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, 1999

                        Commission file number 1-9779

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


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


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


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

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


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

     As of October 31,1999, 125,056,430 common shares were outstanding.



<PAGE>
NiSource Inc.

                                                                PART I.
                                                         FINANCIAL INFORMATION

Item 1.  Financial Statements

Report of Independent Public Accountants

To The Board of Directors of
NiSource Inc.:

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

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

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





                             /s/ Arthur Andersen LLP

Chicago, Illinois
November 9, 1999


<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
                                                                September 30,       December 31,
Assets                                                              1999                1998
                                                                 ==========          ==========
<S>                                                          <C>                 <C>
(In thousands)
Property, Plant and Equipment:
Utility Plant, (including Construction Work in
 Progress of $316,525 and $197,112, respectively)
    Electric                                                    $ 4,217,811      $    4,154,060
    Gas                                                           2,846,138           1,447,945
    Water                                                           725,256             663,355
    Common                                                          365,101             364,822
                                                                 ----------          ----------
                                                                  8,154,306           6,630,182
    Less -Accumulated depreciation and amortization               3,384,196           2,968,078
                                                                 ----------          ----------
      Net Utility Plant                                           4,770,110           3,662,104
                                                                 ----------          ----------
 Other property, at cost, net of accumulated depreciation           129,521              86,565
                                                                 ----------          ----------
      Net Property, Plant and Equipment                           4,899,631           3,748,669
                                                                 ----------          ----------
Investments:
 Investments, at equity                                             253,002             111,340
 Investments, at cost                                                53,083              41,609
 Other investments                                                   30,585              28,702
                                                                 ----------          ----------
      Total Investments                                             336,670             181,651
                                                                 ----------          ----------
Current Assets:
 Cash and cash equivalents                                           23,747              60,848
 Accounts receivable, less reserve of  $19,857 and
     $8,984, respectively                                           326,735             261,971
 Other receivables                                                   36,646              31,780
 Fuel adjustment clause                                               5,716                  --
 Gas cost adjustment clause                                          39,251              45,738
 Materials and supplies, at average cost                             65,859              62,818
 Electric production fuel, at average cost                           23,091              32,402
 Natural gas in storage                                             119,117              69,640
 Prepayments and other                                               38,114              41,670
                                                                 ----------          ----------
      Total Current Assets                                          678,276             606,867
                                                                 ----------          ----------
Other Assets:
 Regulatory assets                                                  223,803             209,059
 Intangible assets, net of accumulated amortization                 121,665              65,039
 Prepayments and other                                              247,216             175,218
                                                                 ----------          ----------
      Total Other Assets                                            592,684             449,316
                                                                 ----------          ----------
                                                                $ 6,507,261         $ 4,986,503
                                                                 ==========          ==========

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


<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
                                                                September 30,       December 31,
Capitalization and Liabilities                                      1999                1998
                                                                 ==========          ==========
<S>                                                             <C>                 <C>
  (In thousands)
Capitalization:
Common shareholders' equity
  (See accompanying statement)                                  $ 1,364,839         $ 1,149,708
Preferred stocks, excluding amounts due within
     one year-
     Series without mandatory redemption provisions                  81,114              85,613
     Series with mandatory redemption provisions                     54,585              56,435
IWC Resources Corporation:
     Series without mandatory redemption provisions                   4,497                  --
Company-obligated mandatorily redeemable
  preferred securities of subsidiary trust holding
  solely Company debentures                                         345,000                  --
Long-term debt, excluding amounts due within one year             1,842,390           1,667,965
                                                                 ----------          ----------
           Total Capitalization                                   3,692,425           2,959,721
                                                                 ----------          ----------
Current Liabilities:
 Current portion of long-term debt                                  163,283               6,790
 Short-term borrowings                                              575,475             411,040
 Accounts payable                                                   265,330             251,399
 Dividends declared on common and preferred stocks                   32,915              31,072
 Customer deposits                                                   27,614              22,199
 Taxes accrued                                                       16,750              44,939
 Interest accrued                                                    28,907              21,202
 Fuel adjustment clause                                                  --               6,279
 Accrued employment costs                                            49,384              52,121
 Other accruals                                                     119,403              39,022
                                                                 ----------          ----------
      Total Current Liabilities                                   1,279,061             886,063
                                                                 ----------          ----------
Other:
 Deferred income taxes                                              979,984             667,167
 Deferred investment tax credits, being amortized over
   life of related property                                          96,909              98,177
 Deferred credits                                                   108,965              68,046
 Customer advances and contributions in aid of construction         124,588             118,778
 Accrued liability for postretirement benefits                      156,387             143,870
 Other noncurrent liabilities                                        68,942              44,681
                                                                 ----------          ----------
      Total Other Liabilities                                     1,535,775           1,140,719
                                                                 ----------          ----------
Commitments and Contingencies

                                                                $ 6,507,261         $ 4,986,503
                                                                 ==========          ==========

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


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

 (In thousands, except for per share amounts)
                                                        Three Months                Nine Months
                                                     Ended September 30,         Ended September 30,
                                                   ---------------------        ---------------------
                                                     1999         1998            1999         1998
                                                  ==========   ==========      ==========   ==========
<S>                                              <C>          <C>             <C>          <C>
Operating Revenues:
  Gas                                            $   265,393  $   199,435     $ 1,127,925  $   831,698
  Electric                                           324,290      468,315         865,355    1,136,162
  Water                                               29,894       24,374          74,794       62,940
  Products and Services                               68,415       55,668         192,156      148,744
                                                  ----------   ----------      ----------   ----------
                                                     687,992      747,792       2,260,230    2,179,544
                                                  ----------   ----------      ----------   ----------
Cost of Sales:
 Gas costs                                           208,032      159,917         812,759      636,835
 Fuel for electric generation                         72,092       72,246         188,020      193,263
 Power purchased                                      28,204      179,645          76,611      365,657
 Products and Services                                37,523       29,110         100,134       75,126
                                                  ----------   ----------      ----------   ----------
                                                     345,851      440,918       1,177,524    1,270,881
                                                  ----------   ----------      ----------   ----------
Operating Margin                                     342,141      306,874       1,082,706      908,663
                                                  ----------   ----------      ----------   ----------
Operating Expenses and Taxes:
  Operation                                          119,627      104,365         374,754      298,584
  Maintenance                                         18,450       19,100          62,672       59,058
  Depreciation and amortization                       78,006       64,417         228,454      191,334
  Taxes (except income)                               24,572       22,044          77,806       66,582
                                                  ----------   ----------      ----------   ----------
                                                     240,655      209,926         743,686      615,558
                                                  ----------   ----------      ----------   ----------
Operating Income                                     101,486       96,948         339,020      293,105
                                                  ----------   ----------      ----------   ----------
Other Income (Deductions):
   Interest expense, net                            (42,376)     (33,077)       (119,378)     (94,522)
   Minority interests                                (5,415)            0        (13,539)            0
   Dividend requirements on preferred stock          (2,071)      (2,122)         (6,264)      (6,417)
   Other, net                                        (9,888)        2,870         (2,022)       10,387
                                                  ----------   ----------      ----------   ----------
                                                    (59,750)     (32,329)       (141,203)     (90,552)
                                                  ----------   ----------      ----------   ----------
Income Before Income Taxes                            41,736       64,619         197,817      202,553

Income Taxes                                          13,781       21,492          70,359       69,259
                                                  ----------   ----------      ----------   ----------
Net Income                                       $    27,955  $    43,127     $   127,458  $   133,294
                                                  ==========   ==========      ==========   ==========
Average common shares outstanding - basic            125,031      119,495         124,218      121,833

Basic earnings per average common share          $      0.22  $      0.36     $      1.02  $      1.09
                                                  ==========   ==========      ==========   ==========
Diluted earnings per average common share        $      0.22  $      0.35     $      1.02  $      1.08
                                                  ==========   ==========      ==========   ==========
Dividends declared per common share              $     0.255  $     0.240     $     0.765  $     0.720
                                                  ==========   ==========      ==========   ==========

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

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

 (In thousands, except for per share amounts)
                                                      Twelve Months
                                                    Ended September 30,
                                                  -----------------------
                                                     1999         1998
                                                  ==========   ==========
<S>                                           <C>             <C>
Operating Revenues:
  Gas                                            $ 1,506,002  $ 1,260,510
  Electric                                         1,155,793    1,447,286
  Water                                               95,833       81,311
  Products and Services                              255,836      197,526
                                                  ----------   ----------
                                                   3,013,464    2,986,633
                                                  ----------   ----------
Cost of Sales:
 Gas costs                                         1,100,962      965,243
 Fuel for electric generation                        245,406      253,786
 Power purchased                                     123,244      433,867
 Products and Services                               129,398       98,735
                                                  ----------   ----------
                                                   1,599,010    1,751,631
                                                  ----------   ----------

Operating Margin                                   1,414,454    1,235,002
                                                  ----------   ----------
Operating Expenses and Taxes:
  Operation                                          475,764      398,489
  Maintenance                                         78,244       79,428
  Depreciation and amortization                      293,594      253,667
  Taxes (except income)                               99,431       88,704
                                                  ----------   ----------
                                                     947,033      820,288
                                                  ----------   ----------
Operating Income                                     467,421      414,714
                                                  ----------   ----------
Other Income (Deductions):
   Interest expense, net                           (153,660)    (125,887)
   Minority interests                               (13,539)           --
   Dividend requirements on preferred stock          (8,385)      (8,588)
   Other, net                                        (1,825)        8,680
                                                  ----------   ----------
                                                   (177,409)    (125,795)
                                                  ---------    ----------
Income Before Income Taxes                           290,012      288,919

Income Taxes                                         101,962       99,719
                                                  ----------   ----------
Net Income                                       $   188,050  $   189,200
                                                  ==========   ==========
Average common shares outstanding - basic            122,578      122,645

Basic earnings per average common share          $      1.53  $      1.54
                                                  ==========   ==========
Diluted earnings per average common share        $      1.52  $      1.53
                                                  ==========   ==========
Dividends declared per common share              $     1.020  $     0.960
                                                  ==========   ==========

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

<PAGE>



<TABLE>
<CAPTION>

Consolidated Statement Of Common Shareholders' Equity

                                                               Additional
(In thousands)                     Common        Treasury       Paid-in      Retained
Three Months Ended                 Shares         Shares        Capital      Earnings       Other
========================         ==========     ==========    ==========    ==========    ==========
<S>                              <C>           <C>            <C>           <C>           <C>
Balance, July 1, 1998            $  870,930    $ (456,018)    $   90,704    $  698,633    $  (2,962)
Comprehensive Income:
  Net income                                                                    43,127
  Other comprehensive income,
   net of tax:
     Gain/loss on available
      for sale securities:
     Unrealized (net of income
       tax of $621)
     Realized (net of income
       tax of $720)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
 Common shares                                                                (28,144)
Treasury shares acquired                          (84,520)
Issued:
 Employee stock purchase plan                          100           251
 Long-term incentive plan                            2,210                                        46
 Amortization of
  unearned compensation                                                                          591
 Other                                                                            (55)

                                 ----------     ----------    ----------    ----------    ----------
Balance, September 30, 1998      $  870,930     $(538,228)    $   90,955    $  713,561    $  (2,325)
                                 ==========     ==========    ==========    ==========    ==========

Balance, July 1, 1999            $  870,930     $(455,640)    $  172,388    $  779,102    $    (976)
Comprehensive Income:
  Net income                                                                    27,955
  Other comprehensive income,
   net of tax:
     Gain/loss on available
      for sale securities:
     Unrealized (net of income
       tax of $1,068)
     Realized (net of income tax
       of  $113)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
   Common shares                                                              (31,891)
Treasury shares acquired                             (346)
Issued:
 Employee stock purchase plan                          112           252
 Long-term incentive plan                              655            29                        (39)
Amortization of
  unearned compensation                                                                          877
 Equity contract costs                                             (302)
Other                                                                            (177)
                                 ----------     ----------    ----------    ----------    ----------
Balance, September 30, 1999      $  870,930     $(455,219)    $  172,367    $  774,989    $    (138)
                                 ==========     ==========    ==========    ==========    ==========
<CAPTION>


<PAGE>




                                 Accumulated                                         Shares
                                   Other                                    ------------------------
   Three Months Ended          Comprehensive                Comprehensive     Common      Treasury
       (continued)                 Income          Total        Income        Shares        Shares
========================         ==========     ==========    ==========    ==========    ==========
<CAPTION>
Balance, July 1, 1998            $    2,602     $1,203,889                  $  147,784    $ (26,750)
Comprehensive Income:
  Net income                                        43,127        43,127
  Other comprehensive income,
   net of tax:
     Gain/loss on available
      for sale securities:
     Unrealized (net of income
       tax of $621)                 (1,017)        (1,017)       (1,017)
     Realized (net of income tax
       of $720)                     (1,180)        (1,180)       (1,180)
  Gain (loss) on foreign currency
     translation:
       Unrealized                     (766)          (766)         (766)
       Realized                         186            186           186
                                                              ----------
Total Comprehensive Income                                       $40,350
                                                              ==========
Dividends:
 Common shares                                    (28,144)
Treasury shares acquired                          (84,520)                                   (2,993)
Issued:
 Employee stock purchase plan                          351                                        13
 Long-term incentive plan                            2,256                                       123
 Amortization of
  unearned compensation                                591
Other                                                 (55)
                                 ----------     ----------                  ----------    ----------
Balance, September 30, 1998      $    (175)     $1,134,718                  $  147,784    $ (29,607)
                                 ==========     ==========                  ==========    ==========

