UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

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

For the transition period from                      to                     

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)

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

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 þ    No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 Par Value: 274,243,476 shares outstanding at October 31, 2008.

 

 

NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2008

Table of Contents

		Page
Defined Terms			3
PART I FINANCIAL INFORMATION			6
Item 1. Financial Statements – unaudited			6
Condensed Statements of Consolidated Income (Loss) (unaudited)			6
Condensed Consolidated Balance Sheets (unaudited)			7
Condensed Statements of Consolidated Cash Flows (unaudited)			9
Notes to Condensed Consolidated Financial Statements (unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			45
Item 3. Quantitative and Qualitative Disclosures About Market Risk			81
Item 4. Controls and Procedures			81
PART II OTHER INFORMATION			82
Item 1. Legal Proceedings			82
Item 1A. Risk Factors			84
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			84
Item 3. Defaults Upon Senior Securities			84
Item 4. Submission of Matters to a Vote of Security Holders			84
Item 5. Other Information			84
Item 6. Exhibits			85
Signature			87
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-31.1
EX-31.2
EX-32.1
EX-32.2

DEFINED TERMS

The following is a list of frequently used abbreviations or acronyms that are found in this report:

NiSource Subsidiaries and Affiliates
Bay State		Bay State Gas Company
Capital Markets		NiSource Capital Markets, Inc.
CER		Columbia Energy Resources, Inc.
CNR		Columbia Natural Resources, Inc.
Columbia		Columbia Energy Group
Columbia Deep Water		Columbia Deep Water Service Company
Columbia Energy Services		Columbia Energy Services Corporation
Columbia Gulf		Columbia Gulf Transmission Company
Columbia of Kentucky		Columbia Gas of Kentucky, Inc.
Columbia of Maryland		Columbia Gas of Maryland, Inc.
Columbia of Ohio		Columbia Gas of Ohio, Inc.
Columbia of Pennsylvania		Columbia Gas of Pennsylvania, Inc.
Columbia of Virginia		Columbia Gas of Virginia, Inc.
Columbia Transmission		Columbia Gas Transmission Corporation
CORC		Columbia of Ohio Receivables Corporation
Crossroads Pipeline		Crossroads Pipeline Company
Granite State Gas		Granite State Gas Transmission, Inc.
Hardy Storage		Hardy Storage Company, L.L.C.
Kokomo Gas		Kokomo Gas and Fuel Company
Lake Erie Land		Lake Erie Land Company
Millennium		Millennium Pipeline Company, L.P.
NDC Douglas Properties		NDC Douglas Properties, Inc.
NiSource		NiSource Inc.
NiSource Corporate Services		NiSource Corporate Services Company
NiSource Development Company		NiSource Development Company, Inc.
NiSource Finance		NiSource Finance Corp.
Northern Indiana		Northern Indiana Public Service Company
Northern Indiana Fuel and Light		Northern Indiana Fuel and Light Company
Northern Utilities		Northern Utilities, Inc.
NRC		NIPSCO Receivables Corporation
PEI		PEI Holdings, Inc.
TPC		EnergyUSA-TPC Corp.
Whiting Clean Energy		Whiting Clean Energy, Inc.
Abbreviations
AFUDC		Allowance for funds used during construction
Algonquin		Algonquin Gas Transmission Co.
ANPR		Advance Notice of Proposed Rulemaking
AOC		Administrative Order by Consent
ARRs		Auction Revenue Rights
ASM		Ancillary Services Market
BBA		British Banker Association
Bcf		Billion cubic feet
BPAE		BP Alternative Energy North America Inc
CAA		Clean Air Act
CAIR		Clean Air Interstate Rule
CAMR		Clean Air Mercury Rule
CCGT		Combined Cycle Gas Turbine
CERCLA		Comprehensive Environmental Response Compensation and Liability Act (Also known as Superfund)
CPCN		Certificate of Public Convenience and Necessity

DEFINED TERMS (continued)

Day 2		Began April 1, 2005 and refers to the operational control of the energy markets by MISO, including the dispatching of wholesale electricity and generation, managing transmission constraints, and managing the day-ahead, real-time and financial transmission rights markets
DPU		Massachusetts Department of Public Utilities
DSM		Demand Side Management
Dth		dekatherms
ECOS		Environmental Council of the States
ECR		Environmental Cost Recovery
ECRM		Environmental Cost Recovery Mechanism
ECT		Environmental cost tracker
EERM		Environmental Expense Recovery Mechanism
EITF Issue No. 02-3		EITF Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities”
Empire		Empire State Pipeline
EPA		United States Environmental Protection Agency
EPS		Earnings per share
FAC		Fuel adjustment clause
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FIN 47		FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”
FIN 48		FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109
FIP		Federal Implementation Plan
FSP		FASB Staff Position
FSP FAS 157-2		FASB Staff Position FAS 157-2: Effective Date of FASB Statement No. 157
FSP FAS 157-3		FASB Staff Position FAS 157-3: Determining the Fair Value of a Financial Asset in a Market that is Not Active
FSP FIN 39-1		FASB Staff Position FIN 39-1: Amendment of FASB Interpretation No. 39
FTRs		Financial Transmission Rights
GAAP		Generally Accepted Accounting Principles
gwh		Gigawatt hours
IBM		International Business Machines Corp.
IBM Agreement		The Agreement for Business Process & Support Services
IDEM		Indiana Department of Environmental Management
Iroquois		Iroquois Gas Transmission System LP
IRP		Integrated Resource Plan
IURC		Indiana Utility Regulatory Commission
LDCs		Local distribution companies
LIBOR		London InterBank Offered Rate
MGP		Manufactured gas plant
MISO		Midwest Independent Transmission System Operator
MLP		Master Limited Partnership
MMDth		Million dekatherms
mw		Megawatts
NAAQS		National Ambient Air Quality Standards
NOV		Notice of Violation
NOx		Nitrogen oxides
NPDES		National Pollutant Discharge Elimination System
NYDEC		State of New York Department of Environmental Conservation
NYMEX		New York Mercantile Exchange
OUCC		Indiana Office of Utility Consumer Counselor

DEFINED TERMS (continued)

PADEP		Pennsylvania Department of Environmental Protection
PCB		Polychlorinated biphenyls
Piedmont		Piedmont Natural Gas Company, Inc.
PPS		Price Protection Service
PUCO		Public Utilities Commission of Ohio
RCRA		Resource Conservation and Recovery Act
SAB No. 92		Staff Accounting Bulletin No. 92, “Accounting and Disclosures Relating to Loss Contingencies”
SEC		Securities and Exchange Commission
SFAS No. 5		Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”
SFAS No. 71		Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation”
SFAS No. 109		Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes”
SFAS No. 123R		Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”
SFAS No. 130		Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”
SFAS No. 133		Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended
SFAS No. 140		Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement 125”
SFAS No. 141R		Statement of Financial Accounting Standards No. 141R, “Business Combinations”
SFAS No. 142		Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
SFAS No. 143		Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”
SFAS No. 157		Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
SFAS No. 158		Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”
SFAS No. 159		Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”
SFAS No. 160		Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”
SFAS No. 161		Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging — an amendment of SFAS No. 133”
SIP		State Implementation Plan
SO2		Sulfur dioxide
SOP 96-1		Statement of Position 96-1, “Environmental Remediation Liabilities”
VaR		Value-at-risk and instrument sensitivity to market factors
VADEQ		Virginia Department of Environmental Quality

PART I

ITEM 1. FINANCIAL STATEMENTS

NiSource Inc.

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
(in millions, except per share amounts)		2008				2007				2008				2007
Net Revenues
Gas Distribution		$	544.4			$	452.8			$	3,697.9			$	3,049.6
Gas Transportation and Storage			217.3				206.1				810.1				778.9
Electric			379.1				377.6				1,050.8				1,037.1
Other			268.3				213.1				929.9				794.5
Gross Revenues			1,409.1				1,249.6				6,488.7				5,660.1
Cost of Sales (excluding depreciation and amortization)			792.7				637.8				4,162.2				3,328.5
Total Net Revenues			616.4				611.8				2,326.5				2,331.6
Operating Expenses
Operation and maintenance			313.1				311.7				1,067.9				1,021.1
Depreciation and amortization			141.0				137.4				424.3				405.2
Impairment and (gain) loss on sale of assets			(0.4	)			0.6				(2.8	)			9.8
Other taxes			58.2				55.2				225.1				219.3
Total Operating Expenses			511.9				504.9				1,714.5				1,655.4
Equity Earnings in Unconsolidated Affiliates			3.4				2.6				7.0				7.8
Operating Income			107.9				109.5				619.0				684.0
Other Income (Deductions)
Interest expense, net			(100.2	)			(101.1	)			(279.4	)			(298.6	)
Other, net			20.8				1.2				20.6				(1.8	)
Total Other Income (Deductions)			(79.4	)			(99.9	)			(258.8	)			(300.4	)
Income From Continuing Operations Before Income Taxes			28.5				9.6				360.2				383.6
Income Taxes (Benefit)			(4.1	)			1.7				117.4				140.2
Income from Continuing Operations			32.6				7.9				242.8				243.4
Income (Loss) from Discontinued Operations — net of taxes			(7.2	)			1.9				(221.5	)			4.1
Gain (Loss) on Disposition of Discontinued Operations — net of taxes			(5.4	)			1.2				(104.3	)			6.9
Net Income (Loss)		$	20.0			$	11.0			$	(83.0	)		$	254.4
Basic Earnings (Loss) Per Share ($)
Continuing operations		$	0.12			$	0.03			$	0.89			$	0.89
Discontinued operations			(0.04	)			0.01				(1.19	)			0.04
Basic Earnings Per Share		$	0.08			$	0.04			$	(0.30	)		$	0.93
Diluted Earnings (Loss) Per Share ($)
Continuing operations		$	0.11			$	0.03			$	0.88			$	0.89
Discontinued operations			(0.04	)			0.01				(1.18	)			0.04
Diluted Earnings Per Share		$	0.07			$	0.04			$	(0.30	)		$	0.93
Dividends Declared Per Common Share		$	0.23			$	0.23			$	0.92			$	0.92
Basic Average Common Shares Outstanding (millions)			274.0				273.9				274.0				273.8
Diluted Average Common Shares (millions)			275.5				274.7				275.4				274.7

The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these unaudited statements.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.

