NISOURCE INC/DE - 10-K Annual Report

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As Filed with the United States Securities and Exchange Commission
on February 22, 2002.
================================================================================

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

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

For the transition period from_____ to ______

Commission file number 001-16189

NISOURCE INC.
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(Exact name of registrant as specified in its charter)

Delaware 35-2108964
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

Registrant's telephone number, including area code (877) 647-5990
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Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] or No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of January 31, 2002, 207,505,264 shares of Common Stock were outstanding. The
aggregate market value of Common Stock (based upon the January 31, 2002, closing
price of $20.80 on the New York Stock Exchange) held by non-affiliates was
approximately $4,282,473,748.80.

Documents Incorporated by Reference

Part III of this report incorporates by reference specific portions of the
Registrant's Notice of Annual Meeting and Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 21, 2002.

CONTENTS

2

PART I

ITEM 1. BUSINESS

NISOURCE INC.

NiSource Inc. (NiSource) is an energy holding company whose subsidiaries provide
natural gas, electricity and other products and services to approximately 3.7
million customers located within a corridor that runs from the Gulf Coast
through the Midwest to New England. NiSource, organized as an Indiana holding
company in 1987 under the name of NIPSCO Industries, Inc., changed its name to
NiSource Inc. on April 14, 1999. In connection with the acquisition of Columbia
Energy Group (Columbia) on November 1, 2000, as discussed below, NiSource became
a Delaware holding company registered under the Public Utility Holding Company
Act of 1935, as amended (1935 Act). NiSource derives substantially all its
revenues and earnings from the operating results of its 16 direct subsidiaries.

On November 1, 2000, NiSource completed its acquisition of Columbia for an
aggregate consideration of approximately $6 billion, consisting of $3,888
million in cash, 72.4 million shares of common stock valued at $1,761 million
and Stock Appreciation Income Linked Securities(SM) (SAILS(SM)) (units
consisting of a zero coupon debt security coupled with a forward equity contract
in NiSource shares) valued at $114 million. NiSource also assumed approximately
$2 billion in Columbia debt. As a result of the acquisition, NiSource is the
largest natural gas distribution company operating east of the Rocky Mountains,
as measured by number of customers. NiSource's principal subsidiaries include
Columbia, a vertically-integrated natural gas distribution, transmission,
storage and exploration and production holding company whose subsidiaries
provide service to customers in the Midwest, the Mid-Atlantic and the Northeast;
Northern Indiana Public Service Company (Northern Indiana), a
vertically-integrated gas and electric company providing service to customers in
northern Indiana; and Bay State Gas Company (Bay State), a natural gas
distribution company serving customers in New England.

NiSource's primary business segments are: Gas Distribution Operations; Gas
Transmission and Storage Operations; Electric Operations; Exploration and
Production Operations; Merchant Operations; and Other.

Gas Distribution Operations

NiSource's natural gas distribution operations serve more than 3.2 million
customers in 9 states and operate over 54,612 miles of pipeline. Through its
wholly-owned subsidiary, Columbia, NiSource owns five distribution subsidiaries
that provide natural gas to approximately 2.1 million residential, commercial
and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky and Maryland.
NiSource also distributes natural gas to approximately 760,000 customers in
northern Indiana through three subsidiaries: Northern Indiana, Kokomo Gas and
Fuel Company and Northern Indiana Fuel and Light Company, Inc. Additionally,
NiSource's subsidiaries Bay State and Northern Utilities, Inc. distribute
natural gas to more than 340,000 customers in Massachusetts, Maine and New
Hampshire. The distribution subsidiaries are currently pursuing initiatives that
give residential and small commercial customers the opportunity to choose their
natural gas suppliers and to use the distribution subsidiaries for
transportation service.

Gas Transmission and Storage Operations

NiSource's gas transmission and storage subsidiaries own and operate
approximately 16,130 miles of interstate pipelines and operate one of the
nation's largest underground natural gas storage systems capable of storing
approximately 670 billion cubic feet (Bcf) of natural gas. Through its
subsidiaries, Columbia Gas Transmission Corporation (Columbia Transmission),
Columbia Gulf Transmission Company (Columbia Gulf), Crossroads Pipeline Company
and Granite State Gas Transmission, Inc. (Granite State), it owns and operates
an interstate pipeline network extending from offshore in the Gulf of Mexico to
Lake Erie, New York and the eastern seaboard. Together, these companies serve
customers in 19 northeastern, mid-Atlantic, midwestern and southern states and
the District of Columbia. The gas transmission and storage subsidiaries are
engaged in several projects that will expand their service territory and
throughput. The largest such project is Millennium Pipeline, which will replace
parts of an existing Columbia Transmission pipeline and will transport 700,000
Dekatherms (Dth) of natural gas per day to growing markets in New York and the
northeast United States.

3

ITEM 1. BUSINESS (continued)

NISOURCE INC.

Electric Operations

NiSource generates and distributes electricity through its subsidiary Northern
Indiana to approximately 430,000 customers in 21 counties in the northern part
of Indiana. Northern Indiana owns and operates four coal-fired electric
generating stations with a net capability of 3,179 megawatts (mw), four gas
fired combustion turbine generating units with a net capability of 203 mw and
two hydroelectric generating plants with a net capability of 10 mw. These
facilities provide for a total system net capability of 3,392 mw. Northern
Indiana is interconnected with five neighboring electric utilities. During the
year ended December 31, 2001, Northern Indiana generated 93.2% and purchased
6.8% of its electric requirements.

On December 5, 2001, Northern Indiana announced that it will indefinitely
shutdown its Dean Mitchell Generating Station (Mitchell Station). The Mitchell
Station ceased production of electricity in January 2002 with completion of the
shutdown process expected by March 1, 2002. Following completion of the
shutdown, Northern Indiana will operate three coal-fired generation stations
with a net capacity of 2,694 mw, three gas-fired combustion turbine generating
station units with a net capacity of 186 mw and two hydroelectric plants with a
net capability of 10 mw.

Exploration and Production Operations

NiSource's exploration and production subsidiary, Columbia Energy Resources,
Inc. (Columbia Resources), is one of the largest independent natural gas and oil
producers in the Appalachian Basin and also has production operations in Canada.
NiSource acquired Columbia Resources as part of the Columbia acquisition on
November 1, 2000. Columbia Resources produced nearly 54.1 billion cubic feet
equivalent (Bcfe) of natural gas and oil for the twelve months ended December
31, 2001. Columbia Resources has financial interests in over 8,000 wells, and
has net proven gas and oil reserve holdings of 1.1 trillion cubic feet
equivalent (Tcfe). Columbia Resources also owns and operates approximately 6,200
miles of gathering pipelines. Columbia Resources seeks to achieve asset and
profit growth primarily through aggressive drilling activities. For the year
ended 2001, Columbia Resource discovered 70 net Bcfe of gas and oil reserves and
participated in 183 gross (172.2 net) wells with a success rate of 92 percent.

Merchant Operations

The Merchant Operations segment provides energy-related services including gas
marketing, electric transmission services, bulk power, power trading and asset
management services to local distribution companies (LDC), wholesale, commercial
and industrial customers, and participates in the development of merchant power
projects. EnergyUSA-TPC Corp. (TPC), provides energy related asset management
and asset portfolio replacement opportunities for LDCs and fuel requirement
services for electric utilities, independent power producers and cogeneration
facilities. TPC also provides natural gas sales and management services to
industrial and commercial customers, engages in natural gas marketing activities
and provides gas supply services to LDC's. Primary Energy, Inc. (Primary Energy)
develops, builds, operates and manages industrial based energy projects.
Primary Energy develops on-site, industrial-based energy solutions for large
complexes having multiple energy needs, such as electricity, steam, by-product
fuels or heated water.

Other

The Other segment participates in real estate, telecommunications and other
businesses. NiSource has built a fiber optics telecommunications network
primarily along its pipeline rights-of-way between New York and Washington D.C.

Divestiture of Non-Core Assets

In connection with the Columbia acquisition, NiSource sold or is divesting
certain businesses judged to be non-core to the company's strategy, including
Indianapolis Water Company (IWC) and other assets of IWC Resources Corporation
(IWCR), SM&P Utility Resources, Inc. (SM&P) and Columbia Propane Corporation.
See Discontinued Operations in Item 7 and Item 8, Note 5 for additional
information.

See Item 7 for additional information about NiSource business segments.

Growth Strategy

NiSource is focused on becoming the premier energy company serving customers
throughout the energy-intensive corridor that extends from the supply areas in
the Gulf Coast through the consumption centers in the Midwest, Mid-Atlantic, New
England and Northeast. This corridor includes 30% of the nation's population and
40% of its energy consumption. NiSource believes natural gas will be the fuel
preferred by customers to meet the corridor's growing energy needs.

4

ITEM 1. BUSINESS (continued)

NISOURCE INC.
Competition and Changes in the Regulatory Environment

The regulatory frameworks applicable to NiSource's operations, at both the state
and federal levels, are undergoing fundamental changes. These changes have had
and will continue to have an impact NiSource's operations, structure and
profitability. At the same time, competition within the gas and electric
industries will create opportunities to compete for new customers and revenues.
Management continually seeks new ways to be more competitive and profitable in
this changing environment, including partnering on energy projects with major
industrial customers; converting some of its generating units to allow use of
lower cost low sulfur coal; providing its gas customers with increased customer
choice for new products and services; acquiring companies that will provide
improved economies of scale and efficiencies; and developing new energy-related
products for residential, commercial and industrial customers.

NATURAL GAS COMPETITION. Open access to natural gas supplies over interstate
pipelines and the deregulation of the commodity price of gas has led to
tremendous change in the energy markets, which continue to evolve. During the
past few years, LDC customers and marketers began to purchase gas directly from
producers and marketers and an open competitive market for gas supplies emerged.
This separation or "unbundling" of the transportation and other services offered
by pipelines and LDCs allows customers to select the service they want
independent from the purchase of the commodity. NiSource's gas distribution
subsidiaries are involved in programs that provide residential customers the
opportunity to purchase their natural gas requirements from third parties and
use the NiSource gas distribution subsidiaries for transportation services only.

ELECTRIC COMPETITION. In 1996, the Federal Energy Regulatory Commission (FERC)
ordered that all public utilities owning, controlling or operating electric
transmission lines file non-discriminatory open-access tariffs and offer
wholesale electricity suppliers and marketers the same transmission service they
provide to themselves. In 1997, FERC accepted for filing Northern Indiana's
open-access transmission tariff. In December 1999, FERC issued Order 2000 a
final rule addressing the formation and operation of Regional Transmission
Organizations (RTOs), (see Item 7, Electric Operations - Regulatory Matters).
The rule was intended to eliminate pricing inequities in the provision of
wholesale transmission service. NiSource does not believe that compliance with
the new rules will be material to its future earnings. Although wholesale
customers currently represent a small portion of Northern Indiana's electricity
sales, it intends to continue its efforts to retain and add wholesale customers
by offering competitive rates and also intends to expand the customer base for
which it provides transmission services.

NiSource's other operations also experience competition for energy sales and
related services from third party providers. NiSource meets these challenges
through innovative programs aimed at providing energy products and services at
competitive prices while also providing new services that are responsive to the
evolving energy market and customer requirements. See Competition in Item 7 for
additional information.

Financing Subsidiary

NiSource Finance Corp. (NiSource Finance) is a wholly owned consolidated special
purpose finance subsidiary of NiSource that engages in financing activities to
raise funds for the business operations of NiSource and its subsidiaries.
NiSource Finance was incorporated in February 2000 under the laws of the State
of Indiana. NiSource Finance actively borrows funds in the commercial paper
market, and maintains a $2.5 billion revolving credit facility with a syndicate
of banks for back-up liquidity purposes. NiSource Finance's obligations are
fully and unconditionally guaranteed by NiSource. The function of NiSource
Finance was previously performed by NiSource Capital Markets, Inc. (Capital
Markets).

Other Relevant Business Information

NiSource's customer base is broadly diversified, with no single customer
accounting for a significant portion of revenues.

As of December 31, 2001, NiSource had 12,501 full-time employees of which 4,704
were subject to collective bargaining agreements. NiSource sold SM&P on January
28, 2002. SM&P had 1,913 employees at December 31, 2001.

For a listing of certain subsidiaries of NiSource refer to Exhibit 21.

5

ITEM 2. PROPERTIES

NISOURCE INC.

Discussed below are the principal properties held by NiSource and its
subsidiaries as of December 31, 2001.

GAS DISTRIBUTION OPERATIONS. NiSource's gas distribution operations own and
operate a total of 54,612 miles of pipelines. This includes (i) for the five
distribution subsidiaries of its Columbia system, 33,215 miles of pipelines
3,300 acres of underground storage, 8 storage wells and one compressor station
with 800 horsepower (hp) of installed capacity, (ii) for its Northern Indiana
system, 14,099 miles of pipelines and 2 compressor stations with a total of
6,000 hp of installed capacity, (iii) for its Bay State system, 5,674 miles of
pipelines, (iv) for its Northern Indiana Fuel and Light system, 879 miles of
pipelines, and (v) for its Kokomo Gas and Fuel system, 781 miles of pipelines.
The physical properties of the NiSource gas utilities are located throughout
Ohio, Indiana, Pennsylvania, Virginia, Kentucky, Maryland, Massachusetts, Maine
and New Hampshire.

GAS TRANSMISSION AND STORAGE OPERATIONS. Columbia Transmission has 882,511 acres
of underground storage, 3,603 storage wells, 11,702 miles of interstate
pipelines and 103 compressor stations with 589,835 hp of installed capacity.
These operations are located in Delaware, Kentucky, Maryland, New Jersey, New
York, North Carolina, Ohio, Pennsylvania, Virginia and West Virginia. Columbia
Gulf has 4,144 miles of transmission pipelines and 12 compressor stations with
479,102 hp of installed capacity. Columbia Gulf's operations are located in
Kentucky, Louisiana, Mississippi, Tennessee, Texas and Wyoming. Granite State
Pipeline has 82 miles of transmission pipeline with operations located in Maine,
Massachusetts and New Hampshire. Crossroads Pipeline has 202 miles of
transmission pipeline and one compressor station with 3,000 hp of installed
capacity. Crossroad's operations are located in Indiana and Ohio.

ELECTRIC OPERATIONS. Northern Indiana owns and operates four coal-fired electric
generating stations with net capabilities of 3,179 mw, two hydroelectric
generating plants with net capabilities of 10 mw and four gas-fired combustion
turbine-generating units with net capabilities of 203 mw, for a total system net
capability of 3,392 mw. It has 288 substations with an aggregate transformer
capacity of 23,230,100 kilovolts (kva). Its transmission system, with voltages
from 34,500 to 345,000 volts, consists of 3,116 circuit miles of line. The
electric distribution system extends into 21 counties and consists of 7,881
circuit miles of overhead and 1,725 cable miles of underground primary
distribution lines operating at various voltages from 2,400 to 12,500 volts.
Northern Indiana has distribution transformers having an aggregate capacity of
11,738,624 kva and 451,310 electric watt-hour meters.

On December 5, 2001, Northern Indiana announced that it will indefinitely
shutdown its Mitchell Station. The Mitchell Station ceased production of
electricity in January 2002 with completion of the shutdown process expected by
March 1, 2002. Following completion of the shutdown, Northern Indiana will
operate three coal-fired generation stations with a net capacity of 2,694 mw,
three gas-fired combustion turbine generating station units with a net capacity
of 186 mw and two hydroelectric plants with a net capability of 10 mw.

EXPLORATION AND PRODUCTION OPERATIONS. Columbia Resources has net proven gas and
oil reserve holdings of approximately 1.1 Tcfe and financial interests in over
8,000 wells. In addition, Columbia Resources owns and operates approximately
6,200 miles of gathering pipelines and 86 compressor stations with 31,145 hp of
installed capacity.

OTHER. Columbia Transmission Communications Corporation (Transcom), a subsidiary
of NiSource, owns a fiber optics telecommunications network that runs along the
right-of-way of Columbia Gas Transmission's pipelines between New York and
Washington D.C. This network consists of approximately 270 miles of fiber optics
cable.

Through subsidiaries, NiSource owns Southlake Complex, a 325,000 square foot
headquarters building located in Merrillville, Indiana and a golf course,
surrounding residential development and land held for resale in Chesterton,
Indiana.

CHARACTER OF OWNERSHIP. Substantially all of the properties of Northern Indiana
are subject to the lien of its First Mortgage Indenture. The principal offices
and properties of NiSource and its subsidiaries are held in fee and are free
from other encumbrances, subject to minor exceptions, none of which are of such
a nature as to impair substantially the usefulness of such properties. Many of
the offices in various communities served are occupied by subsidiaries of
NiSource under leases. All properties are subject to liens for taxes,
assessments and undetermined charges (if any) incidental to construction. It is
NiSource's practice regularly to pay such amounts, as and when due, unless
contested in

6

ITEM 2. PROPERTIES (continued)

NISOURCE INC.

good faith. In general, the electric lines, gas pipelines and related facilities
are located on land not owned in fee but are covered by necessary consents of
various governmental authorities or by appropriate rights obtained from owners
of private property. NiSource does not, however, generally have specific
easements from the owners of the property adjacent to public highways over, upon
or under which its electric lines and gas pipelines are located. At the time
each of the principal properties was purchased a title search was made. In
general, no examination of titles as to rights-of-way for electric lines, gas
pipelines or related facilities was made, other than examination, in certain
cases, to verify the grantors' ownership and the lien status thereof.

ITEM 3. LEGAL PROCEEDINGS

1. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS
TRANSMISSION CORP., ET. AL.

The plaintiff filed a complaint under the False Claims Act, on behalf of the
United States of America, against approximately seventy pipelines. The
plaintiff claimed that the defendants had submitted false royalty reports to
the government (or caused others to do so) by mismeasuring the volume and
heating content of natural gas produced on Federal land and Indian lands.
Plaintiff's original complaint was dismissed without prejudice for
misjoinder of parties and for failing to plead fraud with specificity. In
1997, the plaintiff then filed over sixty-five new False Claims Act
complaints against over 330 defendants in numerous Federal courts. One of
those complaints was filed in the Federal District Court for the Eastern
District of Louisiana against Columbia and twelve affiliated entities.
Plaintiff's second complaint repeats the mismeasurement claims previously
made and adds valuation claims alleging that the defendants have undervalued
natural gas for royalty purposes in various ways, including by making sales
to affiliated entities at artificially low prices. Most of the Grynberg
cases were transferred to Federal court in Wyoming in 1999. In December
1999, the Columbia defendants filed a motion to dismiss plaintiff's second
complaint primarily based on a failure to plead fraud with specificity. In
May 2001, the Court denied the Columbia defendants' motion to dismiss. The
Columbia defendants joined together with numerous other defendants and filed
a motion requesting the district court to amend its order to include a
certification so that the defendants could request permission from the
United States Court of Appeals for the Tenth Circuit to appeal a controlling
question of law. That motion was denied on July 2, 2001.

2. QUINQUE OPERATING CO. ET AL V. GAS PIPELINES, ET. AL.

Plaintiff filed an amended complaint in Stevens County; Kansas state court
on September 23, 1999, against over 200 natural gas measurers, mostly
natural gas pipelines, including Columbia and fourteen affiliated entities.
The allegations in Quinque are similar to those made in Grynberg; however,
Quinque broadens the claims to cover all oil and gas leases (other than the
Federal and Indian leases that are the subject of Grynberg). Quinque asserts
a breach of contract claim, negligent or intentional misrepresentation,
civil conspiracy, common carrier liability, conversion, violation of a
variety of Kansas statutes and other common law causes of action. Quinque
purports to be a nationwide class action filed on behalf of all similarly
situated gas producers, royalty owners, overriding royalty owners, working
interest owners and certain state taxing authorities. The defendants had
previously moved the case to Federal court. On January 12, 2001, the Federal
court remanded the case to state court. In June 2001, the plaintiff
voluntarily dismissed nine of the thirteen Columbia entities. Discovery
relating to personal jurisdiction has begun.

3. VIVIAN K. KERSHAW ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ET AL.

In February 2000, plaintiff filed a complaint in New York state court
against Columbia, Columbia Natural Resources, Inc. and Columbia
Transmission. The complaint alleges that Kershaw owns an interest in an oil
and gas lease in New York and that the defendants have underpaid royalties
on those leases by, among other things, failing to base royalties on the
price at which natural gas is sold to the end user and by improperly
deducting post-production costs. The complaint also seeks class action
status on behalf of all royalty owners in oil and gas leases operated by
Columbia Resources. Plaintiff seeks the alleged royalty underpayments and
punitive damages. Columbia Resources and Columbia Transmission removed the
case to Federal court in March 2000. The Federal court has now remanded
Kershaw back to New York state court. The Columbia defendants' motion to
dismiss was partially granted and partially denied by the New York state
court judge on September 24, 2001.

7

ITEM 3. LEGAL PROCEEDINGS (continued)

NISOURCE INC.

4. ANTHONY GONZALEZ, ET AL. V. NATIONAL PROPANE CORPORATION, ET AL.

On December 11, 1997, plaintiffs Anthony Gonzalez, Helen Pieczynski, as
Special Administrator of the Estate of Edmund Pieczynski, deceased, Michael
Brown and Stephen Pieczynski filed a multiple-count complaint for personal
injuries in the Circuit Court of Cook County, Illinois against National
Propane Corporation and the Estate of Edmund Pieczynski sounding in strict
tort liability and negligence. National Propane Corporation was acquired by
Columbia in 1999, and this litigation was retained by Columbia when Columbia
Propane was sold in 2001. Plaintiff's complaint arises from an explosion and
fire, which occurred in a Wisconsin vacation cottage in 1997. National
Propane, L.P. filed a third-party complaint for contribution against Natural
Gas Odorizing and Phillips Petroleum Company. Written discovery has been
completed and the parties are conducting oral discovery of the fact
witnesses. The case has a scheduled trial date of October 17, 2002.

5. COLUMBIA GAS TRANSMISSION CORP. V. CONSOLIDATION COAL CO., ET AL.

On December 21, 1999, Columbia Transmission filed a complaint in Federal
court in Pittsburgh, Pennsylvania against Consolidation Coal Co. and McElroy
Coal Co. (collectively, Consol), seeking declaratory and permanent
injunctive relief enjoining Consol from pursuing its current plan to conduct
longwall mining through Columbia Transmission's Victory Storage Field
(Victory) in northern West Virginia. The complaint was served on April 10,
2000. In October 2001, the parties reached an agreement in principle to
settle this matter and the related case described below.

6. MCELROY COAL COMPANY V. COLUMBIA GAS TRANSMISSION CORPORATION

On February 12, 2001, McElroy Coal Company (McElroy), an affiliate of
Consolidation Coal Co., filed a complaint against Columbia Transmission in
Federal court in Wheeling, West Virginia. The West Virginia complaint seeks
declaratory and injunctive relief as to McElroy's alleged right to mine coal
within Victory, and Columbia Transmission's obligation to take all necessary
measures to permit McElroy to longwall mine. The complaint also seeks
compensation for the inverse condemnation of any coal that cannot be mined
due to Columbia Transmission's Victory operations. Except for the claim of
inverse condemnation, McElroy's West Virginia complaint appears to be
virtually identical to Consol's original counterclaim to Columbia
Transmission's Federal court action in Pennsylvania. On April 10, 2001, the
West Virginia case was dismissed without prejudice. In October 2001, the
parties reached an agreement in principle to settle this matter and the
related case described above.

8

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a list of the Executive Officers of the Registrant, including
their names, ages and offices held, as of February 1, 2002.

9

NISOURCE INC.
SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)

10

NISOURCE INC.
SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)

11

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

NISOURCE INC.

NiSource's common shares are listed and traded on the New York, Chicago and
Pacific stock exchanges. The table below indicates the high and low sales price
of NiSource's common shares, on the composite tape, during the periods
indicated.

As of January 31, 2002, NiSource had 49,389 common stockholders of record and
207,505,264 shares outstanding.

On November 1, 2000, NiSource issued 72,452,733 shares of common stock in
exchange for Columbia shares in connection with the Columbia acquisition. On
November 27, 2000, NiSource issued 11,500,000 shares of common stock with the
proceeds used to reduce borrowings under the NiSource Finance acquisition credit
facility

The policy of the Board has been to declare cash dividends on a quarterly basis
payable on or about the 20th day of February, May, August and November. NiSource
paid quarterly common dividends of $0.29 per share during 2001. At its January
2002 meeting, the Board declared a quarterly common dividend of $0.29 per share,
payable on February 20, 2002 to holders of record on January 31, 2002.

Holders of NiSource's common shares are entitled to receive dividends when, as
and if declared by the Board out of funds legally available. Although the Board
currently intends to consider the payment of regular quarterly cash dividends on
common shares, the timing and amount of future dividends will depend on the
earnings of NiSource's subsidiaries, their financial condition, cash
requirements, regulatory restrictions, any restrictions in financing agreements
and other factors deemed relevant by the Board.

