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

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

31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED COMMON SHAREHOLDER'S EQUITY

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

32

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. HOLDING COMPANY STRUCTURE AND PRINCIPLES OF CONSOLIDATION. Northern Indiana
Public Service Company (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 and a registered
holding company under the Public Utility Holding Company Act of 1935, as
amended.

The consolidated financial statements include the accounts of Northern Indiana
and subsidiaries, after the elimination of all intercompany items. All
subsidiaries are wholly-owned by Northern Indiana. Certain reclassifications
were made to conform the prior years' financial statements to the current
presentation.

B. CASH, CASH EQUIVALENTS, AND RESTRICTED CASH. Northern Indiana considers all
investments with original maturities of three months or less to be cash
equivalents. Northern Indiana reports amounts deposited in brokerage accounts
for margin requirements in the restricted cash balance sheet caption. In
addition, Northern Indiana has amounts deposited in trust to satisfy
requirements for the provision of various property, liability, workers
compensation, and long-term disability insurance, which is classified as
restricted cash and disclosed as an operating cash flow on the statement of cash
flows.

C. BASIS OF ACCOUNTING FOR RATE-REGULATED OPERATIONS. Northern Indiana's
rate-regulated operations follow the accounting and reporting requirements of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS No. 71). 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 it is probable that such rates can be charged and
collected. Certain expenses and credits subject to utility regulation or rate
determination normally reflected in income are deferred on the balance sheet and
recognized in income as the related amounts are included in service rates and
recovered from or refunded to customers.

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 was approved by the appropriate regulatory bodies 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.

33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Regulatory assets and liabilities were comprised of the following items:

Regulatory assets of approximately $185.2 million are not presently included in
rate base and consequently are not earning a return on investment. These
regulatory assets are being recovered as components of cost of service over a
remaining life of up to 11 years. Regulatory assets of approximately $30.8
million require specific rate action. 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" (SFAS No.
143), recharacterized the liability as a regulatory liability as of December 31,
2003.

D. UTILITY PLANT AND OTHER PROPERTY AND RELATED DEPRECIATION AND MAINTENANCE.
Property, plant and equipment (principally utility plant) are stated at cost.
Northern Indiana records depreciation using composite rates on a straight-line
basis over the remaining service lives of the electric, gas and common
properties.

For Northern Indiana, an allowance for funds used during construction (AFUDC) is
capitalized on all classes of property except organization, land, autos, office
equipment, tools and other general property purchases. The allowance is applied
to construction costs for that period of time between the date of the
expenditure and the date on which such project is completed and placed in
service.

The pre-tax rate for AFUDC was 1.9% in 2003, 2.7% in 2002, and 5.0% in 2001. The
decline in the 2003 AFUDC rate, as compared with 2002, was due to lower
short-term interest rates and the use of short-term borrowings to fund
construction efforts.

The depreciation provisions for utility plant, as a percentage of the original
cost, for the periods ended December 31, 2003, 2002 and 2001 were as follows:

34

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
STATEMENTS OF CONSOLIDATED INCOME

35

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Northern Indiana follows the practice of charging maintenance and repairs,
including the cost of removal of minor items of property, to expense as
incurred. When property that represents a retired unit is replaced or removed,
the cost of such property is credited to utility plant, and such cost, together
with salvage, is charged to the accumulated provision for depreciation.

E. CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of units 17 and
18 at the R. M. Schahfer Generating Station, Northern Indiana capitalized the
carrying charges and deferred depreciation in accordance with orders of the
Indiana Utility Regulatory Commission (IURC), pending the inclusion of the cost
of each unit in rates. Such carrying charges and deferred depreciation are being
amortized over the remaining service life of each unit.

Northern Indiana has capitalized carrying charges and deferred depreciation and
certain operating expenses relating to its scrubber service agreement for its
Bailly Generating Station in accordance with an order of the IURC. The
accumulated balance of the deferred costs and related carrying charges is being
amortized over the remaining life of the scrubber service agreement.

F. AMORTIZATION OF SOFTWARE COSTS. External and internal costs associated with
computer software developed for internal use are capitalized. Capitalization of
such costs commences upon the completion of the preliminary stage of each
project in accordance with Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Once the
installed software is ready for its intended use, such capitalized costs are
amortized on a straight-line basis over a period of five to ten years. Northern
Indiana amortized $13.1 million in 2003, $12.6 million in 2002 and $13.2 million
in 2001 related to software costs.

G. REVENUE RECOGNITION. Revenues are recorded, as products and services are
delivered. Utility revenues are billed to customers monthly on a cycle basis.
Revenues are recorded on the accrual basis and include estimates for electricity
and gas delivered.

Revenues relating to energy trading operations, which were transferred to
EnergyUSA-TPC (TPC) effective November 1, 2001, were recorded based upon changes
in the fair values, net of reserves, of the related energy trading contracts.
Changes in the fair values of energy trading contracts were recognized in "Other
Income" net of associated costs on the consolidated income statement.

H. ACCOUNTS RECEIVABLE SALES PROGRAM. Northern Indiana enters into agreements
with third parties to sell certain accounts receivable without recourse. These
sales are reflected as reductions of accounts receivable in the accompanying
consolidated balance sheets and as operating cash flows in the accompanying
statements of consolidated cash flows. The costs of these programs, which are
based upon the purchasers' level of investment and borrowing costs, are charged
to other income in the accompanying statements of consolidated income.

I. USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

J. FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision for
adjustment to reflect increases and decreases in the cost of fuel and the fuel
cost of purchased power through operation of a fuel adjustment clause. As
prescribed by order of the IURC applicable to metered retail rates, the
adjustment factor has been calculated based on the estimated cost of fuel and
the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied, any
under recovery or over recovery caused by variances between estimated and actual
costs in a given three-month period are recorded as adjustments to revenue and
will be included in a future filing. Northern Indiana records any under recovery
or over recovery as a current regulatory asset or liability until such time as
it is billed or refunded to its customers. The fuel adjustment factor is subject
to a quarterly hearing by the IURC and remains in effect for a three- month
period.

36

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. GAS COST ADJUSTMENT CLAUSE. Northern Indiana adjusts its revenues for
differences between amounts collected from customers and actual gas costs and
adjusts future billings for such deferrals on a basis consistent with applicable
state-approved tariff provisions.

L. NATURAL GAS IN STORAGE. Natural gas in storage is valued using the last-in,
first-out (LIFO) inventory methodology. Based on the average cost of gas using
the LIFO method in December 2003, the estimated replacement cost of gas in
storage at December 31, 2003 , was less than the stated LIFO cost by $26.2
million. Based on the average cost of gas using the LIFO method in December
2002, the estimated replacement cost of gas in storage at December 31, 2002,
exceeded the stated LIFO cost by $86.7 million.

M. AFFILIATED COMPANY TRANSACTIONS. Northern Indiana receives executive,
financial, gas supply, sales and marketing, and administrative and general
services from an affiliate, NiSource Corporate Services Company (NCS), a
wholly-owned subsidiary of NiSource.

The costs of these services are charged to Northern Indiana based on payroll
costs and expenses incurred by NCS employees for the benefit of Northern
Indiana. These costs, which totaled $49.8 million for the year 2003, $61.3
million for the year 2002 and $72.1 million for the year 2001, consist primarily
of employee compensation and benefits. These costs are included in "Operation
Expense," on the consolidated income statement.

Northern Indiana had affiliated gas revenues of $11.0 million, $8.9 and $30.8
million for years 2003, 2002 and 2001, respectively. Also, Northern Indiana had
affiliated electric revenues of $18.8 million, $33.1 million and $2.8 million
for years 2003, 2002 and 2001, respectively.

