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 March 31, 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 incorporation or organization)		(I.R.S. Employer 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: 274,207,282 shares outstanding at April 30, 2008.

 

 

NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2008

Table of Contents

			Page
Defined Terms			3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements — unaudited
Condensed Statements of Consolidated Income			6
Condensed Consolidated Balance Sheets			7
Condensed Statements of Consolidated Cash Flows			9
Notes to Condensed Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Item 3. Quantitative and Qualitative Disclosures About Market Risk			67
Item 4. Controls and Procedures			67
PART II OTHER INFORMATION
Item 1. Legal Proceedings			68
Item 1A. Risk Factors			70
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			70
Item 3. Defaults Upon Senior Securities			70
Item 4. Submission of Matters to a Vote of Security Holders			70
Item 5. Other Information			70
Item 6. Exhibits			71
Signature			72
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

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.
ASM		Ancillary Services Market
BBA		British Banker Association
Bcf		Billion cubic feet
BP		BP Amoco p.l.c.
BPAE		BP Alternative Energy North America Inc
CAIR		Clean Air Interstate Rule
CAMR		Clean Air Mercury Rule
CCGT		Combined Cycle Gas Turbine
CPCN		Certificate of Public Convenience and Necessity
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
Dth		dekatherms
ECR		Environmental Cost Recovery

DEFINED TERMS (continued)

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 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
LIFO		Last-in, first out
MISO		Midwest Independent Transmission System Operator
MMDth		Million dekatherms
mw		Megawatts
NAAQS		National Ambient Air Quality Standards
NOV		Notice of Violation
NOx		Nitrogen oxide
NPDES		National Pollutant Discharge Elimination System
NYMEX		New York Mercantile Exchange
OUCC		Indiana Office of Utility Consumer Counselor
Piedmont		Piedmont Natural Gas Company, Inc.
PPS		Price Protection Service
PUCO		Public Utilities Commission of Ohio
SEC		Securities and Exchange Commission
SFAS No. 71		Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation”
SFAS No. 123R		Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”
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”

DEFINED TERMS (continued)

SFAS No. 141R		Statement of Financial Accounting Standards No. 141R, “Business Combinations”
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
VaR		Value-at-risk and instrument sensitivity to market factors
VADEQ		Virginia Department of Environmental Quality

PART I

ITEM 1. FINANCIAL STATEMENTS

NiSource Inc.

Condensed Statements of Consolidated Income (unaudited)

Three Months Ended March 31, (in millions, except per share amounts)		2008				2007
Net Revenues
Gas Distribution		$	2,229.7			$	1,844.3
Gas Transportation and Storage			357.2				344.3
Electric			331.8				326.0
Other			371.0				330.1
Gross Revenues			3,289.7				2,844.7
Cost of Sales (excluding depreciation and amortization)			2,248.5				1,802.1
Total Net Revenues			1,041.2				1,042.6
Operating Expenses
Operation and maintenance			410.7				376.1
Depreciation and amortization			135.6				134.3
Impairment and (gain) loss on sale of assets			(1.5	)			2.9
Other taxes			103.6				100.4
Total Operating Expenses			648.4				613.7
Equity Earnings in Unconsolidated Affiliates			2.0				1.5
Operating Income			394.8				430.4
Other Income (Deductions)
Interest expense, net			(91.8	)			(99.1	)
Other, net			(1.5	)			(2.9	)
Total Other Income (Deductions)			(93.3	)			(102.0	)
Income From Continuing Operations Before Income Taxes			301.5				328.4
Income Taxes			112.1				121.9
Income from Continuing Operations			189.4				206.5
Income from Discontinued Operations — net of taxes			6.0				3.6
Gain (Loss) on Disposition of Discontinued Operations — net of taxes			(96.1	)			6.6
Net Income		$	99.3			$	216.7
Basic Earnings Per Share ($)
Continuing operations		$	0.69			$	0.75
Discontinued operations			(0.33	)			0.04
Basic Earnings Per Share		$	0.36			$	0.79
Diluted Earnings Per Share ($)
Continuing operations		$	0.69			$	0.75
Discontinued operations			(0.33	)			0.04
Diluted Earnings Per Share		$	0.36			$	0.79
Dividends Declared Per Common Share		$	0.46			$	0.46
Basic Average Common Shares Outstanding (millions)			273.9				273.6
Diluted Average Common Shares (millions)			275.4				274.8

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

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.

Condensed Consolidated Balance Sheets (unaudited)

		March 31,				December 31,
(in millions)		2008				2007
ASSETS
Property, Plant and Equipment
Utility Plant		$	17,428.0			$	17,295.6
Accumulated depreciation and amortization			(7,819.1	)			(7,787.0	)
Net utility plant			9,608.9				9,508.6
Other property, at cost, less accumulated depreciation			67.1				67.3
Net Property, Plant and Equipment			9,676.0				9,575.9
Investments and Other Assets
Assets of discontinued operations and assets held for sale			536.3				593.2
Unconsolidated affiliates			74.4				72.7
Other investments			113.4				117.2
Total Investments and Other Assets			724.1				783.1
Current Assets
Cash and cash equivalents			77.4				34.6
Restricted cash			3.8				57.7
Accounts receivable (less reserve of $62.0 and $37.0, respectively)			1,086.2				900.6
Gas inventory			74.0				452.2
Underrecovered gas and fuel costs			245.3				158.3
Materials and supplies, at average cost			79.4				78.1
Electric production fuel, at average cost			59.9				58.1
Price risk management assets			150.1				102.2
Exchange gas receivable			389.1				210.5
Regulatory assets			176.2				215.4
Assets of discontinued operations and assets held for sale			76.6				85.0
Prepayments and other			103.5				107.3
Total Current Assets			2,521.5				2,460.0
Other Assets
Price risk management assets			86.3				25.2
Regulatory assets			874.4				867.5
Goodwill			3,677.3				3,677.3
Intangible assets			338.8				341.6
Postretirement and postemployment benefits assets			167.5				157.8
Deferred charges and other			120.8				121.5
Total Other Assets			5,265.1				5,190.9
Total Assets		$	18,186.7			$	18,009.9

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

ITEM 1. FINANCIAL STATEMENTS (continued)

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

		March 31,				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; 274,167,301 and 274,176,752 shares issued and outstanding, respectively		$	2.7			$	2.7
Additional paid-in capital			4,013.2				4,011.0
Retained earnings			1,047.5				1,074.5
Accumulated other comprehensive income			24.1				11.7
Treasury stock			(23.3	)			(23.3	)
Total Common Stockholders’ Equity			5,064.2				5,076.6
Long-term debt, excluding amounts due within one year			5,383.0				5,594.4
Total Capitalization			10,447.2				10,671.0
Current Liabilities
Current portion of long-term debt			89.3				33.9
Short-term borrowings			624.7				1,061.0
Accounts payable			755.9				713.0
Dividends declared			63.1				—
Customer deposits			114.4				112.8
Taxes accrued			327.1				188.4
Interest accrued			90.3				99.3
Overrecovered gas and fuel costs			4.4				10.4
Price risk management liabilities			67.5				79.9
Exchange gas payable			571.3				441.6
Deferred revenue			22.4				38.7
Regulatory liabilities			70.4				87.8
Accrued liability for postretirement and postemployment benefits			4.9				4.8
Liabilities of discontinued operations and liabilities held for sale			45.6				20.1
Temporary LIFO liquidation credit			472.3				—
Other accruals			429.7				505.9
Total Current Liabilities			3,753.3				3,397.6
Other Liabilities and Deferred Credits
Price risk management liabilities			10.0				1.7
Deferred income taxes			1,494.5				1,466.2
Deferred investment tax credits			51.6				53.4
Deferred credits			78.5				81.3
Deferred revenue			0.2				0.2
Accrued liability for postretirement and postemployment benefits			566.2				547.8
Liabilities of discontinued operations and liabilities held for sale			141.2				141.3
Regulatory liabilities and other removal costs			1,344.6				1,337.7
Asset retirement obligations			129.6				128.2
Other noncurrent liabilities			169.8				183.5
Total Other Liabilities and Deferred Credits			3,986.2				3,941.3
Commitments and Contingencies (Refer to Note 15)			—				—
Total Capitalization and Liabilities		$	18,186.7			$	18,009.9

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

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.