The following limitations on payment of dividends apply to Northern Indiana:

When any bonds are outstanding under its First Mortgage Indenture, Northern
Indiana may not pay cash dividends on its stock (other than preferred or
preference stock) or purchase or retire common shares, except out of earned
surplus or net profits computed as required under the provisions of the
maintenance and renewal fund. At December 31, 2001, Northern Indiana had
approximately $157.7 million of retained earnings (earned surplus) available for
the payment of dividends. Future common share dividends by Northern Indiana will
depend upon adequate retained earnings, adequate future earnings and the absence
of adverse developments.

So long as any shares of Northern Indiana's cumulative preferred stock are
outstanding, no cash dividends shall be paid on its common shares in excess of
75% of the net income available for the preceding calendar year, unless the
aggregate of the capital applicable to stocks subordinate as to assets and
dividends, would equal or exceed 25% of the sum of all obligations evidenced by
bonds, notes, debentures or other securities, plus the total capital and
surplus. At December 31, 2001, the sum of the capital applicable to stocks
subordinate to the cumulative preferred stock plus the surplus was equal to 43%
of the total capitalization including surplus.

12

ITEM 6. SELECTED FINANCIAL DATA

NISOURCE INC.
SELECTED SUPPLEMENTAL INFORMATION

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

NISOURCE INC.

The Management's Discussion and Analysis, including statements regarding market
risk sensitive instruments, contains "forward-looking statements," within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Investors and
prospective investors should understand that many factors govern whether any
forward-looking statement contained herein will be or can be realized. Any one
of those factors could cause actual results to differ materially from those
projected. These forward-looking statements include, but are not limited to,
statements concerning NiSource's plans, proposed dispositions, objectives,
expected performance, expenditures and recovery of expenditures through rates,
stated on either a consolidated or segment basis, and any and all underlying
assumptions and other statements that are other than statements of historical
fact. From time to time, NiSource may publish or otherwise make available
forward-looking statements of this nature. All such subsequent forward-looking
statements, whether written or oral and whether made by or on behalf of
NiSource, are also expressly qualified by these cautionary statements. All
forward-looking statements are based on assumptions that management believes to
be reasonable; however, there can be no assurance that actual results will not
differ materially. Realization of NiSource's objectives and expected performance
is subject to a wide range of risks and can be adversely affected by, among
other things, increased competition in deregulated energy markets, weather,
fluctuations in supply and demand for energy commodities, successful
consummation of proposed acquisitions and dispositions, growth opportunities for
NiSource's regulated and nonregulated businesses, dealings with third parties
over whom NiSource has no control, actual operating experience of acquired
assets, NiSource's ability to integrate acquired operations into its operations,
the regulatory process, regulatory and legislative changes, changes in general
economic, capital and commodity market conditions, and counter-party credit
risk, many of which risks are beyond the control of NiSource. In addition, the
relative contributions to profitability by each segment, and the assumptions
underlying the forward-looking statements relating thereto, may change over
time.

CONSOLIDATED REVIEW

The Consolidated Review information should be read taking into account the
critical accounting policies adopted by NiSource and discussed in "Other
Information" of this Item 7.

Net Income

For the twelve months ended December 31, 2001, NiSource reported income from
continuing operations of $212.1 million, or $1.03 per share, compared to $141.1
million, or $1.05 per share, in 2000 and $153.9 million, or $1.24 per share in
1999. After adjusting for non-recurring items as reflected on the table below,
income from continuing operations was $249.6 million, or $1.22 per share in
2001, $251.5 million, or $1.87 per share in 2000 and $172.0 million or $1.38 per
share in 1999. All per share amounts are based on basic common shares.

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.

Taking into account income from continuing operations, results from discontinued
operations and a change in accounting, NiSource reported 2001 net income of
$216.2 million, or $1.05 per share, 2000 net income of $150.9 million, or $1.12
per share, and $160.4 million, or $1.29 per share for 1999.

The results for 2001 and 2000 are not comparable due to the acquisition of
Columbia that was completed on November 1, 2000. The current year includes a
full twelve months of Columbia operations while 2000 included November and
December only. In addition, earnings per share are not comparable because of the
issuance of additional NiSource shares in connection with the Columbia
acquisition. The positive impact of the addition of two million Columbia gas
customers as well as the addition of new business segments (Gas Transmission and
Storage and Exploration and Production) was reduced by record setting warm
weather, a continuing economic downturn in the industrial and manufacturing
sectors and a reduced level of trading opportunities for the merchant segment.

The results for 2000 and 1999 are not directly comparable, due to the Columbia
acquisition completed on November 1, 2000. The positive impact of Columbia's net
income for November and December of 2000 was increased by improved results from
EnergyUSA, Inc., higher weather-related natural gas deliveries and electric
sales in December 2000 and summer 2000 and a $23.8 million after-tax gain on the
sale of NiSource's interests in Market Hub Partners, L.P. (MHP) in September
2000. Results were negatively impacted by approximately $67.4 million of costs
in 2000 and $8.1 million in 1999 related to the Columbia acquisition, and $63.2
million of expense in 2000 and $18.3 million for 1999 for the write-down of
certain assets. In 1999, a favorable adjustment of $8.3 million after-tax was
recorded for an insurance settlement associated with clean-up activities for
certain manufactured gas plant sites. Additional expense was also incurred in
2000 related to restructuring activities and the amortization of goodwill and
higher interest and facility fees on borrowings.

In November 2001, NiSource, IWCR and the city of Indianapolis (City) signed a
definitive agreement for the City to buy the assets of IWC and other assets of
IWCR and its subsidiaries for $515.0 million, which includes $132.4 million in
IWCR debt and the redemption of $2.5 million of IWC preferred stock. NiSource
will retain $80.0 million in IWC debt. It is anticipated that the transaction
will be completed in the second quarter of 2002. Consequently, these operations
are reflected in discontinued operations. These discontinued operations resulted
in after-tax income of $0.1 million for 2001, $9.8 million for 2000 and $6.5
million in 1999.

Net Revenues

Total consolidated net revenues (gross revenues less cost of sales) for the
twelve months ended December 31, 2001, were $3,403.4 million, a $1,455.4 million
increase over 2000. The increase, primarily attributable to twelve months of
Columbia operations in 2001 compared to two months in 2000, was reduced by
approximately $63.0 million by record setting warmer than normal weather.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.

Net revenues for 2000 of $1,948 million, increased $555.3 million over 1999 due
in part to $433.1 million from the inclusion of Columbia's operations for the
last two months of 2000 and an increase of $41.4 million for the full year
effect of Bay State. Bay State was acquired in February 1999. Also contributing
to the increase were improved margins on electric and wholesale natural gas
sales, gas and power trading activities and increased sales to commercial and
industrial customers.

Expenses

Operating expenses were $2,394.5 million in 2001, a $1,003.9 million increase
over 2000. The increase was primarily attributable to including twelve months of
Columbia operations in 2001 compared to two months in 2000. In addition, the
current year was negatively impacted by restructuring costs of $28.7 million,
uncollectibles of $17.8 million related to the Enron bankruptcy, an increase in
uncollectible customer accounts of $13.1 million and a one time charge of $15.5
million related to the settlement of the MHP litigation. Other transition and
one-time events increased operating expenses $21.7 million. Depreciation,
depletion and amortization expense in 2001 included goodwill amortization of
$93.1 million for twelve months attributable to the Columbia acquisition
compared to $15.0 million for two months in 2000.

Operating expenses of $1,390.6 million for 2000 increased $435.8 million over
1999. Operation and maintenance expense was $245.9 million higher due primarily
to the inclusion of Columbia's results for November and December 2000 and the
full year effect of Bay State. Higher expense in 2000 compared to 1999 was also
attributable to costs related to restructuring activities that were implemented
in 2000 to improve efficiencies, and higher employee related costs. In addition,
$65.8 million of expense was recorded in 2000 to reflect losses on the sale of
certain assets. In 1999, expense was reduced $13 million due to a favorable
insurance adjustment related to manufactured gas plant site clean-up costs.
Depreciation, amortization and depletion expense increased $81.1 million
reflecting Columbia's operations for the last two months of 2000, the
amortization of goodwill associated with the Columbia acquisition and the full
year effect of Bay State as well as additional plant in service. Taxes other
than income were $156.1 million higher also primarily due to the inclusion of
Columbia for the last two months of 2000 and the full year effect of Bay State.

Other Income (Deductions)

Other Income (Deductions) in 2001 reduced income $613.6 million compared to a
reduction in 2000 of $290.4 million. Interest expense, net increased $293.2
million over 2000 primarily due to the full year effect of interest on Columbia
outstanding debt and the debt incurred for the acquisition, offset by a decrease
in interest rate on short-term borrowings. See Note 8 of the Notes to
Consolidated Financial Statements for additional information. Dividends paid on
Company-obligated mandatorily redeemable preferred securities reflected in the
table above as minority interests, were $20.4 million in 2001 and 2000.
Preferred stock dividends paid were $7.5 million in 2001 and $7.8 million in
2000. Other, net increased 2001 income $12.0 million in 2001 and $42.3 million
in 2000. The year 2000 included a $51.9 million gain on the sale of NiSource's
interest in MHP.

Other Income (Deductions) in 2000 reduced income $290.4 million compared to a
reduction in income of $201.8 million in 1999. Interest expense, net increased
$149.1 million over 1999 due to additional borrowings incurred as a result of
the acquisition of Columbia, the full year effect of interest on the $160
million in Puttable Reset Securities (PURS) issued in September 1999 and
increased short-term borrowings. Costs associated with facility fees and the
ineffective component of interest rate hedges were charged to interest expense
in 2000. See Note 8 of the Notes to Consolidated Financial Statements for
additional information. In 2000, dividends paid on Company-obligated mandatorily
redeemable preferred securities reflected in the table above as minority
interests, were $20.4 million, an increase of $2.7 million from 1999, reflecting
the full year effect of dividends on these securities, which were issued in
February 1999. Other, net, increased $62.9 million primarily reflecting a $51.9
million gain on the sale of

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.

NiSource's interests in MHP in September 2000. In 1999, a $16.5 million
non-recurring charge was recorded associated with the carrying value of oil and
gas properties and a loss that resulted from a decision to abandon certain
businesses and facilities that were not consistent with NiSource's strategic
direction.

Income Taxes

Income taxes increased $57.3 million in 2001 over 2000 and increased $43.7
million in 2000 over 1999 primarily as a result of changes in pre-tax income and
timing differences for certain deferred tax issues. The effective income tax
rate was 46.3%, 47.2% and 34.8% in 2001, 2000 and 1999, respectively. See Note 9
of the Notes to Consolidated Financial Statements for additional information.

Discontinued Operations

Discontinued operations reflected after-tax gain of $0.1 million, or less than
one cent per share, in 2001 compared to after-tax income of $9.8 million, or
$0.07 per share, in 2000 and $6.5 million, or $0.05 per share, in 1999. Income
on discontinued operations reflects results for NiSource's water operations.

LIQUIDITY AND CAPITAL RESOURCES

Generally, cash flow from operations has provided sufficient liquidity to meet
current operating requirements. A significant portion of NiSource's operations,
most notably in the gas and electric distribution businesses, are subject to
seasonal fluctuations in cash flow. During the heating season, which is
primarily from November through March, cash receipts from gas sales and
transportation services typically exceed cash requirements. In the summer
months, cash receipts for electric sales normally exceed requirements. Also,
during the summer months, cash on hand, together with external short-term and
long-term financing, is used in operations to purchase gas to place in storage
for heating season deliveries; perform necessary maintenance of facilities; make
capital improvements in plant; and expand service into new areas.

Credit Facilities

On November 1, 2000, NiSource completed the acquisition of Columbia for
approximately $6 billion plus the assumption of approximately $2 billion of
Columbia debt. The acquisition was accomplished through the creation of a new
holding company. To complete the acquisition of Columbia, NiSource, through
NiSource Finance, arranged a $6 billion 364-day acquisition facility with a
syndicate of banks. On November 1, 2000, the closing date of the acquisition,
the facility supported $4.1 billion of commercial paper issued to finance the
Columbia acquisition. Subsequent to the November 1, 2000 Columbia acquisition,
NiSource reduced its acquisition related commercial paper borrowings through the
issuance of $2.5 billion of privately placed notes completed on November 10,
2000. This issuance included $750 million of three-year notes paying a 7.5%
coupon and maturing on November 15, 2003, $750 million of five-year notes paying
a 7.625% coupon and maturing on November 15, 2005 and $1 billion of ten-year
notes paying a 7.875% coupon and maturing on November 15, 2010. Subsequently, an
additional $150 million of five-year notes were issued, bearing a 7.625% coupon
and maturing on November 15, 2005. On November 27, 2000, NiSource issued
11,500,000 new shares of NiSource common stock at an offering price of $25.25
per share. The $280.9 million of net proceeds were used to repay commercial
paper.

During March 2001, NiSource arranged $2.5 billion in revolving credit facilities
with a syndicate of banks to support its future working capital requirements,
providing back-stop support for NiSource's commercial paper program. The new
facility consolidated essentially all of NiSource's existing short-term credit
facilities into one credit facility. The $2.5 billion credit facility consists
of a $1.25 billion 364-day facility that terminates on March 22, 2002 and a
$1.25 billion facility that terminates on March 23, 2004. On April 6, 2001,
NiSource Finance issued $300.0 million of unsecured two-year notes guaranteed by
NiSource, paying a 5.75% coupon and maturing on April 15, 2003. The proceeds
were used to repay commercial paper.

As a means of further improving the balance sheet, NiSource intends to improve
liquidity through proceeds obtained from the divestiture of the Indianapolis
Water Company and SM&P, the issuance of additional notes and the sale of equity
subsequent to the resolution of its pending rate investigation with the Indiana
Utility Regulatory Commission. Additionally, NiSource is currently evaluating
the appropriate dollar commitment level, if any, to be renewed under the 364-day
facility on March 22, 2002. NiSource has begun preparation for the facility
renewal and syndication process.

17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.

As of December 31, 2001 and December 31, 2000, $1,004.3 million and $2,078.8
million of commercial paper was outstanding, respectively. The weighted average
interest rate on commercial paper outstanding as of December 31, 2001 and
December 31, 2000 was 3.14% and 7.44%, respectively. In addition, NiSource had
outstanding credit facility advances under its 3-year facility of $850.0 million
at December 31, 2001 at a weighted average interest rate of 2.575%, and credit
facility advances (notes payable) of $417.9 million at December 31, 2000, at a
weighted average interest rate of 7.78%. As of December 31, 2001 and December
31, 2000, NiSource had $51.7 million and $128.5 million of standby letters of
credit outstanding, respectively. As of December 31, 2001, $629.0 million of
credit was available under the facility. See Note 15 of the Notes to the
Consolidated Financial Statements for more information.

Credit Ratings

On December 6, 2001 Fitch Ratings downgraded the long-term debt ratings of
NiSource Inc and its subsidiaries. Fitch cited weak consolidated credit coverage
ratios and higher than projected debt levels at NiSource, resulting in a credit
profile which was more consistent with a "BBB" rating category, rather than the
previous "BBB+" rating. At the same time, Fitch also assigned a "Stable" ratings
outlook for NiSource and its subsidiaries. On February 5, 2002, Fitch reaffirmed
the credit ratings of NiSource Inc. and its subsidiaries, but revised the
Company's ratings outlook from "Stable" to "Negative". In January 2002, Standard
and Poor's affirmed NiSource's BBB credit rating and its A2 commercial paper
rating with a negative outlook. On December 7, 2001, Moody's Investors Service
put under review for possible downgrade the short-term and long-term debt
ratings of NiSource Inc. and its subsidiaries. Moody's stated rationale for
their negative ratings watch action was NiSource's higher than expected overall
leverage level and concerns about the effect that the weakening local economy
might have on the Company's operating results. Immediately following the Moody's
ratings watch action, the Company's ability to rollover maturities within the
A2/P2 commercial paper market was significantly constrained. As a result, the
Company utilized its revolving credit facility to fund a number of commercial
paper maturities occurring subsequent to the Moody's ratings watch action. At
December 31, 2001, $850.0 million of commercial paper maturities had been
refinanced through NiSource's revolving credit facility. On February 1, 2001,
Moody's downgraded the senior unsecured long-term debt ratings of NiSource and
NiSource Finance to Baa3 and the commercial paper rating of NiSource Finance to
P3. In addition, Moody's downgraded the long-term debt ratings of all other
rated subsidiaries to Baa2 to align the ratings of the subsidiaries and bring
them closer to the parent's ratings going forward. As a split-rated A2/P3
commercial paper issuer, the Company expects that its access to the commercial
paper market will be significantly constrained and will meet its liquidity needs
going forward by using its revolving credit facility and also terming-out a
portion of its short-term borrowing requirements in the fixed-income capital
markets. Moody's also revised the Company's Outlook from "Stable" to "Negative".

NiSource has entered into gas and electric trading agreements that contain
"ratings triggers" that require increased collateral if the credit ratings of
the Company or certain of its subsidiaries fall below BBB- at Standard and
Poor's or Baa3 at Moody's. The collateral requirement from a downgrade below the
ratings trigger levels would amount to approximately $50.0 million to $60.0
million. In addition to agreements with ratings triggers, there are other
agreements that contain "adequate assurance" or "material adverse change"
provisions. The collateral requirement for those agreements would amount to
approximately $110.0 million to $115.0 million.

In the case of NiSource's Primary Energy subsidiaries, ratings triggers would
result in increases in the financing rates used to calculate operating lease
payments for four of the projects. One other Primary Energy project would
require the issuance of a letter of credit in the event of a ratings downgrade
below Ba1 by Moody's or BB+ by Standard and Poor's. The letter of credit
required in the event of a downgrade would have a face amount of $17 million to
$35 million depending on the extent of the downgrade.

Columbia is the principal for surety bonds issued to guarantee performance under
forward gas sales agreements. The surety bonds related to forward gas sales
under agreements with Mahonia II Limited have indemnity values amounting to
approximately $294.0 million declining over time and have ratings triggers if
the credit rating of Columbia falls below BBB at Standard and Poor's or Baa2 at
Moody's. Columbia's long-term debt ratings are currently BBB and Baa2 at
Standard and Poor's and Moody's, respectively. The collateral requirement from a
downgrade below the ratings trigger levels would require the posting of a letter
of credit of approximately $294.0 million declining over time. In another, but
unrelated transaction, the surety in accordance with the terms of its indemnity
agreement, has asked that NiSource post a letter of credit in the face amount of
approximately $131.0 million declining over time to support the bonds. NiSource
will comply with this request.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.

Columbia of Ohio is a party to an agreement to sell, without recourse,
substantially all of its trade receivables to Columbia Accounts Receivable
Corporation (CARC), a wholly-owned subsidiary of Columbia. CARC, in turn, is
party to an agreement in which it sells a percentage ownership interest in a
defined pool of the accounts receivable to a commercial paper conduit. Under
these agreements, CARC may not sell any new receivables to the conduit if
Columbia's debt rating falls below BBB or Baa2 at Standard and Poor's and
Moody's, respectively. In addition, if Columbia's debt rating falls below
investment grade, the agreements terminate and CARC may not sell any new
receivables to the conduit.

Contractual Obligations and Commercial Commitments

NiSource has certain contractual obligations that extend out beyond 2002. These
commitments include long-term debt; lease obligations, primarily operating
leases related to the Company's Primary Energy subsidiaries; and unconditional
purchase obligations for pipeline capacity, transportation and storage services
through the Company's Gas Distribution subsidiaries. The total contractual cash
obligations in existence at December 31, 2001 due pursuant to contractual
commitments are:

NiSource also has made certain commercial commitments that extend beyond 2002.
These commitments include lines of credit, letters of credit and financing
guarantees. The total commercial commitments in existence at December 31, 2001
and the years in which they expire are:

Capital Expenditures

The table below reflects actual capital expenditures by segment for 2001 and
2000 and an estimate for year 2002:

For 2001, capital expenditures were $679.2 million, an increase of $313.4
million over 2000. These figures are not directly comparable due to the Columbia
acquisition on November 1, 2000. Columbia's capital expenditures for the last
two months are included in the 2000 financial statements. The gas distribution
segment's capital program in 2001 included investments to extend service to new
areas and develop future markets, as well as expenditures to ensure safe,
reliable and improved service to customers. The transmission and storage segment
spent $85.7 million in 2001 to ensure the safety and reliability of the
pipelines. The remaining $51.7 million was used for market development
activities and new business initiatives. The electric program expenditures
mainly related to adding new customers and maintaining equipment. The
exploration and production segment's 2001 program primarily included the
drilling of 230 new wells in the Appalachian Basin and Canada. Other products
and services comprised of $28.7 million for the completion of Transcom's fiber
optics network, $13.0 million for investments in fuel cell technologies and the
remainder for information technology improvements and infrastructure
maintenance.

19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.

For 2002, the projected capital program is expected to be $650.8 million, which
is $28.4 million lower than the 2001 level. This reduced spending reflects the
continued commitment of NiSource to focus on optimizing return on investments at
the core business segments. The program will be funded primarily from cash from
operations as well as anticipated capital markets transactions.

All estimated capital and investment expenditures for the above segments are
subject to periodic review and revision and may vary depending on a number of
factors including, but not limited to, industry restructuring, regulatory
constraints, acquisition opportunities, market volatility and economic trends.

Enron Bankruptcy Filing

On December 2, 2001, Enron Corp. filed for protection from creditors under
Chapter 11 of the United States Bankruptcy Code. NiSource has certain exposure
to Enron, as a result of hedging and trading activities and providing services
to Enron at NiSource's gas pipeline and gas distribution subsidiaries. Prior to
Enron's bankruptcy filing, NiSource had basis and commodity swaps, pipeline
transportation and storage agreements, physical commodity contracts for natural
gas, electricity and coal, and SO2 trading agreements in place with Enron as the
counterparty. All contracts, with the exception of the pipeline transportation
and storage agreements and a contract to supply gas to choice customers of the
Columbia of Ohio gas distribution subsidiary, were terminated by NiSource at the
end of November 2001. NiSource recorded a pre-tax charge of $17.8 million in
2001 related to the Enron bankruptcy filing.

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

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

Through its various business activities, NiSource is exposed to risk including
non-trading and trading risks. The non-trading risks to which NiSource is
exposed include interest rate risk, commodity price risk and credit risk of its
subsidiaries. The risk resulting from trading activities consists primarily of
commodity price and credit risks. NiSource's risk management policy permits the
use of certain financial instruments to manage its market risk, including
futures, forwards, options and swaps.

Risk management at NiSource is defined as the process by which the organization
ensures that the risks to which it is exposed are the risks to which it desires
to be exposed to achieve its primary business objectives. NiSource employs
various analytic techniques to measure and monitor its market and credit risks,
including value-at-risk (VaR) and instrument sensitivity to market factors. VaR
represents the potential loss or gain for an instrument or portfolio from
adverse changes in market factors, for a specified time period and at a
specified confidence level.

Non-Trading Risks

Commodity price risk resulting from non-trading activities at NiSource's
rate-regulated subsidiaries is limited, since current regulations allow recovery
of prudently incurred purchased power, fuel and gas costs through the
rate-making process. As the utility industry undergoes deregulation, these
operations may be providing services without the benefit of the traditional
rate-making process and will be more exposed to commodity price risk. NiSource
enters into certain sales contracts with customers based upon a fixed sales
price and varying volumes, which are ultimately dependent upon the customer's
supply requirements. NiSource utilizes derivative financial instruments to
reduce the commodity price risk based on modeling techniques to anticipate these
future supply requirements.

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.

NiSource's exploration and production segment is also exposed to market risk due
primarily to fluctuations in commodity prices. In order to help minimize this
risk, NiSource has adopted a policy that requires commodity-hedging activities
to help ensure stable cash flow, favorable prices and margins.

NiSource is exposed to interest rate risk as a result of changes in interest
rates on borrowings under revolving credit agreements and lines of credit, which
have interest rates that are indexed to short-term market interest rates, and
refinancing risk in the commercial paper markets. At December 31, 2001 and
December 31, 2000, the combined borrowings outstanding under these facilities
totaled $1,854.3 million and $2,496.7 million, respectively. Based upon average
borrowings under these agreements during 2001 and 2000, an increase in
short-term interest rates of 100 basis points (1%) would have increased interest
expense by $19.4 million and $15.7 million for the year ended 2001 and 2000,
respectively. NiSource is also exposed to interest rate risk under a synthetic
lease agreement related to its Primary Energy subsidiary. A portion of the
synthetic lease payment floats with a referenced interest rate, thus exposing
Primary Energy to interest rate risks. Primary Energy engages in interest rate
swaps to fix the floating payment and designates these instruments as cash flow
hedges. The swaps are entered into to effectively hedge the cash flow risk of
the anticipated lease payments.

