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

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

Commission file number 001-16189

NiSource Inc.

(Exact name of registrant as specified in its charter)

Delaware		35-2108964
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
801 East 86th Avenue Merrillville, Indiana		46410
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yes þ    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer þ		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 Par Value: 278,305,866 shares outstanding at September 30, 2010.

NISOURCE INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2010

Table of Contents

						Page
		Defined Terms					3
PART I		FINANCIAL INFORMATION
		Item 1.		Financial Statements - unaudited
				Condensed Statements of Consolidated Income (Loss) (unaudited)			6
				Condensed Consolidated Balance Sheets (unaudited)			7
				Condensed Statements of Consolidated Cash Flows (unaudited)			9
				Condensed Statements of Consolidated Comprehensive Income (unaudited)			10
				Notes to Condensed Consolidated Financial Statements (unaudited)			11
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			53
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			80
		Item 4.		Controls and Procedures			80
PART II		OTHER INFORMATION
		Item 1.		Legal Proceedings			81
		Item 1A.		Risk Factors			82
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			83
		Item 3.		Defaults Upon Senior Securities			83
		Item 4.		(Removed and Reserved)			83
		Item 5.		Other Information			83
		Item 6.		Exhibits			84
		Signature					85

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

NiSource Subsidiaries and Affiliates
Capital Markets		NiSource Capital Markets, Inc.
CER		Columbia Energy Resources, Inc.
CGORC		Columbia Gas of Ohio Receivables Corporation
CNR		Columbia Natural Resources, Inc.
Columbia		Columbia Energy Group
Columbia Gulf		Columbia Gulf Transmission Company
Columbia of Kentucky		Columbia Gas of Kentucky, Inc.
Columbia of Maryland		Columbia Gas of Maryland, Inc.
Columbia of Massachusetts		Bay State Gas Company
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, LLC
CPRC		Columbia Gas of Pennsylvania 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
Millennium		Millennium Pipeline Company, L.L.C.
NARC		NIPSCO Accounts Receivable Corporation
NDC Douglas Properties		NDC Douglas Properties, Inc.
NiSource		NiSource Inc.
NiSource Corporate Services		NiSource Corporate Services Company
NiSource Development Company		NiSource Development Company, Inc.
NiSource Finance		NiSource Finance Corp.
Northern Indiana		Northern Indiana Public Service Company
Northern Indiana Fuel and Light		Northern Indiana Fuel and Light Company
Northern Utilities		Northern Utilities, Inc.
PEI		PEI Holdings, Inc.
Whiting Clean Energy		Whiting Clean Energy, Inc.
Abbreviations
2010 Health Care Act		The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 signed into law by the President on March 23, 2010 and March 30, 2010, respectively
ACES		American Clean Energy and Security Act of 2009
AFUDC		Allowance for funds used during construction
Ameren		Ameren Services Company
AMRP		Accelerated Main Replacement Program
AOC		Administrative Order by Consent
AOCI		Accumulated other comprehensive income
ARRs		Auction Revenue Rights
ASC		Accounting Standards Codification
BBA		British Banker Association
Bcf		Billion cubic feet
Board		Board of Directors
BPAE		BP Alternative Energy North America Inc
BTMU		The Bank of Tokyo-Mitsubishi UFJ, LTD.
BTU		British Thermal Unit
CAA		Clean Air Act
CAIR		Clean Air Interstate Rule
CAMR		Clean Air Mercury Rule

CARE		Conservation and Ratemaking Efficiency
CCGT		Combined Cycle Gas Turbine
CERCLA		Comprehensive Environmental Response Compensation and Liability Act (also known as Superfund)
Chesapeake		Chesapeake Appalachia, L.L.C.
Day 2		Began April 1, 2005 and refers to the operational control of the energy markets by MISO, including the dispatching of wholesale electricity and generation, managing transmission constraints, and managing the day-ahead, real-time and financial transmission rights markets
DPU		Department of Public Utilities
DSM		Demand Side Management
Dth		Dekatherm
ECRM		Environmental Cost Recovery Mechanism
ECT		Environmental cost tracker
EERM		Environmental Expense Recovery Mechanism
EPA		United States Environmental Protection Agency
EPS		Earnings per share
FAC		Fuel adjustment clause
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FTRs		Financial Transmission Rights
GAAP		U.S. Generally Accepted Accounting Principles
GCR		Gas cost recovery
GHG		Greenhouse gases
gwh		Gigawatt hours
IDEM		Indiana Department of Environmental Management
IFRS		International Financial Reporting Standards
IRP		Infrastructure Replacement Program
IURC		Indiana Utility Regulatory Commission
LDCs		Local distribution companies
LIBOR		London InterBank Offered Rate
LIFO		Last in first out
Mcf		Million cubic feet
MISO		Midwest Independent Transmission System Operator
Mitchell		Dean H. Mitchell Coal Fired Generating Station
MMDth		Million dekatherms
mw		Megawatts
NAAQS		National Ambient Air Quality Standards
NOV		Notice of Violation
NO2		Nitrogen dioxide
NOx		Nitrogen oxide
NYMEX		New York Mercantile Exchange
OCI		Other Comprehensive Income (Loss)
OPEB		Other Postretirement and Postemployment Benefits
OUCC		Indiana Office of Utility Consumer Counselor
PADEP		Pennsylvania Department of Environmental Protection
Piedmont		Piedmont Natural Gas Company, Inc.
PIPP		Percentage of Income Plan
PJM		PJM Interconnection is a regional transmission organization (RTO) that coordinates the movement of wholesale electricity in all or parts of 13 states and the District of Columbia.
PM		particulate matter
PSC		Public Service Commission
PUC		Public Utility Commission
PUCO		Public Utilities Commission of Ohio
RBS		Royal Bank of Scotland PLC

RCRA		Resource Conservation and Recovery Act
RSG		Revenue Sufficiency Guarantee
SEC		Securities and Exchange Commission
SIP		State Implementation Plan
SO2		Sulfur dioxide
VaR		Value-at-risk and instrument sensitivity to market factors
VIE		Variable Interest Entities
VSCC		Virginia State Corporation Commission

PART I

ITEM 1.  FINANCIAL STATEMENTS

NiSource Inc.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in millions, except per share amounts)		2010				2009				2010				2009
Net Revenues
Gas Distribution		$	327.0			$	294.4			$	2,122.4			$	2,456.0
Gas Transportation and Storage			270.7				242.3				905.5				898.7
Electric			397.7				320.0				1,056.1				902.2
Other			142.7				118.2				583.9				708.6
Gross Revenues			1,138.1				974.9				4,667.9				4,965.5
Cost of Sales (excluding depreciation and amortization)			420.0				317.9				2,145.4				2,560.2
Total Net Revenues			718.1				657.0				2,522.5				2,405.3
Operating Expenses
Operation and maintenance			382.1				358.6				1,198.8				1,203.4
Depreciation and amortization			153.1				148.8				454.5				440.7
Impairment and loss on sale of assets, net			1.1				7.6				1.2				6.4
Other taxes			62.0				54.2				213.4				210.9
Total Operating Expenses			598.3				569.2				1,867.9				1,861.4
Equity Earnings in Unconsolidated Affiliates			3.5				5.8				11.3				9.6
Operating Income			123.3				93.6				665.9				553.5
Other Income (Deductions)
Interest expense, net			(97.6	)			(105.0	)			(294.8	)			(300.7	)
Other, net			2.1				2.4				7.3				(2.3	)
Gain on early extinguishment of long-term debt			-				-				-				2.5
Total Other Deductions			(95.5	)			(102.6	)			(287.5	)			(300.5	)
Income/(Loss) from Continuing Operations before Income Taxes			27.8				(9.0	)			378.4				253.0
Income Tax (Benefit) Expense			(5.6	)			4.2				119.6				111.0
Income/(Loss) from Continuing Operations			33.4				(13.2	)			258.8				142.0
(Loss)/Income from Discontinued Operations - net of taxes			(0.2	)			0.2				(0.3	)			(11.2	)
Gain (Loss) on Disposition of Discontinued Operations - net of taxes			-				(2.4	)			0.1				(2.6	)
Net Income (Loss)		$	33.2			$	(15.4	)		$	258.6			$	128.2
Basic Earnings (Loss) Per Share
Continuing operations		$	0.12			$	(0.05	)		$	0.93			$	0.52
Discontinued operations			-				-				-				(0.05	)
Basic Earnings (Loss) Per Share		$	0.12			$	(0.05	)		$	0.93			$	0.47
Diluted Earnings (Loss) Per Share
Continuing operations		$	0.12			$	(0.05	)		$	0.93			$	0.51
Discontinued operations			-				-				-				(0.04	)
Diluted Earnings (Loss) Per Share		$	0.12			$	(0.05	)		$	0.93			$	0.47
Dividends Declared Per Common Share		$	0.23			$	0.23			$	0.92			$	0.92
Basic Average Common Shares Outstanding			278.1				275.4				277.5				274.8
Diluted Average Common Shares			279.9				275.4				278.9				277.3

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

ITEM 1.  FINANCIAL STATEMENTS (continued)

NiSource Inc.