Three Months Ended March 31, (in millions)		2008				2007
Operating Activities
Net income		$	99.3			$	216.7
Adjustments to reconcile net income to net cash from continuing operations:
Depreciation and amortization			135.6				134.3
Net changes in price risk management assets and liabilities			(9.6	)			3.6
Deferred income taxes and investment tax credits			16.7				(0.8	)
Deferred revenue			(16.3	)			(16.5	)
Stock compensation expense			1.4				1.1
Gain on sale of assets			(3.2	)			(0.3	)
Loss on impairment of assets			1.6				3.2
Income from unconsolidated affiliates			(1.7	)			(3.3	)
(Gain) loss on disposition of discontinued operations — net of taxes			96.1				(6.6	)
Income from discontinued operations — net of taxes			(6.0	)			(3.6	)
Amortization of discount/premium on debt			1.8				1.8
AFUDC Equity			(1.1	)			(0.8	)
Changes in assets and liabilities:
Accounts receivable			(152.9	)			(83.3	)
Inventories			847.3				705.1
Accounts payable			32.1				(19.0	)
Customer deposits			1.6				2.0
Taxes accrued			128.4				128.5
Interest accrued			(9.0	)			(0.7	)
(Under) Overrecovered gas and fuel costs			(93.1	)			(101.9	)
Exchange gas receivable/payable			(44.0	)			(75.6	)
Other accruals			(120.9	)			(98.1	)
Prepayments and other current assets			3.7				25.1
Regulatory assets/liabilities			(36.4	)			15.4
Postretirement and postemployment benefits			18.8				(57.7	)
Deferred credits			(5.6	)			(3.0	)
Deferred charges and other noncurrent assets			(7.5	)			2.0
Other noncurrent liabilities			(29.0	)			8.2
Net Operating Activities from Continuing Operations			848.1				775.8
Net Operating Activities from or (used for) Discontinued Operations			(2.1	)			2.6
Net Cash Flows from Operating Activities			846.0				778.4
Investing Activities
Capital expenditures			(190.7	)			(147.8	)
Proceeds from disposition of assets			12.5				1.5
Restricted cash			72.1				79.7
Other investing activities			(1.4	)			(2.9	)
Net Investing Activities used for Continuing Operations			(107.5	)			(69.5	)
Net Investing Activities from or (used for) Discontinued Operations			2.9				(1.1	)
Net Cash Flows used for Investing Activities			(104.6	)			(70.6	)
Financing Activities
Issuance of long-term debt			0.9				—
Retirement of long-term debt			(1.0	)			(4.1	)
Repurchase of long-term debt			(199.0	)			—
Change in short-term debt			(436.3	)			(572.2	)
Issuance of common stock			0.6				2.1
Acquisition of treasury stock			—				(1.5	)
Dividends paid — common stock			(63.1	)			(63.0	)
Net Cash Flows used for Financing Activities			(697.9	)			(638.7	)
Increase in cash and cash equivalents			43.5				69.1
Cash contributions to discontinued operations			(0.7	)			(1.1	)
Cash and cash equivalents at beginning of year			34.6				32.9
Cash and cash equivalents at end of period		$	77.4			$	100.9
Supplemental Disclosures of Cash Flow Information
Cash paid for interest		$	104.5			$	101.1
Interest capitalized			5.5				3.1
Cash paid for income taxes			2.0				3.4

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

ITEM 1. FINANCIAL STATEMENTS (continued)

NiSource Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

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 generally accepted accounting principles 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 generally accepted accounting principles 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 defines fair value, establishes a framework for measuring fair value and expands 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.

See Note 10, “Fair Value of Financial Assets and Liabilities,” in the Notes to Condensed Consolidated Financial Statements 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 12, “Pension and Other Postretirement Benefits,” in the Notes to Condensed Consolidated Financial Statements 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 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

ITEM 1. FINANCIAL STATEMENTS (continued)

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

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 11, “Income Taxes,” in the Notes to Condensed Consolidated Financial Statements 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. This Statement 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.

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. This Statement 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 and Notes to Condensed Consolidated Financial Statements.

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. This Statement 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 Ended March 31, (in thousands)		2008				2007
Denominator
Basic average common shares outstanding			273,922				273,594
Dilutive potential common shares
Nonqualified stock options			—				376
Shares contingently issuable under employee stock plans			1,271				636
Shares restricted under employee stock plans			174				163
Diluted Average Common Shares			275,367				274,769

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. As of March 31, 2008, 14 employees were terminated as a result of the executive initiative. In part, this reduction has come through anticipated attrition and consolidation of certain positions.

In previous years, NiSource implemented restructuring initiatives to streamline its operations and realize efficiencies as a result of the acquisition of Columbia. As of March 31, 2008, 1,567 employees were terminated. Of the $1.9 million remaining restructuring liability from the Columbia merger and related initiatives, $0.9 million is related to facility exit costs.

Restructuring reserve by restructuring initiative:

		Balance at												Balance at
(in millions)		December 31, 2007				Benefits Paid				Adjustments				March 31, 2008
Executive initiative		$	0.6			$	(0.6	)		$	—			$	—
Columbia merger and related initiatives			2.2				(0.3	)			—				1.9
Total		$	2.8			$	(0.9	)		$	—			$	1.9

5. Gas in Storage

Gas Distribution Operations price storage injections at the average of the costs of natural gas supply purchased during the year. For interim periods, the difference between current projected replacement cost and the LIFO cost for quantities of gas temporarily withdrawn from storage is recorded as a temporary LIFO liquidation credit within the Condensed Consolidated Balance Sheets. Due to seasonality requirements, NiSource expects interim reductions in LIFO layers to be replenished by year-end. Changes between the temporary LIFO liquidation credit and gas inventory in the amounts of $472.3 million and $252.4 million during the first quarters of 2008 and 2007, respectively, are considered non-cash activity for the Condensed Statements of Consolidated Cash Flow.

ITEM 1. FINANCIAL STATEMENTS (continued)

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

6. Discontinued Operations and Assets Held for Sale

The assets and liabilities of discontinued operations and held for sale on the Condensed Consolidated Balance Sheet at March 31, 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
NDC Douglas Properties		$	5.2			$	—			$	—			$	—			$	—			$	0.9			$	6.1
NiSource Corporate Services			7.9				—				—				—				—				—				7.9
Lake Erie Land			12.5				—				—				—				—				—				12.5
Columbia Transmission			4.2				—				—				—				—				—				4.2
Columbia Gulf Transmission			4.1				—				—				—				—				—				4.1
Northern Indiana			0.2				—				—				—				—				—				0.2
Granite State Gas			7.2				0.8				—				—				8.1				8.6				24.7
Northern Utilities			144.5				42.6				1.5				14.7				72.2				5.0				280.5
Whiting Clean Energy			253.5				8.3				9.0				—				—				1.9				272.7
Total		$	439.3			$	51.7			$	10.5			$	14.7			$	80.3			$	16.4			$	612.9

Liabilities of discontinued						Accounts				Deferred				Deferred				Regulatory				Other
operations and held for sale:		Debt				payable				income taxes				credits				liabilities				liabilities				Total
NDC Douglas Properties		$	5.6			$	0.3			$	—			$	—			$	—			$	0.4			$	6.3
Granite State Gas			—				0.1				5.1				—				—				9.3				14.5
Northern Utilities			—				11.7				55.8				0.1				19.9				23.1				110.6
Whiting Clean Energy			—				1.0				35.9				17.0				—				1.5				55.4
Total		$	5.6			$	13.1			$	96.8			$	17.1			$	19.9			$	34.3			$	186.8

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
NDC Douglas Properties		$	5.2			$	—			$	—			$	—			$	—			$	0.9			$	6.1
NiSource Corporate Services			9.5				—				—				—				—				—				9.5
Lake Erie Land			12.6				—				—				—				—				—				12.6
Columbia Transmission			8.0				—				—				—				—				—				8.0
Columbia Gulf Transmission			4.8				—				—				—				—				—				4.8
Northern Indiana			0.2				—				—				—				—				—				0.2
Granite State Gas			17.2				0.2				—				0.1				8.1				0.2				25.8
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
Total		$	496.2			$	40.1			$	10.3			$	16.2			$	80.5			$	34.9			$	678.2

Liabilities of discontinued
operations and held for						Accounts				Deferred				Deferred				Regulatory				Other
sale:		Debt				payable				income taxes				credits				liabilities				liabilities				Total
NDC Douglas Properties		$	4.6			$	—			$	—			$	—			$	—			$	1.7			$	6.3
Granite State Gas			—				0.4				5.1				—				—				0.1				5.6
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
Total		$	4.6			$	11.4			$	97.1			$	17.1			$	17.3			$	13.9			$	161.4

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

NiSource reached an agreement on April 18, 2008 for BPAE to purchase Whiting Clean Energy for $210 million. Net assets for Whiting Clean Energy of $217.3 million and $247.3 million have been reclassified to assets and liabilities of discontinued operations and held for sale on the Consolidated Balance Sheet as of March 31, 2008 and December 31, 2007, respectively. During the quarter ended March 31, 2008, NiSource accounted for Whiting Clean Energy as discontinued operations.

