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 March 31, 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 April 30, 1999, 124,885,481 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 March 31,  1999,  and
December 31, 1998,  and the related  consolidated  statements of income,  common
shareholders' equity and cash flows for the three and twelve month periods ended
March  31,  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 March 31, 1999,  and  December 31, 1998,  and the
results of their  operations and their cash flows for the three and twelve month
periods  ended March 31, 1999 and 1998, in conformity  with  generally  accepted
accounting principles.


                                           /s/  Arthur Andersen LLP

Chicago, Illinois
April 28, 1999
PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
                                                                  March 31,        December 31,
Assets                                                              1999               1998
                                                                ==========          ==========
<S>                                                          <C>                 <C>  
(In thousands)
Property, Plant and Equipment:
 Utility Plant, (including Construction Work in
   Progress of  $257,307 and $197,112, respectively)       
    Electric                                                 $    4,171,978      $    4,154,060
    Gas                                                           2,781,687           1,447,945
    Water                                                           690,877             663,355
    Common                                                          361,077             364,822
                                                          ----------------- -------------------
                                                                  8,005,619           6,630,182
    Less -Accumulated depreciation and amortization               3,262,784           2,968,078
                                                          ----------------- -------------------
      Net Utility Plant                                           4,742,835           3,662,104
                                                          ----------------- -------------------
 Other property, at cost, net of accumulated depreciation            99,978              86,565
                                                          ----------------- -------------------
      Net Property, Plant and Equipment                           4,842,813           3,748,669
                                                          ----------------- -------------------
Investments:
 Investments, at equity                                             129,873             111,340
 Investments, at cost                                                40,008              41,609
 Other investments                                                   36,287              28,702
                                                          ----------------- -------------------
      Total Investments                                             206,168             181,651
                                                          ----------------- -------------------
Current Assets:
 Cash and cash equivalents                                           64,482              60,848
 Accounts receivable, less reserve of  $18,517 and
     $8,984, respectively                                           376,139             261,971
 Other receivables                                                   36,087              31,780
 Gas cost adjustment clause                                               -              45,738
 Materials and supplies, at average cost                             66,507              62,818
 Electric production fuel, at average cost                           25,179              32,402
 Natural gas in storage                                              46,511              69,640
 Prepayments and other                                               47,015              41,670
                                                          ----------------- -------------------
      Total Current Assets                                          661,920             606,867
                                                          ----------------- -------------------
Other Assets:
 Regulatory assets                                                  224,982             209,059
 Intangible assets, net of accumulated amortization                  80,597              65,039
 Prepayments and other                                              209,924             175,218
                                                          ----------------- -------------------
      Total Other Assets                                            515,503             449,316
                                                          ----------------- -------------------
                                                             $    6,226,404      $    4,986,503
                                                                 ==========          ==========
</TABLE>

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



<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
                                                                  March 31,        December 31,
Capitalization and Liabilities                                      1999                1998
                                                                ===========         ===========
  (In thousands)
<S>                                                          <C>                 <C>
Capitalization:                                                     
Common shareholders' equity
  (See accompanying statement)                               $    1,371,615      $    1,149,708
Preferred stocks, excluding amounts due within
     one year-
     Series without mandatory redemption provisions                  85,613              85,613
     Series with mandatory redemption provisions                     56,435              56,435
Company-obligated manditorily redeemable preferred securities
     of subsidiary trust holding solely Company debentures          345,000                 -
Long-term debt, excluding amounts due within one year             1,967,400           1,667,965
                                                          -----------------   -----------------
           Total Capitalization                                   3,826,063           2,959,721
                                                          -----------------   -----------------
Current Liabilities:
 Current portion of long-term debt                                   39,122               6,790
 Short-term borrowings                                              249,973             411,040
 Accounts payable                                                   255,003             251,399
 Dividends declared on common and preferred stocks                   33,202              31,072
 Customer deposits                                                   25,547              22,199
 Taxes accrued                                                      125,571              44,939
 Interest accrued                                                    29,743              21,202
 Fuel adjustment clause                                               4,023               6,279
 Gas cost adjustment clause                                           2,509                   -
 Accrued employment costs                                            39,767              52,121
 Other accruals                                                      98,462              39,022
                                                          -----------------   -----------------
      Total Current Liabilities                                     902,922             886,063
                                                          -----------------   -----------------
Other:
 Deferred income taxes                                              949,733             667,167
 Deferred investment tax credits, being amortized over
   life of related property                                         100,750              98,177
 Deferred credits                                                   111,028              68,046
 Customer advances and contributions in aid of construction         120,528             118,778
 Accrued liability for postretirement benefits                      147,559             143,870
 Other noncurrent liabilities                                        67,821              44,681
                                                          -----------------   -----------------
      Total Other Liabilities                                     1,497,419           1,140,719
                                                          -----------------   -----------------
Commitments and Contingencies

                                                             $    6,226,404      $    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

 (Dollars in thousands, except for per share amounts)
                                                       Three Months                 Twelve Months
                                                     Ended March 31,               Ended March 31,
                                                   --------------------          -------------------
                                                      1999         1998           1999         1998
                                                   ========     ========        ========     ========
<S>                                               <C>          <C>           <C>          <C> 
Operating Revenues:     
  Gas                                             $ 553,896    $ 398,916     $ 1,364,755  $ 1,198,305
  Electric                                          264,330      322,912       1,368,018    1,246,857
  Water                                              20,869       17,709          87,139       78,452
  Products and Services                              52,397       39,807         225,014      182,321
                                                   ---------    ---------       ---------   ---------
                                                    891,492      779,344       3,044,926    2,705,935
                                                   ---------    ---------       ---------   ---------
Cost of Sales:
 Gas costs                                          379,590      294,607       1,010,021      889,165
 Fuel for electric generation                        58,298       55,594         253,353      235,734
 Power purchased                                     22,050       90,277         344,063      270,513
 Products and Services                               25,589       19,932         110,047       93,090
                                                   ---------    ---------       ---------   ---------
                                                    485,527      460,410       1,717,484    1,488,502
                                                   ---------    ---------       ---------   ---------
Operating Margin                                    405,965      318,934       1,327,442    1,217,433
                                                   ---------    ---------       ---------   ---------
Operating Expenses and Taxes:
  Operation                                         126,829       96,171         430,252      400,720
  Maintenance                                        22,309       18,947          77,992       77,015
  Depreciation and amortization                      72,909       63,274         266,109      254,734
  Taxes (except income)                              28,009       23,428          92,788       85,883
                                                   ---------    ---------       ---------   ---------
                                                    250,056      201,820         867,141      818,352
                                                   ---------    ---------       ---------   ---------
Operating Income                                    155,909      117,114         460,301      399,081
                                                   ---------    ---------       ---------   ---------
Other Income (Deductions):
   Interest expense, net                           (36,688)     (30,330)       (135,162)    (125,033)
   Minority interests                               (2,708)           --         (2,708)           --
   Dividend requirements on preferred stock
    of subsidiaries                                 (2,116)      (2,167)         (8,487)      (8,691)
   Other, net                                         7,084        8,448           9,220       14,813
                                                   ---------    ---------       ---------   ---------
                                                   (34,428)     (24,049)       (137,137)    (118,911)
                                                   ---------    ---------       ---------   ---------
Income before income taxes                          121,481       93,065         323,164      280,170
                                                   ---------    ---------       ---------   ---------
Income Taxes                                         44,922       32,343         113,441       99,437
                                                   ---------    ---------       ---------   ---------
Net Income                                         $ 76,559     $ 60,722        $ 209,723   $ 180,733

Average common shares outstanding - basic       122,646,186  123,872,613     120,475,670  125,021,821

Basic earnings per average common share            $   0.62     $   0.49         $  1.7      $   1.44
                                                   ========     ========        ========     ========
Diluted earnings per average common share          $   0.62     $   0.48         $  1.72     $   1.44
                                                   ========     ========        ========     ========
Dividends declared per common share                $  0.255     $  0.240        $  0.990     $  0.930
                                                   ========     ========        ========     ========

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

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

                                                              Additional
(Dollars in thousands)             Common         Treasury      Paid-in      Retained
Three Months Ended                 Shares          Shares       Capital      Earnings        Other
========================         ==========      ==========   ==========    ==========    ==========
<S>                              <C>             <C>          <C>           <C>           <C>       
Balance, January 1, 1998         $  870,930      $(363,943)   $   89,768    $  667,790    $  (2,624)
Comprehensive Income:
  Net income                                                                    60,722
  Other comprehensive income,
   net of tax:
     Gain/loss on available for sale
       securities:
     Unrealized (net of income
       tax of $684)
     Realized
  Gain (loss) on foreign currency
     translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
  Common shares                                                                (29,929)
Treasury shares acquired                           (23,298)            2
Issued:
 Employee stock purchase plan                            57          120
 Long-term incentive plan                             3,175         (12)                        (34)
Amortization of
  unearned compensation                                                                          499                
Other                                                                            (655)
                                 ----------      ----------   ----------    ----------    ----------
Balance, March 31, 1998          $  870,930      $(384,009)   $   89,878    $  697,928    $  (2,159)         
                                 ==========      ==========   ==========    ==========    ==========   

Balance, January 1, 1999         $  870,930      $(559,027)   $   94,181    $  744,309    $  (1,815)
Comprehensive Income:
  Net income                                                                    76,559
  Other comprehensive income,
   net of tax:
     Gain/loss on available for sale
      securities:
     Unrealized (net of income
       tax of $133)
     Realized (net of income tax
       of  $78)
  Gain (loss) on foreign currency
     translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
   Common shares                                                                (32,107)
Treasury shares acquired                          (107,658)
Issued:
 Employee stock purchase plan                           115          326
 Long-term incentive plan                             1,106          121                       (382)
 Bay State Gas Acquisition                          205,896      109,787
 Amortization of
  unearned compensation                                                                          723
Equity contract costs                                           (32,829)
Other                                                                            (210)
                                 ----------      ----------   ----------    ----------    ----------
Balance, March 31, 1999          $  870,930      $(459,568)   $  171,586    $  788,551    $  (1,474)        
                                 ==========      ==========   ==========    ==========    ==========


