<PAGE>
 
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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, 1996
                                       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)
 
 
                                                         46320
           5265 HOHMAN AVENUE                          (ZIP CODE)
            HAMMOND, 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:
 
                                                 NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                     ON WHICH REGISTERED
          -------------------                    ---------------------
             COMMON SHARES                   NEW YORK, CHICAGO AND PACIFIC
    PREFERRED SHARE PURCHASE RIGHTS          NEW YORK, CHICAGO AND PACIFIC
  OBLIGATIONS PURSUANT TO SUPPORT                       NEW YORK
   AGREEMENT WITH NIPSCO CAPITAL
   MARKETS, INC.
 
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. [X]
 
  AS OF FEBRUARY 28, 1997 58,968,253 COMMON SHARES (NOT INCLUDING 14,923,856
SHARES HELD IN TREASURY), WERE OUTSTANDING. THE AGGREGATE MARKET VALUE OF THE
COMMON SHARES (BASED UPON THE FEBRUARY 28, 1997 CLOSING PRICE OF $39 7/8 ON THE
NEW YORK STOCK EXCHANGE) HELD BY NONAFFILIATES WAS APPROXIMATELY
$2,332,755,000.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  1996 NIPSCO INDUSTRIES, INC. ANNUAL REPORT TO SHAREHOLDERS--PARTS I, II AND
IV.
 
  NOTICE OF ANNUAL MEETING AND PROXY STATEMENT DATED MARCH 7, 1997 FOR ANNUAL
MEETING TO BE HELD APRIL 9, 1997--PART III.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
 
                                     PART 1
 
ITEM 1. BUSINESS
 
  NIPSCO INDUSTRIES, INC. AND ITS SUBSIDIARIES. NIPSCO Industries, Inc.
(Industries) is an Indiana corporation, incorporated on September 22, 1987,
which serves as the holding company for a number of subsidiaries, including
four regulated companies: Northern Indiana Public Service Company (Northern
Indiana), Kokomo Gas and Fuel Company (Kokomo Gas), Northern Indiana Fuel and
Light Company, Inc. (NIFL), and Crossroads Pipeline Company (Crossroads).
 
  Industries' major non-utility subsidiaries include NIPSCO Development
Company, Inc. (Development), NIPSCO Energy Services, Inc. (Services), Primary
Energy, Inc. (Primary), and NIPSCO Capital Markets, Inc. (Capital Markets).
NIPSCO Industries Management Services Company, a subsidiary of Industries,
provides executive, financial, gas supply, sales and marketing, and
administrative and general services to Northern Indiana and other subsidiaries
of Industries.
 
  On December 19, 1996, Industries and IWC Resources Corporation (IWCR) signed
a definitive agreement for Industries to acquire IWCR for approximately $290
million, in Industries common shares and cash. Each share of IWCR stock will be
exchanged for $32 of Industries common shares or, at the election of the
shareholder, cash. The acquisition was completed on March 25, 1997.
 
  IWCR's largest subsidiary, Indianapolis Water Company, provides water service
to approximately 235,000 customers in Indianapolis and adjacent counties. In
addition, IWCR owns an underground utility locating and marking service
business and one of the nation's major gas pipeline construction companies.
 
  Northern Indiana, Industries' largest and dominant subsidiary, is a public
utility operating company, incorporated in Indiana on August 2, 1912, engaged
in supplying natural gas and electric energy to the public. It operates in 30
counties in the northern part of Indiana, serving an area of about 12,000
square miles with a population of approximately 2,188,000. At December 31,
1996, Northern Indiana served approximately 653,100 customers with gas and
approximately 411,500 with electricity.
 
  Kokomo Gas is a public utility operating company incorporated in Indiana in
1917, engaged in supplying natural gas to the public. It operates in the city
of Kokomo, Indiana and the surrounding area in 6 counties having a population
of approximately 100,000, and served approximately 32,900 customers at December
31, 1996. The Kokomo Gas service territory is contiguous to Northern Indiana's
gas service territory.
 
  NIFL is a public utility operating company incorporated in Indiana in 1906,
engaged in supplying natural gas to the public. Headquartered in Auburn,
Indiana, it operates in 5 counties in the northeast corner of the state having
a population of approximately 66,700, and served approximately 32,400 customers
at December 31, 1996. The NIFL service territory is contiguous to Northern
Indiana's gas service territory.
 
  Crossroads is a natural gas pipeline company which was approved by the
Federal Energy Regulatory Commission (FERC) to operate as an interstate
pipeline in May 1995. Crossroads had $2.8 million in operating revenues for
year 1996.
 
  Development makes various investments, including real estate and venture
capital investments. Services coordinates the energy-related diversification
ventures of Industries. Primary arranges energy-related projects with large
industrial customers. Capital Markets handles financing for ventures of
Industries and its subsidiaries other than Northern Indiana.
 
  The majority of the "Business" discussion of this report relates to Northern
Indiana, Kokomo Gas, NIFL and Crossroads (Utilities). See "Segments of
Business" in the Notes to Consolidated
 
                                       1
<PAGE>
 
Financial Statements and "Selected Supplemental Information--Gas Statistics and
Electric Statistics" in the 1996 Annual Report to Shareholders, which notes and
information are incorporated by reference (see Exhibit 13), regarding financial
information about industry segments and classes of customers served.
 
BUSINESS OF NORTHERN INDIANA, KOKOMO GAS AND NIFL.
 
  ELECTRIC OPERATIONS. 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, 1996, Northern Indiana generated 83.8% and purchased 16.2%
of its electric requirements.
 
  Northern Indiana's 1996 electric control area peak of 3,134,400 kw, which
includes Wabash Valley Power Association, Inc. (WVPA) and Indiana Municipal
Power Agency (IMPA) for which Northern Indiana controls interchange operations,
was set on August 6, 1996. Northern Indiana's all-time control area peak of
3,161,200 kw was set on July 14, 1995. Northern Indiana's 1996 internal peak
load, which excludes WVPA and IMPA, was 2,888,450 kw set on August 6, 1996.
This also established a new all-time internal peak load exceeding the old peak
of 2,882,200 kw established on July 14, 1995.
 
  Northern Indiana's electric system is interconnected with that of American
Electric Power (formerly Indiana Michigan Power Company), ComEd (formerly
Commonwealth Edison Company), Cinergy Services, Inc. (formerly PSI Energy,
Inc.), Consumers Energy (formerly Consumers Power Company), and 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 twelve 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. Pursuant to this agreement, which runs through
December, 2001, WVPA purchases 90,000 kw of capacity per month.
 
  Northern Indiana has full requirement agreements with each of its eight
municipal wholesale customers. These full requirement contracts became
effective October 1, 1987 and extend through January 31, 1998. Northern Indiana
intends to negotiate for extension of the contracts but there is no assurance
that they will be extended.
 
  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 companies 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
thirteen steam generating units have a net capability of 3,179,000 kw. Coal is
the primary source of fuel for all units, except
 
                                       2
<PAGE>
 
for three, which utilize natural gas. In addition, Northern Indiana's four
combustion turbine generating units with a net capability of 203,000 kw are
fired by gas. Fuel requirements for Northern Indiana's generation for 1996 were
supplied as follows:
 
<TABLE>
      <S>                                                                  <C>
      Coal................................................................ 98.4%
      Natural Gas.........................................................  1.6%
</TABLE>
 
  In 1996, Northern Indiana used approximately 8.1 million tons of coal at its
generating stations. Northern Indiana has established a normal level of coal
stock which provides adequate fuel supply during the year under all conditions.
 
  Annual coal requirements for Northern Indiana's electric generating units
through 2001 are estimated to range from 8.7 million tons to 8.9 million tons,
depending from year to year upon anticipated sales levels, scheduled
maintenance, and other variables. These requirements are being or will be met
in part under long-term contracts as follows:
 
<TABLE>
<CAPTION>
        MILLION
       TONS/YEAR                    SULFUR CONTENT                                 EXPIRATION
       ---------                    --------------                                 ----------
      <S>                           <C>                                            <C>
         1.0                             High                                         1998
      Up to 1.0(a)                       High                                         1998
         1.3(b)                          Low                                          2001
         1.8(c)                          Low                                          1999
         1.0(d)                          Low                                          1998
          .5(e)                          High                                         1998
</TABLE>
--------
(a) Contract calls for requirements up to 1.0 million tons/contract year.
(b) 1.8 million tons in 1997.
(c) Plus or minus 10%/contract year (1.225 million tons in 1999).
(d) Plus or minus 10%/contract year (.5 million tons in 1998).
(e) .250 million tons in 1998.
 
  The average cost of coal consumed in 1996 was $27.50 per ton or 15.79 mills
per kilowatt-hour (kwh) generated as compared to $28.28 per ton or 15.89 mills
per kwh generated in 1995. Northern Indiana's forecasts indicate that its coal
costs will be slightly lower over the next two years.
 