On February 15, 2008, NiSource reached a definitive agreement under which Unitil Corporation will acquire NiSource subsidiaries Northern Utilities and Granite State Gas for $160 million plus net working capital at the time of closing. Historically, net working capital has averaged approximately $25 million. 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. The transaction, expected to be completed by the end of 2008, is subject to federal and state regulatory approvals. Net assets for Northern Utilities and Granite State Gas combined of $180.1 million and $234.6 million have been reclassified to assets and liabilities of discontinued operations and held for sale on the Consolidated Balance Sheet as of March 31, 2008 and December 31, 2007, respectively. During the quarter ended March 31, 2008, NiSource accounted for Northern Utilities and Granite State Gas as discontinued operations. NiSource acquired Northern Utilities and Granite State Gas in 1999 as part of the company’s larger acquisition of Bay State.

Columbia Gulf is in the process of selling a majority of its offshore facilities. On October 30, 2007, Columbia Gulf and Tennessee Gas Pipeline Company executed a definitive purchase and sale agreement to sell a portion of Columbia Gulf’s offshore assets. Closing of the transaction is dependent upon the receipt of required regulatory approvals which NiSource anticipates receiving in the first half of 2008. Tennessee Gas Pipeline Company currently co-owns and utilizes the offshore assets being sold. In the third quarter of 2007, these assets were classified as assets of discontinued operations and held for sale.

ITEM 1. FINANCIAL STATEMENTS (continued)

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

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 are expected to be sold or disposed of during 2008. NiSource has accounted for the investments to be sold as assets and liabilities of discontinued operations and held for sale.

NiSource Corporate Services is in the process of selling its Marble Cliff facility. In late February 2008 an offer was accepted. NiSource Corporate Services has begun work on a definitive Purchase and Sale Agreement which is contingent on certain items being met. As a result of the 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 classifies these assets as assets of discontinued operations and held for sale.

Columbia Transmission is in the process of selling certain facilities that are non-core to the operation of the pipeline system. 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 is also in the process of selling a non-core facility. NiSource has accounted for these facilities as assets held for sale.

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 and reserve changes for NiSource’s former exploration and production subsidiary, CER, are provided in the following table:

Three Months Ended March 31, (in millions)		2008				2007
Revenues from Discontinued Operations		$	100.9			$	88.7
Income from discontinued operations			10.2				6.2
Income tax expense			4.2				2.6
Income from Discontinued Operations — net of taxes		$	6.0			$	3.6
Gain (Loss) on Disposition of Discontinued Operations — net of taxes		$	(96.1	)		$	6.6

Results from Discontinued Operations for the first three months of 2008 includes the after tax losses related to the pending sales of Whiting Clean Energy, Northern Utilities and Granite State Gas of $32.5 million, $48.8 million and $14.8 million, respectively.

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.

ITEM 1. FINANCIAL STATEMENTS (continued)

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

NiSource activity for asset retirement obligations:

Three Months Ended March 31, (in millions)		2008				2007
Accretion expense		$	0.2			$	0.2
Accretion recorded as a regulatory asset			1.3				1.5
Increase in Asset Retirement Obligation Liability		$	1.5			$	1.7

8. Regulatory Matters

Gas Distribution Operations Regulatory Matters

Significant Rate Developments. Columbia of Ohio filed a base rate case with 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. The case is currently pending, and is expected to be resolved by the fourth quarter 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 is seeking to recover costs associated with its significant infrastructure rehabilitation program, as well as stabilize revenues and cost recovery through modifications to rate design. The case is currently pending, and is expected to be resolved by the fourth quarter of 2008.

On October 17, 2007, Bay State petitioned the Massachusetts Department of Public Utilities 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 Massachusetts Department of Public Utilities 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 is in the process of reviewing the order and assessing its rehearing or appeal options.

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.

ITEM 1. FINANCIAL STATEMENTS (continued)

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

Certain types of natural gas risers, which are owned by customers, on Columbia of Ohio’s distribution system have been evaluated under a study required by the PUCO and have been found prone to leak natural gas under certain conditions. On February 1, 2007, Columbia of Ohio announced plans to identify and replace these risers on its distribution system. As of March 31, 2008, Columbia of Ohio deferred $7.5 million of costs associated with the study and identification of these natural gas risers as a regulatory asset and currently has estimated approximately $120 million for the cost to identify and replace the risers. On October 26, 2007, Columbia of Ohio and the PUCO Staff filed a Joint Stipulation and Recommendation that provided for Columbia of Ohio’s assumption of financial responsibility for the repair or replacement of customer-owned service lines and the replacement of risers prone to leak. In addition, the Stipulation provides for Columbia of Ohio to capitalize its investment in the service lines and risers, as well as the establishment of a tracking mechanism that would provide for the recovery of operating and maintenance costs related to Columbia of Ohio’s capitalized investment and its expenses incurred in identifying risers prone to leak. On December 28, 2007, Columbia of Ohio entered into a Stipulation with the Ohio Consumers’ Counsel and Ohio Partners for Affordable Energy, addressing the issues of Columbia of Ohio’s authority to assume responsibility for repair or replacement of hazardous customer owned service lines, the establishment of accounting authority for costs related to such activities, and the establishment of a mechanism to recover such costs. The parties recommended approval of the Stipulation to the PUCO, and on April 9, 2008, the PUCO issued an order in this matter approving the Stipulation in all material respects. On April 23, 2008, Utility Service Partners, Inc. requested that the PUCO stay its order, pending the resolution of any applications on rehearing. Columbia of Ohio filed its response to the motion on April 28, 2008.

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 $12.7 million was passed back through March 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.

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.

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 project is projected to add 97,000 Dth per day of storage and transportation capacity 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 and the project is expected to be in service by spring 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. This Appalachian Expansion Project will add 100,000 Dth per day of transportation capacity and is fully subscribed on a 15-year contracted firm basis. The project is expected to be in service in the fourth quarter of 2009.

Electric Operations Regulatory Matters

Significant Rate Developments. To settle a proceeding regarding Northern Indiana’s request to recover intermediate dispatchable power costs, Northern Indiana has agreed to file an electric base rate case on or before July 1, 2008.

ITEM 1. FINANCIAL STATEMENTS (continued)

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

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 $12.5 million and $13.7 million were recognized for electric customers for the first quarter of 2008 and 2007, respectively.

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 quarter of 2008 non-fuel cost credits of $0.9 million were deferred in accordance with the aforementioned orders. In addition, administrative, FERC and other fees of $1.8 million were deferred. In the first quarter of 2008 and 2007, MISO costs of $0.9 million and $2.5 million, respectively, were 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.

On September 14, 2007, MISO filed a tariff with the FERC outlining the development of an ASM. The ASM will allow participants to buy and sell operating reserves and regulation services that are essential to reliability. The pricing of these markets will be simultaneously co-optimized with the current energy markets with the intent to lower the overall cost of providing electric service. MISO is currently targeting the start of the ASM for September 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, filed a request to the IURC to participate in ASM and seek approval of timely cost recovery for the associated costs of participating. 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 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 the costs paid by customers for power purchased by Northern Indiana versus the amount of these costs absorbed by Northern Indiana. The terms of the settlement call for Northern Indiana to make a one-time payment to resolve this question as it relates to power purchased from January 1, 2006 through September 30, 2007. The amount of the refund is set at $33.5 million and will be refunded February 2008 through July 2008. A reserve for the entire amount was recorded in the third quarter of 2007. Northern Indiana implemented a new “benchmarking standard” that will govern the allocation of costs for purchased power between customers and Northern Indiana. The benchmark defines the price below which customers will pay for power purchases and above which Northern Indiana must absorb a portion of the costs. 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. Purchased power costs exceeding the

ITEM 1. FINANCIAL STATEMENTS (continued)

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

benchmark amounted to $3.8 million in the first quarter of 2008. These costs were not passed through to customers, but were absorbed by Northern Indiana. This benchmark will likely result in Northern Indiana absorbing some purchased power costs that will reduce net revenues during future periods. The agreement also contemplates Northern Indiana adding generating capacity to its existing portfolio. The benchmark will be adjusted as new capacity is added. The added generating capacity will substantially reduce the amount of purchased power and mitigate the impact of the adjusted benchmark. Further, the settling parties agreed to support Northern Indiana’s deferral and future recovery of carrying costs and depreciation associated with the acquisition of new generating facilities. In the approving order, the IURC dictated that, while the parties agreed to support the deferral of costs mentioned above, the IURC would rule on such deferral in CPCN proceedings.