<CAPTION>
                                Accumulated                                           Shares
                                  Other                                     ------------------------
   Three Months Ended         Comprehensive                 Comprehensive     Common       Treasury
       (continued)                Income            Total       Income        Shares        Shares
========================         ==========      ==========   ==========    ==========    ==========
<CAPTION>
<S>                              <C>             <C>          <C>         <C>          <C> 
Balance, January 1, 1998         $    2,867      $1,264,788               $147,784,218 $(23,471,554)
Comprehensive Income:
  Net income                                         60,722   $   60,722
  Other comprehensive income,
   net of tax:
     Gain/loss on available for sale
       securities:
     Unrealized (net of income
       tax of $684)                   1,119           1,119        1,119
     Realized
  Gain (loss) on foreign currency
     translation:
       Unrealized                     (210)           (210)        (210)
       Realized                         186             186          186
                                                              ----------
Total Comprehensive Income                                    $   61,817
Dividends:                                                    ==========
  Common shares                                     (29,929)
Treasury shares acquired                            (23,296)                               (910,574)
Issued:
 Employee stock purchase plan                           177                                    7,158
 Long-term incentive plan                             3,129                                  197,044
   Amortization of
  unearned compensation                                 499                                                          
 Other                                                (655)
                                 ----------      ----------                 ----------    ----------
Balance, March 31, 1998          $    3,962      $1,276,530               $147,784,218 $(24,177,926)  
                                 ==========      ==========                 ==========    ==========

Balance, January 1, 1999         $    1,130      $1,149,708               $147,784,218 $(30,253,520)
Comprehensive Income:
  Net income                                         76,559   $   76,559
  Other comprehensive income,
   net of tax:
     Gain/loss on available for sale
      securities:
     Unrealized (net of income
       tax of $133)                     217             217          217
     Realized (net of income tax
       of  $78)                         127             127          127
  Gain (loss) on foreign currency
     translation:
       Unrealized                      (70)            (70)         (70)
       Realized                         186             186          186
                                                              ----------
Total Comprehensive Income                                    $   77,019
                                                              ==========
Dividends:
   Common shares                                   (32,107)
Treasury shares acquired                          (107,658)                              (3,846,630)
Issued:
 Employee stock purchase plan                           441                                   14,484
 Long-term incentive plan                               845                                   58,417
 Bay State Gas Acquisition                          315,683                               11,042,579
     Amortization of
  unearned compensation                                 723
Equity contract costs                              (32,829)
Other                                                 (210)
                                 ----------      ----------                 ----------   -----------
Balance, March 31, 1999          $    1,590      $1,371,615               $147,784,218 $(22,984,670)   
                                 ==========      ==========                 ==========    ==========

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

                                                              Additional
(Dollars in thousands)             Common         Treasury     Paid-in       Retained
Twelve Months Ended                Shares          Shares      Capital       Earnings        Other
========================         ==========      ==========   ==========    ==========    ==========

<CAPTION>
<S>                              <C>             <C>          <C>           <C>           <C> 
Balance, April 1, 1997           $  870,930      $(295,980)   $   88,118    $  635,900    $  (4,128)
Comprehensive Income:
  Net income                                                                   180,733
  Other comprehensive income,
   net of tax:
     Gain/loss on available for sale
       securities:
     Unrealized (net of income
       tax of $1,699)
     Realized
  Gain (loss) on foreign currency
     translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
  Common shares                                                               (117,959)
Treasury shares acquired                           (99,884)         (33)
Issued:
 Employee stock purchase plan                           255          431
 Long-term incentive plan                             7,482           10                       (126)
 NEM Acquisition                                      4,118        1,351
 Amortization of
  unearned compensation                                                                        2,095
  Other                                                                1         (746)
                                 ----------      ----------   ----------    ----------    ----------
Balance, March 31, 1998          $  870,930      $(384,009)   $   89,878    $  697,928    $  (2,159)         
                                 ==========      ==========   ==========    ==========    ==========

Balance April 1, 1998            $  870,930      $(384,009)   $   89,878    $  697,928    $  (2,159)
Comprehensive Income:
  Net income                                                                   209,723
  Other comprehensive income,
   net of tax:
     Gain/loss on available for sale
      securities:
     Unrealized (net of income
       tax of $322)
     Realized (net of income tax
       of  $1,262)
  Gain (loss) on foreign currency
     translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
   Common shares                                                               (118,774)
Treasury shares acquired                          (288,336)
Issued:
 Employee stock purchase plan                           399        1,095
 Long-term incentive plan                             6,482          708                     (1,432)
 Bay State Gas Acquisition                          205,896      109,787
   Amortization of
  unearned compensation                                                                        2,117
Equity contract costs                                           (32,829)
Other                                                              2,946         (325)
                                 ----------      ----------   ----------    ----------    ----------
Balance, March 31, 1999          $  870,930      $(459,568)   $  171,585    $  788,552    $  (1,474)        
                                 ==========      ==========   ==========    ==========    ==========


                                Accumulated                                     Shares
                                   Other                                    ------------------------
   Twelve Months Ended        Comprehensive                  Comprehensive    Common       Treasury
       (continued)                 Income         Total         Income        Shares        Shares
========================         ==========      ==========   ==========    ==========    ==========
 Balance, April 1, 1997          $    2,276      $1,297,116               $147,784,218 $(20,363,752)
Comprehensive Income:
  Net income                                        180,733   $  180,733
  Other comprehensive income,
   net of tax:
     Gain/loss on available for sale
       securities:
     Unrealized (net of income
       tax of $1,699)                 2,779           2,779        2,779
     Realized
  Gain (loss) on foreign currency
     translation:
       Unrealized                   (1,279)         (1,279)      (1,279)
       Realized                         186             186          186
                                                              ----------
Total Comprehensive Income                                    $  182,419
                                                              ==========
Dividends:
  Common shares                                   (117,959)
Treasury shares acquired                           (99,917)                              (4,595,274)
Issued:
 Employee stock purchase plan                           686                                   32,026
 Long-term incentive plan                             7,366                                  479,010
  NEM Acquisition                                     5,469                                  270,064
 Amortization of
  unearned compensation                               2,095                                      
Other                                                 (745)
                                 ----------      ----------                 ----------    ----------
Balance, March 31, 1998          $    3,962      $1,276,530               $147,784,218 $(24,177,926)          
                                 ==========      ==========                 ==========    ==========

Balance April 1, 1998            $    3,962      $1,276,530               $147,784,218 $(24,177,926)
Comprehensive Income:
  Net income                                        209,724     $209,724
  Other comprehensive income,
   net of tax:
     Gain/loss on available for sale
      securities:
     Unrealized (net of income
       tax of $322)                     527             527          527
     Realized (net of income tax
       of  $1,262)                  (2,068)         (2,068)      (2,068)
  Gain (loss) on foreign currency
     translation:
       Unrealized                   (1,017)         (1,017)      (1,017)
       Realized                         186             186          186
                                                              ----------
Total Comprehensive Income                                      $207,352
                                                              ==========
Dividends:
   Common shares                                  (118,774)
Treasury shares acquired                          (288,336)                             (10,245,962)
Issued:
 Employee stock purchase plan                         1,494                                   50,122
 Long-term incentive plan                             5,758                                  346,517
 Bay State Gas Acquisition                          315,683                               11,042,579
 Amortization of
  unearned compensation                               2,117
Equity contract costs                              (32,829)
Other                                                 2,620
                                 ----------      ----------                 ----------    ----------
Balance, March 31, 1999          $    1,590      $1,371,615               $147,784,218 $(22,984,670)
                                 ==========      ==========                 ==========    ==========

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

 
</TABLE>


<TABLE>
Consolidated Statements of Cash Flows

<CAPTION>


                                                             Three Months                  Twelve Months
                                                              Ended March 31,              Ended March 31,
                                                          --------------------      ------------------------
                                                             1999        1998          1999         1998                     
                                                          ========     ========      ========     ========
<S>                                                      <C>          <C>           <C>          <C>
(In thousands)
Cash flows from operating activities:
 Net income                                              $  76,559    $   60,722    $ 209,723    $ 180,733
Adjustments to reconcile net income
 to net cash:
    Depreciation and amortization                           72,909        63,274      266,109      254,734
    Deferred federal and state
         income taxes, net                                (26,928)      (30,040)     (18,829)     (19,345)
    Deferred investment tax credits, net                   (1,887)       (1,821)      (7,427)      (7,395)
    Advance contract payment                                   475           475        1,900        1,900
    Other, net                                             (6,912)       (5,522)      (6,030)      (9,263)
 Change in certain assets and liabilities -*
    Accounts receivable, net                              (18,978)      (12,391)     (33,224)     (63,547)
    Other receivables                                      (4,307)      (20,590)      91,734      (45,626)
    Natural gas in storage                                  51,558       40,413        2,941       (3,005)
    Accounts payable                                      (55,918)      (13,470)     (22,663)     (87,687)
    Taxes accrued                                           94,139        80,313        3,993        5,940
    Gas cost adjustment clause                              74,347        52,019       66,581       50,014
    Accrued employment costs                              (20,628)      (16,296)     (11,010)          660
    Other accruals                                          31,450       (6,838)       26,548      (5,029)
    Other, net                                              21,340         (685)          440       59,818
                                                         ---------     ---------     --------    ---------
      Net cash provided by operating activities            287,219       189,563      570,786      312,902
                                                         ---------     ---------     --------    ---------
Cash flows provided by (used in)
  investing activities:
  Utility construction expenditures                       (58,115)      (48,203)    (250,237)    (220,553)
  Acquisition of businesses,
     net of cash acquired                                (562,266)             0    (562,266)            0
  Acquisition of minority interest                               0             0            0      (5,641)
  Proceeds from disposition of assets                       25,416         9,705       28,299       16,198
  Proceeds from settlement of litigation                         0             0            0       41,069
  Other, net                                              (16,263)      (25,916)     (42,485)     (61,384)
                                                         ---------     ---------     --------    ---------
      Net cash used in investing activities              (611,228)      (64,414)    (826,689)    (230,311)
                                                         ---------     ---------     --------    ---------
Cash flows provided by (used in)
 financing activities:
  Issuance of long-term debt                                78,255         6,371      119,264      528,301
 Retirement of long-term debt                              (4,718)       (2,547)     (97,802)    (325,682)
  Change in short-term debt                              (260,370)      (69,752)        6,400    (133,233)
  Retirement of preferred shares                                 0           (1)      (2,412)      (2,408)
  Proceeds from Corporate Premium
    Income Equity Securities, net                          334,650             0      334,650            0
  Issuance of common shares                                317,351         3,340      324,367       13,427
  Acquisition of treasury shares                         (107,658)      (23,296)    (288,336)     (99,789)
  Cash dividends paid on common shares                    (29,980)      (29,789)    (116,577)    (114,610)
 Other, net                                                    113           121          455        (497)
                                                         ---------     ---------     --------    ---------
      Net cash provided by (used in)
       financing activities                                327,643     (115,553)      280,009    (134,491)
                                                         ---------     ---------     --------    ---------
Net increase (decrease) in cash and
 cash equivalents                                            3,634         9,596       24,106     (51,900)

Cash and cash equivalents at
   beginning of the period                                  60,848        30,780       40,376       92,276
                                                         ---------     ---------     --------    ---------
Cash and cash equivalents at
   end of the period                                    $   64,482     $  40,376    $  64,482    $  40,376
                                                         =========     =========     ========    =========
 *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.,  formerly NIPSCO Industries,
Inc. (NiSource), 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."

