assets                                       447,219              90,705
 Prepayments and other                                               45,774              41,884
                                                              -------------       -------------
      Total Current Assets                                        1,344,719             824,823
                                                              -------------       -------------
Other Assets:
 Regulatory assets                                                  205,958             214,442
 Intangible assets, net of accumulated amortization                  75,183             139,337
 Prepayments and other                                              356,968             289,061
                                                              -------------       -------------
      Total Other Assets                                            638,109             642,840
                                                              -------------       -------------
                                                              $   7,084,167       $   6,898,604
                                                              =============       =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet

                                                              September 30,        December 31,
(Dollars in thousands)                                             2000                1999
Capitalization and Liabilities                                =============       =============

Capitalization:
Common shareholders' equity
<S>                                                           <C>                 <C>
  (See accompanying statement)                                $   1,352,065       $   1,353,504
Preferred stocks-
   Northern Indiana Public Service Company:
     Series without mandatory redemption provisions                  81,114              81,114
     Series with mandatory redemption provisions                     52,180              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             1,737,291           1,975,184
                                                              -------------       -------------
      Total Capitalization                                        3,570,167           3,813,329
                                                              -------------       -------------
Current Liabilities:
  Current portion of long-term debt                                  89,420             173,721
  Short-term borrowings                                             748,608             679,321
  Accounts payable                                                  368,020             277,358
  Dividends declared on common and preferred stocks                  33,679              34,535
  Customer deposits                                                  31,062              28,736
  Taxes accrued                                                      26,478              42,853
  Interest accrued                                                   27,425              34,157
  Fuel adjustment clause                                              1,421                  --
  Accrued employment costs                                           61,717              60,647
  Price risk management liabilities                                 453,302             113,029
  Other                                                             126,442              90,245
                                                              -------------       -------------
      Total Current Liabilities                                   1,967,574           1,534,602
                                                              -------------       -------------
Other:
 Deferred income taxes                                              931,922             998,682
 Deferred investment tax credits, being amortized over
  life of related property                                           89,217              94,946
 Deferred credits                                                   112,609              94,058
 Customer advances and contributions in aid of construction         157,475             140,562
 Accrued liability for postretirement benefits                      169,305             157,517
 Other noncurrent liabilities                                        85,898              64,908
                                                              -------------       -------------

      Total Other                                                 1,546,426           1,550,673
                                                              -------------       -------------
Commitments and Contingencies (see notes)

                                                              $   7,084,167       $   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

                                                      Three Months                   Nine Months
                                                   Ended September 30,          Ended September 30,
                                                ------------------------     ------------------------
                                                    2000         1999            2000         1999
                                                ===========  ===========     ===========  ===========
(Dollars in thousands, except for per share amounts)
Operating Revenues:
<S>                                             <C>          <C>             <C>          <C>
 Gas                                            $   606,889  $   265,393     $ 1,896,245  $ 1,127,925
 Electric                                           294,677      329,267         809,432      865,016
 Water                                               28,926       29,894          76,822       74,794
 Products and Services                               75,054       68,415         213,567      192,156
                                                -----------  -----------     -----------  -----------
                                                  1,005,546      692,969       2,996,066    2,259,891
                                                -----------  -----------     -----------  -----------
Cost of Sales:
 Gas costs                                          526,443      208,032       1,511,549      812,759
 Fuel for electric generation                        64,824       72,092         178,794      188,020
 Power purchased                                      6,958       28,204          22,221       67,677
 Products and Services                               43,987       37,523         123,327      100,134
                                                -----------  -----------     -----------  -----------
                                                    642,212      345,851       1,835,891    1,168,590
                                                -----------  -----------     -----------  -----------
Operating Margin                                    363,334      347,118       1,160,175    1,091,301
                                                -----------  -----------     -----------  -----------
Operating Expenses and Taxes (except income):
 Operation                                          131,081      120,065         394,131      375,515
 Maintenance                                         16,468       18,450          64,082       62,672
 Depreciation and amortization                       84,100       78,006         253,217      228,454
 Taxes (except income)                               24,365       24,572          73,170       77,806
                                                -----------  -----------     -----------  -----------
                                                    256,014      241,093         784,600      744,447
                                                -----------  -----------     -----------  -----------
Operating Income                                    107,320      106,025         375,575      346,854
                                                -----------  -----------     -----------  -----------
Other Income (Deductions):
 Interest expense, net                              (50,161)     (42,376)       (146,304)    (119,378)
 Minority interests                                  (5,225)      (5,563)        (15,266)     (13,939)
 Dividend requirements on preferred stock
  of subsidiaries                                    (2,003)      (2,071)         (6,045)      (6,264)
 Other, net                                          54,074      (14,279)         59,861       (9,456)
                                                -----------  -----------     -----------  -----------
                                                     (3,315)     (64,289)       (107,754)    (149,037)
                                                -----------  -----------     -----------  -----------
Income Before Income Taxes                          104,005       41,736         267,821      197,817
                                                -----------  -----------     -----------  -----------
Income Taxes                                         52,005       13,781         112,792       70,359
                                                -----------  -----------     -----------  -----------
Net Income                                      $    52,000  $    27,955     $   155,029  $   127,458
                                                ===========  ===========     ===========  ===========
Average common shares outstanding - basic       120,559,039  125,030,566     121,651,509  124,217,959

Basic earnings per average common share         $      0.43  $      0.22     $      1.27  $      1.02
                                                ===========  ===========     ===========  ===========
Diluted earnings per average common share       $      0.42  $      0.22     $      1.23  $      1.02
                                                ===========  ===========     ===========  ===========
Dividends declared per common share             $     0.270  $     0.255     $     0.810  $     0.765
                                                ===========  ===========     ===========  ===========

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 September 30,
                                                              ---------------------------------
(Dollars in thousands, except for per share amounts)               2000                1999
                                                              =============       =============

Operating Revenues:
<S>                                                           <C>                 <C>
 Gas                                                          $   2,421,770       $   1,506,002
 Electric                                                         1,065,454           1,155,454
 Water                                                              100,411              95,833
 Products and Services                                              293,116             255,836
                                                              -------------       -------------
                                                                  3,880,751           3,013,125
                                                              -------------       -------------
Cost of Sales:
 Gas costs                                                        1,886,248           1,100,962
 Fuel for electric generation                                       239,938             245,406
 Power purchased                                                     26,289             114,310
 Products and Services                                              165,877             129,398
                                                              -------------       -------------
                                                                  2,318,352           1,599,076
                                                              -------------       -------------
Operating Margin                                                  1,562,399           1,423,049
                                                              -------------       -------------
Operating Expenses and Taxes (except income):
 Operation                                                          553,424             476,525
 Maintenance                                                         83,618              78,244
 Depreciation and amortization                                      336,167             293,594
 Taxes (except income)                                               98,933              99,431
                                                              -------------       -------------
                                                                  1,072,142             947,794
                                                              -------------       -------------
Operating Income                                                    490,257             475,255
                                                              -------------       -------------
Other Income (Deductions):
 Interest expense, net                                             (193,543)           (153,660)
 Minority interests                                                 (19,020)            (14,717)
 Dividend requirements on preferred stock
  of subsidiaries                                                    (8,115)             (8,385)
 Other, net                                                          51,287              (8,481)
                                                              -------------       -------------
                                                                   (169,391)           (185,243)
                                                              -------------       -------------
Income Before Income Taxes                                          320,866             290,012
                                                              -------------       -------------
Income Taxes                                                        132,881             101,962
                                                              -------------       -------------
Net Income                                                    $     187,985       $    188,050
                                                              =============       =============
Average common shares outstanding - basic                       122,422,589        122,577,821

Basic earnings per average common share                       $        1.53       $        1.53
                                                              =============       =============
Diluted earnings per average common share                     $        1.49       $        1.52
                                                              =============       =============
Dividends declared per common share                           $       1.080       $       1.020
                                                              =============       =============
</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, July 1, 1999         $ 870,930  $(455,640) $  172,388  $  779,102  $    (976) $       3,323  $ 1,369,127
Comprehensive Income:
  Net income                                                           27,955                                 27,955  $      27,955
  Other comprehensive income
   net of tax:
    Gain/loss on available for
     sale securities:
      Unrealized (net of income
       tax of $1,068)                                                                            (1,749)      (1,749)        (1,749)
      Realized (net of income
       tax of $113)                                                                                 186          186            186
    Gain/loss on foreign
     currency translation:
      Unrealized                                                                                    150          150            150
      Realized                                                                                       --           --             --
                                                                                                                      -------------
Total Comprehensive Income                                                                                            $      26,542
                                                                                                                      =============
Dividends:
   Common shares                                                      (31,891)                               (31,891)
Treasury shares acquired                         (346)                                                          (346)
Issued:
   Employee stock purchase plan                   112         252                                                364
   Long-term incentive plan                       655          29                    (39)                        645
   Amortization of unearned
    compensation                                                                     877                         877
Equity contract costs                                        (302)                                              (302)
Other                                                                    (177)                                  (177)
                                 ---------  ---------  ----------  ----------  ---------  -------------  -----------  -------------
   Balance, September 30, 1999   $ 870,930  $(455,219) $  172,367  $  774,989  $    (138) $       1,910  $ 1,364,839
                                 =========  =========  ==========  ==========  =========  =============  ===========

   Balance, July 1, 2000         $ 870,930  $(518,617) $  173,595  $  809,543  $ (10,513) $       5,621  $ 1,330,559
Comprehensive Income:
  Net income                                                           52,000                                 52,000  $      52,000
  Other comprehensive income,
   net of tax:
    Gain/loss on available for
     sale securities:
      Unrealized (net of income
       tax of $435)                                                                                (714)        (714)          (714)
      Realized (net of income
       tax of $596)                                                                                 976          976            976
    Gain/loss on foreign
     currency translation:
      Unrealized                                                                                      7            7              7
      Realized                                                                                       --           --             --
                                                                                                                      -------------
Total Comprehensive Income                                                                                            $      52,269
                                                                                                                      =============
Dividends:
  Common shares                                                       (32,756)                               (32,756)
Treasury shares acquired                          (60)                                                           (60)
Issued:
  Employee stock purchase plan                    152         206                                                358
  Long-term incentive plan                      2,460                                                          2,460
  Amortization of unearned
   compensation                                                                    1,112                       1,112
Equity contract costs                                      (1,152)                                            (1,152)
Other                                                                    (725)                                  (725)
                                 ---------  ---------  ----------  ----------  ---------- -------------  -----------  -------------
   Balance, September 30, 2000   $ 870,930  $(516,065) $  172,649  $  828,062  $  (9,401) $       5,890  $ 1,352,065
                                 =========  =========  ==========  ==========  =========  =============  ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHARES
                                  Common    Treasury
    Three Months Ended            Shares     Shares
    ------------------           ---------  ---------
<S>                                <C>        <C>
   Balance July 1, 1999            147,784    (22,770)
Treasury shares acquired                          (16)
Issued:
   Employee stock purchase plan                    14
   Long-term incentive plan                        32
                                 ---------  ---------
   Balance September 30, 1999      147,784    (22,740)
                                 =========  =========

   Balance July 1, 2000            147,784    (26,601)
Treasury shares acquired                           (8)
Issued:
   Employee stock purchase plan                    19
   Long-term incentive plan                       126
                                 ---------  ---------
   Balance September 30, 2000      147,784    (26,464)
                                 =========  =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                  NISOURCE INC.
              CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------------

                                                                                           Accumulated
                                                       Additional                             Other
                                  Common    Treasury    Paid-In     Retained              Comprehensive               Comprehensive
    Nine 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                                                          127,458                                127,458  $     127,458
  Other comprehensive income
   net of tax:
    Gain/loss on available for
     sale securities:
      Unrealized (net of income
       tax of $2,075)                                                                              (101)        (101)          (101)
      Realized (net of income
       tax of $274)                                                                                 449          449            449
    Gain/loss on foreign
     currency translation:
      Unrealized                                                                                    432          432            432
      Realized                                                                                       --           --             --
                                                                                                                      -------------
Total Comprehensive Income                                                                                            $     128,238
                                                                                                                      =============
Dividends:
   Common shares                                                      (95,624)                               (95,624)
Treasury shares acquired                     (108,987)                                                      (108,987)
Issued:
   Employee stock purchase plan                   339         845                                              1,184
   Long-term incentive plan                     3,853         188                   (571)                      3,470
   Bay State Gas Acquisition                  205,881     109,753                                            315,634
   Other Acquisitions                           2,722         939                                              3,661
   Amortization of unearned
    compensation                                                                   2,248                       2,248
Equity contract costs                                     (33,539)                                           (33,539)
Other                                                                  (1,154)                                (1,154)
                                 ---------  ---------  ----------  ----------  ---------  -------------  -----------  -------------
   Balance, September 30, 1999   $ 870,930  $(455,219) $  172,367  $  774,989  $    (138) $       1,910  $ 1,364,839
                                 =========  =========  ==========  ==========  =========  =============  ===========

   Balance, January 1, 2000      $ 870,930  $(472,553) $  174,405  $  774,423  $   1,111  $       5,186  $ 1,353,504
Comprehensive Income:
  Net income                                                          155,029                                155,029  $     155,029
  Other comprehensive income,
   net of tax:
    Gain/loss on available for
     sale securities:
      Unrealized (net of income
       tax of $1,006)                                                                              (982)        (982)          (982)
      Realized (net of income
       tax of $787)                                                                               1,288        1,288          1,288
    Gain/loss on foreign
     currency translation:
      Unrealized                                                                                    398          398            398
      Realized                                                                                       --           --             --
                                                                                                                      -------------
Total Comprehensive Income                                                                                            $     155,733
                                                                                                                      =============
Dividends:
  Common shares                                                       (98,321)                               (98,321)
Treasury shares acquired                      (65,852)                                                       (65,852)
Issued:
  Employee stock purchase plan                    490         608                                              1,098
  Long-term incentive plan                     21,850                            (14,061)                      7,789
  Amortization of unearned
   compensation                                                                    3,549                       3,549
Equity contract costs                                      (3,171)                                            (3,171)
Other                                                         807      (3,071)                                (2,264)
                                 ---------  ---------  ----------  ----------  ---------- -------------  -----------  -------------
   Balance, September 30, 2000   $ 870,930  $(516,065) $  172,649  $  828,062  $  (9,401) $       5,890  $ 1,352,065
                                 =========  =========  ==========  ==========  =========  =============  ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHARES
                                  Common    Treasury
    Nine Months Ended             Shares     Shares
    -----------------            ---------  ---------
<S>                                <C>        <C>
   Balance January 1, 1999         147,784    (30,254)
Treasury shares acquired                       (3,899)
Issued:
   Employee stock purchase plan                    43
   Long-term incentive plan                       194
   Bay State Gas Acquisition                   11,042
   Other Acquisitions                             134
                                 ---------  ---------
   Balance September 30, 1999      147,784    (22,740)
                                 =========  =========