Balance, July 1, 1999            $    3,323     $1,369,127                  $  147,784    $ (22,770)
Comprehensive Income:
  Net income                                        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)
Treasury shares acquired                             (346)                                      (16)
Issued:
 Employee stock purchase plan                          364                                        14
 Long-term incentive plan                              645                                        32
 Amortization of
  unearned compensation                                877
Equity contract costs                                (302)
Other                                                (177)
                                 ----------     ----------                  ----------    ----------
Balance, September 30, 1999      $    1,910     $1,364,839                  $  147,784    $ (22,740)
                                 ==========     ==========                  ==========    ==========

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

                                                              Additional
(In thousands)                     Common        Treasury      Paid-in       Retained
Nine Months Ended                  Shares         Shares       Capital       Earnings       Other
========================         ==========     ==========    ==========    ==========    ==========
<CAPTION>
Balance, January 1, 1998         $  870,930     $(363,943)    $   89,768    $  667,790    $  (2,624)
Comprehensive Income:
  Net income                                                                   133,294
  Other comprehensive income,
   net of tax:
     Gain/loss on available
      for sale securities:
     Unrealized (net of income
       tax of  $140)
     Realized (net of income
       of $1,340)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
  Common shares                                                               (86,781)
Treasury shares acquired                         (182,502)             2
Issued:
 Employee stock purchase plan                          251           608
 Long-term incentive plan                            7,966           575                     (1,084)
 Amortization of
  unearned compensation                                                                        1,383
  Other                                                                2         (742)
                                 ----------     ----------    ----------    ----------    ----------
Balance, September 30, 1998      $  870,930     $(538,228)    $   90,955    $  713,561    $  (2,325)
                                 ==========     ==========    ==========    ==========    ==========

Balance January 1, 1999          $  870,930     $(559,027)    $   94,181    $  744,309    $  (1,815)
Comprehensive Income:
  Net income                                                                   127,458
  Other comprehensive income,
   net of tax:
     Gain/loss on available
      for sale securities:
     Unrealized (net of income
       tax of $2,075)
     Realized (net of income tax
       of  $274)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
   Common shares                                                              (95,624)
Treasury shares acquired                         (108,987)
Issued:
 Employee stock purchase plan                          339           845
 Long-term incentive plan                            3,853           188                       (571)
 Bay State Gas Acquisition                         205,881       109,753
Other Acquisitions                                   2,722           939
 Amortization of
  unearned compensation                                                                        2,248
Equity contract costs                                           (33,539)
Other                                                                          (1,154)
                                 ----------     ----------    ----------    ----------    ----------
Balance, September 30, 1999      $  870,930     $(455,219)    $  172,367    $  774,989    $    (138)
                                 ==========     ==========    ==========    ==========    ==========


                                 Accumulated                                         Shares
                                    Other                                   ------------------------
   Nine Months Ended            Comprehensive                Comprehensive    Common        Treasury
       (continued)                 Income          Total        Income        Shares         Shares
========================         ==========     ==========    ==========    ==========    ==========
 Balance, January 1, 1998        $    2,867     $1,264,788                  $  147,784     $(23,472)
Comprehensive Income:
  Net income                                       133,294       133,294
  Other comprehensive income,
   net of tax:
     Gain/loss on available
      for sale securities:
     Unrealized (net of income
       tax of $140)                     232            232           232
     Realized (net of income tax
        of $1,340)                  (2,196)        (2,196)       (2,196)
  Gain (loss) on foreign currency
     translation:
       Unrealized                   (1,264)        (1,264)       (1,264)
       Realized                         186            186           186
                                                              ----------
Total Comprehensive Income                                    $  130,252
                                                              ==========
Dividends:
 Common shares                                    (86,781)
Treasury shares acquired                         (182,500)                                   (6,620)
Issued:
 Employee stock purchase plan                          859                                        32
 Long-term incentive plan                            7,457                                       453
 Amortization of
  unearned compensation                              1,383
Other                                                (740)
                                 ----------     ----------                  ----------    ----------
Balance, September 30, 1998      $    (175)     $1,134,718                  $  147,784    $ (29,607)
                                 ==========     ==========                  ==========    ==========

Balance January 1, 1999          $    1,130     $1,149,708                  $  147,784    $ (30,254)
Comprehensive Income:
  Net income                                       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)
Treasury shares acquired                         (108,987)                                   (3,899)
Issued:
 Employee stock purchase plan                        1,184                                        43
 Long-term incentive plan                            3,470                                       194
 Bay State Gas Acquisition                         315,634                                    11,042
Other Acquisitions                                   3,661                                       134
 Amortization of
  unearned compensation                              2,248
Equity contract costs                             (33,539)
Other                                              (1,154)
                                 ----------     ----------                  ----------    ----------
Balance, September 30, 1999      $    1,910     $1,364,839                  $  147,784    $ (22,740)
                                 ==========     ==========                  ==========    ==========

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

                                                              Additional
(In thousands)                     Common        Treasury      Paid-in       Retained
Twelve Months Ended                Shares         Shares       Capital       Earnings       Other
========================         ==========     ==========    ==========    ==========    ==========
<CAPTION>
Balance, October 1, 1997         $  870,930     $(336,148)    $   89,663    $  641,708    $  (3,210)
Comprehensive Income:
  Net income                                                                   189,200
  Other comprehensive income,
   net of tax:
     Gain/loss on available
      for sale securities:
     Unrealized (net of income
       tax of $380)
     Realized (net of income
       tax of $1,340)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
  Common shares                                                              (116,605)
Treasury shares acquired                         (211,843)             1
Issued:
 Employee stock purchase plan                          315           714
 Long-term incentive plan                            9,448           575                     (1,084)
 Amortization of
  unearned compensation                                                                        1,969
  Other                                                                2         (742)
                                 ----------     ----------    ----------    ----------    ----------
Balance, September 30, 1998      $  870,930     $(538,228)    $   90,955    $  713,561    $  (2,325)
                                 ==========     ==========    ==========    ==========    ==========

Balance October 1, 1998          $  870,930     $(538,228)    $   90,955    $  713,561    $  (2,325)
Comprehensive Income:
  Net income                                                                   188,050
  Other comprehensive income,
   net of tax:
     Gain/loss on available
      for sale securities:
     Unrealized (net of income
       tax of $671)
     Realized (net of income tax
       of  $274)
  Gain (loss) on foreign
   currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
   Common shares                                                             (125,439)
Treasury shares acquired                         (130,461)
Issued:
 Employee stock purchase plan                          429         1,155
 Long-term incentive plan                            4,438           159                       (571)
Bay State Gas Acquisition                          205,881       109,753
Other Acquisitions                                   2,722           939
 Amortization of
  unearned compensation                                                                        2,758
 Equity contract costs                                          (33,539)
Other                                                              2,945       (1,183)
                                 ----------     ----------    ----------    ----------    ----------
Balance, September 30, 1999      $  870,930     $(455,219)    $  172,367    $  774,989    $    (138)
                                 ==========     ==========    ==========    ==========    ==========


                                 Accumulated                                         Shares
                                    Other                                   ------------------------
   Twelve Months Ended          Comprehensive                Comprehensive    Common       Treasury
       (continued)                  Income         Total        Income        Shares         Shares
========================         ==========     ==========    ==========    ==========    ==========
 Balance, October 1, 1997        $    3,762     $1,266,705                  $  147,784    $ (22,276)
Comprehensive Income:
  Net income                                       189,200       189,200
  Other comprehensive income,
   net of tax:
     Gain/loss on available
      for sale securities:
     Unrealized (net of income
       tax of $380)                     622            622           622
     Realized (net of income
       tax of $1,340)               (2,195)        (2,195)       (2,195)
  Gain (loss) on foreign
   currency translation:
       Unrealized                   (2,550)        (2,550)       (2,550)
       Realized                         186            186           186
                                                              ----------
Total Comprehensive Income                                    $  185,263
                                                              ==========
Dividends:
 Common shares                                   (116,605)
Treasury shares acquired                         (211,842)                                   (7,920)
Issued:
 Employee stock purchase plan                        1,029                                        40
 Long-term incentive plan                            8,939                                       549
 Amortization of
  unearned compensation                              1,969
 Other                                               (740)
                                 ----------     ----------                  ----------    ----------
Balance, September 30, 1998      $    (175)     $1,134,718                  $  147,784    $ (29,607)
                                 ==========     ==========                  ==========    ==========

Balance October 1, 1998          $    (175)     $1,134,718                  $  147,784    $ (29,607)
Comprehensive Income:
  Net income                                       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)
Treasury shares acquired                         (130,461)                                   (4,589)
Issued:
 Employee stock purchase plan                        1,584                                        54
 Long-term incentive plan                            4,026                                       226
 Bay State Gas Acquisition                         315,634                                    11,042
Other Acquisitions                                   3,661                                       134
 Amortization of
  unearned compensation                              2,758
Equity contract costs                             (33,539)
Other                                                1,762
                                 ----------     ----------                  ----------    ----------
Balance, September 30, 1999      $    1,910     $1,364,839                  $  147,784    $ (22,740)
                                 ==========     ==========                  ==========    ==========

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

</TABLE>

<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(In thousands)
                                                              Three Months               Nine Months
                                                            Ended September 30,       Ended September 30,
                                                         -----------------------   -----------------------
                                                            1999        1998          1999         1998
                                                         ==========   ==========   ==========   ==========
<S>                                                     <C>          <C>          <C>          <C>
Cash flows from operating activities:
 Net income                                             $    27,955  $    43,127  $   127,458  $   133,294
Adjustments to reconcile net income
 to net cash:
    Depreciation and amortization                            78,006       64,417      228,454      191,334
    Deferred federal and state
         income taxes, net                                    3,978      (6,991)     (26,772)     (49,641)
    Deferred investment tax credits, net                    (1,921)      (1,821)      (5,728)      (5,463)
    Other, net                                                2,810          307        (215)      (4,437)
 Change in certain assets and liabilities -*
    Accounts receivable, net                                (4,692)       31,696      124,753       39,726
    Other receivables                                            56      (3,644)      (4,866)       70,422
     Natural gas in storage                                (38,759)     (34,467)      (8,462)     (10,607)
     Accounts payable                                        20,799      (6,067)    (121,478)     (23,697)
     Taxes accrued                                         (18,232)        2,571     (20,691)       15,048
    Gas cost adjustment clause                             (39,860)      (6,511)       32,587       56,655
    Accrued employment costs                                  5,428        5,215     (11,011)     (12,730)
    Other accruals                                           19,422      (3,684)       47,147     (12,277)
    Other, net                                              (6,227)     (13,902)      (1,243)     (10,995)
                                                         ----------   ----------   ----------   ----------
      Net cash provided by operating activities              48,763       70,246      359,933      376,632
                                                         ----------   ----------   ----------   ----------
Cash flows from investing activities:
  Utility construction expenditures                        (92,336)     (56,395)    (228,428)    (176,196)
  Acquisition of businesses,
          net of cash acquired                                   --           --    (716,031)           --
 Proceeds from disposition of assets                            892           24       28,452       10,443
 Other, net                                                (30,962)     (14,964)     (73,580)     (63,631)
                                                         ----------   ----------   ----------   ----------
      Net cash used in investing activities               (122,406)     (71,335)    (989,587)    (229,384)
                                                         ----------   ----------   ----------   ----------
Cash flows from financing activities:
 Issuance of long-term debt                                     544       40,503      258,315       46,878
Retirement of long-term debt                                (2,783)     (41,631)    (185,855)     (79,204)
Change in short-term debt                                    81,482      109,341       65,132      149,574
Retirement of preferred shares                                (601)        (600)      (1,852)      (1,856)
 Proceeds from Corporate Premium
         Income Equity Securities, net                           --           --      334,650           --
 Issuance of common shares                                    1,048        2,561      324,520        9,400
 Acquisition of treasury shares                               (346)     (84,520)    (108,987)    (182,500)
 Cash dividends paid on common shares                      (31,884)     (28,871)     (93,710)     (88,180)
 Other, net                                                     114          112          340          350
                                                         ----------   ----------   ----------   ----------
 Net cash provided by (used in)
 financing activities                                        47,574      (3,105)      592,553    (145,538)
                                                         ----------   ----------   ----------   ----------
Net increase (decrease) in cash and
 cash equivalents                                          (26,069)      (4,194)     (37,101)        1,710

Cash and cash equivalents at
   beginning of the period                                   49,816       36,684       60,848       30,780
                                                         ----------   ----------   ----------   ----------
Cash and cash equivalents at
   end of the period                                    $    23,747  $    32,490  $    23,747  $    32,490
                                                         ==========   ==========   ==========   ==========
 *Net of effect from acquisitions of businesses.

