NiSource Annual Report 2007

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FY2007 Annual Report · NiSource

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Strength

Commitment

Service

Value

ASPIRATION

The Premier Regulated Energy Company in North America

2007 Annual Message to Stockholders

President & CEO’s Letter
Board of Directors
Chairman’s Letter
Form 10-K
Stockholder Information

CONTENT

1
7
7
8
Inside Back Cover

STOCKHOLDER INFO

This document contains “forward-looking statements.” For a discussion of factors that could cause actual results to
differ materially from those contained in such statements, please see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in the NiSource Inc. annual report on Form 10-K included herein.

NiSource Inc. common stock is listed and traded on the New York Stock Exchange under the symbol NI. The shares
are listed in financial stock quotations as NISOURCE. As of Dec. 31, 2007, NiSource Inc. had 38,091 registered common
stockholders.

Anticipated Dividend Record and Payment Dates

NiSource Common Stock

Record Date

Payment Date

04-30-08
07-31-08
10-31-08
01-30-09

05-20-08
08-20-08
11-20-08
02-20-09

Stockholder Services
Questions about stockholder accounts, stock
certificates, transfer of shares, dividend payments,
automatic dividend reinvestment and stock purchase plan,
and electronic deposit may be directed to Mellon Investor
Services at the following:

BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015

Common Stock Dividend Declared
The Board of Directors, effective January 4, 2008, has
declared a quarterly dividend of $0.23 per share, equivalent
to $0.92 per share on an annual basis.

Investor and Financial Information
Financial analysts and investment professionals should
direct written and telephone inquiries to NiSource Investor
Relations at 801 E. 86th Ave., Merrillville, IN 46410 or
(219) 647-6209.

Copies of NiSource’s financial reports are available by
writing or calling the Investor Relations department at the
address or phone number listed above. The materials are
also available at www.nisource.com.

480 Washington Boulevard
Jersey City, NJ 07310-1900

(888) 884-7790

TDD for Hearing Impaired
(800) 231-5469

Foreign Stockholders
(201) 680-6578

TDD Foreign Stockholders
(201) 680-6610

www.bnymellon.com/shareowner/isd

On June 6, 2007, NiSource’s Chief Executive Officer submitted to the New York Stock Exchange (“NYSE”) an annual
certification stating that as of that date he was not aware of any violation by the company of the New York Stock Exchange’s
corporate governance listing standards, as required by Section 303A.12(a) of the NYSE’s Listed Company Manual. NiSource’s
Chief Executive Officer and Chief Financial Officer have provided certifications to the U.S. Securities and Exchange
Commission as required by Section 302 of the Sarbanes-Oxley Act of 2002. These certifications are included as Exhibits 31.1
and 31.2 to the company’s 10-K for the year ended December 31, 2007.

Stockholder Inquiries
BNY Mellon Shareowner Services

Analyst Inquiries
Investor Relations

Media Inquiries
Communications

(888) 884-7790

(219) 647-6209

(219) 647-5581

PREMIER

Dear Fellow Stockholders:
At NiSource, our aspiration is to be the premier company in our industry, with a strong financial profile; a wide range of
investment-driven growth opportunities; robust and sustainable earnings and cash flow; top-tier safety, service and
reliability metrics; and a solid foundation of engaged, aligned and safe employees.

I am pleased to report that 2007 was a year of significant progress that brought us closer to achieving that aspiration.
Across virtually every dimension of our business, our team made extraordinary progress in “fixing,” “building” and
“repositioning” NiSource in 2007. Certainly, advancing the implementation of NiSource’s Path Forward business
strategy, which is premised on long-term infrastructure investments, is at the forefront of these accomplishments. Key
components of that implementation effort included bold steps to resolve an array of legacy operating, regulatory and
commercial issues—setting the stage for what promises to be a pivotal year for our company in 2008.

From an earnings standpoint, NiSource’s core regulated natural gas and electric operations continued to deliver solid
performance, with results for 2007 that exceeded our outlook. Meanwhile, our teams made significant progress during
the year to reposition the company to deliver long-term growth. With this important foundational work largely
completed, each of our business segments is now poised to do what they do best—execute the key investment,
regulatory and commercial elements of our business plan, deliver on our commitments, and Achieve Our Aspiration of
becoming The Premier Regulated Energy Company in North America.

