-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JuYH7SlDsIYyJQJnfWi+IIj+YYLJRWyUJNmZVaS8c1d1ZRFdniYKQ4fHu5w1Rg3J SwUoxt0rxkv7Q080a3BOrA== 0000092195-00-000011.txt : 20000331 0000092195-00-000011.hdr.sgml : 20000331 ACCESSION NUMBER: 0000092195-00-000011 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN INDIANA GAS & ELECTRIC CO CENTRAL INDEX KEY: 0000092195 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 350672570 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03553 FILM NUMBER: 588946 BUSINESS ADDRESS: STREET 1: 20 NW FOURTH ST CITY: EVANSVILLE STATE: IN ZIP: 47741-0001 BUSINESS PHONE: 8124655300 10-K405 1 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, 1999 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to ______
Commission Registrant, State of Incorporation; IRS Employer File Number Address and Telephone Number Identification No. 1-11603 SIGCORP, Inc. 35-1940620 (An Indiana corporation) 20 N. W. Fourth Street Evansville, Indiana 47741-0001 (812) 465-5300 1-3553 Southern Indiana Gas and Electric Company 35-0672570 (An Indiana Corporation) 20 N. W. Fourth Street Evansville, Indiana 47741-0001 (812) 465-5300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Registrant Title of each class on which registered SIGCORP, Inc. Common Stock, Without New York Stock Exchange Par Value Rights to Purchase New York Stock Exchange Common Stock Southern Indiana Gas None and Electric Company
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange Registrant Title of each class on which registered SIGCORP, Inc. None Southern Indiana Gas Cumulative Preferred New York Stock Exchange Stock, and Electric Company $100 Par Value
2 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 registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Indicate by check mark whether all Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days: Yes X No __ At February 29, 2000, the aggregate market values of SIGCORP, Inc. Common Stock, Without Par Value, and Southern Indiana Gas and Electric Company Cumulative Preferred Stock, $100 Par Value, 185,895 shares, held by non-affiliates were $511,011,033 and $15,325,490, respectively. As of February 29, 2000, the number of shares outstanding of each of the Registrants' classes of common stock were:
SIGCORP, Inc.: Common stock, no par value, 23,630,568 shares Southern Indiana Gas and Common stock, no par value, 15,754,826 shares Electric Company: outstanding and held by SIGCORP, Inc.
Documents Incorporated by Reference None This combined Form 10-K is separately filed by SIGCORP, Inc. and Southern Indiana Gas and Electric Company.
Table of Contents Item Page Number Number Part I 1 Business 4 2 Properties 14 3 Legal Proceedings 14 4 Submission of Matters to Vote of Security Holders 15 Part II 5 Market for Registrant's Common Equity and Related Security Holder Matters 16 6 Selected Financial Data 17 7 Management's Discussion and Analysis of Results of Operations and Financial Condition 18 8 Financial Statements and Supplementary Data 31 9 Disagreements on Accounting and Financial Disclosure 65 Part III 10 Directors and Executive Officers of the Registrants 66 11 Executive Compensation and Transactions 67 12 Security Ownership of Certain Beneficial Owners and Management 73 13 Certain Relationships and Related Transactions 74 Part IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 75 15 Subsidiaries of the Registrant 81 16 Signatures 82 4 PART I Item 1. BUSINESS SIGCORP and SIGECO This discussion includes forward looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms "anticipate", "expect", "potential", "estimate" and similar words, and actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric and gas utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes including revised environmental requirements, impacts of Year 2000 issues, availability and cost of capital, the pending merger with Indiana Energy, Inc. and other similar factors. ORGANIZATION SIGCORP, Inc. (SIGCORP) is a holding company incorporated October 19, 1994 under the laws of the State of Indiana. SIGCORP has eleven wholly-owned subsidiaries: Southern Indiana Gas and Electric Company (SIGECO), a gas and electric utility, and ten nonregulated subsidiaries. On December 20, 1994, SIGECO's Board of Directors authorized the steps required for a corporate reorganization in which a holding company would become the parent of SIGECO. SIGECO's shareholders approved the reorganization at SIGECO's March 28, 1995 annual meeting, and approval by the Federal Energy Regulatory Commission and the Securities and Exchange Commission was granted November 7, 1995 and December 14, 1995, respectively. Effective January 1, 1996, the new holding company, SIGCORP, became the parent of SIGECO, which accounts for over 80% of SIGCORP's net income, and four of SIGECO's former wholly-owned nonregulated subsidiaries: Energy Systems Group, Inc., Southern Indiana Minerals, Inc., Southern Indiana Properties, Inc. and ComSource, Inc. All of the shares of SIGECO's common stock were exchanged on a one-for-one basis for shares of SIGCORP, while all of SIGECO's debt securities and all of its outstanding shares of preferred stock remained securities of SIGECO and were unaffected. (See "Nonregulated Subsidiaries - General" and Note 1 of the Notes to Consolidated Financial Statements, page 48, for further discussion.) The reorganization was in response to the changes created in the electric industry by the Energy Policy Act of 1992 and the need to respond quickly to the more competitive business environment. The new structure buffers SIGECO and its customers from the effects of pursuing nonregulated opportunities while allowing SIGCORP to engage in closely related, but historically nonregulated, businesses. Providing gas and electric utility service to customers through SIGECO remains the core business and primary focus of SIGCORP. On June 14, 1999, SIGCORP announced an agreement to merge with Indiana Energy, Inc. (IEI) in an all-stock pooling transaction through which a new holding company, Vectren Corporation, would be formed. (See "Pending Merger" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND FINANCIAL CONDITION, Page 18, and Note 1 of the Notes to Consolidated Financial Statements, page 48, for further discussion.) SIGECO - GENERAL SIGECO is an operating public utility incorporated June 10, 1912, under the laws of the State of Indiana, engaged in the generation, transmission, distribution and sale of electric energy and the purchase of natural gas and its transportation, distribution and sale in a service area which covers ten counties in southwestern Indiana. Electric service is supplied directly to Evansville and 74 other cities, towns and communities, and adjacent rural areas. Wholesale electric service is supplied to an additional eight communities. At December 31, 1999, SIGECO served 126,605 electric customers and was also obligated to provide for firm power commitments to the City of Jasper, Indiana and to maintain spinning reserve margin requirements under an agreement with the East Central Area Reliability Group (ECAR). 5 At December 31, 1999, SIGECO supplied gas service to 109,388 customers in Evansville and 64 other nearby communities and their environs. Since 1986, SIGECO has purchased its natural gas supply requirements from numerous suppliers. During 1999, thirty-two suppliers were used. The principal industries served by SIGECO include polycarbonate resin (Lexan) and plastic products, aluminum smelting and recycling, aluminum sheet products, automotive assembly, steel finishing, appliance manufacturing, pharmaceutical and nutritional products, automotive glass, gasoline and oil products and coal mining. The only property SIGECO owns outside of Indiana is approximately eight miles of a 138,000 volt electric transmission line which is located in Kentucky and which interconnects with Louisville Gas and Electric Company's transmission system at Cloverport, Kentucky. The original cost of the property is less than $425,000. SIGECO does not distribute any electric energy in Kentucky. SIGECO - LINES OF BUSINESS The percentages of operating revenues and operating income before income taxes attributable to the electric and gas operations of SIGECO for the five years ended December 31, 1999, were as follows:
Year Ended December 31, 1995 1996 1997 1998 1999 Operating Revenues: Electric 81.3% 74.2% 76.1% 81.7% 81.8% Gas 18.7 25.8 23.9 18.3 18.2 Operating Income Before Income Taxes: Electric 96.4% 89.0% 87.1% 90.8% 91.7% Gas 3.6 11.0 12.9 9.2 8.3
Reference is made to Note 9 of the Notes to Consolidated Financial Statements, page 48, for Segments of Business data. SIGECO - ELECTRIC BUSINESS SIGECO supplies electric service to 126,605 customers, including 110,064 residential, 16,344 commercial, 173 industrial, 19 public street and highway lighting, and five municipal customers. SIGECO's installed generating capacity as of December 31, 1999 was rated at 1,256,000 kilowatts (Kw). Coal-fired generating units provide 1,041,000 Kw of capacity and gas or oil-fired turbines used for peaking or emergency conditions provide 215,000 Kw. In addition, SIGECO has interconnections with Louisville Gas and Electric Company, Cinergy Services, Inc., Indianapolis Power & Light Company, Hoosier Energy Rural Electric Cooperative, Inc., Big Rivers Electric Corporation, Wabash Valley Power Association, and the City of Jasper, providing an ability to simultaneously interchange approximately 750,000 Kw. Record-breaking peak conditions occurred on July 6, 1999, when SIGECO's system summer peak load reached 1,140,800 Kw. SIGECO's total load, including its firm power commitments to the City of Jasper, Indiana, for each of the years 1995 through 1999 at the time of the system summer peak, and the related reserve margin, are presented below.
Date of Summer 8-17-95 8-21-96 7-14-97 7-21-98 7-6-99 Peak Load Company System Peak Load (Kw) 1,021,000 999,800 1,022,700 1,082,500 1,140,800 Firm Power Commitments at Peak 60,800 53,500 63,700 46,800 58,700 Total at Peak 1,081,800 1,053,300 1,086,400 1,129,300 1,199,500 Total Generating Capability (Kw) 1,236,000 1,236,000 1,236,000 1,256,000 1,256,000 Reserve Margin at Peak 14% 17% 14% 11% 5%
6 The winter peak load of the 1998-1999 season of 834,200 Kw occurred on January 5, 1999 and was 9.3% higher than the previous winter peak load of 763,200 Kw which occurred on March 11, 1998. SIGECO, primarily as agent of Alcoa Generating Corporation (AGC), operates the Warrick Generating Station, a coal-fired steam electric plant which interconnects with SIGECO's system and provides power for the Aluminum Company of America's Warrick Operations, which includes aluminum smelting and fabricating facilities. Of the four turbine generators at the plant, Warrick Units 1, 2 and 3, with a capacity of 144,000 Kw each, are owned by AGC. Warrick Unit 4, with a rated capacity of 270,000 Kw, is owned by SIGECO and AGC as tenants in common, each having shared equally in the cost of construction and sharing equally in the cost of operation and in the output. SIGECO (a summer peaking utility) has an agreement with Hoosier Energy Rural Electric Cooperative, Inc. (Hoosier Energy) for the sale of firm peaking power to Hoosier Energy during the annual winter heating season (November 15-March 15). The contract made available 222 Mw during the 1999- 2000 winter season, and was terminated March 15, 2000. Electric generation for 1999 was fueled by coal (98.8%) and natural gas (1.2%). Oil was used only for testing of gas/oil-fired peaking units. Historically, coal for SIGECO's coal-fired generating stations has been purchased from operators of nearby Indiana strip mines pursuant to long-term contracts. Over the past several years, SIGECO has been actively involved in intensive contract negotiations and legal actions to reduce coal costs and thereby lower electric rates. The initial long-term coal contracts to be renegotiated and eventually bought out were those supplying SIGECO's Culley Generating Station and Warrick Unit 4. Net savings from these actions, estimated to total approximately $59 million, were passed back to SIGECO's electric customers through the fuel adjustment clause. The coal used in these plants is blended, when necessary, to meet specifications set in conformance with the requirements of the Indiana State Implementation Plan for sulfur dioxide issued under federal laws regulating air quality (Clean Air Act). Approximately 1,615,000 tons of coal were used during 1999 in the generation of electricity at the Culley Station and Warrick Unit 4 with the majority of the coal used at the Culley Station supplied by SIGCORP's subsidiary, SIGCORP Fuels, Inc (see "Nonregulated Subsidiaries - General", page 8). Culley Units 2 and 3 were equipped with flue gas desulfurization equipment as part of the Clean Air Act Compliance Plan. (See "Environmental Matters", page 11, for further discussion.) SIGECO's remaining long-term contract coal supplier supplied the A. B. Brown Generating Station. On April 10, 1995, SIGECO reached an agreement with this coal supplier, effective July 16, 1995, to buy out the remainder of SIGECO's contractual obligations, enabling it to acquire lower-priced spot market coal. SIGECO estimates the total savings in coal costs resulting from the buyout, net of total buyout costs, approximated $58 million through December 31, 1998, the term of the original contract. The net savings from this coal contract renegotiation have been passed back to SIGECO's retail and firm wholesale electric customers through the fuel adjustment clause. The amount of coal burned at A. B. Brown Generating Station during 1999 was approximately 1,372,000 tons. Both units at the generating station are equipped with flue gas desulfurization equipment so that coal with a higher sulfur content can be used. There are substantial coal reserves in the southern Indiana area. The average cost (including contract buyout costs) of all coal consumed in generating electrical energy for the years 1995 through 1999 was as follows:
Average Cost Average Cost Average Cost Per Kwh Year Per Ton Per MMBTU (In Mills) 1995 30.02 1.33 14.10 1996 26.01 1.16 12.40 1997 20.75 0.91 9.80 1998 21.34 0.94 9.97 1999 21.88 0.96 10.13
7 The Broadway Turbine Units 1 and 2, Northeast Gas Turbines and A. B. Brown Gas Turbine, when used for peaking, reserve or emergency purposes, use natural gas for fuel. Number 2 fuel oil can also be used in the Broadway Turbine Units and the Brown Gas Turbine. All metered electric rates contain a provision for adjustment in charges for electric energy to reflect changes in the cost of fuel and the net energy cost of purchased power through the operation of a fuel adjustment clause unless certain criteria contained in the regulations are not met. Effective April 26, 1995, the principal restriction to recovery of fuel cost increases is that such recovery is not allowed to the extent that total operating income for the 60- month period including the twelve-month period provided in the fuel cost adjustment filing exceeds the total operating income authorized by the Indiana Utility Regulatory Commission (IURC) during the same 60-month period. Prior to April 26, 1995, the operating income test period was the twelve-month period provided in the fuel cost adjustment filing. During 1997-1999, neither restriction affected SIGECO. As prescribed by order of the IURC, the adjustment factor is calculated based on the estimated cost of fuel and the net energy cost of purchased power in a designated future quarter. The order also provides that any over- or underrecovery caused by variances between estimated and actual cost in a given quarter will be included in the second succeeding quarter's adjustment factor. This continuous reconciliation of estimated incremental fuel costs billed with actual incremental fuel costs incurred closely matches revenues to expenses. On August 18, 1999, the IURC issued a generic order establishing new guidelines for the recovery of the net energy cost of purchased power through fuel adjustment clauses. The order requires each utility to establish a benchmark which is the utility's highest on-system fuel cost per kilowatt-hour during the most recent annual period. If the utility's weekly average purchased power costs were less than the benchmark cost of fuel, those costs would be recoverable through the fuel clause as "fuel costs included in purchased power". If the utility's weekly average purchased power costs exceeded the "benchmark", the utility would be required to provide evidence supporting the reasonableness of the costs incurred. SIGECO does not anticipate any limitation of recoverability of its purchased power costs under this generic order. The Office of the Utility Consumer Counselor has appealed the generic order to the Indiana Court of Appeals. SIGECO participates in research and development in which the primary goal is cost savings through the use of new technologies. This is accomplished, in part, through the efforts of the Electric Power Research Institute (EPRI). In 1999, SIGECO paid $1,014,000 to EPRI to help fund research and development programs such as advanced clean coal burning technology. SIGECO is participating with 14 other electric utility companies through Ohio Valley Electric Corporation (OVEC) in arrangements with the United States Department of Energy (DOE), to supply the power requirements of the DOE plant near Portsmouth, Ohio. The sponsoring companies are entitled to receive from OVEC, and are obligated to pay for, any available power in excess of the DOE contract demand. The proceeds from the sale of power by OVEC are designed to be sufficient to meet all of its costs and to provide for a return on its common stock. During 1999, SIGECO's participation in the OVEC arrangements was 1.5%. SIGECO participates with seven other utilities and 31 other affiliated groups located in eight states comprising the east central area of the United States, in the East Central Area Reliability group, the purpose of which is to strengthen the area's electric power supply reliability. Additionally, SIGECO is one of 14 owners of the Midwest Independent System Operator (MISO) which is an organization recently established to ensure the dependable and efficient transmission of electric energy between its owner utilities located in the midwestern United States. The MISO anticipates an in-service date of June 2001 for its control center and systems. SIGECO - GAS BUSINESS SIGECO supplies natural gas service to 109,388 customers, including 99,596 residential, 9,576 commercial and 216 industrial customers, through 2,921 miles of gas transmission and distribution lines. SIGECO owns and operates three underground gas storage fields with an estimated ready delivery from storage of 3.9 million Dth of gas. Natural gas purchased from SIGECO's suppliers is injected into these storage fields during periods of light demand which are typically periods of lower prices. The injected gas is then available to supplement the contracted volumes during periods of peak requirements. It is estimated that approximately 119,000 Dth of gas per day 8 can be withdrawn from the three storage fields during peak demand periods on the system. In 1999, a total of 32 suppliers sold gas to SIGECO. In total, SIGECO purchased 12,574,927 Dth in 1999. During 1999, sixty-one of SIGECO's major gas customers utilized SIGECO's gas transportation program to procure a portion of their gas supply needs from suppliers other than SIGECO. A total of 19,580,081 Dth, 61% of total gas throughput, was transported for these major customers in 1999 compared to 17,349,036 Dth transported in 1998. SIGECO receives fees for the use of its facilities in transporting such gas. The all-time record send out occurred during the 1993- 1994 winter season on January 18, 1994, when 247,449 Dth of gas were delivered to SIGECO's customers. Of this amount, 97,946 Dth was purchased, 106,558 Dth was taken out of SIGECO's three underground storage fields, and 42,945 Dth was transported to customers under transportation agreements. The 1998-1999 winter season peak day send out was 215,284 Dth on January 14, 1999. The average cost per Dth of gas purchased by SIGECO during the past five calendar years was as follows: 1995, $2.48; 1996, $3.47; 1997, $3.25; 1998, $3.22; and 1999, $3.10. The State of Indiana has established procedures which result in SIGECO passing on to its customers the changes in the cost of gas sold unless certain criteria contained in the regulations are not met. Effective April 26, 1995, the principal restriction to recovery of gas cost increases is that such recovery is not allowed to the extent that total operating income for the 60-month period including the twelve-month period provided in the gas cost adjustment filing exceeds the total operating income authorized by the IURC during the same 60-month period. Prior to April 26, 1995, the operating income test period was the twelve-month period provided in the gas cost adjustment filing. During 1997-1999, neither restriction affected SIGECO. Additionally, these procedures provide for scheduled quarterly filings and IURC hearings to establish the amount of price adjustments for a designated future quarter. The procedures also provide for inclusion in a later quarter of any variances between estimated and actual costs of gas sold in a given quarter. This reconciliation process with regard to changes in the cost of gas sold closely matches revenues to expenses. SIGECO's rate structure does not include a weather normalization-type clause whereby a