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

<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(In thousands)
                                                              Twelve Months
                                                            Ended September 30,
                                                         -----------------------
                                                            1999         1998
                                                         ==========   ==========
<S>                                                     <C>          <C>
Cash flows from operating activities:
 Net income                                             $   188,050  $   189,200
Adjustments to reconcile net income
 to net cash:
    Depreciation and amortization                           293,594      253,667
    Deferred federal and state
         income taxes, net                                      928     (17,784)
    Deferred investment tax credits, net                    (7,626)      (7,372)
    Other, net                                                1,482      (3,929)
 Change in certain assets and liabilities -*
    Accounts receivable, net                                 63,890     (20,602)
    Other receivables                                           163       44,811
    Natural gas in storage                                  (6,059)         (19)
    Accounts payable                                       (77,996)       12,716
    Taxes accrued                                          (46,299)     (12,148)
    Gas cost adjustment clause                               20,185       27,155
    Accrued employment costs                                (4,959)      (1,954)
    Other accruals                                           50,516     (14,112)
    Other, net                                              (8,438)       26,176
                                                         ----------   ----------
      Net cash provided by operating activities             467,431      475,805
                                                         ----------   ----------
Cash flows from investing activities:
  Utility construction expenditures                       (302,557)    (234,623)
  Acquisition of businesses,
     net of cash acquired                                 (716,031)           --
  Proceeds from disposition of assets                        30,597       16,475
  Other, net                                               (63,087)     (99,802)
                                                         ----------   ----------
      Net cash used in investing activities             (1,051,078)    (317,950)
                                                         ----------   ----------
Cash flows from financing activities:
  Issuance of long-term debt                                258,817      254,179
 Retirement of long-term debt                             (202,282)    (285,392)
 Change in short-term debt                                  112,576      196,725
 Retirement of preferred shares                             (2,409)      (2,411)
 Proceeds from Corporate Premium
         Income Equity Securities, net                      334,650           --
  Issuance of common shares                                 325,476       11,047
  Acquisition of treasury shares                          (130,461)    (211,837)
  Cash dividends paid on common shares                    (121,916)    (116,431)
  Other, net                                                    453          470
                                                         ----------   ----------
 Net cash provided by (used in)
 financing activities                                       574,904    (153,650)
                                                         ----------   ----------
Net increase (decrease) in cash and
 cash equivalents                                           (8,743)        4,205

Cash and cash equivalents at
   beginning of the period                                   32,490       28,285
                                                         ----------   ----------
Cash and cash equivalents at
   end of the period                                    $    23,747  $    32,490
                                                         ==========   ==========
 *Net of effect from acquisitions of businesses.

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

<PAGE>
Notes to Consolidated Financial Statements

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

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

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

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

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

     On June 7, 1999,  NiSource made an offer to acquire  Columbia  Energy Group
(CEG) for $5.7  billion,  or $68 per share of CEG common stock,  in cash.  CEG's
board rejected the offer, and on June 25, 1999, a tender offer was commenced for
all outstanding shares of CEG common stock at $68 per share in cash. CEG's board
of directors  recommended  that CEG  shareholders  reject the tender  offer.  On
October 17, NiSource  increased the  consideration  to $6.1 billion,  or $74 per
share,  in cash and extended the offer until  November 12, 1999.  In response to
the  increased  offer,  on October 24,  1999,  CEG's board  rejected  the offer,
recommended  that CEG  shareholders  not tender their shares and  authorized its
management to explore strategic alternatives.  CEG stated that it would initiate
discussions  with third parties  regarding  possible  transactions,  including a
merger,  reorganization,  or the disposition of a material amount of assets. The
terms and  conditions of  NiSource's  tender offer are set forth in the Offer to
Purchase  dated June 25,  1999,  as amended  and  supplemented,  and the related
Letter of Transmittal. A commitment letter has been accepted under which certain
financial institutions have agreed, subject to specified conditions,  to provide
$6.5  billion to finance the  proposed  acquisition  of CEG. The tender offer is
subject  to a  number  of  uncertainties,  and no  assurance  can be given as to
whether,  or on what terms,  CEG will be  acquired.  At  September  30, 1999 and
October 31, 1999, approximately $8.4 million and $9.7 million,  respectively, in
filing fees and  professional  services fees related to the CEG acquisition were
capitalized.

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

(2) Summary of Significant Accounting Policies:

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

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

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

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

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

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

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

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

         The  depreciation  provisions for utility plant, as a percentage of the
original cost, for the three-month,  nine-month and  twelve-month  periods ended
September 30, 1999 and 1998 were as follows:


<PAGE>


<TABLE>
<CAPTION>
                           Three Months                      Nine Months                  Twelve Months
                       Ended September 30,                Ended September 30,           Ended September 30,
                     ----------    ----------          ----------    ----------      ----------    ----------
                        1999          1998                 1999         1998           1999        1998
                     ==========    ==========          ==========    ==========      ==========  ==========
<S>                        <C>           <C>                 <C>           <C>             <C>         <C>
Electric                   3.7%          3.8%                3.7%          3.7%            3.7%        3.6%
Gas                        4.5%          5.1%                4.5%          5.1%            4.5%        5.1%
Water                      2.5%          2.2%                2.2%          2.1%            2.4%        2.1%
</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 $721.1 million
and $185.4  million at September  30, 1999 and December 31, 1998,  respectively,
and are being  amortized over  forty-year  periods from the respective  dates of
acquisition.

Intangible  Assets.  The excess of cost over the fair value of the net assets of
non-utility  businesses  acquired is recorded  as  goodwill.  Goodwill of $117.6
million  and  $61.9  million  at  September  30,  1999 and  December  31,  1998,
respectively,  is being  amortized  over a weighted  average period of 28 years.
Other  intangible  assets,  approximating  $12.5  million  and $7.7  million  at
September 30, 1999 and December 31, 1998, respectively, are being amortized over
periods of four to eight  years.  The  recoverability  of  intangible  assets is
assessed on a periodic basis to confirm that expected  future cash flows will be
sufficient to support the recorded intangible assets.  Accumulated  amortization
of  intangible   assets  at  September  30,  1999  and  December  31,  1998  was
approximately $8.5 million and $4.6 million, respectively.

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

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

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

     Comprehensive Income.  Comprehensive income is reported in the consolidated
statements of common  shareholders'  equity. The components of accumulated other
comprehensive income include unrealized gains (losses),  net of income taxes, on
available for sale securities ("securities") and 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,
(In millions)           1997           1998           1998           1998           1999           1999
                     ----------     ----------     ----------     ----------     ----------     ----------

<S>                      <C>           <C>            <C>            <C>            <C>            <C>
Securities               $  4.0        $   4.4        $   4.7        $   2.5        $   3.6        $   5.6
Foreign currency         $ (.3)        $ (1.6)        $ (2.1)        $ (2.6)        $ (2.5)        $ (2.3)
</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,
                                      ------------  ------------  ------------  ------------  ------------  ------------
(In thousands)                             1999      1998              1999      1998             1999      1998
                                          =======   =======          =======   =======           =======   =======
<S>                                    <C>        <C>             <C>        <C>              <C>          <C>
Income taxes                           $ 24,010   $ 19,313        $ 114,188  $ 95,413         $ 146,488    $ 131,562
Interest, net of amounts capitalized   $ 40,437   $ 27,351        $ 113,117  $ 83,537         $ 147,659    $ 117,184
</TABLE>

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

     On August 18, 1999, the IURC issued a 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  has appealed the August 18 order to the Indiana
Court of Appeals.

     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 or  semi-annual
hearing by the state Commissions and remains in effect for a one-,  three-,  six
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 hearing and
IURC  approval,  and made  effective  on  November  1 of each  year.  The demand
component  will  remain in effect for one year until a new demand  component  is
approved by the IURC. The commodity  component of the adjustment  factor will be
determined by monthly  filings,  which will become effective on the first day of
each calendar month,  subject to refund. The monthly filings do not require IURC
approval  but will be reviewed by the IURC during the annual  hearing  that will
take place regarding the demand component filing.  If the statutory  requirement
relating to the level of return for the Indiana 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 includes a gas cost
incentive  mechanism (GCIM) which allows the sharing of any cost savings or cost
increases  with customers  based on a comparison of actual gas supply  portfolio
cost to a market-based benchmark price.

Natural Gas in Storage. Both the last-in, first-out (LIFO) inventory methodology
and the weighted  average  methodology are used to value natural gas in storage.
Based on the average  cost of gas  purchased  under the LIFO method in September
1999  and  December  1998,  the  estimated  replacement  cost of gas in  storage
(current and  non-current)  at September 30, 1999 and December 31, 1998 exceeded
the stated LIFO cost by $67.6 million and $33.7 million, respectively. Inventory
valued using LIFO was $49.4  million and $50.8 million at September 30, 1999 and
December 31, 1998,  respectively.  Inventory  valued using the weighted  average
methodology  was $69.7  million  and $18.8  million at  September  30,  1999 and
December 31, 1998, respectively.

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

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

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

Regulatory  Assets.  The Utilities'  operations are subject to the regulation of
the Commissions and, in the case of certain subsidiaries, FERC. Accordingly, the
Utilities'  accounting  policies are subject to the  provisions  of SFAS No. 71,
"Accounting  for the  Effects of Certain  Types of  Regulation."  The  Utilities
monitor changes in market and regulatory  conditions and the resulting impact of
such changes in order to continue to apply the provisions of SFAS No. 71 to some
or all of their operations. As of September 30, 1999, and December 31, 1998, the
regulatory  assets  identified  below represent  probable future revenues to the
Utilities as these costs are recovered  through the  rate-making  process.  If a
portion of the Utilities' operations becomes no longer subject to the provisions
of SFAS No. 71, a write-off  of certain  regulatory  assets  might be  required,
unless some form of transition  cost recovery is established by the  appropriate
regulatory  body which  would meet the  requirements  under  generally  accepted
accounting  principles for continued accounting as regulatory assets during such
recovery period. Regulatory assets were comprised of the following items:
<TABLE>
<CAPTION>
                                           September 30,   December 31,
(In thousands)                                1999             1998
                                          ==========       ==========
<S>                                         <C>              <C>
Unamortized reacquisition premium
   on debt (see Note 16)                    $ 40,598         $ 43,233
Unamortized R. M. Schahfer Unit 17
   and Unit 18 carrying charges and
    deferred depreciation (see below)         59,166           62,329
Bailly scrubber carrying charges and
   deferred depreciation (see below)           8,243            8,945
Deferral of SFAS No. 106 expense not
    recovered (see Note 8)                    76,980           81,339
FERC Order No. 636 transition costs           15,504           22,093
Regulatory income tax asset, net
(see Note 6)                                  36,185           18,793
Other                                         13,148            4,936

                                          ----------       ----------
                                             249,824          241,668
Less: Current portion of regulatory
 assets                                       26,021           32,609
                                          ----------       ----------
                                            $223,803         $209,059
                                          ==========       ==========
</TABLE>

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

     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.

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

 AFUDC was calculated using a weighted average pre-tax rate as follows:
<TABLE>
<CAPTION>
                                                    September 30,    September 30,
                                                        1999              1998
                                                    ----------        ----------
      <S>                                               <C>                <C>
      Three months ended                                8.73%              8.95%
      Nine months ended                                 8.72%              8.74%
      Twelve months ended                               8.79%              8.89%
</TABLE>

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

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

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

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

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

                                                             UNAUDITED
         (In thousands)                             Nine Months    Twelve Months
                                                    ===========     ===========
      Operating revenue                            $  2,339,870     $  3,244,045
      Operating income                             $    350,816     $    490,045
      Net income                                   $    128,049     $    183,673

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

     On April 1,  1999,  NiSource  acquired  the  stock  of TPC  Corporation,  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  has an
indirect equity investment in the amount of $126.0 million, representing a 77.3%
interest in MHP. The  accompanying  financial  statements  reflect a preliminary
allocation of the purchase  price since the purchase  price  allocation  has not
been finalized.

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

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

Superfund. Because NiSource is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) at
several waste disposal sites, as well as at former  manufactured-gas plant sites
which it, or its  corporate  predecessors,  own or owned or operated,  it may be
required  to  share  in the  cost of  clean  up of such  sites.  A  program  was
instituted to investigate  former  manufactured-gas  plant sites where it is the
current or former owner,  which  investigation  has  identified  forty-six  such
sites.  Initial  sampling  has been  conducted  at thirty  sites.  Investigation
activities have been completed at twenty-three  sites and remedial measures have
been selected or implemented at fifteen 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 several insurance
companies,  including  $13.3 million in the third quarter,  1999.  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,  Inc.  have rate  recovery  for  environmental
response costs in Maine,  Massachusetts  and New  Hampshire.  The rate treatment
allows for the recovery of 100% of prudently  incurred  costs for  investigation
and  remediation  over a 5-7 year period from date of payment.  Recoveries  from
third parties or insurance  companies in Maine and  Massachusetts  are allocated
50% to  rate  payers  and  50% to  shareholders.  In New  Hampshire  100% of any
recoveries  from third  parties or  insurance  companies  are  returned  to rate
payers.

      As of September 30, 1999, a reserve of approximately  $24 million has been
recorded  to cover  probable  corrective  actions.  The  ultimate  liability  in
connection with these sites will depend upon many factors,  including the volume
of  material  contributed  to the  site,  the  number  of other  PRPs and  their
financial  viability,  the  extent  of  corrective  actions  required  and  rate
recovery.  Based upon  investigations and management's  understanding of current
environmental  laws and  regulations,  NiSource  believes  that  any  corrective
actions required, after consideration of insurance coverages, contributions from
other PRPs and rate recovery,  will not have a material  effect on its financial
position or results of operations.

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

     The CAAA also contain other  provisions  that could lead to  limitations on
emissions of hazardous air pollutants and other air pollutants (including NOx as
discussed below), which may require significant capital expenditures for control
of these emissions. Until specific rules have been issued that affect NiSource's
facilities, what these requirements will be or the costs of complying with these
potential requirements 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. On
May 25, 1999, the D.C.  Circuit Court of Appeals issued an order staying the NOx
SIP call rule's  September  30, 1999  deadline  for the state  submittals  until
further order of the court. Any resulting NOx emission limitations could be more
restrictive than those imposed on electric  utilities under the CAAA's acid rain
NOx reduction  program  described above.  NiSource is evaluating the EPA's final
rule and any  potential  requirements  that could  result from the final rule as
implemented by the State of Indiana.  NiSource  believes that the costs relating
to compliance with the new standards may be  substantial,  but such costs depend
upon the outcome of the current  litigation  and the  ultimate  control  program
agreed to by the targeted states and the EPA. Northern Indiana is continuing its
programs to reduce NOx emissions  and NiSource will continue to closely  monitor
developments in this area.