     NiSource also provides non-regulated energy and utility-related services to
its customers  through its  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  services  and  products  that it provides  through the
Utilities   and  the  Products  and  Services   subsidiaries,   NiSource  has  a
wholly-owned  subsidiary,  NiSource Capital  Markets,  Inc.  (Capital  Markets).
Capital Markets engages in financing  activities for NiSource and certain of its
subsidiaries,  excluding  Northern  Indiana  Public  Service  Company  (Northern
Indiana).

     On April 1,  1999,  NiSource  acquired  TPC  Corporation,  a  Houston-based
natural gas marketing and storage company for  approximately  $150 million.  The
acquisition  will be  accounted  for as a  purchase,  with  the  purchase  price
allocated to the assets and  liabilities  acquired based on their estimated fair
values. TPC Corporation owns a 66% equity interest in Market Hub Partners, L.P.,
which stores natural gas in salt caverns.

(2) Summary of Significant Accounting Policies:

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

     On February  12,  1999,  NiSource  acquired  Bay State Gas  Company  (BSG).
Accordingly,  the  Consolidated  Financial  Statements and  disclosures  include
operating results from BSG from the date of acquisition  through March 31, 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.  NiSource  records  provisions for
losses on  construction  contracts,  if any,  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 and twelve-month periods ended March 31, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>


                                       Three Months                 Twelve Months
                                       Ended March 31,              Ended March 31,
                                   -----------------------    -----------------------
                                        1999       1998          1999        1998
                                     =======      =======       =======     =======
<S>                                   <C>          <C>           <C>          <C> 
Electric                              3.7%         3.6%          3.7%         3.6%
Gas                                   4.6%         5.1%          4.6%         5.1%
Water                                 2.0%         2.0%          2.0%         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.  These amounts
were $722.8  million and $185.4 million at March 31, 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 are recorded as goodwill.  Goodwill of $73.0
million and $61.9 million at March 31, 1999 and December 31, 1998, respectively,
is being amortized over a weighted average period of 32 years.  Other intangible
assets,  approximating  $12.8  million  and $7.7  million at March 31,  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
March 31, 1999 and  December  31, 1998 was  approximately  $5.2 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  March  31,  1999,  $100.0  million  of  accounts
receivable had been sold under a sales agreement which expires on May 31, 2002.

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

     Comprehensive Income.  Comprehensive income is reported in the Consolidated
Statements of Common  Shareholders' Equity. The components of accumulated other
comprehensive income include unrealized gains (losses),  net of income taxes, on
available for sale securities  ("securities")  and unrealized  gains (losses) on
foreign currency translation  adjustments ("foreign currency").  The accumulated
amounts for these components are as follows:
<TABLE>
<CAPTION>


                     April 1,        January 1,        March 31,        January 1,      March 31,
(In millions)         1997              1998             1998              1999           1999
                   ----------     -------------    -------------      ------------    -----------
<S>                    <C>             <C>              <C>               <C>            <C>  
Securities             $2.7            $  4.4           $  5.6            $ 3.6          $ 4.0
Foreign currency       $(.5)           $(1.6)           $(1.6)            $(2.5)         $(2.4)

</TABLE>


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

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

                                        Three Months           Twelve Months
                                       Ended March 31,        Ended March 31,
                                     ------------------      ------------------
(In thousands)                        1999     1998           1999         1998
                                    =======   =======        =======      =======
<S>                               <C>         <C>            <C>          <C>      
Income taxes                      $  1,465    $      0       $ 129,178    $ 116,849
Interest, net of amounts
 capitalized                      $ 31,351    $ 23,549       $ 125,881    $ 113,799

</TABLE>


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

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

     Natural Gas in Storage.  NiSource uses both the last-in,  first-out  (LIFO)
inventory  methodology and the weighted average methodology to value natural gas
in storage.  Based on the average cost of gas purchased under the LIFO method in
March 1999 and December 1998, the estimated  replacement  cost of gas in storage
(current and  non-current)  at March 31, 1999 and December 31, 1998 exceeded the
stated  LIFO cost by $21.5  million  and $33.7  million,  respectively.Inventory
valued  using LIFO was $19.6  million  and $50.8  million at March 31,  1999 and
December 31, 1998,  respectively.  Inventory  valued using the weighted  average
methodology  was $26.9  million and $18.8 million at March 31, 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." This Statement
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. The impact of
adopting the Statement on January 1, 2000 is currently being assessed.

     Regulatory Assets. The Utilities' operations are subject to the regulation
of  the  Commissions  and,  in the  case  of  certain  Energy  Utilities,  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 March 31, 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>




                                              March 31,       December 31,
(In thousands)                                 1999               1998
                                             =========         =========
<S>                                          <C>               <C>                                 
Unamortized reacquisition premium
     
   on debt (see Note 16)                     $ 42,355          $ 43,233
Unamortized R. M. Schahfer Unit 17
   and Unit 18 carrying charges and
    deferred depreciation (see below)          61,274            62,329
Bailly scrubber carrying charges and
   deferred depreciation (see below)            8,711             8,945
Deferral of SFAS No. 106 expense not
    recovered (see Note 8)                     79,886            81,339
FERC Order No. 636 transition costs            18,864            22,093
Regulatory income tax asset, net               31,367            18,793
Other                                          11,906             4,936
                                             ---------         ---------
                                              254,363           241,668
Less: Current portion of regulatory assets     29,381            32,609
                                             ---------         ---------
                                             $224,982          $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.

     NiSource 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 pretax rate as follows:
<TABLE>
<CAPTION>


                                                   March 31,          March 31,
                                                     1999               1998
                                                  =========          =========
      <S>                                           <C>                 <C>  
      Three months ended                            8.79%               8.67%
      Twelve months ended                           8.86%               8.97%

</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 within
the Indiana  service  territory 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  $33.5  million  and $34.0
million  relating to affordable  housing projects at March 31, 1999 and December
31, 1998, respectively.

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

     (3)  Acquisition  of Bay State Gas  Company:  On  February  12,  1999,  the
acquisition of BSG was completed for  approximately  $560.1 million.  The $237.7
million  cash  portion  was  financed by the  issuance of 6.9 million  Corporate
Premium Income Equity  Securities  (see Note 19). The  acquisition was accounted
for as a purchase,  and the purchase price was allocated to the assets  acquired
and liabilities assumed based on their estimated fair values. Bay State Gas, 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,  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)
<S>                                                                     <C> 
Assets acquired:    
      Utility plant, net of accumulated depreciation                    $1,081,874
      Intangible assets                                                     16,264
      Other current assets                                                 177,148
      Other noncurrent assets                                               75,126
                                                                         ---------
                                                                         1,350,412
Less:
Liabilities assumed:
      Long-term debt                                                       244,337
      Short-term debt                                                      100,295
      Other current liabilities                                            122,408
      Other noncurrent liabilities                                         323,242
                                                                         ---------
                                                                           790,282
                                                                         ---------
Net assets acquired                                                       $560,130
                                                                         =========
</TABLE>

     On a pro forma basis, NiSource's consolidated results of operations for the
three months and twelve months ended March 31, 1999,  including  BSG, would have
been: 

<TABLE>
<CAPTION>

(In thousands,unaudited)                                      UNAUDITED
                                                       ----------------------   
                                                  Three Months          Twelve Months
                                                   ===========           ===========
      <S>                                          <C>                 <C>  
      Operating revenue                            $ 966,113           $ 3,382,538
      Operating Income                             $ 164,382           $   443,153
      Net Income                                   $  79,746           $   182,342

</TABLE>


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

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

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

(5) Environmental Matters:

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

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

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

     Bay State Gas and Northern  Utilities 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  are allocated 50% to rate payers,  50% to
shareholders  in  Maine  and  Massachusetts  and  100%  to  rate  payers  in New
Hampshire.

     As of March 31,  1999,  a reserve of  approximately  $25  million  has been
recorded  to cover  probable  corrective  actions.  The  ultimate  liability  in
connection with these sites will depend upon many factors,  including the volume
of  material  contributed  to the  site,  the  number  of other  PRPs and  their
financial  viability,  the  extent  of  corrective  actions  required  and  rate
recovery.  Based upon  investigations and management's  understanding of current
environmental  laws and  regulations,  NiSource  believes  that  any  corrective
actions required, after consideration of insurance coverages, contributions from
other  PRPs,  and  rate  recovery  will  not have a  significant  impact  on its
financial position or results of operations.