		September 30,				December 31,
(in millions)		2010				2009
ASSETS
Property, Plant and Equipment
Utility Plant		$	19,274.3			$	19,041.1
Accumulated depreciation and amortization			(8,445.0	)			(8,387.1	)
Net utility plant			10,829.3				10,654.0
Other property, at cost, less accumulated depreciation			92.2				34.0
Net Property, Plant and Equipment			10,921.5				10,688.0
Investments and Other Assets
Assets of discontinued operations and assets held for sale			8.2				14.6
Unconsolidated affiliates			201.8				165.8
Other investments			144.5				129.2
Total Investments and Other Assets			354.5				309.6
Current Assets
Cash and cash equivalents			10.9				16.4
Restricted cash			276.5				174.7
Accounts receivable (less reserve of $41.3 and $39.6, respectively)			517.8				808.6
Income tax receivable			97.6				24.9
Gas inventory			438.8				384.8
Underrecovered gas and fuel costs			136.1				40.2
Materials and supplies, at average cost			94.6				102.3
Electric production fuel, at average cost			37.1				59.9
Price risk management assets			215.6				173.3
Exchange gas receivable			73.2				72.5
Regulatory assets			194.3				238.3
Assets of discontinued operations and assets held for sale			-				1.4
Prepayments and other			103.0				126.3
Total Current Assets			2,195.5				2,223.6
Other Assets
Price risk management assets			280.2				237.6
Regulatory assets			1,641.0				1,644.1
Goodwill			3,677.3				3,677.3
Intangible assets			311.4				319.6
Postretirement and postemployment benefits assets			20.2				19.8
Deferred charges and other			123.8				152.1
Total Other Assets			6,053.9				6,050.5
Total Assets		$	19,525.4			$	19,271.7

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

ITEM 1.  FINANCIAL STATEMENTS (continued)

NiSource Inc.

		September 30,				December 31,
(in millions, except share amounts)		2010				2009
CAPITALIZATION AND LIABILITIES
Capitalization
Common Stockholders’ Equity
Common stock - $0.01 par value, 400,000,000 shares authorized; 278,305,866 and 276,638,021 shares issued and outstanding, respectively		$	2.8			$	2.8
Additional paid-in capital			4,091.4				4,057.6
Retained earnings			868.5				865.5
Accumulated other comprehensive loss			(57.4	)			(45.9	)
Treasury stock			(27.4	)			(25.9	)
Total Common Stockholders’ Equity			4,877.9				4,854.1
Long-term debt, excluding amounts due within one year			5,964.3				5,969.1
Total Capitalization			10,842.2				10,823.2
Current Liabilities
Current portion of long-term debt			726.9				719.7
Short-term borrowings			724.6				103.0
Accounts payable			242.9				502.3
Dividends payable			64.2				0.2
Customer deposits and credits			290.5				301.2
Taxes accrued			168.4				212.9
Interest accrued			85.6				125.4
Overrecovered gas and fuel costs			26.3				220.4
Price risk management liabilities			256.5				190.1
Exchange gas payable			211.0				222.2
Deferred revenue			4.5				27.3
Regulatory liabilities			98.7				43.8
Accrued liability for postretirement and postemployment benefits			7.6				23.6
Liabilities of discontinued operations and liabilities held for sale			-				0.6
Legal and environmental reserves			73.2				146.1
Other accruals			270.3				310.8
Total Current Liabilities			3,251.2				3,149.6
Other Liabilities and Deferred Credits
Price risk management liabilities			218.7				170.2
Deferred income taxes			2,207.7				2,018.2
Deferred investment tax credits			35.1				39.6
Deferred credits			76.7				72.4
Deferred revenue			0.2				8.5
Accrued liability for postretirement and postemployment benefits			1,029.5				1,134.2
Liabilities of discontinued operations and liabilities held for sale			-				6.2
Regulatory liabilities and other removal costs			1,562.3				1,558.8
Asset retirement obligations			134.3				138.2
Other noncurrent liabilities			167.5				152.6
Total Other Liabilities and Deferred Credits			5,432.0				5,298.9
Total Capitalization and Liabilities		$	19,525.4			$	19,271.7

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

ITEM 1.  FINANCIAL STATEMENTS (continued)

NiSource Inc.

Nine Months Ended September 30, (in millions)		2010				2009
Operating Activities
Net Income		$	258.6			$	128.2
Adjustments to Reconcile Net Income to Net Cash from Continuing Operations:
Gain on early extinguishment of debt			-				(2.5	)
Depreciation and amortization			454.5				440.7
Net changes in price risk management assets and liabilities			(4.2	)			(11.3	)
Deferred income taxes and investment tax credits			130.6				354.8
Deferred revenue			(22.7	)			(1.3	)
Stock compensation expense and 401(k) profit sharing contribution			23.2				8.3
Gain on sale of assets			(0.1	)			(2.0	)
Loss on impairment of assets			1.1				7.6
Income from unconsolidated affiliates			(11.1	)			(9.2	)
(Gain) loss on disposition of discontinued operations - net of taxes			(0.1	)			2.6
Loss from discontinued operations - net of taxes			0.3				11.2
Amortization of discount/premium on debt			8.1				9.9
AFUDC equity			(4.9	)			(0.6	)
Distributions of earnings received from equity investee			7.9				-
Changes in Assets and Liabilities:
Accounts receivable			299.2				598.0
Income tax receivable			24.9				(295.7	)
Inventories			(32.8	)			(22.9	)
Accounts payable			(266.8	)			(447.4	)
Customer deposits and credits			(10.7	)			(30.8	)
Taxes accrued			(96.1	)			50.4
Interest accrued			(40.0	)			(32.6	)
(Under) overrecovered gas and fuel costs			(289.9	)			589.4
Exchange gas receivable/payable			(12.9	)			(14.0	)
Other accruals			(22.7	)			(77.8	)
Prepayments and other current assets			32.4				34.5
Regulatory assets/liabilities			103.9				70.1
Postretirement and postemployment benefits			(142.3	)			(60.9	)
Deferred credits			(0.2	)			(5.4	)
Deferred charges and other non current assets			9.9				(1.6	)
Other non current liabilities			(9.7	)			16.3
Net Operating Activities from Continuing Operations			387.4				1,306.0
Net Operating Activities used for Discontinued Operations			(54.9	)			(185.1	)
Net Cash Flows from Operating Activities			332.5				1,120.9
Investing Activities
Capital expenditures			(553.7	)			(586.0	)
Insurance recoveries			3.5				61.4
Proceeds from disposition of assets			0.3				2.4
Restricted cash (deposits) withdrawals			(101.8	)			69.4
Contributions to equity investees			(87.7	)			(26.5	)
Distributions from equity investees			23.8				-
Other investing activities			(45.9	)			(31.2	)
Net Investing Activities used for Continuing Operations			(761.5	)			(510.5	)
Net Investing Activities from Discontinued Operations			0.4				7.6
Net Cash Flow used for Investing Activities			(761.1	)			(502.9	)
Financing Activities
Issuance of long-term debt			-				965.1
Retirement of long-term debt			(16.3	)			(365.9	)
Change in short-term borrowings, net			621.6				(963.4	)
Issuance of common stock			10.6				0.6
Acquisition of treasury stock			(1.4	)			(0.9	)
Dividends paid - common stock			(191.4	)			(189.6	)
Net Cash Flow from (used for) Financing Activities			423.1				(554.1	)
Change in cash and cash equivalents from continuing operations			49.0				241.4
Cash contributions to discontinued operations			(54.5	)			(177.5	)
Cash and cash equivalents at beginning of period			16.4				20.6
Cash and Cash Equivalents at End of Period		$	10.9			$	84.5

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

ITEM 1.  FINANCIAL STATEMENTS (continued)

NiSource Inc.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in millions, net of taxes)		2010				2009				2010				2009
Net Income (Loss)		$	33.2			$	(15.4	)		$	258.6			$	128.2
Other comprehensive income (loss)
Net gain on available-for-sale securities(a)			1.5				2.2				1.9				2.4
Net unrealized (losses) gains on cash flow hedges(b),(c)			(0.7	)			12.9				(14.1	)			109.5
Unrecognized pension benefit and OPEB costs(d)			2.3				0.6				0.7				1.8
Total other comprehensive income (loss)			3.1				15.7				(11.5	)			113.7
Total Comprehensive Income		$	36.3			$	0.3			$	247.1			$	241.9

(a)		Net unrealized gain on available-for-sale securities, net of $0.9 million and $1.4 million tax expense in the third quarter of 2010 and 2009, respectively, and $1.1 million and $1.7 million tax expense for the first nine months of 2010 and 2009, respectively.
(b)		Net unrealized (losses) gains on derivatives qualifying as cash flow hedges, net of $0.5 million tax benefit and $9.1 million tax expense in the third quarter of 2010 and 2009, respectively, and $8.9 million tax benefit and $73.8 million tax expense for the first nine months of 2010 and 2009, respectively.
(c)		Net unrealized (losses) gains on cash flow hedges includes losses of $0.6 million and $15.0 million related to the unrealized losses of interest rate swaps held by NiSource’s unconsolidated equity method investments for the three and nine months ended September 30, 2010, respectively.
(d)		Unrecognized pension benefit and OPEB costs, net of $1.1 million and $0.4 million tax expense in the third quarter of 2010 and 2009, respectively, and $0.1 million and $1.1 million tax expense for the first nine months of 2010 and 2009, respectively.

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

ITEM 1.  FINANCIAL STATEMENTS (continued)

NiSource Inc.

1.      Basis of Accounting Presentation

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

The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in NiSource’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Income for interim periods may not be indicative of results for the calendar year due to weather variations and other factors.

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

At December 31, 2009, certain assets totaling $61.5 million were recorded in “Other property at cost less accumulated depreciation.” NiSource has corrected the classification of these assets as “Utility Plant” in the Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009.

2.      Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Fair Value Measurements and Disclosures. In January 2010, the FASB issued authoritative guidance that amends the disclosures about transfers into and out of Levels 1 and 2 and requires separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for the first reporting period, including interim periods, beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. Early adoption is permitted. NiSource adopted the guidance on January 1, 2010 with the exception of the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis. NiSource is currently reviewing the additional Level 3 disclosure requirements to determine the impact on the Condensed Consolidated Financial Statements (unaudited) and Notes to Condensed Consolidated Financial Statements (unaudited). Refer to Note 10, “Fair Value Disclosures,” for additional information.