     The EPA issued  final  rules  revising  the  National  Ambient  Air Quality
Standards for ozone and  particulate  matter in July 1997. On May 14, 1999,  the
United  States  Court of Appeals for the D.C Circuit  remanded the new rules for
both ozone and  particulate  matters to the EPA.  Once  rectified,  the  revised
standards could require  additional  reductions in sulfur  dioxide,  particulate
matter and NOx emissions from coal-fired boilers  (including  Northern Indiana's
generating  stations)  beyond measures  discussed  above.  Final  implementation
methods will be set by the EPA as well as state regulatory authorities. NiSource
believes  that the costs  relating  to  compliance  with any new  limits  may be
substantial but are dependent upon the ultimate control program agreed to by the
targeted  states  and  the  EPA.  NiSource  will  continue  to  closely  monitor
developments  in this area and anticipates the exact nature of the impact of the
new limits 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,  which
is a by-product  of burning  fossil  fuels.  Reduction of such  emissions  could
result in significant capital outlays or operating expenses to NiSource.

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

     Under  the  Federal  Clean  Water  Act  and  Indiana's  and  Massachusetts'
regulations,  NiSource  must obtain  National  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 that the Water Utilities are currently in
compliance with all MCLs promulgated to date. The EPA has continuing  authority,
however,  to issue  additional  regulations  under  the SDWA.  In  August  1996,
Congress amended the SDWA to allow the EPA more authority to weigh the costs and
benefits  of  regulations  being  considered  in some,  but not all,  cases.  In
December 1998, EPA promulgated two National  Primary  Drinking Water rules,  the
Interim  Enhanced  Surface  Water  Treatment  Rule  and  the  Disinfectants  and
Disinfection  Byproducts  Rule. The Water Utilities must comply with these rules
by December 2001.  Management does not believe that significant  changes will be
required  for the Water  Utilities'  operations  to  comply  with  these  rules;
however, some cost expenditures for equipment  modifications or enhancements may
be necessary to comply with the Interim  Enhanced  Surface Water Treatment Rule.
Additional  rules are anticipated to be promulgated  under the 1996  amendments.
Compliance with such rules could be costly and could require substantial changes
in the Water Utilities' operations.

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

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

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

     The  components  of the net deferred  income tax liability at September 30,
1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>

                                                      September 30,  December 31,
                                                           1999          1998
                                                        ==========    ==========
(In thousands)
<S>                                                     <C>             <C>
Deferred tax liabilities--
   Accelerated depreciation and other
     property differences                               $1,095,319      $806,148
   AFUDC-equity                                             34,652        33,029
   Adjustment clauses                                        7,459        14,965
   Other regulatory assets                                  28,147        29,739
    Prepaid pension and other benefits                      38,278        34,170
   Reacquisition premium on debt                            16,267        17,311
Deferred tax assets--
   Deferred investment tax credits                        (37,642)      (37,236)
   Removal costs                                         (168,745)     (157,728)
   Other postretirement/postemployment benefits           (56,226)      (51,754)
   Other, net                                                5,830      (29,353)
                                                        ----------    ----------
                                                           963,339       659,291
Less: Deferred income taxes related to current
   assets and liabilities                                 (16,645)       (7,876)
                                                        ----------    ----------
Deferred income taxes--noncurrent                         $979,984      $667,167
                                                        ==========    ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                      Three Months               Nine Months               Twelve Months
                                   Ended September 30,        Ended September 30,        Ended September 30,
                               ------------ ------------    ------------ ------------  ------------  ------------
                                    1999        1998            1999      1998             1999       1998
                                   =======    =======         =======    =======          =======    =======
(In thousands)
<S>                               <C>        <C>             <C>        <C>              <C>        <C>
Current income taxes -
 Federal                          $ 10,165   $ 26,063        $ 88,706   $107,974         $ 94,412   $106,568
 State                               1,559      4,241          14,153     16,389           14,248     18,307
                                   -------    -------         -------    -------          -------    -------
                                    11,724     30,304         102,859    124,363          108,660    124,875
                                   -------    -------         -------    -------          -------    -------
Deferred income taxes, net -
 Federal                             3,837    (6,520)        (24,497)   (46,020)            1,097   (16,704)
 State                                 141      (471)         (2,275)    (3,621)            (169)    (1,080)
                                   -------    -------         -------    -------          -------    -------
                                     3,978    (6,991)        (26,772)   (49,641)              928   (17,784)
                                   -------    -------         -------    -------          -------    -------
Deferred investment tax
credits, net                       (1,921)    (1,821)         (5,728)    (5,463)          (7,626)    (7,372)
                                   -------    -------         -------    -------          -------    -------
   Total income taxes             $ 13,781   $ 21,492        $ 70,359   $ 69,259         $101,962   $ 99,719
                                   =======    =======         =======    =======          =======    =======
</TABLE>

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

<TABLE>
<CAPTION>



                                                    Three Months                   Nine Months                   Twelve Months
                                                  Ended September 30,          Ended September 30,            Ended September 30,
                                              ------------ ------------     ------------ ------------     ------------  ------------
(In thousands)                                      1999      1998               1999      1998                1999       1998
                                                  =======   =======             =======   =======             =======   =======
<S>                                              <C>       <C>                 <C>       <C>                <C>        <C>
Net income                                       $ 27,955  $ 43,127            $127,458  $133,294            $188,050  $189,200
Add-Income taxes                                   13,781    21,492              70,359    69,259             101,962    99,719
     Dividend requirements on
     preferred stocks                               2,071     2,122               6,264     6,417               8,385     8,588
                                                  -------   -------             -------   -------             -------   -------
Income before preferred dividend
     requirements and income taxes               $ 43,807  $ 66,741            $204,081  $208,970            $298,397  $297,507
                                                  =======   =======             =======   =======             =======   =======
Amount derived by multiplying pre-tax
      income by the statutory rate               $ 15,332  $ 23,360            $ 71,428  $ 73,140            $104,439  $104,127

Reconciling items multiplied
    by the statutory rate:
    Book depreciation over
           related tax depreciation                   969       998               2,906     2,994               2,906     3,957
    Amortization of deferred
          investment tax credits                  (1,921)   (1,821)             (5,728)   (5,463)             (7,626)   (7,372)
   State income taxes, net of
          federal income tax benefit                1,154     2,286               6,924     7,032               9,092    10,820
    Reversal of deferred taxes provided
          at rates in excess of the current
          federal income tax rate                   (721)   (1,271)             (2,163)   (3,813)             (1,462)   (3,807)
     Low-income housing credits                   (1,128)     (960)             (3,384)   (2,880)             (4,344)   (3,644)
     Nondeductible amounts related to
          amortization of intangible assets
          and plant acquisition adjustments           619       629               1,857     1,887               2,486     2,401
     Other, net                                     (523)   (1,729)             (1,481)   (3,638)             (3,529)   (6,763)
                                                  -------   -------             -------   -------             -------   -------
        Total income taxes                       $ 13,781  $ 21,492            $ 70,359  $ 69,259            $101,962  $ 99,719
                                                  =======   =======             =======   =======             =======   =======

</TABLE>

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

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

<TABLE>
<CAPTION>

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

Benefit obligation at end of the year (December 31,)          $949,039        $875,756
                                                              ========        ========
</TABLE>

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

<TABLE>
<CAPTION>

(In thousands)                                                  1998            1997
                                                              ========        ========
<S>                                                          <C>             <C>
Fair value of plan assets at beginning of year (January 1,)  $ 924,857       $ 790,978
Actual return on plan assets                                    85,254         126,695
Employer contributions                                          34,843          46,440
Acquisition of IWCR                                                 --          15,910
Benefits paid                                                 (57,924)        (55,166)

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

Plan assets at fair value at end of the year (December 31,)  $ 987,030       $ 924,857

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

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

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

<TABLE>
<CAPTION>

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

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

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

     Prepaid  pension  costs were $155.0  million at September  30, 1999 and are
reported under the captions  "Prepayments and Other" in the Consolidated Balance
Sheets.

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

<TABLE>
<CAPTION>

                                                Three Months                    Nine Months                     Twelve Months
                                             Ended September 30,             Ended September 30,            Ended September 30,
                                          ------------  ------------     ------------  ------------     ------------  ------------
(In thousands)                                 1999        1998               1999         1998              1999         1998
                                             =======      =======           =======      =======           =======      =======
<S>                                         <C>          <C>               <C>          <C>               <C>          <C>
Service costs                               $  5,032     $  4,850          $ 14,752     $ 17,886          $ 18,808     $ 16,301
Interest costs                                17,078       15,712            50,570       59,280            67,688       51,922
Expected return on plan assets              (23,147)     (19,619)          (68,546)     (78,125)          (92,711)     (68,412)
Amortization of transition obligation          1,477        1,262             4,372        4,928             6,000        3,685
Amortization of prior service costs            1,607           96             4,765        4,279             5,328        3,869
                                             -------      -------           -------      -------           -------      -------
                                            $  2,047     $  2,301          $  5,913     $  8,248          $  5,113     $  7,365
                                             =======      =======           =======      =======           =======      =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                      1999         1998
                                                                    --------     --------
<S>                                                                    <C>          <C>
Discount rate                                                          7.00%        7.00%
Rate of increase in compensation levels                                4.50%        4.50%
Expected long-term rate of return on assets                            9.00%        9.00%
</TABLE>

     Certain  union  employees  participate  in  industry-wide,   multi-employer
pension  plans which  provide for monthly  benefits  based on length of service.
Specified  amounts per compensated hour for each employee are contributed to the
trustees of these plans.  Contributions  of $0.1 million,  $1.6 million and $2.2
million  were  made  to  these  plans  for  the   three-month,   nine-month  and
twelve-month  periods  ended  September  30,  1999,  respectively.  The relative
position  of each  employer  participating  in these  plans with  respect to the
actuarial  present value of accumulated  plan benefits and net assets  available
for benefits is not available.

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

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

<TABLE>
<CAPTION>

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

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

<TABLE>
<CAPTION>

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

                                                                     -------      -------
Plan assets at fair value at end of the year (December 31,)          $ 2,903      $ 2,400
                                                                     =======      =======
</TABLE>

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

<TABLE>
<CAPTION>

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

   In order to determine  the APBO at December  31, 1998, a discount  rate of 7%
and a pre-Medicare  medical trend rate of 7% declining to a long-term rate of 5%
was used,  and at December 31, 1997,  a discount  rate of 7% and a  pre-Medicare
medical  trend rate of 8%  declining  to a  long-term  rate of 5% was used.  The
accrued  liability for  postretirement  benefits was $162.2 million at September
30, 1999.

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

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

<TABLE>
<CAPTION>

                                             Three Months           Nine Months           Twelve Months
                                           Ended September 30,   Ended September 30,     Ended September 30,
                                         ---------------------  ---------------------  ---------------------
 (In thousands)                              1999     1998          1999    1998        1999      1998
                                           =======  =======       =======  =======    =======    =======
<S>                                       <C>       <C>           <C>     <C>         <C>       <C>
Service costs                             $  1,623  $ 1,488       $ 4,271 $  4,162    $ 5,358   $  4,428
Interest costs                               4,728    4,073        14,103   12,219     17,677     14,041
Expected return on plan assets               (700)     (50)       (1,933)    (150)    (1,999)      (150)
Amortization of transition obligation        3,197    2,929         9,525    8,788     12,482     11,642
Amortization of prior service cost              86       75           258      225        355        504
Amortization of (gain) loss                (1,204)  (1,394)       (3,600)  (4,180)    (5,167)     (6,988)
                                           -------  -------       -------  -------    -------    -------
                                          $  7,730 $  7,121       $22,624 $ 21,064    $28,706   $ 23,477
                                           =======  =======       =======  =======    =======    =======

</TABLE>

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

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

     The effect of a 1% increase in the assumed health care cost trend rates for
each future  year would  increase  the APBO at January 1, 1999 by  approximately
$30.6  million,  and  increase the  aggregate  of the service and interest  cost
components of plan costs by approximately  $0.8 million and $2.3 million for the
three-month and nine-month  periods ended September 30, 1999. The effect of a 1%
decrease in the assumed  health care cost trend rates for each future year would
decrease  the APBO at  January  1,  1999 by  approximately  $23.9  million,  and
decrease the aggregate of the service and interest cost components of plan costs
by  approximately  $0.6  million  and  $1.8  million  for  the  three-month  and
nine-month  periods ended September 30, 1999.  Amounts  disclosed above could be
changed  significantly in the future by changes in health care costs, work force
demographics, interest rates or plan changes.

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

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

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

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

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

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

<TABLE>
<CAPTION>
                                                                                                      Redemption
                                                                                                       Price at
                                                                September 30,      December 31,      September 30,

                                                                    1999               1998              1999
                                                                 ===========       ===========        ===========
(Dollars in thousands)
<S>                                                               <C>                <C>                  <C>
Northern Indiana Public Service Company:
Cumulative preferred stock - $100 par value
 - 4-1/4% series -209,035 and 209,051
  shares outstanding, respectively                                $   20,903         $  20,905            $101.20
  4-1/2% series -  79,996 shares outstanding                           8,000             8,000            $100.00
  4.22% series - 106,198 shares outstanding                           10,620            10,620            $101.60
  4.88% series - 100,000 shares outstanding                           10,000            10,000            $102.00
  7.44% series -   41,890 shares outstanding                           4,189             4,189            $101.00
  7.50% series -   34,842 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, 1999),
     Series A (stated value $50 per share) 473,285
     shares outstanding                                               23,664            23,664             $50.00
 Indianapolis Water Company:
 Cumulative preferred stock- $100 par value
  4.00% to 5.00%, 44,966 shares outstanding                            4,497             4,497   $100.00- $105.00
                                                                 -----------
                                                                  $   85,611         $  85,613
                                                                 ===========       ===========
</TABLE>

    During  the  period  October  1, 1997 to  September  30,  1999 there were no
additional  issuances of the above  preferred  stocks.  The foregoing  preferred
stocks are  redeemable in whole or in part, at any time upon thirty days' notice
at the option of the issuer at the redemption prices shown.