  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 the reserves are being recovered through the rate-
making process as such coal reserves are used to produce electricity.
 
  FUEL ADJUSTMENT CLAUSE. See "Fuel Adjustment Clause" in the Notes to
Consolidated Financial Statements in the 1996 Annual Report to Shareholders,
which note is incorporated herein by reference (see Exhibit 13).
 
  GAS OPERATIONS. Northern Indiana supplies natural gas of about 1,000 British
thermal units (Btu) per cubic foot. In a 24-hour period ended February 3, 1996,
Northern Indiana's 1996 maximum day sendout was 1,553,977 dekatherms (dth).
 
  In 1996, 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).
Approximately 57% of Northern Indiana's 1996 gas supply was purchased on the
spot market, generally on less than 30-day agreements.
 
 
                                       3
<PAGE>
 
  The average price per dth (including FERC Order No. 636 transition charges)
in 1996 was $3.13 compared to $2.98 in 1995, and the average cost of purchased
gas, after adjustment for transition charges billed to transport customers, was
$3.03 per dth as compared to $2.63 per dth in 1995.
 
  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.
 
  Agreements have been negotiated with natural gas suppliers to replace former
pipeline supplier contracts pursuant to the requirements of FERC Order No. 636
(See "FERC Order No. 636" in the Notes to Consolidated Financial Statements in
the 1996 Annual Report to Shareholders, which note is incorporated herein by
reference (see Exhibit 13)). Northern Indiana also has firm transportation
agreements with the pipelines, which allow Northern Indiana to move its gas
through the pipelines' transmission systems. Northern Indiana also has producer
agreements which allow for the purchase of gas either from gas marketers or
producers.
 
  Northern Indiana has a curtailment plan approved by the Indiana Utility
Regulatory Commission (Commission). Effective on August 11, 1981, the plan
allows unrestricted gas sales by Northern Indiana. There were no firm sales
curtailments in 1996 and none are expected during 1997.
 
  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 1996-1997 winter of up to 108,402 dth per
day.
 
  In addition, Northern Indiana and NI-TEX, Inc. (NI-TEX), a subsidiary of
Services, have 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
26,871,707 dth of annual stored volume, and allow for approximately 551,446 dth
of maximum daily withdrawal.
 
  Northern Indiana has a liquefied natural gas plant in LaPorte County which is
designed for peak shaving and has the following capacities: maximum storage of
4,000,000 dth; maximum liquefaction rate (gas to liquid), 20,000 dth per day;
maximum vaporization rate (output to distribution system), 300,000 dth per day.
 
  KOKOMO GAS.  Kokomo Gas' total gas send-out for 1996 was 8,876,848 dth,
compared to 8,232,810 dth for 1995. Total transportation volumes for industrial
customers in 1996 were 3,444,329 dth, compared to 3,273,562 dth in 1995. Kokomo
Gas purchased gas under term agreements from NI-TEX and NESI Energy Marketing,
L.L.C., (NEM), both subsidiaries of Services, to satisfy all of its system
requirements in 1996.
 
  NIFL.  NIFL's total gas send-out for 1996 was 10,855,132 dth compared to
9,517,483 dth for 1995. Total transportation volumes for industrial customers
in 1996 were 4,883,677 dth, compared to 4,251,519 dth in 1995. NIFL purchased
gas on the spot market from a number of suppliers and also under term
agreements from NI-TEX and NEM to satisfy all of its system requirements in
1996.
 
  GAS COST ADJUSTMENT CLAUSE.  See "Gas Cost Adjustment Clause" in the Notes to
Consolidated Financial Statements in the 1996 Annual Report to Shareholders,
which note is incorporated herein by reference (see Exhibit 13).
 
  FERC ORDER NO. 636.  See "FERC Order No. 636" in the Notes to Consolidated
Financial Statements in the 1996 Annual Report to Shareholders, which note is
incorporated herein by reference (see Exhibit 13).
 
                                       4
<PAGE>
 
BUSINESS OF OTHER SUBSIDIARIES
 
  CAPITAL MARKETS.  Capital Markets serves as the funding agent for ventures of
Industries and its subsidiaries other than Northern Indiana. Capital Markets
has a $150 million revolving Credit Agreement, which provides short-term
financing flexibility to Industries and also serves as the back up instrument
for a commercial paper program. As of December 31, 1996, there were no
borrowings outstanding under this agreement. Capital Markets also has $95
million of money market lines of credit. As of December 31, 1996, $27.0 million
of borrowings were outstanding under these lines of credit. As of December 31,
1996, Capital Markets had $119.3 million in commercial paper outstanding,
having a weighted average interest rate of 5.78%.
 
  The 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' securities in the event
of a failure to pay by Capital Markets. Restrictions in the Support Agreement
prohibit recourse on the part of Capital Markets' investors against the stock
and assets of Northern Indiana. 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 to holders of Capital
Markets' securities. The carrying value of those assets, other than Northern
Indiana, reflected in the consolidated financial statements of Industries, was
approximately $518.9 million at December 31, 1996.
 
  DEVELOPMENT.  Development makes various investments, including real estate
and venture capital investments.
 
  Development is a 95% shareholder in Elm Energy and Recycling (UK) Ltd. (Elm
Energy), which owns and operates a tire-fueled electric generating plant in
Wolverhampton, England, that began operating in late 1993. See "Elm Energy and
Recycling (UK) Ltd." in the Notes to Consolidated Financial Statements in the
1996 Annual Report to Shareholders, which note is incorporated herein by
reference (see Exhibit 13).
 
  Developments subsidiary, Lake Erie Land Company is a real estate development
firm whose projects include Sand Creek Country Club, a golf course and
residential development in Chesterton, Indiana and Sand Creek Center, a mixed
use sustainable development also in Chesterton.
 
  In 1996, Development invested in multiple-family residential housing
developments in Hammond, Hebron, Plymouth, and South Bend. Development has
similar projects in Michigan City, South Bend, Rensselaer, Hammond, Fort Wayne,
and Mishawaka. Additional projects are being considered in other communities in
Northern Indiana's service territories. These projects are part of the
continued commitment by Development to provide high quality, energy efficient,
affordable housing to the residents of a variety of geographic and economic
regions served by Northern Indiana.
 
  SERVICES.  Services coordinates energy-related diversification and
optimization of fixed assets. Services has five wholly-owned subsidiaries, a
majority interest in one limited liability company, and minority interests in a
limited liability company and a limited partnership. The five wholly-owned
subsidiaries are NIPSCO Fuel Company, Inc. (Fuel), NI-TEX, Inc. (NI-TEX),
NIPSCO Energy Services Canada Ltd. (NESCL), Parkway Engineering and
Distribution Company, Inc. (PEDCO), and Green Fuels, Inc. (Greenfuels). The
limited liability companies are NESI Energy Marketing L.L.C. (NEM) and
Inventory Management and Distribution Company, L.L.C. The limited partnership
is Market Hub Partners, L.P.
 
  Fuel.  Fuel is an oil and gas exploration and production company with
activities concentrated in the mid-continent region of the United States and
offshore in the Gulf of Mexico. As of
 
                                       5
<PAGE>
 
December 31, 1996, $41.8 million had been invested in U.S. exploration and
development projects. Fuel's estimated proved reserves at year-end totaled 1.74
million barrels of oil and 29.7 billion cubic feet of natural gas. In January
1997, Fuel sold its partnership interest in the offshore properties to SOCO
Offshore, Inc. The partnership interest represented approximately $16.0 million
of Fuel's investment. Proved reserves related to the sale were estimated to be
289,600 barrels of oil and 13.7 billion cubic feet of natural gas.
 
  NI-TEX.  NI-TEX is an intrastate natural gas transmission and supply company
in Texas providing gas sales, transportation and storage services. NI-TEX
provides flexible city gate gas supply to Northern Indiana, Kokomo Gas, and
NIFL under spot and/or term contracts. NI-TEX, through joint ventures with
industry partners, also owns natural gas transmission and storage facilities
located in Texas. Its Laredo-Nueces pipeline affiliate transported 13.9 billion
cubic feet of natural gas in 1996. Its Mid-Tex Gas Storage Company affiliate
operates a salt dome gas storage facility with an operating capacity of 5.7
billion cubic feet due to the expansion of the second cavern completed in
December 1995. Operating income from NI-TEX sales arrangements, combined with
joint venture earnings, totaled $6.4 million for the year.
 
  NEM.  In August 1995, Services formed a limited liability company with Enco
Energy Inc. Services holds a sixty percent interest in NEM. NEM provides
natural gas sales and on-system transportation management services to customers
within Northern Indiana's service territory. NEM is engaged in energy trading
activities to manage risk. NEM opened a Detroit, Michigan office in early 1996
for expansion into the Michigan market. During 1996, operating income for NEM
totaled $3.5 million.
 