Throughout this report and NiSource’s accompanying 2007 Form 10-K, you will see evidence of progress made during
the year. For now, I would like to highlight just a few examples.

Robert C. Skaggs, Jr.
President &
Chief Executive Officer

Michael W. O’Donnell
Executive Vice President
& Chief Financial Officer

Carrie J. Hightman
Executive Vice President
& Chief Legal Officer

Christopher A. Helms
Executive Vice President
& Group CEO, NI Gas
Transmission & Storage

Recommitting to our Core Regulated Assets and our Strategic Plan
Central to our long-term growth strategy is the underlying strength of NiSource’s core regulated assets—our local
natural gas distribution companies, our Indiana electric business and our extensive natural gas transmission and
storage operations.

During 2007, we confirmed the value of those assets through our deliberate and disciplined strategic and financial
review process. The review considered a broad range of options, financial techniques and structures within the context
of our commitment to sustain NiSource’s dividend and maintain our investment grade credit ratings.

As we reported in May, the review concluded that NiSource’s existing set of core assets are fundamentally strong, with
an array of long-term organic growth prospects. We are convinced we can maximize the value of those assets through
our investment-driven strategic plan and deliver long-term, sustainable earnings and cash flow growth for our
shareholders. And we are backing that strategic plan with an unprecedented $1 billion plus annual investment program
that will be tightly integrated with our regulatory and commercial activities.

Executing on our Four-Part Plan
Even as our strategic and financial review process was concluding, NiSource teams were actively advancing a wide
array of initiatives as part of the company’s four-part business plan. That plan centers on: 1) Expansion of and
commercial growth of the gas transmission and storage business; 2) Regulatory and commercial initiatives at our
utilities; 3) Financial management; and 4) Process and expense management.

At the forefront of those initiatives in 2007 was the progress we made on our development of a master limited
partnership (MLP) as a strong complement to our NiSource Gas Transmission and Storage (NGT&S) growth strategy.
That work led to our December announcement that our new, wholly-owned subsidiary, NiSource Energy Partners, L.P.,
had filed a registration statement with the Securities and Exchange Commission (SEC). The filing, subject to SEC
review, proposed an initial public offering, with the partnership’s initial asset being the Columbia Gulf Transmission
Company system stretching from Louisiana to Kentucky.

Beyond the MLP initiative, our NGT&S group also continued to develop and execute on a steady stream of pipeline and
storage growth projects—an important plank in our long-term growth platform. NGT&S projects advanced during 2007
included:

• The initiation of service under the Hardy Storage project,
• The Eastern Market Expansion, which received FERC approval in January of 2008 and is targeted

for completion in early 2009,

• A major expansion of capacity into the Florida Gas Transmission system,
• Several new low-cost, high-return connections to the Columbia Gulf system,
• The June launch of construction on the Millennium Pipeline in New York—slated for completion

in late 2008.

Our Balanced Approach

The NiSource portfolio of low-risk, regulated assets generates
about $3 billion in annual net revenues, ranking among the
nation’s largest integrated energy firms and squarely among
the Fortune 400 list of top U.S. companies. Our operating
income is balanced between each of our three business
segments. NiSource stock trades on the New York Stock
Exchange under the symbol NI.

VALUE

Regulated
Electric
Operations

Regulated
Gas
Distribution

Regulated
Gas Transmission
& Storage

It is also important to note that the NGT&S team delivered improved operating income during 2007, despite tempered
opportunities for optimization-related services due to less volatility in the natural gas market. Driving this improvement
was the near-full subscription of the Columbia Gulf system and higher throughput as a result of increased storage
injections, gas-fired electric generation demands, and marketing activities. NGT&S also delivered increased earnings in
2007 from our Hardy Storage partnership with Piedmont Natural Gas, which began operations in April.

Synchronizing Infrastructure-Driven
Investments and Regulatory Activity
Another central feature of NiSource’s long-term strategy is synchronizing our unprecedented
infrastructure replacement and enhancement projects with thoughtful, collaborative regulatory
initiatives in our Gas Distribution Segment. And here again, we made significant strides during 2007.