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

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

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

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

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

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

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

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

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

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

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

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


                                                       March 31,         December 31,
                                                         1999                1998
(In thousands)                                        =========           =========
<S>                                                  <C>                    <C>          
Deferred tax liabilities-
   Accelerated depreciation and other    
     property differences...............             $1,088,623             $806,148
   AFUDC-equity.........................                 34,762               33,029
   Adjustment clauses...................                     --               14,965
   Other regulatory assets..............                 29,306               29,739
    Prepaid pension and other benefits..                 38,319               34,170
   Reacquisition premium on debt........                 16,885               17,311
Deferred tax assets-
   Deferred investment tax credits......               (39,382)             (37,236)
   Removal costs........................              (161,400)            (157,728)
   Adjustment Clauses...................                (4,135)                    0
   Other postretirement/postemployment benefits        (47,864)             (51,754)
   Other, net...........................               (28,034)             (29,353)
                                                       --------            ---------
                                                        927,080              659,291
Less: Deferred income taxes related to current
   assets and liabilities...............               (22,653)              (7,876)
                                                      ---------            ---------
Deferred income taxes-noncurrent........               $949,733             $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              Twelve Months
                                     Ended March 31,           Ended March 31,
                               ------------ ------------ ------------ ------------
                                      1999       1998         1999         1998
                                    =======    =======      =======      =======
(In thousands)
<S>                                <C>        <C>          <C>          <C>
Current income taxes -      
 Federal                           $ 63,513   $ 55,917     $ 121,276    $ 107,709
 State                               10,224      8,287        18,421       18,468
                                   --------   --------      --------     --------
                                     73,737     64,204       139,697      126,177
                                   --------   --------      --------     --------
Deferred income taxes, net -
 Federal                           (24,789)   (27,806)      (17,409)     (18,145)
 State                              (2,139)    (2,234)       (1,420)      (1,200)
                                   --------   --------      --------     --------
                                   (26,928)   (30,040)      (18,829)     (19,345)
                                   --------   --------      --------     --------
Deferred investment tax 
credits, net                        (1,887)    (1,821)       (7,427)      (7,395)
                                   --------   --------      --------     --------
   Total income taxes             $  44,922   $ 32,343     $ 113,441     $ 99,437
                                    =======    =======       =======      =======
</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               Twelve Months
                                                        Ended March 31,            Ended March 31,
                                                 ------------ ------------ ------------ ------------
(In thousands)                                         1999        1998          1999       1998
                                                      =======     =======       =======    =======
<S>                                                <C>         <C>            <C>        <C>      
Net income                                         $   76,559  $   60,722     $ 209,723  $ 180,733
Add - Income taxes                                     44,922      32,343       113,441     99,437
       Dividend requirements on preferred stocks
       of subsidiaries                                  2,116       2,167         8,487      8,691
                                                     --------    --------      --------   -------- 
Income before preferred dividend requirements of
   subsidiaries and income taxes                  $   123,597   $  95,232     $ 331,651  $ 288,861
                                                      =======     =======       =======    ======= 
Amount  derived
by multiplying pre-tax
  income by the statutory rate                      $  43,259  $   33,331     $ 116,078 $  101,101

Reconciling items multiplied by 
the statutory rate:
  Book depreciation over related
 tax depreciation                                         969         998         3,963      4,026
  Amortization of deferred investment
 tax credits                                          (1,887)     (1,821)       (7,427)    (7,395)
  State income taxes, net of federal
 income tax benefit                                     4,507       3,153        10,554     10,804
  Reversal of deferred taxes provided 
   at rates in excess
     of the current federal income tax rate             (721)     (1,271)       (3,834)    (3,816)
  Low-income housing credits                          (1,128)       (960)       (4,008)    (3,252)
  Nondeductible amounts related to amortization of
   intangible assets and plant acquisition
    adjustments                                           619         629         2,506      2,173
  Other, net                                            (696)     (1,716)       (4,391)    (4,204)
                                                     --------    --------      --------   --------
    Total income taxes                             $   44,922  $   32,343   $   113,441   $ 99,437
                                                      =======     =======       =======    =======
</TABLE>


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

     The change in the benefit obligation for 1998 and 1997 was as follows:
<TABLE>
<CAPTION>


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


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


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

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



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

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


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


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

     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.

     NiSource  prepaid  pension cost  amounts  were $131.2  million at March 31,
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 and twelve-month periods ended March 31, 1999 and March 31, 1998:
<TABLE>
<CAPTION>



                                                      Three Months              Twelve Months
                                                   Ended  March 31,           Ended   March 31,
                                             ------------  ------------     ------------ ------------
(In thousands)                                  1999         1998             1999       1998
                                              =======      =======          =======    =======
<S>                                          <C>          <C>              <C>         <C>     
Service costs                                $  5,419     $  4,934         $ 15,993    $14,799
Interest costs                                 17,214       19,324           56,116     60,433
Expected return on plan assets               (22,995)     (24,733)         (76,413)   (76,483)
Amortization of transition obligation           1,479        1,760            4,940      5,498
Amortization of prior service costs             1,587        1,676            4,242      4,227
                                           ------------  ------------    ------------  ------------
                                              $ 2,704    $   2,961           $4,878    $ 8,474
                                               =======      =======          =======    =======
</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 $0.4  million and $2.1 million were
made to these plans for the three-month and twelve-month periods ended March 31,
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
employee' years of service.  Current rates include postretirement benefit costs
on an accrual basis,  including amortization of the regulatory assets that arose
prior to inclusion of these costs in rates.  Cash  contributions are remitted to
grantor trusts.

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


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

Accumulated postretirement benefit obligation
   at end of the year (December 31,).................................            $240,601         $223,908
                                                                                =========        =========
</TABLE>


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


(In thousands)                                                                    1998             1997
                                                                                =========        =========

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



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


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


     A discount rate of 7%, a pre-Medicare medical trend rate of 7% declining to
a long-term rate of 5%; a discount rate of 7%, and a pre-Medicare  medical trend
rate of 8% declining to a long-term  rate of 5%, were used to determine the APBO
at December 31, 1998 and 1997, respectively. The accrued liability for
postretirement benefits was $153.6 million at March 31, 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 and twelve-month periods
ended March 31, 1999 and March 31, 1998 include the following components:
<TABLE>
<CAPTION>


                                                 Three Months                 Twelve Months
                                                Ended  March 31,              Ended March 31,
                                          ------------  ------------     ------------ ------------
(In thousands)                                  1999         1998             1999       1998
                                               =======      =======          =======    =======

<S>                                             <C>         <C>            <C>        <C>      
Service costs                                   $  996      $ 1,187        $   5,058  $   4,631
Interest costs                                   4,510        4,073           16,230     15,491
Expected return on plan assets                   (379)         (50)            (545)       (50)
Amortization of transition obligation            3,041        2,929           11,857     11,723
Amortization of prior service costs                 86           75              333        354
Amortization of (gain) loss                    (1,176)      (1,393)          (5,530)    (6,229)
                                               -------      -------          -------    -------
                                              $  7,078      $ 6,821        $  27,403   $ 25,920
                                               =======      =======          =======    =======
</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 $.8 million for the three-month period
ended March 31,  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  $.6 million for the
three-month  period  ended  March 31,  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 of NiSource's Series A Junior Participating  Preferred Shares are
reserved for issuance  pursuant to the Share  Purchase  Rights Plan described in
Note 14, Common Shares.

     Northern Indiana -
        2,400,000 shares -Cumulative Preferred -$100 par value
        3,000,000 shares -Cumulative Preferred -no par value
        2,000,000 shares -Cumulative Preference -$50 par value(none outstanding)
        3,000,000 shares -Cumulative Preference -no par value (none issued)
     Indianapolis Water Company (IWC) -
        300,000 shares -Cumulative Preferred -$100 par value

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

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

(10) Preferred Stocks, Redeemable Solely at the Option of the Issuer:
<TABLE>
<CAPTION>

                                                                                         Redemption
                                                                                          Price at
                                                      March 31,      December 31,         March 31,
 (Dollars in thousands)                                 1999             1998               1999
                                                      ===========      ===========        ===========
<S>                                                     <C>              <C>                  <C> 
Northern Indiana Public Service Company:   
Cumulative preferred stock -  $100 par value -
  4-1/4% series - 209,051 shares outstanding            $  20,905        $  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 March 31, 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- $105                       
------------------                                    -----------      -----------
                                                     $     85,613        $  85,613
                                                      ===========      ===========
</TABLE>


     During the period April 1, 1998 to March 31, 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>


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


     The redemption prices at March 31, 1999, as well as sinking fund provisions
for  the   cumulative   preferred   stocks   subject  to  mandatory   redemption
requirements,  or whose  redemption  is outside the  control of issuer,  were as
follows:
<TABLE>
<CAPTION>



                                                                 Sinking Fund or
 Series              Redemption Price Per Share          Mandatory Redemption Provisions
===========            ======================         ======================================
<S>     <C>           <C>                            <C>

Cumulative preferred stock -$100 par value -
         8.85%        $100.74, reduced periodically  12,500 shares on or before April 1.

         8.35%        $103.44, reduced periodically  3,000 shares on or before July 1; increasing to 6,000
                                                       shares beginning in 2004; noncumulative option
                                                        to double amount each year.