  NESCL. NESCL is a Canadian subsidiary formed to hold NESI Canadian
investments and companies. NESCL owns a 50% interest in FuelMaker Corporation,
a manufacturer of vehicle fueling equipment, and a 100% interest in Southlake
Energy, Inc., (SLAKE) a Canadian oil and gas exploration and production
company. NESCL also owns 70% in NESI Energy Marketing Canada Ltd., (NEMC). On
November 27, 1996 NEMC ceased doing business. See "NESI Energy Marketing Canada
Ltd. Litigation" in the Notes to Consolidated Financial Statements in the 1996
Annual Report to Shareholders, which note is incorporated herein by reference
(see Exhibit 13). As of December 31, 1996, SLAKE had invested $17.1 million in
Canadian exploration and development projects. Estimated proved reserves
attributable to said projects were 812,000 barrels of oil and 22.6 billion
cubic feet of natural gas.
 
  PEDCO. NESI acquired PEDCO in January 1996 to develop and expand the market
for energy efficient lighting.
 
  Greenfuels. Greenfuels sells compressed natural gas (CNG) and liquefied
natural gas (LNG) for vehicular fuel. Greenfuels provides conversion kits and
assists in or performs the conversion of gasoline driven vehicles to CNG in
order to expand the market base.
 
  TRIUMPH NATURAL GAS, INC. (TRIUMPH).  Services owns 51% in Triumph. Triumph
is in the process of liquidation. The main issues to be resolved are the sale
of the Triark gas gathering assets and liquidation of the Arkoma Limited
Partnership. Proceeds from the liquidation of Arkoma are expected to be
sufficient to repay all indebtedness of Triumph and is expected in the second
quarter of 1997. Services, as well as certain affiliates and officers, are
defendants in a lawsuit brought by certain shareholders and former members of
the Board of Directors of Triumph. The lawsuit alleges that the Services
defendants' actions caused Triumph to fail and subsequently liquidate. Services
is of the opinion that the suit has no merit and will continue to aggressively
defend itself. Services has filed a counterclaim seeking recovery of Services'
original investment. Trial is set for mid-June 1997.
 
  PRIMARY.  Primary arranges energy-related projects with large industrial
customers and has entered into certain commitments in connection with these
projects. Primary offers large industrial energy customers, nationwide,
expertise in managing the engineering, construction, operation and
 
                                       6
<PAGE>
 
maintenance of these energy-related projects. Primary is the parent of certain
other subsidiaries, including Harbor Coal Company (Harbor Coal), North Lake
Energy Corporation (North Lake), Portside Energy Corporation (Portside),
Lakeside Energy Corporation (LEC), 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 Inland Steel Company for use in the operation of its blast
furnaces. Harbor Coal is a 50% partner in the project with an Inland Steel
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 Inland Steel Company. The facility uses steam generated by
Inland Steel to produce electricity to be delivered to Inland Steel. The
facility began commercial operations in May 1996. Industries has guaranteed
North Lake's obligations relative to the lease and certain obligations to
Inland Steel relative to the project.
 
  LEC has entered into a lease for the use of a 161-megawatt energy facility to
be located at USS Gary Works. The facility will process high pressure steam
into electricity and low pressure steam to be delivered to USX Corporation--US
Steel Group. The fifteen-year lease with a third-party lessor will commence
once the facility is fully constructed. LEC is currently acting as the agent
for the lessor to design, construct, and start up the energy facility. Capital
Markets has guaranteed LEC obligations to the lessor during the construction
period. Capital Markets also guarantees LEC's security deposit obligations
relative to the lease and certain limited LEC obligations to the lessor.
Construction of the project began in January 1996. The facility is scheduled to
be operational in May 1997.
 
  Portside has entered into an agreement with National Steel Corporation
(National) to utilize a new 63-megawatt energy facility at National's Midwest
Division to process natural gas into electricity, process steam and heated
water for a fifteen-year period. Portside intends to lease this facility, once
constructed, from a third party. Additionally, Portside has entered into an
interim agreement, which expires when the lease is established with the third-
party lessor, under which Portside is acting as agent for the lessor to design,
construct, and start up the energy facility. Industries has guaranteed certain
Portside obligations to the lessor during construction. Capital Markets
anticipates guaranteeing certain Portside obligations relative to the
anticipated lease. Construction of the project began in June 1996. The facility
is scheduled to be operational in August 1997.
 
  CE has entered into a fifteen-year service agreement with Inland Steel
Company and the Indiana Harbor Coke Company, LP (Harbor Coke), a subsidiary of
the Sun Company, Inc. This agreement provides that CE will utilize a new energy
facility at Inland's Indiana Harbor Works to scrub flue gases and recover waste
heat from the coke facility being constructed by Harbor Coke and produce
process steam and electricity from the recovered heat which will be delivered
to Inland. CE intends to lease these facilities, once constructed, from a third
party. Additionally, CE has entered into an interim agreement, which expires
when the lease is established with the third party lessor, under which CE is
acting as agent to design, construct and start up the facilities. Capital
Markets has guaranteed certain CE obligations during construction. Capital
Markets anticipates guaranteeing certain CE obligations relative to the
anticipated lease. Construction of the project began in January of 1997. The
facility is scheduled to be operational in July of 1998.
 
  Primary has advanced approximately $42 million and $11 million, at December
31, 1996 and 1995, respectively, to the lessors of the energy related projects
discussed above. These net advances are included in "Current Assets--
Prepayments and other" in the Consolidated Balance Sheet and "Other, net" as a
component of operating activities in the Consolidated Statement of Cash Flows.
 
                                       7
<PAGE>
 
  Primary is evaluating other potential partnerships with Northern Indiana
customers for using waste gases from steelmaking and other processes for power
generation. Low Btu blast furnace gases and other fuels, which could fuel new
generation, are produced at companies served by Northern Indiana.
 
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 predominantly 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. Northern Indiana and Industries have
been advised by their counsel that Industries will not be subject to regulation
by the Commission as long as it is not a public utility. Under existing law,
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 Northern
Indiana, Kokomo Gas, and NIFL (regulated utilities) must be filed with the
Commission.
 
  The regulated utilities are subject to regulation by the Commission as to
rates, service, accounts, issuance of securities, and in other respects. The
regulated 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 Northern Indiana, that engages in FERC
jurisdictional sales or activities will continue to be subject to such
regulation.
 
  Northern Indiana's restructuring under Industries was approved by a February
29, 1988 order of the FERC. The FERC's February 29, 1988 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 1996, about 4% of Northern Indiana's electric revenues were derived from
electric service it furnished at wholesale in interstate commerce to other
utility companies, 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. The jurisdiction of the FERC does
not extend to the issuance of securities by Northern Indiana since it is a
public utility organized and operating in the State of Indiana, under the laws
of which its security issues are regulated by the Commission. The FERC on
October 21, 1954, declared Northern Indiana exempt from the provisions of the
Natural Gas Act. Kokomo Gas and NIFL are also exempt from the provisions of the
Natural Gas Act.
 
                                       8
<PAGE>
 
  RATE MATTERS.  For information regarding the regulated utilities' gas rates
and gas transition costs, see "FERC Order No. 636" in the Notes to Consolidated
Financial Statements in the 1996 Annual Report to Shareholders, which note is
incorporated herein by reference (see Exhibit 13).
 
  Northern Indiana filed a petition for an Alternative Regulatory Plan (ARP)
with the Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory environment and structure which will permit increased
choice for gas customers, competition among suppliers, and improved natural gas
service. In its ARP, Northern Indiana proposes to implement new rates and
services that would include, but not be limited to, further unbundling of
services for additional customer classes which would include increased customer
choice for sources of natural gas supply, negotiated services and prices, and
incentive gas and storage cost mechanisms. The Commission will hold hearings on
the ARP during the first half of 1997.
 
  CONSTRUCTION BUDGET.  The Utilities' 1997-2001 construction budget (including
allowance for funds used during construction) is estimated at approximately
$774 million, including $161 million in 1997, $166 million in 1998, $151
million in 1999, $146 million in 2000 and $150 million in 2001. The Utilities'
construction estimates include adjustments for anticipated inflation. No new
electric generating units are planned in the 1997-2001 budget. Northern Indiana
does not have, and has no plans to construct, a nuclear generating unit.
 
  COMPETITION.  In municipalities where Northern Indiana renders electric
service to the general public as a public utility, no other utility renders
electric or gas service, except in Angola, DeMotte, Rome City, Wanatah, and
Waterloo. In certain municipalities where electric service is supplied by
Northern Indiana, NIFL provides competing gas utility service. In localities
where Northern Indiana renders gas service only, it competes with electric
utilities, municipal or private, for the business for which they render
alternative electric service.
 