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

Trading Risks

The transactions associated with NiSource's energy trading operations give rise
to various risks, including market risks resulting from the potential loss from
adverse changes in the market prices of natural gas or electricity. The gas and
power trading operations market and trade over-the-counter contracts for the
purchase and sale of natural gas and electricity and also trade natural gas
products on the NYMEX. The gas marketing and trading activities consists of both
physical and trading activities. The power trading activities generally do not
result in the physical delivery of electricity. Some contracts within the
trading portfolio may require settlement by physical delivery, but are net
settled in accordance with industry standards.

NiSource employs a VaR model to assess the market risk of its energy trading
portfolios. Market risk refers to the risk that a change in the level of one or
more market prices, rates, indices, volatilities, correlations or other market
factors, such as liquidity, will result in losses for a specified position or
portfolio. NiSource estimates the one-day VaR across all trading groups that
utilize derivatives using either Monte Carlo simulation or variance/covariance
at a 95% confidence level. Based on the results of the VaR analysis, the daily
market exposure for power trading on an average, high and low basis was $1.1
million, $3.7 million and effectively zero, respectively, at December 31, 2001.
The daily VaR for the gas trading portfolio on an average, high and low basis
was $0.9 million, $4.7 million and $0.2 million at December 31, 2001,
respectively.

Trading Contracts

A summary of the activity affecting the change in fair value of NiSource's
trading contracts during 2001 is as follows:

21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.

The fair values of the contracts related to NiSource's trading operations, the
sources of the valuations of the contracts at December 31, 2001 and the years in
which they mature are:

Contracts reported within the caption "Prices actively quoted" include futures
and options traded on the NYMEX. The caption "Prices from other external
sources" generally includes contracts traded on commodity exchanges and
over-the-counter contracts whose value is based on published indices or other
publicly available pricing information. Contracts shown within "Prices based on
models/other method" are valued using a Black-Scholes option pricing model.

Accounting Change

Effective January 1, 2001, NiSource adopted the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as subsequently
amended by SFAS No. 137 and SFAS No. 138 (collectively referred to as SFAS No.
133). These statements establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and resulting designation.

The adoption of this statement on January 1, 2001, resulted in a cumulative
after-tax increase to net income of approximately $4 million and an after-tax
reduction to other comprehensive income (OCI) of approximately $17 million. The
adoption also resulted in the recognition of $178 million of assets and $212.8
million of liabilities on the consolidated balance sheet. Additionally, the
adoption resulted in the reduction of hedged risk basis of $3.8 million and the
reclassification of deferred revenue to OCI of $17.9 million. Approximately $7.4
million of the net losses included in the cumulative effect of a change in
accounting principle component of OCI were reclassified into earnings during
2001.

Refer to "Summary of Significant Accounting Policies - Accounting for Risk
Management Activities" and "Risk Management Activities" in Notes 2 and 8,
respectively, of Notes to the Consolidated Financial Statements for further
discussion of NiSource's risk management.

OTHER INFORMATION

Critical Accounting Policies

NiSource has adopted certain accounting policies based on the accounting
requirements discussed below that have had, and may continue to have,
significant impacts on NiSource's results of operations and consolidated balance
sheets.

SFAS NO. 71 - ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION.
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS No. 71), provides that rate-regulated
subsidiaries account for and report assets and liabilities consistent with the
economic effect of the way in which regulators establish rates, if the rates
established are designed to recover the costs of providing the regulated service
and if the competitive environment makes it probable that such rates can be
charged and collected. NiSource's rate-regulated subsidiaries follow the
accounting and reporting requirements of SFAS No. 71. Certain expenses and
credits subject to utility regulation or rate determination normally reflected
in income are deferred on the balance sheet and are recognized in income as the
related amounts are included in service rates and recovered from or refunded to
customers. The total amounts of regulatory assets and liabilities reflected on
the Consolidated Balance Sheets were $751.3 million and $82.7 million at
December 31, 2001, and $970.6 million and $22.1 million at December 31, 2000,
respectively.

22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.

In the event that regulation significantly changes the opportunity for NiSource
to recover its costs in the future, all or a portion of NiSource's regulated
operations may no longer meet the criteria for the application of SFAS No. 71.
In such event, a write-down of all or a portion of NiSource's existing
regulatory assets and liabilities could result. If transition cost recovery is
approved by the appropriate regulatory bodies that would meet the requirements
under generally accepted accounting principles for continued accounting as
regulatory assets and liabilities during such recovery period, the regulatory
assets and liabilities would be reported at the recoverable amounts. If NiSource
would not be able to continue to apply the provisions of SFAS No. 71, NiSource
would have to apply the provisions of SFAS No. 101, "Regulated Enterprises -
Accounting for the Discontinuation of Application of FASB Statement No. 71." In
management's opinion, NiSource's regulated subsidiaries will be subject to SFAS
No. 71 for the foreseeable future.

Certain of the regulatory assets reflected on NiSource's Consolidated Balance
Sheets require specific regulatory action in order to be included in future
service rates. Although recovery of these amounts is not guaranteed, NiSource
believes that these costs meet the requirements for deferral as regulatory
assets under SFAS No. 71. Regulatory assets requiring specific regulatory action
amounted to $278.4 million and $196.6 million at December 31, 2001 and 2000,
respectively.

SFAS NO. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 requires an entity to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and resulting
designation.

Unrealized and realized gains and losses are recognized each period as
components of other comprehensive income, regulatory assets and liabilities or
earnings depending on the nature of such derivatives. For subsidiaries that
utilize derivatives for cash flow hedges, the effective portions of the gains
and losses are recorded to other comprehensive income and are recognized in
earnings concurrent with the disposition of the hedged risks. For fair value
hedges, the gains and losses are recorded in earnings each period along with the
change in the fair value of the hedged item. For hedges of foreign currency the
accounting treatment generally follows the treatment for cash flow hedges or
fair value hedges depending on the nature of the foreign currency hedge. As a
result of the rate-making process, the rate-regulated subsidiaries generally
record gains and losses as regulatory liabilities or assets and recognize such
gains or losses in earnings when recovered in revenues.

In order for a derivative contract to be designated as a hedge, the relationship
between the hedging instrument and the hedged item or transaction must be highly
effective. The effectiveness test is performed at the inception of the hedge and
each reporting period thereafter, throughout the period that the hedge is
designated. Any amounts determined to be ineffective are recorded currently in
earnings.

Although NiSource applies some judgment in the assessment of hedge effectiveness
to designate certain derivatives as hedges, the nature of the contracts used to
hedge the underlying risks is such that the correlation of the changes in fair
values of the derivatives and underlying risks is generally high. NiSource
generally uses NYMEX exchange-traded natural gas futures and options contracts
and over-the-counter swaps based on published indices to hedge the risks
underlying its natural gas-related businesses. NiSource had $66.0 million of
price risk management assets and $10.3 million of price risk management
liabilities primarily related to cash flow hedges at December 31, 2001. The
amount of unrealized gains recorded to other comprehensive income was $50.1
million at December 31, 2001.

23

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.

EMERGING ISSUES TASK FORCE ISSUE NO. 98-10 - ACCOUNTING FOR ENERGY TRADING AND
RISK MANAGEMENT ACTIVITIES. NiSource evaluates the contracts of its trading
operations in accordance with the criteria for derivative contracts under SFAS
No. 133. Contracts not meeting the criteria under SFAS No. 133 are recorded at
fair value under Emerging Issues Task Force Issue No. 98-10, "Accounting for
Energy Trading and Risk Management Activities" (EITF No. 98-10). EITF No. 98-10
indicates that when certain trading criteria are met, energy contracts,
including "energy-related contracts" such as tolling, transportation and storage
contracts, should be accounted for at fair value (marked to market) along with
any related derivative contracts. The related gains and losses should be
included currently in earnings. Energy trading activities refers to energy
contracts entered into with the objective of generating profits on or from
exposure to shifts or changes in market prices.

NiSource believes that the primary business of its trading operations indicates
that the results of the trading activities should be accounted for under EITF
No. 98-10. Pursuant to the requirements of EITF No. 98-10, NiSource records the
results of its trading operations on a mark to market basis with realized and
unrealized gains and losses recorded currently in earnings. The assessment of
fair values is mainly based on pricing information on exchange-traded contracts.
NiSource does not recognize significant amounts of income or loss at the
origination of its trading deals.

At December 31, 2001 and 2000, NiSource reflected $252.3 million and $1,591.1
million of price risk management assets and $243.4 million and $1,568.6 million
of price risk management liabilities related to unrealized gains and losses on
trading activities, respectively. Trading revenues, net of cost of sales, were
$59.3 million, $24.5 million and $9.6 million for the years 2001, 2000 and 1999,
respectively.

EMERGING ISSUES TASK FORCE ISSUE NO. 97-10 - THE EFFECT OF LESSEE INVOLVEMENT IN
ASSET CONSTRUCTION. Emerging Issues Task Force Issue No. 97-10, "The Effect of
Lessee Involvement in Asset Construction" (EITF No. 97-10), provides the
accounting requirements for situations in which an entity (lessee) is involved
on behalf of an owner (lessor) with the construction of an asset that will be
leased to the lessee when construction of the asset is completed. Various forms
of the lessee's involvement during the construction period may indicate that the
lessee is, in substance, the owner of the asset for financial reporting
purposes. Generally, the lessee is considered the owner of the asset if the
lessee has substantially all of the construction period risks. If the lessee is
considered the owner of the asset during the construction period, a sale and
leaseback of the asset occurs when construction of the asset is complete and the
lease term begins.

In these synthetic lease situations, the owner-lessor is generally a special
purpose entity. Pursuant to Emerging Issues Task Force Issue No. 90-15, "Impact
of Nonsubstantive Lessors, Residual Value Guarantees and Other Provisions in
Leasing Transactions" (EITF No. 90-15), these special purpose entities are not
consolidated by the lessee when parties unrelated to the lessee have made
substantive residual equity capital investments in the amount of at least three
percent of the entities' capitalization. If the three percent test is met, the
constructed asset and related debt, if any, are not included in the lessee's
consolidated financial statements.

Primary Energy has projects that are accounted for under EITF No. 97-10 and EITF
No. 90-15. The aggregate unamortized funding for all the projects at December
31, 2001 was $629.7 million. NiSource does not consolidate the assets or related
debt in its consolidated financial statements.

Competition

The regulatory environment applicable to NiSource's subsidiaries continues to
undergo fundamental changes. These changes have previously had, and will
continue to have an impact on NiSource's operations, structure and
profitability. At the same time, competition within the energy industry will
create opportunities to compete for new customers and revenues. Management has
taken steps to become more competitive and profitable in this changing
environment. These initiatives include partnering on energy projects with major
industrial customers, providing its customers with increased choice for new
products and services, acquiring companies that increase NiSource's scale of
operations and establishing subsidiaries that develop new energy-related
products for residential, commercial and industrial customers, including the
development of distributed generation technologies.

September 11, 2001 Terrorist Attacks

The September 11, 2001 terrorist attacks that occurred on the World Trade Center
in New York City and the Pentagon in Washington D.C. has had pervasive negative
impacts on several U.S. industries and on the U.S. economy in general. While
NiSource was not directly impacted by the event, the Company believes that it
has been impacted indirectly. Since the incident, NiSource has noted evidence of
substantial rate increases and additional coverage restrictions in the energy
insurance market. The Company expects the cost of its insurance and related
deductibles to be higher than they were previously, when much of its insurance
is renewed in July 2002. Other indirect impacts of the September 11 incident
include lower revenues due to the negative impact on certain of NiSource's
industrial customers and higher costs related to items such as travel and
security.

Presentation of Segment Information

As a result of the November 1, 2000 acquisition of Columbia, NiSource revised
its presentation of primary business segment information. Columbia's gas
transmission and storage and exploration and production businesses are now
reported as business segments of NiSource. Columbia's gas distribution
operations have been combined with NiSource's gas distribution business.

During 2001, NiSource realigned a portion of its operations and reclassified
previously reported operating segment information to conform to the realigned
operating structure. The realignment affected three previously reported
segments, and included moving all ongoing operations of Energy Marketing and
certain operations from the Electric Operations and Other segments to the newly
created Merchant Operations segment. The electric wheeling, bulk power, and
power trading operations were moved from the Electric Operations segment to
Merchant Operations, and the Company's Primary Energy subsidiary, which develops
on-site, industrial-based energy solutions, was moved from Other to Merchant
Operations. All periods presented reflect these changes. The business segment
information should be read taking into account the critical accounting policies
adopted by NiSource and discussed in "Other Information" of this Item 7.

24

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
GAS DISTRIBUTION OPERATIONS

25

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)

Competition

Gas Distribution competes with investor-owned, municipal, and cooperative
electric utilities throughout its service area, and to a lesser extent with
propane and fuel oil suppliers. Gas Distribution continues to be a strong
competitor in the energy market as a result of strong customer preference for
natural gas. Electric competition is generally strongest in the residential and
commercial markets of Kentucky, southern Ohio, southwestern Pennsylvania and
western Virginia where electric rates are primarily driven by low-cost
coal-fired generation. Gas competes with fuel oil and propane in the New England
markets.

Restructuring

In December 2001, NiSource announced a restructuring program designed to
generate greater efficiencies in field operations, customer contact centers and
administrative support staff throughout various Gas Distribution and Electric
Operations companies. In October 2001, NiSource executed a reorganization of
sales and marketing functions. The current year results include $28.7 million in
expenses mainly for severance costs associated with these programs. Of this
total, $22.5 million was included in the Gas Distribution segment operating
results with the remainder included in the Electric Operations segment results.
The programs will result in a reduction of 500 employees in field operations,
contact centers, administrative support and sales and marketing functions
throughout the NiSource Gas Distribution and Electric Operations segment
companies.

Regulatory Matters

The gas industry deregulation, which began in the mid-1980s at the federal
level, has broadened to retail customers at the state level. Large industrial
and commercial customers have had the ability to purchase natural gas directly
from marketers and to use Gas Distribution's facilities for transportation
services for several years. This opportunity to choose an alternative supplier
is now migrating into the small commercial and residential customer classes with
approved or pilot transportation programs being used in 8 of the 9 states. As of
December 31, 2001, approximately 700,000 of Gas Distribution's 3.2 million
customers have selected an alternate supplier.

Gas Distribution continues to develop customer choice opportunities through
regulatory initiatives in all of its jurisdictions. While these programs are
intended to provide all customer classes with the opportunity to obtain gas
supplies from alternative merchants, Gas Distribution expects to play a
substantial role in supplying gas commodity services to its customers in the
foreseeable future. As customers enroll in these programs and purchase their gas
from other suppliers, the Gas Distribution subsidiaries are left with pipeline
capacity they have contracted for, but no longer need. The state commissions in
jurisdictions served by Gas Distribution are at various stages in addressing
these issues and other transition considerations. Gas Distribution is currently
recovering, or has the opportunity to recover, the costs resulting from the
unbundling of its services and believes that most of such future costs will be
mitigated or recovered. Methodologies for mitigating or recovering transition
costs include incentive sharing mechanisms, decontracting of pipeline capacity
and mandatory assignment of pipeline capacity to alternative suppliers.

In December 1999, the Public Utilities Commission of Ohio (PUCO) approved a
request from Columbia Gas of Ohio, Inc. (Columbia of Ohio) that extends Columbia
of Ohio's Customer CHOICE(SM) program through October 31, 2004, freezes base
rates through October 31, 2004 and resolves the issue of transition costs from
pipeline capacity. Under the agreement, Columbia of Ohio assumes total financial
risk for mitigation of transition capacity costs at no additional cost to
customers. Columbia of Ohio has the opportunity to utilize non-traditional
revenue sources as a means of offsetting the costs.

On November 20, 2001, the PUCO issued final rules to implement the provisions of
choice legislation enacted by the Ohio General Assembly on March 27, 2001. The
new rules establish the process for PUCO certification and regulation of
competitive retail natural gas suppliers, establish minimum service standards
for competitive natural gas suppliers, and specify the procedures for
establishment of governmental aggregation programs, in which consumers have the
right to "opt-out" of the program. The new rules are expected to become
effective in mid-2002. A number of parties, including Columbia of Ohio, have
requested rehearing on certain provisions of these rules. The PUCO has granted a
rehearing.

26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)

As part of the Kentucky Public Service Commission order approving the
acquisition of Columbia, Columbia of Kentucky is required to file a rate case
that includes an estimate of net merger savings and a mechanism to reflect on
customers' bills merger savings.

Northern Utilities, New Hampshire Division, filed a general rate case in
November 2001. The filing proposes an increase in revenue of $3.8 million or
approximately 7.4% of annual operating revenues. On February 7, 2002, the New
Hampshire Public Utilities Commission (NHPUC) granted an interim rate increase
of approximately $2.3 million. Actual revenues will be reconciled to permanent
rates at the conclusion of the general rate case.

On August 11, 1999, the Indiana Utility Regulatory Commission (IURC) approved a
flexible gas cost adjustment mechanism for Northern Indiana. Under the new
procedure, the demand component of the adjustment factor will be determined,
after hearings and IURC approval, and made effective on November 1 of each year.
The demand component will remain in effect for one year until a new demand
component is approved by the IURC. The commodity component of the adjustment
factor will be determined by monthly filings, which will become effective on the
first day of each calendar month, subject to refund. The monthly filings do not
require IURC approval but will be reviewed by the IURC during the annual hearing
that will take place regarding the demand component filing. Northern Indiana's
gas cost adjustment factor also includes a gas cost incentive mechanism (GCIM)
which allows the sharing of any cost savings or cost increases with customers
based on a comparison of actual gas supply portfolio cost to a market-based
benchmark price. Northern Indiana made its annual filing on September 1, 2001.

FERC Order 637

The FERC issued Order 637 on February 9, 2000. The order sets forth revisions to
the previous regulatory framework to improve the competitiveness and the
efficiency of the interstate natural gas transportation market. It effects
changes in regulations relating to scheduling procedures, pipeline penalties,
more transparent pricing, new pipeline service offerings, capacity release
capabilities, new reporting requirements and various other service related
issues intended to enhance competition in the industry.

Since the order was issued, pipelines have made pro forma filings to comply. Gas
Distribution has actively engaged in settlement discussions with all of its
pipeline suppliers as well as with other major customers on those pipeline
systems in an effort to resolve pertinent issues.

To date, only a few minor pipeline suppliers have been able to reach an
agreement with customers and file settlements, which have generally been
approved by FERC. The major pipeline suppliers have virtually all made revised
pro forma compliance filings, which continue to be protested by the majority of
their customers. Those filings have been awaiting FERC action since early last
fall.

Based upon early orders from FERC on some pipelines' compliance filings, Gas
Distribution believes that implementation of Order 637 will begin to take place
prior to the winter of 2002-2003. Not all of the pipelines serving Gas
Distribution have resolved their Order 637 proceedings; however, FERC's recent
clarifications have provided some guidance regarding the effect of Order 637 on
various aspects of pipeline operations. Gas Distribution is evaluating those
effects, but given the degree of compromise that occurred from all segments of
the industry, management believes that full implementation of Order No. 637 will
not have a material effect upon Gas Distribution costs, operations, or income.

Environmental Matters

REMEDIATION. Several Gas Distribution subsidiaries are "potentially responsible
parties" (PRPs) at waste disposal sites under the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA) (commonly known as Superfund)
and similar state laws, including at former manufactured gas plant (MGP) sites
which such subsidiaries, or their corporate predecessors, own or previously
owned or operated. Gas Distribution subsidiaries may be required to share in the
cost of clean up of such sites. In addition, some Gas Distribution subsidiaries
have corrective action liability under the Resource Conservation and Recovery
Act (RCRA) for closure and clean up costs associated with underground storage
tanks, and under the Toxic Substances Control Act (TSCA) for clean up of
polychlorinated biphenyls (PCBs) released at various facilities.

27

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)

Gas Distribution subsidiaries are parties to or otherwise involved in clean up
of four waste disposal sites under Superfund or similar state laws. For one of
these sites the potential liability is de minimis and, for the other three, the
final costs of clean up have not yet been determined. As site investigations and
clean-ups proceed and as additional information becomes available, waste
disposal site liability is reviewed periodically and adjusted.

A program has been instituted to identify and investigate former MGP sites where
Gas Distribution subsidiaries or predecessors are the current or former owner.
The investigation has identified 84 such sites. Initial investigation has been
conducted at 42 sites. Of these sites, additional investigation activities have
been completed or are in progress at 34 sites and remedial measures have been
implemented or completed at 19 sites. Only those site investigation,
characterization and remediation costs currently known and determinable can be
considered "probable and reasonably estimable" under Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies" (SFAS No. 5).

As costs become probable and reasonably estimable, reserves will be adjusted as
appropriate. As reserves are recorded, regulatory assets are recorded to the
extent environmental expenditures are expected to be recovered through rates.
NiSource is unable, at this time, to accurately estimate the time frame and
potential costs of the entire program. Management expects that, as
characterization is completed, additional remediation work is performed and more
facts become available, NiSource will be able to develop a probable and
reasonable estimate for the entire program or a major portion thereof consistent
with the Securities and Exchange Commission's Staff Accounting Bulletin No. 92
(SAB No. 92) which covers accounting and disclosures relating to loss
contingencies, SFAS No. 5, and American Institute of Certified Public
Accountants Statement of Position 96-1 "Environmental Remediation Liabilities"
(SOP No.96-1).

As of December 31, 2001, a reserve of approximately $68.2 million has been
recorded to cover probable environmental response actions. The ultimate
liability in connection with these sites will depend upon many factors,
including the volume of material contributed to the site, years of ownership or
operation, the number of other PRPs and their financial viability and the extent
of environmental response actions required. Based upon investigations and
management's understanding of current environmental laws and regulations,
NiSource believes that any environmental response actions required, after
consideration of insurance coverage, contributions from other PRPs and rate
recovery, will not have a material effect on its financial position.

MERCURY PROGRAM. Until the 1960s, gas regulators containing small quantities of
mercury were installed in homes on some natural gas systems. The purpose of
these regulators was to reduce the pressure of the natural gas flowing from the
service line for use inside of the home.

In 2000, several gas distribution companies unaffiliated with NiSource were
involved in highly publicized testing and clean up programs resulting from
mercury spills associated with the removal of gas regulators containing mercury.
A number of the NiSource Gas Distribution subsidiaries historically utilized gas
regulators that contained small quantities of mercury. All NiSource Gas
Distribution subsidiaries have implemented programs to investigate, maintain
and/or remove and replace gas regulators containing mercury, including
procedures ensuring that any accidental mercury spills are detected and properly
cleaned up. To date no material problems associated with past or current use or
removal of mercury regulators have been identified. As a result, NiSource
believes it is unlikely that any financial exposure from this matter would have
a material effect on its financial position or results of operations of its Gas
Distribution subsidiaries.

Market Conditions

The recession during 2001 contributed to lower demand. Reduced production and
fuel switching (to coal, #6 oil and distillate) resulted in industrial
throughput falling 25% from its peak of over 400 Bcf. The steel industry, which
has historically represented over two-thirds of the industrial throughput in
Indiana and over one-third of the industrial throughput in the major markets of
Ohio, Pennsylvania and Kentucky, was particularly hard hit with a number of
companies filing for bankruptcy.

28

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)

In the winter of 2000-2001, spot prices for gas purchases exceeded $6.00/dth.
The unprecedented high prices were due primarily to tight supply and increased
demand during this period. Demand was higher than in previous periods due to the
continued economic expansion in 2000, proliferation of gas-fired electric
generation and record cold weather during November and December 2000. Lower
production coupled with increased demand resulted in lower storage levels of
natural gas for many companies during the 2000-2001 winter season.

Spot prices for the current winter period are in the low to mid-$2.00/dth range;
prices more in line with winter seasons in the 1990s. Entering this winter,
storage levels were well above those of recent years as a result of the economic
downturn, reduced demand for gas-driven electric power generation and increased
natural gas drilling activity. Given the high storage levels in place mid-way
through this winter, the current price levels are expected to continue through
this winter season. The higher prices of late 2000 and early 2001 encouraged
producers to increase natural gas drilling activities over levels experienced in
1999. By mid 2001, this resulted in the highest level of natural gas drilling
activity since the early 1980s. However, with the drop in prices since last
winter, that trend in drilling has turned around, with about 26% fewer active
rigs in December 2001 compared to the high experienced in July 2001, and about
6% fewer compared to a year ago in December 2000.

All NiSource Gas Distribution companies have state-approved recovery mechanisms
that provide a means for full recovery of prudently incurred gas costs. Gas
costs are treated as pass-through costs and have no impact on the net revenues
recorded in the period. The gas costs included in revenues are matched with the
gas cost expense recorded in the period and the difference is recorded on the
balance sheet to be included in a future billing mechanism to true up customer
billings.

The impact of the higher gas costs on Gas Distribution customers' bills and
bankruptcies in the steel industry were primarily responsible for the $13.1
million, or 22%, increase in uncollectible expenses recorded in 2001. In Ohio,
regulatory approval was given to defer $19.5 million of current year
uncollectible expense, representing the excess of current year expense over the
amounts collected in base rates.