On November 1, 2007, Northern Indiana filed its bi-annual IRP with the IURC. The plan showed the need to add approximately 1,000 mw of new capacity. Additionally, during November 2007, Northern Indiana filed a CPCN as well as contracts to purchase power generated with renewable energy, specifically with wind. The CPCN requested approval to purchase two CCGT power plants — the Whiting Clean Energy facility owned by PEI, a wholly-owned subsidiary of NiSource, and the Sugar Creek facility located in west central Indiana and owned by LS Power Group. On December 22, 2007, BPAE indicated it would exercise a contractual right of first refusal to purchase the Whiting Clean Energy facility and subsequently signed a purchase agreement on April 18, 2008. As a result, on January 25, 2008, Northern Indiana filed an amended CPCN to address just the Sugar Creek CCGT facility. The estimated cost of the facility is $329 million. The CPCN hearing before the IURC took place on March 25, 2008. Northern Indiana anticipates an order in May 2008. The FERC approved the purchase on February 27, 2008.

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 State Implementation Plan 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 December 19, 2007, the IURC approved Northern Indiana’s latest compliance plan with the estimate of $338.5 million. On April 2, 2008, the IURC approved ECR-11 for $252.6 million in capital expenditures (net of accumulated depreciation) and EER-5 for $14.1 million in expenses.

On January 9, 2008, the IURC established a procedural schedule to review the October 27, 2006 Joint Petition of Indiana Gasification, LLC, Vectren Energy Delivery of Indiana and Northern Indiana. The petition seeks IURC approval for a coal gasification facility, the transportation of electricity and SNG produced at the facility and the recovery of the cost incurred by the Joint Petitioners. On March 27, 2008, Joint Petitioners filed a motion seeking to extend the March 31, 2008 deadline for direct testimony. The Joint Petitioners indicated that positive settlement talks were underway regarding a purchase contract between Vectren Energy Delivery of Indiana, Northern Indiana and Indiana Gasification, LLC. Northern Indiana currently anticipates that the hearing will occur in the fourth quarter of 2008.

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

ITEM 1. FINANCIAL STATEMENTS (continued)

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

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 Sheets at March 31, 2008 were:

(in millions)		Hedge				Non-Hedge				Total
Price risk management assets
Current assets		$	120.1			$	30.0			$	150.1
Other assets			82.6				3.7				86.3
Total price risk management assets		$	202.7			$	33.7			$	236.4
Price risk management liabilities
Current liabilities		$	63.8			$	3.7			$	67.5
Other liabilities			10.0				—				10.0
Total price risk management liabilities		$	73.8			$	3.7			$	77.5

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 first quarter of 2008 and 2007 affecting accumulated other comprehensive income, with respect to cash flow hedges included the following:

Three Months Ended March 31, (in millions, net of taxes)		2008				2007
Net unrealized gains on derivatives qualifying as cash flow hedges at the beginning of the period		$	7.6			$	31.4
Unrealized hedging gains arising during the period on derivatives qualifying as cash flow hedges			26.4				28.4
Reclassification adjustment for net loss (gain) included in net income			9.1				(0.2	)
Net unrealized gains on derivatives qualifying as cash flow hedges at the end of the period		$	24.9			$	59.6

During the first quarter of 2008 and 2007, a loss of $0.1 million and zero, net of taxes respectively, 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 first 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 of approximately $18.5 million of income, net of taxes.

ITEM 1. FINANCIAL STATEMENTS (continued)

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

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 the companies gas cost or place a cap on the total cost that could be charged for any future month specified. In order to hedge the anticipated physical 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 delivery month and currently enters into forward physical 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 the companies gas cost. The NYMEX futures and option contracts associated with these programs are designated and accounted for as cash flow hedges.

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 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 delivery needs of the program and currently enters into forward physical contracts to secure forward gas prices. The NYMEX futures and options contracts associated with this program are generally designated and accounted for as cash flow hedges.

As part of the MISO Day 2 initiative, Northern Indiana was allocated and has purchased FTRs. These rights help Northern Indiana offset congestion costs due to the MISO Day 2 activity. The FTRs 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 these transactions are recorded as a regulatory asset or liability, in accordance with SFAS No. 71. Additionally, Northern Indiana also uses derivative contracts to minimize risk associated with power price volatility. These derivative programs must be marked to fair value, but because these derivatives are used within the framework of their cost recovery mechanism, regulatory assets or liabilities are recorded to offset the change in the fair value of these derivatives.

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.

Columbia Energy Services has fixed price gas delivery commitments to two municipalities in the United States which expire in July 2008 and 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

ITEM 1. FINANCIAL STATEMENTS (continued)

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

Services entered into commodity swaps priced at the locations designated for physical delivery. These commodity swap derivatives are accounted for as cash flow hedges.

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

		March 31, 2008								December 31, 2007
(in millions)		Assets				Liabilities				Assets				Liabilities
Gas price volatility program derivatives		$	33.0			$	(1.8	)		$	0.2			$	(22.1	)
PPS program derivatives			1.7				—				0.2				(1.8	)
DependaBill program derivatives			0.2				—				0.1				(1.1	)
Electric energy program derivatives			0.7				(0.8	)			13.7				(1.1	)
Regulatory incentive program derivatives			—				(1.1	)			—				(3.1	)
Forward purchase agreements derivatives			39.6				—				41.0				—
Total commodity price risk programs included		$	75.2			$	(3.7	)		$	55.2			$	(29.2	)

Interest Rate Risk Activities. Contemporaneously with the pricing of the 5.25% and 5.45% notes issued September 16, 2005, 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.

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 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 either July 15, 2008 or July 15, 2013.

As a result of the fixed-to-variable interest rate swap transactions referenced above, $1,160 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.

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

		March 31, 2008								December 31, 2007
(in millions)		Assets				Liabilities				Assets				Liabilities
Interest rate swap derivatives		$	60.8			$	—			$	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

ITEM 1. FINANCIAL STATEMENTS (continued)

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

Clean Energy, has also entered into power and gas derivative contracts to manage commodity price risk associated with operating Whiting Clean Energy.

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

		March 31, 2008								December 31, 2007
(in millions)		Assets				Liabilities				Assets				Liabilities
Gas marketing derivatives		$	100.4			$	(73.8	)		$	53.2			$	(52.4	)
Power forward derivatives			—				—				0.2				—
Total marketing and power programs		$	100.4			$	(73.8	)		$	53.4			$	(52.4	)

10. 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 on a recurring basis and their level within the fair value hierarchy during the three months ended March 31, 2008:

		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)				March 31, 2008
Assets
Price risk management assets		$	169.8			$	65.8			$	0.8			$	236.4
Available-for-sale securities			35.9				23.4				—				59.3
Total		$	205.7			$	89.2			$	0.8			$	295.7
Liabilities
Price risk management liabilities		$	71.5			$	3.1			$	2.9			$	77.5
Deferred compensation			—				12.3				—				12.3
Total		$	71.5			$	15.4			$	2.9			$	89.8

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. 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.

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

ITEM 1. FINANCIAL STATEMENTS (continued)

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

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.

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 Investments and other in the Condensed Consolidated Balance Sheets. 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 our available-for-sale securities are included in OCI.

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. 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 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 table presents the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis during the three months ended March 31, 2008:

		Financial
(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	)			0.7				0.6
Purchases, issuances and settlements (net)			(11.7	)			(0.1	)			(11.8	)
Balance as of March 31, 2008		$	0.8			$	(2.9	)		$	(2.1	)
Change in unrealized gains/(losses) relating to instruments still held as of March 31, 2008		$	(0.1	)		$	0.3			$	0.2

Realized gains and losses for level 3 recurring items are included in income within Cost of Sales on the Condensed Statements of Consolidated Income. Unrealized gains and losses from Level 3 recurring items are included within regulatory assets and liabilities on the Condensed Consolidated Balance Sheets.

As part of the MISO Day 2 initiative, Northern Indiana was allocated and has purchased FTRs. These rights help Northern Indiana offset congestion costs due to the MISO Day 2 activity. These instruments are considered derivatives and are valued utilizing forecasted congestion source and sink prices in the Day Ahead market. They are classified as Level 3 and reflected in the table above. The FTRs 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 these transactions are recorded as a regulatory asset or liability, in accordance with SFAS No. 71.

11. Income Taxes

NiSource’s interim effective tax rates reflect the estimated annual effective tax rate for 2008 and 2007, respectively, adjusted for tax expense associated with certain discrete items. The effective tax rates for the quarter ended March 31, 2008 and March 31, 2007 were 37.2% and 37.1%, respectively. The effective tax rates differ from the federal tax rate of 35% primarily due to the effects of tax credits, state income taxes, utility rate-making, and other

ITEM 1. FINANCIAL STATEMENTS (continued)

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

permanent book-to-tax differences such as the electric production tax deduction provided under Internal Revenue Code Section 199.

