NIPSCO INDUSTRIES INC, 10-K, 1999-03-29

NIPSCO INDUSTRIES INC
10-K, 1999-03-29
ELECTRIC & OTHER SERVICES COMBINED

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NIPSCO INDUSTRIES, INC.

FORM 10-K

1998
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801 E. 86th Avenue BULK RATE
Merrillville, Indiana 46410-6272 U.S. POSTAGE PAID
NIPSCO

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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, 1998
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 1-9776
NIPSCO Industries, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1719974
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
46410
801 East 86th Avenue (Zip Code)
Merrillville, Indiana
(Address of principal executive offices)

Registrant's telephone number, including area code 219-853-5200
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- ---------------------
<S> <C>
Common Shares New York, Chicago and Pacific
Preferred Share Purchase Rights New York, Chicago and Pacific
Obligations Pursuant to Support New York
Agreements with NIPSCO Capital
Markets, Inc.
Corporate Premium Income Equity Securities New York
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
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, 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.
As of February 26, 1999, 117,565,614 Common Shares (not including 30,218,604
Common Shares held in treasury), were outstanding. The aggregate market value
of the Common Shares (based upon the February 26, 1999 closing price of
$25.938 on the New York Stock Exchange) held by nonaffiliates was
approximately $3,023,748,754.88. This information reflects the two-for-one
stock split which was paid February 20, 1998, to shareholders of record at the
close of business on January 30, 1998.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the NIPSCO Industries, Inc. 1998 Annual Report to Shareholders
are incorporated by reference into Parts I, II and IV of this report.
Portions of the Notice of Annual Meeting and Proxy Statement dated March 15,
1999 for the Annual Meeting to be held April 14, 1999 are incorporated by
reference into Part III of this report.

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PART 1

Item 1. Business

OVERVIEW OF CONSOLIDATED BUSINESS

NIPSCO Industries, Inc. (Industries) is an energy/utility-based holding
company that provides electric energy, natural gas and water to the public
through its seven wholly-owned regulated subsidiaries (Utilities): Northern
Indiana Public Service Company (Northern Indiana), Kokomo Gas and Fuel Company
(Kokomo Gas), Northern Indiana Fuel and Light Company, Inc. (NIFL), Crossroads
Pipeline Company (Crossroads), Indianapolis Water Company (IWC), Harbour Water
Corporation (Harbour) and Liberty Water Company (Liberty). Industries'
regulated gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL
and Crossroads) are referred to as "Energy Utilities", and its regulated water
subsidiaries (IWC, Harbour and Liberty) are referred to as "Water Utilities".

Industries also provides non-regulated energy/utility-related services
including gas marketing, power generation, gas transmission, supply and
storage, installation, repair and maintenance of underground pipelines,
utility line locating and marking, and related products targeted at customer
segments principally through the following wholly-owned subsidiaries: NIPSCO
Development Company, Inc. (Development), NI Energy Services, Inc. (Services),
Primary Energy, Inc. (Primary), Miller Pipeline Corporation (Miller), and SM&P
Utility Resources, Inc. (SM&P). These subsidiaries are referred to
collectively as "Products and Services". NIPSCO Capital Markets, Inc. (Capital
Markets) is a wholly-owned subsidiary of Industries that handles financing
requirements for certain subsidiaries of Industries (excluding Northern
Indiana).

In February 1999, Industries completed its acquisition of Bay State Gas
Company (Bay State) in a stock-for-stock transaction valued at $40 per Bay
State share. The transaction is valued at approximately $551 million. Bay
State shareholders had the option of exchanging their shares of Bay State
stock for cash, up to an aggregate sum of equal to 50% of the total purchase
price (and exercised this option with respect to approximately 43% of the
total purchase price). Bay State, one of the largest natural gas utilities in
New England, provides natural gas distribution services to more than 300,000
customers in Massachusetts, New Hampshire and Maine. The combined company is
the tenth largest local natural gas distribution company in the nation,
servicing more than one million gas customers.

On February 9, 1999, Industries agreed to acquire TPC Corporation, a
natural gas marketing and storage company. Houston-based TPC Corporation, a
wholly-owned subsidiary of PacifiCorp., holds a 66% ownership stake in Market
Hub Partners, L.P., which stores natural gas in salt caverns. Services
currently owns approximately 12% of Market Hub Partners, L.P. The transaction
is expected to close in March or April 1999.

See "Segments of Business" in the Notes to Consolidated Financial
Statements and "Selected Supplemental Information" in the 1998 Annual Report
to Shareholders regarding financial information about industry segments and
classes of customers served (see Exhibit 13).

ELECTRIC, GAS AND WATER OPERATIONS

Electric Operations. Northern Indiana, Industries' largest and dominant
subsidiary, is a public utility operating company incorporated in Indiana on
August 2, 1912 that supplies natural gas

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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. At December 31, 1998, Northern
Indiana served approximately 420,900 customers with electricity.

Northern Indiana owns and operates four coal-fired electric generating
stations with net capabilities of 3,179,000 kilowatts (kw), two hydroelectric
generating plants with net capabilities of 10,000 kw and four gas-fired
combustion turbine generating units with net capabilities of 203,000 kw for a
total system net capability of 3,392,000 kw. During the year ended December
31, 1998, Northern Indiana generated 93.3% and purchased 6.7% of its electric
requirements.

Northern Indiana's 1998 electric control area peak load (the highest level
of electrical utility usage in the control area) of 3,100,160 kw was set on
July 21, 1998. Northern Indiana's electric control area includes Northern
Indiana, Wabash Valley Power Association, Inc. (WVPA) and Indiana Municipal
Power Agency (IMPA). Northern Indiana's all-time electric control area peak
load of 3,161,200 kw was set on July 14, 1995. Northern Indiana's 1998
internal peak load, which excludes WVPA and IMPA, of 2,810,530 kw was set on
June 29, 1998. Northern Indiana's all-time internal peak load of 2,888,450 kw
was set on August 6, 1996.

Northern Indiana's electric system is interconnected with the systems of
American Electric Power, Commonwealth Edison Company (ComEd), Cinergy
Services, Inc., Consumers Energy and Ameren Services Corporation, formerly
Central Illinois Public Service Company. Electric energy is purchased from,
sold to, or exchanged with various other utilities and power marketers under
Northern Indiana's power sales and open access transmission tariffs.

Northern Indiana provides WVPA with transmission and distribution service,
operating reserve requirements and capacity deficiency service, and provides
IMPA with transmission service, operating reserve requirements and capacity
deficiency service in Northern Indiana's control area. Northern Indiana also
engages in sales and services under interconnection agreements with WVPA and
IMPA.

WVPA provides service to 12 Rural Electric Membership Corporations (REMC's)
located in Northern Indiana's control area. IMPA provides service to the
municipal electric system of the city of Rensselaer located in Northern
Indiana's control area.

Northern Indiana and WVPA have executed a supplemental agreement for unit
peaking capacity and energy. Unit peaking capacity is the capacity used to
serve peak demand from a specific peaking generation unit. Pursuant to this
agreement, which runs through December 2001, WVPA purchases 90,000 kw of
capacity per month.

Northern Indiana serves the Town of Argos as a full requirement customer
and provides network integration service to seven municipal wholesale
customers.

Northern Indiana is a member of the East Central Area Reliability
Coordination Agreement (ECAR). ECAR is one of nine regional electric
reliability councils established to coordinate planning and operations of
member electric utilities regionally and nationally.

Fuel Supply. The generating units of Northern Indiana are located at
Bailly, Mitchell, Michigan City and Schahfer Generating Stations. Northern
Indiana's 13 steam generating units have a net capability of 3,179,000 kw.
Coal is the primary source of fuel for all units except for three, which
utilize natural gas. In addition, Northern Indiana's four combustion turbine

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generating units with a net capability of 203,000 kw are fired by gas. Fuel
requirements for Northern Indiana's generation for 1998 were supplied as
follows:

<TABLE>
<S> <C>
Coal................................................................ 97.5%
Natural Gas......................................................... 2.5%
</TABLE>

In 1998, Northern Indiana used approximately 8.8 million tons of coal at
its generating stations. Northern Indiana has established a normal level of
coal stock that is expected to provide adequate fuel supply during the year
under all conditions.

Annual coal requirements for Northern Indiana's electric generating units
through 2002 are estimated to range from 9.7 million tons to 10.2 million
tons, depending from year to year upon anticipated sales levels, scheduled
maintenance and other variables. These requirements are being met or will be
met in part under long-term contracts as follows:

<TABLE>
<CAPTION>
Millions Sulfur
tons/Year Content Expiration
--------- ------- ----------
<S> <C> <C>
1.3(a) Low 2001
1.25 Low 1999
1.6(b) Low 2002
.864(c) Low 2002
1.0(d) Low 2001
.5(e) Low 2000
1.0(f) High 2002
0.75(g) High 2001
0.375 High 1999
</TABLE>
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(a) 1.5 million tons in 1999, 0.4 million tons in 2001.
(b) Tentative new contract, 0.7 million tons in 1999, plus or minus 10% 2000,
2001 and 2002, option years in 2001 and 2002, Northern Indiana can
terminate 12/31/2000.
(c) 0.432 million tons in 1999.
(d) Plus or minus 20%, 1.2 million tons in 1999.
(e) Option year in 2000, seller can terminate 12/31/1999.
(f) Plus or minus 25%, 1.37 million tons in 1999. Plus or minus 25%, 1.0
million tons thereafter. Option years in 2001 and 2002, Northern Indiana
can terminate 12/31/2000 or 12/31/2001.
(g) 0.5 million tons in 1999.

The average cost of coal consumed in 1998 was $26.83 per ton, or 1.50 cents
per kilowatt-hour (kwh) generated as compared to $27.42 per ton or 1.54 cents
per kwh generated in 1997.

Coal Reserves. Included in the previous table of coal contracts is a coal
mining contract with Cyprus Shoshone Coal Corporation (Cyprus) under which
Cyprus is mining Northern Indiana's coal reserves in the Cyprus mine through
the year 2001. The costs of such reserves are being recovered through the
rate-making process as such coal reserves are used to produce electricity.

NESI Power Marketing Inc. (NPMI). NPMI was involved in wholesale power
trading activities in 1998, although it ceased active business operations in
March 1998. During 1998, NPMI had sales of approximately 12.4 million megawatt
hours (mwh).

Fuel Adjustment Clause. Northern Indiana may in some instances adjust
metered electric rates through a fuel adjustment clause to reflect changes in
fuel costs. See "Summary of Significant Accounting Policies--Fuel Adjustment
Clause" in the Notes to Consolidated Financial Statements in the 1998 Annual
Report to Shareholders (see Exhibit 13).

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Gas Operations.

Northern Indiana. At December 31, 1998, Northern Indiana served
approximately 671,200 customers with gas. Northern Indiana supplies natural
gas of about 1,000 British thermal units (Btu) per cubic foot. In a 24-hour
period ended December 22, 1998, Northern Indiana's 1998 maximum day send-out
(the maximum amount of gas delivered through Northern Indiana's distribution
system to its end use customers) was 1.4 million dekatherms (dth). Northern
Indiana's total gas send-out for 1998 was 288.6 million dth, compared to 292.6
million dth in 1997.

Agreements have been negotiated with natural gas suppliers to replace
former pipeline supplier contracts pursuant to the requirements of the Federal
Energy Regulatory Commission (FERC) Order No. 636 (see "FERC Order No. 636" in
the Notes to Consolidated Financial Statements in the 1998 Annual Report to
Shareholders (see Exhibit 13)). Northern Indiana also has producer agreements
which allow for the purchase of gas either from gas marketers or producers.

Northern Indiana has firm transportation agreements with pipelines, which
allow Northern Indiana to move its gas through the pipelines' transmission
systems. In 1998, all of the gas supplied by Northern Indiana was transported
by ANR Pipeline Company (ANR), Crossroads Pipeline Company (Crossroads),
Midwestern Gas Transmission Company (Midwestern), Natural Gas Pipeline Company
of America (Natural), Panhandle Eastern Pipe Line Company (Panhandle),
Tennessee Gas Pipeline Company (Tennessee) and Trunkline Gas Company
(Trunkline). The transportation rates of Crossroads and the transportation and
storage rates of ANR, Midwestern, Natural, Panhandle, Tennessee and Trunkline
to Northern Indiana are subject to change in accordance with rate proceedings
filed with the FERC.

Approximately 84% of Northern Indiana's 1998 gas supply was purchased on
the spot market, generally on less than 30-day agreements. The average price
per dth (including FERC Order No. 636 transition charges) in 1998 was $2.49,
compared to $3.18 in 1997, and the average cost of purchased gas, after
adjustment for transition charges billed to transport customers, was $2.48 per
dth, as compared to $3.08 per dth in 1997.

Northern Indiana has a curtailment plan (a plan which outlines service to
be curtailed in the event of limited gas supply) that has been approved by the
Indiana Utility Regulatory Commission (Commission). There were no firm sales
curtailments in 1998 and none are expected during 1999.

Northern Indiana operates an underground gas storage field at Royal Center,
Indiana, which currently has a storage capacity of 6.75 million dth.
Withdrawals have been made in the 1998-1999 winter of up to 94,308 dth per
day. In addition, Northern Indiana has several gas storage service agreements
which make possible the withdrawal of substantial quantities of gas from other
storage facilities. All of the storage agreements have limitations on the
volume and timing of daily withdrawals. These contracts provide in the
aggregate for approximately 29.6 million dth of annual stored volume and allow
for approximately 540,000 dth of maximum daily withdrawal.

Northern Indiana has a liquefied natural gas plant in LaPorte County which
is designed for peak shaving (which stores pipeline natural gas to supplement
gas supply during periods of high demand) and has the following capacities:
maximum storage of 4 million dth; maximum liquefaction rate (gas to liquid) of
20,000 dth per day; maximum vaporization rate (output to distribution system)
of 300,000 dth per day.

Kokomo Gas. Kokomo Gas is a public utility operating company incorporated
in Indiana in 1917, that supplies natural gas to the public. It operates in
the city of Kokomo, Indiana

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and the surrounding six counties having a population of approximately 100,000,
and served approximately 33,800 customers at December 31, 1998. The Kokomo Gas
service territory is contiguous to Northern Indiana's gas service territory.

Kokomo Gas has a liquefied natural gas plant in Howard County with the
following capacities: maximum storage of 400,000 thousand cubic feet (mcf);
maximum liquefaction rate (gas to liquid) of 2,850 mcf per day; maximum
vaporization rate (output to distribution system) of 30,000 mcf per day.
Kokomo Gas also has a gas holder with a storage capacity of 12,000 mcf.

Kokomo Gas' total gas send-out for 1998 was 7.4 million dth, compared to
8.7 million dth for 1997. Total transportation volumes for industrial
customers in 1998 were 3.3 million dth, compared to 3.6 million dth in 1997.
Kokomo Gas purchased gas under a term agreement from NESI Energy Marketing
L.L.C., (NEM), a subsidiary of Services, to satisfy all of its system
requirements in 1998.

NIFL. NIFL is a public utility operating company incorporated in Indiana in
1906, that supplies natural gas to the public. Headquartered in Auburn,
Indiana, it operates in five counties in the northeast corner of the state
having a population of approximately 66,700, and served approximately 34,380
customers at December 31, 1998. The NIFL service territory is contiguous to
Northern Indiana's gas service territory.

NIFL's total gas send-out for 1998 was 11.0 million dth, compared to 10.8
million dth for 1997. Total transportation volumes for industrial customers in
1998 were 6.7 million dth, compared to 5.6 million dth in 1997. NIFL purchased
gas on the spot market from a number of suppliers and also under term
agreements from NI-TEX, Inc. (NI-TEX) and NESI Energy Marketing L.L.C. (NEM)
to satisfy all of its system requirements in 1998.

Crossroads. Crossroads is a natural gas pipeline company which was approved
by FERC to operate as an interstate pipeline in May 1995. Crossroads owns and
operates a 201-mile, 20-inch pipeline that extends from Schererville, Indiana,
in the northwestern corner of the state, where it takes delivery from the
interstate pipeline facilities of Natural Gas Pipeline Company of America, to
Cygnet, Ohio, located in northwestern Ohio, where it interconnects with
facilities owned by Columbia Gas Transmission Corporation. In December 1997,
Crossroads announced plans to construct a 20-mile extension of its pipeline
facility in Ohio to a point of interconnection with a unit of Consolidated
Natural Gas Company. Construction is anticipated to begin in 2001.

Gas Cost Adjustment Clause. Metered gas rates may be adjusted to reflect
the cost of purchased gas, contracted gas storage and storage transportation
charges. See "Summary of Significant Accounting Policies--Gas Cost Adjustment
Clause" in the Notes to Consolidated Financial Statements in the 1998 Annual
Report to Shareholders (see Exhibit 13).

Water Operations. The Water Utilities supply water for residential, commercial
and industrial uses and for fire protection service in Indianapolis, Indiana
and surrounding areas. The territory served by the Water Utilities covers an
area of approximately 310 square miles in six counties of central Indiana and
the Water Utilities served approximately 253,700 customers at December 31,
1998.

The combined maximum daily capacity of the Water Utilities' treatment
plants, together with the maximum daily capacity of the three primary well
fields, is 235 million gallons per day (MGD). During 1998, the average daily
consumption was 132 MGD and the maximum daily consumption was 192 MGD.

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The principal sources of IWC's present water supply are the White River,
which flows through Indianapolis from north to south and is supplemented by
Morse Reservoir on a tributary, Cicero Creek; Fall Creek, which flows through
Indianapolis from the northeast and is supplemented by Geist Reservoir; the
city of Indianapolis' Eagle Creek Reservoir, located on Eagle Creek in
northwest Marion County, from which water is purchased under a long-term
contract; Geist Well Field, a ground water supply located downstream of Geist
Reservoir; and South Well Field located in southern Marion and northern
Johnson Counties.

The three large surface reservoirs are essential to providing an adequate
supply during dry periods. Two are used to supplement low stream flows in the
White River and Fall Creek, respectively, and water is drawn directly from the
third. The reservoirs are designed to maintain an adequate water supply in the
event of a repetition of the worst two-year drought ever recorded in the
Indianapolis area.

The theoretical dependable supply from the three combined reservoirs
including national stream flows represents approximately 63% of the total
dependable supply available to IWC with the balance supplied by natural stream
flow and wells. Wells constitute the source of supply for Harbour.

The Water Utilities have aquifer protection plans for Geist and South Well
Fields. Once fully developed, the Geist Well Field will produce 12 to 15 MGD
while South Well Field will produce 40 to 50 MGD. The protection plans will
guide the Water Utilities' development of these newest major sources of
supply, and result in land use plans to protect the aquifer systems from
potential contamination sources.

PRODUCTS AND SERVICES AND OTHER SUBSIDIARIES

IWCR. IWCR is a holding company for the Water Utilities and two other material
subsidiaries. SM&P performs underground utility locating and marking services
in Indiana and 6 other states. SM&P performed approximately 5.7 million
locates and had operating income of $3.7 million for the period ending
December 1998. Miller installs, repairs and maintains underground pipelines
used in gas, water and sewer transmission and distribution systems. Operating
income for Miller for the period ending December 1998 was $5.0 million.

Primary. Primary arranges energy-related projects for large energy-intensive
facilities and has entered into certain commitments in connection with these
projects. Primary offers expertise to large energy customers in managing the
engineering, construction, operation and maintenance of these energy-related
projects. Primary is the parent of the following material subsidiaries: Harbor
Coal Company (Harbor Coal), North Lake Energy Corporation (North Lake),
Lakeside Energy Corporation (LEC), Portside Energy Corporation (Portside), and
Cokenergy, Inc. (CE).

Harbor Coal has invested in a partnership to finance, construct, own and
operate a $65 million pulverized coal injection facility which began
commercial operation in August 1993. The facility receives raw coal,
pulverizes it and delivers it to Ispat Inland, Inc. (Ispat) for use in the
operation of its blast furnaces. Harbor Coal is a 50% partner in the project
with an Ispat affiliate. Industries has guaranteed the payment and performance
of the partnership's obligations under a sale and leaseback of a 50% undivided
interest in the facility.

North Lake has entered into a lease for the use of a 75-megawatt energy
facility located at Ispat. The facility uses steam generated by Ispat to
produce electricity which is delivered to Ispat. The facility began commercial
operation in May 1996. Industries has guaranteed North Lake's obligations
relative to the lease and certain obligations to Ispat relative to the
project.

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LEC has entered into a lease for the use of a 161-megawatt energy facility
located at USS Gary Works. The facility processes high-pressure steam into
electricity and low-pressure steam for delivery to USX Corporation-US Steel
Group. A fifteen-year tolling agreement with US Steel commenced on April 16,
1997 when the facility was placed in commercial operation. Capital Markets
guarantees certain limited LEC obligations to the lessor.

Portside built and now operates a 63-megawatt energy facility at the
Midwest Division of National Steel Corporation (National), to process natural
gas into electricity, process steam and heated water to be provided to
National for a fifteen-year period. Portside has entered into a lease for use
of the facility. Industries has guaranteed certain Portside obligations to the
lessor. The facility began commercial operation on September 26, 1997.

CE built and now operates an energy facility at Ispat's Indiana Harbor
Works to scrub flue gases and recover waste heat from the coke facility
constructed by Indiana Harbor Coke Company, LP (Harbor Coke) and to produce
process steam and electricity from the recovered heat which is then delivered
to Ispat. CE leases these facilities from a third party. CE has a fifteen-year
service agreement and a related fifteen-year fuel supply agreement with ISPAT
and Harbor Coke. Capital Markets guarantees certain CE obligations relative to
the lease. Construction of the project began in January 1997 and the facility
began commercial operation on October 1, 1998.

Primary has advanced approximately $31.8 million and $107.2 million, at
December 31, 1998 and December 31, 1997, respectively, to the lessors of the
energy related projects discussed above.

Primary is evaluating other potential projects with Northern Indiana
customers as well as with potential customers outside of Northern Indiana's
service territory. Projects under consideration include those which use
industrial by-product fuels and natural gas to produce electricity.

Services. Services coordinates the energy-related diversification efforts of
Industries. At December 31, 1998, Services had four active wholly-owned
subsidiaries, and material investment interests in three limited liability
entities and two partnerships.

NESI Solutions, Inc. (Solutions) was formed on May 1, 1998, as the result
of the merger between NESI Energy Services Company (NESCO) and Parkway
Engineering and Distribution Company, Inc. (PEDCO). It provides energy
solutions, which enhance competitiveness through cost reductions, modernizing
infrastructure and improving cost accountabilities. It also markets energy
efficient lighting and lighting solutions.

NESI Energy Marketing L.L.C. NEM is a limited liability-company which
provides natural gas sales and management services to industrial and
commercial customers and is also engaged in natural gas marketing activities.
NEM also provides gas supply to Northern Indiana, Kokomo Gas and NIFL under
spot and/or term contracts. During 1998, NEM had sales of approximately 279.3
million dth.

NESI Integrated Energy Resources, Inc. (NIERI) is a wholly-owned subsidiary
of Services, is a retail gas marketing company involved in gas supply pilot
programs in Indiana, Ohio, and Michigan, serving residential, commercial and
light industrial customers.

NIPSCO Security Services, Inc. (NIPSCO Security) is a provider of Security
services to residential and commercial customers. Services sold the stock of
NIPSCO Security to ADT in January 1999.

Mid-Tex Gas Storage Company, L.L.P., of which Services owns 32%, operates a
salt dome gas storage facility with an operating capacity of 5.7 Bcf.

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Canor Energy Ltd. (Canor) is a Canadian oil and gas exploration company in
which Services owns $34%. As of December 31, 1998, Canor had invested $100.8
million in Canadian exploration and development projects with estimated proven
reserves in gas equivalency of 110 Bcf of natural gas.

NESI Energy Marketing Canada Ltd. (NEM Canada) is a bankrupt Canadian
natural gas marketing company in which Services owns 70%, see "NESI Energy
Marketing Canada Ltd. Litigation" in the Notes to Consolidated Financial
Statements in the Annual Report to Shareholders (see Exhibit 13).

Bristol Resources Production Company, L.L.C., (Bristol), is an oil and gas
exploration and production company in which NIPSCO Fuel Company, Inc. owns
64%.

Laredo-Nueces Pipeline Company, (Laredo-Nueces) is an intrastate pipeline
in Texas in which Services owns 50%. Laredo-Neuces transported 6.5 Bcf of
natural gas in 1998.

Portland Natural Gas Transmission System (PNGTS) is a 292 mile pipeline
being developed in northern New England in which Services owns 9.5%.

Development. Development makes various investments, including real estate and
venture capital investments. Development is an 79% shareholder in Retyred 99
Ltd., (formerly Elm Energy and Recycling (UK) Ltd.), which owned and operated
a tire-fueled electric generating plant in Wolverhampton, England. Retyred 99
Ltd. sold the generating plant in December 1998.

In 1998, Development invested in a multiple-family residential housing
development in Indianapolis. Development has additional projects within the
Utilities' service territories and is considering additional projects within
those territories. At December 31, 1998, Development has $34.0 million of
investments, at equity, relating to affordable housing projects. These
projects are part of the continued commitment by Industries to provide high
quality, energy efficient, affordable housing to the residents of a variety of
geographic and economic regions served by the Utilities.

Capital Markets. Capital Markets provides financing for Industries'
subsidiaries other than Northern Indiana and, in certain respects, IWCR and
its subsidiaries. As of December 31, 1998, Capital Markets had $108.1 million
in commercial paper outstanding, having a weighted average interest rate of
5.99% at December 31, 1998. In September 1998, Capital Markets entered into a
five-year $100 million revolving credit agreement and a 364-day $100 million
revolving credit agreement with several banks. These agreements terminate on
September 23, 2003 and September 23, 1999, respectively. These agreements
provide financing flexibility to Capital Markets and may be used to support
the issuance of commercial paper. At December 31, 1998, there were no
borrowings outstanding under either of these agreements. Capital Markets also
has $130 million of money market lines of credit. As of December 31, 1998,
$86.8 million of borrowings were outstanding under these lines of credit.

The financial obligations of Capital Markets are subject to a Support
Agreement between Industries and Capital Markets, under which Industries has
committed to make payments of interest and principal on Capital Markets'
obligations in the event of a failure to pay by Capital Markets. Restrictions
in the Support Agreement prohibit recourse on the part of Capital Markets'
creditors against the stock and assets of Northern Indiana which are owned by
Industries. Under the terms of the Support Agreement, in addition to the cash
flow of cash dividends paid to Industries by any of its consolidated
subsidiaries, the assets of Industries, other than the stock and assets of
Northern Indiana, are available as recourse for the benefit of Capital
Markets' creditors. The carrying value of the assets of Industries, other than
the assets of Northern Indiana, as reflected in the consolidated financial
statements of Industries, was approximately $1.3 billion at December 31, 1998.

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REGULATION

Holding Company Act. Industries is exempt from registration with the
Securities and Exchange Commission (SEC) as a "registered holding company"
under the Public Utility Holding Company Act of 1935, as amended (Holding
Company Act). However, prior approval of the SEC is required under the Holding
Company Act if Industries proposes to acquire, directly or indirectly, any
securities of other electric or gas public utility companies. There may also
be limits on the extent to which Industries and its non-utility subsidiaries
can enter into businesses which are not "functionally related" to the electric
and gas businesses without raising questions about Industries' exempt status
under the Holding Company Act. SEC guidelines established in prior decisions
of the SEC require Industries to remain engaged primarily and predominately in
the electric and gas businesses and to limit the size of its activities
outside of such businesses relative to Industries as a whole.

Industries has no present intention of becoming a registered holding
company subject to regulation by the SEC under the Holding Company Act.

Indiana Utility Regulatory Commission. Industries is not subject to regulation
by the Commission as long as it is not a public utility. Industries and its
non-utility subsidiaries are subject to certain reporting and information
access requirements under Indiana law. Furthermore, certain contracts between
Industries or its non-utility subsidiaries and the Energy Utilities must be
filed with the Commission.

The Utilities are subject to regulation by the Commission as to rates,
service, accounts, issuance of securities and in other respects. The Utilities
are also subject to limited regulation by local public authorities.

Federal Energy Regulatory Commission. Industries is not regulated by the FERC,
but any subsidiary, including the Energy Utilities, that engages in FERC
jurisdictional sales or activities is subject to such regulation.

Northern Indiana's restructuring under Industries was approved by a
February 29, 1988 order of the FERC. The order is conditioned upon the FERC's
continuing authority to examine the books and records of Industries and its
subsidiaries, upon further order of the FERC, and to make such supplemental
orders, for good cause, as it may find necessary or appropriate regarding the
restructuring.

In 1998, about 7% of Northern Indiana's electric revenues were derived from
electric service it furnished at wholesale in interstate commerce to other
utility companies, power marketers, municipalities and WVPA (see "Item 1.
Business-Electric Operations" regarding WVPA). Northern Indiana's wholesale
rates and operations are subject to the jurisdiction of the FERC. FERC
jurisdiction does not extend to the issuance of securities by Northern
Indiana, which are regulated by the Commission. The FERC has declared Northern
Indiana, Kokomo Gas and NIFL exempt from the provisions of the Natural Gas
Act.

RATE MATTERS

For a description of Northern Indiana's Alternative Regulatory Plan (ARP)
See "Competition and Regulatory Charges" below.

On November 14, 1997, IWC petitioned the Commission for approval of new
water rates and charges. On March 17, 1998, IWC and the Office of Utility
Consumer Counselor (UCC) representing the ratepayers filed a "Stipulation and
Settlement Agreement," resolving the issues in the case. This agreement,
approved by the Commission on April 8, 1998, provided for an

10
<PAGE>

increase in IWC's water rates and charges in two phases. The first phase was
an immediate increase of approximately $5,253,000. The second phase approved
an additional increase of approximately $4,540,000 on April 8, 1999. The
agreement further provided that prior to January 1, 2002, IWC cannot request
an additional change in its basic rates and charges nor seek authority to
continue allowance for funds used during construction (AFUDC) or defer
depreciation on its capital projects after they have been completed and are in
service. Effective with the second phase of the increase, IWC will use
individual depreciation rates for each plant account as approved by the IWC
Commission on January 15, 1997, to produce a composite depreciation rate of
2.21%.

COMPETITION AND REGULATORY CHANGES

The regulatory frameworks applicable to the Energy Utilities, at both the
state and federal levels, are in the midst of a period of fundamental change.
These changes have and will continue to impact the operation, structure and
profitability of Industries. At the same time, competition with the electric
and gas industries will create opportunities for Industries' subsidiaries to
compete for new customers and revenues. Industries' management has taken steps
to make the company more competitive and profitable in this changing
environment, including partnering on energy projects with major industrial
customers, converting some of its generating units to allow use of lower cost,
low sulfur coal, providing its gas customers with increased customer choice
for new products and services throughout Northern Indiana's service territory,
and establishing subsidiaries which provide gas and develop new energy-related
products for residential, commercial and industrial customers.

The Electric Industry. At the Federal level, FERC issued Order No. 888-A in
1996 which required all public utilities owning, controlling or operating
transmission lines to file non-discriminatory open-access tariffs and offer
wholesale electricity supplier and marketers the same transmission service
they provide themselves. In 1997, FERC approved Northern Indiana's open-access
transmission tariff. Although wholesale customers currently represent a small
portion of Northern Indiana's electricity sales, Northern Indiana intends to
continue its efforts to retain and add wholesale customers by offering
competitive rates and also intends to expand the customer base for which it
provides transmission services.

At the state level, Industries announced in 1997 that if consensus could be
reached regarding electric utility restructuring legislation, Industries would
support a restructuring bill during the 1999 session of the Indiana General
Assembly. During 1998, Northern Indiana held discussions with the other
investor-owned utilities in Indiana regarding the technical and economic
aspects of possible legislation leading to greater customer choice. A
consensus was not reached. Therefore, Industries does not anticipate that it
will be supporting any legislation regarding electric restructuring during the
1999 session of the Indiana General Assembly. However, during 1999, Northern
Indiana anticipates continued discussions with all segments of the Indiana
electric industry in an attempt to reach a consensus on electric restructuring
legislation for introduction during the 2000 session of the Indiana General
Assembly.

The Gas Industry. At the Federal level, gas industry deregulation began in the
mid 1980's when FERC required interstate pipelines to provide
nondiscriminatory transportation service pursuant to unbundled rates. This
regulatory change permitted large industrial and commercial customers to
purchase their gas supplies either from the Energy Utilities or directly from
competing producers and marketers which would then use the Energy Utilities'
facilities to transport the gas. More recently, the focus of deregulation in
the gas industry has shifted to the states.

At the state level, the Commission approved in 1997 Northern Indiana's ARP
which implemented new rates and services that included, among other things,
unbundling of services for

11
<PAGE>

additional customer classes (primarily residential and commercial users),
negotiated services and prices, a gas cost incentive mechanism and a price
protection program. The gas cost incentive mechanism allows Northern Indiana
to share any cost savings or cost increases with its customers based upon a
comparison of Northern Indiana's actual gas supply portfolio cost to a market-
based benchmark price. Phase I of Northern Indiana's Customer Choice Pilot
Program will end March 31, 1999. This pilot program offered a limited number
of residential and commercial customers within the South Bend metropolitan
area the right to choose alternative gas suppliers. Phase II of Northern
Indiana's Customer Choice Pilot Program will commence April 1, 1999 and
continue for a one-year period. During this phase, Northern Indiana plans to
offer customer choice to a significantly expanded eligible customer base
throughout its gas service territory. The Commission order allows Industries'
natural gas marketing subsidiary to participate as a supplier of choice to
Northern Indiana customers. In addition, as Northern Indiana has allowed
residential and commercial customers to designate alternative gas suppliers,
it has also offered new services to all classes of customers including, but
not limited to, price protection, negotiated sales and services, gas lending
and parking, and new storage services.

To date, the Energy Utilities have not been materially affected by
competition and management does not foresee substantial adverse affects in the
near future unless the current regulatory structure is substantially altered.
Industries believes the steps that it has taken to deal with increased
competition has had and will continue to have significant positive effects in
the next few years.

EMPLOYEES

Industries had 6,035 employees at December 31, 1998. Of these employees,
2,988 are represented by various local unions. The total number of employees
at Northern Indiana was 3,215; at SM&P, 1,094; at Miller, 652; at IWC, 428;
and Industries had 646 employees in diversified operations.

ENVIRONMENTAL MATTERS

General. The operations of Industries 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 Industries' operations as they relate to impacts on air,
water and land.

Superfund. Because Industries is a "potentially responsible party" (PRP) under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) at several waste disposal sites, as well as at former manufactured-
gas plant sites which it, or its corporate predecessors, own or owned or
operated, it may be required to share in the costs of clean up of such sites.
Industries instituted a program to investigate former manufactured-gas plant
sites where it is the current or former owner which investigation has
identified twenty-eight of these sites. Initial sampling has been conducted at
twenty sites. Follow-up investigations have been conducted at thirteen sites
and remedial measures have been selected at seven sites. Industries intends to
continue to evaluate its facilities and properties with respect to
environmental laws and regulations and take any required corrective action.

In an effort to recover a portion of the remediation costs to be incurred
at the manufactured gas plants, Industries approached various companies that
provided insurance coverage which Industries believed covered costs related to
actions taken and to be taken at former manufactured-gas plant sites.
Industries has filed claims in Indiana state court against various insurance

12
<PAGE>

companies, seeking coverage for costs associated with several manufactured-gas
plant sites and damages for alleged misconduct by some of the insurance
companies. Industries has received cash settlements from several insurance
companies. Additionally, Industries has settled other actions against other
companies relating to cost sharing and management of the investigation and
remediation of several former manufactured-gas plant sites at which Industries
and such companies or their predecessors were operators or owners.

As of December 31, 1998, Industries has recorded a reserve of approximately
$19 million to cover probable corrective actions. Industries' ultimate
liability in connection with those sites will depend upon many factors,
including the volume of material contributed to the site, the number of other
PRPs and their financial viability, and the extent of corrective actions
required. Based upon investigations and management's understanding of current
environmental laws and regulations, Industries believes that any corrective
actions required, after consideration of insurance coverages and contributions
from other PRPs, will not have a significant impact on its financial position
or results of operations.

Clean Air Act. The Clean Air Act Amendments of 1990 (CAAA) impose limits to
control acid rain on the emission of sulfur dioxide and nitrogen oxides (NOx)
which become fully effective in 2000. All of Northern Indiana's facilities are
already in compliance with the sulfur dioxide limits. Northern Indiana has
already taken most of the steps necessary to meet the nitrogen oxide limits.

The CAAA also contain other provisions that could lead to limitations on
emissions of hazardous air pollutants and other air pollutants (including
nitrogen oxides as discussed below), which may require significant capital
expenditures for control of these emissions. Until specific rules have been
issued that affect Industries' facilities, Industries cannot predict what
these requirements will be or the costs of complying with these potential
requirements.

Nitrogen Oxides. During 1998, the Environmental Protection Agency (EPA) issued
a final rulemaking, the NOx State Implementation Plan (SIP) call, requiring
certain states, including Indiana, to reduce NOx levels from industrial and
utility boilers to lower regional transport of ozone under the non-attainment
provisions of the CAAA. According to the rule, the State of Indiana has until
September 1999 to issue regulations implementing the control program. The
State of Indiana, as well as some other states, filed a legal challenge in
December 1998 to the EPA NOx SIP call rule. Lawsuits have also been filed
against the rule by various groups, including industry, labor, cities and
towns and chambers of commerce. Industries will participate in the legal
challenge as a member of a utility industry group. Any resulting NOx emission
limitations could be more restrictive than those imposed on electric utilities
under the Acid Rain NOx reduction program described above. Industries is
evaluating the EPA's final rule and any potential requirements that could
result from the final rule as implemented by the State of Indiana. Industries
believes that the costs relating to compliance with the new standards may be
substantial, but such costs are dependent upon the outcome of the current
litigation and the ultimate control program agreed to by the targeted states
and the EPA. Industries will continue to closely monitor developments in this
area.

The EPA issued final rules revising the National Ambient Air Quality
Standards for ozone and particulate matter in July 1997. The revised standards
could require additional reductions in sulfur dioxide, particulate matter and
NOx emissions from coal-fired boilers (including Industries' generating
stations) beyond measures discussed above. Certain implementation proposals,
which are not yet final, would target coal-fired utilities in the Midwest and
South, including Indiana, for more substantial reductions than other areas and
other sources of emissions. Final implementation methods will be set by the
EPA as well as state regulatory authorities. Industries believes that the
costs relating to compliance with the new standards may be substantial but are

13
<PAGE>

dependent upon the ultimate control program agreed to by the targeted states
and the EPA. Industries will continue to closely monitor developments in this
area and anticipates the exact nature of the impact of the new standards on
its operations will not be known for some time.

Carbon Dioxide. Initiatives are being discussed both in the United States and
worldwide to reduce so-called "greenhouse gases" such as carbon dioxide and
other by-products of burning fossil fuels. Reduction of such emissions could
result in significant capital outlays or operating expenses to Industries.

Clean Water Act and Related Matters. Industries' wastewater and water
operations are subject to pollution control and water quality control
regulations, including those issued by the EPA and the State of Indiana.

Under the Federal Clean Water Act and Indiana's regulations, Industries
must obtain National Discharge Elimination System (NPDES) permits for water
discharges from various facilities, including electric generating and water
treatment stations. These facilities either have permits for their water
discharge or they have applied for renewals of any expiring permits. These
permits continue in effect pending review of the current applications.