  Kokomo Gas and NIFL service territories are contiguous to Northern Indiana's
gas service territory, but Northern Indiana, Kokomo Gas, and NIFL do not
compete for any of the same gas customers. Kokomo Gas and NIFL compete with
other electric utilities serving customers in their respective service
territories.
 
  All electric service territories within the State of Indiana are assigned to
the existing suppliers, and boundaries of new territories outside existing
municipalities are assigned to the utility having the nearest existing electric
distribution lines. Only existing municipal electric utilities may expand their
service areas and then only into areas that have been annexed by the
municipality, subject to the approval of the Commission and certain other
conditions. Northern Indiana makes no representation as to the possible effect
upon its business of present or future competition by private or municipal
utilities or governmental agencies, instrumentalities or authorities within the
territory now served.
 
  Northern Indiana is also subject to competition for gas sales to industrial
customers through the ability of these customers, under Northern Indiana's rate
provisions, to make their own purchases of gas and have Northern Indiana
transport the gas to them. During 1996, gas transportation represented 54% of
Northern Indiana's total gas sendout.
 
  Indiana law requires Commission approval before a gas customer of a utility
may bypass the utility and make other arrangements for gas service. Any entity
which transports gas from outside Indiana for direct sale or delivery to itself
or other end-users within the state will be considered a public utility and
must obtain a necessity certificate from the Commission in order to engage in
such activities.
 
  See "Competition" in the Management's Discussion and Analysis of Financial
Condition and Results of Operations in the 1996 Annual Report to Shareholders,
which is incorporated herein by reference (see Exhibit 13).
 
                                       9
<PAGE>
 
  EMPLOYEE RELATIONS. Northern Indiana had 3,562 employees at December 31,
1996. Approximately 72% of Northern Indiana's employees (physical and clerical
workers) are represented by two local unions of the United Steelworkers of
America, AFL-CIO-CLC. Effective June 1, 1993, the bargaining unit employees
ratified four-year agreements which continue until June 1, 1997. Northern
Indiana intends to negotiate new agreements with the two local unions, but can
not predict the timing or terms of new agreements.
 
  Certain officers of Northern Indiana are also officers of Industries.
Industries currently has 457 employees in its diversified operations.
 
  Kokomo Gas had 72 full-time employees at December 31, 1996. Of these, 51
employees are represented by the Oil, Chemical, and Atomic Workers
International Union, AFL-CIO. New collective bargaining agreements covering
these employees were negotiated in early 1995 and will expire February 15,
1998.
 
  NIFL had 77 full-time employees at December 31, 1996, none of whom is
represented by a union.
 
  ENVIRONMENTAL MATTERS. The Utilities have an ongoing program to remain aware
of laws and regulations involved with hazardous waste and other environmental
matters. It is the Utilities' intent to continue to evaluate their facilities
and properties with respect to these rules and identify any sites that would
require corrective action. The Utilities have recorded a reserve of $16.8
million to cover probable corrective actions as of December 31, 1996; however,
environmental regulations and remediation techniques are subject to future
change. The ultimate cost could be significant, depending on the extent of
corrective actions required. Based upon investigations and management's
understanding of current laws and regulations, the Utilities believe that any
corrective actions required, after consideration of insurance coverages and
contributions from other potentially responsible parties, will not have a
significant impact on the financial position or results of operations of
Industries.
 
  The Utilities are subject to regulation with regard to environmental matters
by various federal, state and local authorities.  The Utilities cannot forecast
the effect of all such regulation upon their generating, transmission or other
facilities, or their operations. The Utilities intend to comply with all
applicable governmental requirements and have adopted an environmental policy
that fosters the pursuit of proactive sound environmental programs and
management.
 
  The application of federal and state restrictions to protect the environment,
including but not limited to those hereinafter described, involves or may
involve review, certification or issuance of permits by various federal, state,
and local authorities. Such restrictions, particularly in regard to emissions
into the air and water, and disposal of solid wastes, may impact the operation
of Northern Indiana's facilities, and may also require substantial investments.
 
  Northern Indiana's total capital expenditures from January 1, 1992, through
December 31, 1996 for pollution control facilities were approximately $141
million and were financed in part by the sale of Pollution Control Notes and
Bonds--Jasper County. Northern Indiana anticipates expenditures of
approximately $50 million for pollution control equipment in the 1997-2001
period which includes anticipated expenditures of $29 million in 1997 and $6
million in 1998.
 
  Air. The Indiana Department of Environmental Management (IDEM) Office of Air
Management has submitted to the U.S. Environmental Protection Agency (EPA) a
State Implementation Plan (SIP) in accordance with the requirements of the
Clean Air Act Amendments of 1977.
 
  Attainment-Nonattainment. Under the Clean Air Act Amendments of 1977, the
State has identified areas which are in compliance with the National Ambient
Air Quality Standards
 
                                       10
<PAGE>
 
(NAAQS) (attainment areas) and areas that are not in compliance with respect to
the sulfur dioxide, particulate matter and other pollutant standards
established by NAAQS (nonattainment areas). Portions of Lake County in which
Northern Indiana operates an electric generating facility remain designated a
nonattainment area for sulfur dioxide. Control plans for this county have been
implemented. Reductions in emissions of sulfur dioxide have been made, and
Northern Indiana anticipates no increased costs as a result of the
implementation of the control plans for Lake County. On January 14, 1997, the
EPA designated LaPorte County to attainment for sulfur dioxide.
 
  Lake County, Indiana, is designated as a nonattainment area for particulate
matter or PM-10. The State of Indiana promulgated a PM-10 SIP rule, which
became effective on June 11, 1993. The rule requires reduced opacity and mass
emissions limits at Dean H. Mitchell Station as well as the establishment of
fugitive dust control and continuous compliance plans. Northern Indiana has
made investments in equipment and is currently in compliance with the PM-10 SIP
rules. Porter County has been determined to have an unclassified status for PM-
10. According to state requirements, the area will be monitored for PM-10
impacts to determine the appropriate classification with respect to the NAAQS.
All other counties where Northern Indiana operates electric production
facilities have an unclassified status for PM-10.
 
  Under Title I of the Clean Air Act Amendments of 1990 (CAAA), Lake and Porter
Counties are classified as severe nonattainment areas for ozone. Passage of the
CAAA resulted in new provisions applicable to mobile and stationary sources in
Lake and Porter Counties. Control measures requiring reduction of emissions of
nitrogen oxides from the Mitchell and Bailly Generating Stations as a
consequence of the Lake Michigan Ozone Control Program have yet to be
determined. Northern Indiana is evaluating potential least-cost methods to
reduce emissions of nitrogen oxides from the generating stations. The EPA has
approved a conditional waiver from present reduction of nitrogen oxides under
Title I. Northern Indiana cannot determine the cost impact of the future
provisions.
 
  Acid Rain. Title IV of the CAAA addresses the acid rain issue by targeting
large sources of sulfur dioxide and nitrogen oxides for significant reductions.
The core acid rain rules for sulfur dioxide were promulgated by the EPA on
January 11, 1993. As required by the regulations, Bailly Units 7 and 8 and
Michigan City Unit 12 reduced their sulfur dioxide emissions below 2.5 pounds
per million British thermal units (lbs/mm Btu) by January 1, 1995. These units,
along with the remainder of Northern Indiana's coal-fired units, are required
to reduce their sulfur dioxide emissions below 1.2 lbs/mm Btu by January 1,
2000 (Phase II).
 
  Presently, all of Northern Indiana's eleven coal fired generating units
utilize low sulfur fuel or flue gas desulfurization units to control sulfur
dioxide emissions below the 1.2 lbs/mm Btu level. That places Northern Indiana
in compliance with the Phase II sulfur dioxide standards.
 
  The EPA approved Northern Indiana's acid rain permits for the Bailly and
Michigan City Generating Stations on August 31, 1993. The Phase I acid rain
permits for the stations are effective from January 1, 1995 through December
31, 1999. One component of the permit is the Phase I extension plan for Bailly.
Northern Indiana was eligible for and received the extension because of the
construction and operation of the Bailly scrubber. This extension plan
allocates additional allowances, above the basic allowances, applicable to
Bailly and Michigan City Generating Stations.
 
  Northern Indiana estimates that total costs of compliance with the CAAA
sulfur dioxide regulations will impact electric rates by less than 5% in the
future.
 