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

<TABLE>
<CAPTION>


                                                                    September 30,      December 31,
                                                                         1999              1998
                                                                     ===========        ===========
(Dollars in thousands)
<S>                                                                   <C>                 <C>
 Northern Indiana Public Service Company:
 Cumulative  preferred  stock -$100 par value -
 8.85% series - 37,500 and 50,000
   shares outstanding, respectively                                   $    3,750          $   5,000
   7-3/4% series -  33,352 shares outstanding                              3,335              3,335
   8.35% series - 45,000 and 51,000 shares
     outstanding, respectively                                             4,500              5,100
 Cumulative preferred stock -no par value -
   6.50% series - 430,000 shares outstanding                              43,000             43,000
                                                                     -----------        -----------
                                                                      $   54,585          $  56,435
                                                                     ===========        ===========
</TABLE>

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

<TABLE>
<CAPTION>

                                                                  Sinking Fund or
 Series                Redemption Price Per Share          Mandatory Redemption Provisions
===========            ==========================      ======================================
Cumulative preferred stock -$100 par value -
<S>     <C>           <C>                               <C>
        8.85%         $100.74, reduced periodically     12,500 shares on or before April 1.
        7-3/4%        $104.06, reduced periodically     2,777 shares on or before December 1;
                                                        noncumulative option to double amount each year.
        8.35%         $103.20, reduced periodically     3,000 shares on or before July  1;
                                                        increasing to 6,000 shares beginning in 2004;
                                                        noncumulative option to double amount each year.
   Cumulative preferred stock -no par value -
        6.50%         $100.00 on October 14, 2002       430,000 shares on October 14, 2002.
</TABLE>

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

<TABLE>
<CAPTION>

Twelve Months Ended September 30,
=================================
(In thousands)

<S>                                          <C>
2000                                         $  1,828
2001                                            1,828
2002                                            1,828
2003                                           44,828
2004                                              878
Thereafter                                      5,223
                                              --------
Total preferred stocks,
 redemption outside control of issuer        $ 56,413
                                              ========
</TABLE>

Sinking fund payments due within one year are reported  under the caption "Other
accruals" in the Consolidated Balance Sheets.

(12)  Common  Dividend:  During  the next few years,  NiSource's  ability to pay
dividends will depend upon dividends it receives from Northern Indiana. Northern
Indiana's   Indenture  dated  August  1,  1939,  as  amended  and   supplemented
(Indenture), provides that it will not declare or pay any dividends on any class
of capital stock (other than  preferred or  preference  stock) except out of the
earned  surplus or net profits of  Northern  Indiana.  At  September  30,  1999,
Northern Indiana had  approximately  $146.3 million of retained earnings (earned
surplus)  available for the payment of dividends.  Future  dividends will depend
upon adequate  retained  earnings,  adequate  future earnings and the absence of
adverse developments.

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

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

<TABLE>
<CAPTION>

                                                 Three Months                  Nine Months                    Twelve Months
                                             Ended September 30,            Ended September 30,            Ended September 30,
                                          ------------  ------------     -----------  ------------     ------------  ------------
                                              1999          1998            1999         1998             1999           1998
(In thousands, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------

<S>                                        <C>           <C>          <C>              <C>              <C>           <C>
Net Income                                 $   27,955    $   43,127   $  127,458       $  133,294       $  188,050    $  189,200
                                           ==========    ==========   ==========       ==========       ==========    ==========

Basic
Weighted Average Number of Shares:
     Average Common Shares Outstanding        125,031       119,495      124,218          121,833          122,578       122,645
                                           ==========    ==========   ==========       ==========       ==========    ==========

Basic Earnings per Average Common Share    $     0.22    $     0.36   $     1.02       $     1.09       $     1.53    $     1.54
                                           ==========    ==========   ==========       ==========       ==========    ==========

Diluted
Weighted Average Number of Shares:
     Average Common Shares Outstanding        125,031       119,495      124,218          121,833          122,578       122,645
     Dilutive effect for Nonqualified
     Stock Options and Forward Share
     Purchase Contract                          1,024           566          723              555              711           522
                                           ----------    ----------   ----------       ----------       ----------    ----------
     Weighted Average Shares                  126,055       120,061      124,941          122,388          123,289       123,167
                                           ==========    ==========   ==========       ==========       ==========    ==========

Diluted Earnings per Average Common Share  $     0.22    $     0.35   $     1.02       $     1.08       $     1.52    $     1.53
                                           ==========    ==========   ==========       ==========       ==========    ==========
</TABLE>


(14) Common Shares: On April 8, 1998,  shareholders  approved an increase in the
number of authorized common shares,  without par value, from 200,000,000  shares
to  400,000,000  shares.  All  references to numbers of common shares  reported,
including per share amounts and stock option data, have been adjusted to reflect
the two-for-one stock split paid February 20, 1998.

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

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

     Equity Forward Share Purchase Contracts. During the second quarter of 1999,
a forward  purchase  contract was entered into covering the purchase of up to 5%
of NiSource's  outstanding  common shares.  At the end of each quarterly  period
during the term of the forward purchase  contract,  NiSource has the option, but
not the obligation,  to settle the forward purchase contract with respect to all
or a portion of the common shares held by the counterparty.  As of September 30,
1999, the counterparty  informed NiSource that  approximately 5.6 million shares
had been purchased at a weighted average cost of $26.90 per share.  NiSource has
the option to settle  with the  counterparty  by means of  physical or net share
settlement. On a quarterly basis, NiSource will pay the counterparty a fee based
on the amount paid for common  shares  purchased  by the  counterparty,  and the
counterparty  will remit  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 $279,000  for the
three,  nine and twelve  months  ended  September  30,  1999.

     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, 1999 the fee/ nominal  amount and fair value of the
equity  forward  purchase  contract  were approximately  $150 million  and  $124
million, respectively.

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

     At September 30, 1999,  there were 1.8 million  shares  reserved for future
awards  under the 1994 Plan.  The Plans  permit the  following  types of grants,
separately  or in  combination:  nonqualified  stock  options,  incentive  stock
options,  restricted  stock awards,  stock  appreciation  rights and performance
units.  No incentive  stock options or  performance  units were  outstanding  at
September 30, 1999.  Under the Plans,  the exercise  price of each option equals
the market price of common stock on the date of grant.
Each option has a maximum  term of ten years and vests one year from the date of
grant.

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

     Stock  appreciation  rights (SARs) may be granted only in tandem with stock
options on a  one-for-one  basis and are payable in cash,  common  shares,  or a
combination  thereof.  There were no SARs  outstanding  at  September  30, 1999.
Restricted  stock  awards  are  restricted  as to  transfer  and are  subject to
forfeiture for specific  periods from the date of grant.  Restrictions on shares
awarded in 1995 lapse five years from date of grant,  and vesting varies from 0%
to 200% of the number awarded,  subject to specific earnings per share and stock
appreciation  goals.  Restrictions  on shares awarded in 1998 and 1999 lapse two
years  from  date of grant  and  vesting  varies  from 0% to 100% of the  number
awarded, subject to specific performance goals. If a participant's employment is
terminated  prior to  vesting  other  than by  reason of  death,  disability  or
retirement,  restricted  shares are  forfeited.  There were  513,500 and 534,666
restricted  shares  outstanding  at  September  30, 1999 and  December 31, 1998,
respectively.

     The  Nonemployee  Director  Stock  Incentive  Plan,  which was  approved by
shareholders,  provides  for the  issuance  of up to  200,000  common  shares to
nonemployee directors.  The Plan provides for awards of common shares which vest
in 20% per year  increments,  with full vesting after five years.  The Plan also
allows for the award of nonqualified stock options, 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 April 14,
1999, 75,500 shares had been issued under the Plan.

    These plans are accounted for under Accounting  Principles Board Opinion No.
25, under which no compensation cost has been recognized for nonqualified  stock
options.  The  compensation  cost  that  was  charged  against  net  income  for
restricted  stock awards was $0.9 million and $0.6 million for the  three-month,
$2.2  million and $1.4  million  for the  nine-month  and $2.8  million and $2.0
million for the twelve-month  periods ended September 30, 1999 and September 30,
1998,  respectively.  Had compensation cost for non-qualified stock options been
determined   consistent   with  SFAS  No.  123   "Accounting   for   Stock-Based
Compensation,"  net income and earnings per average common share would have been
reduced to the following pro forma amounts:

 <TABLE>
<CAPTION>

                                  Three Months               Nine Months            Twelve Months
                               Ended September 30,         Ended September 30,     Ended September 30,
                            ------------------------   ------------------------  ------------------------
                                1999       1998            1999       1998          1999       1998
                               ======     ======         ======      ======        =====      ======
                                            (Dollars in thousands, except per share data)
<S>                           <C>        <C>           <C>        <C>           <C>        <C>
Net Income:
 As reported                  $ 27,955   $ 43,127      $ 127,458  $ 133,294     $188,050   $189,200
 Pro forma                    $ 27,564   $ 42,839      $ 126,260  $ 132,580     $186,448   $188,273

Earnings Per Average
 Common Share:
 Basic:
   As reported                $   0.22   $   0.36      $    1.02  $    1.09      $  1.53    $  1.54
   Pro forma                  $   0.22   $   0.35      $    1.01  $    1.08      $  1.52    $  1.53
 Diluted:
  As reported                 $   0.22   $   0.35      $    1.02  $    1.08      $  1.52    $  1.53
   Pro forma                  $   0.21   $   0.35      $    1.01  $    1.08      $  1.51    $  1.52

</TABLE>

     The fair value of each option  granted as used to  determine  pro forma net
income  is  estimated  as of the date of grant  using the  Black-Scholes  option
pricing model with the following weighted average assumptions used for grants in
the three-month,  nine-month and  twelve-month  periods ended September 30, 1999
and   September  30,  1998:   risk-free   interest  rate  of  5.87%  and  5.29%,
respectively;   expected   dividend   yield  per  share  of  $1.02  and   $0.96,
respectively;  expected  option term of 5.22 years and 5.4 years,  respectively;
and expected volatilities of 15.72% and 13.09%, respectively.

Changes  in  outstanding  shares  under  option  and SARs  for the  three-month,
nine-month and  twelve-month  periods ended September 30, 1999 and September 30,
1998 were as follows:
<TABLE>
<CAPTION>

                                                 NONQUALIFIED STOCK OPTIONS
                                      --------------------------------------------------
                                                    Weighted              Weighted
                                                    Average               Average
                                                    Option                Option
Three Months Ended September 30,         1999        Price      1998       Price
================================       ========     =======   ========    =======
<S>                                   <C>          <C>       <C>          <C>
Balance, beginning of period          3,243,206    $  18.81  2,193,600    $  16.76
 Granted                                744,750       24.59    607,000       29.22
 Exercised                               29,000       15.62    115,500       17.77
 Canceled                                    --          --         --          --
                                      ---------               --------
Balance, end of period                3,958,956    $  19.92  2,685,100    $  19.53
                                      =========               ========
Shares exercisable                    3,214,206    $  18.84  2,078,100    $  12.68
                                      =========               ========
</TABLE>
<TABLE>
<CAPTION>


                                                NONQUALIFIED STOCK OPTIONS
                                      --------------------------------------------------
                                                    Weighted               Weighted
                                                    Average                 Average
                                                    Option                  Option
Nine Months Ended September 30,         1999        Price      1998          Price
============================           ========     =======   ========     =======
<S>                                   <C>          <C>       <C>          <C>
Balance, beginning of period          2,651,300    $  19.61  2,535,400    $  16.41
 Converted                              740,780       15.03         --          --
 Granted                                744,750       24.60    607,000       29.22
 Exercised                              171,374       14.03    437,100       14.66
 Canceled                                 6,500       29.22     20,200       20.64
                                       --------               --------
Balance, end of period                3,958,956   $   19.92  2,685,100    $  19.56
                                       ========               ========
Shares exercisable                    3,214,206   $   18.84  2,078,100    $  12.68
                                       ========               ========
</TABLE>

<TABLE>
<CAPTION>
                                                NONQUALIFIED STOCK OPTIONS
                                      --------------------------------------------------
                                                     Weighted              Weighted
                                                     Average               Average
                                                     Option                Option
Twelve Months Ended September 30,       1999         Price      1998       Price
============================           ========     =======   ========    =======
<S>                                   <C>          <C>       <C>          <C>
Balance, beginning of period          2,685,100    $  19.56  2,633,400    $  16.42
 Converted                              740,780       15.03         --          --
 Granted                                744,750       24.59    607,000       29.22
 Exercised                              203,174       14.14    530,100       14.98
 Canceled                                 8,500       29.22     25,200       20.64
                                       --------               --------
Balance, end of period                3,958,956    $  19.92  2,685,100    $  19.56
                                       ========               ========
Shares exercisable                    3,214,206    $  18.84  2,078,100    $  12.68
                                       ========               ========
Weighted average fair value
 of options granted                   $    3.66              $    4.28
                                        ========              ========
</TABLE>

