NORTHERN INDIANA PUBLIC SERVICE CO - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

[ ] FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

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

For the transition period from_____ to ______

Commission file number 1-4125

NORTHERN INDIANA PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)

Indiana 35-0552990
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

801 East 86th Avenue
Merrillville, Indiana 46410
- ---------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
- -------------------------------------------- ---------------------
Series A Cumulative Preferred - No Par Value New York
4-1/4% Cumulative Preferred - $100 Par Value American

Securities registered pursuant to Section 12(g) of the Act: Cumulative Preferred
Stock - $100 Par Value (4-1/2%, 4.22%, 4.88%, 7.44% and 7.50% Series)

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 [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]

As of February 28, 2004, 73,282,258 shares of the registrant's Common Stock, no
par value, were issued and outstanding, all held beneficially and of record by
NiSource Inc.

Documents Incorporated by Reference
None

CONTENTS

2

PART I

ITEM 1. BUSINESS

NORTHERN INDIANA PUBLIC SERVICE COMPANY

Northern Indiana Public Service Company (Northern Indiana) is a public utility
operating company, incorporated in Indiana on August 2, 1912, that supplies
natural gas and electric energy to the public. It operates in 30 counties in the
northern part of Indiana, serving an area of about 12,000 square miles with a
population of approximately 2.2 million.

Northern Indiana's primary business segments are: Gas Distribution Operations,
Electric Operations, and Other Operations. During 2002, Northern Indiana
re-aligned its reportable segments to reflect its current operating structure.
Electric wholesale and wheeling results were moved to the Electric Operations
segment.

Holding Company Structure

Northern Indiana is a subsidiary of NiSource Inc. (NiSource). NiSource is an
energy holding company that provides natural gas, electricity and other products
and services to approximately 3.7 million customers located within a corridor
that runs from the Gulf Coast through the Midwest to New England. NiSource is a
Delaware corporation registered under the Public Utility Holding Company Act of
1935, as amended. NiSource is the largest natural gas distribution company
operating east of the Rocky Mountains, as measured by number of customers.

Gas Distribution Operations

Northern Indiana's natural gas distribution operations serves 702,413 customers
in the northern part of Indiana.

Electric Operations

Northern Indiana generates and distributes electricity to 440,733 customers in
21 counties in the northern part of Indiana and engages in electric wholesale
and wheeling transactions. Northern Indiana owns and has the ability to operate
four coal-fired electric generating stations with a net capability of 3,059
megawatts (mw), six gas fired generating units with a net capability of 323 mw
and two hydroelectric generating plants with a net capability of 10 mw. These
facilities provide for a total system net capability of 3,392 mw. Northern
Indiana's transmission system, with voltages from 34,500 to 345,000 volts,
consists of 3,187 circuit miles. Northern Indiana is interconnected with five
neighboring electric utilities.

In January 2002, Northern Indiana indefinitely shut down its Dean H. Mitchell
Generating Station (Mitchell Station). Northern Indiana now operates three
coal-fired generation stations with a net capacity of 2,574 mw, five gas-fired
generating units with a net capacity of 306 mw and two hydroelectric plants with
a net capability of 10 mw. During the year ended December 31, 2003, Northern
Indiana generated 77.2% and purchased 22.8 % of its electric requirements.
Currently, Northern Indiana is reviewing options to meet the electric needs of
its customers. This review includes an assessment of Northern Indiana's oldest
generating station units and various options regarding the return of the
Mitchell Station, constructed in the early 1950's, to service in the second half
of 2004

Other Operations

At December 31, 2003, the Other Operations segment includes the results of
NIPSCO Receivables Corporation (NRC), a wholly-owned subsidiary of Northern
Indiana, whose sole activity is to purchase accounts receivable from Northern
Indiana and sell these accounts to a commercial paper conduit, within the limits
of the agreement between NRC and the conduit. The Other Operations segment also
reflects power trading results for 2001 only. Effective November 1, 2001,
Northern Indiana's power trading operations were transferred to EnergyUSA-TPC
Corp., a subsidiary of NiSource. Although, Northern Indiana does not participate
in power trading activities currently, in the future, Northern Indiana might
resume power trading operations.

See Item 7 for additional information about Northern Indiana's business
segments.

3

ITEM 1. BUSINESS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

Competition and Changes in the Regulatory Environment

The regulatory frameworks applicable to Northern Indiana's operations, at both
the state and federal levels, continue to evolve. These changes have had and
will continue to have an impact on Northern Indiana's operations, structure and
profitability. Management continually seeks new ways to be more competitive and
profitable in this changing environment, including providing gas customers with
increased choices for products and services, and developing new energy-related
products and services for residential, commercial and industrial customers.

NATURAL GAS COMPETITION. Open access to natural gas supplies over interstate
pipelines and the deregulation of the commodity price of gas has led to
tremendous change in the energy markets, which continue to evolve. During the
past few years, local distribution company (LDC) customers and marketers began
to purchase gas directly from producers and marketers and an open, competitive
market for gas supplies emerged. This separation or "unbundling" of the
transportation and other services offered by pipelines and LDCs allows customers
to select services independent from the purchase of the commodity. Northern
Indiana is involved in programs that provide residential customers the
opportunity to purchase their natural gas requirements from third parties and
use Northern Indiana for transportation services.

ELECTRIC COMPETITION. In 1996, the Federal Energy Regulatory Commission (FERC)
ordered that all public utilities owning, controlling or operating electric
transmission lines file non-discriminatory, open-access tariffs and offer
wholesale electricity suppliers and marketers the same transmission service they
provide to themselves. In 1997, FERC accepted for filing Northern Indiana's
open-access transmission tariff and issued an opinion on December 31, 2002. In
December 1999, FERC issued Order 2000, a final rule addressing the formation and
operation of Regional Transmission Organizations (RTOs). (See Item 7, Electric
Operations - Regulatory Matters). The rule was intended to eliminate pricing
inequities in the provisioning of wholesale transmission services. Northern
Indiana does not believe that compliance with the new rules will be material to
its future earnings.

Other Relevant Business Information

Northern Indiana's customer base is broadly diversified, with no single customer
accounting for a significant portion of revenues.

As of December 31, 2003, Northern Indiana had 2,406 full-time employees.

For a listing of certain subsidiaries of Northern Indiana refer to Exhibit 21.

Northern Indiana files various reports with the Securities and Exchange
Commission (SEC). The reports include the annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. Northern Indiana makes all SEC filings available without
charge to the public on NiSource's web site at http://www.nisource.com.

4

ITEM 2. PROPERTIES

NORTHERN INDIANA PUBLIC SERVICE COMPANY

Discussed below are the principal properties held by Northern Indiana as of
December 31, 2003.

GAS DISTRIBUTION OPERATIONS. Northern Indiana owns and operates approximately
14,403 miles of gas mains, 27,129 acres of underground storage and 2 compressor
stations with a total of 6,000 horsepower of installed capacity. The physical
properties of Northern Indiana are located in the northern part of Indiana. The
distribution system of Northern Indiana is primarily located on or under public
streets, and other public places or on private property not owned by the
company, with easements from or consent of the respective owners.