utility would be authorized to recover the gross margin on sales established in its last general rate case, regardless of actual weather patterns. Natural gas research is supported by SIGECO through the Gas Research Institute in cooperation with the American Gas Association. Since passage of the Natural Gas Act of 1978, a major effort has gone into promoting gas exploration by both conventional and unconventional sources. Efforts continue through various projects to extract gas from tight gas sands, shale and coal. Research is also directed toward the areas of conservation, safety and the environment. SIGCORP NONREGULATED SUBSIDIARIES - GENERAL In addition to its wholly-owned utility subsidiary, SIGECO, SIGCORP has ten wholly-owned nonutility subsidiaries, of which nine were active at December 1999. Southern Indiana Properties, Inc., formed in 1986, invests in leveraged leases of real estate and equipment, real estate partnerships and joint ventures and private placement subordinated debt instruments. Energy Systems Group, Inc., incorporated in April 1994, has a one-third ownership in Energy Systems Group, LLC, an energy-related performance contracting firm serving industrial and commercial customers. Southern Indiana Minerals, Inc., incorporated in May 1994, processes and markets coal combustion by-products. SIGCORP Energy Services, Inc., incorporated in October 1996, was established to market energy and related services and currently provides natural gas, pipeline management, storage service and other natural gas-related services to SIGECO and other customers. SIGCORP Capital, Inc., also incorporated in October 1996, is the primary financing vehicle for SIGCORP's nonregulated subsidiaries. SIGCORP Fuels, Inc., incorporated in December 1996, was formed to own and operate coal mining properties and to provide coal and related services to SIGECO and other customers. SIGCORP Power Marketing, Inc., also incorporated in December 1996, but not yet active, was formed to procure electric power supplies for SIGECO and other customers, and will market SIGECO's excess electric generation capacity. SIGCORP Communications Services, Inc., incorporated in August 1997, was formed to undertake telecommunications-related strategic initiatives. SIGECO Advanced Communications, Inc. (Advanced Communications), incorporated in 9 April 1998, holds SIGCORP's investment in Utilicom Holdings, LLC, the newly formed holding company for Utilicom Networks, Inc., and in SIGECOM Holdings, Inc., the newly formed holding company of SIGECOM, LLC. Advanced Communications and Utilicom Networks, Inc. are partners in SIGECOM, LLC, an integrated communications provider serving the Evansville, Indiana market with an 860-mile fiber-optic based network. (See Note 12 of the Notes to Consolidated Financial Statements, page 48, for discussion of the restructured investment at Advanced Communications.) SIGCORP Environmental Services, Inc., incorporated in November 1998, holds SIGCORP's investment in Air Quality Services, a joint venture created to provide air quality monitoring and testing services to industry and utilities. (See "SIGECO Advanced Communications, Inc." in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 18, and Note 1 of the Notes to Consolidated Financial Statements, page 48, for further discussion.) SIGCORP and SIGECO PERSONNEL The holding company, SIGCORP, had one employee as of December 31, 1999. SIGECO's network of gas and electric operations directly involves 775 employees with an additional 146 employed at Alcoa's Warrick Power Plant. Alcoa reimburses SIGECO for the entire cost of the payroll and associated benefits at the Warrick Plant, with the exception of one- half of the payroll costs and benefits allocated to Warrick Unit 4, which is jointly owned by SIGECO and Alcoa. The total payroll and benefits for SIGECO employees in 1999 (including all Warrick Plant employees) were $62.7 million. In 1998, total payroll and benefits were $55.8 million. On July 1, 1998, SIGECO signed a new two-year contract with Local 702 of the International Brotherhood of Electrical Workers. The contract provides for annual wage increases of 3.5% and 3.0%. Improvements in healthcare coverage costs and pension plan benefits are also included. On October 4, 1999, SIGECO's Hoosier Division signed a new two-year labor contract, ending September 23, 2001, with Local 135 of the Teamsters, Chauffeurs, Warehousemen and Helpers. The contract provides for annual wage increases of 3% and improvements in health care coverage costs and pension and other benefits. As of December 31, 1999, Southern Indiana Properties, Inc. had 2 employees; Southern Indiana Minerals, Inc. had 7 employees; SIGCORP Energy Services, Inc. had 21 employees; SIGCORP Communications, Inc. had 28 employees; SIGCORP Fuels, Inc. had 3 employees; and Sigeco Advanced Communications, Inc. had 1 employee. Energy Systems Group, Inc., SIGCORP Capital, Inc., SIGCORP Environmental Services, Inc. and SIGCORP Power Marketing, Inc. had no employees as of December 31, 1999. There were no labor organizations representing employees of the nonregulated entities. CONSTRUCTION PROGRAM AND FINANCING SIGCORP's demand for capital is primarily related to SIGECO's construction of utility plant and equipment necessary to meet customers' electric and gas energy needs, as well as environmental compliance requirements. Additionally, SIGCORP may periodically make capital investments in its nonregulated operations. See "Liquidity and Capital Resources" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 18, for discussion of construction expenditures and financing during 1999. For 2000, SIGECO's construction expenditures are presently estimated to be $52.0 million. Expenditures in the power production area are expected to total $18.8 million. The balance of the 2000 construction program consists of $17.0 million for additions and improvements to other electric system facilities, $8.9 million for additions and improvements to the gas system and $7.3 million to complete several strategic information systems and for common utility equipment. In keeping with SIGECO's objective to bring new facilities on line as needed, the construction program and amount of scheduled expenditures are reviewed periodically to factor in load growth projections, system planning requirements, environmental compliance and other considerations. As a result of this program of periodic review, 10 construction expenditures may change in the future from the program as presented herein. Currently it is estimated that SIGECO's construction expenditures will total about $357 million, including allowance for funds used during construction, for the years 2000-2004 as follows: 2000 - $52 million; 2001 - $87 million; 2002 - $113 million; 2003 - $62 million; and 2004 - $43 million. This construction program includes $97 million for construction expenditures during 2000-2003 that SIGECO estimates as the maximum amount if it is required to comply with new United States Environmental Protection Agency (USEPA) air quality standards discussed under "Environmental Matters," and $32 million for the construction of a gas- fired electric generation peaking unit in 2002. Because SIGECO plans to lease the proposed cogeneration facility discussed in "Rate and Regulatory Matters" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 18, its cost is not included in the projected five-year construction requirements. While SIGCORP expects the majority of SIGECO's construction and other capital requirements to be provided by internally generated funds, external financing requirements of $50-70 million of medium term debt are anticipated and will be used primarily to retire a similar amount of short-term debt. REGULATION Because of its ownership of SIGECO, SIGCORP is a "Holding Company" as defined by the Public Utility Holding Company Act of 1935 (PUHCA). Furthermore, SIGECO is also a "Holding Company" as defined by PUHCA due to SIGECO's ownership of 33% of Community Natural Gas Company. Both SIGCORP and SIGECO are exempt from regulation under the PUHCA except for the provisions of Section 9(A)(2), which pertain to acquisitions of other utilities. Operating as a public utility under the laws of Indiana, SIGECO is subject to regulation by the Indiana Utility Regulatory Commission (IURC) as to its rates, services, accounts, depreciation, issuance of securities, acquisitions and sale of utility properties or securities, and in other respects as provided by the laws of Indiana. See subsequent discussion under "Competition" regarding the restructuring of the electric utility industry and possible deregulation of certain segments or functions of electric utility service. In addition, SIGECO is subject to regulation by the Federal Energy Regulatory Commission (FERC) with respect to the sale and transmission of electric energy in interstate commerce, its rates for sales for resale, interconnection agreements with other utilities, the classification of its accounts and the acquisition and sale of utility property in certain circumstances as provided by the Federal Power Act. See "SIGECO-Electric Business", page 5 and "SIGECO-Gas Business", page 7 for further discussion regarding regulatory matters. SIGECO is subject to regulations issued pursuant to federal and state laws, pertaining to air and water pollution control. The economic impact of compliance with these laws and regulations is substantial, as discussed in detail under "Environmental Matters." SIGECO is also subject to multiple regulations issued by both federal and state commissions under the Federal Public Utility Regulatory Policies Act of 1978. COMPETITION As part of its efforts to develop a national energy strategy, Congress amended PUHCA and the Federal Power Act by enacting the National Energy Policy Act of 1992 (NEPA), which will affect the traditional structure of the electric utility industry. As a result of changes brought about by NEPA, SIGECO competes with other utilities and wholesale generators for sales of electricity to existing wholesale customers of SIGECO and other potential wholesale customers. SIGECO currently competes with other utilities in connection with intersystem bulk power sales. SIGECO does not presently compete for retail electric or gas customers with the other utilities within its assigned service areas. However, various federal and state legislators, including members of the Indiana General Assembly, have introduced proposed legislation addressing retail wheeling and other related issues. Under the proposed legislation, the electric generation function (and the marketing function under some proposals) would be subject to competition and deregulated, while other 11 functions such as transmitting and distributing power, would continue to be regulated. See "Competition" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 18, for discussion of the major changes effected by NEPA; the status of related Indiana legislation; and further discussion of the deregulation of the electric industry and possible further deregulation of the natural gas industry. Some of SIGECO's gas customers have, or in the future could acquire, access to energy sources other than those available through SIGECO. (See "SIGECO-Gas Business", page 7, for discussion of gas transportation.) Although federal policy allows bypass of a local distribution company, Indiana law disallows bypass in most cases. SIGECO is currently litigating two such attempts in the Indiana regulatory arena and before the FERC. (See "Competition" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 18 for discussion of the bypass attempts and related litigation.) There continues to be interest in research on the development of sources of energy other than those in general use. Such competition from other energy sources has not been a material factor to SIGECO in the past. SIGECO is unable, however, to predict the extent of this competition in the future or its potential effect on SIGECO's operations. ENVIRONMENTAL MATTERS SIGECO is subject to federal, state and local regulations with respect to environmental matters, principally air, solid waste and water quality. Pursuant to environmental regulations, SIGECO is required to obtain operating permits for the electric generating plants which it owns or operates and construction permits for any new plants which it might propose to build. Regulations concerning air quality establish standards with respect to both ambient air quality and emissions from SIGECO's facilities, including particulate matter, sulfur dioxide and nitrogen oxides. Regulations concerning water quality establish standards relating to intake and discharge of water from SIGECO's facilities, including water used for cooling purposes in electric generating facilities. Because of the scope and complexity of these regulations, SIGECO is unable to predict the ultimate effect of such regulations on its future operations, nor is it possible to predict what other regulations may be adopted in the future. SIGECO intends to comply with all applicable valid governmental regulations, but will contest any regulation it deems to be unreasonable or impossible to comply with or which is otherwise invalid. The implementation of federal and state regulations designed to protect the environment, including those hereinafter referred to, involves or may involve review, certification or issuance of permits by federal and state agencies. Compliance with such regulations may limit or prevent certain operations or substantially increase the cost of operation of existing and future generating installations, as well as seriously delay or increase the cost of future construction. Such compliance may also require investments above those amounts stated under "Construction Program and Financing", page 9. All existing SIGECO electric generation facilities have operating permits from the Indiana Department of Environmental Management or other agencies having jurisdiction. In order to secure approval for these permits, SIGECO had installed electrostatic precipitators on all coal-fired units and is operating flue gas desulfurization (FGD) units to remove sulfur dioxide from the flue gas at its A. B. Brown Units 1 and 2 generating facilities. The FGD units at the Brown Station remove most of the sulfur dioxide from the flue gas emissions by way of a scrubbing process, thereby allowing SIGECO to burn high sulfur southern Indiana coal at the station. In October 1990, the U.S. Congress adopted major revisions to the Federal Clean Air Act. The revisions require reduction in emissions of sulfur dioxide (SO2) and nitrogen oxide (NOX) from coal-burning electric generating facilities, including those owned and operated by SIGECO. Two of SIGECO's principal coal-fired facilities (A. B. Brown Units 1 and 2, totaling 500 megawatts of capacity) were equipped with sulfur dioxide removal equipment (scrubbers) and were not severely affected by the new legislation. However, 523 megawatts of SIGECO's coal-fired generating capacity were significantly impacted by the lower emission requirements. SIGECO was required to reduce total emissions from Culley Unit 3, Warrick Unit 4 and Culley Unit 2 by approximately 50% to 2.5 lb/MMBTU by January 1995 (Phase I) and to 1.2 lb/MMBTU by January 2000 (Phase II). SIGECO met all of the Phase I emission requirements and some of the Phase II requirements by January 1995 with the implementation of its Clean Air Act Compliance Plan which includes equipping Culley Units 2 and 3 with a sulfur dioxide scrubber, among other provisions. Unit 1 at Culley Station (46 megawatts) 12 was also subject to the 1.2 lb/MMBTU restriction by January 2000. With the addition of the scrubber at the Culley generating station, SIGECO is surpassing the minimum compliance requirements of Phase I and is using "overcompliance allowances" and fuel blending (with low sulfur coal) strategies to help meet the stricter Phase II requirements effective January 2000. SIGECO is purchasing additional allowances to fully meet Phase II requirements. No material capital expenditures are anticipated to meet Phase II requirements, and thus, none are reflected in the projected construction requirements for the years 2000-2004 discussed in "Construction Program and Financing" or in "Liquidity and Capital Resources" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 18. Current regulatory policy allows for the recovery through rates of all authorized and approved pollution control expenditures. Refer to "Environmental Matters" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 18, for further discussion of SIGECO's Clean Air Act Compliance Plan, and the associated costs. SIGECO filed Title V (of the 1990 Amendments to the Federal Clean Air Act) permit applications for all of its applicable generation facilities during the fourth quarter of 1996. The applications have been approved for completeness and are being processed by the Indiana Department of Environmental Management. Warrick Unit 4 (50% owned by SIGECO) is covered by Title V permit applications filed by Alcoa Generating Corporation, majority owner of the Warrick Generating Station. In December 1996 and January 1997, the USEPA issued proposed regulations regarding new national ambient air quality standards for regional ozone and particulate matter concentration levels. In July 1997, the USEPA issued its final rule which revised the national ambient air quality standard for ozone by setting a lower concentration limit and changing the averaging period from one hour to eight hours. There remains much uncertainty as to the extent that SIGECO would be affected by this ruling. Refer to "Environmental Matters" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 18, for discussion of this new ruling and related issues and the estimated possible costs to comply with reductions if ultimately required. Refer to Item 3, LEGAL PROCEEDINGS, Page 14, and to "Environmental Matters" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 18 for discussion of the USEPA's lawsuit against SIGECO for alleged violations of the Clean Air Act. In connection with the use of sulfur dioxide removal equipment at the A. B. Brown Generating Station, SIGECO operates a solid waste landfill for the disposal of approximately 200,000 tons of residue per year from the scrubbing process. Application for renewal of the landfill operating permit was filed with the Indiana Department of Environmental Management (IDEM) in August 1996, which has not yet been acted upon. The existing permit will remain in effect until action is taken by IDEM on the renewal application. SIGECO also has a solid waste landfill available for the disposal of the gypsum by-product being produced by the new sulfur dioxide scrubber at the Culley Generating Station. SIGECO was granted a five-year operating permit for the landfill in June 1995, but anticipates using this landfill only when the gypsum by- product does not meet contract specifications for its sale to a wallboard manufacturer. Such utilization has not been necessary, to date. Under the Federal Water Pollution Control Act of 1972 and Indiana law and regulations, SIGECO is required to obtain permits to discharge effluents from its existing generating stations into the navigable waterways of the United States. The State of Indiana has received authorization from the USEPA to administer the federal discharge permits program in Indiana. Variances from effluent limitations may be granted by permit on a plant-by- plant basis where the utility can establish the limitations are not necessary to assure the protection of aquatic life and wildlife in and on the body of water into which the discharge is to be made. SIGECO has been granted National Pollution Discharge Elimination System (NPDES) permits covering miscellaneous waste water and thermal discharges for all its generating facilities to which the NPDES is applicable, namely the Culley Station, A. B. Brown Station and Broadway Station (gas turbines). As majority owner of Warrick Generating Station, Alcoa Generating Corporation has been granted an NPDES permit for that facility, including Warrick Unit 4. Such discharge permits are limited in time and must be renewed at five-year intervals. During 1994, SIGECO submitted renewal applications for these permits, which are currently pending, as they are for most industries. The existing permits will remain in effect until action is taken by IDEM on the renewal applications. SIGECO anticipates renewal of the permits by IDEM. At present, there are no known enforcement proceedings concerning water quality pending or threatened against SIGECO. 13