Under the Federal Safe Drinking Water Act (SDWA), the Water Utilities are
subject to regulation by the EPA for the quality of water sold and treatment
techniques used to make the water potable. The EPA promulgates nationally-
applicable maximum contaminant levels (MCLs) for contaminants found in
drinking water. Management believes the Water Utilities are currently in
compliance with all MCLs promulgated to date. The EPA has continuing
authority, however, to issue additional regulations under the SDWA. In August
1996, Congress amended the SDWA to allow the EPA more authority to weigh the
costs and benefits of regulations being considered in some, but not all,
cases. In December 1998, EPA promulgated two National Primary Drinking Water
rules, the Interim Enhanced Surface Water Treatment Rule and the Disinfectants
and Disinfection Byproducts Rule. The Water Utilities must comply with these
rules by December 2001. Management does not believe that significant changes
will be required to the Water Utilities' operations to comply with these
rules; however, some cost expenditures for equipment modifications or
enhancements may be necessary to comply with the Interim Enhanced Surface
Water Treatment Rule. Additional rules are anticipated to be promulgated under
the 1996 amendments. Such standards promulgated could be costly and require
substantial changes in the Water Utilities' operations.

Under a 1991 law enacted by the Indiana legislature, a water utility may
petition the Commission for prior approval of its plans and estimated
expenditures required to comply with the provisions of, and regulations under,
the Federal Clean Water Act and SDWA. Upon obtaining such approval, a water
utility may include, to the extent of its estimated costs as approved by the
Commission, such costs in its rate base for rate-making purposes and recover
its costs of developing and implementing the approved plans if statutory
standards are met. The capital costs for such new systems, equipment or
facilities or modifications of existing facilities may be included in a water
utility's rate base upon completion of construction of the project or any part
thereof. Such an addition to rate base, however, would effect a change in
water rates and IWC, Industries' principal water utility, has agreed to a
moratorium on water rate increases until 2002. Therefore, recovery of any
increased costs discussed above may not be timely for IWC.

YEAR 2000 COSTS

14
<PAGE>

risks. Possible scenarios include a system failure in one of Industries'
generating plants, an operating disruption or delay in transmission or
distribution, or an inability to interconnect with the systems of other
utilities. In addition, while Industries currently anticipates that its own
mission-critical systems will be year 2000 compliant in a timely fashion, it
cannot guarantee the compliance of systems operated by other companies upon
which it depends. For example, the ability of an electric company to provide
electricity to its customers depends upon a regional electric transmission
grid, which connects the systems of neighboring utilities to support the
reliability of electric power within the region. If one company's system is
not year 2000 compliant, then a failure could affect the reliability of all
providers within the grid, including Industries. Similarly, Industries' gas
operations depend on natural gas pipelines that it does not own or control,
and any non-compliance by a company owning or controlling those pipelines may
affect Industries' ability to provide gas to its customers. Failure to achieve
year 2000 readiness could have a material adverse effect on Industries'
results of operations, financial position and cash flows.

Industries is continuing its program to address risks associated with the
year 2000. Industries' year 2000 program focuses on both its information
technology (IT) and non-IT systems, and Industries has been making substantial
progress in preparing these systems for proper functioning in the year 2000.

State of Readiness. Industries' year 2000 program consists of four phases:
inventory (identifying systems potentially affected by the year 2000),
assessment (testing identified systems), remediation (correcting or replacing
non-compliant systems) and validation (evaluating and testing remediated
systems to confirm compliance). By second quarter 1997, Industries had
completed the inventory and assessment phases for all of its mission-critical
IT systems. Industries also has completed the remediation and validation
phases for four of its six major IT components. The remediation and validation
phases for the remaining two components are expected to be completed within
the next few months, so that Industries expects to conclude the year 2000
program for its mission-critical systems by first quarter 1999. Industries has
completed the inventory and assessment phases for all of its non-IT mission-
critical systems. Industries has scheduled remediation (including replacement)
and validation for its non-IT mission-critical systems throughout 1999.
Industries expects to substantially complete its mission-critical year 2000
efforts by June 30, 1999, and to conclude the year 2000 program in the fourth
quarter 1999.

Because Industries depends on outside suppliers and vendors with similar
year 2000 issues, Industries is assessing the ability of those suppliers and
vendors to provide it with an uninterrupted supply of goods and services.
Industries has contacted its critical vendors and suppliers in order to
investigate their year 2000 efforts. In addition, Industries is working with
electricity and gas industry groups such as North American Electric
Reliability Council, Electric Power Research Institute, and the American Gas
Association to discuss and evaluate the potential impact of year 2000 problems
upon the electric grid systems and pipeline networks that interconnect within
each of those industries.

Costs. Industries currently estimates that the total cost of its year 2000
program will be between $17 million and $26 million. These costs have been,
and will continue to be, funded from operations. Costs related to the
maintenance or modification of Industries' existing systems are expensed as
incurred. Costs related to the acquisition of replacement systems are
capitalized in accordance with Industries' accounting policies. Industries
does not anticipate these costs to have a material impact on its results of
operations.

15
<PAGE>

and vendors, conducting staff training and developing communication plans. In
addition, Industries is evaluating both its ability to maintain or restore
service in the event of a power failure or operating disruption or delay, and
its limited ability to mitigate the effects of a network failure by isolating
its own network from the non-compliant segments of the greater network.
Industries expects to complete these contingency plans during the second
quarter of 1999; however, the contingency plans will be under review during
the third and fourth quarters of 1999.

FORWARD LOOKING STATEMENTS

This report contains forward looking statements within the meaning of the
securities laws. Forward looking statements include terms such as "may",
"will", "expect", "believe", "plan" and other similar terms. Industries
cautions that, while it believes such statements to be based on reasonable
assumptions and makes such statements in good faith, there can be no assurance
that the actual results will not differ materially from such assumptions or
that the expectations set forth in the forward looking statements derived from
such assumptions will be realized. Investors should be aware of important
factors that could have a material impact on future results. These factors
include, but are not limited to, weather, the federal and state regulatory
environment, year 2000 issues, the economic climate, regional, commercial,
industrial and residential growth in the service territories served by
Industries' subsidiaries, customers' usage patterns and preferences, the speed
and degree to which competition enters the utility industry, the timing and
extent of changes in commodity prices, changing conditions in the capital and
equity markets and other uncertainties, all of which are difficult to predict,
and many of which are beyond the control of Industries.

Item 2. Properties.

Overview. The physical properties of the Utilities are located in the State of
Indiana, except for Crossroads which owns a 202-mile interstate natural gas
pipeline running from northwest Indiana to Cygnet, Ohio.

The significant properties owned by other subsidiaries of Industries are:
the Southlake Complex, a 325,000 square foot office building located in
Merrillville, Indiana, owned by Development; a 36-mile intrastate natural gas
pipeline, located in southern Texas, half-owned by NI-TEX; interests in oil
and gas exploration and production properties, owned by Fuel; a golf course
and surrounding residential development in Chesterton, Indiana, owned by Lake
Erie Land Company (a wholly-owned subsidiary of Development); commercial real
estate joint ventures, half-owned by KOGAF Enterprises (a wholly-owned
subsidiary of Development) located in Kokomo, Indiana; interests in oil and
gas producing properties in Canada, owned by NI Canada ULC; and parcels of
land for development owned by Waterway Holdings, Inc.

Electric. Northern Indiana owns and operates four coal fired electric
generating stations with net capabilities of 3,179,000 kw, two hydroelectric
generating plants with net capabilities of 10,000 kw and four gas fired
combustion turbine generating units with net capabilities of 203,000 kw, for a
total system net capability of 3,392,000 kw.

Northern Indiana has 291 substations with an aggregate transformer capacity
of 23,131,300 kilavolts (kva). Its transmission system with voltages from
34,500 to 345,000 consists of 3,058 circuit miles of line. The electric
distribution system extends into 21 counties and consists of 7,814 circuit
miles of overhead and 1,497 cable miles of underground primary distribution
lines operating at various voltages ranging from 2,400 to 12,500 volts.
Northern Indiana has distribution transformers having an aggregate capacity of
11,156,320 kva and 445,117 electric watt-hour meters.

16
<PAGE>

Gas. Northern Indiana has an underground storage field at Royal Center and a
liquefied natural gas plant in LaPorte County and Kokomo Gas has a liquefied
natural gas plant in Howard County, all of which are described under "Item 1.
Business--Gas Operations". Northern Indiana has 13,586 miles of gas mains,
Kokomo Gas has 760 miles of gas mains and NIFL has 830 miles of gas mains.

Water. The Water Utilities' properties consist of land, easements, rights
(including water rights), buildings, reservoirs, canals, wells, supply lines,
purification plants, pumping stations, transmission and distribution pipes,
mains and conduits, meters and other facilities used for the collection,
purification and storage of water and the distribution of water to its
customers. The water systems extend from well fields and raw water reservoirs
on Cicero Creek and Fall Creek, north and northeast of Indianapolis, and from
the intake structure in Indianapolis' Eagle Creek Reservoir, northwest of
Indianapolis, to the service connections of the ultimate consumers. The Water
Utilities have 28,025 fire hydrants and 3,212 miles of water mains.

Character of Ownership. Substantially all of the properties of Northern
Indiana and IWC are subject to the lien of their respective First Mortgage
Indentures. The principal offices and properties of Industries and its
subsidiaries are held in fee and are free from other encumbrances, subject to
minor exceptions, none of which are of such a nature as to impair
substantially the usefulness of such properties. Many of the offices in
various communities served are occupied by subsidiaries of Industries under
leases. All properties are subject to liens for taxes, assessments and
undetermined charges (if any) incidental to construction, it is Industries'
practice regularly to pay, as and when due, unless contested in good faith. In
general, the electric, gas and water lines and mains 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.
Industries does not, however, generally have specific easements from the
owners of the property adjacent to public highways over, upon or under which
its electric, gas and water lines and mains 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, gas and water lines
and mains was made, other than examination, in certain cases, to verify the
grantors' ownership and the lien status thereof.

Item 3. Legal Proceedings.

Industries and its subsidiaries are parties to various pending proceedings,
including suits and claims against them for personal injury, death and
property damage. The nature of such proceedings and suits and the amounts
involved are routine for the kinds of businesses conducted by Industries and
its subsidiaries, except as described under the captions "NESI Energy
Marketing Canada Ltd. Litigation" and "Environmental Matters" in the Notes to
Consolidated Financial Statements in the 1998 Annual Report to Shareholders
(see Exhibit 13). No other material legal proceedings against Industries or
its subsidiaries are pending or, to the knowledge of Industries, contemplated
by governmental authorities or other parties.

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

None

17
<PAGE>

Supplemental Item--Executive Officers of the Registrant. The following is a
list of the Executive Officers of the Registrant, including their names, ages
and offices held, as of February, 1999.

<TABLE>
<CAPTION>
Years with
Name Age Industries Office(s) Held in Past 5 Years
---- --- ---------- ------------------------------
<S> <C> <C> <C>
Gary L. Neale**......... 59 9 Chairman, President and Chief Executive Officer
since March 1993.
Stephen P. Adik......... 55 11 Senior Executive Vice President, Chief Financial
Officer and Treasurer since February 1999.
Executive Vice President, Chief Financial Officer
and Treasurer from January 1994 to January 1999.
Patrick J. Mulchay...... 57 37 Executive Vice President of Industries and
President and Chief Operating Officer at
Northern Indiana since February 1999.
Executive Vice President and Chief Operating
Officer at Northern Indiana from July 1996 to
January 1999.
Executive Vice President and Chief Operating
Officer of Electric Operations at Northern
Indiana from January 1994 to July 1996.
Jeffrey W. Yundt........ 53 11(a) Executive Vice President of Industries and
President and Chief Executive Officer at Bay
State since February 1999.
Executive Vice President and Chief Operating
Officer of Energy Services, and President of
Services* from July 1996 to January 1999.
Executive Vice President and Chief Operating
Officer of Gas Services from January 1994 to
June 1996.
Joseph L. Turner, Jr.... 62 11 Senior Vice President of Major Accounts since
July 1996.
President of Primary* since January 1996
Prior thereto, Group Vice President of Northern
Indiana*.
James K. Abcouwer....... 44 3 Senior Vice President and Executive Vice
President at Services since July 1998.
Senior Vice President, Commercial Operations of
Northern Indiana* from February 1998 to June
1998.
Vice President and General Manager of Customer
Services and Distribution of Northern Indiana*
from July 1996 to January 1998.
Vice President of Gas Supply at Northern Indiana
from July 1994 to June 1996.
Vice President of Natural Gas at GSC Energy from
August 1993 to June 1994.
David A. Kelly.......... 60 7 Vice President, Income Tax Management and
Executive Vice President and Chief Financial
Officer at IWCR* since April 1997.
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
Years with
Name Age Industries Office(s) Held in Past 5 Years
---- --- ---------- ------------------------------
<S> <C> <C> <C>
Vice President of Administrative Services at
NIPSCO Industries Management Services Company*
(NIMSC) from January 1997 to April 1997. Prior
thereto, Vice President of Real Estate and Taxes
at NIMSC*.
Thomas J. Aruffo........ 40 --(a) Vice President and Chief Information Officer
since February 1999; Vice President Information
Service at Bay State from October 1997 to
February 1999.
Vice President at Fidelity Investments from
February 1996 to October 1997; Director
Information Systems at Prudential Insurance
Company of America from March 1993 to February
1997.
Mark T. Maassel......... 44 21 Vice President Regulatory and Governmental Policy
since June 1998.
Vice President of Marketing and Sales at NIMSC*
from July 1996 to June 1998.
James T. Morris**....... 55 2(b) Chairman of the Board, President and Chief
Executive Officer of IWCR* since May 1991.
Mark D. Wyckoff......... 36 7 Vice President of Human Resources since June
1998.
Assistant Treasurer since September 1997. Nipsco
Development Principal since January 1994.
Arthur A. Paquin........ 51 29 Controller of NIMSC* since July 1996. Prior
thereto, Controller of Northern Indiana*.
Francis P. Girot, Jr.... 54 18 Treasurer of Northern Indiana* and NIMSC* since
July 1996.
</TABLE>
- --------
*Subsidiary of Industries.
**Also a Director.
(a) Industries acquired Bay State in February 1999.
(b) Industries acquired IWCR in March 1997.

The terms of office of the executive officers of Industries are established
by Industries' Board of Directors (Board) each year, and each officer serves
until the next annual meeting of the Board and/or until his/her successor is
duly elected. Throughout the past five years, each of the executive officers
of Industries has been continuously in the business of Industries or its
subsidiaries, except for Messrs. Abcouwer, Aruffo and Morris.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

Industries' common shares are listed and traded on the New York, Chicago
and Pacific stock exchanges. The table below indicates the high and low sales
price of Industries' common shares, on the composite tape, during the periods
indicated. On December 16, 1997, the Board of Directors authorized a two-for-
one split of Industries' common stock. The stock split was paid on February
20, 1998, to shareholders of record at the close of business on January 30,
1998. The sales prices and common dividends reported have been restated to
reflect the two-for-one stock split.

19
<PAGE>

<TABLE>
<CAPTION>
1998 1997
--------------- -----------------
High Low High Low
------ -------- -------- --------
<S> <C> <C> <C> <C>
First Quarter........................... 28 1/2 24 21/32 20 1/8 19
Second Quarter.......................... 28 3/8 25 11/16 21 1/8 19 7/16
Third Quarter........................... 32 7/8 26 5/8 21 9/32 20 11/32
Fourth Quarter.......................... 33 3/4 28 24 15/16 21 1/16
</TABLE>

As of February 26, 1999, Industries had 36,495 common shareholders of
record.

The policy of the Board has been to declare cash dividends on a quarterly
basis payable on or about the 20th day of February, May, August and November.
Industries paid quarterly common dividends of $0.225 per share during 1997 and
quarterly common dividends of $0.24 per share during 1998. At its December 18,
1998 meeting, the Board increased the quarterly common dividend to $0.255 per
share, payable on February 20, 1999.

Holders of Industries' common shares are entitled to receive dividends
when, as and if declared by the Board out of funds legally available therefor.
Although the Board currently intends to consider the payment of regular
quarterly cash dividends on common shares, the timing and amount of future
dividends will depend on the earnings of Northern Indiana and other
subsidiaries, their financial condition, cash requirements, any restrictions
in financing agreements and other factors deemed relevant by the Board. During
the next few years, it is expected that the great majority of earnings
available for distribution of dividends will depend upon dividends paid to
Industries by Northern Indiana.

The following limitations on payment of dividends and issuance of preferred
stock apply to Northern Indiana:

When any bonds are outstanding under its First Mortgage Indenture, Northern
Indiana may not pay cash dividends on its stock (other than preferred or
preference stock) or purchase or retire common shares, except out of earned
surplus or net profits computed as required under the provisions of the
maintenance and renewal fund. At December 31, 1998, Northern Indiana had
approximately $146.1 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.

So long as any shares of Northern Indiana's cumulative preferred stock are
outstanding, no cash dividends shall be paid on its common shares in excess of
75% of the net income available therefor for the preceding calendar year
unless the aggregate of the capital applicable to stocks subordinate as to
assets and 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, 1998, the sum of the capital applicable
to stocks subordinate to the cumulative preferred stock plus the surplus was
equal to 43% of the total capitalization including surplus.

In connection with the foregoing discussion, see "Common Share Dividend" in
the Notes to Consolidated Financial Statements in the 1998 Annual Report to
Shareholders (see Exhibit 13).

20
<PAGE>

Item 6. Selected Financial Data.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues
(000's)................ $2,932,778 $2,586,541 $1,987,948 $1,769,308 $1,768,029
Net income (000's)...... $ 193,886 $ 190,849 $ 176,734 $ 175,465 $ 163,987
Earnings per average
common share--basic.... $ 1.60 $ 1.54 $ 1.44 $ 1.36 $ 1.24
Earnings per average
common share--diluted.. $ 1.59 $ 1.53 $ 1.43 $ 1.35 $ 1.23
Total assets (000's).... $4,986,503 $4,937,033 $4,288,883 $3,999,520 $3,947,138
Long-term obligations
and redeemable
preferred stock
(000's)................ $1,724,400 $1,726,766 $1,188,352 $1,274,379 $1,281,395
Cash dividends declared
per common share....... $ 0.975 $ 0.915 $ 0.855 $ 0.795 $ 0.735
</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Information regarding results of operations, liquidity and capital
resources, environmental matters Year 2000 costs, competition and regulatory
changes and impact of accounting standards is reported in the 1998 Annual
Report to Shareholders under "Management's Discussion and Analysis of
Financial Condition and Results of Operations (see Exhibit 13).

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Information regarding market risk is reported in the 1998 Annual Report to
Shareholders under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Market Risk Sensitive Instruments and
Positions" (see Exhibit 13).

Item 8. Financial Statements and Supplementary Data.

The following Consolidated Financial Statements and Supplementary Data are
included in the 1998 Annual Report to Shareholders and are hereby incorporated
by reference and made a part of this report (see Exhibit 13).
(1) Consolidated Financial Statements--
Consolidated Statement of Income for the years ended December 31, 1998,
1997 and 1996
Consolidated Balance Sheet at December 31, 1998 and 1997
Consolidated Statement of Capitalization at December 31, 1998 and 1997
Consolidated Statement of Long-term Debt at December 31, 1998 and 1997
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997
and 1996
Consolidated Statement of Common Shareholders' Equity for the years
ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(2) Supplementary Data--
Selected Supplemental Information

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

21
<PAGE>

PART III

Item 10. Directors and Executive Officers of the Registrant.

Information regarding executive officers is included as a supplemental item
at the end of Item 4 of Part I of this Form 10-K.

Information regarding directors is included at pages 2-7 in the Notice of
Annual Meeting and Proxy Statement dated March 15, 1999, for the Annual
Meeting of Shareholders to be held on April 14, 1999, which information is
incorporated by reference.

Item 11. Executive Compensation.

Information regarding executive compensation is included at pages 9-12 and
14-20 in the Notice of Annual Meeting and Proxy Statement dated March 15,
1999, for the Annual Meeting of Shareholders to be held on April 14, 1999,
which information is incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Information regarding security ownership of certain beneficial owners and
management is included at pages 8-9 in the Notice of Annual Meeting and Proxy
Statement dated March 15, 1999, for the Annual Meeting of Shareholders to be
held on April 14, 1999, which information is incorporated by reference.

Item 13. Certain Relationships and Related Transactions.

Information regarding certain relationships and related transactions is
included at page 7 in the Notice of Annual Meeting and Proxy Statement dated
March 15, 1999, for the Annual Meeting of Shareholders to be held on April 14,
1999, which information is incorporated by reference.

22
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) (1) The Financial Statements filed herewith as a part of this report on
Form 10-K are listed on the Index to Financial Statements under Item 8
on page 21.

Consolidated Financial Statements--
Consolidated Statement of Income for the years ended December 31, 1998,
1997 and 1996
Consolidated Balance Sheet at December 31, 1998 and 1997
Consolidated Statement of Capitalization at December 31, 1998 and 1997
Consolidated Statement of Long-term Debt at December 31, 1998 and 1997
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Consolidated Statement of Common Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants

(2) The following is a list of the Financial Statement Schedules filed
herewith as part of this report on Form 10-K:

<TABLE>
<CAPTION>
Schedule
Number Description Pages of 1998 10-K
-------- ----------- ------------------
<S> <C> <C>
I Condensed Financial Information of Registrant 24, 25, 26, 27 & 28
II Valuation and Qualifying Accounts 29, 30 & 31
</TABLE>

(3) Exhibits--

The exhibits filed herewith as a part of this report on Form 10-K are
listed on the Exhibit Index included on pages 34-38. Each management
contract or compensatory plan or arrangement of Industries listed on
the Exhibit Index is separately identified by an asterisk.

(b) Reports on Form 8-K
Form 8-K, dated February 8, 1999, filed on February 9, 1999.
Form 8-K, dated February 11, 1999, filed on February 12, 1999.
Form 8-K, dated February 12, 1999, filed on February 16, 1999.

23
<PAGE>

NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEET

<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(Dollars in
Thousands)
ASSETS
------
<S> <C> <C>
Property:
Property in service.......................................... $ 2,681 $ 2,625
Work in progress............................................. 12,599 5,147
Less: accumulated depreciation............................... 927 713
---------- ----------
Total property........................................... 14,353 7,059
---------- ----------
Investments (principally investments in wholly-owned
subsidiaries)............................................... 1,410,999 1,407,789
---------- ----------
Current Assets:
Cash and cash equivalents.................................... 10,165 6,172
Amounts receivable from subsidiaries......................... 76,676 85,056
Prepayments.................................................. 27,637 21,971
---------- ----------
Total current assets..................................... 114,478 113,199
---------- ----------
Other (principally notes receivable from associated companies). 355,117 323,672
---------- ----------
1,894,947 1,851,719
========== ==========

<CAPTION>
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
Capitalization:
Common shares................................................ 870,930 870,930
Additional paid-in capital................................... 94,181 89,768
Retained earnings............................................ 744,309 667,790
Other........................................................ 1,856 1,813
Less: Treasury shares........................................ 559,027 363,943
Currency translation adjustment............................ 2,541 1,570
---------- ----------
Total capitalization..................................... 1,149,708 1,264,788
Current Liabilities:
Dividends declared on common and preferred stock............. 29,970 29,535
Amounts payable to subsidiaries.............................. 13,041 31,818
Other........................................................ 1,723 2,589
---------- ----------
Total current liabilities................................ 44,734 63,942
---------- ----------
Other (principally notes receivable to associated companies)... 700,505 522,989
---------- ----------
Commitments and Contingencies (Note 3) 1,894,947 1,851,719
========== ==========
</TABLE>

The accompanying notes to condensed financial statements are an integral part
of this statement.

24
<PAGE>

NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENT OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in Thousands except Per Share
Amounts)
<S> <C> <C> <C>
Equity in net earnings of
subsidiaries........................ $ 211,525 $ 202,680 $ 185,106
------------ ------------ ------------
Other income (deductions):
Administrative and general expense. (14,196) (12,117) (10,167)
Interest income.................... 31,874 27,272 21,443
Interest expense................... (48,444) (37,652) (20,604)
Other, net......................... 1,012 (143) 1,543
------------ ------------ ------------
(29,754) (22,640) (7,785)
------------ ------------ ------------
Net income before income taxes....... 181,771 180,040 177,321
Income taxes......................... (12,115) (10,809) 587
------------ ------------ ------------
Net income........................... 193,886 190,849 176,734
Dividend requirements on preferred
shares.............................. -- -- 119
------------ ------------ ------------
Balance available for common
shareholders........................ $ 193,886 $ 190,849 $ 176,615
============ ============ ============
Average common shares outstanding-
basic*.............................. 120,778,077 123,849,126 122,381,500
Basic earnings per average common
share*.............................. $ 1.60 $ 1.54 $ 1.44
============ ============ ============
Diluted earnings per average common
share*.............................. $ 1.59 $ 1.53 $ 1.43
============ ============ ============
</TABLE>

The accompanying notes to condensed financial statements are an integral part
of this statement.

25
<PAGE>

NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Net cash provided by operating activities......... $177,487 $147,528 $183,867
-------- -------- --------
Cash flows provided by (used in) investing
activities:
Acquisition of IWC Resources.................... -- (288,932) --
Acquisition of minority interest................ -- (5,461) --
Capital expenditures............................ (7,451) (5,000) (22)
Sale of property................................ (56) (5) 83
-------- -------- --------
Net cash provided by (used in) investing
activities................................... (7,507) (299,398) 61
-------- -------- --------
Cash flows provided by (used in) financing
activities Issuance of common shares............. 10,356 218,566 5,716
Increase in notes payable to subsidiaries....... 175,012 205,396 133,298
Increase (decrease) in notes receivable from
subsidiaries................................... (30,993) (21,709) (82,740)
Redemption of cumulative preferred shares with
mandatory redemption provisions................ -- -- (35,000)
Cash dividends paid on common shares............ (116,386) (111,593) (103,190)
Cash dividends paid on preferred shares......... -- -- (766)
Acquisition of treasury shares.................. (203,976) (133,073) (105,498)
-------- -------- --------
Net cash provided by (used in) financing
activities................................... (165,987) 157,587 (188,180)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 3,993 5,717 (4,252)
Cash and cash equivalents at beginning of year.... 6,172 455 4,707
-------- -------- --------
Cash and cash equivalents at end of year.......... $ 10,165 $ 6,172 $ 455
======== ======== ========
</TABLE>

The accompanying notes to condensed financial statements are an integral part
of this statement.

26
<PAGE>

NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Dividends from Subsidiaries

Cash dividends paid to NIPSCO Industries, Inc. (Industries) by its
consolidated subsidiaries were (in thousands of dollars): $207,400, $188,175
and $184,750 in 1998, 1997 and 1996, respectively.

2. Support Agreement

The financial obligations of NIPSCO Capital Markets, Inc. (Capital Markets)
are subject to a Support Agreement between Industries and Capital Markets,
under which Industries has committed to make payments of interest and
principal on Capital Markets' obligations in the event of a failure to pay by
Capital Markets. Restrictions in the Support Agreement prohibit recourse on
the part of Capital Markets' creditors against the stock and assets of
Northern Indiana Public Service Company (Northern Indiana) which are owned by
Industries. Under the terms of the Support Agreement, in addition to the cash
flow of cash dividends paid to Industries by any of its consolidated
subsidiaries, the assets of Industries, other than the stock and assets of
Northern Indiana, are available as recourse for the benefit of Capital
Markets' creditors. The carrying value of the assets of Industries, other than
the stock and assets of Northern Indiana, as reflected in the consolidated
financial statements of Industries, was approximately $1.3 billion at December
31, 1998.

3. Contingencies

Industries and its subsidiaries are parties to various pending proceedings,
including suits and claims against them for personal injury, death, and
property damage. Such proceedings and suits, and the amounts involved, are
routine litigation and proceedings for the kinds of businesses conducted by
Industries and its subsidiaries.

4. Earnings Per Share

Industries determines earnings per share in accordance with the provisions
of SFAS No. 128 "Earnings per Share," which requires Industries to present
basic earning per share and diluted earnings per share in place of primary
earnings per share.

27
<PAGE>

The net income, preferred dividends and shares used to compute basic and
diluted earnings per share is presented in the following table:

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(Dollars in Thousands except Per
Share Amounts)
<S> <C> <C> <C>
Basic
Weighted Average Number of Shares:
Average Common Shares Outstanding........ 120,778,077 123,849,126 122,381,500
=========== =========== ===========
Net Income to be Used to Compute Basic
Earnings per Average Common Share:
Net Income............................... $ 193,886 $ 190,849 $ 176,734
Dividend Requirements on Preferred
Shares.................................. -- -- 119
----------- ----------- -----------
Balance Available for Common
Shareholders............................ $ 193,886 $ 190,849 $ 176,615
=========== =========== ===========
Basic Earnings per Average Common Share.... $ 1.60 $ 1.54 $ 1.44
=========== =========== ===========
Diluted
Weighted Average Number of Shares:
Average Common Shares Outstanding........ 120,778,077 123,849,126 122,381,500
Dilutive Effect for Nonqualified Stock
Options................................. 556,799 374,344 323,367
----------- ----------- -----------
Weighted Average Shares.................. 121,334,876 124,223,470 122,704,867
Net Income to be Used to Compute Diluted
Earnings per Average Common Share:
Net Income............................... $ 193,886 $ 190,849 $ 176,734
Dividend Requirements on Preferred
Shares.................................. -- -- 119
----------- ----------- -----------
Balance Available for Common
Shareholders.......................... $ 193,886 $ 190,849 $ 176,615
=========== =========== ===========
Diluted Earnings per Average Common Share.. $ 1.59 $ 1.53 $ 1.43
=========== =========== ===========
</TABLE>

5. Stock Split

On December 16, 1997, the Board of Directors authorized a two-for-one split
of Industries' common shares. The stock split was paid February 20, 1998, to
shareholders of record at the close of business January 30, 1998. All
references to number of shares reported including per share amounts and stock
option data of Industries' common shares reflect the two-for-one stock split
as if it had occurred at the beginning of the earliest period.

6. Purchase of IWC Resources Corporation

On March 25, 1997, Industries acquired all the outstanding common stock of
IWCR for $290.5 million. Industries financed this transaction with debt of
approximately $83.0 million and issuance of approximately 10.6 million
Industries' common shares. Industries accounted for the acquisition as a
purchase. The purchase price was allocated to the assets and liabilities
acquired based on their fair values.

7. Purchase of Bay State Gas Company

In February 1999, Industries completed its acquisition of Bay State Gas
Company (Bay State) in a stock-for-stock transaction valued at $40 per Bay
State Share. The transaction is valued at approximately $551 million. Bay
State shareholders had the option of exchanging their shares of Bay State
stock for cash, up to an aggregate sum of equal to 50% of the total purchase
price (and exercised this option with respect to approximately 43% of the
total purchase price). Bay State, one of the largest natural gas utilities in
New England, provides natural gas distribution services to more than 300,000
customers in Massachusetts, New Hampshire and Maine. The combined company is
the tenth largest local natural gas distribution company in the nation,
servicing more than one million gas customers.

Event (Unaudited) Subsequent to Date of Auditors' Report

On February 9, 1999, Industries agreed to acquire TPC Corporation, a
natural gas marketing and storage company. Houston-based TPC Corporation, a
wholly-owned subsidiary of PacificCorp., holds a 66% ownership stake in Market
Hub Partners, L.P., which stores natural gas in salt caverns. Services
currently owns approximately 12% of Market Hub Partners, L.P. The transaction
is expected to close in March or April 1999.

28
<PAGE>

NIPSCO INDUSTRIES, INC.

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

Twelve months ended December 31, 1998

<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ------- ------------------- ------------ --------
Additions Deductions
------------------- for Purposes
Balance Charged to Charged for which Balance
Jan. 1, Costs and to Other Reserves Dec. 31,
Description 1998 Expenses Accounts were Created 1998
----------- ------- ---------- -------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Reserves Deducted in
Consolidated Balance Sheet
from Assets to Which They
Apply:
Reserve for accounts
receivable............... $ 5,887 $14,635 $-- $11,538 $ 8,984
Reserve for investments,
at equity................ $ 1,762 $ -- $-- $ 729 $ 1,033
Reserves Classified Under
Reserve Section of
Consolidated Balance Sheet:
Injuries and damages
reserve.................. $ 6,499 $ 5,681 $-- $ 4,743 $ 7,437
Environmental reserves.... $19,366 $ 5,103 $-- $ 5,359 $19,110
Other..................... $ 3,928 $ 3,243 $-- $ 43 $ 7,128
</TABLE>

29
<PAGE>

NIPSCO INDUSTRIES, INC.

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

Twelve months ended December 31, 1997

<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ------- ------------------------ ------------ --------
Additions Deductions
------------------------ for Purposes
Balance Charged to Charged for which Balance
Jan. 1, Costs and to Other Reserves Dec. 31,
Description 1997 IWCR Expenses Accounts were Created 1997
----------- ------- ---- ---------- -------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Reserves Deducted in
Consolidated Balance
Sheet from Assets to
Which They Apply:
Reserve for accounts
receivable........... $ 5,569 $ 25 $6,573 $-- $6,280 $ 5,887
Reserve for
investments, at
equity............... $ 1,953 $-- $ -- $-- $ 191 $ 1,762
Reserve for
investments, at cost. $ -- $--
Reserves Classified
Under Reserve Section
of Consolidated Balance
Sheet:
Injuries and damages
reserve.............. $ 4,376 $757 $6,603 $-- $5,237 $ 6,499
Environmental
reserves............. $16,789 $-- $9,489 $-- $6,912 $19,366
Other................. $ 4,471 $-- $ 30 $-- $ 573 $ 3,928
</TABLE>

30
<PAGE>

NIPSCO INDUSTRIES, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

Twelve months ended December 31, 1996

<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ------ ----------------- ---------- --------
Deductions
Additions for
----------------- Purposes
Charged for which
Balance to Costs Charged Reserves Balance
Jan. 1 and to Other were Dec. 31,
Description 1996 Expenses Accounts Created 1996
----------- ------- -------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Reserves Deducted in
Consolidated Balance Sheet from
Assets to Which They Apply:
Reserve for accounts
receivable................... $7,264 $ 6,912 $-- $8,607 $ 5,569
Reserve for investments, at
equity....................... $ 850 $ 1,103 $-- $ -- $ 1,953
Reserves Classified Under
Reserve Section of Consolidated
Balance Sheet:
Injuries and damages reserve.. $1,837 $ 4,875 $-- $2,336 $ 4,376
Environmental reserves........ $5,006 $15,862 $-- $4,079 $16,789
Other......................... $4,091 $ 380 $-- $ -- $ 4,471
</TABLE>

31
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of NIPSCO Industries, Inc.:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in NIPSCO Industries, Inc.'s
annual report to shareholders for the year ended December 31, 1998,
incorporated by reference in this Form 10-K, and have issued our report
thereon dated February 5, 1999. Our audits were made for the purpose of
forming an opinion on those consolidated financial statements taken as a
whole. The schedules listed on Page 60, Item 14(a)(2) are the responsibility
of NIPSCO Industries, Inc.'s management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

Chicago, Illinois
February 5, 1999

32
<PAGE>

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.

NIPSCO Industries, Inc.
(Registrant)

March 25, 1999 /s/ Gary L. Neale
Date ________________________________ By __________________________________
Gary L. Neale, Its Chairman and
President

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.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gary L. Neale Chairman, President,
____________________________________ Principal Executive Officer
Gary L. Neale and Director

/s/ Stephen P. Adik Senior Executive Vice
____________________________________ President, Principal
Stephen P. Adik Financial Officer and
Principal Accounting
Officer

/s/ Steven C. Beering Director
____________________________________
Steven C. Beering

/s/ James T. Morris Director
____________________________________
James T. Morris

/s/ Arthur J. Decio Director
____________________________________
Arthur J. Decio

Director
____________________________________
Denis E. Ribordy

/s/ Ian M. Rolland Director
____________________________________
Ian M. Rolland

/s/ Edmund A. Schroer Director
____________________________________
Edmund A. Schroer

/s/ John W. Thompson Director
____________________________________
John W. Thompson

/s/ Robert J. Welsh Director
____________________________________
Robert J. Welsh

/s/ Dr. Carolyn Y. Woo Director
____________________________________
Dr. Carolyn Y. Woo
</TABLE>

33
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description of Item
------- -------------------
<C> <S>
(3.1) Amended and Restated Articles of Incorporation of NIPSCO Industries,
Inc. dated May 13, 1998 (incorporated by reference to Exhibit 3 of
the NIPSCO Industries, Inc. Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).

(3.2) Amended and Restated By-laws effective January 30, 1999
(incorporated by reference to Exhibit 3.1 to the NIPSCO Industries,
Inc. Current Report on Form 8-K dated February 12, 1999.

(4.1) Indenture dated August 1, 1939 between Northern Indiana Public
Service Company (Northern Indiana) and Trustees (incorporated by
reference to Exhibit 7 to the Northern Indiana Registration
Statement (Registration No. 2-5178)).

(4.2) Third Supplemental Indenture dated August 1, 1943 (incorporated by
reference to Exhibit 7-C to the Northern Indiana Registration
Statement (Registration No. 2-5178)).

(4.3) Eighteenth Supplemental Indenture dated September 1, 1967
(incorporated by reference to Exhibit 1 to the Northern Indiana
Current Report on Form 8-K dated October 9, 1967).

(4.4) Nineteenth Supplemental Indenture dated October 1, 1968
(incorporated by reference to Exhibit 1 to the Northern Indiana
Current Report on Form 8-K dated November 8, 1968).

(4.5) Twenty-third Supplemental Indenture dated March 31, 1972
(incorporated by reference to Exhibit 2 to the Northern Indiana
Current Report on Form 8-K dated May 5, 1972).

(4.6) Thirty-third Supplemental Indenture dated June 1, 1980 (incorporated
by reference to Exhibit 1 to the Northern Indiana Quarterly Report
on Form 10-Q for the quarter ended June 30, 1980).

(4.7) Forty-first Supplemental Indenture dated July 1, 1991 (incorporated
by reference to Exhibit 1 to the Northern Indiana Current Report on
Form 8-K dated March 25, 1992).

(4.8) Indenture dated as of March 1, 1988, between Northern Indiana and
Manufacturers Hanover Trust Company, as Trustee (incorporated by
reference to Exhibit 4 to the Northern Indiana Registration
Statement (Registration No. 33-44193)).

(4.9) First Supplemental Indenture dated as of December 1, 1991, between
Northern Indiana and Manufacturers Hanover Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the Northern Indiana
Registration Statement (Registration No. 33-63870)).

(4.10) Memorandum of Agreement with City of Michigan City, Indiana
(incorporated by reference to Exhibit 7 to the Northern Indiana
Registration Statement (Registration No. 2-48531)).

(4.11) Financing Agreement No. 1 dated November 1, 1988, between Northern
Indiana and Jasper County, Indiana regarding $37,000,000 Series
1988A Pollution Control Refunding Revenue Bonds. Identical financing
agreements between Northern Indiana and Jasper County, Indiana
provide for the issuance of $47,000,000 Series 1988B, $46,000,000
Series 1988C and $24,000,000 Series 1988D Pollution Control
Refunding Revenue Bonds (incorporated by reference to Exhibit 8 to
the Northern Indiana Current Report on Form 8-K dated March 16,
1989).