		September 30,				December 31,
(in millions)		2008				2007
ASSETS
Property, Plant and Equipment
Utility Plant		$	18,227.7			$	17,295.6
Accumulated depreciation and amortization			(8,078.0	)			(7,787.0	)
Net utility plant			10,149.7				9,508.6
Other property, at cost, less accumulated depreciation			112.1				67.0
Net Property, Plant and Equipment			10,261.8				9,575.6
Investments and Other Assets
Assets of discontinued operations and assets held for sale			295.4				593.5
Unconsolidated affiliates			70.5				72.7
Other investments			119.8				117.2
Total Investments and Other Assets			485.7				783.4
Current Assets
Cash and cash equivalents			25.1				34.6
Restricted cash			243.9				57.7
Accounts receivable (less reserve of $40.6 and $37.0, respectively)			586.8				900.3
Gas inventory			706.0				452.2
Underrecovered gas and fuel costs			313.1				158.3
Materials and supplies, at average cost			83.5				78.1
Electric production fuel, at average cost			48.5				58.1
Price risk management assets			106.1				102.2
Exchange gas receivable			407.3				210.5
Regulatory assets			306.4				215.4
Assets of discontinued operations and assets held for sale			70.4				85.9
Prepayments and other			228.9				107.1
Total Current Assets			3,126.0				2,460.4
Other Assets
Price risk management assets			85.0				25.2
Regulatory assets			822.6				867.5
Goodwill			3,677.3				3,677.3
Intangible assets			333.4				341.6
Postretirement and postemployment benefits assets			188.2				157.8
Deferred charges and other			117.8				121.5
Total Other Assets			5,224.3				5,190.9
Total Assets		$	19,097.8			$	18,010.3

The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these unaudited statements.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Condensed Consolidated Balance Sheets (unaudited) (continued)

		September 30,				December 31,
(in millions, except share amounts)		2008				2007
CAPITALIZATION AND LIABILITIES
Capitalization
Common Stockholders’ Equity
Common stock — $0.01 par value, 400,000,000 shares authorized; 274,229,624 and 274,176,752 shares issued and outstanding, respectively		$	2.7			$	2.7
Additional paid-in capital			4,017.8				4,011.0
Retained earnings			739.1				1,074.5
Accumulated other comprehensive income (loss)			(65.3	)			11.7
Treasury stock			(23.5	)			(23.3	)
Total Common Stockholders’ Equity			4,670.8				5,076.6
Long-term debt, excluding amounts due within one year			6,323.3				5,594.4
Total Capitalization			10,994.1				10,671.0
Current Liabilities
Current portion of long-term debt			19.9				33.9
Short-term borrowings			1,263.0				1,061.0
Accounts payable			498.0				713.0
Dividends declared			63.1				—
Customer deposits			120.5				112.8
Taxes accrued			145.1				188.4
Interest accrued			101.8				99.3
Overrecovered gas and fuel costs			—				10.4
Price risk management liabilities			201.5				79.9
Exchange gas payable			649.7				441.6
Deferred revenue			10.9				38.7
Regulatory liabilities			51.8				87.8
Accrued liability for postretirement and postemployment benefits			4.9				4.8
Liabilities of discontinued operations and liabilities held for sale			39.7				20.6
Legal and environmental reserves			467.6				112.3
Other accruals			381.7				393.6
Total Current Liabilities			4,019.2				3,398.1
Other Liabilities and Deferred Credits
Price risk management liabilities			80.6				1.7
Deferred income taxes			1,540.7				1,466.2
Deferred investment tax credits			47.9				53.4
Deferred credits			76.2				81.3
Deferred revenue			5.1				0.2
Accrued liability for postretirement and postemployment benefits			550.0				547.8
Liabilities of discontinued operations and liabilities held for sale			86.9				141.3
Regulatory liabilities and other removal costs			1,400.3				1,337.7
Asset retirement obligations			128.4				128.2
Other noncurrent liabilities			168.4				183.4
Total Other Liabilities and Deferred Credits			4,084.5				3,941.2
Commitments and Contingencies (Refer to Note 17)			—				—
Total Capitalization and Liabilities		$	19,097.8			$	18,010.3

The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these unaudited statements.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.

Nine Months Ended September 30, (in millions)		2008				2007
Operating Activities
Net income (loss)		$	(83.0	)		$	254.4
Adjustments to reconcile net income to net cash from continuing operations:
Depreciation and amortization			424.3				405.2
Net changes in price risk management assets and liabilities			21.4				(1.0	)
Deferred income taxes and investment tax credits			92.1				(24.3	)
Deferred revenue			(27.9	)			(32.6	)
Stock compensation expense			7.2				2.7
Gain on sale of assets			(4.4	)			(0.3	)
Loss on impairment of assets			1.6				10.1
Income from unconsolidated affiliates			(20.3	)			(11.6	)
(Gain) loss on disposition of discontinued operations — net of taxes			104.3				(6.9	)
(Income) loss from discontinued operations — net of taxes			221.5				(4.1	)
Amortization of discount/premium on debt			5.7				5.4
AFUDC Equity			(4.7	)			(3.0	)
Changes in assets and liabilities:
Accounts receivable			405.2				288.8
Inventories			(248.0	)			(120.7	)
Accounts payable			(259.3	)			(230.3	)
Customer deposits			7.7				0.2
Taxes accrued			(51.2	)			(34.0	)
Interest accrued			2.5				11.1
(Under) Overrecovered gas and fuel costs			(165.3	)			(23.3	)
Exchange gas receivable/payable			(2.0	)			(9.6	)
Other accruals			(17.6	)			(77.2	)
Prepayments and other current assets			(12.7	)			47.3
Regulatory assets/liabilities			(89.1	)			24.3
Postretirement and postemployment benefits			8.1				(84.1	)
Deferred credits			2.3				0.5
Deferred charges and other noncurrent assets			(36.3	)			(1.2	)
Other noncurrent liabilities			(18.3	)			0.2
Net Operating Activities from Continuing Operations			263.8				386.0
Net Operating Activities from or (used for) Discontinued Operations			(13.5	)			12.9
Net Cash Flows from Operating Activities			250.3				398.9
Investing Activities
Capital expenditures			(679.4	)			(505.6	)
Sugar Creek purchase			(329.7	)			—
Proceeds from disposition of assets			42.0				2.3
Restricted cash			(186.1	)			44.6
Other investing activities			(18.9	)			24.5
Net Investing Activities used for Continuing Operations			(1,172.1	)			(434.2	)
Net Investing Activities from or (used for) Discontinued Operations			203.2				(12.3	)
Net Cash Flows used for Investing Activities			(968.9	)			(446.5	)
Financing Activities
Issuance of long-term debt			960.1				802.7
Retirement of long-term debt			(37.9	)			(67.2	)
Repurchase of long-term debt			(254.0	)			—
Change in short-term debt			202.0				(520.0	)
Issuance of common stock			1.1				7.9
Acquisition of treasury stock			(0.2	)			(2.1	)
Dividends paid — common stock			(189.2	)			(189.1	)
Net Cash Flows from Financing Activities			681.9				32.2
Decrease in cash and cash equivalents			(36.7	)			(15.4	)
Cash inflows from or (contributions to) discontinued operations			27.2				(0.3	)
Cash and cash equivalents at beginning of period			34.6				32.8
Cash and cash equivalents at end of period		$	25.1			$	17.1
Supplemental Disclosures of Cash Flow Information
Cash paid for interest		$	290.2			$	300.4
Interest capitalized			18.2				12.0
Cash paid for income taxes			40.0				149.7

The accompanying Notes to Condensed Consolidated Financial Statements (unaudited) are an integral part of these unaudited statements.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.

1. Basis of Accounting Presentation

The accompanying unaudited condensed consolidated financial statements for NiSource reflect all normal recurring adjustments that are necessary, in the opinion of management, to present fairly the results of operations in accordance with GAAP in the United States of America.