Age at Name 12/31/99 Positions Held During Past Dates Five Years R. G. Reherman 64 Chairman of the Board of Directors, and Chief Executive May 1999 - Officer of SIGCORP Present Chairman of the Board of Directors, President and Chief Executive Officer of SIGCORP Jan 1996 - April 1999 Chairman of the Board of Directors of SIGECO Sept 1997 - Present Chairman of the Board of Directors, President and Chief Executive Officer of SIGECO *- Sept 1997 A. E. Goebel 52 President and Chief Operating Officer of SIGCORP; Chief Executive Officer of SIGECO May 1999- Present Executive Vice President Sept 1997 - of SIGCORP April 1999 Secretary and Treasurer Jan 1996 - of SIGCORP Sept 1997 President and Chief Executive Officer Sept 1997- of SIGECO April 1999 Senior Vice President, Chief Financial Officer Oct 1996 - and Secretary of SIGECO Sept 1997 Senior Vice President, Chief Financial Officer, Secretary and Treasurer of * - Oct 1996 SIGECO J. G. Hurst 56 President and Chief Operating May 1999 - Officer of SIGECO Present Executive Vice President and Chief Operating Sept 1997 - Officer of SIGECO April 1999 Senior Vice President and General Manager of Operations of SIGECO * - Sept 1997 R. G. Lynch 48 Senior Vice President of Human Resources Mar 1999 - and Administration of SIGCORP Present J. L. Davis 44 Vice President Support Jan 1999 - Services of SIGECO Present Vice President of Marketing and Customer Service of SIGECO * - Dec 1998 W. S. Doty 49 Vice President Energy Jan 1999 - Delivery of SIGECO Present Director of Gas Operations * - Dec 1998 of SIGECO R. G. Jochum 52 Vice President Power Supply Jan 1999 - of SIGECO Present Vice President and Director of Power Production of SIGECO * - Dec 1998 G. M. McManus 52 Vice President and Director of Governmental Relations of SIGECO * - Present * Indicates positions held at least since 1995. 14 Item 2. PROPERTIES SIGCORP and SIGECO SIGCORP has no significant properties other than common stock of affiliates. SIGECO's installed generating capacity as of December 31, 1999 was rated at 1,256,000 Kw. SIGECO's coal-fired generating facilities are: the Brown Station with 500,000 Kw of capacity, located in Posey County about eight miles east of Mt. Vernon, Indiana; the Culley Station with 406,000 Kw of capacity, and Warrick Unit 4 with 135,000 Kw of capacity. Both the Culley and Warrick Stations are located in Warrick County near Yankeetown, Indiana. SIGECO's gas- fired turbine peaking units are: the 80,000 Kw Brown Gas Turbine located at the Brown Station; two Broadway Gas Turbines located in Evansville, Vanderburgh County, Indiana, with a combined capacity of 115,000 Kw; and two Northeast Gas Turbines located northeast of Evansville in Vanderburgh County, Indiana with a combined capacity of 20,000 Kw. The Brown and Broadway turbines are also equipped to burn oil. Total capacity of SIGECO's five gas turbines is 215,000 Kw and they are generally used only for reserve, peaking or emergency purposes due to the higher per unit cost of generation. SIGECO's transmission system consists of 820 circuit miles of 138,000 and 69,000 volt lines. The transmission system also includes 27 substations with an installed capacity of 4,013,590 kilovolt amperes (Kva). The electric distribution system includes 3,195 pole miles of lower voltage overhead lines and 225 trench miles of conduit containing 1,345 miles of underground distribution cable. The distribution system also includes 93 distribution substations with an installed capacity of 1,833,855 Kva and 49,501 distribution transformers with an installed capacity of 2,223,537 Kva. SIGECO owns and operates three underground gas storage fields with an estimated ready delivery from storage capability of 3.9 million Dth of gas. The Oliver Field, in service since 1954, is located in Posey County, Indiana, about 13 miles west of Evansville. The Midway Field is located in Spencer County, Indiana, about 20 miles east of Evansville near Richland, Indiana, and was placed in service in December 1966. The third field is the Monroe City Field, located in Knox County, about 10 miles east of Vincennes, Indiana. The field was placed in service in 1958. SIGECO's gas transmission system includes 359 miles of transmission mains, and the gas distribution system includes 2,562 miles of distribution mains. SIGECO's properties are subject to the lien of the First Mortgage Indenture dated as of April 1, 1932 between SIGECO and Bankers Trust Company, New York, as Trustee, as supplemented by various supplemental indentures, all of which are exhibits to this report and collectively referred to as the "Mortgage". Subsidiaries other than SIGECO have no significant properties other than the ownership and operation of coal mining property and investments in real estate partnerships, leveraged leases, and private placement subordinated debt instruments. Item 3. LEGAL PROCEEDINGS SIGCORP and SIGECO On November 3, 1999, the USEPA filed a lawsuit against SIGECO. The USEPA alleges that, beginning in 1992, SIGECO violated the Clean Air Act by: (i) making modifications to its Culley Generating Station in Yankeetown, Indiana without obtaining required permits; (ii) making major modifications to the Culley Generating Station without installing the best available emission control technology; and (iii) failing to notify the USEPA of the modifications. In addition, the lawsuit alleges that the modifications to the Culley Generating Station required SIGECO to begin complying with federal new source performance standards. SIGECO believes it performed only proper maintenance at the Culley Generating Station. Because proper maintenance does not require permits, application of the best available emission control technology, notice to the USEPA, or compliance with new source performance standards, SIGECO believes that the lawsuit is without merit, and intends to defend the lawsuit vigorously. 15 The lawsuit seeks fines against SIGECO in the amount of $27,500 per day per violation. The lawsuit does not specify the number of days or violations the USEPA believes occurred. The lawsuit also seeks a court order requiring SIGECO to install the best available emissions technology at the Culley Generating Station. If the USEPA is successful in obtaining an order, SIGECO estimates that it would incur capital costs of approximately $40 million to $50 million complying with the order. The USEPA has also issued an administrative notice of violation to SIGECO making the same allegations, but alleging that violations began in 1977. Under applicable rules, SIGECO could be subjected to criminal penalties if the Culley Generating Station continues to operate without complying with the new source performance standards and the allegations are determined by a court to be valid. SIGECO anticipates at this time that the plant will continue to operate while the matter is being decided. No material legal proceedings were terminated during the fourth quarter of 1999. Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS SIGCORP and SIGECO (a) A special meeting of shareholders was held at 2:00 P.M. (CDT) on December 17, 1999, with the following action taken: (b) The merger of SIGCORP, Inc. and Indiana Energy, Inc. was approved by a majority of the outstanding shares of SIGCORP, Inc. (c) The following table shows the voting results:
Approval of Merger Total Votes Cast: 22,606,603 For Against Abstain 21,590,477 708,424 307,702
16 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS SIGCORP and SIGECO Effective January 1, 1996, all shares of common stock of SIGECO were exchanged for an equal number of shares of common stock of SIGCORP. As of March 1, 2000, SIGCORP had 8,407 holders of record of common stock. The principal market on which SIGCORP's common stock is traded is the New York Stock Exchange, Inc. where the common stock is listed. The high and low sales prices for SIGCORP's stock as reported in the consolidated transaction reporting system for each quarterly period during the two most recent fiscal years were:
QUARTERLY PERIOD 1 2 High Low High Low 1999 $35-7/8 $26-7/8 $31-7/16 $26-1/2 1998 $32-5/16 $27-5/16 $32-3/8 $28-1/16 3 4 High Low High Low 1999 $27-15/16 $25-1/2 $26-9/16 $22-9/16 1998 $33-7/16 $30-1/4 $36-9/16 $32-13/16
Dividends declared and paid per share of SIGCORP common stock during the past two years were:
QUARTERLY PERIOD 1 2 3 4 1999 $0.3100 $0.3100 $0.3100 $0.3100 1998 $0.3025 $0.3025 $0.3025 $0.3025
The quarterly dividend on common stock was increased to 31.75 cents per share in January 2000, payable March 20, 2000. DIVIDEND RESTRICTIONS The following restrictions pertain to SIGECO but, to the extent that the dividends of SIGCORP depend on SIGECO earnings, may have an effect on SIGCORP. The payment of cash dividends on SIGECO's common stock to SIGCORP is, in effect, restricted by SIGECO's Mortgage to accumulated surplus, available for distribution to the common stock, earned subsequent to December 31, 1947, subject to reduction if amounts deducted from earnings for current repairs and maintenance and provisions for renewals, replacements and depreciation of all the property of SIGECO are less than amounts specified in the Mortgage. (See Section 1.02 of the Supplemental Indenture dated as of July 1, 1948, as supplemented.) No amount was restricted against cash dividends on common stock as of December 31, 1999 under this restriction. The payment of cash dividends on common stock is, in effect, restricted by SIGECO's Amended Articles of Incorporation to accumulated surplus, available for distribution to the common stock, earned subsequent to December 31, 1935. The Amended Articles of Incorporation require that, immediately after such dividends, there shall remain to the credit of earned surplus an amount at least equal to two times the annual dividend requirements on all then outstanding Preferred Stock, No Par Value. (See Art. VI, Terms of Capital Stock, General Provisions (B)). The amount restricted against cash dividends on common stock at December 31, 1999 under this restriction was $2,154,682, leaving $253,235,117 unrestricted for the payment of dividends. In addition, the Amended Articles of Incorporation provide that surplus otherwise available for the payment of dividends on common stock shall be restricted to the extent that such surplus is included in a calculation required to permit SIGECO to issue, sell or dispose of preferred stock or other stock senior to the common stock (Art. VI, Terms of Capital Stock, General Provisions (E)). 17 An order of the Securities and Exchange Commission dated October 12, 1944 under the Public Utility Holding Company Act of 1935 in effect restricts the payment of cash dividends on common stock to 75% of net income available for distribution to the common stock, earned subsequent to December 31, 1943, if the percentage of common stock equity to total capitalization and surplus, as defined, is less than 25%. At December 31, 1999, such ratio amounted to approximately 52%. Item 6. SELECTED FINANCIAL DATA SIGCORP and SIGECO
SIGCORP, Inc. Year Ended December 31 (in thousands 1999 1998 1997 1996 1995 except for per share amounts) Operating Revenues $ 604,491 $ 557,111 $ 433,237 $ 404,738 $ 360,771 Operating Income $ 88,812 $ 86,079 $ 85,582 $ 82,717 $ 72,401 Net Income Before Cumulative Effect of Accounting Change $ 52,057 $ 50,476 $ 46,140 $ 43,264 $ 38,525 Net Income $ 52,057 $ 50,476 $ 46,140 $ 43,264 $ 44,819 Average Common Shares Outstanding 23,631 23,631 23,631 23,631 23,631 Earnings Per Share of Common Stock Before Cumulative Effect of Accounting Change $ 2.20 $ 2.14 $ 1.95 $ 1.83 $ 1.63 Cumulative Effect of Accounting Change $ - $ - $ - $ - $ 0.27 Basic Earnings Per Share $ 2.20 $ 2.14 $ 1.95 $ 1.83 $ 1.90 Diluted Earnings Per Share $ 2.19 $ 2.12 $ 1.95 $ 1.83 $ 1.90 Dividends Per Share of Common Stock $ 1.24 $ 1.21 $ 1.18 $ 1.15 $ 1.13 Total Assets $1,144,142 $1,029,518 $ 990,023 $ 952,720 $ 923,981 Redeemable Preferred Stock $ 8,192 $ 8,308 $ 8,424 $ 8,424 $ 8,424 Long-Term Obligations $ 276,164 $ 206,705 $ 276,844 $ 266,951 $ 265,085
Southern Indiana Gas And Electric Company Year Ended December 31 (in thousands) 1999 1998 1997 1996 1995 Operating Revenues $ 375,781 $ 364,666 $ 358,106 $ 372,730 $ 338,698 Operating Income $ 63,426 $ 62,002 $ 62,912 $ 61,041 $ 53,873 Net Income Before Cumulative Effect of Accounting Change $ 46,768 $ 43,542 $ 45,363 $ 42,841 $ 39,624 Net Income Applicable to Common Stock $ 45,690 $ 42,447 $ 44,266 $ 41,744 $ 44,819 Total Assets $ 894,759 $ 881,912 $ 864,463 $ 852,325 $ 923,981 Redeemable Preferred Stock $ 8,192 $ 8,308 $ 8,424 $ 8,424 $ 8,424 Long-Term Obligations $ 240,915 $ 170,915 $ 239,420 $ 252,114 $ 265,085
18 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SIGCORP and SIGECO The consolidated financial statements of SIGCORP, Inc. (SIGCORP), an investor-owned holding company, include SIGCORP's principal subsidiary, Southern Indiana Gas and Electric Company (SIGECO), a regulated gas and electric utility, and ten nonregulated subsidiaries. The following discussion and analysis includes those factors which have affected, or may materially affect the results of operations and financial condition of SIGCORP and its subsidiaries. RESULTS OF OPERATIONS Favorable results of sustained economic growth within its service territory and the continued ability to aggressively compete in the wholesale power market, combined with greater capitalized interest charges, produced record earnings of $2.20 per basic share for SIGCORP in 1999. The previous yearly earnings record of $2.14 per share, set in 1998, included a $2.9 million after-tax ($.12 per share) gain on the liquidation of an equity position in a leveraged lease. Earnings per share for 1997 were $1.95. Utility operations contributed $1.93 of the 1999 per share earnings and nonregulated operations contributed $.27 per share; for 1998, utility net income provided $1.80 and strong non- utility results, reflecting the $0.12 gain, contributed the remaining $.34 of total basic earnings per share. The factors effecting the $.06 increase in 1999 earnings follow:
Period ended December 31, 1998 $ 2.14 Weather (.01) Utility sales growth other than weather .19 Electric sales to other utilities and power .02 marketers Utility O&M expense (.06) Utility depreciation expense (.06) Nonregulated gas energy services and nonutility (.07) operations Other .05 Period ended December 31, 1999 $ 2.20
REVENUES Electric utility revenues rose $9.7 million (3.3%) during 1999, reflecting a 5.5% increase in sales to retail and municipal customers following a 7.3% rise in sales to such customers in 1998. Although sales to other utilities and power marketers declined 16.6% in 1999, several new sales contracts produced higher average unit sales prices to these customers and related revenues were down only 2.5%. A $25.3 million ( 9.3%) increase in electric revenues in 1998 reflected the greater sales to retail and municipal customers, higher unit prices for power sales to other utilities and power marketers during a very warm summer and additional sales to Alcoa Generating Corporation. Continued economic growth in SIGECO's service area during 1999 more than offset the impact of milder summer temperatures (21% milder than 1998 in terms of cooling degree-days) on weather- sensitive sales, raising residential and commercial electric sales 3% and 5%, respectfully. Industrial sales reflected the strength of the area's growing industrial base, increasing 7% compared to 1998. The decrease in sales to other utilities and power marketers during the current year also reflected the milder temperatures which eased demand in the wholesale market, compared to the prior year when temperatures were 18% warmer than normal and market supply was constrained. Total electric sales rose 1.2% compared to 1998, when electric sales were 24% greater than the 1997 period. 19 Greater sales to retail gas customers was the primary reason for a 2.1% ($1.4 million) increase in 1999 gas revenues and more than offset the impact on revenues of the recovery of lower per unit gas costs reflected in customer rates. The higher revenues followed a 22% ($18.8 million) decrease in 1998 gas utility revenues resulting from fewer sales and the recovery of lower per unit gas costs. Total gas sales were up 6% in 1999, after a 22% decline in 1998, reflecting the impact of 7% cooler temperatures (in terms of heating degree- days) on weather-sensitive sales and the economic health of SIGECO's service area. Residential sales rose 6% during 1999, after substantially milder winter temperatures in 1998 caused a 19% decrease in such sales. Sales to commercial customers also rose 6% reflecting the cooler temperatures and the growth of the commercial sector. Total natural gas sold and transported to gas customers increased 10% during 1999 after a 1% decline in 1998. The continued growth of SIGCORP Energy Services (Energy), which markets natural gas and related services, during its third full year of operation raised SIGCORP's 1999 revenues $41.9 million, following a $108.0 million increase in Energy's revenues in 1998 which reflected both substantial growth in sales and higher market prices for natural gas sold to Energy's customers during 1998. A $5.7 million decline in other revenues for 1999, which includes the operating revenues of SIGCORP's other nonregulated subsidiaries, was primarily the result of $4.1 million lower revenues at SIGCORP's Communications Services (Communications) subsidiary due to the completion of several large projects by the end of 1998. During 1998, the first full-year operation of Communications and revenues from these large projects were reflected in the $9.4 million increase in other revenues compared to 1997. OPERATING EXPENSES Fuel for electric generation, the most significant electric operating cost, increased 1.7% ($1.1 million) in 1999, tracking a 1.9% increase in electric generation; per unit fuel costs were comparable to the year- earlier period. A 5.5% rise in 1998 electric generation caused a 4.1% rise in total fuel costs. Changes in the unit costs of fuel and purchased electric energy are passed on to electric customers through commission-approved fuel and purchased power cost recovery mechanisms. Although SIGECO's sales of electric energy to nonfirm wholesale customers are provided primarily from excess capacity, SIGECO's purchases of electricity from other utilities for resale to nonfirm wholesale customers typically represent the majority of SIGECO's total purchased electric energy costs. During 1999, total purchases of electric energy declined 13% due to the 17% decline in sales to other utilities and power marketers, however higher average market prices for energy purchased resulted in total costs remaining comparable to prior year costs. Purchased electric energy costs incurred in 1998 increased $6.8 million over 1997 costs due to a 39% rise in purchases from other utilities for resale to nonfirm electric wholesale customers and higher market prices. The cost of gas sold, the major component of gas operating expenses, was comparable to 1998 costs, despite the increased sales of gas, reflecting a 5% lower average per unit cost of gas sold. A 27% ($14.4 million) decrease in the 1998 cost of gas sold was attributed to the 22% decrease in sales of gas and a 7% decline in unit costs. Changes in the unit costs of natural gas are passed on to gas customers through a commission-approved gas cost recovery mechanism. During 1999, the cost of energy services and other revenues, which was chiefly the cost of natural gas purchased for resale by Energy and project contract costs at Communications, rose $36.1 million compared to 1998 due to the continued growth of Energy. Contract costs at Communications were $5.0 million lower than a year ago. The total cost of energy services and other revenues were up $114.1 million in 1998 compared to 1997 due to the significant growth at Energy and higher market prices paid for natural gas sold to their customers and project costs related to the full-year operations of Communications. 20 SIGCORP's other operation expenses in 1999 were up 11.5% ($7.4 million) over 1998 due to a $5.1 million rise in SIGECO's other operation expenses and higher expenses at Energy, Communications and SIGCORP, Inc. (the holding company). The 9% increase in expenses at SIGECO reflects increased compensation and benefits and other general operation expenses, all of which were partially offset by a $2.2 million reduction in provisions for uncollectible revenues which reflected a $2.0 million provision in 1998 for uncollectible revenue from sales of wholesale power to a power marketer. Other operation expenses for 1998 rose 6.1% ($3.7 million) compared to 1997 due to higher operation expenses at several of SIGCORP's nonregulated subsidiaries, primarily Energy, SIGCORP Fuels and Communications, related to their increased activity. SIGECO's 1998 operation expenses, which included the $2 million reserve for uncollectible revenue, were comparable to 1997. Maintenance expenses, essentially all incurred at SIGECO, declined 8% ($2.9 million) compared to 1998, when higher power generation maintenance expenditures related to a scheduled major overhaul of a turbine generator at one generating unit and unscheduled repairs at two other generating units were incurred. During 1999, maintenance costs at SIGECO's generating facilities were down 13% ($3.6 million). SIGCORP's 1998 maintenance costs of $37.5 million represented a 28% ($8.3 million) increase over such costs for 1997, due to an $8.0 million increase in maintenance expenditures at SIGECO's generating facilities. Depreciation and amortization expense increased 6.1% ($2.6 million) in 1999, following a similar increase in 1998, due primarily to SIGECO's continued investment in gas and electric utility facilities required to serve new customers and upgrade existing energy production and delivery systems and due to a greater investment in shorter-lived utility plant. While inflation has a significant impact on the replacement cost of SIGECO's facilities, only the historical cost of electric and gas plant investment is recoverable in revenues as depreciation under the ratemaking principles to which SIGECO is subject. With the exception of adjustments for changes in fuel and gas costs and margin on sales lost under SIGECO's demand side management programs, SIGECO's electric and gas rates remain unchanged until a rate application is filed and a general rate order is issued by the Indiana Utility Regulatory Commission (IURC). Property and other taxes expense in 1999 and 1998 were comparable to 1997 costs. INTEREST AND OTHER CHARGES SIGCORP's total interest and other charges declined slightly from 1998 reflecting greater capitalized interest charges during 1999 which included a $1.1 million adjustment of prior period provisions. Total interest expense during the current period rose 3%, the result of additional short-term debt incurred primarily to fund Southern Indiana Properties' (SIPI) increased investment activity. Interest on long-term debt declined $1.3 million reflecting a full-year impact of lower average interest rates due to SIGECO's 1998 refunding of $80.3 million of tax-exempt bond issues with an equal amount of tax-exempt bonds. Interest income declined from 1998 when SIPI earned additional contingent interest income totaling approximately $1.0 million from two investments. SIGCORP's 1999 Other, net rose by $0.6 million. Gains on sales of some of its investment assets and earnings from additional leveraged lease investments at SIPI combined with improved results from Energy Systems Group due to several new large performance contracts more than offset the impact of the 1998 gain on the liquidation of SIPI's equity position in a leveraged lease and the final $1.4 million sale of a portion of emission allowance credits to another utility under a five-year agreement. A $3.5 million increase in SIGCORP's Other , net, due primarily to the gain on the liquidation of SIPI's leveraged lease investment, was the primary reason for a $4 million reduction in SIGCORP's total interest and other charges in 1998. 