NiSource 10Q 2006 Q1 Quarterly report

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, 2006


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

For the transition period from to

Commission file number001-16189

NiSource Inc.

(Exact name of registrant as specified in its charter)


Delaware		35-2108964

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

801 East 86th Avenue
Merrillville, Indiana		46410

(Address of principal executive offices)		(Zip Code)

(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.
Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filerþ Accelerated filero Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ

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: 272,665,100 shares outstanding at April 28, 2006.

NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2006

Table of Contents


			Page
	Defined Terms			3

PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Statements of Consolidated Income		6

		Consolidated Balance Sheets		7

		Statements of Consolidated Cash Flows		9

		Statements of Consolidated Comprehensive Income		10

		Notes to Consolidated Financial Statements		11

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		49

	Item 4.	Controls and Procedures		49

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings		50

	Item 1A.	Risk Factors		50

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50

	Item 3.	Defaults Upon Senior Securities		50

	Item 4.	Submission of Matters to a Vote of Security Holders		50

	Item 5.	Other Information		50

	Item 6.	Exhibits		51

	Signature			52
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.
Columbia		Columbia Energy Group
Columbia Atlantic Trading		Columbia Atlantic Trading Corporation
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.
NiSource		NiSource Inc.
NiSource Corporate Services		NiSource Corporate Services Company
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.
Transcom		Columbia Transmission Communications Corporation
Whiting Clean Energy		Whiting Clean Energy, Inc.
Whiting Leasing		Whiting Leasing LLC

Abbreviations
APB No. 25		Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
APB No. 28		Accounting Principles Board Opinion No. 28, “Interim Financial Reporting”
ARP		Alternative Regulatory Plan
BBA		British Banker Association
Bcf		Billion cubic feet
BP		BP Amoco p.l.c.
CAIR		Clean Air Interstate Rule
Day 1		Began October 1, 2003 and refers to Northern Indiana turning over operational control of the interchange facilities and its own transmission assets like many other Midwestern electric utilities to MISO
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 transmission service, managing transmission constraints, and managing the day-ahead, real-time and financial transmission rights markets
DOT		United States Department of Transportation
ECRM		Environmental Cost Recovery Mechanism

DEFINED TERMS (continued)


EERM		Environmental Expense Recovery Mechanism
Empire		Empire State Pipeline
EPA		United States Environmental Protection Agency
EPCA		Electric Power Cost Adjustment
EPS		Earnings per share
FAC		Fuel adjustment clause
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FIN 18		FASB Interpretation No. 18, “Accounting for Income Taxes In Interim Periods (An Interpretation of APB Opinion No. 28)”
FIN 47		FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”
FTRs		Financial Transmission Rights
GCA		Gas cost adjustment
GCIM		Gas Cost Incentive Mechanism
gwh		Gigawatt hours
IBM		International Business Machines Corp.
IDEM		Indiana Department of Environmental Management
IURC		Indiana Utility Regulatory Commission
Jupiter		Jupiter Aluminum Corporation
LDCs		Local distribution companies
LIBOR		London InterBank Offered Rate
Massachusetts DTE		Massachusetts Department of Telecommunications and Energy
MISO		Midwest Independent System Operator
Mitchell Station		Dean H. Mitchell Generating Station
MMDth		Million dekatherms
mw		Megawatts
NAAQS		National Ambient Air Quality Standards
NOx		Nitrogen oxide
NYDOS		New York’s Department of State
NYMEX		New York Mercantile Exchange
OPSB		Ohio Power Siting Board
OUCC		Indiana Office of Utility Consumer Counselor
Piedmont		Piedmont Natural Gas Company, Inc.
PPS		Price Protection Service
PRB		Powder River Basin
PUCO		Public Utilities Commission of Ohio
RAM		Retainage Adjustment Mechanism
SEC		Securities and Exchange Commission
SFAS		Statement of Financial Accounting Standards
SFAS No. 71		Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation”
SFAS No. 87		Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”
SFAS No. 88		Statement of Financial Accounting Standards No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”
SFAS No. 106		Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”
SFAS No. 109		Statement of Financial Accounting Standards No. 109, “Accounting for Uncertain Tax Positions”
SFAS No. 123		Statement of Financial Accounting Standards No. 123, “Share-Based Payment”
SFAS No. 123R		Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”

DEFINED TERMS (continued)


SFAS No. 132R		Statement of Financial Accounting Standards No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits — An Amendment of FASB Statements No. 87, 88, and 10”
SFAS No. 133		Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended
SFAS No. 143		Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”
SFAS No. 154		Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections”
SIP		State Implementation Plan
SO2		Sulfur dioxide
VaR		Value-at-risk and instrument sensitivity to market factors
VSCC		Commonwealth of Virginia State Corporate Commission

PART I

ITEM 1.FINANCIAL STATEMENTS

NiSource Inc.

Statements of Consolidated Income (unaudited)


Three Months Ended March 31,(in millions,except per share amounts)	2006			2005

Net Revenues
Gas Distribution	$	1,998.2		$	1,828.3
Gas Transportation and Storage		320.6			328.9
Electric		305.7			282.6
Other		348.3			243.5

Gross Revenues		2,972.8			2,683.3
Cost of Sales		1,991.7			1,670.3

Total Net Revenues		981.1			1,013.0

Operating Expenses
Operation and maintenance		372.9			337.6
Depreciation and amortization		136.9			135.1
Impairment and gain on sale of assets		(0.2	)		(0.5	)
Other taxes		103.0			103.1

Total Operating Expenses		612.6			575.3

Operating Income		368.5			437.7

Other Income (Deductions)
Interest expense, net		(95.8	)		(104.0	)
Dividend requirements on preferred stock of subsidiaries		(1.0	)		(1.1	)
Other, net		(3.4	)		(0.5	)

Total Other Income (Deductions)		(100.2	)		(105.6	)

Income From Continuing Operations Before Income Taxes		268.3			332.1
Income Taxes		96.5			123.4

Income From Continuing Operations		171.8			208.7

Loss from Discontinued Operations — net of taxes		(0.3	)		(2.2	)
Gain (Loss) on Disposition of Discontinued Operations — net of taxes		1.0			(0.2	)
Change in Accounting — net of taxes		0.4			—

Net Income	$	172.9		$	206.3


Basic Earnings (Loss) Per Share ($)
Continuing operations		0.63			0.77
Discontinued operations		—			(0.01	)

Basic Earnings Per Share		0.63			0.76


Diluted Earnings (Loss) Per Share ($)
Continuing operations		0.63			0.77
Discontinued operations		—			(0.01	)

Diluted Earnings Per Share		0.63			0.76



Dividends Declared Per Common Share ($)		0.23			0.23


Basic Average Common Shares Outstanding (millions)		272.3			270.3
Diluted Average Common Shares (millions)		273.1			272.1

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

ITEM 1.FINANCIAL STATEMENTS (continued)

NiSource Inc.

Consolidated Balance Sheets (unaudited)


	March 31,			December 31,
(in millions)	2006			2005

ASSETS
Property, Plant and Equipment
Utility Plant	$	16,745.9		$	16,684.4
Accumulated depreciation and amortization		(7,637.2	)		(7,556.8	)

Net utility plant		9,108.7			9,127.6

Other property, at cost, less accumulated depreciation		388.5			426.7

Net Property, Plant and Equipment		9,497.2			9,554.3


Investments and Other Assets
Assets of discontinued operations and assets held for sale		49.7			34.6
Unconsolidated affiliates		72.5			75.0
Other investments		101.4			114.2

Total Investments		223.6			223.8


Current Assets
Cash and cash equivalents		83.4			69.4
Restricted cash		57.9			33.9
Accounts receivable (less reserve of $75.8 and $67.9, respectively)		1,161.8			1,254.6
Gas inventory		165.0			526.9
Underrecovered gas and fuel costs		190.8			421.8
Materials and supplies, at average cost		73.7			72.0
Electric production fuel, at average cost		44.8			24.9
Price risk management assets		136.6			183.1
Exchange gas receivable		516.7			169.8
Regulatory assets		213.1			195.0
Prepayments and other		99.3			109.3

Total Current Assets		2,743.1			3,060.7


Other Assets
Price risk management assets		137.7			192.9
Regulatory assets		611.6			586.3
Goodwill		3,677.3			3,677.3
Intangible assets		492.7			495.8
Deferred charges and other		178.4			167.4

Total Other Assets		5,097.7			5,119.7

Total Assets	$	17,561.6		$	17,958.5

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

ITEM 1.FINANCIAL STATEMENTS (continued)

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


	March 31,			December 31,
(in millions, except share amounts)	2006			2005

CAPITALIZATION AND LIABILITIES
Capitalization
Common stock equity
Common stock — $0.01 par value, 400,000,000 shares authorized; 272,636,673 and 272,622,905 shares issued and outstanding, respectively	$	2.7		$	2.7
Additional paid-in-capital, net of deferred stock compensation		3,970.6			3,969.4
Retained earnings		1,029.1			981.6
Accumulated other comprehensive loss and other common stock equity		(77.9	)		(20.7	)

Total common stock equity		4,924.5			4,933.0
Preferred stocks—Series without mandatory redemption provisions		81.1			81.1
Long-term debt, excluding amounts due within one year		5,229.6			5,271.2

Total Capitalization		10,235.2			10,285.3


Current Liabilities
Current portion of long-term debt		442.7			440.7
Short-term borrowings		379.2			898.0
Accounts payable		538.7			866.7
Dividends declared on common and preferred stocks		63.8			1.1
Customer deposits		104.6			101.9
Taxes accrued		381.0			217.5
Interest accrued		105.3			86.2
Overrecovered gas and fuel costs		114.6			25.8
Price risk management liabilities		85.7			72.3
Exchange gas payable		660.1			425.2
Deferred revenue		35.1			51.3
Regulatory liabilities		37.3			46.3
Accrued liability for postretirement and postemployment benefits		61.1			61.1
Other accruals		499.5			549.1

Total Current Liabilities		3,508.7			3,843.2


Other Liabilities and Deferred Credits
Price risk management liabilities		46.9			22.2
Deferred income taxes		1,542.7			1,591.9
Deferred investment tax credits		67.9			69.9
Deferred credits		83.4			81.1
Deferred revenue		50.7			60.4
Accrued liability for postretirement and postemployment benefits		501.2			511.0
Regulatory liabilities		1,224.9			1,196.2
Asset retirement obligations		121.6			119.8
Other noncurrent liabilities		178.4			177.5

Total Other Liabilities and Deferred Credits		3,817.7			3,830.0

Commitments and Contingencies		—			—

Total Capitalization and Liabilities	$	17,561.6		$	17,958.5

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

ITEM 1.FINANCIAL STATEMENTS (continued)

NiSource Inc.

Statement of Consolidated Cash Flow (unaudited)


Three Months Ended March 31,(in millions)	2006			2005

Operating Activities
Net income	$	172.9		$	206.3
Adjustments to reconcile net income to net cash from continuing operations:
Depreciation and amortization		136.9			135.1
Net changes in price risk management assets and liabilities		10.2			(31.2	)
Deferred income taxes and investment tax credits		(40.5	)		(29.8	)
Deferred revenue		(26.0	)		(8.6	)
Stock compensation expense		1.3			1.5
Gain on sale of assets		(2.7	)		(0.5	)
Loss on impairment of assets		2.5			—
Cumulative effect of change in accounting principle, net of taxes		(0.4	)		—
Income from unconsolidated affiliates		(1.0	)		(2.0	)
Loss (gain) on sale of discontinued operations		(1.0	)		0.2
Loss from discontinued operations		0.3			2.2
Amortization of discount/premium on debt		2.0			4.8
Other adjustments		(1.6	)		0.2
Changes in assets and liabilities:
Accounts receivable		110.2			0.1
Inventories		442.1			615.5
Accounts payable		(340.6	)		(141.4	)
Customer deposits		2.7			3.1
Taxes accrued		151.6			218.0
Interest accrued		19.1			61.7
(Under) Overrecovered gas and fuel costs		319.7			139.4
Exchange gas receivable/payable		(126.0	)		(80.7	)
Other accruals		(80.1	)		(102.9	)
Prepayments and other current assets		9.9			11.4
Regulatory assets/liabilities		(19.1	)		(4.1	)
Postretirement and postemployment benefits		(6.0	)		8.9
Deferred credits		2.3			(10.7	)
Deferred charges and other noncurrent assets		(5.2	)		1.4
Other noncurrent liabilities		(7.3	)		(2.6	)

Net Operating Activities from Continuing Operations		726.2			995.3
Net Operating Activities from Discontinued Operations		0.1			0.1

Net Cash Flows from Operating Activities		726.3			995.4

Investing Activities
Capital expenditures		(121.6	)		(104.1	)
Proceeds from disposition of assets		3.9			5.8
Restricted cash		(21.8	)		26.2
Other investing activities		14.0			(11.9	)

Net Cash Flows used for Investing Activities		(125.5	)		(84.0	)

Financing Activities
Issuance of long-term debt		0.1			—
Retirement of long-term debt		(0.5	)		(0.3	)
Change in short-term debt		(518.8	)		(307.6	)
Issuance of common stock		1.0			18.7
Acquisition of treasury stock		(5.9	)		(1.4	)
Dividends paid — common shares		(62.7	)		(62.3	)

Net Cash Flows used for Financing Activities		(586.8	)		(352.9	)

Increase in cash and cash equivalents		14.0			558.5
Cash and cash equivalents at beginning of year		69.4			29.5

Cash and cash equivalents at end of period	$	83.4		$	588.0


Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$	76.3		$	36.4
Interest capitalized		1.6			(0.2	)
Cash paid (refunded) for income taxes		4.2			(25.3	)

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

ITEM 1.FINANCIAL STATEMENTS (continued)

NiSource Inc.