Both the first quarter of 2008 and first quarter of 2007 include increases to tax expense for discrete items. On March 31, 2008, the governor of West Virginia signed legislation that phases in a reduction in income tax rates from the current rate of 8.75% to 6.5% over the years 2009 through 2014, provided certain state budgetary targets are met. NiSource has West Virginia deferred income tax benefits recorded on its Consolidated Balance Sheets that, because of the rate decrease, were required to be written down in the first quarter of 2008. The impact of the write-down on first quarter of 2008 net income is a reduction of $2.7 million. This reduced benefit was offset by a $0.5 million decrease in income tax expense due primarily to the discontinuance of filing consolidated Kentucky state income tax returns in 2008. The first quarter of 2007 includes an increase in income tax expense of $1.5 million, due mostly to state income tax issues.

NiSource adopted the provisions of FIN 48 on January 1, 2007, recognizing a charge of $0.8 million to the opening balance of retained earnings. As of December 31, 2007, the total liability for unrecognized tax benefits, which is included in “Other noncurrent liabilities” on the Consolidated Balance Sheets, was $3.7 million ($4.0 million including interest). There have been no material changes in NiSource’s FIN 48 liabilities from the December 31, 2007 amounts.

Effective January 1, 2007, NiSource records interest and penalties (if any) on prior year tax liabilities as a component of income tax expense.

12. Pension and Other Postretirement Benefits

NiSource provides defined contribution plans and noncontributory defined benefit retirement plans that cover its employees. Benefits under the defined benefit retirement plans reflect the employees’ compensation, years of service and age at retirement. Additionally, NiSource provides health care and life insurance benefits for certain retired employees. The majority of employees may become eligible for these benefits if they reach retirement age while working for NiSource. The expected cost of such benefits is accrued during the employees’ years of service. Current rates of rate-regulated companies include postretirement benefit costs, including amortization of the regulatory assets that arose prior to inclusion of these costs in rates. For most plans, cash contributions are remitted to grantor trusts.

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. In the fourth quarter of 2006, NiSource adopted the provisions of SFAS No. 158 requiring employers to recognize in the statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan, measured as the difference between the fair value of the plan assets and the benefit obligation.

The key assumptions used to measure NiSource’s various postretirement benefits plans’ funded status at December 31, 2007 were the same as those used for the previous January 1, 2007 measurement date.

NiSource expects to make contributions of $17.1 million to its pension plans and $38.3 million to its other postretirement benefit plans during 2008. Through March 31, 2008, NiSource has contributed $0.9 million to its pension plans and $9.5 million to its other postretirement benefit plans.

ITEM 1. FINANCIAL STATEMENTS (continued)

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

The following tables provide the components of the plans’ net periodic benefits cost for the first quarter of 2008 and 2007:

		Pension Benefits								Other Postretirement Benefits
Three Months Ended March 31, (in millions)		2008				2007				2008				2007
Components of Net Periodic Benefit Cost
Service cost		$	9.3			$	10.3			$	2.4			$	2.4
Interest cost			33.1				31.9				11.9				10.9
Expected return on assets			(48.5	)			(46.7	)			(6.3	)			(5.2	)
Amortization of transitional obligation			—				—				2.0				2.0
Amortization of prior service cost			1.1				1.4				0.2				0.1
Recognized actuarial loss			0.3				2.0				1.0				1.5
Total Net Periodic Benefits Cost		$	(4.7	)		$	(1.1	)		$	11.2			$	11.7

13. Long-Term Debt

Whiting Clean Energy. On December 31, 2007, Whiting Clean Energy redeemed $292.1 of its notes due June 20, 2011, having an average interest rate of 8.30%. The associated redemption premium of $40.6 million was charged to loss on early extinguishment of long-term debt. The redemption was financed with NiSource borrowings.

Jasper County Pollution Control Bonds. Northern Indiana has seven series of Jasper County Pollution Control Bonds with a total principal value of $254 million currently outstanding. Prior to March 25, 2008, each of the series bore interest at rates established through auctions that took place at either 7, 28, or 35 day intervals. Between February 13, 2008 and March 5, 2008, Northern Indiana received notice that six separate market auctions of four of the series of the Jasper County Pollution Control Bonds had failed. As a result, those series representing an aggregate principal amount of $112 million of the Jasper County Pollution Control Bonds bore interest at default rates equal to 15% or 18% per annum. Subsequent auctions were successful, but resulted in interest rates between 5.13% and 11.0%, which are in excess of historical rates. Northern Indiana does not believe that these increases in interest rates will have a material impact on its financial results. These auction failures were attributable to the recent lack of liquidity in the auction rate securities market, largely driven by the recent turmoil in the bond insurance market. The Jasper County Pollution Control Bonds are insured by either Ambac Assurance Corporation or MBIA Insurance Corporation.

Northern Indiana converted all seven series of Jasper County Pollution Control Bonds from the auction rate mode to a variable rate demand bond mode between March 25, 2008 and April 11, 2008 and repurchased the bonds as part of the conversion process. As of April 11, 2008, all of the Jasper County Pollution Control Bonds were so purchased and are held in Northern Indiana’s treasury. Northern Indiana is currently evaluating its options for converting the debt from variable rate mode into fixed rate mode and subsequently reoffering the debt to the public.

As of March 31, 2008, $199.0 million of this outstanding debt had been converted to the variable rate demand bond format and repurchased by Northern Indiana for its own account. The remaining $55.0 million is classified as current portion of long-term debt in the March 31, 2008 Condensed Consolidated Balance Sheet. Northern Indiana has recorded the repurchased bonds as an offset to long-term debt in the Condensed Consolidated Balance Sheet as the debt is considered extinguished per SFAS No. 140. Unamortized debt expense previously recorded under deferred charges and other qualifies for regulatory treatment and has been reclassified as a regulatory asset. The repurchase of the bonds is included in the financing activities section in the Statement of Consolidated Cash Flow.

ITEM 1. FINANCIAL STATEMENTS (continued)

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

14. Share-Based Compensation

NiSource currently issues long-term incentive grants to key management employees under a long-term incentive plan approved by stockholders on April 13, 1994 (1994 Plan). The 1994 Plan, as amended and restated, permits the following types of grants, separately or in combination: nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights, restricted stock units, contingent stock units and dividend equivalents payable on grants of options, performance units and contingent stock awards. At March 31, 2008, there were 25,858,317 shares reserved for future awards under the amended and restated 1994 Plan.

NiSource recognized stock-based employee compensation expense of $1.6 million and $1.1 million during the first quarter of 2008 and 2007, respectively, as well as related tax benefits of $0.6 million and $0.4 million, respectively. There were no modifications to awards as a result of the adoption of SFAS No. 123R.

As of March 31, 2008, the total remaining unrecognized compensation cost related to nonvested awards amounted to $17.3 million, which will be amortized over the weighted-average remaining requisite service period of 2.3 years.

Stock Options. As of March 31, 2008, approximately 7.3 million options were outstanding and exercisable with a weighted average option price of $22.67.

Restricted and Contingent Stock Unit Awards. In March 2008, 197,311 restricted stock units subject to service conditions were granted. The grant date fair-value of the restricted units was $3.5 million, based on the average market price of NiSource’s common stock at the date of grant of $17.49, which will be expensed net of forfeitures over the vesting period of approximately 3 years. The service conditions lapse on January 31, 2011. If before January 31, 2011, the employee terminates employment (1) due to retirement, having attained age 55 and completed ten years of service, or (2) due to death or disability, the employment conditions will lapse with respect to a pro rata portion of the restricted units on the date of termination. Termination due to any other reason will result in all restricted units awarded being forfeited effective the employee’s date of termination. Employees will be entitled to receive dividends upon vesting.

In March 2008, 394,604 contingent stock units subject to performance conditions were granted. The grant date fair-value of the award was $6.9 million, which will be expensed net of forfeitures over the vesting period of approximately 3 years. The average market price of NiSource’s common stock at the date of grant was $17.49. The performance conditions are based on achievement of a non-GAAP financial measure, cumulative net operating earnings, that NiSource defines as income from continuing operations adjusted for certain items and cumulative funds from operations that NiSource defines as net operating cash flows provided by continuing operations. Per the agreement, to the extent base performance conditions are exceeded during the 3 year performance period, the award will be increased in increments of 10 percent up to 50 percent. If prior to the lapse of the performance conditions, the employee terminates employment (1) due to retirement, having attained age 55 and completed ten years of service, (2) due to disability, or (3) due to death with less than or equal to 12 months remaining in the performance period, the employee will receive a pro rata portion of the contingent shares if the performance conditions have been met. If prior to the lapse of the performance conditions, the employee terminates employment due to death with more than 12 months remaining in the performance period, the employee will receive a pro rata portion of the contingent shares as if the performance conditions had been met. Termination due to any other reason will result in all contingent shares awarded being forfeited effective the employee’s date of termination. Employees will be entitled to receive dividends upon vesting.