   Balance January 1, 2000         147,784    (23,645)
Treasury shares acquired                       (3,971)
Issued:
   Employee stock purchase plan                    62
   Long-term incentive plan                     1,090
                                 ---------  ---------
   Balance September 30, 2000      147,784    (26,464)
                                 =========  =========
</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, October 1, 1998      $ 870,930  $(538,228) $   90,955  $  713,561  $  (2,325) $        (175) $ 1,134,718
Comprehensive Income:
  Net income                                                          188,050                                188,050  $     188,050
  Other comprehensive income
   net of tax:
    Gain/loss on available for
     sale securities:
      Unrealized (net of income
       tax of $671)                                                                               1,097        1,097          1,097
      Realized (net of income
       tax of $274)                                                                                 449          449            449
    Gain/loss on foreign
     currency translation:
      Unrealized                                                                                    539          539            539
      Realized                                                                                       --           --             --
                                                                                                                      -------------
Total Comprehensive Income                                                                                            $     190,135
                                                                                                                      =============
Dividends:
   Common shares                                                     (125,439)                              (125,439)
Treasury shares acquired                     (130,461)                                                      (130,461)
Issued:
   Employee stock purchase plan                   429       1,155                                              1,584
   Long-term incentive plan                     4,438         159                   (571)                      4,026
   Bay State Gas Acquisition                  205,881     109,753
   Other Acquisitions                           2,722         939
   Amortization of unearned
    compensation                                                                   2,758                       2,758
Equity contract costs                                     (33,539)                                           (33,539)
Other                                                       2,945      (1,183)                                 1,762
                                 ---------  ---------  ----------  ----------  ---------  -------------  -----------  -------------
   Balance, September 30, 1999   $ 870,930  $(455,219) $  172,367  $  774,989  $    (138) $       1,910  $ 1,364,839
                                 =========  =========  ==========  ==========  =========  =============  ===========

   Balance, October 1, 1999      $ 870,930  $(455,219) $  172,367  $  774,989  $    (138) $       1,910  $ 1,364,839
Comprehensive Income:
  Net income                                                          187,985                                187,985  $     187,985
  Other comprehensive income,
   net of tax:
    Gain/loss on available for
     sale securities:
      Unrealized (net of income
       tax of $697)                                                                                 860          860            860
      Realized (net of income
       tax of $958)                                                                               1,567        1,567          1,567
    Gain/loss on foreign
     currency translation:
      Unrealized                                                                                    611          611            611
      Realized                                                                                      942          942            942
                                                                                                                      -------------
Total Comprehensive Income                                                                                            $     191,965
                                                                                                                      =============
Dividends:
  Common shares                                                      (131,841)                              (131,841)
Treasury shares acquired                      (82,158)                                                       (82,158)
Issued:
  Employee stock purchase plan                    624         811                                              1,435
  Long-term incentive plan                     20,688          36                               (14,061)       6,663
  Amortization of unearned
   compensation                                                                                   4,798        4,798
Equity contract costs                                      (3,633)                                            (3,633)
Other                                                       3,068      (3,071)                                    (3)
                                 ---------  ---------  ----------  ----------  ---------- -------------  -----------  -------------
   Balance, September 30, 2000   $ 870,930  $(516,065) $  172,649  $  828,062  $  (9,401) $       5,890  $ 1,352,065
                                 =========  =========  ==========  ==========  =========  =============  ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHARES
                                  Common    Treasury
    Twelve Months Ended           Shares     Shares
    -------------------          ---------  ---------
<S>                                <C>        <C>
   Balance October 1, 1998         147,784    (29,607)
Treasury shares acquired                       (4,589)
Issued:
   Employee stock purchase plan                    54
   Long-term incentive plan                       226
   Bay State Gas Acquisition                   11,042
   Other Acquisition                              134
                                 ---------  ---------
   Balance September 30, 1999      147,784    (22,740)
                                 =========  =========

   Balance October 1, 1999         147,784    (22,740)
Treasury shares acquired                       (4,893)
Issued:
   Employee stock purchase plan                    79
   Long-term incentive plan                     1,090
                                 ---------  ---------
   Balance September 30, 2000      147,784    (26,464)
                                 =========  =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows

                                                      Three Months                   Nine Months
                                                   Ended September 30,          Ended September 30,
                                                ------------------------     ------------------------
(Dollars in thousands)                              2000         1999            2000         1999
                                                ===========  ===========     ===========  ===========
Cash flows from operating activities:
<S>                                             <C>          <C>             <C>          <C>
 Net income                                     $     52,00  $    27,955     $   155,029  $   127,458
Adjustments to reconcile net income to net
 cash:
  Depreciation and amortization                      84,100       78,006         253,169      228,454
  Net changes in price risk management
   activities                                        (8,330)          --         (19,371)          --
  Deferred federal and state income taxes, net        1,466        3,978         (31,888)     (26,772)
  Deferred investment tax credits, net               (1,910)      (1,921)         (5,729)      (5,728)
  Gain on sale of Market Hub Partners (Pre-tax)     (51,870)          --         (51,870)          --
  Other, net                                         (3,972)       2,810           7,147         (215)
 Change in certain assets and liabilities -*
  Accounts receivable, net                           79,502       (4,692)         25,373      124,753
  Other receivables                                 (29,139)          56         (59,537)      (4,866)
  Natural gas in storage                            (99,611)     (38,759)       (127,178)      (8,462)
  Accounts payable                                   19,523       20,799          96,260     (121,478)
  Taxes accrued                                      (3,322)     (18,232)         (2,517)     (20,691)
  Gas cost adjustment clause                        (52,195)     (39,860)         (7,378)      32,587
  Accrued employment costs                            5,318        5,428           1,070      (11,011)
  Other accruals                                     29,854       19,422          37,443       47,147
Other, net                                          (22,379)      (6,227)        (40,475)      (1,243)
                                                -----------  -----------     -----------  -----------
   Net cash provided by operating activities           (965)      48,763         229,548      359,933
                                                -----------  -----------     -----------  -----------
Cash flows provided by (used in) investing
 activities:
 Utility construction expenditures                  (74,969)     (92,336)       (200,205)    (228,428)
 Acquisition of businesses, net of cash
  acquired                                               --           --             (50)    (716,031)
Proceeds from disposition of assets                 238,515          892         254,147       28,452
Other, net                                            1,823      (30,962)        (14,287)     (73,580)
                                                -----------  -----------     -----------  -----------
   Net cash used in investing activities            165,369     (122,406)         39,605     (989,587)
                                                -----------  -----------     -----------  -----------
Cash flows provided by (used in) financing
 activities:
  Issuance of long-term debt                             --          544              --      258,315
  Retirement of long-term debt                      (12,379)      (2,783)       (171,110)    (185,855)
  Change in short-term debt                        (121,501)      81,482          69,287       65,132
  Retirement of preferred shares                       (300)        (601)         (3,830)      (1,852)
  Proceeds from Corporate Premium Income Equity
   Securities, net                                       --           --              --      334,650
  Issuance of common shares                           2,612        1,048           8,291      324,520
  Acquisition of treasury shares                        (60)        (346)        (65,852)    (108,987)
  Cash dividends paid on common shares              (32,725)     (31,884)        (98,729)     (93,710)
  Other, net                                             73          114             286          340
                                                -----------  -----------     -----------  -----------
   Net cash provided by (used in) financing
    activities                                     (164,280)      47,574        (261,657)     592,553
                                                -----------  -----------     -----------  -----------
Net increase (decrease) in cash and cash
 equivalents                                            124      (26,069)          7,496      (37,101)

Cash and cash equivalents at beginning of the
   period                                            50,905       49,816          43,533       60,848
                                                -----------  -----------     -----------  -----------
Cash and cash equivalents at end of the period  $    51,029  $    23,747     $    51,029  $    23,747
                                                ===========  ===========     ===========  ===========

*Net of effect from acquisitions of businesses.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows

                                                                        Twelve Months
                                                                     Ended September 30,
                                                              ---------------------------------
(Dollars in thousands)                                            2000                1999
                                                              =============       =============
Cash flows from operating activities:
<S>                                                           <C>                 <C>
 Net income                                                   $     187,985       $     188,050
Adjustments to reconcile net income to net
 cash:
  Depreciation and amortization                                     336,119             293,594
  Net changes in price risk management activities                   (20,268)                 --
  Deferred federal and state income taxes, net                      (13,007)                928
  Deferred investment tax credits, net                               (7,692)             (7,626)
  Gain on sale of Market Hub Partners (Pre-tax)                     (51,870)                 --
  Other, net                                                         30,731)              1,482
 Change in certain assets and liabilities -*
   Accounts receivable, net                                         (46,872)             63,890
   Other receivables                                                (46,101)                163
   Natural gas in storage                                           (71,811)             (6,059)
   Accounts payable                                                 104,204             (77,996)
   Taxes accrued                                                     14,460             (46,299)
   Gas cost adjustment clause                                       (60,625)             20,185
   Accrued employment costs                                          12,333              (4,959)
   Other accruals                                                    26,836              50,516
Other, net                                                          (71,777)             (8,438)
                                                              -------------       -------------
   Net cash provided by operating activities                        322,645             467,431
                                                              -------------       -------------
Cash flows provided by (used in) investing
 activities:
  Utility construction expenditures                                (313,040)           (302,557)
  Acquisition of businesses, net of cash
   acquired                                                         (21,888)           (716,031)
Proceeds from disposition of assets                                 255,470              30,597
  Other, net                                                         (1,787)            (63,087)
                                                              -------------       -------------
   Net cash used in investing activities                            (81,245)         (1,051,078)
                                                              -------------       -------------
Cash flows provided by (used in) financing
 activities:
  Issuance of long-term debt                                         11,221             258,817
  Retirement of long-term debt                                     (189,212)           (202,282)
  Change in short-term debt                                         173,133             112,576
  Retirement of preferred shares                                     (4,385)             (2,409)
  Proceeds from Corporate Premium Income Equity
   Securities, net                                                       --             334,650
  Issuance of common shares                                           8,664             325,476
  Acquisition of treasury shares                                    (83,320)           (130,461)
  Cash dividends paid on common shares                             (130,618)           (121,916)
  Other, net                                                            399                 453
                                                              -------------       -------------
 Net cash provided by (used in) financing
  activities                                                       (214,118)            574,904
                                                              -------------       -------------
Net increase (decrease) in cash and
 cash equivalents                                                    27,282              (8,743)

Cash and cash equivalents at beginning of the
 period                                                              23,747              32,490
                                                              -------------       -------------
Cash and cash equivalents at end of the period                $      51,029       $      23,747
                                                              =============       =============
*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 and
trading  operations  with the April 1999  acquisition  of TPC  Corporation,  now
renamed EnergyUSA-TPC Corp. (TPC).  NiSource's electric business is comprised of
a regulated  electric  utility that operates in northern  Indiana.  The electric
business  also  includes  wholesale  power 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."

         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  $2.0 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, 3.04414 shares in new
holding  company  stock.  Stock  elections  are  subject  to proration for those
elections  made  with  respect  to  more  than  30% of CEG's outstanding shares.
Approval of the NiSource and CEG shareholders was obtained on June 1 and June 2,
respectively.  All actions needed from state utility regulatory  commissions and
from  FERC  have  been  received. The  Securities  and Exchange Commission (SEC)
approved  the merger under the Public Utility Holding Company Act on October 30,
2000.  The merger is expected to be completed on November 1, 2000. NiSource will
register as a public utility holding company.

         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  $1.6  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. 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.

         The SEC in its order approving the merger with CEG required NiSource to
divest  its water utilities within 3 years from the date of the merger. NiSource
will  comply  with  the  Order  and  is currently evaluating its options for the
disposition of the water utilities.


(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 Market
Hub Partners,  L.P. (MHP), a company which operates salt dome storage facilities
for natural gas. In the fourth quarter of 1999 acquired the remaining  interests
in  MHP.  On  September 18, 2000, NiSource sold its indirect ownership in MHP to
Duke  Energy  Gas  Transmission  for $250 million in cash plus the assumption of
$150  million  in  debt. The consolidated  financial  statements and disclosures
include operating results of TPC from April 1, 1999 and the consolidated results
of MHP from December 1999 through September 18, 2000.

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.

The  approximate  weighted  average  remaining  lives  for major  components  of
electric, gas, and water utility plant are as follows:
<TABLE>
<CAPTION>
         Electric:
         ========
         <S>                                          <C>
         Electric generation plant                    24 years
         Transmission plant                           26 years
         Distribution plant                           25 years
         Other electric plant                         24 years


         Gas:
         ===

         Gas storage plant                            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,  nine month and twelve month periods ended  September
30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
                                           Three Months               Nine Months              Twelve Months
                                         Ended September 30,       Ended September 30,       Ended September 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%         4.5%         4.6%         4.5%         4.5%         4.5%
         Water                              2.3%         2.5%         2.2%         2.2%         2.4%         2.4%
</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 $707.4 million
and $722.8  million at September  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 $76.9
million  and  $125.7  million at  September  30,  2000 and  December  31,  1999,
respectively,  is being  amortized  over a weighted  average period of 27 years.
Goodwill  was  reduced  by  $56.8  million as a result of the sale of MHP. Other
intangible  assets,  approximating  $12.6 million and $12.8 million at September
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 September 30, 2000 and December 31, 1999, was approximately
$14.4 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 September 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  realized  and unrealized gains (losses),  net of
income  taxes,  on  available  for  sale securities  (securities) and on foreign
currency translation adjustments (foreign currency).

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

                    October 1,      January 1,       July 1,        October 1,      January 1,        July 1,      September 30,
(Dollars in millions)  1998            1999            1999            1999            2000            2000            2000
                   -------------   -------------   -------------   -------------   -------------   -------------   -------------
<S>                <C>             <C>             <C>             <C>             <C>             <C>             <C>
Securities         $         2.5   $         3.6   $         5.6   $         4.0   $         6.1   $         6.2   $         6.4
Foreign currency   $        (2.7)  $        (2.5)  $        (2.3)  $        (2.1)  $        (0.9)  $        (0.6)  $        (0.5)
</TABLE>

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

Cash paid during the  periods  reported  for income  taxes and  interest  was as
follows:
<TABLE>
<CAPTION>
                                           Three Months               Nine Months              Twelve Months
                                         Ended September 30,       Ended September 30,       Ended September 30,
                                        ---------------------     ---------------------     ---------------------
(Dollars in thousands)                    2000         1999         2000         1999         2000         1999
                                        ========     ========     ========     ========     ========     ========
<S>                                     <C>          <C>          <C>          <C>          <C>           <C>
Income taxes                            $ 59,671     $ 24,010     $158,649     $114,188     $160,453     $152,286
Interest, net of amounts capitalized    $ 55,485     $ 40,437     $443,491     $113,117     $190,420     $147,659
</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) appealed the Generic Order to
the  Indiana  Court  of Appeals.  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.  On September 5, 2000,  the Indiana  Court of Appeals  issued an
order approving a joint stipulation for dismissal, with prejudice, of the OUCC's
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. Northern Indiana
made  its  annual  filing on September 1, 2000 and the matter is  scheduled  for
hearing on December 14, 2000.

         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  September  2000 and
December 1999,  the estimated  replacement  cost of gas in storage  (current and
non-current)  at September  30, 2000 and  December 31, 1999  exceeded the stated
LIFO cost by $138.2 million and $48.9 million,  respectively.  Inventory  valued
using  LIFO was $88.4  million  and $23.0  million  at  September  30,  2000 and
December 31, 1999,  respectively.  Inventory  valued using the weighted  average
methodology  was $102.6  million  and $40.8  million at  September  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 September
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>
Regulatory assets were comprised of the following items:
<TABLE>
<CAPTION>
                                                              September 30,        December 31,
(Dollars in thousands)                                             2000                1999
                                                              =============       =============
<S>                                                           <C>                 <C>
Unamortized reacquisition premium on debt (see Note 16)       $      37,084       $      39,719
Unamortized R. M. Schahfer Unit 17 and Unit 18 carrying
  charges and deferred depreciation (see below)                      54,948              58,111
Bailly scrubber carrying charges and deferred depreciation
  (see below)                                                         7,308               8,010
Deferral of SFAS No. 106 expense not recovered
  (see Note 8)                                                       71,169              75,527
FERC Order No. 636 transition costs                                   9,097              13,728
Regulatory income tax asset, net (see Note 6)                        28,710              24,941
Other                                                                17,255              18,651
                                                              -------------       -------------
                                                                    225,571             238,687
                                                              -------------       -------------
Less: Current portion of regulatory assets                           19,613             24,245
                                                              -------------       -------------
                                                              $     205,958       $     214,442
                                                              =============       =============
</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 $31.1 million and $33.3 million relating to affordable  housing projects
at September 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.