Statements of Consolidated Comprehensive Income (unaudited)


Three Months Ended March 31,(in millions, net of taxes)	2006			2005

Net Income	$	172.9		$	206.3
Other comprehensive income (loss)
Net unrealized gains (losses) on cash flow hedges		(51.0	)		54.4
Net gain (loss) on available for sale securities		(0.3	)		1.5

Total other comprehensive income (loss)		(51.3	)		55.9

Total Comprehensive Income	$	121.6		$	262.2

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

ITEM 1.FINANCIAL STATEMENTS (continued)

NiSource Inc.

Notes to Consolidated Financial Statements (unaudited)

Basis of Accounting Presentation

The accompanying unaudited 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, 2005. Income for interim periods may not be indicative of results for the calendar year due to weather variations and other factors. Certain reclassifications have been made to the 2005 financial statements to conform to the 2006 presentation. In the Statements of Consolidated Cash Flows for the three months ended March 31, 2005, the classification of the activity in restricted cash balances has been reclassified to an investing activity. NiSource previously presented such changes as an operating activity. For the three months ended March 31, 2005, this resulted in a $26.2 million increase to investing cash flows and a corresponding decrease to operating cash flows from the amounts previously reported.

Recent Accounting Pronouncements

SFAS No. 123 (revised 2004) — Share-Based Payment.Effective January 1, 2006, NiSource adopted SFAS No. 123R using the modified prospective transition method. SFAS No. 123R requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. In accordance with the modified prospective transition method, NiSource’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. Prior to the adoption of SFAS No. 123R, NiSource applied the intrinsic value method of APB No. 25 for awards granted under its stock-based compensation plans and complied with the disclosure requirements of SFAS No. 123. There were no modifications to awards as a result of the adoption of SFAS 123R.

NiSource does not anticipate ongoing operating results to be materially impacted by the adoption of SFAS No. 123R. NiSource recognized a cumulative effect of change in accounting principle of $0.4 million, net of income taxes, which reflects the net cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously permitted. NiSource anticipates that other than the requirement for expensing stock options, the current share-based awards will continue to be accounted for substantially as they are currently. For 2006, NiSource’s Board has determined that it would not provide incumbent executives additional grants of options, restricted or contingent shares. As of March 31, 2006, the total remaining unrecognized compensation cost related to non-vested awards amounted to $8.2 million, which will be amortized over the weighted-average remaining requisite service period of 2.8 years. The following table illustrates the effect on net income and EPS as if NiSource had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation in the first quarter of 2005.


	March 31,
(in millions, except per share data)	2005

Net Income
As reported	$	206.3
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		1.0
Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax		7.2

Pro forma	$	200.1


Earnings per share ($)
Basic — as reported		0.76
— pro forma		0.74
Diluted — as reported		0.76
— pro forma		0.74

ITEM 1.FINANCIAL STATEMENTS (continued)

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

SFAS No. 154 — Accounting Changes and Error Corrections.In May 2005, the FASB issued SFAS No. 154 to provide guidance on the accounting for and reporting of accounting changes and error corrections, which is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle, and for the reporting of an error correction. Effective January 1, 2006, NiSource adopted SFAS No. 154. There were no impacts to NiSource’s consolidated financial statements as a result of the adoption of SFAS No. 154.

Accounting for Uncertain Tax Positions.On July 14, 2005, the FASB issued an Exposure Draft, “Accounting for Uncertain Tax Positions,” an interpretation of SFAS No. 109. This proposal seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement requirements related to accounting for income taxes. Specifically, the proposal would require that a tax position meet a “probable recognition threshold” for the benefit of an uncertain tax position to be recognized in the financial statements. The proposal would require recognition in the financial statements of the best estimate of the effects of a tax position only if that position is probable of being sustained on audit by the appropriate taxing authorities, based solely on the technical merits of the position. NiSource is currently reviewing the provisions of the Exposure Draft to determine the impact it may have on its Consolidated Financial Statements and Notes to Consolidated Financial Statements. FASB has not yet issued a final statement.

Stock Options and Awards

Effective January 1, 2006, NiSource adopted SFAS No. 123R using the modified prospective transition method. SFAS No. 123R requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. In accordance with the modified prospective transition method, NiSource’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. Prior to the adoption of SFAS No. 123R, NiSource applied the intrinsic value method of APB No. 25 for awards granted under its stock-based compensation plans and complied with the disclosure requirements of SFAS No. 123.

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, performance units, contingent stock awards and dividend equivalents payable on grants of options, performance units and contingent stock awards. Under the plan, each option has a maximum term of ten years from the date of grant. NiSource has traditionally awarded stock options to employees at the beginning of each year that vested one year from the date of grant. For stock options granted during January 2005, NiSource awarded stock options that vested immediately, but included a one-year exercise restriction. Stock appreciation rights may be granted only in tandem with stock options on a one-for-one basis and are payable in cash, common stock, or a combination thereof. In addition, NiSource currently has non-qualified option grants outstanding and vested which were granted under a 1988 long-term incentive plan.

At the annual meeting of stockholders held on May 10, 2005, NiSource’s stockholders approved proposed amendments to the 1994 Plan. The amendments (i) increased the maximum number of shares of NiSource common stock that may be subject to awards from 21 million to 43 million and (ii) extended the period during which awards could be granted to May 10, 2015 and extended the term of the plan until all the awards have been satisfied by either issuance of stock or the payment of cash. At March 31, 2006, there were 26,019,910 shares reserved for future awards under the amended and restated 1994 Plan.

NiSource has granted restricted stock awards, which are restricted as to transfer and are subject to forfeiture for specific periods from the date of grant and will vest over periods from one year or more. If a participant’s employment is terminated prior to vesting other than by reason of death, disability or retirement, restricted shares are forfeited. However, awards may vest upon death, disability, or upon a change of control or retirement. There were 10,000 restricted shares outstanding at March 31, 2006, which were not a part of the time accelerated restricted stock award plan described below.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

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. These awards of restricted stock or restricted stock units generally vest over a period of six years or, in the case of restricted stock units at age 62 if an employee would become age 62 within six years, but not less than three years. If certain predetermined criteria involving measures of total shareholder return are met, as measured at the end of the third year after the grant date, the awards vest at the end of the third year. At March 31, 2006, NiSource had 820,542 awards outstanding which contain the time-accelerated provisions. The total shareholder return measures established for the 2003 awards were not met as of December 31, 2005, therefore these grants will not have an accelerated vesting period. The measures for the 2004 awards were not met as of March 31, 2006.

For 2006, NiSource’s Board has determined that it would not provide incumbent executives additional grants of options, restricted or contingent shares.

The Amended and Restated Non-employee Director Stock Incentive Plan, which was approved by the Board and stockholders at the 2003 annual meeting, provides for the issuance of up to 500,000 shares of common stock to non-employee directors. The Plan provides for awards of common stock, which vest in 20% increments per year, with full vesting after five years. The Plan permits the granting of restricted stock units and allows for the award of nonqualified stock options, subject to immediate vesting in the event of the director’s death or disability, or a change in control of NiSource. If a director’s service on the Board is terminated for any reason other than retirement at or after age seventy, death or disability, any shares of common stock not vested as of the date of termination are forfeited. As of March 31, 2006, 89,860 restricted shares and 98,603 restricted stock units had been issued under the Plan.

Option grants are granted with an exercise price equal to the average of the high and low market price on the day of the grant. Stock option transactions for the first quarter ended March 31, 2006, were as follows:


				Weighted Average
	Options			Option Price ($)

Outstanding at January 1, 2006		9,948,383			22.59
Granted		—			N/A
Exercised		(38,250	)		20.22
Cancelled		(503,587	)		23.76
Outstanding at March 31, 2006		9,406,546			22.54
Exercisable at March 31, 2006		9,377,975			22.54

The following table summarizes information on stock options outstanding and exercisable at March 31, 2006:


	Options Outstanding						Options Exercisable
			Weighted Average		Weighted Average				Weighted Average
Range of Exercise	Number		Exercise Price		Remaining Contractual		Number		Exercise Price
Prices Per Share ($)	Outstanding		Per Share ($)		Life in Years		Exercisable		Per Share ($)

17.53 - 20.45		1,480,993		19.56		5.8		1,480,993		19.56
20.46 - 23.38		5,790,917		22.09		7.1		5,762,346		22.09
23.39 - 26.30		1,797,886		25.18		4.3		1,797,886		25.18
26.31 - 29.22		336,750		29.22		2.2		336,750		29.22

		9,406,546		22.54		6.2		9,377,975		22.54

There were no stock appreciation rights outstanding at March 31, 2006.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

No options were granted during the first three months ended March 31, 2006. The fair value of each option granted during the first quarter ended March 31, 2005 was estimated on the date of grant using the Black-Scholes option-pricing model with a dividend yield of 4.1%. The weighted average fair value of the options granted during the first quarter of 2005 was $3.34. The following assumptions were used:


	March 31, 2005

Expected Life (yrs.)		4.2
Interest Rate		3.5-3.6	%
Volatility		22.6	%

NiSource recognized compensation cost of $1.3 million and $1.5 million in the first quarter of 2006 and 2005, respectively, as well as related tax benefits of $0.5 million and $0.5 million, respectively. There were no modifications to awards as a result of the adoption of SFAS 123R.

As of March 31, 2006, the total remaining unrecognized compensation cost related to non-vested awards amounted to $8.2 million, which will be amortized over the weighted-average remaining requisite service period of 2.8 years.

Income Taxes

For the three months ended March 31, 2006 and 2005, NiSource’s provision for income taxes was calculated in accordance with APB No. 28 and FIN 18. Accordingly, the interim effective tax rate reflects the estimated annual effective tax rate for 2006 and 2005, respectively, adjusted for tax expense associated with certain discrete items recorded during the quarter. The effective tax rate differs from the federal tax rate of 35% primarily due to the effects of tax credits, state income taxes, utility rate-making, and other permanent book/tax differences such as the electric production tax deduction provided under Internal Revenue Code Section 199.

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)	2006		2005

Denominator
Basic average common shares outstanding		272,342		270,327
Dilutive potential common shares
Nonqualified stock options		50		319
Shares contingently issuable under employee stock plans		572		885
Shares restricted under employee stock plans		119		601

Diluted Average Common Shares		273,083		272,132

Restructuring Activities

During the second quarter of 2005, NiSource Corporate Services reached a definitive agreement with IBM under which IBM will provide a broad range of business transformation and outsourcing services to NiSource. The service and outsourcing agreement is for ten years with a transition period to extend through December 31, 2006. As of March 31, 2006, 821 employees were terminated as a result of the agreement with IBM, of which 554 became employees of IBM. During the first quarter of 2006, 142 employees were terminated and 10 became employees of IBM.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

In the fourth quarter of 2005, NiSource announced a plan to reduce its executive ranks by approximately 15% to 20% of the top-level executive group. In part, this reduction will come through anticipated attrition and consolidation of basic positions. As of March 31, 2006, the employment of 5 employees terminated as a result of the executive initiative, all of which occurred in the first quarter of 2006.

In previous years, NiSource implemented restructuring initiatives to streamline its operations and realize efficiencies as a result of the acquisition of Columbia. In 2000, these restructuring initiatives included a severance program, a voluntary early retirement program, and a transition plan to implement operational efficiencies throughout the company. In 2001, NiSource’s restructuring initiatives focused on creating operating efficiencies in the Gas Distribution and the Electric Operations segments and included the closure of the Mitchell Station in Gary, Indiana. During 2002, NiSource implemented a restructuring initiative which resulted in employee terminations throughout the organization mainly affecting executive and other management-level employees. In connection with these earlier restructuring initiatives, a total of approximately 1,600 management, professional, administrative and technical positions were identified for elimination. As of March 31, 2006, approximately 1,565 employees were terminated, of whom zero employees were terminated during the first quarter of 2006.

Adjustments to the restructuring liability were recorded mainly for adjustments in estimated expenses related to previous restructuring initiatives. Adjustments in the estimated liability are reflected in “Operation and Maintenance” expense. Of the $9.2 million remaining restructuring liability from the Columbia merger and related initiatives, $8.7 million is related to facility exit costs.

Restructuring reserve by restructuring initiative:


	Balance at								Balance at
(in millions)	December 31, 2005		Benefits Paid			Adjustments			March 31, 2006

Outsourcing initiative	$	11.5	$	(4.7	)	$	(1.3	)	$	5.5
Executive initiative		2.9		(0.9	)		—			2.0
Columbia merger and related initiatives		10.1		(0.9	)		—			9.2

Total	$	24.5	$	(6.5	)	$	(1.3	)	$	16.7

Discontinued Operations and Assets Held for Sale

The assets of discontinued operations and assets held for sale included net property, plant, and equipment of $49.7 million and $34.6 million at March 31, 2006 and December 31, 2005, respectively.

NiSource Corporate Services is in the process of selling its Marble Cliff facility. An impairment loss of $2.5 million was recognized in the first quarter of 2006 due to the current book value exceeding the estimated fair value of the facility. NiSource has accounted for this facility, valued at $12.7 million as of March 31, 2006 after impairment, as assets held for sale.

NiSource Development Company is in the process of selling its Northern Indiana headquarters facility. NiSource has accounted for this facility, with a net book value of $1.8 million as of March 31, 2006, as assets held for sale.

As part of PEI’s sale to Private Power in 2003, NiSource retained certain obligations with respect to the former PEI subsidiaries. NiSource retained operational guarantees related to environmental compliance, inventory balances, employee relations, and a contingent obligation to Private Power that could be triggered if U.S. Steel exercised a purchase option under its agreement with a former PEI subsidiary. At the time of the sale, NiSource allocated $0.6 million to this contingent option obligation. However, in November 2005, U.S. Steel Gary Works announced its intent to exercise the purchase option. As a result, in the fourth quarter of 2005, NiSource accrued an additional $7.4 million for the settlement of this obligation.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

reported as assets of discontinued operations. An additional $5.6 million of assets, representing an estimate of land to be sold during the next twelve-months, are reflected as assets held for sale.