Northern Indiana purchased natural gas and transportation services from
affiliated companies in the amount of $0.8 million, $7.6 million and $40.0
million, representing 0.1%, 1.5% and 6.9% of Northern Indiana's total gas costs
for years 2003, 2002 and 2001, respectively.

The December 31, 2003, and 2002 accounts receivable balance include
approximately $3.5 million and $6.6 million, respectively, due from associated
companies.

As of December 31, 2003, Northern Indiana had an intercompany short-term
borrowings of $578.4 million from NiSource Finance Corp. (NFC) at an interest
rate of 1.74%. As of December 31, 2002, Northern Indiana had an intercompany
short-term borrowings of $448.9 million from NFC at an interest rate of 2.11%.

Effective November 1, 2001, Northern Indiana's power trading operations were
transferred to TPC.

N. ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activity" (SFAS No. 133), establishes
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
at fair value, unless such contracts are exempted as normal under the provisions
of the standard. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and resulting designation.
Northern Indiana adopted SFAS No. 133 effective January 1, 2001, resulting in a
cumulative after-tax increase to other comprehensive income of approximately
$4.0 million.

If certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, or (b) a hedge of the exposure
to variable cash flows of a forecasted transaction. In order for a derivative
contract to be designated as a hedge, the relationship between the hedging
instrument and the hedged item or transaction must be highly effective. The
effectiveness test is performed at the inception of the hedge and each reporting
period thereafter, throughout the period that the hedge is designated. Any
amounts determined to be ineffective are recognized currently in earnings. As of
December 31, 2003, the ineffectiveness on Northern Indiana's hedged instruments
was immaterial.

37

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Unrealized and realized gains and losses are recognized each period as
components of other comprehensive income, regulatory assets and liabilities or
earnings 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. If a forecasted transaction
corresponding to a cash flow hedge is not expected to occur, the accumulated
gains or losses on the derivative are recognized currently in earnings. For fair
value hedges, the gains and losses are recorded in earnings each period 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 accommodated in rates.

O. INCOME TAXES AND INVESTMENT TAX CREDITS. Northern Indiana records income
taxes to recognize full interperiod tax allocations. Under the liability method,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and tax basis of
existing assets and liabilities. Previously recorded investment tax credits of
Northern Indiana were deferred and are being amortized over the life of the
related properties to conform to regulatory policy.

Northern Indiana joins in the filing of consolidated federal and state income
tax returns with its parent company, NiSource and certain of NiSource's other
affiliated companies. Northern Indiana is party to a tax allocation agreement
under which the consolidated tax is allocated among the members of the group in
proportion to each member's relative contribution to the group's consolidated
tax liability. Additionally, NiSource's tax savings are allocated to its
subsidiaries and recognized as adjustments to equity. The amount of tax savings
allocated to Northern Indiana for the 2002 and 2001 tax years were $16.8 million
and $14.4 million. These amounts were recorded in equity.

P. ENVIRONMENTAL EXPENDITURES. Northern Indiana accrues for costs associated
with environmental remediation obligations when the incurrence of such costs is
probable and the amounts can be reasonably estimated, regardless of when
expenditures are actually made. The undiscounted estimated future expenditures
are based on currently enacted laws and regulations, existing technology and
site-specific costs. The liability is adjusted as further information is
developed or circumstances change. Northern Indiana applies SFAS No. 71 and
establishes regulatory assets on the balance sheet to the extent that future
recovery of environmental remediation costs is probable through the regulatory
process.

In addition, Northern Indiana received approval from the IURC in 2003 to recover
costs associated with environmental compliance programs for nitrogen oxide
pollution-reduction equipment at the company's generating stations. (See Note 4
for further information.)

Q. EXCISE TAXES. Northern Indiana accounts for excise taxes that are customer
liabilities by separately stating on its invoices the tax to its customers and
recording amounts invoiced as liabilities payable to the applicable taxing
jurisdiction. These types of taxes, comprised largely of sales taxes collected,
are presented on a net basis affecting neither revenues nor cost of sales.
Northern Indiana accounts for other taxes for which it is liable by recording a
liability for the expected tax with a corresponding charge to "Other Taxes"
expense.

R. INTANGIBLE ASSETS. Northern Indiana had approximately $25.2 million of
intangible assets recorded at December 31, 2003, which reflected the
unrecognized prior service cost associated with the additional minimum liability
of the pension plans recognized pursuant to SFAS No. 87, "Employers' Accounting
for Pensions."

2. RESTRUCTURING ACTIVITIES

Since 2000, NiSource has implemented restructuring initiatives to streamline its
operations and realize efficiencies from the acquisition of Columbia Energy
Group (Columbia). The restructuring activities were primarily associated with
reductions in headcount and facility exit costs. Northern Indiana recognized a
charge, net of prior initiative adjustments of approximately $8.5 million during
2001.

38

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During 2002, NiSource developed 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
accrued approximately $4.3 million of salaries and benefits associated with the
eliminated positions during 2002. As of December 31, 2003, 57 of the
approximately 60 employees had been terminated.

For all plans, a total of approximately 180 management, professional,
administrative and technical positions have been identified for elimination at
Northern Indiana. As of December 31, 2003, 161 employees had been terminated, of
whom 9 employees were terminated during 2003. At December 31, 2003 and 2002, the
consolidated balance sheets reflected liabilities of $1.2 million and $2.4
million related to the restructuring plans, respectively. During 2003 and 2002
payments of $1.0 million and $5.4 million of benefits were made in association
with the restructuring plans, respectively. Additionally, during 2003, the
restructuring plan liability was reduced by $0.2 million due to a reduction in
estimated expenses related to previous reorganization initiatives. The reduction
in the estimated liability was reflected in operation and maintenance expense.

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the
FASB issued SFAS No. 143. SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity capitalizes
the cost, thereby increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted, and the capitalized cost is
depreciated over the useful life of the related asset. Northern Indiana defers
the difference between the amount recognized for depreciation and accretion and
the amount collected in rates, as required by SFAS No. 71.

Northern Indiana adopted the provisions of SFAS No. 143 on January 1, 2003, and
as a result an asset retirement obligation 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. Northern Indiana believes that the amounts recognized as
regulatory assets will be recoverable in future rates. 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 regulatory liabilities
and other removal costs were 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.

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.

FASB INTERPRETATION NO. 46 - (REVISED DECEMBER 2003) CONSOLIDATION OF VARIABLE
INTEREST ENTITIES. On January 17, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities"(FIN 46). FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or is entitled to receive a majority of the entity's residual
returns. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights, or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN 46 also requires various disclosures
about variable interest entities that a company is not required to consolidate
but in which it has a significant variable interest. On December 18, 2003, the
FASB deferred the implementation of FIN 46 to the first quarter of 2004. FIN 46,
when implemented, will not have an impact on Northern Indiana's financial
position or results of operations.

39

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SFAS NO. 149 - AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. Effective July 1, 2003, Northern Indiana adopted SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
(SFAS No. 149). SFAS No. 149 codifies and clarifies financial accounting and
reporting for derivative instruments and hedging activities under SFAS No. 133
primarily in connection with decisions made by the Derivatives Implementation
Group and for implementation issues raised in the application of SFAS No. 133.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003. SFAS No. 149 did not have a material impact on Northern Indiana's results
of operations during 2003. However, the statement could have a significant
impact on the number of contracts that will be marked to market through
earnings.

SFAS NO. 150 - ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY. In the second quarter 2003, the FASB issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity" (SFAS No. 150). SFAS No. 150 requires
classification of a financial instrument within its scope as a liability because
it embodies an obligation of the issuer. As defined in SFAS No. 150, an
obligation is a conditional or unconditional duty or responsibility to transfer
assets or to issue equity shares. Instruments that fall within the scope of SFAS
No. 150 include mandatorily redeemable financial instruments, obligations to
repurchase an issuer's equity shares by transferring assets and certain
obligations to issue a variable number of shares. SFAS No. 150 is generally
effective for interim periods beginning after June 15, 2003 for financial
instruments created prior to June 1, 2003. For any instruments entered into or
modified after May 31, 2003, the Statement is effective for those instruments
upon consummation or modification. As a result of SFAS No. 150, Northern Indiana
reclassified its mandatory redeemable preferred stock to a non-current liability
in the third quarter of 2003.