In March 2007, 320,330 contingent stock units were granted. The grant date fair-value of the award was $7.5 million, based on the average market price of NiSource’s common stock at the date of grant of $23.46, which will be expensed net of forfeitures over the vesting period of approximately 3 years. The shares are subject to both performance and service conditions. The performance conditions were based on achievement of a non-GAAP financial measure (net operating earnings) as described above. Per the agreement, to the extent base performance conditions were exceeded, the award would be increased in increments of 10 percent up to 50 percent. If the performance conditions were not met, the grants would be cancelled and the shares would be forfeited. Subsequent to meeting the performance conditions, an additional two year service period will then be required before the shares vest on December 31, 2009. If after completing the performance conditions but prior to completing the service conditions the employee terminates employment (1) due to retirement, having attained age 55 and completed ten

ITEM 1. FINANCIAL STATEMENTS (continued)

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

years of service, or (2) due to death or disability, the employment conditions will lapse with respect to a pro rata portion of the contingent shares on the date of termination. Termination due to any other reason will result in all contingent shares awarded being forfeited effective the employee’s date of termination. During 2007, base performance conditions were exceeded, resulting in an increase of the number of shares to be issued upon vesting by 20 percent. Accordingly, 62,319 additional shares were granted in January 2008. As of March 31, 2008 373,911 nonvested contingent shares were remaining. Employees will be entitled to receive dividends upon vesting.

Time-accelerated Awards. NiSource awarded restricted shares and restricted stock units that contain provisions for time-accelerated vesting to key executives under the 1994 Plan. Most of these awards were issued in January 2003 and January 2004. The total shareholder return measures established were not met; therefore these grants do not have an accelerated vesting period. At March 31, 2008, NiSource had 538,456 awards outstanding which contained the time-accelerated provisions.

Non-employee Director Awards. The Amended and Restated Non-employee Director Stock Incentive Plan provides for awards of restricted stock, stock options and restricted stock units, which vest in 20% increments per year, with full vesting after five years. Effective March 25, 2008, the board approved to amend the vesting provisions of the plan such that all outstanding grants and future grants of restricted stock units will vest immediately. As of March 31, 2008, 62,600 restricted shares and 147,577 restricted stock units had been issued under the Plan.

15. Other Commitments and Contingencies

A. Guarantees and Indemnities. As a part of normal business, NiSource and certain subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include guarantees and stand-by letters of credit. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries’ intended commercial purposes. The total commercial commitments in existence at March 31, 2008 and the years in which they expire were:

(in millions)		Total				2008				2009				2010				2011				2012				After
Guarantees of subsidiaries debt		$	5,119.0			$	5.0			$	460.0			$	1,000.0			$	—			$	315.0			$	3,339.0
Guarantees supporting commodity transactions of subsidiaries			526.0				339.7				181.7				—				—				—				4.6
Lines of credit			624.7				624.7				—				—				—				—				—
Letters of credit			102.1				27.9				58.9				—				14.3				—				1.0
Other guarantees			343.7				65.4				4.1				—				—				17.1				257.1
Total commercial commitments		$	6,715.5			$	1,062.7			$	704.7			$	1,000.0			$	14.3			$	332.1			$	3,601.7

Guarantees of Subsidiaries Debt. NiSource has guaranteed the payment of $5.1 billion of debt for various wholly-owned subsidiaries including NiSource Finance, and through a support agreement, Capital Markets, which is reflected on NiSource’s Condensed Consolidated Balance Sheet as of March 31, 2008. The subsidiaries are required to comply with certain financial covenants under the debt instruments and in the event of default, NiSource would be obligated to pay the debt’s principal and related interest. NiSource does not anticipate its subsidiaries will have any difficulty maintaining compliance.

Guarantees Supporting Commodity Transactions of Subsidiaries. NiSource has issued guarantees, which support up to approximately $526.0 million of commodity-related payments for its current subsidiaries involved in energy marketing to satisfy requirements under forward gas sales. These guarantees were provided to counterparties in order to facilitate physical and financial transactions involving natural gas and electricity. To the extent liabilities exist under the commodity-related contracts subject to these guarantees, such liabilities are included in the Condensed Consolidated Balance Sheets.

Lines and Letters of Credit. NiSource Finance maintains a five-year revolving line of credit with a syndicate of financial institutions which can be used either for borrowings or the issuance of letters of credit. On July 7, 2006, NiSource Finance amended the $1.25 billion five-year revolving credit facility, increasing the aggregate

ITEM 1. FINANCIAL STATEMENTS (continued)

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

commitment level to $1.5 billion and extending the termination date by one year to July 2011. At March 31, 2008, NiSource had $624.7 million in short-term borrowings outstanding under the credit facility. Through the five-year revolver and through other letter of credit facilities, NiSource has issued stand-by letters of credit of approximately $102.1 million for the benefit of third parties.

Other Guarantees or Obligations. On April 18, 2008, PEI reached an agreement with BPAE to sell all of the outstanding stock of Whiting Clean Energy to BPAE for $210 million. The agreement with BPAE contains customary representations, warranties, covenants and closing conditions. NiSource anticipates the closing of the transaction to occur in the second or third quarter of 2008. NiSource has executed purchase and sales agreement guarantees totaling $220 million which guarantee performance of PEI’s covenants, agreements, obligations, liabilities, representations and warranties under the agreement with BPAE. No amounts related to the purchase and sales agreement guarantees are reflected in the Condensed Consolidated Balance Sheet as of March 31, 2008. NiSource continues to review the terms of the guarantees.

On August 29, 2007, Millennium entered into a bank credit agreement to finance the construction of the Millennium Pipeline project. As a condition precedent to the credit agreement, NiSource issued a guarantee securing payment for 47.5%, its indirect ownership interest percentage, of amounts borrowed under the credit agreement up until such time as the amounts payable under the agreement are paid in full. The permanent financing is expected to be completed in the first quarter of 2009. As of March 31, 2008, Millennium borrowed $193.0 million under the financing agreements, of which NiSource guaranteed $91.7 million. NiSource recorded an accrued liability of approximately $3.7 million related to the fair value of this guarantee.

On June 29, 2006, Columbia Transmission, Piedmont, and Hardy Storage entered into multiple agreements to finance the construction of the Hardy Storage project, which is accounted for by NiSource as an equity investment. Under the financing agreement, Columbia Transmission issued guarantees securing payment for 50% of any amounts issued in connection with Hardy Storage up until such time as the project is placed in service and operated within certain specified parameters. As of March 31, 2008, Hardy Storage borrowed $123.4 million under the financing agreement, for which Columbia Transmission recorded an accrued liability of approximately $1.2 million related to the fair value of its guarantee securing payment for $61.7 million, which is 50% of the amount borrowed.

NiSource has purchase and sales agreement guarantees totaling $80.0 million, which guarantee performance of the seller’s covenants, agreements, obligations, liabilities, representations and warranties under the agreements. No amounts related to the purchase and sales agreement guarantees are reflected in the Condensed Consolidated Balance Sheets. Management believes that the likelihood NiSource would be required to perform or otherwise incur any significant losses associated with any of the aforementioned guarantees is remote.

NiSource has issued other guarantees supporting derivative related payments associated with interest rate swap agreements issued by NiSource Finance, operating leases for many of its subsidiaries and for other agreements entered into by its current and former subsidiaries.

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

In the case of Tawney, et al. v. Columbia Natural Resources, Inc., the Plaintiffs, who are West Virginia landowners, filed a lawsuit in early 2003 against CNR alleging that CNR underpaid royalties on gas produced on their land by improperly deducting post-production costs and not paying a fair value for the gas. In December 2004, the court granted plaintiffs’ motion to add NiSource and Columbia as defendants. Plaintiffs also claimed that the defendants fraudulently concealed the deduction of post-production charges. The court certified the case as a class action that includes any person who, after July 31, 1990, received or is due royalties from CNR (and its predecessors or successors) on lands lying within the boundary of the state of West Virginia. All claims by the government of the United States are excluded from the class. Although NiSource sold CNR in 2003, NiSource remains obligated to manage this litigation and for the majority of any damages ultimately awarded to the plaintiffs. On January 27, 2007, the jury hearing the case returned a verdict against all defendants in the amount of $404.3 million; this is comprised of $134.3 million in compensatory damages and $270 million in punitive damages. In January 2008, the Defendants filed their petition for appeal, and on March 24, 2008, the Defendants filed their amended petition for appeal with the West Virginia Supreme Court of Appeals, which may or may not accept the appeal. NiSource has not established a reserve for the punitive damages portion of the verdict.