Columbia Transmission is in the process of selling certain facilities that are non-core to the operation of the pipeline system. NiSource has accounted for the assets of these facilities, with a net book value of $17.7 million, as assets held for sale. Based on discussion with the potential buyer, NiSource does not believe that it is likely to sell certain assets formerly held by Transcom that were valued at $6.1 million. These assets were written down to zero in June 2005.

Results from discontinued operations from the golf course assets of Lake Erie Land and adjustments for NiSource’s former exploration and production subsidiary, CER, and water utilities are provided in the following table:


Three Months Ended March 31,(in millions)	2006			2005

Revenues from Discontinued Operations	$	0.9		$	1.0


Loss from discontinued operations		(0.5	)		(3.8	)
Income tax benefit		(0.2	)		(1.6	)

Net Loss from Discontinued Operations	$	(0.3	)	$	(2.2	)

Regulatory Matters

Gas Distribution Operations Related Matters

Gas Distribution Operations continues to offer CHOICE^{^®} opportunities, where customers can choose to purchase gas from a third party supplier, through regulatory initiatives in all of its jurisdictions. As of March 2006, approximately 693 thousand of Gas Distribution Operations’ residential, small commercial and industrial customers were using an alternate supplier.

On December 17, 2003, the PUCO approved an application by Columbia of Ohio and other Ohio LDCs to establish a tracking mechanism that will provide for recovery of current bad debt expense and for the recovery over a five-year period of previously deferred uncollected accounts receivable. Columbia of Ohio commenced recovery of the deferred uncollectible accounts receivables and establishment of future bad debt recovery requirements in November 2004. On June 1, 2005, the PUCO approved Columbia of Ohio’s application to decrease its Uncollectible Expense Rider rate. This application was based on projected annual bad debt recovery requirements of $26.3 million for the twelve months ended March 31, 2006, reflecting a reduction of $11.4 million of uncollected accounts receivable pending future recovery. As of March 31, 2006, Columbia of Ohio has $38.9 million of uncollected accounts receivable pending future recovery.

On November 21, 2005, Columbia of Ohio filed an application with the PUCO, requesting authority to increase its PIP rider rate from $.0821/Mcf to $.6449/Mcf. This filing provided for the recovery of Columbia of Ohio’s deferred PIP balance over a twelve-month period plus the expected level of arrears during the succeeding twelve-month period. On December 23, 2005, Columbia of Ohio supplemented its application, and as an alternative offered to extend the recovery period for its deferred balance over 36 months, with carrying costs. This filing provided, in the alternative, for the implementation of a revised PIP rate of $.4004/Mcf. Columbia of Ohio’s Supplement to its Application indicated that the PIP rate contained in its November 21, 2005 application would be billed absent express PUCO approval of the alternative within the 45-day review process. The PUCO took no action within the forty-five day period, and on January 9, 2006, Columbia of Ohio filed revised tariffs to reflect the new $.6449/Mcf PIP rider rate, effective with February 2006 bills. On February 1, 2006, the PUCO issued an Entry in which it indicated that it had approved Columbia of Ohio’s application (as supplemented) on the 46th day after the filing (January 6, 2006). On February 28, 2006, Columbia of Ohio filed revised tariffs, reflecting the lower PIP rider rate of $.4004 /Mcf and an extension of the recovery period for its deferred balance over 36 months, with carrying costs, to be effective with bills rendered on and after March 2, 2006. On February 6, 2006, the Office of the Consumers’ Counsel filed an application for rehearing. By Entry on Rehearing dated March 7, 2006, the PUCO denied the application for rehearing. On April 6, 2006, the Office of Consumers’ Counsel and other consumer groups filed a second application for rehearing. Columbia of Ohio filed a memorandum contra on April 17, 2006.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

On November 2, 2005, Columbia of Virginia filed an Application with the VSCC for approval of a performance based rate-making methodology (“PBR Plan”), which would freeze non-gas cost rates at their current levels for five years beginning January 1, 2006. The VSCC issued a Preliminary Order on November 9, 2005 that docketed the PBR Plan and simultaneously initiated an investigation (“Investigation”) into the justness and reasonableness of Columbia of Virginia’s current rates, charges and terms and conditions of service. The Preliminary Order initially required Columbia of Virginia to file the schedules typically required for a general rate case application on or before February 3, 2006. By Order dated January 4, 2006, the VSCC granted a Columbia of Virginia Motion to extend the filing of schedules in the Investigation until May 1, 2006.

In accordance with the IURC’s 1999 Order that permits Northern Indiana to utilize a flexible GCA mechanism to recover its pipeline demand costs annually and changes in commodity gas costs monthly, Northern Indiana filed GCA7, covering the period November 1, 2005 through October 31, 2006 on August 29, 2005. The IURC approved the rates on an interim basis subject to refund on November 22, 2005. A final order approving this filing is expected in the second quarter of 2006.

On July 13, 2005, Northern Indiana and other parties filed a joint Stipulation and Settlement Agreement with the IURC resolving all terms of a new gas ARP program. The IURC approved the Settlement on January 31, 2006. The new ARP is effective May 1, 2006 through April 30, 2010. The new ARP continues key products and services including Northern Indiana’s Choice program for customers. The ARP also continues the GCIM and adds a new incentive mechanism that shares savings of reduced transportation costs between the company and customers. Northern Indiana and the settling parties also agreed to a moratorium on base rates with the ability to address certain defined issues during the term of this agreement.

Electric Operations Related Matters

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, for a cumulative total of $225 million, for the minimum 49-month period, beginning on July 1, 2002. The order provides a rate moratorium through 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 and therefore in times of high usage the credit may be more than the $55.1 million target. Credits amounting to $10.7 million and $14.4 million were recognized for electric customers for the first quarter of 2006 and 2005, respectively.

As part of Northern Indiana’s use of the MISO’s transmission service, Day 1, Northern Indiana incurs transmission charges, based upon the FERC-approved tariff, as well as administrative fees, which relate to the MISO’s management and operations of the transmission system. Day 1 transmission charges are recovered through the FAC process. During 2004, an IURC order denied recovery or deferral of Day 1 administrative fees during Northern Indiana’s rate moratorium. Day 2 charges consist of fuel-related and non-fuel-related categories. On June 1, 2005, the IURC issued an order authorizing Northern Indiana to recover fuel-related Day 2 costs. The order denied recovery or deferral of non-fuel Day 2 costs during Northern Indiana’s rate moratorium, which expires July 31, 2006. The June 2005 order was unclear as to the categorization of certain types of MISO charges as to whether they were fuel or non-fuel. These particular charges, which amounted to $8.7 million in 2005, and $1.6 million for the first three months of 2006, were included as recoverable in Northern Indiana’s FAC-68, FAC-69 and FAC-70 filings, but, pending a clarifying order from the IURC, Northern Indiana has provided a reserve for the full amount. On February 17, 2006, a settlement agreement was filed in cause 42962 providing for recovery through the FAC process of these charges, subject to an agreed upon standard of reasonableness for the charges. The settling parties are Northern Indiana, Indianapolis Power & Light, Vectren Energy Delivery of Indiana, Inc. and the OUCC. The IURC approved Northern Indiana’s FAC-69 and FAC-70 filings, in January 2006 and April 2006, respectively, but noted in both orders that this particular category of charges was approved “subject to refund” and subject to final orders. On May 4, 2006, the IURC issued an order, ruling that these charges were to be classified as fuel charges and were therefore recoverable through the FAC mechanism, beginning with charges incurred on December 9, 2005. The Day 2 non-fuel category includes costs recorded as non-recoverable in net revenues, which amounted to $0.5 million for the first three months of 2006. These costs began in April 2005 and totaled $5.4 million for the year 2005. Day 1 and Day 2 administrative fees, which were recorded as non-recoverable operating expenses, totaled $1.2 million for the first quarter of 2006 and were $5.1 million for the year 2005. Northern Indiana is authorized to begin the deferral of all

ITEM 1.FINANCIAL STATEMENTS (continued)

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

non-fuel and administrative MISO charges incurred after July 31, 2006 for consideration in a future rate proceeding. As part of the established settlement process with market participants, MISO uses “resettlement” statements to make adjustments related to prior operating periods. Amounts related to these adjustments cannot be anticipated or estimated in advance. Northern Indiana records these amounts when billed.

In January 2002, Northern Indiana indefinitely shut down its Mitchell Station. In February 2004, the City of Gary announced an interest in acquiring the land on which the Mitchell Station is located for economic development, including a proposal to increase the length of the runways at the Gary International Airport. On May 7, 2004, the City of Gary filed a petition with the IURC seeking to have the IURC establish a value for the Mitchell Station and establish the terms and conditions under which the City of Gary would acquire the Mitchell Station. On January 18, 2006, the IURC issued a final order dismissing, without prejudice, this cause and the related settlement agreement finding that the agreement entered into between the City of Gary and Northern Indiana lacks essential terms necessary for it to be a valid and enforceable contract under Indiana law. Northern Indiana is evaluating the appropriate course of action for the Mitchell Station facility in light of the City of Gary’s need for that property and the substantial costs associated with restarting the facility.

On May 25, 2004, Northern Indiana filed a petition for approval of a Purchased Power and Transmission Tracker Mechanism to recover the cost of purchased power to meet Northern Indiana’s retail electric load requirements and charges imposed on Northern Indiana by MISO. A hearing in this matter was held in December 2004. Northern Indiana will withdraw this petition if the final order from the IURC in cause 42824 approves recovery of intermediate dispatchable power costs incurred in August to December 2005 as described below.

On April 11, 2005, Whiting Clean Energy, TPC and Northern Indiana, each a subsidiary of NiSource, filed their petition (cause 42824) with the IURC for approval of a three-year arrangement pursuant to which Whiting Clean Energy would sell to TPC electric power generated at Whiting Clean Energy’s generating facility in Whiting, Indiana which power would then be sold by TPC to Northern Indiana. On July 1, 2005, the IURC issued an interim order approving the sales of the necessary capacity and energy produced by the Whiting Clean Energy facility to Northern Indiana through TPC under the Power Sales Tariff on an interim basis until December 31, 2005, or until a subsequent order is issued by the IURC, and authorized Northern Indiana recovery of fuel costs associated with interim purchases made under the Power Sales Tariff as part of its normal FAC proceedings. On July 21, 2005, Intervenor LaPorte County filed a Petition for Reconsideration of the interim order with the IURC. On August 31, 2005, the IURC denied LaPorte County’s Petition for Reconsideration. On September 29, 2005, LaPorte County filed its Notice of Appeal of the IURC’s Order of August 31, 2005 denying its Petition for Reconsideration. On March 9, 2006, LaPorte’s appeal of the IURC’s interim order was dismissed. Northern Indiana filed supplemental testimony on January 26, 2006 indicating that it no longer is seeking approval of the three-year arrangement. The testimony clarifies that Northern Indiana is seeking affirmation from the IURC that the intermediate dispatchable power purchases made between August 9, 2005 and December 31, 2005 which were made pursuant to the July 1, 2005 interim order were reasonable. The evidentiary hearing is scheduled for the second quarter of 2006 and a final order is expected in the third quarter of 2006.

Northern Indiana, the OUCC and the Industrial Group, reached a settlement agreement on August 19, 2005 for purposes of partially settling cause 42824 (described above). The OUCC and the Industrial Group agreed to support Northern Indiana’s recovery of intermediate dispatchable power, through its FAC for the period August 9, 2005 through November 30, 2005. Additional settlement provisions include Northern Indiana’s agreement to file an electric base rate case on or before July 1, 2008.

Northern Indiana has been recovering the costs of electric power purchased for sale to its customers through the FAC. The FAC provides for costs to be collected if they are below a negotiated cap. If costs exceed this cap, Northern Indiana must demonstrate that the costs were prudently incurred to achieve approval for recovery.

Northern Indiana filed FAC-68 on August 15, 2005. This filing included a projected amount of intermediate dispatchable power costs for October to December 2005, consistent with the Interim Order in 42824. The IURC approved this filing on October 26, 2005.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

charges under consideration in cause 42962 as described above. The order approving the FAC-69 factor was issued January 11, 2006. The intermediate dispatchable power cost recovery is subject to refund based upon the outcome of cause 42824 (described above).

Northern Indiana filed FAC-70 on February 6, 2006. This filing included a reconciliation of actual intermediate dispatchable power purchases for October, November and December 2005. The filing also included recovery of certain MISO charges under consideration in cause 42962 as described above. The order approving the FAC-70 factor was issued April 20, 2006. The intermediate dispatchable power cost recovery is subject to refund based upon the outcome of cause 42824 (described above).

On November 26, 2002, Northern Indiana received approval 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. On December 21, 2005, the IURC approved Northern Indiana’s latest compliance plan with the estimate of $306 million. The ECRM revenues amounted to $6.9 million for the three months ended March 31, 2006, and $58.6 million from inception to date, while EERM revenues were $2.3 million for the first quarter of 2006 and $11.1 million from inception to date. On February 3, 2006, Northern Indiana filed ECR-7 simultaneously with EER-3 for capital expenditures (net of accumulated depreciation for those components which have been placed in service) of $230.6 million and depreciation and operating expenses of $18.3 million through December 31, 2005. On March 29, 2006, the IURC approved Northern Indiana’s ECR-7 filing.

On April 13, 2005, Northern Indiana received an order from the IURC in a complaint filed by Jupiter. The complaint asserted that Northern Indiana’s service quality was not reasonably adequate. While concluding that Northern Indiana’s service was reasonably adequate, the IURC ruled that Northern Indiana must construct a backup line and pay Jupiter $2.5 million to install special fast switching equipment at the Jupiter plant. Further, Northern Indiana is precluded from recovering the $2.5 million in rates. Northern Indiana and Jupiter both have appealed the IURC’s order in this matter to the Indiana Court of Appeals. These appeals are currently pending. Northern Indiana remitted the payment of $2.5 million to Jupiter in July 2005, and is working with Jupiter to incorporate the IURC required backup line and the special fast switching equipment with growth plans announced by Jupiter. On December 21, 2005, Jupiter filed with the Indiana Court of Appeals a verified motion for remand asking that the case be moved to the IURC for further proceedings. On March 15, 2006, the Court of Appeals denied Jupiter’s motion for remand. On March 30, 2006, Jupiter filed a second complaint with the IURC, in which Jupiter alleges service problems and seeks additional relief. No hearing dates have been set.