                                       11
<PAGE>
 
  Northern Indiana is pursuing nitrogen oxide reduction measures to meet future
acid rain requirements. The EPA proposed Phase II nitrogen oxide limits in
January of 1996. The final rules were signed by the EPA Administrator on
December 10, 1996. The nitrogen oxides emission limits in the final rules
potentially apply to all of Northern Indiana's electric generating facilities.
Although there is a legal challenge to the final rule, plans will be prepared
to meet compliance with the final rules. On December 30, 1996, Northern Indiana
filed permit applications requesting early election of Northern Indiana's Phase
II pulverized coal boilers. The permits when approved by the EPA will establish
limits based on the Phase I nitrogen oxides emission standards for the seven
boilers during the following ten year period.
 
  Additional Air Issues. The CAAA contain provisions that could lead to
limitations on emissions of nitrogen oxides and hazardous air pollutants, which
may require significant capital expenditures for control of these emissions.
Northern Indiana is pursuing a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with CAAA
requirements.
 
  The EPA has promulgated a permit program to meet the requirements of Title V
of the CAAA. The IDEM, on November 3, 1993, proposed an air operating permit
program to meet the requirements of Title V to Indiana's Air Pollution Control
Board. The Air Pollution Control Board adopted rules to implement the Title V
permit program on March 10, 1994. These operating permit rules, including a new
fee schedule, became effective in Indiana on June 24, 1994. Indiana submitted
the Title V rules to the EPA for approval in August of 1994. The EPA has
approved the submittal and the rules became effective December 14, 1995.
Northern Indiana submitted Title V permit applications for each of the four
electric generating stations during September 1996.
 
  Water. The Clean Water Act, as amended, subjects point source dischargers to
technology and water quality based controls through the National Pollution
Discharge Elimination System (NPDES) permit program. Northern Indiana is
required to have NPDES permits for discharges from its generating stations into
the waters of the United States. The Great Lakes Water Quality Initiative (GLI)
is a complex set of water quality regulations governing dischargers in the
Great Lakes drainage basin. This regulation became effective February 13, 1997
and will affect the NPDES permits for Northern Indiana's three lakeside
stations. As of this date, the Bailly Station NPDES permit has not been renewed
by IDEM. Northern Indiana anticipates that IDEM will issue the new Bailly
permit under the GLI regulations. The Mitchell, Michigan City, and R. M.
Schahfer Stations' NPDES permits expire in August 1998. Northern Indiana
received NPDES permit modifications for intermittent chemical treatment of the
main discharge at the Mitchell and Michigan City Stations for zebra mussel
control. Bailly Station utilizes thermal treatment in its water systems to
control zebra mussels. Schahfer Station has not presently experienced
operational impacts due to zebra mussels. Rather, Schahfer Station has
experienced equipment problems due to an Asiatic clam infestation. Alternate
forms of control are being investigated by Northern Indiana in an effort to
prevent any impact on plant operations relating to these infestations, while
also minimizing the environmental impact of the controls.
 
  Superfund Sites. The EPA has notified Northern Indiana that it is a
"potentially responsible party" (PRP) under the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA) and may be required to share
in the cost of cleanup of several waste disposal sites identified by the EPA.
The sites are in various stages of investigation, analysis, and remediation. At
each of the sites, Northern Indiana is one of several PRPs, and it is expected
that remedial costs, as provided under CERCLA, will be shared among them. At
some sites, Northern Indiana and/or the other named PRPs are presently working
with the EPA to clean up the sites and avoid the imposition of fines or added
costs.
 
                                       12
<PAGE>
 
  Manufactured-Gas Plant Sites. The Utilities have instituted a program to
investigate former manufactured-gas plants where one of them is the current or
former owner. The Utilities have identified twenty-seven of these sites and
made visual inspections of these sites. Initial samplings have been conducted
at seventeen sites. Follow-up investigations have been conducted at seven sites
and potential remedial measures are being evaluated. The Utilities will
continue their program to assess sites. During the follow-up investigation of
the former manufactured-gas plant in Elkhart, Indiana, Northern Indiana noted
the presence of hydrocarbons in the Elkhart River. Northern Indiana reported
this finding to IDEM and the EPA. Northern Indiana has placed the Elkhart site
in the IDEM Voluntary Remediation Program (VRP). The goal of placing the site
in the VRP is to obtain IDEM approval of the determination and subsequent
implementation of what remedial measures, if any, may be needed.
 
  Northern Indiana was notified by IDEM in 1992 of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured-gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort Wayne
site. The remainder of the site is being evaluated to determine what future
remedial measures, if any, may be needed.
 
  During the course of investigation activities, Northern Indiana noted the
presence of manufactured-gas plant residuals in the St. Mary's River in Fort
Wayne, Indiana and the Wabash River in Peru, Indiana. Northern Indiana notified
IDEM and the EPA and immediately took steps to contain the material at both
sites.
 
  Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered
into an agreement covering cost sharing and management of investigation and
remediation programs at five former manufactured-gas plant sites at which both
companies or their predecessors were former operators or owners. One of these
sites is the Lafayette site which Indiana Gas had previously notified Northern
Indiana is being investigated and remediated pursuant to an administrative
order with IDEM. Northern Indiana also notified Cinergy Services, Inc.
(Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator of
seven former manufactured-gas plants at which Northern Indiana had conducted or
was planning investigation or remediation activities. In December 1996,
Northern Indiana sent a written demand to Cinergy related to one of these
sites, Goshen. Northern Indiana demanded that Cinergy pay Northern Indiana for
costs Northern Indiana has already incurred and to be incurred to implement the
needed remedy at the Goshen site.
 
  The Utilities have met with various companies that provided insurance
coverage which the Utilities believe covers costs related to actions taken at
former manufactured-gas plants. In September 1995, certain insurance companies
initiated a suit in Indiana state court against Northern Indiana to deny
coverage. Later in September 1995, Northern Indiana filed a more comprehensive
suit in Federal Court in Indiana against those insurers and several other
insurance companies, seeking coverage for costs associated with several former
manufactured-gas plant sites. The state court action is stayed pending
resolution of the Northern Indiana suit in Federal Court. Both sides have
motions pending in the Federal Court lawsuit that would be dispositive of the
case. Northern Indiana has obtained cash settlements with some of its insurers.
 
  In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities."
This statement provides authoritative guidance for recognition, measurement,
display, and disclosure of environmental remediation liabilities in financial
statements. The Utilities will adopt this standard on January 1, 1997 and
adoption will not have a material impact on Industries' financial position or
results of operations.
 
                                       13
<PAGE>
 
  Electric And Magnetic Fields. The possibility that exposure to electric and
magnetic fields (EMF) emanating from power lines, household appliances and
other electric sources may result in adverse health effects has been the
subject of public, governmental, and media attention. Recently, the U.S.
National Research Council of the National Academy of Sciences concluded in a
report, after examining more than 500 EMF studies spanning seventeen years,
that among other things, there is insufficient evidence to consider EMF a
threat to human health. Despite the report's findings, future research
appropriations are continuing to be dedicated to explore the issue.
 
                               ----------------
 
  It is not possible to predict the scope, enforceability or financial impact
of other environmental regulations or standards which may be established in the
future.
 
ITEM 2. PROPERTIES.
 
  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 only significant properties owned by other subsidiaries of Industries
are: the Southlake Complex, a 325,000 square foot office building in
Merrillville, Indiana, leased to Northern Indiana and owned by Development; a
36-mile intrastate natural gas pipeline, located in southern Texas and half-
owned by NI-TEX, Inc.; a golf course and surrounding residential development in
Chesterton, Indiana, owned by Lake Erie Land Company (a subsidiary of
Development); a waste-to-energy generating plant in Wolverhampton, England
owned by Elm Energy; commercial real estate joint ventures, half-owned by KOGAF
Enterprises (a subsidiary of Development) located in Kokomo, Indiana; and
interests in oil and gas producing properties in the United States and Canada
owned by Fuel.
 
  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. During the year ended December 31,
1996, Northern Indiana generated 83.8% and purchased 16.2% of its electric
requirements.
 
  Northern Indiana has 292 substations with an aggregate transformer capacity
of 22,877,400 kva. Its transmission system with voltages from 34,500 to 345,000
consists of 3,052 circuit miles of line. The electric distribution system
extends into 21 counties and consists of 7,692 circuit miles of overhead and
1,338 cable miles of underground primary distribution lines operating at
various voltages from 2,400 to 12,500 volts. Northern Indiana has distribution
transformers having an aggregate capacity of 11,050,855 kva and 434,851
electric watt-hour meters.
 
  GAS. Northern Indiana has an underground storage field at Royal Center and a
liquefied natural gas plant in LaPorte County, both of which are described
under "Item 1. Business--Gas Operations."  Northern Indiana has 13,195 miles of
gas mains.
 
  Kokomo Gas has a liquified natural gas plant in Howard County which has the
following capacities: maximum storage of 400,000 mcf; maximum liquefaction rate
(gas to liquid), 2,850 mcf per day; maximum vaporization rate (output to
distribution system), 30,000 mcf per day. Kokomo Gas also has a gas holder with
a storage capacity of 12,000 mcf. Kokomo Gas has 738 miles of gas mains.
 