ELECTRIC OPERATIONS. Northern Indiana owns and has the ability to operate four
coal-fired electric generating stations with net capability of 3,059 mw, two
hydroelectric generating plants with net capabilities of 10 mw and six gas-fired
turbine generating units with net capabilities of 323 mw, for a total system net
capability of 3,392 mw. It has 289 substations with an aggregate transformer
capacity of 23,159,300 kilovolt-amps. Its transmission system, with voltages
from 34,500 to 345,000 volts, consists of 3,187 circuit miles of line. The
electric distribution system extends into 21 counties and consists of 7,786
circuit miles of overhead and 1,769 cable miles of underground primary
distribution lines operating at various voltages from 2,400 to 12,500 volts.
Northern Indiana has distribution transformers having an aggregate capacity of
12,794,855 kilovolt-amps and 458,962 electric watt-hour meters. ........

In January 2002, Northern Indiana indefinitely shut down its Mitchell Station.
Northern Indiana now operates three coal-fired generation stations with a net
capacity of 2,574 mw, five gas-fired generating units with a net capacity of 306
mw and two hydroelectric plants with a net capability of 10 mw. Currently,
Northern Indiana is reviewing options to meet the electric needs of its
customers. This review includes an assessment of Northern Indiana's oldest
generating station units and various options regarding the return of the
Mitchell Station, constructed in the early 1950's, to service in the second half
of 2004. Northern Indiana has requested proposals for outside companies to
provide power under varying terms and conditions. These proposals are being
EVALUATED. In February 2004, the city of Gary announced an interest to acquire
the land on which the Mitchell Station plant is located for economic
development, including a proposal to increase the length of the runways at the
Gary International Airport. Northern Indiana expects to discuss the proposal to
acquire the land with the city of Gary in the near future. To date, the city has
not commenced any legal proceedings.

CHARACTER OF OWNERSHIP. The principal offices and properties of Northern Indiana
are held in fee and are free from encumbrances, subject to minor exceptions,
none of which are of such a nature as to impair substantially the usefulness of
such properties. All properties are subject to liens for taxes, assessments and
undetermined charges (if any) incidental to construction. It is Northern
Indiana's practice regularly to pay such amounts, as and when due, unless
contested in good faith. In general, the electric lines, gas pipelines and
related facilities are located on land not owned in fee but are covered by
necessary consents of various governmental authorities or by appropriate rights
obtained from owners of private property. Northern Indiana does not, however,
generally have specific easements from the owners of the property adjacent to
public highways over, upon or under which its electric lines and gas
distribution pipelines are located. At the time each of the principal properties
was purchased a title search was made. In general, no examination of titles as
to rights-of-way for electric lines, gas pipelines or related facilities was
made, other than examination, in certain cases, to verify the grantors'
ownership and the lien status thereof.

5

ITEM 3. LEGAL PROCEEDINGS

NORTHERN INDIANA PUBLIC SERVICE COMPANY

In the normal course of its business, Northern Indiana has been named as a
defendant in various legal proceedings. In the opinion of management, the
ultimate disposition of these currently asserted claims would not have a
material adverse impact on Northern Indiana's financial position.

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

None.

PART II

ITEM 5. Market for Common Equity and Related Stockholder Matters

Northern Indiana's common stock is wholly-owned by NiSource.

At December 31, 2003, Northern Indiana had approximately $183.7 million of
retained earnings (earned surplus) available for the payment of dividends.
Future common share dividends by Northern Indiana will depend upon adequate
retained earnings, adequate future earnings and the absence of adverse
developments.

The following limitation on payment of dividends applies to Northern Indiana:

So long as any shares of Northern Indiana's cumulative preferred stock are
outstanding, no cash dividends shall be paid or declared upon the common stock
in excess of 75% of the net income available for the preceding calendar year,
unless the aggregate of the capital applicable to stocks subordinate as to
assets and dividends to the cumulative preferred stock plus surplus, after
giving effect to such common stock dividends, would equal or exceed 25% of the
sum of all obligations evidenced by bonds, notes, debentures or other
securities, plus the total capital and surplus. At December 31, 2003, the sum of
the capital applicable to stocks subordinate to the cumulative preferred stock
plus the surplus was equal to 41% of the total capitalization including surplus.

ITEM 6. SELECTED FINANCIAL DATA

6

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS

NORTHERN INDIANA PUBLIC SERVICE COMPANY

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

CONSOLIDATED REVIEW

RESULTS OF OPERATIONS

The Consolidated Review information should be read taking into account the
critical accounting policies applied by Northern Indiana and discussed in "Other
Information" of this Item 7.

Net Income

For 2003, net income of Northern Indiana decreased to $162.8 million compared to
$226.9 million for 2002. In 2001, net income was $207.5 million.

Net Revenues

Total consolidated net revenues (operating revenues less cost of sales) for
2003, were $1,013.2 million, a $41.7 million decrease from 2002. The decrease
was attributed to reduced electric margins, which were down $39.7 million,
primarily as a result of $24.0 million in additional credits issued representing
a full year of credits pertaining to the Indiana Utility Regulatory Commission
(IURC) electric rate review settlement and $21.9 million due to cooler weather
during the summer cooling season. Gas net revenues were down slightly. Net
revenues increased by $15.5 million due to colder weather, but this was offset
by decreased non-weather-related usage. In addition, other revenues were down
slightly from 2002.

7

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

Total consolidated net revenues for 2002, were $1,054.9 million, an $8.6 million
decrease from 2001. The decrease was attributed to reduced electric margins,
primarily as a result of $28.1 million in credits issued pertaining to the IURC
electric rate review settlement and $5.2 million from lower bulk power and
wheeling margins, partially offset by $14.8 million from the favorable effect of
warmer weather in the summer cooling season. Gas margins, which increased $9.9
million due to 8% colder weather during the heating season, partially offset the
overall decrease from the electric operations.

Expenses

Operating expenses were $682.2 million in 2003, an increase of $36.4 million
from 2002. Operation and maintenance expenses increased $12.7 million in 2003
from 2002 due to increased pension and postretirement expenses of $25.0 million,
partially offset by decreased administrative and employee-related expenses of
$10.9 million. Property taxes and revenue taxes increased $12.5 million and $5.8
million, respectively. Depreciation and amortization increased $4.9 million in
2003 from 2002 due to plant additions.

Operating expenses were $645.8 million in 2002, a decrease of $16.8 million from
2001. Operation and maintenance expenses decreased $14.0 million in 2002 from
2001 due to a $11.7 million reduction from uncollectible customer accounts and
other customer-related expenses and lower employee-related and support services
expenses of $8.1 million resulting from reorganization initiatives, partially
offset by increased costs related to the electric rate review. Depreciation and
amortization increased $6.2 million in 2002 from 2001 due to plant additions.
Other taxes decreased $8.9 million in 2002 principally due to decreased property
taxes.

Utility Income Taxes

Utility income taxes decreased $14.3 million in 2003 over 2002 due to decreased
pre-tax income in 2003. Utility income taxes increased $6.3 million in 2002 over
2001 due to increased pre-tax income in 2002.

Other Income (Deductions)

Other Income (Deductions) decreased $4.3 million in 2003 from 2002 primarily due
to a reduction of miscellaneous interest income. Other Income (Deductions)
increased $1.6 million in 2002 from 2001 as a result of favorable interest rates
related to the fee on the sale of a portion of Northern Indiana's accounts
receivable and reduced donations expenses, partially offset by a decrease in
electric trading results, the operations of which were transferred to
EnergyUSA-TPC Corp. (TPC) effective November 1, 2001.