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

      (Dollars in thousands)                Nine Months             Twelve Months
                                           =============            =============
      <S>                                  <C>                      <C>
      Operating revenue                    $   2,339,870            $   3,244,045
      Operating income                     $     350,816            $     490,045
      Net income                           $     128,049            $     183,673
</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.  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. In the
fourth  quarter  of  1999,  NiSource acquired the remaining interests in MHP. On
September 18, 2000, NiSource  sold its ownership interests in MHP to Duke Energy
Gas Transmission for $250 million in cash plus the assumption of $150 million in
debt.  This  transaction  resulted  in  a pre-tax gain of $51.9 million which is
reflected  as  a  component of Other, net under Other Income (Deductions) in the
accompanying  Consolidated  Statements  of Income. Results for periods presented
prior to  the  acquisition  to  TPC  are not impacted significantly by pro forma
results of TPC applied to those periods.



(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  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.  On September
1, 2000,  the Trustee filed a separate  adversary  proceeding  against NI Energy
Services, Inc. and Capital Markets,  asserting that NI Energy Services, Inc. and
Capital  Markets  received a preference of $7.2 million within a year of the PCA
bankruptcy filing. NPM, NI Energy Services, Inc. and Capital Markets dispute any
liability  to the Trustee and intend 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-eight sites. Initial sampling has been conducted at thirty-four
sites.  Investigation  activities  have been completed at twenty-five  sites and
remedial  measures  have been  selected  or  implemented  at  twenty-one  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 solvent
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.  Both  utilities  are  actively   negotiating  with  historic  insurance
companies to resolve environmental claims.

         As of September 30, 2000, a reserve of approximately  $23.5 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. The supreme Court has agreed to
hear appeals from the Court of Appeals  Decision.  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.

The  components  of the net deferred  income tax liability at September 30, 2000
and December 31, 1999, were as follows:
<TABLE>
<CAPTION>
                                                              September 30,        December 31,
(Dollars in thousands)                                             2000                1999
                                                              =============       =============
Deferred tax liabilities--
<S>                                                           <C>                 <C>
  Accelerated depreciation and other property differences     $   1,070,909       $   1,129,011
  AFUDC-equity                                                       27,867              31,274
  Adjustment clauses                                                 17,518              16,730
  Other regulatory assets                                            26,024              27,616
  Prepaid pension and other benefits                                 63,788              64,853
  Reacquisition premium on debt                                      14,876              15,919
Deferred tax assets--
  Deferred investment tax credits                                   (34,850)            (36,650)
  Removal costs                                                    (181,118)           (171,645)
  Other postretirement/postemployment benefits                      (59,456)            (58,645)
  Other, net                                                        (35,013)            (27,300)
                                                              -------------       -------------
                                                                    910,545             991,163
Less: Deferred income taxes related to current assets
 and liabilities                                                    (21,377)             (7,519)
                                                              -------------       -------------
Deferred income taxes--noncurrent                             $     931,922       $     998,682
                                                              =============       =============
</TABLE>
        Deferred  income  taxes  on price risk management assets and liabilities
are reflected net as a component of Other, net above.

Federal and state income taxes as set forth in the  Consolidated  Statements  of
Income were comprised of the following:
<TABLE>
<CAPTION>
                                           Three Months               Nine Months              Twelve Months
                                         Ended September 30,       Ended September 30,       Ended September 30,
                                        ---------------------     ---------------------     ---------------------
(Dollars in thousands)                    2000         1999         2000         1999         2000         1999
                                        ========     ========     ========     ========     ========     ========
<S>                                     <C>          <C>          <C>          <C>          <C>           <C>
Current income taxes -

Federal                                 $ 46,880     $ 10,165     $132,273     $ 88,706     $135,466     $ 94,412
State                                      5,569        1,559       18,138       14,153       18,116       14,248
                                        --------     --------     --------     --------     --------     --------
                                          52,449       11,724      150,411      102,859      153,582      108,660
                                        --------     --------     --------     --------     --------     --------
Deferred income taxes, net -
Federal                                    1,241        3,837      (29,246)     (24,497)     (12,626)       1,097
State                                        225          141       (2,643)      (2,275)        (382)        (169)
                                        --------     --------     --------     --------     --------     --------
                                           1,466        3,978      (31,889)     (26,772)     (13,008)         928
                                        --------     --------     --------     --------     --------     --------
Deferred investment tax
 credits                                  (1,910)      (1,921)      (5,730)      (5,728)      (7,693)      (7,626)
                                        --------     --------     --------     --------     --------     --------
   Total income taxes                   $ 52,005     $ 13,781     $112,792     $ 70,359     $132,881     $101,962
                                        ========     ========     ========     ========     ========     ========
</TABLE>
A  reconciliation  of total income tax expense to an amount computed by applying
the statutory federal income tax rate to pre-tax income is as follows:
<TABLE>
<CAPTION>
                                           Three Months               Nine Months              Twelve Months
                                         Ended September 30,       Ended September 30,       Ended September 30,
                                        ---------------------     ---------------------     ---------------------
                                          2000         1999         2000         1999         2000         1999
                                        ========     ========     ========     ========     ========     ========
<S>                                     <C>          <C>          <C>          <C>          <C>           <C>
 Net income                             $ 52,000     $ 27,955     $155,029     $127,458     $187,985     $188,050
 Add - Income taxes                       52,005       13,781      112,792       70,359      132,881      101,962
Dividend requirements on
  preferred stocks of subsidiaries         2,003        2,071        6,045        6,264        8,115        8,385
                                        --------     --------     --------     --------     --------     --------
Income before preferred dividend
  requirements of subsidiaries
  and income taxes                      $106,008     $ 43,807     $273,866     $204,081     $328,981     $298,397
                                        ========     ========     ========     ========     ========     ========

Amount derived by multiplying
  pre-tax income by the statutory rate  $ 37,103     $ 15,332     $ 95,853     $ 71,428     $115,143     $104,439
Reconciling items multiplied by the
  statutory rate:
   Book depreciation over related tax
    depreciation                             918          969        2,753        2,906        3,781         3,904
   Amortization of deferred investment
    tax credits                           (1,910)      (1,921)      (5,730)      (5,728)      (7,693)       (7,626)
   State income taxes, net of federal
    income tax benefit                     3,845        1,154        9,147        6,924       11,393         9,092
   Reversal of deferred taxes provided
    at rates in excess of the current
    federal income tax rate                 (920)        (721)      (2,758)      (2,163)      (6,052)       (4,822)
   Low-income housing credits             (1,267)      (1,128)      (3,801)      (3,384)      (4,929)       (4,344)
   Nondeductible amounts related to
    amortization of  intangible assets
    and plant acquisition adjustments        619          619        1,857        1,857        2,476         2,486
   Basis and stock sale differences        8,392           --        8,392           --        8,392            --
   Other, net                              5,225         (523)       7,079       (1,481)      10,370        (1,167)
                                        --------     --------     --------     --------     --------     --------
       Total income taxes               $ 52,005     $ 13,781     $112,792     $ 70,359     $132,881     $101,962
                                        ========     ========     ========     ========     ========     ========
</TABLE>


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

The change in the benefit obligation for the years 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
(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>

The change in the fair  value of the  plans'  assets for the years 1999 and 1998
was as follows:
<TABLE>
<CAPTION>
(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
                                                              =============       =============
</TABLE>

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


The plans' funded status as of December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
(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 $213.7 million at September 30, 2000 and are reported
under the captions "Prepayments and Other" in the Consolidated Balance Sheets.

The following  items are the components of provisions for pensions for the three
month,  nine  month and  twelve  month  periods  ended  September  30,  2000 and
September 30, 1999:
<TABLE>
<CAPTION>
                                           Three Months               Nine Months              Twelve Months
                                         Ended September 30,       Ended September 30,       Ended September 30,
                                        ---------------------     ---------------------     ---------------------
                                          2000         1999         2000         1999         2000         1999
                                        ========     ========     ========     ========     ========     ========
<S>                                     <C>          <C>          <C>          <C>          <C>           <C>
Service costs                           $  5,228     $  5,032     $ 15,683     $ 14,752     $ 20,742     $ 18,808
Interest costs                            18,876       17,078       56,628       50,570       75,668       67,688
Expected return on plan assets           (27,221)     (23,147)     (81,661)     (68,546)    (108,343)     (92,711)
Amortization of transition obligation      1,471        1,477        4,415        4,372        6,212        6,000
Amortization of prior service costs        1,581        1,607        4,742        4,765        6,487        5,328
Amortization of (gain)/loss                 (720)          --       (2,160)          --       (2,160)          --
                                        --------     --------     --------     --------     --------     --------
                                        $   (785)    $  2,047     $ (2,353)    $  5,913     $  1,394     $  5,113
                                        ========     ========     ========     ========     ========     ========
</TABLE>

Assumptions  used in the  valuation and  determination  of 2000 and 1999 pension
expense were as follows:
<TABLE>
<CAPTION>
                                                                   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,  $1.7 million and $2.3
million  were made to these  plans for the three  month,  nine  month and twelve
month periods ended September 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.

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

The change in the fair  value of the plan  assets for the years 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
(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>

Following is the funded  status for  postretirement  benefits as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
(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 $174.2 million at September 30, 2000.

Net  periodic   postretirement   benefit  costs,  before  consideration  of  the
rate-making  discussed  previously,  for the three month,  nine month and twelve
month  periods ended  September  30, 2000 and  September  30, 1999,  include the
following components:
<TABLE>
<CAPTION>
                                           Three Months               Nine Months              Twelve Months
                                         Ended September 30,       Ended September 30,       Ended September 30,
                                        ---------------------     ---------------------     ---------------------
(Dollars in thousands)                    2000         1999         2000         1999         2000         1999
                                        ========     ========     ========     ========     ========     ========
<S>                                     <C>          <C>          <C>          <C>          <C>           <C>
Service costs                           $  1,520     $  1,623     $  4,564     $  4,271     $  4,484     $  5,358
Interest costs                             4,980        4,728       14,939       14,103       15,053       17,677
Expected return on plan assets              (580)        (700)      (1,739)      (1,933)         (67)      (1,999)
Amortization of transition obligation      3,215        3,197        9,646        9,525       10,869       12,482
Amortization of prior service costs           85           86          257          258          278          355
Amortization of (gain) loss               (1,412)      (1,204)      (4,238)      (3,600)      (6,194)      (5,167)
                                        --------     --------     --------     --------     --------     --------
                                        $  7,808     $  7,730     $ 23,429     $ 22,624     $ 24,423     $ 28,706
                                        ========     ========     ========     ========     ========     ========
</TABLE>

Assumptions   used  in  the   determination   of  2000  and  1999  net  periodic
postretirement benefit costs were as follows:
<TABLE>
<CAPTION>
                                                                   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 $3.9
million for the three month and nine month periods ended September 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 $3.0 million for the three month
and nine month periods ended September 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
                                                     September 30,    December 31,      September 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 September 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 September  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:

Preferred  stocks  subject  to  mandatory   redemption   requirements  or  whose
redemption is outside the control of issuer, excluding sinking fund payments due
within one year were as follows:
<TABLE>
<CAPTION>
                                                              September 30,        December 31,
(Dollars in thousands)                                             2000                1999
                                                              =============       =============
Northern Indiana Public Service Company:
  Cumulative preferred stock -$100 par value -
    8.85% series - 25,000 and 37,500 shares outstanding,
<S>                                                           <C>                 <C>
      respectively                                            $       2,500       $       3,750
    7-3/4% series - 27,798 shares outstanding                         2,780               2,780
    8.35% series - 39,000 and 45,000 shares outstanding,
      respectively                                                    3,900               4,500
  Cumulative preferred stock -no par value -
    6.50% series - 430,000 shares outstanding                        43,000              43,000
                                                              -------------       -------------
                                                              $      52,180       $      54,030
                                                              =============       =============
</TABLE>

The redemption prices at September 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:
<TABLE>
<CAPTION>
                                                                       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%        $102.95, 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>

Sinking  fund   requirements   with  respect  to  redeemable   preferred  stocks
outstanding  at  September  30,  2000  for  each  of the  twelve  month  periods
subsequent to September 30, 2001, were as follows:
<TABLE>
<CAPTION>
                  Twelve Months Ended September 30,        (Dollars in thousands)
                  ===============================================================
                  <S>                                                  <C>
                  2002                                                 $    1,828
                  2003                                                 $   44,828
                  2004                                                 $      878
                  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 September 30, 2000,  Northern  Indiana had  approximately
$134.0 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.

The net income, preferred dividends and shares used to compute basic and diluted
earnings per share is presented in the following table:
<TABLE>
<CAPTION>
                                           Three Months               Nine Months              Twelve Months
                                         Ended September 30,       Ended September 30,       Ended September 30,
                                        ---------------------     ---------------------     ---------------------
                                          2000         1999         2000         1999         2000         1999
                                        ========     ========     ========     ========     ========     ========
(Dollars in thousands, except share amounts)

Basic
Weighted Average Number of Common
<S>                                  <C>          <C>          <C>          <C>          <C>           <C>
    Shares Outstanding               120,559,039  125,030,566  121,651,509  124,217,959  122,422,589   122,577,821
                                     ===========  ===========  ===========  ===========  ===========   ===========

Net Income to be Used to Compute Basic
    Earnings per Share:
Net Income                           $    52,000  $    27,955  $   155,029  $   127,458  $   187,985   $   188,050
                                     ===========  ===========  ===========  ===========  ===========   ===========
Basic Earnings per Average Common
    Share                            $      0.43  $      0.22  $      1.27  $      1.02  $      1.53   $      1.53
                                     ===========  ===========  ===========  ===========  ===========   ===========

Diluted
Weighted Average Number of Common
    Shares Outstanding               120,559,039  125,030,566  121,651,509  124,217,959  122,422,589   122,577,821
Dilutive Shares                        2,853,505    1,024,180    3,628,149      722,559    3,143,613       710,818
                                     -----------  -----------  -----------  -----------  -----------   -----------
Weighted Average Shares              123,412,544  126,054,746  125,279,658  124,940,518  125,566,202   123,288,639
                                     ===========  ===========  ===========  ===========  ===========   ===========

Net Income to be Used to Compute
    Diluted Earnings per Share:
Net Income                           $    52,000  $    27,955  $   155,029  $   127,458  $   187,985   $   188,050
                                     ===========  ===========  ===========  ===========  ===========   ===========
Diluted Earnings per Average
    Common Share                     $      0.42  $      0.22  $      1.23  $      1.02  $      1.49   $      1.52
                                     ===========  ===========  ===========  ===========  ===========   ===========
</TABLE>

(14) Common  Shares:  As of  September  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 effective February 20, 1998.