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

<TABLE>
<CAPTION>

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

                             Number            Weighted Average                          Number
   Range of               Outstanding at        Remaining         Weighted Average       Exercisable at
  Option Price         September 30, 1999    Contractual Life       Option Price         September 30, 1999
=============            ===============     ===============     ===============        ===============
<S>                          <C>                 <C>                    <C>                  <C>
$ 8.53 to $12.31               154,500           1.6  years             $  10.46               154,500
$13.03 to $19.77             2,012,006           6.9  years                15.98             2,012,006
$20.64 to $29.22             1,792,450           9.1  years                25.14             1,047,700
------------------       ---------------      ---------------         ----------        -------------
$  8.53 to $29.22            3,958,956           6.4  years              $ 19.92             3,214,206
                         ===============                                                =============
</TABLE>

(16) Long-Term Debt:

<TABLE>
<CAPTION>
                                                                    September 30,       December 31,
(Dollars in thousands)                                                   1999               1998
                                                                      ==========         ==========
<S>                                                                  <C>                <C>
First mortgage bonds -
    Weighted average interest rate of 6.62% and various
    maturities between May 1, 2001 and July 15, 2028                 $   186,100        $   186,600
Pollution control notes and bonds-
    Weighted average interest rate of 3.91% and various
    maturities between October 1, 2003 and April 1, 2019                 239,500            239,500
Medium-term notes -
   Weighted average interest rate of 7.16% and various
   maturities between July 6, 2000 and September 1, 2031               1,191,313          1,048,025
Subordinated Debentures -7.75%, due March 31, 2026                        75,000             75,000
Senior Notes Payable - 6.78%, due December 1, 2027                        75,000             75,000
Notes payable -
    Weighted average interest rate of 7.32% and various
     maturities between March 5, 2001 and December 1, 2018                48,102             41,807
Variable bank loans - Weighted average interest rate of 5.86% and
     various maturities between March 17, 2001 and August, 2003           30,600              5,600
Unamortized premium and discount on long-term debt, net                  (3,225)            (3,567)
                                                                     -----------        -----------
Total long-term debt, excluding amounts due within one year          $ 1,842,390      $   1,667,965
                                                                     ===========        ===========
</TABLE>


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

<TABLE>
<CAPTION>

Twelve Months Ended September 30,
=================================
(In thousands)
<S>                                                         <C>
2000                                                        $  163,283
2001                                                            91,273
2002                                                            93,689
2003                                                           183,945
2004                                                           124,561
Thereafter                                                   1,348,922
                                                           -----------
Total long-term debt (including current portion)           $ 2,005,673
                                                           ===========

</TABLE>

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

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

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

     In July 1998, $40.0 million of twenty-year medium-term notes were issued at
a rate of 5.05% with a maturity date of July 15, 2018,  with the proceeds  being
used to redeem 7-7/8% Bonds. In February 1999,  $35.0 million of ten-year medium
term notes were  issued at a rate of 5.99% with a maturity  date of  February 1,
2009 and $45.0 million of twenty-year medium term notes were issued at a rate of
6.61% with a maturity  date of February 1, 2019.  The  majority of the  proceeds
were used to reduce existing credit  facilities and the remaining  proceeds were
used for general corporate purposes.

     The  financial  obligations  of Capital  Markets  are  subject to a Support
Agreement  between  NiSource  and  Capital  Markets,  under which  NiSource  has
committed  to make  payments  of  interest  and  principal  on Capital  Markets'
obligations in the event of a failure to pay by Capital Markets. Restrictions in
the  Support  Agreement  prohibit  recourse  on the  part  of  Capital  Markets'
creditors  against  the stock and assets of Northern  Indiana  that are owned by
NiSource. Under the terms of the Support Agreement, in addition to the cash flow
of cash dividends paid to NiSource by any of its consolidated subsidiaries,  the
assets of  NiSource,  other than the stock and assets of Northern  Indiana,  are
available  as  recourse  for the  benefit of  Capital  Markets'  creditors.  The
carrying  value of the assets of  NiSource,  other  than the assets of  Northern
Indiana, were approximately $2.9 billion at September 30, 1999.

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

<TABLE>
<CAPTION>

                                                                             September 30,       December 31,
                                                                                1999                 1998
                                                                               ========            ========
(In thousands)
<S>                                                                            <C>                  <C>
Medium-term notes--
   Weighted average interest rate of 6.80%                                     $156,137             $    --
Notes payable--
   Weighted average interest rate of 7.94%                                        5,146               4,790
Sinking funds due within one year                                                 2,000               2,000
                                                                               --------            --------
   Total current portion of long-term debt                                     $163,283             $ 6,790
                                                                               ========            ========
</TABLE>

(18) Short-Term  Borrowings:  NiSource and its subsidiaries may borrow under two
five-year,  $100 million revolving credit agreements that terminate on September
23, 2003 and two 364-day $100 million revolving credit agreements that terminate
on September 23, 2000. The 364-day  agreements may be extended at expiration for
additional periods of 364 days. Under these agreements,  funds are borrowed at a
floating  rate of interest or, under certain  circumstances,  at a fixed rate of
interest for short-term periods.  These agreements provide financing flexibility
and may be used to support the issuance of  commercial  paper.  At September 30,
1999, there were no borrowings outstanding under these agreements.

      In addition, various NiSource subsidiaries maintain lines of credit for up
to an aggregate of $199.9 million with lenders at either the lender's commercial
prime or market  lending  rates.  As of  September  30,  1999,  there were $41.1
million of  borrowings  outstanding  under these lines of credit with a weighted
average  interest  rate of 6.13%.  As of  December  31,  1998,  there were $84.1
million of borrowings outstanding under these lines of credit.

     NiSource  and its  subsidiaries  maintain  market lines of credit for up to
$396.2 million.  As of September 30, 1999, there were $103.9 million outstanding
under these money market lines of credit with a weighted  average  interest rate
of 5.55%.  At  December  31,  1998,  there were  $127.3  million  of  borrowings
outstanding under these money market lines of credit.

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

     At September 30, 1999 and December 31, 1998,  short-term borrowings were as
follows:

<TABLE>
<CAPTION>

                                                                              September 30,      December 31,
                                                                                  1999               1998
                                                                                ========           ========
(In thousands)
<S>                                                                            <C>                <C>
Commercial paper--
   Weighted average interest rate of 5.56% at September 30, 1999               $261,400           $ 193,700
Notes payable--
   Weighted average interest rate of 6.13% at September 30, 1999                314,075             217,340
                                                                                --------           --------
   Total short-term borrowings                                                 $575,475           $ 411,040
                                                                                ========           ========

</TABLE>

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

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

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

     The Preferred  Securities  represent undivided  beneficial interests in the
assets of NIPSCO  Capital  Trust I (Capital  Trust).  The sole assets of Capital
Trust are  subordinated  debentures  (Debentures)  of Capital  Markets that bear
interest  at a rate of  5.90%  per  annum,  and  certain  rights  under  related
guarantees by Capital Markets.

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

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

<TABLE>
<CAPTION>

Twelve Months Ended September 30,
=================================
(In thousands)
<S>                                                                            <C>
2000                                                                           $ 34,442
2001                                                                             34,051
2002                                                                             65,273
2003                                                                             30,417
2004                                                                             76,784
Later years                                                                     224,978
                                                                               ---------
Total minimum payments required                                                $465,945
                                                                               =========

</TABLE>


     The  consolidated  financial  statements  include  rental  expense  for all
operating leases as follows:

<TABLE>
<CAPTION>

                                               September 30,    September 30,
                                                   1999             1998
                                                 ========        ========
(In thousands)
<S>                                               <C>             <C>
Three months ended                                $12,332         $ 6,167
Nine months ended                                 $36,530         $17,699
Twelve months ended                               $42,531         $19,886
</TABLE>

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

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

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

       Primary Energy, Inc.  ("Primary")  arranges  energy-related  projects for
large energy-intensive  customers and offers such customers nationwide expertise
in managing the  engineering,  construction,  operation and  maintenance of such
projects.  Through its  subsidiaries,  Primary has entered into  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 serve 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 including in the Operating Leases in Note 20.

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

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

 Natural Gas Commodity Risk Management. Commodity futures, options and swaps are
used to hedge the impact of natural gas price  fluctuations  related to business
activities, including price risk related to the physical location of the natural
gas  (basis  risk).  As  of  September  30,  1999,  open  derivative   financial
instruments  represented  hedges of natural gas sales of 43.1 billion cubic feet
(Bcf),  and natural gas purchases and  inventories of 42.0 Bcf. The net deferred
gains on these  derivative  financial  instruments was $3.1 million at September
30, 1999.

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

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

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

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

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

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

                                                              September 30, 1999             December 31, 1998
                                                           Carrying/       Estimated      Carrying/     Estimated
                                                             Notional        Fair         Notional        Fair
                                                             Amount          Value         Amount         Value
                                                          ------------  ------------    ------------  ------------
(In thousands)
<S>                                                         <C>           <C>             <C>           <C>
Investments                                                 $   45,159    $   44,617      $   36,594    $   36,028
Long-term debt (including current portion)                  $2,005,673    $1,901,235      $1,674,755    $1,769,934
Preferred stock (including current portion)                 $  137,527    $  125,405      $  143,876    $  140,420
Preferred securities                                        $  345,000    $  295,838             N/A           N/A
</TABLE>

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

(24) Customer Concentrations:  The Utilities supply natural gas, electric energy
and water. Natural gas and electric energy are supplied to the northern third of
Indiana and  portions  of  Massachusetts,  New  Hampshire  and Maine.  The Water
Utilities  serve  Indianapolis,  Indiana,  and surrounding  areas.  Although the
Energy   Utilities  have  a  diversified  base  of  residential  and  commercial
customers, a substantial portion of their electric and gas industrial deliveries
are dependent upon the basic steel  industry.  Electric  revenues from the basic
steel industry for the twelve months ended  September 30, 1999 and 1998 were 16%
and 13%, respectively.

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

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

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

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

     The following  tables  provide  information  about  business  segments.  In
addition,  adjustments  have been made to the segment  information  to arrive at
information included in the results of operations and financial position.  These
adjustments include unallocated corporate assets,  revenues and expenses and the
elimination  of  intercompany  transactions.  The  accounting  policies  of  the
operating  segments  are the  same as those  described  in Note 2,  "Summary  of
Significant Accounting Policies."
 <TABLE>
 <CAPTION>

                                                                                              Other
(In thousands)                                                                       Gas     Products
For the three months ended September 30, 1999        Gas    Electric     Water    Marketing & Services Adjustments   Total
-----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>        <C>        <C>        <C>        <C>
Operating revenues                             $  133,335  $  325,044  $  29,923  $ 179,322  $  83,108  $ (62,740) $  687,992
Other, net                                     $      911  $      332  $     771  $   1,422  $(12,377)  $    (947) $  (9,888)
Depreciation and amortization                  $   29,203  $   39,856  $   3,872  $     777  $   3,958  $      340 $   78,006
Segment profit (loss)                          $ (14,545)  $  116,857  $  12,888  $ (2,595)  $(10,847)  $ (10,160) $   91,598
Assets                                         $2,478,428  $2,774,031  $ 666,307  $ 365,239  $ 447,270  $(224,014) $6,507,261
Capital Expenditures                           $   44,737  $   24,646  $  22,953  $      25  $   4,444  $       -- $   96,805
Investments in
equity-method investees                        $       --  $       --  $      --  $  91,837  $ 159,355  $       -- $  251,192


                                                                                               Other
 (In thousands)                                                                      Gas      Products
For the three months ended September 30, 1998        Gas    Electric     Water    Marketing & Services Adjustments   Total
-----------------------------------------------------------------------------------------------------------------------------
Operating revenues                             $   80,953  $  469,116  $  24,403  $ 136,746  $  67,958  $ (31,384) $  747,792
Other, net                                     $      186  $      181  $     355  $     417  $     126  $    1,605 $    2,870
Depreciation and amortization                  $   18,868  $   39,438  $   2,968  $      77  $   3,013  $       53 $   64,417
Segment profit (loss)                          $ (15,320)  $  108,107  $   8,187  $   1,555  $   (482)  $  (2,229) $   99,818
Assets                                         $1,024,921  $2,739,708  $ 603,754  $  74,548  $ 496,364  $(102,065) $4,837,230
Capital Expenditures                           $   16,815  $   35,879  $  11,848  $       0  $   8,705  $       -- $   73,247
Investments in
equity-method investees                        $       --  $       --  $      --  $   6,572  $ 100,630  $       -- $  107,202


                                                                                               Other
(In thousands)                                                                       Gas      Products
For the nine months ended September 30, 1999         Gas    Electric     Water    Marketing & Services Adjustments   Total
-----------------------------------------------------------------------------------------------------------------------------
Operating revenues                             $  711,954  $  867,730  $  74,882  $ 554,694  $ 235,769  $(184,799) $2,260,230
Other, net                                     $    2,149  $      696  $   1,234  $   3,659  $ (7,514)  $  (2,246) $  (2,022)
Depreciation and amortization                  $   85,324  $  119,104  $  10,886  $   1,661  $  10,450  $    1,029 $  228,454
Segment profit                                 $   62,764  $  276,108  $  23,725  $ (1,041)  $ (4,113)  $ (20,445) $  336,998
Assets                                         $2,478,428  $2,774,031  $ 666,307  $ 365,239  $ 447,270  $(224,014) $6,507,261
Capital Expenditures                           $   98,488  $   92,528  $  39,779  $      66  $  18,519  $       -- $  249,380
Investments in
 equity-method investees                       $       --  $       --  $      --  $  91,837  $ 159,355  $       -- $  251,192