The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in NiSource’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Income for interim periods may not be indicative of results for the calendar year due to weather variations and other factors.

The following unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although NiSource believes that the disclosures made are adequate to make the information not misleading.

2. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

SFAS No. 157 — Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157 to define fair value, establish a framework for measuring fair value and to expand disclosures about fair value measurements. SFAS No. 157 does not change the requirements to apply fair value in existing accounting standards.

Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability.

To increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy disclosed is based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:

	•		Level 1 inputs are quoted prices (unadjusted) in active markets for identical asset or liabilities that the company has the ability to access as of the reporting date.
	•		Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.
	•		Level 3 inputs are unobservable inputs, such as internally developed pricing models for the asset or liability due to little or no market activity for the asset or liability.

SFAS No. 157 became effective for NiSource as of January 1, 2008. The provisions of SFAS No. 157 are to be applied prospectively, except for the initial impact on the following three items, which are required to be recorded as an adjustment to the opening balance of retained earnings in the year of adoption: (1) changes in fair value measurements of existing derivative financial instruments measured initially using the transaction price under EITF Issue No. 02-3, (2) existing hybrid financial instruments measured initially at fair value using the transaction price and (3) blockage factor discounts. The adoption of SFAS No. 157 did not have an impact on NiSource’s January 1, 2008 balance of retained earnings and is not anticipated to have a material impact prospectively.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

In February 2008, the FASB issued FSP FAS 157-2, which delays the effective date of SFAS No. 157 for all nonrecurring fair value measurements of non-financial assets and liabilities until fiscal years beginning after November 15, 2008. NiSource has elected to defer the adoption of the nonrecurring fair value measurement disclosures of non-financial assets and liabilities.

In October 2008, the FASB issued FSP FAS 157-3, which clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP was effective upon issuance, including prior periods for which financial statements have not been issued.

See Note 11, “Fair Value of Financial Assets and Liabilities,” in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information regarding the adoption of SFAS No. 157.

SFAS No. 158 — Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. In September 2006, the FASB issued SFAS No. 158 to improve existing reporting for defined benefit postretirement plans by requiring employers to recognize in the statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan, among other changes.

In the fourth quarter of 2006, NiSource adopted the provisions of SFAS No. 158. Based on the measurement of the various defined benefit pension and other postretirement plans’ assets and benefit obligations at September 30, 2006, the pretax impact of adopting SFAS No. 158 decreased intangible assets by $46.5 million, decreased deferred charges and other assets by $1.1 million, increased regulatory assets by $538.8 million, increased accumulated other comprehensive income by $239.8 million and increased accrued liabilities for postretirement and postemployment benefits by $251.4 million. In addition, NiSource recorded a reduction in deferred income taxes of approximately $96 million. With the adoption of SFAS No. 158 NiSource determined that for certain rate-regulated subsidiaries the future recovery of pension and other postretirement plans costs is probable in accordance with the requirements of SFAS No. 71. These rate-regulated subsidiaries recorded regulatory assets and liabilities that would otherwise have been recorded to accumulated other comprehensive income.

On January 1, 2007, NiSource adopted the SFAS No. 158 measurement date provisions requiring employers to measure plan assets and benefit obligations as of the fiscal year-end. The pre-tax impact of adopting the SFAS No. 158 measurement date provisions increased deferred charges and other assets by $9.4 million, decreased regulatory assets by $89.6 million, decreased retained earnings by $11.3 million, increased accumulated other comprehensive income by $5.3 million and decreased accrued liabilities for postretirement and postemployment benefits by $74.2 million. NiSource also recorded a reduction in deferred income taxes of approximately $2.6 million. In addition, 2007 expense for pension and postretirement benefits reflects the updated measurement date valuations. Refer to Note 14, “Pension and Other Postretirement Benefits,” in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information.

SFAS No. 159 — The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. In February 2007, the FASB issued SFAS No. 159 which permits entities to choose to measure certain financial instruments at fair value that are not currently required to be measured at fair value. Upon adoption, a cumulative adjustment would be made to beginning retained earnings for the initial fair value option remeasurement. Subsequent unrealized gains and losses for fair value option items will be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and should not be applied retrospectively, except as permitted for certain conditions for early adoption. NiSource has chosen not to elect to measure any applicable financial assets or liabilities at fair value pursuant to this standard when SFAS No. 159 was adopted on January 1, 2008.

FSP FIN 39-1 — FASB Staff Position Amendment of FASB Interpretation No. 39. In April 2007, the FASB posted FSP FIN 39-1 to amend paragraph 3 of FIN 39 to replace the terms conditional contracts and exchange contracts with the term derivative instruments as defined in SFAS No. 133. This FSP also amends paragraph 10 of FIN 39 to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. This FSP became effective for NiSource as of

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

January 1, 2008. NiSource has not elected to net fair value amounts for its derivative instruments or the fair value amounts recognized for its right to receive cash collateral or obligation to pay cash collateral arising from those derivative instruments recognized at fair value, which are executed with the same counterparty under a master netting arrangement. This is consistent with NiSource’s current accounting policy prior to the adoption of this amended standard. NiSource discloses amounts recognized for the right to reclaim cash collateral within “Restricted cash” and amounts recognized for the right to return cash collateral within current liabilities on the Consolidated Balance Sheets.

FIN 48 — Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued FIN 48 to reduce the diversity in practice associated with certain aspects of the recognition and measurement requirements related to accounting for income taxes. Specifically, this interpretation requires that a tax position meet a “more-likely-than-not recognition threshold” for the benefit of an uncertain tax position to be recognized in the financial statements and requires that benefit to be measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The determination of whether a tax position meets the more-likely-than-not recognition threshold is based on whether it is probable of being sustained on audit by the appropriate taxing authorities, based solely on the technical merits of the position. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

On January 1, 2007, NiSource adopted the provisions of FIN 48. As a result of the implementation of FIN 48, NiSource recognized a charge of $0.8 million to the opening balance of retained earnings. Refer to Note 13, “Income Taxes,” in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information.

Recently Issued Accounting Pronouncements

SFAS No. 161 — Disclosures about Derivative Instruments and Hedging — an amendment of SFAS No. 133. In March 2008, the FASB issued SFAS No. 161 to amend and expand the disclosure requirements of SFAS No. 133 with the intent to provide users of the financial statement with an enhanced understanding of how and why an entity uses derivative instruments, how these derivatives are accounted for and how the respective reporting entity’s financial statements are affected. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, and earlier application is encouraged. NiSource is currently reviewing the provisions of SFAS No. 161 to determine the impact it may have on its disclosures within the Notes to Condensed Consolidated Financial Statements (unaudited).

SFAS No. 160 — Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. In December 2007, the FASB issued SFAS No. 160 to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements regarding non-controlling ownership interests in a business and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. NiSource is currently reviewing the provisions of SFAS No. 160 to determine the impact it may have on the Condensed Consolidated Financial Statements (unaudited) and Notes to Condensed Consolidated Financial Statements (unaudited).

SFAS No. 141R — Business Combinations. In December 2007, the FASB issued SFAS No. 141R to improve the relevance, representational faithfulness, and comparability of information that a reporting entity provides in its financial reports regarding business combinations and its effects, including recognition of assets and liabilities, the measurement of goodwill and required disclosures. SFAS No. 141R is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. NiSource is currently reviewing the provisions of SFAS No. 141R to determine the impact on future business combinations.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

3. Earnings Per Share

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

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
(in thousands)		2008				2007				2008				2007
Denominator
Basic average common shares outstanding			273,992				273,881				273,962				273,765
Dilutive potential common shares
Nonqualified stock options			—				6				—				136
Shares contingently issuable under employee stock plans			1,285				626				1,285				626
Shares restricted under employee stock plans			209				186				188				173
Diluted Average Common Shares			275,486				274,699				275,435				274,700

4. Restructuring Activities

In the fourth quarter of 2005, NiSource announced a plan to reduce its executive ranks by approximately 15% to 20% of the top-level executive group. In part, this reduction came through anticipated attrition and consolidation of certain positions. Fourteen employees were terminated as a result of the executive initiative.

In previous years, NiSource implemented restructuring initiatives to streamline its operations and realize efficiencies as a result of the acquisition of Columbia. As of September 30, 2008, 1,567 employees were terminated. All of the remaining $0.4 million restructuring liability from the Columbia merger and related initiatives is related to facility exit costs.