Interest

Interest expenses decreased $4.0 million during 2003, primarily due to a
reduction in long-term debt, partially offset by increased short-term
borrowings. Interest expenses decreased $15.9 million during 2002 as compared to
2001, primarily due to reduced debt levels and lower short-term interest rates.

LIQUIDITY AND CAPITAL RESOURCES

Generally, cash flow from operations has provided sufficient liquidity to meet
operating requirements. A significant portion of Northern Indiana's operations,
most notably in the gas and electric distribution businesses, are subject to
seasonal fluctuations in cash flow. During the heating season, which is
primarily from November through March, cash receipts from gas sales and
transportation services typically exceed cash requirements. During the summer
months, cash on hand, together with the seasonal increase in cash flows from the
electric business during the summer cooling season and external short-term and
long-term financing, is used to purchase gas to place in storage for heating
season deliveries, perform necessary maintenance of facilities, make capital
improvements in plant and expand service into new areas.

Net cash from operations for the twelve months ended December 31, 2003 was
$387.2 million. Cash provided by working capital was $11.1 million, principally
driven by $77.0 million due to the timing of the recovery of gas and fuel costs
and lower payments for taxes of $33.1 million, largely offset by an increase of
natural gas in storage of $105.8 million.

8

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

During February 2004, Northern Indiana redeemed $111.1 million of its
medium-term notes with an average interest rate of 7.5%. The associated
redemption premium was $4.2 million.

On December 18, 2003, $55.0 million of new tax-exempt Pollution Control Revenue
Refunding Bonds were issued by Jasper County, Indiana on behalf of Northern
Indiana. The new tax-exempt bonds were issued on an auction rate basis and bear
interest at a floating rate as determined in 35-day increments by the tax-exempt
auction process. The proceeds of the bonds were loaned to Northern Indiana,
pursuant to a financing agreement dated as of December 1, 2003, and were used to
refund Northern Indiana's $55.0 million aggregate principal amount of Jasper
County, Indiana Collateralized Pollution Control Refunding Revenue Bonds Series
1991. As a result of the refunding, the final series of First Mortgage Bonds
outstanding under Northern Indiana's First Mortgage Indenture were discharged,
cancelled and returned to Northern Indiana. There are no longer any First
Mortgage Bonds outstanding under the First Mortgage Indenture. Northern Indiana
intends to obtain and file in due course in the appropriate recording offices in
Indiana the releases necessary to remove the First Mortgage Indenture from the
title records with respect to the Northern Indiana property formerly subject to
the lien of the First Mortgage Indenture.

Northern Indiana satisfies its liquidity requirements primarily through
internally generated funds and through intercompany borrowings from the NiSource
Money Pool. Northern Indiana may borrow a maximum of $1.0 billion through the
NiSource Money Pool as approved by the Securities and Exchange Commission under
the Public Utility Holding Company Act of 1935. NiSource Finance Corp. (NFC)
provides funding to the NiSource Money Pool from external borrowing sources. Due
to NiSource's strong liquidity position, NFC elected not to renew its $500.0
million 364-day credit facility, which expired on March 20, 2003. The 364-day
credit facility was used to support letters of credit. As a result of the
364-day facility expiring, the NFC $1.25 billion three-year facility that
expires on March 23, 2004 was amended to allow for an increase in aggregate
letters of credit outstanding from $150.0 million to $500.0 million. The credit
facility is guaranteed by NiSource. NFC currently anticipates that its $1.25
billion 3-year credit facility expiring March 23, 2004 will be renewed during
the first quarter of 2004 and will be split between a 364-day facility and a
3-year facility. As of December 31, 2003, Northern Indiana had $578.4 million of
intercompany short-term borrowings outstanding at an interest rate of 1.74%. As
of December 31, 2002, Northern Indiana had $448.9 million of intercompany
short-term borrowings outstanding at an interest rate of 2.11%.

Sale of Trade Receivables

On December 30, 2003, Northern Indiana entered into an agreement to sell,
without recourse, all of its trade receivables, as they originate, to NIPSCO
Receivables Corporation (NRC), a wholly-owned subsidiary of Northern Indiana.
NRC, in turn, is party to an agreement in which it sells a percentage of
ownership interest in the accounts receivable to a commercial paper conduit. The
conduit can purchase up to $200 million of accounts receivable under the
agreement. The agreements expire in December 2004. As of December 31, 2003,
$166.8 million of Northern Indiana's accounts receivable had been sold by NRC.
Under the arrangement, Northern Indiana may not sell any new receivables if
Northern Indiana's debt rating falls below BBB- or Baa3 at Standard and Poor's
and Moody's, respectively.

Credit Ratings

On July 8, 2003, Moody's Investors Service affirmed the senior unsecured ratings
of NiSource at Baa3, and the existing ratings of all other subsidiaries,
concluding a review for possible downgrade that began on May 13, 2003. Moody's
ratings outlook for NiSource and its subsidiaries is now "stable". On June 30,
2003, Fitch Ratings affirmed their BBB senior unsecured rating for NiSource.
Fitch also lowered the rating of Northern Indiana by one notch to BBB+ due to
Fitch's policy of restricting the ratings between a parent and its subsidiaries
where short-term financing facilities are solely at the holding company level.
This did not reflect weakening credit at Northern Indiana. Fitch's outlook for
NiSource and all of its subsidiaries is stable. On June 16, 2003, Standard and
Poor's affirmed its senior unsecured ratings of NiSource at BBB, and the
existing ratings of all other subsidiaries. Standard and Poor's outlook for
NiSource and all of its subsidiaries was revised from negative to stable.

9

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

Contractual Obligations and Commercial Commitments

Northern Indiana has certain contractual obligations that extend beyond 2004.
The obligations include long-term debt, mandatorily redeemable preferred stock,
lease obligations, and purchase obligations for pipeline capacity,
transportation and storage services through Northern Indiana's gas distribution
operations. The total contractual obligations in existence at December 31, 2003
and their maturities were:

Northern Indiana has obligations associated with interest and tax payments. For
2004, Northern Indiana projects that it will be required to make interest and
tax payments of $283.6 million. Also, Northern Indiana does not expect to make
contributions to its pension plan in 2004. However, Northern Indiana expects to
contribute $20.3 million to its postretirement medical and life plans in 2004.

In addition, Northern Indiana has a service agreement with Pure Air, a general
partnership between Air Products and Chemicals, Inc. and First Air Partners LP,
under which Pure Air provides scrubber services to reduce sulfur dioxide
emissions for Units 7 and 8 at the Bailly Generating Station. Services under
this contract commenced on June 15, 1992, and have current annual charges
approximating $16.5 million. The agreement provides that, assuming various
performance standards are met by Pure Air, a termination payment would be due if
Northern Indiana terminated the agreement prior to the end of the twenty-year
contract period.

Capital Expenditures

The table below reflects actual capital expenditures by segment for 2003 and
2002 and an estimate for year 2004:

For 2003, capital expenditures were $272.2 million, an increase of $25.7 million
over 2002. The Gas Distribution Operations segment's capital program in 2003
included business initiatives to extend service to new areas and develop future
markets through new services that may be added to the existing business and to
create a potential new pool of customers, as well as expenditures to ensure
safe, reliable and improved service to customers and modernize and upgrade
facilities. The Electric Operations segment capital program included
improvements related to the operational integrity of generation, transmission
and distribution assets, expenditures related to environmental compliance
regarding nitrogen oxide (NOx) reduction, and additions to electric distribution
systems related to new business. While the NOx expenditures are being funded
with cash from operations, a portion will be recovered over time through the
Northern Indiana environmental tracker.