(4.12) Financing Agreement dated July 1, 1991, with Jasper County, Indiana
regarding $55,000,000 Series 1991 Collateralized Pollution Control
Refunding Revenue Bonds (incorporated by reference to Exhibit 3 to
the Northern Indiana Current Report on Form 8-K dated March 25,
1992).
</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Item
------- -------------------

<C> <S>
(4.13) Financing Agreement dated August 1, 1994, with Jasper County,
Indiana regarding $10,000,000 Series 1994A, $18,000,000 Series 1994B
and $41,000,000 Series 1994C Pollution Control Refunding Revenue
Bonds (incorporated by reference to Exhibit 4.16 to the Northern
Indiana Annual Report on Form 10-K for year ended December 31,
1994).

(4.14) Indenture between NIPSCO Industries, Inc., NIPSCO Capital Markets,
Inc. and Chemical Bank as Trustees dated February 1, 1996
(incorporated by reference to Exhibit 1 to the NIPSCO Industries,
Inc. Registration Statement (Registration No. 33-65285)).

(4.15) Rights Agreement between NIPSCO Industries, Inc. and Harris Trust
and Savings Bank, dated February 27, 1990 (incorporated by reference
to Exhibit 4.1 to the NIPSCO Industries, Inc. Current Report on Form
8-K dated March 7, 1990).

(4.16) Indenture Agreement between NIPSCO Industries, Inc., NIPSCO Capital
Markets, Inc. and Chase Manhattan Bank as trustee dated February 14,
1997 (incorporated by reference to Exhibit 4.1 to the NIPSCO
Industries, Inc. Registration Statement (Registration No.
333-22347)).

(4.17) Certificate of Trust of NIPSCO Capital Trust I by and among Chase
Manhattan Bank Delaware, The Chase Manhattan Bank, Stephen P. Adik,
Francis P. Girot, Jr., and Arthur A. Paquin dated December 17, 1998
(incorporated by reference to Exhibit 4.6 to the NIPSCO Industries,
Inc. Registration Statement on Form S-3 dated December 18, 1998).

(4.18) Declaration of Trust of NIPSCO Capital Trust I by and among NIPSCO
Capital Markets, Inc., The Chase Manhattan Bank, Chase Manhattan
Bank Delaware, Stephen P. Adik, Francis P. Girot, Jr., and Arthur A.
Paquin dated December 17, 1998 (incorporated by reference to Exhibit
4.7 to the NIPSCO Industries, Inc. Registration Statement on Form S-
3 dated December 18, 1998).

(4.19) Fourteenth Supplemental Indenture dated as of January 15, 1978,
between the Fidelity Bank, and IWC, including as Appendix A the
"Restatement of Principal Indenture of Indianapolis Water Company,"
which, except as otherwise specified, restates the granting clauses
and all other sections contained in the First Mortgage dated July 1,
1936, between Fidelity-Philadelphia Trust Company and Registrant as
amended by the Fourth, Fifth, Sixth, Eighth, Twelfth and Fourteenth
Supplemental Indentures (incorporated by reference to Exhibit 4-B1
to IWC's Annual Report on Form 10-K for the year ended December 31,
1980).

(4.20) Eleventh Supplemental Indenture dated as of December 1, 1971
(incorporated by reference to Exhibit 4-B6 to Indianapolis Water
Company's (IWC) Annual Report on Form 10-K for the year ended
December 31, 1980).

(4.21) Seventeenth Supplemental Indenture dated as of March 1, 1989,
between Fidelity Bank, National Association and IWC (incorporated by
reference to Exhibit 4-A9 to IWCR's Annual Report on Form 10-K for
the year ended December 31, 1988).

(4.22) Eighteenth Supplemental Indenture dated as of March 1, 1989, between
Fidelity Bank, National Association and IWC (incorporated by
reference to Exhibit 4-A10 to IWCR's Annual Report on Form 10-K for
the year ended December 31, 1988).

(4.23) Nineteenth Supplemental Indenture dated as of June 1, 1989, between
Fidelity Bank, National Association and IWC (incorporated by
reference to Exhibit 4-A9 to IWCR's Registration Statement
(Registration No. 33-43939)).
</TABLE>

35
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Item
------- -------------------
<C> <S>
(4.24) Twentieth Supplemental Indenture dated as of December 1, 1992,
between Fidelity Bank, National Association and IWC (incorporated by
reference to Exhibit 4-A9 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992).

(4.25) Twenty-First Supplemental Indenture dated as of December 1, 1992,
between Fidelity Bank, National Association and IWC (incorporated by
reference to Exhibit 4-A10 to Registrant's Annual Report on Form 10-
K for the year ended December 31, 1992).

(4.26) Twenty-Second Supplemental Indenture dated as of April 1, 1993,
between IWC and Fidelity Bank, National Association (incorporated by
reference to Exhibit 4.15 to IWCR's Annual Report on Form 10-K for
the year ended December 31, 1993).

(4.27) Indenture of Trust dated as of December 1, 1992, between City of
Indianapolis, Indiana, and IWC to National City Bank, Indiana, as
Trustee (incorporated by reference to Exhibit 10-J to IWCR's Annual
Report on Form 10-K for the year ended December 31, 1992).

(4.28) Indenture of Trust, City of Indianapolis, Indiana, and IWC to
National City Bank, Indiana, as Trustee, dated as of April 1, 1993
(incorporated by reference to Exhibit 4.14 to IWCR's Annual Report
on Form 10-K for the year ended December 31, 1993).

(4.29) Form of First Supplemental Indenture by and among NIPSCO Capital
Markets, Inc., NIPSCO Industries, Inc., and The Chase Manhattan
Bank, as Trustee (incorporated by reference to Exhibit 4.1 to the
NIPSCO Industries, Inc. Current Report on Form 8-K dated February
16, 1999).

(4.30) Indenture of Trust of Town of Fishers and IWC to National City Bank
of Indiana, As Trustee, dated as of July 15, 1998 (including Form of
$30,000,000 Town of Fishers, Indiana Economic Development Water
Facilities Refunding Revenue Bond, Series 1998 (Indianapolis Water
Company Project) (incorporated by reference to Exhibit 4.1 to NIPSCO
Industries, Inc.'s Quarterly Report on Form 10-Q for the period
ended September 30, 1998).

(4.31) Indenture of Trust of City of Indianapolis, Indiana and IWC to
National City Bank of Indiana, As Trustee, dated as of July 15, 1998
(including Form of $10,000,000 City of Indianapolis, Indiana
Economic Development Water Facilities Refunding Revenue Bonds,
Series 1998 (Indianapolis Water Company Project) (incorporated by
reference to Exhibit 4.2 to NIPSCO Industries, Inc.'s Quarterly
Report on Form 10-Q for the period ended September 30, 1998).

(4.32) Certificate of Trust of NIPSCO Capital Trust I by and among Chase
Manhattan Bank Delaware, The Chase Manhattan Bank, Stephen P. Adik,
Francis P. Girot, Jr., and Arthur A. Paquin dated December 17, 1998
(incorporated by reference to Exhibit 4.6 to the NIPSCO Industries,
Inc. Registration Statement on Form S-3 dated December 18, 1998).

(4.33) Declaration of Trust of NIPSCO Capital Trust I by and among NIPSCO
Capital Markets, Inc., The Chase Manhattan Bank, Chase Manhattan
Bank Delaware, Stephen P. Adik, Francis P. Girot, Jr., and Arthur A.
Paquin dated December 17, 1998 (incorporated by reference to Exhibit
4.7 to the NIPSCO Industries, Inc. Registration Statement on Form S-
3 dated December 18, 1998).

(4.34) Form of Pledge Agreement by and among NIPSCO Industries, Inc., The
First National Bank of Chicago, as Collateral Agent and Securities
Intermediary, and The Chase Manhattan Bank, as Purchase Contract
(incorporated by reference to Exhibit 4.2 to the NIPSCO Industries,
Inc. Current Report on Form 8-K dated February 16, 1999).
</TABLE>

36
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Item
------- -------------------
<C> <S>
(4.35) Form of Pledge Agreement by and among NIPSCO Industries, Inc., The
First National Bank of Chicago, as Collateral Agent and Securities
Intermediary, and The Chase Manhattan Bank, as Purchase Contract
(incorporated by reference to Exhibit 4.2 to the NIPSCO Industries,
Inc. Current Report on Form 8-K dated February 16, 1999).

(10.1) Supplemental Life Insurance Plan effective January 1, 1991
(incorporated by reference to Exhibit 2 to the NIPSCO Industries,
Inc. Current Report on Form 8-K dated March 25, 1992).

(10.2) Executive Deferred Compensation Plan effective December 1, 1990
(incorporated by reference to Exhibit 3 to the NIPSCO Industries,
Inc. Current Report on Form 8-K dated March 25, 1992).*

(10.3) Form of Change in Control and Termination Agreements and Schedule of
Parties to the Agreements (incorporated by reference to Exhibit 10.3
to the NIPSCO Industries, Inc. 10-K for the year ended December 31,
1997).*

(10.4) Nonemployee Director Stock Incentive Plan of NIPSCO Industries, Inc.
(As Amended and Restated Effective February 1, 1998).

(10.5) NIPSCO Industries, Inc. Long-Term Incentive Plan (As Amended and
Restated Effective February 1, 1998).

(10.6) Amended and Restated Pension Plan Provisions effective January 1,
1989 (incorporated by reference to Exhibit 17 to the Northern
Indiana Current Report on Form 8-K dated March 25, 1992).*

(10.7) NIPSCO Industries, Inc. 1994 Long-Term Incentive Plan (As Amended
and Restated Effective February 1, 1998).
(10.8) First Amendment to NIPSCO Industries, Inc. 1994 Long-Term Incentive
Plan.
(10.9) NIPSCO Industries, Inc. Directors' Charitable Gift Program effective
September 27, 1994 (incorporated by reference to Exhibit 10.8 to the
NIPSCO Industries Annual Report on Form 10-K for the year ended
December 31, 1996).*

(10.10) Employment Agreement (incorporated by reference to Exhibit 10.13 to
the NIPSCO Industries, Inc. 10-K for the year ended December 31,
1997).*

(10.11) Executive Supplemental Pension Agreement (incorporated by reference
to Exhibit 10.14 to the NIPSCO Industries, Inc. 10-K for the year
ended December 31, 1997).*

(10.12) Agreement dated October 18, 1971, between IWC and Department of
Public Works of the City of Indianapolis, Indiana, regarding the
purchase of water at Eagle Creek Reservoir (incorporated by
reference to Exhibit 5 to IWC's Registration Statement (Registration
Statement No. 2-55201)).

(10.13) Loan Agreement dated as of December 1, 1992, between IWC and City of
Indianapolis, Indiana (incorporated by reference to Exhibit 10-K to
IWCR's Annual Report on Form 10-K for the year ended December 31,
1992).

(10.14) Guaranty Agreement dated as of December 1, 1992, between IWCR and
National City Bank, Indiana, as Trustee (incorporated by reference
to Exhibit 10-L to IWCR's Annual Report on Form 10-K for the year
ended December 31, 1992).

(10.15) Note Agreement dated as of March 1, 1994, between IWCR and American
United Life Insurance Company (incorporated by reference to Exhibit
10.10 to IWCR's Annual Report on Form 10-K for the year ended
December 31, 1993).
</TABLE>

37
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Item
------- -------------------
<C> <S>
(10.16) Loan Agreement dated as of April 1, 1993, between IWC and the City
of Indianapolis (incorporated by reference to Exhibit 10.11 to
IWCR's Annual Report on Form 10-K for the year ended December 31,
1993).

(10.17) Guaranty Agreement between IWCR and National City Bank, Indiana, as
Trustee, dated as of April 1, 1993 (incorporated by reference to
Exhibit 10.12 to IWCR's Annual Report on Form 10-K for the year
ended December 31, 1993).

(12) Ratio of Earnings to Fixed Charges for the Years Ended December 3,
1993, 1994, 1995, 1996 and 1997, and for the Two Month Period Ended
September 3, 1998
(incorporated by reference to Exhibit 12 to the NIPSCO Industries,
Inc. Registration Statement on Form S-3 dated December 18, 1998).

(13) 1998 Annual Report to Shareholders for pages 24-65.

(21) List of Subsidiaries.

(23) Consent of Arthur Andersen LLP.

(27) Financial Data Schedule (incorporated by reference to Exhibit 27.1
to the NIPSCO Industries, Inc. Current Report on Form 8-K dated
February 8, 1999).
</TABLE>
- --------
*Management contract or compensatory plan arrangement of NIPSCO Industries,
Inc.

<PAGE>

EXHIBIT 10.4

NONEMPLOYEE DIRECTOR
STOCK INCENTIVE PLAN

NIPSCO INDUSTRIES, INC.

(AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998)
<PAGE>

TABLE OF CONTENTS
-----------------

ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION.......................... -1-
1.1 Establishment of the Plan.............................. -1-
1.2 Purpose of the Plan.................................... -1-
1.3 Duration of the Plan................................... -2-

ARTICLE 2. DEFINITIONS................................................... -2-

ARTICLE 3. ADMINISTRATION................................................ -4-
3.1 The Board of Directors................................. -4-
3.2 Administration by the Board............................ -5-
3.3 Decisions Binding...................................... -5-

ARTICLE 4. SHARES SUBJECT TO THE PLAN.................................... -5-
4.1 Number of Shares....................................... -5-
4.2 Lapsed Awards.......................................... -5-
4.3 Adjustments in Authorized Shares....................... -6-

ARTICLE 5. ELIGIBILITY AND PARTICIPATION................................. -7-
5.1 Eligibility............................................ -7-
5.2 Actual Participation................................... -7-

ARTICLE 6. RESTRICTED STOCK.............................................. -7-
6.1 Initial Grant of Restricted Stock...................... -7-
6.2 Future Grants of Restricted Stock...................... -7-
6.3 Restricted Stock Award Agreement....................... -8-
6.4 Transferability........................................ -8-
6.5 Other Restrictions..................................... -8-
6.6 Certificate Legend..................................... -9-
6.7 Vesting................................................ -9-
6.8 Termination of Directorship............................ -10-
6.9 Voting Rights.......................................... -10-
6.10 Dividends and Other Distributions...................... -10-

ARTICLE 7. NONQUALIFIED STOCK OPTIONS.................................... -10-
7.1 Potential Grants of Options............................ -10-
7.2 Option Award Agreement................................. -11-
7.3 Option Price........................................... -11-
7.4 Duration of Options.................................... -11-
7.5 Vesting of Shares Subject to Option.................... -11-
7.6 Termination of Directorship............................ -12-

-i-
<PAGE>

7.7 Payment................................................ -13-
7.8 Restrictions on Share Transferability.................. -13-
7.9 Nontransferability of Options.......................... -13-

ARTICLE 8. CHANGE IN CONTROL............................................. -14-

ARTICLE 9. AMENDMENT, MODIFICATION, AND TERMINATION...................... -15-
9.1 Amendment, Modification, and Termination............... -15-
9.2 Awards Previously Granted.............................. -15-

ARTICLE 10. MISCELLANEOUS................................................. -16-
10.1 Gender and Number...................................... -16-
10.2 Severability........................................... -16-
10.3 Indemnification........................................ -16-
10.4 Beneficiary Designation................................ -16-
10.5 No Right of Nomination................................. -17-
10.6 Shares Available....................................... -17-
10.7 Additional Compensation................................ -17-
10.8 Successors............................................. -17-
10.9 Requirements of Law.................................... -18-
10.10 Governing Law.......................................... -18-

-ii-
<PAGE>

NONEMPLOYEE DIRECTOR
STOCK INCENTIVE PLAN
NIPSCO INDUSTRIES, INC.

(AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998)

WHEREAS, NIPSCO Industries, Inc. (the "Company") adopted the NIPSCO
Industries, Inc. Nonemployee Director Stock Incentive Plan, effective
February 1, 1992, as last amended effective December 16, 1997; and

WHEREAS, pursuant to Section 9.1 of the Plan, the Company wishes to amend
the Plan in certain respects and restate it in a single document;

NOW THEREFORE, the Plan is hereby amended and restated, effective
February 1, 1998, as follows:

ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION

1.1 Establishment of the Plan. NIPSCO Industries, Inc. hereby
establishes an incentive compensation plan to be known as the "NIPSCO
Industries, Inc. Nonemployee Director Stock Incentive Plan" (the "Plan"), as set
forth in this document. The Plan permits the grant of Restricted Stock and
Nonqualified Stock Options to Nonemployee Directors, subject to the terms and
provisions set forth herein.

Upon approval by the Board of Directors of the Company, subject to
ratification within twelve (12) months by an affirmative vote of a majority of
Shares present and entitled to vote at the April 8, 1992 annual shareholders
meeting at which a quorum was present, the Plan became effective as of
February 1, 1992 (the "Effective Date"), and shall remain in effect as provided
in Section 1.3 herein.

1.2 Purpose of the Plan. The purpose of the Plan is to promote the
achievement of long-term objectives of the Company by linking the personal
interests of Nonemployee Directors to those
<PAGE>

of Company shareholders, and to attract and retain Nonemployee Directors of
outstanding competence.

1.3 Duration of the Plan. The Plan commenced on February 1, 1992 and
shall remain in effect, subject to the right of the Board of Directors to
terminate the Plan at any time pursuant to Article 9 herein, until all Shares
subject to it shall have been purchased or acquired according to the Plan's
provisions. However, in no event may an Award be granted under the Plan on or
after April 30, 2002.

ARTICLE 2. DEFINITIONS
-----------------------

Whenever used in the Plan, the following terms shall have the meanings set
forth below and, when the meaning is intended, the initial letter of the word is
capitalized:

(a) "Award" means, individually or collectively, a grant of Restricted
Stock or Nonqualified Stock Options under the Plan.

(b) "Award Agreement" means an agreement entered into by and between the
Company and a Nonemployee Director, setting forth the terms and
provisions applicable to an Award granted under the Plan.

(c) "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations under the Exchange
Act.

(d) "Board" or "Board of Directors" means the Board of Directors of the
Company, and includes any committee of the Board of Directors
designated by the Board to administer part or all of the Plan.

(e) "Change in Control" of the Company shall be deemed to have occurred
if any one of the occurrences of "Change in Control" set forth in
the Change in Control and

-2-
<PAGE>

Termination Agreements between the Company and certain executive
officers thereof shall have been satisfied.

(f) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.

(g) "Company" means NIPSCO Industries, Inc., an Indiana corporation, or
any successor thereto as provided in Section 10.8 herein.

(h) "Director" means any individual who is a member of the Board of
Directors of the Company.

(i) "Disability" means a permanent and total disability, within the
meaning of Code Section 22(e)(3), as determined by the Board in good
faith, upon receipt of sufficient competent medical advice from one
or more individuals, selected by the Board, who are qualified to
give professional medical advice.

(j) "Employee" means any full-time, nonunion, salaried employee of the
Company. For purposes of the Plan, an individual whose only
employment relationship with the Company is as a Director, shall not
be deemed to be an Employee.

(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.

(1) "Fair Market Value" means the average of the highest and lowest
quoted selling prices for Shares on the relevant date, or (if there
were no sales on such date) the weighted average of the mean between
the highest and lowest quoted selling prices on the nearest day
before the nearest day after the relevant date, as reported in The
Wall Street Journal or a similar publication selected by the Board.

-3-
<PAGE>

(m) "Nonemployee Director" means any individual who is a member of the
Board of Directors of the Company, but who is not otherwise an
Employee of the Company.

(n) "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares, granted under Article 7 herein.

(o) "Option" means a Nonqualified Stock Option granted under the Plan.

(p) "Parent" shall have the meaning ascribed to such term in
Rule 12b-2 of the General Rules and Regulations under the Exchange
Act.

(q) "Participant" means a Nonemployee Director of the Company who has
outstanding a viable Award granted under the Plan.

(r) "Period of Restriction" means the period during which the transfer
of Shares of Restricted Stock is limited in some way, and the Shares
are subject to a substantial risk of forfeiture, as provided in
Article 6 herein.

(s) "Person" shall have the meaning ascribed to such term in
Section 3(a) (9) of the Exchange Act and used in Sections 13(d)
and 14(d) thereof, including a "group" as defined in Section 13(d).

(t) "Restricted Stock" means an Award granted to a Nonemployee Director
pursuant to Article 6 herein.

(u) "Shares" means the common shares of NIPSCO Industries, Inc., without
par value.

ARTICLE 3. ADMINISTRATION
--------------------------

3.1 The Board of Directors. The Plan shall be administered by the Board
of Directors of the Company, subject to the restrictions set forth in the Plan.

-4-
<PAGE>

3.2 Administration by the Board. The Board shall have the full power,
discretion, and authority to interpret and administer the Plan in a manner which
is consistent with the Plan's provisions. However, in no event shall the Board
have the power to determine Plan eligibility, or to determine the number, the
value, the vesting period, or the timing, of Awards to be made under the Plan
(all such determinations are automatic pursuant to the provisions of the Plan).
Notwithstanding the preceding sentence, the Board shall have the authority to
designate whether an upcoming grant of Awards shall consist of Restricted Stock
or Nonqualified Stock Options.

3.3 Decisions Binding. All determinations and decisions made by the
Board pursuant to the provisions of the Plan, and all related orders or
resolutions of the Board, shall be final, conclusive, and binding on all
persons, including the Company, its stockholders, employees, Participants, and
their estates and beneficiaries.

ARTICLE 4. SHARES SUBJECT TO THE PLAN
--------------------------------------

4.1 Number of Shares. Subject to adjustment as provided in Section 4.3
herein, the total number of Shares available for grant under the Plan may not
exceed one hundred thousand (100,000) (two hundred thousand (200,000) after
January 30, 1998).

4.2 Lapsed Awards. If any Share of Restricted Stock or Share under an
Option granted under the Plan terminates, expires, or lapses for any reason, any
such Shares of Restricted Stock and any Shares subject to purchase pursuant to
such Option, again shall be available for grant under the Plan. However, in the
event that prior to the Award's termination, expiration, or lapse, the holder of
the Award at any time received one or more "benefits of ownership" pursuant to
such Award (as defined by the Securities and Exchange Commission, pursuant to
any rule or interpretation

-5-
<PAGE>

promulgated under Section 16 of the Exchange Act), the Share subject to such
Award shall not be made available for regrant under the Plan.

4.3 Adjustments in Authorized Shares. (i) Appropriate adjustments in the
aggregate number of Shares issuable pursuant to the Plan, the number of Shares
subject to each outstanding Award granted under the Plan and the option price
with respect to Options, shall be made to give effect to any increase or
decrease in the number of issued Shares resulting from a subdivision or
consolidation of shares, whether through recapitalization, stock split, reverse
stock split, spin-off, spin-out or other distribution of assets to stockholders,
stock distributions or combinations of shares, payment of stock dividends, other
increase or decrease in the number of such Shares outstanding effected without
receipt of consideration by the Company, or any other occurrence for which the
Board determines an adjustment is appropriate.

(ii) In the event of any merger, consolidation or reorganization of the
Company with any other corporation or corporations, or an acquisition by the
Company of the stock or assets of any other corporation or corporations, there
shall be substituted on an equitable basis, as determined by the Board in its
sole discretion, for each Share then subject to the Plan, and for each Share
then subject to an Award granted under the Plan, the number and kind of shares
of stock, other securities, cash or other property to which the holders of
Shares of the Company are entitled pursuant to such transaction.

(iii) Without limiting the generality of the foregoing provisions of this
paragraph, any such adjustment shall be deemed to have prevented any dilution or
enlargement of a Participant's rights, if such Participant receives in any such
adjustment, rights that are substantially similar (after taking into account the
fact that the Participant has not paid the applicable option price) to the
rights the

-6-
<PAGE>

Participant would have received had he exercised his outstanding Award and
become a shareholder of the Company immediately prior to the event giving rise
to such adjustment. Adjustments under this paragraph shall be made by the Board,
whose decision as to the amount and timing of any such adjustment shall be
conclusive and binding on all persons.

ARTICLE 5. ELIGIBILITY AND PARTICIPATION
------------------------------------------

5.1 Eligibility. Persons eligible to participate in the Plan are limited
to Nonemployee Directors who are serving on the Board on the date of each
scheduled grant under the Plan.

5.2 Actual Participation. All eligible Nonemployee Directors shall
receive grants of Restricted Stock and Options pursuant to the terms and
provisions set forth in Articles 6 and 7 herein.

ARTICLE 6. RESTRICTED STOCK
-----------------------------

6.1 Initial Grant of Restricted Stock. Each person who was a Nonemployee
Director on the Effective Date was granted two hundred fifty (250) Shares of
Restricted Stock for each year of service as a Nonemployee Director of the
Company or its predecessor (The number of years of service was determined as of
the date of the first annual meeting of shareholders of the Company following
the Effective Date).

6.2 Future Grants of Restricted Stock. Upon each election (or
reelection, as applicable) of a Nonemployee Director to serve on the Board, such
Nonemployee Director shall be granted one thousand (1,000) (two thousand (2000)
after January 30, 1998) Shares of Restricted Stock, subject to the terms of the
Plan. Each such grant shall be made as of the first day of the Board term of the

-7-
<PAGE>

newly-elected (or reelected, as applicable) Nonemployee Director, which begins
immediately following such election (or reelection, as applicable).

In the event that the Board properly designates (pursuant to Section 3.2
herein) that a scheduled Award grant will consist of Options rather than
Restricted Stock, then such grant shall be governed by the terms and provisions
of Article 7 herein, which shall in such event completely supersede and replace
the terms and provisions of this Section 6.2.

6.3 Restricted Stock Award Agreement. Each Restricted Stock grant under
the Plan shall be evidenced by a Restricted Stock Award Agreement that shall
specify the Period(s) of Restriction, the number of Restricted Stock Shares
granted, and such other provisions as the Board shall determine consistent with
the Plan.

6.4 Transferability. Except as provided in this Section 6.4, the Shares
of Restricted Stock granted herein may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated until the end of the applicable
Period of Restriction specified in the Restricted Stock Award Agreement.
However, in no event may any Shares of Restricted Stock granted under the Plan
become vested in a Participant prior to six (6) months following the date of its
grant. Prior to vesting, all rights with respect to Shares of Restricted Stock
granted to a Nonemployee Director under the Plan shall be available during his
or her lifetime only to such Director.

6.5 Other Restrictions. The Board shall impose such other restrictions
on any Shares of Restricted Stock granted pursuant to the Plan as it may deem
advisable, including restrictions imposed under Section 7.8 hereof. Any
restriction imposed on Shares of Restricted Stock shall be included in a legend
appearing on the certificates representing Shares of Restricted Stock.

-8-
<PAGE>

6.6 Certificate Legend. In addition to any legends placed on
certificates pursuant to Section 6.5 herein, each certificate representing
Shares of Restricted Stock granted pursuant to the Plan shall bear the following
legend:

"The sale or other transfer of the Shares of stock represented by this
certificate, whether voluntary, involuntary, or by operation of law, is
subject to certain restrictions on transfer as set forth in the NIPSCO
Industries, Inc. Nonemployee Director Stock Incentive Plan, and in a
Restricted Stock Award Agreement. A copy of the Plan and such Restricted
Stock Award Agreement may be obtained from the Secretary of NIPSCO
Industries, Inc."

6.7 Vesting. Except as otherwise provided in the Plan, all Shares of
Restricted Stock granted under the Plan shall vest and become freely
transferable by the Director according to the following schedule:

Annual Cumulative
Anniversary Percentage of Percentage of
of Grant Date Shares Which Vest Shares Which are Vested
---------------- ------------------ ------------------------
1 20% 20%
2 20% 40%
3 20% 60%
4 20% 80%
5 20% 100%

Regardless of the vesting schedule set forth above, all Shares of
Restricted Stock held by a Participant shall immediately become one hundred
percent (100%) vested upon the first to occur of the following:

(a) The completion of the vesting schedule set forth above; or

(b) The death of the Participant; or

-9-
<PAGE>

(d) The effective date of a Change in Control of the Company.

Following vesting, each Director shall be entitled to have the legend
required by Section 6.5 and/or Section 6.6 removed from his or her Share
certificate.

6.8 Termination of Directorship. In the event a Participant ceases to be
a Director for any reason other than death or Disability, all Shares of
Restricted Stock not vested as of the effective date of termination shall be
forfeited and shall revert back to the Company (with no further vesting to
occur). In the event a Participant ceases to be a Director by reason of death or
Disability, all Shares of Restricted Stock granted under the Plan shall
immediately vest one hundred percent (100%).

6.9 Voting Rights. During the Period of Restriction, Directors holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to such Shares.

6.10 Dividends and Other Distributions. During the Period of Restriction,
Directors holding Shares of Restricted Stock granted hereunder shall be entitled
to receive all dividends and other distributions paid with respect to such
Shares while they are so held. If any such dividends or distributions are paid
in Shares, the Shares shall be subject to the same restrictions on
transferability and forfeitability as the Shares of Restricted Stock with
respect to which they were paid.

ARTICLE 7. NONQUALIFIED STOCK OPTIONS
---------------------------------------

7.1 Potential Grants of Options. In the event that the Board properly
designates (pursuant to Section 3.2 herein) that a scheduled Award will consist
of Options rather than Restricted Stock, then each eligible Nonemployee Director
shall be granted an Option to purchase three thousand (3,000) (six thousand
(6000) after January 30, 1998) Shares, subject to the terms and

-10-
<PAGE>

provisions of the Plan. A Nonemployee Director shall be deemed to be eligible
for such an Option grant if the Director is elected (or reelected, as
applicable) to serve on the Board pursuant to the shareholder vote for which
such Award grant is applicable. Each such grant shall be made as of the first
day of the Board term of the newly-elected (or reelected, as applicable)
Nonemployee Director, which begins immediately following such election (or
reelection, as applicable).

7.2 Option Award Agreement. Each Option grant shall be evidenced by an
Option Award Agreement that shall specify the Option Price, the duration of the
Option, the number of Shares available for purchase under the Option, and such
other provisions as the Board shall determine.

7.3 Option Price. The purchase price per Share available for purchase
under an Option shall equal the Fair Market Value of a Share on the date the
Option is granted.

7.4 Duration of Options. Each Option shall expire on the tenth (10th)
anniversary date of its grant.

7.5 Vesting of Shares Subject to Option. Participants shall be entitled
to exercise Options at any time and from time to time, but no sooner than the
time period beginning six (6) months after the grant of the Option, and ending
ten (10) years after grant of the Option, and according to the following vesting
schedule:

Annual Cumulative
Anniversary Percentage of Percentage of
of Grant Date Options Which Vest Options Which are Vested
---------------- ------------------- -------------------------
1 20% 20%
2 20% 40%
3 20% 60%
4 20% 80%
5 20% 100%

-11-
<PAGE>

Regardless of the vesting schedule set forth in this Section 7.5, all Options
held by a Participant shall immediately become one hundred percent (100%) vested
upon the first to occur of the following:

(a) The completion of the vesting schedule set forth above; or

(b) The death of the Participant; or

(d) The effective date of a Change in Control of the Company.

7.6 Termination of Directorship. In the event a Participant ceases to be
a Director for any reason other than death or Disability, all Options not vested
as of the effective date of termination shall be forfeited and shall revert back
to the Company (with no further vesting to occur). All Options which are vested
as of such date shall remain exercisable for six (6) months following the date
the Director's service on the Board terminates, or until their expiration date,
whichever period is shorter.

To the extent an Option is exercisable immediately following the date of
death (or immediately following the date that the Board determines that the
definition of Disability is satisfied, as applicable), it shall remain
exercisable at any time prior to its expiration date, or for one (1) year after
the date of death (or after the date that the Board determines that the
definition of Disability is satisfied, as applicable), whichever period is
shorter, by the Participant or such person or persons as shall have been named
as the Participant's legal representative or beneficiary, or by such persons
that have acquired the Participant's rights under the Option by will or by the
laws of descent and distribution. Options which vest pursuant to a Change in
Control shall remain exercisable throughout their entire term.

-12-
<PAGE>

7.7 Payment. Options shall be exercised by the delivery of a written
notice of exercise to the Secretary of the Company, setting forth the number of
Shares with respect to which the Option is to be exercised, accompanied by full
payment for the Shares.

The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by tendering
previously acquired Shares having a Fair Market Value at the time of exercise
equal to the total Option Price of the Shares for which the Option is being
exercised (provided that the Shares tendered upon Option exercise have been held
by the Participant for at least six (6) months prior to their tender to satisfy
the Option Price), or (c) by a combination of (a) and (b). The proceeds from
such a payment shall be added to the general funds of the Company and shall be
used for general corporate purposes.

As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased pursuant to the exercise of the Option.

7.8 Restrictions on Share Transferability. The Board shall impose such
restrictions on any Shares acquired pursuant to the exercise of an Option under
the Plan, as it may deem advisable, including, without limitation, restrictions
under applicable Federal securities laws, under the requirements of any stock
exchange or market upon which such Shares are then listed and/or traded, and
under any blue sky or state securities laws applicable to such Shares.

7.9 Nontransferability of Options. No Option granted under the Plan may
be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all
Options granted to a Participant under the Plan shall

-13-
<PAGE>

be exercisable, during his lifetime, only by such Participant. Notwithstanding
the preceding provisions of this Section, a Participant, at any time prior to
his death, may assign all or any portion of an Option granted to him under the
Plan to (i) his spouse or lineal descendant, (ii) the trustee of a trust for the
primary benefit of his spouse or lineal descendant, or (iii) a tax-exempt
organization as described in Section 501(c)(3) of the Code. In such event the
spouse, lineal descendant, trustee or tax-exempt organization will be entitled
to all of the rights of the Participant with respect to the assigned portion of
such Option, and such portion of the Option will continue to be subject to all
of the terms, conditions and restrictions applicable to the Option as set forth
herein, and in the related Option Award Agreement, immediately prior to the
effective date of the assignment. Any such assignment will be permitted only if
(i) the Participant does not receive any consideration therefor, and (ii) the
assignment is expressly approved by the Board or its delegate. Any such
assignment shall be evidenced by an appropriate written document executed by the
Participant, and a copy thereof shall be delivered to the Board or its delegate
on or prior to the effective date of the assignment.

ARTICLE 8. CHANGE IN CONTROL
------------------------------

In the event of a Change in Control of the Company, all Awards granted
under the Plan that are still outstanding and not yet vested, shall become
immediately one hundred percent (100%) vested in each Participant, as of the
effective date of the Change in Control, and shall remain as such for the
remaining life of the Award, as such life is provided herein, and within the
provisions of the related Award Agreements. All Options that are outstanding as
of the effective date of the Change in Control shall remain exercisable for the
remaining lives of the Options.

-14-
<PAGE>

ARTICLE 9. AMENDMENT, MODIFICATION, AND TERMINATION
-----------------------------------------------------

9.1 Amendment, Modification, and Termination. Subject to the terms set
forth in this Section 9.1, the Board may terminate, amend, or modify the Plan at
any time and from time to time; provided, however, that the provisions set forth
in the Plan regarding the amount of securities to be awarded to Directors, the
price of securities to be awarded to Directors, and the timing of awards to
Directors, may not be amended more than once within any six (6) month period.

Without the approval of the shareholders of the Company (as may be required
by the Code, by the insider trading rules of Section 16 of the Exchange Act, by
any national securities exchange or system on which the Shares are then listed
or reported, or by a regulatory body having jurisdiction with respect hereto) no
such termination, amendment, or modification may:

(a) Increase the total number or value of Shares which may be available
for grants of Awards under the Plan, except as provided in
Section 4.3 herein; or

(b) Change the class of Participants eligible to participate in the
Plan; or

(d) Extend the maximum period after the date of grant during which
Options may be exercised; or

(e) Change the provisions of the Plan regarding Option Price.

9.2 Awards Previously Granted. Unless required by law, no termination,
amendment, or modification of the Plan shall in any manner adversely affect any
Award previously granted under the Plan, without the written consent of the
Participant holding the Award.

-15-
<PAGE>

ARTICLE 10. MISCELLANEOUS
--------------------------

10.1 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.

10.2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.

10.3 Indemnification. Each individual who is or shall have been a member
of the Board shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, action, suit, or proceeding to which he or she may be a party or in which
he or she may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him or her in
settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against him
or her, provided he or she shall give the Company an opportunity, at its own
expense, to handle and defend the same before he or she undertakes to handle and
defend it on his or her own behalf.

The foregoing right of indemnification shall not be exclusive of any other
rights of indemnification to which such individuals may be entitled under the
Company's Articles of Incorporation or By-laws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.

10.4 Beneficiary Designation. Each Participant under the Plan may, from
time to time, name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom

-16-
<PAGE>

any benefit under the Plan is to be paid in the event of his or her death
(and/or who may exercise the Participant's vested Options following his or her
death). Each designation will revoke all prior designations by the same
Participant, shall be in a form prescribed by the Board, and will be effective
only when filed by the Participant in writing with the Board during his or her
lifetime. In the absence of any such designation, benefits remaining unpaid at
the Participant's death shall be paid to the Participant's estate (and, subject
to the terms and provisions of the Plan, any unexercised vested Options may be
exercised by the administrator or executor of the Participant's estate).

10.5 No Right of Nomination. Nothing in the Plan shall be deemed to
create any obligation on the part of the Board to nominate any Director for
reelection by the Company's shareholders.

10.6 Shares Available. The Shares made available pursuant to Awards under
the Plan may be either authorized but unissued Shares, or Shares which have been
or may be reacquired by the Company, as determined from time to time by the
Board.

10.7 Additional Compensation. Shares granted under the Plan shall be in
addition to any annual retainer, attendance fees, or other compensation payable
to each Participant as a result of his or her service on the Board.

10.8 Successors. All obligations of the Company under the Plan, with
respect to Awards granted hereunder, shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or
indirect purchase, merger, consolidation, or otherwise, of all or substantially
all of the business and/or assets of the Company.

-17-
<PAGE>

10.9 Requirements of Law. The granting of Awards under the Plan shall be
subject to all applicable laws, rules, and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may be required.

10.10 Governing Law. To the extent not preempted by Federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and governed
by the laws of the State of Indiana.

-18-

<PAGE>

EXHIBIT 10.5

NIPSCO INDUSTRIES, INC.