Share  Purchase  Rights Plan.  On February  17, 2000,  the Board of Directors of
NiSource  adopted a 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  September  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. The counterparty has
informed NiSource that approximately 5.6 million shares have 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 $1.2 million, $3.8 million
and  $4.5 million for the three month, nine month and twelve month periods ended
September 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  September  30,  2000,  the nominal  amount and fair value of the
equity forward purchase  contract was  approximately  $150 million and a loss of
$(14) 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 effect of 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). 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).  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.

        The  1988  Plan  provided  for the issuance of up to 5.0 million  common
shares to key employees through April 1998. 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  issuance of up to 11 million  shares
through April 2004, and permits contingent stock awards and dividend equivalents
payable  on  grants  of  options,  stock appreciation rights (SARs), performance
units  and contingent stock awards. At September 30, 2000,  there were 6,006,336
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
679,500 and 513,500  restricted  shares  outstanding  at September  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 September
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 $0.9 million for the three month,
$3.5  million  and $2.2  million  for the nine month and $4.8  million  and $2.8
million  for the  twelve  month  periods  ended  September  30,  2000 and  1999,
respectively.

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:
<TABLE>
<CAPTION>
                                           Three Months               Nine Months              Twelve Months
                                         Ended September 30,       Ended September 30,       Ended September 30,
                                        ---------------------     ---------------------     ---------------------
                                          2000         1999         2000         1999         2000         1999
                                        ========     ========     ========     ========     ========     ========
(Dollars in thousands, except per share data)
Net Income:
<S>                                     <C>          <C>          <C>          <C>          <C>          <C>
  As reported                           $ 52,000     $ 27,955     $155,029     $127,458     $187,985     $188,050
  Pro forma                             $ 51,264     $ 27,564     $153,068     $126,260     $185,613     $186,448

Earnings Per Average Common Share:
  Basic:
    As reported                         $   0.43     $   0.22     $   1.27     $   1.02     $   1.53     $   1.53
    Pro forma                           $   0.42     $   0.22     $   1.25     $   1.01     $   1.51     $   1.52

  Diluted:
    As reported                         $   0.42     $   0.22     $   1.23     $   1.02     $   1.49     $   1.52
    Pro forma                           $   0.41     $   0.21     $   1.22     $   1.01     $   1.48     $   1.51
</TABLE>

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:
<TABLE>
<CAPTION>
                                         August      January       August       August
                                          2000         2000         1999         1998
                                        ========     ========     ========     ========
<S>                                       <C>          <C>          <C>          <C>
Interest Rate                              6.6%         6.60%        5.87%        5.29%
Expected Dividend Yield                   $1.08        $1.08        $1.02        $0.96
Expected Life (in years)                   5.8          5.4          5.25         5.4
Volatility                                26.16%       28.98%       15.72%       13.09%
</TABLE>

Changes in outstanding  shares under option for the three month,  nine month and
twelve month  periods  ended  September  30, 2000 and September 30, 1999 were as
follows:
<TABLE>
<CAPTION>
                                                 NONQUALIFIED STOCK OPTIONS
                                        ---------------------------------------------
                                                    Weighted                Weighted
                                                     Average                 Average
                                                     Option                  Option
Three Months Ended September 30,          2000        Price       1999        Price
================================        =========   =========   =========   =========
<S>                                     <C>         <C>         <C>         <C>
Balance, beginning of period            4,112,545   $   20.03   3,243,206   $   18.81
 Granted                                  827,000       22.22     744,750       24.59
 Exercised                               (124,540)      13.91     (29,000)      15.62
 Canceled                                 (19,500)      21.47          --         --
                                        ---------               ---------
Balance, end of period                  4,795,505   $   20.56   3,958,956   $   19.92
                                        =========               =========
Shares exercisable                      3,567,505   $   20.42   3,214,206   $   18.84
                                        =========               =========
Weighted average fair value
 of options granted                     $    4.61               $    3.66
                                        =========               =========
</TABLE>
<TABLE>
<CAPTION>
                                                 NONQUALIFIED STOCK OPTIONS
                                        ---------------------------------------------
                                                    Weighted                Weighted
                                                     Average                 Average
                                                     Option                  Option
Nine Months Ended September 30,           2000        Price       1999        Price
===============================         =========   =========   =========   =========
<S>                                     <C>         <C>         <C>         <C>
Balance, beginning of period            3,950,456   $   19.90   2,651,300   $   19.61
 Converted                                     --          --     740,780       15.03
 Granted                                1,235,000       20.97     744,750       24.60
 Exercised                               (330,951)      13.80    (171,374)      14.03
 Canceled                                 (59,000)      23.02      (6,500)      29.22
                                        ---------               ---------
Balance, end of period                  4,795,505   $   20.56   3,958,956   $   19.92
                                        =========               =========
Shares exercisable                      3,567,505   $   20.42   3,214,206   $   18.84
                                        =========               =========
Weighted average fair value
 of options granted                     $    4.33               $    3.66
                                        =========               =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                 NONQUALIFIED STOCK OPTIONS
                                        ---------------------------------------------
                                                    Weighted                Weighted
                                                     Average                 Average
                                                     Option                  Option
Twelve Months Ended September 30,         2000        Price       1999        Price
=================================       =========   =========   =========   =========
<S>                                     <C>         <C>         <C>         <C>
Balance, beginning of period            3,958,956   $   19.92   2,685,100   $   19.56
 Converted                                     --          --     740,780       15.03
 Granted                                1,235,000       20.97     744,750       24.59
 Exercised                               (330,951)      13.80    (203,174)      14.14
 Canceled                                 (67,500)      23.63      (8,500)      29.22
                                        ---------               ---------
Balance, end of period                  4,795,505   $   20.56   3,958,956   $   19.92
                                        =========               =========
Shares exercisable                      3,567,505   $   20.42   3,214,20 6  $   18.84
                                        =========               =========
Weighted average fair value
 of options granted                     $    4.33               $    3.66
                                        =========               =========
</TABLE>

The following table summarizes information about nonqualified stock options:
<TABLE>
<CAPTION>
                    Options Outstanding and Exercisable by Price Range as of September 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     September 30, 2000       Life            Price        September 30, 2000    Exercise Price
  ---------------     ------------------    -----------       --------      ------------------    --------------
    <S>                        <C>                  <C>         <C>                  <C>                  <C>
    $ 8.53-$12.76                101,500            0.7         $10.95                 101,500            $10.95
    $12.77-$19.15              2,058,665            4.7         $16.52               1,653,665            $16.05
    $19.16-$28.74              2,050,340            8.8         $22.62               1,227,340            $22.89
    $28.75-$29.22                585,000            7.7         $29.22                 585,000            $29.22
  ---------------     ------------------    -----------       --------      ------------------    --------------
                               4,795,505            6.7         $20.56               3,567,505            $20.42
</TABLE>

(16) Long-Term Debt:
<TABLE>
<CAPTION>
                                                              September 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                                              $     170,670       $     183,100

Pollution control notes and bonds-
   Weighted  average  interest rate of 4.87% and
   various maturities between October 1, 2003 and
   April 1, 2019                                                    237,000             237,000

Medium-term notes -
   Weighted average interest rate of 7.18% and
   various maturities between August 15, 2001
   and September 1, 2031                                          1,147,025           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 7.43% and
   various maturities between August 15, 2002
   and December 1, 2018                                              29,822             196,704

Variable bank loans - interest rate of 7.63%, due
   August 7, 2003                                                     5,600              30,600

Unamortized premium and discount on
   long-term debt, net                                               (2,826)             (3,112)
                                                              -------------       -------------
Total long-term debt, excluding amounts due
   within one year                                            $   1,737,291       $   1,975,184
                                                              =============       =============
</TABLE>

Sinking fund  requirements  and  maturities  of long-term  debt  outstanding  at
September  30, 2000 for the twelve month  periods  subsequent  to September  30,
2001, were as follows:
<TABLE>
<CAPTION>
                  Twelve Months Ended September 30,        (Dollars in thousands)
                  ===============================================================
                  <S>                                                  <C>
                  2002                                                 $  125,221
                  2003                                                 $  183,359
                  2004                                                 $  123,798
                  2005                                                 $  115,841
</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 $217.7  million
Medium-Term  Notes,  Series  E,  with  various   maturities,   for  purposes  of
refinancing  certain first mortgage bonds and medium-term notes. As of September
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 $3.4 billion at September 30, 2000.


(17) Current Portion of Long-Term Debt:

At September  30, 2000 and December 31, 1999,  the current  portion of long-term
debt due within one year was as follows:
<TABLE>
<CAPTION>
                                                              September 30,       September 30,
(Dollars in thousands)                                             2000                1999
                                                              =============       =============
Medium-term notes--
<S>                                                           <C>                 <C>
   Weighted average interest rate of 6.35%                    $      42,851       $     166,254
Notes payable--
   Weighted average interest rate of 6.69%                           18,569               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                    $      89,420       $     173,721
                                                              =============       =============
</TABLE>

(18) Short-Term  Borrowings:  NiSource and its subsidiaries may borrow under two
364-day $200 million revolving credit agreements that terminate on September 23,
2001. 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
September 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 $175.7  million  with  lenders  at either  the  lender's
commercial  prime or market lending rates. As of September 30, 2000,  there were
$78.7  million of  borrowings  outstanding  under  these  lines of credit with a
weighted  average  interest rate of 7.35%.  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 $424.5  million.  As of  September  30,  2000,  there were $254.0  million
outstanding  under these money  market  lines of credit with a weighted  average
interest  rate of 7.14%.  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 were  unsecured  debentures of Capital
Markets and ranked equally with all other unsecured and  unsubordinated  debt of
Capital  Markets.  On September 28, 2000, all $160 million PURS were redeemed by
NiSource at par.

At  September  30, 2000 and December 31,  1999,  short-term  borrowings  were as
follows:
<TABLE>
<CAPTION>
                                                              September 30,        December 31,
(Dollars in thousands)                                             2000                1999
                                                              =============       =============

Commercial paper--
   Weighted average interest rate of 6.80%
<S>                                                           <C>                 <C>
     at September 30, 2000                                    $     413,500       $     299,565
Notes payable--
   Weighted average interest rate of 6.69%
     at September 30, 2000                                          335,108             379,756
                                                              -------------       -------------
   Total short-term borrowings                                $     748,608       $     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 September 30,
2000, there were 6.9 million 5.9% Preferred Securities  outstanding with Capital
Trust assets of $345 million.


(20) Operating Leases:

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
September 30, 2000:
<TABLE>
<CAPTION>
                  Twelve Months Ended September 30,        (Dollars in thousands)
                  ===============================================================
                  <S>                                                  <C>
                  2001                                                 $   34,873
                  2002                                                     65,993
                  2003                                                     31,081
                  2004                                                     77,091
                  2005                                                     24,301
                  Later years                                             200,117
                                                                          -------
                  Total minimum payments required                      $  433,456
                                                                          =======
</TABLE>

The Consolidated  Financial  Statements include rental expense for all operating
leases as follows:
<TABLE>
<CAPTION>

                                                              September 30,       September 30,
(Dollars in thousands)                                             2000                1999
                                                              =============       =============
<S>                                                           <C>                 <C>
Three months ended                                            $      12,528       $      12,332
Nine months ended                                             $      37,146       $      36,530
Twelve months ended                                           $      50,893       $      42,531
</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 $47.8 million and $36.6 million, at
September  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 September 30, 2000,  NiSource
had  futures  contracts  representing  the  hedge of  natural  gas  sales in the
notional  amount of 0.6 billion cubic feet (BCF) resulting in a deferred loss of
$1.0 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 $0.9 million,
$1.8 million and $0.5 million, $0.7 million, $2.1 million and $0.004 million and
$0.7 million,  $2.1 million and $0.004  million for the three month,  nine month
and twelve month periods ended September 30, 2000,  respectively.  The daily VaR
for the gas  trading  portfolio  on an  average,  high  and low  basis  was $1.6
million,  $5.8 million and $0.5  million,  $2.4  million,  $8.1 million and $0.5
million and $2.2  million,  $8.1  million and $0.4  million for the three month,
nine month and twelve month  periods  ended  September  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
$479.6  million and $90.7  million at September  30, 2000 and December 31, 1999,
respectively,  of which $447.2 million and $90.7 million were included in "Price
risk  management  assets" and $32.4 million and $0.0 million were included under
the caption  "Prepayments  and other"  included in the Other Assets at September
30, 2000 and December  31, 1999,  respectively.  The  accompanying  Consolidated
Balance Sheet also reflects  price risk  management  liabilities  (including net
option  premiums) of $498.2  million and $113.0  million of which $453.3 million
and $113.0  million were  included in "Price risk  management  liabilities"  and
$44.9 million and $0.0 million were included in "Other  noncurrent  liabilities"
at September 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/(loss) of $(0.1) million, $7.7 million and $7.9 million for the three
month,  nine month and twelve month periods  ended  September 30, 2000 and $ 6.2
million,  $7.0  million  and $7.0  million for the three  month,  nine month and
twelve month periods ended September 30, 1999.

These  net  amounts  reflect  realized  revenues  and  cost  of sales related to
option  contracts and physical  forward sales and purchase contracts as follows:

<TABLE>
<CAPTION>
                                           Three Months               Nine Months              Twelve Months
                                         Ended September 30,       Ended September 30,       Ended September 30,
                                        ---------------------     ---------------------     ---------------------
(Dollars in thousands)                    2000         1999         2000         1999         2000         1999
                                        ========     ========     ========     ========     ========     ========
<S>                                     <C>          <C>          <C>          <C>          <C>           <C>
Power Trading Revenues                  $203,085     $121,461     $378,003     $178,339     $437,420     $178,339
Power Trading Cost of Sales             $203,154     $115,264     $370,339     $171,294     $429,466     $171,294
</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.  The amounts  recorded as gas trading  revenues  and costs of goods sold
were as follows:
<TABLE>
<CAPTION>
                                   Three Months                  Nine Months                 Twelve Months
                                Ended September 30,          Ended September 30,          Ended September 30,
                            --------------------------   ---------------------------  ---------------------------
(Dollars in thousands)          2000          1999           2000          1999           2000           1999
                            ============  ============   ============  =============  ============   ============
<S>                         <C>           <C>            <C>           <C>            <C>            <C>
Gas Trading Revenues        $    448,520  $     98,457   $  1,112,956  $     189,007  $  1,303,122   $    189,007
Gas Trading Cost of Sales   $    449,810  $    109,564   $  1,108,881  $     201,126  $  1,295,953   $    201,126
</TABLE>

         NiSource  has entered  into  forward  interest  rate swaps to hedge the
interest  rate risk  exposure  associated  with $1.6 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  notional amount  terminate on
March 30, 2006,  the  interest  rate swap on the $500  million  notional  amount
terminates  on March 30,  2011 and the  interest  rate  swap on the $500 million
amount  terminates  on  March  30,  2031.   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.

The carrying values and estimated fair values of financial  instruments  were as
follows:
<TABLE>
<CAPTION>
                                                   September 30, 2000           December 31, 1999
                                                ------------------------     ------------------------
                                                 Carrying     Estimated       Carrying     Estimated
(Dollars in thousands)                            Amount     Fair Value        Amount     Fair Value
                                                ===========  ===========     ===========  ===========
<S>                                             <C>          <C>             <C>          <C>
Investments                                     $    52,462  $    52,937     $    49,064  $    49,352
Long-term debt (including current portion)      $ 1,826,711  $ 1,663,901     $ 2,148,905  $ 1,992,348
Preferred stock (including current portion)     $   137,638  $   111,587     $   141,469  $   119,702
Company-obligated mandatorily redeemable
   preferred securities of subsidiary trust
   holding solely Company debentures            $   345,000  $   331,200     $   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.