        7-3/4%        $104.06, reduced periodically  2,777 shares on or before December 1;
                                                       noncumulative option to double amount each year.
 Cumulative preferred stock -no par value -
        6.50%         $100.00 on October 14, 2002    430,000 shares on October 14, 2002.
</TABLE>


     Sinking fund requirements  with respect to redeemable  preferred stocks for
the next five years and thereafter,  not reflecting redemptions made after March
31, 1999, were as follows:
<TABLE>
<CAPTION>


Twelve Months Ended March 31,
=============================

(In thousands)
<S>                                                            <C>   
2000     ......................................................$1,828
2001     ...................................................... 1,828
2002     ...................................................... 1,828
2003     ......................................................44,828
2004     ...................................................... 1,828
Thereafter..................................................... 6,123
                                                             ---------
Total preferred stocks, redemption outside control of issuer  $58,263
                                                             =========   
</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 earned
surplus or net profits of Northern Indiana.  At March 31, 1999, Northern Indiana
had approximately $158.5 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:  Earnings per share were  determined in accordance
with the  provisions of SFAS No. 128  "Earnings  per Share," which  requires the
presentation  of basic earning per share and diluted  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                         Twelve Months
                                                                     Ended March  31,                     Ended  March 31, 
                                                                     ----------------                     ----------------
   
   (Dollars in thousands, except per share amounts)                1999            1998                 1999            1998
-----------------------------------------------------------------------------------------------------------------------------------
Basic
<S>                                                             <C>             <C>                  <C>             <C>    

Weighted Average Number of Common Shares Outstanding            122,646,186     123,872,613          120,475,670     125,021,821

Net Income to be Used to Compute Basic Earnings per Share:
Net Income                                                      $    76,559     $    60,722          $   209,723     $   180,733
Basic Earnings per Average Common Share                         $      0.62     $      0.49          $      1.74     $      1.44

Diluted
Weighted Average Number of Common Shares Outstanding            122,646,186     123,872,613          120,475,670     125,021,821
     Dilutive effect for Nonqualified Stock Options                 699,796         511,358              770,512         304,907
     Weighted Average Shares                                    123,345,982     124,383,971          121,246,182     125,326,728

Net Income to be Used to Compute Diluted Earnings per Share:
Net Income                                                      $    76,559     $    60,722          $   209,723     $   180,733
Diluted Earnings per Average Common Share                       $      0.62     $      0.48          $      1.72     $      1.44

</TABLE>

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

     Share  Purchase  Rights Plan. On February 27, 1990,  the Board of Directors
(Board)  declared  a  dividend  distribution  of one Right for each  outstanding
common share to  shareholders  of record on March 12,  1990.  The Rights are not
currently exercisable. 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.

     Common Share  Repurchases.  The Board has authorized the repurchase of 62.1
million  common  shares,   subject  to  certain  limits.   At  March  31,  1999,
approximately  55.2 million  shares had been  repurchased at an average price of
$16.94 per share.

     (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 March 31, 1999,  there were 2,495,350  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 March 31, 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  March  31,  1999.
Restricted  stock  awards  are  restricted  as to  transfer  and are  subject to
forfeiture for specific  periods from the date of grant.  Restrictions on shares
awarded in 1995 lapse five years from date of grant,  and vesting varies from 0%
to 200% of the number awarded,  subject to specific earnings per share and stock
appreciation  goals.  Restrictions  on shares awarded in 1998 and 1999 lapse two
years  from  date of grant  and  vesting  varies  from 0% to 100% of the  number
awarded, subject to specific performance goals. If a participant's employment is
terminated  prior to  vesting  other  than by  reason of  death,  disability  or
retirement,  restricted  shares are  forfeited.  There were  537,166 and 534,666
restricted  shares  outstanding  at  March  31,  1999  and  December  31,  1998,
respectively.

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

     These plans are accounted for under Accounting Principles Board Opinion No.
25, under which no compensation cost has been recognized for nonqualified  stock
options.  The  compensation  cost  that  was  charged  against  net  income  for
restricted  stock awards was $0.7  million and $0.5 million for the  three-month
and $2.9 million and $1.9 million for the  twelve-month  periods ended March 31,
1999 and 1998,  respectively.  Had  compensation  cost for  non-qualified  stock
options been determined consistent with SFAS No. 123 "Accounting for Stock-Based
Compensation,"  net income and earnings per average common share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>

                                 Three Months              Twelve Months
                                Ended March 31,           Ended March 31,
                             --------------------      --------------------
                                1999       1998           1999       1998
                               ======     ======         ======     ======
                             (Dollars in thousands, except per share data)
Net Income:
<S>                          <C>        <C>            <C>        <C>      
 As reported                 $  76,559  $  60,722      $ 209,723  $ 180,733
 Pro forma                   $  76,152  $  60,501      $ 208,408  $ 179,869

Earnings Per Average 
Common Share:
 Basic:
   As reported                $   0.62   $   0.49       $   1.74   $   1.44
   Pro forma                  $   0.62   $   0.49       $   1.72   $   1.43
 Diluted:
  As reported                 $   0.62   $   0.48       $   1.72   $   1.43
   Pro forma                  $   0.61   $   0.48       $   1.71   $   1.43

</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  twelve-month  periods  ended March 31, 1999 and March 31,  1998:  risk-free
interest  rate of 5.29% and 6.19%,  respectively;  expected  dividend  yield per
share of $0.96 and  $0.90,  respectively;  expected  option  term of 5.4 and 5.5
years, respectively; and expected volatilities of 13.09% and 12.2%, 
respectively.

     Changes in outstanding shares under option and SARs for the three-month and
twelve-month periods ended March 31, 1999 and March 31, 1998 were as follows:
<TABLE>
<CAPTION>

                                                 NONQUALIFIED STOCK OPTIONS
                                       -------------------------------------------
                                                    Weighted              Weighted
                                                     Average               Average
                                                      Option                Option
Three Months Ended March 31,              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      15.04          -          -
 Exercised                               (44,417)      16.61  (200,800)      12.55
 Canceled                                 (1,500)      29.22          -
                                       ----------             ---------
Balance, end of period                  3,346,163    $ 18.69  2,334,600   $  16.74
                                       ==========             =========
Shares exercisable                      2,742,663    $ 16.37  1,806,000   $  15.60
                                       ==========             =========
</TABLE>

<TABLE>
<CAPTION>

                                                 NONQUALIFIED STOCK OPTIONS
                                       -------------------------------------------
                                                    Weighted              Weighted
                                                     Average               Average
                                                      Option                Option
Twelve Months Ended March 31,             1999        Price      1998       Price
============================           ==========    =======  =========   ========
<S>                                     <C>          <C>      <C>         <C>     
Balance, beginning of period            2,334,600    $ 16.73  2,284,100   $  15.33
 Converted                                740,780      15.04          -
 Granted                                  607,000      29.22    533,600      20.64
 Exercised                              (312,517)      16.69  (478,100)      14.28
 Canceled                                (23,700)      22.55    (5,000)      20.64
                                       ----------             ---------   
Balance, end of period                 3,346,163   $   18.69  2,334,600   $  16.74
                                       ==========             =========
Shares exercisable                     2,742,663   $   16.37  1,806,000   $  15.60
                                       ==========             =========
Weighted average fair value
 of options granted                     $  4.28               $  2.66
                                       ==========             =========
</TABLE>


     The  following  table  summarizes  information  about  non-qualified  stock
options at March 31, 1999:
<TABLE>
<CAPTION>
                            OPTIONS OUTSTANDING
--------------------------------------------------------------------------------
                              Number            Weighted Average
   Range of               Outstanding at        Remaining         Weighted Average
  Option Price            March 31, 1999      Contractual Life     Option Price
=============            ===============     ===============     ===============
<S>                      <C>                  <C>                 <C>    
$ 8.53 to $12.31           249,457            1.4 years           $  10.66
$13.03 to $19.77         2,008,548            5.0 years              16.05
$20.64 to $29.22         1,088,158            8.8 years              25.41
------------------      ----------------    ----------------    ----------------
$ 8.53 to $29.22         3,346,163            5.9 years           $  18.69
                        ================    
<CAPTION>
                            OPTIONS EXERCISABLE
--------------------------------------------------------------------------------
                                 Number
   Range of                 Exercisable at           Weighted Average
  Option Price                March 31, 1999         Option Price
=============                ===============        ==============
<S>                            <C>                   <C>    
$ 8.53 to $ 12.31                249,457             $  10.66
$13.03 to $ 19.77              2,008,548                16.05
      $20.64                     484,658                20.64
---------------------         -------------          ---------
$ 8.53 to $20.64               2,742,663             $  16.37
                            ===============        ============== 
</TABLE>
       
(16) Long-Term Debt:
<TABLE>
<CAPTION>

                                                                 March 31,           December 31,
(Dollars in thousands)                                             1999                1998
                                                                ==========           ==========
<S>                                                             <C>                  <C>

First mortgage bonds -
 Interest rates between 5.05% and 9.83% with a weighted
   average interest rate of 6.62% and various maturities
   between May 1, 2001 and July 15, 2028                        $  186,600           $  186,600
Pollution control notes and bonds-
 Interest rates between 3.05% and 5.70% with a weighted
  average interest rate of 3.85% and various maturities
  between October 1, 2003 and April 1, 2019                        239,500              239,500

Medium-term notes -
 Interest rates between 5.99% and 9.70% with a weighted
  average interest rate of 7.12% and various maturities
  between March 20, 2000 and August 4, 2027                      1,341,301            1,048,025

Subordinated Debentures -7-3/4%, due March 31, 2026                 75,000               75,000

Senior Notes Payable - 6.78%, due December 1, 2027                  75,000               75,000

Notes payable -
 Interest rates between 6.31% and 9.00% with a weighted
  average interest rate of 7.26% and various maturities
  between October 1, 1999 and January 1, 2008                       47,800               41,807

Variable bank loan - 6.63%, due August, 2003                         5,600                5,600

Unamortized premium and discount on long-term debt, net            (3,401)              (3,567)
                                                                ----------           ----------
Total long-term debt, excluding amounts due within one year     $1,967,400           $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 March 31, 1999:
<TABLE>
<CAPTION>

Twelve Months Ended March 31,
=============================
(In thousands)
<S>                                                        <C>     
2000     ..................................................$   39,122
2001     ...................................................  186,546
2002     ...................................................   49,124
2003     ...................................................  137,010
2004     ...................................................  135,552
Thereafter..................................................1,459,168
                                                            ---------
Total long-term debt (including current portion)...........$2,006,522
                                                            =========
</TABLE>

                                                            

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

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

     NiSource is  authorized  to issue and sell up to  $217,692,000  Medium-Term
Notes,  Series E, with various  maturities,  for purposes of refinancing certain
first mortgage bonds and medium-term notes. As of March 31, 1999, $139.0 million
of these  medium-term  notes had been issued  with  various  interest  rates and
maturities.  The proceeds from these  issuances were used to pay short-term debt
incurred to redeem its First  Mortgage  Bonds,  Series N, and to pay at maturity
various issues of Medium-Term Notes, Series D.