LONG-TERM INCENTIVE PLAN

(AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998)
<PAGE>

NIPSCO INDUSTRIES, INC.
LONG-TERM INCENTIVE PLAN

(AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998)

TABLE OF CONTENTS
-----------------

PAGE
----

1. Purpose.............................................................. -1-

2. Administration and Delegation........................................ -1-

3. Review and Approval.................................................. -1-

4. Shares Subject to Plan............................................... -2-

5. Participants......................................................... -2-

6. Awards Under the Plan................................................ -2-

7. Nonqualified Stock Options........................................... -2-
(a) Option Price.................................................. -2-
(b) Exercise at Option............................................ -2-
(c) Payment for Shares............................................ -3-
(d) Transferability............................................... -3-
(e) Rights Upon Termination at Employment......................... -4-

8. Incentive Stock Options.............................................. -4-
(a) Option Price.................................................. -4-
(b) Exercise of Option............................................ -4-
(c) Payment for Shares............................................ -5-
(d) Transferability............................................... -5-
(e) Rights Upon Termination of Employment......................... -5-

9. Stock Appreciation Rights............................................ -6-
(a) Award......................................................... -6-
(b) Term.......................................................... -6-
(c) Payment....................................................... -7-

10. Performance Units.................................................... -7-
(a) Performance Period............................................ -7-
(b) Valuation of Units............................................ -7-

i
<PAGE>

(c) Performance Targets........................................... -7-
(d) Adjustments................................................... -7-
(e) Payments of Units............................................. -8-
(f) Termination of Employment..................................... -8-
(g) Other Terms................................................... -8-

11. Restricted Stock Awards.............................................. -8-
(a) Restriction Period............................................ -8-
(b) Restrictions Upon Transfer.................................... -8-
(c) Certificates.................................................. -8-
(d) Lapse of Restrictions......................................... -9-
(e) Termination Prior to Lapse of Restrictions.................... -9-

12. Supplemental Cash Payments........................................... -9-

13. General Restrictions................................................. -9-

14. Rights of a Shareholder.............................................. -10-

15. Right to Terminate Employment........................................ -10-

16. Withholding.......................................................... -10-

17. Non-Assignability.................................................... -10-

18. Non-Uniform Determinations........................................... -11-

19. Adjustments.......................................................... -11-

20. Amendment or Termination............................................. -11-

21. Effect on Other Plans................................................ -12-

22. Duration of the Plan................................................. -12-

ii
<PAGE>

NIPSCO INDUSTRIES, INC.
LONG-TERM INCENTIVE PLAN
------------------------

(AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998)

WHEREAS, NIPSCO Industries, Inc. (the "Company") adopted the NIPSCO
Industries, Inc. Long-Term Incentive Plan effective April 13, 1988, as last
amended effective December 16, 1997; and

WHEREAS, pursuant to Section 20 of the Plan, the Company wishes to amend
the Plan in certain respects and restate it in a single document;

NOW THEREFORE, the Plan is hereby amended and restated, effective
February 1, 1998, as follows:

1. PURPOSE. The purpose of the NIPSCO Industries, Inc., Long-Term
Incentive Plan (the "Plan") is to further the earnings of NIPSCO Industries,
Inc. (the "Company"), its subsidiaries and their subsidiaries. The Plan
provides long-term incentives to those officers and key executives who make
substantial contributions by their ability, loyalty, industry and invention.
The Company intends that the Plan will thereby facilitate securing, retaining,
and motivating management employees of high caliber and potential.

2. ADMINISTRATION AND DELEGATION. The Plan shall be administered by the
Nominating and Compensation Committee ("Committee") of the Board of Directors of
the Company ("Board"). The Committee shall be composed of not fewer than two
members of the Board who are "nonemployee directors" of the Company within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
("1934 Act"), and "outside directors" of the Company within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder. Subject to the express provisions of the Plan, the
Committee may interpret the Plan, prescribe, amend and rescind rules and
regulations relating to it, determine the terms and provisions of awards to
officers and other key executive employees under the Plan (which need not be
identical), and make such other determinations as it deems necessary or
advisable for the administration of the Plan. The decisions of the Committee
under the Plan shall be conclusive and binding. No member of the Board or of
the Committee shall be liable for any action taken, or determination made,
hereunder in good faith. Service on the Committee shall constitute service as a
director of the Company so that members of the Committee shall be entitled to
indemnification and reimbursement as directors of the Company, pursuant to its
by-laws.

3. REVIEW AND APPROVAL. Specific performance goals and details for an
award program shall be promulgated by the Committee after consideration of the
recommendations of the chief
<PAGE>

executive officer and shall be submitted to the Board for approval by the
majority vote of directors who are not otherwise employed as officers or
employees.

4. SHARES SUBJECT TO PLAN. Subject to the provisions of section 19, the
shares of common stock of the Company that may be issued, or may be the measure
of stock appreciation rights granted, under the Plan shall not exceed in the
aggregate 2,500,000 (5,000,000 after January 30, 1998) of the common shares
without par value of the Company ("Shares"). Such Shares may be authorized and
unissued Shares or treasury Shares. Except as otherwise provided herein, any
Shares subject to an option or right which for any reason expires or is
terminated, unexercised as to such Shares, shall again be available under the
Plan.

5. PARTICIPANTS. Persons eligible to participate shall be limited to
those officers and other key executive employees who are in positions in which
their decisions, actions and counsel significantly impact upon profitability.
Directors who are not otherwise officers or employees shall not be eligible to
participate in the Plan.

6. AWARDS UNDER THE PLAN. Awards under the Plan may be in the form of
stock options (both options designed to satisfy statutory requirements necessary
to receive favorable tax treatment pursuant to any future legislation and
options not designed to so qualify under any such future legislation), incentive
stock options, stock appreciation rights, performance units or Shares, and
restricted Shares or such combinations of the above as the Committee may in its
discretion deem appropriate.

7. NONQUALIFIED STOCK OPTIONS. Options shall be evidenced by stock
option agreements in such form and not inconsistent with the Plan as the
Committee shall approve from time to time, which agreements shall contain in
substance the following terms and conditions:

(a) OPTION PRICE. The purchase price per Share deliverable upon the
exercise of an option shall not be less than 100% of the fair market value
of the Share on the day the option is granted, as determined by the
Committee. For purposes of the Plan, fair market value shall be the
average of the high and low prices on the New York Stock Exchange Composite
Transactions on the date of the grant.

(b) EXERCISE AT OPTION. Each stock option agreement shall state the
period or periods of time within which the option may be exercised by the
optionee, in whole or in part, which shall be such period or periods of
time as may be determined by the Committee, provided that the option period
shall not commence earlier than six months after the date of the grant of
the option nor end later than ten years after the date of the grant of the
option. The Committee shall have the power to permit in its discretion an
acceleration of the previously determined exercise terms, within the terms
of the Plan, under such circumstances and upon such terms and conditions as
it deems appropriate.

-2-
<PAGE>

(c) PAYMENT FOR SHARES. Except as otherwise provided in the Plan or
in any stock option agreement, the optionee shall pay the purchase price of
the Shares upon the exercise of any option (i) in cash, (ii) in cash
received from a broker-dealer to whom the optionee has submitted an
exercise notice consisting of a fully endorsed option (however in the case
of an optionee subject to Section 16 of the 1934 Act, this payment option
shall only be available to the extent such payment procedures comply with
Regulation T issued by the Federal Reserve Board), (iii) by delivering
Shares having an aggregate fair market value on the date of exercise equal
to the option exercise price, (iv) by directing the Company to withhold
such number of Shares otherwise issuable upon exercise of such option
having an aggregate fair market value on the date of exercise equal to the
option exercise price, (v) by such other medium of payment as the
Committee, in its discretion, shall authorize at the time of grant, or (vi)
by any combination of (i), (ii), (iii), (iv) and (v). In the case of an
election pursuant to (i) or (ii) above, cash shall mean cash or check
issued by a federally insured bank or savings and loan association, and
made payable to NIPSCO Industries, Inc. In the case of payment pursuant to
(ii), (iii) or (iv) above, the optionee's election must be made on or prior
to the date of exercise and shall be irrevocable. In lieu of a separate
election governing each exercise of an option, an optionee may file a
blanket election with the Committee which shall govern all future exercises
of options until revoked by the optionee. The Company shall issue, in the
name of the optionee, stock certificates representing the total number of
Shares issuable pursuant to the exercise of any option as soon as
reasonably practicable after such exercise, provided that any Shares
purchased by an optionee through a broker-dealer pursuant to clause (ii)
above, shall be delivered to such broker-dealer in accordance with
12 C.F.R.(S) 220.3(e)(4), or other applicable provision of law.

(d) TRANSFERABILITY. Each stock option agreement shall provide that
the option subject thereto is not transferable by the optionee otherwise
than by will or the laws of descent or distribution. Notwithstanding the
preceding sentence, an optionee, at any time prior to his death, may assign
all or any portion of the option to (i) his spouse or lineal descendant,
(ii) the trustee of a trust for the primary benefit of his spouse or lineal
descendant, or (iii) a tax-exempt organization as described in Section
501(c)(3) of the Internal Revenue Code of 1986, as amended. In such event
the spouse, lineal descendant, trustee or tax-exempt organization will be
entitled to all of the rights of the optionee with respect to the assigned
portion of such option, and such portion of the option will continue to be
subject to all of the terms, conditions and restrictions applicable to the
option as set forth herein, and in the related stock option agreement,
immediately prior to the effective date of the assignment. Any such
assignment will be permitted only if (i) the optionee does not receive any
consideration therefor, and (ii) the assignment is expressly approved by
the Committee or its delegate. Any such assignment shall be evidenced by an
appropriate written document executed by the optionee, and a copy thereof
shall be delivered to the Committee or its delegate on or prior to the
effective date of the assignment. This paragraph shall apply to all
nonqualified stock options granted under the Plan at any time.

-3-
<PAGE>

(e) RIGHTS UPON TERMINATION AT EMPLOYMENT. In the event that an
optionee ceases to be an employee for any reason other than death,
disability or retirement, the optionee shall have the right to exercise the
option during its term within a period of thirty days after such
termination to the extent that the option was exercisable at the date of
such termination of employment, or during such other period and subject to
such terms as may be determined by the Committee. In the event that an
optionee dies, retires, or becomes disabled prior to termination of his
option without having fully exercised his option, the optionee or his
successor shall have the right to exercise the option during its term
within a period of twelve months after the date of such termination due to
death, disability or retirement, to the extent that the option was
exercisable at the date of termination due to death, disability or
retirement, or during such other period and subject to such terms as may be
determined by the Committee. For purposes of the Plan, the term
"disability" shall mean the inability of an individual to engage in any
substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or which
has lasted or can be expected to last for a continuous period of not less
than twelve (12) months. The Committee, in its sole discretion, shall
determine the date of any disability. For purposes of the Plan, the term
"retirement" shall mean retirement as defined in the Company's pension
plan.

8. INCENTIVE STOCK OPTIONS. Incentive stock options shall be evidenced
by stock option agreements in such form and not inconsistent with the Plan as
the Committee shall approve from time to time, which agreements shall contain in
substance the following terms and conditions:

(a) OPTION PRICE. The purchase price per Share of stock deliverable
upon the exercise of an option shall not be less than 100% of the fair
market value (as defined in subsection 7(a)) of the stock on the day the
option is granted, as determined by the Committee except as provided in
Section 8(b).

-4-
<PAGE>

in Section 425(e) and 425(f) of the Internal Revenue Code of 1986, as
amended. Notwithstanding anything herein to the contrary, if an incentive
stock option is granted to an individual who owns stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of its parent or subsidiary corporations, within
the meaning of Section 422(b)(6) of the Internal Revenue Code of 1986, as
amended, (i) the purchase price of each Share subject to the incentive
stock option shall be not less than one hundred ten percent (110%) of the
fair market value of the Shares on the date the incentive stock option is
granted, and (ii) the incentive stock option shall expire and all rights to
purchase Shares thereunder shall cease no later than the fifth anniversary
of the date the incentive stock option was granted.

(c) PAYMENT FOR SHARES. Except as otherwise provided in the Plan or
in any stock option agreement, the optionee shall pay the purchase price of
the Shares upon the exercise of any option, (i) in cash, (ii) in cash
received from a broker-dealer to whom the optionee has submitted an
exercise notice consisting of a fully endorsed option (however in the case
of an optionee subject to Section 16 of the 1934 Act, this payment option
shall only be available to the extent such payment procedures comply with
Regulation T issued by the Federal Reserve Board), (iii) by delivering
Shares having an aggregate fair market value on the date of exercise equal
to the option exercise price, (iv) by directing the Company to withhold
such number of Shares otherwise issuable upon exercise of such option
having an aggregate fair market value on the date of exercise equal to the
option exercise price, (v) by such other medium of payment as the
Committee, in its discretion, shall authorize at the time of grant, or (vi)
by any combination of (i), (ii), (iii), (iv) and (v). In the case of an
election pursuant to (i) or (ii), cash shall mean cash or check issued by a
federally insured bank or savings and loan association, and made payable to
NIPSCO Industries, Inc. In the case of payment pursuant to (ii), (iii) or
(iv) above, the optionee's election must be made on or prior to the date of
exercise and shall be irrevocable. In lieu of a separate election
governing each exercise of an option, an optionee may file a blanket
election with the Committee which shall govern all future exercises of
options until revoked by the optionee. The Company shall issue, in the
name of the optionee, stock certificates representing the total number of
Shares issuable pursuant to the exercise of any option as soon as
reasonably practicable after such exercise, provided that any Shares
purchased by an optionee through a broker-dealer pursuant to clause (ii)
above, shall be delivered to such broker-dealer in accordance with
12 C.F.R. (S) 220.3(e)(4), or other applicable provision of law.

(d) TRANSFERABILITY. Each stock option agreement shall provide that
it is not transferable by the optionee otherwise than by will or the laws
of descent or distribution.

(e) RIGHTS UPON TERMINATION OF EMPLOYMENT. In the event that an
optionee ceases to be an employee for any reason, the optionee (or in the
case of his death, his beneficiary or personal representative) shall have
the right to exercise the option during the term within a period of ninety
days (or in the case of termination of employment because of disability,
within a period of one year) after such termination to the extent that the
option was

-5-
<PAGE>

exercisable at the date of such termination of employment, or during such
other period and subject to such terms as may be determined by the
Committee.

The provisions of this section 8 shall be construed and applied, and (subject to
the limitations of section 20) shall be amended from time to time so as to
comply with Section 422 of the Internal Revenue Code of 1986, as amended, or its
successors and regulations issued thereunder.

9. STOCK APPRECIATION RIGHTS. Stock appreciation rights shall be
evidenced by stock appreciation right agreements in such form and not
inconsistent with the Plan as the Committee shall approve from time to time,
which agreements shall contain in substance the following terms and conditions:

(a) AWARD. A stock appreciation right shall entitle the grantee to
receive upon exercise the excess of (i) the fair market value of a
specified number of Shares at the time of exercise over (ii) a specified
price which shall not be less than 100% of the fair market value of the
Shares at the time the stock appreciation right was granted, or, if
connected with a previously issued stock option, not less than 100% of the
fair market value of the Shares at the time such option was granted. A
stock appreciation right may be granted in connection with all or any
portion of a previously or contemporaneously granted stock option or not in
connection with a stock option.

(b) TERM. Stock appreciation rights shall be granted for a period
of not less than one year nor more than ten years, and shall be exercisable
in whole or in part, at such time or times and subject to such other terms
and conditions as shall be prescribed by the Committee at the time of
grant, subject to the following:

(i) No stock appreciation right shall be exercisable in whole
or in part, during the six month period starting with the date of
grant; and

(ii) Stock appreciation rights will be exercisable only during
a grantee's employment, except that in the discretion of the Committee
a stock appreciation right may be made exercisable for up to thirty
days after the grantee's employment is terminated for any reason other
than death, disability or retirement. In the event that a grantee
dies, retires, or becomes disabled without having fully exercised his
stock appreciation rights, the grantee or his successor shall have the
right to exercise the stock appreciation rights during their term
within a period of twelve months after the date of such termination
due to death, disability or retirement to the extent that the right
was exercisable at the date of such termination, or during such other
period and subject to such terms as may be determined by the
Committee.

The Committee shall have the power to permit in its discretion
an acceleration of previously determined exercise terms, within the
terms of the Plan,

-6-
<PAGE>

under such circumstances and upon such terms and conditions as it
deems appropriate.

(c) PAYMENT. Upon exercise of a stock appreciation right, payment
shall be made in cash, in the form of Shares at fair market value, or in a
combination thereof, as the Committee may determine.

10. PERFORMANCE UNITS. Performance Units ("Units") shall be evidenced by
performance unit agreements in such form and not inconsistent with the Plan as
the Committee shall approve from time to time, which agreements shall contain in
substance the following terms and conditions:

(a) PERFORMANCE PERIOD. At the time of award, the Committee shall
establish with respect to each Unit award a performance period of not less
than two, nor more than five years.

(b) VALUATION OF UNITS. At the time of award, the Committee shall
establish with respect to each such award a value for each Unit which shall
not thereafter change, or which may vary thereafter determinable from
criteria specified by the Committee at the time of award.

(c) PERFORMANCE TARGETS. At the time of award, the Committee shall
establish maximum and minimum performance targets to be achieved with
respect to each award during the performance period. The participant shall
be entitled to payment with respect to all Units awarded if the maximum
target is achieved during the performance period, but shall be entitled to
payment with respect to a portion of the Units awarded according to the
level of achievement of performance targets, as specified by the Committee,
for performance during the performance period which meets or exceeds the
minimum target but fails to meet the maximum target.

The performance targets established shall relate to corporate,
division, or unit performance and may be established in terms of growth in
gross revenue, earnings per share, ratio of earnings to shareholders'
equity or to total assets or such other performance standards as determined
by the Committee in its discretion. Multiple targets may be used and may
have the same or different weighting, and they may relate to absolute
performance or relative performance as measured against other institutions
or divisions or units thereof.

(d) ADJUSTMENTS. At any time prior to payment of the Units, the
Committee may adjust previously established performance targets and other
terms and conditions, including the corporation's, or division's or unit's
financial performance for Plan purposes, to reflect major unforeseen events
such as changes in laws, regulations or accounting practices, mergers,
acquisitions or divestitures or extraordinary, unusual or non-recurring
items or events.

-7-
<PAGE>

(e) PAYMENTS OF UNITS. Following the conclusion of each performance
period, the Committee shall determine the extent to which performance
targets have been attained for such period as well as the other terms and
conditions established by the Committee. The Committee shall determine
what, if any, payment is due on the Units. Payment shall be made in cash,
in the form of Shares at fair market value, or a combination thereof, as
the Committee may determine.

(f) TERMINATION OF EMPLOYMENT. In the event that a participant
holding a Unit award ceases to be an employee prior to the end of the
applicable performance period by reason of death, disability or retirement,
his Units, to the extent earned under the applicable performance targets,
shall be payable at the end of the performance period in proportion to the
active service of the participant during the performance period, as
determined by the Committee. Upon any other termination of employment,
participation shall terminate forthwith and all outstanding Units held by
the participant shall be cancelled.

(g) OTHER TERMS. The Unit agreements shall contain such other terms
and provisions and conditions not inconsistent with the Plan as shall be
determined by the Committee.

11. RESTRICTED STOCK AWARDS. Restricted Stock Awards under the Plan shall
be in the form of Shares of the Company, restricted as to transfer and subject
to forfeiture, and shall be evidenced by restricted stock agreements in such
form and not inconsistent with the Plan as the Committee shall approve from time
to time, which agreements shall contain in substance the following terms and
conditions:

(a) RESTRICTION PERIOD. Shares awarded pursuant to the Plan shall be
subject to such terms, conditions, and restrictions, including without
limitation: prohibitions against transfer, substantial risks of forfeiture,
attainment of performance objectives and repurchase by the Company or right
of first refusal, and for such period or periods as shall be determined by
the Committee at the time of grant. The Committee shall have the power to
permit in its discretion, an acceleration of the expiration of the
applicable restriction period with respect to any part or all of the Shares
awarded to a participant.

(b) RESTRICTIONS UPON TRANSFER. Shares awarded, and the right to
vote such Shares and to receive dividends thereon, may not be sold,
assigned, transferred, exchanged, pledged, hypothecated, or otherwise
encumbered, except as herein provided, during the restriction period
applicable to such Shares. Subject to the foregoing, and except as
otherwise provided in the Plan, the participant shall have all the other
rights of a shareholder including, but not limited to, the right to receive
dividends and the right to vote such Shares.

(c) CERTIFICATES. Each certificate issued in respect of Shares
awarded to a participant shall be deposited with the Company, or its
designee, and shall bear the following legend:

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<PAGE>

"This certificate and the shares represented hereby are subject to the
terms and conditions (including forfeiture and restrictions against
transfer) contained in the NIPSCO Industries, Inc. Long-Term Incentive Plan
and an Agreement entered into by the registered owner. Release from such
terms and conditions shall obtain only in accordance with the provisions of
the Plan and Agreement, a copy of each of which is on file in the office of
the Secretary of said Company."

(d) LAPSE OF RESTRICTIONS. The Agreement shall specify the terms
and conditions upon which any restrictions upon Shares awarded under the
Plan shall lapse, as determined by the Committee. Upon the lapse of such
restrictions, Shares, free of the foregoing restrictive legend, shall be
issued to the participant or his legal representative.

(e) TERMINATION PRIOR TO LAPSE OF RESTRICTIONS. In the event of a
participant's termination of employment, other than due to death or
retirement, prior to the lapse of restrictions applicable to any Shares
awarded to such participant, all Shares as to which there still remains
unlapsed restrictions shall be forfeited by such participant without
payment of any consideration to the participant, and neither the
participant nor any successors, heirs, assigns, or personal representatives
of such participant shall thereafter have any further rights or interest in
such Shares or certificates.

12. SUPPLEMENTAL CASH PAYMENTS. Subject to the Company's discretion,
stock option, incentive stock option, stock appreciation right, performance unit
or restricted stock agreements may provide for the payment of a supplemental
cash payment to a participant promptly after the exercise of an option or stock
appreciation right, or, at the time of payment of a performance unit or at the
end of a restriction period of a restricted stock award. Supplemental cash
payments shall be subject to such terms and conditions as shall be provided by
the Committee at the time of grant, provided that in no event shall the amount
of each payment exceed:

(a) In the case of an option, the excess of the fair market value of
a Share on the date of exercise over the option price multiplied by the
number of Shares for which such option is exercised, or

(b) In the case of a stock appreciation right, performance unit or
restricted stock award, the value of the Shares and other consideration
issued in payment of such award.

13. GENERAL RESTRICTIONS. Each award under the Plan shall be subject to
the requirement that, if at any time the Committee shall determine that (i) the
listing, registration or qualification of the Shares subject or related thereto
upon any securities exchange or under any state or federal law, or (ii) the
consent or approval of any government regulatory body, or (iii) an agreement by
the recipient of an award with respect to the disposition of Shares, is
necessary or desirable as a condition of, or in connection with, the granting of
such award or the issue or purchase of Shares thereunder, such award may not be
consummated in whole or in part unless such listing, registration,

-9-
<PAGE>

qualification, consent, approval or agreement shall have been effected or
obtained, free of any conditions not acceptable to the Committee.

14. RIGHTS OF A SHAREHOLDER. The recipient of any award under the Plan,
unless otherwise provided by the Plan, shall have no rights as a shareholder
with respect thereto unless and until certificates for Shares are issued to him.

15. RIGHT TO TERMINATE EMPLOYMENT. Nothing in the Plan or in any
agreement entered into pursuant to the Plan shall confer upon any participant
the right to continue in employment or affect any right which his employer may
have to terminate the employment of such participant.

16. WITHHOLDING. Whenever the Company proposes or is required to issue
or transfer Shares to a participant under the Plan, the Company shall have the
right to require the participant to remit to the Company an amount sufficient to
satisfy all federal, state and local withholding tax requirements prior to the
delivery of any certificate or certificates for such Shares. If such
certificates have been delivered prior to the time a withholding obligation
arises, the Company shall have the right to require the participant to remit to
the Company an amount sufficient to satisfy all federal, state or local
withholding tax requirements at the time such obligation arises and to withhold
from other amounts payable to the participant, as compensation or otherwise, as
necessary. Whenever payments under the Plan are to be made to a participant in
cash, such payment shall be net of any amount sufficient to satisfy all federal,
state and local withholding tax requirements. In lieu of requiring a participant
to make a payment to the Company in an amount related to the withholding tax
requirement, the Committee may, in its discretion, provide that at the
participant's election, the tax withholding obligation shall be satisfied by the
Company's withholding a portion of the Shares otherwise distributable to the
participant, such Shares being valued at the fair market value at the date of
exercise, or by the participant's delivering to the Company a portion of the
Shares previously delivered by the Company, such Shares being valued at their
fair market value as of the date of delivery of such Shares by the participant
to the Company. For this purpose, the amount of required withholding shall be a
specified rate not less than the statutory minimum federal, state and local (if
any) withholding rate, and not greater than the maximum federal, state and local
(if any) marginal tax rate applicable to the participant and to the particular
transaction. Notwithstanding any provision of the Plan to the contrary, a
participant's election pursuant to the preceding sentences (a) must be made on
or prior to the date as of which income is realized by the recipient in
connection with the particular transaction, and (b) must be irrevocable. In lieu
of a separate election on each effective date of each transaction, a participant
may file a blanket election with the Committee which shall govern all future
transactions until revoked by the participant. 17. NON-ASSIGNABILITY. No award
under the Plan shall be assignable or transferable by the recipient thereof
except by will or by the laws of descent and distribution or except as set forth
in subsection 7(d). During the life of the recipient, such award shall be
exercisable only by such person or by such person's guardian or legal
representative.

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<PAGE>

18. NON-UNIFORM DETERMINATIONS. The Committee's determinations under the
Plan (including, without limitation determinations of the persons to receive
awards, the form, amount and timing of such awards, the terms and provisions of
such awards and the agreements evidencing same, and the establishment of values
and performance targets) need not be uniform and may be made by it selectively
among persons who receive, or are eligible to receive, awards under the Plan,
whether or not such persons are similarly situated.

19. ADJUSTMENTS. (i) Appropriate adjustments in the aggregate number of
Shares issuable pursuant to the Plan, the number of Shares subject to each
outstanding award granted under the Plan, the option price with respect to
options and connected stock appreciation rights, the specified price of stock
appreciation rights not connected to options, and the value for Units, shall be
made to give effect to any increase or decrease in the number of issued Shares
resulting from a subdivision or consolidation of Shares, whether through
recapitalization, stock split, reverse stock split, spin-off, spin-out or other
distribution of assets to stockholders, stock distributions or combinations of
Shares, payment of stock dividends, other increase or decrease in the number of
such Shares outstanding effected without receipt of consideration by the
Company, or any other occurrence for which the Committee determines an
adjustment is appropriate.

(ii) In the event of any merger, consolidation or reorganization of the
Company with any other corporation or corporations, or an acquisition by the
Company of the stock or assets of any other corporation or corporations, there
shall be substituted on an equitable basis, as determined by the Committee in
its sole discretion, for each Share then subject to the Plan, and for each Share
then subject to an award granted under the Plan, the number and kind of shares
of stock, other securities, cash or other property to which the holders of
Shares of the Company are entitled pursuant to such transaction.

(iii) Without limiting the generality of the foregoing provisions of
this paragraph, any such adjustment shall be deemed to have prevented any
dilution or enlargement of a participant's rights, if such participant receives
in any such adjustment, rights that are substantially similar (after taking into
account the fact that the participant has not paid the applicable option price)
to the rights the participant would have received had he exercised his
outstanding award and become a shareholder of the Company immediately prior to
the event giving rise to such adjustment. Adjustments under this paragraph
shall be made by the Committee, whose decision as to the amount and timing of
any such adjustment shall be conclusive and binding on all persons.

20. AMENDMENT OR TERMINATION. The Board or the Committee may at any time
terminate, suspend or modify the Plan without the authorization of stockholders
to the extent allowed by law, including without limitation any rules issued by
the Securities and Exchange Commission under Section 16 of the 1934 Act, insofar
as shareholder approval thereof is required in order for the Plan to continue to
satisfy the requirements of Rule 16b-3 under the 1934 Act. No termination,
suspension or modification of the Plan shall adversely affect any right acquired
by any participant under an award granted before the date of such termination,
suspension or modification, unless such participant shall consent; but it shall
be conclusively presumed that any adjustment for changes in

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<PAGE>

capitalization as provided for herein does not adversely affect any such right.
Any member of the Board who is an officer or employee of the Company shall be
without a vote on any proposed amendment to the Plan, or on any other matter
which might affect that member's individual interest under the Plan.

21. EFFECT ON OTHER PLANS. Unless otherwise specifically provided,
participation in the Plan shall not preclude an employee's eligibility to
participate in any other benefit or incentive plan and any awards made pursuant
to the Plan shall not be considered as compensation in determining the benefits
provided under any other plan.

22. DURATION OF THE PLAN. The Plan shall remain in effect until all
awards under the Plan have been satisfied by the issuance of Shares or the
payment of cash, but no award shall be granted more than ten years after the
date the Plan is approved by the shareholders, which shall be its effective date
of adoption.

-12-

<PAGE>

EXHIBIT 10.7

NIPSCO INDUSTRIES, INC.
1994 LONG-TERM INCENTIVE PLAN

AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998
<PAGE>

NIPSCO INDUSTRIES, INC.
1994 LONG-TERM INCENTIVE PLAN

As Amended and Restated Effective February 1, 1998

TABLE OF CONTENTS
-----------------

Page
----

1. Purpose............................................................. -1-

2. Administration...................................................... -1-

3. Common Shares Subject to the Plan................................... -1-

4. Participants........................................................ -2-

5. Awards Under the Plan............................................... -2-

6. Section 162(m) Limitations.......................................... -3-

7. NonQualified Stock Options.......................................... -3-
(a) Option Price................................................... -3-
(b) Exercise of Option............................................. -3-
(c) Payment for Shares............................................. -3-
(d) Transferability................................................ -4-
(e) Rights Upon Termination of Employment.......................... -4-

8. Incentive Stock Options............................................. -5-
(a) Option Price................................................... -5-
(b) Exercise of Option............................................. -5-
(c) Payment for Shares............................................. -5-
(d) Transferability................................................ -6-
(e) Rights Upon Termination of Employment.......................... -6-

9. Stock Appreciation Rights........................................... -6-
(a) Awards......................................................... -6-
(b) Term........................................................... -7-
(c) Payment........................................................ -7-

10. Performance Units................................................... -7-

i
<PAGE>

(a) Performance Period............................................. -7-
(b) Valuation of Units............................................. -7-
(c) Performance Targets............................................ -8-
(d) Adjustments.................................................... -8-
(e) Payments of Units.............................................. -8-
(f) Termination of Employment...................................... -8-
(g) Other Terms.................................................... -8-

11. Restricted Stock Awards............................................. -8-
(a) Restriction Period............................................. -9-
(b) Restrictions Upon Transfer..................................... -9-
(c) Certificates................................................... -9-
(d) Lapse of Restrictions.......................................... -9-
(e) Termination Prior to Lapse of Restrictions..................... -9-

12. Supplemental Cash Payments.......................................... -9-

13. General Restrictions................................................ -10-

14. Rights as a Shareholder............................................. -10-

15. Employment Rights................................................... -10-

16. Tax--Withholding.................................................... -10-

17. Change in Control................................................... -11-

18. Amendment or Termination............................................ -11-

19. Effect on Other Plans............................................... -12-

20. Duration of the Plan................................................ -12-

ii
<PAGE>

NIPSCO INDUSTRIES, INC.
1994 LONG-TERM INCENTIVE PLAN

(AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998)

WHEREAS, NIPSCO Industries, Inc. (the "Company") adopted the NIPSCO
Industries, Inc. 1994 Long-Term Incentive Plan effective April 13, 1994, as last
amended effective December 16, 1997 ("Plan"); and

WHEREAS, pursuant to Section 18 of the Plan, the Company wishes to amend
the Plan in certain respects and restate it in a single document;

NOW THEREFORE, the Plan is hereby amended and restated, effective
February 1, 1998, as follows:

1. PURPOSE. The purpose of the NIPSCO Industries, Inc. 1994 Long-Term
Incentive Plan (the "Plan") is to further the earnings of NIPSCO Industries,
Inc. (the "Company") and its subsidiaries. The Plan provides long-term
incentives to those officers and key executives who make substantial
contributions by their ability, loyalty, industry and invention. The Company
intends that the Plan will thereby facilitate securing, retaining, and
motivating management employees of high caliber and potential.

2. ADMINISTRATION. The Plan shall be administered by the Nominating and
Compensation Committee ("Committee") of the Board of Directors of the Company
("Board"). The Committee shall be composed of not fewer than two members of the
Board who are "nonemployee directors" of the Company within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act"),
and "outside directors" of the Company within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, as amended, ("Code"), and the regulations
thereunder. Subject to the express provisions of the Plan, the Committee may
interpret the Plan, prescribe, amend and rescind rules and regulations relating
to it, determine the terms and provisions of awards to officers and other key
executive employees under the Plan (which need not be identical), and make such
other determinations as it deems necessary or advisable for the administration
of the Plan. The decisions of the Committee under the Plan shall be conclusive
and binding. No member of the Board or of the Committee shall be liable for any
action taken, or determination made, hereunder in good faith. Service on the
Committee shall constitute service as a director of the Company so that members
of the Committee shall be entitled to indemnification and reimbursement as
directors of the Company, pursuant to its by-laws.

3. COMMON SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of
Section 3(b), the shares that may be issued, or may be the measure of stock
appreciation rights granted, under the Plan shall not exceed in the aggregate
2,500,000 (5,000,000 after January 30, 1998) of the common shares without par
value of the Company (the "Common Shares"). Such shares may be authorized and
unissued shares or treasury shares. Except as otherwise provided herein, any
shares subject to an
<PAGE>

option or right which for any reason expires or is terminated, unexercised as to
such shares, shall again be available under the Plan.

(b) (i) Appropriate adjustments in the aggregate number of Common Shares
issuable pursuant to the Plan, the number of Common Shares subject to each
outstanding award granted under the Plan, the option price with respect to
options and connected stock appreciation rights, the specified price of stock
appreciation rights not connected to options, and the value for Units, shall be
made to give effect to any increase or decrease in the number of issued Common
Shares resulting from a subdivision or consolidation of shares, whether through
recapitalization, stock split, reverse stock split, spin-off, spin-out or other
distribution of assets to stockholders, stock distributions or combinations of
shares, payment of stock dividends, other increase or decrease in the number of
such Common Shares outstanding effected without receipt of consideration by the
Company, or any other occurrence for which the Committee determines an
adjustment is appropriate.

(ii) In the event of any merger, consolidation or reorganization of the
Company with any other corporation or corporations, or an acquisition by the
Company of the stock or assets of any other corporation or corporations, there
shall be substituted on an equitable basis, as determined by the Committee in
its sole discretion, for each Common Share then subject to the Plan, and for
each Common Share then subject to an award granted under the Plan, the number
and kind of shares of stock, other securities, cash or other property to which
the holders of Common Shares of the Company are entitled pursuant to such
transaction.

4. PARTICIPANTS. Persons eligible to participate shall be limited to those
officers and other key executive employees of the Company and its subsidiaries
who are in positions in which their decisions, actions and counsel significantly
impact upon profitability. Directors who are not otherwise officers or
employees shall not be eligible to participate in the Plan.

5. AWARDS UNDER THE PLAN. Awards under the Plan may be in the form of stock
options (both options designed to satisfy statutory requirements necessary to
receive favorable tax treatment pursuant to any present or future legislation
and options not designed to so qualify), incentive stock options, stock
appreciation rights, performance units or shares, and restricted shares or such
combinations of the above as the Committee may in its discretion deem
appropriate.

6. SECTION 162(M) LIMITATIONS. Subject to Section 3(b) of the Plan, the
maximum number of options granted to any person who qualifies as an executive
officer named from time to time in the

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<PAGE>

summary compensation table in the Company's annual meeting proxy statement and
who is employed by the Company on the last day of the taxable year (the "SCT
Executives") shall be 25,000 (50,000 after January 30, 1998) options to purchase
Common Shares per year and 250,000 (500,000 after January 30, 1998) options to
purchase Common Shares during the term of the Plan. The maximum number of
restricted stock awards granted to any SCT Executive shall be 25,000 (50,000
after January 30, 1998) Common Shares per year, provided, however, that no more
than 25,000 (50,000 after January 30, 1998) Shares of restricted stock may be
awarded in any three-year period and that the maximum number of Shares of
restricted stock granted to any SCT Executive during the term of the Plan shall
be 75,000 (150,000 after January 30, 1998).

7. NONQUALIFIED STOCK OPTIONS. Options shall be evidenced by stock option
agreements in such form and not inconsistent with the Plan as the Committee
shall approve from time to time, which agreements shall contain in substance the
following terms and conditions:

(a) OPTION PRICE. The purchase price per Common Share deliverable upon
the exercise of an option shall not be less than 100% of the fair market value
of a Common Share on the day the option is granted, as determined by the
Committee. Fair market value of Common Shares for purposes of the Plan shall be
the average of the high and low prices on the New York Stock Exchange Composite
Transactions on the date of the grant, or on any other applicable date.

(c) PAYMENT FOR SHARES. Except as otherwise provided in the Plan or in
any stock option agreement, the optionee shall pay the purchase price of the
Common Shares upon the exercise of any option (i) in cash, (ii) in cash received
from a broker-dealer to whom the optionee has submitted an exercise notice
consisting of a fully endorsed option (however in the case of an optionee
subject to Section 16 of the 1934 Act, this payment option shall only be
available to the extent such payment procedures comply with Regulation T issued
by the Federal Reserve Board), (iii) by delivering Common Shares having an
aggregate fair market value on the date of exercise equal to the option exercise
price, (iv) by directing the Company to withhold such number of Common Shares
otherwise issuable upon exercise of such option having an aggregate fair market
value on the date of exercise equal to the option exercise price, (v) by such
other medium of payment as the Committee, in its discretion, shall authorize at
the time of grant, or (vi) by any combination of (i), (ii), (iii), (iv) and (v).
In the case of an election pursuant to (i) or (ii) above, cash shall mean cash
or check issued by a federally insured bank or savings and loan association, and
made payable to NIPSCO Industries, Inc. In the case of payment pursuant to
(ii), (iii) or (iv) above, the optionee's election must be made on or prior to
the date of exercise and shall be irrevocable. In lieu of a separate election
governing

-3-
<PAGE>

each exercise of an option, an optionee may file a blanket election with the
Committee which shall govern all future exercises of options until revoked by
the optionee. The Company shall issue, in the name of the optionee, stock
certificates representing the total number of Common Shares issuable pursuant to
the exercise of any option as soon as reasonably practicable after such
exercise, provided that any Common Shares purchased by an optionee through a
broker-dealer pursuant to clause (ii) above, shall be delivered to such broker-
dealer in accordance with 12 C.F.R.(S) 220.3(e)(4), or other applicable
provision of law.

(d) TRANSFERABILITY. Each stock option agreement shall provide that the
option subject thereto is not transferable by the optionee otherwise than by
will or the laws of descent or distribution. Notwithstanding the preceding
sentence, an optionee, at any time prior to his death, may assign all or any
portion of the option to (i) his spouse or lineal descendant, (ii) the trustee
of a trust for the primary benefit of his spouse or lineal descendant, or (iii)
a tax-exempt organization as described in Section 501(c)(3) of the Code. In
such event the spouse, lineal descendant, trustee or tax-exempt organization
will be entitled to all of the rights of the optionee with respect to the
assigned portion of such option, and such portion of the option will continue to
be subject to all of the terms, conditions and restrictions applicable to the
option as set forth herein, and in the related stock option agreement,
immediately prior to the effective date of the assignment. Any such assignment
will be permitted only if (i) the optionee does not receive any consideration
therefor, and (ii) the assignment is expressly approved by the Committee or its
delegate. Any such assignment shall be evidenced by an appropriate written
document executed by the optionee, and a copy thereof shall be delivered to the
Committee or its delegate on or prior to the effective date of the assignment.
This paragraph shall apply to all nonqualified stock options granted under the
Plan at any time.

(e) RIGHTS UPON TERMINATION OF EMPLOYMENT. In the event that an optionee
ceases to be an employee for any reason other than death, disability or
retirement, the optionee shall have the right to exercise the option during its
term within a period of thirty days after such termination to the extent that
the option was exercisable at the date of such termination of employment, or
during such other period and subject to such terms as may be determined by the
Committee. In the event that an optionee dies, retires, or becomes disabled
prior to termination of his option without having fully exercised his option,
the optionee or his successor shall have the right to exercise the option during
its term within a period of three years after the date of such termination due
to death, disability or retirement, to the extent that the option was
exercisable at the date of termination due to death, disability or retirement,
or during such other period and subject to such terms as may be determined by
the Committee. For purposes of the Plan, the term "disability" shall mean
disability as defined in the Company's Long-Term Disability Plan. The Committee,
in its sole discretion, shall determine the date of any disability. For purposes
of the Plan, the term "retirement" shall mean retirement as defined in the
Company's pension plan.