21 INCOME TAX EXPENSE Higher pretax income in 1999 and the favorable impact on the 1998 effective tax rate of the liquidation of the leveraged lease discussed above caused the increase in federal and state income tax expense for the 1999 period. Despite SIGCORP's higher pretax income in 1998, federal and state income taxes in 1998 were comparable to 1997 due to the favorable impact of the lower 1998 effective tax rate. EARNINGS The $0.06 per share (3%) increase in basic earnings per share for the current twelve-month period was the result of greater retail and municipal electric sales, higher unit margins on sales to other utilities and power marketers, increased gas sales, lower utility maintenance expenses and additional capitalized interest charges, the favorable impacts of which were partially offset by higher utility operation and depreciation expenses and comparatively lower non-utility earnings due to the $0.12 per share after-tax gain realized by SIPI on the liquidation of the leveraged lease investment in 1998. Much stronger non-utility results in 1998, up $0.26 per share over 1997, resulted in the $0.19 per share (10%) higher earnings in 1998. PENDING MERGER On June 14, 1999, SIGCORP announced an agreement to merge with Indiana Energy, Inc. (IEI) in an all- stock pooling transaction through which a new holding company, Vectren Corporation (Vectren), would be formed. In a tax-free exchange, SIGCORP shareholders would receive one and one-third shares of Vectren stock for each share of SIGCORP stock, while IEI shares would be exchanged on a one- for-one basis. The merger would create a company with more than 650,000 customers providing gas and/or electric service in adjoining service areas covering nearly two-thirds of Indiana and assets of approximately $1.8 billion. On March 9, 2000, SIGCORP and IEI received approval from the U.S. Securities and Exchange Commission to merge, representing the last remaining federal or state approval needed to complete the merger; shareholder approval was received on December 17, 1999. SIGCORP and IEI will complete the merger on March 31, 2000. The companies expect to generate efficiencies and other savings of $200 million over a ten- year period, net of non-recurring merger costs in the range of $50 million to $55 million. SIGCORP transaction and related costs incurred by December 31, 1999 were $5,506,000 and have been deferred pending completion of the merger. On December 15, 1999, IEI announced that its board of directors had approved a definitive agreement which will allow IEI to acquire DPL Inc.'s (DPL) natural gas distribution business for $425 million in a cash transaction. The acquisition, which is expected to close by the third quarter of 2000, will be a Vectren transaction. The service area of DPL's natural gas business is contiguous to Vectren's distribution system in East Central Indiana, and includes 16 counties in West Central Ohio. With the acquisition, Vectren Corporation will have total assets approximating $2.2 billion and revenues approximating $1.2 billion; utility customer count will total nearly one million. RATE AND REGULATORY MATTERS SIGECO complies with the provisions of Statement of Financial Accounting Standard (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation" that allows certain costs incurred by SIGECO that have been, or are expected to be, approved by regulatory authorities for recovery through rates, to be deferred as regulatory assets until recovered by SIGECO. Criteria that could give rise to the discontinuance of SFAS 71 include (1) increasing competition that restricts SIGECO's ability to establish prices to recover specific costs, and (2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. SIGECO periodically reviews these criteria to ensure the continuing application of SFAS 71 is appropriate. In the event SIGECO determines that it no longer meets the criteria for following SFAS 71, the accounting impact could be an extraordinary noncash charge to operations of an amount that could be material. SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", imposes a stricter criterion for these regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Under SIGECO's present regulatory 22 environment and given its current competitive position in the industry, SIGECO believes its use of regulatory accounting is appropriate. On October 1, 1998, SIGECO announced plans and filed for regulatory approval with the Indiana Department of Environmental Management (IDEM) and the IURC to build a $120 million cogeneration facility, pending contract finalization, regulatory approval and placement of permanent financing. The facility, an atmospheric fluidized-bed coal- fired plant, will have production capacity for approximately 600,000 pounds/hour of steam and generation of approximately 70 megawatts of electricity. SIGECO plans to lease the facility through an operating lease. Regulatory reviews by the IDEM and IURC are in progress, as are preliminary financing discussions. The final outcome of these matters are uncertain at this time, however, SIGECO believes these issues will be favorably resolved. Pending final resolution, construction of the facility is expected to begin in late-2000, with commercial operation to begin during the first quarter of 2003. COMPETITION SIGCORP's predominant subsidiary, SIGECO, is presently a fully integrated provider of retail gas and electric utility service within a franchised, retail monopoly service area. The production of electricity is the most significant functional component of the integrated SIGECO operations, representing approximately 60% of regulated assets and, as a result of wholesale sales of electricity, a greater portion of the net income of the utility. A fundamental change with respect to the monopoly structure of the electric utility industry is occurring in the United States, brought about by the National Energy Policy Act of 1992 (NEPA). The primary purpose of the electric provisions of NEPA is to increase competition in electric generation, and under authority granted by NEPA, the Federal Energy Regulatory Commission (FERC) has aggressively undertaken the introduction of competition into the wholesale electric business. The results of the changes in the wholesale electric business on SIGECO have been generally favorable. Because SIGECO has below average fuel for electric generation costs, it has been an aggressive seller of electricity to power marketers and other providers seeking electricity to fulfill wholesale sales contracts. The results of the increased wholesale sales are discussed further in "Results of Operations." Conversely, SIGECO has reduced prices to firm wholesale customers, or offered to do so, to retain their business. These discounts in pricing terms, when fully effective, result in gross margins which are several million dollars below margins attainable from such customers prior to NEPA. SIGECO cannot predict the long-term consequences of these changes on its results of operations or financial condition. FERC does not have jurisdiction over the retail sales of electricity. States retain jurisdiction over the permitting of retail competition, the terms of such competition and the recovery of any costs or other transition charges resulting from retail competition. To date, numerous state legislatures or regulatory agencies have adopted laws or regulations to introduce retail electricity competition. However, most states are continuing to evaluate the issue. In Indiana, the state legislature must adopt appropriate legislation to amend the Public Utility Act to provide for retail competition. In each of the past four years, such legislation was introduced in the Indiana Senate, but failed to pass. In January 2000, an association of Indiana's large manufacturers introduced an electric deregulation bill in the Indiana Senate but the bill was not voted out of the Senate Commerce Committee, and the legislative session terminated before further review could be taken. Since 1998, Indiana's five largest investor-owned utilities have attempted to develop the framework for a comprehensive retail competition bill. However, no comprehensive proposal has been finalized. Also, recent studies have concluded that many of Indiana's electric and gas customers, whose energy costs rank among the lowest in the 23 nation, may actually experience rate increases with retail competition. These and other developments have delayed statewide deregulation in Indiana. It is anticipated by SIGECO that pressure on the Indiana legislature could intensify as other surrounding states implement retail competition for electricity. SIGECO will continue to participate in the debate to represent the interests of all its stakeholders. One of SIGECO's primary concerns in the debate is that appropriate reciprocity provisions with other utilities and power marketers are enacted which would prevent out-of-state providers from having an unfair advantage over Indiana utilities. In addition, SIGECO has taken the position in the debate (and will continue to attempt to influence the outcome of the debate) that low-cost producers such as SIGECO should not, as has occurred in other states, be penalized for prudently managing its business and being a low-cost provider. More specifically, the implementation of "access charges" and "transition charges" in other states have served to make it very difficult for low-cost producers to economically compete for business from the customers of high-cost producers due to the need for those customers to pay their current provider very high fixed charges for the privilege of "accessing" the marketplace. At the same time, historically low-cost producers, such as SIGECO, have lower access charges because their "stranded costs" are low, making it economically less difficult for high-cost producers to sell to a low-cost producer's customer base at marginal production costs. SIGECO is unable to predict the timing or final provisions of Indiana legislative actions on competition, if any. Although SIGECO is uncertain of the timing and/or final outcome of these developments, it is committed to pursuing, and has been implementing, its corporate strategy of positioning itself as a low-cost energy producer and the provider of high-quality service to its retail and wholesale customers. SIGECO also provides retail integrated natural gas service in Indiana. However, SIGECO does not earn a profit on the direct sale of the natural gas commodity. SIGECO simply charges its retail gas customers the cost SIGECO incurs to purchase the gas and have it delivered to SIGECO's metering points on the interstate pipeline network. SIGECO does earn a return on the investment in its assets used to deliver the gas to customers. As a result, as long as SIGECO delivers gas to end users, SIGECO does not anticipate any material impact on the financial results of its operations should the right of retail customers to choose gas commodity providers extend beyond the current level. Although federal policy allows bypass of a local distribution company, Indiana law disallows bypass in most cases. SIGECO is litigating two attempts to bypass its gas distribution system in the Indiana regulatory arena. In May 1998, a natural gas transmission pipeline company requested and received authorization from FERC to construct and operate a 3-mile lateral pipeline from its main line system directly to a newly-constructed industrial facility located in SIGECO's service territory, thus bypassing SIGECO, the local distribution company. SIGECO petitioned the IURC to rule on the pipeline company's proposal. The IURC issued an order effectively awaiting final FERC action on the issue. The IURC has not yet ruled on the pipeline company's proposal. The pipeline lateral was constructed despite SIGECO's opposition. Recently, the pipeline company requested authorization for a tap from its main line to directly serve a second SIGECO customer, at an exisiting facility. SIGECO is opposing this effort at the IURC. If through litigation, SIGECO is unable to prevent the pipeline from directly serving the facilities of the two customers, the gas service revenue forgone for these two customers will not have a material detrimental impact on SIGCORP's revenues or financial condition, however, continued bypass activity may eventually impact retail rates. SIGCORP's nonutility subsidiaries are all subject to the competitive forces existing in their respective industries, including the gas marketing industry, the energy services industry, telecommunications, industrial mineral products and coal production. As such, the financial results of the nonregulated entities depend upon their ability to successfully compete in their respective markets. 24 SIGCORP SIGECO ADVANCED COMMUNICATIONS, INC. On May 7, 1998, SIGCORP formed SIGECO Advanced Communications, Inc. (Advanced Communications), a wholly-owned nonregulated subsidiary, to hold SIGCORP's investment in SIGECOM, LLC and Utilicom Networks, Inc. (Utilicom). SIGECOM, LLC, also formed on May 7, 1998, was a joint venture between Advanced Communications and Utilicom to provide and market enhanced communication services over a high capacity fiber optic network in the greater Evansville area and potentially other areas encompassing SIGECO's service territory. Advanced Communications had a preferred interest in SIGECOM LLC which held a 100% liquidation preference and was convertible to a 49% common interest, and Utilicom had a 100% common interest. Advanced Communications also acquired an 11.5% interest in Utilicom. Advanced Communications and Utilicom were to make equity contributions to SIGECOM during the 24- month period subsequent to the formation date as required by the construction and operating needs of SIGECOM. In addition to these equity contributions, SIGCORP contributed its wholly-owned subsidiary, ComSource, Inc. to SIGECOM on July 1, 1998. As of December 31, 1999, Advanced Communications had made $15.1 million, including the value of ComSource, Inc., of its required equity contributions to SIGECOM and will contribute an estimated remaining $1.5 million in 2000. The equity contributions by Advanced Communications and Utilicom over the 24-month period are expected to total approximately $40 million. On January 28, 2000, affiliates of Blackstone Capital Partners III, a private equity fund of The Blackstone Group invested in class B equity units of Utilicom Holdings LLC (Holdings), the newly formed holding company for Utilicom. The investment was the first part of a commitment by Blackstone to invest up to $100 million to fund future growth opportunities in fiber optic networks. At the same time, Advanced Communications exchanged 35% of its 49% preferred equity interest in SIGECO LLC for $16.5 million of convertible debt of Holdings. The debt is convertible into class A equity units at a future date or in the event of a public offering of stock. Advanced Communications' remaining 14% of preferred equity interest in SIGECOM LLC was converted to a 14% indirect common equity interest in SIGECOM LLC. The investment restructuring resulted in an immediate after- tax gain to SIGCORP of $4.9 million in the first quarter of 2000. SIGCORP and SIGECO ENVIRONMENTAL MATTERS To meet the Phase I requirements of the Clean Air Act Amendments of 1990 (CAAA), effective 1995, and some of the Phase II requirements (effective 2000), SIGECO installed a single sulfur dioxide scrubber at the Culley Generating Station to serve Culley Units 2 and 3 and installed low nitrogen oxide (NOx) burners on the two units. With the addition of the scrubber, SIGECO is emitting lower sulfur dioxide quantities than the minimum compliance requirements of Phase I of the CAAA and has available unused allowances, called "overcompliance allowances", for retention by SIGECO to meet stricter post-2000 emission limitations. SIGECO is purchasing additional allowances to fully meet Phase II requirements. In July 1997, the United States Environmental Protection Agency (USEPA) issued its final rule which revised the national ambient air quality standard for ozone by setting a lower concentration limit and changing measurement methods. It is anticipated that the number of ozone nonattainment counties in the United States will increase significantly. The USEPA has encouraged states to target utility coal-fired boilers for the majority of the reductions required, especially NOx emissions, because they believe this approach is the most cost effective. Northeastern states have claimed that ozone transport from midwestern states (including Indiana) is a significant reason for their ozone concentration problems. Although this premise is challenged by others based on various air quality modeling studies, including studies commissioned by the USEPA, the USEPA intends to incorporate a regional control strategy to reduce ozone transport. In October 1997, the USEPA provided each state a proposed budget of 25 allowed NOx emissions, a key ingredient of ozone, which requires a significant reduction of such emissions. Under that budget, utilities may be required to reduce NOx emissions to a rate of 0.15 lb/mmBtu from levels already imposed by Phase I and Phase II of the CAAA. Midwestern states (the alliance) have been working together to determine the most appropriate compliance strategy as an alternative to the USEPA proposal. The alliance submitted its proposal, which calls for a smaller, phased in reduction of NOx levels, to the USEPA and the IDEM in June 1998. In July 1998, Indiana submitted its proposed plan to the USEPA in response to the USEPA's proposed new NOx rule and the emissions budget proposed for Indiana. The Indiana plan, which calls for a reduction of NOx emissions to a rate of 0.25 lb/mmBtu by 2003, is less stringent than the USEPA proposal but more stringent than the alliance proposal. The USEPA issued its final ruling on September 24, 1998, which was essentially unchanged from its July 1997 proposed rule, after considering all filed comments. The USEPA's final ruling is being litigated in the federal courts by approximately ten midwestern states, including Indiana. The proposed NOx emissions budget for Indiana stipulated in the USEPA's final ruling requires a significant reduction in total NOx emissions from Indiana. Depending on the level of emission reductions required, and the control technology utilized to achieve the reductions, the estimated construction costs of the control equipment could reach approximately $100 million, and related additional operation and maintenance expenses could be an estimated $8 million to $10 million, annually. Under the USEPA implementation schedule, the emissions reductions and required control equipment must be implemented and in place by May 15, 2003. During the second quarter of 1999, the USEPA lost two federal court challenges to key air-pollution control requirements. In the first ruling by the U.S. Court of Appeals for the District of Columbia on May 14, 1999, the court struck down the USEPA's attempt to tighten the one- hour ozone standard to an eight-hour standard and the attempt to tighten the standard for particulate emissions, finding the actions unconstitutional. In the second ruling by the same Court on May 25, 1999, the Court placed an indefinite stay on the USEPA's attempts to reduce the allowed Nox emissions rate from levels required by the CAAA. The USEPA appealed both court rulings. On October 29, 1999, the Court refused to reconsider its May 14, 1999 ruling. On March 3, 2000, the Court reversed its ruling of May 25, 1999, and removed its stay on the USEPA's attempts to reduce the allowed Nox emissions rate. This decision by the Court will be appealed by the affected parties, including SIGECO. (Refer to "Capital Requirements" for discussion of SIGECO's five-year construction requirements and inclusion of the estimated construction costs for the control equipment.) Approximately 12 months ago, the USEPA initiated an investigation under Section 114 of the Clean Air Act (the Act) of SIGECO's coal-fired electric generating units in commercial operation by 1977 to determine compliance with environmental permitting requirements related to repairs, maintenance, modifications and operations changes. The focus of the investigation was to determine whether new source performance standards should be applied to the modifications and whether the best control technology was, or should have been used. Numerous other electric utilities were, and are currently, being investigated by the USEPA under an industry-wide review for similar compliance. On November 3, 1999, the USEPA filed a lawsuit against SIGECO alleging that, beginning in 1992, SIGECO violated the Act by: (i) making modifications to its Culley Generating Station in Yankeetown, Indiana without obtaining the required permits; (ii) making major modifications to the Culley Generating Station without installing the best available emission control technology; and (iii) failing to notify the USEPA of the modifications. In addition, the lawsuit alleges that the modifications to the Culley Generating Station required SIGECO to begin complying with federal performance standards. 