Risk Management and Energy Trading Activities

NiSource uses commodity-based derivative financial instruments to manage certain risks in its business. NiSource accounts for its derivatives under SFAS No. 133.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

Hedging Activities.The activity for the first quarter of 2006 and 2005 affecting accumulated other comprehensive income, with respect to cash flow hedges included the following:


Three Months Ended March 31,(in millions, net of taxes)	2006			2005

Net unrealized gains on derivatives qualifying as cash flow hedges at the beginning of the period	$	150.7		$	93.7

Unrealized hedging gains (losses) arising during the period on derivatives qualifying as cash flow hedges		(51.7	)		52.6

Reclassification adjustment for net gain included in net income		0.7			1.8

Net unrealized gains on derivatives qualifying as cash flow hedges at the end of the period	$	99.7		$	148.1

Unrealized gains and losses on NiSource’s hedges were recorded as price risk management assets and liabilities along with unrealized gains and losses on NiSource’s trading portfolio. The accompanying Consolidated Balance Sheets include price risk management assets related to unrealized gains and losses on hedges of $266.3 million and $338.1 million at March 31, 2006 and December 31, 2005, respectively, of which $129.9 million and $152.6 million were included in “Current Assets,” and $136.4 million and $185.5 million were included in “Other Assets.” Price risk management liabilities related to unrealized gains and losses on hedges (including net option premiums) were $121.8 million and $85.6 million at March 31, 2006 and December 31, 2005, respectively, of which $74.9 million and $63.4 million were included in “Current Liabilities,” and $46.9 million and $22.2 million were included in “Other Liabilities and Deferred Credits.”

During the first quarter of 2006 and 2005, zero and a loss of $0.1 million, net of taxes respectively, was recognized in earnings due to the change in value of certain derivative instruments primarily representing time value. Additionally, 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 2006 and 2005, NiSource reclassified no amounts related to its cash flow hedges from other comprehensive income to earnings, due to the probability that certain forecasted transactions would not occur. It is anticipated that during the next twelve months the expiration and settlement of cash flow hedge contracts will result in income recognition of amounts currently classified in other comprehensive income of approximately $38.3 million, net of taxes.

Commodity Price Risk Programs.Northern Indiana, Northern Indiana Fuel and Light, Kokomo Gas, Northern Utilities, 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 their gas cost recovery mechanism, regulatory assets or liabilities are recorded to offset the change in the fair value of these derivatives. The Consolidated Balance Sheets reflected $6.1 million and $35.7 million of price risk management assets associated with these programs at March 31, 2006 and December 31, 2005, respectively. In addition, the Consolidated Balance Sheets reflected $6.3 million and zero of price risk management liabilities associated with these programs at March 31, 2006 and December 31, 2005, respectively.

Northern Indiana offers a PPS as an alternative to the standard gas cost recovery mechanism. This service provides Northern Indiana customers with the opportunity to either lock in their gas cost or place a cap on the total cost that could be charged for any future month specified. In order to hedge the anticipated physical future purchases associated with these obligations, Northern Indiana purchases NYMEX futures and options contracts that correspond to a fixed or capped price in the associated delivery month. The NYMEX futures and options contracts are designated as cash flow hedges. Columbia of Virginia started a program in April 2005 similar to the Northern Indiana PPS, which allows non-jurisdictional customers the opportunity to lock in their gas cost. The Consolidated Balance Sheets reflected $0.8 million and $1.8 million of price risk management assets and $3.8 million and $2.5 million of price risk management liabilities associated with these programs at March 31, 2006 and December 31, 2005, respectively.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

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 purchases NYMEX futures and options contracts that match the anticipated delivery needs of the program. These derivatives are presently designated as cash flow hedges. The Consolidated Balance Sheets reflected zero and $1.6 million of price risk management assets and $0.3 million and zero of price risk management liabilities at March 31, 2006 and December 31, 2005, respectively, associated with the DependaBill program.

As part of the new MISO Day 2 initiative, Northern Indiana was allocated FTRs. These rights protect Northern Indiana against congestion losses due to the new 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. The Consolidated Balance Sheets reflected $1.2 million and $2.2 million of price risk management assets and zero and $0.4 million of price risk management liabilities associated with this program at March 31, 2006 and December 31, 2005, respectively.

For regulatory incentive purposes, Northern Indiana enters into 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, Columbia of Virginia 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. Columbia LDCs defer a portion of the change in the fair value of the options as either a regulatory asset or liability in accordance with SFAS No. 71. The remaining change is recognized currently in earnings. The Consolidated Balance Sheets reflected $0.7 million and zero of price risk management assets and $4.5 million and $8.5 million of price risk management liabilities associated with the programs at March 31, 2006 and December 31, 2005, respectively.

Columbia Energy Services has fixed price gas delivery commitments to three municipalities in the United States. Columbia Energy Services entered into a forward purchase agreement with a gas supplier, wherein the supplier will fulfill the delivery obligation requirements at a slight premium to index. In order to hedge this anticipated future purchase of gas from the gas supplier, Columbia Energy Services entered into commodity swaps priced at the locations designated for physical delivery. These swaps are designated as cash flow hedges of the anticipated purchases. The Consolidated Balance Sheets reflected $205.0 million and $266.7 million of price risk management assets associated with this program at March 31, 2006 and December 31, 2005, respectively.

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

ITEM 1.FINANCIAL STATEMENTS (continued)

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

the initial date of the swaps. In addition, each party has the right to cancel the swaps on May 15, 2009 at mid-market.

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 at mid-market.

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 using the short-cut method pursuant to SFAS No. 133. NiSource had no net gain or loss recognized in earnings due to hedging ineffectiveness from prior years.

Marketing and Trading Activities.The remaining operations of TPC primarily involve commercial and industrial gas sales. As of March 31, 2006, all power trading contracts were settled. TPC may enter into power derivative contracts in the future to manage price risk associated with operating Whiting Clean Energy, which may not qualify for hedge treatment as determined by SFAS No. 133.

In April 2003, the remaining gas-related activities (physical commodity sales to commercial and industrial customers) that had been classified as derivatives were considered to fall within the normal purchase and sale exception under SFAS No. 133. Therefore, all gas-related derivatives used to offset the physical obligations necessary to fulfill these commodity sales were designated as cash flow hedges. The Consolidated Balance Sheets reflected $60.5 million and $68.0 million of price risk management assets and $79.2 million and $70.9 million of price risk management liabilities associated with this program at March 31, 2006 and December 31, 2005, respectively.

The fair market values of NiSource’s power trading assets and liabilities were zero at March 31, 2006 and December 31, 2005.

10.

Goodwill Assets

NiSource’s goodwill assets at March 31, 2006 were $3,677.3 million pertaining primarily to the acquisition of Columbia on November 1, 2000. The goodwill balances at March 31, 2006 for Northern Indiana Fuel and Light and Kokomo Gas were $13.3 million and $5.5 million, respectively.

NiSource will perform its annual impairment test of goodwill associated with the purchases of Columbia, Northern Indiana Fuel and Light and Kokomo Gas in the quarter ended June 30, 2006. For the purpose of testing for impairment the goodwill recorded in the acquisition of Columbia, the related subsidiaries were aggregated into two distinct reporting units, one within the Gas Distribution Operations segment and one within the Gas Transmission and Storage Operations segment. NiSource uses the discounted cash flow method to estimate the fair value of its reporting units for the purposes of this test.

11.

Pension and Other Postretirement Benefits

NiSource uses September 30 as its measurement date for its pension and other postretirement benefit plans. NiSource expects to make contributions of $7.1 million to its pension plans and $54.2 million to its other postretirement benefit plans in 2006.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

The following table provides the components of the plans’ net periodic benefits cost for the first quarter of 2006 and 2005:


	Pension Benefits						Other Benefits
Three Months Ended March 31,(in millions)	2006			2005			2006			2005

Net periodic cost
Service cost	$	10.7		$	10.4		$	2.3		$	2.3
Interest cost		31.2			32.0			10.1			10.4
Expected return on assets		(43.9	)		(41.1	)		(4.6	)		(4.0	)
Amortization of transitional obligation		—			—			2.0			2.4
Amortization of prior service cost		1.5			2.6			0.1			0.2
Recognized actuarial loss		4.6			4.3			1.6			0.9
Settlement loss		—			0.3			—			—

Net Periodic Benefits Cost	$	4.1		$	8.5		$	11.5		$	12.2

12.

Asset Retirement Obligations

NiSource has accounted for retirement obligations on its assets since January 1, 2003 with the adoption of SFAS No. 143. In the fourth quarter 2005, NiSource adopted the provisions of FIN 47, which broadened the scope of SFAS No. 143 to include contingent asset retirement obligations and it also provided additional guidance for the measurement of the asset retirement liabilities. This accounting standard and the related interpretation requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost, thereby increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted, and the capitalized cost is depreciated over the useful life of the related asset. The rate-regulated subsidiaries defer the difference between the amount recognized for depreciation and accretion and the amount collected in rates as required pursuant to SFAS No. 71 for those amounts it has collected in rates or expects to collect in future rates.

Changes in NiSource’s liability for asset retirement obligations for the first quarter of 2006 are presented in the table below:


Three Months Ended March 31,(in millions)	2006

Beginning Balance	$	119.8
Accretion		1.8

Ending Balance	$	121.6

NiSource has recognized asset retirement obligations associated with various obligations including costs to remove and dispose of certain construction materials located within many of NiSource’s facilities, certain costs to retire pipeline, removal costs for certain underground storage tanks, removal of certain pipelines known to contain PCB contamination, closure costs for certain sites including ash ponds, solid waste management units and a landfill, obligation to return leased rail cars to specified conditions and the removal costs of certain facilities and off-shore platforms, as well as some other nominal asset retirement obligations. NiSource recognizes that there are obligations to incur significant costs to retire wells associated with gas storage operations, however, these assets are land assets with indeterminable lives. Additionally, NiSource has a significant obligation associated with the decommissioning of its two hydro facilities located in Indiana. However, these assets have an indeterminate life and no asset retirement obligation has been recorded.

Certain costs of removal that have been, and continue to be, included in depreciation rates and collected in the service rates of the rate-regulated subsidiaries, did not meet the definition of an asset retirement obligation pursuant to SFAS No. 143 and FIN 47. The amount of the other costs of removal reflected as a component of NiSource’s accumulated depreciation and amortization was approximately $1.2 billion and $1.1 billion at March 31, 2006 and December 31, 2005, respectively, based on rates for estimated removal costs embedded in composite depreciation

ITEM 1.FINANCIAL STATEMENTS (continued)

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

rates. Upon the adoption of SFAS No. 143 on January 31, 2003, NiSource reclassified its cost of removal from accumulated depreciation to regulatory liabilities and other removal costs on the Consolidated Balance Sheets.

For the three months ended March 31, 2006, NiSource accrued $1.8 million of accretion, of which $0.3 million was expensed and $1.5 million was recorded as a regulatory asset. For the three months ended March 31, 2005, NiSource accrued $0.1 million of accretion, of which the majority of it was expensed. NiSource anticipates that the depreciation and accretion amounts to be recognized in 2006 associated with its asset retirement obligation assets and liabilities will be $2.8 million and $7.5 million, respectively, and will primarily be recorded as a regulatory asset or liability pursuant to SFAS No. 71.

13.

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, 2006 and the years in which they expire were:


(in millions)	Total		2006		2007		2008		2009		2010		After

Guarantees of subsidiaries debt	$	5,008.6	$	293.1	$	32.4	$	8.6	$	464.0	$	1,004.3	$	3,206.2
Guarantees supporting commodity transactions of subsidiaries		1,018.8		571.0		204.2		39.6		43.3		—		160.7
Lines of credit		379.2		379.2		—		—		—		—		—
Letters of credit		96.0		7.8		19.5		68.7		—		—		—
Other guarantees		158.3		—		—		8.4		4.1		—		145.8

Total commercial commitments	$	6,660.9	$	1,251.1	$	256.1	$	125.3	$	511.4	$	1,004.3	$	3,512.7

Guarantees of Subsidiaries Debt.NiSource has guaranteed the payment of $5.0 billion of debt for various wholly owned subsidiaries including Whiting Leasing, NiSource Finance, and through a support agreement, Capital Markets, which is reflected on NiSource’s Consolidated Balance Sheets. The subsidiaries are required to comply with certain financial covenants under the debt indenture and in the event of default, NiSource would be obligated to pay the debt’s principal and related interest. NiSource does not anticipate its subsidiaries will have any difficulty maintaining compliance.

Guarantees Supporting Commodity Transactions of Subsidiaries.NiSource has issued guarantees, which support up to approximately $1.0 billion of commodity-related payments for its current subsidiaries involved in energy marketing and trading and those satisfying requirements under forward gas sales agreements of current and former subsidiaries. These guarantees were provided to counterparties in order to facilitate physical and financial transactions involving natural gas and electricity. To the extent liabilities exist under the commodity-related contracts subject to these guarantees, such liabilities are included in the Consolidated Balance Sheets.

Lines and Letters of Credit.NiSource Finance maintains a revolving line of credit with a syndicate of financial institutions which can be used either for borrowings or the issuance of letters of credit. At March 31, 2006, NiSource had $379.2 million outstanding under the revolving line of credit. Through this revolver and through other letter of credit facilities, NiSource has issued stand-by letters of credit of approximately $96.0 million for the benefit of third parties.

Other Guarantees or Obligations. After the October 20, 2003 sale of six subsidiaries, PEI continues to own Whiting Clean Energy.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

employee relations, and a contingent obligation to Private Power that could be triggered if U.S. Steel exercised a purchase option under its agreement with a former PEI subsidiary. At the time of the sale, NiSource allocated $0.6 million to this contingent option obligation. However, in November 2005, U.S. Steel Gary Works announced its intent to exercise the purchase option. As a result, in the fourth quarter of 2005, NiSource accrued an additional $7.4 million for the settlement of this obligation.