                                                                                               Other
 (In thousands)                                                                      Gas      Products
For the nine months ended September 30, 1998         Gas    Electric     Water    Marketing & Services Adjustments   Total
-----------------------------------------------------------------------------------------------------------------------------
Operating revenues                             $  434,032  $1,138,589  $  63,029  $ 451,543  $ 187,056  $ (94,705) $2,179,544
Other, net                                     $    1,102  $      354  $     575  $   1,588  $   4,682  $    2,086 $   10,387
Depreciation and amortization                  $   56,390  $  117,162  $   7,634  $     193  $   9,795  $      160 $  191,334
Segment profit                                 $   30,637  $  258,885  $  19,070  $   3,688  $ (1,341)  $  (7,447) $  303,492
Assets                                         $1,024,921  $2,739,708  $ 603,754  $  74,548  $ 496,364  $(102,065) $4,837,230
Capital Expenditures                           $   46,680  $   92,631  $  42,070  $      --  $  18,649  $       -- $  200,030
Investments in
 equity-method investees                       $       --  $       --  $      --  $   6,572  $ 100,630  $       -- $  107,202


                                                                                               Other
(In thousands)                                                                       Gas      Products
For the twelve months ended September 30, 1999       Gas    Electric     Water    Marketing & Services Adjustments   Total
-----------------------------------------------------------------------------------------------------------------------------
Operating revenues                             $  915,020  $1,159,127  $  95,951  $ 760,843  $ 311,782  $(229,259) $3,013,464
Other, net                                     $    3,849  $      895  $   1,371  $   4,087  $ (8,402)  $  (3,625) $  (1,825)
Depreciation and amortization                  $  104,479  $  158,786  $  12,883  $   1,799  $  14,563  $    1,084 $  293,594
Segment profit                                 $  100,366  $  358,655  $  30,188  $     323  $   1,151  $ (25,087) $  465,596
Assets                                         $2,478,428  $2,774,031  $ 666,307  $ 365,239  $ 447,270  $(224,014) $6,507,261
Capital Expenditures                           $  117,621  $  130,331  $  56,974  $     432  $  27,265  $       -- $  332,623
Investments in
 equity-method investees                       $       --  $       --  $      --  $  91,837  $ 159,355  $       -- $  251,192


                                                                                               Other
(In thousands)                                                                       Gas      Products
For the twelve months ended September 30, 1998       Gas    Electric     Water    Marketing & Services Adjustments   Total
-----------------------------------------------------------------------------------------------------------------------------
Operating revenues                             $  696,604  $1,450,576  $  81,430  $ 654,088  $ 247,293  $(143,358) $2,986,633
Other, net                                     $    1,385  $      632  $   1,167  $   2,109  $   1,016  $    2,371 $    8,680
Depreciation and amortization                  $   74,621  $  154,819  $  11,368  $     253  $  11,915  $      691 $  253,667
Segment profit                                 $   75,598  $  338,706  $  23,761  $   3,861  $ (3,612)  $ (14,920) $  423,394
Assets                                         $1,024,921  $2,739,708  $ 603,754  $  74,548  $ 496,364  $(102,065) $4,837,230
Capital Expenditures                           $   65,557  $  107,055  $  54,599  $       7  $  30,002  $       -- $  257,220
Investments in
 equity-method investees                       $       --  $       --  $      --  $   6,572  $ 100,630  $       -- $  107,202
</TABLE>

The following table reconciles  total reportable  segment income before interest
and other  charges  and income  taxes to net  income for three,  nine and twelve
months ended September 30,1999 and 1998:
<TABLE>
<CAPTION>
                                   Three Months               Nine Months           Twelve Months
                                 Ended September 30,       Ended Septembe 30,      Ended September 30,
                             ------------------------  ------------------------  ------------------------

                                   1999       1998         1999       1998           1999       1998
(In thousands)                   ========   ========     ========    ========     ========    ========
<S>                              <C>        <C>         <C>         <C>           <C>         <C>
Total segment profit             $ 91,598   $ 99,818    $ 336,998   $ 303,492     $465,596    $423,394
Interest expense, net            (42,376)   (33,077)    (119,378)    (94,522)    (153,660)   (125,887)
Minority interests                (5,415)         --     (13,539)          --     (13,539)          --
Dividends requirements on
      preferred stock             (2,071)    (2,122)      (6,264)     (6,417)      (8,385)     (8,588)
                                 --------   --------     --------    --------     --------    --------
Income before income taxes         41,736     64,619      197,817     202,553      290,012     288,919
Less: income taxes                 13,781     21,492       70,359      69,259      101,962      99,719
                                 --------   --------     --------    --------    ---------    --------
Net income                        $27,955    $43,127     $127,458    $133,294     $188,050    $189,200
                                 ========   ========     ========    ========     ========    ========

</TABLE>


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

Results of Operations

Holding Company

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

Operating Revenues

      Twelve months ended September 30, 1999.  Total operating  revenues for the
twelve  months ended  September  30, 1999 were $26.8  million  higher than total
operating  revenues for the twelve months ended September 30, 1998. Gas revenues
were  $1.5  billion,  which  represented  a  $245.5  million  increase  from the
comparable  period ended  September 30, 1998. This increase was primarily due to
the  inclusion of $197.9  million gas  revenues  from BSG,  increased  marketing
revenues as a result of the TPC  acquisition  and  increased  deliveries  of gas
transported for others,  partially  offset by decreased gas sales to residential
and commercial customers as a result of warmer weather during the fourth quarter
of 1998,  decreased  purchased  gas costs per  dekatherm  (dth),  decreased  gas
transition costs and decreased sales to industrial customers.  Electric revenues
were $1.2 billion,  which  represented a $291.5  million  decrease from electric
revenues for the comparable  period ended  September 30, 1998. This decrease was
mainly due to a decrease in  wholesale  electric  marketing  volumes,  partially
offset by increased  electric sales to residential and commercial  customers due
to warmer  weather  during  the third  quarter of 1999 and  increased  costs per
kilowatt-hour  (kwh).  Water  revenues were $95.8 million,  which  represented a
$14.5  million  increase  from water  revenues for the  comparable  period ended
September 30, 1998.  This increase was primarily due to increased  water volumes
sold and to increased water rates for IWC that became effective on April 8, 1998
and April 8, 1999.  Products and Services  revenues were $255.8  million,  which
represented a $58.3 million increase from Products and Services revenues for the
comparable period ended September 30, 1998. This increase reflects revenues from
a new energy related project which began  commercial  operations in August 1998,
increased pipeline construction activity and increased line locating and marking
activity.

      Nine months ended  September 30, 1999.  Total  operating  revenues for the
nine  months  ended  September  30,  1999 were $80.7  million  higher than total
operating revenues for the nine months ended September 30, 1998,  representing a
3.7%  increase.  Gas revenues  were $1.1  billion,  which  represented  a $296.2
million  increase from the  comparable  period ended  September  30, 1998.  This
increase was primarily  due to the  inclusion of $197.9  million in gas revenues
from BSG,  increased  marketing  revenues  as a result  of the TPC  acquisition,
increased  gas  sales  to  residential  and  commercial   customers,   increased
deliveries of gas transported for others partially offset by decreased gas costs
per dth and decreased  transition costs.  Electric revenues were $865.4 million,
which  represented a $270.8  million  decrease  from electric  revenues from the
comparable  period ended  September  30, 1998.  This  decrease was mainly due to
decreased  wholesale electric marketing volumes in the 1999 period,  compared to
the 1998 period partially  offset by increased sales to residential,  commercial
and industrial  customers and increased costs per kwh. Water revenues were $74.8
million,  which represented a $11.8 million increase from water revenues for the
comparable  period ended  September 30, 1998. This increase was primarily due to
increased  water  volumes sold and to increased  water rates for IWC that became
effective on April 8, 1998 and April 8, 1999.  Products  and  Services  revenues
were $192.2 million,  which  represented a $43.4 million  increase from Products
and Services  revenues for the comparable  period ended September 30, 1998. This
increase  reflects  revenues  from a new  energy  related  project  which  began
commercial  operations in August 1998, increased pipeline  construction activity
and increased line locating and marking activity.

      Three months ended September 30, 1999.  Total  operating  revenues for the
three  months  ended  September  30,  1999 were $59.8  million  lower than total
operating revenues for the three months ended September 30, 1998, representing a
8.0%  decrease.  Gas revenues  were $265.4  million,  which  represented a $65.9
million increase from gas revenues for the comparable period ended September 30,
1998.  This  increase was  primarily  due to the  inclusion of $28.8  million of
operating revenues from BSG, increased  marketing revenues primarily as a result
of the TPC  acquisition,  increased  gas  sales to  residential  and  commercial
customers and increased gas costs per dth,  partially  offset by decreased sales
to  industrial   customers.   Electric  revenues  were  $324.3  million,   which
represented a $144 million  decrease from electric  revenues for the  comparable
period  ended  September  30,  1998.  This  decrease was mainly due to decreased
wholesale  electric  marketing volumes in the 1999 period,  compared to the 1998
period,  partially  offset  by  increased  sales to  commercial  and  industrial
customers and increased costs per kwh. Water revenues were $29.9 million,  which
represented  a $5.5 million  increase  from water  revenues  for the  comparable
period ended  September  30, 1998.  This increase was primarily due to increased
water volumes sold and to increased water rates for IWC that became effective on
April 8,  1999.  Products  and  Services  revenues  were  $68.4  million,  which
represented a $12.7 million increase from Products and Services revenues for the
comparable period ended September 30, 1998. This increase reflects revenues from
a new energy related project which began  commercial  operations in August 1998,
increased pipeline construction activity and increased line locating and marking
activity.

      The basic steel industry accounted for 16.44% of all natural gas delivered
(including  volumes  transported)  and 24.60% of all  electric  sales during the
twelve months ended September 30, 1999.

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

                                                   Variations from Prior Periods
                                                -------------------------------------
                                          September 30, 1999 Compared to September 30, 1998
                                       ------------------------------------------------------
                                              Three              Nine           Twelve
(In thousands)                                Months            Months          Months
                                           ==========         ==========      ==========
<S>                                         <C>              <C>             <C>
Gas Revenue
  Pass through of net changes in
    purchased gas costs, gas storage,
    and storage transportation costs        $   8,853        $  (17,111)     $  (46,126)
  Gas transition costs                        (1,137)            (3,238)         (6,732)
  Changes in sales levels                     (9,866)              (323)        (50,780)
  Gas transported                               (252)                765           6,760
  Bay State Gas Acquisition                    28,804            197,938         197,938
  Gas Wholesale Marketing                      39,555            118,196         144,432
                                           ----------         ----------      ----------
Gas Revenue Change                             65,957            296,227         245,492
                                           ----------         ----------      ----------
Electric Revenue  -
  Pass through of net changes
     in fuel costs                             12,128              9,312           9,078
  Changes in sales levels                      14,315             25,736          24,896
  Wholesale electric                        (170,467)          (305,854)       (325,466)
                                           ----------         ----------      ----------
Electric Revenue Change                     (144,024)          (270,806)       (291,492)
                                           ----------         ----------      ----------
Water Revenue Change                            5,520             11,854          14,521
                                           ----------         ----------      ----------
Products and Services Revenues -
  Pipeline construction                         2,631              8,244          10,589
  Locate and marking                            1,768              3,452           5,332
  Other                                         8,348             31,716          42,388
                                           ----------         ----------      ----------
Products and Services Revenue Change           12,747             43,412          58,309
                                           ----------         ----------      ----------
   Total Revenue Change                     $(59,800)        $    80,687     $    26,830
                                           ==========         ==========      ==========

</TABLE>


Cost of Sales

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

      Gas Costs.  Total gas costs for the twelve months ended September 30, 1999
increased  $135.7 million over the twelve months ended  September 30, 1998. This
increase  reflects  the  inclusion  of gas  costs of $95.7  million  for BSG and
increased gas marketing activities,  partially offset by decreased purchased gas
costs per dth for the Energy Utilities.  The gas costs for the nine months ended
September  30, 1999  increased  by $175.9  million,  from gas costs for the nine
months ended  September 30, 1998.  This  increase  reflects the inclusion of gas
costs of $95.7 million for BSG and increased gas marketing  activities partially
offset by decreased  purchased gas costs per dth for the Energy  Utilities.  The
gas costs for the three  months  ended  September  30, 1999  increased  by $48.1
million,  from gas costs for the three months  ended  September  30, 1998.  This
increase reflects the inclusion of gas costs of $7.5 million for BSG,  increased
gas  marketing  activities  and  increased  gas  cost  per dth  for  the  Energy
Utilities.

      Fuel and Purchased  Power.  The cost of fuel used for electric  generation
decreased  during the twelve months ended September 30, 1999 and the nine months
ended  September  30,  1999 due to  decreased  fuel costs,  partially  offset by
increased  electric  generation.  The cost of fuel for the  three  months  ended
September  30,  1999 was  relatively  unchanged  from  the  three  months  ended
September 30, 1998. Purchased power decreased by $310.6, $289 and $151.4 million
for the twelve,  nine and three months ended  September 30, 1999,  respectively,
compared to the comparable  periods ended  September 30, 1998,  primarily due to
decreased power purchased for wholesale electric marketing activity.

     Cost of Sales:  Products and  Services.  The cost of sales for the Products
and  Services  subsidiaries  during  the  twelve,  nine and three  months  ended
September 30, 1999 were $30.7, $25.0 and $8.4 million higher, respectively, than
in the comparable  periods ended September 30, 1998.  These increases  reflected
the  inclusion of cost of sales for other  Products  and  Services  subsidiaries
acquired  in  the  BSG  acquisition  and  increased  activity  at  SM&P  Utility
Resources,  Inc.  (SM&P)  and Miller  Pipeline  Corporation  (Miller),  the line
locating and marking and pipeline construction subsidiaries.