Restructuring reserve by restructuring initiative:

		Balance at												Balance at
(in millions)		December 31, 2007				Benefits Paid				Adjustments				September 30, 2008
Executive initiative		$	0.6			$	(0.6	)		$	—			$	—
Columbia merger and related initiatives			2.2				(1.8	)			—				0.4
Total		$	2.8			$	(2.4	)		$	—			$	0.4

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

5. Discontinued Operations and Assets Held for Sale

The assets and liabilities of discontinued operations and held for sale on the Condensed Consolidated Balance Sheet (unaudited) at September 30, 2008 were:

(in millions)
		Property, plant								Materials and
Assets of discontinued		and equipment,				Accounts				supplies, at				Regulatory				Intangible				Other
operations and held for sale:		net				receivable, net				average cost				assets				assets				assets				Total
Northern Utilities			180.9				17.2				1.5				18.6				34.6				38.8				291.6
Granite State Gas			15.4				0.6				—				0.1				—				7.7				23.8
Bay State Gas Company			19.7				—				—				—				—				—				19.7
Lake Erie Land			11.9				—				—				—				—				—				11.9
NiSource Corporate Services			7.9				—				—				—				—				—				7.9
NDC Douglas Properties			4.0				—				—				—				—				1.0				5.0
Columbia Transmission			2.6				—				—				—				—				—				2.6
Columbia of Ohio			2.2				—				—				—				—				—				2.2
NiSource Retail Service Corp			—				0.9				—				—				—				—				0.9
Northern Indiana			0.2				—				—				—				—				—				0.2
Total		$	244.8			$	18.7			$	1.5			$	18.7			$	34.6			$	47.5			$	365.8
Liabilities of discontinued							Accounts			Deferred income					Deferred			Regulatory				Other
operations and held for sale:		Debt				payable				taxes				credits				liabilities				liabilities				Total
Northern Utilities			—				7.9				58.3				0.1				20.2				20.5				107.0
Granite State Gas			—				0.8				5.1				—				—				7.8				13.7
NDC Douglas Properties			5.0				0.2				—				—				—				0.1				5.3
NiSource Retail Service Corp			—				0.6				—				—				—				—				0.6
Total		$	5.0			$	9.5			$	63.4			$	0.1			$	20.2			$	28.4			$	126.6

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The assets and liabilities of discontinued operations and held for sale on the Consolidated Balance Sheet at December 31, 2007 including reclassifications of balances for entities discontinued during 2008, were:

(in millions)
		Property, plant								Materials and
Assets of discontinued		and equipment,				Accounts				supplies, at				Regulatory				Intangible				Other
operations and held for sale:		net				receivable, net				average cost				assets				assets				assets				Total
Northern Utilities		$	168.8			$	27.2			$	1.4			$	16.1			$	72.4			$	22.0			$	307.9
Whiting Clean Energy			269.9				12.7				8.9				—				—				11.8				303.3
Granite State Gas			17.2				0.2				—				0.1				8.1				0.2				25.8
Lake Erie Land			12.6				—				—				—				—				—				12.6
NiSource Corporate Services			9.5				—				—				—				—				—				9.5
Columbia Transmission			8.0				—				—				—				—				—				8.0
NDC Douglas Properties			5.2				—				—				—				—				0.9				6.1
Columbia Gulf Transmission			4.8				—				—				—				—				—				4.8
NiSource Retail Service Corp			0.3				0.7				—				—				—				0.2				1.2
Northern Indiana			0.2				—				—				—				—				—				0.2
Total		$	496.5			$	40.8			$	10.3			$	16.2			$	80.5			$	35.1			$	679.4
Liabilities of discontinued						Accounts				Deferred				Deferred				Regulatory				Other
operations and held for sale:		Debt				payable				income taxes				credits				liabilities				liabilities				Total
Northern Utilities		$	—			$	9.9			$	56.0			$	0.1			$	17.3			$	10.2			$	93.5
Whiting Clean Energy			—				1.1				36.0				17.0				—				1.9				56.0
NDC Douglas Properties			4.6				—				—				—				—				1.7				6.3
Granite State Gas			—				0.4				5.1				—				—				0.1				5.6
NiSource Retail Service Corp			—				0.5				—				—				—				—				0.5
Total		$	4.6			$	11.9			$	97.1			$	17.1			$	17.3			$	13.9			$	161.9

Assets classified as discontinued operations and held for sale are no longer depreciated.

NiSource reached an agreement on April 18, 2008 with BPAE for the sale of Whiting Clean Energy. On June 30, 2008, NiSource sold Whiting Clean Energy to BPAE for $217.2 million which included $16.3 million in working capital. During the first quarter of 2008 an estimated loss of $32.5 million was recorded to Gain (Loss) on Disposition of Discontinued Operations in the Condensed Statements of Consolidated Income (Loss) (unaudited). During the second quarter of 2008, a $0.6 million adjustment was made to the estimated loss on the disposition of the asset.

On February 15, 2008, NiSource reached a definitive agreement under which Unitil Corporation will acquire NiSource subsidiaries Northern Utilities and Granite State Gas. Under the terms of the transaction, Unitil Corporation will acquire Northern Utilities, a local gas distribution company serving 52 thousand customers in 44 communities in Maine and New Hampshire and Granite State Gas, an 86-mile FERC regulated gas transmission pipeline primarily located in Maine and New Hampshire. In the first quarter of 2008, net assets for Northern Utilities and Granite State Gas were accounted for as assets and liabilities of discontinued operations. For the third quarter and nine months ended September 30, 2008, estimated losses of $4.8 million and $71.7 million were included in Gain (Loss) on Disposition of Discontinued Operations in the Condensed Statements of Consolidated Income (Loss) (unaudited).

On June 27, 2008, Columbia Gulf sold a portion of Columbia Gulf’s offshore assets to Tennessee Gas Pipeline Company for $7.5 million, which resulted in a gain of $2.9 million that was recorded during the second quarter of 2008. Payment was received on July 1, 2008.

NDC Douglas Properties, a subsidiary of NiSource Development Company, is in the process of exiting some of its low income housing investments. One of these investments was disposed of during 2007 and two other investments

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

are expected to be sold or disposed of during 2009. NiSource has accounted for the assets and liabilities of the investments to be sold as assets held for sale.

NiSource Corporate Services is continuing to work with several potential buyers to sell its Marble Cliff facility. In late February 2008 an offer was accepted but the parties have failed to reach a definitive agreement. As a result of the initial offer, an impairment loss of $1.6 million was recognized during the first quarter of 2008. During the first quarter of 2007 an impairment loss of $3.2 million was recognized due to the current book value exceeding the estimated fair value of the facility. NiSource has accounted for this facility as assets held for sale.

Lake Erie Land, which is wholly-owned by NiSource, is in the process of selling real estate over a 10-year period as a part of an agreement reached in June 2006 with a private real estate development group. Part of the sale transaction included the assets of the Sand Creek Golf Club, and NiSource began accounting for the operations of the Sand Creek Golf Club as discontinued operations at that time. NiSource estimates the property to be sold to the private developer during the next twelve months and accounts for these assets as assets held for sale.

Columbia Transmission is in the process of selling certain facilities that are non-core to the operation of the pipeline system. During the third quarter of 2008, certain assets were reclassified to assets held and used, which resulted in a $1.6 million decrease to the balance of assets held for sale. In the first quarter of 2008, certain assets in Ohio were sold, which resulted in a $3.8 million decrease to the balance of assets held for sale. Northern Indiana and Columbia of Ohio are also in the process of selling non-core assets. NiSource has accounted for these assets as assets held for sale.

During the second quarter of 2008 Bay State signed a letter of intent to sell certain assets. Beginning in the second quarter of 2008, these assets were accounted for as assets held for sale.

NiSource Retail Services, a wholly-owned subsidiary of NiSource, is engaged in a process to sell certain assets. These assets and liabilities of NiSource Retail Services were accounted for as assets of discontinued operations and the results of operations and cash flows of NiSource Retail Services were classified as discontinued operations during the third quarter.

Results from discontinued operations from Whiting Clean Energy, Granite State Gas, Northern Utilities, NDC Douglas Properties low income housing investments, the golf course assets of Lake Erie Land, NiSource Retail Services, and reserve changes for NiSource’s former exploration and production subsidiary, CER, are provided in the following table:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
(in millions)		2008				2007				2008				2007
Revenues from Discontinued Operations		$	13.2			$	53.0			$	168.4			$	190.3
Income (loss) from discontinued operations			(11.0	)			3.8				(338.5	)			9.0
Income tax expense (benefit)			(3.8	)			1.9				(117.0	)			4.9
Income (Loss) from Discontinued Operations - net of taxes		$	(7.2	)		$	1.9			$	(221.5	)		$	4.1
Gain (Loss) on Disposition of Discontinued Operations - net of taxes		$	(5.4	)		$	1.2			$	(104.3	)		$	6.9

Losses from Discontinued Operations for the first nine months of 2008 are primarily attributable to an increase to the reserve for the Tawney litigation associated with CER. Refer to Note 17-B, “Other Legal Proceedings,” in the Notes to Condensed Consolidated Financial Statements (unaudited) for further discussion on the Tawney litigation. The gain (loss) on disposition of discontinued operations for the first nine months of 2008 primarily include the after tax loss on disposition related to the sale of Whiting Clean Energy and pending sales of Northern Utilities and Granite State Gas of $32.3 million, $56.7 million and $14.9 million, respectively.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

6. Purchase of Sugar Creek Plant

On May 30, 2008, Northern Indiana purchased Sugar Creek for $329.7 million. This purchase was in response to Northern Indiana’s need to add approximately 1,000 mw of new capacity. Refer to Note 8, “Regulatory Matters,” in the Notes to Condensed Consolidated Financial Statements (unaudited) for further discussion. The Sugar Creek facility is a CCGT located in West Terre Haute, Indiana. Sugar Creek has a plant capacity rating of 535 mw. Sugar Creek has transmission access to and is able to participate in both the MISO and PJM Interconnection wholesale electricity markets. The plant is currently committed to the PJM Interconnection market until May 31, 2010. At acquisition, Northern Indiana recorded at fair value $328.1 million related to utility plant. No goodwill was recorded in conjunction with the purchase. The preliminary allocation of the purchase price was assigned to the assets and liabilities of Sugar Creek, based on their estimated fair value in accordance with GAAP. This allocation is subject to completion of certain analyses and allocation of property, plant and equipment unit of accounts. Northern Indiana has up to one year from the date of purchase to complete its final purchase price allocation.