The  following  table shows the basic steel  industry  percentage of gas revenue
(including  transportation  services)  and  electric  revenue for 2000 and 1999:
<TABLE>
<CAPTION>
                                                              Twelve Months          Twelve Months
                                                            Ended September 30,    Ended September 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 September 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                     $  202,323    $  295,295    $ 29,109    $  471,628    $   77,482    $ (70,291)    $1,005,546
Other Net                              $     (909)   $      (28)   $     (3)   $   50,175    $    4,142    $     697     $   54,074
Depreciation and Amortization          $   31,865    $   40,403    $  4,294    $    2,601    $    3,950    $     987     $   84,100
Income before Interest and Other
   Charges and Income Taxes            $  (21,704)   $  119,266    $ 11,292    $   56,061    $    4,031    $  (7,552)    $  161,394
Assets                                 $2,478,656    $2,723,813    $714,993    $  791,566    $  591,001    $(215,862)    $7,084,167
Capital Expenditures                   $   25,594    $   33,398    $     --    $      262    $    3,247    $      --     $   62,501
Investment in Equity-Method Investees  $       --    $       --    $     --    $    7,786    $   97,247    $      --     $  105,033
</TABLE>
<TABLE>
<CAPTION>
For the three months ended September 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                     $  133,335    $  325,044    $ 29,923    $  179,322    $   72,068    $ (51,700)    $  687,992
Other Net                              $      911    $    4,871    $    771    $    1,422    $  (16,853)   $    (862)    $   (9,740)
Depreciation and Amortization          $   29,203    $   39,856    $  3,872    $      777    $    3,626    $     672     $   78,006
Income before Interest and Other
   Charges and Income Taxes            $  (14,545)   $  121,396    $ 12,888    $   (2,595)   $  (15,385)   $ (10,013)    $   91,746
Assets                                 $2,348,302    $2,704,192    $666,307    $  314,642    $  547,900    $ (74,082)    $6,507,261
Capital Expenditures                   $   44,737    $   24,646    $ 22,953    $       25    $    4,444    $      --     $   96,805
Investment in Equity-Method Investees  $       --    $       --    $     --    $   91,837    $  159,355    $      --     $  251,192
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 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                     $  914,459    $  811,388    $ 77,190    $1,168,669    $  221,251    $(196,891)    $2,996,066
Other Net                              $    1,422    $       48    $    223    $   50,830    $   10,014    $  (2,676)    $   59,861
Depreciation and Amortization          $   96,684    $  120,563    $ 12,827    $    8,645    $   11,860    $   2,638     $  253,217
Income before Interest and Other
   Charges and Income Taxes            $   70,248    $  292,776    $ 21,246    $   74,470    $    6,378    $ (29,682)    $  435,436
Assets                                 $2,478,656    $2,723,813    $714,993    $  791,566    $  591,001    $(215,862)    $7,084,167
Capital Expenditures                   $   71,463    $   91,132    $ 38,831    $   12,797    $   12,959    $      --     $  227,182
Investment in Equity-Method Investees  $       --    $       --    $     --    $    7,786    $   97,247    $      --     $  105,033
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 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                     $  711,954    $  867,730    $ 74,882    $  554,694    $  202,827    $(151,857)    $2,260,230
Other Net                              $    2,149    $     (430)   $  1,234    $    3,659    $  (15,261)   $  (1,907)    $  (10,556)
Depreciation and Amortization          $   85,324    $  119,104    $ 10,886    $    1,661    $    9,547    $   1,932     $  228,454
Income before Interest and Other
   Charges and Income Taxes            $   62,764    $  283,916    $ 23,725    $   (1,041)   $  (12,056)   $ (19,910)    $  337,398
Assets                                 $2,348,302    $2,704,192    $666,307    $  314,642    $  547,900    $ (74,082)    $6,507,261
Capital Expenditures                   $   98,488    $   92,528    $ 39,779    $       66    $   18,519    $      --     $  249,380
Investment in Equity-Method Investees  $       --    $       --    $     --    $   91,837    $  159,355    $      --     $  251,192
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the twelve months ended September 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                     $1,278,072    $1,068,154    $100,808    $1,385,751    $  301,950    $(253,984)    $3,880,751
Other Net                              $    3,436    $      134    $    972    $   52,377    $    5,144    $ (10,776)    $   51,287
Depreciation and Amortization          $  127,506    $  160,436    $ 17,367    $   10,121    $   15,423    $   5,314     $  336,167
Income before Interest and Other
   Charges and Income Taxes            $  127,090    $  372,534    $ 26,661    $   75,026    $    4,400    $ (64,167)    $  541,544
Assets                                 $2,478,656    $2,723,813    $714,993    $  791,566    $  591,001    $(215,862)    $7,084,167
Capital Expenditures                   $  101,034    $  132,468    $ 63,075    $   12,912    $   11,891    $      --     $  321,380
Investment in Equity-Method Investees  $       --    $       --    $     --    $    7,786    $   97,247    $      --     $  105,033
</TABLE>
<TABLE>
<CAPTION>
For the twelve months ended September 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                     $  915,020    $1,159,127    $ 95,951    $  760,843    $  270,089    $(187,566)    $3,013,464
Other Net                              $    3,849    $     (231)   $  1,371    $    4,087    $  (16,150)   $  (2,507)    $   (9,581)
Depreciation and Amortization          $  104,479    $  158,786    $ 13,859    $    1,799    $   12,438    $   2,233     $  293,594
Income before Interest and Other
   Charges and Income Taxes            $  100,366    $  366,464    $ 29,212    $      323    $   (5,746)   $ (23,845)    $  466,774
Assets                                 $2,348,302    $2,704,192    $666,307    $  314,642    $  547,900    $ (74,082)    $6,507,261
Capital Expenditures                   $  117,621    $  130,331    $ 56,974    $      432    $   27,265    $      --     $  332,623
Investment in Equity-Method Investees  $       --    $       --    $     --    $   91,837    $  159,355    $      --     $  251,192

Gas  Marketing  and Storage, Other  Net  for  the  three  months, nine months, and twelve months ended September 30, 2000 includes a
pre-tax gain of $51.9 million related to the sale of MHP.
</TABLE>

The following table reconciles  total reportable  segment income before interest
and other charges and income taxes to net income for three month, nine month and
twelve month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>

                                           Three Months               Nine Months              Twelve Months
                                         Ended September 30,       Ended September 30,       Ended September 30,
                                        ---------------------     ---------------------     ---------------------
(Dollars in thousands)                    2000         1999         2000         1999         2000         1999
                                        ========     ========     ========     ========     ========     ========
<S>                                     <C>          <C>          <C>          <C>          <C>          <C>
Total Segment profit (loss)             $161,394     $ 91,746     $435,436     $337,398     $541,544     $466,774
Interest expense, net                    (50,161)     (42,376)    (146,304)    (119,378)    (193,543)    (153,660)
Minority interests                        (5,225)      (5,563)     (15,266)     (13,939)     (19,020)     (14,717)
Dividends requirements on
    preferred stock of subsidiaries       (2,003)      (2,071)      (6,045)      (6,264)      (8,115)      (8,385)
                                        --------     --------     --------     --------     --------     --------
Income before income taxes               104,005       41,736      267,821      197,817      320,866      290,012
Less: Income taxes                        52,005       13,781      112,792       70,359      132,881      101,962
                                        --------     --------     --------     --------     --------     --------
Net Income                              $ 52,000     $ 27,955     $155,029     $127,458     $187,985     $188,050
                                        ========     ========     ========     ========     ========     ========
</TABLE>

(26)  Unaudited Pro Forma  Financial  Information.  The following  unaudited pro
forma  information  reflects  the  historical  combined  condensed  consolidated
financial  data of NiSource and Columbia  after  accounting  for the merger as a
purchase  business  combination.  Accordingly,  you  should  read the  following
information  together with the historical  consolidated  financial statements of
NiSource and Columbia and all related  notes.  The unaudited pro forma  combined
condensed  consolidated  balance  sheet  assumes the merger was  completed as of
September  30, 2000.  The unaudited pro forma  combined  condensed  consolidated
statements of income from continuing operations assumes the merger was completed
at the beginning of the periods stated.

         The information  presented  below is not necessarily  indicative of the
results of  operations  that would have  occurred had the merger  actually  been
completed  at the  beginning  of the  periods  stated,  or the actual  financial
position  that would have  resulted had the merger  actually  been  completed on
September 30, 2000. The  information is also not  necessarily  indicative of the
future results of operations or financial position of New NiSource. In addition,
NiSource  management  has  identified  significant  synergies and merger savings
which  are  not  reflected  in the pro  forma  combined  condensed  consolidated
financial data.  NiSource  expects to record a  restructuring  charge during the
fourth quarter of 2000 reflecting  costs  associated with a workforce  reduction
and other  merger-related  costs.  NiSource has not yet quantified the amount of
this charge.


         The information below reflects completion of the merger using a holding
company  structure,  which  involves  the  creation  of a new  holding  company,
currently named New NiSource,  and two separate but concurrent  mergers. In this
merger, a wholly-owned  subsidiary of New NiSource will merge into NiSource.  In
the other merger,  a second  wholly-owned  subsidiary of New NiSource will merge
into Columbia. NiSource and Columbia will be the surviving corporations in those
mergers  and will be  wholly-owned  by New  NiSource.  Immediately  after  these
mergers,  NiSource will merge into New  NiSource.  New NiSource will then change
its name to "NiSource Inc." and will serve as a holding company for Columbia and
its subsidiaries and the subsidiaries of NiSource.

         The pro forma  combined  condensed  consolidated  financial data assume
that 30% of Columbia's shares are each exchanged for 3.04414 New NiSource common
shares,  and 70% of  Columbia's  shares are exchanged for $70 in cash plus $2.60
stated  amount  of  a  SAILS.  The  total  aggregated  purchase  price  for  the
transaction using this assumption is approximately $5.8 billion.

         The merger is being accounted for by the purchase method.  The purchase
price has been allocated to the assets  acquired and  liabilities  assumed based
upon their estimated fair values. The accompanying  allocation  anticipates that
the fair market value of Columbia's regulated operations reasonably approximates
the underlying book values of these operations.  As a result, the purchase price
paid in excess of the estimated fair value of  non-regulated  operations and the
book value,  which is a proxy for fair value,  of regulated  operations has been
allocated to goodwill.  Allocations included in the pro forma combined condensed
consolidated  financial  statements  are  based  on  analyses  that  are not yet
completed.  Management  continues  to assess  the  strategic  nature  and fit of
certain assets and operations of the combined entity.  Additionally,  management
continues to assess financial exposure to litigation, environmental,  regulatory
and  other  similar  contingencies  as  part  of  the  merger.  Another  ongoing
assessment  includes the  requirements  to fulfill the combined  company's human
resource  needs.  Accordingly,  the final  value of the  purchase  price and its
allocation may differ, perhaps  significantly,  from the amounts included in the
accompanying pro forma statements.

         On October 30, 2000  NiSource  received an order from the SEC approving
the merger.  This order  requires  NiSource  to dispose of its water  operations
three years from the date of the merger.  Management  has not developed a formal
plan of disposition responsive to the order and, accordingly,  has not reflected
the water operations as a discontinued operation or assets held for sale.

         The  pro  forma  financial  statements  and  notes  should  be  read in
conjunction with the historical  consolidated  financial  statements and related
notes of NiSource and CEG.  These  statements  were prepared in accordance  with
rules and regulations  established by the Securities and Exchange Commission and
are not necessarily  reflective of the actual or future results of operations or
financial position of the combined company.
<PAGE>
<TABLE>
<CAPTION>
                                                              New NiSource Inc.
                                      Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet
                                                          as of September 30, 2000

                                                                                                              Pro Forma
(Dollars in thousands)                                 NiSource           CEG         Adjustments            Consolidated
                                                     =============   =============   =============          =============
Assets
    Property, Plant and Equipment:
<S>                                                  <C>             <C>             <C>                    <C>
      Net Utility Plant                              $   4,773,669   $   4,313,300   $          --          $   9,086,969
      Net Other Plant                                      127,841         628,500         219,573 G              975,914
                                                     -------------   -------------   -------------          -------------
           Total Property, Plant and Equipment           4,901,510       4,941,800         219,573             10,062,883
                                                     -------------   -------------   -------------          -------------

Investments:
     Investment in unconsolidated affiliates               165,484         305,600         (12,773) L             458,311
     Other                                                  34,345         171,700        (134,600) O             71,445
                                                     -------------   -------------   -------------          -------------
           Total Investments                               199,829         477,300        (147,373)               529,756
                                                     -------------   -------------   -------------          -------------

Current Assets:
     Cash and cash equivalents                              51,029          30,300              --                 81,329
     Accounts receivable, less reserve                     425,216         278,300              --                703,516
     Exchange gas                                               --         458,400              --                458,400
     Energy adjustment clauses                              94,280          92,300              --                186,580
     Other inventories                                      90,273          14,600              --                104,873
     Natural gas in storage                                190,928         236,500              --                427,428
     Price risk management assets                          447,219              --              --                447,219
     Prepayments and other current assets                   45,774         200,400              --                246,174
                                                     -------------   -------------   -------------          -------------
           Total Current Assets                          1,344,719       1,310,800              --              2,655,519
                                                     -------------   -------------   -------------          -------------

 Other Assets
     Regulatory assets                                     205,958         344,900              --                550,858
     Intangible assets, less accumulated provision
    for amortization                                        75,183           3,300       3,539,347 A,O          3,617,830
     Prepayments and other assets                          356,968          22,400          48,050 J              427,418
                                                     -------------   -------------   -------------          -------------
           Total Other Assets                              638,109         370,600       3,587,397              4,596,106
                                                     -------------   -------------   -------------          -------------
                                                     $   7,084,167   $   7,100,500   $   3,659,597          $  17,844,264
                                                     =============   =============   =============          =============


See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Statements.