  NIFL has 789 miles of gas mains.
 
  OTHER PROPERTIES. Northern Indiana owns offices and service buildings,
salesrooms, garages, repair shops, motor vehicles, construction equipment and
tools, and office furniture and equipment, and also leases offices in various
localities.  It also owns miscellaneous parcels of real estate not now used in
utility operations.
 
                                       14
<PAGE>
 
  CHARACTER OF OWNERSHIP. The properties of Northern Indiana are subject to the
lien of its First Mortgage Indenture. The principal offices and properties are
held in fee and are free from other encumbrances, subject to minor exceptions,
none of which is of such a nature as substantially to impair the usefulness to
Northern Indiana of such properties. Many of the offices in the various
communities served are occupied by Northern Indiana under leases. All
properties are subject to liens for taxes, assessments and undetermined charges
(if any) incidental to construction, which it is Northern Indiana's practice
regularly to pay, as and when due, unless contested in good faith. In general,
the electric and gas 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. These consents and
rights are deemed adequate for the purposes for which they are being used.
Northern Indiana does not, however, generally have specific easements from the
owners of the property adjacent to public highways over, upon, or under which
its electric and gas lines 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 and gas 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 Northern Indiana are parties to various pending proceedings,
including suits and claims against them for personal injury, death and property
damage, but, in the opinion of their counsel, the nature of such proceedings
and suits, and the amounts involved, do not depart from the ordinary routine
litigation and proceedings incidental to the kind of businesses conducted by
Industries and Northern Indiana, except as set forth above under "Item 1.
Business--Environmental Matters and Triumph Natural Gas, Inc." and as described
under the captions "Pending Tax Matter," "Elm Energy and Recycling (UK) Ltd.,"
"NESI Energy Marketing Canada Ltd. Litigation," and "Environmental Matters" in
the Notes to Consolidated Financial Statements in the 1996 Annual Report to
Shareholders, which notes are incorporated herein by reference (see Exhibit
13). To the knowledge of Industries no other material legal proceedings against
Industries, Northern Indiana or their subsidiaries are contemplated by
governmental authorities and other parties.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
  None.
 
SUPPLEMENTAL ITEM--EXECUTIVE OFFICERS OF THE REGISTRANT.
 
<TABLE>
<CAPTION>
                                                                 DATE OF ASSUM-
                                                                       ING
                                                                  PRESENT POSI-
      NAME         AGE                  OFFICE                        TION
      ----         ---                  ------                   --------------
<S>                <C> <C>                                       <C>
Gary L. Neale      57  Chairman, President, Chief                March 1, 1993
                        Executive Officer and Director         
Stephen P. Adik    53  Executive Vice President and Chief        January 1, 1994
                        Financial Officer, and                 
                        Treasurer                              
Patrick J.         55  Executive Vice President and Chief        July 1, 1996
 Mulchay                Operating Officer, Northern Indiana    
                        Public Service Company                 
Jeffrey W. Yundt   51  Executive Vice President and Chief        July 1, 1996
                        Operating Officer, Energy Services     
Joseph L. Turner,  60  Executive Vice President, Major Accounts  July 1, 1996
 Jr.                                                           
Jerry M. Springer  64  Controller and Assistant Secretary        April 13, 1994
Dennis E. Senchak  51  Assistant Treasurer                       January 1, 1994
Nina M. Rausch     53  Secretary                                 July 1, 1992
</TABLE>
 
                                      15
<PAGE>
 
  Throughout the past five years, each of the executive officers of Industries
has been continuously active in the business of Industries or Northern Indiana.
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S 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.
 
<TABLE>
<CAPTION>
                                   1996          1995
                               ------------- -------------
                               HIGH    LOW    HIGH   LOW
                               ------ ------ ------ ------
           <S>                 <C>    <C>    <C>    <C>
           First Quarter...... 39 1/8 35 7/8 32 1/4 29 1/4
           Second Quarter..... 40 1/4 35 1/4 35 1/4 30 3/4
           Third Quarter...... 40 1/4 35 3/4 34 7/8 32 1/8
           Fourth Quarter..... 39 7/8 35 7/8 38 1/2 34 1/2
</TABLE>
 
  As of February 28, 1997, Industries had 34,974 common shareholders of record.
 
  The policy of the Board of Directors has been to declare dividends on a
quarterly basis payable on or about the 20th day of February, May, August and
November. Industries paid quarterly common dividends of $0.39 per share during
1995 and quarterly common dividends of $0.42 per share during 1996. At its
December 17, 1996 meeting Industries' Board of Directors increased the
quarterly common dividend to $0.45 per share, payable February 20, 1997.
 
  Holders of Industries' common shares are entitled to receive dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor. Although the Board of Directors of Industries 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 of Directors. 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, 1996, Northern Indiana had
approximately $146.0 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 to the cumulative preferred stock plus the surplus, after giving
effect to such 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, 1996, the sum of the capital
applicable to stocks subordinate to the cumulative preferred stock plus the
surplus was equal to 40% of the total capitalization including surplus.
 
                                       16
<PAGE>
 
  In connection with the foregoing discussion, see "Common Share Dividend" in
the Notes to Consolidated Financial Statements in the 1996 Annual Report to
Shareholders, which note is incorporated herein by reference (see Exhibit 13).
 
ITEM 6. SELECTED FINANCIAL DATA.
 
<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31,
                         ------------------------------------------------------
                            1996       1995       1994       1993       1992
                         ---------- ---------- ---------- ---------- ----------
<S>                      <C>        <C>        <C>        <C>        <C>
Operating revenues
 (000's)................ $1,821,625 $1,722,325 $1,676,401 $1,677,872 $1,582,356
Net income (000's)...... $  176,734 $  175,465 $  163,987 $  156,140 $  136,648
Earnings per average
 common share ..........      $2.88      $2.72      $2.48      $2.31      $2.00
Total assets (000's).... $4,274,343 $3,999,520 $3,947,138 $3,912,324 $3,807,941
Long-term obligations
 and redeemable pre-
 ferred stock (000's)... $1,188,352 $1,274,379 $1,281,395 $1,295,962 $1,160,122
Cash dividends declared
 per common share.......      $1.71      $1.59      $1.47      $1.35      $1.26
</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 and competition is reported in the 1996 Annual Report to
Shareholders under "Management's Discussion and Analysis of Financial Condition
and Results of Operations," which information is incorporated herein by
reference (see Exhibit 13).
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
  The following Consolidated Financial Statements and Supplementary Data are
included in the 1996 Annual Report to Shareholders and are hereby incorporated
by reference and made a part of this report (see Exhibit 13).
 
<TABLE>
<CAPTION>
 
 
 
   <S>                                                                  <C>
   (1) Consolidated Financial Statements--
    Consolidated Statement of Income for the years ended December 31,
     1996, 1995 and 1994
    Consolidated Balance Sheet at December 31, 1996 and 1995
    Consolidated Statement of Capitalization at December 31, 1996 and
     1995
    Consolidated Statement of Long-term Debt at December 31, 1996 and
     1995
    Consolidated Statement of Cash Flows for the years ended December
     31, 1996, 1995 and 1994
    Consolidated Statement of Common Shareholders' Equity for the
     years ended
     December 31, 1996, 1995 and 1994
    Notes to Consolidated Financial Statements
    Report of Independent Public Accountants
   (2) Supplementary Data--
    Selected Supplemental Information
</TABLE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE.
 
  None.
 
                                       17
<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 2-6 in the Notice of
Annual Meeting and Proxy Statement dated March 7, 1997, for Annual Meeting to
be held April 9, 1997, which information is incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
  Information regarding executive compensation is included at pages 8-10 and
12-19 in the Notice of Annual Meeting and Proxy Statement dated March 7, 1997,
for Annual Meeting to be held April 9, 1997, which information is incorporated
herein 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 page 7 in the Notice of Annual Meeting and Proxy
Statement dated March 7, 1997, for Annual Meeting to be held April 9, 1997,
which information is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
  None.
 
                                    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
17.
 
 
    (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                                PAGE OF
       NUMBER         DESCRIPTION            1996 10-K
      --------        -----------            ---------
      <C>      <S>                        <C>
             I Condensed Financial
               Information of
               Registrant..............   19, 20, 21 & 22
               Valuation and Qualifying
            II Accounts................     23, 24 & 25
</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 28-29. 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: None.
 