The Gas Distribution companies have pursued non-traditional revenue sources
within the evolving natural gas marketplace. These efforts include both the sale
of products and services upstream of its service territory, the sale of products
and services in its service territories and gas supply cost incentive mechanisms
for service to its core markets. The upstream products are made up of
transactions that occur between the Gas Distribution company and a buyer for the
sales of unbundled or rebundled gas supply and capacity products. The on-system
services are offered by the company to customers and include products such as
the transportation of gas on the Gas Distribution company system. The incentive
mechanisms give the Gas Distribution companies an opportunity to share in the
savings created from such things as gas purchase prices paid below an agreed
benchmark and its ability to reduce pipeline capacity charges. The treatment of
the revenues generated from these types of transactions vary by operating
company with some sharing in the benefits with customers and others using these
revenues to mitigate transition costs occurring as the result of choice programs
described above under "Regulatory Matters." Gas Distribution generated $42.2 in
net revenues from various non-traditional sales and incentive programs in 2001,
a $38.7 million increase over the prior year.

Weather

Weather in the Gas Distribution service territory was 12% warmer than normal.
This negatively impacted the deliveries primarily to residential and commercial
customers by approximately 36.0 million dekatherms (Mdth) versus prior year and
reduced net revenues by approximately $63.0 million from prior year. Weather in
2000 and 1999 was 18% and 8%, respectively, warmer than normal.

Throughput

Total volumes sold and transported of 1,007.5 MDth for 2001 increased 468.1 MDth
from 2000. Columbia's five Gas Distribution companies contributed 550.8 MDth
additional throughput. This increase was partially offset by the impact of the
economic decline on the industrial demand, primarily the steel industry.
Additionally, the warmer weather reduced current period throughput by 35.7 Mdth.

Throughput for 2000 of 539.4 MDth increased 88.8 MDth from 1999, due to the
acquisition of Columbia on November 1, 2000.

29

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
GAS DISTRIBUTION OPERATIONS (CONTINUED)

Net Revenues

Net revenues for 2001 were $1,392.4 million, up $656.4 million over 2000. The
acquisition of Columbia generated higher net revenues of $704.5 million,
partially offset by a decline of approximately $63.0 million as a result of
warmer weather.

Operating Income

For the twelve months ended December 31, 2001, operating income for Gas
Distribution operations was $380.8 million, an increase of $139.8 million over
the same period in 2000, reflecting the benefit of twelve months of Columbia
operations compared to two months in 2000. The increase was tempered by record
setting warmer than normal weather that reduced operating income by
approximately $63.0 million, a $36.0 million increase in amortization of
goodwill associated with the acquisition of Columbia and $23.4 million for
restructuring costs. In addition, higher uncollectibles increased $13.1 million
over the prior year, primarily resulting from the higher cost of gas in the
2000-2001 heating period. This negative variance was reduced by the impact of a
favorable order that allows regulatory treatment of customer bad debts totaling
approximately $19.5 million.

Operating income of $241.0 million for 2000 increased $127.0 million over 1999
reflecting two months of Columbia's operations and the full year effect of Bay
State operations. Tempering these improvements was $16.9 million of expense in
2000 for the write-down of certain assets in preparation for sale and
approximately $6.9 million of expense related to the amortization of goodwill
attributable to the acquisition of Columbia, restructuring costs and higher
employee related costs. These higher costs were partially offset by lower
customer related expenses.

30

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS

Proposed Millennium Pipeline Project

The proposed Millennium Pipeline Project (Millennium Project), in which Columbia
Transmission is participating and will serve as developer and operator, will
transport western gas supplies to northeast and mid-Atlantic markets. The
442-mile pipeline will connect to Canadian facilities at a new Lake Erie export
point and transport approximately 700,000 Dth per day to eastern markets. In
August 2001, TransCanada Pipelines Ltd. and St. Clair Pipelines, Ltd., the
sponsors of the proposed upstream Canadian facilities to the Lake Erie export
point, withdrew their pending applications before Canada's National Energy Board
for approval of the proposed facilities, without prejudice to refiling at a
later date. The withdrawal notice cited the delays encountered in Millennium's
FERC proceedings. On December 19, 2001, the FERC issued a certificate approving
the construction and operation of the pipeline, subject to a number of
conditions, including a condition that construction may not commence until any
necessary Canadian authorizations are obtained. Furthermore, the certificate
requires that the Millennium facilities be constructed within two years from the
date of the order. Rehearing requests were filed on January 18, 2002.

To date, a number of shippers have signed agreements for a significant portion
of the available capacity. In light of the changing market environment,
Millennium is in ongoing discussions with potential shippers regarding the
extent and timing their needs.

The sponsors of the proposed Millennium Project are Columbia Transmission,
Westcoast Energy, Inc., TransCanada Pipe Lines Ltd. and MCN Energy Group, Inc.

31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)

Sale of Facilities

Columbia Transmission continues to evaluate and dispose of non-core assets.
Columbia Transmission is currently negotiating with third parties on the sale of
small diameter pipelines and other facilities in Kentucky, Ohio, New York,
Pennsylvania and West Virginia.

Transportation for New Electric Generation Projects

During 2001, Columbia Transmission began providing up to 629,000 dekatherms a
day (Dth/d) to serve five new electric generating facilities. Columbia
Transmission has also requested permission from the FERC to construct facilities
to provide up to 260,000 Dth/d to two electric generating facilities scheduled
to be in service in 2003.

Effect of LDC Unbundling Services

NiSource's Gas Transmission and Storage subsidiaries compete with other
interstate pipelines for the transportation and storage of natural gas. Since
the issuance of FERC Order No. 636, various states throughout Columbia
Transmission's service area have initiated proceedings dealing with open access
and unbundling of LDC services. Among other things, unbundling involves
providing all LDCs with the choice of what entity will serve as transporter as
well as merchant supplier. While the scope and timing of these various
unbundling initiatives varies from state to state, retail choice programs are
being extended to LDC customers throughout Columbia Transmission's market area.

Among the issues being addressed in the state unbundling proceedings is the
treatment of the pipeline transmission and storage agreements that have
underpinned the traditional LDC merchant function. In the case of Columbia
Transmission and Columbia Gulf, contracts covering the majority of their firm
transportation and storage quantities with LDCs have primary terms that extend
to October 31, 2004. Management fully expects that the LDCs, or those entities
to which pipeline capacity may be assigned as a result of the LDC unbundling
process, will continue to fulfill their obligations under these contracts.
However, in view of the changing market and regulatory environment, NiSource's
Gas Transmission and Storage companies have commenced the process of discussing
long-term transportation and storage service needs with their firm customers.
Those discussions could result in the restructuring of some of these contracts
on mutually agreeable terms prior to 2004.

Environmental Matters

Columbia Transmission continues to conduct characterization and remediation
activities at specific sites under a 1995 EPA Administrative Order by Consent
(AOC). The program pursuant to the AOC covers approximately 240 facilities,
approximately 13,000 liquid removal points, approximately 2,200 mercury
measurement stations and about 3,700 storage well locations. As of December 31,
2001, field characterization has been performed at all sites. Site
characterization reports and remediation plans, which must be submitted to the
EPA for approval, are in various stages of development and completion.
Remediation has been completed at the mercury measurement stations, liquid
removal point sites and storage well locations and at a number of the 240
facilities.

Only those site investigation, characterization and remediation costs currently
known and determinable can be considered "probable and reasonably estimable"
under SFAS No. 5. As costs become probable and reasonably estimable, reserves
will be adjusted as appropriate. Columbia Transmission is unable, at this time,
to accurately estimate the time frame and potential costs of the entire program.
Management expects that as characterization reports and remediation plans are
completed and approved by the EPA and additional remediation work is performed,
Columbia Transmission should be able to develop a probable and reasonable
estimate for the entire program consistent with SAB No. 92, SFAS No. 5, and SOP
No. 96-1.

Columbia Transmission and Columbia Gulf are PRPs at several waste disposal
sites. The potential liability is believed to be de minimis, however, the final
allocation of clean-up costs has yet to be determined. As site investigations
and clean-ups proceed and as additional information becomes available, waste
disposal site liability is reviewed periodically and adjusted.

At the end of 2001, the remaining environmental liability recorded on the
balance sheet for Gas Transmission and Storage operations was $ 90.5 million.
Columbia Transmission's environmental cash expenditures are expected to be
approximately $ 12.5 million in 2002. These expenditures will be charged against
the previously recorded liability. A regulatory asset has been recorded to the
extent environmental expenditures are expected to be recovered through

32

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)

rates. Management does not believe that Columbia Transmission's environmental
expenditures will have a material adverse effect on NiSource's operations,
liquidity or financial position, based on known facts, existing laws,
regulations, Columbia Transmission's cost recovery settlement with customers and
the long time period over which expenditures will be made.

Lost and Unaccounted For Gas

On March 1, 2001, Columbia Transmission made its annual Retainage Adjustment
Mechanism (RAM) filing with the FERC to revise the retainage percentages
applicable to its tariff services to be effective April 2, 2001, based on actual
activity for the calendar year 2000, and projected activity over the 12-month
period commencing April 1. On March 28, 2001, the FERC accepted and suspended
the filing, subject to refund and further review, and noted the increase in the
actual level of lost and unaccounted-for gas during 2000. On April 30, 2001, in
response to the March 28, 2001 order, Columbia Transmission submitted responses
to certain questions asked by the FERC with respect to the company's March 1
filing. In its responses, Columbia Transmission agreed to review certain factors
that may have contributed to the increase in lost and unaccounted-for gas for
calendar year 2000, and to file a report setting forth steps that may be taken
to mitigate future losses.

Columbia Transmission filed a report with the FERC on October 31, 2001, setting
forth its analysis of items that may have contributed to the increase in lost
and unaccounted-for gas. On the same date, Columbia Transmission made a
supplemental filing with the FERC to decrease the transportation retainage
percentage level established in the March 1 filing. On December 19, 2001, the
FERC issued an order accepting the company's April 30 and October 31 filings.
The order requires the company to answer certain questions in its next annual
filing on March 1, 2002. Request for rehearing of the FERC's December 19 order
have been filed. It is the opinion of management that the outcome of this matter
is not expected to have a material effect on NiSource's financial position.

Storage Base Gas Sales

Columbia Transmission sold 5.4 (MDth) of base gas volumes during 2001 resulting
in a pre-tax gain of $11.4 million. Base gas represents storage volumes that are
maintained to ensure that adequate pressure exists to deliver current inventory.
As a result of ongoing improvements made in its storage operations, Columbia
Transmission determined that a portion of these storage volumes were no longer
necessary to maintain deliverability of current inventory.

Capital Expenditure Program

The Gas Transmission and Storage segment's net capital expenditure program was
$137.4 million in 2001 and is projected to be approximately $132.3 million in
2002. New business initiatives totaled approximately $51.7 million in 2001 and
are expected to be $58.3 million in 2002. The remaining expenditures are for
modernizing and upgrading facilities.

Throughput

Columbia Transmission's throughput consists of transportation and storage
services for LDCs and other customers within its market area, which covers
portions of northeastern, mid-Atlantic, midwestern, and southern states and the
District of Columbia. Throughput for Columbia Gulf reflects mainline
transportation services from Rayne, Louisiana to Leach, Kentucky and short-haul
transportation services from the Gulf of Mexico to Rayne, Louisiana. Crossroads
serves customers in northern Indiana and Ohio and Granite provides service in
New Hampshire, Maine and Massachusetts.

Throughput for the Transmission and Storage segment totaled 1,241.4 MDth for
2001, compared to 395.4 MDth in 2000. The increase primarily reflects the
addition of Columbia Transmission and Columbia Gulf as a result of the
acquisition of Columbia.

Net Revenues

Net revenues were $883.6 million for 2001, an increase of $712.6 million from
2000. This increase is primarily due to the inclusion of Columbia's operations
for a full twelve months in 2001 compared to two months in 2000.

33

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)

Operating Income

Operating income of $349.0 million in 2001 was an increase of $301.4 million
from 2000. This increase was due primarily to the inclusion of Columbia's
operations for twelve months, partially offset by an increase of $42.2 million
for twelve months of amortization of goodwill for the Columbia acquisition. In
addition, the current year results compare favorably to 2000 due to the negative
impact for an asset impairment recognized in 2000.

34

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
ELECTRIC OPERATIONS

Market Conditions

The regulatory frameworks applicable to Electric Operations continue to work
through fundamental changes as noted below. These changes will continue to have
an impact on NiSource's Electric Operation's structure and profitability. At the
same time, competition within the industry will create opportunities to compete
for new customers and revenues. Management has taken steps to become more
competitive and profitable in this changing environment, including shutting down
inefficient generating plant, converting some of its generating units to allow
use of lower cost, low sulfur coal and improving the transmission
interconnections with neighboring electric utilities.

The overall weakening of the U.S. economy is reflected in the 559.4
gigawatt-hour (gwh) decline in sales to the industrial customer class in 2001
versus 2000. In particular, the steel and steel related industries have been
adversely impacted by recent events and market conditions, with two major
customers (LTV Corp. and Bethlehem Steel Corp.) declaring bankruptcy. Overall
deliveries to the steel industry were down 345.8 gwh in 2001 versus the prior
year. Additionally, uncollectible expense in the current year was $2.4 million
higher than the prior year reflecting steel industry bankruptcies.

35

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)

The summer cooling season weather in the electric service territory was 16%
warmer in 2001 than the prior summer, causing a 130.3 kwh increase in sales to
residential and commercial class customers. However, the positive impact of the
warmer summer was tempered by the negative impact of a warmer than normal winter
heating season, resulting in an annual 11% increase in cooling degree days and a
74.0 kwh increase in sales for the 2001 compared to 2000.

Restructuring

In December 2001, NiSource announced a restructuring program designed to
generate greater efficiencies in field operations, customer contact centers and
administrative support staff throughout various Gas Distribution and Electric
Operations companies. In October 2001, NiSource executed a reorganization of
sales and marketing functions. The current year results include $28.7 million in
expenses mainly for severance costs associated with these programs. Of this
total, $22.5 million was included in the Gas Distribution segment operating
results with the remainder included in the electric segment results. The
programs will result in a reduction of approximately 500 employees in field
operations, contact centers, administrative support and sales and marketing
functions throughout the NiSource Gas Distribution and Electric Operations
segment companies.

As part of the restructuring programs and in response to the decline in electric
demand, the Mitchell Station, with a net capacity of 502 mw, will be shutdown by
the end of the first quarter of 2002. Originally constructed in 1955, this
facility has the oldest active operating units and is the least efficient
station in the Northern Indiana electric production system. In addition to the
high level of ongoing maintenance costs, there are substantial capital
investments that are necessary to comply with future environmental standards.
Costs totaling $2.2 million have been accrued for severance related to the plant
shutdown. These costs for employee reductions are included in the $28.7
restructuring charge.

Regulatory Matters

In 1999, FERC issued Order 2000 addressing the formation and operation of RTOs.
On February 28, 2001, Northern Indiana joined the Alliance RTO. On December 18,
2001, the IURC issued an order denying Northern Indiana's request to transfer
functional control of its transmission facilities to the Alliance RTO. On
December 20, 2001, the FERC reversed prior orders that had preliminarily
approved the Alliance RTO and concluded that the Alliance RTO failed to meet
Order 2000's scope and configuration requirements. FERC ordered the Alliance RTO
companies, including Northern Indiana, to pursue membership in the Midwest
Independent System Operator (MISO). The Alliance RTO is actively negotiating to
become a part of the MISO. Northern Indiana has expended approximately $5.6
million related to joining the Alliance RTO. The Company believes that the
amounts spent will be recoverable. Also, FERC has indicated that a December 15,
2001 start date for RTOs was not achievable and no alternative date has been
proposed. 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.

Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the Fuel Adjustment Clause. The recovery provides
for cost to be collected if they are below a cap set based upon the costs of
Northern Indiana's most expensive generating unit. If costs exceed this cap,
Northern Indiana must demonstrate why it should be allowed recovery before
recovery is approved. In January 2002, Northern Indiana filed for approval to
implement a purchase power tracker (PPT). The PPT would allow recovery of all
costs related to purchasing electricity for use by Northern Indiana's customers
on a periodic basis. No actions have been taken by the IURC on this filing.

During the course of a regularly scheduled review, referred to as a Level 1
review, the staff of the IURC made a preliminary determination, based on
unadjusted historical financial information filed by Northern Indiana, that
Northern Indiana was earning returns that were in excess of its last rate order
and generally established standards. Despite efforts to explain to the IURC
staff several adjustments that needed to be made to the filed information to
make such an analysis meaningful, the staff recommended that a formal
investigation be performed. During 2001, Northern Indiana and several other
parties filed testimony, participated in hearings and submitted proposed forms
of the order and comments on these proposed orders. Northern Indiana's testimony
indicated that if rates are to be changed, they should be increased.

36

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)

Environmental Matters AIR. The Clean Air Act Amendments of 1990 (CAAA) impose
limits to control acid rain on the emission of sulfur dioxide and nitrogen
oxides (NOx), which became fully effective in 2000. All of Northern Indiana's
facilities are in compliance with the sulfur dioxide and NOx limits.

During 1998, the U.S. 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. Consistent with EPA requirements, the State of Indiana
developed regulations implementing the control program, which became effective
September 16, 2001. The EPA approved the state rules effective December 10,
2001. Compliance with the NOx limits contained in these rules is required by May
31, 2004. The NOx emission limitations in the Indiana rules are more restrictive
than those imposed on electric utilities under the CAAA's acid rain NOx
reduction program described above. Capital estimates of Northern Indiana's NOx
control compliance costs range from $200 to $300 million over the next 2 years.
Actual compliance costs may vary depending on a number of factors including
market demand/resource constraints, uncertainty of future equipment and
construction costs, and the potential need for additional control technology.

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

The EPA issued final rules revising the National Ambient Air Quality Standards
for ozone and particulate matter in July 1997. On May 14, 1999, the United
States Court of Appeals for the D.C. Circuit remanded the new rules for both
ozone and particulate matters to the EPA. The Court of Appeals decision was
appealed to the Supreme Court, which heard oral arguments on November 7, 2000.
The Supreme Court rendered a complex ruling on February 27, 2001 that will
require some issues to be resolved by the D.C. Circuit Court and the EPA before
final rulemaking occurs. Consequently, final rules specifying a compliance
level, deadline, and controls necessary for compliance are not expected in the
near future. Resulting rules could require additional reductions in sulfur
dioxide, particulate matter and NOx emissions from coal-fired boilers (including
Northern Indiana's electric 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 and are currently
not reasonably estimable. NiSource will continue to closely monitor developments
in this area; however, the exact nature of the impact of the new standards on
its operations will not be known for some time.

The EPA has initiated enforcement actions against several electric utilities
alleging violations of the new source review provisions of the Clean Air Act.
Northern Indiana has received and is in the process of responding to information
requests from the EPA on this subject. It is impossible at this time to predict
the result of EPA's review of Northern Indiana's information responses.

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

The CAAA also contain other provisions that could lead to limitations on
emissions of hazardous air pollutants. In response to the CAAA requirements, on
December 20, 2000, the EPA issued a finding that the regulation of emissions of
mercury and other air toxics from coal and oil-fired electric steam generating
units is necessary and appropriate. The EPA expects to issue proposed
regulations by December 15, 2003, and finalized regulations by December 15,
2004. The potential impact, if any, to NiSource's financial results that may
occur because of any of these potential new regulations is unknown at this time.

37

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)

The EPA is in the process of developing a program to address regional haze. The
new administration announced that the EPA would move forward with rules that
mandate the states to require power plants built between 1962 and 1977 to
install the "best available retrofit technology" or BART. The BART program will
target for control by 2013 those pollutants that limit visibility, namely
particulate, sulfur dioxide and/or nitrogen oxides. Until the program is
developed, Northern Indiana cannot predict the cost of complying with these
rules.

WATER. The Great Lakes Water Quality Initiative ("GLI") program is expected to
add new water quality standards for facilities that discharge into the Great
Lakes watershed, including Northern Indiana's three electric generating stations
located on Lake Michigan. The State of Indiana has promulgated its regulations
for this water discharge permit program and has received final EPA approval. As
promulgated, the regulations would provide the Indiana Department of
Environmental Management (IDEM) with the authority to grant water quality
criteria variances and exemptions for non-contact cooling water. However, the
EPA revised the variance language and other minor provisions of IDEM's GLI rule.
The EPA by and large left the non-contact cooling water exemption intact;
however, a separate agreement between the EPA and IDEM on interpretation of this
exemption still leaves uncertainty as to its impact. The EPA change to the
variance rule has prompted litigation by the affected industrial parties and the
EPA/IDEM agreement on the non-contact cooling water exemption may be subject to
future litigation. Northern Indiana expects that IDEM will issue a proposed
permit renewal for each of its lakeside stations. Pending the outcome of
litigation and the proposed permit renewal requirements, the costs of complying
with these requirements cannot be predicted at this time.

REMEDIATION. Northern Indiana is a PRP at four waste disposal sites under CERCLA
and similar state laws, and may be required to share in the cost of clean-up of
such sites. In addition, Northern Indiana has corrective action liability under
RCRA for closure and clean-up costs associated with treatment, storage, and
disposal sites. As of December 31, 2001, a reserve of approximately $2.2 million
has been recorded to cover probable environmental response actions at these
sites. The ultimate liability in connection with these sites will depend upon
many factors, including the volume of material contributed to the site, years of
ownership of operations, the number of other PRPs and their financial viability
and the extent of environmental response required. Based upon investigations and
management's understanding of current environmental laws and regulations,
NiSource believes that any environmental response required will not have a
material effect on its financial position or results of operations.

Sales

Electric sales for 2001 of 15,489.5 gwh decreased 491.8 gwh compared to 2000,
due primarily to reduced industrial sales reflecting the economic downturn and
steel industry bankruptcies, partially offset by the impact of warmer weather.
In 2000, electric sales of 15,981.3 gwh increased 305.6 gwh from 1999.

Net Revenues

Electric net revenues of $754.6 million for 2001 decreased by $4.7 million from
2000, primarily reflecting the reduced deliveries to the industrial segment. The
positive impact of slightly warmer weather in the second quarter was offset by
slightly cooler weather in the third quarter. In 2000, electric net revenues of
$759.3 million were relatively unchanged from 1999.

Operating Income

Operating income for 2001 was $309.6 million, a decrease of $6.1 million from
2000. This is due to lower net revenues discussed above and higher operating
expenses of $1.4 million. The 2001 operating expenses included increased
uncollectible expenses of $2.4 million and restructuring charges of $6.2
million.

Operating income for 2000 was $315.7 million, a decrease of $8.3 million from
1999. This was due to higher operating expenses, attributable to generally
increased operating costs and higher depreciation expense as result of
additional plant in service. These higher expenses were partially offset by
lower other taxes.

38

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
EXPLORATION AND PRODUCTION OPERATIONS

Change in Accounting Method

During the fourth quarter of 2001, NiSource changed its method of accounting for
acquisition, exploration and development activities related to oil and gas
reserves from the full cost method to the successful efforts method. Under the
successful efforts method of accounting, except for property acquisition costs,
only costs associated with specific discovered reserves are capitalized.
Capitalized costs include mineral interests in properties, wells and related
equipment and facilities, support equipment, and uncompleted wells. Depletion
expense is equal to annual production multiplied by the depletion rate per unit
that is derived by spreading the total costs capitalized under successful
efforts over the number of units expected to be extracted over the life of the
reserves on a lease basis. Compared to the full cost method, the change to
successful efforts reduced operating income by $5.3 million and $10.3 million
for 2001 and 2000, respectively.

Forward Sale of Natural Gas

In 1999 and 2000, a subsidiary of Columbia Resources entered into agreements
with Mahonia II Limited (Mahonia), whereby the subsidiary agreed to sell 156.7
Bcf of natural gas to Mahonia for the period February 2000 through July 2005. On
March 30, 2001, the subsidiary restructured its existing forward gas sales
agreements with Mahonia to postpone physical deliveries of 19.9 Bcf of natural
gas originally scheduled for the period April 2001 through March 2002. These
deliveries have been scheduled to resume in January 2003 and continue through
February 2006. The restructuring also increased the amount of gas to be
delivered by 31.7 Bcf.

39

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)

The forward sales under the Mahonia agreements have been guaranteed through the
use of surety bonds with indemnity values amounting to approximately $294.0
million declining over time. The surety bonds have ratings triggers if the
credit rating of Columbia falls below BBB at Standard and Poor's or Baa2 at
Moody's. Columbia's long-term debt ratings are currently BBB and Baa2 at
Standard and Poor's and Moody's, respectively. The collateral requirement from a
downgrade below the ratings trigger levels would require the posting of a letter
of credit in the amount of approximately $294.0 million declining over time.

Volumes

Gas production was 54.1 Bcf in 2001 and 9.5 Bcf in the last two months of 2000.
Oil and liquids production was 53,100 barrels in 2001 and 26,500 barrels in the
last two months of 2000.