Transfer of Financial Assets. In June 2009, the FASB issued authoritative guidance to amend derecognition criteria guidance in ASC 860 to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. NiSource adopted the guidance on January 1, 2010. This guidance requires transfers of accounts receivable that previously qualified for sales accounting to be accounted for as secured borrowings resulting in the recognition of short-term debt on the Condensed Consolidated Balance Sheets (unaudited). Refer to Note 11, “Transfers of Financial Assets,” for additional information.

Consolidation of Variable Interest Entities. In June 2009, the FASB issued authoritative guidance to amend the manner in which entities evaluate whether consolidation is required for VIEs. The model for determining which enterprise has a controlling financial interest and is the primary beneficiary of a VIE has changed significantly under the new guidance. Previously, variable interest holders were required to determine whether they retained a controlling financial interest in a VIE based on a quantitative analysis of the expected gains and/or losses of the entity. In contrast, the new guidance requires an enterprise with a variable interest in a VIE to qualitatively assess whether it has a controlling financial interest in the entity, and if so, whether it is the primary beneficiary.

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

Furthermore, this guidance requires that companies continually evaluate VIEs for consolidation, rather than assessing based upon the occurrence of triggering events. This revised guidance also requires enhanced disclosures about how a company’s involvement with a VIE affects its financial statements and exposure to risks. NiSource adopted the guidance on January 1, 2010. Refer to Note 15, “Variable Interests and Variable Interest Entities,” for additional information.

3.      Earnings Per Share

Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The weighted average shares outstanding for diluted EPS includes the incremental effects of the various long-term incentive compensation plans and the Forward Agreement (see Note 4). The calculation of diluted earnings per share for September 30, 2010 and 2009 excludes out-of-the-money stock options that had an anti-dilutive effect. The numerator in calculating both basic and diluted EPS for each period is reported net income. The computation for the three months ended September 30, 2009 is not presented since NiSource had a loss from continuing operations and net loss on the Condensed Statements of Consolidated Income (Loss) (unaudited) during the period. The computation of diluted average common shares follows:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
(in thousands)		2010				2010				2009
Denominator
Basic average common shares outstanding			278,088				277,538				274,758
Dilutive potential common shares
Shares contingently issuable under employee stock plans			957				903				2,423
Shares restricted under employee stock plans			410				368				108
Forward Agreements			415				138				-
Diluted Average Common Shares			279,870				278,947				277,289

4.      Forward Equity Agreement

On September 14, 2010, NiSource and Credit Suisse Securities (USA) LLC, as forward seller, closed an underwritten registered public offering of 24,265,000 shares of NiSource’s common stock. All of the shares sold were borrowed and delivered to the underwriters by the forward seller. NiSource did not receive any of the proceeds from the sale of the borrowed shares, but NiSource will receive proceeds upon settlement of the Forward Agreements referred to below.

In connection with the public offering, NiSource entered into forward sale agreements (“Forward Agreements”) with an affiliate of the forward seller covering an aggregate of 24,265,000 shares of NiSource’s common stock. Settlement of the Forward Agreements is expected to occur no later than September 10, 2012. Subject to certain exceptions, NiSource may elect cash or net share settlement for all or a portion of its obligations under the Forward Agreements. Upon any physical settlement of the Forward Agreements, NiSource will deliver shares of its common stock in exchange for cash proceeds at the forward sale price, which initially is $15.9638 and is subject to adjustment as provided in the Forward Agreements.

In accordance with ASC 815-40, NiSource has classified the Forward Agreement as an equity transaction. As a result of this classification, no amounts have been recorded in the consolidated financial statements as of and for the period ended September 30, 2010 in connection with the Forward Agreements. The only impact to the Condensed Consolidated Financial Statements (unaudited) is the inclusion of incremental shares within the calculation of fully diluted EPS under the treasury stock method. Refer to Note 3, “Earnings Per Share,” for additional information.

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

5.      Restructuring Activities

During the first quarter of 2009, NiSource began an organizational restructuring initiative in response to the decline in overall economic conditions.

In February 2009, NiSource announced the restructuring of the Gas Transmission and Storage Operations segment. NiSource has eliminated positions across the 16 state operating territory of Gas Transmission and Storage. The reductions have occurred through voluntary programs and involuntary separations. In addition to employee reductions, the Gas Transmission and Storage Operations segment took steps to achieve additional cost savings by efficiently managing its various business locations, reducing its fleet operations, creating alliances with third party service providers, and implementing other changes in line with its strategic plan for growth and maximizing value of existing assets. During the first nine months of 2009, NiSource recorded pre-tax restructuring charges of $20.0 million to “Operation and maintenance” expense on the Condensed Statement of Consolidated Income (Loss) (unaudited), which primarily includes costs related to severance and other employee related costs. No additional material charges have been recorded since the initial restructuring charge in the first quarter of 2009. The restructuring program was substantially completed in 2009.

In September 2009, NiSource announced the restructuring of Northern Indiana, which aims to redefine business and operations strategies and achieve cost reductions, and impacts both Electric Operations and Gas Distribution Operations. During 2009, NiSource recorded a pre-tax restructuring charge related to this initiative, net of adjustments, of $5.4 million, which primarily includes costs related to severance and other employee related costs and outside service costs. The initial restructuring charge consisted of a $3.7 million and $1.7 million expense to the Electric and Gas Distributions Operations’ segments, respectively. During 2010, NiSource recorded a pre-tax restructuring charge related to this initiative of $1.1 million to “Operation and maintenance” expense on the Condensed Statements of Consolidated Income (Loss) (unaudited), which primarily includes costs related to outside service costs. The restructuring program is expected to be completed in 2010.

Changes in the restructuring reserve, included in “Other accruals” on the Condensed Consolidated Balance Sheets (unaudited), were as follows:

		Balance at																Balance at
(in millions)		December 31, 2009				Additions				Benefits Paid				Adjustments				Sept. 30, 2010
2009 Initiatives:
Gas Transmission and Storage		$	1.5			$	-			$	(1.4	)		$	-			$	0.1
Northern Indiana			1.1				1.1				(2.1	)			-				0.1
Total		$	2.6			$	1.1			$	(3.5	)		$	-			$	0.2

6.      Discontinued Operations and Assets and Liabilities Held for Sale

The assets and liabilities of discontinued operations and held for sale on the Condensed Consolidated Balance Sheet (unaudited) at September 30, 2010 were:

(in millions)
		Property, plant and
Assets of discontinued operations and held for sale:		equipment, net				Other assets				Total
NiSource Corporate Services		$	5.6			$	-			$	5.6
Columbia Transmission			2.6				-				2.6
Total		$	8.2			$	-			$	8.2

There were no liabilities of discontinued operations and held for sale at September 30, 2010.

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

The assets and liabilities of discontinued operations and held for sale on the Condensed Consolidated Balance Sheet at December 31, 2009 were:

(in millions)
						Property, plant and
Assets of discontinued operations and held for sale:						equipment, net				Other assets				Total
NiSource Corporate Services						$	6.2			$	-			$	6.2
NDC Douglas Properties							5.8				1.4				7.2
Columbia Transmission							2.6				-				2.6
Total						$	14.6			$	1.4			$	16.0
Liabilities of discontinued operations and held for sale:		Debt				Accounts payable				Other liabilities				Total
NDC Douglas Properties		$	6.6			$	0.2			$	-			$	6.8
Total		$	6.6			$	0.2			$	-			$	6.8
Assets classified as discontinued operations or held for sale are no longer depreciated.

NiSource Corporate Services continues its effort to sell its Marble Cliff facility. A third party appraisal was performed in December 2009 with an estimated market value of the property slightly higher than the book value. NiSource has accounted for this facility as assets held for sale.

NDC Douglas Properties, a subsidiary of NiSource Development Company, is in the process of exiting some of its low income housing investments. In 2009, based on the expected proceeds from the sale of the five properties being less than the net book value, an impairment charge of $2.7 million, net of tax, was included in Loss on Disposition of Discontinued Operations in the Statement of Consolidated Income for the year ended December 31, 2009. Three of these properties were sold during the first quarter of 2010 and two of these properties remained classified as assets and liabilities held for sale. Results of operations and cash flows for these properties were classified as discontinued operations. Upon sale of three of the properties in the first quarter of 2010, a gain on sale of $0.1 million, net of taxes, was recorded in Discontinued Operations. During the second quarter of 2010, it was determined that the remaining properties no longer meet the criteria as “assets held for sale” as NiSource could no longer assert that a sale would take place within the next twelve months. As such, the assets and liabilities were reclassified to assets held and used. Additionally, the results of operations and cash flows were reclassified to continuing operations for all periods presented. These reclassifications did not have a significant impact on overall results of NiSource.

On June 18, 2009, Columbia Transmission received approval from the FERC to abandon by sale its Line R System in West Virginia to an unaffiliated third party, which includes certain natural gas pipeline and compression facilities. These assets held for sale have a net book value of $2.4 million. The sale transaction is currently in negotiation. Columbia Transmission filed an application with FERC to abandon by sale the remaining portion of the assets held for sale and expects to receive an order by the end of 2010.