                                       18
<PAGE>
 
                    NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
 
                                   SCHEDULE I
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                                 BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                 ---------------------
                                                                    1996       1995
                                                                 ---------- ----------
                                                                      (DOLLARS IN
                                                                      THOUSANDS)
ASSETS
------
<S>                                                              <C>        <C>
Property:
  Property in service..........................................  $    2,620 $    2,681
  Construction work in progress................................          76         12
  Less: accumulated depreciation...............................         541        466
                                                                 ---------- ----------
      Total property...........................................       2,155      2,227
                                                                 ---------- ----------
Investments (principally investments in wholly-owned
 subsidiaries).................................................   1,097,173  1,097,621
                                                                 ---------- ----------
Current Assets:
  Cash and cash equivalents....................................         455      4,707
  Amounts receivable from subsidiaries.........................      75,508     70,721
  Prepayments..................................................       3,647      4,818
                                                                 ---------- ----------
      Total current assets.....................................      79,610     80,246
                                                                 ---------- ----------
Other (principally notes receivable from associated companies).     303,373    220,682
                                                                 ---------- ----------
                                                                 $1,482,311 $1,400,776
                                                                 ========== ==========
<CAPTION>
CAPITALIZATION AND LIABILITIES
------------------------------
<S>                                                              <C>        <C>
Capitalization:
  Common shares................................................  $  870,930 $  870,930
  Cumulative preferred shares with mandatory redemption
   provisions..................................................         --      35,000
  Additional paid-in capital...................................      32,868     32,210
  Retained earnings............................................     591,370    518,837
  Less: Treasury shares........................................     392,995    293,223
    Unearned compensation......................................       1,532      4,609
    Currency translation adjustment............................         140      1,930
                                                                 ---------- ----------
      Total capitalization.....................................   1,100,501  1,157,215
                                                                 ---------- ----------
Current Liabilities:
  Dividends declared on common and preferred stock.............      27,053     26,829
  Amounts payable to subsidiaries..............................      30,340     31,431
  Other........................................................       5,085      1,176
                                                                 ---------- ----------
      Total current liabilities................................      62,478     59,436
                                                                 ---------- ----------
Other (principally notes payable to associated companies)......     319,332    184,125
                                                                 ---------- ----------
Commitments and Contingencies (Note 3):
                                                                 $1,482,311 $1,400,776
                                                                 ========== ==========
</TABLE>
 
 The accompanying notes to condensed financial statements are an integral part
                               of this statement.
 
                                       19
<PAGE>
 
                    NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
 
                                   SCHEDULE I
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                              STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                             ----------------------------------
                                                1996        1995        1994
                                             ----------  ----------  ----------
                                                  (DOLLARS IN THOUSANDS)
<S>                                          <C>         <C>         <C>
Equity in net earnings of subsidiaries...... $  185,106  $  180,827  $  167,780
                                             ----------  ----------  ----------
Other income (deductions):
  Administrative and general expense........    (10,167)     (9,854)     (5,560)
  Interest income...........................     21,443      15,575      11,289
  Interest expense..........................    (20,604)    (12,274)     (8,741)
  Other, net................................      1,543        (663)     (1,727)
                                             ----------  ----------  ----------
                                                 (7,785)     (7,216)     (4,739)
                                             ----------  ----------  ----------
Net income before income taxes..............    177,321     173,611     163,041
Income taxes................................        587      (1,854)       (946)
                                             ----------  ----------  ----------
Net income..................................    176,734     175,465     163,987
Dividend requirements on preferred shares...        119       3,063       3,063
                                             ----------  ----------  ----------
Balance available for common shareholders... $  176,615  $  172,402  $  160,924
                                             ==========  ==========  ==========
Average common shares outstanding........... 61,190,750  63,281,177  64,820,039
Earnings per average common share........... $     2.88  $     2.72  $     2.48
                                             ==========  ==========  ==========
</TABLE>
 
 
 
 The accompanying notes to condensed financial statements are an integral part
                               of this statement.
 
                                       20
<PAGE>
 
                    NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
 
                                   SCHEDULE I
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                            STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                 -----------------------------
                                                   1996       1995      1994
                                                 ---------  --------  --------
                                                   (DOLLARS IN THOUSANDS)
<S>                                              <C>        <C>       <C>
Net cash provided by operating activities....... $ 183,867  $184,300  $157,613
                                                 ---------  --------  --------
Cash flows provided by (used in) investing
 activities:
  Capital expenditures..........................       (22)     (100)     (954)
  Sale of property..............................        83       935       --
                                                 ---------  --------  --------
    Net cash provided by (used in) investing
     activities.................................        61       835      (954)
                                                 ---------  --------  --------
Cash flows provided by (used in) financing
 activities:
  Issuance of common shares.....................     5,716     7,389     2,060
  Increase (decrease) in notes payable to
   subsidiaries.................................   133,298    41,211    21,262
  Increase in notes receivable from
   subsidiaries.................................   (82,740)  (58,479)  (26,254)
  Redemption of cumulative preferred shares with
   mandatory redemption provisions..............   (35,000)      --        --
  Cash dividends paid on common shares..........  (103,190)  (99,043)  (93,578)
  Cash dividends paid on preferred shares.......      (766)   (3,063)   (3,063)
  Acquisition of treasury shares................  (105,498)  (69,183)  (58,717)
                                                 ---------  --------  --------
    Net cash used in financing activities.......  (188,180) (181,168) (158,290)
                                                 ---------  --------  --------
Net increase (decrease) in cash and cash
 equivalents....................................    (4,252)    3,967    (1,631)
Cash and cash equivalents at beginning of year..     4,707       740     2,371
                                                 ---------  --------  --------
Cash and cash equivalents at end of year........ $     455  $  4,707  $    740
                                                 =========  ========  ========
</TABLE>
 
 
 The accompanying notes to condensed financial statements are an integral part
                               of this statement.
 
                                       21
<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): $184,750, $183,475
and $174,245 in 1996, 1995, and 1994, respectively.
 
2. SUPPORT AGREEMENT
 
  The 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' securities in the event of a failure to pay by Capital Markets.
Restrictions in the Support Agreement prohibit recourse on the part of Capital
Markets' investors 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 to holders of Capital Markets' securities. The carrying value of
those assets other than Northern Indiana, reflected in the consolidated
financial statements of Industries, was approximately $518.9 million at
December 31, 1996.
 
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. The nature of such proceedings and suits, and the amounts
involved, do not depart from the routine litigation and proceedings incident to
the kind of businesses conducted by Industries and its subsidiaries.
--------
  See also Notes to Consolidated Financial Statements in the 1996 Annual Report
to Shareholders, which are incorporated herein by reference. (See Exhibit 13).
 
                                       22
<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
            ------             ------- ------------------ ------------ --------
                                           ADDITIONS
                                       ------------------  DEDUCTIONS
                                        CHARGED           FOR PURPOSES
                               BALANCE    TO     CHARGED   FOR WHICH   BALANCE
                               JAN. 1, COSTS AND TO OTHER   RESERVES   DEC. 31,
         DESCRIPTION            1996   EXPENSES  ACCOUNTS WERE CREATED   1996
         -----------           ------- --------- -------- ------------ --------
                                            (DOLLARS IN THOUSANDS)
<S>                            <C>     <C>       <C>      <C>          <C>
Reserves Deducted in Consoli-
 dated Balance Sheet from As-
 sets to Which They Apply:
 Reserve for accounts receiv-
  ables......................  $7,264   $ 6,912    $--       $8,607    $ 5,569
 Reserve for investments, at
  equity.....................  $  850   $ 1,103    $--       $   --    $ 1,953
Reserves Classified Under Re-
 serve Section of Consoli-
 dated Balance Sheet:
 Injuries and damages re-
  serve......................  $1,837   $ 4,875    $--       $2,336    $ 4,376
 Environmental reserves......  $5,006   $15,862    $--       $4,079    $16,789
 Miscellaneous operating re-
  serves.....................  $4,091   $   380    $--       $   --    $ 4,471
</TABLE>
 
 
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                                       23
<PAGE>
 
                            NIPSCO INDUSTRIES, INC.
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
                     TWELVE MONTHS ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
            COL. A             COL. B        COL. C          COL. D     COL. E
            ------             ------- ------------------ ------------ --------
                                           ADDITIONS
                                       ------------------  DEDUCTIONS
                                        CHARGED           FOR PURPOSES
                               BALANCE    TO     CHARGED   FOR WHICH   BALANCE
                               JAN. 1, COSTS AND TO OTHER   RESERVES   DEC. 31,
         DESCRIPTION            1995   EXPENSES  ACCOUNTS WERE CREATED   1995
         -----------           ------- --------- -------- ------------ --------
                                            (DOLLARS IN THOUSANDS)
<S>                            <C>     <C>       <C>      <C>          <C>
Reserves Deducted in Consoli-
 dated Balance Sheet from As-
 sets to Which They Apply:
 Reserve for accounts receiv-
  ables......................  $4,899   $6,759     $--       $4,394     $7,264
 Reserve for investments, at
  equity.....................  $2,850   $   --     $--       $2,000     $  850
Reserves Classified Under Re-
 serve Section of Consoli-
 dated Balance Sheet:
 Injuries and damages re-
  serve......................  $2,538   $2,800     $--       $3,501     $1,837
 Environmental reserves......  $3,610   $3,188     $--       $1,792     $5,006
 Miscellaneous operating re-
  serves.....................  $4,061   $   30     $--       $   --     $4,091
</TABLE>
 