7. Asset Retirement Obligations

NiSource accounts for its asset retirement obligations in accordance with SFAS No. 143 and FIN 47. 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 are classified as regulatory liabilities and other removal costs on the Condensed Consolidated Balance Sheets (unaudited).

NiSource activity for asset retirement obligations:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
(in millions)		2008				2007				2008				2007
Accretion expense		$	0.2			$	0.3			$	0.6			$	0.7
Accretion recorded as a regulatory asset			1.7				1.5				4.5				4.6
Settlements			(1.7	)			—				(4.9	)			—
Increase in Asset Retirement Obligation Liability		$	0.2			$	1.8			$	0.2			$	5.3

Northern Indiana performed retirement activities associated with a landfill and asbestos removal resulting in settlements of $1.7 million and $4.9 million for the quarter and nine months ended September 30, 2008 respectively.

8. Regulatory Matters

Gas Distribution Operations Regulatory Matters

Significant Rate Developments. Columbia of Ohio filed a base rate case with the PUCO on March 3, 2008, requesting an increase in base rates in excess of $80 million annually. Columbia of Ohio is seeking recovery of increased infrastructure rehabilitation costs, as well as the stabilization of revenues and cost recovery through rate design. A settlement agreement was filed on October 24, 2008. The agreement recommends an annual revenue increase of $47.1 million, and also provides for recovery of costs associated with Columbia of Ohio’s infrastructure rehabilitation program. Rate design issues are to be resolved by the PUCO. The case is currently pending, and is expected to be resolved before the end of 2008.

On January 28, 2008, Columbia of Pennsylvania filed a base rate case with the Pennsylvania Public Utility Commission, seeking an increase of approximately $60 million annually, effective October 28, 2008. Through this filing, Columbia of Pennsylvania sought to recover costs associated with its significant infrastructure rehabilitation program, as well as stabilize revenues and cost recovery through modifications to rate design. On July 2, 2008, Columbia of Pennsylvania and all interested parties filed a unanimous settlement with the Pennsylvania Public

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Utilities Commission. On October 23, 2008, the Pennsylvania Public Utilities Commission issued an Order approving the settlement as filed, increasing annual revenues by $41.5 million.

On October 17, 2007, Bay State petitioned the DPU to allow the company to collect an additional $7.5 million in annual revenue related to usage reductions occurring since its last rate case. Bay State also requested approval of a steel infrastructure tracker that would allow for recovery of ongoing infrastructure replacement program investments. The DPU held hearings on this matter in the first quarter of 2008 and issued an order denying Bay State’s petition on April 30, 2008. NiSource has decided not to appeal this case, and continues to weigh its options. On July 16, 2008, the DPU issued an order in its generic decoupling proceeding for gas utilities.

On October 1, 2008, Columbia of Maryland filed a base rate case with the Maryland Public Service Commission, seeking an increase of approximately $3.7 million annually. New rates are expected to take effect during the second quarter of 2009.

Cost Recovery and Trackers. A significant portion of the distribution companies’ revenue is related to the recovery of gas costs, the review and recovery of which occurs via standard regulatory proceedings. All states require periodic review of actual gas procurement activity to determine prudence and to permit the recovery of prudently incurred costs related to the supply of gas for customers. NiSource distribution companies have historically been found prudent in the procurement of gas supplies to serve customers.

Certain operating costs of the NiSource distribution companies are significant, recurring in nature, and generally outside the control of the distribution companies. Some states allow the recovery of such costs via cost tracking mechanisms. Such tracking mechanisms allow for abbreviated regulatory proceedings in order for the distribution companies to implement charges and recover appropriate costs. Tracking mechanisms allow for more timely recovery of such costs as compared with more traditional cost recovery mechanisms. Examples of such mechanisms include gas cost recovery adjustment mechanisms, tax riders, and bad debt recovery mechanisms.

Comparability of Gas Distribution Operations line item operating results is impacted by these regulatory trackers that allow for the recovery in rates of certain costs such as bad debt expenses. Increases in the expenses that are the subject of trackers result in a corresponding increase in net revenues and therefore have essentially no impact on total operating income results.

On April 9, 2008, the PUCO issued an order approving, in all material respects, a joint Stipulation submitted on behalf of Columbia of Ohio. This Stipulation is a result of a process that began on April 13, 2005 with a PUCO ordered investigation into the type of gas risers installed in the state, the conditions of installation and overall performance. The Stipulation provides for: establishment of accounting for and recovery of costs resulting from the Staff’s investigation; Columbia’s performance of a survey to identify those customer-owned risers on its system prone to failure; and related customer education and other program related expenses. In addition this Stipulation provides for: Columbia’s assumption of financial responsibility for the replacement of all risers identified as prone to failure; repair or replacement of hazardous customer owned service lines; and capitalization of this investment with recovery to be addressed in future rate proceedings. As of September 30, 2008, Columbia of Ohio has approximately $38.5 million in costs associated with the gas riser and customer service line programs recorded as a regulatory asset and/or capitalized plant.

On December 28, 2007, Columbia of Ohio entered into a Stipulation with the Ohio Consumers’ Counsel and PUCO Staff and other stakeholders resolving litigation concerning a pending Gas Cost Recovery audit of Columbia of Ohio. The Stipulation calls for an accelerated pass back to customers of $36.6 million that will occur from January 31, 2008 through January 31, 2009, generated through off-system sales and capacity release programs, the development of new energy efficiency programs for introduction in 2009, and the development of a wholesale auction process for customer supply to take effect in 2010. Approximately $21.2 million was passed back through September 2008. The Stipulation also resolves issues related to pending and future Gas Cost Recovery Management Performance audits through 2008. The PUCO approved this agreement on January 23, 2008.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Gas Transmission and Storage Operations Regulatory Matters

Significant FERC Developments. Columbia Gulf and Columbia Transmission are cooperating with the FERC on an informal, non-public investigation of certain operating practices regarding tariff services offered by those companies. Although the companies are continuing to cooperate with the FERC in an effort to reach a consensual settlement, it is likely that any settlement will require the payment of fines or refunds. Management does not expect these fines and refunds to be material to the results of operations for 2008.

Eastern Market Expansion Project. On May 3, 2007, Columbia Transmission filed a certificate application before the FERC for approval to expand its facilities to provide additional storage and transportation services and to replace certain existing facilities. This Eastern Market Expansion is projected to add 97,000 Dth per day of storage and transportation deliverability and is fully subscribed on a 15-year contracted firm basis. On January 14, 2008, the FERC issued a favorable order which granted a certificate to construct the project. Construction of the facilities is underway and the project is expected to be in service by April 2009.

Appalachian Expansion Project. On February 29, 2008, Columbia Transmission filed an application before the FERC for approval to build a new 9,470 horsepower compressor station in West Virginia. The Appalachian Expansion Project will add 100,000 Dth per day of transportation capacity and is fully subscribed on a 15-year contracted firm basis. On August 22, 2008, the FERC issued a favorable order which granted a certificate to construct the project. Construction is in progress and the project is expected to be in service in the fourth quarter of 2009.

Ohio Storage Project. On June 24, 2008, Columbia Transmission filed an application before the FERC for approval to expand two of its Ohio storage fields for additional capacity of nearly 7 MMDths and 103,400 Dth per day of daily deliverability. If required approvals are granted as requested, construction would begin in 2009 and the expanded facilities would be placed in service by the end of 2009. The expansion capacity is 58% contracted on a long-term, firm basis.

Electric Operations Regulatory Matters

Significant Rate Developments. Northern Indiana filed a petition for new electric base rates and charges on June 27, 2008 and filed its case-in-chief on August 29, 2008. The filing requests a two-step increase. Step One is a request for an increase in base rates calculated to produce additional gross margin of approximately $24 million. Step Two requests an additional increase to incorporate the return on and recovery of the Sugar Creek facility, which Northern Indiana purchased on May 30, 2008. The Step Two increase, if granted, would become effective as soon as the Sugar Creek facility is no longer committed to the PJM Interconnection market and is dispatched into MISO, but no later than June 1, 2010. The hearing on Northern Indiana’s case-in-chief is scheduled to begin on January 6, 2009. Several stakeholder groups have intervened in the case, representing customer groups and various counties and towns within Northern Indiana’s electric service territory. Testimony from the OUCC and all intervenors will be due by April 17, 2009. Assuming the case goes through the full procedural schedule without settlement, the final hearing is scheduled to begin July 27, 2009 and new rates are anticipated to take effect in early 2010.