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                              New NiSource Inc.
                                      Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet
                                                          as of September 30, 2000

                                                                                                              Pro Forma
(Dollars in thousands)                                 NiSource           CEG         Adjustments            Consolidated
                                                     =============   =============   =============          =============
Capitalization and Liabilities

Capitalization:

<S>                                                  <C>             <C>             <C>                    <C>
    Common stock - without par                       $     870,930   $          --   $    (870,930)D        $          --
    Common stock, $.01 par value                                --             800            (800)D                   --
    Common stock, $.01 par value                                --              --           1,938 E                1,938
    Additional paid-in capital                             172,649       1,617,000         498,048 D,E,L        2,287,697
    Treasury shares                                       (516,065)       (249,100)        765,165 K                   --
    Retained earnings                                      824,551         665,600        (665,600)D              824,551
                                                     -------------   -------------   -------------          -------------
          Common Shareholders' Equity                    1,352,065       2,034,300        (272,179)             3,114,186
                                                     -------------   -------------   -------------          -------------

    Cumulative Preferred Stock                             135,811              --              --                135,811
     Company-obligated preferred securities of
     subsidiary trust holding solely Company
     debentures                                            345,000              --              --                345,000
     SAILS                                                      --              --         106,100 M              106,100
     Long-term debt, less current portion                1,737,291       1,639,200       2,494,563 I,N          5,871,054
                                                     -------------   -------------   -------------          -------------
          Total Capitalization                           3,570,167       3,673,500       2,328,484              9,572,151
                                                     -------------   -------------   -------------          -------------

Current Liabilities:
    Current portion of long-term debt                       89,420         311,100              --                400,520
    Short term borrowings                                  748,608              --       3,828,916 H            4,577,524
    Short term borrowings                                       --          54,100      (2,628,916)I           (2,574,816)
    Accounts payable                                       368,020         238,700              --                606,720
    Dividends declared on common and preferred stocks       33,679              --              --                 33,679
    Transportation and exchange gas                             --         223,700              --                223,700
    Taxes accrued                                           26,478         144,500              --                170,978
    Interest accrued                                        27,425          75,600              --                103,025
    Price risk management liabilities                      453,302              --              --                453,302
    Deferred revenue                                            --         436,000              --                436,00
    Other accruals                                         220,642         321,600              --                542,242
                                                     -------------   -------------   -------------          -------------
          Total Current Liabilities                      1,967,574       1,805,300       1,200,000              4,972,874
                                                     -------------   -------------   -------------          -------------

Other:
    Deferred income taxes                                  931,922         741,100          83,262 G            1,756,284
    Deferred investment tax credits, being
      amortized over life of related property               89,217          31,600              --                120,817
    Deferred credits                                       112,609              --              --                112,609
    Deferred revenue                                            --         512,200              --                512,200
    Customers advances and contributions in aid to
      construction                                         157,475          21,900              --                179,375
    Accrued liability for postretirement benefits          169,305         116,700              --                286,005
    Other                                                   85,898         198,200          47,851  J             331,949
                                                     -------------   -------------   -------------          -------------
          Total Other                                    1,546,426       1,621,700         131,113              3,299,239
                                                     -------------   -------------   -------------          -------------
                                                     $   7,084,167   $   7,100,500   $   3,659,597          $  17,844,264
                                                     =============   =============   =============          =============

See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Statements.

</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                                                              New NiSource Inc.
                         Unaudited Pro Forma Combined Condensed Statement of Income from Continuing Operations
                                                 For Nine Months Ended September 30, 2000

                                                                                                              Pro Forma
(Dollars in thousands, except for per share amounts)   NiSource           CEG         Adjustments            Consolidated
                                                     =============   =============   =============          =============
<S>                                                  <C>             <C>             <C>                    <C>
Operating Revenues                                   $   2,996,066   $   1,828,300   $          --          $   4,824,366
Cost of Sales                                            1,835,891         468,300              --              2,304,191
                                                     -------------   -------------   -------------          -------------
Operating Margin                                         1,160,175       1,360,000              --              2,520,175
                                                     -------------   -------------   -------------          -------------

Operating Expenses and Taxes (except income) :
  Operation and maintenance                                458,213         638,900          (7,500)P            1,089,613
  Settlement of supply charges                                  --              --              --                     --
  Depreciation, depletion and amortization                 253,217         153,000          74,597 F              480,814
  Taxes (except income)                                     73,170         141,300              --                214,470
                                                     -------------   -------------   -------------          -------------
                                                           784,600         933,200          67,097              1,784,897
                                                     -------------   -------------   -------------          -------------
Operating Income                                           375,574         426,800         (67,097)               733,660
                                                     -------------   -------------   -------------          -------------

Other Income (Deductions)                                   59,861Q        103,800Q             --                163,661
                                                     -------------   -------------   -------------          -------------
                                                           435,436         530,600         (67,097)               898,939
                                                     -------------   -------------   -------------          -------------

Interest and Other Charges:
  Interest expense                                         146,304         139,200         230,789 B              516,293
  Minority interest                                         15,266              --              --                 15,266
  Dividend requirements on  preferred stock of
    subsidiaries                                             6,045              --              --                  6,045
                                                     -------------   -------------   -------------          -------------
        Total                                              167,615         139,200         230,789                537,604
                                                     -------------   -------------   -------------          -------------

Income Before Income Taxes                                 267,821         391,400        (297,886)               361,335
                                                     -------------   -------------   -------------          -------------

Income Taxes                                               112,792Q        145,600Q        (87,793)C,F,P          170,599
                                                     -------------   -------------   -------------          -------------

Net Income from continuing operations                      155,029         245,800        (210,093)               190,736
                                                     =============   =============   =============          =============
Average common shares outstanding - basic                  121,652          80,163              --                201,815
Common  shares retired                                          --              --         (80,163)D              (80,163)
Common  shares issued                                           --              --          54,351 E               54,351
Average number of common shares                                 --              --               -                176,003
Diluted shares                                               3,628             767            (767)D                3,628
                                                     -------------   -------------   -------------          -------------
        Total Diluted Shares                               125,280          80,930              --                179,631

Basic earnings per average common share from
 continuing operations                               $        1.27   $        3.06              --          $        1.08
                                                     =============   =============   =============          =============

Diluted earnings per average common share from
continuing operations                                $        1.23   $        3.03              --          $        1.06
                                                     =============   =============   =============          =============

Common shares outstanding  at end of period (000)          121,320          79,530              --                175,671


See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                              New NiSource Inc.
                         Unaudited Pro Forma Combined Condensed Statement of Income from Continuing Operations
                                                 For Twelve Months Ended September 30, 2000

                                                                                                              Pro Forma
(Dollars in thousands, except for per share amounts)   NiSource           CEG         Adjustments            Consolidated
                                                     =============   =============   =============          =============
<S>                                                  <C>             <C>             <C>                    <C>
Operating Revenues                                   $   3,880,751   $   2,620,000   $          --          $   6,500,751
Cost of Sales                                            2,318,352         683,400              --              3,001,752
                                                     -------------   -------------   -------------          -------------
Operating Margin                                         1,562,399       1,936,600              --              3,498,999
                                                     -------------   -------------   -------------          -------------

Operating Expenses and Taxes (except income) :
  Operation and maintenance                                637,042         862,200          (7,500)P            1,491,742
  Settlement of supply charges                                  --          (1,900)             --                 (1,900)
  Depreciation, depletion and amortization                 336,167         181,600          99,462 F              617,229
  Taxes (except income)                                     98,933         188,700              --                287,633
                                                     -------------   -------------   -------------          -------------
                                                         1,072,142       1,230,600          91,962              2,394,704
                                                     -------------   -------------   -------------          -------------
Operating Income                                           490,257         706,000         (91,962)             1,104,295
                                                     -------------   -------------   -------------          -------------

Other Income (Deductions)                                   51,287Q        118,500Q             --                169,787
                                                     -------------   -------------   -------------          -------------
                                                           541,544         524,500         (91,962)             1,274,082
                                                     -------------   -------------   -------------          -------------

Interest and Other Charges:
  Interest expense                                         193,543         187,800         307,718 B              689,061
  Minority interest                                         19,020              --              --                 19,020
  Dividend requirements on  preferred stock of
    subsidiaries                                             8,115              --              --                  8,115
                                                     -------------   -------------   -------------          -------------
        Total                                              220,678         187,800         307,718                716,196
                                                     -------------   -------------   -------------          -------------

Income Before Income Taxes                                 320,866         636,700        (399,680)               557,886
                                                     -------------   -------------   -------------          -------------

Income Taxes                                               132,881Q        219,800Q       (118,006)C,F,P          234,675
                                                     -------------   -------------   -------------          -------------

Net Income from continuing operations                      187,985         416,900        (281,674)               323,211
                                                     =============   =============   =============          =============
Average common shares outstanding - basic                  122,423          80,423              --                202,846
Common  shares retired                                          --              --         (80,423)D              (80,423)
Common  shares issued                                           --              --          72,468 E               72,468
Average number of common shares                                 --              --               -                194,891
Diluted shares                                               3,143             767            (767)D                3,143
                                                     -------------   -------------   -------------          -------------
        Total Diluted Shares                               125,566          81,190              --                198,034

Basic earnings per average common share from
 continuing operations                               $        1.53   $        5.18              --          $        1.65
                                                     =============   =============   =============          =============

Diluted earnings per average common share from
continuing operations                                $        1.49   $        5.13              --          $        1.63
                                                     =============   =============   =============          =============

Common shares outstanding  at end of period (000)          121,320          79,530              --                193,788


See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                              New NiSource Inc.
                         Unaudited Pro Forma Combined Condensed Statement of Income from Continuing Operations
                                                 For Twelve Months Ended September 30, 1999

                                                                                                              Pro Forma
(Dollars in thousands, except for per share amounts)   NiSource           CEG         Adjustments            Consolidated
                                                     =============   =============   =============          =============
<S>                                                  <C>             <C>             <C>                    <C>
Operating Revenues                                   $   3,144,576   $   2,800,900   $          --          $   5,945,476
Cost of Sales                                            1,651,051         892,900              --              2,543,951
                                                     -------------   -------------   -------------          -------------
Operating Margin                                         1,493,525       1,908,000              --              3,401,525
                                                     -------------   -------------   -------------          -------------

Operating Expenses and Taxes (except income) :
  Operation and maintenance                                617,016         838,600              -- O            1,455,616
  Settlement of supply charges                                  --         (31,700)             --                (31,700)
  Depreciation, depletion and amortization                 311,404         202,700          99,462 F               13,566
  Taxes (except income)                                    103,569         203,200              --                306,769
                                                     -------------   -------------   -------------          -------------
                                                         1,031,989       1,212,800          99,462              2,344,251
                                                     -------------   -------------   -------------          -------------
Operating Income                                           461,536         695,200         (99,462)             1,057,274
                                                     -------------   -------------   -------------          -------------

Other Income (Deductions)                                  (18,030)         34,900              --                 16,870
                                                     -------------   -------------   -------------          -------------
                                                           443,506         730,100         (99,462)             1,074,144
                                                     -------------   -------------   -------------          -------------

Interest and Other Charges:
  Interest expense                                         166,617         164,200         307,718 B              638,535
  Minority interest                                         17,693              --              --                 17,693
  Dividend requirements on  preferred stock of
subsidiaries                                                 8,334              --              --                  8,334
                                                     -------------   -------------   -------------          -------------
        Total                                              192,644         164,200         307,718                664,562
                                                     -------------   -------------   -------------          -------------

Income Before Income Taxes                                 250,862         565,900        (407,180)               409,582
                                                     -------------   -------------   -------------          -------------

Income Taxes                                                90,448         178,100        (120,850)C,F,P          147,698
                                                     -------------   -------------   -------------          -------------

Net Income from continuing operations                      160,414         387,800        (286,330)               261,884
                                                     =============   =============   =============          =============
Average common shares outstanding - basic                  124,343          82,210              --                206,553
Common  shares retired                                          --              --         (80,163)D              (82,210)
Common  shares issued                                           --              --          72,468 E               72,468
Average number of common shares                                 --              --               -                196,811
Diluted shares                                                 996             499            (499)D                  996
                                                     -------------   -------------   -------------          -------------
        Total Diluted Shares                               125,339          82,709              --                197,807

Basic earnings per average common share from
 continuing operations                               $        1.29   $        4.71              --          $        1.33
                                                     =============   =============   =============          =============

Diluted earnings per average common share from
continuing operations                                $        1.28   $        4.68              --          $        1.32
                                                     =============   =============   =============          =============

Common shares outstanding  at end of period (000)          124,139          81,305              --                196,607


See Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
              Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Statement

<S>     <C>                                                                                       <C>
A.       To reflect the purchase price  allocation to goodwill.  The adjustments
         include the step-up applied to Columbia common shares, estimated merger
         costs  NiSource will incur and costs  relating to certain  compensation
         obligations, net of tax benefits.

         Weighted average consideration to be paid for Columbia common shares                     $           72.54
         Columbia Common Shares (in thousands):
         Outstanding at September 30, 2000 excluding shares held by NiSource                                 79,350
                                                                                                  -----------------
         Fair value of consideration                                                              $       5,756,084
         Less: Columbia's net equity at September 30, 2000                                                2,034,300
         Less: Profit from sale of electric facility                                                         86,300
         NiSource ownership of Columbia shares                                                               13,313
                                                                                                  -----------------
         Consideration in excess of Columbia book value                                           $       3,648,797
         Reserves for contractual obligations                                                                47,851
         Value of nonqualified stock options cashed out                                                     111,413
         Estimated merger costs                                                                              50,000
         Estimated tax benefits associated with non-qualified stock options
           and contractual obligations                                                                      (48,050)
                                                                                                  ------------------
         Allocable purchase price                                                                 $       3,810,010
         Less:
         Step-up allocated to non-utility properties, net of deferred taxes                                (136,311)
         Adjustment to CEG debt                                                                            (134,353)
                                                                                                  ------------------
         Amount allocated to goodwill                                                             $       3,539,346
                                                                                                  =================

         The weighted  average  consideration  of $72.54 assumes that holders of
         30% of Columbia's  shares will elect to receive 3.04414 of New NiSource
         common  shares and that the holders of 70% of the shares  will  receive
         $70 in  cash  and  $2.60  stated  amount  of  SAILS.  The  accompanying
         allocation  anticipates  that  the  fair  market  value  of  Columbia's
         regulated operations reasonably  approximates the underlying book value
         of these operations.  This allocation is based on analyses that are not
         yet completed.  Accordingly,  the final value of the purchase price and
         its  allocation  may differ,  perhaps  significantly,  from the amounts
         included in the accompanying pro forma statements.

B.       To  adjust  historical  interest  expense  to  reflect  the cost of the
         increased  indebtedness  from  completion of the merger.  The pro forma
         statements  assume a weighted  average 7.8% per annum  interest rate on
         the indebtedness  incurred to complete the merger. A one-eighth percent
         variance from the assumed rate increases or decreases  pre-tax interest
         expense by approximately $4.8 million on an annual basis.

C.       To  recognize  the  estimated pro forma income tax effect of additional
         interest expense reflected in adjustment (B).

D.       To  eliminate  Columbia  and  NiSource  common shareholders' equity and
         related common shares.

E.       To reflect the issuance of 3.04414 shares of New NiSource  common stock
         for  each  converted share of Columbia common stock and the issuance of
         one  share  of  New  NiSource common stock for each old NiSource common
         share.

F.       To adjust historical  depreciation,  depletion and amortization expense
         for the preliminary  purchase price  allocation  reflected in these pro
         forma financial  statements.  The amount allocated to goodwill reflects
         amortization on a straight-line basis over a 40-year period. The amount
         allocated to net other plant reflects  amortization  on a straight-line
         basis over a 20-year period. This adjustment also reflects the deferred
         income  tax impact of  amortizing  the  amount  allocated  to net other
         plant.

G.       To  reflect  the  allocation  of  purchase  price  to  the  exploration
         production  properties  including $219.6 million to net other plant and
         related deferred income taxes of $83.3 million.

H.       To reflect the issuance of $3.8 billion of short-term acquisition debt.

I.       To reflect the  reclassification  of acquisition  debt from  short-term
         to long-term consistent with NiSource's intent and ability to refinance
         such amounts.

J.       To  reflect  a  liability  of  $47.9  million  related  to  contractual
         obligations associated with employment agreements of Columbia including
         related tax benefits.  The  adjustment  also reflects the estimated tax
         benefits associated with the cash out of Columbia stock options.

K.       To reflect the cancellation of NiSource and Columbia treasury shares.

L.       To   eliminate  NiSource  investments  in  Columbia  common  shares  at
         September 30, 2000 and allocate to purchase price.

M.       To reflect the fair value purchase price consideration of SAILS,  units
         consisting of zero coupon  securities and forward equity contracts.