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

Results from discontinued operations from NDC Douglas Properties low income housing investments, and reserve changes for NiSource’s former exploration and production subsidiary, CER, are provided in the following table:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in millions)		2010				2009				2010				2009
Revenues from Discontinued Operations		$	-			$	0.6			$	0.7			$	1.7
(Loss) Income from discontinued operations			(0.4	)			0.3				(0.5	)			(18.2	)
Income tax (benefit) expense			(0.2	)			0.1				(0.2	)			(7.0	)
(Loss) Income from Discontinued Operations - net of taxes		$	(0.2	)		$	0.2			$	(0.3	)		$	(11.2	)
Gain (Loss) on Disposition of Discontinued Operations - net of taxes		$	-			$	(2.4	)		$	0.1			$	(2.6	)

7.      Asset Retirement Obligations

Certain costs of removal that have been, and continue to be, included in depreciation rates and collected in the service rates of the rate-regulated subsidiaries are classified as regulatory liabilities and other removal costs on the Condensed Consolidated Balance Sheets (unaudited).

Changes in NiSource’s liability for asset retirement obligations for the first nine months of 2010 and 2009 are presented in the table below:

(in millions)		2010				2009
Balance as of January 1,		$	138.2			$	126.0
Accretion expense			0.6				0.5
Accretion recorded as a regulatory asset/liability			5.6				5.4
Additions			-				4.7
Settlements			(5.6	)			(2.6	)
Change in estimated cash flows(a)			(4.5	)			-
Balance as of September 30,		$	134.3			$	134.0

(a)

The change in estimated cash flows for 2010 is attributed to changes in the estimated useful lives and costs for electric generating stations.

8.      Regulatory Matters

Gas Distribution Operations Regulatory Matters

Significant Rate Developments. On September 29, 2010, Columbia of Pennsylvania filed a tariff modification with the Pennsylvania PUC, seeking permission to apply a BTU content billing adjustment to customers’ metered volumetric consumption. The filing seeks to account for high BTU content gas that is produced from Marcellus Shale, which burns hotter than gas from other sources, resulting in lower volumes than assumed in the design of the Company’s rates. The proposed billing adjustment is designed to produce revenues reflective of the BTU content underlying the demand forecast in Columbia of Pennsylvania’s most recent base rate case. If the billing adjustment had been in place for the twelve months ended June 30, 2010, it would have produced revenues of approximately $3.7 million.

On September 7, 2010, Columbia of Ohio filed an application with the PUCO requesting authority to reduce its PIPP rider rate by $0.4215 per Mcf. This will result in a reduction in revenue of approximately $70.7 million and a corresponding reduction in expense of the same amount to better match current costs and revenues. As a result, this filing does not impact Columbia of Ohio’s operating income, but does reduce cash-flow. The application was deemed approved on October 26, 2010, and Columbia of Ohio began billing the new rate effective with bills rendered on and after October 27, 2010.

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

On May 3, 2010, Northern Indiana filed a natural gas rate case with the IURC, the first since 1987, proposing enhanced low income assistance and extending energy-efficiency programs for customers, as well as a change in rate design and adjustments to depreciation rates and expense. In a Prehearing Conference Order issued June 16, 2010, the IURC established the procedural schedule. Northern Indiana entered into a comprehensive settlement with all parties on August 24, 2010. Northern Indiana submitted testimony in support of the settlement on September 1, 2010 and interveners filed supporting testimony on September 8, 2010. A settlement hearing was held on September 21, 2010. All further evidentiary hearings have been vacated and an order is expected in 2010.

On September 1, 2010, Northern Indiana Fuel and Light Company and Kokomo Gas and Fuel Company filed gas rate cases with the IURC, the first cases for both companies since 1992 and 1987, respectively. The Companies replicated many of the proforma adjustments and rate design proposals included in the recent Northern Indiana gas settlement pending approval with the IURC. In addition, both companies are seeking to implement new products and services, including customer choice, low-income assistance and energy assistance programs in this case. A prehearing conference was conducted on September 27, 2010, at which time a procedural schedule was developed. IURC orders on both rate cases are anticipated in the first half of 2011.

Also, on September 1, 2010, a Petition and case-in-chief was filed with the IURC requesting approval to legally merge Northern Indiana Fuel and Light Company and Kokomo Gas and Fuel into Northern Indiana. A prehearing conference was held on October 13, 2010, and a procedural schedule was established. IURC ruling on the merger is anticipated in the first half of 2011.

On May 3, 2010, Columbia of Virginia filed a base rate case with the VSCC seeking an annual revenue increase of $13.0 million to recover an updated level of costs upon the expiration of its Performance Based Regulation Plan on December 31, 2010. Columbia of Virginia also seeks a Weather Normalization Adjustment, cost recovery of certain gas related items through its Purchased Gas Adjustment mechanism rather than base rates, and forward looking accounting adjustments predicted to occur during the rate year ending December 31, 2011. Evidentiary hearings are scheduled to begin on November 16, 2010. New rates are scheduled to become effective January 1, 2011.

On February 26, 2010, Columbia of Ohio filed an application to adjust rates associated with IRP and DSM Riders. The DSM Rider tracks and recovers costs associated with Columbia of Ohio’s energy efficiency and conservation programs. On April 14, 2010, Columbia of Ohio filed a Joint Stipulation and Recommendation that settled all issues. On April 28, 2010, the PUCO issued an Order approving the Stipulation. Rates associated with IRP and DSM Riders were increased by approximately $17.8 million annually, beginning April 29, 2010.

On January 28, 2010, Columbia of Pennsylvania filed a base rate case with the Pennsylvania PUC, seeking a revenue increase of approximately $32.0 million annually. On June 25, 2010, Columbia of Pennsylvania and the other active parties filed a Joint Petition for Settlement that would result in an annual revenue increase of $12 million. On August 18, 2010, the Pennsylvania PUC entered a final order approving the Joint Petition for Settlement and new rates went into effect on October 1, 2010.

On January 28, 2010, Columbia of Maryland filed a base rate case with the Maryland PSC, seeking a revenue increase of $2.2 million annually in order for Columbia of Maryland to earn the rate of return authorized by the PSC in its 2008 rate case. On May 10, 2010, the parties filed a Joint Motion for Approval of Stipulation and Settlement Agreement that would result in an annual revenue increase of approximately $1.7 million. The Maryland PSC issued a final order approving the Settlement, and new rates went into effect on May 28, 2010.

On December 9, 2009, Northern Indiana filed a Petition with the IURC to extend its alternative regulatory programs which were scheduled to expire on May 1, 2010. On February 12, 2010, Northern Indiana, the OUCC and gas marketers supplying gas to residential and small commercial customers filed a Joint Stipulation and Agreement proposing an extension to the programs through March 31, 2012, which was approved by the IURC on March 31, 2010.

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

On October 30, 2009, the Massachusetts DPU approved a mechanism for the recovery of costs associated with the replacement of portions of Columbia of Massachusetts’ infrastructure. Columbia of Massachusetts filed an application to increase its Targeted Infrastructure Replacement Factor Rider on April 30, 2010. Columbia of Massachusetts anticipates an order from the DPU by October 31, 2010.

On October 26, 2009, the Kentucky PSC approved a mechanism for recovering the costs of Columbia of Kentucky’s AMRP. In the same Order, the Kentucky PSC also approved a mechanism for the recovery of Columbia of Kentucky’s uncollectible expenses associated with the cost of gas. On March 31, 2010, Columbia Gas of Kentucky made its annual filing related to the AMRP Rider and requested an adjustment of those rates related to the Rider. On July 12, 2010, the Commission entered an order approving the requested annual amount of $1.1 million. The new rates associated with the AMRP Rider went into effect for bills rendered on or after July 29, 2010.

On October 21, 2009, the IURC issued an order in the proceeding concerning Northern Indiana’s annual gas recovery, rejecting the use of a four-year average to compute unaccounted for gas. This Order requires Northern Indiana to refund an estimated $5.8 million to customers based on a calculation utilizing a one-year average of unaccounted for gas for the twelve month periods ended July 31, 2008 and July 31, 2009. A reserve has been provided for the full amount of the refund, which Northern Indiana began returning to customers in March 2010.

On June 8, 2009, Columbia of Virginia filed an application with the VSCC for approval of a CARE Plan for a three-year period beginning January 1, 2010. The CARE Plan included incentives for residential and small general service customers to actively pursue conservation and energy efficiency measures, a surcharge designed to recover the costs of such measures on a real-time basis, and a performance-based incentive for the delivery of conservation and energy efficiency benefits. The CARE Plan also included a rate decoupling mechanism designed to mitigate the impact of declining customer usage. On October 28, 2009, Columbia of Virginia and other parties to the proceeding presented a unanimous settlement to the Hearing Examiner, which provided for approval of the CARE Plan Application with modifications. The settlement was approved by the VSCC on December 4, 2009, with mechanisms becoming effective January 1, 2010.

On April 30, 2009, Columbia of Ohio filed an application with the PUCO to defer pension and other postretirement benefits expenses above those currently subject to collection in rates, effective January 1, 2009. On July 8, 2009, the PUCO issued an Order approving Columbia of Ohio’s application, although the deferred balances will not accrue carrying charges and Columbia of Ohio may not seek recovery of pension and other postretirement benefits deferrals in a base rate proceeding for a period of five years from the date of the order. Approximately $6.1 million and $13.0 million was deferred for 2010 and 2009, respectively.

In March 2009, Indiana Governor Daniels signed Senate Bill 423 into law giving the Indiana Finance Authority the ability to contract, on behalf of gas customers in the state of Indiana, with developers capable of building facilities that manufacture Substitute Natural Gas from coal. The Indiana Finance Authority received one bid, from Indiana Gasification, by the April 9, 2009 deadline to initiate a Substitute Natural Gas plant in Southern Indiana under a 30 year contract. In March 2010, Governor Daniels signed into law House Enrolled Act 1086, which allows the Indiana Finance Authority to enter into contracts for the sale of Substitute Natural Gas with third parties, with proceeds from and costs of those sales being reflected on customers’ bills. The IURC must approve the final purchase contract between the Indiana Finance Authority and Indiana Gasification as well as the management agreement between IFA and the utilities for collection of funds or pass through of credits to customers related to the purchase contracts. To date, no filing has been made with the IURC regarding these matters.