In January 2002, Northern Indiana indefinitely shut down its Mitchell Station. In the base rate case filed on August 29, 2008, Northern Indiana stated in pre-filed testimony that it intends to retire the Mitchell station, demolish it, and remediate the site to industrial condition, subject to the ability to recover these costs.

During 2002, Northern Indiana settled certain regulatory 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. The credits will continue at approximately the same annual level and per the same methodology, until the IURC enters a base rate order that approves revised Northern Indiana electric rates. The order included a rate moratorium that expired on July 31, 2006. The order also provides that 60% of any future earnings beyond a specified earnings level will be retained by Northern Indiana. The revenue credit is calculated based on electric usage; therefore, in times of high usage the credit may be more than $55.1 million. Credits amounting to $40.5 million and $44.3 million were recognized for electric customers for the first nine months of 2008 and 2007, respectively.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

MISO. As part of Northern Indiana’s participation in the MISO transmission service and wholesale energy market, certain administrative fees and non-fuel costs have been incurred. IURC orders have been issued authorizing the deferral for consideration in a future rate case proceeding of the administrative fees and certain non-fuel related costs incurred after Northern Indiana’s rate moratorium, which expired on July 31, 2006. During the first nine months of 2008 non-fuel costs of $1.9 million were deferred in accordance with the aforementioned orders. In addition, administrative, FERC and other fees of $5.0 million were deferred. In the first nine months of 2008 and 2007, MISO costs of $6.9 million and $18.4 million, respectively, were deferred. In the base rate case filed in August 2008, Northern Indiana proposed a tracker for these MISO charges which are currently being deferred.

On April 25, 2006, the FERC issued an order on the MISO’s Transmission and Energy Markets Tariff, stating that MISO had violated the tariff on several issues including not assessing revenue sufficiency guarantee charges on virtual bids and offers and for charging revenue sufficiency guarantee charges on imports. The FERC ordered MISO to perform a resettlement of these charges back to the start of the Day 2 Market. The resettlement began on June 9, 2007 and ended in January 2008. Certain charge types included in the resettlement were originally considered to be non-fuel and were recorded as regulatory assets, in accordance with previous IURC orders allowing deferral of certain non-fuel MISO costs. During the fourth quarter 2007, based on precedent set by an IURC ruling for another Indiana utility, Northern Indiana reclassified these charges, totaling $16.7 million, as fuel and included them in the fuel cost recovery mechanism in its latest FAC filing. Prior to the hearing for FAC-78 on April 17, 2008, several intervenors objected to a portion of the $16.7 million and Northern Indiana agreed to remove $7.6 million from the FAC filing. This amount represents the portion of the resettlement costs related to periods prior to December 9, 2005. The $7.6 million was recorded as a reduction to net revenues in the first quarter of 2008.

Northern Indiana is an active stakeholder in the process used in designing, testing and implementing the ASM and in developing the surrounding business practices. On January 18, 2008, Northern Indiana as part of a Joint Petition among several other Indiana utilities “Joint Petitioners” filed a request to the IURC to participate in ASM and seek approval of timely cost recovery for the associated costs of participating. On August 13, 2008, the IURC issued a Phase I order, authorizing the Joint Petitioners authority to transfer additional balancing authority functions and to implement the operational changes necessary to participate in the ASM and to seek recovery of modified MISO charge-types via the FAC and to defer certain other MISO charge-types, pending a final determination on the issue of cost recovery. This order also created a subdocket for the purpose of further consideration of whether a cost-benefit analysis of participation in MISO or the MISO ASM should be required. Phase II of this proceeding deals with how the Joint Petitioners will approach the ASM, specifically related to operating reserves, and the specifics regarding cost recovery. The evidentiary hearing for Phase II is scheduled for December 22, 2008. At this time, Northern Indiana is unable to determine what impact the ASM will have on its operations or cash flows.

Cost Recovery and Trackers. A significant portion of the Northern Indiana’s revenue is related to the recovery of fuel costs to generate power and the fuel costs related to purchased power. These costs are recovered through a FAC, a standard, quarterly, “summary” regulatory proceeding in Indiana.

On May 30, 2008, Northern Indiana purchased the Sugar Creek facility for $329.7 million. The Sugar Creek facility is a CCGT located in West Terre Haute, Indiana. Sugar Creek has a plant capacity rating of 535 mw. Sugar Creek has transmission access to and is able to participate in both the MISO and PJM Interconnection wholesale electricity markets. The plant is currently committed to the PJM Interconnection market until May 31, 2010. The purchase was in response to Northern Indiana’s need to add approximately 1,000 mw of new capacity, as filed in its bi-annual IRP with the IURC on November 1, 2007.

The IURC had issued an order on May 28, 2008 approving the purchase of Sugar Creek, but denied Northern Indiana’s request for deferral of depreciation expense and carrying costs related to the plant, beginning with the acquisition date, on the basis that the facility would not be used and useful property under traditional regulation until the facility was operating inside of MISO. The order also denied Northern Indiana’s request for alternative regulatory treatment of the plant, based on incomplete presentation of evidence, but provided for the establishment of a subdocket to allow for the proper presentation and consideration of alternative regulatory treatment. On June 6, 2008, Northern Indiana filed its (a) Verified Petition for Rehearing; (b) Request for Establishment of a Subdocket for Presentation and Consideration of an Alternative Regulatory Plan; and (c) Motion for Consolidation (a single document) in Cause No. 43396. The IURC established a subdocket for consideration of Northern Indiana’s Alternative Regulatory Plan. Northern Indiana’s case-in-chief was filed with the IURC on September 26, 2008 and

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

an evidentiary hearing in the subdocket proceeding is scheduled for February 3 and 4, 2009. The subdocket proposes deferral of depreciation and carrying costs associated with Sugar Creek and creation of a regulatory asset, which would be reduced by the Sugar Creek capacity and energy revenues, net of operation and maintenance expenses to operate the plant.

The IRP included a commitment to using renewable energy, and a subsequent filing was made with the IURC, requesting approval for Northern Indiana to enter into power purchase contracts with subsidiaries of Iberdrola Renewables for wind-generated power in Iowa and South Dakota, and requesting full recovery of all associated costs. On July 24, 2008, the IURC issued an order approving Northern Indiana’s proposed purchase power agreement with subsidiaries of Iberdrola Renewables. The agreement provides Northern Indiana the opportunity to purchase 100 mw of wind power commencing in early 2009.

On January 30, 2008, the IURC approved a settlement agreement which was reached in October 2007 with the OUCC, LaPorte County and a group of Northern Indiana industrial customers to resolve questions relating to purchased power costs in the period from January 1, 2006 through September 30, 2007. The terms of the settlement called for Northern Indiana to make a one-time payment of $33.5 million to FAC customers. A reserve for the entire amount was recorded in the third quarter of 2007 and the refund was made to customers via the FAC in the periods of February through July 2008. As part of this agreement, Northern Indiana implemented a new “benchmarking standard,” that became effective in October 2007, which defines the price above which purchased power costs must be absorbed by Northern Indiana and are not permitted to be passed on to customers. The benchmark is based upon the costs of power generated by a hypothetical natural gas fired CCGT using gas purchased and delivered to Northern Indiana. During the first nine months of 2008, the amount of purchased power costs exceeding the benchmark amounted to $10.8 million, which was recognized as a net reduction of revenues. The agreement also contemplated Northern Indiana adding generating capacity to its existing portfolio and that the benchmark would be adjusted as new capacity is added. It was anticipated that the addition of the Sugar Creek capacity would trigger a change in the benchmark beginning in June 2008. However, based on the IURC order in the CPCN as described above, the Sugar Creek capacity will not be considered until the plant is operating inside of MISO and therefore the benchmark is unchanged.

On November 26, 2002, Northern Indiana received approval from the IURC for an ECT. Under the ECT, Northern Indiana is permitted to recover (1) AFUDC and a return on the capital investment expended by Northern Indiana to implement IDEM’s NOx SIP through an ECRM and (2) related operation and maintenance and depreciation expenses once the environmental facilities become operational through an EERM. Under the IURC’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. In December 2006, Northern Indiana filed a petition with the IURC for appropriate cost treatment and recovery of emission control construction needed to address the Phase I CAIR requirements of the Indiana Air Pollution Control Board’s CAIR rules that became effective on February 25, 2007. On July 3, 2007, Northern Indiana received an IURC order issuing a CPCN for the CAIR and CAMR Phase I Compliance Plan Projects, estimated to cost approximately $23 million. Northern Indiana will include the CAIR and CAMR Phase I Compliance Plan costs to be recovered in the semi-annual and annual ECRM and EERM filing six months after construction costs begin. On October 23, 2008, Northern Indiana filed for approval of a revised cost estimate to meet the NOx and SO2 and mercury emissions environmental standards. Northern Indiana anticipates a total capital investment of approximately $368 million. On October 1, 2008, the IURC approved ECR-12 for capital expenditures (net of accumulated depreciation) of $267.7 million.