For 2004, the projected capital program is expected to be $193.7 million, which
is a decrease of 29%, or $78.4 million, from capital expenditures in 2003. This
reduction in the capital expenditure budget is mainly due to a reduction in
estimated expenditures for NOx compliance.

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

Pension Funding

Due to the upswing in the equity markets, the fair value of NiSource's pension
fund assets has increased since September 30, 2002. Northern Indiana expects
market returns to revert to normal levels as demonstrated in historical periods.
However, Northern Indiana may be required to provide additional funding for the
pension obligations if returns on plan assets fall short of the assumed 9.0%
long-term earnings rate assumption. As a result of the increase in the fair
value of the plans assets, Northern Indiana expects pension expense for 2004 to
decrease approximately $16.7 million from the amount recognized in 2003. See
Note 7, Pension and Other Postretirement Benefits, of the Consolidated Financial
Statements for more information.

MARKET RISK DISCLOSURES

Through its various business activities, Northern Indiana is exposed to risk
including commodity price, interest rate and credit risks. Northern Indiana's
risk management policy permits the use of certain financial instruments to
manage its market risk, including futures, forwards, options and swaps.

Non-Trading Risks

Commodity price risk at Northern Indiana is limited, since regulations allow
recovery of prudently incurred purchased power, fuel and gas costs through the
rate-making process. If Indiana were to explore regulatory reform, Northern
Indiana may begin providing services without the benefit of the traditional
ratemaking process and could become more exposed to commodity price risk.
Northern Indiana enters into certain sales contracts with customers based upon a
fixed sales price and varying volumes, which are ultimately dependent upon the
customer's supply requirements. Northern Indiana utilizes derivative financial
instruments to reduce the commodity price risk based on modeling techniques to
anticipate these future supply requirements.

Northern Indiana is exposed to interest rate risk as a result of changes in
interest rates on intercompany borrowings with NFC. These borrowings have
interest rates that are indexed to short-term market interest rates. At December
31, 2003, and December 31, 2002, the combined borrowings totaled $578.4 million
and $448.9 million, respectively. Based upon average borrowings during 2003 and
2002, an increase in short-term interest rates of 100 basis points (1%) would
have increased interest expense by $4.7 million and $1.9 million for years 2003
and 2002, respectively.

Due to the nature of the industry, credit risk is a factor in many of Northern
Indiana's business activities. Credit risk arises because of the possibility
that a customer, supplier or counterparty will not be able or willing to fulfill
its obligations on a transaction on or before the settlement date. Exposure to
credit risk is measured in terms of both current and potential exposure. Current
credit exposure is generally measured by the notional or principal value of
financial instruments and direct credit substitutes, such as commitments,
standby letters of credit and guarantees. Because many of Northern Indiana's
exposures vary with changes in market prices, Northern Indiana also estimates
the potential credit exposure over the remaining term of transactions through
statistical analyses of market prices. In determining exposure, Northern Indiana
considers collateral and master netting agreements, which are used to reduce
individual counterparty credit risk.

OFF BALANCE SHEET ARRANGEMENTS

Northern Indiana has purchase commitments and operating leases. Please refer to
Note 5, Risk Management Activities, and Note 13, Other Commitments and
Contingencies, of the Consolidated Financial Statements for additional
information about Northern Indiana's off balance sheet arrangements.

Northern Indiana has a service agreement with Pure Air, a general partnership
between Air Products and Chemicals, Inc. and First Air Partners LP, under which
Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units
7 and 8 at the Bailly Generating Station. Services under this contract commenced
on June 15, 1992, and have current annual charges approximating $16.5 million.
The agreement provides that, assuming various performance standards are met by
Pure Air, a termination payment would be due if Northern Indiana terminated the
agreement prior to the end of the twenty-year contract period.

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

In addition, Northern Indiana has sold certain accounts receivable. Northern
Indiana's accounts receivable program qualifies for sale accounting because it
meets the conditions specified in Statement of Financial Accounting Standards
(SFAS) No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." In the agreement, all transferred assets have
been isolated from the transferor and put presumptively beyond the reach of the
transferor and its creditors, even in bankruptcy or other receivership. Northern
Indiana does not retain any interest in the receivables under these programs.
Refer to Note 12, Fair Value of Financial Instruments, of the Consolidated
Financial Statements for additional information on these agreements.

OTHER INFORMATION

Critical Accounting Policies

Northern Indiana applies certain accounting policies based on the accounting
requirements discussed below that have had, and may continue to have,
significant impacts on Northern Indiana's results of operations and consolidated
balance sheets.

BASIS OF ACCOUNTING FOR RATE-REGULATED SUBSIDIARIES. SFAS No. 71, "Accounting
for the Effects of Certain Types of Regulation" (SFAS No. 71), provides that
rate-regulated subsidiaries account for and report assets and liabilities
consistent with the economic effect of the way in which regulators establish
rates, if the rates established are designed to recover the costs of providing
the regulated service and if the competitive environment makes it probable that
such rates can be charged and collected. Northern Indiana follows the accounting
and reporting requirements of SFAS No. 71. Certain expenses and credits subject
to utility regulation or rate determination normally reflected in income are
deferred on the balance sheet and are recognized in income as the related
amounts are included in service rates and recovered from or refunded to
customers. The total amounts of regulatory assets and liabilities reflected on
the Consolidated Balance Sheets were $257.4 million and $728.6 million at
December 31, 2003, and $325.2 million and $43.7 million at December 31, 2002,
respectively. Additionally, refer to SFAS No. 143 "Accounting for Asset
Retirement Obligations" under this Item 7 heading titled, "Accounting Changes
and Recently Issued Accounting Pronouncements".

In the event that regulation significantly changes the opportunity for Northern
Indiana to recover its costs in the future, all or a portion of Northern
Indiana's regulated operations may no longer meet the criteria for the
application of SFAS No. 71. In such event, a write-down of all or a portion of
Northern Indiana's existing regulatory assets and liabilities could result. If
transition cost recovery is approved by the IURC, that would meet the
requirements under generally accepted accounting principles for continued
accounting as regulatory assets and liabilities during such recovery period, the
regulatory assets and liabilities would be reported at the recoverable amounts.
If unable to continue to apply the provisions of SFAS No. 71, Northern Indiana
would be required to apply the provisions of SFAS No. 101, "Regulated
Enterprises - Accounting for the Discontinuation of Application of Financial
Accounting Standards Board (FASB) Statement No. 71." In management's opinion,
Northern Indiana will be subject to SFAS No. 71 for the foreseeable future.

Certain of the regulatory assets reflected on Northern Indiana's Consolidated
Balance Sheets require specific regulatory action in order to be included in
future service rates. Although recovery of these amounts is not guaranteed,
Northern Indiana believes that these costs meet the requirements for deferral as
regulatory assets under SFAS No. 71. Regulatory assets requiring specific
regulatory action amounted to $30.8 million at December 31, 2003. If Northern
Indiana determined that the amounts included as regulatory assets were not
recoverable, a charge to income would immediately be required to the extent of
the unrecoverable amounts.

ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. Under SFAS No. 133, as amended, the
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and resulting designation. Unrealized and realized gains
and losses are recognized each period as components of other comprehensive
income, earnings, or regulatory assets and liabilities depending on the nature
of such derivatives. Northern Indiana utilizes derivatives for cash flow hedges,
the effective portions of the gains and losses are recorded to other
comprehensive income and are recognized in earnings concurrent with the
disposition of the hedged risks. For fair value hedges, the gains and losses are
recorded in earnings each period along with the change in the fair value of the
hedged item. As a result of the rate-making process, Northern Indiana generally
records gains and losses as regulatory liabilities or assets and recognizes such
gains or losses in earnings when recovered in revenues.

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

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 recorded currently in
earnings.

Although Northern Indiana applies some judgment in the assessment of hedge
effectiveness to designate certain derivatives as hedges, the nature of the
contracts used to hedge the underlying risks is such that the correlation of the
changes in fair values of the derivatives and underlying risks is high. Northern
Indiana generally uses NYMEX exchange-traded natural gas futures and options
contracts and over-the-counter swaps based on published indices to hedge the
risks underlying its natural-gas-related businesses. Northern Indiana had $4.6
million of price risk management assets and $0.5 million of price risk
management liabilities primarily related to cash flow hedges at December 31,
2003. The amount of unrealized gains recorded to other comprehensive income was
$2.6 million at December 31, 2003.

PENSIONS AND POSTRETIREMENT BENEFITS. Northern Indiana, through NiSource has
defined benefit plans for both pensions and other postretirement benefits. The
plans are accounted for under SFAS No. 87, "Employers' Accounting for Pensions,"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions." The calculation of the net obligations and annual expense related to
the plans requires a significant degree of judgment regarding the discount rates
to be used in bringing the liabilities to present value, long-term returns on
plan assets and employee longevity, among other assumptions. Due to the size of
the plans and the long-term nature of the associated liabilities, changes in the
assumptions used in the actuarial estimates could have material impacts on the
measurement of the net obligations and annual expense recognition. For further
discussion of NiSource's pensions and other postretirement benefits see Note 7,
Pension and Other Postretirement Benefits, of the Consolidated Financial
Statements.

Accounting Changes and Recently Issued Accounting Pronouncements

SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", AS
SUBSEQUENTLY AMENDED BY SFAS NO. 137, SFAS NO. 138 AND SFAS NO. 149
(COLLECTIVELY REFERRED TO AS SFAS NO. 133). Effective January 1, 2001, Northern
Indiana adopted the FASB's SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as subsequently amended by SFAS No. 137, SFAS No. 138
and SFAS 149. These statements establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. 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. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and resulting designation.

The adoption of SFAS No. 133 on January 1, 2001, resulted in a cumulative
after-tax increase to other comprehensive income (OCI) of approximately $4.0
million, which was recognized in earnings during 2002 and 2001. The adoption
also resulted in the recognition of $16.0 million of assets and $12.0 million of
liabilities on the consolidated balance sheet.

SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. Northern Indiana
adopted the provisions of SFAS No. 143 on January 1, 2003 and as a result an
asset retirement obligations liability of $1.9 million was recognized. In
addition, Northern Indiana capitalized $0.8 million in additions to plant
assets, net of accumulated amortization, and recognized regulatory assets of
$1.2 million. Certain costs of removal that have been, and continue to be,
included in depreciation rates and collected in Northern Indiana's service
rates, did not meet the definition of an asset retirement obligation pursuant to
SFAS No. 143. The amount of the other costs of removal reflected as a component
of Northern Indiana's accumulated depreciation and amortization was
approximately $661.9 million and $621.2 million at December 31, 2003 and 2002,
respectively, based on rates for estimated removal costs embedded in composite
depreciation rates. Northern Indiana reclassified its cost of removal as of
December 31, 2002 from accumulated depreciation to regulatory liabilities and
other removal costs on the consolidated balance sheet and upon adoption of SFAS
No. 143 "Accounting for Asset Retirement Obligations" recharacterized the
liability as a regulatory liability as of December 31, 2003.

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

For the twelve months ended December 31, 2003, Northern Indiana amortized less
than $0.2 million related to the amounts capitalized as additions to plant and
accreted the liability by $0.2 million with corresponding amounts recognized as
regulatory assets at December 31, 2003. The asset retirement obligations
liability totaled $2.1 million at December 31, 2003. Had Northern Indiana
adopted SFAS No. 143 at the dates the actual liabilities were incurred, the
asset retirement obligations liability would have been $1.8 million and $1.5
million at December 31, 2001 and 2000, respectively.

Additionally, refer to "Recently Issued Accounting Pronouncements" in Note 3 of
the Consolidated Financial Statements for information regarding recently issued
accounting standards.

Power Outage in the Northeast

On August 14, 2003, a massive power outage affected approximately 50.0 million
people in Michigan, Ohio, New York, Pennsylvania, New Jersey, Connecticut,
Vermont and Canada and completely darkened major metropolitan areas such as New
York City, Cleveland, Detroit and Toronto. Northern Indiana's electric system
operated as it was designed and separated its system from the affected blackout
area.

Bargaining Unit Contract

On May 31, 2004, the contract with Northern Indiana's bargaining unit employees
expires. Discussions between Northern Indiana and bargaining unit's union
representatives are ongoing.

RESULTS AND DISCUSSION OF SEGMENT OPERATIONS

Presentation of Segment Information

During 2002, Northern Indiana realigned a portion of its operations and
reclassified previously reported operating segment information to conform to the
realigned operating structure. The electric wheeling and bulk power operations
were moved to the Electric Operations segment. Power trading results through
October 31, 2001, are reflected in the Other Operations segment. The power
trading operations were transferred to TPC effective November 1, 2001. Although
Northern Indiana does not participate in power trading activities currently, in
the future, Northern Indiana might resume power trading operations. At December
31, 2003, the Other Operations segment includes the results of NIPSCO
Receivables Corporation (NRC), a wholly-owned subsidiary of Northern Indiana,
whose sole activity is to purchase accounts receivable from Northern Indiana and
sell these accounts to a commercial paper conduit, within the limits of the
agreement between NRC and the conduit. For further information on NRC, refer to
Note 12, Fair Value of Financial Instruments, in the Consolidated Financial
Statements. As a result of the realignment, all periods have been adjusted to
reflect the new segments.

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS

Competition

Northern Indiana competes with investor-owned, municipal, and cooperative
electric utilities throughout its service area, and to a lesser extent with
other regulated natural gas utilities and propane and fuel oil suppliers.
Northern Indiana continues to be a strong competitor in the energy market as a
result of strong customer preference for natural gas.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS (CONTINUED)

Restructuring

During 2002, NiSource carried out a new reorganization initiative, which
resulted in the elimination of approximately 60 positions at Northern Indiana
mainly affecting executive and other management-level employees. Northern
Indiana's Gas Distribution Operations accrued approximately $1.8 million of
salaries, benefits and facilities costs associated with the reorganization
initiative. Payments made in 2003 in respect of the restructuring items within
Gas Distribution Operations were $0.4 million. Additionally, during 2003, the
restructuring reserve was decreased by $0.1 million related to previous
reorganization initiatives. The restructuring program for Gas Distribution
Operations is substantially complete with $0.5 million remaining of
restructuring liability at December 31, 2003.