NiSource has purchase and sales agreement guarantees totaling $85.0 million, which guarantee performance of the seller’s covenants, agreements, obligations, liabilities, representations and warranties under the agreements. No amounts related to the purchase and sales agreement guarantees are reflected in the Consolidated Balance 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.

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.

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.

As of March 31, 2006, a reserve of approximately $68 million has been recorded to cover probable corrective actions at sites where NiSource has environmental remediation liability. The ultimate liability in connection with these sites will depend upon many factors, including the volume of material contributed to the site, the number of the other potentially responsible parties and their financial viability, the extent of corrective actions required and rate recovery. Based upon investigations and management’s understanding of current environmental laws and regulations, NiSource believes that any corrective actions required will not have a material effect on its financial position or results of operations.

Gas Distribution Operations.
There were no new environmental matters relating to Gas Distribution Operations during the first quarter of 2006.

Gas Transmission and Storage Operations.
On January 17, 2006, the EPA published in the Federal Register a proposed revision to the particulate matter NAAQS that would increase the stringency of the current fine particulate (PM2.5) standard and add a new standard for inhalable coarse particulate (particulate matter between 10 and 2.5 microns in diameter). The proposal would also revoke the current PM10 NAAQS except in areas with a population of 100,000 or more with monitors violating the current standard. In a separate but related action, the EPA proposed to amend its national ambient air quality monitoring requirements, including those for particulate matter that would include a design for a PM10-2.5 monitoring network necessary to establish attainment of the proposed new NAAQS. The EPA must issue final standards by September 27, 2006. These actions could require further reductions in NOx emissions from various emission sources in and near nonattainment areas, including reductions from pipeline Transmission and Storage Operations. The effects of the recent EPA actions on Transmission and Storage Operations cannot be determined at this time.

Columbia Transmission discovered and notified the State of West Virginia of compliance issues associated with turbine operations at two of its facilities. Columbia Transmission is currently negotiating with the West Virginia Department of Environmental Protection to resolve these issues.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

Electric Operations.

Air.On January 17, 2006, the EPA published in the Federal Register a proposed revision to the particulate matter NAAQS that would increase the stringency of the current fine particulate (PM2.5) standard and add a new standard for inhalable coarse particulate (particulate matter between 10 and 2.5 microns in diameter). The proposal would also revoke the current PM10 NAAQS except in areas with a population of 100,000 or more with monitors violating the current standard. In a separate but related action, the EPA proposed to amend its national ambient air quality monitoring requirements, including those for particulate matter that would include a design for a PM10-2.5 monitoring network necessary to establish attainment of the proposed new NAAQS. The EPA must issue final standards by September 27, 2006. Northern Indiana will continue to closely monitor developments in this area that could impact the emission control requirements for coal-fired boilers including Northern Indiana’s electric generating stations.

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 Indiana electric utilities, 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. The main rulemaking established federal implementation plans, or FIPs, for power plants to ensure that the emissions reductions required by the CAIR are achieved on schedule and provide criteria, whereby SIPs that meet a majority of the federal requirements or abbreviated SIPs could be approved if submitted by the states within six months of the September 2006 deadline. As an affected state, Indiana initiated state rule making in June 2005, for creating rules detailing how it will implement the federal rule and meet the emission caps. Indiana structured the draft rule to meet the EPA abbreviated CAIR SIP requirements and should therefore be eligible for a six-month extension of the submittal deadline. Accordingly, Indiana anticipates that the state CAIR rule will be finalized by March of 2007. Northern Indiana will continue to closely monitor developments in this area and cannot accurately estimate the timing or cost of emission controls at this time.

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 stations located on Lake Michigan. The State of Indiana has promulgated its regulations for this water discharge permit program and has received final EPA approval. All issues in subsequent litigation related to the EPA’s actions have been resolved with the exception of the EPA’s disapproval of the IDEM method for testing whole effluent toxicity. The water discharge permit for Michigan City Generating Station has been issued and became effective on April 1, 2006. Engineering studies have begun to determine specific compliance costs for this facility. The permit for the Bailly Generating Station is expected to be finalized within the next calendar quarter. Pending issuance of this permit, the cost of complying with these requirements cannot be predicted at this time.

ITEM 1.FINANCIAL STATEMENTS (continued)

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

14.

Accumulated Other Comprehensive Loss

The following table displays the components of Accumulated Other Comprehensive Loss, which is included in “Common stock equity,” on the Consolidated Balance Sheets.


	March 31,			December 31,
(in millions)	2006			2005

Other comprehensive income (loss), before taxes:
Unrealized gains (losses) on securities	$	(0.2	)	$	0.3
Tax (expense) or benefit on unrealized gains (losses) on securities		(0.1	)		(0.3	)
Unrealized gains on cash flow hedges		148.6			228.5
Tax (expense) on unrealized gains on cash flow hedges		(48.9	)		(77.8	)
Minimum pension liability adjustment		(260.1	)		(260.1	)
Tax benefit on minimum pension liability adjustment		103.8			103.8

Total Accumulated Other Comprehensive Loss, net of taxes	$	(56.9	)	$	(5.6	)

15.

Business Segment Information

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

NiSource’s operations are divided into four primary business segments. The Gas Distribution Operations segment provides natural gas service and transportation for residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky, Maryland, Indiana, Massachusetts, Maine and New Hampshire. The Gas Transmission and Storage Operations segment offers gas transportation and storage services for LDCs, marketers and industrial and commercial customers located in northeastern, mid-Atlantic, midwestern and southern states and the District of Columbia. The Electric Operations segment provides electric service in 21 counties in the northern part of Indiana. The Other Operations segment primarily includes gas and power marketing, and ventures focused on distributed power generation technologies, including cogeneration facilities, fuel cells and storage systems.

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

ITEM 1.FINANCIAL STATEMENTS (continued)

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


Three Months Ended March 31,(in millions)	2006			2005

REVENUES
Gas Distribution Operations
Unaffiliated		2,180.3			2,018.1
Intersegment		4.4			(0.8	)

Total		2,184.7			2,017.3

Gas Transmission and Storage Operations
Unaffiliated		158.5			158.2
Intersegment		73.1			71.5

Total		231.6			229.7

Electric Operations
Unaffiliated		306.5			281.8
Intersegment		0.4			0.9

Total		306.9			282.7

Other Operations
Unaffiliated		327.7			224.5
Intersegment		14.0			5.0

Total		341.7			229.5

Adjustments and eliminations		(92.1	)		(75.9	)

Consolidated Revenues	$	2,972.8		$	2,683.3



Operating Income (Loss)
Gas Distribution Operations		206.0			274.9
Gas Transmission and Storage Operations		110.3			109.5
Electric Operations		68.1			65.4
Other Operations		(9.2	)		(5.2	)
Corporate		(6.7	)		(6.9	)

Consolidated Operating Income	$	368.5		$	437.7

16.

Subsequent Event

On April 14, 2006, Northern Indiana redeemed all of its outstanding cumulative preferred stock, having a total redemption value of $81.6 million.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NiSource Inc.

Note regarding forward-looking statements

The Management’s Discussion and Analysis, including statements regarding market risk sensitive instruments, contains “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Investors and prospective investors should understand that many factors govern whether any forward-looking statement contained herein will be or can be realized. Any one of those factors could cause actual results to differ materially from those projected. These forward-looking statements include, but are not limited to, statements concerning NiSource’s plans, objectives, expected performance, expenditures and recovery of expenditures through rates, stated on either a consolidated or segment basis, and any and all underlying assumptions and other statements that are other than statements of historical fact. From time to time, NiSource may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of NiSource, are also expressly qualified by these cautionary statements. All forward-looking statements are based on assumptions that management believes to be reasonable; however, there can be no assurance that actual results will not differ materially.

Realization of NiSource’s objectives and expected performance is subject to a wide range of risks and can be adversely affected by, among other things, weather, fluctuations in supply and demand for energy commodities, growth opportunities for NiSource’s businesses, increased competition in deregulated energy markets, the success of regulatory and commercial initiatives, dealings with third parties over whom NiSource has no control, the effectiveness of NiSource’s outsourcing initiative, actual operating experience of NiSource’s assets, the regulatory process, regulatory and legislative changes, changes in general economic, capital and commodity market conditions, and counterparty credit risk, many of which risks are beyond the control of NiSource. In addition, the relative contributions to profitability by each segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time.

The following Management’s Discussion and Analysis should be read in conjunction with NiSource’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

CONSOLIDATED REVIEW

Executive Summary

NiSource generates virtually 100% of the company’s operating income through the sale, distribution, transportation and storage of natural gas and the generation, transmission and distribution of electricity, which are rate regulated.

For the first quarter of 2006, income from continuing operations was $171.8 million, or $0.63 per share. This compares to income from continuing operations of $208.7 million, or $0.77 per share, for the year-ago period. The quarterly difference was due to lower net revenues due primarily to the mild winter weather and declines in residential usage by natural gas utility customers. Weather was 13% warmer than normal and 15% warmer than a year ago. Weather reduced net revenues in NiSource’s Gas Distribution Operations business segment by approximately $46 million. Gas Distribution Operations net revenues were also reduced by approximately $11 million due to residential usage declines, which were slightly offset by approximately $2 million as a result of an increase in the number of residential customers. Residential usage declines are likely to continue to adversely impact the operating results of Gas Distribution Operations.

Excluding expenses that are recovered through regulatory trackers, and thereby increase both operating expenses and net revenues (see discussion below), operating expenses were up $16.0 million. This increase was due to $8.3 million of transition costs associated with the IBM agreement and $4.5 million of costs associated with scheduled maintenance at the Whiting Clean Energy facility.

NiSource is recognizing interest expense savings due to the refinancing of $2.4 billion in long-term debt during 2005. Interest expense was reduced by $8.2 million for the first quarter of 2006, compared with the year-ago period.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.

NiSource continues to focus on its four-point platform for long-term, sustainable growth. This plan is centered on its portfolio of low-risk, regulated assets: commercial and regulatory initiatives; commercial growth and expansion of the gas transmission and storage business; financial management of the balance sheet; and expense management. Following are updates related to these initiatives.

Commercial and Regulatory Initiatives

Sales of Shorter-Term Transportation and Storage Services.Seasonal price fluctuations in the national energy market created opportunities for customers to utilize existing shorter-term transportation and storage tariff services provided by Columbia Transmission and Columbia Gulf. A newly redeveloped, Houston-based commercial team has capitalized on these opportunities. Columbia Transmission entered into contracts that represent revenues in excess of $25 million of shorter-term business for 2006, $3.4 million of which was recorded during the first quarter ended March 31, 2006. Columbia Gulf’s mainline throughput increased by 16.5% over 2005 due to the increased utilization of these services.

Regulatory Trackers.Comparability of Gas Distribution Operations line item operating results was impacted by regulatory trackers that allow for the recovery in rates of certain costs such as bad debt expenses. The expenses that are recovered through these trackers increase both operating expenses and net revenues and have essentially no impact on total operating earnings results. Approximately $23.2 million of the increase in operation and maintenance expenses for the Gas Distribution Operations segment was a result of the effect of the regulatory trackers with a corresponding increase to net revenues reflecting recovery of certain costs.

Bay State Rate Case.On April 27, 2005, Bay State filed for a rate increase of $22.2 million, or 4.7%, with the Massachusetts DTE. On November 30, 2005, Bay State received approval from the Massachusetts DTE to increase its rates by $11.1 million. The Massachusetts DTE also approved Bay State’s request for a performance based rate plan but denied the request for cost recovery of a steel infrastructure replacement program.

Commercial Growth and Expansion of the Gas Transmission and Storage Business

Hardy Storage and Millennium Pipeline.Construction of the Hardy Storage project in West Virginia has begun and the project financing is expected to close in the second quarter of 2006. The redistribution of equity among partners in the Millennium Pipeline is now complete, with NiSource subsidiary Columbia Transmission holding a 47.5% equity stake. Subject to the receipt of regulatory approvals of all companion pipeline projects, the project has a targeted in-service date in the fourth quarter of 2007.

Financial Management of the Balance Sheet

Interest Expense Savings.Interest expense, net was $95.8 million for the quarter, a decrease of $8.2 million compared to the first quarter 2005. This decrease was due to the refinancing of $2.4 billion in long-term debt at lower rates during 2005, partially offset by higher short-term interest rates.

Expense Management

Operating Expenses.Operating expenses for the first quarter 2006 were $612.6 million, an increase of $37.3 million from the 2005 period. Excluding expenses that are recovered through regulatory trackers that increase both operating expenses and net revenues, operating expenses were up $16.0 million. This increase was primarily due to $8.3 million of transition costs associated with the IBM agreement and $4.5 million of costs associated with scheduled maintenance at the Whiting Clean Energy facility.

With the majority of the NiSource property and casualty insurance renewing on July 1, 2006, indications are that NiSource will see an increase in premiums related to insurance for Offshore and Onshore facilities located in or near the Gulf of Mexico. In addition to increased premiums, deductibles and retentions along with added restrictions to coverage and limitations in capacity, for its property insurance program and to a lesser extent for the casualty insurance program are anticipated. Such increases and restrictions in coverage are being driven by the overall poor underwriting experience of the insurance industry over the past few years, resulting from the unprecedented losses

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.

sustained over the last few years from hurricanes such as Ivan, Katrina and Rita. This drives the need for underwriters to seek higher premiums and further restrict coverage.

2006 Outlook

NiSource currently expects income for continuing operations for 2006 to be between $1.33 to $1.43 basic earnings per share. This expectation takes in account the weather impact of 9 cents per share that occurred during the first quarter 2006.