8. INCENTIVE STOCK OPTIONS. Incentive stock options shall be evidenced by
stock option agreements in such form and not inconsistent with the Plan as the
Committee shall approve from time to time, which agreements shall contain in
substance the following terms and conditions:

-4-
<PAGE>

(a) OPTION PRICE. Except as otherwise provided in Section 8(b), the
purchase price per share of stock deliverable upon the exercise of an incentive
stock option shall not be less than 100% of the fair market value of the Common
Shares on the day the option is granted, as determined by the Committee.

(b) EXERCISE OF OPTION. Each stock option agreement shall state the
period or periods of time within which the option may be exercised by the
optionee, in whole or in part, which shall be such period or periods of time as
may be determined by the Committee, provided that the option period shall not
commence earlier than six months after the date of the grant of the option nor
end later than ten years after the date of the grant of the option. The
aggregate fair market value (determined with respect to each incentive stock
option at the time of grant) of the Common Shares with respect to which
incentive stock options are exercisable for the first time by an individual
during any calendar year (under all incentive stock option plans of the Company
and its parent and subsidiary corporations) shall not exceed $100,000. If the
aggregate fair market value (determined at the time of grant) of the Common
Shares subject to an option, which first becomes exercisable in any calendar
year exceeds the limitation of this Section 8(b), so much of the option that
does not exceed the applicable dollar limit shall be an incentive stock option
and the remainder shall be a nonqualified stock option; but in all other
respects, the original option agreement shall remain in full force and effect.
As used in this Section 8, the words "parent" and "subsidiary" shall have the
meanings given to them in Section 424(e) and 424(f) of the Code.
Notwithstanding anything herein to the contrary, if an incentive stock option is
granted to an individual who owns stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company or of
its parent or subsidiary corporations, within the meaning of Section 422(b)(6)
of the Code, (i) the purchase price of each Common Share subject to the
incentive stock option shall be not less than one hundred ten percent (110%) of
the fair market value of the Common Shares on the date the incentive stock
option is granted, and (ii) the incentive stock option shall expire, and all
rights to purchase Common Shares thereunder shall cease, no later than the fifth
anniversary of the date the incentive stock option was granted.

(c) PAYMENT FOR SHARES. Except as otherwise provided in the Plan or in
any stock option agreement, the optionee shall pay the purchase price of the
Common Shares upon the exercise of any option, (i) in cash, (ii) in cash
received from a broker-dealer to whom the optionee has submitted an exercise
notice consisting of a fully endorsed option (however in the case of an optionee
subject to Section 16 of the 1934 Act, this payment option shall only be
available to the extent such payment procedures comply with Regulation T issued
by the Federal Reserve Board), (iii) by delivering Common Shares having an
aggregate fair market value on the date of exercise equal to the option
exercise price, (iv) by directing the Company to withhold such number of Common
Shares otherwise issuable upon exercise of such option having an aggregate fair
market value on the date of exercise equal to the option exercise price, (v) by
such other medium of payment as the Committee, in its discretion, shall
authorize at the time of grant, or (vi) by any combination of (i), (ii), (iii),
(iv) and (v). In the case of an election pursuant to (i) or (ii), cash shall
mean cash or check issued by a federally insured bank or savings and loan
association, and made payable to NIPSCO Industries, Inc. In the case of payment
pursuant to (ii), (iii) or (iv) above, the optionee's election must be made on
or prior to the date of exercise and shall be irrevocable. In lieu of a
separate election governing each

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<PAGE>

exercise of an option, an optionee may file a blanket election with the
Committee which shall govern all future exercises of options until revoked by
the optionee. The Company shall issue, in the name of the optionee, stock
certificates representing the total number of Common Shares issuable pursuant to
the exercise of any option as soon as reasonably practicable after such
exercise, provided that any Common Shares purchased by an optionee through a
broker-dealer pursuant to clause (ii) above, shall be delivered to such broker-
dealer in accordance with 12 C.F.R. (S) 220.3(e)(4), or other applicable
provision of law.

(d) TRANSFERABILITY. Each stock option agreement shall provide that it
is not transferable by the optionee otherwise by will or the laws of descent or
distribution.

(e) RIGHTS UPON TERMINATION OF EMPLOYMENT. In the event that an optionee
ceases to be an employee for any reason other than death, disability or
retirement, the optionee shall have the right to exercise the option during its
term within a period of thirty days after such termination to the extent that
the option was exercisable at the date of such termination of employment, or
during such other period and subject to such terms as may be determined by the
Committee. In the event that an optionee dies, retires, or becomes disabled
prior to termination of his option without having fully exercised his option,
the optionee or his successor shall have the right to exercise the option during
its term within a period of three years after the date of such termination due
to death, disability or retirement, to the extent that the option was
exercisable at the date of termination due to death, disability or retirement,
or during such other period and subject to such terms as may be determined by
the Committee. Notwithstanding the foregoing, in accordance with Section 422 of
the Code, if an incentive stock option is exercised more than ninety days after
termination of employment, that portion of the option exercised after such date
shall automatically be a nonqualified stock option, but in all other respects,
the original option agreement shall remain in full force and effect.

The provisions of this Section 8 shall be construed and applied, and (subject to
the limitations of section 20) shall be amended from time to time so as to
comply with Section 422 or its successors of the Code and regulations issued
thereunder.

9. STOCK APPRECIATION RIGHTS. Stock appreciation rights shall be evidenced by
stock appreciation right agreements in such form and not inconsistent with the
Plan as the Committee shall approve from time to time, which agreements shall
contain in substance the following terms and conditions:

(a) AWARDS. A stock appreciation right shall entitle the grantee to
receive upon exercise the excess of (i) the fair market value of a specified
number of shares of the Company Common Shares at the time of exercise over (ii)
a specified price which shall not be less than 100% of the fair market value of
the Common Shares at the time the stock appreciation right was granted, or, if
connected with a previously issued stock option, not less than 100% of the fair
market value of Common Shares at the time such option was granted. A stock
appreciation right may be granted in connection with all of any portion of a
previously or contemporaneously granted stock option or not in connection with a
stock option.

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<PAGE>

(b) TERM. Stock appreciation rights shall be granted for a period of not
less than one year nor more than ten years, and shall be exercisable in whole or
in part, at such time or times and subject to such other terms and conditions,
as shall be prescribed by the Committee at the time of grant, subject to the
following:

(i) No stock appreciation right shall be exercisable in whole or
in part, during the six-month period starting with the date of grant; and

(ii) Stock appreciation rights will be exercisable only during a
grantee's employment, except that in the discretion of the Committee a
stock appreciation right may be made exercisable for up to thirty days
after the grantee's employment is terminated for any reason other than
death, disability or retirement. ln the event that a grantee dies,
retires, or becomes disabled without having fully exercised his stock
appreciation rights, the grantee or his successor shall have the right to
exercise the stock appreciation rights during their term within a period of
three years after the date of such termination due to death, disability or
retirement to the extent that the right was exercisable at the date of such
termination or during such other period and subject to such terms as may be
determined by the Committee.

The Committee shall have the power to permit in its discretion an
acceleration of previously determined exercise terms, within the terms of
the Plan, under such circumstances and upon such terms and conditions as it
deems appropriate.

(c) PAYMENT. Upon exercise of a stock appreciation right, payment shall
be made in cash, in the form of Common Shares at fair market value, or in a
combination thereof, as the Committee may determine.

(a) PERFORMANCE PERIOD. At the time of award, the Committee shall
establish with respect to each Unit award a performance period of not less than
two, nor more than five, years.

(b) VALUATION OF UNITS. At the time of award, the Committee shall
establish with respect to each such award a value for each Unit which shall not
thereafter change, or which may vary thereafter determinable from criteria
specified by the Committee at the time of award.

(c) PERFORMANCE TARGETS. At the time of award, the Committee shall
establish maximum and minimum performance targets to be achieved with respect to
each award during the performance period. The participant shall be entitled to
payment with respect to all Units awarded if the maximum target is achieved
during the performance period, but shall be entitled to payment with respect to
a portion of the Units awarded according to the level of achievement of
performance

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<PAGE>

targets, as specified by the Committee, for performance during the performance
period which meets or exceeds the minimum target but fails to meet the maximum
target.

The performance targets established shall relate to corporate, division, or
unit performance and may be established in terms of growth in gross revenue,
earnings per share, ratio of earnings to shareholders' equity or to total assets
or such other performance standards as determined by the Committee in its
discretion. Multiple targets may be used and may have the same or different
weighting, and they may relate to absolute performance or relative performance
as measured against other institutions or divisions or units thereof.

(d) ADJUSTMENTS. At any time prior to payment of the Units, the
Committee may adjust previously established performance targets and other terms
and conditions, including the corporation's, or division's or unit's financial
performance for Plan purposes, to reflect major unforeseen events such as
changes in laws, regulations or accounting practices, mergers, acquisitions or
divestitures or extraordinary, unusual or non-recurring items or events.

(e) PAYMENTS OF UNITS. Following the conclusion of each performance
period, the Committee shall determine the extent to which performance targets
have been attained for such period as well as the other terms and conditions
established by the Committee. The Committee shall determine what, if any,
payment is due on the Units. Payment shall be made in cash, in the form of
Common Shares at fair market value, or in a combination thereof, as the
Committee may determine.

(f) TERMINATION OF EMPLOYMENT. In the event that a participant holding a
Unit award ceases to be an employee prior to the end of the applicable
performance period by reason of death, disability or retirement, his Units, to
the extent earned under the applicable performance targets, shall be payable at
the end of the performance period in proportion to the active service of the
participant during the performance period, as determined by the Committee. Upon
any other termination of employment, participation shall terminate forthwith and
all outstanding Units held by the participant shall be canceled.

(g) OTHER TERMS. The Unit agreements shall contain such other terms and
provisions and conditions not inconsistent with the Plan as shall be determined
by the Committee.

11. RESTRICTED STOCK AWARDS. Restricted Stock Awards under the Plan shall
be in the form of Common Shares of the Company, restricted as to transfer and
subject to forfeiture, and shall be evidenced by restricted stock agreements in
such form and not inconsistent with the Plan as the Committee shall approve from
time to time, which agreements shall contain in substance the following terms
and conditions:

(a) RESTRICTION PERIOD. Restricted Common Shares awarded pursuant to the
Plan shall be subject to such terms, conditions, and restrictions,
including without limitation: prohibitions against transfer, substantial
risks of forfeiture, attainment of performance objectives and repurchase by
the Company or right of first refusal, and for such period or

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<PAGE>

periods as shall be determined by the Committee at the time of grant. The
Committee shall have the power to permit in its discretion, an acceleration
of the expiration of the applicable restriction period with respect to any
part or all of the Common Shares awarded to a participant.

(b) RESTRICTIONS UPON TRANSFER. Common Shares awarded, and the right to
vote such Shares and to receive dividends thereon, may not be sold,
assigned, transferred, exchanged, pledged, hypothecated, or otherwise
encumbered, except as herein provided, during the restriction period
applicable to such Shares. Subject to the foregoing, and except as
otherwise provided in the Plan, the participant shall have all the other
rights of a shareholder including, but not limited to, the right to receive
dividends and the right to vote such Shares.

(c) CERTIFICATES. Each certificate issued in respect of Common Shares
awarded to a participant shall be deposited with the Company, or its
designee, and shall bear the following legend:

"This certificate and the shares represented hereby are subject to
the terms and conditions (including forfeiture and restrictions against
transfer) contained in the NIPSCO Industries, Inc. 1994 Long-Term incentive
Plan and an Agreement entered into by the registered owner. Release from
such terms and conditions shall obtain only in accordance with the
provisions of the Plan and Agreement, a copy of each of which is on file in
the office of the Secretary of said Company."

(d) LAPSE OF RESTRICTIONS. A restricted stock agreement shall specify
the terms and conditions upon which any restrictions upon Common Shares
awarded under the Plan shall lapse, as determined by the Committee. Upon
the lapse of such restrictions, Common Shares, free of the foregoing
restrictive legend, shall be issued to the participant or his legal
representative.

(e) TERMINATION PRIOR TO LAPSE OF RESTRICTIONS. In the event of a
participant's termination of employment, other than due to death,
disability or retirement, prior to the lapse of restrictions applicable to
any Common Shares awarded to such participant, all Shares as to which there
still remains unlapsed restrictions shall be forfeited by such participant
without payment of any consideration to the participant, and neither the
participant nor any successors, heirs, assigns, or personal representatives
of such participant shall thereafter have any further rights or interest in
such Shares or certificates.

12. SUPPLEMENTAL CASH PAYMENTS. Subject to the Company's discretion, stock
option, incentive stock option, stock appreciation right, performance unit or
restricted stock agreements may provide for the payment of a supplemental cash
payment to a participant promptly after the exercise of an option or stock
appreciation right, or, at the time of payment of a performance unit or at the
end of a restriction period of a restricted stock award. Supplemental cash
payments shall be subject to such

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<PAGE>

terms and conditions as shall be provided by the Committee at the time of grant,
provided that in no event shall the amount of each payment exceed:

(a) In the case of an option, the excess of the fair market value of a
Common Share on the date of exercise over the option price multiplied by
the number of Common Shares for which such option is exercised, or

(b) In the case of a stock appreciation right, performance unit or
restricted stock award, the value of the Common Shares and other
consideration issued in payment of such award.

13. GENERAL RESTRICTIONS. Each award under the Plan shall be subject to the
requirement that, if at any time the Committee shall determine that (i) the
listing, registration or qualification of the Common Shares subject or related
thereto upon any securities exchange or under any state or federal law, or (ii)
the consent or approval of any government regulatory body, or (iii) an agreement
by the recipient of an award with respect to the disposition of Common Shares,
is necessary or desirable as a condition of, or in connection with, the granting
of such award or the issue or purchase of Common Shares thereunder, such award
may not be consummated in whole or in part unless such listing, registration,
qualification, consent, approval or agreement shall have been effected or
obtained, free of any conditions not acceptable to the Committee.

14. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan, unless
otherwise provided by the Plan, shall have no rights as a shareholder with
respect thereto unless and until certificates for Common Shares are issued to
the recipient.

15. EMPLOYMENT RIGHTS. Nothing in the Plan or in any agreement entered into
pursuant to the Plan shall confer upon any participant the right to continue in
employment or affect any right which his employer may have to terminate the
employment of such participant.

16. TAX--WITHHOLDING. Whenever the Company proposes or is required to issue
or transfer Common Shares to a participant under the Plan, the Company shall
have the right to require the participant to remit to the Company an amount
sufficient to satisfy all federal, state and local withholding tax requirements
prior to the delivery of any certificate or certificates for such Common Shares.
If such certificates have been delivered prior to the time a withholding
obligation arises, the Company shall have the right to require the participant
to remit to the Company an amount sufficient to satisfy all federal, state or
local withholding tax requirements at the time such obligation arises and to
withhold from other amounts payable to the participant, as compensation or
otherwise, as necessary. Whenever payments under the Plan are to be made to a
participant in cash, such payment shall be net of any amount sufficient to
satisfy all federal, state and local withholding tax requirements. In lieu of
requiring a participant to make a payment to the Company in an amount related to
the withholding tax requirement, the Committee may, in its discretion, provide
that, at the participant's election, the tax withholding obligation shall be
satisfied by the Company's withholding a portion of the Common Shares otherwise
distributable to the participant, such Common Shares being valued at their fair
market value at the date of exercise, or by the participant's delivering to

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<PAGE>

the Company a portion of the Common Shares previously delivered by the Company,
such Common Shares being valued at their fair market value as of the date of
delivery of such Common Shares by the participant to the Company. For this
purpose, the amount of required withholding shall be a specified rate not less
than the statutory minimum federal, state and local (if any) withholding rate,
and not greater than the maximum federal, state and local (if any) marginal tax
rate applicable to the participant and to the particular transaction.
Notwithstanding any provision of the Plan to the contrary, a participant's
election pursuant to the preceding sentences (a) must be made on or prior to the
date as of which income is realized by the recipient in connection with the
particular transaction, and (b) must be irrevocable. In lieu of a separate
election on each effective date of each transaction, a participant may file a
blanket election with the Committee which shall govern all future transactions
until revoked by the participant.

17. CHANGE IN CONTROL. (a) Effect of Change in Control. Notwithstanding any
of the provisions of the Plan or any agreement evidencing awards granted
hereunder, upon a Change in Control of the Company (as defined in Section 17(b))
all outstanding awards shall become fully exercisable and all restrictions
thereon shall terminate in order that participants may fully realize the
benefits thereunder. Further, the Committee, as constituted before such Change
in Control, is authorized, and has sole discretion, as to any award, either at
the time such award is granted hereunder or any time thereafter, to take any one
or more of the following actions: (i) provide for the exercise of any such award
for an amount of cash equal to the difference between the exercise price and the
then fair market value of the Common Shares covered thereby had such award been
currently exercisable; (ii) provide for the vesting or termination of the
restrictions on any such award; (iii) make such adjustment to any such award
then outstanding as the Committee deems appropriate to reflect such Change in
Control; and (iv) cause any such award then outstanding to be assumed, by the
acquiring or surviving corporation, after such Change in Control.

(b) Definition of Change in Control. A "Change in Control" of the
Company shall be deemed to have occurred if any one of the occurrences of a
"Change in Control" set forth in the Change in Control and Termination
Agreements between the Company and certain executive officers thereof shall have
been satisfied.

18. AMENDMENT OR TERMINATION. The Board or the Committee may at any time
terminate, suspend or modify the Plan without the authorization of shareholders
to the extent allowed by law, including without limitation any rules issued by
the Securities and Exchange Commission under Section 16 of the 1934 Act, insofar
as shareholder approval thereof is required in order for the Plan to continue to
satisfy the requirements of Rule 16b-3 under the 1934 Act. No termination,
suspension or modification of the Plan shall adversely affect any right acquired
by any participant under an award granted before the date of such termination,
suspension or modification, unless such participant shall consent; but it shall
be conclusively presumed that any adjustment for changes in capitalization as
provided for herein does not adversely affect any such right.

19. EFFECT ON OTHER PLANS. Unless otherwise specifically provided,
participation in the Plan shall not preclude an employee's eligibility to
participate in any other benefit or incentive plan and

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<PAGE>

any awards made pursuant to the Plan shall not be considered as compensation in
determining the benefits provided under any other plan.

20. DURATION OF THE PLAN. The Plan shall remain in effect until all awards
under the Plan have been satisfied by the issuance of Common Shares or the
payment of cash, but no award shall be granted more than ten years after the
date the Plan is approved by the shareholders, which shall be its effective date
of adoption.

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<PAGE>

EXHIBIT 10.8

FIRST AMENDMENT
TO
NIPSCO INDUSTRIES, INC.
1994 LONG-TERM INCENTIVE PLAN

WHEREAS, NIPSCO Industries, Inc. (the "Company") adopted the NIPSCO
Industries, Inc. 1994 Long-Term Incentive Plan ("Plan"), effective April 13,
1994, as amended and restated effective February 1, 1998; and

WHEREAS, pursuant to Section 18 of the Plan, the Company deems it to be in
its best interest to amend the Plan as described below;

NOW THEREFORE, the Plan is hereby amended by the addition of the following
Section 21, effective as of December 1, 1998:

21. ASSUMPTION OF OPTIONS. Pursuant to the terms of Section 5.22 of the
Amended and Restated Agreement and Plan of Merger by and among the Company,
Acquisition Gas Company, Inc., a wholly owned subsidiary of the Company, and Bay
State Gas Company ("Bay State"), dated as of December 18, 1997 and amended and
restated as of March 4, 1998 and further amended as of November 16, 1998 (as may
be further amended, restated or supplemented, the "Agreement'), and at the
Effective Time defined in the Agreement, each outstanding stock option issued
under the Bay State Gas Company 1989 Key Employee Stock Option Plan ("Bay State
Stock Option Plan"), shall be assumed by the Company. Each such stock option
("Assumed Option") shall be deemed to constitute an option to acquire Common
Shares in an amount and at a purchase price determined pursuant to Section 5.22
of the Agreement. Each Assumed Option shall be subject to all of the terms and
conditions applicable to options granted under the Plan. Notwithstanding the
preceding sentence:

(1) if the employment of the holder of an Assumed Option with the
Company and its subsidiaries terminates for any reason other than death,
disability, retirement or Cause, he, or his legal representatives or
beneficiary, may exercise the Assumed Option at any time within three
months immediately following such termination of employment, but not later
than the expiration of the term of such Assumed Option;

(2) if the holder of an Assumed Option that is a non-qualified stock
option terminates employment with the Company and its subsidiaries because
of death, disability or retirement, he, or his legal representatives or
beneficiary, may exercise the Assumed Option at any time during the term of
such Assumed Option to the extent he was entitled to exercise it at the
date of death, disability or retirement;
<PAGE>

(3) if the holder of an Assumed Option that is an incentive stock
option terminates employment with the Company and its subsidiaries because
of death, his legal representatives or beneficiary may exercise the Assumed
Option at any time during the term of such Assumed Option to the extent he
was entitled to exercise it at the date of death;

(4) if the holder of an Assumed Option that is an incentive stock
option terminates employment with the Company and its subsidiaries because
of disability or retirement, he, or his legal representatives or
beneficiary, may exercise the Assumed Option at any time within three
months immediately following such termination of employment, but not later
than the expiration of the term of such Assumed Option;

(5) if the employment of the holder of an Assumed Option with the
Company and its subsidiaries terminates for Cause, the Assumed Option shall
expire as of the date of such termination of employment.

For purposes of this Section, "Cause" shall have the same meaning as defined in
the holder's severance agreement with the Company or any of its subsidiaries in
effect on the date of termination of employment. If the holder has not entered
into a severance agreement with the Company or any subsidiary that is in effect
on the date of termination of employment, or if the term "Cause" is not defined
therein, Cause shall mean the holder's conviction for the commission of a
felony, or the holder's fraud or dishonesty which has resulted in or is likely
to result in material economic damage to the Company or any subsidiary.

Each Assumed Option shall be evidenced by an amended and restated stock
option agreement entered into as of the Effective Time by and among the Company,
Bay State and the applicable optionee.

This First Amendment has been executed by the Company, by its duly
authorized officer, on this ____ day of December, 1998.

NIPSCO Industries, Inc.

By:
--------------------------------------

<PAGE>

To the Board of Directors of NIPSCO Industries, Inc.:

We have audited the accompanying consolidated balance sheet and consolidated
statements of capitalization and long-term debt of NIPSCO Industries, Inc. (an
Indiana corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, common shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of Industries'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 NIPSCO
Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.

Chicago, Illinois
February 5, 1999 Arthur Andersen LLP
<PAGE>

1998 Financial Review

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Holding Company

NIPSCO Industries, Inc. (Industries) is an energy/utility-based holding
company providing electric energy, natural gas and water to the public through
its seven wholly-owned regulated subsidiaries (Utilities): Northern Indiana
Public Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo
Gas); Northern Indiana Fuel and Light Company, Inc. (NIFL); Crossroads
Pipeline Company (Crossroads); Indianapolis Water Company (IWC); Harbour Water
Corporation (Harbour); and Liberty Water Company (Liberty). Industries'
regulated gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL
and Crossroads) are referred to as "Energy Utilities"; and regulated water
subsidiaries (IWC, Harbour and Liberty) are referred to as "Water Utilities."

Industries also provides non-regulated energy/utility-related services
including gas marketing, power generation, gas transmission, supply and
storage, installation, repair and maintenance of underground pipelines,
utility line locating and marking, and related products targeted at customer
segments, principally through the following wholly-owned subsidiaries: NIPSCO
Development Company, Inc. (Development), NI Energy Services, Inc. (Services),
Primary Energy, Inc. (Primary); Miller Pipeline Corporation (Miller), and SM&P
Utility Resources, Inc. (SM&P). These subsidiaries are referred to collectively
as "Products and Services." NIPSCO Capital Markets, Inc. (Capital Markets)
handles financing requirements for certain subsidiaries of Industries other than
Northern Indiana.

On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR).
IWCR's subsidiaries include the Water Utilities and five non-utility companies
providing utility-related services including installation, repair and
maintenance of underground pipelines and utility line locating and marking.
The two primary non-utility subsidiaries are Miller and SM&P. Industries'
results of operations include twelve months of operating results from IWCR for
the period ended December 31, 1998 and nine months of operating results from
IWCR for the period ended December 31, 1997.

Net Income

For 1998, net income of Industries increased to $193.9 million, or basic
earnings of $1.60 per average common share, compared to $190.8 million, or
basic earnings of $1.54 per average common share, for 1997. There were
approximately 3.1 million fewer average common shares outstanding in 1998 than
in 1997. In 1996, net income was $176.6 million, or basic earnings of $1.44
per average common share. See Selected Supplemental Information regarding
revenue and costs associated with delivering gas, electricity and water and
providing products and services.

Operating Revenues

In 1998, operating revenues increased $346.2 million, or 13.4%, over 1997.
Operating revenues in 1997 increased $598.6 million, or 30.1%, from 1996.

Gas revenues were $637.1 million in 1998, a decrease of $170.1 million from
1997. The decrease in gas revenues was mainly due to decreased deliveries to
residential and commercial customers, decreased gas costs per dekatherms (dth)
and decreased gas transition costs. During 1998, gas deliveries in dth, which
include transportation services, decreased 1.8%. Gas deliveries to residential
and commercial customers decreased 20.4% and 23.3%, respectively, reflecting
heating degree-days 21.3% lower than 1997. This decrease in deliveries was
partially offset by increased deliveries to industrial customers of 3.9% and
sales to other utilities. The Energy Utilities had 739,400 gas customers at
December 31, 1998.

2
<PAGE>

Gas revenues were $807.2 million in 1997, an increase of $7.8 million from
1996. The increase in gas revenues was mainly due to increased gas costs per
dth and increased deliveries of gas transported for others, partially offset
by decreased sales to residential and commercial customers and decreased gas
transition costs. During 1997, gas deliveries in dth, which include
transportation services, increased 2.9% over 1996. Gas deliveries to
residential and commercial customers decreased 5.1% and 1.6% respectively, due
to a warmer heating season than 1996. Gas transportation services increased
4.2% mainly due to increased deliveries of gas transported for industrial
customers. The large commercial and industrial customers continue to utilize
transportation services provided by the Energy Utilities. Gas transportation
customers purchase much of their gas directly from producers and marketers and
then pay a transportation fee to have their gas delivered over the Energy
Utilities' systems. The Energy Utilities transported 216.5, 203.7 and 194.4
million dth for others in 1998, 1997 and 1996, respectively.

In 1998, electric revenues were $1.430 billion, an increase of $243.7
million from 1997. Sales of electricity in kilowatt-hours (kwh) increased
25.5% from 1997. The increase in electric revenue was mainly due to increased
sales to residential and commercial customers (increases of 7.8% and 6.3% in
kwh, respectively), reflecting a significantly warmer summer in 1998.
Wholesale power transactions also increased significantly in a rapidly
developing market. The increases were partially offset by a 2.0% kwh reduction
in sales to industrial customers, reflecting a full year of operations at two
cogeneration projects located at major industrial customers' facilities. At
December 31, 1998, Industries had 420,955 electric customers.

In 1997, electric revenues were $1.186 billion, an increase of $164.1
million from 1996. The increase was mainly due to increased sales to
residential and commercial customers and to increased revenues related to
wholesale power marketing transactions. Industrial sales decreased during the
period as a result of the two cogeneration projects located at major
industrial customers' facilities coming on line during the period. Electric
sales increased from 1996 reflecting increased wholesale power marketing
transactions partially offset by decreased sales to industrial customers.

Water revenues for 1998 were $84.0 million. Water sales to residential and
commercial customers accounted for $75.2 million of 1998 revenues. The Water
Utilities had sales in millions of gallons (m.g.) of 40,822 during 1998 and
served 253,664 customers at December 31, 1998. Water revenues for the period
April 1997 through December 1997 were $60.7 million, of which water sales to
residential and commercial customers accounted for $54.4 million. The Water
Utilities had sales of 32,504 m.g. during the last nine months of 1997 and
served 246,643 customers at December 31, 1997.

In 1998, Products and Services revenues were $781.7 million, an increase of
$249.5 million from 1997. Approximately $205.0 million of this increase is
attributable to increased gas marketing activity associated with customer
growth and additional sales to existing customers. Miller and SM&P's operating
revenues increased $31.7 million reflecting a full year of operations included
in 1998. Products and Services revenues in 1997 increased $366.0 million from
1996. The increase was mainly due to an additional $275.4 million in gas
marketing revenues resulting from increased sales to existing customers and
customer growth, and the addition of Miller and SM&P revenues for the last nine
months of 1997.

The basic steel industry accounted for 36% of natural gas delivered
(including volumes transported) and 16% of electric sales during 1998.

3
<PAGE>

The components of the changes in operating revenues are shown in the
following table:

<TABLE>
<CAPTION>
Year 1998 Year 1997
Compared to Compared to
Year 1997 Year 1996
----------- -----------
(In millions)
<S> <C> <C>
Gas Revenue Changes
Pass through of net changes in purchased gas costs,
gas storage and storage transportation costs........ $ (60.6) $ 14.8
Gas transition costs................................. (22.4) (4.3)
Changes in sales levels.............................. (95.5) (6.6)
Gas transported...................................... 8.4 3.9
------- ------
Total Gas Revenue Change............................... (170.1) 7.8
------- ------
Electric Revenue Changes
Pass through of net changes in fuel costs............ (4.8) 4.0
Changes in sales levels.............................. 63.9 (9.1)
Wholesale electric marketing......................... 184.6 169.2
------- ------
Total Electric Revenue Change.......................... 243.7 164.1
------- ------
Water Revenue Change................................... 23.2 60.7
------- ------
Products and Services Revenue Changes
Gas Marketing........................................ 205.0 275.4
Pipeline construction................................ 14.4 47.2
Locate and marking................................... 17.3 48.4
Other................................................ 12.7 (5.0)
------- ------
Total Products and Services Revenue Change............. 249.4 366.0
------- ------
Total Operating Revenue Change..................... $ 346.2 $598.6
======= ======
</TABLE>

See "Summary of Significant Accounting Policies--Gas Cost Adjustment
Clause" in the Notes to the Consolidated Financial Statements for a discussion
of the gas cost incentive mechanism. In addition, see "FERC Order No. 636" in
the Notes to Consolidated Financial Statements regarding Federal Energy
Regulatory Commission (FERC) Order No. 636 transition costs.

Gas Costs

The Energy Utilities' gas costs decreased $137.3 million (27.7%) in 1998
due to decreased gas purchases, decreased gas transition costs and decreased
gas costs per dth. The average cost for the Energy Utilities' purchased gas in
1998, after adjustment for gas transition costs billed to transport customers,
was $2.60 per dth as compared to $3.15 per dth in 1997. Gas costs increased
$11.5 million (2.4%) in 1997 due to increased gas costs per dth, which were
partially offset by decreased gas transition costs. The average cost for the
Energy Utilities' purchased gas in 1997, after adjustment for gas transition
costs billed to transport customers, was $3.15 per dth as compared to $3.06
per dth in 1996.

Fuel and Purchased Power

Cost of fuel for electric generation in 1998 increased mainly as a result
of increased production. The average cost per kwh generated decreased 2.7%
from 1997 to 1.50 cents per kwh. The cost of fuel for electric generation in
1997 increased mainly as a result of increased production. The average cost
per kwh generated decreased 2.3% from 1996 to 1.54 cents per kwh.

4
<PAGE>

Power purchased increased $207.9 million in 1998 as a result of increased
bulk power purchases and wholesale power marketing activities. Power purchased
increased $151.3 million in 1997 as a result of increased wholesale power
marketing activities.

Cost of Sales: Products and Services

The cost of sales for Products and Services increased $234.1 million mainly
due to increased purchases of gas of $212.0 million related to gas marketing
transactions and the cost of sales for IWCR's non-regulated subsidiaries
(including Miller and SM&P) being included for twelve months in 1998 compared
to nine months in 1997.

In 1997 cost of sales for Products and Services increased $335.5 million
mainly due to increased purchases of gas related to gas marketing transactions
and the inclusion of nine months of operations at IWCR's non-regulated
subsidiaries.

Operating Margins

Operating margins increased $29.5 million in 1998 to $1.240 billion. Gas
operating margin decreased $32.8 million in 1998 due to decreased deliveries
to residential and commercial customers reflecting the warmer heating season,
partially offset by increased sales to wholesale customers and increased
deliveries of gas transported for others. Operating margin from electric sales
increased $23.6 million due to increased sales to residential and commercial
customers, reflecting a significantly warmer summer in 1998 than in 1997, and
increased wholesale transactions, partially offset by decreased sales to
industrial customers. The Water Utilities' operating margin increased $23.2
million reflecting the inclusion of a full year of operating results in 1998.
Additionally, Miller and SM&P increased Products and Services' operating margin
$6.7 million during 1998, reflecting the inclusion of a full year of
operations. Operating margins increased $95.0 million in 1997 to $1.211
billion. Gas operating margin decreased $3.7 million in 1997 due to decreased
sales to residential and commercial customers reflecting mild weather,
partially offset by increased sales to wholesale customers and increased
deliveries of gas transported for others. Operating margin from electric sales
increased $7.5 million in 1997 due to increased sales to residential and
commercial customers and increased wholesale transactions partially offset by
decreased sales to industrial customers. The Water Utilities contributed $60.7
million to operating margin in 1997, reflecting the March 1997 acquisition of
IWCR. Additionally, inclusion of nine months of operating margins for Miller
and SM&P increased Products and Services' operating margin $28.4 million during
1997.

Operating Expenses and Taxes

Operating expenses and taxes (except income) in 1998 increased 2.3% from
1997 to $818.9 million and in 1997 increased 9.7% from 1996 to $800.4 million.

Operation expense includes an increase of $21.9 million reflecting a full
year of operations at IWCR and its subsidiaries. New operations at Primary's
subsidiaries increased lease expenses by approximately $10.2 million. These
increases were partially offset by decreased operation expenses at Northern
Indiana of $23.4 million, mainly due to decreased employee related costs of
$11.7 million, decreased sales and marketing activities of $5.7 million and
decreased electric production operating costs of $4.3 million. Operation
expenses increased $44.2 million in 1997 over 1996. The inclusion of nine
months of operations at IWCR and its subsidiaries increased operation expenses
$44.1 million in 1997. Additionally, new operations at Primary and Services
increased operation expenses $8.4 million in 1997. These increases were
partially offset by reduced pension costs, reduced environmental costs of $4.2
million and reduced pollution control facility costs of $4.1 million at
Northern Indiana.

Maintenance expenses decreased $1.9 million in 1998 from 1997 mainly
reflecting decreased maintenance activity for electric production and
distribution facilities. Maintenance expenses increased $2.5 million in 1997
from 1996 mainly reflecting the inclusion of nine months of maintenance at the
Water Utilities.

5
<PAGE>

Depreciation and amortization expense increased $6.7 million in 1998 from
1997 as a result of plant additions and the inclusion of twelve months of
depreciation and amortization at IWCR. Depreciation and amortization expense
increased $15.8 million in 1997 from 1996 resulting from utility plant
additions and the inclusion of nine months of depreciation expenses and
amortization of plant acquisition adjustments and intangible assets at IWCR.

Other Income (Deductions) decreased $5.2 million in 1998 from 1997 mainly
reflecting a loss on the disposition of properties as compared to gains on
disposition of properties in the same period a year earlier. Other Income
(Deductions) increased $3.8 million in 1997 from 1996 mainly resulting from
the disposition of certain oil and natural gas properties during the first
quarter of 1997.

Interest and other charges increased $8.0 million and $14.9 million in 1998
and 1997, respectively. The 1998 increase reflects twelve months of interest
payments on $300 million of Capital Markets' medium-term notes and $75 million
of Capital Markets' Junior Subordinated Deferrable Interest Debentures, Series A
and the inclusion of twelve months of interest expense at IWCR. The 1997
increase reflects the issuance of $300 million of Capital Markets' medium-term
notes and the inclusion of nine months of interest expense at IWCR.

See Notes to Consolidated Financial Statements for a discussion of
accounting policies and transactions impacting this analysis.

Environmental Matters

The operations of Industries 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 Industries' operations as they relate to impacts on air, water and
land.

Refer to "Environmental Matters" in the Notes to Consolidated Financial
Statements for information regarding certain environmental issues.

Liquidity and Capital Resources

During the next few years, it is anticipated that the great majority of
earnings available for distribution of dividends will depend upon dividends
paid to Industries by Northern Indiana. See Notes to Consolidated Financial
Statements for a discussion of the Common Share Dividend.

Cash flow from operations at Northern Indiana has provided sufficient
liquidity to meet current operating requirements. Because of the seasonal
nature of the utility business and the construction program, Northern Indiana
makes use of commercial paper intermittently as short-term financing. As of
December 31, 1998 and December 31, 1997, Northern Indiana had $85.6 million
and $71.5 million of commercial paper outstanding, respectively. At December
31, 1998, the weighted average interest rate of commercial paper outstanding
was 5.62%.

In September 1998, Northern Indiana entered into a five-year $100 million
revolving credit agreement and a 364-day $100 million revolving credit
agreement with several banks. These agreements terminate on September 23, 2003
and September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364 days upon the request of Northern
Indiana and agreement by the banks. Under these agreements, Northern Indiana
may borrow funds at a floating rate of interest or, at Northern Indiana's
request under certain circumstances, a fixed rate of interest for short term
periods. These agreements provide financing flexibility to Northern Indiana
and may be used to support the issuance of commercial paper. At December 31,
1998, there were no borrowings outstanding under either of these agreements.
Concurrently with entering into such agreements, Northern Indiana terminated
its then existing revolving credit agreement which would otherwise have
terminated on August 19, 1999.

6
<PAGE>

In addition, Northern Indiana has $14.2 million in lines of credit which run
to May 31, 1999. The credit pricing of each of the lines varies from either the
lending banks' commercial prime or market rates. Northern Indiana has agreed to
compensate the participating banks with arrangements that vary from no
commitment fees to a combination of fees which are mutually satisfactory to both
parties. As of December 31, 1998, there were no borrowings under these lines of
credit. The lines of credit are also available to support the issuance of
commercial paper.

Northern Indiana also has $273.5 million of money market lines of credit.
As of December 31, 1998 there was $40.5 million outstanding under these lines
of credit. At December 31, 1997, there was $47.5 million outstanding under
these lines of credit.

Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1998, there were no borrowings outstanding under this facility.

Capital Markets provides financing for Industries' subsidiaries other than
Northern Indiana and, in certain respects, IWCR and its subsidiaries. As of
December 31, 1998 and December 31, 1997, Capital Markets had $108.1 million
and $17.0 million, respectively, of commercial paper outstanding. The weighted
average interest rate of commercial paper outstanding was 5.99% at December
31, 1998.

In September, 1998, Capital Markets entered into a five-year $100 million
revolving credit agreement and a 364 day $100 million revolving credit
agreement with several banks. These agreements terminate on September 23, 2003
and September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364 days upon the request of Capital
Markets and agreement by the banks. Under these agreements, Capital Markets
may borrow, repay and reborrow funds at a floating rate of interest or, at
Capital Market's request under certain circumstances, at a fixed rate of
interest for short term periods. These agreements provide financing
flexibility to Capital Markets and may be used to support the issuance of
commercial paper. At December 31, 1998, there were no borrowings outstanding
under either of these agreements. Concurrently with entering into such
agreements, Capital Markets terminated its then existing revolving credit
agreement which would otherwise have terminated on August 19, 1999.