At Columbia Gas of Pennsylvania (CPA), our team launched a 20-year, $1.4 billion natural gas infrastructure program.
That initiative set the stage for CPA’s January 2008 filing of a base rate case seeking a nearly $60 million annual increase
in the company’s rates, with an expected effective date of October 28, 2008. Our Pennsylvania team also is taking a
leadership role in building support for legislation that would facilitate the timely recovery of costs associated with natural
gas infrastructure improvements.

Meanwhile, in neighboring Ohio, Columbia Gas of Ohio (COH) and other stakeholders reached a landmark agreement in
December that provides COH and its key stakeholders with critically important certainty for the future. The agreement
establishes the framework for operations under the company’s Customer CHOICEsm program for the next several years
and provides for a wholesale gas supply auction by early 2010. With this agreement in place, the stage has been set for
COH to proceed with its own infrastructure-driven base rate case proceeding during the first quarter of 2008. COH has
requested an increase of approximately $80 million per year, and new base rates are expected to become effective in the
fourth quarter of this year.

Also during 2007:

• Columbia Gas of Virginia received approval to implement an off-system sales and capacity release incentive

mechanism, effective in January 2008.

• Bay State Gas received approval for a $5.9 million increase in base rates, effective last November 1, under its

performance-based rate program.

• Northern Indiana Public Service Company (NIPSCO) received approval in May for a natural gas rate simplification

program that benefits both the company and customers, including the creation of a new energy conservation program.

• And Columbia Gas of Kentucky received approval of a rate case settlement that increases annual revenues by

$7.25 million.

The accomplishments in our Gas Distribution segment speak to our continued commitment to take constructive,
collaborative approaches to address business and regulatory issues affecting our company and our customers.

Eileen O’Neill Odum
Executive Vice President
& Group CEO, NI Indiana
Business Segment

Jimmy Staton
Executive Vice President
& Group CEO, NI Gas
Distribution

Robert D. Campbell
Senior Vice President,
Human Resources

Glen L. Kettering
Senior Vice President,
Corporate Affairs

Maximizing Value:
NiSource’s Investment-Driven Strategy

As part of NiSource’s strategy to maximize the value of its core
regulated assets, the company has embarked on a $1 billion-plus
annual capital investment program. These investments span each
of NiSource’s business segments, including promising new
organic growth prospects in natural gas transmission and storage,
new generation capacity to meet electric customers’ needs, and
significant infrastructure replacement and enhancement programs
in natural gas distribution. Our approach to these programs is
straightforward—the investments will be disciplined, aggressively
managed and synchronized with corresponding commercial and
regulatory strategies in order to deliver long-term, sustainable
earnings and cash flow growth for NiSource shareholders.

INVESTING

5-Year Capital Program

$1500

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Other
Electric
GT&S
Gas Distribution

2007

2008E

2009E

2010E

2011E

2012E

That same approach holds true in our Electric Business, where our NIPSCO team took several important steps during
2007 to set the stage for a robust 2008 regulatory agenda.

First, NIPSCO reached a settlement with regulatory stakeholders and large customers resolving matters related to the
cost of purchasing electric power to meet growing demand. NIPSCO then filed an Integrated Resource Plan (IRP) with
the Indiana Utility Regulatory Commission outlining its approach to meeting the company’s need to add approximately
1,000 megawatts of new capacity by 2014. The IRP concluded that the best alternative for meeting that need would be
for NIPSCO to invest in additional gas-fired combined cycle generating capacity. As of this writing, NIPSCO is actively
pursuing several potential options for acquiring additional generating facilities.

The NIPSCO team, under the leadership of Eileen O’Neill Odum—Group CEO of our Indiana businesses—is now well
positioned to file a base rate case on July 1 of this year. We are excited about the addition of Eileen to our senior
leadership team and convinced that the business segment operating model being developed across NiSource will
provide the necessary focus and accountability for NiSource to deliver on its financial commitments in the years to
come. That model is already in place in our NGT&S segment under the leadership of Group CEO Chris Helms, and has
been very recently established in our Gas Distribution segment, with the announcement of Jimmy Staton as Group CEO.

Resolving Legacy Issues
As indicated above, 2007 marked the successful resolution of a number of “legacy” issues that had caused distractions
or financial pressures in the past. One of the notable accomplishments in this regard was the significantly improved
results from our Whiting Clean Energy unit, under its redefined operating agreement with BP. During the year, our Other
Operations segment delivered operating income of $8.1 million, as compared to a loss of $40.2 million in 2006. The
$48.3 million improvement was almost exclusively driven by improved results from the Whiting unit.

Also notable was the restructuring of NiSource’s business services agreement with IBM. Under the restructured
agreement, IBM will primarily provide information technology services, with a number of other business service
functions transitioned back to the NiSource organization. Going forward, NiSource will be in a position to more
effectively manage its employee and administrative expenses, while ensuring delivery of services to meet the
company’s needs. This situation has been a distraction over the last several years, and I am pleased we have made the
necessary changes to stabilize these services and move forward on a solid footing.

Maintaining Investment Grade Credit Ratings
We met with credit rating agencies in late 2007 and reviewed our long-term business plans, including our $1 billion plus
annual infrastructure investment program. Both Moody’s and Standard & Poor’s (S&P) confirmed NiSource’s investment
grade credit ratings. The company received a Baa3 rating from Moody’s and a BBB– rating from S&P. S&P’s outlook is
stable, while Moody’s is negative. Despite being at the lower end of the investment grade rating
category, we nonetheless were encouraged by the favorable view of NiSource’s business profile
expressed by each of the rating agencies, as well as their indication that the company’s successful
execution of its business plan should sustain our investment grade ratings.

W. Harris Marple
Senior Vice President,
Distribution Operations

Kathleen O’Leary
Senior Vice President,
Performance
Management

Violet G. Sistovaris
Senior Vice President,
Administrative Services

Larry J. Francisco
Vice President,
Audit

This impressive list of 2007 key accomplishments is proof positive of our team’s ability to execute our game plan to
position the company to deliver on our four-part business plan for long-term, sustainable growth. We continue to move
aggressively, and thoughtfully, to engage our stakeholders, make disciplined investments, and position our teams to
execute on NiSource’s growth strategy.

Charging into a Pivotal Year
With significant groundwork having been laid in 2007, we view 2008 as a pivotal year in our long-term growth strategy.
In fact, we are charging into 2008 with three critical areas of focus:

• Executing on Major Infrastructure Enhancement

Projects, which will constitute a significant portion
of NiSource’s more than $1 billion annual ongoing
capital investment program.

• Achieving our Key Regulatory Initiatives, including
gas base rate cases in Pennsylvania and Ohio, as
well as NIPSCO’s electric rate case scheduled for
filing on July 1, 2008.

• Advancing our NGT&S Growth Strategy, including
securing approvals and timely construction of
announced projects, developing an array of potential
new growth opportunities, and continuing with the
formation of NiSource Energy Partners, L.P.

As we aggressively pursue these priorities, we are
keenly aware and appreciative of your continued
support. Our investment-driven utility and pipeline
growth strategies clearly require time and considerable
effort to bear fruit. Nevertheless, we are convinced that
the foundation we have built, and will continue to build
over the next several years, will position NiSource to
generate meaningful and sustainable future earnings
and cash flow growth.

NYSE: NI

Stock Price Performance

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DJ Utilities
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Doing What We Do Best
With our strategy clearly set, employees all across
NiSource are hard at work today—committed to
achieving our long-term aspiration, step-by-step, brick-
by-brick. And the capstone is that our entire team is
energized, and intently focused on executing this plan. Quite frankly, as a regulated energy company, we welcome
these priorities. This is what we do best. As always, we remain committed to communicating with our investors and all
other stakeholders in a transparent and timely manner regarding these and all of our efforts. Ongoing updates will be
provided on www.nisource.com.

DJ Utilities

NiSource

S&P 500

116.18

128.67

126.04

142.67

120.01

149.67

144.61

173.31

129.26

168.19

245.32

210.34

100.0

2005

2006

2003

2004

2007

118.22

293.58

182.82

Thank you once again for your continued interest in and support of NiSource.

Sincerely,

Robert C. Skaggs, Jr.
President and Chief Executive Officer

Dear Fellow Stockholders:
On behalf of the Board of Directors, I want to take this opportunity to thank you for your investment in and continued
support of NiSource.