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

     The  financial  obligations  of Capital  Markets  are  subject to a Support
Agreement  between  NiSource  and  Capital  Markets,  under which  NiSource  has
committed  to make  payments  of  interest  and  principal  on Capital  Markets'
obligations in the event of a failure to pay by Capital Markets. Restrictions in
the  Support  Agreement  prohibit  recourse  on the  part  of  Capital  Markets'
creditors  against  the stock and assets of Northern  Indiana  that are owned by
NiSource. Under the terms of the Support Agreement, in addition to the cash flow
of cash dividends paid to NiSource by any of its consolidated subsidiaries,  the
assets of  NiSource,  other than the stock and assets of Northern  Indiana,  are
available  as  recourse  for the  benefit of  Capital  Markets'  creditors.  The
carrying  value of the assets of  NiSource,  other  than the assets of  Northern
Indiana, were approximately $2.6 billion at March 31, 1999.

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


                                                                               March 31,     December 31,
(In thousands)                                                                   1999            1998
                                                                              =========        =========
<S>                                                                           <C>              <C>       
Medium-term notes-
   Interest rates between 5.83% and 6.93% with a weighted average 
     interest rate of 6.00% .........................................         $   7,289        $       -
Notes payable-
   Interest rates between 5.75% and 9.00% with a weighted average
     interest rate of 6.08% .........................................            29,833            4,790
Sinking funds due within one year....................................             2,000            2,000
                                                                              ---------        ---------
   Total current portion of long-term debt...........................         $  39,122        $   6,790
                                                                              =========        =========
</TABLE>


     (18) Short-Term Borrowings: There are two five-year, $100 million revolving
credit  agreements  that  terminate on  September  23, 2003 and two 364-day $100
million  revolving  credit  agreements that terminate on September 23, 1999. The
364-day  agreements may be extended at expiration for additional  periods of 364
days. Under these agreements,  funds are borrowed at a floating rate of interest
or, under  certain  circumstances,  at a fixed rate of interest  for  short-term
periods.  These  agreements  provide  financing  flexibility  and may be used to
support the  issuance of  commercial  paper.  At March 31,  1999,  there were no
borrowings outstanding under these agreements.

     In  addition,  various  lines of credit  are  maintained,  as well as a $50
million uncommitted finance facility. At March 31, 1999 there were no borrowings
under the uncommitted finance facility. Lines of credit for up to $214.1 million
are held with lenders at either their  commercial prime or market lending rates.
As of March 31, 1999, there were $35.0 million of borrowings  outstanding  under
these  lines of credit with a weighted  average  interest  rate of 5.71%.  As of
December 31, 1998,  there were $84.1  million of  borrowings  outstanding  under
these lines of credit.

     Money market lines of credit for up to $403.5 million are maintained. As of
March 31, 1999,  there was $86.0  million  outstanding  under these money market
lines of credit with a weighted  average interest rate of 5.99%. At December 31,
1998,  there were $127.3  million of  borrowings  outstanding  under these money
market lines of credit.

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

<TABLE>
<CAPTION>


                                                                              March 31,       December 31,
(In thousands)                                                                  1999             1998
                                                                              =========        =========

<S>                                                                            <C>             <C>
Commercial paper-      
   Weighted average interest rate of 4.99% at March 31, 1999.........          $114,200        $ 193,700
Notes payable-
   Weighted average interest rate of 5.58% at March 31, 1999.........           135,773          217,340
                                                                              ---------        ---------  
   Total short-term borrowings.......................................          $249,973         $411,040
                                                                              =========        =========
</TABLE>


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

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

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

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

     The dividends paid on Preferred  Securities are presented under the caption
"minority  interests"  in  NiSource's  Consolidated  Statements  of Income.  The
amounts   outstanding  are  presented  under  the  caption,   "Company-obligated
manditorily  redeemable  preferred securities of subsidiary trust holding solely
company  debentures," in NiSource's  Consolidated  Balance Sheets.  At March 31,
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 March 31, 1999:
<TABLE>
<CAPTION>


(In thousands)
<S>                                                                            <C>     
2000     ............................................................          $ 32,020
2001     ............................................................            31,205
2002     ............................................................            31,142
2003     ............................................................            60,632
2004     ............................................................            76,742
Later years..........................................................           231,309
                                                                              ---------
Total minimum payments required......................................          $463,050
                                                                              =========
</TABLE>


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

<TABLE>
<CAPTION>


                                               March 31,       March 31,
(In thousands)                                   1999            1998
                                               ========        ========
<S>                                           <C>              <C>     
Three months ended                            $  9,307         $  4,949
Twelve months ended                           $ 27,968         $ 11,540
</TABLE>


     (21)  Commitments:   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.

     During 1995, Northern Indiana entered into a ten-year agreement with IBM to
have IBM perform all data center,  application development and maintenance,  and
desktop  management.  Annual fees under the  agreement  are  estimated  at $20.0
million.

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

     Primary has advanced  approximately  $36.1  million and $31.8  million,  at
March 31, 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 March 31, 1999,  open  derivative  financial
instruments represented hedges of natural gas sales of 23.0 Bcf, and natural gas
purchases and  inventories of 1.6 Bcf. The net deferred gains or losses on these
derivative financial instruments was not material.

     Energy  Trading  Activities.   Energy  trading  contracts,   which  include
forwards,  futures, options and swaps are used in connection with energy trading
activities  and may involve the delivery of energy.  The net open  positions for
these energy trading contracts were not significant as of March 31, 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 to NiSource 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>


                                                                 March 31, 1999             December 31, 1998
                                                                           Estimated                     Estimated
                                                             Carrying        Fair         Carrying         Fair
(In thousands)                                                 Amount        Value         Amount         Value
                                                            ===========    =========     ==========     ==========
<S>                                                         <C>           <C>            <C>            <C>      
Investments.................................                $    43,891   $   56,523     $   36,594     $   36,028
Long-term debt (including current portion)..                $ 2,006,522   $2,027,788     $1,674,755     $1,769,934
Preferred stock (including current portion).....            $   144,220   $  134,561     $  143,876     $  140,420
Preferred securities............................            $   345,000   $  348,450            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. The following table shows the basic
steel industry percentage of gas revenue (including transportation services) and
electric revenue for 1999 and 1998.

<TABLE>
<CAPTION>


                                                                Twelve Months        Twelve Months
                                                                Ended March 31,      Ended March 31,
                                                                    1999                1998
                                                                  =========           =========
<S>                                                               <C>                 <C>
Basic Steel Industry                                                                          
Gas revenue percentage.............................................3%                 2%
Electric revenue percentage.......................................14%                 16%
</TABLE>


     (25) Segments of Business:  SFAS No. 131, "Disclosures about Segments of an
Enterprise  and Related  Information,"  was adopted  during  1998.  SFAS No. 131
establishes  standards for reporting  information  about  operating  segments in
financial statements and disclosures about products and services, and geographic
areas.  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 until early 1999
marketed  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 the
quantitative  thresholds  required  by SFAS No.  131.  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 March 31, 1999          Gas        Electric     Water      Marketing   &Services  Adjustments   Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>          <C>         <C>        <C>           <C>        <C>         <C>      
Operating revenues                              $  393,258   $  265,188  $  20,898  $   215,360   $  66,674  $ (69,886)  $  891,492
Other, net                                      $    1,419   $      128  $     196  $       402   $   6,712  $  (1,773)  $    7,084
Depreciation and amortization                   $   26,376   $   39,655  $   3,200  $        84   $   3,247  $      347  $   72,909
Segment profit (loss)                           $   88,150   $   73,634  $   3,990  $       892   $   3,916  $  (7,589)  $  162,993
Assets                                          $2,539,841   $2,700,678  $ 632,832  $   107,420   $ 369,939  $(124,306)  $6,226,404
Capital Expenditures                            $   26,844   $   26,638  $  27,788  $        29   $   5,140  $        0  $   86,439
Investments in equity-method investees          $        0   $        0  $   4,476  $     7,365   $ 118,032  $        0  $  129,873

                                                                                                    Other
(In thousands)                                                                          Gas        Products
For the three months ended March 31, 1998          Gas        Electric     Water      Marketing   &Services  Adjustments   Total
-----------------------------------------------------------------------------------------------------------------------------------
Operating revenues                              $  242,735   $  323,834  $  17,709  $   174,866   $  53,846  $ (33,646)  $  779,344
Other, net                                      $      605   $       89  $   (111)  $       517   $   7,551  $    (203)  $    8,448
Depreciation and amortization                   $   18,714   $   38,768  $   2,793  $        66   $   2,880  $       53  $   63,274
Segment profit (loss)                           $   48,727   $   73,760  $   3,673  $       133   $   2,977  $  (3,708)  $  125,562
Assets                                          $1,080,989   $2,701,962  $ 568,453  $    88,156   $ 549,295  $ (88,363)  $4,900,492
Capital Expenditures                            $    9,213   $   24,097  $  14,198  $         0   $   2,794  $        0  $   50,302
Investments in equity-method investees          $        0   $        0  $   3,802  $     6,331   $ 101,676  $        0  $  111,809



                                                                                                    Other
(In thousands)                                                                           Gas      Products
For the twelve months ended March 31, 1999           Gas     Electric     Water      Marketing    & Services Adjustments   Total
-----------------------------------------------------------------------------------------------------------------------------------
Operating revenues                              $  787,621   $1,371,340  $  87,257  $   698,187   $ 275,897  $(175,376)  $3,044,926
Other, net                                      $    2,534   $      592  $     806  $     1,902   $   4,038  $    (652)  $    9,220
Depreciation and amortization                   $   83,208   $  157,730  $  11,991  $       350   $  12,323  $      507  $  266,109
Segment profit (loss)                           $  106,592   $  341,306  $  23,655  $     5,835   $   7,883  $ (15,750)  $  469,521
Assets                                          $2,539,841   $2,700,678  $ 632,832  $   107,420   $ 369,939  $(124,306)  $6,226,404
Capital Expenditures                            $   79,048   $  128,120  $  72,878  $       400   $  25,166  $        0  $  305,612
Investments in equity-method investees          $        0   $        0  $   4,476  $     7,365   $ 118,032  $        0  $  129,873