Operating Revenues

Operating revenues for the year were $232.7 million, an increase of $192.1
million over 2000, primarily due to 2001 including twelve months of operations
compared to two months in 2000. Approximately 92% of Columbia Resource's natural
gas production was hedged at an average price of $4.04 per million cubic feet
(Mcf) for the twelve-month period compared to an average hedged price of $3.98
per Mcf in 2000.

Operating Income

Operating income for 2001 was $51.9 million, an increase of $46.5 million over
2000, primarily due to 2001 including twelve months of operations compared to
two months in 2000.

40

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
MERCHANT OPERATIONS

Primary Energy

Primary Energy is currently involved in six projects that are concerned with the
generation of electricity, steam or thermal energy on the sites of industrial
customers. Five projects generate energy from process streams or fuel provided
by the industrial customers. The energy is then delivered to the industrial
customers under long-term contracts providing for tolling fees, sublease
payments, unit sale payments or processing fees. One project, Whiting Clean
Energy, will obtain natural gas to produce electricity for sale in the wholesale
markets and steam for industrial use.

Each project is developed by a wholly-owned subsidiary (the "Lessee") of Primary
Energy. The Lessee leases the facility after completion of construction from a
non-affiliated special purpose entity (the "Lessor"), which owns the facility
and advances the funds for construction. The Lessor obtains funding primarily
from bank borrowings or a private placement of notes, secured by the Lessor's
rights in the facility. The indebtedness of the Lessor is not treated as
indebtedness of NiSource under generally accepted accounting principles in the
United States. The lease payments from the Lessee to the Lessor are based on a
return on the amounts advanced plus any amortization of the amounts advanced.
With respect to three of the projects, the costs of the project financing depend
on the debt rating on NiSource's outstanding commercial paper or long-term debt.

The projects are located on the customers' premises pursuant to long-term ground
leases. The responsibility for operation and maintenance lies directly with the
industrial customers for two of the projects and with the Lessee on the
remaining projects. Where the Lessee is responsible for the operation and
maintenance, it contracts with third parties to manage and perform the operation
and maintenance activities.

NiSource, either directly or through Capital Markets, has guaranteed or in
substance guaranteed most lease payments to the Lessors, including regular lease
payments, accelerated lease payments on an event of default, and payment
obligations, including residual guarantee amounts, at the end of lease terms. In
the case of an event of default, a Lessor can accelerate the full, unamortized
amount of the Lessor's funding. The aggregate unamortized funding for all the
projects at December 31, 2001 was $629.7 million.

At the end of an initial lease term, the Lessee has the right to purchase the
facility for the unamortized amount of the Lessor's funding. If the Lessee
cannot satisfy return conditions, the Lessee is required to purchase the
facility at such price. If the Lessee determines not to purchase the facility
and the Lessee can satisfy the return conditions, the

41

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
MERCHANT OPERATIONS (CONTINUED)

Lessee may be responsible for a residual guarantee amount. Since the energy
contracts with the industrial customers are long-term and typically extend past
the initial lease term. One strategy is to attempt to refinance the
property and extend the lease term.

The present value of a Lessee's aggregate liability for lease payments and
residual guarantees is generally limited to an amount equal to less than 90% of
the amount advanced. The following table shows, by year, future minimum rental
payments, including maximum residual guarantee amounts and additional amounts
due if the Lessees were to purchase all the facilities at the end of the initial
terms of the leases.

The amounts contained in the first column, representing future minimum rental
payments, are included as part of the future minimum rental payments for
operating leases shown in Note 18G in the Notes to Consolidated Financial
Statements.

Primary Energy's Whiting Clean Energy project at BP's Whiting, Indiana refinery
has incurred delays primarily associated with remediating damage that occurred
during commissioning in September 2001. The delays have also resulted in an
increase in estimated project costs and the need for approximately $20 million
of additional funding. Primary Energy has asserted a claim against the
construction contractor relating to the delay. The project is expected to be
capable of producing electricity in the first quarter of 2002, at a total cost
of approximately $320 million.

In addition to the construction issues at the Whiting Clean Energy facility,
NiSource projects that the facility will operate at a loss based on the current
market view of forward pricing in the gas and electric markets. For 2002, the
after-tax loss is projected to be approximately $16.0 million. The profitability
of the project in future periods will be dependent on, among other things,
prevailing prices in the energy markets and regional load dispatch patterns.

Primary Energy's Ironside project at LTV Steel Company's East Chicago, Indiana
mill has been negatively impacted by LTV's bankruptcy filing in December 2000
and LTV's December 2001 decision to idle the steel mill. The Ironside facility
is complete in all material respects. However, the facility cannot currently be
operated on an economic basis if the mill is not operating. In addition, there
can be no guarantee that LTV will not reject the project contracts in connection
with the bankruptcy, in which event the Lessee will have limited contract
damages against LTV and the status of an unsecured creditor. Primary Energy
believes that the Ironside project brings economic value to the operator of the
mill by utilizing energy waste streams to generate electricity for the mill at
attractive prices. However, there can be no assurance that any successor to LTV
will reopen the mill or be willing to restructure the transaction on an economic
basis to Primary Energy. The winner of the bids for the purchase of LTV's steel
mill will be determined on February 28, 2002. The total cost of the Ironside
project is approximately $67 million.

The lease at Primary Energy's North Lake project is due to expire in June 2002.
Of the several options available, the most likely outcomes are that the project
will be refinanced and the lease will be extended or that the Lessee will
purchase the project at its unamortized cost of approximately $38 million. If
the Lessee purchases the project, the payment will be funded by NiSource. The
strategy at this time is to pursue refinancing.

42

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
MERCHANT OPERATIONS (CONTINUED)

In addition, a subsidiary of Primary Energy is a 50% partner in a partnership
which operates a coal pulverization facility. The partnership has entered into a
lease of a 50% undivided interest in the facility. NiSource has entered into a
guarantee of all of the obligations of the partnership under the lease. Minimum
rental payments under the lease are as follows:

($ in millions)

2002 3.4
2003 6.2
2004 4.3
2005 4.3
2006 4.3
After 19.5

In an event of default, the partnership will be required to pay a stipulated
amount under the lease. This amount was $34.7 million as of December 31, 2001.

Net Revenues

Net revenues of $113.0 million for 2001 decreased $40.8 million from 2000. The
reduction is primarily due to mark to market loss on January East Coast trades
and limited trading opportunities. This decrease is partially offset by
increases in electric wheeling due to upgraded interconnections with neighboring
electric companies and increases in power marketing.

Net revenues for 2000 were $153.8 million, compared to $109.6 million in 1999.
The improvement is due primarily to the addition of significant asset management
contracts in the TPC portfolio and the full year effect in 2000 of TPC
operations. TPC was acquired in April 1999.

Operating Income

Merchant Operations reported operating income of $22.2 million, a decrease of
$56.8 million from 2000. The reduction is primarily due to mark to market loss
on January East Coast trades, limited trading opportunities and a fourth quarter
charge of $16.0 million related to the Enron bankruptcy.

Operating income of $79.0 million in 2000 was an increase of $29.5 million from
1999. The improvement is due primarily to the addition of significant asset
management contracts in the TPC portfolio and the full year effect in 2000 of
TPC operations.

43

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
OTHER

Telecommunications Network

As a result of project delays, cost overruns and a decline in the fiber optics
market that have occurred since the acquisition of Columbia, NiSource recorded a
charge of $9.2 million to operating income in the second quarter of 2001,
related to Transcom, a fiber optics telecommunications network.

In September and October 2000, management held discussions with investment
banking firms seeking strategic options for the Transcom assets. Although
significant uncertainties existed surrounding the estimated costs to complete
the fiber optic network, time to market in a competitive environment, and delays
due to construction deficiencies and environmental issues, management decided to
complete the Transcom network and sell the completed network.

The Company received subsequent information pertaining to the estimated
construction costs and delays. Consequently, management concluded that the
carrying value of the telecommunication assets exceeded the realizable value by
approximately $89.2 million. Consequently, goodwill resulting from the
acquisition of Columbia was increased by a substantial portion of such excess
carrying amount ($52.0 million after-tax).

In August 2001, Transcom invited potential buyers to submit bids for the assets.
Based on these bids, present market conditions preclude Transcom from realizing
the carrying value of the assets by selling at the present time. Therefore
management has decided to operate the network, while continuing to evaluate
market conditions for possible sale. At December 31, 2001, the anticipated cash
flow from Transcom's business plan indicates that the asset's current carrying
value is realizable. However, economic and other events may adversely affect the
Transcom's ability to achieve such plan.

Sale of Underground Locating and Marking Service

On January 28, 2002, NiSource sold all of the issued and outstanding capital
stock of SM&P, a wholly owned subsidiary of NiSource, to The Laclede Group, Inc.
for $37.9 million. SM&P operates an underground locating and marking service in
ten midwestern states. In the first quarter of 2002, NiSource will recognize an
after-tax gain of $10.3 million related to the sale. The net assets of SM&P were
reported as assets held for sale on the consolidated balance sheets.

Environmental Matters

TRANSCOM. In spring 2000, Transcom received directives from the Philadelphia
District of the U.S. Army Corps of Engineers (Philadelphia District) and an
administrative order from Pennsylvania Department of Environmental Protection
(PA DEP) addressing alleged violations of federal and state laws resulting from
construction activities associated with Transcom's laying fiber optic cable
along portions of a route between Washington, D.C. and New York City. The order
and directives required Transcom to largely cease construction activities. On
September 18, 2000, Transcom entered into a voluntary settlement agreement with
the Philadelphia District under which Transcom contributed $1.2 million to the
Pennsylvania chapter of the Nature Conservancy and the Philadelphia District
lifted its directives. As a result of the voluntary agreement with the
Philadelphia District and communications with the PA

44

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)

NISOURCE INC.
OTHER (CONTINUED)

DEP, the Maryland Department of the Environment and the Baltimore District of
the US Army Corps of Engineers, work in Pennsylvania and Maryland was allowed to
be continued and has been completed. On October 25, 2001, Transcom entered into
a Consent Order and Agreement with the PA DEP in settlement of its enforcement
action under which Transcom paid $80,633 in penalties and $223,567 to fund six
community environmental projects.

OTHER AFFILIATES. NiSource affiliates have retained environmental cleanup
liability associated with some its former companies, including Columbia Propane,
Columbia Petroleum and certain local gas distribution companies. The primary
environmental liability associated with former propane operations relates to a
former manufactured gas plant (MGP) site in Wisconsin for which reserves have
been accrued. Environmental liability associated with former petroleum
operations includes relatively minor cleanups of product spills at third party
properties and liability for pre-existing environmental conditions at former
petroleum terminals. A NiSource affiliate also retains liability for two former
MGP sites associated with a local gas distribution company in New York, for
which reserves have been accrued.

The ultimate liability in connection with these sites will depend upon many
factors including the extent of environmental response actions required, other
PRPs and their financial viability, and indemnification from previous facility
owners. Only those corrective action costs currently known and determinable can
be considered "probable and reasonably estimable" under SFAS No. 5 and
consistent with SOP No. 96-1. As costs become probable and reasonably estimable,
reserves will be adjusted as appropriate. NiSource believes that any
environmental response actions required at former operations, for which it is
ultimately liable, after consideration of insurance coverage and contributions
from other PRPs, will not have a material adverse effect on NiSource's financial
position.

Net Operating Revenues

Net operating revenues of $46.1 million for 2001 decreased by $27.9 million from
2000. This decrease is due to the sale of non-core businesses, partially offset
by higher revenues in the line locating business.

Net operating revenues of $74.0 million for 2000 increased by $9.7 million from
1999. This increase is primarily due to higher revenues in the line locating
business.

Operating Income (Loss)

The Other segment reported an operating loss of $67.2 million in 2001 versus an
operating loss of $28.0 million in 2000, reflecting the impairment of
telecommunication assets, the settlement of litigation related to Market Hub
Partners (MHP) which was sold in 2000 and negative impact of winding down
non-core businesses.

Other reported an operating loss of $28.0 million for 2000 versus an operating
loss of $7.3 million in 1999.

45

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

NISOURCE INC.

46

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE BOARD OF DIRECTORS OF NISOURCE INC.:

We have audited the accompanying consolidated balance sheets and statements of
consolidated capitalization and long-term debt of NiSource Inc. and subsidiaries
as of December 31, 2001 and 2000, and the related statements of consolidated
income, common stockholders' equity and cash flows for each of the three years
in the period ended December 31, 2001. These financial statements are the
responsibility of NiSource's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NiSource Inc. and subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.

As explained in Note 2 to the financial statements, NiSource Inc. has given
retroactive effect to the change in accounting for acquisition, exploration and
development activities related to oil and gas reserves from the full cost method
to the successful efforts method. As explained in Note 8 to the financial
statements, effective January 1, 2001, NiSource Inc. adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives Instruments
and Hedging Activities," as amended.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
Index to Item 8, Financial Statements and Supplementary Data are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic consolidated financial statements. These schedules
have been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

Arthur Andersen LLP
Chicago, Illinois
January 29, 2002

47

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
STATEMENTS OF CONSOLIDATED INCOME

The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.

48

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

49

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
CONSOLIDATED BALANCE SHEETS

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

50

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
CONSOLIDATED BALANCE SHEETS

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

51

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
STATEMENTS OF CONSOLIDATED CAPITALIZATION

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

52

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
STATEMENTS OF CONSOLIDATED LONG-TERM DEBT

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

53

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

54

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY (CONTINUED)

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

55

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. HOLDING COMPANY STRUCTURE

NiSource Inc. (NiSource) is an energy holding company whose subsidiaries provide
natural gas, electricity and other products and services to 3.6 million
customers located within a corridor that runs from the Gulf Coast through the
Midwest to New England. NiSource, organized as an Indiana holding company in
1987 under the name of NIPSCO Industries, Inc., changed its name to NiSource
Inc. on April 14, 1999. Subsequent to the completion of the acquisition of
Columbia Energy Group (Columbia) on November 1, 2000, as discussed in Note 3
below, NiSource became a Delaware holding company registered under the Public
Utility Holding Company Act of 1935, as amended (1935 Act). NiSource derives
substantially all its revenues and earnings from the operating results of its 16
direct subsidiaries.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of NiSource and its majority-owned subsidiaries after the
elimination of all intercompany accounts and transactions. Investments for which
at least a 20% interest is owned, certain joint ventures and limited partnership
interests of more than 3% are accounted for under the equity method. With
limited exceptions, 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.

B. DILUTED AVERAGE COMMON SHARES COMPUTATION. Basic earnings per share (EPS) is
computed by dividing income available to common stockholders by the
weighted-average number of shares of common stock outstanding for the period.
The weighted average shares outstanding for diluted EPS include the incremental
effect of the various long-term incentive compensation plans. For 2001 and 2000,
the weighted average shares outstanding for diluted EPS also includes the
incremental effect of a forward equity contract associated with the Stock
Appreciation Income Linked Securities(SM) (SAILS(SM)). For 1999, the incremental
effect of shares of common stock associated with another equity forward share
purchase contract, calculated under the reverse treasury stock method, is also
included in the weighted average shares outstanding for diluted EPS. See Note
12B for a description of the equity forward share purchase contract.

The numerator in calculating both basic and diluted EPS for each year is
reported net income. The computation of diluted average common shares follows:

C. CASH AND CASH EQUIVALENTS. NiSource considers all investments with original
maturities of three months or less to be cash equivalents.

D. BASIS OF ACCOUNTING FOR RATE-REGULATED SUBSIDIARIES. Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71), provides that rate-regulated subsidiaries account for
and report assets and liabilities consistent with the economic effect of the way
in which regulators establish rates, if the rates established are designed to
recover the costs of providing the regulated service and if the competitive
environment makes it probable that such rates can be charged and collected.
NiSource's rate-regulated subsidiaries follow the accounting and reporting
requirements of SFAS No. 71. Certain expenses and credits subject to utility
regulation or rate determination normally reflected in income are deferred on
the balance sheet and are recognized in income as the related amounts are
included in service rates and recovered from or refunded to customers. In the
event that regulation significantly changes the opportunity for NiSource to
recover its costs in the future, all or a portion of NiSource's regulated
operations may no longer meet the criteria for the application of SFAS No. 71.
In such event, a write-down of all or a portion of NiSource's existing
regulatory assets

56

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and liabilities could result. If transition cost recovery is approved by the
appropriate regulatory bodies that would meet the requirements under generally
accepted accounting principles for continued accounting as regulatory assets and
liabilities during such recovery period, the regulatory assets and liabilities
would be reported at the recoverable amounts. If NiSource would not be able to
continue to apply the provisions of SFAS No. 71, NiSource would have to apply
the provisions of SFAS No. 101, "Regulated Enterprises - Accounting for the
Discontinuation of Application of FASB Statement No. 71." In management's
opinion, NiSource's regulated subsidiaries will be subject to SFAS No. 71 for
the foreseeable future.

Net regulatory assets and liabilities were comprised of the following items:

Regulatory assets of approximately $461.7 million are not presently included in
the rate base and consequently are not earning a return on investment. These
regulatory assets are being recovered through cost of service. The remaining
recovery periods generally range from 1 to 15 years. Regulatory assets of
approximately $278.4 million require specific rate action.

E. UTILITY PLANT AND OTHER PROPERTY AND RELATED DEPRECIATION AND MAINTENANCE.
Property, plant and equipment (principally utility plant) are stated at cost.
The cost of utility and other plant of the rate-regulated subsidiaries includes
an allowance for funds used during construction (AFUDC). Property, plant and
equipment of other subsidiaries include interest during construction (IDC). The
2001 before-tax rates for AFUDC and IDC were 6.6% and 6.8%, respectively. The
2000 before-tax rates for AFUDC and IDC were 6.4% and 6.8%, respectively. The
1999 before-tax rate for AFUDC was 5.5%.

The regulated subsidiaries record depreciation using a straight-line method over
the remaining service lives of the electric, gas and common properties.

The depreciation provisions for utility plant, as a percentage of the original
cost, for the periods ended December 31, 2001, 2000 and 1999 were as follows:

57

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The regulated subsidiaries 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.

Net utility plant includes amounts allocated to utility plant in excess of the
original cost as part of purchase price allocations associated with the
acquisition of certain utility businesses, net of accumulated depreciation. Net
plant acquisition adjustments were $496.5 million and $553.4 million at December
31, 2001, and December 31, 2000, respectively, and are being amortized over
forty-year periods from the respective dates of acquisition.

F. GAS AND OIL PRODUCING PROPERTIES. During the fourth quarter of 2001, NiSource
changed its method of accounting for acquisition, exploration and development
activities related to oil and gas reserves from the full cost method to the
successful efforts method. Under the successful efforts method of accounting,
except for property acquisition costs, only costs associated with specific
discovered reserves are capitalized. Capitalized costs include mineral interests
in properties, wells and related equipment and facilities, support equipment,
and uncompleted wells. Depletion expense is equal to annual production
multiplied by the depletion rate per unit that is derived by spreading the total
costs capitalized under successful efforts over the number of units expected to
be extracted over the life of the reserves on a lease basis. The costs
capitalized using the successful efforts method, net of accumulated depletion,
are subject to impairment under SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121),
through 2001. Beginning January 1, 2002, the net capitalized costs will be
subject to impairment testing under SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144), which supercedes SFAS No. 121.
NiSource, as well as the Securities Exchange Commission (SEC), believes that the
successful efforts method is preferable when compared with the full cost method.
The accounting change requires that the financial statements of all periods
presented be restated to take into account the effect of the change. Compared to
full cost, the change to successful efforts reduced operating income by $5.3
million and $10.3 million for 2001 and 2000, respectively.

G. CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M. Schahfer
Units 17 and 18, Northern Indiana Public Service Company (Northern Indiana)
capitalized the carrying charges and deferred depreciation in accordance with
orders of the Indiana Utility Regulatory Commission (IURC) until the cost of
each unit was allowed in rates. Such carrying charges and deferred depreciation
are being amortized over the remaining life of each unit.

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

In Columbia Gas of Ohio, Inc.'s (Columbia of Ohio) 1999 rate agreement, the
Public Utilities Commission of Ohio (PUCO) authorized Columbia of Ohio to revise
its depreciation accrual rates for the period January 1, 1999 through December
31, 2004. The revised depreciation rates are lower than those that would have
been utilized if Columbia of Ohio were not subject to regulation and,
accordingly, a regulatory asset has been established for the difference. The
amount of depreciation that would have been recorded for 2001 had Columbia of
Ohio not been subject to rate regulation is $37.1 million, a $24.5 million
increase over the $12.6 million reflected in rates. The amount of depreciation
that would have been recorded for 2000 had Columbia of Ohio not been subject to
rate regulation is $34.6 million, a $21.2 million increase over the $13.4
million reflected in rates. The regulatory asset was $64.5 million as of
December 31, 2001.

H. 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 each project in accordance with SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." 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.

58

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

I. INTANGIBLE ASSETS. Intangible assets were recorded at cost and are amortized
on a straight-line basis. The excess of cost over the fair value of the net
assets acquired in an acquisition was recorded as goodwill. Goodwill assets of
$3.8 billion were reported at December 31, 2001. The goodwill associated with
the Columbia acquisition is being amortized over forty years, while goodwill
associated with other acquisitions is being amortized over a weighted average
period of twenty-seven years. Other intangible assets were approximately $5.0
million at December 31, 2001 and 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 undiscounted future cash flows would be
sufficient to support the recorded intangible assets. Accumulated amortization
of other intangible assets at December 31, 2001 was approximately $2.8 million.

Effective beginning January 1, 2002, goodwill will no longer be amortized
pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
Instead goodwill will be subject to annual impairment testing under SFAS No.
142. Intangible assets other than goodwill with finite useful lives will
continue to be amortized over the assets' useful lives. Intangible assets, other
than goodwill, will be subject to impairment testing under SFAS No. 144 which
supercedes SFAS No. 121 beginning January 1, 2002. (See Note 6A and 6C).

J. REVENUE RECOGNITION. Except as discussed below, revenues are recorded as
products and services are delivered. Utility revenues are billed to customers
monthly on a cycle basis. Revenues are recorded on the accrual basis and include
an estimate for electricity and gas delivered. Cash received in advance from
sales of commodities to be delivered in the future is recorded as deferred
revenue and recognized as income upon delivery of the commodities. Revenues
relating to energy trading operations are recorded based upon changes in the
fair values, net of reserves, of the related energy trading contracts.

K. ESTIMATED RATE REFUNDS. Certain rate-regulated subsidiaries collect revenues
subject to refund pending final determination in rate proceedings. In connection
with such revenues, estimated rate refund liabilities are recorded which
reflects management's current judgment of the ultimate outcome of the
proceedings. No provisions are made when, in the opinion of management, the
facts and circumstances preclude a reasonable estimate of the outcome.

L. ACCOUNTS RECEIVABLE SALES PROGRAM. NiSource enters into agreements with third
parties to sell certain accounts receivable without recourse. These sales are
reflected as reductions of accounts receivable in the accompanying consolidated
balance sheets and as operating cash flows in the accompanying statements of
consolidated cash flows. The costs of this program, which are based upon the
purchasers' level of investment and borrowing costs, are charged to other income
in the accompanying statements of consolidated income.

M. USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent 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.

N. FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision for
adjustment in charges for electric energy to reflect increases and decreases in
the cost of fuel and the fuel cost of purchased power through operation of a
fuel adjustment clause. As prescribed by order of the IURC applicable to metered
retail rates, the adjustment factor has been calculated based on the estimated
cost of fuel and the fuel cost of purchased power in a future three-month
period. If two statutory requirements relating to expense and return levels are
satisfied, any under recovery or over recovery caused by variances between
estimated and actual cost in a given three-month period will be included in a
future filing. Northern Indiana records any under recovery or over recovery as a
current regulatory 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.

O. GAS COST ADJUSTMENT CLAUSE. NiSource's gas distribution subsidiaries defer
differences between gas purchase costs and the recovery of such costs in
revenues, and adjust future billings for such deferrals on a basis consistent
with applicable state-approved tariff provisions.

59

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

P. NATURAL GAS IN STORAGE. Both the last-in, first-out (LIFO) inventory
methodology and the weighted average methodology are used to value natural gas
in storage. Based on the average cost of gas using the LIFO method in December
2001 and December 2000, the estimated replacement cost of gas in storage at
December 31, 2001, and December 31, 2000, exceeded the stated LIFO cost by $71.2
million and $791.1 million, respectively. The unusually high estimated
replacement cost at December 31, 2000 is due to the spike in gas prices that
occurred during the closing months of the year. Inventory valued using LIFO was
$300.4 million and $257.2 million at December 31, 2001, and December 31, 2000,
respectively. Inventory valued using the weighted average methodology was $77.3
million and $65.3 million at December 31, 2001, and December 31, 2000,
respectively.

Q. ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign-currency-denominated forecasted transaction. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and resulting designation.