26 SIGECO believes it performed only proper maintenance at the Culley Generating Station. Because proper maintenance does not require permits, application of the best available emission control technology, notice to the USEPA, or compliance with the new source performance standards, SIGECO believes that the lawsuit is without merit, and intends to defend the lawsuit vigorously. The USEPA also filed suit against six other investor-owned utilities for similar actions. The lawsuit seeks fines against SIGECO in the amount of $27,500 per day per violation. The lawsuit does not specify the number of days or violations the USEPA believes occurred. The lawsuit also seeks a court order requiring SIGECO to install the best available emissions technology at the Culley Generating Station. If the USEPA is successful in obtaining an order. SIGECO estimates that it would incur capital costs of approximately $40 million to $50 million complying with the order. In the event that SIGECO is required to install system-wide Nox emission control equipment, the majority of the $40 million to $50 million for best available emissions technology at Culley Generating Station would be included in the $100 million expenditure. The USEPA has also issued an administrative notice of violation to SIGECO making the same allegations, but alleging that violations began in 1977. Under applicable rules, SIGECO could be subjected to criminal penalties if the Culley Generating Station continues to operate without complying with the source performance standards and the allegations are determined by a court to be valid. SIGECO anticipates at this time that the plant will continue to operate while the matter is being decided. Also in July 1997, the USEPA announced a new 2.5-micron particulate matter (PM) standard while retaining the existing 10-micron PM standard. The regulatory impacts of this action cannot be determined until appropriate monitoring data is collected and subsequent national ambient air quality area designations are determined. The extent of the impact on SIGECO, if any, is unknown. DEMAND SIDE MANAGEMENT (DSM) In the November 1997 update of its Integrated Resource Plan (IRP), SIGECO determined that certain of its DSM programs were not cost effective and those programs have been discontinued. The remaining DSM programs are residential and commercial direct load control programs, which have been very effective. In the latest update of the IRP, filed in November 1999, the IRP evaluation determined that through 1998 approximately 71 megawatts of required capacity are estimated to have been postponed or eliminated by these programs. Projected DSM program expenditures for the 2000-2015 period are expected to total less than $10 million. SIGECO will continue to monitor the benefits of its DSM programs and additional changes are possible. YEAR 2000 READINESS SIGCORP, primarily SIGECO, uses various software, systems and technology that could have been affected by the date change in 2000. All identification, testing and replacement or remediation of such software, systems and technology at SIGECO was completed by December 31, 1999. No significant noncompliance issues have been encountered in 2000 and SIGECO anticipates that no such issues will be encountered. SIGECO estimates the expense of Year 2000-readiness modifications to existing systems or replacements treated as expense incurred through December 31, 1999 totaled approximately $1.7 million. SIGCORP's contingency planning was completed during 1999 and SIGECO's detailed contingency plan was filed with the Indiana Utility Regulatory Commission on June 30, 1999. The planning encompasses external dependencies such as critical suppliers, interconnected electricity and natural gas transmission systems and major customers, as well as SIGECO's electric generation facilities and other gas and electric operations areas. 27 SIGCORP is not aware of any significant noncompliance issues in 2000 with the critical systems of its suppliers or major customers, however it believes that noncompliance of such systems would not have a material adverse effect on its financial position or results of operations. A review of SIGECO's Year 2000-readiness initiatives follow: A Year 2000 team was established in early 1997 to identify and address Year 2000-readiness issues. In 1998, this process became more formalized with the establishment of SIGCORP's Year 2000 Task Force. A high-level assessment of the mission-critical systems and items of all SIGCORP subsidiaries was completed in early 1997. SIGECO has completed a detailed inventory of all systems and devices, including imbedded technology in the operational areas, determined to be date-sensitive. All systems and devices in the inventory have been rated on criticality and likelihood of failure and prioritized for testing. Due to functional obsolescence, under its general business plan SIGECO has recently replaced or is currently replacing, all of its known major noncompliant mission-critical information and control systems with systems incorporating Year 2000-ready technology. As of June 30, 1999, SIGECO had tested all of its mission-critical systems and devices and remediated those systems and devices found not ready for 2000, thus meeting the North American Electric Reliability Council (NERC)-imposed deadline to ensure Year 2000 readiness of SIGECO's operations. SIGECO's noncompliant critical information systems, the customer billing and financials/supply chain systems, developed in the late 1960's, are being replaced to address functional obsolescence. Of the two noncompliant critical information systems being replaced, the customer billing system carried the most risk since it has experienced project delays. Due to the risk of not completing this project by 2000, SIGECO modified its existing customer billing system to be Year 2000-ready, testing of which was completed by late 1999. The first and largest phase of the financials/supply chain systems project was successfully implemented September 1, 1998 and the smaller, final phase of the financials/supply chain systems project, the payroll/HR information system, was successfully implemented in July 1999. At SIGECO's base-load generating stations, all noncompliant critical control and data systems were replaced due to functional obsolescence by June 30, 1999. Based on the findings of SIGECO's detailed inventory and related testing, there were a low number of smaller non- critical systems and items identified as also requiring Year 2000-readiness upgrades or replacement, and those upgrades or replacements were completed by late 1999. MARKET RISK SIGCORP is exposed to market risk due to changes in interest rates and changes in the market price for electricity and natural gas resulting from changes in supply and demand. Exposure for interest rate changes relates to its long-term debt and preferred equity and partnership obligations. Exposure to electricity market price risk relates to forward contracts to effectively manage the supply of, and demand for, the electric generation capability of SIGECO's generating plants related to its wholesale power marketing activities. Exposure to natural gas price risk relates to forward contracts taken by Energy to manage its exposure to commodity price risks in providing natural gas supplies to its customers. SIGECO is not currently exposed to market risk for purchases of electric power and natural gas for its retail customers due to current Indiana regulations which allow for full cost recovery of such purchases through SIGECO's fuel and natural gas cost adjustment mechanisms. A 1999 generic order issued by the IURC established new guidelines for the recovery of purchased electric energy costs through fuel adjustment clauses, however, SIGECO does not anticipate any limitation of recoverability of its purchased electric power costs under this generic order. This order has been appealed by the Office of the Utility Consumer Counselor, and if the appeal is upheld, non-recovery of some future purchased electric energy costs could be possible. SIGECO and Energy do not presently utilize financial instruments for trading or speculative purposes. 28 The table below provides the fair value and average interest, or fixed dividend rate, of outstanding debt, preferred stock equity instruments and partnership obligations at December 31, 1999. The Series A and C Adjustable Rate Pollution Control Bonds are listed as variable rate long-term debt due to annual adjustment of their interest rates to current market rates on March 1.
Fair Value Expected Maturity Date as of SIGCORP and 2000 2001 2002 2003 2004 There- Total 12/31/99 Subsidiaries after (millions) Long-Term Debt Fixed Rate - - - $1.0 - $272.3 $273.3 $308.1 Average Interest Rate - - - 6.3% - 6.8% Variable Rate - - - - - $ 53.7 $ 53.7 $ 46.4 Average Interest Rate - - - - - 3.0% Preferred Stock Not Subject to Mandatory Redemption - - - - - $ 7.5 $ 7.5 $ 7.5 Average Dividend Rate - - - - - 6.5% Partnership Obligations $0.6 $0.2 - - - - $ 0.8 $ 0.9 Average Interest Rate 8.3% 8.3% - - - -
SIGECO utilizes contracts for the forward sale of electricity to effectively manage the utilization of its available generating capability. Such contracts include forward physical contracts for wholesale sales of its generating capability, during periods when SIGECO's available generating capability is expected to exceed the demands of its retail, or native load, customers. To minimize the risk related to these forward contracts, SIGECO may utilize call option contracts to hedge against the unexpected loss of its generating capability during periods of heavy demand. SIGECO also utilizes forward physical contracts for the wholesale purchase of generating capability to resell to other utilities and power marketers through nonfirm "buy-resell" transactions where the sale and purchase prices of power are concurrently set. As of December 31, 1999, management believes exposure from these positions was not material. Energy utilizes forward physical contracts for both the purchase and sale of natural gas to its customers, primarily through "back-to-back" transactions where the sale and purchase prices of natural gas are concurrently set. As of December 31, 1999, approximately 4% of Energy's forward sales contracts were not covered by forward purchase contracts; management believes exposure from these positions was not material. Energy sells fixed-price and capped-price products, and reduces its market price risk through the use of fixed-price supplier contracts and storage assets. As of December 31,1999, the estimated fair market value of Energy's forward sales contracts was approximately $10.5 million; and the estimated fair market value of its forward purchase contracts was approximately $10.1 million. SIGECO and Energy are also exposed to counterparty credit risk when a customer or supplier defaults upon a contract to pay or deliver product. To mitigate this risk, they have established procedures to determine and monitor the creditworthiness of counterparties. 29 LIQUIDITY AND CAPITAL RESOURCES SIGCORP and SIGECO In 1999, financial performance continued to be solid. Internally generated cash (net income less dividends plus charges to net income not requiring cash) fully funded SIGECO's 1999 construction expenditures; these expenditures were also fully funded with internally generated cash in 1998. Cash provided from operations increased $25.5 million during 1999 compared to 1998, while cash required for investing and financing activities increased $16.6 million. SIGCORP's ratio of earnings to fixed charges (SEC method) remained 4.0:1 for 1999, and its embedded cost of long-term debt and preferred stock is 6.2% and 5.6%, respectively. SIGCORP's financial strength is reflected in high quality credit ratings. SIGECO's senior secured debt continues to be rated AA, or equivalent, by major credit rating agencies. CAPITAL REQUIREMENTS SIGCORP's demand for capital is primarily related to SIGECO's construction of utility plant and equipment necessary to meet customers' electric and gas energy needs and environmental compliance requirements. Additionally, SIGCORP may periodically make capital investments in its nonregulated operations. Construction expenditures totaled $60.9 million during 1999, which primarily included normal improvements and replacements of facilities comprising SIGECO's electric and gas utility systems, and also included $10.4 million expended on the design and implementation of several comprehensive information systems necessary to meet expanding customer service needs and to better manage SIGECO's resources. The 1999 construction expenditures compare to $56.5 million and $68.4 million expended in 1998 and 1997, respectively. SIGECO's construction requirements for the years 2000-2004 are projected to total approximately $360 million, including construction expenditures that may be required to comply with new USEPA air quality standards discussed under "Environmental Matters" which could total approximately $100 million, and an estimated $32 million for the construction of a gas-fired electric generation peaking unit planned for 2002. Because SIGECO plans to lease the proposed cogeneration facility discussed in "Rate and Regulatory Matters", its cost is not included in the projected five- year construction requirements. FINANCING ACTIVITIES During April 1999, SIGECO temporarily refunded its $45 million 6% series first mortgage bonds due in 1999 with short-term debt. In July, $80 million in short- term borrowings, including the above amount, were refunded with the issue of $80 million of 6.72% Senior Notes due August 1, 2029. In November 1999, SIGECO refunded $10 million of its $25 million 8-7/8% series first mortgage bonds due 2016 with short-term notes payable. During 1998, SIGECO refunded four tax-exempt bond issues totaling $80.3 million with an equal amount of tax-exempt bonds which will reduce total interest expense on a present value basis by $8.5 million over the remaining lives of the bond issues. SIGECO also refunded $14 million of its first mortgage bonds with short-term notes payable. SIGCORP's short-term notes payable increased $39.1 million during 1999 following a $28.6 million rise in such short-term borrowings the prior year, primarily to fund structured financial investments by SIPI. At year end, SIGCORP had $108.6 million in short-term borrowings, leaving unused lines of credit and trust demand note arrangements totaling $57.4 million. Over the five-year period, SIGCORP expects the majority of the construction requirements and any capital contributions to its nonregulated subsidiaries to be provided by internally generated funds, however, SIGCORP anticipates issuing $50 million to $70 million of medium-term debt that will be used primarily to retire a similar amount of short- term debt. SIGCORP is confident that its long-term financial objectives, which include maintaining a capital structure near 45-50% long-term debt, 3-7% preferred stock and 43-48% common equity, will continue to be met, while providing for 30 future construction and other capital requirements. FORWARD LOOKING STATEMENTS This discussion includes forward looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms "anticipate", "expect", "potential", "estimate" and similar words, and actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric and gas utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes including revised environmental requirements, impacts of Year 2000 issues, availability and cost of capital, the pending merger with Indiana Energy, Inc. and other similar factors. 31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Number 1. Financial Statements SIGCORP Report of Independent Public Accountants 32 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 34 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 35 Consolidated Balance Sheets - December 31, 1999 and 1998 36 Consolidated Statements of Capitalization - December 31, 1999 and 1998 38 Consolidated Statements of Common Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 39 SIGECO Report of Independent Public Accountants 40 Statements of Income for the years ended December 31, 1999, 1998 and 1997 42 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 43 Balance Sheets - December 31, 1999 and 1998 44 Statements of Capitalization - December 31, 1999 and 1998 46 Statements of Common Shareholder's Equity for the years ended December 31, 1999, 1998 and 1997 47 SIGCORP and SIGECO Notes to Consolidated Financial Statements 48 2. Supplementary Information SIGCORP and SIGECO Selected Quarterly Financial Data 65 3. Supplemental Schedules SIGCORP and SIGECO Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended December 31, 1999, 1998 79 and 1997 All other schedules have been omitted as not applicable or not required or because the information required to be shown is included in the Consolidated Financial Statements or the accompanying Notes to Consolidated Financial Statements.
32 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO SIGCORP, Inc.: We have audited the consolidated balance sheets and consolidated statements of capitalization of SIGCORP, Inc. (an Indiana corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements and the supplemental schedule referred to below are the responsibility of SIGCORP, Inc.'s management. Our responsibility is to express an opinion on these financial statements and supplemental schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SIGCORP, Inc. as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule listed under Item 8 (3) is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states 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, 2000 33 SIGCORP, Inc. and Subsidiaries 34