Operating Margins

      Twelve months ended September 30, 1999.  Operating  margins for the twelve
months ended September 30, 1999 were $1.4 billion, an increase of $179.5 million
from the twelve months ended September 30, 1998. Gas operating margin was $109.8
million  higher than in the  comparable  period ended  September 30, 1998.  This
increase  reflects the February 1999  acquisition of BSG in the amount of $103.4
million and increased deliveries of gas transported for others, partially offset
by decreased sales to residential and commercial customers, reflecting unusually
warm  weather  during  the  fourth  quarter  of  1998,  and  decreased  sales to
industrial  customers.  Electric  operating margin was $27.5 million higher than
the comparable  period ended September 30, 1998.  This increase  occurred mainly
due to increased  sales to  residential  and  commercial  customers and improved
margins  on  wholesale  electric  marketing  transactions,  partially  offset by
decreased industrial sales. Water operating margin was $14.5 million higher than
in the comparable period ended September 30, 1998, due to increased volumes sold
and  increased  water rates for IWC that became  effective  on April 8, 1998 and
April 8, 1999.  Products and Services  operating margin was $27.6 million higher
than in the comparable period ended September 30, 1998,  reflecting a new energy
related project,  which began commercial operations in August 1998 and increased
pipeline construction activity.

      Nine months  ended  September  30,  1999.  Operating  margins for the nine
months ended  September 30, 1999 were $1.1 billion,  an increase of $174 million
from the nine months ended  September 30, 1998. Gas operating  margin was $120.3
million  higher than in the  comparable  period ended  September 30, 1998.  This
increase  reflects the February 1999  acquisition  of BSG in the amount of 102.4
million,  increased gas sales to residential customers and commercial customers,
reflecting  colder  weather  during  the first  quarter of 1999,  and  increased
deliveries of gas transported for others.  Electric  operating  margin was $23.5
million  higher than in the  comparable  period ended  September 30, 1998.  This
increase  occurred  mainly due to increased  sales to residential and commercial
customers and improved margins on wholesale power marketing transactions.  Water
operating  margin was $11.8 million higher than in the  comparable  period ended
September 30, 1998,  due to increased  volumes sold and increased  rates for IWC
became  effective  on April 8, 1998 and April 8,  1999.  Products  and  Services
operating  margin was $18.4 million higher than in the  comparable  period ended
September  30,  1998,  reflecting  a new energy  related  project,  which  began
commercial  operations  in  August  1998  and  increased  pipeline  construction
activity.

      Three months ended  September  30, 1999.  Operating  margins for the three
months  ended  September  30,  1999 were  $342.1  million,  an increase of $35.3
million from  operating  margins for the three months ended  September 30, 1998.
Gas operating margin was $17.8 million higher than gas operating margins for the
comparable period ended September 30, 1998. This increase reflected the February
1999  acquisition  of BSG in the  amount of $21.4  million.  Electric  operating
margin  was $7.6  million  higher  than the  electric  operating  margin for the
comparable  period ended  September  30, 1998.  This  increase was mainly due to
increased  sales to  residential  customers  and  improved  margins on wholesale
electric marketing transactions.  Water operating margin was $5.5 million higher
than water operating margins for the comparable period ended September 30, 1998,
due to  increased  water  volumes sold and  increased  rates for IWC that became
effective  on April 8, 1999.  Products and  Services  operating  margin was $4.3
million  higher than  Products and Services  margins for the  comparable  period
ended  September 30, 1998,  reflecting a new energy related  project which began
commercial  operations  in  August  1998  and  increased  pipeline  construction
activity.

Operating Expenses and Taxes

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

      Operation  expenses.  Operation  expenses  for  the  twelve  months  ended
September 30, 1999 were $77.3  million  higher than  operation  expenses for the
comparable period ended September 30, 1998. This increase reflects the inclusion
of $79.1  million of operation  expenses at BSG and  subsidiaries  and increased
operation  expenses  at Primary  due to the  operation  of a new energy  related
project and IWC Resources Corporation (IWCR) partially offset by a $13.0 million
insurance  settlement  related to  manufactured  gas plant site  cleanup  costs.
Operation  expenses  for the nine  months  ended  September  30, 1999 were $76.1
million higher than operation expenses for the comparable period ended September
30, 1998.  This  increase  reflects the  inclusion of $79.1 million of operation
expenses at BSG and  subsidiaries  increased  operation  expenses at Primary and
IWCR  partially  offset  by a $13.0  million  insurance  settlement  related  to
manufactured  gas plant site  cleanup  costs.  Operation  expenses for the three
months  ended  September  30,  1999 were $15.3  million  higher  than  operation
expenses for the comparable  period ended  September 30, 1998. This increase was
primarily due to the inclusion of $26.9 million of operating expenses at BSG and
Primary partially offset by the $13.0 million insurance settlement.

      Maintenance  expenses.  Maintenance  expenses for the twelve  months ended
September 30, 1999, were $1.2 million lower than for the comparable period ended
September 30, 1998.  Maintenance  expenses  were lower  primarily as a result of
decreased  electric  production  facility  maintenance  costs and  decreased gas
distribution  facilities maintenance costs, partially offset by the inclusion of
maintenance  expenses  for BSG.  Maintenance  expenses for the nine months ended
September  30, 1999,  were $3.6 million  higher than for the  comparable  period
ended September 30, 1998 primarily due to the inclusion of maintenance  expenses
for BSG. Maintenance expenses for the three months ended September 30, 1999 were
relatively unchanged from the comparable period ended September 30, 1998.

      Depreciation  and  amortization  expenses.  Depreciation  and amortization
expenses for the twelve months, nine months and three months ended September 30,
1999 were $39.9, $37.1 and $13.6 million higher, respectively, than depreciation
and amortization  expenses for the comparable  periods ended September 30, 1998.
These higher  expenses  reflect the inclusion of depreciation  and  amortization
expenses of BSG and property additions.

Other Income (Deductions)

       Interest  charges for the twelve  months,  nine  months and three  months
ended   September  30,  1999  were  $27.8,   $24.9  and  $9.3  million   higher,
respectively,  than interest  charges in the comparable  periods ended September
30, 1998.  These increases  reflect the inclusion of interest charges of BSG and
increased short-term and long-term borrowings.  Additionally, minority interests
reflects  dividends  paid on Preferred  Securities in  connection  with the PIES
offering during the nine-month period ended September 30, 1999.

       Other, net for the twelve, nine and three months ended September 30, 1999
were $10.5, $12.4 and $12.8 million lower, respectively,  than Other, net in the
comparable  periods ended September 30, 1998.  These decreases  primarily result
from a charge of $16.5 million in the third quarter of 1999 related to an equity
exploration and production  investment,  partially offset by higher net gains on
disposition of businesses and  properties  and power trading  activities,  which
began in early 1999.

Liquidity and Capital Resources

           Generally,   cash  flow  from  operations  has  provided   sufficient
liquidity to meet current  operating  requirements.  But because the utility and
utility construction business is seasonal in nature,  commercial paper is issued
for short-term financing. As of September 30, 1999 and December 31, 1998, $261.4
million and $193.7 million of commercial  paper was  outstanding,  respectively.
The  weighted  average  interest  rate of  commercial  paper  outstanding  as of
September 30, 1999 was 5.56%.

       NiSource  and its  subsidiaries  may  borrow  under two  five-year,  $100
million revolving credit agreements that terminate on September 23, 2003 and two
364-day $100 million revolving credit agreements that terminate on September 23,
2000.  The  364-day  agreements  may be extended at  expiration  for  additional
periods of 364 days.  Under these  agreements,  funds are borrowed at a floating
rate of interest or, under  certain  circumstances,  at a fixed rate of interest
for short-term periods.  These agreements provide financing  flexibility and may
be used to support the issuance of  commercial  paper.  At  September  30, 1999,
there were no borrowings outstanding under these agreements.

      In addition,  various  lines of credit are  maintained.  At September  30,
1999, there were no borrowings under the uncommitted finance facility.  Lines of
credit for up to $199.9 million are held with lenders at either their commercial
prime or market lending rates.  At September 30, 1999,  there were $41.1 million
of borrowings  outstanding  under these lines of credit with a weighted  average
interest  rate of 6.13%.  As of December 31, 1998,  there were $84.1  million of
borrowings outstanding under these lines of credit.

     NiSource and its subsidiaries  maintain money market lines of credit for up
to $403.5  million.  As of September 30, 1999,  $103.9  million was  outstanding
under these money market lines of credit with a weighted  average  interest rate
of 5.57%.  At  December  31,  1998,  there were  $127.3  million  of  borrowings
outstanding under these money market lines of credit.

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

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

     In September  1999,  Capital  Markets  issued $160 million  Puttable  Reset
Securities  (PURS)  in an  underwritten  public  offering  and the  underwriters
acquired a call option to  purchase  the PURS on  September  28,  2000.  The net
proceeds  from the sale of the PURS and the call option of $162.4  million  were
used to  refinance  short-term  indebtedness  incurred  in  connection  with the
acquisition of BSG in February 1999. See Note 18 "Short-Term Borrowings," to the
consolidated financial statements for a description of the PURS.

      NiSource  has made an offer to acquire  CEG for $6.1  billion,  or $74 per
share of CEG common stock, in cash. A commitment  letter has been accepted under
which  certain  financial   institutions  have  agreed,   subject  to  specified
conditions,  to provide $6.5 billion to finance the proposed acquisition of CEG.
No assurance can be given as to whether, or on what terms, NiSource will acquire
CEG.

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

Market Risk Sensitive Instruments and Positions

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

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

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

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

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

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

     The daily net  commodity  position  consists  of natural  gas  inventories,
commodity  purchase and sales  contracts and derivative  financial and commodity
instruments.  The fair market value of this portfolio is a summation of the fair
market values  calculated for each  commodity,  whose net values are measured by
quotes from energy exchange markets and over-the-counter markets. Based upon the
fair market value of this  portfolio as of September  30, 1999,  if the electric
and natural gas market  prices  dropped by 10 percent,  this change would reduce
NiSource's  net income by  approximately  $1.3  million.  Any such  movements in
prices, however, are not indicative of actual results and are subject to change.

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

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

Year 2000 Costs

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

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

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

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

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

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

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

Competition and Regulatory Changes

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

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

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

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

     At the state  level,  the  Indiana  Utility  Regulatory  Commission  (IURC)
approved in 1997  Northern  Indiana's  Alternative  Regulatory  Plan (ARP) which
implemented new rates and services that included, among other things, unbundling
of  services  for  additional   customer  classes  (primarily   residential  and
commercial  users),  negotiated  services  and  prices,  a  gas  cost  incentive
mechanism,  and a price  protection  program.  The gas cost incentive  mechanism
allows  Northern  Indiana to share any cost savings or cost  increases  with its
customers  based  upon a  comparison  of  Northern  Indiana's  actual gas supply
portfolio cost to a market-based  benchmark price. Phase I of Northern Indiana's
Customer  Choice  Pilot  Program  ended on March 31,  1999.  This pilot  program
offered a limit of 82,000  residential  customers  within St.  Joseph County and
10,000  commercial  customers  throughout the NiSource service area the right to
choose alternative gas suppliers. Phase II of Northern Indiana's Customer Choice
Pilot Program  commenced April 1, 1999 and will continue for a one-year  period.
During this phase,  Northern Indiana is offering  customer choice to all 660,000
residential  and  50,000  commercial   customers   throughout  its  gas  service
territory.  A limit of 150,000  residential and 20,000 commercial  customers are
eligible to enroll in Phase II of the program.  The IURC order allows NiSource's
natural  gas  marketing  subsidiary  to  participate  as a supplier of choice to
Northern  Indiana  customers.  In  addition,  as  Northern  Indiana  has allowed
residential and commercial customers to designate alternative gas suppliers,  it
has also  offered  new  services  to all classes of  customers  including  price
protection,  negotiated  sales and  services,  gas lending and parking,  and new
storage services.

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

Impact of Accounting Standards

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

Forward Looking Statements

     This report contains forward looking  statements  within the meaning of the
securities laws. Forward looking statements include terms such as "may," "will,"
"expect,"  "believe,"  "plan" and other similar terms.  NiSource  cautions that,
while it believes  such  statements to be based on  reasonable  assumptions  and
makes such  statements  in good  faith,  you  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,  year 2000 issues,  the economic
climate, regional, commercial,  industrial and residential growth in the service
territories  served by NiSource's  subsidiaries,  customers'  usage patterns and
preferences,  the  speed and  degree to which  competition  enters  the  utility
industry,  the  timing  and extent of  changes  in  commodity  prices,  changing
conditions  in the capital and equity  markets and other  uncertainties,  all of
which are difficult to predict, and many of which are beyond NiSource's control.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

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

                                                               PART II.
                                                           OTHER INFORMATION

Item 1.   Legal Proceedings.

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

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

Item 3.  Defaults Upon Senior Securities.
         None

Item 4.  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- Letter Agreement dated October 25, 1999 between Mr. Roger
                  A. Young and NiSource Inc.

    Exhibit 10.2- Letter Agreement Dated April 9, 1999 between Mr. Joseph L.
                  Turner, Jr. and NiSource Inc.

    Exhibit 10.3- Equity Forward  Purchase  Transaction  dated November 9, 1999
                   between Scotia Capital (USA) Inc.and NiSource Inc.

    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 August 31, 1999. All events were
                 reported  under Item 5, Other Events.  A report on Form 8-K was
                 filed  September 28, 1999.  All events were reported under Item
                 5, Other Events.  A report on Form 8-K was filed  September 30,
                 1999. All events were reported under Item 5, Other Events.


Signatures

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


                                NiSource Inc.

                                    (Registrant)

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



Date:  November 10, 1999