Unrealized and realized gains and losses are recognized each period as
components of other comprehensive income, regulatory assets and liabilities or
earnings depending on the nature of such derivatives. For subsidiaries that
utilize derivatives for cash flow hedges, the effective portions of the
gains and losses are recorded to other comprehensive income and are recognized
in earnings concurrent with the disposition of the hedged risks. If a
forecasted transaction does not occur, the gains or losses are recognized
currently in earnings. For fair value hedges, the gains and losses are recorded
in earnings each period along with the change in the fair value of the hedged
item. For hedges of foreign currency the accounting treatment generally follows
the treatment for cash flow hedges or fair value hedges depending on the nature
of the foreign currency hedge. As a result of the rate-making process, the
rate-regulated subsidiaries generally record gains and losses as regulatory
liabilities or assets and recognize such gains or losses in earnings when
recovered in revenues.

In order for a derivative contract to be designated as a hedge, the relationship
between the hedging instrument and the hedged item or transaction must be highly
effective. The effectiveness test is performed at the inception of the hedge and
each reporting period thereafter, throughout the period that the hedge is
designated. Any amounts determined to be ineffective are recorded currently in
earnings.

NiSource evaluates the contracts of its trading operations in accordance with
the criteria for derivative contracts under SFAS No. 133. Contracts not meeting
the criteria under SFAS No. 133 are recorded at fair value under Emerging Issues
Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management
Activities" (EITF No. 98-10). EITF No. 98-10 indicates that when certain trading
criteria are met, energy contracts, including "energy-related contracts" such as
tolling, transportation and storage contracts, should be accounted for at fair
value (marked to market) along with any related derivative contracts. The
related gains and losses should be included currently in earnings. Energy
trading activities refers to energy contracts entered into with the objective of
generating profits on or from exposure to shifts or changes in market prices.

R. INCOME TAXES AND INVESTMENT TAX CREDITS. NiSource records income taxes to
recognize full interperiod tax allocations. Under the liability method of income
tax accounting, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax base of existing assets and liabilities.

Previously recorded investment tax credits of the regulated subsidiaries were
deferred and are being amortized over the life of the related properties to
conform to regulatory policy.

S. ENVIRONMENTAL EXPENDITURES. NiSource accrues for costs associated with
environmental remediation obligations when such costs are probable and can be
reasonably estimated, regardless of when expenditures are made. The undiscounted
estimated future expenditures are based on currently enacted laws and
regulations, existing technology and site-specific costs. The liability is
adjusted as further information is discovered or circumstances change.
Rate-regulated subsidiaries applying SFAS No. 71 establish regulatory assets on
the balance sheet to the extent that future recovery of environmental
remediation costs is probable through the regulatory process.

T. STOCK OPTIONS AND AWARDS. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123), encourages, but
does not require, entities to adopt the fair value method of accounting for
stock-based compensation plans. The fair value method would require the
amortization of

60

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the fair value of stock-based compensation at the date of grant over the related
vesting period. NiSource continues to apply Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees."

U. SYNTHETIC LEASES RELATING TO REAL ESTATE. NiSource accounts for the
synthetic leases of its Primary Energy subsidiary in accordance with Emerging
Issues Task Force Issue No. 97-10, "The Effect of Lessee Involvement in Asset
Construction" (EITF No. 97-10). EITF No. 97-10 provides the accounting
requirements for situations in which an entity (lessee) is involved on behalf
of an owner (lessor) with the construction of an asset that will be leased to
the lessee when construction of the asset is completed. In these situations,
the owner-lessor is generally a special purpose entity. NiSource does not
consolidate the special purpose entities related to its Primary Energy
projects, pursuant to Emerging Issues Task Force Issue No. 90-15, "Impact of
Nonsubstantive Lessors, Residual Value Guarantees and Other Provisions in
Leasing Transactions," when parties unrelated to NiSource have made substantive
residual equity capital investments in the amount of at least three percent of
the entities' capitalization.

3. ACQUISITIONS

On November 1, 2000, NiSource completed its acquisition of Columbia for an
aggregate consideration of approximately $6 billion, primarily consisting of
$3,888 million in cash, 72.4 million shares of common stock valued at $1,761
million and SAILS(SM) (units each consisting of a zero coupon debt security
coupled with a forward equity contract in NiSource shares) valued at $114
million. NiSource also assumed approximately $2 billion in Columbia debt.
NiSource has accounted for the acquisition in accordance with the purchase
method of accounting. The purchase price was allocated to the assets and
liabilities acquired based on the fair value of those assets and liabilities as
of the acquisition date. Based upon the nature of the regulatory environment in
which Columbia's rate regulated subsidiaries operate, the fair value of
rate-regulated assets and liabilities are generally considered to approximate
historical cost. The excess of the aggregate purchase price over the estimated
fair value of the net assets acquired, approximately $3.8 billion, has been
reflected as goodwill in the consolidated financial statements and has been
amortized on a straight-line basis over forty years through 2001.

The final allocation of the purchase price to assets acquired and liabilities
assumed in the acquisition of Columbia was as follows:

On February 12, 1999, the acquisition of Bay State Gas Company (Bay State) was
completed for approximately $560.1 million in cash and NiSource common shares.
The $237.7 million cash portion was partially financed by the issuance of
Corporate Premium Income Equity Securities (Corporate PIES) (See Note 16). The
acquisition was accounted for as a purchase, and the purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values.

On a pro forma basis, NiSource's consolidated results of operations for the
twelve months ended December 31, 2000 and December 31, 1999, assuming the
acquisition of Columbia had occurred on January 1, 1999, would have been:

UNAUDITED

61

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On April 1, 1999, NiSource acquired the stock of TPC Corporation, a
Houston-based natural gas marketing and storage company, for approximately $150
million in cash. The acquisition was accounted for as a purchase, with the
purchase price allocated to the assets and liabilities acquired based on their
estimated fair values. As a result of the TPC Corporation acquisition, NiSource
had an indirect investment in the amount of $126.0 million, representing a 77.3%
interest in Market Hub Partners, L.P. (MHP). In the fourth quarter of 1999,
NiSource acquired the remaining interests in MHP. On September 18, 2000,
NiSource sold its ownership interests in MHP to Duke Energy Gas Transmission for
$250 million in cash plus the assumption of $150 million in debt. This
transaction resulted in a pre-tax gain of $51.9 million, which is reflected as a
component of other, net under other income (deductions) in the accompanying 2000
statement of consolidated income. Results for periods presented prior to the
acquisition of TPC are not impacted significantly by pro forma results of TPC
applied to those periods.

4. RESTRUCTURING ACTIVITIES

During 2000, NiSource developed and began the implementation of a plan to
restructure its operations as a result of the acquisitions discussed in Note 3.
The restructuring plan included a severance program, a transition plan to
implement operational efficiencies throughout NiSource's operations and a
voluntary early retirement program. During 2001, the restructuring initiative
was continued with the addition of a plan to restructure the operations within
the Company's Gas Distribution and Electric Operations segments. Additionally,
in December 2001 NiSource announced its plan to indefinitely shut down the Dean
H. Mitchell Generating Station located in Gary, Indiana.

As a result of the restructuring plan initiated during 2001, approximately 500
positions will be eliminated. For all of the plans, a total of approximately
1,400 management, professional, administrative and technical positions will be
eliminated. As of December 31, 2001, approximately 725 employees had been
terminated.

During 2001, NiSource recorded a pre-tax charge amounting to $28.7 million
comprised primarily of severance and related benefits costs for the plans to
restructure the operations within the Gas Distribution and Electric Operations
segments and indefinitely shut down the generating station. In October 2000, a
pre-tax charge of $5.8 million was recorded for severance and related benefits
costs. In addition, due to the merger with Columbia during 2000, NiSource
assumed $66.9 million in liabilities related to the restructuring of Columbia's
operations representing severance and related benefits costs and relocation of
certain operations. At December 31, 2001 and 2000, the consolidated balance
sheets reflected liabilities of $58.3 million and $65.4 million related to the
restructuring plans, respectively.

5. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

In November 2001, NiSource, its subsidiary IWC Resources Corporation (IWCR) and
the City of Indianapolis (City) signed a definitive agreement for the City to
buy the assets of the Indianapolis Water Company (IWC) and other assets of IWCR
and its subsidiaries for $515.0 million, which includes $132.4 million in IWC
debt and the redemption of $2.5 million of IWC preferred stock. NiSource will
retain $80 million of IWC debt. The divestiture of IWCR was required as part of
the order by the SEC approving the November 2000 acquisition of Columbia.
Closing of the sale is contingent upon the receipt of all necessary consents,
including approval by the Indiana Utility Regulatory Commission and the ability
of the City to obtain financing. It is anticipated that the transaction will be
completed in the second quarter of 2002. The water utilities' operations were
reported as discontinued operations.

Results from discontinued operations of the water utilities are provided in the
following table:

62

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On January 28, 2002, NiSource sold all of the issued and outstanding capital
stock of SM&P Utility Resources, Inc. (SM&P), a wholly owned subsidiary of
NiSource to The Laclede Group, Inc. for $37.9 million. SM&P operates an
underground locating and marking service in ten midwestern states. In the first
quarter of 2002, NiSource will recognize an after-tax gain of $12.3 million
related to the sale. The net assets of SM&P were reported as assets held for
sale on the consolidated balance sheets.

On August 21, 2001, Columbia sold Columbia Propane Corporation and its
subsidiaries (Columbia Propane) to AmeriGas Partners L.P. (AmeriGas) for
approximately $196.0 million, consisting of $152.0 million of cash and $44.0
million of AmeriGas partnership common units. On December 11, 2001, NiSource
sold the common units in a public offering for $48.5 million. NiSource has also
sold substantially all the assets of Columbia Petroleum Corporation (Columbia
Petroleum), a diversified petroleum distribution company. At December 31, 2000,
the net assets of Columbia Propane and Columbia Petroleum were reported as net
assets of discontinued operations on the consolidated balance sheets.

The net assets of the discontinued operations and assets held for sale were as
follows:

6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

A. SFAS NOS. 141 AND 142 - BUSINESS COMBINATIONS AND GOODWILL AND OTHER
INTANGIBLE ASSETS. In July 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The key
requirements of the two interrelated Statements include mandatory use of the
purchase method of accounting for business combinations, discontinuance of
goodwill amortization, a revised framework for testing for goodwill impairment
at a "reporting unit" level, and new criteria for the identification and
potential amortization of other intangible assets. Other changes to existing
accounting standards involve the amount of goodwill to be used in determining
the gain or loss on the disposal of assets and a requirement to test goodwill
for impairment at least annually.

The Business Combinations Statement is generally effective for combinations
initiated after June 30, 2001. The Statement on Goodwill and Other Intangible
Assets is effective for fiscal years beginning after December 15, 2001; however,
for business combinations consummated after June 30, 2001 the requirements to
discontinue goodwill amortization are effective upon issuance of the Statements.
The first part of the annual impairment test is to be performed within six
months of adopting the Statement on Goodwill and Other Intangible Assets.

NiSource adopted the provisions of the Business Combinations Statement on July
1, 2001, and adopted the Goodwill and Other Intangible Assets Statement on
January 1, 2002. Although NiSource is currently evaluating the impact that the
Statements will have on its results of operations, the Company expects the
adoption of the Statement on Goodwill and Other Intangibles to have a
significantly favorable impact on operating income beginning January 1, 2002
since goodwill is no longer required to be amortized. NiSource amortized
approximately $93.1 million of goodwill during 2001.

B. SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the
FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The
Statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time,

63

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the liability is accreted to its then present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss.

The Statement is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged. NiSource is currently evaluating the impact that
the Statement will have on its financial position and results of operations.

C. SFAS NO. 144 - ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS. In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No. 144). The Statement replaces SFAS No. 121, although it retains the two-step
impairment testing methodology used in SFAS No. 121. The accounting and
reporting provisions of Accounting Principals Board Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" (APBO No. 30), are superceded by SFAS No. 144, except that the
Statement preserves the requirement of APBO No. 30 to report discontinued
operations separately from continuing operations. The Statement covers a variety
of implementation issues inherent in SFAS No. 121, unifies the framework used in
accounting for assets to be disposed of and discontinued operations and broadens
the reporting of discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction.

The Statement is effective for fiscal years beginning after December 15, 2001.
NiSource adopted SFAS No. 144 on January 1, 2002. The Company does not expect
the adoption of the Statement to have a material impact on its financial
position and results of operations.

7. ELECTRIC OPERATIONS REGULATORY REVIEW

During the course of a regularly scheduled review, referred to as a Level 1
review, the staff of the IURC made a preliminary determination, based on
unadjusted historical financial information filed by Northern Indiana, that
Northern Indiana was earning returns that were in excess of its last rate order
and generally established standards. Despite efforts to explain to the IURC
staff several adjustments that needed to be made to the filed information to
make such an analysis meaningful, the staff recommended that a formal
investigation be performed. During 2001, Northern Indiana and several other
parties filed testimony, participated in hearings and submitted proposed forms
of the order and comments on these proposed orders. Northern Indiana's testimony
indicated that if rates are to be changed, they should be increased.

8. RISK MANAGEMENT ACTIVITIES

NiSource uses commodity-based derivative financial instruments to manage certain
risks inherent in its business. Senior management takes an active role in the
risk management process and has developed policies and procedures that require
specific administrative and business functions to assist in the identification,
assessment and control of various risks. The open positions resulting from risk
management activities are managed in accordance with strict policies, which
limit exposure to market risk and require daily reporting to management of
potential financial exposure. In recognition of the increasingly varied and
complex nature of the energy business, NiSource's risk management policies and
procedures continue to evolve and are subject to ongoing review and
modification.

ACCOUNTING CHANGE - SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES." Effective January 1, 2001, NiSource adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as subsequently
amended by SFAS No. 137 and SFAS No. 138 (collectively referred to as SFAS No.
133). These statements establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c)

64

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

a hedge of the foreign currency exposure of a net investment in a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and resulting designation.

The adoption of this statement on January 1, 2001, resulted in a cumulative
after-tax increase to net income of approximately $4.0 million and an after-tax
reduction to other comprehensive income (OCI) of approximately $17.0 million.
The adoption also resulted in the recognition of $178.0 million of assets and
$212.8 million of liabilities on the consolidated balance sheet. Additionally,
the adoption resulted in the reclassification of deferred revenue to OCI of
$17.9 million. During 2001, approximately $7.4 million of the net losses
previously included in the cumulative effect of a change in accounting principle
component of OCI were reclassified into earnings. Further detail of the assets
and liabilities recorded on the consolidated financial statements for the
adoption of SFAS No. 133 is as follows:

As stated above, the initial recording of the cumulative effect of this
accounting change included unrealized holding losses in OCI of $17.0 million.
However, the activity for 2001 resulted in unrealized gains on qualifying
derivatives of $50.1 million. The activity for 2001 included:

Unrealized gains and losses on NiSource's hedges were recorded as price risk
management assets and liabilities along with unrealized gains and losses on
NiSource's trading portfolio. The accompanying Consolidated Balance Sheets
reflected price risk management assets related to unrealized gains and losses on
hedges of $66.0 million at December 31, 2001, of which $65.9 million was
included in "Current Assets" and $0.1 million was included in "Other Assets."
Price risk management liabilities related to unrealized gains and losses on
hedges (including net option premiums) were $10.3 million at December 31, 2001,
all of which were included in "Current Liabilities."

Following is additional information regarding the impact of SFAS No. 133 by
segment.

GAS DISTRIBUTION. For regulatory incentive purposes, the Columbia gas
distribution subsidiaries (Columbia LDCs) enter into contracts that allow
counterparties the option to sell gas to Columbia LDCs at first of the month
prices for a particular month of delivery. Columbia LDCs charge the
counterparties a fee for this option. The changes in the fair value of the
options are primarily due to the changing expectations of the future intra-month
volatility of gas prices. Columbia LDCs defer a portion of the change in the
fair value of the options as either a regulatory asset or liability in
accordance with SFAS No. 71. The remaining change is recognized currently in
earnings.

65

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Northern Indiana offers a Price Protection Service as an alternative to the
standard gas cost recovery mechanism. This service provides Northern Indiana
customers with the option to either lock in their gas cost or place a cap on the
total cost that could be charged for any future month specified. In order to
hedge the anticipated physical future purchases associated with these
obligations, Northern Indiana purchases NYMEX futures and options contracts that
correspond to a fixed or capped price and the associated delivery month. The
NYMEX futures and options contracts satisfy all definitions of a derivative and
they qualify and are designated as a cash flow hedge. Northern Indiana has no
net gain or loss recognized in earnings due to ineffectiveness or time value for
this program in the reporting period and none of the components of the
derivative instruments' value are excluded in its assessment of hedge
effectiveness. It is anticipated that during the next 12 months, expiration of
futures and options contracts will result in loss recognition of amounts
currently classified in OCI of approximately $2.7 million, net of tax, which
will be included in net income. Northern Indiana has futures and options
contracts designated as cash flow hedges through December 2002. At this time
Northern Indiana expects to continue its cash flow hedges due to the probability
that the forecasted transaction will occur.

Northern Utilities, Inc. offers a Guaranteed Price Service Program as an
alternative to the standard gas cost recovery mechanism. This service provides
its New Hampshire customers with the option to lock in their gas cost. In order
to hedge the anticipated physical future purchases associated with these
obligations, Northern Utilities purchases NYMEX futures that correspond to a
fixed price and the associated delivery month. The NYMEX futures contracts
satisfy all definitions of a derivative. Regulatory assets or liabilities are
recorded to offset the change in the fair value of these derivatives.

Northern Indiana and Bay State Gas Company also engage in writing options that
potentially obligate them to purchase or sell gas at the holder's discretion at
some future market-based price. These written options are derivative
instruments, must be marked to fair value and do not meet the requirement for
hedge accounting treatment. Northern Indiana also uses NYMEX derivative
contracts to minimize its gas costs. These contracts do not qualify for hedge
accounting and must be marked to fair value. Because these derivatives are used
within the framework of its gas cost incentive mechanism, Northern Indiana may
ultimately share in a portion of the gains or losses on these options with the
ratepayers. Regulatory assets or liabilities are recorded to offset the change
in the fair value of these derivatives until there is certainty as to the level
of sharing, if any.

EXPLORATION AND PRODUCTION. In conjunction with certain fixed price gas delivery
commitments, Columbia Resources has purchased financial basis swaps to transfer
basis risk from the counterparty back to Columbia Resources. Because these
transactions by definition are derivatives and do not qualify for hedge
accounting, the changes in the fair value of these swaps directly impact
earnings. Additionally, Columbia Resources has engaged in commodity and basis
swaps to hedge the anticipated future sale of natural gas. These contracts are
derivatives and are designated as cash flow hedges of anticipated future sales.
The fair value of the effective portions of these derivatives are recorded in
OCI until the related sale. Any ineffectiveness is charged to earnings. Columbia
Resources has a net gain of approximately $0.7 million recognized in earnings
due to time value in the reporting period and has not excluded components of the
derivatives' values in its assessment of hedge effectiveness. It is anticipated
that during the next 12 months, expiration of derivatives contracts will result
in income recognition for amounts currently classified in OCI of approximately
$17.6 million, net of tax, which will be included in net income. Columbia
Resources has forward derivative contracts designated as cash flow hedges
through December 2002. During 2001, Columbia Resources reclassified $2.4 million
of certain cash flow hedges into earnings due to the probability that the
forecasted transaction would not occur.

MERCHANT OPERATIONS. Certain contracts that would be considered trading
contracts at EnergyUSA-TPC Corp. (TPC) are not considered trading contracts at
the consolidated level. Certain corresponding, offsetting third-party forward
purchase commitments or long futures contracts are designated as cash flow
hedges. The mark to fair value impact of the effective portions of these hedges
is offset in OCI. There is no net gain or loss recognized in earnings due to
ineffectiveness or time value in the reporting period and no components of the
derivatives' values have been excluded in the assessment of hedge effectiveness.
It is anticipated that during the next 12 months, expiration of forward
contracts will result in loss recognition of amounts currently classified in OCI
of approximately $2.0 million, net of tax, which will be included

66

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

in net income. NiSource has designated certain TPC forward derivative contracts
as cash flow hedges through September 2003. At this time, NiSource expects to
continue its cash flow hedges due to the probability that the forecasted
transactions will occur.

Primary Energy, Inc. (Primary Energy) finances, builds and operates cogeneration
plants that generate energy and convert waste products into alternative forms of
energy. Primary Energy finances the construction of these facilities by creating
synthetic leases. A portion of the synthetic lease payment floats with a
referenced interest rate, thus exposing Primary Energy to interest rate risks.
Primary Energy engages in interest rate swaps to fix the floating payment and
designates these instruments as cash flow hedges. The swaps are entered into to
effectively hedge the cash flow risk of the anticipated lease payments. Any
earnings impact of changes in the effective portions of the swaps' fair values
is charged to OCI until the calculation period is settled. Any ineffectiveness
is charged currently to earnings. Primary Energy has no net gain or loss
recognized in earnings due to ineffectiveness or time value in the reporting
period and it has not excluded any component of the derivative instrument's
value in its assessment of hedge effectiveness. It is anticipated that during
the next twelve months, expiration of interest rate swap contracts will result
in loss recognition of amounts currently classified in OCI of approximately $0.5
million, net of tax, which will be included in net income. Primary Energy has
interest rate swap contracts designated as cash flow hedges through June 2002.
At this time, Primary Energy expects to continue its cash flow hedges due to the
probability that the forecasted transactions will occur.

OTHER. Columbia Energy Services, Inc. (Columbia Energy Services) has fixed price
gas delivery commitments to three municipalities in the United States. Columbia
Energy Services entered into a forward purchase agreement with a gas supplier,
wherein the supplier will fulfill the delivery obligation requirements at a
slight premium to index. In order to hedge this anticipated future purchase of
gas from the gas supplier, Columbia Energy Services entered into pay
fixed/receive floating swaps priced at the locations designated for physical
delivery. These swaps are designated as cash flow hedges of the anticipated
purchases. Changes in the effective portions of the swaps' fair values are
included in OCI until the sales are completed. Any ineffectiveness is included
in earnings. Columbia Energy Services has no net gain or loss recognized in
earnings due to ineffectiveness. It is anticipated that during the next 12
months, expiration of forward swap contracts will result in income recognition
of amounts currently classified in OCI of approximately $1.5 million, net of
tax. Columbia Energy Services has forward swap contracts designated as cash flow
hedges through December 2008. At this time, Columbia Energy Services expects to
continue its cash flow hedges due to the probability that the forecasted
transactions will occur.

INTEREST RATE SWAPS. Columbia has entered into interest rate swap agreements to
modify the interest characteristics of its outstanding long-term debt. At
December 31, 2001, Columbia had four interest rate swap agreements outstanding
effective through November 28, 2002, on $200.0 million notional amount of its
6.61% Series B Debentures due November 28, 2002. In addition, Columbia has two
other outstanding interest rate swap agreements, including a $100.0 million
notional value swap effective through November 28, 2005 on its 6.80% Series C
Debentures due November 28, 2005 and a $281.5 million notional value swap
effective through November 28, 2007 on its 7.05% Series D Debentures due
November 28, 2007. The Series D swap can be terminated at the option of the
counter party at any time between the optional termination date of November 28,
2005 and the stated termination date of November 28, 2007. Under the terms of
all the swap agreements, Columbia pays interest based on a floating rate index
and receives interest based on a fixed rate. The effect of these agreements is
to modify the interest rate characteristics of a portion of Columbia's long-term
debt from fixed to variable. As a result of these transactions, $581.5 million
of Columbia's long-term debt is now subject to fluctuations in interest rates.
These interest rate swaps are designated as fair value hedges. The effectiveness
of the interest rate swaps in offsetting the exposure to changes in the debt's
fair value is measured using the short-cut method. Columbia had no net gain or
loss recognized in earnings due to ineffectiveness during 2001.

NiSource entered into forward interest rate swaps to hedge the interest rate
risk exposure associated with $1.6 billion of its anticipated financing of the
Columbia acquisition debt. The swaps had an effective date of March 30, 2001.
The interest rate swaps on the $600 million notional amount was scheduled to
terminate on March 30, 2006, the interest rate swap on the $500 million notional
amount was scheduled to terminate on March 30, 2011 and the interest rate swap
on the other $500 million amount was scheduled to terminate on March 30, 2031.
Financing for the Columbia acquisition was completed on November 14, 2000, as a
result, the interest rate swaps referred to above were terminated early and the
ineffective component of the change in the value of the swaps was charged to
expense in 2000.

67

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TRADING ACTIVITIES. NiSource's trading operations include the activities of its
power trading business and gas trading business associated with TPC. NiSource
employs a value-at-risk (VaR) model to assess the market risk of its energy
trading portfolios. NiSource estimates the one-day VaR across all trading
groups, which utilize derivatives using either Monte Carlo simulation or
variance/covariance, at a 95% confidence level. Based on the results of the VaR
analysis, the daily market exposure for power trading on an average, high and
low basis was $1.1 million, $3.7 million and effectively zero and $0.8 million,
$2.7 million and effectively zero during 2001 and 2000, respectively. The daily
VaR for the gas trading portfolio on an average, high and low basis was $0.9
million, $4.7 million and $0.2 million and $2.3 million, $8.1 million and $0.5
million during 2001 and 2000, respectively.