SIGCORP, Inc. CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (in thousands except for per share amounts) 1999 1998 1997 OPERATING REVENUES: Electric utility $ 307,569 $ 297,865 $ 272,545 Gas utility 68,212 66,801 85,561 Energy services and other 228,710 192,445 75,131 Total operating revenues 604,491 557,111 433,237 OPERATING EXPENSES: Fuel for electric generation 66,305 65,222 62,630 Purchased electric energy 20,791 20,762 13,985 Cost of gas sold 39,612 39,627 54,060 Cost of energy services and other 223,887 187,742 73,668 Other operation expenses 71,823 64,430 60,726 Maintenance 34,661 37,553 29,224 Depreciation and amortization 45,340 42,733 40,373 Property and other taxes 13,260 12,963 12,989 Total operating expenses 515,679 471,032 347,655 OPERATING INCOME 88,812 86,079 85,582 INTEREST AND OTHER CHARGES: Interest expense on long-term debt 18,722 19,977 19,797 Interest expense on short-term debt 5,245 3,313 1,519 Amortization of premium, discount and expense on debt 487 690 671 Allowance for funds used during construction (2,803) (1,392) (1,378) Preferred dividend requirements of subsidiary 1,078 1,095 1,097 Interest income (4,495) (5,488) (3,003) Other, net (7,197) (6,602) (3,122) Total interest and other charges 11,037 11,593 15,581 INCOME BEFORE INCOME TAXES 77,775 74,486 70,001 Federal and state income taxes 25,718 24,010 23,861 NET INCOME $ 52,057 $ 50,476 $ 46,140 AVERAGE COMMON SHARES OUTSTANDING 23,631 23,631 23,631 BASIC EARNINGS PER SHARE OF COMMON STOCK $ 2.20 $ 2.14 $ 1.95 DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 2.19 $ 2.12 $ 1.95 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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SIGCORP, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (in thousands) 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 52,057 $ 50,476 $ 46,140 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 45,340 42,733 40,373 Preferred dividend requirements of subsidiary 1,078 1,095 1,097 Deferred income taxes and investment tax credits, net 8,637 (3,684) (3,899) Allowance for other funds used during construction 296 - (581) Change in assets and liabilities: Receivables, net (including accrued unbilled revenues) (15,385) (11,608) (19,497) Inventories 2,115 (12,421) (4,306) Accounts payable 7,407 5,650 14,141 Accrued taxes 5,137 (1,005) (1,855) Refunds to customers and from gas suppliers 3,219 1,001 (1,566) Other assets and liabilities (2,861) 9,322 8,103 Net cash provided by operating activities 107,040 81,559 78,150 CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (net of allowance for other funds used during construction) (60,676) (55,313) (65,501) Demand side management program expenditures (252) (1,182) (2,340) Investments in leveraged leases (49,734) 6,961 - Purchases of investments (389) (1,940) (423) Sales of investments 183 80 264 Investments in partnerships and other corporations (3,340) (11,419) 3,166 Change in nonutility property (5,504) (279) (5,572) Change in notes receivable (11,899) 1,033 (5,592) Other (1,368) (2,176) (1,181) Net cash used in investing activities (132,979) (64,235) (77,179) CASH FLOWS FROM FINANCING ACTIVITIES First mortgage bonds retired (55,000) (14,000) (295) First mortgage bonds issued 80,000 - - Dividends paid (32,380) (30,188) (30,482) Reduction in preferred stock (116) (116) - Change in environmental improvement funds held by trustee 3,304 (198) (272) Payments on partnership obligations (1,513) (2,205) (2,276) Change in notes payable 39,058 28,140 27,027 Other 718 465 2,963 Net cash (used) provided by in financing activities 34,071 (18,102) (4,335) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,132 (778) (3,364) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,049 5,827 9,191 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,181 $ 5,049 $ 5,827 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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SIGCORP, Inc. CONSOLIDATED BALANCE SHEETS At December 31 (in thousands) 1999 1998 ASSETS UTILITY PLANT, at original cost: Electric $ 1,160,216 $ 1,141,870 Gas 156,918 150,136 1,317,134 1,292,006 Less accumulated provision for depreciation 623,611 593,901 693,523 698,105 Construction work in progress 45,393 24,306 Net utility plant 738,916 722,411 OTHER INVESTMENTS AND PROPERTY: Investments in leveraged leases 85,737 36,003 Investments in partnerships and other corporations 35,729 32,389 Environmental improvement funds held by trustee 996 4,300 Notes receivable 32,271 20,372 Nonutility property and other, net 20,405 14,901 Total other investments and property 175,138 107,965 CURRENT ASSETS: Cash and cash equivalents 13,181 5,049 Temporary investments, at market 903 793 Receivables, less allowance of $2,210 and $2,204, respectively 83,073 65,829 Accrued unbilled revenues 18,736 20,595 Inventories 43,060 45,351 Current regulatory assets 7,921 9,527 Other current assets 9,068 3,777 Total current assets 175,942 150,921 OTHER ASSETS: Unamortized premium on reacquired debt 3,937 4,226 Postretirement benefits other than pensions - 985 Demand side management programs 25,298 25,046 Allowance inventory 2,269 2,093 Deferred charges 22,642 15,871 Total other assets 54,146 48,221 TOTAL $ 1,144,142 $ 1,029,518 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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SIGCORP, Inc. CONSOLIDATED BALANCE SHEETS At December 31 (in thousands) 1999 1998 SHAREHOLDERS' EQUITY AND LIABILITIES CAPITALIZATION: Common Stock $ 78,258 $ 78,258 Retained Earnings 315,028 292,717 Accumulated Other Comprehensive Income (Loss) (78) (12) Total common shareholders' equity 393,208 370,963 Cumulative Nonredeemable Preferred Stock of Subsidiary 11,090 11,090 Cumulative Redeemable Preferred Stock of Subsidiary 7,500 7,500 Cumulative Special Preferred Stock of Subsidiary 692 808 Long-Term Debt, net of current maturities 273,282 204,771 Long-Term Partnership Obligations, net of current maturities 249 781 Total capitalization, excluding bonds subject to tender (see Consolidated Statements of Capitalization) 686,021 595,913 CURRENT LIABILITIES: Current Portion of Adjustable Rate Bonds Subject to Tender 53,700 53,700 Current Maturities of Long-Term Debt, Interim Financing and Long-Term Partnership Obligations: Maturing long-term debt - 45,000 Notes payable 108,566 69,508 Partnership obligations 596 1,577 Total current maturities of long-term debt, interim financing and long-term partnership obligations 109,162 116,085 Other Current Liabilities: Accounts payable 60,798 53,391 Dividends payable 117 120 Accrued taxes 10,000 4,863 Accrued interest 6,823 5,140 Refunds to customers 5,375 2,156 Other accrued liabilities 25,758 21,320 Total other current liabilities 108,871 86,990 Total current liabilities 271,733 256,775 OTHER LIABILITIES: Accumulated deferred income taxes 154,459 144,032 Accumulated deferred investment tax credits, being amortized over lives of property 17,372 18,802 Postretirement benefits other than pensions 12,041 11,337 Other 2,516 2,659 Total other liabilities 186,388 176,830 TOTAL $ 1,144,142 $ 1,029,518 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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SIGCORP, Inc. CONSOLIDATED STATEMENTS OF CAPITALIZATION At December 31 (in thousands except for per share amounts) 1999 1998 COMMON SHAREHOLDERS' EQUITY Common Stock, without par value, authorized 50,000,000 shares, issued 23,630,568 $ 78,258 $ 78,258 Retained Earnings, $2,155 restricted as to payment of cash dividends on common stock 315,028 292,717 Accumulated Other Comprehensive Income (78) (12) Total common shareholders' equity 393,208 370,963 PREFERRED STOCK OF SUBSIDIARY Cumulative, $100 par value, authorized 800,000 shares, issuable in series: Nonredeemable 4.8% Series, outstanding 85,895 shares, callable at $110 per share 8,590 8,590 4.75% Series, outstanding 25,000 shares, callable at $101 per share 2,500 2,500 Total nonredeemable preferred stock of subsidiary 11,090 11,090 Redeemable 6.50% Series, outstanding 75,000 shares, redeemable at $100 per share December 1, 2002 7,500 7,500 SPECIAL PREFERRED STOCK OF SUBSIDIARY Cumulative, no par value, authorized 5,000,000 shares, issuable in series: 8-1/2% series, outstanding 6,917 and 8,077 shares, respectively, redeemable at $100 per share 692 808 LONG-TERM DEBT, NET OF CURRENT MATURITIES First mortgage bonds 239,915 169,915 Notes payable 36,000 36,009 Unamortized debt premium and discount, net (2,633) (1,153) Total long-term debt 273,282 204,771 LONG-TERM PARTNERSHIP OBLIGATIONS, NET OF CURRENT MATURITIES 249 781 CURRENT PORTION OF ADJUSTABLE RATE POLLUTION CONTROL BONDS SUBJECT TO TENDER, DUE 2025, Series A, presently 3.00% 31,500 31,500 2030, Series C, presently 3.05% 22,200 22,200 53,700 53,700 TOTAL CAPITALIZATION, including bonds subject to tender $ 739,721 $ 649,613 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY Accumulated Other Common Retained Compre- hensive (in thousands ) Total Stock Earnings Income (Loss) Balances, December 31, 1996 $ 330,924 $ 78,258 $ 252,626 $ 40 Net Income 46,140 - 46,140 - Unrealized Gain on Securities (net of tax) 37 - - 37 Comprehensive Income 46,177 - 46,140 37 Common Stock Dividends ($1.15 per share) (27,938) - (27,938) - Balances, December 31, 1997 349,163 78,258 270,828 77 Net Income 50,476 - 50,476 - Unrealized (Loss) on Securities (net of tax) (89) - - (89) Comprehensive Income 50,387 - 50,476 (89) Common Stock Dividends ($1.21 per share) (28,587) - (28,587) - Other (429) - - (429) Balances, December 31, 1998 370,534 78,258 292,288 (12) Net Income 52,057 - 52,057 - Unrealized (Loss) on Securities (net of tax) (66) - - (66) Comprehensive Income 51,991 - 52,057 (66) Common Stock Dividends ($1.24 per share) (29,224) - (29,224) - Other (93) - (93) - Balances, December 31, 1999 $ 393,208 $ 78,258 $ 315,028 ($78) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO SOUTHERN INDIANA GAS AND ELECTRIC COMPANY: We have audited the balance sheets and statements of capitalization of SOUTHERN INDIANA GAS AND ELECTRIC COMPANY (an Indiana corporation) as of December 31, 1999 and 1998, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1999. These financial statements and the supplemental schedule referred to below are the responsibility of Southern Indiana Gas and Electric Company's management. Our responsibility is to express an opinion on these financial statements and supplemental schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southern Indiana Gas and Electric Company as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule listed under Item 8 (3) is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states 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, 2000 41 Southern Indiana Gas And Electric Company 42
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY STATEMENTS OF INCOME Year Ended December 31 (in thousands) 1999 1998 1997 OPERATING REVENUES: Electric $ 307,569 $297,865 $ 272,545 Gas 68,212 66,801 85,561 Total operating revenues 375,781 364,666 358,106 OPERATING EXPENSES: Fuel for electric generation 72,155 68,849 62,630 Purchased electric energy 20,791 20,762 13,985 Cost of gas sold 39,612 39,627 54,060 Other operation expenses 61,108 56,001 55,611 Maintenance 34,550 37,398 29,086 Depreciation and amortization 44,867 42,401 40,191 Federal and state income taxes 26,427 25,035 27,259 Property and other taxes 12,845 12,591 12,828 Total operating expenses 312,354 302,664 295,650 OPERATING INCOME 63,426 62,002 62,456 OTHER INCOME: Allowance for other funds used during construction 296 (73) 581 Interest 363 340 541 Other, net (58) 488 1,448 Total other income 601 755 2,570 INCOME BEFORE INTEREST AND OTHER CHARGES 64,027 62,757 65,026 INTEREST AND OTHER CHARGES: Interest on long-term debt 16,121 17,376 18,020 Interest on short-term debt 3,158 2,614 1,769 Amortization of premium, discount, and expense on debt 487 690 671 Allowance for borrowed funds used during construction (2,507) (1,465) (797) Total interest and other charges 17,259 19,215 19,663 NET INCOME 46,768 43,542 45,363 Preferred stock dividend 1,078 1,095 1,097 NET INCOME APPLICABLE TO COMMON STOCK $ 45,690 $ 42,447 $ 44,266 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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SOUTHERN INDIANA GAS AND ELECTRIC COMPANY STATEMENTS OF CASH FLOWS Year Ended December 31 (in thousands) 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 46,768 $ 43,542 $ 45,363 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 44,867 42,401 40,191 Deferred income taxes and investment tax credits, net 3,401 2,207 (4,951) Allowance for other funds used during construction 296 - (581) Change in assets and liabilities: Receivables, net (including accrued unbilled revenues) (5,184) 5,152 (3,261) Inventories 5,200 (12,587) (3,407) Accounts payable 433 1,061 (272) Accrued taxes 3,636 (1,153) (2,788) Refunds to customers and from gas suppliers 3,219 1,001 (1,566) Other assets and liabilities 7,986 7,492 7,950 Net cash provided by operating activities 110,622 89,116 76,678 CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (net of allowance for other funds used during construction) (60,676) (55,314) (65,501) Demand side management program expenditures (252) (1,182) (2,340) Change in nonutility property (50) (25) - Other (990) (1,894) (456) Net cash used in investing activities (61,968) (58,415) (68,297) CASH FLOWS FROM FINANCING ACTIVITIES First mortgage bonds retired (55,000) (14,000) (295) First mortgage bonds issued 80,000 - - Dividends paid (32,380) (30,187) (30,482) Reduction in preferred stock (116) (116) - Change in environmental improvement funds held by trustee 3,304 (198) (272) Change in notes payable (42,800) 13,150 20,176 Other (1,725) 48 479 Net cash used in financing activities (48,717) (31,303) (10,394) NET DECREASE IN CASH AND CASH EQUIVALENTS (63) (602) (2,013) CASH AND CASH EQUIVALENTS AT BEGINNING 512 1,114 3,127 OF PERIOD CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 449 $ 512 $ 1,114 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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SOUTHERN INDIANA GAS AND ELECTRIC COMPANY BALANCE SHEETS At December 31 (in thousands) 1999 1998 UTILITY PLANT, at original cost: Electric $ 1,160,216 $ 1,141,870 Gas 156,918 150,136 1,317,134 1,292,006 Less accumulated provision for depreciation 623,611 593,901 693,523 698,105 Construction work in progress 45,393 24,306 Net utility plant 738,916 722,411 OTHER INVESTMENTS AND PROPERTY: Environmental improvement funds held by trustee 996 4,300 Notes receivable 1,159 - Nonutility property and other 1,627 1,577 Total other investments and property 3,782 5,877 CURRENT ASSETS: Cash and cash equivalents 449 512 Receivables, less allowance of $2,138 and $2,156, respectively 34,738 28,854 Accrued unbilled revenues 18,736 20,595 Inventories 39,190 44,566 Current regulatory assets 7,921 9,527 Other current assets 2,970 2,776 Total current assets 104,004 106,830 OTHER ASSETS: Unamortized premium on reacquired debt 3,937 4,226 Postretirement benefits other than pensions - 985 Demand side management programs 25,298 25,046 Allowance inventory 2,269 2,093 Deferred charges 16,553 14,444 Total other assets 48,057 46,794 TOTAL $ 894,759 $ 881,912 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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SOUTHERN INDIANA GAS AND ELECTRIC COMPANY At December 31 (in thousands) 1999 1998 SHAREHOLDER'S EQUITY AND LIABILITIES CAPITALIZATION: Common Stock $ 78,258 $ 78,258 Retained Earnings 256,312 241,924 Total common shareholder's equity 334,570 320,182 Cumulative Nonredeemable Preferred Stock of Subsidiary 11,090 11,090 Cumulative Redeemable Preferred Stock of Subsidiary 7,500 7,500 Cumulative Special Preferred Stock of Subsidiary 692 808 Long-Term Debt, net of current maturities 238,282 169,762 Total capitalization, excluding bonds subject to tender (see Statements of Capitalization) 592,134 509,342 CURRENT LIABILITIES: Current Portion of Adjustable Rate Bonds Subject to Tender 53,700 53,700 Current Maturities of Long-Term Debt and Interim Financing: Maturing long-term debt - 45,000 Notes payable 22,880 50,759 Notes payable to Associated Company - 14,930 Total current maturities of long-term debt and interim financing 22,880 110,689 Other Current Liabilities: Accounts payable 28,560 28,127 Dividends payable 117 120 Accrued taxes 8,408 4,772 Accrued interest 6,012 4,676 Refunds to customers 5,375 2,156 Other accrued liabilities 22,706 18,544 Total other current liabilities 71,178 58,395 Total current liabilities 147,758 222,784 OTHER LIABILITIES: Accumulated deferred income taxes 122,977 118,147 Accumulated deferred investment tax credits, being amortized over lives of property 17,372 18,801 Postretirement benefits other than pensions 12,041 11,337 Other 2,477 1,501 Other liabilities 154,867 149,786 TOTAL $ 894,759 $ 881,912 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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SOUTHERN INDIANA GAS AND ELECTRIC COMPANY STATEMENTS OF CAPITALIZATION At December 31 (dollars in thousands) 1999 1998 COMMON SHAREHOLDER'S EQUITY Common Stock, without par value, authorized 50,000,000 shares, issued 15,754,826 $ 78,258 $ 78,258 Retained Earnings, $2,155 restricted as to payment of cash dividends on common stock 256,312 241,924 Total common shareholder's equity 334,570 320,182 PREFERRED STOCK Cumulative, $100 par value, authorized 800,000 shares, issuable in series: Nonredeemable 4.8% Series, outstanding 85,895 shares, callable at $110 per share 8,590 8,590 4.75% Series, outstanding 25,000 shares, callable at $101 per share 2,500 2,500 Total nonredeemable preferred stock 11,090 11,090 Redeemable 6.50% Series, outstanding 75,000 shares, redeemable at $100 per share December 1, 2002 7,500 7,500 SPECIAL PREFERRED STOCK Cumulative, no par value, authorized 5,000,000 shares, issuable in series: 8-1/2% series, outstanding 6,917 and 8,077 shares, respectively, redeemable at $100 per share 692 808 LONG-TERM DEBT, NET OF CURRENT MATURITIES First mortgage bonds 239,915 169,915 Notes payable 1,000 1,000 Unamortized debt premium and discount, net (2,633) (1,153) Total long-term debt 238,282 169,762 CURRENT PORTION OF ADJUSTABLE RATE POLLUTION CONTROL BONDS SUBJECT TO TENDER, DUE 2025, Series A, presently 3.00% 31,500 31,500 2030, Series C, presently 3.05% 22,200 22,200 53,700 53,700 TOTAL CAPITALIZATION, including bonds subject to tender $ 645,834 $ 563,042 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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SOUTHERN INDIANA GAS AND ELECTRIC COMPANY STATEMENTS OF RETAINED EARNINGS At December 31 (dollars in thousands) 1999 1998 Balance Beginning of Period $ 241,924 $ 228,570 Net Income 46,768 43,542 288,692 272,112 Preferred Stock Dividends 1,078 1,095 Common Stock Dividends 31,302 29,093 32,380 30,188 Balance End of Period (See Consolidated Statements of Capitalization for restriction) $ 256,312 $ 241,924 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SIGCORP AND SIGECO PRINCIPLES OF CONSOLIDATION SIGCORP, Inc. (SIGCORP), an Indiana holding company, has 11 wholly-owned subsidiaries: Southern Indiana Gas and Electric Company (SIGECO), a gas and electric utility which accounts for over 80% of SIGCORP's net income for the twelve months ended December 31, 1999, and ten nonregulated subsidiaries. On June 14, 1999, SIGCORP announced an agreement to merge with Indiana Energy, Inc. (IEI) in an all-stock pooling transaction through which a new holding company, Vectren Corporation, would be formed. In a tax-free exchange, SIGCORP shareholders would receive one and one-third shares of Vectren stock for each share of SIGCORP stock, while IEI shares would be exchanged on a one-for-one basis. SIGCORP and IEI are proceeding to obtain the necessary regulatory approvals and completion of the merger is expected by the end of the first quarter of 2000. Transaction and related costs incurred by SIGCORP through December 31, 1999 were $5,506,000 and have been deferred. SIGECO, which has no subsidiaries, is a regulated gas and electric utility is engaged principally in the production, purchase, transmission, distribution and sale of electricity and the delivery of natural gas. SIGECO serves 126,605 electric customers in the city of Evansville and 74 other communities and serves 109,388 gas customers in the city of Evansville and 64 other communities. Energy Systems Group, Inc. (ESGI) has a one-third ownership in Energy Systems Group, LLC, an energy-related performance contracting firm serving industrial and commercial customers. Southern Indiana Minerals, Inc. (SIMI) processes and markets coal combustion by-products. Southern Indiana Properties, Inc. (SIPI) invests in leveraged leases of real estate and equipment, real estate partnerships and joint ventures, and private placement subordinated debt instruments. Cash balances are invested in marketable securities. SIGCORP Energy Services, Inc. (Energy) was established to market energy and related services and is currently providing natural gas, pipeline management, storage service and other natural gas-related services to SIGECO, other utilities and endusers. SIGCORP Capital, Inc. (Capital) is the primary financing vehicle for SIGCORP's nonregulated subsidiaries. SIGCORP Fuels, Inc. (Fuels) was formed to provide coal and related services to SIGECO and other customers. SIGCORP Power Marketing, Inc. (Power), not yet active, was formed to procure electric power supplies for SIGECO and other customers, and will market SIGECO's excess electric generation capacity. SIGCORP Communications Services (Communications) was formed to undertake telecommunications-related strategic initiatives. SIGCORP Environmental Services, Inc. (Environmental Services) holds SIGCORP's investment in Air Quality Services, a joint venture created to provide air quality monitoring and testing services to industry and utilities. SIGECO Advanced Communications, Inc. (Advanced Communications) holds SIGCORP's investment in SIGECOM, LLC and Utilicom Networks, Inc. (Utilicom). SIGECOM, LLC, is a joint venture between Advanced Communications and Utilicom to provide and market enhanced communications services over a high capacity fiber optic network in a multi-state area encompassing SIGECO's service territory. Effective June 30, 1998, ComSource, Inc., a former subsidiary of SIGCORP, was merged into Advanced Communications. All significant intercompany transactions are eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REGULATION The Indiana Utility Regulatory Commission (IURC) has jurisdiction over all investor-owned gas and electric utilities in Indiana. The Federal Energy Regulatory Commission (FERC) has jurisdiction over those investor-owned utilities that make wholesale energy sales. These agencies regulate SIGECO's utility business operations, rates, accounts, depreciation allowances, services, security issues and the sale and acquisition of properties. The financial statements of SIGCORP and SIGECO are based on generally accepted accounting principles, which give recognition to the ratemaking and accounting practices of these agencies. 49 REGULATORY ASSETS SIGECO is subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Regulatory assets represent probable future revenues to SIGECO associated with certain incurred costs which will be recovered from customers through the ratemaking process. Generally accepted accounting principles for rate regulated companies also require that regulatory assets which are no longer probable of recovery through future revenues, at the balance sheet date, be charged to earnings. The following regulatory assets are reflected in the financial statements:
At December 31 (in thousands) 1999 1998 Regulatory Assets: Demand side management program costs $ 25,900 $ 25,648 Postretirement benefits other than pensions 1,234 3,263 Unamortized premium on reacquired debt 4,416 4,705 Regulatory study costs 21 107 Fuel and gas costs 5,585 5,931 37,156 39,654 Less current amounts 7,921 9,527 Total long-term regulatory assets $ 29,235 $ 30,127 Refer to the individual paragraphs in this Note for discussion of specific regulatory assets. See Income Taxes for regulatory assets and liabilities related to income taxes.