In the electric base rate case filed in August 2008, Northern Indiana proposed a new tracker, referred to as the Reliability Adjustment mechanism. The case proposes that this tracker be used for recovery of MISO charges currently being deferred. This tracker is also intended to be used to recover purchased power energy and capacity costs and to share with customers the proceeds of off-system sales and transmission revenues, as well as to track costs and revenues associated with emissions allowances.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Northern Indiana is committed to offering DSM and energy efficiency programs to its electric customers and plans to file a petition and case-in-chief requesting approval to implement a variety of programs. The filing is expected to be made with the IURC in the fourth quarter of 2008, with anticipated approval and implementation in 2009. Proposed programs will include rebates for energy efficiency appliances and an air-conditioning cycling program, designed to reduce peak load.

On October 27, 2006, Indiana Gasification, LLC, Vectren Energy Delivery of Indiana, Citizens Gas & Coke Utility and Northern Indiana filed a joint petition at the IURC seeking approval for Indiana Gasification, LLC to construct a coal gasification facility and the respective utilities to enter into long-term contracts to purchase the energy output of the plant, both gas and electricity. This filing was based upon a Letter of Intent that was entered into by the parties, but subject to finalization of a contract and regulatory approval. On December 12, 2007, Citizens Gas & Coke Utility filed a Motion with the IURC to withdraw from the petition. The parties have had frequent negotiations during the two year period, but have not reached a definitive agreement. On October 15, 2008, Joint Petitioners filed a motion requesting that the technical conference scheduled for November 25, 2008 be used to establish a new procedural schedule.

9. Risk Management and Energy Marketing Activities

NiSource uses commodity-based derivative financial instruments primarily to manage commodity price risk and interest rate risk exposure in its business as well as for commercial and industrial sales. NiSource is not involved in speculative energy trading activity. NiSource accounts for its derivatives in accordance with SFAS No. 133. Under SFAS No. 133, 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. Additionally, certain NiSource subsidiaries enter into forward physical contracts with various third parties to procure natural gas or power for its operational needs. These forward physical contracts are derivatives which qualify for the normal purchase normal sales exception under SFAS No. 133 and do not require mark-to-market accounting.

NiSource’s derivatives on the Condensed Consolidated Balance Sheet (unaudited) at September 30, 2008 were:

(in millions)		Hedge				Non-Hedge				Total
Price risk management assets
Current assets		$	102.2			$	3.9			$	106.1
Other assets			85.0				—				85.0
Total price risk management assets		$	187.2			$	3.9			$	191.1
Price risk management liabilities
Current liabilities		$	158.0			$	43.5			$	201.5
Other liabilities			73.6				7.0				80.6
Total price risk management liabilities		$	231.6			$	50.5			$	282.1

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

NiSource’s derivatives on the Consolidated Balance Sheets at December 31, 2007 were:

(in millions)		Hedge				Non-Hedge				Total
Price risk management assets
Current assets		$	88.5			$	13.7			$	102.2
Other assets			25.0				0.2				25.2
Total price risk management assets		$	113.5			$	13.9			$	127.4
Price risk management liabilities
Current liabilities		$	53.8			$	26.1			$	79.9
Other liabilities			1.5				0.2				1.7
Total price risk management liabilities		$	55.3			$	26.3			$	81.6

The hedging activity for the third quarter and nine months ended September 30, 2008 and 2007 affecting accumulated other comprehensive income (loss), with respect to cash flow hedges included the following:

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
(in millions, net of taxes)		2008				2007				2008				2007
Net unrealized gains on derivatives qualifying as cash flow hedges at the beginning of the period		$	34.9			$	34.5			$	7.6			$	31.4
Unrealized hedging losses arising during the period on derivatives qualifying as cash flow hedges			(87.5	)			(12.3	)			(34.7	)			—
Reclassification adjustment for net gain included in net income			(9.7	)			(7.2	)			(35.2	)			(16.4	)
Net unrealized gains (losses) on derivatives qualifying as cash flow hedges at the end of the period		$	(62.3	)		$	15.0			$	(62.3	)		$	15.0

During the third quarter of 2008 and 2007, no amounts were recognized in earnings due to the ineffectiveness of derivative instruments being accounted for as hedges. All derivatives classified as a hedge are assessed for hedge effectiveness, with any components determined to be ineffective charged to earnings or classified as a regulatory asset or liability per SFAS No. 71 as appropriate. During the third quarter of 2008 and 2007, NiSource did not reclassify any amounts related to its cash flow hedges from accumulated other comprehensive income to earnings due to the probability that the underlying 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 statement recognition of amounts currently classified in accumulated other comprehensive income (loss) of approximately $39.4 million of loss, net of taxes.

Commodity Price Risk Programs. Northern Indiana, Northern Indiana Fuel and Light, Kokomo Gas, Columbia of Pennsylvania, Columbia of Kentucky, Columbia of Maryland and Columbia of Virginia use NYMEX derivative contracts to minimize risk associated with gas price volatility. These derivative hedging programs must be marked to fair value, but because these derivatives are used within the framework of the companies’ gas cost recovery mechanism, regulatory assets or liabilities are recorded to offset the change in the fair value of these derivatives.

Northern Indiana offers a PPS 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 gas costs that could be charged in future months. In order to hedge the anticipated physical purchases associated with these obligations, Northern Indiana has purchased NYMEX futures, NYMEX options and basis contracts that correspond to a fixed or capped price in the associated future delivery months and currently enters into forward physical purchase contracts to secure forward gas prices. Columbia of Virginia started a program in April 2005 similar to the Northern Indiana PPS, which allows non-jurisdictional customers the opportunity to lock in their future gas costs. The NYMEX futures and option contracts associated with these programs are generally designated and accounted

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

for as cash flow hedges and Northern Indiana elects the normal purchase normal sale exemption under SFAS No. 133 for its forward physical contracts associated with this program.

Northern Indiana also offers a DependaBill program to its customers 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 in future months 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 has purchased NYMEX futures, NYMEX options and basis contracts that match the anticipated future delivery needs of the program to secure forward gas prices and currently enters into forward physical purchase contracts to secure forward gas prices. The NYMEX futures contracts associated with this program are generally designated and accounted for as cash flow hedges and Northern Indiana elects the normal purchase normal sale exemption under SFAS No. 133 for its forward physical contracts associated with this program.

As part of the MISO Day 2 initiative, Northern Indiana was allocated and has purchased FTRs. These FTRs help Northern Indiana offset congestion costs due to the MISO Day 2 activity. The FTRs are marked to fair value and do not qualify for hedge accounting treatment, but since congestion costs are recoverable through the fuel cost recovery mechanism, the related gains and losses associated with marking these derivatives to market are recorded as a regulatory asset or liability, in accordance with SFAS No. 71. In the second quarter of 2008, MISO changed its allocation procedures from an allocation of FTRs to an allocation of ARRs, whereby Northern Indiana was allocated ARRs based on its historical use of the MISO administered transmission system. ARRs entitle the holder to a stream of revenues or charges based on the price of the associated FTR in the FTR auction. Northern Indiana converted the ARRs that were received in the second quarter of 2008 into FTRs. Additionally, Northern Indiana also uses derivative contracts to minimize risk associated with power price volatility.

For regulatory incentive purposes, Northern Indiana enters into gas purchase contracts at first of the month prices that give counterparties the daily option to either sell an additional package of gas at first of the month prices or recall the original volume to be delivered. Northern Indiana charges a fee for this option. The changes in the fair value of these options are primarily due to the changing expectations of the future intra-month volatility of gas prices. These written options are derivative instruments, must be marked to fair value and do not meet the requirement for hedge accounting treatment. However, in accordance with SFAS No. 71, Northern Indiana records the related gains and losses associated with these transactions as a regulatory asset or liability.

For regulatory incentive purposes, Columbia of Kentucky, Columbia of Ohio, Columbia of Pennsylvania, and Columbia of Maryland (collectively, the “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. These 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 based on the regulatory customer sharing mechanisms in place, with the remaining changes in fair value recognized currently in earnings.

As of September 30, 2008, Columbia Energy Services has fixed price gas delivery commitments to a municipality in the United States which expires in December 2008. 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 commodity swap derivatives are accounted for as cash flow hedges.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Commodity price risk programs included in price risk assets and liabilities:

		September 30, 2008								December 31, 2007
(in millions)		Assets				Liabilities				Assets				Liabilities
Gas price volatility program derivatives		$	—			$	49.0			$	0.2			$	22.1
PPS program derivatives			—				1.4				0.2				1.8
DependaBill program derivatives			0.1				—				0.1				1.1
Electric energy program derivatives			3.8				(1.5	)			13.7				1.1
Regulatory incentive program derivatives			—				—				—				3.1
Forward purchase agreements derivatives			4.6				—				41.0				—
Total commodity price risk programs		$	8.5			$	48.9			$	55.2			$	29.2

Interest Rate Risk Activities. 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 May 12, 2004, NiSource Finance entered into fixed-to-variable interest rate swap agreements in a notional amount of $660 million with six counterparties having a 6 1/2-year term. NiSource Finance will receive payments based upon a fixed 7.875% interest rate and pay a floating interest amount based on U.S. 6-month BBA LIBOR plus an average of 3.08% 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 May 15, 2009. On September 15, 2008, NiSource Finance terminated a fixed-to-variable interest rate swap agreement with Lehman Brothers having a notional amount of $110 million.