 
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                                       24
<PAGE>
 
                            NIPSCO INDUSTRIES, INC.
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
                     TWELVE MONTHS ENDED DECEMBER 31, 1994
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
            COL. A             COL. B        COL. C          COL. D     COL. E
            ------             ------- ------------------ ------------ --------
                                           ADDITIONS
                                       ------------------  DEDUCTIONS
                                        CHARGED           FOR PURPOSES
                               BALANCE    TO     CHARGED   FOR WHICH   BALANCE
                               JAN. 1, COSTS AND TO OTHER   RESERVES   DEC. 31,
         DESCRIPTION            1994   EXPENSES  ACCOUNTS WERE CREATED   1994
         -----------           ------- --------- -------- ------------ --------
                                            (DOLLARS IN THOUSANDS)
<S>                            <C>     <C>       <C>      <C>          <C>
Reserves Deducted in Consoli-
 dated Balance Sheet from As-
 sets to Which They Apply:
 Reserve for accounts receiv-
  ables......................  $4,855   $6,918     $--       $6,874     $4,899
 Reserve for investments, at
  equity.....................  $2,500   $  350     $--       $   --     $2,850
 Reserve for investments, at
  cost.......................  $2,500   $   --     $--       $2,500     $   --
Reserves Classified Under Re-
 serve Section of Consoli-
 dated Balance Sheet:
 Injuries and damages re-
  serve......................  $3,994   $3,350     $--       $4,806     $2,538
 Environmental reserves......  $2,371   $3,381     $--       $2,142     $3,610
 Miscellaneous operating re-
  serves.....................  $3,731   $  330     $--       $   --     $4,061
</TABLE>
 
 
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                                       25
<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, 1996,
incorporated by reference in this Form 10-K, and have issued our report thereon
dated January 28, 1997. 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 18, 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.
 
                                          Arthur Andersen LLP
 
Chicago, Illinois
January 28, 1997
 
                                       26
<PAGE>
 
                                   SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
                                          NIPSCO Industries, Inc.
                                              (Registrant)
           March 26, 1997                          /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
------------------------------------
           Gary L. Neale             Chairman, President, Principal
                                      Executive Officer and
                                      Director
        /s/ Stephen P. Adik
------------------------------------
          Stephen P. Adik            Executive Vice President and
                                      Principal Financial Officer
      /s/ Jerry M. Springer
------------------------------------
         Jerry M. Springer           Controller and Principal
                                      Accounting Officer
 
------------------------------------
         Steven C. Beering           Director
 
------------------------------------
          Arthur J. Decio            Director
    /s/ Ernestine M. Raclin
------------------------------------
        Ernestine M. Raclin          Director                         March 26, 1997
        /s/ Denis E. Ribordy
------------------------------------
          Denis E. Ribordy           Director
         /s/ Ian M. Rolland
------------------------------------
           Ian M. Rolland            Director
      /s/ Edmund A. Schroer
------------------------------------
         Edmund A. Schroer           Director
        /s/ John W. Thompson
------------------------------------
          John W. Thompson           Director
        /s/ Robert J. Welsh
------------------------------------
          Robert J. Welsh            Director
</TABLE>
 
                                       27
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                            DESCRIPTION OF ITEM
 -------                           -------------------
 <C>     <S>
  (3.1)  Articles of Incorporation of September 22, 1987, and all Articles of Amendment
          thereto (incorporated by reference to Exhibit 1 to the NIPSCO Industries, Inc.
          Current Report on Form 8-K dated March 25, 1992).
  (3.2)  By-laws effective August 27, 1996 (incorporated by reference to Exhibit 3 to the
          NIPSCO Industries, Inc. Quarterly Report on Form 10-Q for the quarter ended Sep-
          tember 30, 1996).
  (4.1)  Indenture dated August 1, 1939 between Northern Indiana Public Service Company
          ("Northern Indiana") and Trustees (incorporated by reference to Exhibit 7 to
          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 Northern Indiana Registration Statement (Registration No. 2-
          5178)).
  (4.3)  Eighteenth Supplemental Indenture dated September 1, 1967 (incorporated by refer-
          ence to Exhibit 1 to 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 Northern Indiana Current Report on Form 8-K dated November 8,
          1968).
  (4.5)  Twenty-third Supplemental Indenture dated March 31, 1972 (incorporated by refer-
          ence to Exhibit 2 to 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 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 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
          Northern Indiana Registration Statement (Registration No. 33-44193)).
  (4.9)  First Supplemental Indenture dated December 1, 1991, between Northern Indiana and
          Manufacturers Hanover Trust Company, as Trustee (incorporated by reference to Ex-
          hibit 4.1 to Northern Indiana Registration Statement (Registration No.
          33-63870)).
 (4.10)  Memorandum of Agreement with City of Michigan City, Indiana (incorporated by ref-
          erence to Exhibit 7 to Northern Indiana Registration Statement (Registration No.
          2-48531)).
 (4.11)  Financing Agreement No. 1 dated November 1, 1988 with Jasper County, Indiana re-
          garding $37,000,000 Series 1988A Pollution Control Refunding Revenue Bonds. Iden-
          tical financing agreements between Registrant and Jasper County 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 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 Northern Indiana Current Report on
          Form 8-K dated March 25, 1992).
 (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 Northern Indiana Annual Report on Form 10-K for year ended December 31,
          1994).
</TABLE>
 
 
                                       28
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                   DESCRIPTION OF ITEM
 -------                                  -------------------
 <S>      <C>
 (4.14)   Indenture between Registrant, NIPSCO Capital Markets, Inc. and Chemical Bank as
           Trustee dated February 1, 1996 (incorporated by reference to Exhibit 1 to NIPSCO
           Industries, Inc. Registration Statement (Registration No. 33-65285)).
 (4.15)   Rights Agreement between Registrant and Harris Trust and Savings Bank, dated Feb-
           ruary 27, 1990 (incorporated by reference to Exhibit 4.1 to the NIPSCO Indus-
           tries, Inc. Current Report on Form 8-K dated March 7, 1990).
 (10.1)   Supplemental Life Insurance Plan effective January 1, 1991 (incorporated by refer-
           ence 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 (incorporated by reference to
           Exhibit 4 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated March
           25, 1992).*
 (10.4)   Nonemployee Director Stock Incentive Plan effective February 1, 1992 (incorporated
           by reference to Exhibit 5 to the NIPSCO Industries, Inc. Current Report on Form
           8-K dated March 25, 1992).*
 (10.5)   NIPSCO Industries, Inc. Long-Term Incentive Plan (incorporated by reference to Ex-
           hibit 6 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated March 25,
           1992).*
 (10.6)   Amended and Restated Pension Plan Provisions effective January 1, 1989 (incorpo-
           rated by reference to Exhibit 17 to Northern Indiana Current Report on Form 8-K
           dated March 25, 1992).*
 (10.7)   NIPSCO Industries, Inc. 1994 Long-Term Incentive Plan.*
 (10.8)   NIPSCO Industries, Inc. Directors' Charitable Gift Program.*
  (11)    Computation of Per Share Earnings.
  (13)    1996 Annual Report to Shareholders for pages 23-53.
  (21)    List of Subsidiaries.
  (23)    Consent of Arthur Andersen LLP.
  (99)    Amended Articles of Incorporation of Northern Indiana Public Service Company (in-
           corporated by reference to Exhibit 1 to the Northern Indiana Current Report on
           Form 8-K dated May 5, 1982).
</TABLE>
--------
*  Management contract or compensatory plan arrangement of NIPSCO Industries,
   Inc.
 
                                       29
<PAGE>
 
                     GRAPHIC MATERIAL CROSS-REFERENCE PAGE
 
CAPITALIZATION RATIO CHART SHOWS PERCENT OF LONG-TERM DEBT, COMMON SHARE
EQUITY AND PREFERRED AND PREFERENCE STOCK FOR YEARS 1987-1996.
 
COST OF FUEL FOR ELECTRIC GENERATION CHART SHOWS IN MILLS PER KWH THE COST OF
FUEL FOR ELECTRIC GENERATION FOR YEARS 1987-1996.
 
COST OF GAS PURCHASED FOR RESALE CHART SHOWS IN DOLLARS PER DEKATHERM THE COST
OF GAS PURCHASED FOR RESALE FOR YEARS 1987-1996.