NISOURCE INC/DE - 10-K Annual Report

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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, 2003

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

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

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

Registrant's telephone number, including area code (877) 647-5990

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
---------------------------------------- ----------------------------
Common Stock New York, Chicago and Pacific
Preferred Share Purchase Rights New York, Chicago and Pacific
Stock Appreciation Income Linked Securities New York

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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]

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. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]

The aggregate market value of Common Stock (based upon the June 30, 2003,
closing price of $19.00 on the New York Stock Exchange) held by non-affiliates
was approximately $4,929,601,082.

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 11, 2004.

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 is the successor to an Indiana
corporation organized in 1987 under the name of NIPSCO Industries, Inc., which
changed its name to NiSource Inc. on April 14, 1999. In connection with the
acquisition of Columbia Energy Group (Columbia) on November 1, 2000, NiSource
became a Delaware corporation registered under the Public Utility Holding
Company Act of 1935, as amended.

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 and storage 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 derives substantially all of its revenues and
earnings from the operating results of its 15 direct subsidiaries.

NiSource's business segments are: Gas Distribution Operations; Gas Transmission
and Storage Operations; Electric Operations; and Other Operations. During the
second quarter of 2003, NiSource sold its exploration and production operations.
Previous to this sale, NiSource reported these operations in an Exploration and
Production segment. In addition, during the fourth quarter, NiSource sold
certain subsidiaries of PEI Holdings, Inc. (formerly Primary Energy, Inc.)(PEI).
Previously, the PEI assets were reported in the Other Operations segment. All
periods have been adjusted to include the PEI subsidiaries and the exploration
and production segment as discontinued operations.

Gas Distribution Operations

NiSource's natural gas distribution operations serve more than 3.3 million
customers in 9 states and operate over 55,000 miles of pipeline. Through its
wholly owned subsidiary, Columbia, NiSource owns five distribution subsidiaries
that provide natural gas to approximately 2.2 million residential, commercial
and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky and Maryland.
NiSource also distributes natural gas to approximately 770,000 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 329,000 customers in Massachusetts, Maine and New
Hampshire.

Gas Transmission and Storage Operations

NiSource's Gas Transmission and Storage Operations subsidiaries own and operate
approximately 16,000 miles of interstate pipelines and operate one of the
nation's largest underground natural gas storage systems capable of storing
approximately 646 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
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 Operations subsidiaries are
engaged in several projects that will expand their facilities and throughput.
The largest such project is the proposed Millennium Pipeline. The Millennium
Pipeline is a project proposed by a partnership of energy companies including
Columbia Transmission, which would replace parts of an existing Columbia
Transmission pipeline.

3

ITEM 1. BUSINESS (continued)

NISOURCE INC.

Electric Operations

NiSource generates and distributes electricity through its subsidiary Northern
Indiana to approximately 440,000 customers in 21 counties in the northern part
of Indiana. Northern Indiana owns and has the ability to operate four coal-fired
electric generating stations with a net capability of 3,059 megawatts (mw), six
gas-fired generating units with a net capability of 323 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's transmission system,
with voltages from 34,500 to 345,000 volts, consists of 3,187 circuit miles.
Northern Indiana is interconnected with five neighboring electric utilities.

In January 2002, Northern Indiana indefinitely shut down its Dean H. Mitchell
Generating Station (Mitchell Station). Northern Indiana now operates three
coal-fired generation stations with a net capacity of 2,574 mw, five gas-fired
generating units with a net capacity of 306 mw and two hydroelectric plants with
a net capability of 10 mw. During the year ended December 31, 2003, Northern
Indiana generated 77.2% and purchased 22.8% of its electric requirements.
Currently, Northern Indiana is reviewing options to meet the electric needs of
its customers. This review includes an assessment of Northern Indiana's oldest
generating station units and various options regarding the return of the
Mitchell Station, constructed in the early 1950's, to service in the second half
of 2004.

Other Operations

The Other Operations segment participates in energy-related services including
gas marketing, power trading and ventures focused on distributed power
generation technologies, including a cogeneration facility, fuel cells and
storage systems. PEI operates the Whiting Clean Energy project, which is a 525
mw cogeneration facility that uses natural gas to produce electricity for sale
in the wholesale markets and also provides steam for industrial use.
Additionally, the Other Operations segment is involved in real estate and other
businesses.

See Item 7 for additional information about NiSource's business segments.

Divestiture of Non-Core Assets

Since the Columbia acquisition, NiSource has sold certain businesses judged to
be non-core to NiSource's strategy, including Indianapolis Water Company and
other assets of IWC Resources Corporation (IWCR), SM&P Utility Resources, Inc.
(SM&P), Columbia Propane Corporation, a significant portion of EnergyUSA-TPC
Corp. (TPC) net obligations under its gas forward transaction portfolio,
physical storage inventory and associated agreements, Columbia Energy Resources,
Inc. (CER), Columbia Transmission Communications Corporation (Transcom),
Columbia Service Partners, Inc., all of the steel-related, inside-the-fence
assets of PEI, and other non-core assets (See "Discontinued Operations" in Item
7 and Note 4 of Notes to the Consolidated Financial Statements for additional
information.).

Business Strategy

NiSource has focused its business strategy on its core, rate-regulated
asset-based businesses with virtually 100% of its operating income generated
from the rate-regulated businesses. With the nation's fourth largest natural gas
pipeline, the largest natural gas distribution network east of the Rocky
Mountains and one of the nation's largest natural gas storage networks, NiSource
operates 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.

Competition and Changes in the Regulatory Environment

The regulatory frameworks applicable to NiSource's operations, at both the state
and federal levels, continue to evolve. These changes have had and will continue
to have an impact on NiSource's operations, structure and profitability.
Management continually seeks new ways to be more competitive and profitable in
this changing environment, including providing gas customers with increased
choices for products and services, disposing of non-core assets and operations,
and developing new energy-related products and services for residential,
commercial and industrial customers.

4

ITEM 1. BUSINESS (continued)

NISOURCE INC.

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, local distribution company (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 services independent from the purchase of the commodity. NiSource's
Gas Distribution Operations 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 Operations subsidiaries
for transportation services.

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 and issued an opinion on December 31, 2002. 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 provisioning of wholesale transmission service. NiSource does
not believe that compliance with the new rules will be material to its future
earnings.

NiSource's Other Operations subsidiaries 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.

Financing Subsidiary

NiSource Finance Corp. (NiSource Finance) is a wholly-owned, consolidated
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's obligations are fully and unconditionally guaranteed
by NiSource. The function of NiSource Finance was previously performed by
NiSource Capital Markets, Inc.

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, 2003, NiSource had 8,614 employees of whom 3,351 were subject
to collective bargaining agreements.

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

NiSource files various reports with the Securities and Exchange Commission
(SEC). The reports include the annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934. NiSource makes all SEC filings available without charge to the public on
its web site at http://www.nisource.com.

5

ITEM 2. PROPERTIES

NISOURCE INC.

Discussed below are the principal properties held by NiSource and its
subsidiaries as of December 31, 2003.

GAS DISTRIBUTION OPERATIONS. NiSource's Gas Distribution Operations subsidiaries
own and operate a total of 55,469 miles of pipelines and certain related
facilities. This includes: (i) for the five distribution subsidiaries of its
Columbia system, 33,624 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, 14,403 miles of pipelines,
27,129 acres of underground storage and 2 compressor stations with a total of
6,000 hp of installed capacity, (iii) for its Bay State system, 5,745 miles of
pipelines, (iv) for its Northern Indiana Fuel and Light Company Inc. system, 909
miles of pipelines, and (v) for its Kokomo Gas and Fuel Company system, 788
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 841,992 acres
of underground storage, 3,578 storage wells, 11,604 miles of interstate
pipelines and 92 compressor stations with 589,519 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 4,133 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, Wyoming and the offshore
Gulf of Mexico. 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 Pipeline's operations are located in
Indiana and Ohio.

ELECTRIC OPERATIONS. Northern Indiana owns and has the ability to operate four
coal-fired electric generating stations with a net capability of 3,059 mw, six
gas-fired generating units with a net capability of 323 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. It has 289 substations with an
aggregate transformer capacity of 23,159,300 kilovolt-amps. Its transmission
system, with voltages from 34,500 to 345,000 volts, consists of 3,187 circuit
miles of line. The electric distribution system extends into 21 counties and
consists of 7,786 circuit miles of overhead and 1,769 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 12,794,855 kilovolt-amps and 458,962 electric watt-hour meters.

In January 2002, Northern Indiana indefinitely shutdown its Mitchell Station.
Northern Indiana now operates three coal-fired generation stations with a net
capacity of 2,574 mw, five gas-fired generating units with a net capacity of 306
mw and two hydroelectric plants with a net capability of 10 mw. Currently,
Northern Indiana is reviewing options to meet the electric needs of its
customers. This review includes an assessment of Northern Indiana's oldest
generating station units and various options regarding the return of the
Mitchell Station, constructed in the early 1950's, to service in the second half
of 2004. Northern Indiana has requested proposals for outside companies to
provide power under varying terms and conditions. These proposals are being
evaluated. In February 2004, the city of Gary announced an interest to acquire
the land on which the Mitchell Station is located for economic development,
including a proposal to increase the length of the runways at the Gary
International Airport. Northern Indiana expects to discuss the proposal to
acquire the land with the city of Gary in the near future. To date, the city has
not commenced any legal proceedings.

OTHER OPERATIONS. PEI owns and operates the Whiting Clean Energy project, which
is a 525 mw cogeneration facility that uses natural gas to produce electricity
for sale in the wholesale markets and also provides steam for industrial use.
Through other subsidiaries, NiSource owns Southlake Complex, its 325,000 square
foot headquarters building located in Merrillville, Indiana and other
residential and development property which it holds for resale in Indiana.

6

ITEM 2. PROPERTIES

NISOURCE INC.

CHARACTER OF OWNERSHIP. The principal offices and properties of NiSource and its
subsidiaries are held in fee and are free from 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 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 distribution 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.

7

ITEM 3. LEGAL PROCEEDINGS

NISOURCE INC.

1. VIRGINIA NATURAL GAS, INC. V. COLUMBIA GAS TRANSMISSION CORP., FEDERAL
ENERGY REGULATORY COMMISSION (FERC)

On January 13, 2004, Virginia Natural Gas, Inc. (VNG) filed with FERC a
"Complaint Seeking Compliance with the Natural Gas Act and with
Regulations and Certificate Orders of the Federal Energy Regulatory
Commission and Seeking Remedies" in Docket No. RP04-139. VNG alleges
various violations during the 2002-2003 winter by Columbia Transmission
of its firm service obligations to VNG. VNG seeks monetary damages and
remedies (exceeding $37 million), and also seeks certain prospective
remedies. Columbia Transmission filed its response to the complaint on
February 2, 2004, demonstrating the authority under which it had acted
and the limitations on FERC's authority to address the issues and
damage claims raised by VNG. On February 17, 2004, VNG filed an answer
and motion for summary disposition. Columbia filed its response to that
most recent VNG pleading on March 3, 2004. FERC has taken no action to
date regarding the complaint.

2. ATLANTIGAS CORPORATION V. NISOURCE, ET AL, U.S. DISTRICT COURT,
NORTHERN DISTRICT OF MARYLAND AND TRIAD ENERGY RESOURCES, ET AL. V.
NISOURCE, ET AL

In the Atlantigas proceeding, the original complaint was filed in June
2002 in the U.S. District Court, District of Columbia. This original
complaint was dismissed for lack of personal jurisdiction on September
29, 2003. A new complaint was filed in the U.S. District Court of
Northern Maryland on October 27, 2003. This complaint alleges that
various NiSource companies, including Columbia Transmission and
Columbia Gulf, and certain "select shippers" engaged in an "illegal gas
scheme" that violated federal anti-trust and state law. The "illegal
gas scheme" complained of by the plaintiff relates to the Columbia
Transmission and Columbia Gulf gas imbalance transactions that were the
subject of the FERC enforcement staff investigation and subsequent
settlement approved in October 2000. In January 2004, the defendants
filed a motion to dismiss the suit on the issue of Atlantigas' standing
to sue and the case is stayed pending argument on that motion.

The Triad Energy case which was filed in March of 2003 was also
originally filed in the U.S. District Court, District of Columbia. This
case was a purported class action against various NiSource companies
(including Columbia Transmission and Columbia Gulf) as well as several
"select shippers" who allegedly benefited from the gas imbalance
transactions described in the Atlantigas proceeding. Plaintiffs
asserted a claim for damages of $1.716 billion ($5.147 billion if
trebled). Based on the Court's decision on personal jurisdiction in
Atlantigas, the plaintiffs dismissed this case on October 31, 2003 from
the District of Columbia and indicated that the case would be refiled
in another jurisdiction. To date, the plaintiffs have not refiled a
case against any NiSource companies.

3. VIVIAN K. KERSHAW ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ET AL.,
CHAUTAUQUA COUNTY COURT, NEW YORK

Plaintiffs filed a complaint in 2000 against Columbia Natural
Resources, a former subsidiary, Columbia Transmission, Columbia Energy
Group and Columbia Energy Resources, Inc. The complaint alleges that
plaintiffs own an interest in oil and gas leases 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.
Plaintiffs seek the alleged royalty underpayment and punitive damages.
The complaint also seeks class action status on behalf of all royalty
owners in oil and gas leases owned by the defendants. Discovery is
still proceeding regarding class certification issues.

8

ITEM 3. LEGAL PROCEEDINGS (continued)

NISOURCE INC.

4. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS
TRANSMISSION CORP., ET AL., U.S. DISTRICT COURT, E.D. LOUISIANA

The plaintiff filed a complaint in 1997, under the False Claims Act, on
behalf of the United States of America, against approximately seventy
pipelines, including Columbia Gulf and Columbia Transmission. The
plaintiff claimed that the defendants had submitted false royalty
reports to the government (or caused others to do so) by mis-measuring
the volume and heating content of natural gas produced on Federal land
and Indian lands. The Plaintiff's original complaint was dismissed
without prejudice for misjoinder of parties and for failing to plead
fraud with specificity. 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 thirteen affiliated entities.

Plaintiff's second complaint, filed in 1997, repeats the
mis-measurement claims previously made and adds valuation claims
alleging that the defendants have undervalued natural gas for royalty
purposes in various ways, including sales to affiliated entities at
artificially low prices. Most of the Grynberg cases were transferred to
Federal court in Wyoming in 1999.

This case is still in the discovery process.

5. PRICE ET AL V. GAS PIPELINES, ET AL., STEVENS COUNTY COURT, KANSAS

This was originally a nationwide class action suit filed in 1999 on
behalf of all domestic producers and all state taxing authorities
against over 200 natural gas measurers, mostly natural gas pipelines.
The plaintiffs allege that, since January 1, 1974, Defendants have
mismeasured the volume and/or heating content of natural gas from
non-federal oil and gas leases and, as a result, caused substantial
royalty underpayments. The allegations in this case are in most
respects identical to the allegations in the Grynberg case described
above but these allegations apply to all "non-federal" leases.
Plaintiffs have filed their Fourth Amendment Petition, in which they
narrow the number of defendants, now down to only 53, and the
geographic scope of their allegations (from a nationwide class to
actions occurring in Kansas, Wyoming and Colorado only). Plaintiffs
have also filed a companion suit against the same defendants named in
the Fourth Amended Petition alleging mismeasurement relating to BTU
content. The only remaining NiSource defendant is Columbia Energy
Service Corporation. NiSource is seeking to have Columbia Energy
Service Corporation dismissed as a defendant.

6. TAWNEY, ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ROANE COUNTY, WV
CIRCUIT COURT

The Plaintiffs, who are royalty owners, filed a lawsuit in early 2003
against Columbia Natural Resources alleging that Columbia Natural
Resources underpaid royalties by improperly deducting post-production
costs and not paying a fair value for the gas produced from their
leases. Plaintiffs seek the alleged royalty underpayment and punitive
damages claiming that Columbia Natural Resources fraudulently concealed
the deduction of post-production charges. In February 2004, the court
certified the case as a class action that includes any person who,
after January 1, 1980, received or is due royalties from Columbia
Natural Resources (and its predecessors or successors) on lands lying
within the boundary of the State of West Virginia. All individuals,
corporations, agencies, departments or instrumentalities of the United
States of America are excepted from the class. Although NiSource sold
Columbia Natural Resources in 2003, it remains obligated to manage this
litigation and also remains at least partly liable for any damages
awarded to the plaintiffs. The company intends to appeal the decision
granting class certification.

Refer to Footnote 17E,"Other Commitments and Contingencies" in the notes to the
consolidated financial statements, for additional information regarding legal
proceedings.

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

None.

9

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT

NISOURCE INC.

The following is a list of the Executive Officers of the Registrant, including
their names, ages and offices held, as of February 1, 2004.

10

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT (continued)

NISOURCE INC.

11

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

NISOURCE INC.

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

As of December 31, 2003, NiSource had 42,034 common stockholders of record and
262,630,409 shares outstanding.

In February 2003, NiSource issued approximately 13.1 million shares of common
stock upon the settlement of forward equity agreements comprising a component of
the Corporate PIES. Concurrently with the settlement of the forward agreements,
NiSource remarketed most of the underlying debentures, due February 19, 2005,
and reset the interest rate to 4.25%. NiSource received net proceeds of $344.1
million from the remarketing in satisfaction of the Corporate PIES holders'
obligation under the forward equity agreements. The sole purchaser of the
remarketed debentures purchased newly-offered 6.15% notes of NiSource Finance
due March 1, 2013, using the remarketed debentures as consideration.

In November 2002, NiSource issued 41.4 million shares of common stock at a
per-share price of $18.30 ($17.75 on a net basis). The net proceeds of
approximately $734.9 million were used to reduce debt.

Holders of shares of NiSource's common stock are entitled to receive dividends
when, as and if declared by NiSource's Board of Directors (Board) out of funds
legally available. 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 totaling $1.10 per share for
2003 and $1.16 per share for 2002. Beginning with the November 2003 dividend,
NiSource reduced its annual dividend to $0.92 per share from $1.16 per share in
line with the company's objectives of ongoing debt reduction, cash flow and core
business reinvestment for the future. This decision was also influenced by the
fact that its dividend yield and payout ratio prior to the dividend reduction
were higher than industry averages. At its January 5, 2004 meeting, the Board
declared a quarterly common dividend of $0.23 cents per share, payable on
February 20, 2004 to holders of record on January 30, 2004.

Although the Board currently intends to continue 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 limitation on payment of dividends applies to Northern Indiana:

So long as any shares of Northern Indiana's cumulative preferred stock are
outstanding, no cash dividends shall be paid or declared on its common stock 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 to the cumulative preferred stock plus the surplus, after
giving effect to such common stock 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, 2003, the sum of
the capital applicable to stocks subordinate to the cumulative preferred stock
plus the surplus was equal to 41% of the total capitalization including surplus.

12

ITEM 6. SELECTED FINANCIAL DATA

NISOURCE INC.

SELECTED SUPPLEMENTAL INFORMATION

* 1999 has not been adjusted for the effects of discontinued operations and the
consensus reached at the October 25, 2002 Emerging Issues Task Force (EITF)
meeting regarding EITF Issue No. 02-03 "Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities." Information for those periods is not
available.

The results in the table above for years prior to 2001 are not comparable as a
result of the Columbia acquisition in 2000. Also, in 2002, NiSource discontinued
the amortization of goodwill consistent with SFAS No. 142, "Goodwill and Other
Intangible Assets"

13

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

NISOURCE INC.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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 Inc.'s (NiSource) plans, 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,
weather, fluctuations in supply and demand for energy commodities, growth
opportunities for NiSource's businesses, increased competition in deregulated
energy markets, dealings with third parties over whom NiSource has no control,
actual operating experience of acquired assets, 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

EXECUTIVE SUMMARY

NiSource generates nearly all of its net revenue through the sale, distribution,
and storage of natural gas and the generation, transmission and distribution of
electricity, which are rate regulated. A significant portion of NiSource's
operations, most notably in the gas distribution, gas transportation and
electric businesses, is subject to seasonal fluctuations in sales. During the
heating season, which is primarily from November through March, and the cooling
season, which is primarily from June through September, net revenues from gas
and electric sales and transportation services are more significant than other
months.

As a regulated company, NiSource is exposed to regulatory risk. Currently,
NiSource is in discussions with various regulatory bodies. This past year,
NiSource implemented several creative agreements by working collaboratively with
regulators and other key stakeholders, which provided value for our customers
and shareholders. Ohio regulators have approved a surcharge, to begin in April
2004, that will allow Columbia of Ohio to recover previously uncollected bad
debts, and will allow payment-troubled customers to have the opportunity to
participate in Customer CHOICE(sm) programs for the first time. Columbia Gas of
Ohio, Inc. (Columbia of Ohio) offers one of the most successful gas utility
choice programs in the nation.

14

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

NISOURCE INC.

However, the Ohio regulators have recently decided to modify parts of a
regulatory stipulation designed to enhance the Customer CHOICE(sm) program and
provide Columbia of Ohio customers rate certainty. The Company is likely to
seek rehearing on the components that have been modified. Columbia Gas of
Pennsylvania, Inc. (CPA) received regulatory approval in October to recover
certain costs of an affordable payment plan to low-income gas customers with
long-term bill payment problems. This agreement should reduce CPA's arrearages
and bad debt write-offs going forward. Northern Indiana Public Service Company
(Northern Indiana) received approval from the Indiana Utility Regulatory
Commission (IURC) in 2003 to recover costs associated with environmental
compliance programs for nitrogen oxide (NOx) pollution-reduction equipment at
the company's generating stations. All regulatory matters are discussed in the
segments section of the management discussion and analysis.

NiSource has had many accomplishments in the current and recent years. The
divestiture of major non-core businesses, which allowed NiSource to reduce debt
and business risk, and focus on the core, regulated assets, and the reduction of
the dividend in November 2003 has helped NiSource affirm its investment grade
credit rating with a stable outlook. In addition NiSource reduced interest
expense during 2003 by $51.7 million as compared to last year, or 10 percent, by
retiring $1.28 billion in debt and reissuing another $1.35 billion of debt at a
lower rate. NiSource also downsized the revolving credit facility by $500
million and retired $345 million in mandatory redeemable preferred securities,
which further reduced fixed charges. NiSource currently anticipates that its
$1.25 billion 3-year credit facility expiring March 23, 2004 will be replaced
during the first quarter of 2004 and will be split between a 364-day facility
and a 3-year facility.

NiSource also completed the previously announced divestitures of non-core
assets, including the gas exploration and production unit, PEI Holdings Inc.'s
(PEI) steel-related cogeneration assets and the telecommunications business.
These sales generated about $305 million after taxes, plus the elimination of
roughly $274 million of debt that was assumed by the buyers. This strengthened
the balance sheet and lowered NiSource's risk profile. NiSource will capitalize
on the stable portfolio of virtually 100 percent regulated and strategically
located gas and electric businesses.

In addition, NiSource adopted a new organizational structure that will focus on
the regulated, core businesses of strategically located gas and electric
operations that generate virtually 100% of the company's operating income.
Through this focus on operations and a new organizational structure, NiSource
has been able to hold the line on operation and maintenance costs, despite
increases in employee benefits and pension costs. Through these and many other
efforts NiSource was able to deliver income from continuing operations of $1.64
per share for the year ended December 31, 2003.

Going forward, NiSource will continue to build value and customer trust by
capitalizing on its super-regional utility and pipeline operations. NiSource
will focus on: continuing to standardize its operations and focus on
predictability and reliability; continuing to deliver the best possible service
at the lowest cost; continuing to develop innovative ways to help our customers
manage heating bills and gas price volatility, with products such as its
fixed-price option; continuing to find ways to control the cost of generating
electricity; and pursuing projects that will bring long-term attractively priced
gas supplies to the market.

Finally, NiSource has always been committed to accurate and complete financial
reporting - and requires a strong commitment to ethical behavior by its
employees. NiSource's senior management takes an active role in the development
of the Form 10-K. In addition, NiSource will continue our mandatory ethics
training program in which employees at every level and in every function of our
organization participate.

RESULTS OF OPERATIONS

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

Net Income

For the twelve months ended December 31, 2003, NiSource reported income from
continuing operations of $425.7 million, or $1.64 per share, compared to $398.1
million, or $1.89 per share, in 2002 and $191.0 million, or 93 cents per share
in 2001. All per share amounts are based on basic weighted common shares
outstanding.

15

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

NISOURCE INC.

Including results from discontinued operations and a change in accounting,
NiSource reported 2003 net income of $85.2 million, or 33 cents per share, 2002
net income of $372.5 million, or $1.77 per share, and $216.2 million, or $1.05
per share for 2001. Earnings per share are not comparable because of 13.1
million shares issued upon the settlement of forward equity agreements in
February 2003 and an equity offering of 41.4 million shares that was completed
in November 2002.