N.       To   reflect  the  fair  value  adjustment  of  CEG's  long  term  debt
         outstanding.

O.       To  reflect  the  sale of Columbia's electric facilities expected to be
         completed   in   the   fourth  quarter  2000.  The  adjustment  reduces
         investments  by  $134.6  million and increases equity by $86.3 million.
         Net proceeds of $220.9 million will be used to reduce debt.

P.       To reflect  the  elimination  of  compensation  expense of certain  CEG
         employees  associated with  additional  amounts paid as a result of the
         merger, along with the related income tax effect.

Q.       Other Income (Deductions) from continuing operations for the nine month
         and twelve month periods ended September 30, 2000 reflect pre-tax gains
         of $51.9 million for NiSource in connection with its disposition of MHP
         and $95.2  million  for CEG in  connection  with the sale of Cove Point
         LNG.  Amounts  included in Income Taxes  related to these sales include
         $25.8 million for the disposition of MHP and $36.2 million for the sale
         of Cove Point LNG. Operating revenues,  operating income and net income
         from continuing operations reflected in the accompanying  unaudited pro
         forma  combined  condensed  consolidated   statements  of  income  from
         continuing operations for MHP and Cove Point LNG are not significant to
         each company.
</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 and
trading  operations  with the April 1999  acquisition  of TPC  Corporation,  now
renamed EnergyUSA-TPC Corp. (TPC).  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 remained  relatively  unchanged from the twelve months ended
September  30,  1999.  For nine  months  ended  September  30,  2000 net  income
increased  $27.6 million from the nine months ended September 30, 1999 to $155.0
million and increased  $24.0  million from the three months ended  September 30,
1999 to $52.0 million for the three months ended September 30, 2000. Results for
the three periods ended  September 30 are not directly  comparable  year to year
due  to  the  acquisition  of  BSG,  TPC  and MHP in 1999. Earnings for all 2000
periods reflect  an  after  tax  gain  of $23.8  million  from  the sale of MHP.
NiSource  established its New England  presence when it acquired BSG in February
1999.  The  natural gas marketing and asset  optimization units of TPC 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 $2.4 billion for the twelve months ended September 30, 2000 (after
elimination  of  intercompany  transmission,  marketing  and storage  revenue of
approximately $237.9 million), an increase of $915.8 million from the comparable
period ended  September  30, 1999.  This increase was primarily due to increased
gas  revenues  from BSG of $221.8  million  reflecting  a full twelve  months of
results,  increased gas marketing,  storage and trading  revenues of $601.7 as a
result  of the TPC and MHP  acquisitions  in 1999,  and  increased  gas costs of
$110.2  million  partially  offset by  decreased  sales to the  residential  and
commercial  customers of the Energy  Utilities  located in northern Indiana as a
result of heating degree days 3% lower than 1999.

         Gas revenues were $1.9 billion for the nine months ended  September 30,
2000 (after  elimination  of  intercompany  transmission,  marketing and storage
revenue of approximately $185.4 million), an increase of $768.3 million from the
comparable  period ended  September 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 nine months results from BSG in
the 2000 period and increased gas costs  partially  offset by decreased sales to
the  residential  and commercial  customers of the Energy  Utilities  located in
northern Indiana as a result of heating degree days 6% lower than 1999.

         Gas revenues were $606.9  million for the three months ended  September
30, 2000 (after elimination of intercompany transmission,  marketing and storage
revenue of  approximately  $66.5 million) an increase of $341.5 million from the
comparable  period ended  September 30, 1999.  This increase is  attributable to
increased gas marketing,  storage and trading revenues,  increased gas costs and
increased sales to residential and commercial  customers of the Energy Utilities
as a result of heating degree days 48% higher than 1999.

         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  54.9,  188.4 and 258.1
million  dth for others  during  the three  month,  nine month and twelve  month
periods ended September 30, 2000, respectively.

         The basic steel  industry  accounted  for 18% of natural gas  delivered
(including volumes transported) during the nine months ended September 30, 2000.

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

<TABLE>
<CAPTION>

                                                            ---------------------------------------------
                                                                      Ended September 30, 2000
                                                            ---------------------------------------------
                                                               Three            Nine            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          $     41,532    $     90,726     $    110,232
  Changes in sales levels                                         18,120         (15,968)         (19,449)
  Bay State Gas Acquisition                                           --         103,273          221,765
  Gas transported                                                  7,945             844            1,543
  Gas marketing, storage and trading                             273,899         589,446          601,678
                                                            ------------    ------------     ------------
Gas Revenue Change                                          $    341,496    $    768,321     $    915,769
                                                            ============    ============     ============
</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 $785.3 million (71%) to $1.9 billion for the twelve months ended
September 30, 2000 from the comparable  period ended  September 30, 1999, due to
the  increased  gas costs of $125.8  million  for BSG  reflecting  a full twelve
months of operations,  increased gas marketing and trading  activities of $589.7
million as a result of the TPC acquisition 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 $3.52 per dth, excluding purchased gas
costs of BSG,  as  compared  to $2.48 per dth for the  comparable  period  ended
September 30, 1999.

         Gas costs  increased  $698.8 million (86%) to $1.5 billion for the nine
months ended  September 30, 2000 from the comparable  period ended September 30,
1999,  mainly due to increased  gas purchases of $574.3  million  related to gas
marketing  and trading  activities as a result of the TPC  acquisition  in 1999,
increased  gas cost of $66.3  million for BSG  reflecting  a full nine 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 $3.64 per dth,  excluding  purchased  gas costs of BSG, as compared to $2.49
per dth for the comparable period ended September 30, 1999.

         Gas costs  increased  $318.4  million  (153%) to $526.4 million for the
three months ended September 30, 2000 from the comparable period ended September
30, 1999, mainly due to increased gas purchases of $285.8 million related to gas
marketing and trading activities as a result of the TPC acquisition 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 $5.11 per dth as compared to
$3.04 per dth for the comparable period ended September 30, 1999.


GAS OPERATING MARGIN

         Gas  operating  margin for the twelve  months ended  September 30, 2000
increased  $130.5  million to $535.5  million from the  comparable  period ended
September 30, 1999.  This increase  mainly reflects an increase of $95.0 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 the Indiana Energy Utilities  residential and commercial customers
reflecting a warmer heating season during the period.

         Gas operating  margin  increased $69.5 million to $384.7 million during
the nine months  ended  September  30,  2000 from the  comparable  period  ended
September 30, 1999.  This increase  mainly reflects an increase of $36.2 million
of gas  operating  margin from BSG,  reflecting a full nine months of operation,
and increased gas marketing, storage and trading activities, partially offset by
decreased deliveries to the Indiana Energy Utilities  residential and commercial
customers  reflecting the warmer heating season during the first quarter of 2000
from the comparable period ended September 30, 1999.

         Gas operating  margin  increased  $23.1 million to $80.4 million during
the three  months  ended  September  30, 2000 from the  comparable  period ended
September 30, 1999. This increase  reflects  increased margin earned from higher
sales to  residential  and  commercial  customers  of the Energy  Utilities as a
result of increased  heating days and an increase of $2.8 million of margin from
gas marketing and trading activities.


ELECTRIC REVENUES

         Electric  revenues  were  $1.1  billion  for the  twelve  months  ended
September  30,  2000  (after   elimination  of   intercompany   transactions  of
approximately  $2.6  million),  a decrease of $90.0 million from the  comparable
period ended  September  30, 1999.  Electric  revenues  decreased as a result of
reduced  wholesale  sales and power  marketing  transactions,  reduced  sales to
residential  customers  due to  cooler  weather  in 2000 and lower  fuel  costs,
partially  offset  by  increased  industrial  sales.  Sales  of  electricity  in
kilowatt-hours  (kwh)  decreased 14% from the comparable  period ended September
30, 1999.

         Electric  revenues  were  $809.4  million  for the  nine  months  ended
September  30,  2000  (after   elimination  of   intercompany   transactions  of
approximately  $2.0  million),  a decrease of $55.6 million from the  comparable
period ended  September  30, 1999.  Electric  revenues  decreased as a result of
reduced  wholesale sales and power marketing  transactions  and reduced sales to
residential  customers  due  to  cooler  weather.  Sales  of  electricity in kwh
decreased 8% from the comparable period ended September 30, 1999, as a result of
cooling degree days 23% lower than 1999.

         Electric  revenues  were  $294.7  million  for the three  months  ended
September  30,  2000  (after   elimination  of   intercompany   transactions  of
approximately  $0.6  million),  a decrease of $34.6 million from the  comparable
period ended  September  30, 1999.  Electric  revenues  decreased as a result of
reduced wholesale sales and power marketing transactions and reduced residential
and  industrial  sales.  Electric  wholesale  sales  decreased  45% and sales to
residential  customers  decreased  4%,  due  to  cooler  weather  and  decreased
industrial  customers.  Sales  of  electricity  in kwh  decreased  8%  from  the
comparable  period ended  September 30, 1999, as a result of cooling degree days
24% lower than 1999.

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

The  components  of the changes in electric  revenues are shown in the following
table:
<TABLE>
<CAPTION>

                                                            ---------------------------------------------
                                                                      Ended September 30, 2000
                                                            ---------------------------------------------
                                                               Three            Nine            Twelve
 (Dollars in thousands)                                        Months          Months           Months
                                                            ============    ============     ============

Electric Revenue Changes
<S>                                                         <C>             <C>              <C>
    Pass through of net changes in fuel costs               $    (12,234)   $    (17,774)    $    (20,182)
  Changes in sales levels                                         (6,916)          1,345           13,359
  Wholesale sales and power marketing                            (15,414)        (39,131)         (83,129)
                                                            ------------    ------------     ------------
Electric Revenue Change                                     $   (34,564)    $    (55,560)    $    (89,952)
                                                            ============    ============     ============
</TABLE>


ELECTRIC COST OF SALES

         Cost of fuel for electric  generation  decreased $5.5 million to $239.9
million for the twelve  months  ended  September  30,  2000 from the  comparable
period  ended  September  30, 1999.  The decrease is primarily  due to decreased
generation and fuel costs per kwh generated.  The average cost per kwh generated
decreased 5% from the comparable  period ended September 30, 1999, to 1.41 cents
per kwh, for the twelve months ended September 30, 2000.

         Cost of fuel for electric  generation  decreased $9.2 million to $178.8
million for the nine months ended September 30, 2000 from the comparable  period
ended  September 30, 1999. The decrease is primarily due to decreased fuel costs
per kwh  generated.  The average  cost per kwh  generated  decreased 6% from the
comparable  period ended September 30, 1999, to 1.40 cents per kwh, for the nine
months ended September 30, 2000.

         Cost of fuel for electric  generation  decreased  $7.3 million to $64.8
million for the three months ended September 30, 2000 from the comparable period
ended September 30, 1999. The decrease is primarily due to decreased  generation
and fuel cost per kwh generated. The average cost per kwh generated decreased 3%
from the comparable  period ended September 30, 1999, to 1.45 cents per kwh, for
the three months ended September 30, 2000.


POWER PURCHASED

         Power purchased decreased $88.0 million to $26.2 million for the twelve
months ended  September 30, 2000 from the comparable  period ended September 30,
1999. The decrease is a result of decreased  wholesale sales and power marketing
activities and decreased cost per kwh.

         Power  purchased  decreased  $45.5  million and $21.2  million to $22.2
million and $7.0  million,  respectively,  for the nine and three  months  ended
September 30, 2000 from the  comparable  periods ended  September 30, 1999.  The
decrease is a result of decreased cost per kwh and decreased wholesale sales and
power marketing activities.


ELECTRIC OPERATING MARGIN

         Operating  margin from electric sales  increased $3.5 million to $799.3
million for the twelve  months  ended  September  30,  2000 from the  comparable
period ended September 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 a $1.8 million  charge to
earnings due to a change in the  regulatory  mechanism for recovery of purchased
power costs in the second  quarter 2000 and decreased  residential  sales due to
weather.

         Operating  margin from electric sales  decreased $0.9 million to $608.4
million for the nine months ended September 30, 2000 from the comparable  period
ended  September  30, 1999.  This  decrease  includes a $1.8  million  charge to
earnings due to a change in the  regulatory  mechanism for recovery of purchased
power costs,  lower sales to  residential  customers due to cooler  weather this
summer  and was  mostly  offset  by  improved  margins  on  wholesale  and power
marketing   transactions  and  increased  sales  to  commercial  and  industrial
customers.

         Operating  margin from electric sales  decreased $6.1 million to $222.9
million for the three months ended September 30, 2000 from the comparable period
ended  September  30,  1999.  This  decrease  is  mainly  due to lower  sales to
residential customers due to cooling degree days 24% less than last year.


WATER REVENUE

         Water  revenues  were  $100.4  million  for  the  twelve  months  ended
September  30,  2000  (after   elimination  of   intercompany   transactions  of
approximately  $0.3 million for the twelve months ended  September 30, 2000), an
increase of $4.6 million from the  comparable  period ended  September 30, 1999.
This increase is due to the increase in base rates for IWC and  increased  water
volumes sold.

         Water  revenues were $76.8 million for the nine months ended  September
30, 2000 (after  elimination of intercompany  transactions of approximately $0.2
million for the nine  months  ended  September  30,  2000),  an increase of $2.0
million from the comparable  period ended  September 30, 1999. This increase was
primarily due to the increase in base rates for IWC.

         Water revenues were $28.9 million for the three months ended  September
30, 2000 (after  elimination of intercompany  transactions of approximately $0.1
million for the three  months  ended  September  30,  2000),  a decrease of $1.0
million from the comparable  period ended  September 30, 1999. This decrease was
due to decreased water volumes sold during the quarter.

The  components  of the  changes in water  revenues  are shown in the  following
table:
<TABLE>
<CAPTION>

                                                            ---------------------------------------------
                                                                      Ended September 30, 2000
                                                            ---------------------------------------------
                                                               Three            Nine            Twelve
 (Dollars in thousands)                                        Months          Months           Months
                                                            ============    ============     ============

Water Revenue Changes
<S>                                                         <C>             <C>              <C>
Rate increase                                               $         --    $      1,160     $      5,351
  Changes in sales levels                                           (968)            868            (773)
                                                            ------------    ------------     ------------
Water Revenue Change                                        $      (968)    $      2,028     $      4,578
                                                            ============    ============     ============
</TABLE>


PRODUCTS AND SERVICES REVENUES

         Products  and  Services  revenues  were  $293.1  million for the twelve
months ended September 30, 2000 (after elimination of intercompany  transactions
of  approximately  $13.3  million),  an  increase  of  $37.3  million  from  the
comparable  period ended  September 30, 1999. This increase  reflects  increased
line locating and marking activity,  increased pipeline  construction  activity,
increased  revenue from a cogeneration  facility and the inclusion of revenue of
BSG's unregulated subsidiaries commencing in February 1999.

         Products and Services  revenues were $213.6 million for the nine months
ended  September 30, 2000 (after  elimination of  intercompany  transactions  of
approximately  $9.3  million),  an increase of $21.4 million from the comparable
period ended September 30, 1999. This increase reflects  increased line locating
and marking  activity and increased  pipeline  construction  activity  offset by
lower revenue from other energy-related service companies.

         Products and Services  revenues were $75.1 million for the three months
ended  September 30, 2000 (after  elimination of  intercompany  transactions  of
approximately  $3.1  million),  an increase of $6.6 million from the  comparable
period ended September 30, 1999. This increase reflects  increased line locating
and marking  activity  offset by decreased  pipeline  construction  activity and
lower revenue from the other energy-related service companies.