                                                                                                   Other
 (In thousands)                                                                        Gas         Products
For the twelve months ended March 31, 1998           Gas     Electric     Water      Marketing   & Services  Adjustments    Total
-----------------------------------------------------------------------------------------------------------------------------------
Operating revenues                              $  716,574   $1,249,508  $  78,452  $   567,066     240,501  $(146,166)  $2,705,935
Other, net                                      $    1,008   $      519  $   1,354  $     2,989   $   9,520  $    (577)  $   14,813
Depreciation and amortization                   $   73,703   $  154,332  $  11,033  $       284   $  15,179  $      202  $  254,733
Segment profit (loss)                           $   78,643   $  316,105  $  23,766  $     3,741   $   7,582  $ (15,943)  $  413,894
Assets                                          $1,080,989   $2,701,962  $ 568,453  $    88,156   $ 549,295  $ (88,363)  $4,900,492
Capital Expenditures                            $   54,203   $  120,245  $  54,795  $        23   $  24,113  $        0  $  253,379
Investments in equity-method investees          $        0   $        0  $   3,802  $     6,331   $ 101,676  $        0  $  111,809
</TABLE>


     The following  table  reconciles  total  reportable  segment  income before
interest  and other  charges and income taxes to net income for three and twelve
months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>


                                                                 Three Months Ended         Twelve Months Ended
                                                              March 31,    March 31,       March 31,    March 31, 
(In thousands)                                                   1999        1998            1999           1998
                                                            ---------     ---------     ---------   ---------
<S>                                                          <C>           <C>          <C>         <C>     
Total Segment profit (loss)                                  $162,993      $125,562     $ 469,521   $ 254,733
Interest expense, net                                        (36,688)      (30,330)     (135,162)   (125,033)
Minority interests                                            (2,708)             -       (2,708)           -
Dividends requirements on preferred stock of subsidiaries     (2,116)       (2,167)       (8,487)     (8,691)
                                                            ---------     ---------     ---------   ---------
  Income before income taxes                                  121,481        93,065       323,164
  Less Income taxes                                            44,922        32,343       113,441      99,437
                                                            ---------     ---------     ---------   ---------
   Net Income                                                $ 76,559      $ 60,722     $ 209,723    $180,733 
</TABLE>
    
                                                      

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

Results of Operations

Holding Company

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

Operating Revenues

     Twelve months ended March 31, 1999. Total operating revenues for the twelve
months  ended  March 31, 1999 were $339.0  million  higher than total  operating
revenues  for the  twelve  months  ended  March  31,  1998,  representing  a 13%
increase. Gas revenues were $1,364.8 million, which represented a $166.5 million
increase  from the  comparable  period ended March 31, 1998.  This  increase was
primarily  due to the inclusion of $110.0 of gas revenues from BSG and increased
gas marketing  activity,  partially offset by decreased gas sales to residential
and  commercial  customers as a result of warmer  weather than normal during the
fourth  quarter  of 1998 and  decreased  gas  costs  per dth and  decreased  gas
transition costs.  Electric revenues were $1,368.0 million,  which represented a
$121.2 million increase from electric  revenues for the comparable  period ended
March 31, 1998.  This  increase was mainly due to  increased  electric  sales to
residential and commercial customers due to warmer weather during the second and
third quarters of 1998 and increased wholesale electric transactions,  partially
offset by decreased  electric  sales to industrial  customers and decreased fuel
costs.  Water  revenues  were $87.1  million,  which  represented a $8.7 million
increase  from water  revenues for the  comparable  period ended March 31, 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.  Products  and
Services  revenues  were  $225.0  million,  which  represented  a $42.7  million
increase from  Products and Services  revenues for the  comparable  period ended
March 31, 1998. This increase reflected increased sales at Primary, SM&P Utility
Resources, Inc. (SM&P) and Miller Pipeline Corporation (Miller).

     Three months ended March 31, 1999.  Total operating  revenues for the three
months  ended  March 31, 1999 were $112.1  million  higher than total  operating
revenues for the three months ended March 31, 1998, representing a 14% increase.
Gas revenues were $553.9 million,  which  represented a $155.0 million  increase
from gas revenues for the comparable  period ended March 31, 1998. This increase
was primarily due to the inclusion of $110.0 million of operating  revenues from
BSG,  increased gas marketing  activities,  increased  sales to residential  and
commercial  customers  due to colder  weather  during the  period and  increased
deliveries of gas transported for others partially offset by decreased gas costs
per dth and  decreased  gas  transition  costs.  Electric  revenues  were $264.3
million,  which  represented a $58.6 million decrease from electric revenues for
the  comparable  period ended March 31, 1998.  This  decrease  represents  fewer
wholesale electric transactions in the 1999 period, compared to the 1998 period,
partially offset by increased sales to residential and commercial  customers and
increased fuel costs.  Water revenues were $20.9  million,  which  represented a
$3.2 million increase from water revenues for the comparable  period ended March
31, 1998.  This increase was  primarily due to increased  water volumes sold and
increased water rates for IWC that became  effective on April 8, 1998.  Products
and Services  revenues  were $52.4  million,  which  represented a $12.6 million
increase from  Products and Services  revenues for the  comparable  period ended
March 31, 1998. This increase reflected  increased sales at Primary,  Miller and
SM&P.

     The basic steel  industry  accounted  for 27% of all natural gas  delivered
(including volumes  transported) and 18% of all electric sales during the twelve
months ended March 31, 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

            --------------------------------------------------------------------
                            March 31, 1999 Compared to March 31, 1998
            --------------------------------------------------------------------
                                              Three                              Twelve
(In thousands)                                Months                             Months
                                              =======                            =======
<S>                                        <C>                                <C> 
Gas Revenue -
  Pass through of net changes in
    purchased gas costs, gas storage,     
    and storage transportation costs       $ (18,977)                         $ (41,568)
  Gas transition costs                        (1,093)                           (16,026)
  Changes in sales levels                      23,064                           (40,209)
  Gas transported                              4,353                              11,389
  Bay State Acquisition                       109,997                            109,997
  Gas Marketing                                37,636                            142,867
                                         ------------                       ------------
Gas Revenue Change                            154,980                            166,450
                                         ------------                       ------------
Electric Revenue  -
  Pass through of net changes
     in fuel costs                                862                            (4,617)
  Changes in sales levels                       6,975                             30,573
  Wholesale electric                         (66,419)                             95,205
                                         ------------                       ------------
Electric Revenue Change                      (58,582)                            121,161
                                         ------------                       ------------
Water Revenue Change                            3,160                              8,687
                                         ------------                       ------------
Products and Services Revenues -
  Pipeline construction                         1,594                              4,847
  Locate and marking                              628                              6,705
  Other                                        10,368                             31,141
                                         ------------                       ------------
Products and Services Revenue Change           12,590                             42,693
                                         ------------                       ------------
   Total Revenue Change                     $ 112,148                          $ 338,991
                                              =======                            =======
</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  March 31,  1999
increased $120.9 million, or by 14%. This increase reflects the inclusion of gas
costs of $58.7  million for BSG and  increased  gas  purchases for gas marketing
activities,  partially  offset by decreased  gas costs per dth and decreased gas
transition  costs. The average cost for the Energy  Utilities  purchased gas for
the twelve months ended March 31, 1999, after adjusting for gas transition costs
billed to transport  customers,  decreased  from $2.60 per dth, to $2.51 per dth
for the  comparable  period  ended March 31,  1998.  The gas costs for the three
months ended March 31, 1999  increased  by $85.0  million,  or by 29%,  from gas
costs for the three  months  ended March 31, 1998.  This  increase  reflects the
inclusion of gas costs of $58.7  million for BSG and increased gas purchases for
gas marketing  activities,  partially  offset by decreased gas costs per dth and
gas transition  costs. The average cost for the Energy  Utilities  purchased gas
for the three months ended March 31, 1999,  after  adjusting for gas  transition
costs billed to transport  customers,  decreased from $2.60 per dth to $2.37 per
dth for the comparable period ended March 31, 1998.

     Fuel and  Purchased  Power.  The cost of fuel used for electric  generation
during the twelve months ended March 31, 1999 was $17.6 million  higher than the
cost of fuel used during the twelve  months ended March 31, 1998,  mainly due to
increased electric  generation of 8.7%. The average cost per kilowatt-hour (kwh)
generated  decreased  by 1.1% from 1.54 cents per kwh  during the twelve  months
ended March 31, 1998 to 1.52 cents per kwh for the comparable period ended March
31, 1999. The cost of fuel used for electric  generation during the three months
ended March 31, 1999 was $2.7  million  higher than the cost of fuel used during
the  twelve  months  ended  March 31,  1998,  mainly due to  increased  electric
generation of 5.2%.  The average cost per kwh generated  during the three months
ended March 31, 1999 remained  relatively  unchanged from the comparable  period
ended March 31, 1998.

     Purchased  power was $73.5  million  higher  during the twelve months ended
March 31, 1999 than for the twelve months ended March 31, 1998, primarily due to
increased power purchased for wholesale  electric  activity and higher costs per
kwh.  Purchased  power for the three months ended March 31, 1999 decreased $68.2
million  primarily  due to decreased  power  purchased  for  wholesale  electric
activity and lower costs per kwh.

     Cost of Sales:  Products and  Services.  The cost of sales for the Products
and  Services  subsidiaries  during the twelve and three  months ended March 31,
1999 were $17.0 and $5.7 million  higher,  respectively,  than in the comparable
periods ended March 31, 1998. This increase reflected inclusion of cost of sales
for other Products and Services subsidiaries acquired in the BSG acquisition and
increased activity at SM&P and Miller.