Regulatory Matters

Changes in gas industry regulation, which began in the mid-1980s at the federal
level, have broadened to retail customers at the state level. For many years,
large industrial and commercial customers have had the ability to purchase
natural gas directly from marketers and to use Northern Indiana's Gas
Distribution Operations' facilities for transportation services. Beginning in
the mid-1990s, Northern Indiana has provided these CHOICE(R) programs for their
retail customers. Through December 2003, approximately 50,000 of Northern
Indiana's residential and small commercial customers have selected an alternate
supplier.

Northern Indiana continues to offer a Customer Choice(SM) program through a
regulatory initiative that is to expire at the end of 2004 as discussed in the
following paragraph. While the Customer Choice(SM) program is intended to
provide all customer classes with the opportunity to obtain gas supplies from
alternative merchants, Northern Indiana expects to play a substantial role in
supplying gas commodity services to its customers in the foreseeable future. As
customers enroll in these programs and purchase their gas from other suppliers,
Northern Indiana is sometimes left with pipeline capacity it has contracted for,
but no longer needs. Northern Indiana is currently recovering, or has the
opportunity to recover, the costs resulting from the unbundling of its services
and believes that most of such future costs will be mitigated or recovered.

On August 11, 1999, the IURC approved a flexible gas cost adjustment mechanism
for Northern Indiana. Under the approved procedure, the demand component of the
adjustment factor is determined, after hearings and IURC approval, and made
effective on November 1 of each year. The demand component remains in effect for
one year until a new demand component is approved by the IURC. The commodity
component of the adjustment factor is determined by monthly filings, which
become effective on the first day of each calendar month, subject to refund. The
monthly filings do not require IURC approval but are reviewed by the IURC during
the annual hearing that takes place regarding the demand component filing.
Northern Indiana's gas cost adjustment factor also includes a gas cost incentive
mechanism which allows the sharing of any cost savings or cost increases with
customers based on a comparison of actual gas supply portfolio cost to a
market-based benchmark price. Northern Indiana made its annual filing for 2002
on August 29, 2002. The IURC approved implementation of interim rates, subject
to refund, effective November 1, 2002. Testimony was filed indicating that some
gas costs should not be recovered. On September 30, 2003, the IURC issued an
order adjusting the recovery of costs in March 2003 and reducing recovery by
$3.8 million. On October 8, 2003, the IURC approved the demand component of the
adjustment factor. Northern Indiana made its annual filing for 2003 on August
26, 2003. The IURC approved implementation of interim rates subject to refund,
effective November 1, 2003. Northern Indiana expects the proceeding with respect
to the 2003 program to be concluded during the second quarter of 2004. In
addition, the gas cost incentive mechanism program, which allows the sharing of
any cost savings or cost increases with the customers expires at the end of
2004, under the current settlement approved by the IURC. Northern Indiana
expects the program to continue after 2004.

Environmental Matters

Currently, various environmental matters impact the Gas Distribution Operations
segment. As of December 31, 2003, a reserve has been recorded to cover probable
environmental response actions. Refer to Footnote 13D "Environmental Matters" in
the Consolidated Financial Statements, for additional information regarding
environmental matters for the Gas Distribution Operations segment.

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS (CONTINUED)

Market Conditions

An economic slowdown during 2001, which has extended through 2003 and
contributed to lower demand and the reduced industrial production, and fuel
switching (to coal, heating oil and distillate) resulted in industrial
throughput falling 25% from its peak of over 400 billion cubic feet (Bcf). The
steel industry, which has historically represented over two-thirds of the
industrial throughput in Indiana, was particularly hard hit with a number of
steel-related companies filing for bankruptcy.

Spot prices for the winter of 2002-2003 were in the $4.00-$6.00 per dekatherm
(Dth) range with a large spike toward $10 in February, significantly higher than
the prices experienced during the 2001-2002 winter season. Entering the
2002-2003 winter season, storage levels were near the top of the five-year
range; however, concerns over lower levels of natural gas production and
near-normal temperatures sustained higher prices. Mid-way through the 2002-2003
winter season natural gas storage levels fell below the trailing five-year
average ending the winter season with the lowest level of gas in storage ever
recorded by the Energy Information Administration (EIA) since the EIA began
recording such data in 1976.

Throughout the summer of 2003, prices stayed between $4.50 and $5.50/Dth. Thus
far during the winter of 2003-2004 price levels are between $5.00 and $7.00/Dth,
though stocks of storage gas continue to be higher than the five-year average.

Northern Indiana has state-approved recovery mechanisms that provide a means for
full recovery of prudently incurred gas costs. Gas costs are treated as
pass-through costs and have no impact on the net revenues recorded in the
period. The gas costs included in revenues are matched with the gas cost expense
recorded in the period and the difference is recorded on the balance sheet to be
included in future customer billings. During times of unusually high gas prices,
throughput and net revenue may be adversely affected as customers may reduce
their usage as a result of higher gas cost.

Northern Indiana has pursued non-traditional revenue sources within the evolving
natural gas marketplace. These efforts include both the sale of products and
services upstream of its service territory, the sale of products and services in
its service territories and gas supply cost incentive mechanisms for service to
its core markets. The upstream products are made up of transactions that occur
between Northern Indiana and a buyer for the sales of unbundled or rebundled gas
supply and capacity. The on-system services are offered by Northern Indiana to
customers and include products such as the transportation and balancing of gas
on Northern Indiana's system. The incentive mechanisms give Northern Indiana an
opportunity to share in the savings created from such things as gas purchase
prices paid below an agreed upon benchmark and its ability to reduce pipeline
capacity charges.

Capital Expenditures

Northern Indiana's Gas Distribution Operations segment's capital expenditure
program was $46.4 million in 2003 and is projected to be approximately $49.0
million in 2004. New business initiatives totaled approximately $28.5 million in
2003 and are expected to be $24.9 million in 2004. The remaining expenditures
are primarily for modernizing and upgrading facilities.

Weather

In general, Northern Indiana calculates the weather related revenue variance
based on changing customer demand driven by weather variance from normal heating
degree-days. Normal is evaluated using heating degree days across the Northern
Indiana's distribution region. The temperature used for measuring heating
degree-days (i.e. the estimated average daily temperature at which heating load
begins) is 65 degrees. In 2003, Northern Indiana revised its calculation of
normal heating degree-days using weather information from the average of 30
years ended 2001. This resulted in a decrease in normal heating degree-days of
about 3.5%.

17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
GAS DISTRIBUTION OPERATIONS (CONTINUED)

Weather in the Northern Indiana service territory for 2003 was 4% warmer than
normal, but 5% colder than 2002, resulting in increased deliveries to
residential, commercial and industrial customers as compared to 2002. This
increase in sales due to weather was offset by decreased non-weather usage,
primarily in the residential and transportation classes and decreases in
off-system sales. Weather in the Northern Indiana service territory for 2002 was
4% warmer than normal, but 8% colder than 2001, resulting in increased
deliveries to residential and commercial customers as compared to 2001. In
addition, transportation deliveries increased 7% over 2001. Weather in 2001 was
12% warmer than normal.

Throughput

Volumes sold and transported of 244.9 million dekatherms (MDth) for 2003
decreased 8.5 MDth from 2002. This reduction was primarily due to a decrease of
15.1 MDth in non-weather-related usage, a decrease of 5.1 MDth in off-system
sales, and partially offset by an increase of 10.2 MDth due to colder weather.