C. Environmental Matters.

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

ITEM 1. FINANCIAL STATEMENTS (continued)

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

A reserve of $76.0 million and $77.2 million has been recorded as of March 31, 2008 and December 31, 2007, respectively, to cover probable corrective actions at sites where NiSource has environmental remediation liability. Regulatory assets have been recorded to the extent environmental expenditures are expected to be recovered in rates. NiSource accrues for costs associated with environmental remediation obligations when the incurrence of such costs is probable and the amounts can be reasonably estimated, regardless of when the expenditures are actually made. The undiscounted estimated future expenditures are based on many factors including currently enacted laws and regulations, existing technology and estimated site-specific costs whereby assumptions may be made about the nature and extent of site contamination, the extent of cleanup efforts, costs of alternative cleanup methods and other variables. NiSource’s estimated environmental remediation liability will be refined as events in the remediation process occur. Actual remediation costs may differ materially from NiSource’s estimates due to the dependence on the factors listed above.

Proposals for voluntary initiatives and mandatory controls are being discussed both in the United States and worldwide to reduce so-called “greenhouse gases” such as carbon dioxide, a by-product of burning fossil fuels, and methane, a component of natural gas. Certain NiSource affiliates engage in efforts to voluntarily report and reduce their greenhouse gas emissions. NiSource is currently a participant in the EPA’s Climate Leaders program. On April 2, 2007, in Massachusetts v. EPA, the Supreme Court ruled that the EPA does have authority under the Clean Air Act to regulate emissions of greenhouse gases if it is determined that greenhouse gases have a negative impact on human health or the environment. NiSource will continue to monitor and participate in developments related to efforts to register and potentially regulate greenhouse gas emissions.

On March 12, 2008, the EPA announced the tightening of the 8-hour ozone NAAQS from 0.08 parts per million to 0.075 parts per million. The number of areas that do not meet the new standards could significantly increase across the country. Over the next several years, states will be required to develop ozone attainment plans to implement the standards and improve air quality in these areas. This could lead to additional emission reductions of NOx, an ozone precursor, from facilities owned by NiSource. NiSource will closely monitor developments in these matters and cannot at this time accurately estimate the timing or cost of emission controls that may eventually be required.

Gas Distribution Operations. Several Gas Distribution Operations subsidiaries are potentially responsible parties at waste disposal sites under the CERCLA (commonly known as Superfund) and similar state laws, as well as at MGP sites, which such subsidiaries, or their corporate predecessors, own or previously owned or operated. Gas Distribution Operations subsidiaries may be required to share in the cost of cleanup of such sites. In addition, some Gas Distribution Operations subsidiaries have responsibility for corrective action under the RCRA for closure and cleanup costs associated with underground storage tanks and under the Toxic Substances Control Act for cleanup of PCBs. The final costs of cleanup have not yet been determined. As site investigations and cleanup proceed and as additional information becomes available reserves are adjusted.

A program has been instituted to identify and investigate former MGP sites where Gas Distribution Operations subsidiaries or predecessors are the current or former owner. The program has identified up to 86 such sites and initial investigations have been conducted at 54 sites. Additional investigation activities have been completed or are in progress at 50 sites and remedial measures have been implemented or completed at 37 sites. This effort includes the sites contained in the January 2004 agreement entered into with the IDEM, Northern Indiana, Kokomo Gas, and other Indiana utilities under the Indiana Voluntary Remediation Program. Only those site investigation, characterization and remediation costs currently known and determinable can be considered “probable and reasonably estimable” under SFAS No. 5. As costs become probable and reasonably estimable, reserves will be adjusted. As reserves are recorded, regulatory assets are recorded to the extent environmental expenditures are expected to be recovered through rates. NiSource is unable, at this time, to accurately estimate the time frame and potential costs of the entire program. Management expects that, as characterization is completed, additional remediation work is performed and more facts become available, NiSource will be able to develop a probable and reasonable estimate for the entire program or a major portion thereof consistent with the SEC’s SAB No. 92, SFAS No. 5 and SOP No. 96-1.

Gas Transmission and Storage Operations. Columbia Transmission continues to conduct characterization and remediation activities at specific sites under a 1995 EPA Administrative Order by Consent. The program pursuant to the Administrative Order by Consent covers approximately 245 facilities, approximately 13,000 liquid removal points, approximately 2,200 mercury measurement stations and about 3,700 storage well locations. Field

ITEM 1. FINANCIAL STATEMENTS (continued)

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

characterization has been performed at all sites. Site characterization reports and remediation plans, which must be submitted to the EPA for approval, are in various stages of development and completion. Remediation has been completed at the mercury measurement stations, liquid removal point sites and storage well locations and at all but 7 of the 245 facilities. The AOC was amended in 2007 to facilitate payment of EPA oversight costs and to remove remediated sites from the AOC.

Columbia Transmission and Columbia Gulf are potentially responsible parties at several waste disposal sites under CERCLA and similar state laws. The potential liability is believed to be de minimis. However, the final allocation of cleanup costs has yet to be determined. As site investigations and cleanups proceed and as additional information becomes available reserves will be adjusted.

On February 21, 2007, Pennsylvania Department of Environmental Protection provided representatives of Columbia Transmission with a proposed Consent Order and Agreement covering an unmanned equipment storage site located in rural southwest Pennsylvania. The proposed order alleges that Columbia Transmission has violated the state’s Clean Streams Act and Solid Waste Management Act by discharging petroleum products onto the property and into the waters of the state. In addition to requiring remediation and monitoring activities at the site, the state has proposed penalties for these violations. Columbia Transmission plans to engage in further discussions with the agency regarding the proposed order, including the rationale for the proposed penalty. The site in question is subject to an existing EPA Administrative Consent Order.

On September 26, 2007, Columbia Transmission received an NOV related to bentonite discharge associated with a horizontal directional drill operation for the Hardy Storage project. On November 29, 2007, Columbia Transmission received an NOV related to the collapse of Swift Run stream bed associated with the same horizontal directional drill operation. Columbia Transmission received the Draft Consent Special Order from the VADEQ on March 3, 2008. NiSource has provided comments to the VADEQ on the Draft Consent Special Order and continues to work with the VADEQ on the content of the Draft Consent Special Order. Stream restoration activities are continuing. Continued monitoring of the stream will occur for the next six months to two years.

Electric Operations.

Air. In December 2001, the EPA approved regulations developed by the State of Indiana to comply with the EPA’s NOx SIP call. The NOx SIP call requires certain states, including Indiana, to reduce NOx levels from several sources, including industrial and utility boilers, to lower regional transport of ozone. Compliance with the NOx limits contained in these rules was required by May 31, 2004. To comply with the rule, Northern Indiana developed a NOx compliance plan, which included the installation of Selective Catalytic Reduction NOx reduction technology at each of its active generating stations and is currently in compliance with the NOx limits. In implementing the NOx compliance plan, Northern Indiana has expended approximately $290 million as of December 31, 2007. Actual costs may vary depending on a number of factors including market demand and resource constraints, uncertainty of future equipment and construction costs, and the potential need for additional control technology.

On March 10, 2005, the EPA issued the CAIR final regulations. The rule establishes phased reductions of NOx and SO2 from 28 Eastern states, including electric utilities in Indiana, by establishing an annual emissions cap for NOx and SO2 and an additional cap on NOx emissions during the ozone control season. On March 15, 2006, the EPA signed three related rulemakings providing final regulatory decisions on implementing the CAIR. The EPA, in one of the rulings, denied several petitions for reconsideration of various aspects of the CAIR, including requests by Northern Indiana to reconsider SO2 and NOx allocations. On March 25, 2008, the U. S. Court of Appeals for the D. C. Circuit held oral arguments in litigation challenging the CAIR. Northern Indiana, along with other utilities, directly participated in one of the arguments addressing the legality of using the allowance allocations of the Acid Rain program for the purpose of complying with the CAIR SO2 reduction requirements. A decision on these arguments is expected later this year and such decision could potentially alter CAIR requirements.