EITF ISSUE NO. 03-11 - REPORTING REALIZED GAINS AND LOSSES ON DERIVATIVE
INSTRUMENTS THAT ARE SUBJECT TO FASB STATEMENT NO. 133 AND NOT "HELD FOR TRADING
PURPOSES" AS DEFINED IN EITF ISSUE NO. 02-03. In August 2003, the EITF released
Issue No. 03-11, which provides guidance on whether to report realized gains or
losses on derivative contracts that settle on a net basis. Currently, Northern
Indiana generally reports contracts requiring physical delivery of a commodity
on a gross basis. EITF No. 03-11 did not have a material impact on Northern
Indiana's results of operations.

FASB STAFF POSITION NO. FAS 106-1 - ACCOUNTING AND DISCLOSURE REQUIREMENTS
RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF
2003. On December 8, 2003, the President of the United States signed the
Medicare Prescription Drug, Improvement and Modernization Act into law. The Act
introduces a prescription drug benefit under Medicare (Medicare Part D) as well
as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D.
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," requires presently enacted changes in relevant laws to be considered
in current period measurements of postretirement benefit costs and the
Accumulated Projected Benefit Obligation. However, specific authoritative
guidance on the accounting for the federal subsidy is currently pending, and
Northern Indiana has elected to defer accounting for the effects of this
pronouncement as allowed by this staff position. It is expected that the law and
pronouncement will reduce the effects of the currently high prescription drug
trend rates on Northern Indiana's post-retirement benefits costs and cash flows
assuming that Northern Indiana's post-retirement benefits remain unchanged.
However, it is not certain at this time what effects this law and pronouncement
will have on Northern Indiana's postretirement benefit costs and cash flows.

4. 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.

40

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 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.

Northern Indiana has been recovering the costs of electric power purchased for
sale to its customers through the FAC. The FAC provides for costs to be
collected if they are below a negotiated cap. If costs exceed this cap, Northern
Indiana must demonstrate that the costs were prudently incurred to achieve
approval for recovery. 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 the oldest generating
station units owned by the company and the options to return 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 of 2004, the city of Gary announced an interest to acquire the land on
which the Mitchell Station plant resides 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

41

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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.

5. RISK MANAGEMENT ACTIVITIES

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

HEDGING ACTIVITIES. The activity for the years 2003 and 2002 affecting other
comprehensive income, with respect to cash flow hedges included the following:

Unrealized gains and losses on Northern Indiana's hedges were recorded as price
risk management assets and liabilities. The accompanying Consolidated Balance
Sheets reflected price risk management assets related to unrealized gains and
losses on hedges of $4.6 million and $3.5 million at December 31, 2003 and 2002,
respectively, which were included in "Current Assets." Price risk management
liabilities were $0.5 million and $0.8 million at December 31, 2003 and 2002,
respectively, all of which was included in "Current Liabilities."

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During 2003 and 2002, no amounts were recognized in earnings due to
ineffectiveness and there were no components of the derivatives' fair values
excluded in the assessment of hedge effectiveness. Also, during 2003, Northern
Indiana did not reclassify any amount from other comprehensive income to
earnings, due to the probability that certain originally forecasted transactions
would not occur. It is anticipated that during the next twelve months the
expiration and settlement of cash flow hedge contracts will result in a minimal
income recognition of amounts being currently classified in other comprehensive
income, net of tax.

Northern Indiana offers a Price Protection Service as an alternative to the
standard gas cost recovery mechanism. This service provides Northern Indiana
customers with the opportunity to either lock in their gas cost or place a cap
on the total cost that could be charged for any future month specified. In order
to hedge the anticipated physical future purchases associated with these
obligations, Northern Indiana purchases New York Mercantile Exchange (NYMEX)
futures and options contracts that correspond to a fixed or capped price and the
associated delivery month. The NYMEX futures and options contracts are
designated as cash flow hedges.

Northern Indiana offers a Dependabill program as an alternative to the standard
tariff rate that is charged to residential customers. The program allows
Northern Indiana customers to fix their total monthly bill at a flat rate
regardless of gas usage or commodity cost. In order to hedge the anticipated
physical purchases associated with these obligations, Northern Indiana purchases
fixed priced gas and the option to call on additional volumes that match the
anticipated delivery needs of the program. These derivatives are presently
marked-to-market and have not been designated as cash flow hedges. The
consolidated balance sheets reflected $0.3 million of price risk management
liabilities associated with these programs.

Northern Indiana is also engaged in writing options that potentially obligates
Northern Indiana to purchase or sell gas at the holder's discretion at some
future market-based price. These written options are derivative instruments,
must be marked to fair value and do not meet the requirement for hedge
accounting treatment. Northern Indiana also uses NYMEX derivative contracts to
minimize its gas costs. These contracts do not qualify for hedge accounting and
must be marked to fair value. Because these derivatives are used within the
framework of its gas cost incentive mechanism, regulatory assets or liabilities
are recorded to offset the change in the fair value of these derivatives.

TRADING ACTIVITIES. Northern Indiana's trading operations included the
activities of its power trading business. Since power trading assets and
liabilities were transferred to TPC, effective November 1, 2001, there were no
trading assets and liabilities at December 31, 2003 and December 31, 2002.

Other Income (Deductions) in the Statement of Consolidated Income were comprised
of the following items:

43

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES

The components of income tax expense were as follows:

Total income taxes are different from the amount that would be computed by
applying the statutory Federal income tax rate to book income before income tax.
The major reasons for this difference were as follows:

44

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Deferred income taxes resulted from temporary differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
The principal components of Northern Indiana's net deferred tax liability were
as follows:

On June 28, 2002, the Governor of Indiana signed into law legislation that
increased the Indiana Corporate Income tax rate from 4.5% to 8.5% effective
January 1, 2003. As a result, Northern Indiana recorded an additional deferred
income tax liability of $64.1 million (net) in the second quarter of 2002 to
reflect the impact of the increased tax rate. Northern Indiana recorded a
regulatory asset in the amount of $65.0 million to reflect the probable
collection of the increased tax liability through future rates. The overall
impact on income tax expense in 2002 was a reduction of $0.9 million.

7. PENSION AND OTHER POSTRETIREMENT BENEFITS

NiSource provides defined contribution plans and a noncontributory defined
benefit retirement plan that cover employees of Northern Indiana. Benefits under
the defined benefit retirement plan reflect the employees' compensation, years
of service and age at retirement. Additionally, Northern Indiana provides health
care and life insurance benefits for certain retired employees under NiSource
post-retirement benefit plan. The majority of employees may become eligible for
these benefits if they reach retirement age while working for Northern Indiana.
The expected cost of such benefits is accrued during the employees' years of
service. Current rates of rate-regulated companies include postretirement
benefit costs on an accrual basis, including amortization of the regulatory
assets that arose prior to inclusion of these costs in rates. For most plans,
cash contributions are remitted to grantor trusts. In 2000, NiSource began using
September 30 as its measurement date rather than December 31 for its pension and
postretirement benefit plans.

NiSource employs a total return investment approach whereby a mix of equities
and fixed income investments are used to maximize the long-term return of plan
assets for a prudent level of risk. Risk tolerance is established through
careful consideration of plan liabilities, plan funded status, and asset class
volatility. The investment portfolio contains a diversified blend of equity and
fixed income investments. Furthermore, equity investments are diversified across
U.S. and non-U.S. stocks, as well as growth, value, small and large
capitalizations. Other assets such as private equity and hedge funds are used
judiciously to enhance long-term returns while improving portfolio
diversification. Derivatives may be used to mitigate market exposure in an
efficient and timely manner; however, derivatives may not be used to leverage
the portfolio beyond the market value of the underlying assets. Investment risk
is measured and monitored on an ongoing basis through quarterly investment
portfolio reviews, annual liability measurements, and periodic asset/liability
studies.

The most important component of an investment strategy is the portfolio asset
mix, or the allocation between the various classes of securities available to
the pension plan for investment purposes. The asset mix and acceptable minimum
and maximum ranges established represents a long-term view and are as follows:

45

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Asset Mix Policy of Total Fund

Pension Plan and Postretirement Plan Asset Mix at September 30, 2003:

NiSource employs a building block approach with proper consideration of
diversification and rebalancing in determining the long-term rate of return for
plan assets. Historical markets are studied and long-term historical
relationships between equities and fixed income are analyzed to ensure that they
are consistent with the widely accepted capital market principle that assets
with higher volatility generate greater return over the long run. Current market
factors such as inflation and interest rates are evaluated before long-term
capital market assumptions are determined. Peer data and historical returns are
reviewed to check for reasonability and appropriateness.

Due to the upswing in the equity markets in 2003, the fair value of NiSource's
pension fund assets has increased since September 30, 2002. However, the
discount rate used to measure the accumulated benefit obligation has decreased,
which slightly offset the increase in the pension assets. In accordance with
FASB Statement No. 87, "Employers' Accounting for Pensions," Northern Indiana
adjusted its minimum pension liability at December 31, 2003 to recognize its
share of the estimated minimum liability. The adjustment resulted in a decrease
to the retirement benefit liabilities of $32.3 million, a decrease to deferred
income tax assets of $13.2 million and an increase to other comprehensive income
of $19.1 million after-tax. 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. In addition,
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.

46

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Northern Indiana participates in the NiSource pension and postretirement benefit
plans. The following disclosures are for the NiSource pension and postretirement
benefit plans, which include Northern Indiana and NiSource Corporate Service
employees. The following tables provide a reconciliation of the plans' funded
status and amounts reflected in NiSource's Consolidated Balance Sheets at
December 31 based on a September 30 measurement date:

47

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table provides the components of the plans' net periodic benefits
cost (benefit) for each of the three years:

The expense amounts above are for the total NiSource plan. Northern Indiana
recorded pension expense of $32.5 million and $11.7 million for 2003 and 2002,
respectively. In 2001, Northern Indiana recorded pension income of $2.8 million.
For 2003, 2002 and 2001 Northern Indiana recorded other post-retirement expense
of $20.1 million, $14.4 million and $22.0 million, respectively.

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:

8. AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS

The authorized classes of par value and no par value cumulative preferred and
preference stocks of Northern Indiana are as follows: 2,400,000 shares of
Cumulative Preferred with a $100 par value; 3,000,000 shares of Cumulative
Preferred with no par value; 2,000,000 shares of Cumulative Preference with a
$50 par value (none outstanding); and 3,000,000 shares of Cumulative Preference
with no par value (none outstanding).

The preferred stockholders of Northern Indiana have no voting rights, except in
the event of default on the payment of four consecutive quarterly dividends, or
as required by Indiana law to authorize additional preferred shares, or by the
Articles of Incorporation in the event of certain merger transactions.

48

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The redemption prices at December 31, 2003, for the cumulative preferred stock,
which is redeemable solely at the option of Northern Indiana, in whole or in
part, at any time upon thirty days' notice, were as follows:

The redemption prices at December 31, 2003, as well as sinking fund provisions,
for the cumulative preferred stock subject to mandatory redemption requirements,
or whose redemption is outside the control of Northern Indiana, were as follows:

Sinking fund requirements with respect to redeemable preferred stocks
outstanding at December 31, 2003, for each of the subsequent five years were as
follows:

9. COMMON STOCK

All of Northern Indiana's common shares are owned by NiSource.

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.

49

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. LONG-TERM DEBT

Sinking fund requirements and maturities of long-term debt outstanding at
December 31, 2003, for each of the five years subsequent to December 31, 2003,
were as follows:

Unamortized debt expense, premium and discount on long-term debt applicable to
outstanding bonds are being amortized over the lives of such bonds.
Reacquisition premiums have been deferred and are being amortized. These
premiums are not earning a return during the recovery period.

11. SHORT-TERM BORROWINGS - AFFILIATED

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 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 issue 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 replaced 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%.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate fair
value:

INVESTMENTS. Investments are carried at cost, which approximates market value.

LONG-TERM DEBT AND PREFERRED STOCK. The fair values of these securities are
estimated based on the quoted market prices for the same or similar issues or on
the rates offered for securities of the same remaining maturities. Certain
premium costs associated with the early settlement of long-term debt are not
taken into consideration in determining fair value.

The carrying amount and estimated fair values of financial instruments were as
follows:

50

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SALE OF TRADE ACCOUNTS RECEIVABLE. 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.

Northern Indiana's accounts receivable program qualifies for sale accounting
based upon meeting the conditions in 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 the agreement.

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

13. OTHER COMMITMENTS AND CONTINGENCIES

A. CAPITAL EXPENDITURES. Northern Indiana expects that approximately $193.7
million will be expended for construction purposes during 2004.

B. SERVICE AGREEMENTS. 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.

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

D. ENVIRONMENTAL MATTERS.

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

Proposals for voluntary initiatives and mandatory controls are being discussed
both in the United States and worldwide to reduce so-called "greenhouse gases"
such as carbon dioxide, a by-product of burning fossil fuels, and methane, a
component of natural gas. Northern Indiana engages in efforts to voluntarily
report and reduce greenhouse gas emissions. Northern Indiana will monitor and
participate in developments related to efforts to register and potentially
regulate greenhouse gas emissions.

GAS DISTRIBUTION. Northern Indiana is a "potentially responsible party" (PRP) at
waste disposal sites under the Comprehensive Environmental Response Compensation
and Liability Act (CERCLA) (commonly known as Superfund) and similar state laws,
including at former manufactured gas plant (MGP) sites which it, or its
corporate predecessors, own or previously owned or operated. Northern Indiana
may be required to share in the cost of clean up of such sites. In addition,
Northern Indiana has responsibility for corrective action under the Resource
Conservation and Recovery Act (RCRA) for closure and clean-up costs associated
with underground storage tanks and under the Toxic Substances Control Act for
clean up of polychlorinated biphenyls. The final costs of clean up have not yet
been determined. As site investigations and clean ups proceed and as additional
information becomes available reserves are adjusted.

51

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A program has been instituted to identify and investigate former MGP sites where
Northern Indiana or predecessors are the current or former owner. The program
has identified 24 such sites and initial investigations have been conducted at
22 sites. Of these sites, additional investigation activities have been
completed or are in progress at 20 sites and remedial measures have been
implemented or completed at 9 sites. This effort includes the sites specified in
the January 2004 agreement entered into by the Indiana Department of
Environmental Management, Northern Indiana, and other Indiana utilities under
the Indiana Voluntary Remediation Program. Only those site investigation,
characterization and remediation costs currently known and determinable can be
considered "probable and reasonably estimable" under SFAS No. 5, "Accounting for
Contingencies" (SFAS No. 5). As costs become probable and reasonably estimable,
reserves will be adjusted. As reserves are recorded, regulatory assets are
recorded to the extent environmental expenditures are expected to be recovered
through rates. Northern Indiana is unable, at this time, to accurately estimate
the time frame and potential costs of the entire program. Management expects
that, as characterization is completed, additional remediation work is performed
and more facts become available, Northern Indiana will be able to develop a
probable and reasonable estimate for the entire program or a major portion
thereof consistent with the Security Exchange Commission's Staff Accounting
Bulletin No. 92 (SAB No. 92) which covers accounting and disclosures relating to
loss contingencies, SFAS No. 5, and American Institute of Certified Public
Accountants Statement of Position 96-1, "Environmental Remediation Liabilities"
(SOP No. 96-1).

As of December 31, 2003, a reserve of approximately $12.4 million has been
recorded to cover probable environmental response actions. The ultimate
liability in connection with these sites will depend upon many factors,
including the volume of material contributed to the site, years of ownership or
operation, the number of other potentially responsible parties and their
financial viability and the extent of environmental response actions required.
Based upon investigations and management's understanding of current
environmental laws and regulations, Northern Indiana believes that any
environmental response actions required will not have a material effect on its
financial position.

ELECTRIC OPERATIONS.

AIR. In December 2001, the U.S. Environmental Protection Agency (EPA) approved
regulations developed by the State of Indiana to comply with EPA's nitrogen
oxide (NOx) State Implementation Plan (SIP) call. The NOx SIP call requires
certain states, including Indiana, to reduce NOx levels from several sources,
including industrial and utility boilers, to lower regional transport of ozone.
Compliance with the NOx limits contained in these rules is required by May 31,
2004. Northern Indiana's plans include the installation of Selective Catalytic
Reduction NOx reduction technology at each of its active generating stations to
comply with the rules and estimates total capital costs will range from $250.0
to $300.0 million. Actual compliance costs may vary depending on a number of
factors including market demand and resource constraints, uncertainty of future
equipment and construction costs, and the potential need for additional control
technology.

After a lengthy legal proceeding, the EPA has begun implementing the Particulate
Matter and Ozone National Ambient Air Quality Standards it revised in July 1997.
As a result, EPA is in the process of designating areas not attaining the
standards. After designation, the Clean Air Act provides for a process that
would provide for promulgation of rules specifying a compliance level,
compliance deadline, and necessary controls to be implemented within designated
areas over the next few years. Resulting rules could require additional
reductions in sulfur dioxide, particulate matter and NOx emissions from
coal-fired boilers (including Northern Indiana's electric generating stations).

In 2003, the Bush Administration and the EPA proposed new legislation and rules
for SO2, NOx and mercury emissions from electric power generating stations. The
Administration's Clear Skies Act would provide for significant reductions of
SO2, NOx and mercury emissions from electric power generating stations,
including Northern Indiana's stations. Similarly, EPA's proposed regulations
contain phased in reductions for these three pollutants under alternative
control approaches, including emission allowance based trading programs. Until
the legislation passes or the rulemaking is completed by EPA and implemented by
the States, the potential impact on Northern Indiana will be uncertain.
Nonetheless, if implemented, these potential reduction requirements could impose
substantial costs on affected utilities, including Northern Indiana.

52

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During 1999, the EPA initiated enforcement actions against several electric
utilities alleging violations of the new source review provisions of the Clean
Air Act and subsequently has issued additional information collection requests
to many other utilities. Northern Indiana has received and responded to
information requests from the EPA on this subject most recently in June 2002. At
this time, Northern Indiana is unable to predict the result of the EPA's review
of Northern Indiana's information responses. Subsequent to this activity the EPA
has undertaken to reform its New Source Rules.

The EPA has proposed Maximum Achievable Control Technology (MACT) standards for
hazardous air pollutants for stationary combustion turbines, industrial boilers
and reciprocating internal combustion engines. The EPA has issued final
regulations for stationary turbines and is expected to issue final standards for
the other categories in the near future. The final regulations for turbines are
not expected to have a substantial impact on Northern Indiana. Northern Indiana
will continue to monitor the proposed MACT standards for potential applicability
and cost impact to its operations. Until finalization of the proposed standards,
Northern Indiana is unable to predict what, if any, additional compliance costs
may result.

The EPA is in the process of developing a program to address regional haze.
These rules will mandate that states require power plants built between 1962 and
1977 to install the "best available retrofit technology" (BART). The BART
program will target for control by 2013 those pollutants that limit visibility,
namely particulate, sulfur dioxide and/or nitrogen oxides. Until the program is
developed, Northern Indiana cannot predict the cost of complying with these
rules.

WATER. The Great Lakes Water Quality Initiative (GLI) program is expected to add
new water quality standards for facilities that discharge into the Great Lakes
watershed, including Northern Indiana's three electric generating stations
located on Lake Michigan. The State of Indiana has promulgated its regulations
for this water discharge permit program and has received final EPA approval. All
issues in subsequent litigation related to the EPA's actions have been resolved
with the exception of the EPA's disapproval of IDEM's method for testing whole
effluent toxicity. Northern Indiana expects that IDEM will issue a proposed
permit renewal for each of its lakeside stations. Pending issuance of these
permits, the costs of complying with these requirements cannot be predicted at
this time.

In 2003 the EPA proposed revised rules under section 316(b) of the Clean Water
Act that would establish requirements for minimizing adverse environmental
impacts from cooling water intake structures and the water withdrawn by steam
electric power plants, including Northern Indiana's electric generating
stations. The EPA is expected to issue final rules in 2004. The requirements
will be implemented through permits for the affected facilities. Until the rules
are finalized and the new permit requirements are established, the costs of
complying with these rules cannot be predicted.

REMEDIATION. Northern Indiana is a potentially responsible party under CERCLA
and similar state laws at three waste disposal sites and shares in the cost of
their cleanup with other potentially responsible parties. At one of these sites,
Northern Indiana has entered into an EPA Administrative Order on Consent to
perform a removal action in the vicinity of a third party, state permitted
landfill where Northern Indiana contracted for fly ash disposal. The site is the
subject of a Federal citizens suit and a state court action. Meanwhile, Northern
Indiana, the EPA, and the IDEM are currently evaluating the potential for
additional actions at this site. In addition, Northern Indiana has corrective
action liability under the Resource Conservation & Recovery Act (RCRA) for
closure and clean-up costs associated with treatment, storage and disposal
sites. As of December 31, 2003, a reserve of approximately $2.9 million has been
recorded to cover probable environmental response actions at these sites. The
ultimate liability in connection with these sites will depend upon many factors,
including the volume of material contributed to the site, years of ownership of
operations, the number of other potentially responsible parties and their
financial viability and the extent of environmental response required. Based
upon investigations and management's understanding of current environmental laws
and regulations, Northern Indiana believes that any environmental response
required will not have a material effect on the its financial position or
results of operations.

E. OPERATING LEASES. Payments made in connection with operating leases are
primarily charged to operation and maintenance expense as incurred. Such amounts
were $13.3 million in 2003, $13.3 million in 2002 and $11.5 million in 2001.

53

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Future minimum rental payments required under operating leases that have initial
or remaining noncancellable lease terms in excess of one year are:

F. PURCHASE COMMITMENTS. Northern Indiana has service agreements that provide
for pipeline capacity, transportation and storage services. These agreements
which have expiration dates ranging from 2004 to 2013, require Northern Indiana
to pay fixed monthly charges. The estimated aggregate amounts of such payments
at December 31, 2003, were:

14. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table displays the components of Accumulated Other Comprehensive
Income.

15. SEGMENTS OF BUSINESS

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

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.

Northern Indiana's operations are divided into three primary business segments.
The Gas Distribution Operations segment provides natural gas service and
transportation for residential, commercial and industrial customers in Indiana.
The Electric Operations segment provides electric service in 21 counties in the
northern part of Indiana and engages in electric wholesale and wheeling
transactions. The Other Operations segment engaged in electric power trading
through October 2001. Although Northern Indiana does not participate in power
trading activities currently, in the future, Northern Indiana might resume power
trading operations. 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.

54

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following tables provide information about business segments. Adjustments
have been made to the segment information to arrive at information included in
the results of operations and financial position. Northern Indiana uses
operating income as its primary measurement for each of the reported segments.
Operating income is derived from revenues and expenses directly associated with
each segment.

The adjustments above represent the revenues and pre-tax operating income of
Northern Indiana's electric trading business which are reflected in the Other
Operations segment above but are reported as a component of Other Income
(Deductions) in the Statements of Consolidated Income.

55

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly financial data does not always reveal the trend of Northern Indiana's
business operations due to nonrecurring items and seasonal weather patterns
which affect earnings and related components of net revenues and operating
income.

56

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS

TWELVE MONTHS ENDED DECEMBER 31, 2003

NORTHERN INDIANA PUBLIC SERVICE COMPANY

SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS

TWELVE MONTHS ENDED DECEMBER 31, 2002

57

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS

TWELVE MONTHS ENDED DECEMBER 31, 2001

58

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

NORTHERN INDIANA PUBLIC SERVICE COMPANY

On May 21, 2002 the Board of Directors of NiSource, upon recommendation of its
Audit Committee, dismissed Arthur Andersen LLP as the independent public
accountants for NiSource and its subsidiaries, Columbia Energy Group and
Northern Indiana (collectively, the "Registrants"), and decided to engage
Deloitte & Touche LLP to serve as the Registrants' independent public
accountants for 2002. Information with respect to this matter is included in
Northern Indiana's current report on Form 8-K filed May 21, 2002, which
information is incorporated herein by reference.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Northern Indiana's principal executive officer and its principal financial
officer, after evaluating the effectiveness of Northern Indiana's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)), have concluded based on the evaluation required by paragraph (b) of
Exchange Act Rules 13a-15 and 15d-15 that, as of the end of the period covered
by this report, Northern Indiana's disclosure controls and procedures were
adequate and effective to ensure that material information relating to Northern
Indiana and its consolidated subsidiaries would be made known to them by others
within those entities.

Changes in Internal Controls

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

59

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

NORTHERN INDIANA PUBLIC SERVICE COMPANY

The following is a list of executive officers of Northern Indiana, including
their names, ages and offices held, as of December 31, 2003.

EXECUTIVE OFFICERS OF THE REGISTRANT

60

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

David J. Vajda.................... 47 26 Vice President and Treasurer since January
2003. Vice President and Treasurer,
NiSource, Inc. since January 2003. Vice
President, Finance, Indiana Energy Group
of NiSource Corporate Services Company
from August 2002 to December 2002. Vice
President, Finance and Administration,
Merchant Energy of NiSource Corporate
Services Company from October 2000 to
August 2002. Vice President, Finance of
Northern Indiana from February 2000 to
October 2000. Controller from July 1996
to January 2000.

Throughout the past five years, each of the executive officers has been
continuously active in the business of Northern Indiana or its parent, NiSource
except as follows: Jeffrey W. Grossman was Vice President and Controller of
Columbia Energy Group from May 1996 to October 2000.

The following chart gives information about current directors of Northern
Indiana.

61

ITEM 11. EXECUTIVE COMPENSATION

NORTHERN INDIANA PUBLIC SERVICE COMPANY

SUMMARY. The following table summarizes all annual and long-term compensation
for services provided to Northern Indiana for the years 2003, 2002, and 2001
awarded to, earned by or paid to executive officers of Northern Indiana whose
total annual salary and bonus exceeded $100,000 (the "Named Officers"). The
following table does not include information relating to the annual and
long-term compensation for executive officers who provide service both to
Northern Indiana and to NiSource Inc. (NiSource) and its subsidiaries.

SUMMARY COMPENSATION TABLE

(1) Compensation deferred at the election of Named Officer is reported in
the category and year in which such compensation was earned. The 2001
amount for Mr. Hatches includes salary for April 1, 2001 through
December 31, 2001.

(2) All bonuses are paid pursuant to the NiSource Annual Incentive Plan.

(3) The 2002 amount for Mr. Godwin includes imputed income of $15,570 for
the purchase of a company automobile and an associated tax allowance of
$10,380. The 2001 amount shown for Mr. Hatches includes a relocation
allowance of $11,681 and a related tax allowance of $8,681.

62

ITEM 11. EXECUTIVE COMPENSATION (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

(4) Represents restricted and contingent stock awarded under the NiSource
Time Accelerated Restricted Stock Award Program ("TARSAP") which began
in 2003. The amounts shown are based on the closing sale price of
NiSource's common stock on December 31, 2002, as reported on the New
York Stock Exchange Composite Transactions Tape. Vesting of restricted
stock under the Long Term Incentive Plan in prior years were
performance based and are shown under the Long-Term Incentive Plan
Payouts column. See Note 5 below. As of December 31, 2003, the total
NiSource shares outstanding under the TARSAP (including those shares
held by the Named Officers) was 709,785 with an aggregate value of
$11,300,006.55, based on NiSource's closing market price on such date
($21.94).

(5) The payouts shown are based on the value, at date of vesting, of
restricted shares awarded under NiSource's Long-Term Incentive Plan
which vested during the years shown. Total restricted shares held
(assuming 100% vesting) and aggregate market value at December 31, 2003
(based on the closing sale price of the Common Stock on that date as
reported on the New York Stock Exchange Composite Transactions Tape for
the Named Officers were as follows: Mr. Hatches, 20,447 shares valued
at $448,607, Mr. Maassel, 16,685 shares valued at $366,069, Mr. Godwin,
22,101 shares valued at $484,896 and Mr. Foley, 303 shares valued at
$6,060. Dividends on the restricted shares are paid to the Named
Officers.

(6) "All Other Compensation" represents NiSource's contributions to the
401(K) Plan $6,346 for Mr. Hatches, $8,967 for Mr. Maassel, $11,341 for
Mr. Godwin and $7,379 for Mr. Foley.

(7) The 2003 amount shown for Mr. Foley reflects the value of restricted
stock vesting under the PEI Holdings, Inc. incentive plan.

OPTION GRANTS IN 2003. The following table sets forth information concerning the
grants of options to purchase common stock NiSource made during 2003 to the
Named Officers. No stock appreciation rights were awarded during 2003.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS

(1) All options granted in 2003 are fully exercisable commencing one year
from the date of grant. Vesting may be accelerated as a result of
certain events relating to a change in control of NiSource. The
exercise price may be paid by delivery of already owned shares of
common stock and tax withholding obligation related to exercise may be
paid by delivery of already owned shares of common stock or by reducing
the number of shares of common stock received on exercise, subject to
certain conditions.

(2) Based on an aggregate of 2,464,996 options granted to all NiSource
employees in 2003.

(3) The options were granted on January 1, 2003 at the average of high and
low sale prices of NiSource common stock on December 31, 2002 as
reported on the New York Stock Exchange Composite Transactions Tape.

63

ITEM 11. EXECUTIVE COMPENSATION (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

(4) Grant date present value is determined using the Black-Scholes option
pricing model. The assumptions used in the Black-Scholes option pricing
model for the January 1, 2003 grants (expiring December 31, 2012) were
as follows: expected volatility - 30% (estimated stock price volatility
for the term of the grant); risk-free rate of return - 4.05% (the rate
for a ten-year U.S. treasury); discount for risk of forfeiture - 10%;
estimated annual dividend - $0.92; expected option term - ten years;
and vesting - 100% one year after date of grant. No assumption was made
relating to non-transferability. Actual gains, if any, on option
exercises and common shares are dependent on the future performance of
the common stock and overall market condition. The amounts reflected in
this table may not be achieved.

OPTION EXERCISES IN 2003. The following table sets forth certain information
concerning the exercise of options or stock appreciation rights during 2003 by
each of the Named Officers and the number and value of unexercised options and
stock appreciation rights at December 31, 2003.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

(1) Represents the difference between the option exercise price and $21.86,
the average of high and low sale prices of the common shares on
December 31, 2003, as reported on the New York Stock Exchange Composite
Transactions Tape.

LONG-TERM INCENTIVE PLAN AWARDS IN 2003. The following table sets forth
information concerning the shares of NiSource restricted stock and shares of
contingent stock awarded pursuant to the Long-Term Incentive Plan during 2003 to
each of the Named Officers.

(1) The awards for Messrs. Hatches, Maassel and Foley reflected above
consist of grants of restricted stock under the Long Term Incentive
Plan which were made on January 1, 2003, pursuant to NiSource's TARSAP.
Restrictions with respect to the awards will lapse on December 31,
2008; however, if at the end of the three year performance cycle (that
began on January 1, 2003 and will end on December 31, 2005) NiSource
meets both a peer group target (a 60% percentile for relative total
stockholder return ranking) and an absolute target (a 12% annualized
compound total stockholder return), the restrictions with respect to
the awards will lapse on December 31, 2005. The restrictions with
respect to the awards will lapse upon the death or disability of the
grantee. Upon the death or disability of the grantee, the grantee will
receive a partial distribution of the restricted stock awarded on a pro
rata basis based on a quarterly distribution schedule contained in the
restricted stock agreement between NiSource and each grantee with
respect to each grant.

64

ITEM 11. EXECUTIVE COMPENSATION (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

(2) The award for Mr. Godwin reflected above consist of grants of
contingent stock under the Long Term Incentive Plan which were made on
January 1, 2003, pursuant to NiSource's TARSAP. Restrictions with
respect to the awards will lapse on December 31, 2008; however, if at
the end of the three year performance cycle (that began on January 1,
2003 and will end on December 31, 2005) NiSource meets both a peer
group target (a 60% percentile for relative total stockholder return
ranking) and an absolute target (a 12% annualized compound total
stockholder return), the restrictions with respect to the awards will
lapse on December 31, 2005. If both of the targets are not met,
restrictions with respect to the award will not lapse at the end of a
three year performance cycle but will lapse on the sixth anniversary of
the date of grant of the award. The restrictions with respect to the
awards will lapse upon the death or disability of the grantee. Upon (i)
the death or disability of the grantee or (ii) the voluntarily or
involuntarily termination without cause, upon the grantee having
attained age 55 and completed 10 years of service with NiSource or its
affiliates, the grantee will receive a partial distribution of the
contingent stock awarded on a pro rata basis based on a quarterly
distribution schedule contained in the contingent stock agreement
between NiSource and each grantee with respect to each grant.

PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

The following table shows estimated annual benefits, giving effect to NiSource's
Pension Plan and Supplemental Executive Retirement Plan, payable upon retirement
to persons in the specified remuneration and years-of-service classifications.
The NiSource Supplemental Executive Retirement Plan applies to all of the Named
Officers (other than Mr. Foley) and other employees who are selected by the
NiSource board of directors to participate in the plan. The estimated annual
benefits for Mr. Foley, therefore, will be less then the amounts shown below.

PENSION PLAN TABLE

The credited years of service for each of the Named Officers (other than Messrs.
Foley, Vajda and O'Malley), pursuant to the Pension Plan and Supplemental
Executive Retirement Plan, are as follows: Barrett Hatches - 3 years; Mark
Maassel - 26 years; Jerry Godwin - 9 years; and Kenneth P. Foley, Jr. - 31
years. Mr. Godwin has an agreement with NiSource that will entitle him, under
certain circumstances, to an additional five years of credited service under the
Pension Plan and Supplemental Executive Retirement Plan in early 2005.

Upon their retirement, regular employees and officers of NiSource and its
subsidiaries which adopt the plan (including directors who are also full-time
officers) will be entitled to a monthly pension in accordance with the
provisions of NiSource pension plan, originally effective as of January 1, 1945.
The directors who are not and have not been officers of NiSource or its
subsidiaries are not included in the pension plan. The pensions are payable out
of a trust fund established under the pension plan with The Northern Trust
Company, trustee. The trust fund consists of contributions made by NiSource and
the earnings of the fund. Over a period of years the contributions are intended
to result in overall actuarial solvency of the trust fund. The pension plan of
NiSource has been determined by the Internal Revenue Service to be qualified
under Section 401 of the Internal Revenue Code.

The pension plan was amended and restated effective July 1, 2002 to add a "cash
balance feature." Participants in the plan as of December 31, 2002 were entitled
to elect to remain in the "final average pay feature" of the plan or to begin
participating in the new cash balance feature. Participants hired on and after
January 1, 2002 automatically participate in the cash balance feature. A
participant in the cash balance feature will have a benefit consisting of his or
her opening account balance (his or her accrued benefit under the final average
pay feature of the plan as of December 31, 2002, if any) plus annual pay and
interest credits to his or her cash balance account. Pay credits equal a
percentage of compensation based on the participant's combined age and service.
Interest is credited to his or her account based on the interest rate on 30-year
treasury securities, as determined by the Internal Revenue Service, for the
September immediately preceding the first day of each year, but not less than
4%. Upon retirement, termination of employment or death, the participant or his
or her beneficiary will receive a benefit that is the equivalent of his or her
cash balance account balance. Participants and beneficiaries are entitled to
elect to receive payment of this benefit pursuant to various alternatives
including a lump sum option.

65

ITEM 11. EXECUTIVE COMPENSATION (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

Pension benefits are determined separately under the final average pay portion
of the plan for each participant. The formula for a monthly payment for
retirement at age 65 is 1.7% of average monthly compensation multiplied by years
of service (to a maximum of 30 years) plus 0.6% of average monthly compensation
multiplied by years of service over 30. Average monthly compensation is the
average for the 60 consecutive highest-paid months in the employee's last 120
months of service. Covered compensation is defined as wages reported as W-2
earnings (up to a limit set forth in the Internal Revenue Code and adjusted
periodically) plus any salary reduction contributions made under NiSource's
401(k) plan, minus any portion of a bonus in excess of 50% of base pay and any
amounts paid for unused vacation time and vacation days carried forward from
prior years. The benefits listed in the Pension Plan table are not subject to
any deduction for Social Security or other offset amounts.

For each officer and employee who first participated in the Supplemental
Retirement Plan prior to January 23, 2004, the Supplemental Executive Retirement
Plan provides a retirement benefit at age 65 of the greater of (i) 60% of
five-year average pay (prorated for less than 20 years of service) and an
additional 0.5% of 5-year average pay per year for participants with between 20
and 30 years of service, less Primary Social Security Benefits or (ii) the
benefit formula under the NiSource Pension Plan. In either case, the benefit is
reduced by the actual pension payable from the NiSource Pension Plan. In
addition, the Supplemental Executive Retirement Plan provides certain early
retirement and disability benefits and pre-retirement death benefits for the
spouse of a participant.

For each officer and employee who first participates in the Supplemental
Retirement Plan on and after January 23, 2004, the Supplemental Executive
Retirement Plan provides a credit into a notional account as of the last day of
each year beginning on or after January 1, 2004 equal to five percent of the
officer or employee's compensation. Interest will be credited to the account
until distribution upon termination of employment after five or more years of
service with NiSource and its affiliates. In addition, the Officer Nomination
and Compensation Committee, subject to approval of the Board of NiSource, may
authorize supplemental credits to an officer or employee's account in such
amounts and at such times, and subject to such specific terms and provisions, as
authorized by the Committee. Benefits from the Supplemental Executive
Retirement Plan are to be paid from the general assets of NiSource.

Effective January 1, 2004, NiSource assumed sponsorship of the Pension
Restoration Plan for Columbia Energy Group, renamed the plan the "Pension
Restoration Plan for NiSource and Affiliates," and broadened the plan to include
all employees of NiSource and its affiliates whose benefits under the applicable
tax-qualified pension plan are limited by sections 415 and 401(a)(17) of the
Internal Revenue Code.

Effective January 1, 2004, NiSource assumed sponsorship of the Savings
Restoration Plan for Columbia Energy Group, renamed the plan the "Savings
Restoration Plan for NiSource and Affiliates," and broadened the plan to include
all employees of NiSource and its affiliates. The revised Savings Restoration
Plan provides for a supplemental benefit equal to the difference between (i) the
benefit an employee would have received under the NiSource Retirement Savings
Plan had such benefit not been limited by sections 415 and 401(a)(17) of the
Internal Revenue Code and reduced by his deferrals into NiSource's Executive
Deferred Compensation Plan, minus (ii) the actual benefit he received under the
Savings Plan.

NISOURCE CHANGE IN CONTROL AND TERMINATION AGREEMENTS

The board of directors of NiSource has authorized Change in Control and
Termination Agreements with Messrs. Hatches, Maassel and Godwin. NiSource
believes that these agreements and related shareholder rights protections are in
the best interests of the shareholders, to insure that in the event of
extraordinary events, totally independent judgment is enhanced to maximize
shareholder value. The agreements can be terminated on three years' notice and
provide for the payment of specified benefits if the executive terminates
employment for good reason or is terminated by NiSource for any reason other
than good cause within 24 months following certain changes in control. Each of
these agreements also provides for payment of these benefits if the executive
voluntarily terminates employment during a specified one-month period within 24
months following a change in control. No amounts will be payable under the
agreements if the executive's employment is terminated by NiSource for good
cause (as defined in the agreements).

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ITEM 11. EXECUTIVE COMPENSATION (continued)

NORTHERN INDIANA PUBLIC SERVICE COMPANY

The agreements provide for the payment of three times the executive's current
annual base salary and target incentive bonus compensation. The executive will
also receive a pro rata portion of the executive's targeted incentive bonus for
the year of termination. The executive would also receive benefits from NiSource
that would otherwise be earned during the three-year period following the
executive's termination under NiSource's Supplemental Executive Retirement Plan
and qualified retirement plans. All stock options held by the executive would
become immediately exercisable upon the date of termination of employment, and
the restrictions would lapse on all restricted shares awarded to the executive.
NiSource will increase the payment made to the executive as necessary to
compensate the executive for any parachute penalty tax imposed on the payment of
the amounts under the contracts.

During the three-year period following the executive's termination, the
executive and his or her spouse will continue to be covered by applicable health
or welfare plans of NiSource. If the executive dies during the three-year period
following the executive's termination, all amounts payable to the executive will
be paid to a named beneficiary.

In connection with a corporate restructuring, NiSource entered into a severance
agreement with Mr. Hatches entitling him to receive a lump sum payment of
$265,000 and a lump sum payment equal to 130% of 52 weeks of COBRA payments.
Pursuant to the agreement, Mr. Hatches was treated as an active employee of
Northern Indiana until January 1, 2004 for purposes of vesting with respect to
awards under NiSource Inc.'s 1994 Long Term Incentive Plan. The NiSource board
of directors also accelerated to January 1, 2004 the vesting of certain grants
under its 1994 Long Term Incentive that were scheduled to vest on April 1, 2004.
Mr. Hatches forfeited any restricted stock awards that he had received under
NiSource's TARSAP Plan.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Not applicable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Northern Indiana receives executive, financial, gas supply, sales and marketing,
and administrative and general services from an affiliate, NiSource Corporate
Services Company, a wholly-owned subsidiary of NiSource.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

NORTHERN INDIANA PUBLIC SERVICE COMPANY

The following table represents the aggregate fees for professional audit
services rendered to Northern Indiana Public Service Company's (Northern
Indiana) corporate parent NiSource Inc. (NiSource) by Arthur Andersen LLP,
NiSource's former independent auditor, and Deloitte & Touche LLP (Deloitte),
NiSource's current independent auditor, for the audit of NiSource's and Northern
Indiana's annual financial statements for the years ended December 31, 2002 and
2003, and fees billed for other services rendered by Arthur Andersen LLP and
Deloitte during those periods. Certain amounts for 2002 have been reclassified
to conform to the 2003 presentation.

(1) Audit Fees -- These are fees for professional services performed by Deloitte
for the audit of NiSource's and Northern Indiana's annual financial statements
and review of financial statements included in NiSource's and Northern Indiana's
10-Q filings, and services that are normally provided in connection with
statutory and regulatory filings or engagements. The amounts shown for Deloitte
for 2002 include $2,600.0 thousand in fees related to the re-auditing of years
2000 and 2001 which had been previously audited by Arthur Andersen LLP.

(2) Audit-Related Fees -- These are fees for the assurance and related services
performed by Deloitte that are reasonably related to the performance of the
audit or review of NiSource's and Northern Indiana's financial statements.

(3) Tax Fees -- These are fees for professional services performed by Deloitte
with respect to tax compliance, tax advice and tax planning.

(4) All Other Fees -- These are fees for permissible work performed by Deloitte
that does not meet the above categories.

Pre-Approval Policies and Procedures. During fiscal year 2003, the Audit
Committee of NiSource approved all audit, audit related and non-audit services
provided to NiSource or Northern Indiana by Deloitte prior to management
engaging the auditor for those purposes. The Audit Committee's current practice
is to consider for pre-approval annually all audit, audit related and non-audit
services proposed to be provided by our independent auditors for the fiscal
year. Additional fees for other proposed audit-related or non-audit services
which have been properly presented to the Pre-Approval Subcommittee of the Audit
Committee (consisting of Ian M. Rolland) by the Vice President and Controller of
NiSource (not within the scope of the approved audit engagement) may be
considered and, if appropriate, approved by the Pre-Approval Subcommittee of the
Audit Committee. In no event, however, will (i) any non-audit related service be
presented or approved that would result in the independent auditor no longer
being considered independent under the applicable Securities and Exchange
Commission rules or (ii) any service be presented or approved by the
Pre-Approval Subcommittee the fees for which are estimated to exceed $100,000.

68

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

NORTHERN INDIANA PUBLIC SERVICE COMPANY

Exhibits

The exhibits filed herewith as a part of this report on Form 10-K are listed on
the Exhibit Index. Each management contract or compensatory plan or arrangement
of Northern Indiana, listed on the Exhibit Index, is separately identified by an
asterisk.

Financial Statement Schedules

All of the financial statements and financial statement schedules filed as a
part of the Annual Report on Form 10-K are included in Item 8.

Reports on Form 8-K
None.

69

SIGNATURES

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

Northern Indiana Public Service Company
----------------------------------------------
(Registrant)

Date March 19, 2004 By: /s/ MARK T. MAASSEL
-------------- ----------------------------------------------
Mark T. Maassel
President
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

/s/ MARK T. MAASSEL President and Director March 19, 2004
- --------------------------- (Principal Executive Officer)
Mark t. Maassel

/s/ JEFFREY W. GROSSMAN Vice President March 19, 2004
- --------------------------- (Principal Accounting Officer)
Jeffrey W. Grossman

/s/ WILLIAM M. O'MALLEY Vice President, Finance March 19, 2004
- --------------------------- (Principal Financial Officer)
William M. O'Malley

/s/ JERRY L. GODWIN. Vice President, Electric Generation March 19, 2004
- --------------------------- and Transmission, and Chief
Jerry L. Godwin Operating Officer and Director
March 19, 2004

/s/ KENNETH FOLEY JR. General Manager and Director March 19, 2004
- ---------------------------
Kenneth Foley Jr.

70

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

NORTHERN INDIANA PUBLIC SERVICE COMPANY

71

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

NORTHERN INDIANA PUBLIC SERVICE COMPANY

*Management contract or compensatory plan arrangement of Northern Indiana.
**Exhibit filed herewith.

72