The fair market value of NiSource power trading assets and liabilities were
$60.3 million and $59.4 million, respectively, at December 31, 2001 and $30.9
million and $42.6 million, respectively, at December 31, 2000. The fair market
value of NiSource gas trading assets and liabilities were $192.0 million and
$184.0 million, respectively, at December 31, 2001. The fair market value of
NiSource gas trading assets and liabilities were $1,560.2 million and $1,526.0
million, respectively, at December 31, 2000.

NiSource has recorded power trading revenues and cost of sales of $979.7 million
and $966.3 million, respectively, for the year ended December 31, 2001. NiSource
has recorded power trading revenues and cost of sales of $485.2 million and
$472.9 million, respectively, for the year ended December 31, 2000. Power
trading revenues and cost of sales were $237.8 million and $230.4 million,
respectively, for the year ended December 31, 1999. NiSource has recorded gas
trading revenues and cost of sales of $2,146.1 million and $2,100.2 million,
respectively, for the year ended December 31, 2001. NiSource has recorded gas
trading revenues and cost of sales of $1,893.3 million and $1,881.1 million,
respectively, for the year ended December 31, 2000. Gas trading revenues and
cost of sales were $390.4 million and $388.2 million, respectively, for the year
ended December 31, 1999.

Unrealized gains and losses on NiSource's trading portfolio are recorded as
price risk management assets and liabilities along with unrealized gains and
losses on NiSource's hedges. The accompanying Consolidated Balance Sheets
reflected price risk management assets related to unrealized gains and losses on
trading activities of $252.3 million and $1,591.1 million at December 31, 2001
and December 31, 2000, respectively, of which $233.3 million and $1,558.5
million were included in "Current Assets" and $19.0 million and $32.6 million
were included in "Other Assets." Price risk management liabilities related to
unrealized gains and losses on trading activities (including net option
premiums) were $243.4 million and $1,568.6 million, of which $232.0 million and
$1,529.2 million were included in "Current Liabilities" and $11.4 million and
$39.4 million were included in "Other Liabilities and Deferred Credits" at
December 31, 2001 and December 31, 2000, respectively.

9. INCOME TAXES

The components of income tax expense are as follows:

68

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Total income taxes from continuing operations are different from the amount that
would be computed by applying the statutory Federal income tax rate to book
income before income tax. The major reasons for this difference are as follows:

Deferred income taxes result from temporary differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
The principal components of NiSource's net deferred tax liability are as
follows:

10. PENSION AND OTHER POSTRETIREMENT BENEFITS

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.

NiSource provides certain health care and life insurance benefits for certain
retired employees. The majority of employees may become eligible for these
benefits if they reach retirement age while working for NiSource.

The expected cost of such benefits is accrued during the employees' years of
service. Current rates of rate-regulated companies include postretirement
benefit costs on an accrual basis, including amortization of the regulatory
assets that arose prior to inclusion of these costs in rates. For most plans,
cash contributions are remitted to grantor trusts.

69

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Beginning in 2000, NiSource is reflecting the information presented below as of
September 30 rather than December 31. The effect of utilizing September 30
rather than December 31 is not significant. The following tables provide a
reconciliation of the plans' funded status and amounts reflected in NiSource's
Consolidated Balance Sheets at December 31:

* One of the several established medical trusts and the trust established for
life insurance are subject to taxation which results in an after-tax asset
earnings rate that is less than 9.00%

70

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table provides the components of the plans expense for each of the
three years:

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:

11. AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS

NiSource has 20,000,000 authorized shares of Preferred with a $0.01 par value,
of which 4,000,000 shares are designated Series A Junior Participating Preferred
Shares and are reserved for issuance pursuant to the Share Purchase Rights Plan
described in Note 12A.

The authorized classes of par value and no par value cumulative preferred and
preference stocks of Northern Indiana are as follows: 2,400,000 shares of
Cumulative Preferred with a $100 par value; 3,000,000 shares of Cumulative
Preferred with no par value; 2,000,000 shares of Cumulative Preference with a
$50 par value (none outstanding); and 3,000,000 shares of Cumulative Preference
with no par value (none outstanding).

The preferred stockholders of Northern Indiana 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.

The redemption prices at December 31, 2001, for the cumulative preferred stock,
which is redeemable solely at the option of Northern Indiana, in whole or in
part, at any time upon thirty days' notice, were as follows:

71

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The redemption prices at December 31, 2001, as well as sinking fund provisions,
for the cumulative preferred stock subject to mandatory redemption requirements,
or whose redemption is outside the control of Northern Indiana, were as follows:

Sinking fund requirements with respect to redeemable preferred stocks
outstanding at December 31, 2001, for each of the subsequent five years were as
follows:

12. COMMON STOCK

As of December 31, 2001, NiSource had 400,000,000 of authorized shares of common
stock with a $0.01 par value.

A. SHAREHOLDER RIGHTS PLAN. The Board of Directors of NiSource has adopted a
Shareholder Rights Plan, pursuant to which one Right accompanies each share of
common stock. Each Right, when exercisable, would initially entitle the holder
to purchase from NiSource one one-hundredth of a share of Series A Junior
Participating Preferred Stock, with $0.01 par value, at a price of $60 per one
one-hundredth of a share. In certain circumstances, if an acquirer obtained 25%
of NiSource's outstanding shares, or merged into NiSource or merged NiSource
into the acquirer, the Rights would entitle the holders to purchase NiSource's
or the acquirer's common shares for one-half of the market price. The Rights
will not dilute NiSource's common stock nor affect earnings per share unless
they become exercisable for common stock. The Plan was not adopted in response
to any specific attempt to acquire control of NiSource. The Rights are not
currently exercisable.

B. EQUITY FORWARD SHARE PURCHASE CONTRACT. During the second quarter of 1999,
NiSource entered into a forward purchase contract covering the purchase of up to
5% of NiSource's outstanding common stock. At the end of each quarterly period
during the term of the forward purchase contract, NiSource had the option, but
not the obligation, to settle the forward purchase contract with respect to all
or a portion of the common shares held by the

72

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

counterparty. The counterparty informed NiSource that approximately 5.6 million
shares had been purchased at a weighted average cost of $26.90 per share.
NiSource had the option to settle with the counterparty by means of physical,
net cash or net share settlement. On a quarterly basis, NiSource paid the
counterparty a fee based on the amount paid for common stock purchased by the
counterparty, and the counterparty remitted dividends received on shares owned.
All such amounts paid and remitted under the contract are reflected in equity
contract costs of common stockholders' equity. On December 26, 2000 the contract
was terminated and a new agreement was entered into that allowed NiSource to
cash settle with the counterparty. The fair value of the new agreement was
recorded on the balance sheet as of December 31, 2000 and settled in January
2001.

13. LONG-TERM INCENTIVE PLANS

NiSource currently issues long-term incentive grants to key management employees
under a long-term incentive plan approved by stockholders on April 13, 1994
(1994 Plan). The 1994 Plan, as amended and restated, permits the following types
of grants, separately or in combination: nonqualified stock options, incentive
stock options, restricted stock awards, stock appreciation rights (SARs),
performance units, contingent stock awards and dividend equivalents payable on
grants of options, performance units and contingent stock awards. Each option
has a maximum term of ten years and vests one year from the date of grant. SARs
may be granted only in tandem with stock options on a one-for-one basis and are
payable in cash, common stock, or a combination thereof.

The amended and restated 1994 Plan provides for the issuance of up to 11 million
shares through April 2004. At December 31, 2001, there were 1,920,208 shares
reserved for future awards under the amended and restated 1994 Plan.

In connection with the acquisition of Bay State (see Note 3), all outstanding
Bay State nonqualified stock options were replaced with NiSource nonqualified
stock options. The replacement of such options did not change their original
vesting provisions, terms or fair values. Information regarding these options
can be found in the following tables about changes in nonqualified stock options
under the caption "converted." In connection with the acquisition of Columbia,
no options were converted or assumed.

Restricted stock awards are restricted as to transfer and are subject to
forfeiture for specific periods from the date of grant. Restrictions on shares
awarded in 1995 lapsed on January 27, 2000 and vested at 116% of the number
awarded, due to attaining specific earnings per share and stock appreciation
goals. Restrictions on shares awarded in 1998 lapsed two years from date of
grant and vested at 100% of the number awarded. Restricted stock grants made in
2001 and 2000 were exchanged in 2001 for new grants equal to 150% of the shares
of common stock subject to the original grants. Restricted stock issued in
conjunction with the new grants generally will vest over a period of years
beginning on December 31, 2002, and for the Chief Executive Officer, the awards
will vest after the year of death, disability, termination without cause, change
of control or retirement. Shares subject to the new grants must be held until
December 31, 2004. 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 1,991,643 and 667,500 restricted shares outstanding at
December 31, 2001 and December 31, 2000, respectively.

The Nonemployee Director Stock Incentive Plan, which was approved by
stockholders, provides for the issuance of up to 200,000 shares of common stock
to nonemployee directors. The Plan provides for awards of common stock, which
vest in 20% increments per year, with full vesting after five years. The Plan
also allows for the award of nonqualified stock options, subject to immediate
vesting in the event of the director's death or disability, or a change in
control of NiSource. If a director's service on the Board is terminated for any
reason other than retirement at or after age seventy, death or disability, any
shares of common stock not vested as of the date of termination are forfeited.
As of December 31, 2001, 87,500 shares had been issued under the Plan.

These plans are accounted for under APB Opinion No. 25. The compensation cost
that was charged against net income for restricted stock awards was $30.0
million, $6.8 million and $3.5 million for years ended December 31, 2001, 2000
and 1999, respectively. On January 1, 2001, NiSource granted 1.7 million
employee stock options with an identical exercise price that was less than fair
market value at the time of the grant. The Company recorded a pre-tax charge of
$6.9 million in 2001 related to this option grant.

73

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Transactions for the three years ended December 31, 2001, are as follows:

The following table summarizes information on stock options outstanding and
exercisable at December 31, 2001:

There were no SARs outstanding at December 31, 2001, 2000 or 1999.

Had compensation cost been determined consistent with the provisions of the SFAS
No. 123 fair value method (See Note 2T), NiSource's net income and earnings per
share would have been the pro forma amounts below:

74

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with a dividend yield of 3.58 - 4.90%. The
weighted average fair value of options granted was $8.44, $4.61 and $3.66 during
the years 2001, 2000 and 1999, respectively. The following assumptions used for
grants in 2001, 2000 and 1999:

14. LONG-TERM DEBT

In November 2000, NiSource, through its NiSource Finance subsidiary, issued $2.5
billion of notes, providing a layer of permanent financing for the acquisition
of Columbia. This issuance included $750.0 million of three-year notes bearing a
7.50% coupon and maturing on November 15, 2003; $750.0 million of five-year
notes bearing a 7.625% coupon and maturing on November 15, 2005 and $1.0 billion
of ten-year notes bearing a 7.875% coupon and maturing on November 15, 2010.
Subsequently, an additional $150.0 million of five-year notes were issued,
bearing a 7.625% coupon and maturing on November 15, 2005. The notes are
guaranteed by NiSource.

As a portion of the consideration payable in the acquisition of Columbia (See
Note 3), NiSource issued 55.5 million SAILS(SM). The SAILS(SM) were issued as
one unit consisting of two separate instruments: a debenture with a stated
amount of $2.60 and a purchase contract requiring the holder to purchase for
$2.60 cash, a number of shares of NiSource common stock based on a settlement
rate that is indexed to the market price of NiSource common stock. The purchase
contract settlement date will be on November 1, 2004 or earlier if there is a
change in control of NiSource before that date. The purchase contracts may not
be settled prior to the purchase contract settlement date. The debentures, which
mature on November 1, 2006, have been pledged to secure the holders' obligation
to purchase common stock under the purchase contract.

Sinking fund requirements and maturities of long-term debt outstanding at
December 31, 2001, for each of the four years subsequent to December 31, 2002
were as follows:

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

Of NiSource's $5,780.8 million of long-term debt at December 31, 2001, $450.0
million was issued by NiSource's affiliate, Capital Markets. 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, was $13.8 billion at
December 31, 2001.

Columbia has entered into interest rate swap agreements to modify the interest
characteristics of its outstanding long-term debt. At December 31, 2001,
Columbia had four interest rate swap agreements outstanding effective through
November 28, 2002, on $200.0 million notional amount of its 6.61% Series B
Debentures due November 28, 2002. In addition, Columbia has two other
outstanding interest rate swap agreements, including a $100.0 million

75

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

notional value swap effective through November 28, 2005 on its 6.80% Series C
Debentures due November 28, 2005 and a $281.5 million notional value swap
effective through November 28, 2007 on its 7.05% Series D Debentures due
November 28, 2007. The Series D swap can be terminated at the option of the
counter party at any time between the optional termination date of November 28,
2005 and the stated termination date of November 28, 2007. Under the terms of
all the swap agreements, Columbia pays interest based on a floating rate index
and receives interest based on a fixed rate. The effect of these agreements is
to modify the interest rate characteristics of a portion of Columbia's long-term
debt from fixed to variable.

15. SHORT-TERM BORROWINGS

Acquisition Financing

In November 2000, NiSource, through its NiSource Finance subsidiary, entered
into a $6.0 billion 364-day acquisition facility with a syndicate of banks. The
facility was put in place to finance $6.0 billion acquisition of Columbia, which
was consummated on November 1, 2000. Borrowings under the facility were
guaranteed by NiSource. On November 1, 2000, the facility supported $4.1 billion
of commercial paper issued by NiSource Finance to finance the Columbia
acquisition. At December 31, 2000, the facility supported the remaining $1.1
billion of commercial paper originally issued in connection with the Columbia
acquisition.

Subsequent to the November 1, 2000 Columbia acquisition, the Company reduced its
acquisition related commercial paper borrowings through the issuance of $2.65
billion of notes, completed in the fourth quarter of 2000.

On November 27, 2000, the Company issued 11,500,000 new shares of NiSource, Inc.
common stock at an offering price of $25.25 per share. The $280.9 million of net
proceeds were used to reduce borrowings under the NiSource Finance acquisition
credit facility.

Permanent Credit Facility

During March 2001, NiSource arranged $2.5 billion in revolving credit facilities
with a syndicate of banks to support its future working capital requirements,
providing back-stop support for NiSource's commercial paper program. The new
facility consolidated essentially all of NiSource's existing short-term credit
facilities into one credit facility at NiSource Finance. The $2.5 billion credit
facility is evenly split between a $1.25 billion 364-day facility that
terminates on March 22, 2002 and a $1.25 billion facility that terminates on
March 23, 2004. NiSource is currently evaluating the appropriate dollar
commitment level, if any, to be renewed under the 364-day facility on March 22,
2002. In addition, NiSource has begun preparation for the facility renewal and
syndication process.

As of December 31, 2001, NiSource had $51.7 million of letters of credit
outstanding. At December 31, 2000, NiSource had $128.5 million of letters of
credit outstanding.

Short-term borrowings were as follows:

16. CORPORATE PREMIUM INCOME EQUITY SECURITIES AND COMPANY-OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES OF TRUST HOLDING SOLELY COMPANY DEBENTURES

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

76

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Distributions paid on the Preferred Securities are presented under the caption
"Minority Interests" in NiSource's Statements of Consolidated Income. The
amounts outstanding are presented under the caption "Company-obligated
mandatorily redeemable preferred securities of subsidiary trust holding solely
Company debentures" in NiSource's Consolidated Balance Sheets. At December 31,
2001, there were 6.9 million 5.9% Preferred Securities outstanding with Capital
Trust assets of $345.0 million. At December 31, 2000, there were 6.9 million
5.9% Preferred Securities outstanding with Capital Trust assets of $345.0
million.

17. 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:

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

LONG-TERM DEBT/PREFERRED STOCK AND PREFERRED SECURITIES. The fair values of
these securities are estimated based on the quoted market prices for the same or
similar issues or on the rates offered for securities of the same remaining
maturities. Certain premium costs associated with the early settlement of
long-term debt are not taken into consideration in determining fair value.

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

A 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.

In October 1999, Columbia of Ohio entered into an agreement to sell, without
recourse, substantially all of its trade accounts receivable to Columbia
Accounts Receivable Corporation (CARC), a wholly owned subsidiary of Columbia.
At the same time, CARC entered into an agreement, with a third party, Canadian
Imperial Bank of Commerce (CIBC), to sell a percentage ownership interest in a
defined pool of accounts receivable (Sales Program). Under this Sales Program,
CARC can transfer an undivided interest in a designated pool of its accounts
receivable on an ongoing basis up to a maximum of either $125.0 million or
$100.0 million, as determined by the seasonal fluctuation in Columbia of Ohio's
account receivable balances and the mutual consent of both parties. The amount
available at any measurement date varies based upon the level of eligible
receivables. Under this agreement, approximately $82.8 million of receivables
were sold as of December 31, 2001.

77

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Under a separate agreement, in conjunction with the Sales Program, Columbia of
Ohio acts as agent for CIBC, the ultimate purchaser of the receivables, by
performing record keeping and cash collection functions for the accounts
receivable sold by CARC. Columbia of Ohio receives a fee, which provides
adequate compensation, for such services.

Northern Indiana may sell, without recourse, up to $100 million of certain of
its accounts receivable to Citibank under a sales agreement, which expires May
2003. Northern Indiana has sold $100 million under this agreement.

Under a separate agreement, in conjunction with the sales agreement, Northern
Indiana acts as agent for Citibank, by performing record keeping and cash
collection functions for the accounts receivable sold to Citibank. Northern
Indiana receives a fee, which provides adequate compensation, for such services.

18. OTHER COMMITMENTS AND CONTINGENCIES

A. CAPITAL EXPENDITURES. NiSource expects that approximately $650.8 million will
be expended for construction purposes during 2002. Substantial commitments have
been made in connection with this construction program.

B. SERVICE AGREEMENTS. Northern Indiana has entered into a service agreement
with Pure Air, a general partnership between Air Products and Chemicals, Inc.
and Mitsubishi Heavy Industries America, Inc., under which Pure Air provides
scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly
Generating Station. Services under this contract commenced on June 15, 1992,
with annual charges approximating $20 million. The agreement provides that,
assuming various performance standards are met by Pure Air, a termination
payment would be due if Northern Indiana terminates the agreement prior to the
end of the twenty-year contract period.

C. ASSETS UNDER LIEN. Substantially all of Columbia Transmission's properties
have been pledged to Columbia as security for debt owed by Columbia Transmission
to Columbia. The first mortgage bonds of Northern Indiana constitute a first
mortgage lien on certain utility property and franchises.

D. GUARANTEES AND INDEMNITIES.

PRIMARY ENERGY. Primary Energy is currently involved in six projects that are
concerned with the generation of electricity, steam, or thermal energy on the
sites of industrial customers. Five projects generate energy from process
streams or fuel provided by the industrial customers. The energy is then
delivered to the industrial customers under long-term contracts providing for
tolling fees, sublease payments, unit sale payments or processing fees. One
project, Whiting Clean Energy, will obtain natural gas to produce electricity
for sale in the wholesale markets and steam for industrial use.

Each project is developed by a wholly-owned subsidiary (the "Lessee") of Primary
Energy. The Lessee leases the facility after completion of construction from a
non-affiliated special purpose entity (the "Lessor"), which owns the facility
and advances the funds for construction. The Lessor obtains funding primarily
from bank borrowings or a private placement of notes, secured by the Lessor's
rights in the facility. The indebtedness of the Lessor is not treated as
indebtedness of NiSource under generally accepted accounting principles in the
United States. The lease payments from the Lessee to the Lessor are based on a
return on the amounts advanced plus any amortization of the amounts advanced.
With respect to three of the projects, the costs of the project financing depend
on the debt rating on NiSource's outstanding commercial paper or long-term debt.

The projects are located on the customers' premises pursuant to long-term ground
leases. The responsibility for operation and maintenance lies directly with the
industrial customers for two of the projects and with the Lessee on the
remaining projects. Where the Lessee is responsible for the operation and
maintenance, it contracts with third parties to manage and perform the operation
and maintenance activities.

NiSource, either directly or through Capital Markets, has guaranteed or in
substance guaranteed most lease payments to the Lessors, including regular lease
payments, accelerated lease payments on an event of default, and payment
obligations, including residual guarantee amounts, at the end of lease terms. In
the case of an event of default, a Lessor can accelerate the full, unamortized
amount of the Lessor's funding. The aggregate unamortized funding for all the
projects at December 31, 2001 was $629.7 million.

78

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At the end of an initial lease term, the Lessee has the right to purchase the
facility for the unamortized amount of the Lessor's funding. If the Lessee
cannot satisfy return conditions, the Lessee is required to purchase the
facility at such price. If the Lessee determines not to purchase the facility
and the Lessee can satisfy the return conditions, the Lessee may be responsible
for a residual guarantee amount. Since the energy contracts with the industrial
customers are long-term and typically extend past the initial lease term, the
Lessee's strategy is to attempt to refinance the property and extend the lease
term.

The present value of a Lessee's aggregate liability for lease payments and
residual guarantees is generally limited to an amount equal to less than 90% of
the amount advanced. The following table shows, by year, future minimum rental
payments, including maximum residual guarantee amounts and additional amounts
due if the Lessees were to purchase all the facilities at the end of the initial
terms of the leases.

The amounts contained in the first column, representing future minimum rental
payments are included as part of the future minimum rental payments for
operating leases shown in Note 18G.

Primary Energy's Whiting Clean Energy project at BP's Whiting, Indiana refinery
has incurred delays primarily associated with remediating damage that occurred
during commissioning in September 2001. The delays have also resulted in an
increase in estimated project costs and the need for approximately $20 million
of additional funding. Primary Energy has asserted a claim against the
construction contractor relating to the delay. The project is expected to be
capable of producing electricity in the first quarter of 2002, at a total cost
of approximately $320 million.

In addition to the construction issues at the Whiting Clean Energy facility,
NiSource projects that the facility will operate at a loss based on the current
market view of forward pricing in the gas and electric markets. For 2002, the
after-tax loss is projected to be approximately $16.0 million. The profitability
of the project in future periods will be dependent on, among other things,
prevailing prices in the energy markets and regional load dispatch patterns.

Primary Energy's Ironside project at LTV Steel Company's East Chicago, Indiana
mill has been negatively impacted by LTV's bankruptcy filing in December 2000
and LTV's December 2001 decision to idle the steel mill. The Ironside facility
is complete in all material respects. However, the facility cannot currently be
operated on an economic basis if the mill is not operating. In addition, there
can be no guarantee that LTV will not reject the project contracts in connection
with the bankruptcy, in which event the Lessee will have limited contract
damages against LTV and the status of an unsecured creditor. Primary Energy
believes that the Ironside project brings economic value to the operator of the
mill by utilizing energy waste streams to generate electricity for the mill at
attractive prices. However, there can be no assurance that any successor to LTV
will reopen the mill or be willing to restructure the transaction on an economic
basis to Primary Energy. The winner of the bids for the purchase of LTV's steel
mill will be determined on February 28, 2002. The total cost of the Ironside
project is approximately $67 million.

The lease at Primary Energy's North Lake project is due to expire in June 2002.
Of the several options available, the most likely outcomes are that the project
will be refinanced and the lease will be extended or that the Lessee will
purchase the project at its unamortized cost of approximately $38 million. If
the Lessee purchases the project, the payment will be funded by NiSource. The
strategy at this time is to pursue refinancing.

79

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In addition, a subsidiary of Primary Energy is a 50% partner in a partnership,
which operates a coal pulverization facility. The partnership has entered into a
lease of a 50% undivided interest in the facility. NiSource has entered into a
guarantee of all of the obligations of the partnership under the lease. Minimum
rental payments under the lease are as follows:

In an event of default, the partnership will be required to pay a stipulated
amount under the lease. This amount was $34.7 million as of December 31, 2001.

E. OTHER LEGAL PROCEEDINGS. In the normal course of its business, NiSource and
its subsidiaries have been named as defendants in various legal proceedings. In
the opinion of management, the ultimate disposition of these currently asserted
claims will not have a material adverse impact on NiSource's consolidated
financial position.

F. 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.

GAS DISTRIBUTION. Several Gas Distribution subsidiaries are "potentially
responsible parties" (PRPs) at waste disposal sites under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) (commonly known
as Superfund) and similar state laws, including at former manufactured gas plant
(MGP) sites which such subsidiaries, or their corporate predecessors, own or
previously owned or operated. Gas Distribution subsidiaries may be required to
share in the cost of clean up of such sites. In addition, some Gas Distribution
subsidiaries have corrective action liability under the Resource Conservation
and Recovery Act (RCRA) for closure and clean-up costs associated with
underground storage tanks and under the Toxic Substances Control Act (TSCA) for
clean up of polychlorinated biphenyls (PCBs) released at various facilities.