On October 3, 2007, the Indiana Air Pollution Control Board adopted, with minor changes from the EPA Clean Air Mercury Rule, the state rule to implement EPA’s CAMR. The rule became effective on February 3, 2008, with compliance required in 2010. The EPA FIP rule, published December 22, 2006, has not been finalized and is intended only as a backstop for states such as Indiana that missed the November 17, 2006 submittal deadline but is working diligently to finalize its state rule. The IDEM has indicated it is planning on utilizing an option in the FIP that allows the state to submit a request for partial approval to use the IDEM’s allowance allocation methodology

ITEM 1. FINANCIAL STATEMENTS (continued)

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

until the EPA is able to approve the full state plan. The state’s request for partial approval will be due to the EPA upon the effective date of the final FIP, estimated to be in the first half of 2008. The EPA would not record allowance allocations for 2010 until September 2008. The FIP would be rescinded upon EPA acceptance of the Indiana rule. On February 8, 2008, the United States Court of Appeals for the District of Columbia Circuit vacated two EPA rules addressing utility mercury emissions that are the stimulus for the Indiana Air Pollution Control Board’s CAMR. The first is the EPA’s rule delisting coal and oil-fired electric generating units from the list of sources whose emissions are regulated under section 112 of the Clean Air Act, 42 U.S.C. § 7412. Revision of December 2000 Regulatory Finding (“Delisting Rule”), 70 Fed. Reg. 15,994 (March 29, 2005). The second is the EPA’s rule that set performance standards for new coal-fired electric generating units and established total mercury emission limits for States along with a cap-and-trade program for new and existing coal-fired electric generating units. Standards of Performance for New and Existing Stationary Sources: Electric Utility Steam Generating Units (“CAMR”), 70 Fed. Reg. 28,606 (May 18, 2005). On March 24, 2008, the EPA and industry filed petitions with the court for rehearing of these decisions. The resolution of this legal action and the EPA’s response will affect the implementation and timing of the installation of controls to address potential mercury reduction obligations. Northern Indiana will closely monitor developments regarding any further action by the EPA and subsequent regulatory developments from the EPA and/or the Indiana Air Pollution Control Board in this matter.

Local air quality has improved in three counties in which Northern Indiana generating assets are located. In recognition of this improvement the IDEM submitted petitions to the EPA seeking redesignation of the Indiana counties of Lake, Porter, and LaPorte to attainment of the eight-hour ozone NAAQS. Final EPA rulemaking approving the LaPorte County redesignation became effective on July 19, 2007. The EPA approval for Lake and Porter counties is undergoing further evaluation and may be delayed until after the 2008 ozone season due to monitored values in 2007 at one site that put the design value just above the NAAQS. On October 3, 2007, the Air Pollution Control Board adopted the redesignation of LaPorte County to attainment as part of a reformatting of the state attainment designation rule. The rule became effective January 28, 2008. Upon promulgation of the EPA and subsequent IDEM regulations to implement the redesignations to attainment, new source review rules are expected to change from nonattainment new source review rules to prevention of significant deterioration while measures responsible for existing emission reductions would continue. The March 12, 2008 EPA tightening of the 8-hour ozone NAAQS may preclude the approval of the redesignation requests and may result in these counties remaining and/or again being designated as nonattainment of the ozone NAAQS. As discussed above under “General,” the EPA ozone NAAQS revision could lead to additional emission reductions of NOx, an ozone precursor, from facilities owned by Northern Indiana. Northern Indiana will closely monitor developments in these matters and cannot at this time accurately estimate the timing or cost of emission controls that may eventually be required.

In a related matter, the U. S. Court of Appeals for the D. C. Circuit, in late 2006, ruled a requirement to impose CAA §185 fees on emissions sources located in counties that failed to attain the previous (1-hr) ozone standard, which had been rescinded by the EPA in May 2005, remained applicable retroactive to November 2005. The court remanded the issue to the EPA for reconsideration. In January 2008, the U. S. Supreme Court denied a petition to hear an appeal on this matter. The EPA has announced that it intends to propose regulations in fall 2008 to specify how §185 fees will be imposed and calculated. One of Northern Indiana’s operating generating assets is located in a county where this fee could potentially be applied. Northern Indiana will closely monitor developments in this matter and cannot estimate the financial impact at this time.

In late 1999, the EPA initiated a New Source Review enforcement action against several industries, including the electric utility industry, concerning rule interpretations that have been the subject of recent (prospective) reform regulations. Northern Indiana has received and responded to the EPA information requests on this subject, most recently in June 2002. The EPA issued an NOV to Northern Indiana on September 29, 2004, for alleged violations of the Clean Air Act and the SIP. Specifically, the NOV alleges that modifications were made to certain boiler units at the Michigan City, Schahfer, and Bailly Generating Stations between the years of 1985 and 1995 without obtaining appropriate air permits for the modifications. An adverse outcome in this matter could require capital expenditures beyond the EPA requirements that cannot be determined at this time and could require payment of substantial penalties. Northern Indiana is unable, at this time, to predict the timing or outcome of this EPA action.

Water. The Great Lakes Water Quality Initiative program is expected to add new water quality standards for facilities that discharge into the Great Lakes watershed, including Northern Indiana’s three electric generating

ITEM 1. FINANCIAL STATEMENTS (continued)

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

stations located on Lake Michigan. The State of Indiana has promulgated its regulations for this water discharge permit program and has received final EPA approval.

The NPDES water discharge permit for Michigan City Generating Station has been issued and became effective on April 1, 2006. The permit requires that the facility meet the Great Lakes Initiative discharge limits for copper. The Michigan City Generating Station has a four year compliance schedule to meet these limits, which ends April 1, 2010. Northern Indiana is evaluating alternatives for treating copper in wastewater at the Michigan City Generating Station.

Great Lakes Initiative-based discharge limits for mercury have also been set for both the Michigan City and Bailly Generating Stations. Northern Indiana will collect data, develop and implement pollution reduction program plans, to demonstrate progress in reducing mercury discharge.

The permit for the Bailly Generating Station was issued on June 26, 2006, and became effective on August 1, 2006. Northern Indiana appealed the Bailly Generating Station NPDES permit, due to an unacceptable internal outfall monitoring permit condition. On February 18, 2008, the Bailly NPDES permit was modified to resolve the monitoring issue and to address the 316(b) rule status due to the remand mentioned below. Due to additional pending studies, the cost of complying with the permit requirements cannot be estimated at this time.

On February 16, 2004, the EPA Administrator signed the Phase II Rule of the Clean Water Act Section 316(b) which requires all large existing steam electric generating stations meet certain performance standards to reduce the effects on aquatic organisms at their cooling water intake structures. The rule became effective on September 7, 2004. Under this rule, stations will either have to demonstrate that the performance of their existing fish protection systems meet the new standards or develop new systems, such as a closed-cycle cooling tower. On January 25, 2007, the Second Circuit in a court decision on the Phase II 316(b) rule, remanded for EPA reconsideration the options providing flexibility for meeting the requirements of the rule. On March 20, 2007, the EPA issued a guidance memo advising its Regional Administrators that the Agency considers the 316(b), Phase II Rule governing cooling water withdrawals suspended and will be issuing a Federal Register notice to that effect. On July 9, 2007, the EPA published a notice in the Federal Register suspending the Phase II rule. The notice explained that the EPA is not accepting comments on the suspension and notes that “best professional judgment” is to be used in making 316(b) decisions. The EPA will need to propose a revised 316(b) rule and/or provide guidance to address the impact of the court decision. Northern Indiana will closely monitor the EPA rule developments.

On July 5, 2007, the Second Circuit Court of Appeals denied the petitions for rehearing asking the court to reconsider its remand of the Phase II 316(b) ruling. Various parties submitted petitions for a writ of certiorari to the U. S. Supreme Court in early November seeking to reverse the Second Circuit Court’s decision. Northern Indiana will continue to closely monitor this activity.

ITEM 1. FINANCIAL STATEMENTS (continued)

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

16. Changes in Common Stockholders’ Equity and Comprehensive Income

The following table displays the changes in Common Stockholders’ Equity and Comprehensive Income for the three months ended March 31, 2008 and 2007.

										Additional								Accum
		Common				Treasury				Paid-In				Retained				Other Comp								Comp
(in millions)		Stock				Stock				Capital				Earnings				Income/(Loss)				Total				Income
Balance January 1, 2008		$	2.7			$	(23.3	)		$	4,011.0			$	1,074.5			$	11.7			$	5,076.6
Comprehensive Income:
Net Income															99.3								99.3				99.3
Other comprehensive income, net of tax:
Gain/loss on available for sale securities:
Unrealized (a)																			(1.3	)			(1.3	)			(1.3	)
Net unrealized losses on derivatives qualifying as cash flow hedges (b)																			17.3				17.3				17.3
Unrecognized Pension Benefit and OPEB cost (c )																			(3.6	)			(3.6	)			(3.6	)
Total comprehensive income																											111.7
Dividends:
Common shares															(126.3	)							(126.3	)
Treasury stock acquired
Issued:
Employee stock purchase plan											0.2												0.2
Long-term incentive plan											1.7												1.7
Amortization of Long-term incentive Plan											0.3												0.3
Balance March 31, 2008		$	2.7			$	(23.3	)		$	4,013.2			$	1,047.5			$	24.1			$	5,064.2