As of December 31, 1999, the recovery of $15,762,000 of SIGECO's total regulatory assets is reflected in rates charged to customers. The remaining $21,373,000 of regulatory assets, which are not yet included in rates, represent SIGECO's demand side management (DSM) costs incurred after 1993. When SIGECO files its next electric rate case, these costs will be included in rate base and earn a return; amortization of these costs over a period anticipated to be 15 years will be recovered through rates as a cost of operations. Of the $15,762,000 of regulatory assets currently reflected in rates, a total of $8,943,000 is earning a return: $4,527,000 of pre-1994 DSM costs and $4,416,000 of unamortized premium on reacquired debt. The remaining recovery periods for the DSM costs and premium on reacquired debt are 10.5 years and 19 years, respectively. The remaining $6,819,000 of regulatory assets included in rates but not earning a return are being recovered over varying periods: $1,234,000 of deferred postretirement benefit costs, over 1 year; $3,869,000 of fuel costs, over 3 months; and $1,716,000 of gas costs, over 12 months. If all or a separable portion of SIGECO's operations becomes no longer subject to the provisions of SFAS No. 71, a write off of related regulatory assets would be required, unless some form of transition cost recovery continues through rates established and collected for SIGECO's remaining regulated operations that would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. In addition, SIGECO would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. CONCENTRATION OF CREDIT RISK SIGECO's customer receivables from gas and electric sales and gas transportation services are primarily derived from a diversified base of residential, commercial and industrial customers located in a southwestern region of Indiana. SIGECO continually reviews customers' creditworthiness and requests deposits or refunds deposits based on that review. SIGECO also sells electricity to wholesale marketers which increases its exposure to potential credit losses. Energy's customer receivables from gas sales and transportation services are primarily derived from a diversified base of commercial and industrial customers located in the midwestern region of the United States. Energy investigates the creditworthiness of its potential customers. See Note 2 for a discussion of receivables related to SIPI's leveraged lease investments. UTILITY PLANT Utility plant is stated at the historical original cost of construction. The cost of repairs and minor renewals is charged to maintenance expense as incurred. Property unit replacements are capitalized and the depreciation reserve is charged with the cost, less net salvage, of units retired. 50 DEPRECIATION Depreciation of utility property is provided using the straight-line method over the estimated service lives of the depreciable plant. Provisions for depreciation, expressed as an annual percentage of the cost of average depreciable plant in service, were as follows:
1999 1998 1997 Electric 3.5% 3.4% 3.4% Gas 3.3% 3.3% 3.2%
INCOME TAXES SIGCORP and SIGECO utilizes the liability method of accounting for income taxes, providing deferred taxes on temporary differences. Investment tax credits have been deferred and are amortized through credits to income over the lives of the related property. The components of the net deferred income tax liability are as follows:
SIGCORP, Inc. At December 31 (in thousands) 1999 1998 Deferred Tax Liabilities: Depreciation and cost recovery timing differences $ 120,306 $ 117,866 Deferred fuel costs, net 2,427 3,446 Leveraged leases 30,700 25,330 Regulatory assets recoverable through future rates 26,128 26,048 Deferred Tax Assets: Unbilled revenue (417) (1,394) Regulatory liabilities to be settled through future rates (20,388) (22,993) Other, net (4,297) (4,271) Net deferred income tax liability $ 154,459 $ 144,032
The $10,427,000 increase in net deferred income tax liability is due to: accelerated tax depreciation in excess of book $1,064,000; unseasonably warm weather at year end reducing unbilled revenue $977,000; investment in two leveraged leases during year $5,370,000; reduction of liability to customers due to fuel clauses $1,019,000; amortization of investment tax credit $1,430,000; reduction of deferred tax asset regulatory liability due to investment tax credit amortization and accelerated tax depreciation in excess of book $2,605,000.
Southern Indiana Gas and Electric Company At December 31 (in thousands) 1999 1998 Deferred Tax Liabilities: Depreciation and cost recovery timing differences $ 120,307 $ 117,765 Deferred fuel costs, net 2,427 3,446 Regulatory assets recoverable through future rates 26,128 26,048 Deferred Tax Assets: Unbilled revenue (417) (1,394) Regulatory liabilities to be settled through future rates (20,388) (22,993) Other, net (5,080) (4,725) Net deferred income tax liability $ 122,977 $ 118,147
The $4,830,000 increase in net deferred income tax liability is due to: accelerated tax depreciation in excess of book $837,000; unseasonably warm weather at year end reducing unbilled revenue $977,000; reduction of liability to customers due to fuel clauses $1,019,000; amortization of investment tax credit $1,430,000; reduction of deferred tax asset regulatory liability due to investment tax credit amortization and accelerated tax depreciation in excess of book $2,605,000. 51 The components of current and deferred income tax expense are as follows:
SIGCORP, Inc. Year Ended December 31 ( in thousands) 1999 1998 1997 Current Federal $ 14,573 $ 18,984 $ 24,387 State 2,431 2,859 3,961 Deferred, net Federal 8,722 3,558 (2,858) State 1,422 56 (172) Investment tax credit, net (1,430) (1,447) (1,457) Total income tax expense $ 25,718 $ 24,010 $ 23,861
Southern Indiana Gas and Electric CompanyYear Ended December 31 ( in 1999 1998 1997 thousands) Current Federal $ 19,836 $ 19,521 $ 28,403 State 3,195 2,849 4,265 Deferred, net Federal 4,080 3,270 (3,673) State 746 842 (278) Investment tax credit, net (1,430) (1,447) (1,458) Total income tax expense $ 26,427 $ 25,035 $ 27,259
A reconciliation of the statutory tax rates to effective income tax rate is as follows:
SIGCORP, Inc. Year Ended December 31 1999 1997 1996 Statutory federal and state rate 37.9% 37.9% 37.9% Equity portion of allowance for funds used during construction (.1) - (0.3) Book depreciation over related tax depreciation - nondeferred 1.6 1.7 1.8 Amortization of deferred investment tax credit (1.8) (1.9) (2.1) Low-income housing credit (3.5) (3.8) (4.0) Preferred dividend requirements of subsidiary .5 0.6 0.6 Excess deferred tax (1.5) (2.8) (1.2) Other, net - 0.5 1.4 Effective tax rate 33.1% 32.2% 34.1%
Southern Indiana Gas and Electric Company Year Ended December 31 1999 1998 1997 Statutory federal and state rate 37.9% 37.9% 37.9% Equity portion of allowance for funds used during construction - - (0.3) Book depreciation over related tax depreciation - nondeferred 1.7 1.7 1.8 Amortization of deferred investment tax credit (1.9) (2.1) (2.1) Other, net (1.1) (.4) 0.2 Effective tax rate 36.6% 37.1% 37.5%
PENSION BENEFITS SIGECO has trusteed, noncontributory defined benefit plans which cover eligible full-time regular employees. The plans provide retirement benefits based on years of service and the employee's highest 60 consecutive months' compensation during the last 120 months of employment. The funding policy of SIGECO is to contribute amounts to the plans equal to at least the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) but not in excess of the maximum deductible for federal income tax purposes. The plans' assets as of December 31, 1999 consist of investments in interest-bearing obligations and common stocks. 52 Change in benefit obligation:
Year Ended December 31 (in thousands) 1999 1998 Benefit obligation at beginning of year $ 79,743 $ 72,914 Service cost - benefits earned during the year 3,020 2,639 Interest cost on projected benefit obligation 5,637 5,020 Plan amendments 33 2,220 Benefits paid (3,286) (3,176) Actuarial (gain) loss (3,445) 126 Benefit obligation at end of year $ 81,702 $ 79,743
Change in plan assets:
At December 31 (in thousands) 1999 1998 Plan assets at fair value at beginning of year $ 83,337 $ 76,587 Actual return on plan assets 6,000 9,926 Benefits paid (3,286) (3,176) Fair value of plan assets at end of year $ 86,051 $ 83,337
Reconciliation of funded status:
At December 31 (in thousands) 1999 1998 Excess of plan assets over projected benefit $ 4,349 $ 3,594 obligation Remaining unrecognized transitional asset (1,398) (1,815) Unrecognized service cost 3,180 3,455 Unrecognized net gain (14,490) (11,864) Accrued pension benefit liability $ (8,359) $ (6,630)
Components of net periodic pension benefit cost:
Year Ended December 31 (in thousands) 1999 1998 Service cost $ 3,020 $ 2,639 Interest cost 5,637 5,020 Expected return on plan assets (6,517) (5,985) Amortization of prior service cost 307 178 Amortization of transitional asset (418) (418) Recognized actuarial gain (300) (47) Net periodic benefit cost $ 1,729 $ 1,387
The projected benefit obligation at December 31, 1999 and 1998 was determined using an assumed discount rate of 7.5% and 7.0%, respectively. For both periods, the long-term rate of compensation increases was assumed to be 5.0%, and the long-term rate of return on plan assets was assumed to be 8.0%. The transitional asset is being amortized over approximately 15, 18 and 14 years for the Salaried, Hourly and Hoosier plans, respectively. On January 1, 1999 SIGECO amended its pension plans by increasing the "monthly earnings multiplier" applied to all credited years of service in the plans' benefit formulas. These amendments increased unrecognized prior service costs. In addition to the trusteed pension plans discussed above, SIGECO provides supplemental pension benefits to certain current and former officers under nonqualified and nonfunded plans. The accrued pension liability for these plans at December 31, 1999 and 1998 was $4,648,000 and $3,820,000, respectively. Service cost related to these benefits for the year ended December 31, 1999 was approximately $1,000,000. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS SIGECO provides certain postretirement health care and life insurance benefits for retired employees and their dependents through a combination of self-insured and fully-insured plans. In 1998, SIGECO amended these benefits for salaried employees aged 49 years and younger to require retiree contributions towards the related health care insurance costs. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires the expected cost of these benefits be recognized during the 52 employees' years of service. As authorized by the IURC, SIGECO deferred as a regulatory asset the additional SFAS No. 106 costs accrued over the costs of benefits actually paid after date of adoption, but prior to inclusion in rates. Subsequently, the IURC authorized SIGECO to include in rates SFAS No. 106 costs and to recover the amounts previously deferred over a 60-month period. Change in benefit obligation:
Year Ended December 31 (in thousands) 1999 1998 Benefit obligation at beginning of year $ 25,529 $ 30,924 Service cost - benefits earned during the period 620 578 Interest cost on accumulated benefit obligation 1,707 1,664 Actuarial gain (2,287) (4,201) Benefits paid net of participant contributions (661) (1,024) Plan amendments - (2,412) Benefit obligation at end of year $ 24,908 $ 25,529
The net periodic cost determined under the standard includes the amortization of the discounted present value of the obligation at the adoption date over a 20-year period. Change in plan assets:
At December 31 (in thousands) 1999 1998 Plan assets at fair value at beginning of year $ 9,511 $ 7,336 Actual return on plan assets 1,434 1,031 Employer contribution 1,425 2,168 Benefits paid net of participant contributions (661) (1,024) Fair value of plan assets at end of year $ 11,709 $ 9,511
Reconciliation of funded status:
At December 31 (in thousands) 1999 1998 Excess of projected benefit obligation over plan $ (13,199) $ (16,018) assets Unrecognized actuarial gain (15,885) (13,671) Unrecognized transition obligation 17,043 18,353 Accrued postretirement benefit liability $ (12,041) $ (11,336)
Components of net periodic other postretirement benefit cost:
Year Ended December 31 (in thousands) 1999 1998 Service cost $ 620 $ 578 Interest cost 1,707 1,664 Expected return on plan assets (751) (577) Amortization of transitional obligation 1,311 1,311 Recognized actuarial gain (757) (743) Net periodic benefit cost $ 2,130 $ 2,233
The assumptions used to develop the accumulated postretirement benefit obligation at December 31, 1999 and 1998 included discount rates of 7.5% and 7.0%, respectively. As of December 31, 1999 the health care cost trend rate is 8.0% declining to 4.5% in 2006. The accrued health care cost trend rate for 2000 is 7.0%. The estimated cost of these future benefits could be significantly affected by future changes in health care costs, work force demographics, interest rates or plan changes. A 1.0% increase in the assumed health care cost trend rate each year would increase the aggregate service and interest costs for 1999 by $382,000 and the accumulated postretirement benefit obligation by $3,606,000. A 1.0% decrease in the assumed health care cost trend rate each year would decrease the aggregate service and interest costs for 1999 by $307,000 and the accumulated postretirement benefit obligation by $2,952,000. 54 On July 1, 1998, SIGECO amended its postretirement benefit plans to change benefits for existing employees under fifty years of age and new employees to a graduated benefit rate. SIGECO has adopted Voluntary Employee Beneficiary Association (VEBA) Trust Agreements for the funding of postretirement health benefits for retirees and their eligible dependents and beneficiaries. Annual funding is discretionary and is based on the projected cost over time of benefits to be provided to covered persons consistent with acceptable actuarial methods. To the extent these postretirement benefits are funded, the benefits will not be shown as a liability on SIGECO's financial statements. CASH FLOW INFORMATION For balance sheet and cash flow purposes, SIGCORP and SIGECO consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. During 1999, 1998 and 1997, SIGCORP paid interest (net of amounts capitalized) of $19,777,000, $21,900,000 and $19,888,000, respectively, and income taxes of $19,990,000, $27,594,000 and $29,552,000, respectively. SIGCORP is involved in several partnerships which are partially financed by partnership obligations amounting to $845,000 and $2,358,000 at December 31, 1999 and 1998, respectively. During 1999, 1998 and 1997, SIGECO paid interest (net of amounts capitalized) of $15,437,000, $18,484,000 and $18,929,000, respectively, and income taxes of $25,476,000, $23,789,000 and $35,239,000, respectively. INVENTORIES SIGECO accounts for inventories under the average cost method except for gas in underground storage which is accounted for under the last-in, first-out (LIFO) method. Energy accounts for gas in underground storage under the lower of cost or market method.
SIGCORP, Inc.At December 31 (in thousands) 1999 1998 Fuel (coal and oil) for electric generation $ 12,824 $ 15,701 Materials and supplies 14,131 15,179 Emission allowances 4,437 5,133 Gas in underground storage - at LIFO cost 11,441 10,762 Other 2,496 669 Total inventories $ 45,329 $ 47,444
Southern Indiana Gas and Electric Company At December 31 (in thousands) 1999 1998 Fuel (coal and oil) for electric generation $ 12,229 $ 15,701 Materials and supplies 13,352 15,063 Emission allowances 4,437 5,133 Gas in underground storage - at LIFO cost 11,441 10,762 Total inventories $ 41,459 $ 46,659
Based on the December 1999 price of gas purchased, the cost of replacing SIGECO's current portion of gas in underground storage at December 31, 1999 exceeded the amount stated on a LIFO basis by approximately $12,000,000. OPERATING REVENUES AND FUEL COSTS SIGECO accrues an estimate of revenues unbilled for electric and gas service furnished from the meter reading dates to the end of each accounting period. All metered gas rates contain a gas cost adjustment clause which allows for adjustment in charges for changes in the cost of purchased gas. Metered electric rates typically contain a fuel adjustment clause which allows for adjustment in charges for electric energy to reflect changes in the cost of fuel and the net energy cost of purchased power. SIGECO also collects through a quarterly rate adjustment mechanism, the margin on electric sales lost due to the implementation of demand side management programs. 55 SIGECO records any adjustment clause under-or overrecovery each month in revenues. A corresponding asset or liability is recorded until such time as the under-or overrecovery is billed or refunded to its customers. The cost of gas sold is charged to operating expense as delivered to customers and the cost of fuel for electric generation is charged to operating expense when consumed. COMPREHENSIVE INCOME Comprehensive income is a measure of all changes in equity of an enterprise which result from transactions or other economic events during the period other than transactions with shareholders. This information is reported in the Consolidated Statements of Common Shareholders' Equity. SIGCORP's components of accumulated other comprehensive income (loss) includes unrealized gains (losses) on available for sale securities. SIGECO has no elements of other comprehensive income. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 2000, but may be adopted earlier. The June 15, 1999 date was amended by SFAS No. 137 to June 15, 2000. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on Consolidated Balance Sheets as either an asset or liability measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. SFAS No. 133 requires that changes in the derivative's fair value be recognized in the current period's earnings, unless specific hedge accounting criteria are met. If an entity qualifies for hedge accounting, gains and losses on derivatives, generally, will offset the related effects of the hedged items in the current period income statement. SFAS No. 133 requires that formal documentation be maintained and that the effectiveness of the hedge be assessed quarterly. SIGCORP and SIGECO have not yet quantified the effects of adopting SFAS No. 133 on their financial statements and have not determined the timing or method of their adoption of this statement. However, adoption of SFAS No. 133 could increase the volatility in earnings and other comprehensive income. NOTE 2 LEVERAGED LEASES SIGCORP SIPI is a lessor in several leveraged lease agreements under which an office building, a part of a reservoir, a gas turbine electric generating peaking unit, two heat and power generating facilities and passenger railroad cars are leased to third parties. In early 1998, SIPI sold its leveraged lease in a paper mill. In 1999 SIPI entered into two new leveraged leases in the Netherlands and Belgium. The economic lives and lease terms vary with the leases. The total equipment and facilities cost was approximately $409,700,000 and $86,700,000 at December 31, 1999 and 1998, respectively. The cost of the equipment and facilities was partially financed by nonrecourse debt provided by lenders, who have been granted an assignment of rentals due under the leases and a security interest in the leased property, which they accepted as their sole remedy in the event of default by the lessee. Such debt amounted to approximately $373,500,000 and $66,700,000 at December 31, 1999 and 1998, respectively. SIGCORP's net investment in leveraged leases at those dates was $55,037,000 and $10,673,000, respectively, as shown:
At December 31 (in thousands) 1999 1998 Minimum lease payments receivable $ 161,551 $ 51,443 Estimated residual value 29,073 29,073 Less unearned income 104,887 44,513 Investment in lease financing receivables and loan 85,737 36,003 Less deferred taxes arising from leveraged leases 30,700 25,330 Net investment in leveraged leases $ 55,037 $ 10,673
56 NOTE 3 SHORT-TERM FINANCING SIGCORP and SIGECO SIGECO has trust demand note arrangements totaling $17,000,000 with several banks, of which none was utilized at December 31, 1999. Funds are also borrowed periodically from banks on a short-term basis, made available through lines of credit. SIGCORP has available lines of credit totaling $149,000,000 at December 31, 1999 of which $108,566,000 was utilized at that date.