On January 30, 2009, Columbia of Ohio filed an application with the PUCO to implement a gas supply auction. The auction replaced Columbia of Ohio’s current GCR mechanism for providing commodity gas supplies to its sales customers. By order dated December 2, 2009, the PUCO approved a stipulation that resolved all issues in the case. Pursuant to the stipulation, Columbia of Ohio will conduct two consecutive one-year long standard service offer auction periods starting April 1, 2010 and April 1, 2011. On February 23, 2010, Columbia of Ohio held the first standard service offer auction which resulted in a final retail price adjustment of $1.93 per mcf. On February 24, 2010, the PUCO issued an Entry that approved the results of the auction and directed Columbia of Ohio to proceed with the implementation of the standard service offer process.

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

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

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

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

Certain of the NiSource distribution companies have completed rate proceedings involving infrastructure replacement or are embarking upon regulatory initiatives to replace significant portions of their operating systems that are nearing the end of their useful lives. Each LDC’s approach to cost recovery may be unique, given the different laws, regulations and precedent that exist in each jurisdiction.

Gas Transmission and Storage Operations Regulatory Matters

Majorsville, PA Project. The Gas Transmission and Storage Operations segment is in the process of executing three separate projects totaling approximately $80 million in the Majorsville, PA vicinity to aggregate Marcellus Shale gas production for downstream transmission. Precedent agreements were executed by anchor shippers in the fourth quarter of 2009, which were superseded by the execution of tong-term service agreements in August and September 2010. In 2010, Columbia Transmission received approval from the FERC to refunctionalize certain transmission assets to gathering and transferred these pipeline facilities to a newly formed affiliate, NiSource Midstream Services, LLC. These facilities are included in providing non-FERC jurisdiction gathering services to producers in the Majorsville, PA vicinity. The Majorsville, PA project was placed in service on August 1, 2010.

Columbia Gulf Rate Case. On October 28, 2010, Columbia Gulf filed a rate case with the FERC, proposing a rate increase and tariff changes. Among other things, the filing proposes a revenue increase of $50.0 million to cover increases in the cost of service, which includes adjustments for operation and maintenance expenses, capital investments, adjustments to depreciation rates and expense, rate of return, and increased federal, state and local taxes. New rates are expected to be effective by May 2011, subject to refund.

Electric Operations Regulatory Matters

Significant Rate Developments. On June 27, 2008, Northern Indiana filed a petition for new electric base rates and charges. Northern Indiana filed its last electric base rate increase in 1986. On August 25, 2010, the IURC issued an order authorizing electric rates to reflect investments in reliability, environmental technology and other infrastructure improvements.

Upon review of the order, NiSource has concluded that the overall impact is in line with the company’s expected outcome for the case and its financial outlook. The IURC approved a rate base of $2,639.0 million and an overall rate of return of 7.29%, which results in an allowed net operating income of $192.4 million. In conjunction with approved expenses, the rate order approves rates designed to produce a margin of $899.0 million based on 2007 test year volumes. The approved rate base includes Sugar Creek Generating Station. Among other findings, the IURC also approved revised depreciation accrual rates for electric and common plant,

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

amortization of deferrals, and two new tracking mechanisms, a Resource Adequacy Tracker and Regional Transmission Organization Tracker (RTO). The IURC also found that Northern Indiana, before declaring or paying any dividend to NiSource must request IURC approval.

Consistent with Northern Indiana’s proposal, the IURC also approved a rate base that excludes Dean H. Mitchell Generating Station and Michigan City Generating Station Units 2 and 3. In accordance with FAS 90, Regulated Enterprises – Accounting for Abandonments and Disallowance of Plant Costs, Northern Indiana retired the Dean H. Mitchell Generating Station and Michigan City Generating Station Units 2 and 3 during the third quarter of 2010 as the plant is no longer used and useful. Construction work in progress, materials and supplies and base coal of $0.6 million, $2.9 million and $0.8 million, respectively were expensed during the third quarter as there were no remaining future economic benefits associated with these assets.

As part of the order, the IURC required Northern Indiana to file a compliance filing that includes updated tariffs for approval within 30 days, and Northern Indiana made such filing on September 14, 2010. New rates cannot be implemented until the IURC approves the filed tariff. The IURC outlined a process that allows the parties an opportunity to contest the compliance filing, and various parties have filed such contests. The IURC held a procedural attorney’s conference regarding the compliance filing on October 8, 2010 and the second and final technical conference is scheduled for February 22, 2011. Several parties have also filed an appeal of the IURC order to the Indiana Court of Appeals.

Northern Indiana filed a petition for reconsideration with the IURC on September 14, 2010 to clarify that the effective date of all aspects of the case including the RTO tracker, new depreciation rates, commencement of amortization of deferred balances and discontinuance of further regulatory deferrals and the $55.0 million bill credit should coincide with the IURC’s approval of new customer rates. On October 22, 2010, the IURC issued a docket entry clarifying that this interpretation is correct.

Northern Indiana anticipates filing another electric base rate case in the fourth quarter of 2010. Among other things, the filing is expected to include the effect of increased pension expense, as well as usage levels based on more recent operating experience.

Northern Indiana received a favorable regulatory order on February 18, 2009 related to its actions to increase its electric generating capacity and advance its electric rate case. Acting on a settlement reached among Northern Indiana and its regulatory stakeholders, the IURC ruled that Northern Indiana’s Sugar Creek electric generating plant was in service for ratemaking purposes as of December 1, 2008. The IURC also approved the deferral of depreciation expenses and carrying costs associated with the $330.0 million Sugar Creek investment. Northern Indiana purchased Sugar Creek on May 30, 2008 and effective December 1, 2008, Sugar Creek was accepted as an internal designated network resource within the MISO. The Sugar Creek investment was included in rate base as part of the IURC’s August 25, 2010 rate order. Northern Indiana will continue to defer depreciation expenses and carrying costs associated with the $330.0 million Sugar Creek investment until the IURC approves new customer rates. The annual deferral for Sugar Creek is reduced by the annual depreciation on the Mitchell plant of $4.5 million, pursuant to the FAC-71 settlement. The IURC also approved a five year amortization of balances that were deferred as of December 31, 2009 and such amortization will commence with the IURC’s approval of new customer rates.

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 certain electric customers of Northern Indiana will receive bill credits of approximately $55.1 million each year. The credits will continue at approximately the same annual level and per the same methodology, until the IURC approves new customer rates. Credits amounting to $46.0 million and $41.1 million were recognized for electric customers for the first nine months of 2010 and 2009, respectively.

On December 9, 2009, the IURC issued an order in its generic DSM investigation proceeding establishing an overall annual energy savings goal of 2% to be achieved by Indiana jurisdictional electric utilities in 10 years, with interim savings goals established in years one through nine. Under the order, Northern Indiana and other jurisdictional

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

electric utilities must file DSM plans on July 1, 2010, 2013, 2016, and 2019, with annual updates in the interim periods. The IURC requires that certain core programs be established and administered by an independent third party. The IURC did not make any specific findings with respect to cost recovery issues. In compliance with the December 9, 2009 Order, on March 16, 2010 Northern Indiana filed a proposal for a mechanism to recover the costs associated with these energy efficiency programs, including lost revenue. On June 17, 2010, Northern Indiana filed for approval of its energy efficiency programs, recovery of program costs and lost revenue, and its proposed performance incentive level and methodology.

MISO. As part of Northern Indiana’s participation in the MISO transmission service, wholesale energy and ancillary service markets, certain administrative fees and non-fuel costs have been incurred. IURC orders have been issued authorizing the deferral for consideration in a future rate case proceeding of certain non-fuel related costs incurred after Northern Indiana’s rate moratorium, which expired on July 31, 2006. Northern Indiana proposed recovery of the cumulative amount of net non-fuel charges that were deferred as of December 31, 2008, and to recover, through a tracker, charges deferred between December 31, 2008 and the IURC’s approval of new customer rates in this case. During the first nine months of 2010, MISO costs of $7.5 million were deferred, while $1.1 million were deferred in the first nine months of 2009. As of September 30, 2010, Northern Indiana has deferred a total of $33.9 million of MISO costs. In the Electric Order issued on August 25, 2010, the IURC approved a RTO tracker for recovery of MISO non-fuel costs and revenues and off system sales sharing and ordered that purchased power costs and fuel-related MISO charge types be recovered in the FAC. The IURC also approved a purchase capacity tracker referred to as the Resource Adequacy Tracker.

On November 7, 2008, the FERC issued an Order clarifying the RSG First Pass calculation and requiring the MISO to resettle the RSG market using the correct calculation and to pay refunds, or assess surcharges, to market participants, as appropriate, to correct a misinterpretation of an order issued by the FERC in April 2006. Northern Indiana believes that the original order would have entitled Northern Indiana to a refund, with the amount subject to calculation by MISO. On June 12, 2009, however, the FERC issued an order on rehearing in which it affirmed its prior order clarifying the method to calculate the RSG First Pass rate, but reversed its ruling requiring the MISO to pay refunds, and collect surcharges, on equitable grounds. Northern Indiana has asked the FERC to reconsider its decision to deny refunds and that request remains pending. MISO’s implementation of the FERC’s April 2006 Order on the RSG First Pass calculation resulted in several million dollars of surcharges to Northern Indiana through market resettlements implemented during the summer of 2007. As a result, Northern Indiana and Ameren jointly filed a complaint with the FERC on August 10, 2007, contending that the RSG rates in effect were unjust and unreasonable. On November 10, 2008, the FERC issued an order granting these complaints and ordering the MISO to calculate refunds and surcharges, as appropriate, back to the date of the complaint filed by Northern Indiana and Ameren, as authorized by Section 206 of the Federal Power Act. On May 6, 2009, however, the FERC issued an order that upheld its decision granting the complaint, but largely reversed its directive requiring MISO to pay refunds, and collect surcharges, on equitable grounds. The FERC affirmed the refund and surcharge requirement only for those transactions that occurred after the date of the November 10, 2008 Order, instead of August 10, 2007, as it had previously required. Northern Indiana and Ameren requested rehearing of the FERC’s May 6, 2009 Order, and the FERC issued three orders regarding the issue on August 30, 2010. Northern Indiana has requested reconsideration of two of the orders.