Results of Operations
Quarter Ended March 31, 2006

Net Income

NiSource reported net income of $172.9 million, or $0.63 per share, for the three months ended March 31, 2006, compared to net income of $206.3 million, or $0.76 per share, for the first quarter 2005. Operating income was $368.5 million, a decrease of $69.2 million from the same period in 2005. All per share amounts are basic earnings per share. Basic average shares of common stock outstanding at March 31, 2006 were 272.3 million compared to 270.3 million at March 31, 2005.

Net Revenues

Total consolidated net revenues (gross revenues less cost of sales) for the three months ended March 31, 2006, were $981.1 million, a $31.9 million decrease from the same period last year. Excluding the impact of $21.3 million of trackers discussed above, net revenues decreased by $53.2 million. The quarterly difference was due to lower Gas Distribution Operations net revenues due primarily to the mild winter weather and declines in residential usage partially offset by net revenue increases within Gas Transmission and Storage Operations and Electric Operations. Weather negatively impacted net revenues of Gas Distribution Operations by approximately $46 million. Gas Distribution Operations net revenues were also reduced by approximately $11 million due to residential usage declines, which were slightly offset by approximately $2 million as a result of an increase in the number of residential customers. Electric Operations net revenue increases of $2.9 were primarily a result of increased environmental cost recovery trackers, a reduction in customer credits, and an increase in industrial usage and the number of residential and commercial customers. Gas Transmission and Storage Operations net revenue increases of $2.0 million from the same period in 2005 were due to increased sales of shorter-term transportation and storage services described above.

Expenses

Operating expenses for the first quarter 2006 were $612.6 million, an increase of $37.3 million from the 2005 period. Excluding expenses that are recovered through regulatory trackers that increase both operating expenses and net revenues (see discussion above), operating expenses were up $16.0 million. This increase was primarily due to $8.3 million of transition costs associated with the IBM agreement and $4.5 million of costs associated with scheduled maintenance at the Whiting Clean Energy facility.

Other Income (Deductions)

Interest expense, net was $95.8 million for the quarter, a decrease of $8.2 million compared to the first quarter 2005. This decrease was due to the refinancing of $2.4 billion in long-term debt at lower rates during 2005, partially offset by higher short-term interest rates. Other, net was a loss of $3.4 million for the current quarter compared to loss of $0.5 million for the comparable 2005 period due to increased costs associated with factoring of accounts receivable. Higher fees, due to higher interest rates, and increased levels of accounts receivable balances resulted in the higher expenses.

Income Taxes

Income tax for the first quarter of 2006 was $96.5 million, a decrease of $26.9 million compared to the first quarter of 2005 due primarily to lower pretax income and a lower effective tax rate. The effective tax rate for the quarter ended March 31, 2006 was 36.0% compared to 37.2% for the comparable period last year. The lower effective tax rate is due to a reduction of $5.3 million in deferred state income tax liabilities resulting from revised estimates of

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.

consolidated state income tax apportionment factors, offset by $1.4 million of additional tax expense for recapture of income tax credits associated with disposition of NiSource’s investment in a low income housing partnership.

Liquidity and Capital Resources

Generally, cash flow from operations has provided sufficient liquidity to meet operating requirements. A significant portion of NiSource’s operations, most notably in the gas distribution, gas transportation and electric businesses, is subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from gas sales and transportation services typically exceed cash requirements. During the summer months, cash on hand, together with the seasonal increase in cash flows from the electric business during the summer cooling season and external short-term and long-term financing, is used to purchase gas to place in storage for heating season deliveries, perform necessary maintenance of facilities, make capital improvements in plant and expand service into new areas. The recent increase in the price of natural gas has resulted in an increase in working capital requirements to fund the cost of gas placed in storage, the cost of gas flowing directly to our customers and the related increase in accounts receivable. While the $1.25 billion revolving line of credit is projected to adequately meet these needs, on November 30, 2005, NiSource Finance entered into a new $300 million nine-month revolving credit agreement to further improve its available liquidity.

Operating Activities

Net cash from operating activities for the three months ended March 31, 2006 was $726.3 million, a decrease of $269.1 million from the three months ended March 31, 2005. This decrease was primarily due to the impact in 2006 of reducing relatively high accounts payable balances partially offset by the collection of under-recovered gas cost. High gas cost in December 2005 resulted in unusually large balances in accounts payable and under-recovered gas cost. Much milder weather in the first quarter of 2006 compared to the first quarter of 2005 resulted in less inventory being withdrawn and converted to cash in 2006. A federal tax refund in the first quarter of 2005 compared to a tax payment in the first quarter of 2006 and the timing of interest payments also decreased net cash from operating activities period over period.

Investing Activities

Capital expenditures of $121.6 million in the first three months of 2006 were $17.5 million higher than the comparable 2005 period. The spending for the first three months primarily reflected on-going system improvements and upgrades to maintain service and reliability. Capital spending is expected to increase in 2006 compared to last year, mainly for increased integrity-management improvements in the pipeline segment and expenditures to replace key components within electric generation in addition to new business projects. The program is expected to be funded primarily via cash from operations.

Financing Activities

On July 29, 2003, NiSource filed a shelf registration statement with the SEC to periodically sell up to $2.5 billion in debt securities, common and preferred stock, and other securities. The registration statement became effective on August 7, 2003, which when combined with NiSource’s pre-existing shelf capacity, provided an aggregate $2.8 billion of total issuance capacity. As of March 31, 2006, NiSource’s shelf capacity was $850 million.

Cumulative Preferred Stock.On April 14, 2006, Northern Indiana redeemed all of its outstanding cumulative preferred stock, having a total redemption value of $81.6 million.

Credit Facilities.On November 30, 2005, NiSource Finance entered into a new $300 million 9-month revolving credit agreement with Dresdner Kleinwort Wasserstein LLC. The new facility will further improve NiSource’s available liquidity in the current environment of volatile natural gas prices. During March 2005, NiSource Finance obtained a new $1.25 billion five-year revolving credit facility with a syndicate of banks led by Barclays Capital. The new facility replaced an expiring $500 million 364-day credit facility, as well as a $750 million three-year credit facility that would have expired in March 2007.

NiSource Finance is currently considering an amendment to the Barclays credit facility, which would increase the aggregate commitment level to $1.5 billion and reduce its borrowing costs under the facility.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.

NiSource Finance had outstanding credit facility advances of $379.2 million at March 31, 2006, at a weighted average interest rate of 5.01%, and advances of $898.0 million at December 31, 2005, at a weighted average interest rate of 4.95%. As of March 31, 2006 and December 31, 2005, NiSource Finance had $96.0 million and $101.6 million of stand-by letters of credit outstanding, respectively. At March 31, 2006, $67.9 million of the $96.0 million total outstanding letters of credit resided within a separate bi-lateral letter of credit arrangement with Barclays Bank that NiSource Finance obtained during February 2004. Of the remaining $28.1 million of stand-by letters of credit outstanding at March 31, 2006, $24.7 million resided under NiSource Finance’s five-year credit facility and $3.4 million resided under an uncommitted arrangement with another financial institution. As of March 31, 2006, $1,146.1 million of credit was available under both credit facilities.

Sale of Trade Accounts Receivables.On May 14, 2004, Columbia of Ohio entered into an agreement to sell, without recourse, substantially all of its trade receivables, as they originate, to CORC, a wholly owned subsidiary of Columbia of Ohio. CORC, in turn, is party to an agreement, also dated May 14, 2004, in which it sells an undivided percentage ownership interest in the accounts receivable to a commercial paper conduit. The conduit can purchase up to $300 million of accounts receivable under the agreement. The agreement has a scheduled expiration date of May 12, 2006, and can be renewed if mutually agreed to by both parties. As of March 31, 2006, $285 million of accounts receivable had been sold by CORC.

Under the agreement, Columbia of Ohio acts as administrative agent, by performing record keeping and cash collection functions for the accounts receivable sold by CORC. Columbia of Ohio receives a fee, which provides adequate compensation, for such services.

On December 30, 2003, Northern Indiana entered into an agreement to sell, without recourse, all of its trade receivables, as they originate, to NRC, a wholly-owned subsidiary of Northern Indiana. NRC, in turn, is party to an agreement in which it sells an undivided percentage ownership interest in the accounts receivable to a commercial paper conduit. The conduit can purchase up to $200 million of accounts receivable under the agreement. NRC’s agreement with the commercial paper conduit has a scheduled expiration date of December 22, 2006, and can be renewed if mutually agreed to by both parties. As of March 31, 2006, NRC had sold $200 million of accounts receivable. Under the arrangement, Northern Indiana may not sell any new receivables if Northern Indiana’s debt rating falls below BBB- or Baa3 at Standard and Poor’s and Moody’s, respectively.

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

Market Risk Disclosures

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

Various analytical techniques are employed to measure and monitor NiSource’s market and credit risks, including VaR. VaR represents the potential loss or gain for an instrument or portfolio from changes in market factors, for a specified time period and at a specified confidence level.

Non-Trading Risks

Commodity price risk resulting from non-trading activities at NiSource’s rate-regulated subsidiaries is limited, since regulations allow recovery of prudently incurred purchased power, fuel and gas costs through the rate-making process. If states should explore additional regulatory reform, these subsidiaries may begin providing services without the benefit of the traditional rate-making process and may be more exposed to commodity price risk.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.

NiSource is exposed to interest rate risk as a result of changes in interest rates on borrowings under revolving credit agreements, variable rate pollution control bonds and floating rate notes, which have interest rates that are indexed to short-term market interest rates. NiSource is also exposed to interest rate risk due to changes in interest rates on fixed-to-variable interest rate swaps that hedge the fair value of long-term debt. Based upon average borrowings and debt obligations subject to fluctuations in short-term market interest rates during the first quarter of 2006, an increase in short-term interest rates of 100 basis points (1%) would have increased interest expense by $6.1 million for the three months ended March 31, 2006.

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

Trading Risks

The transactions associated with NiSource’s power trading operations give rise to various risks, including market risks resulting from the potential loss from adverse changes in the market prices of electricity. The power trading operations market and trade over-the-counter contracts for the purchase and sale of electricity. Those contracts within the power trading portfolio that require settlement by physical delivery are often net settled in accordance with industry standards. As of March 31, 2006, all power trading contracts were settled. TPC may enter into power derivative contracts in the future to manage price risk associated with operating Whiting Clean Energy.

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

Market Risk Measurement

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a specified position or portfolio. NiSource calculates a one-day VaR at a 95% confidence level for the power trading group and the gas marketing group that utilize a variance/covariance methodology. Based on the results of the VaR analysis, the daily market exposure for power trading on an average, high and low basis was zero, during the first quarter of 2006. The daily market exposure for the gas marketing and trading portfolios on an average, high and low basis was $0.6 million, $0.9 million and $0.2 million during the first quarter of 2006, respectively. Prospectively, management has set the VaR limit at $0.5 million for gas marketing. Exceeding this limit would result in management actions to reduce portfolio risk. The VaR limit for power trading was $2.5 million, however, this limit was reduced to zero in the third quarter of 2005 with the settlement of all power trading contracts. Should TPC enter into power derivative contracts in the future to manage price risk associated with Whiting Clean Energy, those contracts would be limited to the physical generation capacity of Whiting Clean Energy.

Refer to Note 9, “Risk Management and Energy Trading Activities,” in the Notes to Consolidated Financial Statements for further discussion of NiSource’s risk management.

Off Balance Sheet Arrangements

NiSource has issued guarantees that support up to approximately $1.0 billion of commodity-related payments for its current subsidiaries involved in energy marketing and power trading and to satisfy requirements under forward gas

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.

sales agreements of current and former subsidiaries. These guarantees were provided to counterparties in order to facilitate physical and financial transactions involving natural gas and electricity. To the extent liabilities exist under the commodity-related contracts subject to these guarantees, such liabilities are included in the Consolidated Balance Sheets.

NiSource has other guarantees, operating leases, and lines and letters of credit outstanding. Refer to Note 9, “Risk Management and Energy Trading Activities,” and Note 13-A, “Guarantees and Indemnities,” in the Notes to Consolidated Financial Statements for additional information about NiSource’s off balance sheet arrangements.

Other Information

Recently Adopted Accounting Pronouncements

SFAS No. 123 (revised 2004) – Share-Based Payment.Effective January 1, 2006, NiSource adopted SFAS No. 123R using the modified prospective transition method. SFAS No. 123R requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. In accordance with the modified prospective transition method, NiSource’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. Prior to the adoption of SFAS No. 123R, NiSource applied the intrinsic value method of APB No. 25 for awards granted under its stock-based compensation plans and complied with the disclosure requirements of SFAS No. 123. There were no modifications to awards as a result of the adoption of SFAS 123R.

SFAS No. 154 – Accounting Changes and Error Corrections.In May 2005, the FASB issued SFAS No. 154 to provide guidance on the accounting for and reporting of accounting changes and error corrections, which is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle, and for the reporting of an error correction. Effective January 1, 2006, NiSource adopted SFAS No. 154. There were no impacts to NiSource’s consolidated financial statements as a result of the adoption of SFAS No. 154.

FASB Interpretation No. 47 – Accounting for Conditional Asset Retirement Obligations.In March 2005, the FASB issued FIN 47 to clarify the accounting for conditional asset retirement obligations and to provide additional guidance for when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation, as used in SFAS No. 143. This interpretation is effective for fiscal years ending after December 15, 2005. NiSource has adopted FIN 47 in the fourth quarter 2005. Refer to Note 12, “Asset Retirement Obligations,” in the Notes to Consolidated Financial Statements for additional information.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.