Capital Markets also has $130 million of money market lines of credit. As
of December 31, 1998 and December 31, 1997, $86.8 million and $20.1 million of
borrowings were outstanding, respectively, under these lines of credit.

The financial obligations of Capital Markets are subject to a Support
Agreement between Industries and Capital Markets, under which Industries has
committed to make payments of interest and principal on Capital Markets'
obligations in the event of a failure to pay by Capital Markets. Restrictions
in the Support Agreement prohibit recourse on the part of Capital Markets'
creditors against the stock and assets of Northern Indiana which are owned by
Industries. Under the terms of the Support Agreement, in addition to the cash
flow of cash dividends paid to Industries by any of its consolidated
subsidiaries, the assets of Industries, other than the stock and assets of
Northern Indiana, are available as recourse for the benefit of Capital
Markets' creditors. The carrying value of the assets of Industries, other than
the assets of Northern Indiana as reflected in the consolidated financial
statements of Industries, was approximately $1.3 billion at December 31, 1998.

IWCR and its subsidiaries have lines of credit with banks aggregating $92.4
million. At December 31, 1998, and December 31, 1997, $84.1 million and $48.9
million were outstanding under these lines of credit, respectively.

IWC issued Refunding Revenue Bonds, Series 1998, on July 15, 1998, in the
amount of $40 million. The proceeds from the Series 1998 Bonds were used to
redeem the City of Indianapolis, Indiana 7 7/8% Economic Development Water
Facilities Revenue Bonds and the Town of Fishers, Indiana 7 7/8% Economic
Development Water Facilities Revenue Bonds. The Series 1998 Bonds bear
interest at 5.05% per annum and mature on July 15, 2028. In February 1999, IWC
issued $35 million of ten-year medium term notes at a rate of 5.99% and $45
million of twenty-year medium term notes at a rate of 6.61%. The majority of
the proceeds will be used to reduce IWC's existing credit facilities and the
remaining proceeds will be used for general corporate purposes.

7
<PAGE>

Utility construction expenditures for 1998, 1997 and 1996 were approximately
$245 million, $219 million and $208 million, respectively. Industries' total
utility plant investment on December 31, 1998, was $6.6 billion. During recent
years, Industries has been able to finance its construction program with
internally generated funds and expects to be able to meet future commitments
through such funds.

The Energy Utilities do not anticipate the need to file for retail gas and
electric base rate increases in the near future. IWC has agreed to a
moratorium on water rate increases until 2002.

During 1998, Industries' non-utility subsidiaries acquired interests in other
properties and investments totaling approximately $43 million.

In February 1999, Industries completed its acquisition of Bay State Gas
Company (Bay State) in a stock-for-stock transaction valued at $40 per Bay State
share. The transaction is valued at approximately $551 million. Bay State
shareholders will have the option of taking up to 50 percent of the total
purchase price in cash. Capital Markets issued $345 million of premium income
equity securities, each consisting of a trust preferred security and a purchase
contract for Industries' common shares, to pay the cash portion of the
consideration payable in the Bay State acquisition and to repay short-term
indebtedness incurred in connection with the acquisition.

On February 9, 1999, Industries agreed to acquire TPC Corporation, a natural
gas marketing and storage company. Houston-based TPC Corporation, a wholly-owned
subsidiary of PacifiCorp., holds a 66% ownership stake in Market Hub Partners,
L.P., which stores natural gas in salt caverns. Services currently owns
approximately 12% of Market Hub Partners, L.P. The proposed acquisition is part
of Industries' strategy to build a system of assets to serve the natural gas
market. The transaction is expected to close in March or April 1999.

Market Risk Sensitive Instruments and Positions

The primary market risks to which Industries is exposed and in connection
with which Industries uses market risk sensitive instruments are commodity
price risk and interest rate risk.

Industries engages in price risk management activities related to
electricity and natural gas. Price risk arises from fluctuations in energy
commodity prices due to changes in supply and demand. Industries actively
monitors and limits its exposure to commodity price risk. Industries' price
risk management policy allows the use of derivative financial and commodity
instruments to reduce (hedge) exposure to price risk of its supply and related
purchase and sales commitments of energy, as well as anticipated transactions.
As part of this commodity price risk, Industries is exposed to geographic
price differentials due primarily to transportation costs and local supply-
demand factors. Industries may use basis swaps to hedge a portion of this
exposure. For economic reasons or otherwise, Industries does not hedge all of
its basis exposure.

Industries 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. Industries utilizes derivative financial
instruments to reduce the commodity price risk based on modeling techniques to
anticipate these future supply requirements. Industries continues to be
exposed to price risk for the difference between the ultimate supply
requirements and those modeled.

Although the Energy Utilities are subject to commodity price risk as part
of their traditional operations, the current regulatory framework within which
the Energy Utilities operate allows for full collection of fuel and gas costs
in rates. Consequently, there is limited commodity price risk after
consideration of the related rate-making. However, as the utility industry
deregulates, the Energy Utilities will be providing services without the
benefit of the traditional rate-making and will therefore be more exposed to
commodity price risk.

Because the commodities covered by Industries' derivative financial and
commodity instruments are substantially the same commodities that Industries
buys and sells in the physical market, no special correlation studies other
than monitoring the degree of convergence between the derivative and cash
markets are deemed necessary.

Industries' daily net commodity position consists of natural gas
inventories, commodity purchase and sales contracts and derivative financial
and commodity instruments. The fair value of such positions is a summation of

8
<PAGE>

the fair values calculated for each commodity by valuing each net position at
quotes from exchanges and over-the-counter markets and includes location
differentials. Based on Industries' net commodity position at fair value at
December 31, 1998, a 10% adverse movement in electric and natural gas market
prices would have reduced net income by approximately $0.4 million. However,
any such movements in prices are not indicative of actual results and are
subject to change.

Industries utilizes long-term debt as a primary source of capital in its
business. A significant portion of Industries' long-term debt consists of
medium-term notes. In addition, the Utilities utilize longer term fixed price
debt instruments which have been and will be refinanced at lower interest
rates if Industries deems it to be economical. Refer to Consolidated Statement
of Long-term Debt for detailed information related to Industries' long-term
debt outstanding and "Fair Value of Financial Instruments" in Notes to
Consolidated Financial Statements for current market valuation of long-term
debt. Refer to "Summary of Significant Accounting Policies-Hedging Activities"
in Notes to Consolidated Financial Statements for further discussion of
Industries' hedging policies.

Year 2000 Costs

Risks. Year 2000 issues address the ability of electronic processing
equipment to process date sensitive information and recognize the last two
digits of a date as occurring in or after the year 2000. Any failure in one of
Industries' systems may result in material operational and financial risks.
Possible scenarios include a system failure in one of Industries' generating
plants, an operating disruption or delay in transmission or distribution, or
an inability to interconnect with the systems of other utilities. In addition,
while Industries currently anticipates that its own mission-critical systems
will be year 2000 compliant in a timely fashion, it cannot guarantee the
compliance of systems operated by other companies upon which it depends. For
example, the ability of an electric company to provide electricity to its
customers depends upon a regional electric transmission grid, which connects
the systems of neighboring utilities to support the reliability of electric
power within the region. If one company's system is not year 2000 compliant,
then a failure could affect the reliability of all providers within the grid,
including Industries. Similarly, Industries' gas operations depend on natural
gas pipelines that it does not own or control, and any non-compliance by a
company owning or controlling those pipelines may affect Industries' ability
to provide gas to its customers. Failure to achieve year 2000 readiness could
have a material adverse affect on Industries' results of operations, financial
position and cash flows.

State of Readiness. Industries' year 2000 program consists of four phases:
inventory (identifying systems potentially affected by the year 2000),
assessment (testing identified systems), remediations (correcting or replacing
non-compliant systems) and validation (evaluating and testing remediated
systems to confirm compliance). By second quarter 1997, Industries had
completed the inventory and assessment phases for all of its mission-critical
IT systems. Industries also has completed the remediation and validation
phases for four of its six major IT components. The remediation and validation
phases for the remaining two components are expected to be completed within
the next few months, so that Industries expects to conclude the year 2000
program for its mission-critical systems by first quarter 1999. Industries has
completed the inventory and assessment phases for all of its non-IT mission-
critical systems. Industries has scheduled remediation (including replacement)
and validation for its non-IT mission-critical systems throughout 1999.
Industries expects to substantially complete its mission-critical year 2000
efforts by June 30, 1999, and to conclude the year 2000 program in the fourth
quarter 1999.

9
<PAGE>

Reliability Council, Electric Power Research Institute, and the American Gas
Association to discuss and evaluate the potential impact of year 2000 problems
upon the electric grid systems and pipeline networks that interconnect within
each of those industries.

Contingency Plans. Industries currently is in the process of structuring
its contingency plans to address the possibility that any mission-critical
system upon which it depends, including those controlled by outside parties,
will be non-compliant. This includes identifying alternate suppliers and
vendors, conducting staff training and developing communication plans. In
addition, Industries is evaluating both its ability to maintain or restore
service in the event of a power failure or operating disruption or delay, and
its limited ability to mitigate the effects of a network failure by isolating
its own network from the non-compliant segments of the greater network.
Industries expects to complete these contingency plans during the second
quarter of 1999; however, the contingency plans will be under review during
the third and fourth quarters of 1999.

Competition and Regulatory Changes

The regulatory frameworks applicable to the Energy Utilities, at both the
state and federal levels, are in the midst of a period of fundamental change.
These changes have and will continue to impact the operation, structure and
profitability of Industries. At the same time, competition within the electric
and gas industries will create opportunities for Industries' subsidiaries to
compete for new customers and revenues. Industries' management has taken steps
to make the company more competitive and profitable in this changing
environment, including partnering on energy projects with major industrial
customers, converting some of its generating units to allow use of lower cost,
low sulfur coal, providing its gas customers with increased customer choice
for new products and services throughout Northern Indiana's service territory,
and establishing subsidiaries which provide gas and develop new energy-related
products for residential, commercial and industrial customers.

The Electric Industry. At the Federal level, FERC issued Order No. 888-A in
1996 which required all public utilities owning, controlling or operating
transmission lines to file non-discriminatory open-access tariffs and offer
wholesale electricity suppliers and marketers the same transmission service
they provide themselves. In 1997, FERC approved Northern Indiana's open-access
transmission tariff. Although wholesale customers currently represent a small
portion of Northern Indiana's electricity sales, Northern Indiana intends to
continue its efforts to retain and add wholesale customers by offering
competitive rates and also intends to expand the customer base for which it
provides transmission services.

The Gas Industry. At the Federal level, gas industry deregulation began in
the mid 1980s when FERC required interstate pipelines to provide
nondiscriminatory transportation services pursuant to unbundled rates. This
regulatory change permitted large industrial and commercial customers to
purchase their gas supplies either from the Energy Utilities or directly from
competing producers and marketers which would then use the Energy

10
<PAGE>

Utilities' facilities to transport the gas. More recently, the focus of
deregulation in the gas industry has shifted to the states.

At the state level, the Indiana Utility Regulatory (Commission) approved in
1997 Northern Indiana's Alternative Regulatory Plan (ARP) which implemented new
rates and services that included, among other things, unbundling of services for
additional customer classes (primarily residential and commercial users),
negotiated services and prices, a gas cost incentive mechanism and a price
protection program. The gas cost incentive mechanism allows Northern Indiana to
share any cost savings or cost increases with its customers based upon a
comparison of Northern Indiana's actual gas supply portfolio cost to a market-
based benchmark price. Phase I of Northern Indiana's Customer Choice Pilot
Program will end March 31, 1999. This pilot program offered a limited number of
residential and commercial customers within the South Bend metropolitan area the
right to choose alternative gas suppliers. Phase II of Northern Indiana's
Customer Choice Pilot Program will commence April 1, 1999 and continue for a
one-year period. During this phase, Northern Indiana plans to offer customer
choice to a significantly expanded eligible customer base throughout its gas
service territory. The Commission order allows Industries' natural gas marketing
subsidiary to participate as a supplier of choice to Northern Indiana customers.
In addition, as Northern Indiana has allowed residential and commercial
customers to designate alternative gas suppliers, it has also offered new
services to all classes of customers including, but not limited to, price
protection, negotiated sales and services, gas lending and parking, and new
storage services.

Impact of Accounting Standards

Refer to "Summary of Significant Accounting Policies--Impact of Accounting
Standards" in the Notes to Consolidated Financial Statements for information
regarding impact of accounting standards not yet adopted.

Forward Looking Statements

This report contains forward looking statements within the meaning of the
securities laws. Forward looking statements include terms such as "may," "will,"
"expect," "believe," "plan" and other similar terms. Industries cautions that,
while it believes such statements to be based on reasonable assumptions and
makes such statements in good faith, there can be no assurance that the actual
results will not differ materially from such assumptions or that the
expectations set forth in the forward looking statements derived from such
assumptions will be realized. Investors should be aware of important factors
that could have a material impact on future results. These factors include, but
are not limited to, weather, the federal and state regulatory environment, year
2000 issues, the economic climate, regional, commercial, industrial and
residential growth in the service territories served by Industries'
subsidiaries, customers' usage patterns and preferences, the speed and degree to
which competition enters the utility industry, the timing and extent of changes
in commodity prices, changing conditions in the capital and equity markets and
other uncertainties, all of which are difficult to predict, and many of which
are beyond the control of Industries.

11
<PAGE>

NIPSCO INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
(Dollars in thousands, except per
share amounts)
<S> <C> <C> <C>
Operating Revenues:
Gas...................................... $ 637,098 $ 807,239 $ 799,395
Electric................................. 1,429,986 1,186,331 1,022,231
Water.................................... 83,979 60,743 --
Products and Services.................... 781,715 532,228 166,322
----------- ----------- -----------
2,932,778 2,586,541 1,987,948
----------- ----------- -----------
Cost of Sales:
Gas costs................................ 357,939 495,287 483,777
Fuel for electric generation............. 250,649 238,548 233,215
Power purchased.......................... 412,949 205,031 53,751
Products and Services.................... 670,830 436,748 101,240
----------- ----------- -----------
1,692,367 1,375,614 871,983
----------- ----------- -----------
Operating Margin........................... 1,240,411 1,210,927 1,115,965
----------- ----------- -----------
Operating Expenses and Taxes (except
income):
Operation................................ 399,594 390,253 346,059
Maintenance.............................. 74,630 76,552 74,101
Depreciation and amortization............ 256,474 249,804 233,993
Taxes (except income).................... 88,207 83,765 75,504
----------- ----------- -----------
818,905 800,374 729,657
----------- ----------- -----------
Operating Income........................... 421,506 410,553 386,308
----------- ----------- -----------
Other Income (Deductions).................. 10,584 15,768 11,241
----------- ----------- -----------
Interest and Other Charges:
Interest on long-term debt............... 111,420 102,842 84,255
Other interest........................... 12,794 13,047 16,863
Amortization of premium, reacquisition
premium, discount and expense on debt,
net..................................... 4,590 4,718 4,605
Dividend requirements on preferred stocks
of subsidiaries......................... 8,538 8,691 8,712
----------- ----------- -----------
137,342 129,298 114,435
----------- ----------- -----------
Income before income taxes................. 294,748 297,023 283,114
----------- ----------- -----------
Income Taxes............................... 100,862 106,174 106,380
----------- ----------- -----------
Net Income................................. 193,886 190,849 176,734
----------- ----------- -----------
Dividend requirements on preferred shares.. -- -- 119
----------- ----------- -----------
Balance available for common shareholders.. $ 193,886 $ 190,849 $ 176,615
=========== =========== ===========
Average common shares outstanding--basic... 120,778,077 123,849,126 122,381,500
Basic earnings per average common share.... $ 1.60 $ 1.54 $ 1.44
=========== =========== ===========
Diluted earnings per average common share.. $ 1.59 $ 1.53 $ 1.43
=========== =========== ===========
Dividends declared per common share........ $ 0.975 $ 0.915 $ 0.855
=========== =========== ===========
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of this statement.

12
<PAGE>

NIPSCO INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 193,886 $ 190,849 $ 176,734
Adjustments to reconcile net income to
net cash:
Depreciation and amortization......... 256,474 249,804 233,993
Deferred federal and state operating
income taxes, net.................... (21,941) (1,649) 21,126
Deferred investment tax credits, net.. (7,361) (7,376) (7,408)
Advance contract payment.............. 1,900 1,900 (17,100)
Change in certain assets and
liabilities--*
Accounts receivable, net............ (21,137) (37,369) (45,037)
Other receivables................... 75,451 (65,047) (30,778)
Electric production fuel............ (13,565) 7,646 (12,225)
Natural gas in storage.............. (8,204) 3,657 (4,209)
Accounts payable.................... 19,785 (18,567) 81,013
Taxes accrued....................... (9,833) 3,389 17,002
Fuel adjustment clause.............. 8,958 6,470 1,152
Gas cost adjustment clause.......... 44,253 10,223 (98,791)
Accrued employment costs............ (6,678) 12,135 (2,509)
Other accruals...................... (11,641) 11,994 (13,503)
Other, net............................ (16,215) 66,498 5,971
----------- ----------- -----------
Net cash provided by operating
activities....................... 484,132 434,557 305,431
----------- ----------- -----------
Cash flows provided by (used in)
investing activities:
Utility construction expenditures..... (245,825) (218,931) (207,881)
Acquisition of IWC Resources, net of
cash acquired........................ -- (288,932) --
Proceeds from disposition of assets... 12,588 35,993 11,049
Proceeds from settlement of
litigation........................... -- 41,069 --
Other, net............................ (57,638) (66,561) (22,689)
----------- ----------- -----------
Net cash used in investing
activities....................... (290,875) (497,362) (219,521)
----------- ----------- -----------
Cash flows provided by (used in)
financing activities:
Issuance of long-term debt............ 47,380 658,232 78,366
Issuance of short-term debt........... 2,512,640 1,029,508 1,582,210
Net change in commercial paper........ 105,200 (224,645) 191,705
Retirement of long-term debt.......... (95,631) (324,604) (89,792)
Retirement of short-term debt......... (2,420,822) (1,042,224) (1,609,734)
Retirement of preferred shares........ (2,413) (2,408) (37,604)
Issuance of common shares............. 10,356 218,566 5,716
Acquisition of treasury shares........ (203,976) (133,073) (105,498)
Cash dividends paid on common shares.. (116,386) (111,593) (103,190)
Cash dividends paid on preferred
shares............................... -- -- (766)
Other, net............................ 463 (507) 514
----------- ----------- -----------
Net cash provided by (used in)
financing activities............. (163,189) 67,252 (88,073)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 30,068 4,447 (2,163)
Cash and cash equivalents at beginning
of period.............................. 30,780 26,333 28,496
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 60,848 $ 30,780 $ 26,333
=========== =========== ===========
</TABLE>
- --------
*Net of effect from purchase of IWC Resources Corporation.

The accompanying notes to consolidated financial statements are an integral
part of this statement.

13
<PAGE>

NIPSCO INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Assets
Property, Plant and Equipment:
Utility Plant (including construction work in progress
of $197,112 and $188,710, respectively):
Electric.............................................. $ 4,154,060 $ 4,066,568
Gas................................................... 1,447,945 1,395,140
Water................................................. 663,355 603,013
Common................................................ 364,822 351,350
----------- -----------
6,630,182 6,416,071
Less--Accumulated provision for depreciation and
amortization......................................... 2,968,078 2,759,945
----------- -----------
Total utility plant................................... 3,662,104 3,656,126
----------- -----------
Other property, at cost, less accumulated provision for
depreciation.......................................... 86,565 96,028
----------- -----------
Total Property, Plant and Equipment.............. 3,748,669 3,752,154
----------- -----------
Investments:
Investments, at equity................................ 111,340 82,855
Investments, at cost.................................. 41,609 31,771
Other investments..................................... 28,702 24,499
----------- -----------
Total Investments................................ 181,651 139,125
----------- -----------
Current Assets:
Cash and cash equivalents............................. 60,848 30,780
Accounts receivable, less reserve of $8,984 and
$5,887, respectively................................. 261,971 231,580
Other receivables..................................... 31,780 107,231
Fuel adjustment clause................................ -- 2,679
Gas cost adjustment clause............................ 45,738 89,991
Materials and supplies, at average cost............... 62,818 60,085
Electric production fuel, at average cost............. 32,402 18,837
Natural gas in storage................................ 69,640 61,436
Prepayments and other................................. 41,670 28,089
----------- -----------
Total current assets............................. 606,867 630,708
----------- -----------
Other Assets:
Regulatory assets..................................... 209,059 211,513
Intangible assets, less accumulated provision for
amortization......................................... 65,039 68,175
Prepayments and other................................. 175,218 135,358
----------- -----------
Total other assets............................... 449,316 415,046
----------- -----------
$4,986,503 $ 4,937,033
=========== ===========
Capitalization and Liabilities
Capitalization:
Common shareholders' equity........................... $ 1,149,708 $ 1,264,788
Preferred stocks--
Northern Indiana Public Service Company:
Series without mandatory redemption provisions.... 81,116 81,123
Series with mandatory redemption provisions....... 56,435 58,841
Indianapolis Water Company:
Series without mandatory redemption provisions.... 4,497 4,497
Long-term debt, excluding amounts due within one
year............................................... 1,667,965 1,667,925
----------- -----------
Total capitalization............................. 2,959,721 3,077,174
----------- -----------
Current Liabilities:
Current portion of long-term debt..................... 6,790 54,621
Short-term borrowings................................. 411,040 212,639
Accounts payable...................................... 251,399 226,751
Dividends declared on common and preferred stocks..... 31,072 30,784
Customer deposits..................................... 22,199 22,091
Taxes accrued......................................... 44,939 77,573
Interest accrued...................................... 21,202 19,124
Fuel adjustment clause................................ 6,279 --
Accrued employment costs.............................. 52,121 58,799
Other accruals........................................ 39,022 47,930
----------- -----------
Total current liabilities........................ 886,063 750,312
----------- -----------
Other:
Deferred income taxes................................. 667,167 651,815
Deferred investment tax credits, being amortized over
life of related property............................. 98,177 105,538
Deferred credits...................................... 68,046 73,715
Customer advances and contributions in aid of
construction......................................... 118,778 110,145
Accrued liability for postretirement benefits......... 143,870 132,919
Other noncurrent liabilities.......................... 44,681 35,415
----------- -----------
Total other...................................... 1,140,719 1,109,547
----------- -----------
Commitments and Contingencies (see notes)
$4,986,503 $ 4,937,033
=========== ===========
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of this statement.

14
<PAGE>

NIPSCO INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CAPITALIZATION

<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Common shareholders' equity............... $1,149,708 38.8% $1,264,788 41.1%
---------- ----------
Preferred Stocks, which are redeemable
solely at option of issuer:
Northern Indiana Public Service
Company--
Cumulative preferred stock--$100 par
value--
4 1/4% series--209,051 and 209,118
shares outstanding, respectively... 20,905 20,912
4 1/2% series--79,996 shares
outstanding........................ 8,000 8,000
4.22% series--106,198 shares
outstanding........................ 10,620 10,620
4.88% series--100,000 shares
outstanding........................ 10,000 10,000
7.44% series--41,890 shares
outstanding........................ 4,189 4,189
7.50% series--34,842 shares
outstanding........................ 3,484 3,484
Premium on preferred stock.......... 254 254
Cumulative preferred stock--no par
value--
Adjustable Rate Series A (stated
value--$50 per share), 473,285
shares outstanding................. 23,664 23,664
---------- ----------
81,116 2.7% 81,123 2.6%
---------- ----------
Redeemable Preferred Stocks, subject to
mandatory redemption requirements or
whose redemption is outside the control
of issuer:
Northern Indiana Public Service
Company--
Cumulative preferred stock--$100 par
value--
8.85% series--50,000 and 62,500
shares outstanding, respectively... 5,000 6,250
7 3/4% series--33,352 and 38,906
shares outstanding, respectively... 3,335 3,891
8.35% series--51,000 and 57,000
shares outstanding, respectively... 5,100 5,700
Cumulative preferred stock--no par
value--
6.50% series--430,000 shares
outstanding........................ 43,000 43,000
---------- ----------
56,435 1.9% 58,841 1.9%
---------- ----------
Indianapolis Water Company--
Cumulative preferred stock--$100 par
value--
4 1/2% Series
44,966 shares outstanding......... 4,497 0.2% 4,497 0.2%
---------- ----------
Long-term debt............................ 1,667,965 56.4% 1,667,925 54.2%
---------- ----- ---------- -----
Total capitalization.............. $2,959,721 100.0% $3,077,174 100.0%
========== ===== ========== =====
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of this statement.

15
<PAGE>

NIPSCO INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF LONG-TERM DEBT

<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Northern Indiana Public Service Company:
First mortgage bonds--
Series T, 7 1/2% --due April 1, 2002.............. $ 39,000 $ 39,500
Series NN, 7.10% --due July 1, 2017............... 55,000 55,000
----------- -----------
Total........................................... 94,000 94,500
----------- -----------
Pollution control notes and bonds--
Series A note--City of Michigan City--
5.70% due October 1, 2003........................ 16,500 18,000
Series 1988 Bonds--Jasper County--Series A, B and
C
3.05% weighted average at December 31, 1998, due
November 1, 2016................................. 130,000 130,000
Series 1988 Bonds--Jasper County--Series D
3.13% weighted average at December 31, 1998, due
November 1, 2007................................. 24,000 24,000
Series 1994 Bonds--Jasper County--Series A
5.15% at December 31, 1998, due August 1, 2010... 10,000 10,000
Series 1994 Bonds--Jasper County--Series B
5.15% at December 31, 1998, due June 1, 2013..... 18,000 18,000
Series 1994 Bonds--Jasper County--Series C
5.15% at December 31, 1998, due April 1, 2019.... 41,000 41,000
----------- -----------
Total........................................... 239,500 241,000
----------- -----------
Medium-term notes--
Issued at interest rates between 6.10% and 7.69%,
with a weighted average interest rate of 7.00%
and various maturities between March 20, 2000 and
August 4, 2027................................... 748,025 748,025
----------- -----------
Unamortized premium and discount on long-term debt,
net................................................ (3,567) (4,029)
----------- -----------
Total long-term debt of Northern Indiana Public
Service Company................................ 1,077,958 1,079,496
----------- -----------
Indianapolis Water Company:
First mortgage bonds--
Series 5.20%--due May 1, 2001..................... 11,600 11,600
Series 8.00%--due December 15, 2001............... 3,000 3,000
Series 7 7/8%--due March 1, 2019.................. -- 40,000
Series 9.83%--due June 15, 2019................... 5,000 5,000
Series 6.10%--due December 1, 2022................ 5,000 5,000
Series 8.19%--due December 1, 2022................ 10,000 10,000
Series 5.85%--due September 1, 2025............... 18,000 18,000
Series 5.05%--due July 15, 2028................... 40,000 --
----------- -----------
Total long-term debt of Indianapolis Water
Company........................................ 92,600 92,600
----------- -----------
IWC Resources Corporation:
Senior Note Payable--6.31% due March 15, 2001....... 14,000 14,000
Variable Bank Loan--6.62% due August 7, 2003........ 5,600 5,600
----------- -----------
Total long-term debt of IWC Resources
Corporation.................................... 19,600 19,600
----------- -----------
NIPSCO Capital Markets, Inc.:
Subordinated Debentures--Series A, 7 3/4%, due
March 31, 2026..................................... 75,000 75,000
Senior Notes Payable--6.78%, due December 1, 2027... 75,000 75,000
Medium-term notes--
Issued at interest rates between 7.38% and 7.99%,
with a weighted average interest rate of 7.66%
and various maturities between April 1, 2004 and
May 5, 2027...................................... 300,000 300,000
----------- -----------
Total long-term debt of NIPSCO Capital Markets,
Inc............................................ 450,000 450,000
----------- -----------
NIPSCO Development Company, Inc.:
Lake Erie Land Company--Notes Payable--9.00%--due
July 7, 2004....................................... 2,533 2,637
NDC Douglas Properties, Inc.--Notes Payable--
Interest rates between 6.72% and 8.38% with a
weighted average interest rate of 7.87% and
maturities through January 1, 2008............... 25,274 23,592
----------- -----------
Total long-term debt of NIPSCO Development
Company, Inc................................... 27,807 26,229
----------- -----------
Total long-term debt, excluding amounts due
within one year................................ $ 1,667,965 $ 1,667,925
=========== ===========
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of this statement.

16
<PAGE>

NIPSCO INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Additional Accum.
Common Treasury Paid-In Retained Other Comp. Comp. Common
Shares Shares Capital Earnings Other Income Total Income Shares
-------- --------- ---------- -------- ------- ----------- ---------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................. $870,930 $(293,223) $32,210 $518,837 $(6,278) $ (261) $1,122,215 147,784,218
-------- --------- ------- -------- ------- ------- ---------- -----------
Comprehensive Income
Net income.......... 176,734 176,734 176,734
Other comprehensive
income, net of tax:
Gain/loss on
available for sale
securities:
Unrealized gain
(net of income
tax of $691).... 1,079 1,079 1,079
Realized........
Gain (loss) on
foreign currency
translation:
Unrealized...... 1,790 1,790 1,790
--------
Realized........
Total Comprehensive
Income............... $179,603
========
Dividends:
Preferred shares.... (119) (119)
Common shares....... (103,981) (103,981)
Treasury shares
acquired............. (105,498) -- (105,498)
Issued:
Employee stock
purchase plan....... 329 454 783
Long-term incentive
plan................ 5,397 186 (572) 5,011
Amortization of
unearned
compensation......... 2,570 2,570
Other................ 18 (101) (83)
-------- --------- ------- -------- ------- ------- ---------- -----------
Balance, December 31,
1996................. $870,930 $(392,995) $32,868 $591,370 $(4,280) $ 2,608 $1,100,501 147,784,218
======== ========= ======= ======== ======= ======= ========== ===========
Comprehensive Income
Net income.......... 190,849 190,849 $190,849
Other comprehensive
income, net of tax:
Gain/loss on
available for sale
securities:
Unrealized gain
(net of income
tax of $1,033).. 1,689 1,689 1,689
Realized........
Gain (loss) on
foreign currency
translation:
Unrealized...... (1,430) (1,430) (1,430)
--------
Realized........
Total Comprehensive
Income............... $191,108
========
Dividends:
Preferred shares....
Common shares....... (114,303) (114,303)
Treasury shares
acquired............. (133,073) 1 (133,072)
Issued:
Employee stock
purchase plan....... 273 424 697
Long-term incentive
plan................ 5,329 116 (443) 5,002
IWC Resources
Corporation
acquisition......... 152,405 55,007 207,412
Acquisition of
minority interest... 4,118 1,351 5,469
Amortization of
unearned
compensation......... 2,099 2,099
Other................ 1 (126) (125)
-------- --------- ------- -------- ------- ------- ---------- -----------
Balance, December 31,
1997................. $870,930 $(363,943) $89,768 $667,790 $(2,624) $ 2,867 $1,264,788 147,784,218
======== ========= ======= ======== ======= ======= ========== ===========
<CAPTION>
Treasury
Shares
------------
<S> <C>
Balance, January 1,
1996................. (23,025,026)
------------
Comprehensive Income
Net income..........
Other comprehensive
income, net of tax:
Gain/loss on
available for sale
securities:
Unrealized gain
(net of income
tax of $691)....
Realized........
Gain (loss) on
foreign currency
translation:
Unrealized......
Realized........
Total Comprehensive
Income...............
Dividends:
Preferred shares....
Common shares.......
Treasury shares
acquired............. (5,587,208)
Issued:
Employee stock
purchase plan....... 41,338
Long-term incentive
plan................ 398,000
Amortization of
unearned
compensation.........
Other................
------------
Balance, December 31,
1996................. (28,172,896)
============
Comprehensive Income
Net income..........
Other comprehensive
income, net of tax:
Gain/loss on
available for sale
securities:
Unrealized gain
(net of income
tax of $1,033)..
Realized........
Gain (loss) on
foreign currency
translation:
Unrealized......
Realized........
Total Comprehensive
Income...............
Dividends:
Preferred shares....
Common shares....... (6,536,928)
Treasury shares
acquired.............
Issued:
Employee stock
purchase plan....... 34,376
Long-term incentive
plan................ 353,066
IWC Resources
Corporation
acquisition......... 10,580,764
Acquisition of
minority interest... 270,064
Amortization of
unearned
compensation.........
Other................
------------
Balance, December 31,
1997................. (23,471,554)
============
</TABLE>

17
<PAGE>

NIPSCO INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY

18
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Holding Company Structure

NIPSCO Industries, Inc. (Industries) is an energy/utility-based holding
company providing electric energy, natural gas and water to the public through
its seven wholly-owned regulated subsidiaries (Utilities): Northern Indiana
Public Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo
Gas); Northern Indiana Fuel and Light Company, Inc. (NIFL); Crossroads Pipeline
Company (Crossroads); Indianapolis Water Company (IWC); Harbour Water
Corporation (Harbour) and Liberty Water Company (Liberty). Industries' regulated
gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL and
Crossroads) are referred to as "Energy Utilities"; and its regulated water
subsidiaries (IWC, Harbour and Liberty) are referred to as "Water Utilities."

Industries also provides non-regulated energy/utility-related services
including gas marketing, power generation, gas transmission, supply and storage,
installation, repair and maintenance of underground pipelines, utility line
locating and marking, and related products targeted at customer segments
principally through the following wholly-owned subsidiaries: NIPSCO Development
Company, Inc. (Development), NI Energy Services, Inc. (Services), Primary
Energy, Inc. (Primary), Miller Pipeline Corporation (Miller), and SM&P Utility
Resources, Inc. (SM&P). These non-regulated subsidiaries are referred to
collectively as "Products and Services." NIPSCO Capital Markets, Inc. (Capital
Markets) handles financing requirements for certain subsidiaries of Industries
other than Northern Indiana.

On March 25, 1997 Industries acquired IWC Resources Corporation (IWCR).
Industries' results of operations include twelve months of operating results
from IWCR for the period ended December 31, 1998 and nine months for the period
ended December 31, 1997.

In February 1999, Industries completed its acquisition of Bay State in a
stock-for-stock transaction. Refer to Purchase of Bay State Gas Company below
for a more detailed discussion of the acquisition.

Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of majority-owned
subsidiaries of Industries after the elimination of significant intercompany
accounts and transactions. Investments for which Industries has at least a 20%
interest and certain joint ventures are accounted for under the equity method.
Investments with less than a 20% interest are accounted for under the cost
method. Certain reclassifications were made to conform the prior years'
financial statements to the current presentation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of 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.

Operating Revenues

Utility revenues are recorded based on estimated service rendered, but are
billed to customers monthly on a cycle basis. Electric and gas marketing
revenues are recognized as the related commodity is delivered to customers.
Construction revenues are recognized on the percentage of completion method
whereby revenues are recognized in proportion to costs incurred over the life of
each project. Industries records provisions for losses on construction
contracts, if any, in the period in which such losses become probable.

19
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Depreciation and Maintenance

The Utilities provide depreciation on a straight-line method over the
remaining service lives of the electric, gas, water and common properties. The
approximate weighted average remaining lives for major components of electric,
gas, and water plant are as follows:

<TABLE>
<S> <C>
Electric
Electric generation plant...................................... 24 years
Transmission plant............................................. 26 years
Distribution plant............................................. 25 years
Other electric plant........................................... 24 years
Gas:
Gas storage plant.............................................. 18 years
Transmission plant............................................. 34 years
Distribution plant............................................. 27 years
Other gas plant................................................ 24 years
Water:
Water source and treatment plant............................... 34 years
Distribution plant............................................. 68 years
Other water plant.............................................. 13 years
</TABLE>

The depreciation provision for electric utility plant, as a percentage of
the original cost, was 3.7% for 1998, 3.6% for 1997 and 3.7% for 1996.

The depreciation provision for gas utility plant, as a percentage of the
original cost, was 5.1% for 1998 and 1997, and 5.0% for 1996.

The depreciation provision for water utility plant, as a percentage of the
original cost, was 2.1% for 1998 and 1997.

The Utilities follow the practice of charging maintenance and repairs,
including the cost of removal of minor items of property, to maintenance
expense accounts, except for repairs of transportation and service equipment
which are charged to clearing accounts and redistributed to operating expense
and other accounts. When property which represents a retired unit is replaced
or removed, the cost of such property is credited to utility plant, and such
cost, together with the cost of removal less salvage, is charged to the
accumulated provision for depreciation.

Amortization of Software Costs

Industries has capitalized software relating to various technology
functions. At the date of installation, Industries estimates that the specific
software will have a useful life between five and ten years. The Federal
Energy Regulatory Commission (FERC) prescribes certain amortization periods,
and Industries' management has determined that, on average, these are
reasonable useful life estimates for the portfolio of capitalized software.
The Energy Utilities include these amortization estimates, based on useful
life, in their quarterly filings with the Indiana Utility Regulatory
Commission (Commission).

Plant Acquisition Adjustments

Utility plant includes amounts representing the excess of purchase price
over underlying book values associated with the acquisitions of Kokomo Gas,
NIFL, IWC and Harbour. These amounts are $185.4 million and $197.7 million at
December 31, 1998 and December 31, 1997, respectively, and are being amortized
over a forty-year period from the respective dates of acquisition.

20
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Intangible Assets

The excess of cost over the fair value of the net assets of non-utility
subsidiaries acquired is reported as goodwill and is being amortized on a
straight-line basis over a weighted average period of 34 years. Other
intangible assets approximating $7.7 million are being amortized over a period
of eight years. Industries assesses the recoverability of its intangible
assets on a periodic basis to confirm that expected future cash flows will be
sufficient to support the recorded intangible assets. Accumulated amortization
of intangibles at December 31, 1998 and December 31, 1997 was approximately
$4.6 million and $1.1 million, respectively.

Coal Reserves

Northern Indiana has a long-term mining contract to mine its coal reserves
through the year 2001. The costs of these reserves are being recovered through
the rate-making process as such coal reserves are used to produce electricity.

Power Purchased

Power purchases and net interchange power with other electric utilities
under interconnection agreements and wholesale power purchases are included in
Cost of Sales under the caption "Power purchased."

Accounts Receivable

At December 31, 1998, Northern Indiana had sold $100 million of its
accounts receivable under a sales agreement which expires May 31, 2002.

Customer Advances and Contributions in Aid of Construction

IWC allows developers to install and provide for the installation of water
main extensions, which are to be transferred to IWC upon completion. The cost
of the main extensions and the amount of any funds advanced for the cost of
water mains installed are included in customer advances for construction and
are generally refundable to the customer over a period of ten years. Advances
not refunded within ten years are permanently transferred to contributions in
aid of construction.

Comprehensive Income

Industries adopted SFAS No. 130, "Reporting Comprehensive Income" effective
January 1, 1998. The objective of the statement is to report comprehensive
income which is a measure of all changes in equity of an enterprise which
result from transactions or other economic events during the period other than
transactions with shareholders. This information is reported in Industries'
Consolidated Statement of Common Shareholders' Equity. Industries' components
of accumulated other comprehensive income includes unrealized gains (losses)
on available for sale securities and unrealized gains (losses) on foreign
currency translation adjustments. The accumulated amounts for these
components, respectively, were $3.6 million and $(2.5) million as of December
31, 1998; $4.4 million and $(1.6) million as of December 31, 1997; $2.7
million and $(0.1) million as of December 31, 1996 and $1.6 million and $(1.9)
million as of January 1, 1996.

Statement of Cash Flows

For purposes of the Consolidated Statement of Cash Flows, Industries
considers temporary cash investments with an original maturity of three months
or less to be cash equivalents.