MISO and PJM Interconnection undertook a joint effort in April and May 2009 to identify a source of unaccounted flows on several coordinated flowgates. The analysis found that certain PJM Interconnection generating units that were once associated with unit-specific capacity sales were erroneously excluded from PJM Interconnection’s market flows, which significantly affected the congestion price on reciprocally coordinated flowgates on Northern Indiana systems. Higher PJM Interconnection market flows on congested flowgates would have resulted in higher payments to MISO by PJM Interconnection during market to market coordination since April 1, 2005. The model was fixed on June 18, 2009 and MISO and PJM Interconnection are currently in settlement discussions with the FERC that began on October 19, 2009 to determine the financial impact of any resettlements. Initial amounts calculated by PJM Interconnection approximated $78.0 million, while MISO has performed a preliminary estimate of $125.0 to $150.0 million. The impact to Northern Indiana cannot be reasonably estimated until a settlement is

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

reached between MISO and PJM Interconnection, and MISO receives approval from the FERC on an allocation methodology to its market participants. Any adjustment will be neutral or favorable to operations.

Cost Recovery and Trackers. A significant portion of Northern Indiana’s revenue is related to the recovery of fuel costs to generate power and the fuel costs related to purchased power. These costs are recovered through a FAC, a standard, quarterly, “summary” regulatory proceeding in Indiana. Various intervenors, including the OUCC, had taken issue with the allocation of costs included in Northern Indiana’s FAC-80, FAC-81 and FAC-82, which cover the reconciliation of April – December 2008. The IURC granted a sub-docket to consider such issues in those filings. The intervening parties and Northern Indiana discussed procedures to eliminate these concerns and to resolve them for the historical periods. On November 4, 2009 the IURC approved a settlement agreement which calls for a credit of $8.2 million to be provided to FAC customers beginning in November 2009, less any amount for attorney’s fees and expenses.

As part of a settlement agreement which resolved issues surrounding purchased power costs, Northern Indiana implemented a new “benchmarking standard,” that became effective in October 2007, which defines the price above which purchased power costs must be absorbed by Northern Indiana and are not permitted to be passed on to ratepayers. The benchmark is based upon the costs of power generated by a hypothetical natural gas fired unit using gas purchased and delivered to Northern Indiana and a set sharing mechanism. The agreement also contemplated Northern Indiana adding generating capacity to its existing portfolio by providing for the benchmark to be adjusted as new capacity is added. The dispatch of Sugar Creek into MISO on December 1, 2008 triggered a change in the benchmark, whereby the first 500 mw tier of the benchmark provision was eliminated. During the first nine months of 2010 and 2009, the amount of purchased power costs exceeding the benchmark amounted to $0.4 million and $1.0 million, respectively, which was recognized as a net reduction of revenues. In the Electric Order issued on August 25, 2010, the IURC approved the continued use of a purchased power benchmark that is consistent with IPL and Vectren South and includes a modification that may reduce the purchased power volumes subject to the benchmark.

Northern Indiana has approval from the IURC to recover certain environmental related costs through an ECT. Under the ECT, Northern Indiana is permitted to recover (1) AFUDC and a return on the capital investment expended by Northern Indiana to implement IDEM’s NOx SIP and CAIR and CAMR compliance plan projects through an ECRM and (2) related operation and maintenance and depreciation expenses once the environmental facilities become operational through an EERM. The IURC approved the continued use of the ECRM and the EERM trackers in the August 25, 2010 Order. All compliance plan projects that were complete as of December 31, 2007 were included in rate base and will, therefore, be removed from the ECRM filing when the IURC approves new customer rates. On July 7, 2010 the IURC approved the revised capital expenditure cost estimate of approximately $361.0 million. On June 18, 2010, Northern Indiana filed for a certificate of public convenience and necessity and associated ratemaking and accounting relief to construct flue gas desulfurization technology on Schaffer Unit 14 with a current estimated construction cost of approximately $154.0 million. Northern Indiana is seeking authority to recover construction and ongoing operating and maintenance costs through the ECT.

9.      Risk Management Activities

NiSource is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price risk and interest rate risk. Derivative natural gas contracts are entered into to manage the price risk associated with natural gas price volatility and to secure forward natural gas prices. Interest rate swaps are entered into to manage interest rate risk associated with NiSource’s fixed-rate borrowings. NiSource designates some of its commodity forward contracts as cash flow hedges of forecasted purchases of commodities and designates its interest rate swaps as fair value hedges of fixed-rate borrowings. Additionally, certain NiSource subsidiaries enter into forward physical contracts with various third parties to procure or sell natural gas or power. Certain forward physical contracts are derivatives which qualify for the normal purchase and normal sales exception which would not require mark-to-market accounting.

Accounting Policy for Derivative Instruments. The ASC topic on accounting for derivatives and hedging requires an entity to recognize all derivatives as either assets or liabilities on the Consolidated Balance Sheets at fair value, unless such contracts are exempted as a normal purchase and normal sale contract under the provisions of the

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

ASC topic. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation.

NiSource uses a variety of derivative instruments (exchange traded futures and options, physical forwards and options, basis contracts, financial commodity swaps, interest rate swaps, and FTR’s) to effectively manage its commodity price risk and interest rate risk exposure. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, or (b) a hedge of the exposure to variable cash flows of a forecasted transaction. In order for a derivative contract to be designated as a hedge, the relationship between the hedging instrument and the hedged item or transaction must be highly effective. The effectiveness test is performed at the inception of the hedge and each reporting period thereafter, throughout the period that the hedge is designated. Any amounts determined to be ineffective are recognized currently in earnings. For derivative contracts that qualify for the normal purchase and normal sales exception, a contract’s fair value is not recognized in the Consolidated Financial Statements until the contract is settled.

Unrealized and realized gains and losses are recognized each period as components of accumulated other comprehensive income (loss), regulatory assets and liabilities or earnings depending on the designation of the derivative instrument. For subsidiaries that utilize derivatives for cash flow hedges, the effective portions of the gains and losses are recorded to accumulated other comprehensive income (loss) and are recognized in earnings concurrent with the disposition of the hedged risks. If a forecasted transaction corresponding to a cash flow hedge is no longer probable to occur, the accumulated gains or losses on the derivative are recognized currently in earnings. For fair value hedges, the gains and losses are recorded in earnings each period together with the change in the fair value of the hedged item. As a result of the rate-making process, the rate-regulated subsidiaries generally record gains and losses as regulatory liabilities or assets and recognize such gains or losses in earnings when both the contracts settle and the physical commodity flows. These gains and losses recognized in earnings are then subsequently recovered or paid to customers through rates. When gains and losses are recognized in earnings, they are recognized in cost of sales for derivatives that correspond to commodity risk activities and are recognized in interest expense for derivatives that correspond to interest-rate risk activities.

Commodity Price Risk Programs. NiSource and NiSource’s utility customers are exposed to variability in cash flows associated with natural gas purchases and volatility in natural gas prices. NiSource purchases natural gas for sale and delivery to its retail, commercial and industrial customers, and for most customers the variability in the market price of gas is passed through in their rates. Some of NiSource’s utility subsidiaries offer programs where variability in the market price of gas is assumed by the respective utility. The objective of NiSource’s commodity price risk programs is to mitigate this gas cost variability, for NiSource or on behalf of its customers, associated with natural gas purchases or sales by economically hedging the various gas cost components by using a combination of futures, options, forward physical contracts, basis swap contracts or other derivative contracts. Northern Indiana also uses derivative contracts to minimize risk associated with power price volatility. These commodity price risk programs and their respective accounting treatment are described below.

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

Northern Indiana, Columbia of Virginia and Columbia of Pennsylvania offer a fixed price program as an alternative to the standard GCR mechanism. This service provides customers with the opportunity to either lock in their gas cost or place a cap on the gas costs that would be charged in future months. In order to hedge the anticipated physical purchases associated with these obligations, forward physical contracts, NYMEX futures and NYMEX options have been used to secure forward gas prices. The accounting treatment elected for these contracts is varied whereby certain of these contracts have been accounted for as cash flow hedges while some contracts are not. The

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

normal purchase and normal sales exception is elected for forward physical contracts associated with these programs whereby delivery of the commodity is probable to occur.

Northern Indiana offers a DependaBill program to its customers as an alternative to the standard tariff rate that is charged to residential customers. This program allows Northern Indiana customers to fix their total monthly bill in future months at a flat rate regardless of gas usage or commodity cost. In order to hedge the anticipated physical purchases associated with these obligations, forward physical contracts, and NYMEX options are used to secure forward gas prices. The normal purchase and normal sales exception is elected for forward physical contracts associated with these programs whereby delivery of the commodity is probable to occur.

Northern Indiana enters into gas purchase contracts at first of the month prices that give counterparties the daily option to either sell an additional package of gas at first of the month prices or recall the original volume to be delivered. Northern Indiana charges a fee for this option. The changes in the fair value of these options are primarily due to the changing expectations of the future intra-month volatility of gas prices. These written options are derivative instruments, must be marked to fair value and do not meet the requirement for hedge accounting treatment. However, Northern Indiana records the related gains and losses associated with these transactions as a regulatory asset or liability.

Columbia of Kentucky, Columbia of Ohio, Columbia of Pennsylvania, and Columbia of Maryland (collectively, the “Columbia LDCs”) enter into contracts that allow counterparties the option to sell gas to Columbia LDCs at first of the month prices for a particular month of delivery. Columbia LDCs charge the counterparties a fee for this option. The changes in the fair value of the options are primarily due to the changing expectations of the future intra-month volatility of gas prices. The Columbia LDCs defer a portion of the change in the fair value of the options as either a regulatory asset or liability based on the regulatory customer sharing mechanisms in place, with the remaining changes in fair value recognized currently in earnings.

As part of the MISO Day 2 initiative, Northern Indiana was allocated or has purchased FTRs. These FTRs help Northern Indiana offset congestion costs due to the MISO Day 2 activity. The FTRs are marked to fair value and are not accounted for as a hedge, but since congestion costs are recoverable through the fuel cost recovery mechanism, the related gains and losses associated with marking these derivatives to market are recorded as a regulatory asset or liability. In the second quarter of 2008, MISO changed its allocation procedures from an allocation of FTRs to an allocation of ARRs, whereby Northern Indiana was allocated ARRs based on its historical use of the MISO administered transmission system. ARRs entitle the holder to a stream of revenues or charges based on the price of the associated FTR in the FTR auction. ARRs are not derivatives and are convertible to FTRs. Northern Indiana purchased FTRs in May 2010 for a 12 month period starting June 1, 2010.

NiSource is in the process of winding down its unregulated natural gas marketing business, where gas derivatives are utilized to hedge expected future gas purchases and sales. Prior to the decision to wind down this business in the second quarter of 2009, the financial derivatives associated with commercial and industrial gas sales were accounted for as cash flow hedges. NiSource also has corresponding forward physical sales contracts of natural gas with customers. These forward physical sales contracts are derivatives that have generally qualified for the normal purchase and normal sales exception, which NiSource had elected prior to the decision to wind down the business in 2009. As a result of the decision to wind down the business, certain forecasted transactions were no longer probable to occur, which triggered the mark-to-market treatment of certain forward sales contracts that were previously exempt under the normal purchase and normal sale exception. In addition, the mark-to-market gains and losses deferred in accumulated other comprehensive income (loss) related to certain financial derivatives accounted for as a cash flow hedge were recognized in income. NiSource established reserves of $6.6 million at September 30, 2010 and $9.2 million at December 31, 2009, against certain of these physical sale contract derivatives. These amounts represent reserves related to the creditworthiness of certain customers, the fair value of future cash flows, and the cost of maintaining significant amounts of restricted cash. The physical sales contracts marked-to-market had a fair value of approximately $186.0 million at September 30, 2010 and $126.9 million at December 31, 2009, while the financial derivative contracts marked-to-market had a fair value loss of $172.4 million at September 30, 2010 and $114.6 million at December 31, 2009.

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

Commodity price risk program derivative contracted gross volumes are as follows:

		September 30, 2010				December 31, 2009
Commodity Price Risk Program:
Gas price volatility program derivatives (MMDth)			36.8				26.4
Price Protection Service program derivatives (MMDth)			2.1				1.6
DependaBill program derivatives (MMDth)			0.4				0.6
Regulatory incentive program derivatives (MMDth)			2.2				1.7
Gas marketing program derivatives (MMDth)(a)			55.5				74.7
Gas marketing forward physical derivatives (MMDth)(b)			56.6				79.6
Electric energy program FTR derivatives (mw)(c)			12,403.0				1,343.7

(a) Basis contract volumes not included in the above table were 53.6 MMDth and 82.3 MMDth as of September 30, 2010 and December 31, 2009, respectively.

(b) Basis contract volumes not included in the above table were 60.5 MMDth and 85.4 MMDth as of September 30, 2010 and December 31, 2009, respectively.

(c) Northern Indiana purchased FTR derivatives in May 2010 for use over the next twelve months.

Interest Rate Risk Activities. NiSource recognizes that the prudent and selective use of derivatives may help it to lower its cost of debt capital and manage its interest rate exposure. NiSource Finance has entered into various “receive fixed” and “pay floating” interest rate swap agreements which modify the interest rate characteristics of its outstanding long-term debt from fixed to variable rate. These interest rate swaps also serve to hedge the fair market value of NiSource Finance’s outstanding debt portfolio. As of September 30, 2010, NiSource had $7.4 billion of outstanding debt, of which $1,050 million is subject to fluctuations in interest rates as a result of the fixed-to-variable interest rate swap transactions. These interest rate swaps are designated as fair value hedges. NiSource had no net gain or loss recognized in earnings due to hedging ineffectiveness.

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 receives payments based upon a fixed 7.875% interest rate and pay a floating interest amount based on U.S. 6-month BBA LIBOR plus an average of 3.08% per annum. There was no exchange of premium at the initial date of the swaps. On September 15, 2008, NiSource Finance terminated a fixed-to-variable interest rate swap agreement with Lehman Brothers having a notional amount of $110 million. NiSource Finance elected to terminate the swap when Lehman Holdings Inc., guarantor under the applicable International Swaps and Derivatives Association agreement, filed for Chapter 11 bankruptcy protection on September 14, 2008, which constituted an event of default under the swap agreement between NiSource Finance and Lehman Brothers Special Financing Inc. The mark-to-market close-out value of this swap at the September 15, 2008 termination date was determined to be $4.8 million and was fully reserved in the third quarter of 2008. The termination of this swap did not impact NiSource’s ability to assert hedge accounting for its remaining fixed-to-variable interest rate swap agreements.

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 receives payments based upon a fixed 5.40% interest rate and pay a floating interest amount based on U.S. 6-month BBA LIBOR plus an average of 0.78% per annum. There was no exchange of premium at the initial date of the swaps. In addition, each party has the right to cancel the swaps on July 15, 2013.

Contemporaneously with the issuance on September 16, 2005 of $1 billion of its 5.25% and 5.45% notes, NiSource Finance settled $900 million of forward starting interest rate swap agreements with six counterparties. NiSource paid an aggregate settlement payment of $35.5 million which is being amortized from accumulated other

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

comprehensive loss to interest expense over the term of the underlying debt, resulting in an effective interest rate of 5.67% and 5.88%, respectively. As of September 30, 2010, accumulated other comprehensive loss includes $13.2 million related to forward starting interest rate swap settlement. These derivative contracts are accounted for as a cash flow hedge.

As of September 30, 2010, NiSource holds a 47.5% interest in Millennium Pipeline Company, L.L.C (Millennium). During 2008, Millennium entered into various interest rate swap agreements in order to protect against the risk of increasing interest rates. During August 2010, Millennium completed the refinancing of its long-term debt, securing permanent fixed-rate financing through the private placement issuance of two tranches of notes totaling $725.0 million, $375.0 million at 5.33% due June 30, 2027, and $350.0 million at 6.00% due June 30, 2032. Upon the issuance of these notes, Millennium repaid all outstanding borrowings under the credit agreement, terminated the sponsor guarantee and cash settled the interest rate hedges. These interest rate hedges were primarily accounted for as cash flow hedges by Millennium. As an equity method investment, NiSource is required to recognize a proportional share of Millennium’s OCI. The remaining unrealized loss related to these terminated interest rate swaps is being amortized into earnings using the effective interest method through interest expense as interest payments are made by Millennium.

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

NiSource’s location and fair value of derivative instruments on the Condensed Consolidated Balance Sheets (unaudited) were:

		September 30,				December 31,
Asset Derivatives (in millions)		2010				2009
Balance Sheet Location		Fair Value				Fair Value
Derivatives designated as hedging instruments
Interest rate risk activities
Price risk management assets (current)	$		11.3			$	-
Price risk management assets (noncurrent)			67.2				68.2
Total derivatives designated as hedging instruments	$		78.5			$	68.2
Derivatives not designated as hedging instruments
Commodity price risk programs
Price risk management assets (current)	$		204.3			$	173.3
Price risk management assets (noncurrent)			213.0				169.4
Total derivatives not designated as hedging instruments	$		417.3			$	342.7
Total Asset Derivatives	$		495.8			$	410.9
		September 30,				December 31,
Liability Derivatives (in millions)		2010				2009
Balance Sheet Location		Fair Value				Fair Value
Derivatives designated as hedging instruments
Commodity price risk programs
Price risk management liabilities (current)	$		1.7			$	1.0
Price risk management liabilities (noncurrent)			0.3				0.5
Total derivatives designated as hedging instruments	$		2.0			$	1.5
Derivatives not designated as hedging instruments
Commodity price risk programs
Price risk management liabilities (current)	$		254.8			$	189.1
Price risk management liabilities (noncurrent)			218.4				169.7
Total derivatives not designated as hedging instruments	$		473.2			$	358.8
Total Liability Derivatives	$		475.2			$	360.3

The effect of derivative instruments on the Condensed Statements of Consolidated Income (Loss) (unaudited) was:

Derivatives in Cash Flow Hedging Relationships

Three Months Ended, (in millions):

		Amount of Gain (Loss)										Amount of Gain (Loss)
		Recognized in OCI on										Reclassified from AOCI
		Derivative (Effective								Location of Gain (Loss)		into Income (Effective
	Portion)									Reclassified from AOCI	Portion)
Derivatives in Cash Flow		Sept. 30,				Sept. 30,				into Income (Effective		Sept. 30,				Sept. 30,
Hedging Relationships		2010				2009				Portion)		2010				2009
Commodity price risk programs	$		(0.5	)	$		12.5			Cost of Sales	$		0.1		$		(18.2	)
Interest rate risk activities			0.4				0.4			Interest expense, net			(0.7	)			-
Total	$		(0.1	)	$		12.9				$		(0.6	)	$		(18.2	)

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

Nine Months Ended (in millions):

		Amount of Gain (Loss)										Amount of Gain (Loss)
		Recognized in OCI on										Reclassified from AOCI
		Derivative (Effective								Location of Gain (Loss)		into Income (Effective
	Portion)									Reclassified from AOCI	Portion)
Derivatives in Cash Flow		Sept. 30,				Sept. 30,				into Income (Effective		Sept. 30,				Sept. 30,
Hedging Relationships		2010				2009				Portion)		2010				2009
Commodity price risk programs	$		(0.3	)	$		108.3			Cost of Sales	$		0.9		$		(43.0	)
Interest rate risk activities			1.2				1.2			Interest expense, net			(2.0	)			-
Total	$		0.9		$		109.5				$		(1.1	)	$		(43.0	)

Three Months Ended, (in millions):

				Amount of Gain (Loss) Recognized
				in Income on Derivative
		Location of Gain (Loss)		(Ineffective Portion and Amount
		Recognized in Income on		Excluded from Effectiveness
		Derivative (Ineffective Portion	Testing)
Derivatives in Cash Flow Hedging		and Amount Excluded from
Relationships		Effectiveness Testing)		Sept. 30, 2010				Sept. 30, 2009
Commodity price risk programs		Cost of Sales	$		-		$		-
Interest rate risk activities		Interest expense, net			-				-
Total			$		-		$		-
Nine Months Ended, (in millions)
				Amount of Gain (Loss) Recognized
				in Income on Derivative
		Location of Gain (Loss)		(Ineffective Portion and Amount
		Recognized in Income on		Excluded from Effectiveness
		Derivative (Ineffective Portion	Testing)
Derivatives in Cash Flow Hedging		and Amount Excluded from
Relationships		Effectiveness Testing)		Sept. 30, 2010				Sept. 30, 2009
Commodity price risk programs		Cost of Sales	$		-		$		-
Interest rate risk activities		Interest expense, net			-				-
Total			$		-		$		-

It is anticipated that during the next twelve months the expiration and settlement of cash flow hedge contracts will result in income statement recognition of amounts currently classified in accumulated other comprehensive income (loss) of approximately $0.3 million of loss, net of taxes.

Derivatives in Fair Value Hedging Relationships

Three Months Ended, (in millions)

				Amount of Gain (Loss) Recognized
Derivatives in Fair Value Hedging		Location of Gain (Loss) Recognized in	in Income on Derivatives
Relationships		Income on Derivatives		Sept. 30, 2010				Sept. 30, 2009
Interest rate risk activities		Interest expense, net	$		2.9		$		9.4
Total			$		2.9		$		9.4

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

Nine Months Ended, (in millions)

				Amount of Gain (Loss) Recognized
Derivatives in Fair Value Hedging		Location of Gain (Loss) Recognized in	in Income on Derivatives
Relationships		Income on Derivatives		Sept. 30, 2010				Sept. 30, 2009
Interest rate risk activities		Interest expense, net	$		9.0		$		24.7
Total			$		9.0		$		24.7

Three Months Ended, (in millions)

				Amount of Gain (Loss) Recognized
Hedged Item in Fair Value Hedge		Location of Gain (Loss) Recognized in	in Income on Related Hedged Items
Relationships		Income on Related Hedged Item		Sept. 30, 2010				Sept. 30, 2009
Fixed-rate debt		Interest expense, net	$		(2.9	)	$		(9.4	)
Total			$		(2.9	)	$		(9.4	)

Nine Months Ended, (in millions)

				Amount of Gain (Loss) Recognized
Hedged Item in Fair Value Hedge		Location of Gain (Loss) Recognized in	in Income on Related Hedged Items
Relationships		Income on Related Hedged Item		Sept. 30, 2010				Sept. 30, 2009
Fixed-rate debt		Interest expense, net	$		(9.0	)	$		(24.7	)
Total			$		(9.0	)	$		(24.7	)

Derivatives not designated as hedging instruments

Three Months Ended, (in millions)

				Amount of Realized/Unrealized Gain
				(Loss) Recognized in Income on
			Derivatives *
		Location of Gain (Loss)
Derivatives Not Designated as Hedging		Recognized in
Instruments		Income on Derivatives		Sept. 30, 2010				Sept. 30, 2009
Commodity price risk programs		Gas Distribution revenues	$		(0.1	)	$		3.0
Commodity price risk programs		Other revenues			43.4				(6.8	)
Commodity price risk programs		Cost of Sales			(38.8	)			10.8
Total			$		4.5		$		7.0

* For the amounts of realized/unrealized gain (loss) recognized in income on derivatives disclosed in the table above, gains of $7.4 million and $3.1 million for the third quarter of 2010 and 2009, respectively, were deferred as allowed by regulatory orders. These amounts will be amortized to income over future periods of up to twelve months as specified in a regulatory order.

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

Nine Months Ended, (in millions)

				Amount of Realized/Unrealized Gain
				(Loss) Recognized in Income on
			Derivatives *
		Location of Gain (Loss)
Derivatives Not Designated as Hedging		Recognized in
Instruments		Income on Derivatives		Sept. 30, 2010				Sept. 30, 2009
Commodity price risk programs		Gas Distribution revenues	$		(21.6	)	$		(42.9	)
Commodity price risk programs		Other revenues			116.1				143.0
Commodity price risk programs		Cost of Sales			(106.4	)			(119.2	)
Total			$		(11.9	)	$		(19.1	)

* For the amounts of realized/unrealized gain (loss) recognized in income on derivatives disclosed in the table above, losses of $8.8 million and $44.2 million for the first nine months of 2010 and 2009, respectively, were deferred as allowed by regulatory orders. These amounts will be amortized to income over future periods of up to twelve months as specified in a regulatory order.

During the second quarter of 2009, NiSource reclassified $126.4 million ($75.1 million, net of tax) related to its cash flow hedges from accumulated other comprehensive loss to Cost of Sales due to the probability that certain forecasted transactions would not occur related to the unregulated natural gas marketing business that NiSource had planned to sell. No additional reclassifications from accumulated other comprehensive loss to earnings due to the probability that certain forecasted transactions would not occur were recorded in the three and nine months ended September 30, 2010 and 2009.

NiSource’s derivative instruments measured at fair value as of September 30, 2010 do not contain any credit-risk-related contingent features.

Certain NiSource affiliates have physical commodity purchase agreements that contain “ratings triggers” that require increases in collateral if the credit rating of NiSource or certain of its affiliates are rated below BBB- by Standard and Poor’s or below Baa3 by Moody’s. These agreements are primarily for the physical purchase or sale of natural gas and electricity. The collateral requirement from a downgrade below the ratings trigger levels would amount to approximately $0.3 million. In addition to agreements with ratings triggers, there are some agreements that contain “adequate assurance” or “material adverse change” provisions that could result in additional credit support such as letters of credit and cash collateral to transact business.

NiSource had $271.4 million and $173.2 million of cash on deposit with brokers for margin requirements associated with open derivative positions reflected within, “Restricted cash,” on the Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2010 and December 31, 2009, respectively.

10.      Fair Value Disclosures

A.       Fair Value Measurements. NiSource adopted the provisions of ASC Topic 820 – Fair Value Measurements and Disclosures for financial assets and liabilities on January 1, 2008 and non-financial assets and liabilities on January 1, 2009. There was no impact on retained earnings as a result of the adoption.

Recurring Fair Value Measurements. The following tables present financial assets and liabilities measured and recorded at fair value on NiSource’s Condensed Consolidated Balance Sheet (unaudited) on a recurring basis and their level within the fair value hierarchy as of September 30, 2010 and December 31, 2009:

ITEM 1.  FINANCIAL STATEMENTS (continued)

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

		Quoted Prices in				Significant
		Active Markets				Other				Significant
		for Identical				Observable				Unobservable
Recurring Fair Value Measurements		Assets				Inputs				Inputs				Balance as of
September 30, 2010 (in millions)		(Level 1)				(Level 2)				(Level 3)				Sept. 30, 2010
Assets
Commodity Price risk management assets:
Physical price risk programs		$	-			$	193.1			$	-			$	193.1
Financial price risk programs			221.0				3.2				-				224.2
Interest rate risk activities			-				78.5				-				78.5
Available-for-sale securities			56.4				30.6				-				87.0
Total		$	277.4			$	305.4			$	-			$	582.8
Liabilities
Commodity Price risk management liabilities:
Physical price risk programs		$	-			$	3.9			$	-			$	3.9
Financial price risk programs			466.1				4.7				-				470.8
Other			-				-				0.5				0.5
Total		$	466.1			$	8.6			$	0.5			$	475.2
		Quoted Prices in				Significant
		Active Markets				Other				Significant
		for Identical				Observable				Unobservable
Recurring Fair Value Measurements		Assets				Inputs				Inputs				Balance as of
December 31, 2009 (in millions)		(Level 1)				(Level 2)				(Level 3)				December 31, 2009
Assets
Commodity Price risk management assets:
Physical price risk programs		$	-			$	141.7			$	-			$	141.7
Financial price risk programs			187.5				11.4				-				198.9
Other			-				-				2.1				2.1
Interest rate risk activities			-				68.2				-				68.2
Available-for-sale securities			34.5				37.4				-				71.9
Total		$	222.0			$	258.7			$	2.1			$	482.8
Liabilities
Commodity Price risk management liabilities:
Physical price risk programs		$	-			$	9.6			$	-			$	9.6
Financial price risk programs			343.8				6.9				-				350.7
Total		$	343.8			$	16.5			$	-			$	360.3