Operating Margins

     Twelve months ended March 31, 1999. Operating margins for the twelve months
ended March 31, 1999 were $1.3 billion,  an increase of $110.0  million from the
twelve  months  ended March 31, 1998.  Gas  operating  margin was $45.6  million
higher  than in the  comparable  period  ended  March 31,  1998.  This  increase
reflected the February 1999  acquisition of BSG and increased  deliveries of gas
transported  for others  partially  offset by decreased sales to residential and
commercial customers reflecting unusually warm weather during the fourth quarter
of 1998 and decreased sales to industrial  customers.  Electric operating margin
was $30.0  million  higher than in the  comparable  period ended March 31, 1998.
This  increase  occurred  mainly  due to  increased  sales  to  residential  and
commercial  customers due to warmer weather during the second and third quarters
of 1998 partially offset by lower wholesale  electric  margins.  Water operating
margin was $8.7  million  higher than in the  comparable  period ended March 31,
1998, due to increased  volumes sold and increased water rates for  Indianapolis
Water  Company  that became  effective  on April 8, 1998.  Products and Services
operating  margin was $25.7 million higher than in the  comparable  period ended
March 31,  1998,  reflecting  higher  margins at Primary,  Miller,  SM&P and the
inclusion of Products and Services subsidiaries at BSG.

     Three months ended March 31, 1999.  Operating  margins for the three months
ended March 31,  1999 were $406.0  million,  an increase of $87.0  million  from
operating  margins for the three  months  ended March 31,  1998.  Gas  operating
margin was $70.0 million  higher than gas operating  margins for the  comparable
period ended March 31, 1998.  This increase is primarily due to the inclusion of
gas operating  margin for BSG and increased gas marketing  activities.  Electric
operating margin was $6.9 million higher than the electric  operating margin for
the  comparable  period  ended March 31, 1998.  This  increase was mainly due to
increased sales to residential and commercial customers.  Water operating margin
was $3.2 million higher than water operating  margins for the comparable  period
ended March 31, 1998,  due to increased  water volumes sold and increased  water
rates for IWC that became  effective  on April 8, 1998.  Products  and  Services
operating  margin was $6.9 million higher than Products and Services margins for
the comparable period ended March 31, 1998, reflecting higher margins at Primary
Energy,  Miller and SM&P and the inclusion of Products and Services subsidiaries
at BSG.

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 March
31, 1999 were $29.5 million  higher than  operation  expenses for the comparable
period  ended March 31, 1998.  This  increase  reflects  the  inclusion of $17.6
million  of  operation  expenses  at BSG and  increased  operation  expenses  at
Primary. Operation expenses for the three months ended March 31, 1999 were $30.7
million higher than operation expenses for the comparable period ended March 31,
1998.  This  increase  reflects  the  inclusion  of $17.6  million of  operating
expenses at BSG, increased  operating expenses at Primary and increased employee
related costs.

     Maintenance expenses.  Maintenance expenses for the twelve months and three
months  ended March 31, 1999 were $1.0 and $3.4  million  higher,  respectively,
than maintenance expenses for the comparable periods ended March 31, 1998. These
increases were primarily due to maintenance expenses for BSG.

     Depreciation  and  amortization  expenses.  Depreciation  and  amortization
expenses for the twelve  months and three months ended March 31, 1999 were $11.4
and $9.6  million  higher,  respectively,  than  depreciation  and  amortization
expenses for the comparable  periods ended March 31, 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 and three  months  ended March 31,
1999 were $10.1 and $6.4 million higher than interest  charges in the comparable
periods ended March 31, 1998. These increases  reflect the inclusion of interest
charges  of  BSG  and  increased  short-term  borrowings.Additionally,  minority
interests reflects dividends paid on Preferred Securities in connection with the
PIES offering during the three month period ended March 31, 1999.

     Other, net for the twelve months and three months ended March 31, 1999 were
$5.6 and $1.4 million  lower,  respectively,  than Other,  net in the comparable
periods ended March 31, 1998.  These decreases  reflect lower equity earnings in
equity  investees during the current periods and higher net gains on disposition
of businesses and properties in prior periods.


Net Income

     Net income for the twelve  months ended March 31, 1999 was $209.7  million,
compared to net income of $180.7  million for the twelve  months ended March 31,
1998.  Net income for the three months  ended March 31, 1999 was $76.6  million,
compared  to net income of $60.7  million for the three  months  ended March 31,
1998.

Liquidity and Capital Resources

     During the next few years, NiSources's ability to pay dividends will depend
upon dividends it receives from Northern Indiana.  More information about common
share dividends can be found in Note 12, "Common  Dividend," to the Consolidated
Financial Statements.

     Generally,  cash flow from operations has provided sufficient  liquidity to
meet  current  operating  requirements.  But  because  the  utility  and utility
construction  business is seasonal in nature,  commercial  paper for  short-term
financing is  occasionally  issued.  As of March 31, 1999 and December 31, 1998,
$114.2  million  and  $193.7  million  of  commercial   paper  was  outstanding,
respectively. The weighted average interest rate of commercial paper outstanding
as of March 31, 1999 was 4.99%.

     There are two five-year,  $100 million  revolving  credit  agreements  that
terminate on September  23, 2003 and two 364-day $100 million  revolving  credit
agreements  that terminate on September 23, 1999. The 364-day  agreements may be
extended  at  expiration  for  additional  periods  of  364  days.  Under  these
agreements,  funds are borrowed at a floating rate of interest or, under certain
circumstances,  at a fixed  rate  of  interest  for  short-term  periods.  These
agreements provide financing flexibility and may be used to support the issuance
of commercial  paper.  At March 31, 1999,  there were no borrowings  outstanding
under these agreements.

     In  addition,  various  lines of credit  are  maintained,  as well as a $50
million uncommitted finance facility. At March 31, 1999 there were no borrowings
under the uncommitted finance facility. Lines of credit for up to $214.1 million
are held with lenders at either their  commercial prime or market lending rates.
As of March 31, 1999, there were $35.0 million of borrowings  outstanding  under
these  lines of credit with a weighted  average  interest  rate of 5.71%.  As of
December 31, 1998,  there were $84.1  million of  borrowings  outstanding  under
these lines of credit.

     Money market lines of credit for up to $403.5 million are maintained. As of
March 31, 1999 there were $86.0 million was outstanding under these money market
lines of credit with a weighted  average interest rate of 5.99%. 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 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.

     Construction  Program.  NiSource  expects that it will continue to meet its
future  commitments with respect to its construction  program 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.

     Two primary market risks,  commodity price risk and interest rate risk, are
addressed by a risk management policy.

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

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

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

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

     The daily net  commodity  position  consists  of natural  gas  inventories,
commodity  purchase and sales  contracts and derivative  financial and commodity
instruments.  The fair market value of this portfolio is a summation of the fair
market values  calculated for each  commodity,  whose net values are measured by
quotes from energy exchange markets and over-the-counter markets. Based upon the
fair market value of this  portfolio  as of March 31, 1999,  if the electric and
natural gas market  prices  dropped by 10  percent,  this  change  would  reduce
NiSource's  net income by  approximately  $1.1  million.  Any such  movements in
prices, however, are not indicative of actual results and are subject to change.

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

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

Year 2000 Costs

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

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

     State  of  Readiness.  The  year  2000  program  consists  of four  phases:
inventory   (identifying   systems  potentially  affected  by  the  year  2000),
assessment (testing identified  systems),  remediation  (correcting or replacing
non-compliant  systems) and validation (evaluating testing remediated systems to
confirm  compliance).   Northern  Indiana  has  completed  the  remediation  and
validation  phases  for all its  mission-critical  systems.  BSG  completion  is
expected in the fourth quarter of 1999. IWC completion is expected in June 1999.
NiSource,  except for BSG, has completed the inventory and assessment phases for
all of  its  non-IT  mission-critical  systems  and  has  scheduled  remediation
(including replacement) and validation for its non-IT  mission-critical  systems
throughout 1999.  Substantially completion of mission-critical year 2000 efforts
is expected  by June 30,  1999,  with the year 2000  program  concluding  in the
fourth quarter of 1999.

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

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

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

Competition and Regulatory Changes

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

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

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

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

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

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

Impact of Accounting Standards

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

Forward Looking Statements

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

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

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

<PAGE>
                                     PART II.
                                OTHER INFORMATION

Item 1.   Legal Proceedings.

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

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

Item 3.  Defaults Upon Senior Securities.
         None

     Item 4. Submission of Matters to a Vote of Security  Holders.  On April 14,
1999,  at the  Annual  Meeting  of  Shareholders,  shareholders  elected  Ian M.
Rolland,  John W.  Thompson and Roger A. Young to serve as  directors  until the
2002 Annual Meeting of  Shareholders.  Directors  whose terms of office continue
after the 1999 Annual Meeting of Shareholders are Arthur J. Decio, Gary L. Neale
and  Robert  J.  Welsh,  whose  terms  expire  at the  2000  Annual  Meeting  of
Shareholders,  and Steven C.  Beering,  James T.  Morris,  Denis E.  Ribordy and
Carolyn Y. Woo, whose terms expire at the 2001 Annual Meeting of Shareholders.

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

                                              Votes                     Votes
                                            Received                   Withheld
           Ian M. Rolland                 105,542,370                  1,003,313
           John W. Thompson               105,637,428                    908,254
           Roger A. Young                 105,636,513                    909,169

     Additionally at the Annual Meeting of Shareholders, shareholders approved a
proposal  to  change  the  company's  name  from  "NIPSCO  Industries,  Inc. to
"NiSource  Inc." by a vote of  100,509,285  shares in favor of the  proposal and
6,036,388  shares voted  against the  proposal or withheld.  The name change was
intended to reflect the company's  new  direction as a  multi-state  supplier of
energy and water resources and related services.

     Also at the  Annual  Meeting  of  Shareholders,  shareholders  approved  an
Amended and  Restated  1994  Long-Term  Incentive  Plan by a vote of  96,025,133
shares  in favor of the  proposal,  with  10,520,549  shares  voted  against  or
withheld and an Amended and Restated 1988 Long-Term  Incentive Plan by a vote of
96,042,263 shares in favor of the proposal, with 10,503,419 shares voted against
the proposal or withheld.

Item 5.  Other Information.
         None

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

               
               Exhibit 23 - Consent of Arthur Andersen LLP

               Exhibit 27 - Financial Data Schedule

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

          (b) Reports on Form 8-K.

     A report on Form 8-K was filed  February 8, 1999.  All events were reported
under Item 5, Other Events.  A report on Form 8-K was filed April 14, 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 Executive Vice President, Chief
                            Financial Officer, Treasurer and 
                            Chief Accounting Officer



Date:  May 13, 1999