21
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Cash paid during the periods reported for income taxes and interest was as
follows:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Income taxes................................... $127,713 $116,849 $75,795
Interest, net of amounts capitalized........... 118,079 102,361 87,281
</TABLE>

Fuel Adjustment Clause

All metered electric rates contain a provision for adjustment in charges
for electric energy 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 Commission 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 cost in a given three-month period will be included in a
future filing. Northern Indiana records any under-recovery or over-recovery as
a current asset or current 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 Commission and remains in effect for a three-month
period.

Gas Cost Adjustment Clause

All metered gas sales rates contain an adjustment factor, which reflects
the increases and decreases in the cost of purchased gas, contracted gas
storage and storage transportation charges. The gas cost adjustment factor for
Northern Indiana is subject to a quarterly hearing by the Commission and
remains in effect for a three-month period. The gas cost adjustment factors
for Kokomo Gas and NIFL are subject to semi-annual hearings by the Commission
and remain in effect for a six-month period. If the statutory requirement
relating to the level of return is satisfied, any under-recovery or over-
recovery caused by variances between estimated and actual cost in a given
three-month or six-month period will be included in a future filing. The
Energy Utilities record any under-recovery or over-recovery as a current asset
or current liability until such time it is billed or refunded to customers.
Northern Indiana's gas cost adjustment factor includes a gas cost incentive
mechanism (GCIM) which allows Northern Indiana to share any cost savings or
cost increases with customers based on a comparison of Northern Indiana's
actual gas supply portfolio cost to a market-based benchmark price. See FERC
Order No. 636 for a discussion of gas transition cost charges.

Natural Gas in Storage

Northern Indiana's natural gas in storage is valued using the last-in,
first-out (LIFO) inventory methodology. Based on the average cost of gas
purchased in December 1998 and 1997 the estimated replacement cost of gas in
storage (current and non-current) at December 31, 1998 and 1997 exceeded the
stated LIFO cost by approximately $34 million and $42 million, respectively.
Certain other subsidiaries of Industries have natural gas in storage valued at
average cost.

Hedging Activities

Industries utilizes a variety of commodity-based derivative financial
instruments to reduce the price risk inherent in its natural gas and electric
power marketing activities. The gains and losses on these derivative financial
instruments are deferred (Other Current Assets or Other Current Liabilities)
pursuant to an identified risk reduction strategy. Such deferrals are
recognized in income concurrent with the disposition of the underlying
physical commodity. In certain circumstances, a derivative financial
instrument will serve to hedge the acquisition cost of gas injected into
storage. In this situation, the gain or loss on the derivative financial
instrument is deferred as part of the cost basis of gas in storage and
recognized upon the ultimate disposition of the gas. If a derivative financial
instrument contract is terminated early because it is probable that a
transaction or anticipated transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings. If a derivative financial
instrument contract is terminated early for other economic reasons, any gain
or loss as of the termination date is deferred and ultimately recognized in
earnings when the associated transaction or anticipated transaction affects
earnings.

22
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Industries uses commodity futures contracts, options and swaps to hedge the
impact of natural gas price fluctuations related to its business activities,
including price risk related to the physical location of the natural gas
(basis risk). As of December 31, 1998, Industries had open derivative
financial instruments representing hedges of natural gas sales of 31.5 billion
cubic feet (Bcf), and natural gas purchases of 7.2 Bcf. The net deferred loss
on these derivative financial instruments as of December 31, 1998 was not
material. Industries utilizes options to hedge price risk associated with a
portion of its fixed price purchase and sale commitments related to
electricity.

Impact of Accounting Standards

During June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement standardizes
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, by requiring that a company recognize
those items as assets or liabilities in the balance sheet and measure them at
fair value. This Statement generally provides for matching of the timing of
gain or loss recognition of derivatives instruments designated as a hedge with
the recognition of changes in the fair value of the hedged asset or liability
through earnings. This Statement also provides that the effective portion of a
hedging instrument's gain or loss on a forecasted transaction be initially
reported in other comprehensive income and subsequently reclassified into
earnings when the hedged forecasted transaction affects earnings. Industries
expects to adopt this Statement on January 1, 2000, and is currently assessing
the impact of adoption on its financial position and results of operations.

In December 1998, the Emerging Issues Task Force reached consensus on Issue
No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities" (EITF Issue 98-10). EITF Issue 98-10 requires energy
trading contracts to be recorded at fair value on the balance sheet, with the
changes in fair value included in earnings. Industries adopted EITF Issue 98-
10 on January 1, 1999 and the adoption did not have a significant impact on
its financial position or results of operations.

In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance for the capitalization of certain costs related to computer software
developed or obtained for internal use. Industries adopted SOP 98-1 on January
1, 1999 and the adoption did not have a significant impact on its financial
position or results of operations.

Regulatory Assets

The Utilities' operations are subject to the regulation of the Commission
and, in the case of the Energy Utilities, the FERC. Accordingly, the
Utilities' accounting policies are subject to the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." The Utilities
monitor changes in market and regulatory conditions and the resulting impact
of such changes in order to continue to apply the provisions of SFAS No. 71 to
some or all of their operations. As of December 31, 1998 and December 31,
1997, the regulatory assets identified below represent probable future revenue
to the Utilities associated with certain incurred costs as these costs are
recovered through the rate-making process. If a portion of the Utilities'
operations becomes no longer subject to the provisions of SFAS No. 71, a
write-off of certain regulatory assets might be required, unless

23
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

some form of transition cost recovery is established by the appropriate
regulatory body which would meet the requirements under generally accepted
accounting principles for continued accounting as regulatory assets during
such recovery period. Regulatory assets were comprised of the following items:

<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Unamortized reacquisition premium on debt (See
Long-Term Debt note).......................... $ 43,233 $ 46,748
Unamortized R. M. Schahfer Unit 17 and Unit 18
carrying charges and deferred depreciation.... 62,329 66,546
Bailly scrubber carrying charges and deferred
depreciation.................................. 8,945 9,880
Deferral of SFAS No. 106 expense not recovered
(See Postretirement Benefits note)............ 81,339 87,653
FERC Order No. 636 transition costs (See FERC
Order No. 636 note)........................... 22,093 28,744
Regulatory income tax asset, net............... 18,793 6,941
Other.......................................... 4,936 4,261
-------- --------
241,668 250,773
-------- --------
Less: Current portion of regulatory assets..... 32,609 39,260
-------- --------
$209,059 $211,513
======== ========
</TABLE>

Carrying Charges and Deferred Depreciation

Upon completion of R. M. Schahfer Units 17 and 18, Northern Indiana
capitalized the carrying charges and deferred depreciation in accordance with
orders of the Commission until the cost of each unit was allowed in rates.
Such carrying charges and deferred depreciation are being amortized over the
remaining 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 Commission.
The accumulated balance of the deferred costs and related carrying charges is
being amortized over the remaining life of the scrubber service agreement.

Allowance for Funds Used During Construction

Allowance for funds used during construction (AFUDC) is charged to
construction work in progress during the period of construction and represents
the net cost of borrowed funds used for construction purposes and a reasonable
rate upon other (equity) funds. Under established regulatory rate practices,
after the construction project is placed in service, the Utilities are permitted
to include in the rates charged for utility services (a) a fair return on and
(b) depreciation of such AFUDC included in plant in service.

At January 1, 1996, a pretax rate of 5.5% for all construction was being
used; effective January 1, 1997, the rate remained at 5.5%; and effective
January 1, 1998, the rate increased to 5.75%.

Foreign Currency Translation

Translation gains or losses are based upon the end-of-period exchange rate
and are recorded as a separate component of other comprehensive income
reflected in the Consolidated Statement of Shareholders' Equity.

24
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Investments In Real Estate

Development invests in a series of affordable housing projects within the
Utilities' service territory. These investments include certain tax benefits,
including low-income housing tax credits and tax deductions for operating
losses of the housing projects. Development accounts for these investments
using the equity method. Investments, at equity, include $34.0 million and
$30.1 million relating to affordable housing projects at December 31, 1998 and
December 31, 1997, respectively.

Income Taxes

Deferred income taxes are recognized as costs in the rate-making process by
the commissions having jurisdiction over the rates charged by the Utilities.
Deferred income taxes are provided as a result of provisions in the income tax
law that either require or permit certain items to be reported on the income
tax return in a different period than they are reported in the financial
statements. These taxes are reversed by a debit or credit to deferred income
tax expense as the temporary differences reverse. Investment tax credits have
been deferred and are being amortized to income over the life of the related
property.

Purchase of IWC Resources Corporation

Purchase of Bay State Gas Company

In February 1999, Industries completed its acquisition of Bay State in a
stock-for-stock transaction valued at $40 per Bay State share. The transaction
is valued at approximately $551 million. Bay State shareholders will have the
option of taking up to 50 percent of the total purchase price in cash. Bay
State, one of the largest natural gas utilities in New England, provides natural
gas distribution services to more than 300,000 customers in Massachusetts, New
Hampshire and Maine. The combined company will be the 10th largest natural gas
distribution company in the nation, servicing more than 1 million gas customers.

NESI Energy Marketing Canada Ltd. Litigation

On October 31, 1996, Services' wholly-owned subsidiary NIPSCO Energy
Services Canada Ltd. (NESI Canada) acquired 70% of the outstanding shares of
Chandler Energy Inc., a gas marketing and trading company located in Calgary,
Alberta, and subsequently renamed it NESI Energy Marketing Canada Ltd. (NEMC).
Between November 1 and November 27, 1996, gas prices in the Calgary market
increased dramatically. As a result, NEMC was selling gas, pursuant to
contracts entered into prior to the acquisition date, at prices substantially
below its costs to acquire such gas. On November 27, 1996, NEMC ceased doing
business and sought protection from its creditors under the Companies'
Creditors Arrangement Act, a Canadian corporate reorganization statute. NEMC
was declared bankrupt as of December 12, 1996.

25
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Certain creditors of NEMC have filed claims in the Canadian courts against
Industries, Services, Capital Markets and NESI Canada, alleging certain
misrepresentations relating to NEMC's financial condition and claiming
damages. Industries and its affiliates intend to vigorously defend against
such claims and any other claims seeking to assert that any party other than
NEMC is responsible for NEMC's liabilities. Industries has fully reserved its
investment in NEMC. Management believes that any additional loss relating to
NEMC would not be material to the financial position or results of operations
of Industries.

FERC Order No. 636

Since December 1993, the Energy Utilities have paid approximately $140.6
million of interstate pipeline transition costs to pipeline suppliers to
reflect the impact of FERC Order No. 636. The Energy Utilities expect that
additional transition costs will not be significant. The Commission has
approved the recovery of these FERC-allowed transition costs on a volumetric
basis from sales and transportation customers. Regulatory assets, in amounts
corresponding to the costs recorded but not yet collected, have been recorded
to reflect the ultimate recovery of these costs.

Environmental Matters

General

Superfund

Because Industries is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
at several waste disposal sites, as well as at former manufactured-gas plant
sites which it, or its corporate predecessors, own or owned or operated, it
may be required to share in the cost of clean up of such sites. Industries
instituted a program to investigate former manufactured-gas plant sites where
it is the current or former owner which investigation has identified twenty-
eight of these sites. Initial sampling has been conducted at twenty sites.
Follow-up investigations have been conducted at thirteen sites and remedial
measures have been selected at seven sites. Industries intends to continue to
evaluate its facilities and properties with respect to environmental laws and
regulations and take any required corrective action.

In an effort to recover a portion of the remedial costs to be incurred at
the manufactured gas plants, Industries approached various companies that
provided insurance coverage which Industries believed covered costs related to
actions taken and to be taken at former manufactured-gas plant sites.
Industries has filed claims in Indiana state court against various insurance
companies, seeking coverage for costs associated with several manufactured-gas
plant sites and damages for alleged misconduct by some of the insurance
companies. Industries has received cash settlements from several insurance
companies. Additionally, Industries has settled other actions against other
companies relating to cost sharing and management of the investigation and
remediation of several former manufactured-gas plant sites at which Industries
and such companies or their predecessors were operators or owners.

26
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Clean Air Act

The Clean Air Act Amendments of 1990 (CAAA) imposed limits to control acid
rain on the emission of sulfur dioxide and nitrogen oxides (NOx) which become
fully effective in 2000. All of Northern Indiana's facilities are already in
compliance with the sulfur dioxide limits. Northern Indiana has already taken
most of the steps necessary to meet the nitrogen oxide limits.

Nitrogen Oxides

During 1998, the EPA issued a final rulemaking, the NOx State
Implementation Plan (SIP) call, requiring certain states, including Indiana,
to reduce NOx levels from industrial and utility boilers to lower regional
transport of ozone under the non-attainment provisions of the CAAA. According
to the rule, the State of Indiana has until September 1999 to issue
regulations implementing the control program. The State of Indiana, as well as
some other states, filed a legal challenge in December 1998 to the EPA NOx SIP
call rule. Lawsuits have also been filed against the rule by various groups,
including industry, labor, cities and towns and chambers of commerce.
Industries will participate in the legal challenge as a member of a utility
industry group. Any resulting NOx emission limitations could be more
restrictive than those imposed on electric utilities under the Acid Rain NOx
reduction program described above. Industries is evaluating the EPA's final
rule and any potential requirements that could result from the final rule as
implemented by the State of Indiana. Industries believes that the costs
relating to compliance with the new standards may be substantial, but such
costs are dependent upon the outcome of the current litigation and the
ultimate control program agreed to by the targeted states and the EPA.
Industries will continue to closely monitor developments in this area.

Carbon Dioxide

Initiatives are being discussed both in the United States and worldwide to
reduce so-called "greenhouse gases" such as carbon dioxide and other by-
products of burning fossil fuels. Reduction of such emissions could result in
significant capital outlays or operating expenses to Industries.

27
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Clean Water Act and Related Matters

Industries' wastewater and water operations are subject to pollution
control and water quality control regulations, including those issued by the
EPA and the State of Indiana.

Under the Federal Clean Water Act and Indiana's regulations, Industries
must obtain National Discharge Elimination System (NPDES) permits for water
discharges from various facilities, including electric generating and water
treatment stations. These facilities either have permits for their water
discharge or they have applied for a permit renewal of any expiring permits.
These permits continue in effect pending review of the current applications.

Income Taxes

Industries uses the liability method of accounting for income taxes under
which deferred income taxes are recognized, at currently enacted income tax
rates, to reflect the tax effect of temporary differences between the
financial statement and tax bases of assets and liabilities.

To the extent certain deferred income taxes of the Utilities are
recoverable or payable through future rates, regulatory assets and liabilities
have been established. Regulatory assets are primarily attributable to
undepreciated AFUDC-equity and the cumulative net amount of other income tax
timing differences for which deferred taxes had not been provided in the past,
when regulators did not recognize such taxes as costs in the rate-making
process. Regulatory liabilities are primarily attributable to the Utilities'
obligation to credit to ratepayers deferred income taxes provided at rates
higher than the current federal income tax rate currently being credited to
ratepayers using the average rate assumption method and unamortized deferred
investment tax credits.

28
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The components of the net deferred income tax liability at December 31,
1998 and 1997, are as follows:

<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax liabilities--
Accelerated depreciation and other property
differences....................................... $818,748 $779,223
AFUDC-equity....................................... 33,029 35,282
Adjustment clauses................................. 14,965 35,253
Other regulatory assets............................ 29,739 31,862
Reacquisition premium on debt...................... 17,311 18,335
Deferred tax assets--
Deferred investment tax credits.................... (37,236) (40,017)
Removal costs...................................... (157,728) (144,111)
Other postretirement/postemployment benefits....... (51,754) (45,298)
Other, net......................................... (7,783) (3,069)
-------- --------
659,291 667,460
-------- --------
Less: Deferred income taxes related to current assets
and liabilities..................................... (7,876) 15,645
-------- --------
Deferred income taxes--noncurrent.................... $667,167 $651,815
======== ========
</TABLE>

Federal and state income taxes as set forth in the Consolidated Statement
of Income are comprised of the following:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current income taxes--
Federal................................... $113,680 $ 98,126 $ 79,938
State..................................... 16,484 17,073 12,724
-------- -------- --------
130,164 115,199 92,662
-------- -------- --------
Deferred income taxes, net--
Federal................................... (20,426) (1,772) 19,282
State..................................... (1,515) 123 1,844
-------- -------- --------
(21,941) (1,649) 21,126
-------- -------- --------
Deferred investment tax credits, net........ (7,361) (7,376) (7,408)
-------- -------- --------
Total income taxes........................ $100,862 $106,174 $106,380
======== ======== ========
</TABLE>

29
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A reconciliation of total income tax expense to an amount computed by
applying the statutory federal income tax rate to pretax income is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net income................................. $193,886 $190,849 $176,734
Add--Income taxes.......................... 100,862 106,174 106,380
Dividend requirements on preferred stocks
of subsidiaries........................... 8,538 8,691 8,712
-------- -------- --------
Income before preferred dividend
requirements of subsidiaries and income
taxes..................................... $303,286 $305,714 $291,826
======== ======== ========
Amount derived by multiplying pretax income
by statutory rate......................... $106,150 $107,000 $102,139
Reconciling items multiplied by the
statutory rate:
Book depreciation over related tax
depreciation............................ 3,992 4,072 4,621
Amortization of deferred investment tax
credits................................. (7,361) (7,376) (7,408)
State income taxes, net of federal income
tax benefit............................. 9,200 11,220 10,115
Reversal of deferred taxes provided at
rates in excess of the current federal
income tax rate......................... (4,384) (6,151) (6,644)
Low-income housing credits............... (3,840) (3,056) (2,303)
Nondeductible amounts related to
amortization of intangible assets and
plant acquisition adjustments........... 2,516 1,640 385
Other, net................................. (5,411) (1,175) 5,475
-------- -------- --------
Total income taxes..................... $100,862 $106,174 $106,380
======== ======== ========
</TABLE>

Pension Plans

Industries and its subsidiaries have four noncontributory, defined benefit
retirement plans covering the majority of their employees. Benefits under the
plans reflect the employees' compensation, years of service and age at
retirement.

The change in the benefit obligation for 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Benefit obligation at beginning of year (January
1,)................................................ $875,756 $743,634
Service cost........................................ 17,093 14,714
Interest cost....................................... 60,686 57,938
Plan amendments..................................... 14,655 25,096
Actuarial loss...................................... 38,773 73,768
Acquisition of IWCR................................. -- 15,772
Benefits paid....................................... (57,924) (55,166)
-------- --------
Benefit obligation at end of the year (December
31,)............................................... $949,039 $875,756
======== ========
</TABLE>

30
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The change in the fair value of the plans' assets for the years 1998 and
1997 is as follows:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Fair value of plan assets at beginning of year
(January 1,)....................................... $924,857 $790,978
Actual return on plan assets........................ 85,254 126,695
Employer contributions.............................. 34,843 46,440
Acquisition of IWCR................................. -- 15,910
Benefits paid....................................... (57,924) (55,166)
-------- --------
Plan assets at fair value at end of the year
(December 31,)..................................... $987,030 $924,857
======== ========
</TABLE>

The plans' assets are invested primarily in common stocks, bonds and notes.

The plans' funded status as of December 31, 1998 and December 31, 1997 is
as follows:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Plan assets in excess of benefit obligation........... $ 37,991 $ 49,101
Unrecognized net actuarial loss....................... (10,938) (46,959)
Unrecognized prior service cost....................... 57,193 47,114
Unrecognized transition amount........................ 26,813 32,107
-------- --------
Prepaid pension costs................................. $111,059 $ 81,363
======== ========
</TABLE>

The benefit obligation is the present value of future pension benefit
payments and is based on a plan benefit formula which considers expected
future salary increases. Discount rates of 7.00% and rates of increase in
compensation levels of 4.5% were used to determine the benefit obligations at
December 31, 1998 and 1997.

The long-term portion of prepaid pension cost amounts for 1998 and 1997 are
included in "Prepayments and other" in the Consolidated Balance Sheet.

The following items are the components of provisions for pensions for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Service costs............................... $ 17,092 $ 14,438 $ 16,300
Interest costs.............................. 60,686 57,645 53,477
Expected return on plan assets.............. (82,671) (72,253) (63,551)
Amortization of transition obligation....... 5,294 5,326 5,422
Amortization of prior service costs......... 4,746 3,501 2,604
-------- -------- --------
$ 5,147 $ 8,657 $ 14,252
======== ======== ========
</TABLE>

Assumptions used in the valuation and determination of 1998, 1997 and 1996
pension expense were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Discount rate........................................... 7.00% 7.75% 7.25%
Rate of increase in compensation levels................. 4.50% 5.50% 5.50%
Expected long-term rate of return on assets............. 9.00% 9.00% 9.00%
</TABLE>

IWCR participates in several industry-wide, multi-employer pension plans
for certain of its union employees at Miller. These plans provide for monthly
benefits based on length of service. Specified amounts per compensated hour
for each employee are contributed to the trustees of these plans.
Contributions of $2.0 million and $1.7 million were made to these plans for
the year ended December 31, 1998 and 1997 respectively. The relative position
of each employer participating in these plans with respect to the actuarial
present value of accumulated plan benefits and net assets available for
benefits is not available.

31
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Postretirement Benefits

Industries provides certain health care and life insurance benefits for
retired employees. The majority of Industries' employees may become eligible
for these benefits if they reach retirement age while working for Industries.
The expected cost of such benefits is accrued during the employees' years of
service.

Northern Indiana's rate-making had historically included the cost of
providing these benefits based on the related insurance premiums. On December
30, 1992, the Commission authorized the accrual method of accounting for
postretirement benefits for rate-making purposes consistent with SFAS No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions," and
authorized the deferral of the differences between the net periodic
postretirement benefit costs and the insurance premiums paid for such benefits
as a regulatory asset. On June 11, 1997, the Commission issued an order
approving the inclusion of accrual-based postretirement benefit costs in the
rate-making process to be effective February 1, 1997 for electric rates and
March 1, 1997 for gas rates. These costs include an amortization of the
existing regulatory asset consistent with the remaining amortization period
for the transition obligation. Northern Indiana discontinued its cost deferral
and began amortizing its regulatory asset concurrent with these dates.

IWC's current rates include postretirement benefit costs on an accrual
basis, including amortization of the regulatory asset that arose prior to
inclusion of these costs in rates. IWC currently remits to a grantor trust
amounts collected in rates.

The following table sets forth the change in the plans' accumulated
postretirement benefit obligation (APBO) as of December 31, 1998 and 1997:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation at
beginning of year (January 1,)...................... $223,908 $200,790
Service cost......................................... 5,249 5,034
Interest cost........................................ 15,793 16,215
Plan amendments...................................... (283) 4,015
Actuarial (gain) loss................................ 8,453 (10,242)
Acquisition of IWCR.................................. -- 18,505
Benefits paid........................................ (12,519) (10,409)
-------- --------
Accumulated postretirement benefit obligation at end
of the year (December 31,).......................... $240,601 $223,908
======== ========
</TABLE>

The change in the fair value of the plan assets for the years 1998 and 1997
is as follows:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Fair value of plan assets at beginning of year
(January 1,)........................................ $ 2,400 $ --
Actual return of plan assets ........................ 1,103 --
Employer contributions............................... 10,637 12,809
Participant contributions............................ 1,282 --
Benefits paid........................................ (12,519) (10,409)
-------- --------
Plan assets at fair value at end of the year
(December 31,)...................................... $ 2,903 $ 2,400
======== ========
</TABLE>

32
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Following is the funded status for postretirement benefits as of December
31, 1998 and 1997:

<TABLE>
<CAPTION>
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Funded status...................................... $(237,698) $(221,508)
Unrecognized net actuarial gain.................... (87,087) (99,117)
Unrecognized prior service cost.................... 3,873 4,195
Unrecognized transition amount..................... 164,436 176,464
--------- ---------
Accrued liability for postretirement benefits...... $(156,476) $(139,966)
========= =========
</TABLE>

A discount rate of 7%, a pre-Medicare medical trend rate of 7% declining to
a long-term rate of 5%; a discount rate of 7%, and a pre-Medicare medical
trend rate of 8% declining to a long-term rate of 5%, were used to determine
the APBO at December 31, 1998 and 1997, respectively.

Net periodic postretirement benefit costs, before consideration of the
rate-making discussed previously, for the years ended December 31, 1998, 1997
and 1996 include the following components:

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Service costs.................................. $ 5,249 $ 4,904 $ 7,352
Interest costs................................. 15,793 15,878 18,311
Expected return on plan assets................. (216) -- --
Amortization of prior service cost............. 322 279 --
Amortization of transition obligation.......... 11,745 11,558 11,593
Amortization of (gain) loss.................... (5,747) (5,844) (554)
------- ------- -------
$27,146 $26,775 $36,702
======= ======= =======
</TABLE>

Assumptions used in the determination of 1998, 1997 and 1996 net periodic
postretirement benefit costs were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate.......................................... 7.00% 7.75% 7.25%
Rate of increase in compensation levels................ 4.50% 5.50% 5.00%
Assumed annual rate of increase in health care
benefits.............................................. 8.00% 8.00% 9.00%
Assumed ultimate trend rate............................ 5.00% 6.00% 6.00%
</TABLE>

The effect of a 1% increase in the assumed health care cost trend rates for
each future year would increase the accumulated postretirement benefit
obligation at December 31, 1998 by approximately $30.6 million, and increase
the aggregate of the service and interest cost components of plan costs by
approximately $3.0 million for the year ended December 31, 1998. The effect of
a 1% decrease in the assumed health care cost trend rates for each future year
would decrease the accumulated postretirement benefit obligation at December
31, 1998 by approximately $23.9 million, and decrease the aggregate of the
service and interest cost components of plan costs by approximately $2.3
million. Amounts disclosed above could be changed significantly in the future
by changes in health care costs, work force demographics, interest rates, or
plan changes.

Preferred and Preference Shares

Industries is authorized to issue 20,000,000 shares of Preferred Shares,
without par value. Four million shares are designated Series A Junior
Participating Preferred Shares and are reserved for issuance pursuant to the
Share Purchase Rights Plan described in Common Shares.

33
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

The Preferred shareholders of Northern Indiana and IWC 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.

The redemption prices at December 31, 1998 for the cumulative preferred
stock, which is redeemable solely at the option of Northern Indiana and IWC,
in whole or in part, at any time upon thirty days' notice, are as follows:

<TABLE>
<CAPTION>
Redemption
Price Per
Series Share
------ ----------
<S> <C> <C>
Northern Indiana Public Service Company:
Cumulative preferred stock--$100 par value-- 4 1/4% $101.20
4 1/2% $100.00
4.22% $101.60
4.88% $102.00
7.44% $101.00
7.50% $101.00
Cumulative preferred stock--no par value-- adjustable
rate (6.00% at December 31, 1998), Series A (stated
value $50 per share)................................ $ 50.00
Indianapolis Water Company:
Cumulative preferred stock--$100 par value--rates
ranging from 4% to 5%............................... $100-$105
</TABLE>

The redemption prices at December 31, 1998, 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,
are as follows:

<TABLE>
<CAPTION>
Series Redemption Price Per Share Sinking Fund Or Mandatory Redemption
------- ---------------------------------- -------------------------------------
<S> <C> <C>
Cumulative preferred stock--$100 par value--
8.85% $100.74, reduced periodically 12,500 shares on or before April 1.

8.35% $103.44, reduced periodically 3,000 shares on or before July 1;
increasing to 6,000 shares
beginning in 2004; noncumulative
option to double amount each year.

7.75% $104.06, reduced periodically 2,777 shares on or before December 1;
noncumulative option to double amount
each year.

Cumulative preferred stock--no par value--
6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002.
</TABLE>

34
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Sinking fund requirements with respect to redeemable preferred stocks
outstanding at December 31, 1998 for each of the four years subsequent to
December 31, 1999 are as follows:

<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000......................................................... $1,827,700
2001......................................................... $1,827,700
2002......................................................... $1,827,700
2003......................................................... $1,827,700
</TABLE>

Stock Split

On December 16, 1997, the Board of Directors authorized a two-for-one split
of Industries' common shares. The stock split was paid February 20, 1998 to
shareholders of record at the close of business January 30, 1998. All
references to number of common shares reported, including per share amounts
and stock option data of Industries' common shares, reflect the two-for-one
stock split as if it had occurred at the beginning of the earliest period.

Common Share Dividend

During the next few years, Industries expects that the majority of earnings
available for distribution of dividends will depend upon dividends paid to
Industries by Northern Indiana. Northern Indiana's Indenture dated August 1,
1939, as amended and supplemented (Indenture), provides that it will not
declare or pay any dividends on any class of capital stock (other than
preferred or preference stock) except out of earned surplus or net profits of
Northern Indiana. At December 31, 1998, Northern Indiana had approximately
$146.1 million of retained earnings (earned surplus) available for the payment
of dividends. Future dividends will depend upon adequate retained earnings,
adequate future earnings and the absence of adverse developments.

Earnings Per Share

Basic earnings per share is computed by dividing net income, reduced for
preferred dividends, by the average number of common shares outstanding during
the period. The diluted earnings per share calculation assumes conversion of
nonqualified stock options into common shares. As a result of adopting the
statement, previously reported earnings per share information was restated.
The effect of this accounting change on previously reported earnings per share
data was insignificant.

35
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The net income, preferred dividends and shares used to compute basic and
diluted earnings per share is presented in the following table:

<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands, except per
share amounts)
<S> <C> <C> <C>
Basic
Weighted Average Number of Shares:
Average Common Shares Outstanding.... 120,778,077 123,849,126 122,381,500
============ ============ ============
Net Income to be Used to Compute Basic
Earnings per Average Common Share:
Net Income........................... $ 193,886 $ 190,849 $ 176,734
Dividend requirements on Preferred
Shares.............................. -- -- 119
------------ ------------ ------------
Balance Available for Common
Shareholders........................ $ 193,886 $ 190,849 $ 176,615
============ ============ ============
Basic Earnings per Average Common
Share................................. $ 1.60 $ 1.54 $ 1.44
============ ============ ============
Diluted
Weighted Average Number of Shares:
Average Common Shares Outstanding.... 120,778,077 123,849,126 122,381,500
Dilutive effect for Nonqualified
Stock Options....................... 556,799 374,344 323,367
------------ ------------ ------------
Weighted Average Shares............ 121,334,876 124,223,470 122,704,867
Net Income to be Used to Compute
Diluted Earnings per Average Common
Share:
Net Income........................... $ 193,886 $ 190,849 $ 176,734
Dividend requirements on Preferred
Shares.............................. -- -- 119
------------ ------------ ------------
Balance Available for Common
Shareholders........................ $ 193,886 $ 190,849 $ 176,615
============ ============ ============
Diluted Earnings per Average Common
Share................................. $ 1.59 $ 1.53 $ 1.43
============ ============ ============
</TABLE>

Common Shares

On April 8, 1998, shareholders approved an increase in the number of
authorized common shares without par value from 200,000,000 shares to
400,000,000 shares.

Share Purchase Rights Plan

On February 27, 1990, the Board of Directors of Industries (Board) declared
a dividend distribution of one Right for each outstanding common share of
Industries to shareholders of record on March 12, 1990. The Rights are not
currently exercisable. Each Right, when exercisable, would initially entitle
the holder to purchase from Industries one two-hundredth of a share of Series
A Junior Participating Preferred Share, without par value, of Industries at a
price of $30 per one two-hundredth of a share. In certain circumstances, if an
acquirer obtained 25% of Industries' outstanding shares, or merged into
Industries or merged Industries into the acquirer, the Rights would entitle
the holders to purchase Industries' or the acquirer's common shares for one-
half of the market price. The Rights will not dilute Industries' common shares
nor affect earnings per share unless they become exercisable for common
shares. The Plan was not adopted in response to any specific attempt to
acquire control of Industries.

Common Share Repurchases

The Board has authorized the repurchase of Industries' common shares,
subject to certain limits. At December 31, 1998, Industries had purchased
approximately 51.3 million shares since 1989 at an average price of $16.12 per
share. Approximately 10.7 million additional common shares may be repurchased
under the Board's authorization.

36
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Long-Term Incentive Plans

Industries has two long-term incentive plans for key management employees
that were approved by shareholders on April 13, 1988 (1988 Plan) and April 13,
1994 (1994 Plan), each of which provides for the issuance of up to 5.0 million
of Industries' common shares to key employees through April 1998 and April
2004, respectively. At December 31, 1998, there were 3,244,700 shares reserved
for future awards under the 1994 Plan. The Plans permit the following types of
grants, separately or in combination: nonqualified stock options, incentive
stock options, restricted stock awards, stock appreciation rights and
performance units. No incentive stock options or performance units were
outstanding at December 31, 1998. Under the Plans, the exercise price of each
option equals the market price of Industries' common stock on the date of
grant. Each option has a maximum term of ten years and vests one year from the
date of grant.

Stock appreciation rights (SARs) may be granted only in tandem with stock
options on a one-for-one basis and are payable in cash, Industries' common
shares, or a combination thereof. There were no SARs outstanding at December
31, 1998. Restricted stock awards are restricted as to transfer and are
subject to forfeiture for specific periods from the date of grant.
Restrictions on shares awarded in 1995 lapse five years from date of grant and
vesting is variable from 0% to 200% of the number awarded, subject to specific
earnings per share and stock appreciation goals. Restrictions on shares
awarded in 1997 and 1998 lapse two years from date of grant and vesting is
variable from 0% to 100% of the number awarded, subject to specific
performance goals. If a participant's employment is terminated prior to
vesting other than by reason of death, disability or retirement, restricted
shares are forfeited. There were 534,666, 542,666 and 524,000 restricted
shares outstanding at December 31, 1998, 1997 and 1996, respectively.

The Industries' Nonemployee Director Stock Incentive Plan, which was
approved by shareholders, provides for the issuance of up to 200,000 of
Industries' common shares to nonemployee directors of Industries. The Plan
provides for awards of common shares which vest in 20% per year increments,
with full vesting after five years. The Plan also allows the award of
nonqualified stock options. If a director's service on the Board is terminated
for any reason other than death or disability, any common shares not vested as
of the date of termination are forfeited. As of December 31, 1998, 71,500
shares were issued under the Plan.

Industries accounts for these plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized for
nonqualified stock options. The compensation cost that was charged against net
income for restricted stock awards was $2.7 million, $1.8 million and $2.1
million for the years ending December 31, 1998, 1997 and 1996 respectively.
Had compensation cost for non-qualified stock options been determined
consistent with SFAS No. 123 "Accounting for Stock-Based Compensation,"
Industries' net income and earnings per average common share would have been
reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(In thousands,
except per share amounts)
<S> <C> <C> <C>
Net Income:
As reported................................. $193,886 $190,849 $176,734
Pro forma................................... 192,764 189,999 176,087
Earnings Per Average Common Share:
Basic:
As reported............................... $ 1.60 $ 1.54 $ 1.44
Pro forma................................. 1.59 1.53 1.43
Diluted:
As reported............................... $ 1.59 $ 1.53 $ 1.43
Pro forma................................. 1.59 1.52 1.43
</TABLE>

37
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The fair value of each option granted as used to determine pro forma net
income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in the years ended December 31, 1998, 1997 and 1996 respectively: Risk-free
interest rate of 5.70%, 6.29%, and 6.39%; expected dividend yield of $0.67,
$0.87 and $0.84 per share; expected option term of five and one-quarter years
for 1998 and 1997 and five years for 1996; and expected volatility of 12.7%
for 1998 and 1997 and 13.2% for 1996.

Changes in outstanding shares under option and SARs for 1996, 1997 and
1998, are as follows:

<TABLE>
<CAPTION>
Nonqualified
Nonqualified Stock Options
Stock Options with SARs
------------------- ----------------
Weighted
Average
Option Option
Year Ended December 31, 1996 Options Price Options Price
---------------------------- --------- -------- -------- ------
<S> <C> <C> <C> <C>
Balance at beginning of year........ 2,202,100 $14.31 11,200 $5.47
Granted........................... 556,600 $18.91 --
Exercised......................... (368,000) $14.51 --
Cancelled......................... (29,800) $16.88 --
--------- ------ -------- -----
Balance at end of year.............. 2,360,900 $15.33 11,200 $5.47
========= ====== ======== =====
Shares exercisable.................. 1,812,300 $14.25 11,200 $5.47
========= ====== ======== =====
Weighted average fair value of
options granted.................... $2.50
=========
<CAPTION>
Weighted
Average
Option Option
Year Ended December 31, 1997 Options Price Options Price
---------------------------- --------- -------- -------- ------
<S> <C> <C> <C> <C>
Balance at beginning of year........ 2,360,900 $15.33 11,200 $5.47
Granted........................... 533,600 $20.64 --
Exercised......................... (330,400) $15.29 --
Cancelled......................... (28,700) $19.21 --
--------- ------ -------- -----
Balance at end of year.............. 2,535,400 $16.41 11,200 $5.47
========= ====== ======== =====
Shares exercisable.................. 2,006,800 $15.30 11,200 $5.47
========= ====== ======== =====
Weighted average fair value of
options granted.................... $2.66
=========
<CAPTION>
Weighted
Average
Option Option
Year Ended December 31, 1998 Options Price Options Price
---------------------------- --------- -------- -------- ------
<S> <C> <C> <C> <C>
Balance at beginning of year........ 2,535,400 $16.41 11,200 $5.47
Granted........................... 607,000 $29.22 --
Exercised......................... (457,700) $14.88 (11, 200) 5.47
Cancelled......................... (33,400) $16.07 --
--------- ------ -------- -----
Balance at end of year.............. 2,651,300 $19.61 -- --
========= ====== ======== =====
Shares exercisable.................. 2,046,300 $16.77 -- --
========= ====== ======== =====
Weighted average fair value of
options granted.................... $4.28
=========
</TABLE>

38
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about non-qualified stock
options at December 31, 1998:

OPTIONS OUTSTANDING

<TABLE>
<CAPTION>
Weighted
Average Weighted
Range Number Remaining Average
of Option Outstanding at Contractual Option
Price December 31, 1998 Life Price
---------------- ----------------- ----------- --------
<S> <C> <C> <C>
$ 8.53 to $ 8.97 88,000 1.52 years $ 8.62
$11.47 to $18.91 1,488,100 7.91 years $16.03
$20.64 to $29.22 1,075,200 9.47 years $25.47
---------------- --------- ---------- ------
$ 8.53 to $29.22 2,651,300 7.29 years $19.61
================ ========= ========== ======
</TABLE>

OPTIONS EXERCISABLE

<TABLE>
<CAPTION>
Average
Range Number Remaining
of Option Exercisable at Option
Price December 31, 1998 Price
---------------- ----------------- ---------
<S> <C> <C>
$ 8.53 to $ 8.97 88,000 $ 8.62
$11.47 to $18.91 1,488,100 $16.03
$20.64 470,200 $20.64
---------------- --------- ------
$ 8.53 to $20.64 2,046,300 $16.77
================ ========= ======
</TABLE>

Long-Term Debt

The sinking fund requirements and maturities of long-term debt outstanding
at December 31, 1998 (including the maturity of Northern Indiana's first
mortgage bonds: Series T, 7 1/2%, due April 1, 2002; Northern Indiana's
medium-term notes due from March 20, 2000 to July 8, 2003; Northern Indiana's
Pollution Control Note, Series A, City of Michigan City 5.70% due October 1,
2003; and NDC Douglas Properties, Inc.'s notes payable due January 1, 2000
through October 1, 2003; IWC's first mortgage bonds: Series 5.20%, due May 1,
2001 and Series 8.00%, due December 15, 2001; and IWCR's senior notes payable,
due March 15, 2001 and August 7, 2003), for each of the four years subsequent
to December 31, 1999 are as follows:

<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000........................ $164,150,865
2001........................ $ 53,718,777
2002........................ $ 64,988,989
2003........................ $140,913,520
</TABLE>

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 are being deferred and amortized. These premiums are
not earning a return during the recovery period.