On July 22, 2003, NiSource Finance entered into fixed-to-variable interest rate swap agreements in a notional amount of $500 million with four counterparties with an 11-year term. NiSource Finance will receive payments based upon a fixed 5.40% interest rate and pay a floating interest amount based on U.S. 6-month 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 July 15, 2013.

As stated above, on September 15, 2008, NiSource Finance terminated a fixed-to-variable interest rate swap agreement with Lehman Brothers having a notional amount of $110 million. NiSource Finance elected to terminate the swap when Lehman Holdings Inc., guarantor under the applicable International Swaps and Derivatives Association agreement, filed for Chapter 11 bankruptcy protection on September 14, 2008, which constituted an event of default under the swap agreement between NiSource Finance and Lehman Brothers Special Financing Inc. The mark-to-market close-out value of this swap at the September 15, 2008 termination date was determined to be $4.8 million. NiSource Finance recognized a $4.8 million reserve, which increases interest expense, for the Lehman swap and an additional $0.7 million reserve to recognize potential additional swap counterparty credit exposures. The termination of this swap did not impact NiSource’s ability to assert hedge accounting for its remaining fixed-to-variable interest rate swap agreements.

As a result of the fixed-to-variable interest rate swap transactions referenced above, $1,050 million of NiSource Finance’s existing long-term debt is now subject to fluctuations in interest rates. These interest rate swaps are designated as fair value hedges. The effectiveness of the interest rate swaps in offsetting the exposure to changes in the debt’s fair value is measured pursuant to SFAS No. 133. NiSource had no net gain or loss recognized in earnings due to hedging ineffectiveness from prior years.

Contemporaneously with the issuance on September 16, 2005 of the 5.25% and 5.45% notes, NiSource Finance settled $900 million of forward starting interest rate swap agreements with six counterparties. NiSource paid an aggregate settlement payment of $35.5 million which is being amortized as an increase to interest expense over the term of the underlying debt, resulting in an effective interest rate of 5.67% and 5.88%, respectively.

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Interest rate risk activities programs included in price risk management assets and liabilities:

		September 30, 2008								December 31, 2007
(in millions)		Assets				Liabilities				Assets				Liabilities
Interest rate swap derivatives		$	30.6			$	—			$	18.8			$	—

Marketing and Other Activities. The operations of TPC primarily involve commercial and industrial gas sales, whereby TPC utilizes gas derivatives to hedge its expected future gas purchases. These derivatives associated with commercial and industrial gas sales are accounted for as cash flow hedges. In addition, TPC, on behalf of Whiting Clean Energy, had previously entered into power and gas derivative contracts to manage commodity price risk associated with operating Whiting Clean Energy prior to its sale in the second quarter of 2008 to BPAE.

Marketing and power programs included in price risk management assets and liabilities:

		September 30, 2008								December 31, 2007
(in millions)		Assets				Liabilities				Assets				Liabilities
Gas marketing derivatives		$	152.0			$	230.2			$	53.2			$	52.4
Power forward derivatives			—				—				0.2				—
Total marketing and power programs		$	152.0			$	230.2			$	53.4			$	52.4

10. Equity Investments

On August 27, 2008, NiSource Development Company sold its interest in JOF Transportation Company to Lehigh Service Corporation for a pre-tax gain of $16.7 million included within, “Other, net,” on the Condensed Statements of Consolidated income (Loss) (unaudited). JOF Transportation Company held 40% interest in Chicago South Shore & South Bend Railroad Co. and a 40% interest in Indiana Illinois Development Company, LLC.

11. Fair Value of Financial Assets and Liabilities

NiSource adopted the provisions of SFAS No. 157 on January 1, 2008. There was no impact on retained earnings as a result of the adoption.

Recurring Fair Value Measurements. The following table presents assets and liabilities measured and recorded at fair value on NiSource’s Condensed Consolidated Balance Sheet (unaudited) on a recurring basis and their level within the fair value hierarchy as of September 30, 2008:

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

		Quoted Prices in				Significant
		Active Markets				Other				Significant
		for Identical				Observable				Unobservable
Recurring Fair Value Measurements		Assets				Inputs				Inputs				Balance as of
(in millions)		(Level 1)				(Level 2)				(Level 3)				September 30, 2008
Assets
Price risk management assets		$	152.3			$	35.0			$	3.8			$	191.1
Available-for-sale securities			38.6				31.3				—				69.9
Total		$	190.9			$	66.3			$	3.8			$	261.0
Liabilities
Price risk management liabilities		$	275.6			$	6.2			$	0.3			$	282.1
Deferred compensation			—				11.5				—				11.5
Total		$	275.6			$	17.7			$	0.3			$	293.6

Price risk management assets and liabilities include commodity exchange-traded and non-exchange-based derivative contracts. Exchange-traded derivative contracts are generally based on unadjusted quoted prices in active markets and are classified within Level 1. These financial assets and liabilities are secured with cash on deposit with the exchange; therefore nonperformance risk has not been incorporated into these valuations. Certain non-exchange-traded derivatives are valued using broker or over-the-counter, on-line exchanges. In such cases, these non-exchange-traded derivatives are classified within Level 2. Non-exchange-based derivative instruments include swaps, forwards, and options. In certain instances, these instruments may utilize models to measure fair value. The company uses a similar model to value similar instruments. Valuation models utilize various inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and market-corroborated inputs, i.e., inputs derived principally from or corroborated by observable market data by correlation or other means. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Certain derivatives trade in less active markets with a lower availability of pricing information and models may be utilized in the valuation. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3. Credit risk is considered in the fair value calculation of derivative instruments that are not exchange-traded. Credit exposures are adjusted to reflect collateral agreements which reduce exposures.

Price risk management assets also include fixed-to-floating interest-rate swaps, which are designated as fair value hedges, as a means to achieve its targeted level of variable-rate debt as a percent of total debt. NiSource uses a calculation of future cash inflows and estimated future outflows related to the swap agreements, which are discounted and netted to determine the current fair value. Additional inputs to the present value calculation include the contract terms, as well as market parameters such as current and projected interest rates and volatility. As they are based on observable data and valuations of similar instruments, the interest-rate swaps are categorized in Level 2 in the fair value hierarchy. Credit risk is considered in the fair value calculation of the interest rate swap. Credit exposures are adjusted to reflect collateral agreements which reduce exposures.

Available-for-sale securities include assets in NiSource’s deferred compensation trust and investments pledged as collateral for trust accounts related to NiSource’s wholly-owned insurance company. Available-for-sale securities are included within “Other investments” in the Condensed Consolidated Balance Sheets (unaudited). Securities classified within Level 1 include U.S. Treasury debt securities which are highly liquid and are actively traded in over-the-counter markets. NiSource values corporate and mortgage-backed debt securities using a matrix pricing model that incorporates market-based information. These securities trade less frequently and are classified within Level 2. Unrealized gains and losses from available-for-sale securities are included in other comprehensive income.

NiSource’s deferred compensation plan allows participants to defer certain cash compensation into a notional investment account. NiSource includes the plan in other noncurrent liabilities in the Condensed Consolidated Balance Sheets (unaudited). The value of the deferred compensation obligation is based on the market value of the participants’ notional investment accounts. The notional investments include balances which are credited based

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

upon published interest and bond yield indices and investments in mutual funds. NiSource uses the lowest level of input significant to the valuation to determine the fair value hierarchy classification, and therefore the liability is categorized in Level 2.

The following tables present the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis during the three and nine months ended September 30, 2008:

		Financial
Three Months Ended September 30, 2008 (in millions)		Transmission Rights				Other Derivatives				Total
Balance as of June 30, 2008		$	5.6			$	(5.3	)		$	0.3
Total gains or losses (unrealized/realized)
Included in regulatory assets/liabilities			—				3.6				3.6
Purchases, issuances and settlements (net)			(1.8	)			1.4				(0.4	)
Balance as of September 30, 2008		$	3.8			$	(0.3	)		$	3.5
Change in unrealized gains/(losses) relating to instruments still held as of September 30, 2008		$	—			$	—			$	—

		Financial
Nine Months Ended September 30, 2008 (in millions)		Transmission Rights				Other Derivatives				Total
Balance as of January 1, 2008		$	12.6			$	(3.5	)		$	9.1
Total gains or losses (unrealized/realized)
Included in regulatory assets/liabilities			(0.1	)			1.0				0.9
Purchases, issuances and settlements (net)			(8.7	)			2.2				(6.5	)
Balance as of September 30, 2008		$	3.8			$	(0.3	)		$	3.5
Change in unrealized gains/(losses) relating to instruments still held as of September 30, 2008		$	(0.1	)		$	—			$	(0.1	)