Gas Distribution subsidiaries are parties to or otherwise involved in clean up
of four waste disposal sites under Superfund or similar state laws. For one of
these sites the potential liability is de minimis and, for the other three, the
final costs of clean up have not yet been determined. As site investigations and
clean-ups proceed and as additional information becomes available, waste
disposal site liability is reviewed periodically and adjusted.

A program has been instituted to identify and investigate former MGP sites where
Gas Distribution subsidiaries or predecessors are the current or former owner.
The investigation has identified 84 such sites. Initial investigation has been
conducted at 42 sites. Of these sites, additional investigation activities have
been completed or are in progress at 34 sites and remedial measures have been
implemented or completed at 19 sites. Only those site investigation,
characterization and remediation costs currently known and determinable can be
considered "probable and reasonably estimable" under Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies" (SFAS No. 5).

As costs become probable and reasonably estimable, reserves will be adjusted as
appropriate. As reserves are recorded, regulatory assets are recorded to the
extent environmental expenditures are expected to be recovered through rates.
NiSource is unable, at this time, to accurately estimate the time frame and
potential costs of the entire program. Management expects that, as
characterization is completed, additional remediation work is performed and

80

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

more facts become available, NiSource will be able to develop a probable and
reasonable estimate for the entire program or a major portion thereof consistent
with the SEC's Staff Accounting Bulletin No. 92 (SAB No. 92) which covers
accounting and disclosures relating to loss contingencies, SFAS No. 5, and
American Institute of Certified Public Accountants Statement of Position 96-1,
"Environmental Remediation Liabilities" (SOP No.96-1).

As of December 31, 2001, a reserve of approximately $68.2 million has been
recorded to cover probable environmental response actions. The ultimate
liability in connection with these sites will depend upon many factors,
including the volume of material contributed to the site, years of ownership or
operation, the number of other PRPs and their financial viability and the extent
of environmental response actions required. Based upon investigations and
management's understanding of current environmental laws and regulations,
NiSource believes that any environmental response actions required, after
consideration of insurance coverage, contributions from other PRPs and rate
recovery, will not have a material effect on its financial position.

MERCURY PROGRAM. Until the 1960s, gas regulators containing small quantities of
mercury were installed in homes on some natural gas systems. The purpose of
these regulators was to reduce the pressure of the natural gas flowing from the
service line for use inside of the home.

In 2000, several gas distribution companies unaffiliated with NiSource were
involved in highly publicized testing and clean-up programs resulting from
mercury spills associated with the removal of gas regulators containing mercury.
A number of the NiSource Gas Distribution subsidiaries historically utilized gas
regulators that contained small quantities of mercury. All NiSource Gas
Distribution subsidiaries have implemented programs to investigate, maintain
and/or remove and replace gas regulators containing mercury, including
procedures ensuring that any accidental mercury spills are detected and properly
cleaned up. To date no material problems associated with past or current use or
removal of mercury regulators have been identified.

As a result, NiSource believes it is unlikely that any financial exposure from
this matter would have a material effect on its financial position or results of
operations of its Gas Distribution subsidiaries.

ELECTRIC OPERATIONS. The Clean Air Act Amendments of 1990 (CAAA) impose limits
to control acid rain on the emission of sulfur dioxide and nitrogen oxides
(NOx), which became fully effective in 2000. All of Northern Indiana's
facilities are in compliance with the sulfur dioxide and NOx limits.

During 1998, the U.S. 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. Consistent with the EPA requirements, the State of
Indiana developed regulations implementing the control program, which became
effective September 16, 2001. The EPA approved the state rules effective
December 10, 2001. Compliance with the NOx limits contained in these rules is
required by May 31, 2004. The NOx emission limitations in the Indiana rules are
more restrictive than those imposed on electric utilities under the CAAA's acid
rain NOx reduction program described above. Capital estimates of Northern
Indiana's NOx control compliance costs range from $200 to $300 million over the
next 2 years. Actual compliance costs may vary depending on a number of factors
including market demand/resource constraints, uncertainty of future equipment
and construction costs, and the potential need for additional control
technology.

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

The EPA issued final rules revising the National Ambient Air Quality Standards
for ozone and particulate matter in July 1997. On May 14, 1999, the United
States Court of Appeals for the D.C. Circuit remanded the new rules for both
ozone and particulate matters to the EPA. The Court of Appeals decision was
appealed to the Supreme Court, which heard oral arguments on November 7, 2000.
The Supreme Court rendered a complex ruling on February 27, 2001 that will
require some issues to be resolved by the D.C. Circuit Court and the EPA before
final rulemaking

81

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

occurs. Consequently, final rules specifying a compliance level, deadline, and
controls necessary for compliance are not expected in the near future. Resulting
rules could require additional reductions in sulfur dioxide, particulate matter
and NOx emissions from coal-fired boilers (including Northern Indiana's electric
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 and are currently not reasonably estimable. NiSource
will continue to closely monitor developments in this area. However, the exact
nature of the impact of the new standards on its operations will not be known
for some time.

The EPA has initiated enforcement actions against several electric utilities
alleging violations of the new source review provisions of the Clean Air Act.
Northern Indiana has received and is in the process of responding to information
requests from the EPA on this subject. It is impossible at this time to predict
the result of EPA's review of Northern Indiana's information responses.

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

The CAAA also contain other provisions that could lead to limitations on
emissions of hazardous air pollutants. In response to the CAAA requirements, on
December 20, 2000, the EPA issued a finding that the regulation of emissions of
mercury and other air toxics from coal and oil-fired electric steam generating
units is necessary and appropriate. The EPA expects to issue proposed
regulations by December 15, 2003, and finalized regulations by December 15,
2004. The potential impact, if any, to NiSource's financial results that may
occur because of any of these potential new regulations is unknown at this time.

The EPA is in the process of developing a program to address regional haze. The
new administration announced that the EPA would move forward with rules that
mandate the states to require power plants built between 1962 and 1977 to
install the "best available retrofit technology" or BART. The BART program will
target for control by 2013 those pollutants that limit visibility, namely
particulate, sulfur dioxide and/or nitrogen oxides. Until the program is
developed, Northern Indiana cannot predict the cost of complying with these
rules.

WATER. The Great Lakes Water Quality Initiative ("GLI") program is expected to
add new water quality standards for facilities that discharge into the Great
Lakes watershed, including Northern Indiana's three electric generating stations
located on Lake Michigan. The State of Indiana has promulgated its regulations
for this water discharge permit program and has received final EPA approval. As
promulgated, the regulations would provide the Indiana Department of
Environmental Management (IDEM) with the authority to grant water quality
criteria variances and exemptions for non-contact cooling water. However, the
EPA revised the variance language and other minor provisions of IDEM's GLI rule.
The EPA by and large left the non-contact cooling water exemption intact;
however, a separate agreement between the EPA and IDEM on interpretation of this
exemption still leaves uncertainty as to its impact. The EPA change to the
variance rule has prompted litigation by the affected industrial parties and the
EPA/IDEM agreement on the non-contact cooling water exemption may be subject to
future litigation. Northern Indiana expects that IDEM will issue a proposed
permit renewal for each of its lakeside stations. Pending the outcome of
litigation and the proposed permit renewal requirements, the costs of complying
with these requirements cannot be predicted at this time.

REMEDIATION. Northern Indiana is a PRP at four waste disposal sites under CERCLA
and similar state laws, and may be required to share in the cost of clean up of
such sites. In addition, Northern Indiana has corrective action liability under
the RCRA for closure and clean-up costs associated with treatment, storage, and
disposal sites. As of December 31, 2001, a reserve of approximately $2.2 million
has been recorded to cover probable environmental response actions at these
sites. The ultimate liability in connection with these sites will depend upon
many factors, including the volume of material contributed to the site, years of
ownership of operations, the number of other PRPs and their financial viability
and the extent of environmental response required. Based upon investigations and
management's understanding of current environmental laws and regulations,
NiSource believes that any environmental response required will not have a
material effect on the its financial position or results of operations.

82

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

GAS TRANSMISSION. Columbia Transmission continues to conduct characterization
and remediation activities at specific sites under a 1995 EPA Administrative
Order by Consent (AOC). The program pursuant to the AOC covers approximately 240
facilities, approximately 13,000 liquid removal points, approximately 2,200
mercury measurement stations and about 3,700 storage well locations. As of
December 31, 2001, field characterization has been performed at all sites. Site
characterization reports and remediation plans, which must be submitted to the
EPA for approval, are in various stages of development and completion.
Remediation has been completed at the mercury measurement stations, liquid
removal point sites and storage well locations and at a number of the 240
facilities.

Only those site investigation, characterization and remediation costs currently
known and determinable can be considered "probable and reasonably estimable"
under SFAS No. 5. As costs become probable and reasonably estimable, reserves
will be adjusted as appropriate. Columbia Transmission is unable, at this time,
to accurately estimate the time frame and potential costs of the entire program.
Management expects that as characterization reports and remediation plans are
completed and approved by the EPA, and additional remediation work is performed,
Columbia Transmission should be able to develop a probable and reasonable
estimate for the entire program consistent with SAB No. 92, SFAS No. 5, and SOP
No. 96-1.

Columbia Transmission and Columbia Gulf are PRPs at several waste disposal
sites. The potential liability is believed to be de minimis, however, the final
allocation of clean-up costs has yet to be determined. As site investigations
and clean-ups proceed and as additional information becomes available, waste
disposal site liability is reviewed periodically and adjusted.

At the end of 2001, the remaining environmental liability recorded on the
balance sheet for the Gas Transmission and Storage operations was $90.5 million.
Columbia Transmission's environmental cash expenditures are expected to be
approximately $12.5 million in 2002. These expenditures will be charged against
the previously recorded liability. A regulatory asset has been recorded to the
extent environmental expenditures are expected to be recovered through rates.
Management does not believe that Columbia Transmission's environmental
expenditures will have a material adverse effect on NiSource's operations,
liquidity or financial position, based on known facts, existing laws,
regulations, Columbia Transmission's cost recovery settlement with customers and
the time period over which expenditures will be made.

TRANSCOM. In spring 2000, Transcom received directives from the Philadelphia
District of the U.S. Army Corps of Engineers (Philadelphia District) and an
administrative order from Pennsylvania Department of Environmental Protection
(PA DEP) addressing alleged violations of federal and state laws resulting from
construction activities associated with Transcom's laying fiber optic cable
along portions of a route between Washington, D.C. and New York City. The order
and directives required Transcom to largely cease construction activities. On
September 18, 2000, Transcom entered into a voluntary settlement agreement with
the Philadelphia District under which Transcom contributed $1.2 million to the
Pennsylvania chapter of the Nature Conservancy and the Philadelphia District
lifted its directives. As a result of the voluntary agreement with the
Philadelphia District and communications with the PA DEP, the Maryland
Department of the Environment and the Baltimore District of the US Army Corps of
Engineers, work in Pennsylvania and Maryland was allowed to be continued and has
been completed. On October 25, 2001, Transcom entered into a Consent Order and
Agreement with the PA DEP in settlement of its enforcement action under which
Transcom paid $80,633 in penalties and $223,567 to fund six community
environmental projects through the Green Valleys Association.

DISCONTINUED OPERATIONS. NiSource affiliates have retained environmental cleanup
liability associated with some of its former companies, including Columbia
Propane, Columbia Petroleum, and certain local gas distribution companies. The
primary environmental liability associated with former propane operations
relates to a former MGP site in Wisconsin for which reserves have been accrued.
Environmental liability associated with former petroleum operations includes
relatively minor cleanups of product spills at third party properties and
liability for pre-existing environmental conditions at former petroleum
terminals pursuant to sale agreements. A NiSource affiliate also retains
liability for two former MGP sites associated with a local gas distribution
company in New York, for which reserves have been accrued.

83

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The ultimate liability in connection with these sites will depend upon many
factors including the extent of environmental response actions required, other
PRPs and their financial viability, and indemnification from previous facility
owners. Only those corrective action costs currently known and determinable can
be considered "probable and reasonably estimable" under SFAS No. 5 and
consistent with SOP No. 96-1. As costs become probable and reasonably estimable,
reserves will be adjusted as appropriate. NiSource believes that any
environmental response actions required at former operations, for which it is
ultimately liable, after consideration of insurance coverage and contributions
from other PRPs, will not have a material adverse effect on NiSource's financial
position.

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

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

ENVIRONMENTAL RESERVES. It is management's continued intent to address
environmental issues in cooperation with regulatory authorities in such a manner
as to achieve mutually acceptable compliance plans. However, there can be no
assurance that fines and penalties will not be incurred. Management expects most
environmental assessment and remediation costs to be recoverable through rates
for certain of NiSource companies.

As of December 31, 2001, a reserve of approximately $167.3 million has been
recorded to cover probable corrective actions at sites where NiSource has
environmental remediation liability. The ultimate liability in connection with
these sites will depend upon many factors, including the volume of material
contributed to the site, the number of the other PRPs and their financial
viability, the extent of corrective actions required and rate recovery. Based
upon investigations and management's understanding of current environmental laws
and regulations, NiSource believes that any corrective actions required, after
consideration of insurance coverages, contributions from other PRPs and rate
recovery, will not have a material effect on its financial position or results
of operations.

84

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

G. OPERATING LEASES. Payments made in connection with operating leases are
primarily charged to operation and maintenance expense as incurred. Such amounts
were $132.4 million in 2001, $57.4 million in 2000 and $48.5 million in 1999.

Future minimum rental payments required under operating leases that have initial
or remaining noncancellable lease terms in excess of one year are:

H. PURCHASE COMMITMENTS. NiSource has service agreements that provide for
pipeline capacity, transportation and storage services. These agreements, which
have expiration dates ranging from 2002 to 2014, provide for NiSource to pay
fixed monthly charges. The estimated aggregate amounts of such payments at
December 31, 2001, were:

19. ENRON BANKRUPTCY FILING

On December 2, 2001, Enron Corp. filed for protection from creditors under
Chapter 11 of the United States Bankruptcy Code. NiSource has certain exposure
to Enron as a result of hedging and trading activities and providing services to
Enron at NiSource's gas pipeline and gas distribution subsidiaries. Prior to
Enron's bankruptcy filing, NiSource had basis and commodity swaps, pipeline
transportation and storage agreements, physical commodity contracts for natural
gas, electricity and coal, and SO2 trading agreements in place with Enron as the
counterparty. All contracts, with the exception of the pipeline transportation
and storage agreements and a contract to supply gas to choice customers of the
Columbia of Ohio gas distribution subsidiary, were terminated by NiSource at the
end of November 2001. NiSource recorded a pre-tax charge of $17.8 million in
2001 related to the Enron bankruptcy filing.

20. TELECOMMUNICATION NETWORK (TRANSCOM)

As a result of project delays, cost overruns and a decline in the fiber optics
market that have occurred since the acquisition of Columbia, NiSource recorded a
charge of $9.2 million to operating income in the second quarter of 2001,
related to Transcom, a fiber optics telecommunications network.

In September and October 2000, management held discussions with investment
banking firms seeking strategic options for the Transcom assets. Although
significant uncertainties existed surrounding the estimated costs to complete
the fiber optic network, time to market in a competitive environment, and delays
due to construction deficiencies and environmental issues, management decided to
complete the Transcom network and sell the completed network.

85

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company received subsequent information pertaining to the estimated
construction costs and delays. Consequently, management concluded that the
carrying value of the telecommunication assets exceeded the realizable value by
approximately $89.2 million. Consequently, goodwill resulting from the
acquisition of Columbia was increased by a substantial portion of such excess
carrying amount ($52.0 million after-tax).

In August 2001, Transcom invited potential buyers to submit bids for the assets.
Based on these bids, present market conditions preclude Transcom from realizing
the carrying value of the assets by selling at the present time. Therefore
management has decided to operate the network, while continuing to evaluate
market conditions for possible sale. At December 31, 2001, the anticipated cash
flow from Transcom's business plan indicates that the asset's current carrying
value is realizable. However, economic and other events may adversely affect
Transcom's ability to achieve such plan.

21. OTHER, NET

22. INTEREST EXPENSE, NET

23. SEGMENTS OF BUSINESS

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

Effective for the second quarter of 2001, NiSource realigned a portion of its
operations and reclassified previously reported operating segment information to
conform to the realigned operating structure. The realignment affected three
previously reported segments, and included moving all ongoing operations of
Energy Marketing and certain operations from the Electric Operations and Other
segments to the newly created Merchant Operations segment. The electric
wheeling, bulk power, and power trading operations were moved from the Electric
Operations segment to Merchant Operations, and the Company's Primary Energy
subsidiary, which develops on-site, industrial-based energy solutions, was moved
from Other to Merchant Operations.

NiSource's operations are divided into six primary business segments. The Gas
Distribution segment provides natural gas service and transportation for
residential, commercial and industrial customers in Ohio, Pennsylvania,
Virginia, Kentucky, Maryland, Indiana, Massachusetts, Maine and New Hampshire.
The Electric Operations segment provides electric service in 21 counties in the
northern part of Indiana. The Gas Transmission and Storage segment offers gas
transportation and storage services for local distribution companies, marketers
and industrial and commercial customers located in northeastern, mid-Atlantic,
midwestern and southern states and the District of Columbia. The Exploration and
Production segment explores for, develops, produces and markets gas and oil in
the

86

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

United States and in Canada. The Merchant Operations segment provides
energy-related services including gas marketing, electric transmission, bulk
power, power trading and asset management services to local distribution
companies (LDC), wholesale, commercial and industrial customers, and
participates in the development of merchant power projects. The Other segment
participates in real estate, telecommunications and other businesses.

The following tables provide information about business segments. NiSource uses
operating income as its primary measurement for each of the reported segments
and makes decisions on finance, dividends and taxes at the corporate level on a
consolidated basis. Segment revenues include intersegment sales to affiliated
subsidiaries, which are eliminated in consolidation. Affiliated sales are
recognized on the basis of prevailing market, regulated prices or at levels
provided for under contractual agreements. Operating income is derived from
revenues and expenses directly associated with each segment.

87

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

88

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

24. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly financial data does not always reveal the trend of NiSource's business
operations due to nonrecurring items and seasonal weather patterns, which affect
earnings, and related components of net revenues and operating income.

89

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

25. EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)

Reserve information contained in the following tables for the U.S. and Canadian
properties is management's estimate, which was reviewed by the independent
consulting firms of Ryder Scott Company Petroleum Engineers for the U.S.
reserves and Sproule Associates Limited for the Canadian reserves. Reserves are
reported as net working interest. Gross revenues are reported after deduction of
royalty interest payments. The below information begins with the year 2001, due
to Columbia Resources not being acquired until November 1, 2000.

RESERVE QUANTITY INFORMATION

CAPITALIZED COSTS

(a) Represents expenditures associated with properties on which evaluations
have not been completed.

90

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OTHER EXPLORATION AND PRODUCTION DATA

(a) Includes the effect of hedging activities

HISTORICAL RESULTS OF OPERATIONS

Results of operations for exploration and production activities exclude
administrative and general costs, corporate overhead and interest expense.
Income tax expense is expressed at statutory rates less Section 29 credits.

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

Future cash inflows are computed by applying year-end prices to estimated future
production of proved gas and oil reserves. Future expenditures (based on
year-end costs) represent those costs to be incurred in developing and producing
the reserves. Discounted future net cash flows are derived by applying a 10%
discount rate, as required by the Financial Accounting Standards Board, to the
future net cash flows. This data is not intended to reflect the actual economic
value of Columbia's gas and oil producing properties or the true present value
of estimated future cash flows since many arbitrary assumptions are used. The
data does provide a means of comparison among companies through the use of
standardized measurement techniques.

A reconciliation of changes in the standardized measure of discounted cash flows
is omitted. The Exploration and Production Operations segment became a part of
Nisource Operations on November 1, 2000, as a result of the Columbia acquisition
and consequently, the years are not comparable.

91

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC. AND SUBSIDIARIES

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEET

92

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC. AND SUBSIDIARIES

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENT OF INCOME

93

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC. AND SUBSIDIARIES

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENT OF CASH FLOWS

94

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC. AND SUBSIDIARIES

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. DIVIDENDS FROM SUBSIDIARIES

Cash dividends paid to NiSource Inc. (NiSource) by its consolidated subsidiaries
were (in millions of dollars): $248.0, $302.2 and $239.2 in 2001, 2000 and 1999,
respectively.

2. NOTES TO CONDENSED FINANCIAL STATEMENTS

See Item 8 for the full text of notes to the Consolidated Financial Statements.

95

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

TWELVE MONTHS ENDED DECEMBER 31, 2001

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

TWELVE MONTHS ENDED DECEMBER 31, 2000

96

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)
]

NISOURCE INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

TWELVE MONTHS ENDED DECEMBER 31, 2001

97

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

NISOURCE INC.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding executive officers is included as a supplemental item at
the end of Item 4 of Part I of this Form 10-K.

Information regarding directors will be included in the Notice of Annual Meeting
and Proxy Statement for the Annual Meeting of Stockholders to be held on May 21,
2002, which information is incorporated by reference.

Information regarding delinquent filings under Section 16 of the
Securities Exchange Act of 1934 by executive officers and directors will be
included in the Notice of Annual Meeting and Proxy Statement for the Annual
Meeting of Stockholders to be held on May 21, 2002, which information is
incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation will be included in the Notice of
Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders held
on May 21, 2002, which information is incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management will be included in the Notice of Annual Meeting and Proxy Statement
for the Annual Meeting of Stockholders held on May 21, 2002, which information
is incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Exhibits

The exhibits filed herewith as a part of this report on Form 10-K are listed on
the Exhibit Index. Each management contract or compensatory plan or arrangement
of NiSource, listed on the Exhibit Index, is separately identified by an
asterisk.

Financial Statement Schedules

All of the financial statements and financial statement schedules filed as a
part of the Annual Report on Form 10-K are included in Item 8.

98

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(continued)

NISOURCE INC.

Reports on Form 8-K

99

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, hereunto duly authorized.

NiSource Inc.
------------------------------
(Registrant)

Date February 22, 2002 By: /s/ GARY L. NEALE
------------------------------ -------------------------------
Gary L. Neale
Chairman, President and Chief
Executive Officer, and Director
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

/s/ GARY L. NEALE Chairman, President and Chief February 22, 2002
- -------------------------------------------- Executive Officer, and Director
Gary L. Neale (Principal Executive Officer)

/s/ STEPHEN P. ADIK Vice Chairman and Director February 22, 2002
- --------------------------------------------
Stephen P. Adik

/s/ STEVEN C. BEERING Director February 22, 2002
- --------------------------------------------
Steven C. Beering

/s/ ARTHUR J. DECIO Director February 22, 2002
- --------------------------------------------
Arthur J. Decio

/s/ DENNIS E. FOSTER Director February 22, 2002
- --------------------------------------------
Dennis E. Foster

/s/ JEFFREY W. GROSSMAN Vice President and Controller February 22, 2002
- -------------------------------------------- (Principal Accounting Officer)
Jeffrey W. Grossman

/s/ JAMES T. MORRIS Director February 22, 2002
- --------------------------------------------
James T. Morris

/s/ MICHAEL W. O'DONNELL Executive Vice President and February 22, 2002
- -------------------------------------------- Chief Financial Officer
Michael W. O'Donnell (Principal Financial Officer)

/s/ IAN M. ROLLAND Director February 22, 2002
- --------------------------------------------
Ian M. Rolland

/s/ JOHN W. THOMPSON Director February 22, 2002
- --------------------------------------------
John W. Thompson

/s/ ROBERT J. WELSH Director February 22, 2002
- --------------------------------------------
Robert J. Welsh

/s/ DR. CAROLYN Y. WOO Director February 22, 2002
- --------------------------------------------
Dr. Carolyn Y. Woo

/s/ ROGER A. YOUNG Director February 22, 2002
- --------------------------------------------
Roger A. Young

100

EXHIBIT INDEX

**Exhibit filed herewith.

101

EXHIBIT INDEX (continued)

102

EXHIBIT INDEX (continued)

103

EXHIBIT INDEX (continued)

104

EXHIBIT INDEX (continued)

**Exhibit filed herewith.

105

EXHIBIT INDEX (continued)

* Management contract or compensatory plan or arrangement of NiSource Inc.
** Exhibit filed herewith.

106

EXHIBIT INDEX (continued)

* Management contract or compensatory plan or arrangement of NiSource Inc.
** Exhibit filed herewith.

107

EXHIBIT INDEX (continued)

* Management contract or compensatory plan or arrangement of NiSource Inc.
** Exhibit filed herewith.

108

EXHIBIT INDEX (continued)

* Management contract or compensatory plan or arrangement of NiSource Inc.
** Exhibit filed herewith.

References made herein to Columbia Energy Group filings can be found at
Commission File Number 001-01098 and references made to NiSource Inc. filings
made prior to November 1, 2000 can be found at Commission File Number 001-09779.

109