Northern Indiana's Indenture, securing the first mortgage bonds issued by
Northern Indiana, constitutes a direct first mortgage lien upon substantially
all property and franchises owned by Northern Indiana, other than expressly
excepted property.

On May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes. As
of December 31, 1998, $139.0 million of the medium-term notes had been issued
with various interest rates and maturities. The proceeds from these issuances
were used to pay short-term debt incurred to redeem its First Mortgage Bonds,
Series N, and to pay at maturity various issues of Medium-Term Notes, Series
D.

39
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

IWC's first mortgage bonds are secured by its utility plant. Provisions of
trust indentures related to the 8% Series Bonds require annual sinking or
improvement payments amounting to .50% of the maximum aggregate amount
outstanding. As permitted, this requirement has been satisfied by substituting
a portion of permanent additions to utility plant.

IWC issued Refunding Revenue Bonds, Series 1998 on July 15, 1998, in the
amount of $40 million. The proceeds from the Series 1998 Bonds were used to
redeem the City of Indianapolis, Indiana 7 7/8% Economic Development Water
Facilities Revenue Bonds and the Town of Fishers, Indiana 7 7/8% Economic
Development Water Facilities Revenue Bonds. The Series 1998 bonds bear
interest at 5.05% per annum and mature on July 15, 2028. In February 1999, IWC
issued $35 million of ten-year medium term notes at a rate of 5.99% and $45
million of twenty-year medium term notes at a rate of 6.61%. The majority of
the proceeds will be used to reduce IWC's existing credit facilities and the
remaining proceeds will be used for general corporate purposes.

Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold
$300 million of medium-term notes with various interest rates and maturities.
The proceeds from these issuances were used for the purchase of IWCR and to
pay outstanding short-term obligations of Capital Markets.

In December 1997, Capital Markets issued and sold $75 million of 6.78%
senior notes which mature December 1, 2027. The holders of the notes have the
right to require Capital Markets to repurchase all or a portion of the notes
on December 1, 2007 at a purchase price of the principal amount plus accrued
interest thereon. Proceeds from the sale of these notes were primarily used to
pay Capital Markets' Zero Coupon Notes which matured December 1, 1997. The
remaining proceeds were used for Industries' general corporate purposes.

The financial obligations of Capital Markets are subject to a Support
Agreement between Industries and Capital Markets, under which Industries has
committed to make payments of interest and principal on Capital Markets'
obligations in the event of a failure to pay by Capital Markets. Restrictions
in the Support Agreement prohibit recourse on the part of Capital Markets'
creditors against the stock and assets of Northern Indiana which are owned by
Industries. Under the terms of the Support Agreement, in addition to the cash
flow of cash dividends paid to Industries by any of its consolidated
subsidiaries, the assets of Industries, other than the stock and assets of
Northern Indiana, are available as recourse for the benefit of Capital
Markets' creditors. The carrying value of the assets of Industries, other than
the assets of Northern Indiana as reflected in the consolidated financial
statements of Industries, was approximately $1.3 billion at December 31, 1998.

40
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Current Portion of Long-Term Debt

At December 31, 1998 and 1997, Industries' current portion of long-term
debt due within one year was as follows:

<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
First mortgage bonds........................... $ -- $14,509
Medium-term notes--
Interest rates between 5.83% and 5.95% with a
weighted average interest rate of 5.86% and
maturities between April 6, 1998 and April
13, 1998.................................... -- 35,000
Notes payable--
Interest rates between 6.72% and 9.00% with a
weighted average interest rate of 7.87% and
maturities between January 1, 1999 and
December 22, 1999........................... 4,790 3,612
Sinking funds due within one year.............. 2,000 1,500
------ -------
Total current portion of long-term debt.... $6,790 $54,621
====== =======
</TABLE>

Short-Term Borrowings

Northern Indiana and Capital Markets make use of commercial paper to fund
short-term working capital requirements. As of December 31, 1998 and December
31, 1997, Northern Indiana had $85.6 million and $71.5 million of commercial
paper outstanding, respectively. At December 31, 1998, the weighted average
interest rate of commercial paper outstanding was 5.62%. As of December 31,
1998 and December 31, 1997, Capital Markets had $108.1 million and $17.0
million of commercial paper outstanding. At December 31, 1998, the weighted
average interest rate of commercial paper outstanding was 5.99%.

Northern Indiana also has $273.5 million of money market lines of credit.
As of December 31, 1998 and 1997, $40.5 million and $47.5 million of
borrowings respectively, were outstanding under these lines of credit.

41
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1998 and 1997, there were no borrowings outstanding under this
facility.

In September 1998, Capital Markets entered into a five-year $100 million
revolving credit agreement and a 364-day $100 million revolving credit
agreement with several banks. These agreements terminate on September 23, 2003
and September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364 days upon the request of Capital
Markets and agreement by the banks. Under these agreements, Capital Markets
may borrow funds at a floating rate of interest or, at Capital Market's
request under certain circumstances, a fixed rate of interest for a short term
period. These agreements provide financing flexibility to Capital Markets and
may be used to support the issuance of commercial paper. At December 31, 1998,
there were no borrowings outstanding under either of these agreements.
Concurrently with entering into such agreements, Capital Markets terminated
its then existing revolving credit agreement which would otherwise have
terminated on August 19, 1999.

Capital Markets also has $130 million of money market lines of credit. As
of December 31, 1998 and 1997, $86.8 million and $20.1 million, respectively,
of borrowings were outstanding under these lines of credit.

IWCR and its subsidiaries have lines of credit with banks aggregating $92.4
million. At December 31, 1998, $84.1 million and $48.9 million, respectively,
were outstanding under these lines of credit.

At December 31, 1998 and 1997, Industries' short-term borrowings were as
follows:

<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Commercial paper--
Weighted average interest rate of 5.83% at
December 31, 1998........................... $193,700 $ 88,500
Notes payable--
Issued at interest rates between 4.96% and
6.50% with a weighted average interest rate
of 5.85% and various maturities between
January 11, 1999 and December 31, 1999...... 217,340 116,469
Revolving loan facility........................ -- 7,670
-------- --------
Total short-term borrowings................ $411,040 $212,639
======== ========
</TABLE>

Operating Leases

On April 1, 1990, Northern Indiana entered into a twenty-year agreement for
the rental of office facilities from Development at a current annual rental
payment of approximately $3.4 million.

The following is a schedule, by years, of future minimum rental payments,
excluding those to associated companies, required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as
of December 31, 1998:

<TABLE>
<CAPTION>
Year Ending December 31, (In thousands)
------------------------ --------------
<S> <C>
1999....................................................... $ 29,804
2000....................................................... 29,466
2001....................................................... 29,154
2002....................................................... 59,590
2003....................................................... 75,464
Later years................................................ 237,108
--------
Total minimum payments required............................ $460,586
========
</TABLE>

42
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The consolidated financial statements include rental expense for all
operating leases as follows:

<TABLE>
<CAPTION>
Year Ending December 31, (In thousands)
------------------------ --------------
<S> <C>
1998..................................................... $23,700
1997..................................................... 8,839
1996..................................................... 8,121
</TABLE>

Commitments

Industries estimates that approximately $1.283 billion will be expended for
construction purposes for the period from January 1, 1999 to December 31,
2003. Substantial commitments have been made by the Utilities in connection
with their programs.

Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air provides scrubber
services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly
Generating Station. Services under this contract commenced on June 15, 1992
with annual charges approximating $20 million. The agreement provides that,
assuming various performance standards are met by Pure Air, a termination
payment would be due if Northern Indiana terminates the agreement prior to the
end of the twenty-year contract period.

During 1995, Northern Indiana entered into a ten year agreement with IBM to
perform all data center, application development and maintenance, and desktop
management. Annual fees under the agreement are estimated at $20 million.

Primary arranges energy-related projects for large energy-intensive
customers and offers such customers, nationwide expertise in managing the
engineering, construction, operation and maintenance of such projects. Primary
through its subsidiaries Harbor Coal Company, North Lake Energy Corporation,
Lakeside Energy Corporation, Portside Energy Corporation, and Cokenergy, Inc.,
has entered into partnering arrangements with several of Industries' largest
industrial customers, principally steel mills, to service a portion of their
energy needs. In order to serve its customers under the partnering
arrangements, Primary, through its subsidiaries, has or expects to enter into
certain operating lease commitments to lease these energy-related projects
which have a combined capacity of 393 megawatts Industries, principally
through its subsidiary Capital Markets, guarantees certain of Primary's
obligations under each lease, which are included in the Operating Leases table
above.

Primary has advanced approximately $31.8 million and $107.2 million, at
December 31, 1998 and December 31, 1997, respectively, to the lessors of the
energy related projects discussed above. These net advances are included in
"Other Receivables" in the Consolidated Balance Sheet and as a component of
operating activities in the Consolidated Statement of Cash Flows.

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
that value:

Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.

43
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Investments: The fair value of some investments is estimated based on
market prices for those or similar investments.

Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock is estimated based on the quoted market prices for the same or
similar issues or on the rates offered to Industries 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 values and estimated fair values of Industries' financial
instruments are as follows:

<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents.... $ 60,848 $ 60,848 $ 30,780 $ 30,780
Investments.................. 36,594 36,028 32,625 32,886
Long-term debt (including
current portion)............ 1,674,755 1,769,934 1,722,546 1,718,897
Preferred stock.............. 143,876 140,420 146,289 139,814
</TABLE>

A substantial portion of the long-term debt relates to utility operations.
The Utilities are subject to regulation and gains or losses may be included in
rates over a prescribed amortization period, if in fact settled at amounts
approximating those above.

Customer Concentrations

Industries' utility subsidiaries supply natural gas, electric energy and
water. Natural gas and electric energy are supplied to the northern third of
Indiana. The Water Utilities serve Indianapolis, Indiana, and surrounding
areas. Although the Energy Utilities have a diversified base of residential
and commercial customers, a substantial portion of their electric and gas
industrial deliveries are dependent upon the basic steel industry. The
following table shows the basic steel industry percentage of gas revenue
(including transportation services) and electric revenue for 1998, 1997 and
1996:

<TABLE>
<CAPTION>
Basic Steel Industry 1998 1997 1996
-------------------- ---- ---- ----
<S> <C> <C> <C>
Gas revenue percent........................................ 3% 4% 1%
Electric revenue percent................................... 13% 17% 22%
</TABLE>

44
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Quarterly Financial Data(a)

The following data summarize certain operating results for each of the
quarters of 1998 and 1997:

<TABLE>
<CAPTION>
1998 Quarters Ended
------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(Dollars in thousands, except per
share amounts)
<S> <C> <C> <C> <C>
Operating revenues................ $779,344 $652,408 $747,792 $753,234
Operating expenses................ 662,230 573,365 650,844 624,833
-------- -------- -------- --------
Operating income.................. 117,114 79,043 96,948 128,401
Other income (deductions)......... 8,448 (931) 2,870 197
Interest and other charges........ 32,497 33,243 35,199 36,403
Income taxes...................... 32,343 15,424 21,492 31,603
-------- -------- -------- --------
Net income........................ 60,722 29,445 43,127 60,592
Dividend requirements on preferred
shares........................... -- -- -- --
-------- -------- -------- --------
Balance available for common
shareholders..................... $ 60,722 $ 29,445 $ 43,127 $ 60,592
======== ======== ======== ========
Basic earnings per average common
share(a)......................... $ 0.49 $ 0.24 $ 0.36 $ 0.51
======== ======== ======== ========
Diluted earnings per average
common share(a).................. $ 0.48 $ 0.24 $ 0.35 $ 0.51
======== ======== ======== ========
Market price for the quarter:
High............................. $ 28.375 $ 28.313 $ 32.875 $ 33.625
Low.............................. $ 24.750 $ 25.813 $ 26.625 $ 28.875
<CAPTION>
1997 Quarters Ended
------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(Dollars in thousands, except per
share amounts)
<S> <C> <C> <C> <C>
Operating revenues................ $659,950 $523,187 $596,315 $807,089
Operating expenses................ 531,364 449,239 509,905 685,480
-------- -------- -------- --------
Operating income.................. 128,586 73,948 86,410 121,609
Other income (deductions)......... 9,403 4,308 3,764 (1,707)
Interest and other charges........ 28,071 33,607 34,084 33,536
Income taxes...................... 39,080 16,413 20,221 30,460
-------- -------- -------- --------
Net income........................ 70,838 28,236 35,869 55,906
Dividend requirements on preferred
shares........................... -- -- -- --
-------- -------- -------- --------
Balance available for common
shareholders..................... $ 70,838 $ 28,236 $ 35,869 $ 55,906
======== ======== ======== ========
Basic earnings per average common
share(a)......................... $ 0.59 $ 0.22 $ 0.28 $ 0.44
======== ======== ======== ========
Diluted earnings per average
common share(a).................. $ 0.59 $ 0.22 $ 0.28 $ 0.44
======== ======== ======== ========
Market price for the quarter:
High............................. $ 20.125 $ 21.125 $ 21.282 $ 49.875
Low.............................. $ 19.000 $ 19.438 $ 20.344 $ 42.125
</TABLE>
- --------
(a) Because of the combined mathematical effect of common shares repurchased
and issued and the cyclical nature of net income during the year, the sum
of earnings per share data for any four quarterly periods may vary
slightly from the earnings per share data for the equivalent twelve-month
period.

Segments of Business

Industries adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" during 1998. SFAS No. 131 establishes
standards for reporting information about operating segments in financial
statements and disclosures about products and services, and geographic areas.
Operating segments are defined as components of an enterprise for which
separate financial information is available and is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.

45
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Industries has four reportable operating segments: Gas, Electric, Water and
Gas Marketing. The Gas segment includes regulated gas utilities which provide
natural gas distribution and transportation services. The Electric segment is
comprised principally of Northern Indiana, a regulated electric utility, which
generates, transmits and distributes electricity. In addition, the Electric
segment includes a wholesale power marketing operation which markets wholesale
power to other utilities and electric power marketers. The Water segment
includes regulated water utilities which provide distribution of water supply
to the public. The Gas Marketing segment provides natural gas marketing and
sales to wholesale and industrial customers. The Other Products and Services
category includes a variety of energy-related businesses, such as
installation, repair and maintenance of underground pipelines; utility line
locating and marking; transmission of natural gas through pipelines; the
arrangement of energy-related projects for large energy-intensive facilities;
and other energy-related products.

Industries' reportable segments are operations that are managed separately
and meet the quantitative thresholds required by SFAS No 131.

Revenues for each of Industries' segments are principally attributable to
customers in the United States. Additional revenues, which are insignificant
to Industries' consolidated revenues, are attributable to customers in Canada
and the United Kingdom.

46
<PAGE>

NIPSCO INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following tables provide information about Industries' business
segments. Industries uses income before interest and other charges and income
taxes as its primary measurement for each of the reported segments. In
addition, adjustments have been made to the segment information to arrive at
information included in the results of operations and financial position of
Industries. These adjustments include unallocated corporate assets, revenues
and expenses and the elimination of intercompany receivables and payables. The
accounting policies of the operating segments are the same as those described
in "Summary of Significant Accounting Policies."

<TABLE>
<CAPTION>
Other
Gas Products Adjust-
1998 Gas Electric Water Marketing & Services ments Total
- ---- ---------- ---------- -------- --------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $ 637,098 $1,429,986 $ 83,979 $657,692 $263,069 $(139,046) $2,932,778
Other Income
(Deductions)........... $ 1,720 $ 553 $ 712 $ 2,017 $ 4,877 $ 705 $ 10,584
Depreciation and
amortization........... $ 75,547 $ 156,844 $ 11,589 $ 332 $ 11,954 $ 208 $ 256,474
Income before Interest
and Other Charges and
Income Taxes........... $ 67,217 $ 341,433 $ 23,460 $ 5,006 $ 6,614 $ (11,640) $ 432,090
Assets.................. $ 930,240 $2,514,791 $619,505 $121,574 $483,243 $ 317,150 $4,986,503
Capital Expenditures.... $ 62,981 $ 124,044 $ 59,265 $ 24 $ 11,325 $ -- $ 257,639
Investment in equity--
method investees....... $ -- $ -- $ -- $ 6,707 $104,633 $ -- $ 111,340
<CAPTION>
Other
Gas Products Adjust-
1997 Gas Electric Water Marketing & Services ments Total
- ---- ---------- ---------- -------- --------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $ 807,239 $1,186,331 $ 60,743 $480,986 $211,996 $(160,754) $2,586,541
Other Income
(Deductions)........... $ 821 $ 637 $ 1,465 $ 3,349 $ 10,936 $ (1,440) $ 15,768
Depreciation and
amortization........... $ 73,017 $ 153,843 $ 8,241 $ 233 $ 13,336 $ 1,134 $ 249,804
Income before Interest
and Other Charges and
Income Taxes........... $ 88,950 $ 312,243 $ 19,363 $ 7,085 $ 13,121 $ (14,441) $ 426,321
Assets.................. $ 965,473 $2,507,905 $565,717 $ 94,690 $500,706 $ 302,542 $4,937,033
Capital Expenditures.... $ 64,009 $ 115,012 $ 39,910 -- -- -- $ 218,931
Investment in equity--
method investees....... $ -- $ -- $ -- $ 6,710 $ 76,145 $ -- $ 82,855
<CAPTION>
Other
Gas Products Adjust-
1996 Gas Electric Water Marketing & Services ments Total
- ---- ---------- ---------- -------- --------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $ 799,395 $1,022,231 $ N/A $229,922 $ 81,851 $(145,451) $1,987,948
Other Income
(Deductions)........... $ 479 $ 897 $ N/A $ 2,790 $ 8,927 $ (1,852) $ 11,241
Depreciation and
amortization........... $ 68,584 $ 146,444 $ N/A $ 34 $ 18,773 $ 158 $ 233,993
Income before Interest
and Other Charges and
Income Taxes........... $ 97,139 $ 301,525 $ N/A $ 12,964 $ (4,427) $ (9,652) $ 397,549
Assets.................. $1,006,270 $2,575,995 $ N/A $ 87,209 $355,243 $ 264,166 $4,288,883
Capital Expenditures.... $ 61,221 $ 146,660 $ N/A -- -- -- $ 207,881
Investment in equity--
method investees....... $ -- $ -- $ N/A $ 6,462 $ 45,798 $ -- $ 52,260
</TABLE>

The following table reconciles total reportable segment income before
interest and other charges and income taxes to Industries' consolidated net
income for each of the years ending 1998, 1997 and 1996 as follows:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income before Interest and Other Charges and
Income Taxes................................ $432,090 $426,321 $397,549
Interest and Other Charges................... 137,342 129,298 114,435
Income Taxes................................. 100,862 106,174 106,380
-------- -------- --------
Net Income................................. $193,886 $190,849 $176,734
======== ======== ========
</TABLE>

EVENT (Unaudited) Subsequent to Date of Auditors' Report

On February 9, 1999, Industries agreed to acquire TPC Corporation, a natural
gas marketing and storage company. Houston-based TPC Corporation, a wholly-owned
subsidiary of PacifiCorp., holds a 66% ownership stake in Market Hub Partners,
L.P., which stores natural gas in salt caverns. Services currently owns
approximately 12% of Market Hub Partners, L.P. The transaction is expected to
close in March or April 1999.

47
<PAGE>

SELECTED SUPPLEMENTAL INFORMATION

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
Gas Statistics 1998 1997 1996
- -------------- ---------- ---------- ----------
<S> <C> <C> <C>
Operating Revenues ($000's):
Residential (including home heating)......... $ 385,030 $ 479,461 $ 422,646
Commercial................................... 124,903 164,359 141,193
Industrial................................... 62,003 78,531 70,062
Gas transported for others................... 45,035 43,226 33,536
Gas marketing................................ 657,692 480,986 229,922
Other*....................................... 20,127 41,662 131,958
---------- ---------- ----------
Total...................................... $1,294,790 $1,288,225 $1,029,317
========== ========== ==========
Volumes in dth (000's):
Residential (including home heating)......... 63,514 79,816 84,146
Commercial................................... 24,256 31,640 32,164
Industrial................................... 12,824 16,989 17,732
Gas transported for others................... 216,505 203,728 194,397
Gas marketing................................ 279,282 148,728 59,598
Other........................................ 23,090 14,201 8,263
---------- ---------- ----------
Total...................................... 619,471 495,102 396,300
========== ========== ==========
Customers Served--End of Year:
Residential (including home heating)......... 678,989 669,833 659,742
Commercial................................... 55,918 55,124 54,300
Industrial................................... 4,414 4,408 4,234
Other........................................ 79 84 80
---------- ---------- ----------
Total...................................... 739,400 729,449 718,356
========== ========== ==========
</TABLE>

* Includes deferred gas cost revenue of $(42,055), $(11,075) and $95,843,
respectively.

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
Electric Statistics 1998 1997 1996
- ------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Operating Revenues ($000's):
Residential.................................. $ 290,738 $ 272,619 $ 269,906
Commercial................................... 267,996 253,299 247,808
Industrial................................... 405,302 416,741 428,273
Street lighting.............................. 8,740 8,697 8,549
Wholesale.................................... 430,420 214,206 43,272
Other**...................................... 26,790 20,769 24,423
---------- ---------- ----------
Total...................................... $1,429,986 $1,186,331 $1,022,231
========== ========== ==========
Sales in kilowatt-hours (000's):
Residential.................................. 2,936,762 2,723,990 2,700,234
Commercial................................... 3,162,511 2,974,703 2,886,940
Industrial................................... 8,794,481 8,971,926 9,318,353
Street lighting.............................. 57,607 57,764 56,413
Wholesale.................................... 14,480,608 8,688,014 1,678,346
Other........................................ 64,037 84,935 100,265
---------- ---------- ----------
Total...................................... 29,496,006 23,501,332 16,740,551
========== ========== ==========
Customers Served--End of Year:
Residential.................................. 372,383 368,907 365,011
Commercial................................... 44,961 43,802 42,911
Industrial................................... 2,737 2,764 2,725
Other........................................ 874 885 874
---------- ---------- ----------
Total...................................... 420,955 416,358 411,521
========== ========== ==========
</TABLE>
- --------
** Includes deferred fuel cost revenue of $(8,880), $(5,223) and $1,980,
respectively.

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
Water Statistics 1998 1997*** 1996
- ---------------- ---------- ---------- ----------
<S> <C> <C> <C>
Operating Revenues ($000's):
Residential.................................. $ 55,281 $ 39,570 $ --
Commercial................................... 19,942 14,763 --
Industrial................................... 4,227 3,015 --
Other........................................ 4,529 3,395 --
---------- ---------- ----------
Total...................................... $ 83,979 $ 60,743 $ --
========== ========== ==========
Sales in millions of gallons (000's):
Residential.................................. 22,454 18,095 --
Commercial................................... 13,029 10,345 --
Industrial................................... 4,392 3,310 --
Other........................................ 947 754 --
---------- ---------- ----------
Total...................................... 40,822 32,504 --
========== ========== ==========
Customers Served--End of Year:
Residential.................................. 232,333 225,627 --
Commercial................................... 17,265 17,083 --
Industrial................................... 348 347 --
Other........................................ 3,718 3,586 --
---------- ---------- ----------
Total...................................... 253,664 246,643 --
========== ========== ==========
</TABLE>

***Amounts are for the period April 1997 through December 1997.

<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C> <C>
Operating Revenues
Gas (000's)............................................................... $ 637,098 $ 807,239 $ 799,395
Electric ($000's)......................................................... 1,429,986 1,186,331 1,022,231
Water ($000's)............................................................ 83,979 60,743 --
Products and Services ($000's)............................................ 781,715 532,228 166,322
----------- ----------- -----------
Total Operating Revenues................................................ $ 2,932,778 $ 2,586,541 $ 1,987,948
Operating Margin ($000's).................................................. $ 1,240,411 $ 1,210,927 $ 1,115,965
Operating Income ($000's).................................................. $ 421,506 $ 410,553 $ 386,308
Net Income ($000's)........................................................ $ 193,886 $ 190,849 $ 176,734
Shares outstanding at year end............................................. 117,530,698 124,312,664 119,611,322
Number of common shareholders.............................................. 36,277 37,373 35,339
Basic earnings per average common share.................................... $ 1.60 $ 1.54 $ 1.44
Diluted earnings per average common share.................................. $ 1.59 $ 1.53 $ 1.43

Return on average common equity............................................ 16.1% 16.1% 15.9%
Times interest earned (pre-tax)............................................ 3.13 3.43 3.62
Dividends paid per share................................................... $ 0.96 $ 0.90 $ 0.84
Dividend payout ratio...................................................... 60.0% 58.4% 58.3%
Market values during the year:
High..................................................................... $ 33.625 $ 24.938 $ 20.125
Low...................................................................... $ 24.750 $ 19.000 $ 17.625
Close.................................................................... $ 30.437 $ 24.719 $ 19.813
Book value of common shares................................................ $ 9.78 $ 10.17 $ 9.20
Market-to-book ratio at year end........................................... 311.2% 243.1% 215.4%

Total Assets ($000's)...................................................... $ 4,986,503 $ 4,937,033 $ 4,288,883
Utility construction expenditures ($000's)................................. $ 245,825 $ 218,931 $ 207,881
Capitalization:
Common shareholders' equity ($000's)..................................... $ 1,149,708 $ 1,264,788 $ 1,100,501
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's)............... $ 81,116 $ 81,123 $ 81,126
Series with mandatory redemption provisions ($000's)................. $ 56,435 $ 58,841 $ 61,246
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's).................. $ -- $ -- $ --
Indianapolis Water Company:
Series without mandatory redemption provision ($000's)............... $ 4,497 $ 4,497 $ --
Long-Term debt ($000's).................................................... $ 1,667,965 $ 1,667,925 $ 1,127,106
----------- ----------- -----------
Total Capitalization ($000's).......................................... $ 2,959,721 $ 3,077,174 $ 2,369,979
Number of employees........................................................ 6,035 5,984 4,168
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------- ---------- ----------
<S>........................................................................ <C> <C> <C>
Operating Revenues
Gas (000's)............................................................... $ 691,402 $ 681,909 $ 714,229
Electric ($000's)......................................................... 1,030,923 994,492 963,643
Water ($000's)............................................................ -- -- --
Products and Services ($000's)............................................ 46,983 91,628 59,387
----------- ----------- -----------
Total Operating Revenues................................................ $ 1,769,308 $ 1,768,029 $ 1,737,259
Operating Margin ($000's).................................................. $ 1,074,820 $ 1,014,566 $ 1,001,542
Operating Income ($000's).................................................. $ 381,877 $ 353,452 $ 355,918
Net Income ($000's)........................................................ $ 175,465 $ 163,987 $ 156,140
Shares outstanding at year end............................................. 124,759,192 127,810,778 131,657,676
Number of common shareholders.............................................. 37,299 39,172 41,038
Basic earnings per average common share.................................... $ 1.36 $ 1.24 $ 1.15
Diluted earnings per average common share.................................. $ 1.35 $ 1.23 $ 1.15

Return on average common equity............................................ 15.5% 14.6% 14.6%
Times interest earned (pre-tax)............................................ 3.72 3.61 3.61
Dividends paid per share................................................... $ 0.78 $ 0.72 $ 0.72
Dividend payout ratio...................................................... 57.4% 58.1% 58.1%
Market values during the year:
High..................................................................... $ 19.250 $ 16.500 $ 17.438
Low...................................................................... $ 14.625 $ 13.063 $ 13.063
Close.................................................................... $ 19.125 $ 14.875 $ 16.438
Book value of common shares................................................ $ 9.00 $ 8.67 $ 8.31
Market-to-book ratio at year end........................................... 212.5% 171.6% 197.8%

Total Assets ($000's)...................................................... $ 3,999,520 $ 3,947,138 $ 3,912,324
Utility construction expenditures ($000's)................................. $ 192,966 $ 202,545 $ 180,852
Capitalization:
Common shareholders' equity ($000's)..................................... $ 1,122,215 $ 1,107,848 $ 1,094,672
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's)............... $ 81,325 $ 86,389 $ 97,753
Series with mandatory redemption provisions ($000's)................. $ 63,651 $ 66,057 $ 68,462
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's).................. $ 35,000 $ 35,000 $ 35,000
Indianapolis Water Company:
Series without mandatory redemption provision ($000's)............... $ -- $ -- $ --
Long-Term debt ($000's).................................................... $ 1,175,728 $ 1,180,338 $ 1,192,500
----------- ----------- -----------
Total Capitalization ($000's).......................................... $ 2,477,919 $ 2,475,632 $ 2,488,387
Number of employees........................................................ 4,356 4,441 4,602
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31, 1992 1991 1990
- ------------------------------------------------------------------------------------------- ---------- ----------
<S>........................................................................ <C> <C> <C>
Operating Revenues
Gas (000's)............................................................... $ 666,221 $ 601,920 $ 625,159
Electric ($000's)......................................................... 916,135 933,241 895,836
Water ($000's)............................................................ -- -- --
Products and Services ($000's)............................................ -- -- --
----------- ----------- -----------
Total Operating Revenues................................................ $ 1,582,356 $ 1,535,161 $ 1,520,995
Operating Margin ($000's).................................................. $ 927,089 $ 919,951 $ 885,262
Operating Income ($000's).................................................. $ 246,217 $ 254,354 $ 247,777
Net Income ($000's)........................................................ $ 136,648 $ 133,388 $ 125,361
Shares outstanding at year end............................................. 131,516,700 133,343,230 137,748,458
Number of common shareholders.............................................. 38,097 39,346 41,285
Basic earnings per average common share.................................... $ 1.00 $ 0.97 $ 0.90
Diluted earnings per average common share.................................. $ 0.99 $ 0.96 $ 0.89

Return on average common equity............................................ 13.1% 12.9% 12.7%
Times interest earned (pre-tax)............................................ 3.17 2.93 2.81
Dividends paid per share................................................... $ 0.62 $ 0.58 $ 0.52
Dividend payout ratio...................................................... 62.0% 59.8% 57.8%
Market values during the year:
High..................................................................... $ 13.313 $ 13.500 $ 9.625
Low...................................................................... $ 11.250 $ 9.250 $ 7.825
Close.................................................................... $ 13.250 $ 12.875 $ 9.438
Book value of common shares................................................ $ 7.87 $ 7.59 $ 7.30
Market-to-book ratio at year end........................................... 168.4% 169.6% 129.3%

Total Assets ($000's)...................................................... $ 3,807,941 $ 3,647,557 $ 3,625,181
Utility construction expenditures ($000's)................................. $ 172,329 $ 168,958 $ 152,280
Capitalization:
Common shareholders' equity ($000's)..................................... $ 1,034,530 $ 1,011,666 $ 1,005,982
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's)............... $ 97,917 $ 98,710 $ 99,374
Series with mandatory redemption provisions ($000's)................. $ 70,668 $ 53,978 $ 59,358
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's).................. $ 35,000 $ 35,000 $ 35,000
Indianapolis Water Company:
Series without mandatory redemption provision ($000's)............... $ -- $ -- $ --
Long-Term debt ($000's).................................................... $ 1,054,454 $ 1,068,708 $ 1,165,682
----------- ----------- -----------
Total Capitalization ($000's).......................................... $2,292,569 $ 2,268,062 $ 2,365,396
Number of employees........................................................ 4,648 4,600 4,547
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31, 1989 1988
- ------------------------------------------------------------------------------------------- ----------
<S>........................................................................ <C> <C>
Operating Revenues
Gas (000's)............................................................... $ 677,262 $ 620,723
Electric ($000's)......................................................... 882,303 903,461
Water ($000's)............................................................ -- --
Products and Services ($000's)............................................ -- --
----------- -----------
Total Operating Revenues................................................ $ 1,559,565 $ 1,524,184
Operating Margin ($000's).................................................. $ 900,035 $ 863,213
Operating Income ($000's).................................................. $ 252,807 $ 257,923
Net Income ($000's)........................................................ $ 72,112/b/ $ 103,449
Shares outstanding at year end............................................. 138,738,984 146,620,420
Number of common shareholders.............................................. 43,763 47,324
Basic earnings per average common share.................................... $ 0.50/b/ $ 0.70
Diluted earnings per average common share.................................. $ 0.49/b/ $ 0.70

Return on average common equity............................................ 7.2%/b/ 10.4%
Times interest earned (pre-tax)............................................ 2.02 2.38
Dividends paid per share................................................... $ 0.42 $ 0.30
Dividend payout ratio...................................................... 84.0% 42.9%
Market values during the year:
High..................................................................... $ 9.813 $ 7.063
Low...................................................................... $ 6.563 $ 4.313
Close.................................................................... $ 9.688 $ 6.938
Book value of common shares................................................ $ 6.96 $ 7.02
Market-to-book ratio at year end........................................... 139.2% 98.9%

Total Assets ($000's)...................................................... $ 3,657,718 $ 3,684,721
Utility construction expenditures ($000's)................................. $ 150,786 $ 116,874
Capitalization:
Common shareholders' equity ($000's)..................................... $ 965,437 $ 1,028,554
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's)............... $ 99,874 $ 99,937
Series with mandatory redemption provisions ($000's)................. $ 66,309 $ 75,189
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's).................. $ -- $ --
Indianapolis Water Company:
Series without mandatory redemption provision ($000's)............... $ -- $ --
Long-Term debt ($000's).................................................... $ 1,261,760 $ 1,308,303
----------- -----------
Total Capitalization ($000's).......................................... $ 2,393,380 $ 2,511,983
Number of employees........................................................ 4,825 4,946
</TABLE>

/b/Earnings per share were reduced by $0.72 due to the $82.0 million refund,
less associated tax benefits of $30.3 million, related to the Bailly N1
generating unit.

<PAGE>

EXHIBIT 21

NIPSCO INDUSTRIES, INC.
LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1998

All subsidiaries are incorporated in Indiana, except for Retyred 99, Ltd.,
which is incorporated in United Kingdom; Inventory Management and Distribution
Company, L.L.C., Laredo Nueces Pipeline Company, MidTex Gas Storage Company,
L.L.P. and NFCO Acquisition Company, which are incorporated in Texas; N Squared
Aviation LLC, Market Hub Partners, Inc., Market Hub Partners L.P., NI-TEX Gas
Services and Bristol Resources Production Company, L.L.C. which are incorporated
in Delaware; Sun Power Corporation which is incorporated in California; Progeni,
Inc. which is incorporated in Illinois; and NESI Energy Marketing Canada Ltd.,
NIPSCO Energy Services Canada Limited, NESI Energy Marketing Canada, Inc. and
Canor Energy Ltd., which are incorporated in Alberta, Canada; NI Canada ULC
which is incorporated in Nova Scotia, Canada; Portland Natural Gas
Transmission System which is incorporated in Maine. All subsidiaries are wholly-
owned unless otherwise indicated.

NIPSCO Industries Management Services Company

Hamilton Harbour Insurance Services, Ltd.

NIPSCO Capital Markets, Inc.

IWC Resources Corporation
Its subsidiaries are:
Indianapolis Water Company
Harbour Water Corporation
Liberty Water Corporation
Utility Data Corporation
Waterway Holdings, Inc.
IWC Services, Inc.
Its subsidiary is:
White River Environmental Partnership (1)
SM&P Utility Resources, Inc.
Miller Pipeline Corporation

Primary Energy, Inc.
Its subsidiaries are:
Harbor Coal Company
Lakeside Energy Corporation
North Lake Energy Corporation
Portside Energy Corporation
Cokenergy, Inc.
Whiting Clean Energy, Inc.
Ironside Energy Corporation

Northern Indiana Public Service Company
Its subsidiaries are:
NIPSCO Exploration Company, Inc.
Shore Line Shops Incorporated

NI Energy Services, Inc. (formerly known as NIPSCO Energy Services, Inc.)
Its subsidiaries are:
Market Hub Partners, Inc. (3)
Market Hub Partners, L.P. (2)

37
<PAGE>

Inventory Management and Distribution Company, L.L.C. (3)
NI Telecomm, Inc.
NIPSCO Fuel Company, Inc.
Its subsidiaries are:
NFCO Acquisition Company
Bristol Resources Production Company, L.L.C. (4)
NEM Acquisition Corp.
Crossroads Pipeline Company
NI-TEX, Inc.
Laredo Nueces Pipeline Company (5)
NESI Energy Marketing, L.L.C. (7) (8)
Green Fuels, Inc.
NESI Power Marketing, Inc.
NESI Integrated Energy Resources, Inc.
NIPSCO Energy Services Canada Ltd.
Its subsidiary is:
NESI Energy Marketing Canada, Ltd. (10)
NI-TEX Gas Services, Inc.
MidTex Gas Storage Company, L.L.P. (6)
NI Energy Services Transportation, Inc.
NI Energy Services Development Corp.
Its subsidiary is:
Portland Natural Gas Transmission System (14)
NESI Solutions, Inc.
NESI Canadian Holdings, Inc.
NI Canada ULC.
Its subsidiary is:
Canor Energy Ltd. (9)
NIPSCO Security Services, Inc.

NIPSCO Development Company, Inc.
Its subsidiaries are:
Analytic Systems Laboratories, Inc. (12)
Retyred 99, LTD.
Protonics Research, Inc. (12)
International Polymer Corp.
JOF Transportation Company
KOGAF Enterprises, Inc.
Lake Erie Land Company, Inc.
Its subsidiary is:
SCC Services, Inc.
N Squared Aviation, LLC (13)
NDC Douglas Properties, Inc.
NIPSCO International Power Systems Company
Cardinal Property Management, Inc.
Progeni, Inc.
Sun Power Corporation (11)
Customer Information Servcies, Inc.

Kokomo Gas and Fuel Company
Its subsidiary is:
KGF Trading Company

Northern Indiana Fuel and Light Company, Inc.
Its subsidiary is:
Northern Indiana Trading Company, Inc.
_______________
(1) Majority-owned interest of IWC Services, Inc.
(2) Minority-owned partnership of NI Energy Services, Inc.

38
<PAGE>

(3) Minority-owned interest of NI Energy Services, Inc.
(4) Majority-owned interest of NIPSCO Fuel Company, Inc.
(5) 50% owned interest of NI-TEX, Inc.
(6) Minority-owned interest of NI-TEX Gas Services, Inc.
(7) Majority-owned interest of NI Energy Services, Inc.
(8) Minority-owned interest of NEM Acquisition Corporation.
(9) Minority-owned interest of NI Canada ULC
(10) Majority-owned by NIPSCO Energy Services Canada Ltd.
(11) Minority-owned subsidiary of NIPSCO Development Company, Inc.
(12) Minority-owned subsidiary of NIPSCO Development Company, Inc.
(13) Minority-owned interest of NIPSCO Development Company, Inc.
(14) Minority-owned interest of NI Energy Services Development Corp.

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into NIPSCO Industries, Inc.'s
previously filed Form S-8 Registration Statement No. 33-30619; Form S-8
Registration Statement No. 33-30621; Form S-8 Registration Statement No. 333-
08263; Form S-8 Registration Statement No. 333-19981; Form S-8 Registration
Statement No. 333-19983; Form S-8 Registration Statement No. 333-19985; Form
S-8 Registration Statement No. 333-59151; Form S-8 Registration Statement No.
333-59153; Form S-3 Registration Statement No. 333-69279; Form S-3
Registration Statement No. 333-22347; Form S-3 Registration Statement No. 333-
26847 and Form S-3 Registration Statement No. 333-39911.

Chicago, Illinois
March 25, 1999