Recently Issued Accounting Pronouncements

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.On March 31, 2006, the FASB issued an Exposure Draft, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” an amendment of SFAS No. 87, 88, 106, and 132R. This proposed Statement seeks to improve existing reporting for defined benefit postretirement plans by requiring these employer business entities to do the following; a) recognize in its 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, b) recognize as a component of other comprehensive income, net of tax, the actuarial gains and losses and the prior service costs and credits that were not recognized as components of net periodic benefit cost pursuant to prior rules, c) recognize to the opening balance of retained earnings any transition asset or obligation remaining from the initial application of SFAS No. 87 or 106, d) measure defined benefit plan assets and defined benefit plan obligations as of the date of the employer’s statement of financial position, and e) disclose additional information in the notes to financial statements about certain affects on net periodic benefit cost in the upcoming fiscal year. Based on the measurement of the various defined benefit pension and other postretirement plans’ assets and benefit obligations at December 31, 2005, the impact of the proposed Statement, should it have been in effect at December 31, 2005, would have reduced Total Other Assets by approximately $69 million, increased Total Other Liabilities and Deferred Credits by approximately $171 million and decreased Total common stock equity by approximately $240 million. The proposed rules will not have an impact on the Statement of Consolidated Income at adoption and all impacts are non-cash. The release of a final interpretation is scheduled for September of 2006, with an effective date for fiscal years ending after December 15, 2006.

RESULTS AND DISCUSSION OF SEGMENT OPERATIONS

Presentation of Segment Information

NiSource’s operations are divided into four primary business segments; Gas Distribution Operations, Gas Transmission and Storage Operations, Electric Operations, and Other Operations.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Gas Distribution Operations


Three Months Ended March 31,(in millions)	2006			2005

Net Revenues
Sales Revenues	$	2,019.1		$	1,840.5
Less: Cost of gas sold		1,624.2			1,419.2

Net Sales Revenues		394.9			421.3
Transportation Revenues		165.6			176.8

Net Revenues		560.5			598.1

Operating Expenses
Operation and maintenance		228.5			198.7
Depreciation and amortization		57.3			55.8
Other taxes		68.7			68.7

Total Operating Expenses		354.5			323.2

Operating Income	$	206.0		$	274.9


Revenues ($ in Millions)
Residential		1,409.0			1,261.7
Commercial		494.5			431.3
Industrial		81.3			74.6
Transportation		165.6			176.8
Off System Sales		95.3			51.2
Other		(61.0	)		21.7

Total		2,184.7			2,017.3


Sales and Transportation (MMDth)
Residential sales		91.5			109.1
Commercial sales		33.3			39.5
Industrial sales		6.6			7.8
Transportation		152.4			174.7
Off System Sales		10.8			7.1
Other		0.3			0.4

Total		294.9			338.6


Heating Degree Days		2,273			2,673
Normal Heating Degree Days		2,625			2,627
% Colder (Warmer) than Normal		(13	%)		2	%

Customers
Residential		2,448,796			2,382,114
Commercial		213,199			215,719
Industrial		5,193			5,740
Transportation		698,951			749,831
Other		59			61

Total		3,366,198			3,353,465

NiSource’s natural gas distribution operations serve approximately 3.4 million customers in nine states: Ohio, Indiana, Pennsylvania, Massachusetts, Virginia, Kentucky, Maryland, New Hampshire and Maine. The regulated subsidiaries offer both traditional bundled services as well as transportation only for customers that purchase gas from alternative suppliers. The operating results reflect the temperature-sensitive nature of customer demand with

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Gas Distribution Operations (continued)

over 71% of annual residential and commercial throughput affected by seasonality. As a result, segment operating income is higher in the first and fourth quarters reflecting the heating demand during the winter season.

Restructuring

Payments made for all restructuring initiatives within Gas Distribution Operations amounted to $0.9 million for the first quarter of 2006 and the restructuring liability remaining at March 31, 2006 was $8.1 million. Refer to Note 6, “Restructuring Activities,” in the Notes to Consolidated Financial Statements for additional information regarding restructuring initiatives for the Gas Distribution Operations segment.

Regulatory Matters

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Gas Distribution Operations (continued)

GCA7, covering the period November 1, 2005 through October 31, 2006 on August 29, 2005. The IURC approved the rates on an interim basis subject to refund on November 22, 2005. A final order approving this filing is expected in the second quarter of 2006.

Environmental Matters

Currently, various environmental matters impact the Gas Distribution Operations segment. As of March 31, 2006, a reserve has been recorded to cover probable environmental response actions. Refer to Note 13-C, “Environmental Matters,” in the Notes to Consolidated Financial Statements for additional information regarding environmental matters for Gas Distribution Operations.

Weather

In general, NiSource calculates the weather related revenue variance based on changing customer demand driven by weather variance from normal heating degree-days. Normal is evaluated using heating degree days across the NiSource distribution region. While the temperature base for measuring heating degree-days (i.e. the estimated average daily temperature at which heating load begins) varies slightly across the region, the NiSource composite measurement is based on 62 degrees.

Weather in the Gas Distribution Operation’s territories for the first quarter of 2006 was 15% warmer than the comparable quarter in 2005, and 13% warmer than normal overall.

Throughput

Total volumes sold and transported of 294.9 MMDth for the first quarter of 2006, decreased 43.7 MMDth from the same period last year. This decrease in volume was experienced across residential, commercial, and industrial markets and was attributable mainly to the milder weather and decreased residential customer usage compared to the same period last year. Decreases in commercial and industrial customers also contributed to this decrease in gas volume.

Net Revenues

Net revenues for the three months ended March 31, 2006 were $560.5 million, a decrease of $37.6 million from the same period in 2005 due primarily to the impact of warmer weather amounting to approximately $46 million for the quarter and approximately $11 million due to residential usage declines. This decrease in net revenues was partially offset by an increase in revenues recognized for regulatory trackers of $23.2 million, which are offset in operating expenses, and approximately $2 million as a result of an increase in the number of residential customers.

Operating Income

For the first quarter of 2006, Gas Distribution Operations reported operating income of $206.0 million, a decrease of $68.9 million from the same period in 2005. The decrease in operating income was mainly attributable to warmer weather and reduced residential customer usage described above as well as $6.1 million of transition costs and new system development costs associated with the IBM agreement. The $23.2 million increase in revenues from regulatory trackers was offset by $23.2 million of increased tracker related operation and maintenance expenses.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Gas Transmission and Storage Operations


Three Months Ended March 31,(in millions)	2006			2005

Operating Revenues
Transportation revenues	$	184.2		$	178.4
Storage revenues		44.4			45.2
Other revenues		3.0			6.1

Total Operating Revenues		231.6			229.7
Less: Cost of gas sold		5.4			5.5

Net Revenues		226.2			224.2

Operating Expenses
Operation and maintenance		72.3			71.4
Depreciation and amortization		28.7			28.1
Other taxes		14.9			15.2

Total Operating Expenses		115.9			114.7

Operating Income	$	110.3		$	109.5


Throughput (MMDth)
Columbia Transmission
Market Area		328.5			395.6
Columbia Gulf
Mainline		161.6			138.7
Short-haul		16.6			18.2
Columbia Pipeline Deep Water		2.9			3.5
Crossroads Gas Pipeline		11.0			12.0
Granite State Pipeline		11.6			13.9
Intrasegment eliminations		(156.3	)		(138.6	)

Total		375.9			443.3

NiSource’s Gas Transmission and Storage Operations segment consists of the operations of Columbia Transmission, Columbia Gulf, Columbia Deep Water, Crossroads Pipeline and Granite State Gas. In total NiSource owns a pipeline network of approximately 16 thousand miles extending from offshore in the Gulf of Mexico to New York and the eastern seaboard. The pipeline network serves customers in nineteen northeastern, mid-Atlantic, midwestern and southern states, as well as the District of Columbia. In addition, the NiSource Gas Transmission and Storage Operations segment operates one of the nation’s largest underground natural gas storage systems.

Restructuring

Payments made for all restructuring initiatives within Gas Transmission and Storage Operations amounted to $0.6 million for the first quarter of 2006 and the restructuring liability remaining at March 31, 2006 was $2.8 million. Refer to Note 6, “Restructuring Activities,” in the Notes to Consolidated Financial Statements for additional information regarding restructuring initiatives for the Gas Transmission and Storage Operations segment.

Regulatory Matters

On June 30, 2005, the FERC issued the “Order On Accounting for Pipeline Assessment Costs.” This guidance was issued by the FERC to address consistent application across the industry for accounting of the DOT’s Integrity Management Rule. The effective date of the guidance is January 1, 2006 after which all assessment costs will be recorded as operating expenses. Importantly, the rule specifically provides that amounts capitalized in periods prior to January 1, 2006 will be permitted to remain as recorded. It is anticipated that operating expenses will increase approximately $7 — $12 million in future years related to this guidance and the expenditures NiSource expects to incur to comply with the DOT’s Integrity Management Rule.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Gas Transmission and Storage Operations

Environmental Matters

Currently, various environmental matters impact the Gas Transmission and Storage Operations segment. As of March 31, 2006, a reserve has been recorded to cover probable environmental response actions. Refer to Note 13-C, “Environmental Matters,” in the Notes to Consolidated Financial Statements for additional information regarding environmental matters for Gas Transmission and Storage Operations.

Proposed Millennium Pipeline Project

Millennium has proposed a pipeline project, in which Columbia Transmission is participating and will serve as operator, which will provide access to a number of supply and storage basins and the Dawn, Ontario trading hub. The project is currently being marketed in two phases. Phase 1 of the project is to begin at a proposed interconnect with Empire, an existing pipeline that originates at the Canadian border and extends easterly towards Syracuse, New York. Empire would construct a lateral pipeline southward to connect with Millennium near Corning, New York. Millennium would extend eastward to an interconnect with Algonquin Gas Transmission at Ramapo, New York. As currently planned, Phase 2 would cross the Hudson River, linking to the New York City metropolitan market.

The FERC issued an order in September 2002 in which it granted final certificate authority for the original Millennium project, but specified that Millennium could not begin construction until certain environmental and other conditions were met. One such condition, impacting what is now being marketed as Phase 2 of the project, was compliance with the Coastal Zone Management Act, which is administered by the NYDOS. NYDOS determined that the Hudson River crossing plan was not consistent with the Coastal Zone Management Act. Millennium’s appeal of that decision to the United States Department of Commerce was denied. Millennium filed an appeal of the United States Department of Commerce ruling relating to the project’s Hudson River crossing plan in the United States Federal District Court on February 13, 2004. On March 31, the United States Federal District Court denied Millennium’s appeal.

On August 1, 2005, Millennium submitted a certificate amendment filing to the FERC. This amended filing requests authorization from the FERC to construct the project in phases, details construction and development plans for Phase 1 of the project, and includes executed precedent agreements for service on Phase 1 of the project. Millennium recently completed renegotiations of the precedent agreements with its anchor shippers. The reconfigured Millennium project relies on completion of some or all of several other related pipeline projects proposed by Empire, Algonquin, Iroquois, and Islander East collectively referred to as the “Companion Pipelines.” The timing of receipt of the necessary regulatory approvals for Millennium and its Companion Pipelines may impact the targeted in-service date during the fourth quarter of 2007 and may even affect the viability of Phase 1. Provided the necessary approvals are received in a timely manner, Millennium plans to begin construction in Spring 2007.

In March 2006, Columbia Atlantic Trading, a NiSource subsidiary, sold its 21.0% interest in the Millennium partnership to KeySpan Millennium (owned by KeySpan Corp.) and DTE Millennium (owned by DTE Energy Co.) through an equity redistribution and a re-writing of the partnership agreements. The Millennium partnership is now currently made up of the following companies: Columbia Transmission (47.5%), DTE Millennium (26.25%), KeySpan Millennium (26.25%). Columbia Transmission will be the operator.

Hardy Storage Project

In November 2004, Columbia Transmission and a subsidiary of Piedmont reached an agreement to jointly develop a major new underground natural gas storage field to help meet increased market demand for natural gas in the eastern United States.

Columbia Transmission and Piedmont have formed Hardy Storage, to develop a natural gas storage field from a depleted natural gas production field in West Virginia. Columbia Transmission and Piedmont each have a 50% equity interest in the project, and Columbia Transmission will serve as operator of the facilities.

An open season for Hardy Storage conducted in early 2004 resulted in full subscription of the project’s storage capacity under long-term firm contracts. The field, which will have the capacity to store approximately 12 Bcf of natural gas, is planned to begin service in November 2007, and will ultimately be able to deliver 176 MMDth per day of firm storage service on behalf of the four customers subscribing to capacity in Hardy Storage. These

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Gas Transmission and Storage Operations (continued)

customers have also signed long-term firm agreements with Columbia Transmission for transportation capacity to deliver gas from Hardy Storage to their markets. Columbia Transmission will expand its natural gas transmission system to create this capacity.

Both Hardy Storage and Columbia Transmission filed the necessary applications for the projects with the FERC on April 25, 2005, and received a favorable order on November 1, 2005. Construction began in the first quarter of 2006. Service from both projects is expected to be available in 2007.

Other Growth Projects

Columbia Transmission recently held open seasons for three additional projects, two Eastern Market expansion projects, and an Appalachian pipeline expansion in Kentucky and West Virginia. Columbia Gulf recently held an open season to expand the East Lateral System. Market interest for all projects is encouraging. Columbia Transmission has signed precedent agreements with four East Coast customers for one of the Eastern Market expansions. Customer negotiations are ongoing for the remaining projects.

Sales of Shorter-Term Transportation and Storage Services

Seasonal price fluctuations in the national energy market created opportunities for customers to utilize existing shorter-term transportation and storage tariff services provided by Columbia Transmission and Columbia Gulf. A newly redeveloped, Houston-based commercial team has capitalized on these opportunities. Columbia Transmission entered into contracts that represent revenues in excess of $25 million of shorter-term business for 2006, $3.4 million of which was recorded during the first quarter ended March 31, 2006. Columbia Gulf’s mainline throughput increased by 16.5% over 2005 due to the increased utilization of these services.

Throughput

Throughput for the Gas Transmission and Storage Operations segment totaled 375.9 MMDth for the first quarter 2006, compared to 443.3 MMDth for the same period in 2005. The decrease of 67.4 MMDth is due to warmer weather and to a lesser extent lower offshore natural gas production due to the 2005 Gulf of Mexico hurricanes which impacted the first quarter of 2006. Columbia Gulf mainline throughput increased to 161.6 MMDth for the first quarter of 2006 compared to 138.7 MMDth for the same period in 2005 due to increased utilization of the shorter-term transportation and storage services described above.