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

                                                            ---------------------------------------------
                                                                      Ended September 30, 2000
                                                            ---------------------------------------------
                                                               Three            Nine            Twelve
 (Dollars in thousands)                                        Months          Months           Months
                                                            ============    ============     ============

Products and Services Revenue Changes
<S>                                                         <C>             <C>              <C>
    Pipeline construction                                   $       (793)   $      4,532     $      7,311
    Locate and marking                                             6,142          18,474           20,438
    Cogeneration project                                             265           3,334            2,750
    Other                                                          1,026          (4,927)           6,783
                                                            ------------    ------------     ------------
Products and Services Revenue Change                        $      6,640    $     21,413     $     37,282
                                                            ============    ============     ============

</TABLE>

PRODUCTS AND SERVICES COST OF SALES

         The cost of sales for Products and Services  increased $36.5 million to
$165.9  million  for the  twelve  months  ended  September  30,  2000  from  the
comparable period ended September 30, 1999. This increase reflects the inclusion
of higher costs due to increased activity from 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 $23.2 million to
$123.3 million for the nine months ended  September 30, 2000 from the comparable
period ended  September 30, 1999 mainly due to the increase in the cost of sales
for line locating and marking  activities  and pipeline  construction  partially
offset by decreased project costs at the energy-related service subsidiaries.


         The cost of sales for Products and Services  increased  $6.5 million to
$44.0 million for the three months ended  September 30, 2000 from the comparable
period ended  September 30, 1999 mainly due to the increase in the cost of sales
for line locating and marking  activities  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 $0.8 million to $127.2
million for the twelve  months ended  September 30, 2000,  reflecting  increased
revenue from a cogeneration  facility,  increased pipeline construction activity
and the inclusion of the operating  margin of certain  subsidiaries  acquired in
connection with the BSG acquisition, offset by decreased margin in line locating
and marking activity.

         Products and Services  operating margin decreased $1.8 million to $90.2
million for the nine months  ended  September  30,  2000,  reflecting  decreased
margin in line  locating and marking  activity  and real estate sales  partially
offset by increased margins from cogeneration activities.

         Products and Services  operating margin decreased $0.2 million to $31.1
million for the three months ended  September  30,  2000,  reflecting  decreased
pipeline  construction  activity  and real  estate  sales  activity,  offset  by
increased  margin  in line  locating  and  marking  activity  and  margins  from
cogeneration activities.


OPERATING EXPENSES AND TAXES (EXCEPT INCOME)

         Operating  expenses and taxes (except income)  increased $124.3 million
to $1,072.1  million for the twelve  months  ended  September  30, 2000 from the
comparable period ended September 30, 1999. Operating expenses and taxes (except
income)  increased  $40.2  million to $784.6  million for the nine months  ended
September  30,  2000  from the  comparable  period  ended  September  30,  1999.
Operating  expenses and taxes (except income)  increased $14.9 million to $256.0
million for the three months ended September 30, 2000 from the comparable period
ended September 30, 1999.

         The  operation  and  maintenance   expenses  of  the  Energy  Utilities
increased  $42.7 million to $431.0 million for the twelve months ended September
30, 2000 from the comparable  period ended  September 30, 1999. The increase was
due to an increase of $34.3 million of operation  expenses from BSG reflecting a
full twelve months of expenses, a favorable $13.0 million  insurance  settlement
in  the  1999  period  related to  manufactured  gas plants site cleanup  costs,
increased employee related costs of $2.2 million,  partially offset by decreased
customer  related  costs  of  $2.8  million,  decreased  expenses  for  electric
production facilities of $1.6 million and other operating costs. The unregulated
gas marketing, gas storage and trading operation expenses increased $8.7 million
to $19.2 million for the twelve months ended September 30, 2000 primarily due to
the  inclusion of an additional $15.5 million of TPC  operation  costs offset by
decreases in other operating  costs.  Operation  expenses at the Water Utilities
increased  $2.8 million to $49.6 million for the twelve  months ended  September
30, 2000 from the comparable period ended September 30, 1999. Operation expenses
for  Products  and Services  increased  $4.9  million to $115.0  million for the
twelve  months  ended  September  30,  2000  from the  comparable  period  ended
September 30, 1999 reflecting  increased operating expenses in line locating and
marking operations and pipeline construction operations.

         Operation  expenses for the twelve months ended September 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 $8.5 million to $317.6 million for the nine months ended September 30,
2000 from the  comparable  period ended  September  30, 1999.  This increase was
primarily  due  to  increased  operation  expenses  from  BSG of  $12.4  million
reflecting a full nine months expenses,  the $13.0 million insurance  settlement
in  September  1999  related to  manufactured  gas plants  site  cleanup  costs,
partially offset by decreased employee related costs of $7.4 million,  decreased
sales and marketing costs of $1.3 million,  decreased  customer related costs of
$1.4 million and various other operation  costs.  The unregulated gas marketing,
gas storage and  trading  operation  expenses  increased  $6.3  million to $15.6
million for the nine month ended  September 30, 2000 from the comparable  period
ended September 30, 1999 primarily due to the inclusion of a full nine months of
TPC operation costs.  Operation and maintenance  expenses at the Water Utilities
increased $1.3 million to $36.9 million for the nine months ended  September 30,
2000  from the  comparable  period  ended  September  30,  1999.  Operation  and
maintenance  expenses for Products and Services  increased $1.5 million to $84.6
million for the nine month ended  September 30, 2000 from the comparable  period
ended  September  30,  1999  reflecting  increased  operating  expenses  in line
locating and marking operations and pipeline construction operations.

         The  operation  and  maintenance   expenses  of  the  Energy  Utilities
increased $7.0 million to $99.2 million for the three months ended September 30,
2000 from the  comparable  period ended  September  30, 1999.  This increase was
primarily  due to the $13.0  million  insurance  settlement  in  September  1999
related to  manufactured  gas plants site  cleanup  costs,  partially  offset by
decreased  employee related costs of $1.8 million and other decreased  operation
costs. The unregulated gas marketing, gas storage and trading operation expenses
increased  $1.1 million to $5.1 million for the three month ended  September 30,
2000 from the  comparable  period ended  September 30, 1999 primarily due to the
inclusion  of a  full  three  months  of  TPC  operation  costs.  Operation  and
maintenance  expenses at the Water  Utilities  decreased  $0.6  million to $11.6
million for the three months ended September 30, 2000 from the comparable period
ended September 30, 1999.  Operation and  maintenance  expenses for Products and
Services  increased  $1.5  million to $28.2  million  for the three  month ended
September  30,  2000  from  the  comparable  period  ended  September  30,  1999
reflecting increased operating expenses in line locating and marking operations.

         Depreciation  and  amortization  expenses  increased  $42.6  million to
$336.2  million  for the  twelve  months  ended  September  30,  2000  from  the
comparable period ended September 30, 1999,  primarily  resulting from increased
depreciation  and  amortization  expense from BSG of $19.3 million  reflecting a
full twelve months of expenses, increased depreciation and amortization from TPC
and MHP of $9.9  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  $24.8  million to
$253.2 million for the nine months ended  September 30, 2000 from the comparable
periods  ended   September  30,  1999,   primarily   resulting   from  increased
depreciation and amortization  expense from BSG of $8.8 million and from TPC and
MHP of $8.1  million  reflecting  a full nine months of expenses  and  increased
depreciation expense at the Energy and Water Utilities due to plant additions.

         Depreciation and amortization  expenses increased $6.1 million to $84.1
million  for the three  months  ended  September  30,  2000 from the  comparable
periods  ended   September  30,  1999,   primarily   resulting   from  increased
depreciation  and  amortization  expense  from  TPC  and  MHP of  $1.9  million,
increased  depreciation  and  amortization  expense from BSG of $1.8 million and
increased  depreciation  expense at the Energy and Water  Utilities due to plant
additions.

         Taxes (except  income)  decreased $0.5 million to $98.9 million for the
twelve  months  ended  September  30,  2000,  from the  comparable  period ended
September 30, 1999 primarily as the result of decreased  property tax expense at
Northern  Indiana  offset by the inclusion of a full twelve months expenses from
BSG.

        Taxes (except  income)  decreased $4.6 million and $0.2 million to $73.2
million  and  $24.4 million for the nine months and three months ended September
30, 2000,  respectively,  from  the  comparable period ended September 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 $39.9 million to $193.5 million for the
twelve  months  ended  September  30,  2000  from the  comparable  period  ended
September 30,1999.  This increase reflects the inclusion of a full twelve months
of interest expense from BSG of $9.6 million and MHP of $18.8 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 $26.9 million to $146.3 million for the
nine months ended September 30, 2000 from the comparable periods ended September
30,1999. This increase reflects the inclusion of nine months of interest charges
for BSG and MHP, interest on the September 1999 issuance of $160 million in PURS
and increased interest expense on higher short-term borrowings.

         Interest  expense,  net increased $7.8 million to $50.1 million for the
three  months  ended  September  30,  2000  from the  comparable  periods  ended
September  30,1999.  This increase  reflects the interest on the September  1999
issuance  of $160  million  in PURS and  increased  interest  expense  on higher
short-term borrowings.


MINORITY INTERESTS

         Minority interest increased $4.3 million and $1.3 million and decreased
$0.3 million for the twelve months, nine months and three months ended September
30, 2000,  respectively,  from the comparable  periods ended September 30, 1999.
The increases for the twelve month and nine month periods  reflect the inclusion
of  dividends  paid  on  Company-obligated   mandatorily   redeemable  Preferred
Securities issued in February 1999.


OTHER, NET

         Other,  net changed  $59.8  million to a gain of $51.3  million for the
twelve  months  ended  September  30,  2000  from the  comparable  period  ended
September 30, 1999, primarily  reflecting  the  pre-tax gain of $51.9 million on
the sale of MHP and a non-recurring  pre-tax charge of $16.5 million in the 1999
period related to the carrying value of oil and gas properties, partially offset
by the abandonment of certain businesses and facilities that were not consistent
with its strategic direction in the fourth quarter of 1999.

         Other, net increased $69.3 million to $59.9 million for the nine months
ended  September 30, 2000 from the comparable  period ended  September 30, 1999.
This increase  reflects the gain on the sale of MHP and a  non-recurring pre-tax
charge of $16.5 million in the 1999 period  related to the carrying value of oil
and gas properties.

         Other,  net  increased  $68.3  million to $54.1  million  for the three
months ended  September 30, 2000 from the comparable  period ended September 30,
1999.  This  increase  reflects the gain on the sale of MHP and a  non-recurring
pre-tax charge of $16.5 million in the 1999 period related to the carrying value
of oil and gas properties.


INCOME TAXES

         Income taxes increase by $30.9 million, $42.4 million and $38.2 million
for the twelve  months,  nine months and three months ended  September 30, 2000,
respectively.  In each case,  the  increase is  primarily a result of  increased
pre-tax book income,  certain basis differences  associated with the sale of MHP
and income tax return adjustments associated with the tax return filing.

         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 September  30, 2000 and December 31, 1999,  $413.5
million and $299.6 million of commercial  paper was  outstanding,  respectively.
The  weighted  average  interest  rate on  commercial  paper  outstanding  as of
September 30, 2000 was 6.72%.

         NiSource and its subsidiaries may borrow under two 364-day $200 million
revolving  credit  agreements that terminate on September 23, 2001.  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 September 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 $175.7  million  with  lenders  at either  the  lender's
commercial  prime or market lending rates. As of September 30, 2000,  there were
$78.7  million of  borrowings  outstanding  under  these  lines of credit with a
weighted  average  interest rate of 7.35%.  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 $424.5  million.  As of  September  30,  2000,  there were $254.0  million
outstanding  under  these  money  market  lines of credit at a weighted  average
interest  rate of 7.14%.  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 PURS in an underwritten  public  offering.  The PURS were unsecured
debentures of Capital  Markets and ranked  equally with all other  unsecured and
unsubordinated  debt of Capital  Markets.  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.  On
September 28, 2000,  all $160 million PURS were redeemed by NiSource at par. 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  $2.0 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,  3.04414 in new holding
company stock. Stock elections are subject to proration for those elections made
with  respect  to   more  than  30% of CEG's outstanding shares. Approval of the
NiSource  and  CEG shareholders was obtained on June 1 and June 2, respectively.
All actions needed from state utility regulatory  commissions and from FERC have
been received.  The Securities and Exchange Commission (SEC) approved the merger
under the Public Utility  Holding Company Act on October 30, 2000. The merger is
expected to be completed on November 1, 2000.

         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  $1.6  billion  of  its
anticipated refinancing of such debt.

         NiSource  expects to record a  restructuring  charge  during the fourth
quarter of 2000 reflecting costs associated with a workforce reduction and other
merger-related costs. NiSource has not yet quantified the amount of this charge.

         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  finding,  among  other
things, that the type of investigation  requested by CAC could only be conducted
by the IURC  itself.  Northern  Indiana  has been  meeting  with the  interested
parties in this proceeding.  As of October 30, 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 $0.9 million,  $1.8 million and $0.5 million,  $0.7 million,  $2.1
million and $0.004 million and $0.7 million, $2.1 million and $0.004 million for
the three month,  nine month and twelve month periods ended  September 30, 2000,
respectively.  The daily VaR for the gas trading  portfolio on an average,  high
and low basis was $1.6  million,  $5.8 million and $0.5  million,  $2.4 million,
$8.1  million and $0.5 million and $2.2  million,  $8.1 million and $0.4 million
for the three month,  nine month and twelve month  periods  ended  September 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 September 30, 2000 and December 31, 1999,
the combined borrowings  outstanding under these facilities totaled $749 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 $2.0 million and $1.3
million for the three months,  $5.4 million and $3.7 million for the nine months
and $6.6 million and $4.7 million for the twelve  months  ending  September  30,
2000 and September 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.  On  October  16,  2000,  NiSource  filed  with  the FERC
indicating  that it is  committed to joining a RTO and that it would likely join
the Alliance 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.




<PAGE>


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."


                                    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.
         None

Item 5.  Other Information.
         None

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

         Exhibit 10.1 Puttable Reset Securities (PURS) Purchase Agreement by and
         among NiSource Capital Markets, Inc., NiSource Inc., Goldman, Sachs and
         Company, and Barclays Bank plc dated September 13, 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  September  1,  2000.  All  events  were
         reported  under  Item 5, Other  Events.  A report on Form 8-K was filed
         September  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 and Chief Financial Officer
                    and Treasurer

Date:  October 31, 2000




<PAGE>


                                                                      EXHIBIT-23








CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


     As independent public  accountants,  we hereby consent to the incorporation
of our report included in this Form 10-Q,  into NiSource Inc.'s  (formerly known
as NIPSCO Industries, Inc.) previously filed Form S-8 Registration Statement No.
33-30619;  Form S-8 Registration  Statement No. 33-30621;  Form S-8 Registration
Statement No. 333-08263; Form S-8 Registration Statement No. 333-19981; Form S-8
Registration  Statement  No.  333-19983;  Form S-8  Registration  Statement  No.
333-19985;  Form S-3 Registration Statement No. 333-26847; Form S-8 Registration
Statement No. 333-59151; Form S-8 Registration Statement No. 333-59153; Form S-3
Registration  Statement  No.  333-69279;  Form S-8  Registration  Statement  No.
333-72367;  Form S-8 Registration Statement No. 333-72401; Form S-3 Registration
Statement No. 333-76645, Form S-3 Registration Statement No. 333-76909, and Form
S-4 Registration Statement Nos. 333-33896 and 333-33896-01.


                             /s/ Arthur Andersen LLP

Chicago, Illinois

October 30, 2000