Volumes sold and transported of 253.4 MDth for 2002 increased 14.4 MDth from
2001, due to colder weather in 2002 compared to 2001 as well as increased
transportation to customers in the steel industry.

Net Revenues

Net revenues for 2003 were $284.6 million, a decrease of $1.9 million from 2002.
Net revenues increased by $15.5 million due to colder weather, but this was
offset by decreased non-weather-related usage. In addition, other revenues were
down slightly from 2002.

Net revenues for 2002 were $286.5 million, an increase of $9.9 million over
2001. The increase was mainly the result of colder weather in 2002 as compared
with 2001.

Operating Income

For 2003, operating income was $63.5 million, a decrease of $23.3 million from
2002. This decrease in operating income was due to the decrease in net revenues
discussed above, a $1.4 million increase in employee-related and support
services, a $6.3 million increase in pension and postretirement expenses and
$1.1 million increase in uncollectible customer accounts and other
customer-related expenses. Additionally, property taxes increased by $2.9
million and gross receipt taxes, which are generally offset in revenues,
increased $5.9 million, due to an increase in gross revenues as well as an
increase in the utility receipt tax rate from 1.2% to 1.4%, effective January 1,
2003.

For 2002, operating income was $86.8 million, an increase of $26.6 million over
2001, due to the increase in net revenues discussed above, lower
employee-related and support services of $7.1 million primarily resulting from
reorganization initiatives, a reduction of $4.1 million in uncollectible
customer accounts and other customer-related expenses, and decreased other taxes
of $4.0 million mainly resulting from decreased property taxes.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS

Market Conditions

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

19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)

The economic situation in the steel and steel-related industries continues to
have an impact on electric sales. The Indiana facilities of LTV Corporation and
Bethlehem Steel, which declared bankruptcy, were acquired by International Steel
Group (ISG) in early 2002. The steel sector continues to show improvement, with
a 6% improvement in sales for 2003 over 2002.

Restructuring

During the third quarter of 2002, NiSource carried out a new reorganization
initiative, which resulted in the elimination of approximately 400 positions
throughout all NiSource segments mainly affecting executive and other
management-level employees. During 2002, Electric Operations accrued
approximately $2.5 million of salaries and benefits associated with the
reorganization initiative. Payments of $0.6 million were made in 2003 in respect
of the reorganization initiatives mentioned above. Additionally, during 2003,
the restructuring reserve was decreased by $0.1 million related to previous
reorganization initiatives. The restructuring program for Electric Operations is
substantially complete with $0.7 million remaining of restructuring liability at
December 31, 2003.

Regulatory Matters

During 2002, Northern Indiana settled matters related to an electric rate
review. On September 23, 2002, the IURC issued an order adopting most aspects of
the settlement. The order approving the settlement provides that electric
customers of Northern Indiana will receive bill credits of approximately $55.1
million each year, for a cumulative total of $225 million, for the minimum
49-month period, beginning on July 1, 2002. The order also provides that 60% of
any future earnings beyond a specified cap will be retained by Northern Indiana.
Credits amounting to $52.0 million were recognized for electric customers in
2003. The order adopting the settlement was appealed to the Indiana Court of
Appeals by both the Citizens Action Coalition of Indiana and fourteen
residential customers. On October 14, 2003, the Appeals Court upheld the IURC's
approval of the settlement. The Citizens Action Coalition of Indiana and the
fourteen residential customers have filed a petition for transfer to the Supreme
Court of Indiana.

Northern Indiana submitted its quarterly fuel adjustment clause (FAC) filing for
the twelve-month period ended September 30, 2002, which included a calculation
for the sharing of earnings in excess of allowed earnings as outlined in the
IURC order regarding the electric rate review settlement. The IURC issued an
order related to the filing on January 29, 2003 rejecting Northern Indiana's
sharing calculation, which prorated the amount to be shared with the customers
based on the amount of time the rate credit, was in effect during the
twelve-month period. Northern Indiana filed a request for a rehearing and
reconsideration of the order. On March 12, 2003, the IURC denied Northern
Indiana's request and the appropriate amount has been refunded to customers.

On June 20, 2002, Northern Indiana, Ameren Corporation and First Energy
Corporation established terms for joining the Midwest Independent System
Operator (MISO) through participation in an independent transmission company
(ITC). The MISO arrangements were filed with the FERC, and on July 31, 2002, the
FERC issued an order conditionally approving these arrangements. On November 5,
2002, the ITC signed an agreement with MISO. At its April 30, 2003 meeting, FERC
approved the transfer of functional control of Northern Indiana's transmission
system to the ITC and issued an order addressing the pricing of electric
transmission. An IURC order approving the transfer of functional control of the
transmission system to the ITC was issued on September 24, 2003. An uncontested
settlement that authorized the reimbursement of $7.4 million to Northern Indiana
for incurred costs was approved by the FERC on July 31, 2003. This reimbursement
was received on September 30, 2003. Functional control was transferred to the
ITC and MISO on October 1, 2003.

As part of Northern Indiana's use of MISO's transmission service, Northern
Indiana will incur new categories of transmission charges based upon MISO's
FERC-approved tariff. One of the new categories of charges, Schedule 10, relates
to the payment of administrative charges to MISO for its continuing management
and operations of the transmission system. Northern Indiana filed a petition on
September 30, 2003, with the IURC seeking approval to establish accounting
treatment for the deferral of the Schedule 10 charges from MISO. A hearing at
the IURC was held on March 15, 2004.

The MISO has initiated the Midwest Market Initiative (MMI), which will develop
the structures and processes to be used to implement an electricity market for
the MISO region. This MMI proposes non-discriminatory transmission service,
reliable grid operation, and the purchase and sale of electric energy in a fair,
efficient and non-discriminatory manner.

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)

MISO filed detailed tariff information, with a planned initial operation date of
March 31, 2004. However, in October 2003, MISO petitioned FERC to withdraw this
tariff filing. FERC approved the withdrawal and has provided guidance to MISO as
to how it should proceed in the future. It is now expected that MISO will file a
new tariff application with FERC and will delay the initial operation date to
December 1, 2004. Northern Indiana and TPC are actively pursuing roles in the
MMI. At the current time, management believes that the MMI will change the
manner in which Northern Indiana and TPC conducts their electric business;
however, at this time management cannot determine the impact the MMI will have
on Northern Indiana.

Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the fuel adjustment clause (FAC). The FAC provides
for costs to be collected if they are below a negotiated cap. If costs exceed
this cap, Northern Indiana must demonstrate that the costs were prudently
incurred to achieve approval for recovery. A group of industrial customers
challenged the manner in which Northern Indiana applied costs associated with a
specific interruptible sales tariff. An estimated refund liability was recorded
in the first quarter of 2003. A settlement was reached with the customers and
Northern Indiana recorded the full costs of the settlement. As a result of the
settlement, the industrial customers challenge was withdrawn and dismissed in
January 2004. In addition, as a result of the settlement, Northern Indiana has
sought and received approval by the IURC to reduce the charges under the
interruptible sales tariff. This reduction will remain in effect until the Dean
H. Mitchell Generating Station (Mitchell Station) has been returned to service.