As Bob Skaggs’ letter in this report shows, 2007 was, indeed, a year of significant progress for NiSource, one that sets
the stage for continued progress in 2008 as the company aggressively pursues its aspiration of becoming North
America’s premier regulated energy company. I can’t emphasize enough the level of this Board’s engagement,
alignment and support of management’s investment-driven business strategy and its detailed plans for executing on that
strategy and delivering long-term, sustainable growth for our shareholders.

I would be remiss if I did not mention that many of our successes during this and previous years were made possible in
part through the efforts of Peter Fazio and Roger Young. Peter retired in December 2007 as Executive Vice President and
General Counsel after 15 years of service. Roger has elected to retire from the Board of Directors at the end of his
current term in May of this year after nine years of service. Prior to that time, Roger served as Chairman of Bay State
Gas. Peter and Roger each brought tremendous expertise and wise counsel to NiSource, and we wish them well in
retirement.

Sadly, early this year, we said goodbye to another valued board member and friend, as Steve McCracken lost a long
battle with cancer. Steve was a widely respected business leader, a member of our Board since 2005, and a committed
husband and father. He is greatly missed.

Board of Directors

Ian M. Rolland
Chairman of the Board, NiSource Inc.

Robert C. Skaggs, Jr.
President & CEO, NiSource Inc.

Dr. Steven C. Beering
Chairman, National Science Board

Richard L. Thompson
Chairman, Lennox International, Inc.

Deborah S. Coleman
EVP & COO, National Urban League

Dennis E. Foster
Principal, Foster Thoroughbred
Investments

Dr. Carolyn Y. Woo
Martin J. Gillen Dean & Ray &
Milann Siegfried
Prof. of Entrepreneurial Studies
Mendoza College of Business
University of Notre Dame

Marty Kittrell
EVP & CFO, Dresser, Inc.

Roger A. Young
Retired Chairman, Bay State Gas Co.

Also during 2007, we welcomed to the NiSource
Board the new perspectives and business and
operational insights of Deborah S. Coleman, who
joined our ranks in July 2007. Deborah brings
extensive background in process improvement
and operational effectiveness. We also expect
two new additions to the Board during 2008.

As we move into 2008, the NiSource Board will
continue to test and validate key components of
the company’s Path Forward strategy. We take
seriously our role as stewards of your
investment, and are committed to building a
long-term, sustainable enterprise predicated on
sound business strategy, exemplary customer
service, and strong financial metrics.

W. Lee Nutter
Retired Chairman, President & CEO,
Rayonier, Inc.

As a Board, we remain firmly committed to the
principles of transparency, integrity and
responsiveness, as well as to governance
standards and practices that reflect those
principles. We took a number of actions during
2007 that attest to that commitment, including
the adoption of revised director election processes and new committee structures. You have my commitment that the
Board will assess its governance practices on an ongoing basis and make any adjustments necessary to continue to
fulfill our fiduciary responsibilities to our shareholders.

Sincerely,

Ian M. Rolland
Chairman of the Board

Form 10-K

President & CEO’s Letter
Board of Directors
Chairman’s Letter
Form 10-K
Stockholder Information

CONTENT

1
7
7
8
Inside Back Cover

STOCKHOLDER INFO

Anticipated Dividend Record and Payment Dates

NiSource Common Stock

Record Date

Payment Date

04-30-08
07-31-08
10-31-08
01-30-09

05-20-08
08-20-08
11-20-08
02-20-09

BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015

Common Stock Dividend Declared
The Board of Directors, effective January 4, 2008, has
declared a quarterly dividend of $0.23 per share, equivalent
to $0.92 per share on an annual basis.

480 Washington Boulevard
Jersey City, NJ 07310-1900

(888) 884-7790

TDD for Hearing Impaired
(800) 231-5469

Foreign Stockholders
(201) 680-6578

TDD Foreign Stockholders
(201) 680-6610

www.bnymellon.com/shareowner/isd

Stockholder Inquiries
BNY Mellon Shareowner Services

Analyst Inquiries
Investor Relations

Media Inquiries
Communications

(888) 884-7790

(219) 647-6209

(219) 647-5581

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Strength

Commitment

Service

Value

ASPIRATION

The Premier Regulated Energy Company in North America

2007 Annual Message to Stockholders