Net Revenues

Net revenues were $226.2 million for the first quarter 2006, an increase of $2.0 million from the same period in 2005, primarily due to increased sales of shorter-term transportation and storage services described above.

Operating Income

Operating income was $110.3 million for the first quarter 2006 compared to $109.5 million in the first quarter 2005. Operating income increased as a result of the change in net revenues described above, partially offset by slightly higher operating expenses of $1.2 million. Operation and maintenance expenses increased slightly as a result of higher employee and administrative expense of $1.5 million due primarily to transition costs associated with the IBM agreement.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Electric Operations


For the Three Months Ended March 31,(in millions)	2006		2005

Net Revenues
Sales revenues	$	306.9	$	282.7
Less: Cost of sales		117.3		96.0

Net Revenues		189.6		186.7

Operating Expenses
Operation and maintenance		60.5		61.1
Depreciation and amortization		46.1		45.5
Other taxes		14.9		14.7

Total Operating Expenses		121.5		121.3

Operating Income	$	68.1	$	65.4


Revenues ($ in millions)
Residential		80.9		73.4
Commercial		82.4		73.2
Industrial		125.5		112.4
Wholesale		5.5		7.5
Other		12.6		16.2

Total		306.9		282.7


Sales (Gigawatt Hours)
Residential		761.1		767.0
Commercial		894.0		894.2
Industrial		2,437.4		2,328.3
Wholesale		152.1		161.2
Other		28.6		32.6

Total		4,273.2		4,183.3


Electric Customers
Residential		395,653		392,527
Commercial		51,313		50,485
Industrial		2,521		2,531
Wholesale		8		28
Other		762		766

Total		450,257		446,337

NiSource generates and distributes electricity, through its subsidiary Northern Indiana, to approximately 450 thousand customers in 21 counties in the northern part of Indiana. The operating results reflect the temperature-sensitive nature of customer demand with annual sales affected by temperatures in the northern part of Indiana. As a result, segment operating income is generally higher in the second and third quarters, reflecting cooling demand during the summer season.

Market Conditions

The regulatory frameworks applicable to Electric Operations continue to be affected by fundamental changes that will impact Electric Operations’ structure and profitability. Notwithstanding those changes, competition within the industry will create opportunities to compete for new customers and revenues. Management has taken steps to improve operating efficiencies in this changing environment.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Electric Operations (continued)

The U.S. Steel Industry continues to adjust to changing market conditions including international competition, increased energy costs, and fluctuating demand for their products. The industry has responded with plant consolidation and rationalization to reduce costs and improve their position in the market place. Increased use of advanced technology by U.S. steel producers has lowered production costs and increased productivity, reducing the labor differential between international producers and those in the United States.

Steel demand for 2006 is anticipated to remain at current levels for the first half of the year. It is estimated that international pressure may reduce the price per ton for rolled steel by as much as 20% by June 2006. This anticipated price reduction may cause inventories to increase once again and repeat the price/production cycle seen in 2004 and 2005. Electric sales to the steel industry in 2005 were down 3.2% as compared to 2004.

In 2005, Northern Indiana coal deliveries from the PRB area were limited to 80 – 85% of contracted amounts as a result of maintenance problems on track owned jointly by the Union Pacific Railroad Company and Burlington Northern Santa Fe Railway Company. Northern Indiana met the expected electricity demand through the end of 2005 by changing the fuel blend, which reduced its need for PRB coal. Northern Indiana has been blending this fuel for a number of years. In the second quarter of 2006, track maintenance will resume until completion, but at this time it is unknown if coal deliveries will be impacted.

Regulatory Matters

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Electric Operations (continued)

In January 2002, Northern Indiana indefinitely shut down its Mitchell Station. In February 2004, the City of Gary announced an interest in acquiring the land on which the Mitchell Station is located for economic development, including a proposal to increase the length of the runways at the Gary International Airport. On May 7, 2004, the City of Gary filed a petition with the IURC seeking to have the IURC establish a value for the Mitchell Station and establish the terms and conditions under which the City of Gary would acquire the Mitchell Station. On January 18, 2006, the IURC issued a final order dismissing, without prejudice, this cause and the related settlement agreement finding that the agreement entered into between the City of Gary and Northern Indiana lacks essential terms necessary for it to be a valid and enforceable contract under Indiana law. Northern Indiana is evaluating the appropriate course of action for the Mitchell facility in light of the City of Gary’s need for that property and the substantial costs associated with restarting the facility.

Northern Indiana filed FAC-69 on November 3, 2005. This filing included a reconciliation of actual intermediate dispatchable power purchases for August and September 2005. The filing also included recovery of certain MISO charges under consideration in cause 42962 as described above. The order approving the FAC-69 factor was issued January 11, 2006. The intermediate dispatchable power cost recovery is subject to refund based upon the outcome of cause 42824 (described above).

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Electric Operations (continued)

Environmental Matters

Currently, various environmental matters impact the Electric Operations segment. As of March 31, 2006, a reserve has been recorded to cover probable environmental response actions. Refer to Note 13-C, “Environmental Matters,” in the Notes to Consolidated Financial Statements for additional information regarding environmental matters for the Electric Operations segment.

Sales

Electric Operations sales quantities for the first quarter of 2006 were 4,273.2 gwh, an increase of 89.9 gwh compared to the 2005 period, as a result of increased industrial usage.

Net Revenues

In the first quarter of 2006, electric net revenues of $189.6 million increased by $2.9 million from the comparable 2005 period. This improvement was primarily a result of increased environmental cost recovery trackers of $2.5, a reduction in customer credits, and an increase in industrial usage and the number of residential and commercial customers mentioned above.

Operating Income

Operating income for the first quarter of 2006 was $68.1 million, an increase of $2.7 million from the same period in 2005. The increase was primarily due to the changes in net revenue mentioned above. While operating expenses were relatively flat as compared to the 2005 period, increases in unrecoverable MISO costs of $0.5 million and increased maintenance expenditures were offset by reduced employee and administrative expense.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Other Operations


Three Months Ended March 31,(in millions)	2006			2005

Net Revenues
Products and services revenue	$	341.7		$	229.5
Less: Cost of products purchased		336.1			224.1

Net Revenues		5.6			5.4

Operating Expenses
Operation and maintenance		12.4			6.4
Depreciation and amortization		3.0			2.9
Gain on sale of assets		(2.7	)		(0.5	)
Other taxes		2.1			1.8

Total Operating Expenses		14.8			10.6

Operating Loss	$	(9.2	)	$	(5.2	)

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

Lake Erie Land Company, Inc.

In March 2005, Lake Erie Land, wholly owned by NiSource, recognized a pre-tax impairment charge of $2.9 million related to the Sand Creek Golf Club property and began accounting for the operations of the golf club as discontinued operations. The assets of the Sand Creek Golf Club, valued at $11.9 million at March 31, 2006, are reported as assets of discontinued operations. An additional $5.6 million of assets, representing an estimate of land to be sold during the next twelve-months, are reflected as assets held for sale.

PEI Holdings, Inc.

Whiting Clean Energy.PEI’s Whiting Clean Energy project at BP’s Whiting, Indiana refinery was placed in service in 2002. Initially, the facility was not able to deliver steam to BP to the extent originally contemplated without plant modifications. Whiting Clean Energy reached an agreement in October 2004 with the engineering, procurement and construction contractor, under which the contractor paid for a portion of the necessary plant modifications and other expenses. Whiting Clean Energy is also pursuing recovery from the insurance provider for construction delays and necessary plant modifications and repairs.

For the first three months of 2006, the PEI holding companies’ consolidated after-tax loss was approximately $10.2 million. The profitability of the Whiting Clean Energy project in future periods will be dependent on, among other things, prevailing prices in the energy markets and regional load dispatch patterns. Also impacting the profitability of Whiting Clean Energy is the steam requirements for BP’s oil refinery. During the first quarter of 2005, Whiting Clean Energy completed renegotiation of the terms of its agreement with BP’s oil refinery in Whiting, Indiana. Under the revised agreement, Whiting Clean Energy will continue to meet BP’s need for steam, while reducing the power plant’s required run time for the next three years.

In the first quarter of 2005, Northern Indiana selected TPC from bidders responding to a Request for Proposals issued in October 2004 to provide, pending regulatory approval, 230 mw of intermediate dispatchable power, utilizing the generation facilities of Whiting Clean Energy. The FERC accepted a tariff covering the sale of such intermediate dispatchable power.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NiSource Inc.
Other Operations (continued)

Northern Indiana through TPC under the Power Sales Tariff on an interim basis until December 31, 2005, or until a subsequent order is issued by the IURC, and authorized Northern Indiana recovery of fuel costs associated with interim purchases made under the Power Sales Tariff as part of its normal FAC proceedings. On July 21, 2005, Intervenor LaPorte County filed a Petition for Reconsideration of the interim order with the IURC. On August 31, 2005, the IURC denied LaPorte County’s Petition for Reconsideration. On September 29, 2005, LaPorte County filed its Notice of Appeal of the IURC’s Order of August 31, 2005 denying its Petition for Reconsideration. Northern Indiana filed supplemental testimony on January 26, 2006 indicating that it no longer is seeking approval of the three-year arrangement. The testimony clarifies that Northern Indiana is seeking affirmation from the IURC that the intermediate dispatchable power purchases made between August 9, 2005 and December 31, 2005 which were made pursuant to the July 1, 2005 interim order were reasonable. The evidentiary hearing and final order are expected in the second quarter of 2006.

Net Revenues

Net revenues of $5.6 million for the first quarter of 2006 increased by $0.2 million from the first quarter of 2005, as a result of increased gas marketing revenues of $1.1 million.

Operating Loss

Other Operations reported an operating loss of $9.2 million for the first quarter of 2006, versus an operating loss of $5.2 million for the comparable 2005 period. The increase in the operating loss resulted primarily from increased scheduled maintenance for Whiting Clean Energy of $4.5 million.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

NiSource Inc.

For a discussion regarding quantitative and qualitative disclosures about market risk see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk Disclosures.”

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

NiSource’s chief executive officer and its principal financial officer, after evaluating the effectiveness of NiSource’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), have concluded based on the evaluation required by paragraph (b) of Exchange Act Rules 13a-15 and 15d-15 that, as of the end of the period covered by this report, NiSource’s disclosure controls and procedures were adequate and effective.

Changes in Internal Controls

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

PART II

ITEM 1.LEGAL PROCEEDINGS

NiSource Inc.

1.		United States of America ex rel. Jack J. Grynberg v. Columbia Gas Transmission Corporation, et al., U.S. District Court, E.D. Louisiana

		The plaintiff filed a complaint in 1997, under the False Claims Act, on behalf of the United States of America, against approximately seventy pipelines, including Columbia Gulf and Columbia Transmission. The plaintiff claimed that the defendants had submitted false royalty reports to the government (or caused others to do so) by mis-measuring the volume and heating content of natural gas produced on Federal land and Indian lands. The Plaintiff’s original complaint was dismissed without prejudice for misjoinder of parties and for failing to plead fraud with specificity. The plaintiff then filed over sixty-five new False Claims Act complaints against over 330 defendants in numerous Federal courts. One of those complaints was filed in the Federal District Court for the Eastern District of Louisiana against Columbia and thirteen affiliated entities (collectively, the “Columbia defendants”).

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

		The defendants, including the Columbia defendants, have filed motions to dismiss for lack of subject matter jurisdiction in this case. Oral argument on the motions to dismiss was held on March 17 and 18, 2005 before a Special Master. On May 13, 2005, the Special Master issued his report and recommendations and recommended dismissal of the action against the Columbia defendants. The decision of the Special Master has been briefed and argued by the parties and presented to the Federal District Court Judge for a final ruling, which is expected in the second quarter of 2006.

ITEM 1A.RISK FACTORS

No material changes from the risk factors disclosed in NiSource’s 2005 Form 10-K filed on March 10, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Company Purchases of Equity Securities

The following table provides information about purchases by the Company during the quarter ended March 31, 2006 of equity securities registered by the Company pursuant to Section 12 of the Exchange Act.

Issuer Purchases of Equity Securities

Average

Total Number of Shares

Approximate Dollar

Price

Purchased as Part of

Value of Shares that

Total Number of

Paid Per

Publicly Announced

May Yet Be Purchased

Period

Shares Purchased (1)

Share (2)

Plans or Programs

Under the Plans

January 2006

280,306

21.03

N/A


(1)		Shares of Common Stock that are tendered by employees to the Company to satisfy the employees’ tax withholding obligations in connection with the vesting of awards of restricted stock, which are repurchased by the Company based on their fair market value on the vesting date.

(2)		The calculation of the average price per share does not give effect to any fees, commissions or other costs associated with the repurchase of such shares.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5.OTHER INFORMATION

None

ITEM 6.EXHIBITS

NiSource Inc.

	(10.1)		Amended and Restated NiSource Inc. Executive Severance Policy (incorporated by reference to Exhibit 10.1 to the NiSource Inc. Current Report on Form 8-K filed on January 31, 2006). *

	(10.2)		Amended and Restated NiSource Inc. Directors’ Charitable Gift Program (incorporated by reference to Exhibit 10.1 to the NiSource Inc. Current Report on Form 8-K filed on January 31, 2006). *

	(31.1)		Certification of Robert C. Skaggs, Jr., Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **

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

	(32.1)		Certification of Robert C. Skaggs, Jr., Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). **

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


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

**		Exhibit filed herewith.

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

SIGNATURE

NiSource Inc.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		NiSource Inc.

		(Registrant)

Date: May 5, 2006	By:	/s/ Jeffrey W. Grossman

		Jeffrey W. Grossman
		Vice President and Controller
		(Principal Accounting Officer
		and Duly Authorized Officer)

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NiSource (NI) 10-Q2006 Q1 Quarterly report

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