Currently, Northern Indiana is reviewing options to meet the electric needs of
its customers. This review includes an assessment of Northern Indiana's oldest
generating station units and various options regarding the return of the
Mitchell Station, constructed in the early 1950's, to service in the second half
of 2004. Northern Indiana has requested proposals for outside companies to
provide power under varying terms and conditions. These proposals are being
evaluated. In February 2004, the city of Gary announced an interest to acquire
the land on which the Mitchell Station plant is located for economic
development, including a proposal to increase the length of the runways at the
Gary International Airport. Northern Indiana expects to discuss the proposal to
acquire the land with the city of Gary in the near future. To date, the city has
not commenced any legal proceedings.

In January 2002, Northern Indiana filed for approval to implement an
environmental cost tracker (ECT). The ECT was approved by the IURC on November
26, 2002. Under the ECT Northern Indiana will be able to recover (1) allowance
for funds used during construction and a return on the capital investment
expended by Northern Indiana to implement Indiana Department of Environmental
Management's nitrogen oxide State Implementation Plan through an Environmental
Cost Recovery Mechanism (ECRM) and (2) related operation and maintenance and
depreciation expenses once the environmental facilities become operational
through an Environmental Expense Recovery Mechanism (EERM). The IURC order was
appealed to the Indiana Court of Appeals by the Citizens Action Coalition of
Indiana, where it was upheld by the Court on March 9, 2004. The Citizens Action
Coalition of Indiana has 30 days from the date of that decision to petition the
Court of Appeals for rehearing or the Supreme Court of Indiana for transfer of
the case to that court. However, in a related case, the Citizens Action
Coalition of Indiana has indicated, in a filing served on March 16, 2004, that
it does not intend to petition for a rehearing or file for a transfer to the
Supreme Court of Indiana. Under the Commission's November 26, 2002 order,
Northern Indiana is permitted to submit filings on a semi-annual basis for the
ECRM and on an annual basis for the EERM. Northern Indiana made its initial
filing of the ECRM, ECR-1, in February 2003 for capital expenditures of $58.4
million. On April 30, 2003, the IURC issued an order approving the ECRM filing,
providing for the collection of funds expended during construction and a return
on the capital investment through increased rates beginning with the May 2003
customer bills. Through December 31, 2003 the ECRM revenues amounted to $5.2
million. On August 1, Northern Indiana filed ECR-2 for capital investments of
$120.0 million. This petition was approved by the IURC on October 1, 2003. The
initial filing of the EERM was filed with the most recent semi-annual filing of
the ECT in February 2004, which included a filing of the ECR-3 for capital
investments of $194.1 million and an EERM amount of $1.9 million. Over the
timeframe required to meet the environmental standards, Northern Indiana
anticipates a total capital investment amounting to approximately $274.2
million. On February 4, 2004, the IURC approved Northern Indiana's latest
compliance plan with the estimate of $274.2 million.

21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
ELECTRIC OPERATIONS (CONTINUED)

Environmental Matters

Currently, various environmental matters impact Electric Operations segment. As
of December 31, 2003, a reserve has been recorded to cover probable
environmental response actions. Refer to Note 13D, "Environmental Matters" of
the Consolidated Financial Statements, for additional information regarding
environmental matters for the Electric Operations segment.

Capital Expenditure Program

The Electric Operations segment's capital expenditure program was $225.8 million
in 2003 and is projected to be approximately $144.7 million in 2004.
Expenditures for 2003 included improvements related to the operational integrity
of generation, transmission and distribution assets, expenditures related to
environmental compliance (NOx reduction), and additions to electric distribution
systems related to new business. Estimated expenditures for 2004 are
approximately $26.4 million for the NOx reduction program. The remaining
expenditures are for new business initiatives and maintenance programs.

Sales

Electric Operations sales were 18,439.2 gwh for the year 2003, a decrease of
336.7 gwh compared to 2002. The decrease in sales resulted from cooler weather
during the summer cooling season, partially offset by increases in non-weather
related usage and increased customer count.

Electric Operations sales for 2002 of 18,775.9 gwh increased 2,464.6 gwh
compared to 2001 due primarily to 27% warmer weather during the summer cooling
season.

Net Revenues

Electric Operations net revenues were $728.6 million for 2003, a decrease of
$39.8 million from 2002, primarily as a result of $24.0 million in additional
credits issued representing a full year of credits pertaining to the IURC
electric rate review settlement and the unfavorable impact of cooler weather of
$21.9 million. These decreases were partially offset by increases in
non-weather-related usage and customer growth.

Electric Operations net revenues were $768.4 million for 2002, a decrease of
$18.5 million from 2001, primarily as a result of $28.1 million in credits
issued pertaining to the IURC electric rate review settlement and $5.2 million
from decreased wholesale and wheeling net revenues. The unfavorable variance was
partially offset by $14.8 million from warmer weather during the summer cooling
season as compared to 2001.

Operating Income

Operating income for 2003 was $267.5 million, a decrease of $54.8 million from
2002. The decrease was primarily a result of the above-mentioned decreases in
revenues, increased pension and post-retirement expenses of $18.7 million and
increased property tax expense of $9.6 million, partially offset by decreased
administrative and employee related expenses of $12.3 and lower uncollectible
accounts receivable expense of $4.6 million

Operating income for 2002 was $322.3 million, a decrease of $18.4 million from
2001. The decrease was primarily a result of $28.1 million in credits issued
pertaining to the IURC electric rate review settlement and $5.2 million from
decreased wholesale and wheeling revenues, partially offset by $14.8 million
from the favorable impact of warmer weather during the summer cooling season.

22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
OTHER OPERATIONS

Effective November 1, 2001, Northern Indiana's power trading operations were
transferred to TPC, a subsidiary of NiSource. Similar type transactions (bulk
power and wheeling) are included in the Electric Operations Segment. The Other
Operations segment reflects power trading results for 2001 only. At December 31,
2003, the Other Operations segment includes the results of NRC, a wholly-owned
subsidiary of Northern Indiana, whose sole activity is to purchase accounts
receivable from Northern Indiana and sell these accounts to a commercial paper
conduit, within the limits of the agreement between NRC and the conduit. NRC
commenced operations on December 30, 2003.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures about Market Risk are reported in Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk Disclosures."

23

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NORTHERN INDIANA PUBLIC SERVICE COMPANY

24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS OF NORTHERN INDIANA PUBLIC SERVICE COMPANY:

We have audited the accompanying consolidated balance sheets and statements of
consolidated capitalization and long-term debt of Northern Indiana Public
Service Company and subsidiaries as of December 31, 2003 and 2002, and the
related statements of consolidated income, common shareholder's equity and cash
flows for each of the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedules listed in the index at
Item 15. These consolidated financial statements and financial statement
schedules are the responsibility of Northern Indiana Public Service Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northern Indiana
Public Service Company and subsidiaries as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

As explained in Note 1N to the consolidated financial statements, effective
January 1, 2001, Northern Indiana Public Service Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. As explained in Note 3 to the consolidated
financial statements, effective January 1, 2003, Northern Indiana Public Service
Company adopted SFAS 143, "Accounting for Asset Retirement Obligations."

DELOITTE & TOUCHE LLP
Chicago, Illinois
March 11, 2004

25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME

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

26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS

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

27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
CONSOLIDATED BALANCE SHEETS

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

28

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED CAPITALIZATION

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

29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED LONG-TERM DEBT

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

30

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS