10-Q 1 c78921e10vq.txt FORM 10-Q WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 twelve months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] As of August 1, 2003, 73,282,258 shares of the registrant's Common Shares, no par value, were issued and outstanding, all held beneficially and of record by NiSource Inc. Documents Incorporated by Reference ----------------------------------- None NORTHERN INDIANA PUBLIC SERVICE COMPANY FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2003 TABLE OF CONTENTS

2 PART I ITEM 1. FINANCIAL STATEMENTS NORTHERN INDIANA PUBLIC SERVICE COMPANY STATEMENTS OF CONSOLIDATED INCOME (unaudited)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY CONSOLIDATED BALANCE SHEETS

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY CONSOLIDATED BALANCE SHEETS

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 6 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (unaudited)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 7 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF ACCOUNTING PRESENTATION The accompanying unaudited consolidated financial statements for Northern Indiana Public Service Company (Northern Indiana) reflect all normal recurring adjustments that are necessary, in the opinion of management, to present fairly the results of operations in accordance with accounting principles generally accepted in the United States. The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Northern Indiana's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. Income for interim periods may not be indicative of results for the calendar year due to weather variations and other factors. Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 presentation. 2. REGULATORY MATTERS During 2002, Northern Indiana settled matters related to its electric rate review. On September 23, 2002, the Indiana Utility Regulatory Commission (IURC) issued an order adopting most aspects of the settlement. The order approving the settlement provides that electric customers of Northern Indiana will receive an amount intended to approximate $55.1 million each year in credits to their electric bills for 49 months, 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 $24.3 million were recognized for electric customers for the first half of 2003. The order adopting the settlement is currently being appealed to the Indiana Court of Appeals by both the Citizens Action Coalition of Indiana and fourteen residential customers. Northern Indiana does not expect this matter to have a significant impact on its results of operations. Northern Indiana submitted its quarterly fuel adjustment clause 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 is being refunded to customers. 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 has challenged the manner in which Northern Indiana has applied costs associated with a specific interruptible sales tariff. While Northern Indiana continues to pursue settlement of this proceeding, an estimated refund liability was recognized in the first quarter 2003. In January 2002, Northern Indiana filed for approval to implement a purchase power tracker. On March 21, 2003, Northern Indiana amended its filing to allow recovery, via the FAC, of transmission costs paid to third parties, and the costs associated with electric physical derivative transaction costs, including option premiums to purchase power, and brokerage commissions. No actions have been taken by the IURC on this filing. On December 30, 2002, the Federal Energy Regulatory Commission (FERC) issued an order that, among other things, reduced the rate base and rate of return allowed to Northern Indiana under electric rates proposed in connection with the filing of its 1995 Open Access Transmission Tariff, thus creating a refund liability for Northern Indiana. Northern Indiana did not seek rehearing of the FERC's December 30, 2002 order and submitted a compliance filing on March 17, 2003, which proposed rates and services in compliance with the FERC's order. Based on this filing, an estimated refund liability has been recorded. 8 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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). Northern Indiana will 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 in February 2003 for capital expenditures of $58.4 million. On April 30, 2003, the IURC issued an order approving the ECRM filing, which allows for collection of allowance for funds used during construction and a return on the capital investment beginning with the May 2003 customer bills. Through June 30, 2003 the ECRM revenues amounted to $1.0 million. On August 1, Northern Indiana filed the ECRM for capital investments of $120 million. The initial filing of the EERM is anticipated with the next semi-annual filing of the ECT. Over the timeframe required to meet the environmental standards, Northern Indiana anticipates a total capital investment amounting to approximately $234 million. The IURC order is currently being appealed to the Indiana Court of Appeals by the Citizens Action Coalition of Indiana 3. RESTRUCTURING ACTIVITIES Since 2000, Northern Indiana's parent company NiSource Inc. (NiSource) has implemented restructuring initiatives to streamline its operations and realize efficiencies culminating from the acquisition of Columbia Energy Group. For all of the initiatives, a total of approximately 180 management, professional, administrative and technical positions have been identified for elimination at Northern Indiana. As of June 30, 2003, 158 employees were terminated, of whom 6 employees were terminated during the first quarter and six months ended June 30, 2003. At June 30, 2003 and December 31, 2002, the consolidated balance sheets reflected liabilities of $1.4 million and $2.4 million, respectively, related to the restructuring plans. During the first quarter and six months ended June 30, 2003, $0.9 million of benefits were paid as a result of the restructuring plans. Additionally, during the first quarter 2003 and six months ended June 30, 2003, the restructuring plan liability was reduced by $0.1 million due to a reduction in estimated costs related to the reorganization initiatives. 4. RISK MANAGEMENT ACTIVITIES Northern Indiana uses commodity-based derivative financial instruments to manage certain risks inherent in its business. Northern Indiana accounts for its derivatives under Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). HEDGING ACTIVITIES. The activity for the second quarter and six months ended June 30, 2003 and June 30, 2002 affecting accumulated other comprehensive income, with respect to cash flow hedges included the following:

9 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unrealized gains and losses on Northern Indiana's hedges were recorded as price risk management assets and liabilities. The accompanying consolidated balance sheets reflect price risk management assets related to unrealized gains on hedges of $2.8 million and $3.5 million at June 30, 2003 and December 31, 2002, respectively, which were included in "Current Assets." Price risk management liabilities related to unrealized losses on hedges (and net option premiums) were $1.1 million and $0.8 million at June 30, 2003 and December 31, 2002, respectively, both of which were included in "Current Liabilities." During the first and second quarters 2003, Northern Indiana had no net gain or loss recognized in earnings due to the change in value of derivative instruments primarily representing time value, and there were no components of the derivatives' fair values excluded in the assessment of hedge effectiveness. Also, during the second quarter, Northern Indiana reclassified $0.9 million 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 income recognition of amounts currently classified in accumulated other comprehensive income of approximately $1.3 million, net of tax. 5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (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 pursuant to SFAS No. 71,"Accounting for the Effects of Certain Types of Regulation." Northern Indiana's asset retirement obligations liability was mainly comprised of obligations for the removal of certain hydro towers and obligations associated with leased railcars. Asset retirement obligations related to the gas and electric distribution facilities were identified, however the associated liabilities were not quantifiable due to the indeterminate lives of the associated assets. Northern Indiana adopted the provisions of SFAS No. 143 on January 1, 2003 and as a result, Northern Indiana recognized an asset retirement obligations liability of $1.9 million. 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 $642.0 million at June 30, 2003. For the second quarter and six months ended June 30, 2003, Northern Indiana amortized less than $0.1 million and $0.1 million, respectively, related to the amounts capitalized as additions to plant and accreted the liability by $0.1 million with corresponding amounts recognized as regulatory assets at June 30, 2003. The asset retirement obligations liability totaled $2.0 million at June 30, 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. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS NO. 149"). Effective July 1, 2003, Northern Indiana adopted Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 codifies and clarifies financial accounting and reporting for derivative instruments and hedging activities under Statement of Financial Accounting Standards No. 133, "Derivative Instruments and Hedging Activities," 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, as such the impact on Northern Indiana's existing contracts at June 30, 2003 is not material. Because the effect of SFAS No. 149 is dependent upon the terms 10 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of contracts the company enters into after June 30, 2003, Northern Indiana cannot determine the impact of adopting SFAS No. 149 on a prospective basis. 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. Currently, Northern Indiana has mandatory redeemable preferred stock that will be reclassified as a liability in the third quarter of 2003. Northern Indiana does not expect SFAS No. 150 to have any impact on its financial condition or results of operations. 6. STOCK OPTIONS AND AWARDS NiSource currently issues long-term incentive grants to key management employees, including the management of Northern Indiana. SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), encourages, but does not require, entities to adopt the fair value method of accounting for stock-based compensation plans. The fair value method would require the amortization of the fair value of stock-based compensation at the date of grant over the related vesting period. NiSource continues to apply the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for awards granted under the stock-based compensation plans. The following table illustrates the effect on Northern Indiana's net income as if NiSource had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

7. 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 would not have a material adverse impact on Northern Indiana's financial position. 8. ACCUMULATED OTHER COMPREHENSIVE INCOME The following table displays the components of Accumulated Other Comprehensive Income.

11 ITEM 1. FINANCIAL STATEMENTS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. BUSINESS SEGMENT INFORMATION 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 segment. As a result of the realignment, all 2002 periods have been adjusted to reflect the new segments. Northern Indiana's operations are divided into two primary business segments. The Gas Distribution 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 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.

12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NORTHERN INDIANA PUBLIC SERVICE COMPANY CONSOLIDATED RESULTS 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, increased competition in deregulated energy markets, weather, fluctuations in supply and demand for energy commodities, growth opportunities for Northern Indiana's regulated businesses, 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. The following Management's Discussion and Analysis should be read in conjunction with Northern Indiana's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (Form 10-K). SECOND QUARTER AND SIX MONTH RESULTS Net Income Northern Indiana reported net income of $28.6 million for the three months ended June 30, 2003, compared to $42.8 million in the 2002 period. For the six months ended June 30, 2003, Northern Indiana reported net income of $90.9 million, a 24.7 million decrease from the 2002 period. Net Revenues Total consolidated net revenues (operating revenues less cost of sales) for the three months ended June 30, 2003, were $226.4 million, a $19.5 million decrease from the same period last year. The decrease in net revenues was primarily a result of $10.8 million of credits issued pertaining to the Indiana Utility Regulatory Commission (IURC) electric rate review settlement and reduced electric sales of $6.2 million as a result of cooler weather toward the end of the quarter. Total consolidated net revenues for the six months ended June 30, 2003, were $521.7 million, a $17.0 million decrease from the same period last year. The decrease was primarily a result of $24.3 million from credits issued pertaining to the IURC electric rate review settlement and reduced electric sales of $6.2 million as a result of cooler weather toward the end of the quarter, partially offset by increased net gas revenues of $18.4 million due to colder weather during the first three months of the year. Expenses Operating expenses for the second quarter 2003 were $164.0 million, a decrease of $1.6 million from the 2002 period. Operation and maintenance expenses decreased $5.0 million mainly due to $8.3 million reduction in employee-related and administrative expenses, $2.9 decrease in uncollectible expenses, partially offset by increased pension and postretirement expenses of $6.5 million. Depreciation and amortization expense increased by $1.8 million due to plant additions. Other taxes increased $1.6 million, principally due to increased property taxes and higher gross receipts taxes that are generally offset in revenues. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY Operating expenses for the six months ended June 30, 2003 were $340.4 million, an increase of $12.6 million from the 2002 period. Operations and maintenance expenses were relatively flat, but reflected increases of $12.3 million due to higher pension and postretirement costs. These increases were offset by a decrease in employee-related and administrative costs. Depreciation and amortization expense increased by $3.5 million due to plant additions. Other taxes increased $8.4 million, principally due to increased property taxes and higher gross receipts taxes, which are generally offset in revenues. Utility Income Taxes Utility income tax expenses for the second quarter 2003 were $18.9 million, compared to $22.7 million in 2002, due to lower pre-tax income. Utility income tax expenses for the six months of 2003 were $61.3 million compared to $64.9 million in 2002, due to lower pre-tax income. Interest Interest expense for the second quarter 2003 remained relatively unchanged compared to the 2002 period. Interest expense for the first six months of 2003 was $29.1 million, a decrease of $1.1 million compared to the 2002 period, primarily due to a reduction in long-term debt. LIQUIDITY AND CAPITAL RESOURCES Generally, cash flow from operations has provided sufficient liquidity to meet current 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. In the summer months, cash receipts for electric sales normally exceed cash requirements. Also, during the summer months, cash on hand, together with external short-term and long-term financing, is used in operations 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 six months ended June 30, 2003 was $188.1 million, a decrease of $222.5 million from the comparable period in 2002. The decrease was mainly due to a reduction in cash generated from working capital, principally driven by a decrease in accounts payable and an increase in natural gas in storage, partly offset by decreased under recovered gas and fuel costs. During the first half of 2003, Northern Indiana redeemed $54.0 million of medium-term notes. In addition, on July 8, 2003, Northern Indiana redeemed $70.0 million of medium-term notes. 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 1935 Act. NiSource Finance Corp. (NFC) provides funding to the NiSource Money Pool from external borrowing sources. NFC elected not to renew its $500.0 million 364-day credit facility, which expired on March 20, 2003. The 364-day credit facility allowed NFC to utilize the $500 million to support the issuance of letters of credit. As a result of its expiration, the NFC $1.25 billion three-year facility that expires on March 23, 2004 has been amended to allow for an increase in the aggregate letters of credit outstanding from $150.0 million to $500.0 million. The credit facility is guaranteed by NiSource. As of June 30, 2003, Northern Indiana had $515.5 million of intercompany short-term borrowings outstanding at an interest rate of 1.96%. As of December 31, 2002, Northern Indiana had an intercompany note payable of $448.9 million at an interest rate of 2.11%. 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 does not reflect weakening credit measures at Northern Indiana. Fitch rating outlook for all entities 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 were revised to stable from negative. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY Northern Indiana may sell up to $100.0 million of certain of its accounts receivable under a sales agreement, without recourse. As of June 30, 2003, Northern Indiana has sold $100.0 million of its accounts receivable under this agreement. Northern Indiana and Citibank are currently negotiating a new Accounts Receivable Sales Agreement which would increase Northern's capacity under this program to $200.0 million. MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS 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 current regulations allow recovery of prudently incurred purchased power, fuel and gas costs through the rate-making process. As states experiment with regulatory reform, Northern Indiana may begin providing services without the benefit of the traditional rate-making process and will be 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 June 30, 2003, the outstanding borrowings totaled $515.5 million. Based upon average borrowings during 2003, an increase in short-term interest rates of 100 basis points (1%) would have increased interest expense by $1.0 million and $1.9 million for the quarter and six months ended June 30, 2003. 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. FINANCIAL ACCOUNTING STANDARDS BOARD'S (FASB) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 71 ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION. 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. 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 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 FASB Statement No. 71." In management's opinion, Northern Indiana will be subject to SFAS No. 71 for the foreseeable future. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY 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. HEDGING ACTIVITIES. Under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as subsequently amended by SFAS No. 137 and SFAS No. 138 (collectively referred to as SFAS No. 133), 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. Because 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. 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. 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. 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, amongst 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. Refer to "Recently Issued Accounting Pronouncements" in Note 5 of the Notes of Consolidated Financial Statements for information regarding recently issued accounting standards. Insurance Renewal Northern Indiana sustained an overall increase in premiums for the property and casualty insurance program that renewed on July 1, 2003. However, the renewal of the executive liability program, which includes directors and officer's liability and fiduciary liability, is scheduled for November 1, 2003 and all indications are that the increase in premiums for those particular coverages will be much higher. In addition to increases in premiums, we anticipate added restrictions to coverage and capacity. Environmental Matters 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. Northern Indiana engages in efforts to voluntarily report and reduce its greenhouse gas emissions. Northern Indiana will monitor and participate in developments related to efforts to register and potentially regulate greenhouse gas emissions. Northern Indiana uses various combustion equipment in the generation, distribution and transmission of energy, including turbines, boilers and various reciprocating engines. Within the period December 2002 to January 2003, the U.S. Environmental Protection Agency (EPA) proposed maximum achievable control technology (MACT) standards to meet national emission standards for hazardous air pollutants (NESHAP) for stationary combustion turbines, industrial boilers and reciprocating internal combustion engines. Northern Indiana will continue to monitor the proposed MACT standards for potential applicability and cost impact to its operations. Pending finalization of the proposed standards, Northern Indiana is unable to predict what, if any, additional compliance costs may result. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY 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. As a result of the realignment, all 2002 periods have been adjusted to reflect the new segments. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY GAS DISTRIBUTION OPERATIONS

Northern Indiana's natural gas distribution operations serve approximately 690,000 customers in the northern part of Indiana. Northern Indiana offers both traditional bundled services as well as transportation only for customers that purchase gas from alternative suppliers. The operating results reflect the temperature-sensitive nature of customer demand. As a result, segment operating income is generally higher in the first and fourth quarters reflecting the heating demand during the winter season. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY GAS DISTRIBUTION OPERATIONS (CONTINUED) Regulatory Matters Changes in gas industry regulation, which began in the mid-1980s at the federal level, has broadened to retail customers at the state level. Large industrial and commercial customers have had the ability to purchase natural gas directly from marketers and to use Northern Indiana's Gas Distribution's facilities for transportation services. Additionally, as of June 30, 2003, approximately 45,000 of Northern Indiana's Gas Distribution's residential and commercial customers had selected an alternate supplier. Northern Indiana continues to develop customer choice opportunities through regulatory initiatives. While these programs are 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. Weather Weather in Northern Indiana's market area for the second quarter 2003 was 10% colder than normal and 11% warmer than the second quarter 2002. For the first six months of 2003, weather was 8% colder than normal and 17% colder than the first six months of 2002. Throughput Northern Indiana sold and transported 46.5 million dekatherms (MDth) for the second quarter 2003, a decrease of 2.3 MDth from the same period last year, primarily due to warmer weather when compared to the second quarter of 2002. Total volumes sold and transported were 138.5 MDth for the first six months of 2003, an increase of 3.6 MDth from the same period in 2002, primarily due to colder weather during the first three months of the year, partially offset by decreased off-system sales. Net Revenues Net revenues for the three months ended June 30, 2003 of $50.7 million were relatively unchanged from the same period in 2002. Net revenues for the six months ended June 30, 2003 were $176.5 million, an increase of $13.9 million from the same period in 2002, mainly attributable to colder weather during the first three months of the year. Operating Income (Loss) Operating loss for the second quarter 2003 was $1.7 million, $1.0 million greater than the loss in the same period in 2002. The decrease was mainly attributable to $0.6 million increase in depreciation and amortization expense due to plant additions and $0.3 million increase in property taxes. Operating income for the first six months of 2003 was $64.6 million, an increase of $6.5 million from the same period in 2002. The increase was mainly attributable to $18.4 million of increased sales and deliveries of natural gas due to the colder weather during the first three months of the year. Pension and postretirement costs increased $3.4 million. Depreciation and amortization expense increased by $0.8 million due to plant additions. Other taxes increased by $5.6 million, principally due to increased property taxes and higher gross receipt taxes, which are generally offset in revenues. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY ELECTRIC OPERATIONS

Northern Indiana generates and distributes electricity to approximately 437,000 customers in 21 counties in the northern part of Indiana. The operating results reflect the temperature-sensitive nature of customer demand with annual sales affected by temperatures in the northern part of Indiana. As a result, segment operating income is generally higher in the second and third quarters reflecting the cooling demand during the summer season. Market Conditions The steel sector continues to show improvement, with second quarter 2003 sales 8% higher than the 2002 level and a 14% improvement for the six month period. The acquisitions of Bethlehem Steel and National Steel by International Steel Group and U.S. Steel, respectively, have been completed. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY ELECTRIC OPERATIONS (CONTINUED) 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 an amount intended to approximate $55.1 million each year in credits to their electric bills for 49 months, 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 $24.3 million were recognized for electric customers in the first half of 2003. The order adopting the settlement is currently being appealed to the Indiana Court of Appeals by both the Citizens Action Coalition of Indiana and fourteen residential customers. Northern Indiana does not expect this matter to have a significant impact on its results of operations. Northern Indiana submitted its quarterly fuel adjustment clause 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 is being 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 Federal Energy Regulatory Commission (FERC), and on July 31, 2002, the FERC issued an order conditionally approving these arrangements. On November 5, 2002, the ITC, which includes Northern Indiana, 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 proceeding to obtain approval to transfer functional control of the transmission system to the ITC is ongoing. An uncontested settlement that authorizes reimbursement of $7.4 million to Northern Indiana for incurred costs was approved by the FERC on July 31, 2003. As of June 30, 2003, Northern Indiana has deferred $6.5 million of costs related to joining the ITC. 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 market proposes non-discriminatory transmission service, reliable grid operation, and the purchase and sale of electric energy in a fair, efficient and non-discriminatory manner. MISO has filed detailed tariff information with a planned initial operation date of March 31, 2004. Northern Indiana is actively pursuing its role in the MMI. At the current time, management believes that MMI will change the manner in which Northern Indiana conducts its electric business, however, management cannot determine at this time the final MMI impacts. 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 has challenged the manner in which Northern Indiana has applied costs associated with a specific interruptible sales tariff. While Northern Indiana continues to pursue settlement of this proceeding, an estimated refund liability was recognized in the first quarter 2003. In January 2002, Northern Indiana filed for approval to implement a purchase power tracker. On March 21, 2003, Northern Indiana amended its filing. The amendment, if approved, would allow Northern Indiana to recover via the FAC, transmission costs paid to third parties, and the costs associated with electric physical derivative transaction costs, including option premiums to purchase power, and brokerage commissions. No actions have been taken by the IURC on this filing. On December 30, 2002, the FERC issued an order that, among other things, reduced the rate base and rate of return allowed to Northern Indiana under electric rates proposed in connection with the filing of its 1995 Open Access Transmission Tariff, thus creating a refund liability for Northern Indiana. Northern Indiana did not seek rehearing of the FERC's December 30, 2002 order and submitted a compliance filing on March 17, 2003, which proposed rates and services in compliance with the FERC's order. Based on this filing, an estimated refund liability has been recorded. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NORTHERN INDIANA PUBLIC SERVICE COMPANY ELECTRIC OPERATIONS (CONTINUED) 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). Northern Indiana will 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 in February 2003 for capital expenditures of $58.4 million. On April 30, 2003, the IURC issued an order approving the ECRM filing, which allows for collection of allowance for funds used during construction and a return on the capital investment beginning with the May 2003 customer bills. Through June 30, 2003 the ECRM revenues amounted to $1.0 million. On August 1, Northern Indiana filed the ECRM for capital investments of $120 million. The initial filing of the EERM is anticipated with the next semi-annual filing of the ECT. Over the timeframe required to meet the environmental standards, Northern Indiana anticipates a total capital investment amounting to approximately $234 million. The IURC order is currently being appealed to the Indiana Court of Appeals by the Citizens Action Coalition of Indiana. Sales Electric sales for the second quarter 2003 were 4,482.7 gwh, a decrease of 118.2 gwh compared to the 2002 period. The decrease primarily reflected cooler weather during the quarter. Electric sales for the first six months of 2003 were 8,972.9 gwh, an increase of 18.4 gwh compared to the 2002 period, primarily reflecting increased sales to residential and industrial customers, offset by decreased commercial and wholesale transactions. Residential sales improved due to overall increased usage and an increase in the number of customers, while industrial sales increased due to increased demand from the steel industry. Net Revenues In second quarter 2003, electric net revenues of $175.7 million decreased by $19.7 million from the comparable 2002 period. The decrease was primarily due to $10.8 million of credits issued pertaining to the IURC electric rate review settlement and cooler weather that decreased electric sales by $6.2 million. In the first six months of 2003, electric net revenue of $345.2 million decreased by $30.9 million from the 2002 period due to $24.3 million of credits issued pertaining to the IURC electric rate review settlement and cooler weather at the beginning of the summer season. Operating Income Operating income for the second quarter 2003 was $64.1 million, a decrease of $16.9 million from the same period in 2002. The decrease was primarily due to the changes in revenue mentioned above. Operating income for the first half of 2003 was $116.7 million, a decrease of $36.1 million from the same period in 2001 due to the changes in revenue mentioned above and increased pension and postretirement benefits expenses of $9.0 million. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion regarding quantitative and qualitative disclosures about market risk, see Management's Discussion and Analysis of Financial Condition and Results of Operations under "Market Risk Sensitive Instruments and Positions." 22 ITEM 4. CONTROLS AND PROCEDURES NORTHERN INDIANA PUBLIC SERVICE COMPANY 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 would be made known to them. Changes in Internal Controls There were no significant changes in Northern Indiana's internal controls or in other factors that could significantly affect Northern Indiana's internal controls subsequent to the date of the most recent evaluation, nor were there any significant deficiencies or material weaknesses in Northern Indiana's internal controls. As a result, no corrective actions were required or undertaken. 23 PART II NORTHERN INDIANA PUBLIC SERVICE COMPANY ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 9, 2003, by written consent in lieu of the Annual Meeting of Shareholders, the sole shareholder of Northern Indiana elected Barrett Hatches and Samuel W. Miller, Jr. to serve as directors until the 2004 Annual Meeting of Shareholders. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: (31.1) Certification of Barrett Hatches, Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). (31.2) Certification of William M. O'Malley, Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). (32.1) Certification of Barrett Hatches, Principal Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). (32.2) Certification of William M. O'Malley, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). (b) Reports on Form 8-K There were no reports on Form 8-K filed during the second quarter 2003: 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Northern Indiana Public Service Company ----------------------------------------------- (Registrant) Date: August 12, 2003 By: /s/ Jeffrey W. Grossman ---------------------------------------------- Jeffrey W. Grossman Vice President (Duly Authorized Officer) 25

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