Net Revenues

Total consolidated net revenues (gross revenues less cost of sales) for the
twelve months ended December 31, 2003 were $3,060.3 million, a $10.6 million
decrease compared with 2002. Items that favorably impacted the year included
colder weather during the heating season in the first quarter amounting to $60.1
million and modest increases in non-traditional and non-weather related volume
of $15.4 million. These favorable items were offset by reduced electric revenue
of $21.9 million due to cooler weather during the summer cooling season, lower
interruptible service revenues and firm service revenues of $19.7 million in the
Gas Transmission and Storage Operations segment due to measures undertaken
during the first quarter period of sustained, colder-than-normal weather, a
decrease in storage and transportation revenues of $13.5 million due mainly to
reduced deliveries to power generating facilities, and credits totaling $24.0
million pertaining to the Indiana Utility Regulatory Commission (IURC) electric
rate review settlement.

Total consolidated net revenues (gross revenues less cost of sales) for the
twelve months ended December 31, 2002 were $3,070.9 million, a $55.9 million
decrease compared with 2001. The decrease in revenues was primarily attributable
to reduced off-system sales, incentive programs and non-weather-related gas
sales totaling $41.5 million; credits totaling $28.1 million pertaining to the
IURC electric rate review settlement; $12.9 million from scaling back the energy
trading operations and an $8.5 million reduction in gains on the sales of
storage base gas. Offsetting the decrease was a $36.6 million impact of
favorable weather due to a much colder fall heating season, which increased
natural gas sales and deliveries, and a warmer summer cooling season that
positively impacted electric sales.

Expenses

Operating expenses were $1,944.0 million in 2003, a $25.3 million increase from
2002. Operating expense increases experienced during the year included $28.5
million in pension and post-retirement expenses, an increase in uncollectible
accounts receivable expense amounting to $21.3 million, and increased operating
tax expense of $12.3 million consisting primarily of increased property taxes.
Expense reductions for 2003 include $27.5 million in reduced administrative and
employee-related expense and the approval of a bad debt tracker for Columbia of
Ohio for the recovery of $25.2 million of previously uncollected accounts
receivable. In addition, NiSource sold Columbia Service Partners, Inc. for a
gain of $16.6 million in third quarter of 2003 and Midtex Gas Storage for a gain
of $7.5 million in the fourth quarter of 2003. The 2002 period included $24.5
million of insurance recoveries for environmental expenses, a reduction in
estimated sales taxes of $11.4 million that occurred in 2002 related to sales of
natural gas to customers of a subsidiary previously engaged in the retail and
wholesale gas marketing business, a reduction in a reserve for environmental
expenditures of $10.0 million and a $10.0 million reversal in reserves related
to unaccounted-for gas, offset by $14.8 million of increased expenses related to
NiSource's reorganization initiatives and other employee-related costs and $8.7
million related to the recognition of a reserve related to a long-term note
receivable.

Operating expenses of $1,918.7 million for 2002 decreased $240.2 million over
2001. A portion of the decrease was attributable to a $123.0 million reduction
in operation and maintenance expenses primarily due to lower employee-related,
support services and facilities expenses of $35.4 million resulting from
reorganization initiatives; insurance recoveries of environmental expenses
totaling $24.5 million; a reversal of $30.3 million in reserves for estimated
taxes and environmental expenditures; and a reduction of $16.8 million from
reduced uncollectible customer accounts and other customer-related expenses. The
2001 period was unfavorably impacted by the $15.5 million litigation settlement
related to Market Hub Partners, L.P. (MHP). Also contributing to the decrease
was the elimination of $93.1 million of goodwill amortization as a result of a
Financial Accounting Standards Board (FASB) accounting standard that affected
goodwill amortization beginning January 1, 2002 and $27.1 million primarily from
gains on the sales of NiSource's utility line-locating and marking business and
a significant portion of TPC's gas trading contracts.

16

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

NISOURCE INC.

Other Income (Deductions)

Other Income (Deductions) in 2003 reduced income $456.4 million compared to a
reduction of $535.2 million in 2002. Interest expense, net decreased $51.7
million from 2002 primarily due to lower short-term and long-term interest rates
and a decrease in total debt of $191 million from December 31, 2002. Minority
interest, consisting of dividends paid on company-obligated mandatorily
redeemable preferred securities associated with the Corporate Premium Income
Equity Securities (Corporate PIES), was $2.5 million in 2003 compared to $20.4
million in 2002 as a result of the settlement and remarketing of the Corporate
PIES in February 2003.

Other Income (Deductions) in 2002 reduced income $535.2 million compared to a
reduction of $610.3 million in 2001. Interest expense, net decreased $75.6
million from 2001 primarily due to debt reduction during 2002 of $1.4 billion
resulting from proceeds from the sale of 41.4 million shares of common stock,
approximating $734.9 million, and the sales of IWCR and SM&P. Lower short-term
interest rates also contributed to the decrease. Minority interest, consisting
of dividends paid on company-obligated mandatorily redeemable preferred
securities associated with the Corporate PIES, was $20.4 million in both 2002
and 2001.

Income Taxes

Income taxes increased $15.3 million in 2003 as compared with 2002 and increased
$52.3 million in 2002 over 2001 primarily as a result of higher pre-tax income
in each succeeding period. The effective income tax rates were 35.5%, 35.5 % and
46.6% in 2003, 2002 and 2001, respectively. The decrease in the effective tax
rate after 2002 was primarily due to discontinuing the amortization of goodwill
in 2002. See Note 9 of the Notes to Consolidated Financial Statements for
additional information.

Discontinued Operations

Discontinued operations reflected an after-tax loss of $331.7 million, or a loss
of $1.28 per share, in 2003 compared to a loss of $25.6 million, or loss of 12
cents per share, in 2002 and income of $21.2 million, or 10 cents per share, in
2001. In 2003, an after-tax loss of $301.2 million was related to the sale of
NiSource's exploration and production properties, CER, while a loss of $29.1
million was recognized on the sale of six PEI subsidiaries and a loss of $1.3
million on the sale of Columbia Transmission Communications Corporation
(Transcom). The 2002 results were unfavorably impacted by a non-cash charge of
$51.3 million, after tax, that was recognized as a result of the continuing
depressed market for dark fiber and NiSource's decision to exit the
telecommunications business. 2001 results included income of $30.4 million from
CER partly offset by a loss of $14.3 million from Transcom, which included an
impairment charge of $5.7 million, after-tax. NiSource accounted for CER, six of
the PEI subsidiaries, Transcom and water utility assets that were sold in 2002
as discontinued operations.

Change in Accounting

The change in accounting in 2003 of $8.8 million, net-of-tax, resulted from the
cumulative effect of adopting the Financial Accounting Standards Board statement
on asset retirement obligations. The change in accounting in 2001 is a result of
the adoption of the Financial Accounting Standards Board statement on derivative
accounting.

LIQUIDITY AND CAPITAL RESOURCES

Generally, cash flow from operations has provided sufficient liquidity to meet
operating requirements. A significant portion of NiSource's operations, most
notably in the gas distribution, gas transportation and electric businesses, is
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. During the summer
months, cash on hand, together with the seasonal increase in cash flows from the
electric business during the summer cooling season and external short-term and
long-term financing, is used 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.

Net cash from continuing operations for the twelve months ended December 31,
2003 was $472.9 million. Cash used for working capital was $430.7 million,
principally driven by increased gas inventories and gas exchange receivables and
decreased exchange gas payables, partly offset by lower accounts receivable and
the timing of the recovery of gas and fuel costs.

17

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

NISOURCE INC.

During February 2004, Northern Indiana redeemed $111.1 million of its
medium-term notes and Bay State redeemed $10.0 million of its medium-term notes,
with an average interest rate of 7.5% and 7.6%, respectively. The associated
redemption premium was $4.6 million.

On December 18, 2003, $55.0 million of new tax-exempt Pollution Control Revenue
Refunding Bonds were issued by Jasper County, Indiana on behalf of Northern
Indiana. The new tax-exempt bonds were issued on an auction rate basis and bear
interest at a floating rate as determined in 35-day increments by the tax-exempt
auction process. The proceeds of the bonds were loaned to Northern Indiana,
pursuant to a financing agreement dated as of December 1, 2003, and were used to
refund Northern Indiana's $55.0 million aggregate principal amount of Jasper
County, Indiana Collateralized Pollution Control Refunding Revenue Bonds Series
1991. As a result of the refunding, the final series of First Mortgage Bonds
outstanding under Northern Indiana's First Mortgage Indenture were discharged,
cancelled and returned to Northern Indiana. There are no longer any First
Mortgage Bonds outstanding under the First Mortgage Indenture. Northern Indiana
intends to obtain and file in due course in the appropriate recording offices in
Indiana the releases necessary to remove the First Mortgage Indenture from the
title records with respect to the Northern Indiana property formerly subject to
the lien of the First Mortgage Indenture.

On November 4, 2003, NiSource Finance issued $250.0 million of 18-month floating
rate unsecured notes that mature May 4, 2005. The notes are callable, at par, at
the option of NiSource on or after May 4, 2004. Also on November 4, 2003,
NiSource Finance issued $250.0 million of 3.20% three year unsecured notes that
mature November 1, 2006. The proceeds were used to repay a portion of NiSource
Finance's $750.0 million notes, which matured on November 15, 2003.

On October 20, 2003, NiSource sold all of the steel-related, "inside-the-fence"
assets of its subsidiary PEI, to Private Power, LLC (Private Power). The sale
included six PEI operating subsidiaries and the name "Primary Energy". Private
Power paid approximately $325.4 million, comprised of $113.1 million in cash and
the assumption of debt-related liabilities and other obligations. The assumption
of such liabilities and the after tax cash proceeds from the sale, reduced
NiSource's debt by $206.3 million. NiSource has accounted for the assets sold as
discontinued operations and has adjusted periods after 1999 accordingly. During
2003, NiSource recognized an after-tax loss of $29.1 million related to the
sale.

On August 29, 2003, NiSource sold its exploration and production subsidiary, CER
to a subsidiary of Triana Energy Holdings for $330.0 million, plus the
assumption of obligations to deliver approximately 94.0 billion cubic feet (Bcf)
of natural gas pursuant to existing forward sales contracts. On January 28,
2003, NiSource's former subsidiary Columbia Natural Resources, Inc. (CNR) sold
its interest in certain natural gas exploration and production assets in New
York for approximately $95.0 million. NiSource has accounted for CER as
discontinued operations and has adjusted periods after 1999 accordingly. During
2003, NiSource recognized an after-tax loss of $301.2 million related to the
sales.

On July 29, 2003, NiSource filed a shelf registration statement with the
Securities and Exchange Commission to periodically sell up to $2.5 billion in
debt securities, common and preferred stock, and other securities. The
registration statement became effective on August 7, 2003, which when combined
with NiSource's pre-existing shelf capacity, provided the Company with an
aggregate $2.8 billion of total issuance capacity. After the November 4, 2003
debt offerings discussed previously herein, the Company's shelf capacity remains
at $2.3 billion.

On July 21, 2003, NiSource Finance issued $500.0 million of 5.40% eleven-year
senior unsecured notes that mature July 15, 2014. The proceeds were used to
reduce other maturing debt and for working capital needs. During the time period
of March 2003 through July 2003, Northern Indiana redeemed $124.0 million of
Northern Indiana medium term notes. On April 15, 2003, NiSource Finance repaid
at maturity $300.0 million of its 5.75% two-year senior notes. On March 31,
2003, NiSource Capital Markets Inc. (NiSource Capital Markets) redeemed $75.0
million of its 7.75% Subordinated Debentures due March 1, 2026.

On July 8, 2003 NiSource announced that it would reduce its common stock
dividend to 92 cents per share from $1.16 per share on an annual basis. This
change took effect beginning with the dividend payable on November 20, 2003. The
change in the dividend, the sale of non-core assets, the November 2002 equity
offering and ongoing debt reduction efforts have stabilized NiSource's credit
ratings, enhanced cash flows and provided funds to reinvest in

18

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

NISOURCE INC.

NiSource's core businesses for the future. NiSource's decision was also
influenced by the fact that its dividend yield and payout ratio prior to the
dividend reduction were higher than industry averages.

In February 2003, NiSource issued approximately 13.1 million shares of common
stock upon the settlement of forward equity agreements comprising a component of
the Corporate PIES. Concurrently with the settlement of the forward agreements,
NiSource remarketed most of the underlying debentures, due February 19, 2005,
and reset the interest rate to 4.25%. NiSource received net proceeds of $344.1
million from the remarketing in satisfaction of the Corporate PIES holders'
obligations under the forward equity agreements. The sole purchaser of the
remarketed debentures purchased newly-offered 6.15% notes of NiSource Finance
due March 1, 2013, using the remarketed debentures as consideration.

In November 2002, NiSource issued 41.4 million shares of common stock at a
per-share price of $18.30 ($17.75 on a net basis). The net proceeds of
approximately $734.9 million were used to reduce debt.

Credit Facilities

Due to the company's strong liquidity position, NiSource elected not to renew
its $500.0 million 364-day credit facility, which expired on March 20, 2003. The
364-day credit facility was used to support the issuance of letters of credit.
As a result of the 364-day facility expiring, the $1.25 billion three-year
facility that expires on March 23, 2004 was amended to allow for an increase in
aggregate letters of credit outstanding from $150.0 million to $500.0 million.
The recent reduction in NiSource's short-term borrowing needs is attributable to
the $734.9 million of net proceeds from the equity offering during November
2002, the Corporate PIES remarketing, the sale of the exploration and production
properties, the sale of PEI's assets and net cash flow from continuing
operations. NiSource currently anticipates that its $1.25 billion 3-year credit
facility expiring March 23, 2004 will be replaced during the first quarter of
2004 and will be split between a 364-day facility and a 3-year facility.

As of December 31, 2003 and 2002, zero and $150.0 million of commercial paper
was outstanding, respectively. The weighted average interest rate on commercial
paper outstanding as of December 31, 2002 was 2.25%. In addition, NiSource had
outstanding credit facility advances under its 3-year facility of $685.5 million
at December 31, 2003, at a weighted average interest rate of 1.82%, and credit
facility advances of $763.1 million at December 31, 2002, at a weighted average
interest rate of 2.107%. As of December 31, 2003 and 2002, NiSource had $121.4
million and $171.7 million of standby letters of credit outstanding,
respectively. As of December 31, 2003, $443.1 million of credit was available
under the credit facilities. In addition, NiSource had standby letters of credit
of $4.9 million as of December 31, 2003 and 2002 issued under another credit
facility.

Debt Covenants

NiSource is subject to two financial covenants under both its 364-day and 3-year
revolving credit facilities. These covenants are not expected to change
materially under NiSource's current renewal of the credit facilities. On a
consolidated basis, NiSource must maintain an interest coverage ratio of not
less than 1.75, as determined for each period of four consecutive fiscal
quarters. Additionally, NiSource must maintain a debt to capitalization ratio
that does not exceed 70 percent. As of December 31, 2003, NiSource was in
compliance with these financial covenants.

NiSource is also subject to certain negative covenants under the revolving
credit facilities. Such covenants include a limitation on the creation or
existence of new liens on NiSource's assets, generally exempting liens on
utility assets, purchase money security interests, preexisting security
interests and an additional asset basket equal to 5.0% of NiSource's
consolidated net tangible assets. An asset sale covenant generally restricts the
sale, lease and/or transfer of NiSource's assets to no more than 10.0% of its
consolidated total assets. The revolving credit facilities also include a
cross-default provision, which triggers an event of default under the credit
facility in the event of an uncured payment default relating to any indebtedness
of NiSource or any of its subsidiaries in a principal amount of $50.0 million or
more.

NiSource's bond indentures generally do not contain any financial maintenance
covenants. However, NiSource's bond indentures are generally subject to cross
default provisions ranging from uncured payment defaults of $5.0 to $50.0
million, and limitations

19

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

NISOURCE INC.

on the incurrence of liens on NiSource's assets, generally exempting liens on
utility assets, purchase money security interests, preexisting security
interests and an additional asset basket capped at either 5.0% or 10.0% of
NiSource's consolidated net tangible assets.

Sale of Trade Receivables

Columbia of Ohio is a party to an agreement to sell, without recourse, all of
its trade receivables, with the exception of certain low-income payment plan
receivables, as they originate, to Columbia Accounts Receivable Corporation
(CARC), a wholly-owned subsidiary of Columbia Energy Group (Columbia). CARC, in
turn, is party to an agreement under which it sells a percentage ownership
interest in the accounts receivable to a commercial paper conduit. Under these
agreements, CARC may not sell any new affiliate 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. As of December 31, 2003, $89.5 million of accounts
receivable had been sold by CARC. Canadian Imperial Bank of Commerce (CIBC), the
administrative agent for the program, has informed Columbia of Ohio that, CIBC
and its commercial paper conduit entities will let all existing receivable
securitization agreements expire in the normal course of business. As such, the
Columbia of Ohio receivables program with CIBC will terminate on May 15, 2004
and Columbia of Ohio plans to initiate a new program with a new agent and
conduit purchaser.

On December 30, 2003, Northern Indiana entered into an agreement to sell,
without recourse, all of its trade receivables, as they originate, to NIPSCO
Receivables Corporation (NRC), a wholly-owned subsidiary of Northern Indiana.
NRC, in turn, is party to an agreement in which it sells a percentage ownership
interest in the accounts receivable to a commercial paper conduit. The conduit
can purchase up to $200 million of accounts receivable under the agreement. The
agreements expire in December 2004. As of December 31, 2003, $166.8 million of
accounts receivable had been sold by NRC. Under the arrangement, Northern
Indiana may not sell any new receivables if Northern Indiana's debt rating falls
below BBB- or Baa3 at Standard and Poor's and Moody's, respectively.

Credit Ratings

On July 8, 2003, Moody's Investors Service affirmed the senior unsecured ratings
of NiSource at Baa3, and the existing ratings of all other subsidiaries,
concluding a review for possible downgrade that began on May 13, 2003. Moody's
ratings outlook for NiSource and its subsidiaries is now "stable". On June 30,
2003, Fitch Ratings affirmed their BBB senior unsecured rating for NiSource and
the BBB+ rating for Columbia. Fitch also lowered the rating of Northern Indiana
by one notch to BBB+ due to Fitch's policy of restricting the ratings between a
parent and its subsidiaries where short-term financing facilities are solely at
the holding company level. This did not reflect weakening credit at Northern
Indiana. Fitch's outlook for NiSource and all of its subsidiaries is stable. On
June 16, 2003, Standard and Poor's affirmed its senior unsecured ratings of
NiSource at BBB, and the existing ratings of all other subsidiaries. Standard
and Poor's outlook for NiSource and all of its subsidiaries was revised from
negative to stable.

Certain TPC electric trading agreements contain "ratings triggers" that require
increased collateral if the credit ratings of NiSource or certain of its
subsidiaries are rated below BBB- by Standard and Poor's or Baa3 by Moody's. The
collateral requirement from a downgrade below the ratings trigger levels would
amount to approximately $5.0 million to $10.0 million. In addition to agreements
with ratings triggers, there are other electric or gas trading agreements that
contain "adequate assurance" or "material adverse change" provisions. The
collateral requirement for those agreements would amount to approximately $48.0
million to $53.0 million.

20

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

NISOURCE INC.

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 $184.3 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 $184.3 million declining over time. In another, but
unrelated transaction, the surety, in accordance with the terms of its indemnity
agreement, required NiSource to post a letter of credit in the face amount of
approximately $131.0 million, declining over time, to support the bonds. At
December 31, 2003, the total amount of letters of credit required with respect
to these transactions was $103.2 million.

Contractual Obligations and Commercial Commitments

NiSource has certain contractual obligations that extend beyond 2004. The
obligations include long-term debt, mandatorily redeemable preferred stock,
lease obligations, and purchase obligations for pipeline capacity,
transportation and storage services by NiSource's Gas Distribution Operations
subsidiaries. The total contractual obligations in existence at December 31,
2003 and their maturities were:

NiSource has obligations associated with interest and tax payments. For 2004,
NiSource projects that it will be required to make interest and tax payments of
$890.1 million. Also, NiSource expects to make contributions of $18.1 million to
its pension plans and $51.5 million to its postretirement medical and life plans
in 2004.

In addition, Northern Indiana has a service agreement with Pure Air, a general
partnership between Air Products and Chemicals, Inc. and First Air Partners LP,
under which Pure Air provides scrubber services to reduce sulfur dioxide
emissions for Units 7 and 8 at the Bailly Generating Station. Services under
this contract commenced on June 15, 1992, and have current annual charges
approximating $16.5 million. The agreement provides that, assuming various
performance standards are met by Pure Air, a termination payment would be due if
Northern Indiana terminated the agreement prior to the end of the twenty-year
contract period.

NiSource has made certain commercial commitments that extend beyond 2004. The
commitments include lines of credit, letters of credit and guarantees, which
support commercial activities. The total commercial commitments in existence at
December 31, 2003, including commercial commitments for discontinued operations,
and the years in which they expire were:

21

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

NISOURCE INC.

Of the commercial commitments outstanding shown above, NiSource had
approximately $4.6 billion of debt and capital lease obligations recorded on its
consolidated balance sheet at December 31, 2003.

Capital Expenditures

The table below reflects actual capital expenditures by segment for 2003 and
2002 and an estimate for year 2004:

For 2003, capital expenditures were $572.5 million, an increase of $45.0 million
over 2002. The Gas Distribution Operations segment's capital program in 2003
included business initiatives to extend service to new areas and develop future
markets through new services that may be added to the existing business and to
create a potential new pool of customers, as well as expenditures to ensure
safe, reliable and improved service to customers and modernize and upgrade
facilities. The Gas Transmission and Storage Operations segment invested
primarily in modernizing and upgrading facilities with some expenditure for new
business initiatives. The Electric Operations segment capital program included
improvements related to the operational integrity of generation, transmission
and distribution assets, expenditures related to environmental compliance
regarding nitrogen oxide (NOx) reduction, and additions to electric distribution
systems related to new business. While the NOx expenditures are being funded
with cash from operations, a portion will be recovered over time through the
Northern Indiana environmental tracker. The Other Operations segment primarily
reflects capital spending for enterprise-wide information technology
infrastructure improvements.

For 2004, the projected capital program is expected to be $518.6 million, which
is a decrease of 9%, or $53.9 million, from capital expenditures in 2003. This
reduction in the capital expenditure budget is mainly due to a reduction in
estimated expenditures for NOx compliance.

Pension Funding

Due to the upswing in the equity markets, the fair value of NiSource's pension
fund assets has increased since September 30, 2002. NiSource expects market
returns to revert to normal levels as demonstrated in historical periods.
However, NiSource may be required to provide additional funding for the pension
obligations if returns on plan assets fall short of the assumed 9.0% long-term
earnings rate assumption. As a result of the increase in the fair value of the
plans assets, NiSource expects pension expense for 2004 to decrease
approximately $19.2 million from the amount recognized in 2003. See Note 10 of
Notes to the Consolidated Financial Statements for more information.

MARKET RISK DISCLOSURES

Risk is an inherent part of NiSource's energy businesses. 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 trading
and non-trading risks that are 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 committee 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

22

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

NISOURCE INC.

business, NiSource's risk management policies and procedures continue to evolve
and are subject to ongoing review and modification.

Various analytical techniques are employed to measure and monitor NiSource's
market and credit risks, including value-at-risk and instrument sensitivity to
market factors (VaR). VaR represents the potential loss or gain for an
instrument or portfolio from 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 regulations allow recovery of
prudently incurred purchased power, fuel and gas costs through the rate-making
process. If states should explore additional regulatory reform, these
subsidiaries may begin providing services without the benefit of the traditional
ratemaking process and may be more exposed to commodity price risk.

Effective July 1, 2002, TPC sold a significant portion of its net obligations
under its gas forward transaction portfolio, physical storage inventory and
associated agreements to a third party. Beginning with the effective date of the
sale, the primary remaining operations associated with TPC include commercial
and industrial gas sales (including arranging supply), power marketing and gas
supply associated with NiSource's single merchant cogeneration facility and
power trading. With the exception of power trading and one remaining gas trading
transaction, which expired in October 2002, since July 1, 2002 the gas-related
activities at TPC were no longer considered trading activities for accounting
purposes.

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. At
December 31, 2003, the combined borrowings outstanding under these facilities
totaled $685.5 million. NiSource is also exposed to interest rate risk due to
changes in interest rates on fixed-to-variable interest rate swaps that hedge
the fair value of long-term debt. The principal amount of such long-term debt
subject to interest rate hedges at December 31, 2003 was $1,163.0 million. Based
upon average borrowings under agreements subject to fluctuations in short-term
market interest rates during 2003 and 2002, an increase in short-term interest
rates of 100 basis points (1%) would have increased interest expense by $13.6
million and $17.5 million for the years 2003 and 2002, respectively.

On July 22, 2003, NiSource entered into fixed-to-variable interest rate swap
agreements in a notional amount of $500.0 million with four counterparties with
an 11-year term. NiSource will receive payments based upon a fixed 5.40%
interest rate and pay a floating interest amount based on U.S. 6-month British
Banker Association (BBA) LIBOR plus an average of 0.78% per annum. There was no
exchange of premium at the initial date of the swaps. In addition, each party
has the right to cancel the swaps on either July 15, 2008 or July 15, 2013 at
mid-market.

On April 11, 2003, Columbia entered into fixed-to-variable interest rate swap
agreements in a notional amount of $100 million with two counterparties.
Columbia will receive payments based upon a fixed 7.42% interest rate and pay a
floating interest amount based on U.S. 6-month BBA LIBOR plus an average of
2.39% per annum. There was no exchange of premium at the initial date of the
swaps. The swaps contain mirror-image call provisions that allow the
counterparties to cancel the agreements beginning November 28, 2005 through the
stated maturity date. In addition, each party has the right to cancel the swaps
on either April 15, 2008 or April 15, 2013 at mid-market.

On April 4, 2003, Columbia terminated a fixed-to-variable interest rate swap
agreement in a notional amount of $100.0 million. NiSource received a settlement
payment from the counterparty amounting to $8.2 million, which is being
amortized as a reduction to interest expense over the remaining term of the
underlying debt.

On September 3, 2002, Columbia entered into new fixed-to-variable interest rate
swap agreements totaling $281.5 million with three counterparties effective as
of September 5, 2002. According to the agreements, NiSource will receive
payments based upon a fixed 7.32% interest rate and will pay a floating interest
amount based on U.S. 6-month BBA LIBOR plus 2.66% per annum. There was no
exchange of premium at inception of the swaps. The swaps contain mirror-image
call provisions that allow the counterparties to cancel the agreements beginning
November 28, 2005 through the stated maturity date. In addition, each party has
the one-time right to cancel the swaps on September 5, 2007 at mid-market.

23

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

NISOURCE INC.

Due to the nature of the industry, credit risk is a factor in many of NiSource's
business activities. Credit risk arises because of the possibility that a
customer, supplier or counterparty will not be able or willing to fulfill its
obligations on a transaction on or before the settlement date. For derivative
contracts such as interest rate swaps, credit risk arises when counterparties
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, standby letters of credit
and guarantees. 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

Prior to the July 1, 2002 sale of the TPC gas marketing and trading contracts,
NiSource's trading operations consisted of gas- and power-related activities.
Beginning July 1, 2002, with the exception of one remaining gas trading
transaction, which expired in October 2002, the trading activities of TPC have
involved power only.

The transactions associated with NiSource's power trading operations give rise
to various risks, including market risks resulting from the potential loss from
adverse changes in the market prices of electricity. The power trading
operations market and trade over-the-counter contracts for the purchase and sale
of electricity. Those contracts within the power trading portfolio that require
settlement by physical delivery are often net settled in accordance with
industry standards.

Fair value represents the amount at which willing parties would transact an
arms-length transaction. Fair value is determined by applying a current price to
the associated contract volume for a commodity. The current price is derived
from one of three sources including actively quoted markets such as the New York
Mercantile Exchange (NYMEX), other external sources including electronic
exchanges and over-the-counter broker-dealer markets, as well as financial
models such as the Black-Scholes option pricing model.

The fair values of the contracts related to NiSource's trading operations, the
activity affecting the changes in the fair values during 2003, the sources of
the valuations of the contracts during 2003 and the years in which the remaining
contracts (all power trading) mature are:

24

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

NISOURCE INC.

The caption "Prices from other external sources" generally includes contracts
traded on electronic 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 generally
valued employing the widely used Black-Scholes option-pricing model.

Market Risk Measurement

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 calculates a one-day VaR at a 95% confidence level for the power
trading group and the gas marketing group that utilize a variance/covariance
methodology. Based on the results of the VaR analysis, the daily market exposure
for power trading on an average, high and low basis was $0.4 million, $1.3
million and effectively zero, during 2003, respectively. The daily market
exposure for the gas marketing and trading portfolios on an average, high and
low basis was $0.3 million, $0.5 million and $0.1 million during 2003,
respectively. Prospectively, management has set the VaR limits at $2.5 million
for power trading and $0.5 million for gas marketing. Exceeding the VaR limits
would result in management actions to reduce portfolio risk.

Refer to "Critical Accounting Policies" of this Item 7, and "Risk Management
Activities" in Notes 1 and 7, respectively, of Notes to the Consolidated
Financial Statements for further discussion of NiSource's risk management.

OFF BALANCE SHEET ARRANGEMENTS

NiSource has issued guarantees that support up to approximately $1.5 billion of
commodity-related payments for its current subsidiaries involved in energy
marketing and power trading and to satisfy requirements under forward gas sales
agreements of a former subsidiary. These guarantees were provided to
counterparties in order to facilitate physical and financial transactions
involving natural gas and electricity. To the extent liabilities exist under the
commodity-related contracts subject to these guarantees, such liabilities are
included in the consolidated balance sheets. In addition, NiSource has other
guarantees, purchase commitments, operating leases, lines of credit and letters
of credit outstanding. Refer to Note 7, Risk Management Activities, and Note 17,
Other Commitments and Contingencies, for additional information about NiSource's
off balance sheet arrangements.

Northern Indiana has a service agreement with Pure Air, a general partnership
between Air Products and Chemicals, Inc. and First Air Partners LP, under which
Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units
7 and 8 at the Bailly Generating Station. Services under this contract commenced
on June 15, 1992, and have current annual charges approximating $16.5 million.
The agreement provides that, assuming various performance standards are met by
Pure Air, a termination payment would be due if Northern Indiana terminated the
agreement prior to the end of the twenty-year contract period.

In addition, NiSource has sold certain accounts receivable. NiSource's accounts
receivable programs qualify for sale accounting because they meet the conditions
specified in SFAS No. 140 "Accounting for Transfers and Servicing of Financial
Asset and Extinguishments of Liabilities." In the agreements, all transferred
assets have been isolated from the transferor and put presumptively beyond the
reach of the transferor and its creditors, even in bankruptcy or other
receivership. NiSource does not retain any interest in the receivables under
these programs. Refer to Note 16, Fair Value of Financial Instruments, of the
Consolidated Financial Statements for additional information on these
agreements.

25

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

NISOURCE INC.

OTHER INFORMATION

Critical Accounting Policies

NiSource applies 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.

BASIS OF ACCOUNTING FOR RATE-REGULATED SUBSIDIARIES. SFAS 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 $927.7 million
and $1,199.0 million at December 31, 2003, and $953.2 million and $156.8 million
at December 31, 2002, respectively. Additionally, refer to SFAS No. 143
"Accounting for Asset Retirement Obligations" under this Item 7 heading titled,
"Accounting Changes and Recently Issued Accounting Pronouncements".

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 unable
to continue to apply the provisions of SFAS No. 71, NiSource would be required
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 $153.3 million at December 31, 2003. If NiSource determined that the
amounts included as regulatory assets were not recoverable, a charge to income
would immediately be required to the extent of the unrecoverable amounts.

ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. Under SFAS No. 133, as amended, 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, earnings, or regulatory assets and liabilities 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. 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.

26

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

NISOURCE INC.

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 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 $166.8 million of price risk
management assets and $13.3 million of price risk management liabilities
primarily related to hedges at December 31, 2003. The amount of unrealized gains
recorded to other comprehensive income was $91.7 million at December 31, 2003.

ACCOUNTING FOR ENERGY TRADING ACTIVITIES. 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 evaluates the
contracts of its trading operations in accordance with the criteria for
derivative contracts under SFAS No. 133. Through 2002, contracts not meeting the
criteria under SFAS No. 133 were 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).

Pursuant to EITF No. 98-10, 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, recognizing related gains and
losses currently in earnings. In the October 2002 EITF meeting, EITF No. 98-10
was rescinded and only contracts meeting the definition in SFAS No. 133 can be
marked to market. Refer to Note 7 to the consolidated financial statement for
further information.

While the assessment of fair values for NiSource's trading contracts have been
mainly based on pricing information for exchange-traded contracts,
transportation and storage agreements related to gas trading deals entered into
prior to the cessation of gas trading activities were marked to fair value based
on the results of internal models. No estimates of fair values on transportation
and storage contracts related to gas trading activities remained as of December
31, 2002 due to the sale or expiration of all gas-trading related agreements
during the year. In addition, power trading options were marked to fair value
through earnings based on internal calculations of fair value employing the
widely-used Black-Scholes option pricing model. At December 31, 2003, the fair
value of the "mark-to-fair-value" options outstanding was a loss of $1.5
million.

At December 31, 2003, NiSource's balance sheet contained $21.9 million of price
risk management assets and $23.4 million of price risk management liabilities
related to unrealized gains and losses on trading activities, respectively.

PENSIONS AND POSTRETIREMENT BENEFITS. NiSource has defined benefit plans for
both pensions and other postretirement benefits. The plans are accounted for
under SFAS No. 87, and SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions." The calculation of the net obligations and annual
expense related to the plans requires a significant degree of judgment regarding
the discount rates to be used in bringing the liabilities to present value,
long-term returns on plan assets and employee longevity, among other
assumptions. Due to the size of the plans and the long-term nature of the
associated liabilities, changes in the assumptions used in the actuarial
estimates could have material impacts on the measurement of the net obligations
and annual expense recognition. For further discussion of NiSource's pensions
and other postretirement benefits see Note 10 of the Notes to Consolidated
Financial Statements.

27

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

NISOURCE INC.

Accounting Changes and Recently Issued Accounting Pronouncements

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", AS SUBSEQUENTLY AMENDED BY SFAS
NO. 137, SFAS NO. 138 AND SFAS NO. 149 (COLLECTIVELY REFERRED TO AS SFAS NO.
133). Effective January 1, 2001, NiSource adopted the FASB's Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as subsequently amended by SFAS No. 137,
SFAS No. 138 and SFAS 149. 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, or
(b) a hedge of the exposure to variable cash flows of a 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 SFAS No. 133 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,
which was recognized in earnings during 2002 and 2001. 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 reduction of hedged risk basis of $3.8 million and the
reclassification of deferred revenue to OCI of $17.9 million.

EITF ISSUE NO. 02-03 - ISSUES INVOLVED IN ACCOUNTING FOR DERIVATIVE CONTRACTS
HELD FOR TRADING PURPOSES AND CONTRACTS INVOLVED IN ENERGY TRADING AND RISK
MANAGEMENT ACTIVITIES AND EITF ISSUE NO. 98-10 - ACCOUNTING FOR CONTRACTS
INVOLVED IN ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES. On October 25, 2002,
the EITF reached a final consensus in EITF No. 02-03 that gains and losses
(realized or unrealized) on all derivative instruments within the scope of SFAS
No. 133 should be shown net in the income statement, whether or not settled
physically, if the derivative instruments are held for trading purposes. For
purposes of the consensus, energy trading activities encompass contracts entered
into with the objective of generating profits on, or exposure to, shifts in
market prices. This consensus was effective for financial statements issued for
periods beginning after December 15, 2002. Upon implementation of EITF No. 02-03
in 2003, NiSource reevaluated its portfolio of contracts in order to determine
which contracts were required to be reported net in accordance with the
provisions of the consensus. EITF No. 02-03 implementation resulted in equal and
offsetting reductions to revenues and cost of sales of $945.4 million, $2,910.8
million and $2,214.8 million for the years ended December 31, 2002, 2001 and
2000 respectively. Accordingly, NiSource's operating income remained unchanged
for all periods presented.

SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. NiSource adopted the
provisions of SFAS No. 143 on January 1, 2003, and as a result an asset
retirement obligations liability of $54.3 million was recognized, of which $43.4
was related to assets sold in 2003. In addition, NiSource capitalized $41.3
million in additions to plant assets, net of accumulated amortization, of which
$21.7 million was related to assets sold in 2003, and recognized regulatory
assets and liabilities of $1.2 million and $4.6 million, respectively. NiSource
believes that the amounts recognized as regulatory assets will be recoverable in
future rates. The cumulative after-tax effect of adopting SFAS No. 143 amounted
to $8.8 million. Certain costs of removal that have been, and continue to be,
included in depreciation rates and collected in the service rates of the
rate-regulated subsidiaries, did not meet the definition of an asset retirement
obligation pursuant to SFAS No. 143. The amount of the other costs of removal
was approximately $1.0 billion at December 31, 2003 and December 31, 2002 based
on rates for estimated removal costs embedded in composite depreciation rates.
NiSource reclassified its cost of removal as of December 31, 2002 from
accumulated depreciation

28

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

NISOURCE INC.

to regulatory liabilities and other removal costs on the consolidated balance
sheet and upon adoption of SFAS No. 143 "Accounting for Asset Retirement
Obligations" recharacterized the liability as a regulatory liability as of
December 31, 2003.

For the twelve months ended December 31, 2003, NiSource recognized accretion
expense of $0.6 million. The asset retirement obligations liability totaled
$11.4 million at December 31, 2003. Had NiSource adopted SFAS No. 143 at the
dates the actual liabilities were incurred, the asset retirement obligations
liability would have been $49.4 million and $45.0 million at December 31, 2001
and 2000, respectively, of which $38.3 million and $34.6 million were related to
assets sold in 2003.

Additionally, refer to "Recently Issued Accounting Pronouncements" in Note 5 of
the Notes of Consolidated Financial Statements for information regarding
recently issued accounting standards.

Environmental Matters

NiSource affiliates have retained environmental liability, including cleanup
liability, associated with some of its former operations including those of
propane operations, petroleum operations, certain local gas distribution
companies and Columbia Energy Resources. Most significant environmental
liability relates to former manufactured gas plant (MGP) sites whereas less
significant liability is associated with former petroleum operations and
metering stations using mercury-containing measuring equipment.

The ultimate liability in connection with the contamination sites will depend
upon many factors including the extent of environmental response actions
required, other potentially responsible parties 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, "Accounting for Contingencies" and
consistent with American Institute of Certified Public Accountants Statement of
Position 96-1, "Environmental Remediation Liabilities." As costs become probable
and reasonably estimable, reserves will be recorded and adjusted as appropriate.
NiSource believes that any environmental response actions required at former
operations, for which it is ultimately liable, will not have a material adverse
effect on NiSource's financial position.

Proposals for voluntary initiatives and mandatory controls 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, and methane, a
component of natural gas. Certain Nisource affiliates engage in efforts to
voluntarily report and reduce their greenhouse gas emissions. Nisource will
monitor and participate in developments related to efforts to register and
potentially regulate greenhouse gas emissions.

Power Outage in the Northeast

On August 14, 2003, a massive power outage affected approximately 50.0 million
people in Michigan, Ohio, New York, Pennsylvania, New Jersey, Connecticut,
Vermont and Canada and completely darkened major metropolitan areas such as New
York City, Cleveland, Detroit and Toronto. Northern Indiana's electric system
operated as it was designed and separated its system from the affected blackout
area.

Bargaining Unit Contract

As of December 31, 2003, NiSource had 8,614 employees of which 3,351 were
subject to collective bargaining agreements. On May 31, 2004, the contracts with
Northern Indiana's bargaining unit employees expire. Discussions between
Northern Indiana and bargaining unit's union representatives are ongoing.

RESULTS AND DISCUSSION OF SEGMENT OPERATIONS

Presentation of Segment Information

With the sale of the exploration and production business, NiSource's operations
are divided into four primary business segments; Gas Distribution Operations,
Gas Transmission and Storage Operations, Electric Operations, and Other
Operations.

29

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

NISOURCE INC.

GAS DISTRIBUTION OPERATIONS

30

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

NISOURCE INC.

GAS DISTRIBUTION OPERATIONS

Competition

Gas Distribution Operations competes with investor-owned, municipal, and
cooperative electric utilities throughout its service area, and to a lesser
extent with other regulated natural gas utilities and propane and fuel oil
suppliers. Gas Distribution Operations continues to be a strong competitor in
the energy market as a result of strong customer preference for natural gas.
Competition with providers of electricity is generally strongest in the
residential and commercial markets of Kentucky, southern Ohio, central
Pennsylvania and western Virginia where electric rates are primarily driven by
low-cost, coal-fired generation. In Ohio and Pennsylvania, gas on gas
competition is also common. Gas competes with fuel oil and propane in the New
England markets mainly due to the installed base of fuel oil and propane-based
heating which, over time, has comprised a declining percentage of the overall
market.

Restructuring

During 2002, NiSource carried out a new reorganization initiative, which
resulted in the elimination of approximately 400 positions throughout all
NiSource segments mainly affecting executive and other management-level
employees. Gas Distribution Operations accrued approximately $7.8 million of
salaries, benefits and facilities costs associated with the reorganization
initiative. The charge included $2.4 million related to the consolidation of
facilities affecting leased office space in Richmond, Virginia and Mount
Lebanon, Pennsylvania. Payments made in 2003 in respect of the restructuring
items within Gas Distribution Operations were $5.6 million. Additionally, during
2003, the restructuring reserve was decreased by $3.1 million related to
previous reorganization initiatives due to adjustments in estimated costs. The
restructuring liability at December 31, 2003 and 2002 was $9.9 million and $18.7
million, respectively.

Regulatory Matters

Changes in gas industry regulation, which began in the mid-1980s at the federal
level, have broadened to retail customers at the state level. For many years,
large industrial and commercial customers have had the ability to purchase
natural gas directly from marketers and to use Gas Distribution Operations'
facilities for transportation services. Beginning in the mid-1990s, Gas
Distribution Operations has provided these "CHOICE(R)" programs for their retail
customers. Through December 2003, approximately 0.8 million of Gas Distribution
Operations' residential and small commercial customers have selected an
alternate supplier.

Gas Distribution Operations continues to offer Customer Choice(SM) opportunities
through regulatory initiatives in all of its jurisdictions. While Customer
Choice(SM) programs are intended to provide all customer classes with the
opportunity to obtain gas supplies from alternative merchants, Gas Distribution
Operations 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
Operations subsidiaries are sometimes left with pipeline capacity they have
contracted for, but no longer need. The state commissions in jurisdictions
served by Gas Distribution Operations are at various stages in addressing these
issues and other transition considerations. Gas Distribution Operations 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, reducing levels of
reserved pipeline capacity and mandatory assignment of pipeline capacity to
alternative suppliers.

Through October 2004, Columbia of Ohio is operating under a regulatory
stipulation approved by the Public Utilities Commission of Ohio (PUCO). On
October 9, 2003, Columbia of Ohio and other parties filed with the PUCO an
amended stipulation that would govern Columbia of Ohio's regulatory framework
from November 2004 through October 2010. The majority of Columbia of Ohio's
contracts with interstate pipelines expire in October 2004, and the amended
stipulation would permit Columbia to renew those contracts for firm capacity
sufficient to meet up to 100% of the design peak day requirements through
October 31, 2005 and up to 95% of the design peak day requirements through
October 31, 2010. Among other things, the amended stipulation would also: (1)
extend Columbia of Ohio's CHOICE(R) program through October 2010; (2) provide
Columbia of Ohio with an opportunity to generate revenues sufficient to cover
the stranded costs associated with the CHOICE(R) program; and, (3) allow
Columbia of Ohio to record post-in-service-carrying charges on plant placed into
service after October 2004, and to defer the property taxes and depreciation
associated with such plant.

On March 11, 2004, the PUCO issued an order that adopted and modified the
stipulation from Columbia Gas of Ohio and a collaborative of parties. The order
extended Columbia of Ohio's CHOICE (R) program. However, the order limited the
time period of the stipulation through December 31, 2007 and declined to
pre-approve the amount of interstate pipeline firm capacity for which Columbia
of Ohio could contract. In addition, the PUCO made other modifications which
would limit Columbia of Ohio's ability to generate additional revenues
sufficient to cover stranded costs, including declining to mandate that natural
gas marketers participating in the CHOICE (R) program obtain 75% of their
interstate capacity directly from Columbia of Ohio and changing the allocation
of revenues generated through off-systems sales. The order allows Columbia of
Ohio to record post-in-service-carrying charges on plant placed in service after
October 2004 and allows the deferral of property taxes and depreciation
associated with such plant. Although this order will have a minimal impact on
2004, NiSource's initial estimate is that this order, if left unchanged, could
potentially reduce operating income by approximately $20 million annually 2005
through 2007. Columbia Gas of Ohio anticipates, consistent with standard
regulatory process, petitioning the commission for rehearing on the components
which have been modified.

31

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

NISOURCE INC.

GAS DISTRIBUTION OPERATIONS

As part of the 2002 annual review of Columbia of Ohio's gas cost recovery rates,
the PUCO retained Exeter Associates, Inc. ("Exeter") to conduct a
management/performance review of Columbia of Ohio's gas purchasing practices and
strategies. On July 25, 2003, Exeter filed its final audit report. In the audit
report Exeter questioned Columbia of Ohio's decision to recontract for all of
its pipeline capacity, and recommended that Columbia of Ohio should contract for
only that post-October 2004 capacity necessary to serve its bundled service
customers, to meet the balancing requirements of CHOICE(R) customers, and to
accommodate the capacity assignment elections of CHOICE(R) suppliers. According
to Exeter, this approach would eliminate the need for Columbia of Ohio to engage
in off-system sales activities to recover stranded costs. Exeter also criticized
Columbia of Ohio's procedures for dealing with operational flow orders and
operational matching orders, which procedures had been the subject of a
stipulation previously approved by the PUCO. Exeter therefore recommended that
Columbia of Ohio's procedures for dealing with operational flow orders and
operational matching orders be revised. Exeter further criticized Columbia of
Ohio's volume banking and balancing service because the service allegedly does
not reflect the costs of certain interstate pipeline charges, and recommended
that Columbia of Ohio redesign its balancing rates. The issues raised in the
Exeter report will be resolved by the PUCO either in a rehearing on the
stipulation or in the 2002 gas cost recovery case.

On December 17, 2003, the PUCO approved an application by Columbia of Ohio and
other Ohio LDCs to establish a tracking mechanism that will provide for recovery
of current bad debt expense and for the recovery over a five-year period of
previously deferred uncollected accounts receivable. The approval of the tracker
will allow for the recovery of $25.2 million in previously uncollected accounts
receivable for Columbia of Ohio.

On August 11, 1999, the IURC approved a flexible gas cost adjustment mechanism
for Northern Indiana. Under the approved 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 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 for 2002 on August 29, 2002. The IURC approved implementation of
interim rates, subject to refund, effective November 1, 2002. Testimony was
filed indicating that some gas costs should not be recovered. On September 30,
2003, the IURC issued an order adjusting the recovery of costs in March 2003 and
reducing recovery by $3.8 million. On October 8, 2003, the IURC approved the
demand component of the adjustment factor. Northern Indiana made its annual
filing for 2003 on August 26, 2003. The IURC approved implementation of interim
rates subject to refund, effective November 1, 2003. NiSource expects the
proceeding with respect to the 2003 program to be concluded during the second
quarter of 2004. In addition, the gas cost incentive mechanism program, which
allows the sharing of any cost savings or cost increases with the customers
expires at the end of 2004, under the current settlement approved by the IURC.
NiSource expects the program to continue after 2004.

Effective November 2003, the Pennsylvania Public Utility Commission approved a
surcharge allowing CPA. to recover certain expenses related to Columbia's
Customer Assistance Program for low-income customers. The Customer Assistance
Program is available to customers with incomes at or below 150% of the poverty
level. The estimated increase in annual revenues as a result of the surcharge is
$11.5 million annually. However, the surcharge will fluctuate based on the
number of customers and cost of gas. Approximately $1.8 million is reflected in
the year ended December 31, 2003. The Pennsylvania Public Utility Commission
approved the Customer Assistance Surcharge on October 30, 2003, subject to
customer complaint cases filed in opposition to the surcharge.

Environmental Matters

Currently, various environmental matters impact the Gas Distribution Operations
segment. As of December 31, 2003, a reserve has been recorded to cover probable
environmental response actions. Refer to Footnote 17G "Environmental Matters" in
the notes to the consolidated financial statements, for additional information
regarding environmental matters for the Gas Distribution Operations segment.

32

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

NISOURCE INC.

GAS DISTRIBUTION OPERATIONS

Market Conditions

An economic slowdown during 2001, which has extended through 2003, contributed
to lower demand and the reduced industrial production and fuel switching (to
coal, heating oil and distillate) resulted in industrial throughput falling 25%
from its peak of over 400 billion cubic feet (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
steel-related companies filing for bankruptcy.

Spot prices for the winter of 2002-2003 were in the $4.00-$6.00 per dekatherm
(Dth) range with a large spike toward $10 in February, significantly higher than
the prices experienced during the 2001-2002 winter season. Entering the
2002-2003 winter season, storage levels were near the top of the five-year
range; however, concerns over lower levels of natural gas production and
near-normal temperatures sustained higher prices. Mid-way through the 2002-2003
winter season natural gas storage levels fell below the trailing five-year
average ending the winter season with the lowest level of gas in storage ever
recorded by the Energy Information Administration (EIA) since the EIA began
recording such data in 1976.

Throughout the summer of 2003, prices stayed between $4.50 and $5.50/Dth. Thus
far during the winter of 2003-2004 price levels are between $5.00 and $7.00/Dth,
though stocks of storage gas continue to be higher than the five-year average.

All NiSource Gas Distribution Operations 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 future customer billings. During times of
unusually high gas prices, throughput and net revenue may be adversely affected
as customers may reduce their usage as a result of higher gas cost.

The Gas Distribution Operations 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 their service territory, the sale
of products and services in their service territories and gas supply cost
incentive mechanisms for service to their core markets. The upstream products
are made up of transactions that occur between an individual Gas Distribution
company and a buyer for the sales of unbundled or rebundled gas supply and
capacity. The on-system services are offered by NiSource to customers and
include products such as the transportation and balancing of gas on the Gas
Distribution Operations company system. The incentive mechanisms give the Gas
Distribution Operations companies an opportunity to share in the savings created
from such things as gas purchase prices paid below an agreed upon 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 the benefits with customers and others using these revenues to mitigate
transition costs occurring as the result of customer choice programs described
above under "Regulatory Matters."

Capital Expenditures

The Gas Distribution Operations segment's net capital expenditure program was
$195.1 million in 2003 and is projected to be approximately $210.2 million in
2004. New business initiatives totaled approximately $85.6 million in 2003 and
are expected to be $82.6 million in 2004. The remaining expenditures are
primarily for modernizing and upgrading facilities.

Weather

In general, NiSource calculates the weather related revenue variance based on
changing customer demand driven by weather variance from normal heating
degree-days. Normal is evaluated using heating degree days across the NiSource
distribution region. While the temperature base for measuring heating
degree-days (i.e. the estimated average daily temperature at which heating load
begins) varies slightly across the region, the NiSource composite measurement is
based on 62 degrees. In 2003, NiSource changed its definition of normal heating
degree-days using weather information from the average of 30 years ended 2001.
This resulted in a decrease in normal heating degree-days of about 3.5%.

33

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

NISOURCE INC.

GAS DISTRIBUTION OPERATIONS

Weather in the Gas Distribution Operations service territories for 2003 was
approximately 4% colder than normal and 8% colder than 2002, increasing net
revenues by approximately $60.1 million over the year ended December 31, 2002.

In 2002, weather in the Gas Distribution Operations service territories was 7%
warmer than normal. However, weather conditions were 6% colder than for the year
ended December 31, 2001, which resulted in increased net revenue of
approximately $21.8 million over 2001.

Throughput

Total volumes sold and transported for the year ended December 31, 2003 were
878.9 million dekatherms (MDth), compared to 924.2 MDth for 2002. This reduction
was primarily due to a decrease in off-system sales as a result of fewer market
opportunities.

Total volumes sold and transported of 924.2 MDth for 2002 decreased 82.6 MDth
from 2001. This decrease was primarily due to the decline in off-system sales.

Net Revenues

Net revenues for 2003 were $1,476.6 million, up $87.8 million from 2002, mainly
as a result of increased deliveries of natural gas to residential, commercial
and industrial customers of $60.1 million due to colder weather during the first
quarter of 2003, increased non-traditional revenues of $8.6 million and higher
cost trackers and gross receipts taxes generally offset in operating expenses.

Net revenues for 2002 were $1,388.8 million, down $3.6 million from 2001 mainly
as a result of a decrease in off-system sales and incentive programs amounting
to $24.3 million, mostly offset by a $21.8 million increase in gas distribution
revenue as a result of colder weather as compared to 2001.

Operating Income

For the twelve months ended December 31, 2003, operating income for the Gas
Distribution Operations segment was $506.4 million, an increase of $47.3 million
over the same period in 2002. The increase was the result of higher net revenue
mentioned above, the approval of a bad debt tracker for Columbia of Ohio for the
recovery $25.2 million of previously uncollected accounts receivable and reduced
administrative and employee related expenses of $14.5 million. These benefits to
operating income were offset in part by increased bad debt expense of $25.9
million, higher pension and postretirement expenses of $9.8 million, and $22.4
million of insurance recoveries for environmental expenses recognized in the
2002 period.

For the twelve months ended December 31, 2002, operating income for the Gas
Distribution Operations segment was $459.1 million, an increase of $78.3 million
over the same period in 2001. The increase consisted of $21.8 million from
increased deliveries as a result of favorable weather and $81.9 million from
lower operating expenses. These lower operating expenses consisted mainly of the
discontinuation of the amortization of goodwill of $42.8 million, $22.4 million
of insurance recoveries for environmental expenses, decreased employee-related
and support services expenses resulting from reorganization initiatives of $19.3
million and reductions of $9.2 million in reduced uncollectible customer
accounts and other customer related expenses. The favorable variances were
partially offset by a decrease of $24.3 million in off-system sales and
incentive programs.

34

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

NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS

Pipeline Firm Service Contracts

Since implementation of Order No. 636 in the early 1990's, the services of
Columbia Transmission and Columbia Gulf have consisted of open access
transportation services, and open access storage services in the case of
Columbia Transmission. These services are provided primarily to local
distribution companies (LDC), and compete to some degree with comparable
services provided by other interstate pipelines. The majority of the firm
contracts that were restructured in Order No. 636 expire in late 2004. Customer
decisions on capacity re-subscription are affected by many factors, including
decisions by state regulators on the treatment of pipeline capacity agreements
in the context of LDC unbundling proceedings. Several LDC's have effectively
extended their long-term capacity commitments and the companies are in the
process of negotiating with other firm capacity holders.

Transportation for New Electric Generation Projects

Columbia Transmission received approval from the FERC to construct facilities to
provide service at levels up to 560,000 Dth per day to three electric generating
facilities originally planned to be in service in 2003. Due to market
conditions, customers at two of the proposed electric generation facilities
elected to cancel the underlying contracts for service, and plans for these
facilities have been terminated. Initial service to a 1,020-megawatt generating
facility in Maryland began in November 2003 under contracts providing up to
270,000 Dth per day of transportation capacity.

35

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

NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)

Proposed Millennium Pipeline Project

The proposed Millennium Pipeline Project (Millennium), in which Columbia
Transmission is participating and will serve as developer and operator, will
provide access to a number of supply and storage basins and the Dawn, Ontario,
trading hub. The Millennium partnership recently announced its intention to
develop the project in two phases. Phase 1 of the project, subject to demand, is
expected to be in service by November 2006 and will include the 186-mile section
from Corning, N.Y. to Ramapo, N.Y., transporting 500,000 Dth per day.
Millennium's upstream link will be via the Empire State Pipeline, an existing
pipeline that originates at the Canadian border and extends easterly to near
Syracuse. Empire will construct a lateral pipeline southward to connect with
Millennium near Corning, N.Y. This will provide a continuous link between
Canadian gas supplies and the Millennium Pipeline with a capacity of at least
250,000 Dth per day. Assuming the resolution of certain permitting issues
discussed below, plans call for the 46-mile Millennium Phase 2 to cross the
Hudson River, linking to the New York City metropolitan market via the
Consolidated Edison distribution system.

On September 19, 2002, the FERC issued its order granting final certificate
authority for the original Millennium project and specified that Millennium may
not begin construction until certain environmental and other conditions are met.
One such condition, impacting Phase 2 of the project, is compliance with the
Coastal Zone Management Act, which is administered by the State of New York's
Department of State (NYDOS). NYDOS has determined that the Hudson River crossing
plan is not consistent with the Act. Millennium's appeal of that decision to the
United States Department of Commerce was denied. Millennium filed an appeal of
the U.S. Department of Commerce ruling relating to the project's Hudson River
crossing plan in the U.S. District Court for the District of Columbia on
February 13, 2004. Millennium is in ongoing discussions with potential shippers
regarding the extent, location, and timing of their needs and anticipates
filing, later in 2004, to amend its FERC certificate to accommodate the
above-described phasing of the project.

The sponsors of the proposed Millennium project are Columbia Transmission,
Westcoast Energy, Inc. (subsidiary of Duke Energy Corp.), TransCanada Pipe Lines
Ltd. and MCN Energy Group, Inc. (subsidiary of DTE Energy Co.).

Regulatory Matters

On February 28, 2003, Columbia Transmission filed with the Federal Energy
Regulatory Commission (FERC) certain scheduled annual rate adjustments,
designated as the Transportation Costs Rate Adjustment (TCRA), Retainage
Adjustment Mechanism (RAM), and Electric Power Cost Adjustment (EPCA). These
filings seek to recover certain expenses relating to transportation costs
incurred by Columbia Transmission on interconnecting pipelines and electric
costs incurred in the operation of certain compressors (TCRA and EPCA,
respectively), as well as quantities of gas required by Columbia Transmission to
operate its pipeline system (RAM). The recovery of each of these costs is done
through a "tracker" which ensures recovery of only actual expenses. On October
1, 2003, FERC issued an order accepting Columbia Transmission's compliance
filing supporting its TCRA filing, and accepting the full recovery of upstream
transportation costs as proposed in the filing. On February 11, 2004, FERC
approved an order regarding the annual EPCA filing, which upheld Columbia
Transmission's ability to fully recover its electric costs, but required
Columbia Transmission to implement a separate EPCA rate to recover electric
power costs incurred by a newly expanded electric-powered compressor station
from specific customers. The order also limits Columbia Transmission's ability
to prospectively discount its EPCA rates. Management does not believe this order
will have a material financial impact. The FERC has not yet issued a final Order
in Columbia Transmission's 2003 RAM proceeding.

Restructuring

During 2002, NiSource carried out a new reorganization initiative, which
resulted in the elimination of approximately 400 positions throughout all
NiSource segments mainly affecting executive and other management-level
employees. During 2002, Gas Transmission and Storage Operations accrued
approximately $14.8 million of salaries, benefits and facilities costs
associated with the reorganization initiative. Payments made in 2003 in respect
of restructured items within Gas Transmission and Storage Operations was $8.3
million. Additionally, during 2003, the restructuring reserve was decreased by
$1.5 million related to previous reorganization initiatives due to adjustments
in estimated costs. The restructuring liability at December 31, 2003 and 2002
was $7.1 million and $16.9 million, respectively.

36

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

NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)

Environmental Matters

Currently, various environmental matters impact the Gas Transmission and Storage
Operations segment. As of December 31, 2003, a reserve has been recorded to
cover probable environmental response actions. Refer to Footnote 17G
"Environmental Matters" in the notes to the consolidated financial statements,
for additional information regarding environmental matters for the Gas
Transmission and Storage Operations.

Storage Base Gas Sales

Base gas represents storage volumes that are maintained to ensure that adequate
pressure exists to deliver current gas 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. Columbia Transmission sold 0.8 MDth, 2.0 MDth and 5.4 MDth of
storage base gas volumes during 2003, 2002 and 2001, respectively. These sales
resulted in pre-tax gains of $1.6 million, $2.9 million and $11.4 million in
2003, 2002 and 2001, respectively.

Long-Term Notes Receivable

In 1999, Columbia Transmission sold certain gathering facilities to a third
party for approximately $22 million. The buyer executed a promissory note, which
provides for payment of the purchase price to Columbia Transmission over a
five-year period. In the second quarter of 2002, an appropriate reserve was
recorded against the receivable in light of the failure to receive timely
payments from the counterparty. During the third quarter, of 2002 management
negotiated a new payment schedule and secured a guarantee from the third party's
parent company as security for the note. Columbia Transmission is in discussions
with the counterparty about its failure to make a $500,000 payment that was due
on January 1, 2004. A notice of default was sent on February 10, 2004. The
counterparty has until March 11, 2004 to make this payment or Columbia
Transmission will proceed to execute the default remedies outlined in the
agreement. At December 31, 2003, the balance of the note was $9.2 million.

Capital Expenditure Program

The Gas Transmission and Storage Operations segment's capital expenditure
program was $120.5 million in 2003 and is projected to be approximately $138.5
million in 2004. New business initiatives totaled approximately $16.2 million in
2003. Only $3.1 million of new business expenditures in 2004 are currently
budgeted excluding any capital requirements for the proposed Millennium project.
The remaining expenditures are primarily for modernizing and upgrading
facilities and complying with the requirements of the U.S. Department of
Transportation's (DOT) recently issued Integrity Management Rule. The DOT
Integrity Management Rule requires that high consequence areas on transmission
lines be assessed and remediated, if required, within a 10-year period beginning
December 2002. Compliance will entail extensive assessment, including pipeline
modifications to allow for testing devices, and facility replacement depending
on test results.

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 State provides service
in New Hampshire, Maine and Massachusetts.

Throughput for the Gas Transmission and Storage Operations segment totaled
1,238.9 MDth for 2003, compared to 1,314.3 MDth in 2002. The decrease of 75.4
MDth was primarily due to lower deliveries to dual fueled electric power
generators, which chose not to run on the high priced gas experienced throughout
2003. Also, contributing to the decrease was the continued decline of offshore
natural gas production.

Throughput for the Gas Transmission and Storage Operations segment totaled
1,314.3 MDth for 2002, compared to 1,241.3 MDth in 2001. The increase of 73.0
MDth reflected slightly colder weather in 2002 and an increase in market demand.

37

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

NISOURCE INC.
GAS TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)

Net Revenues

Net revenues were $837.3 million for 2003, a decrease of $37.1 million from
2002. The decrease was primarily due to $9.3 million of lower interruptible
service revenues and $10.4 million of lower firm service revenues. The decline
in interruptible revenues was due to higher use of capacity by firm customers
resulting in less capacity available for interruptible services. Firm service
revenues were reduced due to actions taken to alleviate late season
deliverability limitations in the pipeline's eastern storage fields. The
limitations resulted from the cumulative effect of facility outages that
restricted eastern storage field inventory, a work stoppage that extended the
outages and above-normal demand on storage withdrawals due to sustained cold
weather. In addition, storage and transportation revenues decreased $13.5
million primarily due to reduced deliveries to power generating facilities.

Net revenues were $874.4 million for 2002, a decrease of $9.2 million from 2001.
The decrease was primarily due to an $8.5 million reduction in gains on the
sales of storage base gas that occurred in the 2002 period compared to the 2001
period.

Operating Income

Operating income of $398.8 million in 2003 increased $0.5 million from 2002. The
$37.1 million decline in revenues discussed above was offset by a $12.5 million
reduction in employee-related and administrative expense, an improvement to
income of $11.0 million based on a decrease in estimated environmental
expenditures, and a $6.6 million reversal of a litigation reserve relating to a
lawsuit that was settled in the second quarter of 2003. The 2002 period was also
favorably impacted a reduction in a reserve for environmental expenditures of
$10.0 million, a $10.0 million reduction in reserves related to unaccounted-for
gas, offset by $14.8 million of increased expenses related to NiSource's
reorganization initiatives and other employee-related costs and $8.7 million
related to the recognition of a reserve related to a long-term note receivable.

Operating income of $398.3 million in 2002 increased $49.3 million from 2001.
The increase was due primarily to the effects of discontinuing the amortization
of $50.3 million of goodwill, a reduction in a reserve for environmental
expenditures of $10.0 million, a $10.0 million reduction in reserves related to
unaccounted-for gas and lower employee-related and support services expenses
approximating $13.6 million. The favorable impacts were partly offset by $8.5
million from lower gains on the sales of storage base gas that occurred in the
2002 period, compared with the 2001 period, expenses related to NiSource's
reorganization initiatives totaling $14.8 million and $8.7 million related to
the recognition of a reserve related to a long-term note receivable.

38

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 be
affected by fundamental changes., that will impact Electric Operations'
structure and profitability. Notwithstanding those changes, competition within
the industry will create opportunities to compete for new customers and
revenues. Management has taken steps to improve operating efficiencies in this
changing environment and improve the transmission interconnections with
neighboring electric utilities.

39

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

NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)

The economic situation in the steel and steel-related industries continues to
have an impact on electric sales. The Indiana facilities of LTV Corporation
(LTV) and Bethlehem Steel, which declared bankruptcy, were acquired by
International Steel Group (ISG) in early 2002. The steel sector continues to
show improvement, with a 6% improvement in sales for 2003 over 2002. The
acquisitions of Bethlehem Steel and National Steel by ISG and U.S. Steel,
respectively, have been completed.

Restructuring

During the third quarter of 2002, NiSource carried out a new reorganization
initiative, which resulted in the elimination of approximately 400 positions
throughout all NiSource segments mainly affecting executive and other
management-level employees. During 2002, Electric Operations accrued
approximately $2.5 million of salaries and benefits associated with the
reorganization initiative. Payments of $0.6 million were made in 2003 in respect
of the reorganization initiatives mentioned above. Additionally, during 2003,
the restructuring reserve was decreased by $0.1 million related to previous
reorganization initiatives. The restructuring program for Electric Operations is
substantially complete with $0.7 million remaining of restructuring liability at
December 31, 2003.

Regulatory Matters

During 2002, Northern Indiana settled matters related to an electric rate
review. On September 23, 2002, the IURC issued an order adopting most aspects of
the settlement. The order approving the settlement provides that electric
customers of Northern Indiana will receive bill credits of approximately $55.1
million each year, for a cumulative total of $225 million, for the minimum
49-month period, beginning on July 1, 2002. The order also provides that 60% of
any future earnings beyond a specified cap will be retained by Northern Indiana.
Credits amounting to $52.0 million were recognized for electric customers in
2003. The order adopting the settlement was appealed to the Indiana Court of
Appeals by both the Citizens Action Coalition of Indiana and fourteen
residential customers. On October 14, 2003, the Appeals Court upheld the IURC's
approval of the settlement. The Citizens Action Coalition of Indiana and the
fourteen residential customers have filed a petition for transfer to the Supreme
Court of Indiana.

Northern Indiana submitted its quarterly fuel adjustment clause (FAC) filing for
the twelve-month period ended September 30, 2002, which included a calculation
for the sharing of earnings in excess of allowed earnings as outlined in the
IURC order regarding the electric rate review settlement. The IURC issued an
order related to the filing on January 29, 2003 rejecting Northern Indiana's
sharing calculation, which prorated the amount to be shared with the customers
based on the amount of time the rate credit, was in effect during the
twelve-month period. Northern Indiana filed a request for a rehearing and
reconsideration of the order. On March 12, 2003, the IURC denied Northern
Indiana's request and the appropriate amount has been refunded to customers.

On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy
Corporation established terms for joining the Midwest Independent System
Operator (MISO) through participation in an independent transmission company
(ITC). The MISO arrangements were filed with the FERC, and on July 31, 2002, the
FERC issued an order conditionally approving these arrangements. On November 5,
2002, the ITC signed an agreement with MISO. At its April 30, 2003 meeting, FERC
approved the transfer of functional control of Northern Indiana's transmission
system to the ITC and issued an order addressing the pricing of electric
transmission. An IURC order approving the transfer of functional control of the
transmission system to the ITC was issued on September 24, 2003. An uncontested
settlement that authorized the reimbursement of $7.4 million to Northern Indiana
for incurred costs was approved by the FERC on July 31, 2003. This reimbursement
was received on September 30, 2003. Functional control was transferred to the
ITC and MISO on October 1, 2003.

As part of Northern Indiana's use of MISO's transmission service, Northern
Indiana will incur new categories of transmission charges based upon MISO's
FERC-approved tariff. One of the new categories of charges, Schedule 10, relates
to the payment of administrative charges to MISO for its continuing management
and operations of the transmission system. Northern Indiana filed a petition on
September 30, 2003, with the IURC seeking approval to establish accounting
treatment for the deferral of the Schedule 10 charges from MISO. A hearing at
the IURC is scheduled for March 15, 2004.

40

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

NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)

The MISO has initiated the Midwest Market Initiative (MMI), which will develop
the structures and processes to be used to implement an electricity market for
the MISO region. This MMI proposes non-discriminatory transmission service,
reliable grid operation, and the purchase and sale of electric energy in a fair,
efficient and non-discriminatory manner. MISO filed detailed tariff information,
with a planned initial operation date of March 31, 2004. However, in October
2003, MISO petitioned FERC to withdraw this tariff filing. FERC approved the
withdrawal and has provided guidance to MISO as to how it should proceed in the
future. It is now expected that MISO will file a new tariff application with
FERC and will delay the initial operation date to December 1, 2004. Northern
Indiana and TPC are actively pursuing roles in the MMI. At the current time,
management believes that the MMI will change the manner in which Northern
Indiana and TPC conducts their electric business; however, at this time
management cannot determine the impact the MMI will have on Northern Indiana or
TPC.

Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the fuel adjustment clause (FAC). The FAC provides
for costs to be collected if they are below a negotiated cap. If costs exceed
this cap, Northern Indiana must demonstrate that the costs were prudently
incurred to achieve approval for recovery. A group of industrial customers
challenged the manner in which Northern Indiana applied costs associated with a
specific interruptible sales tariff. An estimated refund liability was recorded
in the first quarter of 2003. A settlement was reached with the customers and
Northern Indiana recorded the full costs of the settlement. As a result of the
settlement, the industrial customers challenge was withdrawn and dismissed in
January 2004. In addition, as a result of the settlement, Northern Indiana has
sought and received approval by the IURC to reduce the charges under the
interruptible sales tariff. This reduction will remain in effect until the Dean
H. Mitchell Generating Station (Mitchell Station) has been returned to service.

Currently, Northern Indiana is reviewing options to meet the electric needs of
its customers. This review includes an assessment of Northern Indiana's oldest
generating station units and various options regarding the return of the
Mitchell Station, constructed in the early 1950's, to service in the second half
of 2004. Northern Indiana has requested proposals for outside companies to
provide power under varying terms and conditions. These proposals are being
evaluated. In February 2004, the city of Gary announced an interest to acquire
the land on which the Mitchell Station is located for economic development,
including a proposal to increase the length of the runways at the Gary
International Airport. Northern Indiana expects to discuss the proposal to
acquire the land with the city of Gary in the near future. To date, the city has
not commenced any legal proceedings.

In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). The ECT was approved by the IURC on November
26, 2002. Under the ECT Northern Indiana will be able to recover (1) allowance
for funds used during construction and a return on the capital investment
expended by Northern Indiana to implement Indiana Department of Environmental
Management's nitrogen oxide State Implementation Plan through an Environmental
Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and
depreciation expenses once the environmental facilities become operational
through an Environmental Expense Recovery Mechanism (EERM). The IURC order was
appealed to the Indiana Court of Appeals by the Citizens Action Coalition of
Indiana, where it was upheld by the Court on March 9, 2004. The Citizens Action
Coalition of Indiana has 30 days from the date of that decision to petition the
Court of Appeals for rehearing or the Supreme Court of Indiana for transfer of
the case to that court. Under the Commission's November 26, 2002 order, Northern
Indiana is permitted to submit filings on a semi-annual basis for the ECRM and
on an annual basis for the EERM. Northern Indiana made its initial filing of the
ECRM, ECR-1, in February 2003 for capital expenditures of $58.4 million. On
April 30, 2003, the IURC issued an order approving the ECRM filing, providing
for the collection of funds expended during construction and a return on the
capital investment through increased rates beginning with the May 2003 customer
bills. Through December 31, 2003 the ECRM revenues amounted to $5.2 million. On
August 1, Northern Indiana filed ECR-2 for capital investments of $120.0
million. This petition was approved by the IURC on October 1, 2003. The initial
filing of the EERM was filed with the most recent semi-annual filing of the ECT
in February 2004, which included a filing of the ECR-3 for capital investments
of $194.1 million and an EERM amount of $1.9 million. Over the timeframe
required to meet the environmental standards, Northern Indiana anticipates a
total capital investment amounting to approximately $274.2 million. On February
4, 2004, the IURC approved Northern Indiana's latest compliance plan with the
estimate of $274.2 million.

41

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

NISOURCE INC.
ELECTRIC OPERATIONS (CONTINUED)

Environmental Matters

Currently, various environmental matters impact Electric Operations segment. As
of December 31, 2003, a reserve has been recorded to cover probable
environmental response actions. Refer to Footnote 17G "Environmental Matters" in
the notes to the consolidated financial statements, for additional information
regarding environmental matters for the Electric Operations segment.

Capital Expenditure Program

The Electric Operations segment's capital expenditure program was $225.1 million
in 2003 and is projected to be approximately $144.7 million in 2004.
Expenditures for 2003 included improvements related to the operational integrity
of generation, transmission and distribution assets, expenditures related to
environmental compliance (NOx reduction), and additions to electric distribution
systems related to new business. Estimated expenditures for 2004 are
approximately $26.4 million for the NOx reduction program. The remaining
expenditures are for new business initiatives and maintenance programs.

Sales

Electric Operations sales were 18,439.2 gwh for the year 2003, a decrease of
336.7 gwh compared to 2002. The decrease in sales resulted from cooler weather
during the summer cooling season, partially offset by increases in non-weather
related usage and increased customer count.

Electric Operations sales for 2002 of 18,775.9 gwh increased 2,464.6 gwh
compared to 2001 due primarily to 27% warmer weather during the summer cooling
season.

Net Revenues

Electric Operations net revenues were $728.6 million for 2003, a decrease of
$39.8 million from 2002, primarily as a result of $24.0 million in additional
credits issued representing a full year of credits pertaining to the IURC
electric rate review settlement and the unfavorable impact of cooler weather of
$21.9 million. These decreases were partially offset by increases in
non-weather-related usage and customer growth.

Electric Operations net revenues were $768.4 million for 2002, a decrease of
$18.5 million from 2001, primarily as a result of $28.1 million in credits
issued pertaining to the IURC electric rate review settlement and $5.2 million
from decreased wholesale and wheeling net revenues. The unfavorable variance was
partially offset by $14.8 million from warmer weather during the summer cooling
season as compared to 2001.

Operating Income

Operating income for 2003 was $267.5 million, a decrease of $54.8 million from
2002. The decrease was primarily a result of the above-mentioned decreases in
revenues, increased pension and post-retirement expenses of $18.7 million and
increased property tax expense of $9.6 million, partially offset by decreased
administrative and employee related expenses of $12.3 and lower uncollectible
accounts receivable expense of $4.6 million

Operating income for 2002 was $322.3 million, a decrease of $18.4 million from
2001. The decrease was primarily a result of $28.1 million in credits issued
pertaining to the IURC electric rate review settlement and $5.2 million from
decreased wholesale and wheeling revenues, partially offset by $14.8 million
from the favorable impact of warmer weather during the summer cooling season.

42

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

NISOURCE INC.
OTHER OPERATIONS

Sale of PEI Assets

On October 20, 2003, NiSource sold all of the steel-related, "inside-the-fence"
assets of its subsidiary PEI, to Private Power. The sale included six PEI
operating subsidiaries and the name "Primary Energy". Private Power paid
approximately $325.4 million, comprised of $113.1 million in cash and the
assumption of debt-related liabilities and other obligations. The assumption of
such liabilities and the after tax cash proceeds from the sale, reduced
NiSource's debt by $273.6 million, of which $67.3 million was off balance sheet.
NiSource has accounted for the assets sold as discontinued operations and has
adjusted periods after 1999 accordingly.

Midtex Gas Storage Company, LLP.

On November 26, 2003, NiSource sold its interest in Midtex Gas Storage Company,
LLP for approximately $15.8 million and the assumption, by the buyer, of $1.7
million in debt. In the fourth quarter of 2003, NiSource recognized a pre-tax
gain of $7.5 million and an after tax gain of $4.4 million related to this sale.

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 operated an underground line locating and marking
service in ten midwestern states. In the first quarter of 2002, NiSource
recognized an after-tax gain of $12.5 million related to the sale. The gain on
the sale was reflected in Corporate.

PEI Holdings, Inc.

WHITING CLEAN ENERGY. PEI's Whiting Clean Energy project at BP's Whiting,
Indiana refinery was placed in service in 2002. Initially, the facility was not
able to deliver steam to BP to the extent originally contemplated without plant
modifications. Whiting Clean Energy has commenced an arbitration proceeding to
seek recovery of damages from the engineering, procurement and construction
contractor. Whiting Clean Energy is also pursuing recovery from the insurance
provider for construction delays and necessary plant modifications. The
contractor has asserted that it fully performed under its contract and is
demanding payment of the full contract price plus additional amounts for
remediation.

PEI estimates that the facility will operate at a loss in the near term based on
the current market view of forward pricing for gas and electricity. For 2003,
the after-tax loss was approximately $30.0 million and the expected 2004
after-tax loss is expected to be similar to 2003 based on a similar market for
gas and electricity. 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. Because of the expected losses from this
facility and decreases in estimated forward pricing for electricity versus
changes in gas prices, an impairment study was performed in the first quarter of
2003 on this facility in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The study indicated that, at that
time, no impairment was necessary.

43

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

NISOURCE INC.
OTHER OPERATIONS (CONTINUED)

However, the study includes many estimates and assumptions for the 40-year
estimated useful life of the facility. Changes in these estimates and
assumptions, such as forward prices for electricity and gas, volatility in the
market, etc., could result in a situation where total undiscounted net revenues
are less than the carrying value of the facility, which would result in a
write-down that could be significant.

During the second quarter of 2003, PEI's wholly owned subsidiary Whiting Energy,
LLC purchased the Whiting Clean Energy plant from a special purpose lessor
entity and the facility is accounted for as an owned asset.

Environmental Matters

Currently, various environmental matters impact Other Operations segment. As of
December 31, 2003, a reserve has been recorded to cover probable environmental
response actions. Refer to Footnote 17G "Environmental Matters" in the notes to
the consolidated financial statements, for additional information regarding
environmental matters for the Other Operations segment.

Net Revenues

For the year ended 2003, net operating revenues were $16.0 million, an increase
of $2.2 million from 2002. The increase in net revenues was primarily due to
losses of $11.7 million recorded in 2002 associated with NiSource's decision to
scale back its gas trading business, slightly offset by losses of $1.6 million
recorded in 2003 associated with the power trading business as a result of lower
volatility in the market and decreased volumes sold and a decrease in Whiting
Clean Energy net revenues of $7.0.

For the year ended 2002, net operating revenues were $13.8 million, a decrease
of $48.4 million from 2001. The decrease in net revenues primarily resulted from
NiSource's decision to scale back its gas trading business, the change in value
of NiSource's gas and power marketing portfolios and the sale of SM&P.

All results reflect power trading activities on a net revenue basis. The 2001
and half of the 2002 results related to gas trading activities are reflected on
a net basis. Beginning July 1, 2002 NiSource exited the gas trading business.
All gas marketing sales at NiSource after June 30, 2003 were reported on a gross
basis pursuant to EITF 02-03. . (Refer to Footnote 5 for further information on
EITF 02-03.)

Operating Income (Loss)

The Other Operations segment reported an operating loss of $43.8 million in 2003
compared to an operating loss of $43.1 million in the 2002 period. The 2003
period included a gain on the sale of NiSource's interest in Mid-Tex Gas
Storage, LLP of $7.5 million, a reversal of a litigation reserve of $7.0
relating to a lawsuit that was settled in the fourth quarter of 2003 and an
increase in operating losses at Whiting Clean Energy. 2002 operating expenses
were lower as a result of a reduction in estimated sales taxes of $11.4 million
that occurred in 2002 related to sales of natural gas to customers of a
subsidiary previously engaged in the retail and wholesale gas marketing
business, mostly offset by expenses of $9.8 million associated with the July 1,
2002 sale of a portfolio of TPC gas marketing contracts.

The Other Operations segment reported an operating loss of $43.1 million for
2002, an improvement of $26.5 million compared to the 2001 period. The
improvement was primarily attributable to reduced losses related to NiSource's
other non-core subsidiaries, a $15.5 million litigation settlement related to
MHP affecting the 2001 period, a $11.4 million reduction in reserves for
estimated sales taxes of a subsidiary previously engaged in the gas marketing
business, consolidation of facilities of $11.3 million resulting from
reorganization initiatives and a $3.1 million gain on the sale of contracts
associated with scaling back the energy trading operations. The improvements
were partly offset by an increase of $13.9 million in depreciation and operating
expenses associated with Whiting Clean Energy and a decrease of $12.9 million in
the value of the power trading portfolio.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures about Market Risk are reported in Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk Disclosures."

44

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

NISOURCE INC.

45

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.

INDEPENDENT AUDITORS' REPORT

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, 2003 and 2002, 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, 2003. Our audits also included the financial
statement Schedules I & II. These consolidated financial statements and
financial statement schedules are the responsibility of NiSource's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NiSource Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.

As explained in Note 1P to the consolidated financial statements, effective
January 1, 2001, NiSource Inc. adopted Statement of Financial Accounting
Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. As explained in Notes 1H and 5 to the consolidated
financial statements, effective January 1, 2002, NiSource adopted SFAS 142,
"Goodwill and Other Intangible Assets." As explained in Notes 1I and 5 to the
consolidated financial statements, effective January 1, 2003, NiSource Inc.
adopted EITF Issue No. 02-03, "Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities." Amounts for the years 2001 and 2002 have been
reclassified in the accompanying consolidated statement of income to conform to
this new method of presentation. As explained in Note 5 to the consolidated
financial statements, effective January 1, 2003, NiSource Inc. adopted SFAS 143,
"Accounting for Asset Retirement Obligations."

DELOITTE & TOUCHE LLP
Chicago, Illinois
March 11, 2004

46

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.

47

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.

48

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.

49

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.

50

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.

51

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
STATEMENTS OF CONSOLIDATED LONG-TERM DEBT

52

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
STATEMENTS OF CONSOLIDATED LONG-TERM DEBT (CONTINUED)

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)

55

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. COMPANY STRUCTURE AND PRINCIPLES OF CONSOLIDATION. NiSource Inc.
(NiSource), a Delaware corporation, is a 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. 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 holding company registered under
the Public Utility Holding Company Act of 1935, as amended. NiSource derives
substantially all of its revenues and earnings from the operating results of its
15 direct subsidiaries.

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. Except where noted above and in the event
where NiSource has significant influence, investments with less than a 20%
interest are accounted for under the cost method. Certain amounts in 2002 and
2001 have been reclassified to conform with the current year 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
effects of the various long-term incentive compensation plans and the forward
equity contracts associated with the Stock Appreciation Income Linked
Securities(SM) (SAILS(SM)) and the Corporate Premium Income Equity Securities
(Corporate PIES).

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, CASH EQUIVALENTS, AND RESTRICTED CASH. NiSource considers all
investments with original maturities of three months or less to be cash
equivalents. NiSource reports amounts deposited in brokerage accounts for margin
requirements in the restricted cash balance sheet caption. In addition, NiSource
has amounts deposited in trust to satisfy requirements for the provision of
various property, liability, workers compensation, and long-term disability
insurance, which is classified as restricted cash and disclosed as an operating
cash flow on the statement of cash flows..

D. BASIS OF ACCOUNTING FOR RATE-REGULATED SUBSIDIARIES. NiSource's
rate-regulated subsidiaries follow the accounting and reporting requirements of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS No. 71). 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 it is probable that such rates can be charged and
collected. 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.

56

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 was
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 unable
to continue to apply the provisions of SFAS No. 71, NiSource would be required
to apply the provisions of SFAS No. 101, "Regulated Enterprises - Accounting for
the Discontinuation of Application of Financial Accounting Standards Board
(FASB) Statement No. 71." In management's opinion, NiSource's regulated
subsidiaries will be subject to SFAS No. 71 for the foreseeable future.

Regulatory assets and liabilities were comprised of the following items:

Regulatory assets of approximately $488.6 million are not presently included in
rate base and consequently are not earning a return on investment. These
regulatory assets are being recovered as components of cost of service over a
remaining life of up to 11 years. Regulatory assets of approximately $153.5
million require specific rate action. NiSource reclassified its cost of removal
as of December 31, 2002 from accumulated depreciation to regulatory liabilities
and other removal costs on the consolidated balance sheet and, upon adoption of
SFAS No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143),
recharacterized the liability as a regulatory liability as of December 31, 2003.

57

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. UTILITY PLANT AND OTHER PROPERTY AND RELATED DEPRECIATION AND MAINTENANCE.
Property, plant and equipment (principally utility plant) are stated at cost.
The rate-regulated subsidiaries record depreciation using composite rates on a
straight-line basis over the remaining service lives of the electric, gas and
common properties.

For rate-regulated companies, an allowance for funds used during construction
(AFUDC) is capitalized on all classes of property except organization, land,
autos, office equipment, tools and other general property purchases. The
allowance is applied to construction costs for that period of time between the
date of the expenditure and the date on which such project is completed and
placed in service. The pre-tax rate for AFUDC was 2.0% in 2003, 2.8% in 2002,
and 6.6% in 2001. The decline in the 2003 AFUDC rate, as compared with 2002, was
due to lower short-term interest rates and the use of short-term borrowings to
fund construction efforts.

The depreciation provisions for utility plant, as a percentage of the original
cost, for the periods ended December 31, 2003, 2002 and 2001 were as follows:

The Whiting Clean Energy facility owned by PEI Holdings, Inc. (PEI), a
consolidated subsidiary of NiSource, is being depreciated on a straight-line
basis over a 40-year useful life.

Generally, NiSource's 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,
net of salvage, is charged to the accumulated provision for depreciation.

F. CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of units 17 and
18 at the R. M. Schahfer Generating Station, 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), pending the inclusion of the cost of each unit in rates. Such
carrying charges and deferred depreciation are being amortized over the
remaining service 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's) 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 October
31, 2004. The revised depreciation rates are lower than those which 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 2003 had Columbia of
Ohio not been subject to rate regulation is $36.6 million, a $22.1 million
increase over the $14.5 million reflected in rates. The amount of depreciation
that would have been recorded for 2002 had Columbia of Ohio not been subject to
rate regulation is $35.0 million, a $21.6 million increase over the $13.4
million reflected in rates. The amount of depreciation that would have been
recorded for 2001 had Columbia of Ohio not been subject to rate regulation was
$34.9 million, a $22.3 million increase over the $12.6 million reflected in
rates. The balance of the regulatory asset was $103.0 million and 85.3 million
as of December 31, 2003 and 2002, respectively.

G. AMORTIZATION OF SOFTWARE COSTS. External and 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 Statement of Position (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. NiSource
amortized $12.0 million in 2003, $9.1 million in 2002 and $9.5 million in 2001
related to software costs.

58

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

H. INTANGIBLE ASSETS. Substantially all goodwill relates to the excess of cost
over the fair value of the net assets acquired in the Columbia acquisition.
Originally, goodwill was being amortized over forty years, but beginning January
1, 2002, goodwill amortization was discontinued pursuant to SFAS No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142). The change in goodwill
from December 31, 2002 to 2003 was a result of adjustments relating to income
taxes. Pursuant to the requirements of SFAS No. 142, NiSource has aggregated the
subsidiaries related to the acquisition of Columbia into two distinct reporting
units, one within the Gas Distribution Operations segment and one within the
Transmission and Storage Operations segment, for the purpose of testing goodwill
for impairment. NiSource completes its analysis of potential goodwill impairment
annually at June 30. The results in 2003 indicated that no impairment charge was
required.

Franchise right intangible assets apart from goodwill were identified as part of
the purchase price allocations associated with the acquisition of Bay State Gas
Company (Bay State), a wholly owned subsidiary of NiSource, and its
subsidiaries. These amounts were $475.2 million and $492.8 million, net of
amortization of $69.0 million and $53.3 million at December 31, 2003, and 2002,
respectively, and are being amortized over forty years from the date of
acquisition. In addition, NiSource had approximately $51.2 million and $57.3
million of other intangible assets recorded at December 31, 2003 and 2002,
respectively, which reflected the additional minimum liability associated with
the unrecognized service cost of the pension plans pursuant to SFAS No. 87,
"Employers' Accounting for Pensions" (SFAS No. 87).

I. REVENUE RECOGNITION. With the exception of amounts recognized for energy
trading activities, 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 estimates 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.
Changes in the fair values of energy trading contracts are recognized in
revenues net of associated costs. Gains and losses relating to non-trading
derivatives designated as cash flow or fair value hedges are reported on a gross
basis, upon settlement, in the same income statement category as the related
hedged item. Normal purchase or sale contracts are reported on a gross basis
upon settlement and recorded in the corresponding income statement category
based on commodity type

Beginning with financial statements issued for the first quarter 2003, revenues
associated with trading activities are displayed net of related costs pursuant
to Emerging Issues Task Force Issue (EITF) No. 02-03 "Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities" (EITF No. 02-03),
whether or not resulting in physical delivery. All periods have been adjusted to
conform to the net presentation. (Refer to Note 5 for further information.)

J. 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 outcomes of the
proceedings. No provisions are made when, in the opinion of management, the
facts and circumstances preclude a reasonable estimate of the outcome.

K. 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 these programs, which are based upon the
purchasers' level of investment and borrowing costs, are charged to other income
in the accompanying statements of consolidated income.

L. 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.

59

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision for
adjustment 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
costs in a given three-month period will be included in a future filing. The
differences are recognized in income when rates are adjusted to accommodate the
differences. Northern Indiana records any under-recovery or over-recovery as a
current regulatory asset or 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.

N. GAS COST ADJUSTMENT CLAUSE. All of NiSource's Gas Distribution Operations
subsidiaries except for Northern Indiana defer most 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. Northern Indiana adjusts its revenues for differences between
amounts collected from customers and actual gas costs and adjusts future
billings for such deferrals on a basis consistent with applicable state-approved
tariff provisions

O. 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. The application of different methodologies is due to the acquisition
of Bay State. Bay State uses the weighted average cost of gas method, as
approved by state regulators, in setting its rates while both Northern Indiana
and the Columbia subsidiaries use the LIFO methodology when setting rates in
their respective jurisdictions. Inventory valued using LIFO was $378.2 million
and $230.2 million at December 31, 2003, and 2002, respectively. Based on the
average cost of gas using the LIFO method, the estimated replacement cost of gas
in storage at December 31, 2003 and December 31, 2002, exceeded the stated LIFO
cost by $220.1 million and $281.6 million, respectively. Inventory valued using
the weighted average methodology was $51.2 million at December 31, 2003 and
$25.1 million at December 31, 2002.

P. ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activity" (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
at fair value, unless such contracts are exempted as normal under the provisions
of the standard. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and resulting designation.
NiSource adopted SFAS No. 133 effective January 1, 2001, resulting in a
cumulative after-tax increase to net income of approximately $4.0 million and an
after-tax reduction to other comprehensive income of approximately $17.0
million.

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, or (b) a hedge of the exposure
to variable cash flows of a forecasted transaction. 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 recognized currently in earnings. As of
December 31, 2003, the ineffectiveness on NiSource's hedged instruments was
immaterial.

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 corresponding to a cash flow hedge is not expected to occur, the
accumulated gains or losses on the derivative 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. 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 accommodated in rates.

60

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 evaluates the contracts of its trading operations in
accordance with the criteria for derivative contracts under SFAS No. 133.
Through 2002, trading contracts not meeting the criteria to be accounted for as
derivatives under SFAS No. 133 were recorded at fair value under EITF 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 resulting
gains and losses resulting from marking the contracts to fair value are included
currently in earnings. During an October 25, 2002 EITF meeting, EITF No. 98-10
was rescinded effective immediately for contracts entered into after that date,
and beginning January 1, 2003 for existing trading contracts. (Refer to Note 5
for further information.)

Q. INCOME TAXES AND INVESTMENT TAX CREDITS. NiSource records income taxes to
recognize full interperiod tax allocations. Under the liability method, 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 tax basis 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.

R. ENVIRONMENTAL EXPENDITURES. NiSource accrues for costs associated with
environmental remediation obligations when the incurrence of such costs is
probable and the amounts can be reasonably estimated, regardless of when the
expenditures are actually 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.

In addition, Northern Indiana received approval from the IURC in 2003 to recover
costs associated with environmental compliance programs for nitrogen oxide
pollution-reduction equipment at the company's generating stations. (See Note 6
for further information.)

S. STOCK OPTIONS AND AWARDS. SFAS 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 the fair value of
stock-based compensation at the date of grant over the related vesting period.
NiSource continues to apply the intrinsic value method of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No.
25), for awards granted under its stock-based compensation plans. The following
table illustrates the effect on net income and EPS as if NiSource had applied
the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.

61

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

T. EXCISE TAXES. NiSource accounts for excise taxes that are customer
liabilities by separately stating on its invoices the tax to its customers and
recording amounts invoiced as liabilities payable to the applicable taxing
jurisdiction. These types of taxes, comprised largely of sales taxes collected,
are presented on a net basis affecting neither revenues nor cost of sales.
NiSource accounts for other taxes for which it is liable by recording a
liability for the expected tax with a corresponding charge to "Other Taxes"
expense.

U. EQUITY FORWARD CONTRACTS. NiSource accounts for equity forward contracts on
its own common shares as permanent equity consistent with the provisions of EITF
Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock" (EITF No. 00-19).
Accordingly, such contracts are recorded in equity at fair value at the date of
inception and changes in fair value are not recognized as long as the contracts
continue to be classified as equity.

2. ACQUISITIONS

NiSource accounted for the acquisition of Columbia in accordance with the
purchase method of accounting. 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. The
goodwill was being amortized on a straight-line basis over forty years through
2001; however, the amortization was discontinued effective January 1, 2002
pursuant to the adoption of SFAS No. 142. The remaining goodwill balances
related to the Columbia acquisition were $3,675.1 million and $3,692.2 million
at December 31, 2003 and 2002, respectively.

3. RESTRUCTURING ACTIVITIES

Since 2000, NiSource has implemented restructuring initiatives to streamline its
operations and realize efficiencies from the acquisition of Columbia. The
restructuring activities were primarily associated with reductions in headcount
and facility exit costs. NiSource recognized a restructuring charge, net of
prior initiative adjustments, of $22.3 million in 2001.

During 2002, NiSource developed a new reorganization initiative, which resulted
in the elimination of approximately 400 positions throughout the organization
mainly affecting executive and other management-level employees. NiSource
recognized a restructuring charge, net of prior initiative adjustments, of
approximately $28.0 million during 2002. As of December 31, 2003, 397 of the
approximately 400 employees were terminated.

For all of the plans, a total of approximately 1,600 management, professional,
administrative and technical positions have been identified for elimination. As
of December 31, 2003, approximately 1,550 employees had been terminated, of whom
approximately 250 were terminated during 2003. At December 31, 2003 and 2002,
the consolidated balance sheets reflected liabilities of $19.5 million and $49.6
million related to the restructuring plans, respectively. During 2003 and 2002,
payments of $22.6 million and $36.6 million were made in association with the
restructuring plans, respectively. Additionally, during 2003, the restructuring
plan liability was reduced by $7.5 million due to a reduction in estimated
expenses related to previous reorganization initiatives. The reduction in the
estimated liability was reflected in operation and maintenance expense.

4. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

On November 26, 2003, NiSource sold its interest in Midtex Gas Storage Company,
LLP for approximately $15.8 million and the assumption, by the buyer, of $1.7
million in debt. In the fourth quarter of 2003, NiSource recognized an after tax
gain of $4.4 million related to this sale.

On October 20, 2003, NiSource sold all of the steel-related, "inside-the-fence"
assets of its subsidiary PEI Holdings, Inc. (PEI), to Private Power, LLC
(Private Power). The sale included six PEI operating subsidiaries and the name
"Primary Energy". Private Power paid approximately $325.4 million, comprised of
$113.1 million in cash and the assumption of debt-related liabilities and other
obligations. The assumption of such liabilities and the after tax cash proceeds
from the sale reduced NiSource's debt by $206.3 million. NiSource has accounted
for the assets sold as discontinued operations and has adjusted all periods
presented accordingly. During 2003, NiSource recognized an after-tax loss of
$29.1 million related to the sale.

62

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On September 30, 2003, NiSource sold Columbia Service Partners, Inc. (Columbia
Service Partners), a subsidiary of Columbia for approximately $22.5 million. In
the third quarter of 2003, NiSource recognized an after-tax gain of $10.6
million related to the sale. Columbia Service Partners had been reported as
assets held for sale.

On August 29, 2003, NiSource sold its exploration and production subsidiary,
Columbia Energy Resources, Inc. (CER), to a subsidiary of Triana Energy Holdings
(Triana). Under the CER sales agreement, Triana , an affiliate of Morgan Stanley
Dean Witter Capital Partners IV, L.P. (MSCP), purchased all of the stock of CER
for $330.0 million, plus the assumption of obligations to deliver approximately
94.0 billion cubic feet (Bcf) of natural gas pursuant to existing forward sales
contracts. The sale transferred 1.1 trillion cubic feet of natural gas reserves.
Approximately $220.0 million of after-tax cash proceeds from the sale were used
to reduce NiSource's debt. In addition, a $213.0 million liability related to
the forward sales contracts was removed from the balance sheet. On January 28,
2003, NiSource's former subsidiary Columbia Natural Resources, Inc. sold its
interest in certain natural gas exploration and production assets in New York
for approximately $95.0 million. NiSource has accounted for CER as discontinued
operations and has adjusted all periods presented accordingly. During 2003,
NiSource recognized an after-tax loss of $301.2 million related to the sales.

During 2002, NiSource decided to exit the telecommunications business. The
results of operations related to Columbia Transmission Communications
Corporation (Transcom) were displayed as discontinued operations on NiSource's
consolidated income statement and its assets and liabilities were separately
aggregated and reflected as assets and liabilities of discontinued operations on
the consolidated balance sheets in 2002. On September 15, 2003, NiSource's
subsidiary Columbia sold 100% of its shares in Transcom. During 2003, NiSource
recognized an additional after-tax loss of $1.3 million related to the sale.

On April 30, 2002, NiSource sold the water utility assets of the Indianapolis
Water Company and other assets of IWC Resources Corporation and its subsidiaries
to the City of Indianapolis for $540.0 million. The divestiture of the water
utilities was required as part of the U.S. Securities and Exchange Commission
order approving the November 2000 acquisition of Columbia. The water utilities'
operations were reported as discontinued operations through 2002.

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 operated an
underground line locating and marking service in ten midwestern states. In the
first quarter 2002, NiSource recognized an after-tax gain of $12.5 million
related to the sale. SM&P was reported as assets held for sale.

On August 21, 2001, Columbia sold Columbia Propane Corporation and its
subsidiaries to AmeriGas Partners L.P. 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, a diversified petroleum distribution company.

Results from discontinued operations of CER (including the New York State
properties), the six PEI subsidiaries, Transcom and the water utilities are
provided in the following table:

63

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

SFAS NOS. 141 AND 142 -- BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE
ASSETS. In July 2001, the FASB issued SFAS No. 141, "Business Combinations"
(SFAS No. 141), and SFAS No. 142. 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 adoption of SFAS No. 142 on January 1, 2002 resulted in an increase in
operating income of $93.1 million for the year ending December 31, 2002,
reflecting the effects of discontinuing the amortization of goodwill. Net income
would have been $309.3 million, or $1.51 per basic share for 2001 had NiSource
discontinued the amortization of goodwill effective January 1, 2001. NiSource
adopted the provisions of SFAS No. 141 on July 1, 2001.

In addition, NiSource has aggregated the subsidiaries related to the acquisition
of Columbia into two distinct reporting units, one within the Gas Distribution
Operations segment and one within the Transmission and Storage Operations
segment, for the purpose of testing goodwill for impairment. NiSource completed
its analysis of the goodwill impairment test as of June 30, 2003. The results
indicated that no impairment charge was required. NiSource will continue to
complete the goodwill impairment test on an annual basis at June 30.

FASB INTERPRETATION NO. 45 -- GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. In
November of 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Refer to "Other Commitments and Contingencies - Guarantees
and Indemnities" in Note 17D for further discussion of NiSource's guarantees.

64

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SFAS NO. 143 -- ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the
FASB issued SFAS No. 143. SFAS No. 143 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
the cost, thereby increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted, and the capitalized cost is
depreciated over the useful life of the related asset. The rate-regulated
subsidiaries defer the difference between the amount recognized for depreciation
and accretion and the amount collected in rates as required pursuant to SFAS No.
71.

NiSource adopted the provisions of SFAS No. 143 on January 1, 2003, and as a
result an asset retirement obligation liability of $54.3 million was recognized,
of which $43.4 was related to assets sold in 2003. In addition, NiSource
capitalized $41.3 million in additions to plant assets, net of accumulated
amortization, of which $27.1 million was related to assets sold in 2003, and
recognized regulatory assets and liabilities of $1.2 million and $4.6 million,
respectively. NiSource believes that the amounts recognized as regulatory assets
will be recoverable in future rates. The cumulative after-tax effect of adopting
SFAS No. 143 amounted to $8.8 million. Certain costs of removal that have been,
and continue to be, included in depreciation rates and collected in the service
rates of the rate-regulated subsidiaries, did not meet the definition of an
asset retirement obligation pursuant to SFAS No. 143. The amount of the other
costs of removal reflected as a component of NiSource's accumulated depreciation
and amortization was approximately $1.0 billion at December 31, 2003 and 2002
based on rates for estimated removal costs embedded in composite depreciation
rates. NiSource reclassified its cost of removal as of December 31, 2002 from
accumulated depreciation to regulatory liabilities and other removal costs on
the consolidated balance sheet and upon adoption of SFAS No. 143 "Accounting for
Asset Retirement Obligations" recharacterized the liability as a regulatory
liability as of December 31, 2003.

For the twelve months ended December 31, 2003, NiSource recognized accretion
expense of $0.6 million. The asset retirement obligations liability totaled
$11.4 million at December 31, 2003. Had NiSource adopted SFAS No. 143 at the
dates the actual liabilities were incurred, the asset retirement obligations
liability would have been $49.4 million and $45.0 million at December 31, 2001
and 2000, respectively, of which $38.3 million and $34.6 million were related to
assets sold in 2003.

EITF ISSUE NO. 02-03 -- ISSUES INVOLVED IN ACCOUNTING FOR DERIVATIVE CONTRACTS
HELD FOR TRADING PURPOSES AND CONTRACTS INVOLVED IN ENERGY TRADING AND RISK
MANAGEMENT ACTIVITIES AND EITF ISSUE NO. 98-10 (EITF NO. 98-10) - ACCOUNTING FOR
CONTRACTS INVOLVED IN ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES. On October
25, 2002, the EITF reached a final consensus in EITF No. 02-03 that gains and
losses (realized or unrealized) on all derivative instruments within the scope
of SFAS No. 133 should be shown net in the income statement, whether or not
settled physically, if the derivative instruments are held for trading purposes.
For purposes of the consensus, energy trading activities encompass contracts
entered into with the objective of generating profits on, or exposure to, shifts
in market prices. This consensus became effective for financial statements
issued for periods beginning after December 15, 2002. NiSource reevaluated its
portfolio of contracts in order to determine which contracts were required to be
reported net in accordance with the provisions of the consensus and, as a result
recognized equal and offsetting reductions to revenues and cost of sales of
$945.4 million and $2,910.8 million for the years ended December 31, 2002 and
2001 respectively. Accordingly, NiSource's operating income remained unchanged
for all periods presented.

The task force also reached a consensus to rescind EITF No. 98-10 and preclude
mark-to-market accounting for energy trading contracts that are not derivatives
pursuant to SFAS No. 133. The consensus was effective for fiscal periods
beginning after December 15, 2002, for energy trading contracts that existed on
or before October 25, 2002 that remained in effect at the date the consensus was
initially applied (January 1, 2003 for NiSource). Contracts entered into after
October 25, 2002, were analyzed pursuant to a generally accepted accounting
principles hierarchy, excluding EITF No. 98-10. Since NiSource is no longer
involved in gas-related trading activities and has minimal power trading
activities, the rescission of EITF No. 98-10 did not have a material effect on
its results of operations since adoption of the consensus.

65

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FASB INTERPRETATION NO. 46 (REVISED DECEMBER 2003) -- CONSOLIDATION OF VARIABLE
INTEREST ENTITIES. On January 17, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46) FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or is entitled to receive a majority of the entity's residual
returns. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights, or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN 46 also requires various disclosures
about variable interest entities that a company is not required to consolidate
but in which it has a significant variable interest. On December 18, 2003, the
FASB deferred the implementation of FIN 46 to the first quarter of 2004.
Currently, NiSource expects to consolidate certain real estate investments
beginning in the first quarter of 2004. Upon consolidation, NiSource will
increase its assets and liabilities by approximately $50 million.

SFAS NO. 149 -- AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. Effective July 1, 2003, NiSource adopted SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149).
SFAS No. 149 codifies and clarifies financial accounting and reporting for
derivative instruments and hedging activities under SFAS No. 133 primarily in
connection with decisions made by the Derivatives Implementation Group and for
implementation issues raised in the application of SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. SFAS No.
149 did not have a material impact on NiSource's results of operations during
2003. However, the statement could have a significant impact on the number of
contracts that will be marked to market through earnings.

SFAS NO. 150 -- ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. In the second quarter 2003, the
FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" (SFAS No. 150). SFAS No. 150
requires classification of a financial instrument within its scope as a
liability because it embodies an obligation of the issuer. As defined in SFAS
No. 150, an obligation is a conditional or unconditional duty or responsibility
to transfer assets or to issue equity shares. Instruments that fall within the
scope of SFAS No. 150 include mandatorily redeemable financial instruments,
obligations to repurchase an issuer's equity shares by transferring assets and
certain obligations to issue a variable number of shares. SFAS No. 150 is
generally effective for interim periods beginning after June 15, 2003 for
financial instruments created prior to June 1, 2003. For any instruments entered
into or modified after May 31, 2003, the Statement is effective for those
instruments upon consummation or modification. As a result of SFAS No. 150,
NiSource reclassified its mandatory redeemable preferred stock to a non-current
liability in the third quarter of 2003.

EITF ISSUE NO. 03-11 -- REPORTING REALIZED GAINS AND LOSSES ON DERIVATIVE
INSTRUMENTS THAT ARE SUBJECT TO FASB STATEMENT NO. 133 AND NOT "HELD FOR TRADING
PURPOSES" AS DEFINED IN EITF ISSUE NO. 02-03. (EIF NO. 03-11) In August 2003,
the EITF released Issue No. 03-11, which provides guidance on whether to report
realized gains or losses on derivative contracts that settle on a net basis.
Currently, NiSource generally reports contracts requiring physical delivery of a
commodity on a gross basis. EITF No. 03-11 did not have a material impact on
NiSource's results of operations.

FASB STAFF POSITION NO. FAS 106-1 -- ACCOUNTING AND DISCLOSURE REQUIREMENTS
RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF
2003. On December 8, 2003, the President of the United States signed the
Medicare Prescription Drug, Improvement and Modernization Act into law. The Act
introduces a prescription drug benefit under Medicare (Medicare Part D) as well
as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D.
FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," requires presently enacted changes in relevant laws to be
considered in current period measurements of postretirement benefit costs and
the Accumulated Projected Benefit Obligation. However, specific authoritative
guidance on the accounting for the federal subsidy is currently pending, and
NiSource has elected to defer accounting for the effects of this pronouncement
as allowed by this staff position. It is expected that the law and pronouncement
will reduce the effects of the currently high prescription drug trend rates on
NiSource's post-retirement benefits costs and cash flows assuming that
NiSource's post-retirement benefits remain unchanged. However, it is not certain
at this time what effects this law and pronouncement will have on NiSource's
postretirement benefit costs and cash flows.

66

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. REGULATORY MATTERS

On December 17, 2003, the PUCO approved an application by Columbia of Ohio and
other Ohio LDCs to establish a tracking mechanism that will provide for recovery
of current bad debt expense and for the recovery over a five-year period of
previously deferred uncollected accounts receivable. The approval of the tracker
will allow for the recovery of $25.2 million in previously uncollected accounts
receivable for Columbia of Ohio.

Through October 2004, Columbia of Ohio is operating under a regulatory
stipulation approved by the PUCO. On October 9, 2003, Columbia of Ohio and other
parties filed with the PUCO an amended stipulation that would govern Columbia of
Ohio's regulatory framework from November 2004 through October 2010. The
majority of Columbia of Ohio's contracts with interstate pipelines expire in
October 2004, and the amended stipulation would permit Columbia to renew those
contracts for firm capacity sufficient to meet up to 100% of the design peak day
requirements through October 31, 2005 and up to 95% of the design peak day
requirements through October 31, 2010. Among other things, the amended
stipulation would also: (1) extend Columbia of Ohio's Choice(R) program through
October 2010; (2) provide Columbia of Ohio with an opportunity to generate
revenues sufficient to cover the stranded costs associated with the CHOICE(R)
program; and, (3) allow Columbia of Ohio to record post-in-service-carrying
charges on plant placed into service after October 2004, and to defer the
property taxes and depreciation associated with such plant.

On March 11, 2004, the PUCO issued an order that adopted and modified the
stipulation from Columbia Gas of Ohio and a collaborative of parties. The order
extended Columbia of Ohio's CHOICE(R) program. However, the order limited the
time period of the stipulation through December 31, 2007 and declined to
pre-approve the amount of interstate pipeline firm capacity for which Columbia
of Ohio could contract. In addition, the PUCO made other modifications which
would limit Columbia of Ohio's ability to generate additional revenues
sufficient to cover stranded costs, including declining to mandate that natural
gas marketers participating in the CHOICE(R) program obtain 75% of their
interstate capacity directly from Columbia of Ohio and changing the allocation
of revenues generated through off-systems sales. The order allows Columbia of
Ohio to record post-in-service-carrying charges on plant placed in service after
October 2004 and allows the deferral of property taxes and depreciation
associated with such plant. Although this order will have a minimal impact on
2004, NiSource's initial estimate is that this order, if left unchanged, could
potentially reduce operating income by approximately $20 million annually 2005
through 2007. Columbia Gas of Ohio anticipates, consistent with standard
regulatory process, petitioning the commission for rehearing on the components
which have been modified.

During 2002, Northern Indiana settled matters related to an electric rate
review. On September 23, 2002, the IURC issued an order adopting most aspects of
the settlement. The order approving the settlement provides that electric
customers of Northern Indiana will receive bill credits of approximately $55.1
million each year, for a cumulative total of $225 million, for the minimum 49
month period, beginning on July 1, 2002. The order also provides that 60% of any
future earnings beyond a specified cap will be retained by Northern Indiana.
Credits amounting to $52.0 million were recognized for electric customers in
2003. The order adopting the settlement was appealed to the Indiana Court of
Appeals by both the Citizens Action Coalition of Indiana and fourteen
residential customers. On October 14, 2003, the Appeals Court upheld the IURC's
approval of the settlement. The Citizens Action Coalition of Indiana and the
fourteen residential customers have filed a petition for transfer to the Supreme
Court of Indiana.

Northern Indiana submitted its quarterly fuel adjustment clause (FAC) filing for
the twelve-month period ended September 30, 2002, which included a calculation
for the sharing of earnings in excess of allowed earnings as outlined in the
IURC order regarding the electric rate review settlement. The IURC issued an
order related to the filing on January 29, 2003 rejecting Northern Indiana's
sharing calculation, which prorated the amount to be shared with the customers
based on the amount of time the rate credit, was in effect during the
twelve-month period. Northern Indiana filed a request for a rehearing and
reconsideration of the order. On March 12, 2003, the IURC denied Northern
Indiana's request and the appropriate amount has been refunded to customers.

On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy
Corporation established terms for joining the Midwest Independent System
Operator (MISO) through participation in an independent transmission company
(ITC). The MISO arrangements were filed with the FERC, and on July 31, 2002, the
FERC issued an order conditionally approving these arrangements. On November 5,
2002, the ITC signed an agreement with MISO. At its April 30, 2003 meeting, FERC
approved the transfer of functional control of Northern Indiana's transmission
system to the ITC and issued an order addressing the pricing of electric
transmission. An IURC order approving the transfer of functional control of the
transmission system to the ITC was issued on September 24, 2003. An uncontested
settlement that authorized the reimbursement of $7.4 million to Northern Indiana
for incurred costs was approved by the FERC on July 31, 2003. This reimbursement
was received on September 30, 2003. Functional control was transferred to the
ITC and MISO on October 1, 2003.

67

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the FAC. The FAC provides for costs to be
collected if they are below a negotiated cap. If costs exceed this cap, Northern
Indiana must demonstrate that the costs were prudently incurred to achieve
approval for recovery. A group of industrial customers challenged the manner in
which Northern Indiana applied costs associated with a specific interruptible
sales tariff. An estimated refund liability was recorded in the first quarter of
2003. A settlement was reached with the customers and Northern Indiana recorded
the full costs of the settlement. As a result of the settlement, the industrial
customers challenge was withdrawn and dismissed in January 2004. In addition, as
a result of the settlement, Northern Indiana has sought and received approval by
the IURC to reduce the charges under the interruptible sales tariff. This
reduction will remain in effect until the Dean H. Mitchell Generating Station
(Mitchell Station) has been returned to service.

Currently, Northern Indiana is reviewing options to meet the electric needs of
its customers. This review includes an assessment of Northern Indiana's oldest
generating station units and various options regarding the return of the
Mitchell Station, constructed in the early 1950's, to service in the second half
of 2004. Northern Indiana has requested proposals for outside companies to
provide power under varying terms and conditions. These proposals are being
evaluated. In February 2004, the city of Gary announced an interest to acquire
the land on which the Mitchell Station is located for economic development,
including a proposal to increase the length of the runways at the Gary
International Airport. Northern Indiana expects to discuss the proposal to
acquire the land with the city of Gary in the near future. To date, the city has
not commenced any legal proceedings.

In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). The ECT was approved by the IURC on November
26, 2002. Under the ECT Northern Indiana will be able to recover (1) allowance
for funds used during construction and a return on the capital investment
expended by Northern Indiana to implement Indiana Department of Environmental
Management's nitrogen oxide State Implementation Plan through an Environmental
Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and
depreciation expenses once the environmental facilities become operational
through an Environmental Expense Recovery Mechanism (EERM). The IURC order was
appealed to the Indiana Court of Appeals by the Citizens Action Coalition of
Indiana, where it was upheld by the Court on March 9, 2004. The Citizens Action
Coalition of Indiana has 30 days from the date of that decision to petition the
Court of Appeals for rehearing or the Supreme Court of Indiana for transfer of
the case to that court. Under the Commission's November 26, 2002 order, Northern
Indiana is permitted to submit filings on a semi-annual basis for the ECRM and
on an annual basis for the EERM. Northern Indiana is permitted to submit filings
on a semi-annual basis for the ECRM and on an annual basis for the EERM.
Northern Indiana made its initial filing of the ECRM, ECR-1, in February 2003
for capital expenditures of $58.4 million. On April 30, 2003, the IURC issued an
order approving the ECRM filing, providing for the collection of funds expended
during construction and a return on the capital investment through increased
rates beginning with the May 2003 customer bills. Through December 31, 2003 the
ECRM revenues amounted to $5.2 million. On August 1, Northern Indiana filed
ECR-2 for capital investments of $120.0 million. This petition was approved by
the IURC on October 1, 2003. The initial filing of the EERM was filed with the
most recent semi-annual filing of the ECT in February 2004, which included a
filing of the ECR-3 for capital investments of $194.1 million and an EERM amount
of $1.9 million. Over the timeframe required to meet the environmental
standards, Northern Indiana anticipates a total capital investment amounting to
approximately $274.2 million. On February 4, 2004, the IURC approved Northern
Indiana's latest compliance plan with the estimate of $274.2 million.

68

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. RISK MANAGEMENT ACTIVITIES

NiSource uses commodity-based derivative financial instruments to manage certain
risks in its business. NiSource accounts for its derivatives under SFAS No. 133
and, through 2002, accounted for any trading contracts that did not qualify as
derivatives accounted for under SFAS No. 133 pursuant to EITF No. 98-10.

HEDGING ACTIVITIES. The activity for the years 2003 and 2002 affecting other
comprehensive income, with respect to cash flow hedges included the following:

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 $165.6 million and $140.6 million at December 31, 2003 and 2002,
respectively, of which $51.3 million and $29.2 million were included in "Current
Assets", $114.3 million and $111.4 million were included in "Other Assets."
Price risk management liabilities related to unrealized gains and losses on
hedges (including net option premiums) were $3.5 million and $4.1 million at
December 31, 2003 and 2002, respectively, all of which was included in "Current
Liabilities."

During 2003 and 2002, a gain of $2.0 million, net of tax and zero respectively,
was recognized in earnings due to the change in value of certain derivative
instruments primarily representing time value, and there were no components of
the derivatives' fair values excluded in the assessment of hedge effectiveness.
Also during 2003 and 2002, NiSource reclassified $0.9 million and zero
respectively, related to its cash flow hedges from other comprehensive income to
earnings, due to the probability that certain forecasted transactions would not
occur. It is anticipated that during the next twelve months the expiration and
settlement of cash flow hedge contracts will result in income recognition of
amounts currently classified in other comprehensive income of approximately
$25.2 million, net of tax.

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.

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 opportunity 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 New York Mercantile Exchange (NYMEX)
futures and options contracts that correspond to a fixed or capped price and the
associated delivery month. The NYMEX futures and options contracts are
designated as cash flow hedges.

69

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Northern Indiana offers a Dependabill program as an alternative to the standard
tariff rate that is charged to residential customers. The program allows
Northern Indiana customers to fix their total monthly bill at a flat rate
regardless of gas usage or commodity cost. In order to hedge the anticipated
physical purchases associated with these obligations, Northern Indiana purchases
fixed priced gas and the option to call on additional volumes that match the
anticipated delivery needs of the program. These derivatives are presently
marked-to-market and have not been designated as cash flow hedges. The
consolidated balance sheets reflected $0.3 million of price risk management
liabilities associated with these programs.

Northern Utilities, Inc. has implemented a hedging program designed to fix a
portion of their gas supply costs for the coming year of service. In order to
fix these costs, Northern Utilities purchases NYMEX futures that correspond to
the associated delivery month. Since any gains or losses on the fair value of
these derivatives are passed through to the ratepayer directly, the value of
these derivatives is offset by either a regulatory asset or liability.

In addition, Northern Indiana and Bay State 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, regulatory assets or
liabilities are recorded to offset the change in the fair value of these
derivatives. The consolidated balance sheets reflected $1.2 million of price
risk management assets associated with the programs.

Columbia Energy Services Corporation (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 commodity swaps
priced at the locations designated for physical delivery. These swaps are
designated as cash flow hedges of the anticipated purchases.

NiSource has entered into interest rate swap agreements to modify the interest
rate characteristics of its outstanding long-term debt from fixed to variable On
July 22, 2003, NiSource entered into fixed-to-variable interest rate swap
agreements in a notional amount of $500.0 million with four counterparties with
an 11-year term. NiSource will receive payments based upon a fixed 5.40%
interest rate and pay a floating interest amount based on U.S. 6-month British
Bankers Association (BBA) LIBOR plus an average of 0.78% per annum. There was no
exchange of premium at the initial date of the swaps. In addition, each party
has the right to cancel the swaps on either July 15, 2008 or July 15, 2013 at
mid-market.

Columbia has entered into interest rate swap agreements to modify the interest
rate characteristics of its outstanding long-term debt from fixed to variable.
On April 11, 2003, Columbia entered into fixed-to-variable interest rate swap
agreements in a notional amount of $100 million with two counterparties.
Columbia will receive payments based upon a fixed 7.42% interest rate and pay a
floating interest amount based on U.S. 6-month BBA LIBOR plus an average of
2.39% per annum. There was no exchange of premium at the initial date of the
swaps. The swaps contain mirror-image call provisions that allow the
counterparties to cancel the agreements beginning November 28, 2005 through the
stated maturity date. In addition, each party has the right to cancel the swaps
on either April 15, 2008 or April 15, 2013 at mid-market.

On April 4, 2003, Columbia terminated a fixed-to-variable interest rate swap
agreement containing a notional amount of $100.0 million. NiSource received a
settlement payment from the counterparty amounting to $8.2 million, which will
be amortized as a reduction to interest expense over the remaining term of the
underlying debt.

70

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On September 3, 2002, Columbia entered into new fixed-to-variable interest rate
swap agreements for a combined notional amount of $281.5 million with three
counterparties effective as of September 5, 2002. Columbia will receive payments
based upon a fixed 7.32% interest rate and pay a floating interest amount based
on U.S. 6-month BBA LIBOR plus 2.66% per annum. There was no exchange of premium
at inception of the swaps. The swaps contain mirror-image call provisions that
allow the counterparties to cancel the agreements beginning November 28, 2005
through the stated maturity date. In addition, each party has the one-time right
to cancel the swaps on September 5, 2007 at mid-market.

As a result of the interest rate swap transactions, $500.0 million of NiSource
Finance Corporation's (NiSource Finance) long-term debt and $663.0 million of
Columbia's long-term debt is now subject to fluctuations in interest rates. The
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 pursuant to SFAS No. 133. Both
NiSource and Columbia had no net gain or loss recognized in earnings due to
hedging ineffectiveness from prior years.

MARKETING AND TRADING ACTIVITIES. Effective July 1, 2002, EnergyUSA-TPC (TPC)
sold a significant portion of its net obligations under its gas forward
transaction portfolio, physical storage inventory and associated agreements to a
third party. Prior to the sale, TPC's operations included the activities of its
gas and power trading businesses. Beginning with the effective date of the sale,
the primary remaining operations associated with TPC include commercial and
industrial gas sales (including arranging supply), gas supply and power
marketing associated with NiSource's single merchant cogeneration facility and
power trading. With the exception of power trading and one remaining gas trading
deal, which expired in October 2002, since July 1, 2002 the gas-related
activities at TPC have no longer been considered trading activities, and all
positions were marked to fair value pursuant to SFAS No. 133.

In April 2003, the remaining gas-related activities (physical commodity sales to
commercial and industrial customers) that had been classified as derivatives
were considered to fall within the normal purchase and sale exception under SFAS
No. 133. Therefore, all gas-related derivatives used to offset the physical
obligations necessary to fulfill these commodity sales were designated as cash
flow hedges.

The fair market values of NiSource's power trading assets and liabilities were
$21.9 million and $23.4 million, respectively, at December 31, 2003 and $16.4
million and $16.4 million, respectively, at December 31, 2002. The fair market
values of NiSource's gas marketing assets and liabilities were $24.8 million and
$22.4 million, respectively, at December 31, 2002.

Pursuant to the October 25, 2002 consensus reached regarding EITF No. 02-03
beginning in 2003 the results of derivatives related to trading activities were
presented on a net basis. All periods presented have been adjusted to conform to
the revised presentation.

71

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. EQUITY INVESTMENT SUBSIDIARIES

Certain investments of NiSource are accounted for under the equity method of
accounting. All investments shown as limited partnerships are limited
partnership interests. The following is a list of NiSource's equity investments
at December 31, 2003.

72

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES

The components of income tax expense were as follows:

Total income taxes from continuing operations were 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 were as follows:

73

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Deferred income taxes resulted 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 were as
follows:

On June 28, 2002, the governor of Indiana signed into law legislation that
increased the Indiana Corporate Income tax rate from 4.5% to 8.5% effective
January 1, 2003. As a result, NiSource recorded an additional deferred income
tax liability of $63.3 million (net) in the second quarter of 2002 to reflect
the impact of the increased tax rate. NiSource's regulated subsidiaries recorded
a regulatory asset in the amount of $65.0 million to reflect the probable
collection of the increased tax liability through future rates. The overall
impact on income tax expense in 2002 was a reduction of $1.7 million.

10. PENSION AND OTHER POSTRETIREMENT BENEFITS

NiSource provides defined contribution plans and noncontributory defined benefit
retirement plans that cover its employees. Benefits under the defined benefit
retirement plans reflect the employees' compensation, years of service and age
at retirement. Additionally, NiSource provides 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. NiSource uses
September 30 as its measurement date for its pension and postretirement benefit
plans.

NiSource employs a total return investment approach whereby a mix of equities
and fixed income investments are used to maximize the long-term return of plan
assets for a prudent level of risk. Risk tolerance is established through
careful consideration of plan liabilities, plan funded status, and asset class
volatility. The investment portfolio contains a diversified blend of equity and
fixed income investments. Furthermore, equity investments are diversified across
U.S. and non-U.S. stocks, as well as growth, value, small and large
capitalizations. Other assets such as private equity and hedge funds are used
judiciously to enhance long-term returns while improving portfolio
diversification. Derivatives may be used to gain market exposure in an efficient
and timely manner; however, derivatives may not be used to leverage the
portfolio beyond the market value of the underlying assets. Investment risk is
measured and monitored on an ongoing basis through quarterly investment
portfolio reviews, annual liability measurements, and periodic asset/liability
studies.

74

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The most important component of an investment strategy is the portfolio asset
mix, or the allocation between the various classes of securities available to
the pension plan for investment purposes. The asset mix and acceptable minimum
and maximum ranges established represents a long-term view and are as follows:

Asset Mix Policy of Total Fund:

Pension Plan and Postretirement Plan Asset Mix at September 30, 2003:

NiSource employs a building block approach with proper consideration of
diversification and rebalancing in determining the long-term rate of return for
plan assets. Historical markets are studied and long-term historical
relationships between equities and fixed income are analyzed to ensure that they
are consistent with the widely accepted capital market principle that assets
with higher volatility generate greater return over the long run. Current market
factors such as inflation and interest rates are evaluated before long-term
capital market assumptions are determined. Peer data and historical returns are
reviewed to check for reasonability and appropriateness.

Due to the upswing in the equity markets in 2003, the fair value of NiSource's
pension fund assets has increased since September 30, 2002. However, the
discount rate used to measure the accumulated benefit obligation has decreased,
which slightly offset the increase in the pension assets. In accordance with
FASB Statement No. 87, "Employers' Accounting for Pensions," NiSource adjusted
its minimum pension liability at December 31, 2003. The adjustment resulted in a
decrease to the retirement benefit liabilities of $94.8 million, a decrease in
intangible assets of $6.1 million, a decrease to deferred income tax assets of
$35.2 million and an increase to other comprehensive income of $53.5 million
after-tax. As a result of the increase in the fair value of the plans assets,
NiSource expects pension expense for 2004 to decrease approximately $19.2
million from the amount recognized in 2003. In addition, NiSource expects to
make contributions of $18.1 million to its pensions plans and $51.5 million to
its postretirement medical and life plans in 2004.

75

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following tables provide a reconciliation of the plans' funded status and
amounts reflected in NiSource's Consolidated Balance Sheets at December 31 based
on a September 30 measurement date:

76

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' net periodic benefits
cost (benefit) 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 13B.

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.

77

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The redemption prices at December 31, 2003, 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:

The redemption prices at December 31, 2003, 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, 2003, for each of the subsequent five years were as
follows:

12. COMMON STOCK

As of December 31, 2003, NiSource had 400,000,000 authorized shares of common
stock with a $0.01 par value.

A. CORPORATE PIES REMARKETING. In February 2003, NiSource issued approximately
13.1 million shares of common stock associated with the settlement of forward
equity agreements comprising a component of the Corporate PIES. Concurrently
with the settlement of the forward agreements, NiSource remarketed the
underlying debentures, due February 19, 2005, and reset the interest rate to
4.25%. NiSource received net proceeds of $344.1 million from the remarketing in
satisfaction of the Corporate PIES holders' obligation under the forward equity
agreements. As a result of the transaction, the underlying subsidiary trust was
dissolved.

78

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. EQUITY OFFERING. In November 2002, NiSource issued 41.4 million shares of
common stock at a per-share price of $18.30 ($17.75 on a net basis). The net
proceeds of approximately $734.9 million were used to reduce debt.

C. 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.

D. NORTHERN INDIANA DIVIDEND RESTRICTION. So long as any shares of Northern
Indiana's cumulative preferred stock are outstanding, no cash dividends shall be
paid or declared on its common stock 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 to the cumulative
preferred stock plus the surplus, after giving effect to such common stock
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, 2003, the sum of the capital applicable to stocks
subordinate to the cumulative preferred stock plus the surplus was equal to 41%
of the total capitalization including surplus.

E. COMMON STOCK DIVIDEND. Holders of shares of NiSource's common stock are
entitled to receive dividends when, as and if declared by NiSource's Board of
Directors (Board) out of funds legally available. 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 totaling $1.10 per share for the 2003 year. Beginning with the
November 2003 dividend, NiSource reduced its annual dividend to $0.92 per share
from $1.16 per share. At its January 5, 2004 meeting, the Board declared a
quarterly common dividend of $0.23 cents per share, payable on February 20, 2004
to holders of record on January 30, 2004.

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. In addition, NiSource
currently has non-qualified option grants outstanding and not vested which were
granted under a 1988 long-term incentive plan.

The amended and restated 1994 Plan provides for the issuance of up to 21 million
shares through December 31, 2005. At December 31, 2003, there were 8,101,539
shares reserved for future awards under the amended and restated 1994 Plan. 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. 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 641,529 and 861,740 restricted shares outstanding and not
vested at December 31, 2003 and 2002, respectively.

79

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At December 31, 2003, NiSource had 799,829 outstanding awards under a contingent
stock plan. The terms of the awards contain a provision that varies the number
of shares to be issued based on the level of attainment of certain stock
performance targets and also allows for the accrual of dividends on the
contingent stock awards. In 2003, based on the performance of NiSource's common
stock through December 31, 2003, NiSource recorded expense of $6.7 million for
the 2003 year related to the awards of contingent shares under the 1994 Plan.

NiSource established a time accelerated restricted stock award plan (TARSAP),
which governs restricted stock awards beginning with the January 1, 2003 grants.
Under the plan, key executives are granted awards of restricted stock or
contingent stock that generally vest over a period of six years or at age 62 if
an employee would become age 62 within six years, but not less than three years.
If certain predetermined criteria involving measures of total shareholder return
are met, as measured at the end of the third year after the grant date, the
awards vest at the end of the third year. On January 1, 2003, 732,029 grants of
restricted and contingent shares were issued under the TARSAP. NiSource
recognized expense of $4.4 million for TARSAP awards for the year ended December
31, 2003.

The Amended and Restated Non-employee Director Stock Incentive Plan, which was
approved by the board and stockholders at the 2003 annual meeting, provides for
the issuance of up to 500,000 shares of common stock to non-employee directors.
The Plan provides for awards of common stock, which vest in 20% increments per
year, with full vesting after five years. The Plan permits the granting of
restricted stock units and 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, 2003, 100,500 shares had been
issued under the Plan.

The long-term incentive plans have been accounted for using the intrinsic value
method under APB No. 25. The compensation cost that was charged against net
income for restricted stock awards was $12.9 million; $7.3 million and $7.3
million for years ended December 31, 2003, 2002 and 2001, respectively. Option
grants are granted with an exercise price equal to the average of the high and
low market price on the day of the grant.

Stock option transactions for the three years ended December 31, 2003, were as
follows:

80

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes information on stock options outstanding and
exercisable at December 31, 2003:

There were no SARs outstanding at December 31, 2003, 2002 or 2001.

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with a dividend yield of 4.9-6.0%. The
weighted average fair value of options granted was $3.44, $6.03 and $8.44 during
the years 2003, 2002 and 2001, respectively. The following assumptions were used
for grants in 2003, 2002 and 2001:

14. LONG-TERM DEBT

On November 4, 2003, NiSource Finance issued $250.0 million of 18-month floating
rate unsecured notes that mature May 4, 2005. The notes are callable, at par, at
the option of NiSource on or after May 4, 2004. Also on November 4, 2003,
NiSource Finance issued $250.0 million of 3.20% three year unsecured notes that
mature November 1, 2006. On July 21, 2003, NiSource issued $500.0 million of
5.40% eleven-year senior unsecured notes that mature July 15, 2014. In February
2003, NiSource remarketed most of the underlying debentures due February 19,
2005, which were comprised of a component of the Corporate PIES, resetting the
interest rate to 4.25%. NiSource received net proceeds of $344.1 million from
the remarketing in satisfaction of the Corporate PIES holders' obligation under
the forward equity agreements. The sole purchaser of the remarketed securities
purchased newly offered 6.15% notes due March 1, 2013, using the remarketed
debentures as consideration.

As a portion of the consideration payable in the acquisition of Columbia,
NiSource issued 55.5 million SAILSSM. The SAILSSM 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
fractional number of shares of NiSource common stock based on a settlement rate
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 debentures, which mature on November
1, 2006, have been pledged to secure the holders' obligation to purchase common
stock under the purchase contract.

81

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The value of the consideration received, Columbia shares, was allocated between
the debenture and the stock purchase contract consistent with the provisions of
APB Opinion No. 14, "Accounting for Convertible Debt and Debt issued with Stock
Purchase Warrants." Payments under the debenture were $144.4 million nominally
and were discounted at a market interest rate to reflect a fair value of $107.0
million at the date of issuance. The debentures are reflected as a component of
long-term debt on NiSource's consolidated balance sheet. The value of the
forward equity contracts at the date of issuance was determined to be $7.4
million. The value of the stock purchase contracts was reflected as a component
of equity, consistent with the provisions of EITF Issue No. 96-13, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in a
Company's Own Stock" (at that time) and, subsequently, EITF No. 00-19.

Sinking fund requirements and maturities of long-term debt outstanding at
December 31, 2003, for each of the five years subsequent to December 31, 2003
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 $5,993.4 million of long-term debt at December 31, 2003, $295.3
million was issued by NiSource's affiliate, NiSource Capital Markets, Inc.
(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 Market's
obligations in the event of a failure to pay by Capital Markets. 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 Market's creditors. The carrying value of the assets of
NiSource, other than the assets of Northern Indiana, was $12.4 billion at
December 31, 2003.

Columbia has entered into interest rate swap agreements for $663.0 million of
its outstanding long-term debt. In addition, NiSource has entered into interest
rate swap agreements for $500.0 million of its outstanding long-term debt. The
effect of these agreements is to modify the interest rate characteristics of a
portion of their respective long-term debt from fixed to variable. See Note 7
for further information regarding the interest rate swaps.

NiSource is subject to two financial covenants under both its 364-day and 3-year
revolving credit facilities. These covenants are not expected to change
materially under NiSource's current renewal of the credit facilities. On a
consolidated basis, NiSource must maintain an interest coverage ratio of not
less than 1.75, as determined for each period of four consecutive fiscal
quarters. Additionally, NiSource must maintain a debt to capitalization ratio
that does not exceed 70 percent. As of December 31, 2003, NiSource was in
compliance with these financial covenants.

NiSource is also subject to certain negative covenants under the revolving
credit facilities. Such covenants include a limitation on the creation or
existence of new liens on NiSource's assets, generally exempting liens on
utlity assets, purchase money security interests, preexisting security
interests and an additional asset basket equal to 5.0% of NiSource's
consolidated net tangible assets. An asset sale covenant generally restricts the
sale, lease and/or transfer of NiSource's assets to no more than 10.0% of its
consolidated total assets. The revolving credit facilities also include a
cross-default provision, which triggers an event of default under the credit
facility in the event of any uncured payment default relating to any
indebtedness of NiSource or any of its subsidiaries in a principal amount of
$50.0 million or more.

82

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NiSource's bond indentures generally do not contain any financial maintenance
covenants. However, NiSource's bond indentures are generally subject to cross
default provisions ranging from uncured payment defaults of $5.0 to $50.0
million, and limitations on the incurrence of liens on NiSource's assets,
generally exempting liens on utility assets, purchase money security interests,
preexisting security interests and an additional asset basket capped at either
5.0% or 10.0% of NiSource's consolidated net tangible assets.

15. SHORT-TERM BORROWINGS

Due to the company's liquidity position, NiSource elected not to renew its
$500.0 million 364-day credit facility, which expired on March 20, 2003. The
364-day credit facility was utilized to support the issuance of letters of
credit. As a result of the 364-day facility expiring, the $1.25 billion
three-year facility that expires on March 23, 2004 was amended to allow for an
increase in aggregate letters of credit outstanding from $150.0 million to
$500.0 million. The recent reduction in NiSource's short-term borrowing needs is
attributable to the $734.9 million of net proceeds from the equity offering
during November 2002, the successful Corporate PIES remarketing, the sale of the
exploration and production properties, certain assets of PEI and net cash flow
from continuing operations. NiSource currently anticipates that its $1.25
billion 3-year credit facility expiring March 23, 2004 will be replaced during
the first quarter of 2004 and will be split between a 364-day facility and a
3-year facility.

As of December 31, 2003, NiSource had $121.4 million of letters of credit
outstanding. At December 31, 2002, NiSource had $171.7 million of letters of
credit outstanding.

Short-term borrowings were as follows:

16. 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 amount and estimated fair values of financial instruments were as
follows:

83

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SALE OF TRADE ACCOUNTS RECEIVABLE. NiSource's accounts receivable programs
qualify for sale accounting based upon the conditions met in SFAS No. 140
"Accounting for Transfers and Servicing of Financial Asset and Extinguishments
of Liabilities." In the agreements, all transferred assets have been isolated
from the transferor and put presumptively beyond the reach of the transferor and
its creditors, even in bankruptcy or other receivership. NiSource does not
retain any interest in the receivables under both agreements.

Columbia of Ohio is a party to an agreement to sell, without recourse, all of
its trade receivables, with the exception of certain low-income payment plan
receivables, as they originate, to Columbia Accounts Receivable Corporation
(CARC), a wholly-owned subsidiary of Columbia. CARC, in turn, is party to an
agreement under which it sells a percentage ownership interest in the accounts
receivable to a commercial paper conduit. Under these agreements, CARC may not
sell any new affiliate 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. As of
December 31, 2003, $89.5 million of accounts receivable had been sold by CARC.
Canadian Imperial Bank of Commerce (CIBC), the administrative agent for the
program, has informed Columbia of Ohio that, CIBC and its commercial paper
conduit entities will let all existing receivable securitization agreements
expire in the normal course of business. As such, the Columbia of Ohio
receivables program with CIBC will terminate on May 15, 2004 and Columbia of
Ohio plans to initiate a new program with a new agent and conduit purchaser.

Under the agreements, Columbia of Ohio acts as administrative agent, 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.

On December 30, 2003, Northern Indiana entered into an agreement to sell,
without recourse, all of its trade receivables, as they originate, to NIPSCO
Receivable Corporation (NRC), a wholly-owned subsidiary of Northern Indiana.
NRC, in turn, is party to an agreement in which it sells a percentage
ownership interest in the accounts receivable to a commercial paper conduit. The
conduit can purchase up to $200 million of accounts receivable under the
agreement. The agreements expire in December 2004. As of December 31, 2003,
$166.8 million of accounts receivable had been sold by NRC. Under the
arrangement, Northern Indiana may not sell any new receivables if Northern
Indiana's debt rating falls below BBB- or Baa3 at Standard and Poor's and
Moody's, respectively.

Under the agreements, Northern Indiana acts as servicer, performing record
keeping and cash collection functions for the accounts receivable sold. Northern
Indiana receives a fee, which provides adequate compensation, for such services.

17. OTHER COMMITMENTS AND CONTINGENCIES

A. CAPITAL EXPENDITURES. NiSource expects that approximately $518.6 million will
be expended for construction purposes during 2004.

B. SERVICE AGREEMENTS. Northern Indiana has a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and First Air
Partners LP, under which Pure Air provides scrubber services to reduce sulfur
dioxide emissions for Units 7 and 8 at the Bailly Generating Station. Services
under this contract commenced on June 15, 1992, and have current annual charges
approximating $16.5 million. The agreement provides that, assuming various
performance standards are met by Pure Air, a termination payment would be due if
Northern Indiana terminated the agreement prior to the end of the twenty-year
contract period.

C. ASSETS UNDER LIEN. Substantially all of Columbia Gas Transmission
Corporation's (Columbia Transmission) properties have been pledged to Columbia
as security for debt owed by Columbia Transmission to Columbia.

84

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

D. GUARANTEES AND INDEMNITIES. As a part of normal business, NiSource and
certain subsidiaries enter into various agreements providing financial or
performance assurance to third parties on behalf of certain subsidiaries. Such
agreements include guarantees and stand-by-letters of credit. These agreements
are entered into primarily to support or enhance the creditworthiness otherwise
attributed to a subsidiary on a stand-alone basis, thereby facilitating the
extension of sufficient credit to accomplish the subsidiaries' intended
commercial purposes. The total commercial commitments in existence at December
31, 2003 and the years in which they expire were:

(in millions) Total 2004 2005 2006 2007 2008 After
- -----------------------------------------------------------------------------------------------------------------------------------

Guarantees of subsidaries debt $ 3,924.4 $ 82.6 $ 1,183.2 $ 293.1 $ 32.4 $ 8.6 $ 2,324.5
Guarantees supporting commodity
transactions of subsidiaries 1,463.5 310.3 100.2 796.5 39.5 57.4 159.6
Other guarantees 432.9 150.0 51.2 -- -- 11.3 220.4
Lines of credit 685.5 685.5 - -- -- -- --
Letters of credit 126.3 20.4 1.5 0.1 1.1 103.2 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total commercial commitments $ 6,632.6 $ 1,248.8 $ 1,336.1 $ 1,089.7 $ 73.0 $ 180.5 $ 2,704.5
- -----------------------------------------------------------------------------------------------------------------------------------

NiSource has guaranteed the payment of $3.9 billion of debt for various
wholly-owned subsidiaries including NiSource Finance, the former PEI
subsidiaries that were sold in the fourth quarter and through a support
agreement, Capital Markets. Other than the debt associated with the former PEI
subsidiaries that were sold, the debt is reflected on NiSource's consolidated
balance sheet. The subsidiaries are required to comply with certain financial
covenants under the debt indenture and in the event of default, NiSource would
be obligated to pay the debt's principal and related interest. NiSource does not
anticipate its subsidiaries will have any difficulty maintaining compliance.
NiSource Finance also maintains lines of credit with financial institutions. At
December 31, 2003, the amount outstanding under the lines of credit and
guaranteed by NiSource amounted to $685.5 million. Additionally, NiSource has
issued guarantees, which support up to approximately $1.5 billion of
commodity-related payments for its current subsidiaries involved in energy
marketing and trading and those satisfying requirements under forward gas sales
agreements of former subsidiaries. These guarantees were provided to
counterparties in order to facilitate physical and financial transactions
involving natural gas and electricity. To the extent liabilities exist under the
commodity-related contracts subject to these guarantees, such liabilities are
included in the consolidated balance sheets.

NiSource has issued standby letters of credit of approximately $126.3 million
through financial institutions for the benefit of third parties that have
extended credit to certain subsidiaries. If a subsidiary does not pay amounts
when due under covered contracts, the beneficiary may present its claim for
payment to the financial institution, which will in turn request payment from
NiSource.

NiSource has purchase and sales agreement guarantees totaling $140.0 million,
which guarantee performance of the seller's covenants, agreements, obligations,
liabilities, representations and warranties under the agreements. No amounts
related to the purchase and sales agreement guarantees are reflected in the
consolidated balance sheet.

Management believes that the likelihood NiSource would be required to perform or
otherwise incur any significant losses associated with any of the aforementioned
guarantees is remote.

After the October 20, 2003 sale of six subsidiaries, PEI, continues to own
Whiting Clean Energy. The total of the outstanding debt guaranteed for Whiting
Clean Energy at December 31, 2003 was $326.9 million. As of December 31, 2003,
approximately $304.1 million of debt related to Whiting Clean Energy was
included in NiSource's consolidated balance sheet.

NiSource retains certain operational and financial guarantees with respect to
the former PEI subsidiaries and CER. NiSource has retained guarantees of $158.0
million as of December 31, 2003 of debt outstanding related to three of the PEI
projects. In addition, NiSource has retained several operational guarantees
related to the former PEI subsidiaries. These operational guarantees are related
to environmental compliance, inventory balances, employee relations, and a
residual future purchase guarantee. The fair value of the guarantees was
determined to be $11.1 million and a portion of the net proceeds in the sale
amount were assumed allocated to the guarantees as prescribed by FIN 45.

85

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NiSource has retained liabilities related to the CER forward gas sales
agreements with Mahonia II Limited (Mahonia) for guarantees of the forward sales
and for indemnity agreements with respect to surety bonds backing the forward
sales. The guarantees, surety bonds and associated indemnity agreements remain
in place subsequent to the closing of the CER sale and decline over time as
volumes (approximately 72.1 Bcf as of December 31, 2003) are delivered in
satisfaction of the contractual obligations, ending in February 2006. NiSource
will be indemnified by Triana, and MSCP will fund up to a maximum of $221.0
million of additional equity to Triana to support Triana's indemnity, for
Triana's gas delivery and related obligations to Mahonia. The MSCP commitment
declines over time in concert with the surety bonds and the guaranteed
obligation to deliver gas to Mahonia.

Immediately after the close of the sale, Triana owned approximately 1.1 Tcf of
proved reserves, and was capitalized with $330.0 million, approximately $200.0
million of which was provided as initial equity by MSCP and the remainder of
which is provided as part of a $500.0 million revolving credit facility.
NiSource believes that the combination of Triana's proved reserves, sufficient
capitalization, and access to the credit facility, combined with the Triana
indemnity and the $221.0 million of further commitments to Triana from MSCP,
adequately offset any losses that may be incurred by NiSource due to Triana's
non-performance under the Mahonia agreements. Accordingly, NiSource has not
recognized a liability related to the retention of the Mahonia guarantees.

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. INTERNAL REVENUE SERVICE (IRS) AUDIT. The IRS issued its Revenue Agent Report
(RAR) covering the former Columbia's remaining open tax years (1998, 1999 and
ten months ended November 1, 2000) on December 2, 2003. All issues included in
the RAR were negotiated and agreed to at the IRS Examination Team level and
payment of the tax and related interest was made on December 15, 2003.

The audit of NiSource's 1999 and 2000 consolidated federal income tax returns
commenced on March 6, 2003. Completion of that audit cycle is expected by the
end of 2004. The start of the 2001-2002 audit cycle is planned for June 2004.

Management believes adequate reserves have been established for issues related
to these and subsequently filed returns.

G. 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.

Proposals for voluntary initiatives and mandatory controls 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, and methane, a
component of natural gas. Certain NiSource affiliates engage in efforts to
voluntarily report and reduce their greenhouse gas emissions. NiSource will
monitor and participate in developments related to efforts to register and
potentially regulate greenhouse gas emissions.

GAS DISTRIBUTION. Several Gas Distribution Operations subsidiaries are
potentially responsible parties at waste disposal sites under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) (commonly known
as Superfund) and similar state laws, including former manufactured gas plant
(MGP) sites, which such subsidiaries, or their corporate predecessors, own or
previously owned or operated. Gas Distribution Operations subsidiaries may be
required to share in the cost of clean up of such sites. In addition, some Gas
Distribution Operations subsidiaries have responsibility for corrective action
under the Resource Conservation and Recovery Act (RCRA) for closure and clean-up
costs associated with underground storage tanks, under the Toxic Substances
Control Act for clean up of polychlorinated biphenyls, and for mercury releases.
The final costs of clean up have not yet been determined. As site investigations
and clean up proceed and as additional information becomes available reserves
are adjusted.

86

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A program has been instituted to identify and investigate former MGP sites where
Gas Distribution Operations subsidiaries or predecessors are the current or
former owner. The program has identified 84 such sites and initial
investigations have been conducted at 45 sites. Of these sites, additional
investigation activities have been completed or are in progress at 42 sites and
remedial measures have been implemented or completed at 23 sites. This effort
includes the sites contained in the January 2004 agreement entered into by the
Indiana Department of Environmental Management, Northern Indiana, and other
Indiana utilities under the Indiana Voluntary Remediation Program. Only those
site investigation, characterization and remediation costs currently known and
determinable can be considered "probable and reasonably estimable" under SFAS
No. 5, "Accounting for Contingencies". As costs become probable and reasonably
estimable, reserves will be adjusted. 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 Security 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, 2003, a reserve of approximately $63.0
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 potentially responsible parties 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 will not have a material effect on its financial
position.

GAS TRANSMISSION AND STORAGE 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 245 facilities, approximately 13,000 liquid removal points,
approximately 2,200 mercury measurement stations and about 3,700 storage well
locations. Field characterization has been performed at all sites. Site
characterization reports and remediation plans, which must be submitted to the
U.S. Environmental Protection Agency (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 most of the 245 facilities. During 2003, Columbia Transmission completed a
sufficient number of the characterization reports and remediation plans to
adjust its estimate for the entire program. As a result, the liability was
reduced by $44.2 million, the related regulatory asset was decreased by $33.2
million, and there was an improvement to operating income of $11.0 million. As
of December 31, 2003 the remaining environmental liability recorded on the
balance sheet of Columbia Transmission was approximately $4.6 million.

Columbia Transmission and Columbia Gulf are potentially responsible parties at
several waste disposal sites under CERCLA and similar state laws. 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 reserves will be
adjusted.

87

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

After a lengthy legal proceeding, the EPA has begun implementing the Particulate
Matter and Ozone National Ambient Air Quality Standards it revised in July 1997.
As a result, EPA is in the process of designating areas not attaining the
standards. After designation, the Clean Air Act provides for a process that
would provide for promulgation of rules specifying a compliance level,
compliance deadline, and necessary controls to be implemented within designated
areas over the next few years. In the interim, existing ozone ambient air
quality standards will remain in place and may require imposition of additional
controls in areas of non-attainment. In addition, EPA may reissue the portion of
the nitrogen oxide (NOx) State Implementation Plan (SIP) Call regulation
(dealing with regional ozone transport) which is applicable to certain pipeline
engines, but which was remanded by the Court of Appeals after challenge by the
pipeline industry. Resulting rules could require additional reductions in NOx
emissions from reciprocating engines and turbines at pipeline compressor
stations (including compressor stations owned by Columbia Transmission and
Columbia Gulf). The EPA and state regulatory authorities will set final
implementation requirements. Certain states have already begun to propose new
NOx emission requirements that may be applicable to pipeline compressor station
engines and turbines. NiSource believes that the costs relating to compliance
with any new limits may be significant but are dependent upon the ultimate
control program established by the targeted states and the EPA, and currently
are not reasonably estimable. NiSource will continue to closely monitor
developments in this area.

The EPA has proposed Maximum Achievable Control Technology (MACT) standards for
hazardous air pollutants for stationary combustion turbines, industrial boilers
and reciprocating internal combustion engines. Final MACT standards for
stationary combustion turbines have been issued and standards for the other
categories are expected to be issued in the near future. The final standards for
turbines are not anticipated to impose substantial compliance costs upon
NiSource. NiSource will continue to monitor the proposed MACT standards for
potential applicability and cost impact to its operations. Pending finalization
of the proposed standards, NiSource is unable to predict what, if any,
additional compliance costs may result.

ELECTRIC OPERATIONS.
AIR. In December 2001, the EPA approved regulations developed by the State of
Indiana to comply with EPA's NOx SIP call. The NOx SIP call requires certain
states, including Indiana, to reduce NOx levels from several sources, including
industrial and utility boilers, to lower regional transport of ozone. Compliance
with the NOx limits contained in these rules is required by May 31, 2004.
Northern Indiana's plans include the installation of Selective Catalytic
Reduction NOx reduction technology at each of its active generating stations to
comply with the rules and estimates total capital costs will range from $250.0
to $300.0 million. Actual compliance costs may vary depending on a number of
factors including market demand and resource constraints, uncertainty of future
equipment and construction costs, and the potential need for additional control
technology.

After a lengthy legal proceeding, the EPA has begun implementing the Particulate
Matter and Ozone National Ambient Air Quality Standards it revised in July 1997.
As a result, EPA is in the process of designating areas not attaining the
standards. After designation, the Clean Air Act provides for a process that
would provide for promulgation of rules specifying a compliance level,
compliance deadline, and necessary controls to be implemented within designated
areas over the next few years. 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).

In 2003, the Bush Administration and the EPA proposed new legislation and rules
for SO2, NOx and mercury emissions from electric power generating stations. The
Administration's Clear Skies Act would provide for significant reductions of
SO2, NOx and mercury emissions from electric power generating stations,
including Northern Indiana's stations. Similarly, EPA's proposed regulations
contain phased in reductions for these three pollutants under alternative
control approaches, including emission allowance based trading programs. Until
the legislation passes or the rulemaking is completed by EPA and implemented by
the States, the potential impact on Northern Indiana will be uncertain.
Nonetheless, if implemented, these potential reduction requirements could impose
substantial costs on affected utilities, including Northern Indiana.

88

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During 1999, the EPA initiated enforcement actions against several electric
utilities alleging violations of the new source review provisions of the Clean
Air Act and subsequently has issued additional information collection requests
to many other utilities. Northern Indiana has received and responded to
information requests from the EPA on this subject most recently in June 2002. At
this time, Northern Indiana is unable to predict the result of the EPA's review
of Northern Indiana's information responses. Subsequent to this activity the EPA
has undertaken to reform its New Source Rules.

The EPA has proposed MACT standards for hazardous air pollutants for stationary
combustion turbines, industrial boilers and reciprocating internal combustion
engines. The EPA has issued final regulations for stationary turbines and is
expected to issue final standards for the other categories in the near future.
The final regulations for turbines are not expected to have a substantial impact
on Northern Indiana. Northern Indiana will continue to monitor the proposed MACT
standards for potential applicability and cost impact to its operations. Until
finalization of the proposed standards, Northern Indiana is unable to predict
what, if any, additional compliance costs may result.

The EPA is in the process of developing a program to address regional haze. That
program will mandate that states require power plants built between 1962 and
1977 to install the "best available retrofit technology" (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 it.

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. All
issues in subsequent litigation related to the EPA's actions have been resolved
with the exception of the EPA's disapproval of the Indiana Department of
Environmental Management's (IDEM) method for testing whole effluent toxicity.
Northern Indiana expects that IDEM will issue a proposed permit renewal for each
of its lakeside stations. Pending issuance of these permits, the costs of
complying with these requirements cannot be predicted at this time.

In 2003 the EPA proposed revised rules under section 316(b) of the Clean Water
Act that would establish requirements for minimizing adverse environmental
impacts from cooling water intake structures and the water withdrawn by steam
electric power plants, including Northern Indiana's electric generating
stations. The EPA is expected to issue final rules in 2004. The requirements
will be implemented through permits for the affected facilities. Until the rules
are finalized and the new permit requirements are established, the costs of
complying with these rules cannot be predicted.

REMEDIATION. Northern Indiana is a potentially responsible party under CERCLA
and similar state laws at three waste disposal sites and shares in the cost of
their cleanup with other potentially responsible parties. At one of these sites,
Northern Indiana has entered into an EPA Administrative Order on Consent to
perform a removal action in the vicinity of a third party, state permitted
landfill where Northern Indiana contracted for fly ash disposal. The site is the
subject of a Federal citizens suit and a state court action. Meanwhile, Northern
Indiana, the EPA, and the IDEM are currently evaluating the potential for
additional actions at this site. In addition, Northern Indiana has corrective
action liability under the Resource Conservation & Recovery Act (RCRA) for
closure and clean-up costs associated with treatment, storage and disposal
sites. As of December 31, 2003, a reserve of approximately $2.9 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 potentially responsible parties 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.

OTHER OPERATIONS.
PEI. In connection with the sale of certain PEI assets mentioned above, NiSource
has agreed to provide indemnification to the purchaser for specified potential
environmental liabilities. However, the total amount of these liabilities is not
reasonably estimable at this time.

89

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On June 26, 2002, EPA issued a Notice of Violation (NOV) to three companies
involved with a project at Ispat Inland Inc.'s East Chicago, Indiana facility,
including PEI's former subsidiary, Cokenergy. The NOV alleges violations of the
construction permit requirements of the Clean Air Act. At issue is whether air
emissions permitting requirements for major sources applied to the construction
of the project in 1997. NiSource maintains that the project was properly
permitted by the IDEM and cannot predict whether any fines or penalties will be
assessed or if additional compliance costs will be incurred.

OTHER INFORMATION.
OTHER AFFILIATES NiSource affiliates have retained environmental liabilities,
including cleanup liabilities associated with some of its former operations
including those of propane operations, petroleum operations, certain local gas
distribution companies and CER. Most significant environmental liability relates
to former MGP sites whereas less significant liability is associated with former
petroleum operations and former mercury metering stations.

The ultimate liability in connection with these contamination sites will depend
upon many factors including the extent of environmental response actions
required, other potentially responsible parties 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, will not have a
material adverse effect on NiSource's financial position.

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 NiSource companies.

As of December 31, 2003, a reserve of approximately $76.6 million has been
recorded to cover probable corrective actions at sites where NiSource has
environmental remediation liability. Regulatory assets have been recorded to the
extent environmental expenditures are expected to be recovered in rates. 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 potentially responsible parties 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 will not have a material
effect on its financial position or results of operations.

H. OPERATING LEASES. Payments made in connection with operating leases are
primarily charged to operation and maintenance expense as incurred. Such amounts
were $54.8 million in 2003, $60.3 million in 2002 and $93.2 million in 2001.

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

90

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

I. PURCHASE COMMITMENTS. NiSource has service agreements that provide for
pipeline capacity, transportation and storage services. These agreements, which
have expiration dates ranging from 2004 to 2016, require NiSource to pay fixed
monthly charges. The estimated aggregate amounts of such payments at December
31, 2003, were:

J. WHITING CLEAN ENERGY. PEI's Whiting Clean Energy project at BP's Whiting,
Indiana refinery was placed in service in 2002. Initially, the facility was not
able to deliver steam to BP to the extent originally contemplated without plant
modifications. Whiting Clean Energy has commenced an arbitration proceeding to
seek recovery of damages from the engineering, procurement and construction
contractor. Whiting Clean Energy is also pursuing recovery from the insurance
provider for construction delays and necessary plant modifications. The
contractor has asserted that it fully performed under its contract and is
demanding payment of the full contract price plus additional amounts for
remediation.

PEI estimates that the facility will operate at a loss in the near term based on
the current market view of forward pricing for gas and electricity. For 2003,
the after-tax loss was approximately $30.0 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. Because of the
expected losses from this facility and decreases in estimated forward pricing
for electricity versus changes in gas prices, an impairment study was performed
in the first quarter of 2003 on this facility in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". The study
indicated that, at that time, no impairment was necessary.

However, by necessity, the study includes many estimates and assumptions for the
40-year estimated useful life of the facility. Changes in these estimates and
assumptions, such as forward prices for electricity and gas, volatility in the
market, etc., could result in a situation where total undiscounted net revenues
are less than the carrying value of the facility, which would result in a
write-down that could be significant.

18. 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. In 2002, an additional pre-tax
charge of $4.7 million was recognized. It is not anticipated that the final
disposition of Enron's liability to NiSource will have a significant effect on
income.

91

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table displays the components of Accumulated Other Comprehensive
Income.

20. OTHER, NET

21. INTEREST EXPENSE, NET

22. SEGMENTS OF BUSINESS

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

During the second quarter 2003, NiSource re-aligned its reportable segments to
reflect the announced sale of its exploration and production operations. As of
the second quarter 2003, NiSource no longer reported an Exploration and
Production Operations segment. In addition, the PEI subsidiaries sold are
reported as discontinued operations. All periods have been adjusted to conform
with the realignment.

NiSource's operations are divided into four primary business segments. The Gas
Distribution Operations 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 Gas Transmission and Storage Operations 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 Electric Operations segment
provides electric service in 21 counties in the northern part of Indiana. The
Other Operations segment primarily includes gas marketing, power marketing and
trading and ventures focused on distributed power generation technologies,
including cogeneration facilities, fuel cells and storage systems.

92

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

93

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

94

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23. 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.

95

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC. AND SUBSIDIARIES

SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEET

96

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC. AND SUBSIDIARIES

SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENT OF INCOME

97

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC. AND SUBSIDIARIES

SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENT OF CASH FLOWS

98

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 by its consolidated subsidiaries were (in
millions of dollars): $465.8, $444.4 and $248.0 in 2003, 2002 and 2001,
respectively. In addition, NiSource received (in millions of dollars): $2.9,
$2.9 and $3.1 in cash distributions from equity investments adjusted for
investments sold in connections with discontinued operations in 2003, 2002 and
2001, respectively.

2. NOTES TO CONDENSED FINANCIAL STATEMENTS

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

99

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

TWELVE MONTHS ENDED DECEMBER 31, 2003

TWELVE MONTHS ENDED DECEMBER 31, 2002

100

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA (continued)

NISOURCE INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

TWELVE MONTHS ENDED DECEMBER 31, 2003

101

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

NISOURCE INC.

On May 21, 2002 the Board of Directors of NiSource, upon recommendation of its
Audit Committee, dismissed Arthur Andersen LLP as the independent public
accountants for NiSource and its subsidiaries, Columbia Energy Group and
Northern Indiana Public Service Company (collectively, the "Registrants"), and
decided to engage Deloitte & Touche LLP to serve as the Registrants' independent
public accountants for 2002. Information with respect to this matter is included
in NiSource's current report on Form 8-K filed May 21, 2002, which information
is incorporated herein by reference.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

NiSource's chief executive officer and its chief financial officer, after
evaluating the effectiveness of NiSource's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), have concluded based
on the evaluation required by paragraph (b) of Exchange Act Rules 13a-15 and
15d-15 that, as of the end of the period covered by this report, NiSource's
disclosure controls and procedures were adequate and effective to ensure that
material information relating to NiSource and its consolidated subsidiaries
would be made known to them by others within those entities.

Changes in Internal Controls

There was no change in NiSource's internal control over financial reporting
during the fiscal quarter covered by this report that has materially affected,
or is reasonably likely to materially affect, NiSource's internal control over
financial reporting.

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 11,
2004, 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 11, 2004, which information is incorporated by
reference.

Information regarding NiSource's code of ethics, corporate governance guidelines
and Board of Directors Committee charters will be included in the Notice of
Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be
held on May 11, 2004, 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 to be
held on May 11, 2004, 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 and the Equity Compensation Plan Information will be included in the
Notice of Annual Meeting and Proxy Statement for the Annual Meeting of
Stockholders to be held on May 11, 2004, which information is incorporated by
reference.

102

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

NISOURCE INC.

Not applicable.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information regarding principle accounting fees and services will be included in
the Notice of Annual Meeting and Proxy Statement for the Annual Meeting of
Stockholders to be held on May 11, 2004, which information is incorporated by
reference.

103

PART IV

ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

NISOURCE INC.

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.

Reports on Form 8-K

The following reports on Form 8-K were filed during the fourth quarter of 2003.

104

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 March 12, 2004 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 March 12, 2004
- -------------------------------------------- Executive Officer, and Director
Gary L. Neale (Principal Executive Officer)

/s/ MICHAEL W. O'DONNELL Executive Vice President and March 12, 2004
- -------------------------------------------- Chief Financial Officer
Michael W. O'Donnell (Principal Financial Officer)

/s/ JEFFREY W. GROSSMAN Vice President and Controller March 12, 2004
- -------------------------------------------- (Principal Accounting Officer)
Jeffrey W. Grossman

/s/ STEPHEN P. ADIK Director March 12, 2004
- --------------------------------------------
Stephen P. Adik

/s/ STEVEN C. BEERING Director March 12, 2004
- --------------------------------------------
Steven C. Beering

/s/ ARTHUR J. DECIO Director March 12, 2004
- --------------------------------------------
Arthur J. Decio

/s/ DENNIS E. FOSTER Director March 12, 2004
- --------------------------------------------
Dennis E. Foster

/s/ IAN M. ROLLAND Director March 12, 2004
- --------------------------------------------
Ian M. Rolland

/s/ JOHN W. THOMPSON Director March 12, 2004
- --------------------------------------------
John W. Thompson

/s/ ROBERT J. WELSH Director March 12, 2004
- --------------------------------------------
Robert J. Welsh

/s/ DR. CAROLYN Y. WOO Director March 12, 2004
- --------------------------------------------
Dr. Carolyn Y. Woo

/s/ ROGER A. YOUNG Director March 12, 2004
- --------------------------------------------
Roger A. Young

105

ITEM 15. EXHIBIT INDEX (CONTINUED)

NISOURCE INC.

106

ITEM 15. EXHIBIT INDEX (CONTINUED)

NISOURCE INC.

107

ITEM 15. EXHIBIT INDEX (CONTINUED)

NISOURCE INC.

Bank One, National Association (Main Office, Chicago),
Citibank, N.A., Toronto Dominion (Texas), Inc. as
Co-Documentation Agents, Barclays Bank PLC, as Administrative
Agent and LC Bank, Barclays Capital and Credit Suisse First
Boston, as Lead Arrangers and Barclays Capital, as Sole Book
Runner (incorporated by reference to Exhibit 4.60 to the
NiSource Inc. Annual Report on Form 10-K for the period ended
December 31, 2000).

(10.1) Supplemental Life Insurance Plan effective January 1, 1991, as
amended, (incorporated by reference to Exhibit 2 to the NIPSCO
Industries, Inc. Current Report on Form 8-K dated March 25,
1992). *

(10.2) NiSource Inc. Executive Deferred Compensation Plan, as amended
and restated, effective January 1, 2004. * **

(10.3) Form of Change in Control and Termination Agreements and
Schedule of Parties to the Agreements (incorporated by
reference to Exhibit 10.4 to the NiSource Inc. Annual Report
on Form 10-K for the period ended December 31, 2002). *

(10.4) NiSource Inc. Nonemployee Director Stock Incentive Plan (As
Amended July 7, 2002 and Restated Effective July 1, 2002)
(incorporated by reference to Exhibit 10.5 to the NiSource
Inc. Annual Report on Form 10-K for the period ended December
31, 2002).*

(10.5) NIPSCO Industries, Inc. Long-Term Incentive Plan (as amended
and restated Effective April 14, 1999) (incorporated by
reference to Exhibit 10.6 to the NiSource Inc. Annual Report
on Form 10-K for the period ended December 31, 1999). *

(10.6) NiSource Inc. 1994 Long-Term Incentive Plan, as amended and
restated effective January 1, 2004. * **

(10.7) Letter Agreement dated December 3, 2003 between Stephen P.
Adik and NiSource Corporate Services Company. ** ***

(10.8) Noncompetition Agreement dated February 12, 1999 between Roger
A. Young and Bay State Gas Company. **

(10.9) Employment Agreement dated February 12, 1999 between Mr. Roger
A. Young and Bay State Gas Company. **

(10.10) Amended and restated Indenture of Mortgage and Deed of Trust
by Columbia Gas Transmission Corporation to Wilmington Trust
Company, dated as of November 28, 1995 (incorporated by
reference to Exhibit 10-AF to the Columbia Energy Group Annual
Report on Form 10-K for the period ended December 31, 1995).

(10.11) Memorandum of Understanding among the Millennium Pipeline
Project partners (Columbia Transmission, West Coast Energy,
MCN Investment Corp. and TransCanada Pipelines Limited) dated
December 1, 1997 (incorporated by reference to Exhibit 10-CF
to Columbia Energy Group's Annual Report on Form 10-K for the
period ended December 31, 1997).

(10.12) Agreement of Limited Partnership of Millennium Pipeline
Company, L.P. dated May 31, 1998 (incorporated by reference to
Exhibit 10-CG to Columbia Energy Group's Annual Report on Form
10-K for the period ended December 31, 1998).

(10.13) Contribution Agreement Between Columbia Gas Transmission
Corporation and Millennium Pipeline Company, L.P. dated July
31, 1998 (incorporated by reference to Exhibit 10-CH to
Columbia Energy Group's Annual Report on Form 10-K for the
period ended December 31, 1998).

108

ITEM 15. EXHIBIT INDEX (CONTINUED)

NISOURCE INC.

(10.14) Regulations of Millennium Pipeline Management Company, L.L.C.
dated May 31, 1998 (incorporated by reference to Exhibit 10-CI
to Columbia Energy Group's Annual Report on Form 10-K for the
period ended December 31, 1998).

(10.15) NiSource Inc. Nonemployee Director Retirement Plan, as amended
and restated effective January 1, 2002 (incorporated by
reference to Exhibit 10.21 to the NiSource Inc. Annual Report
on Form 10-K for the period ended December 31, 2002). *

(10.16) NiSource Inc. Supplemental Executive Retirement Plan, as
amended and restated effective June 1, 2002 (incorporated by
reference to Exhibit 10.22 to the NiSource Inc. Annual Report
on Form 10-K for the period ended December 31, 2002). *

(10.17) Bay State Gas Company Supplemental Executive Retirement Plan
restated January 1, 1992 (incorporated by reference to Exhibit
10.23 to the NiSource Inc. Annual Report on Form 10-K for the
period ended December 31, 2002). *

(10.18) Pension Restoration Plan of The Columbia Gas System, Inc.,
amended and restated March 1, 1997 (incorporated by reference
to Exhibit 10.27 of the NiSource Inc. Quarterly Report on Form
10-Q for the period ended September 30, 2001). *

(10.19) Thrift Restoration Plan for The Columbia Energy Group, as
amended and restated effective January 1, 2000 (incorporated
by reference to Exhibit 10.28 to the NiSource Inc. Quarterly
Report or Form 10-Q for the period ended September 30, 2001).
*

(10.20) NiSource Inc. Executive Severance Policy, effective June 1,
2002 (incorporated by reference to Exhibit 10.27 to the
NiSource Inc. Annual Report on Form 10-K for the period ended
December 31, 2002). *

(10.21) Amendment to NiSource Inc. Executive Severance Policy. * **

(10.22) NiSource Inc. Executive Severance Policy, effective January 1,
2004. * **

(10.23) Form of Agreement between NiSource Inc. and certain officers
of Columbia Energy Group and schedule of parties to such
Agreements (incorporated by reference to Exhibit 10.33 to the
NiSource Inc. Annual Report on Form 10-K for the period ended
December 31, 2002). *

(10.24) NiSource Inc. Directors' Charitable Gift Program effective
January 1, 2001 (incorporated by reference to Exhibit 10.35 to
the NiSource Inc. Quarterly Report on Form 10-Q for the period
ended June 30, 2001). *

(10.25) Letter Agreement between NiSource Corporate Services Company
and S. LaNette Zimmerman, dated July 15, 2002 (incorporated by
reference to Exhibit 10.35 to the NiSource Inc. Annual Report
on Form 10-K for the period ended December 31, 2002). *

(10.26) Description of NiSource Inc. Annual Incentive Plan, effective
as of January 1, 2003. * **

(10.27) First Amendment to NiSource Inc. Supplemental Executive
Retirement Plan. **

(10.28) Second Amendment to the NiSource Inc. Supplemental Executive
Retirement Plan. **

(10.29) Third Amendment to the NiSource Inc. Supplemental Executive
Retirement Plan. **

(10.30) Financing Agreement dated as of December 1, 2003 between
Jasper County, Indiana and Northern Indiana Public Service
Company.**

109

ITEM 15. EXHIBIT INDEX (CONTINUED)

NISOURCE INC.

(10.31) Insurance Agreement, dated as of December 18, 2003, by and
between AMBAC Assurance Corporation and Northern Indiana
Public Service Company. **

(12) Ratio of Earnings to Fixed Charges. **

(21) List of Subsidiaries. **

(23.1) Consent of Deloitte & Touche LLP. **

(31.1) Certification of Gary L. Neale, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **

(31.2) Certification of Michael W. O'Donnell, Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. **

(32.1) Certification of Gary L. Neale, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith). **

(32.2) Certification of Michael W. O'Donnell, Chief Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith). **

* Management contract or compensatory plan or arrangement of NiSource Inc.

** Exhibit filed herewith.

*** Confidential portions of this exhibit have been redacted and filed
separately with the Commission pursuant to a confidential treatment
request in accordance with Rule 24b-2 of the Securities Exchange Act of
1934, as amended.

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.

110