SIGCORP, Inc. At December 31 (in thousands) 1999 1998 1997 Notes Payable Balance at year end $ 108,566 $ 69,508 $ 41,368 Weighted average interest rate on year end balance 6.26% 5.86% 6.21% Average daily amount outstanding during the year $ 96,920 $ 38,408 $ 14,510 Weighted average interest rate on average daily amount outstanding during the year 5.94% 6.22% 6.08%
Southern Indiana Gas and Electric Company At December 31 (in thousands) 1999 1998 1997 Notes Payable Balance at year end $ 22,880 $65,689 $ 52,529 Weighted average interest rate on year end balance 6.42% 5.77% 6.31% Average daily amount outstanding during the year $ 54,576 $43,149 $ 19,777 Weighted average interest rate on average daily amount outstanding during the year 5.74% 6.28% 6.13%
NOTE 4 LONG-TERM DEBT SIGCORP and SIGECO The annual sinking fund requirement of SIGECO's first mortgage bonds is 1% of the greatest amount of bonds outstanding under the Mortgage Indenture. This requirement may be satisfied by certification to the Trustee of unfunded property additions in the prescribed amount as provided in the Mortgage Indenture. SIGECO intends to meet the 2000 sinking fund requirement by this means and, accordingly, the sinking fund requirement for 2000 is excluded from current liabilities on the balance sheet. At December 31, 1999, $200,011,000 of SIGECO's utility plant remained unfunded under SIGECO's Mortgage Indenture. Several of SIGCORP's partnership investments have been financed through obligations with such partnerships. Of the amount of first mortgage bonds, notes payable and partnership obligations outstanding at December 31, 1999, the following amounts which mature in the five years subsequent to 1999 are as follows:
SIGCORP SIGECO 2000 $ 596,000 $ - 2001 249,000 - 2003 1,000,000 1,000,000
In addition, $53,700,000 of adjustable rate pollution control series first mortgage bonds could, at the election of the bondholder, be tendered to SIGECO in March 2000. If SIGECO's agent is unable to remarket any bonds tendered at that time, SIGECO would be required to obtain additional funds for payment to bondholders. For financial statement presentation purposes those bonds subject to tender in 2000 are shown as current liabilities. 57 First mortgage bonds, notes payable and partnership obligations outstanding and classified as long-term are as follows:
SIGCORP, Inc. At December 31 (in thousands) 1999 1998 First Mortgage Bonds due: 2020, 4.40% Pollution Control Series B $ 4,640 $ 4,640 2030, 4.40% Pollution Control Series B 22,000 22,000 2014, 7.25% Pollution Control Series A 22,500 22,500 2016, 8.875% 13,000 23,000 2023, 7.60% 45,000 45,000 2025, 7.625% 20,000 20,000 Adjustable Rate Pollution Control: 2015, Series A, presently 4.55% 9,975 9,975 Adjustable Rate Environmental Improvement: 2023, Series B, presently 6% 22,800 22,800 2029, 6.72% 80,000 - Total first mortgage bonds $ 239,915 $ 169,915 Notes Payable: Insurance Company, due 2012, 7.43% $ 35,000 $ 35,000 Tax Exempt, due 2003, 6.25% 1,000 1,000 Bank, due 2000, 2.90% - 9 Total notes payable $ 36,000 $ 36,009 Partnership Obligations, due 2001 through 2005, without interest $ 249 $ 781
Southern Indiana Gas and Electric Company At December 31 (in thousands) 1999 1998 First Mortgage Bonds due: 2020, 4.40% Pollution Control Series B $ 4,640 $ 4,640 2030, 4.40% Pollution Control Series B 22,000 22,000 2014, 7.25% Pollution Control Series A 22,500 22,500 2016, 8.875% 13,000 23,000 2023, 7.60% 45,000 45,000 2025, 7.625% 20,000 20,000 Adjustable Rate Pollution Control: 2015, Series A, presently 4.55% 9,975 9,975 Adjustable Rate Environmental Improvement: 2023, Series B, presently 6% 22,800 22,800 2029, 6.72% 80,000 - Total first mortgage bonds $ 239,915 $ 169,915 Notes Payable: Tax Exempt, due 2003, 6.25% 1,000 1,000 Total notes payable $ 1,000 $ 1,000
NOTE 5 CAPITAL STOCK SIGCORP and SIGECO COMMON STOCK Each outstanding share of SIGCORP's common stock contains a right which entitles registered holders to purchase from SIGCORP one-hundredth of a share of SIGCORP's common stock, at an initial price of $65 per share (Purchase Price) subject to adjustment. The rights will not be exercisable until a party acquires beneficial ownership of 10% of common shares or makes a tender offer for at least 10% of its common shares. The rights expire December 31, 2005. If not exercisable, the rights in whole may be redeemed by SIGCORP at a price of $.01 per right at 58 any time prior to their expiration. If at any time after the rights become exercisable and are not redeemed and SIGCORP is involved in a merger or other business combination transaction, proper provision shall be made to entitle a holder of a right to buy common stock of the acquiring company having a value of two times such Purchase Price. These rights are not exercisable in the merger with IEI. SIGECO has a common stock option plan for its key management employees. The option price for all stock options is at least 100% of the fair market value of SIGCORP common stock at the grant date. Options generally vest and become exercisable between one and three years in equal annual installments beginning one year after the grant date, and generally expire in 10 years. The expiration dates for options outstanding as of December 31, 1999, ranged from July 13, 2005 to July 14, 2008. Stock option activity for the past three years was as follows:
At December 31 1999 1998 1997 Outstanding at beginning of year 503,668 458,169 327,901 Granted 204,639 74,999 139,348 Exercised (9,878) (29,500) (9,080) Outstanding at end of year 698,429 503,668 458,169 Exercisable at end of year 493,790 381,765 318,821 Reserved for future grants at end of year - 204,639 279,638 Average Option Price - Exercised $23.36 $21.16 $18.42 - Outstanding at end of year $24.43 $23.28 $21.58
SIGCORP and SIGECO account for stock compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under Accounting Principles Board Opinion No. 25, no compensation cost has been recognized for stock options. Had compensation cost for stock options been determined consistent with SFAS No. 123 "Accounting for Stock-based Compensation," net income would have been reduced to the following pro forma amounts:
SIGCORP, Inc. At December 31 1999 1998 1997 Net Income: As reported $52,057 $50,476 $46,140 Pro forma 51,386 49,961 45,848 Basic Earnings Per Share: As reported $2.20 $2.14 $1.95 Pro forma 2.17 2.11 1.94 Diluted Earnings Per Share: As reported $2.19 $2.12 $1.95 Pro forma 2.17 2.10 1.94
Southern Indiana Gas and Electric Company At December 31 1999 1998 1997 Net Income: As reported $45,690 $42,447 $44,266 Pro forma 45,019 41,932 43,974
The fair value of each option granted used to determine pro forma net income is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the twelve month periods ended December 31, 1999, 1998 and 1997: risk- free interest rate of 6.46%, 4.44% and 5.75%, respectively; expected option term of five years; expected volatilities of 34.00%, 33.16% and 36.62%, respectively; and dividend rates of 4.46%, 3.77% and 4.46%, respectively. 59 EARNINGS PER SHARE The following table illustrates the basic and diluted earnings per share calculations.
SIGCORP, Inc. At December 31 (in thousands except for per share amounts) 1999 1998 1997 Per Per Per Income Shares Share Income Shares Share Income Shares Share Amount Amount Basic EPS $52,057 23,631 $2.20 $50,476 23,631 $2.14 $46,140 23,631 $1.95 Effect of dilutive securities 93 134 56 Diluted EPS $52,057 23,724 $2.19 $50,476 23,765 $2.12 $46,140 23,687 $1.95
Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share were determined using the treasury stock method for dilutive stock options. Options to purchase 74,999 shares of common stock at $32.06 per share were granted in July 1998, but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares. CUMULATIVE PREFERRED STOCK OF SIGECO The amount payable in the event of involuntary liquidation of each series of the $100 par value preferred stock is $100 per share, plus accrued dividends. This nonredeemable preferred stock is callable at the option of SIGECO as follows: the 4.8% Series at $110 per share, plus accrued dividends; and the 4.75% Series at $101 per share, plus accrued dividends. CUMULATIVE REDEEMABLE PREFERRED STOCK OF SIGECO The Series has a dividend rate of 6.50% and is redeemable at $100 per share on December 1, 2002. In the event of involuntary liquidation of this series of $100 par value preferred stock, the amount payable is $100 per share, plus accrued dividends. CUMULATIVE SPECIAL PREFERRED STOCK OF SIGECO The Cumulative Special Preferred Stock contains a provision which allows the stock to be tendered on any of its dividend payment dates. On January 29, 1999, SIGECO repurchased 1,160 shares of the Cumulative Special Preferred Stock at a cost of $117,600 as a result of a tender within the provision of the issuance. NOTE 6 OWNERSHIP OF WARRICK UNIT 4 SIGCORP and SIGECO SIGECO and Alcoa Generating Corporation (AGC), a subsidiary of Aluminum Company of America, own the 270 MW Unit 4 at the Warrick Power Plant as tenants in common. SIGECO's share of the cost of this unit at December 31, 1999 is $37,503,000 with accumulated depreciation totaling $27,306,000. AGC and SIGECO also share equally in the cost of operation and output of the unit. SIGECO's share of operating costs is included in operating expenses in the Consolidated Statements of Income. NOTE 7 COMMITMENTS AND CONTINGENCIES SIGCORP and SIGECO SIGECO presently estimates that approximately $51,991,000 will be expended for construction purposes in 2000, including those amounts applicable to SIGECO's demand side management (DSM) programs. Commitments for the 2000 construction program are approximately $7,149,000 at December 31, 1999. Additionally, SIGECO has a three-year contract with a utility-affiliated power marketer to purchase 50 MW of electric power beginning January 2000 through December 2002. 60 NOTE 8 LEASE OBLIGATIONS SIGCORP SIMI has entered into an agreement to lease back a previously sold manufacturing facility and related equipment at $532,000 per year through 2010 under a noncancelable operating lease. In December 1997, Fuels entered operating lease agreements for mining equipment. The aggregate future minimum rental payments required under the above leases are as follows:
Year Ended December 31 (in thousands) 2000 $ 2,319 2001 2,319 2002 2,319 2003 2,145 2004 1,924 Thereafter 6,915 Total lease payments $ 17,941
Total rental expense under all operating leases was $679,863, $1,206,977 and $578,454 for the years ended December 31, 1999, 1998 and 1997, respectively. NOTE 9 SEGMENTS OF BUSINESS SIGCORP AND SIGECO SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments in financial statements and disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SIGCORP has four reportable segments. They are SIGECO's electric and gas utility operations, Energy Services' gas marketing services and SIPI's investment operations. All other subsidiary operations and corporate activities are included in other. SIGCORP's reportable segments are operations that are managed separately and meet the quantitative thresholds required by SFAS No. 131. A description of the segments' products and services is included in Note 1 "Principles of Consolidation." The accounting policies of the segments are those described in Note 1. Revenues for each of SIGCORP's segments are attributable principally to customers in the United States except a portion of revenues for SIPI which are attributable to customers in the Netherlands and Belgium as well. 61 Certain financial information relating to significant segments of business is presented below:
SIGCORP, Inc. Year Ended December 31 (in 1999 1998 1997 thousands) Operating revenues: Electric $ 307,569 $ 297,865 $ 272,545 Gas 68,212 66,801 85,561 Gas marketing 221,534 179,613 71,669 Investment operations 1,039 963 955 All other 26,680 28,664 2,507 Total 625,034 573,906 433,237 Interest revenue: Electric 330 309 492 Gas 33 31 49 Gas marketing 85 71 27 Investment operations 2,863 3,702 2,305 All other 7,321 4,880 2,912 Total 10,632 8,993 5,785 Interest expense: Electric 17,544 18,191 18,009 Gas 1,735 1,799 1,781 Gas marketing 168 155 15 Investment operations 4,051 2,749 2,242 All other 6,604 3,901 2,051 Total 30,102 26,795 24,098 Income taxes: Electric 24,331 22,881 23,714 Gas 2,096 2,153 3,545 Gas marketing 244 339 244 Investment operations (1,052) (1,517) (2,564) All other 99 154 (1,078) Total 25,718 24,010 23,861 Net income: Electric 41,820 38,342 37,861 Gas 3,870 4,106 6,404 Gas marketing 239 543 405 Investment operations 5,318 6,899 3,528 All other 810 586 (2,058) Total 52,057 50,476 46,140 Depreciation and amortization expense: Electric 40,829 38,077 36,217 Gas 4,038 4,324 3,974 Gas marketing 75 36 4 Investment operations 139 189 91 All other 260 107 87 Total 45,341 42,733 40,373 Capital expenditures: Electric 51,080 47,114 55,735 Gas 9,893 9,381 12,687 Gas marketing - - - Investment operations - - - All other 902 2,277 592 Total 61,875 58,772 69,014 Identifiable assets: Electric 751,159 740,746 726,507 Gas 143,078 141,174 137,956 Gas marketing 39,545 25,905 22,372 Investment operations 154,739 87,000 94,365 All other 577,756 460,706 398,928 Total assets $ 1,666,277 $ 1,455,531 $ 1,380,128 SIGECO allocates interest revenue and expense based on the net plant ratio which is 91% electric and 9% gas. Utility plant less accumulated provision for depreciation, inventories, receivables (less allowance), regulatory assets and other identifiable assets.
62 The following is a reconciliation to the consolidated financial statements of SIGCORP:
Year Ended December 31 (in thousands) 1999 1998 1997 Operating revenues: Total revenues for segments $ 625,034 $ 573,906 $ 433,237 Elimination of intersegment revenues (20,543) (16,795) - Total consolidated revenues 604,491 557,111 433,237 Interest revenue: Total interest revenue for segments 10,632 8,993 5,785 Elimination of intersegment interest (6,137) (3,505) (2,782) Total consolidated interest revenue 4,495 5,488 3,003 Interest expense: Total interest expense for segments 30,102 26,795 24,098 Elimination of intersegment interest (6,135) (3,505) (2,782) Total consolidated interest expense 23,967 23,290 21,316 Identifiable assets: Total assets for segments 1,666,277 1,455,531 1,380,128 Elimination of intersegment assets (522,135) (426,013) (390,105) Total consolidated assets $ 1,144,142 $ 1,029,518 $ 990,023
Southern Indiana Gas and Electric Company Year Ended December 31 (in thousands) 1999 1998 1997 Operating revenues: Electric $ 307,569 $ 297,865 $ 272,545 Gas 68,212 66,801 85,561 Total 375,781 364,666 358,106 Interest revenue: Electric 330 309 492 Gas 33 31 49 Total 363 340 541 Interest expense: Electric 17,544 18,191 18,009 Gas 1,735 1,799 1,780 Total 19,279 19,990 19,789 Identifiable assets: Electric 751,598 740,746 18,009 Gas 143,161 141,174 1,780 Total assets $ 894,759 $ 881,920 $ 19,789 SIGECO allocates interest revenue and expense based on the net plant ratio which is 91% electric and 9% gas. Utility plant less accumulated provision for depreciation, inventories, receivables (less allowance), regulatory assets and other identifiable assets.
63 NOTE 10 DISCLOSURES ABOUT FAIR VALUE SIGCORP and SIGECO Except for the following financial instruments, fair value of SIGCORP's and SIGECO's financial instruments is equivalent to carrying value due to their short-term nature.
SIGCORP, Inc. At December 31 1999 1998 (in thousands) Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Long-Term Debt (including current portion) $ 326,982 $ 354,426 $ 303,471 $376,424 Partnership Obligations (including current portion) 845 905 2,358 3,446 Redeemable Preferred Stock of Subsidiary 7,500 7,538 7,500 9,044
Southern Indiana Gas and Electric Company At December 31 1999 1998 (in thousands) Carrying Estimated Carrying Estimated Amount Fair Amount Fair Value Value Long-Term Debt (including current portion) $ 291,982 $ 316,535 $ 268,462 $333,456 Redeemable Preferred Stock 7,500 7,538 7,500 9,044
At December 31, 1999 and 1998, respectively, the fair value of SIGCORP's debt relating to utility operations exceeded carrying amounts by $24,500,000 and $65,000,000. Anticipated regulatory treatment of the excess or deficiency of fair value over carrying amounts of SIGECO's long-term debt, if in fact settled at amounts approximating those above, would dictate that these amounts be used to reduce or increase SIGECO's rates over a prescribed amortization period. Accordingly, any settlement would not result in a material impact on SIGECO's financial position or results of operations. LONG-TERM DEBT At December 31, 1999 and 1998, respectively, the fair value of SIGCORP's long-term debt, which was substantially related to SIGECO's operations, were based on the current quoted market interest rate of long-term debt of comparably rated utilities (6.46%) and (5.09%). Fair value of SIGCORP's tax-exempt issues were valued at the tax- effected rate of such debt (3.26%) and (4.01%), respectively. REDEEMABLE PREFERRED STOCK OF SIGECO At December 31, 1999 and 1998, respectively, the fair value of SIGECO's redeemable preferred stock were based on the current quoted market rate of long-term debt with similar characteristics, of comparably rated utilities (6.46%) and (5.09%). PARTNERSHIP OBLIGATIONS At December 31, 1999 and 1998, respectively, the fair value of SIGCORP's partnership obligations were estimated based on the current quoted market rate of comparable debt (7.62%) and (5.09%). NOTE 11 ENVIRONMENTAL On November 3, 1999, the USEPA filed a lawsuit against SIGECO. The USEPA alleges that, beginning in 1992, SIGECO violated the Clean Air Act by: (i) making modifications to its Culley Generating Station in Yankeetown, Indiana without obtaining required permits; (ii) making major modifications to the Culley Generating Station without installing the best available emission control technology; and (iii) failing to notify the USEPA of the modifications. In addition, the lawsuit alleges that the modifications to the Culley Generating Station required SIGECO to begin complying with federal new source performance standards. SIGECO believes it performed only proper maintenance at the Culley Generating Station. Because proper maintenance does not require permits, application of the best available emission control technology, notice to the USEPA, or compliance with new source performance standards, SIGECO believes that the lawsuit is without merit, and intends to defend the lawsuit vigorously. The lawsuit seeks fines against SIGECO in the amount of $27,500 per day per violation. The lawsuit does not specify the number of days or violations the USEPA believes occurred. The lawsuit also seeks a court order requiring SIGECO to install the best available emissions technology at the Culley Generating Station. If the USEPA is successful in obtaining an order, SIGECO estimates that it would incur capital costs of approximately $40 million to $50 million complying with the order. The USEPA has also issued an administrative notice of violation to SIGECO making the same allegations, but alleging that violations began in 1977. Under applicable rules, SIGECO could be subjected to criminal penalties if the Culley Generating Station continues to operate without complying with the new source performance standards and the allegations are determined by a court to be valid. SIGECO anticipates at this time that the plant will continue to operate while the matter is being decided. SIGECO does not believe that it is liable for the alleged fine in this matter, but cannot determine the outcome of the matter with certainty. Currently, no liability has been recorded for this matter. NOTE 12 SUBSEQUENT EVENT On January 28, 2000, affiliates of Blackstone Capital Partners III, a private equity fund of The Blackstone Group invested in class B equity units of Utilicom Holdings LLC (Holdings) a newly formed holding company. The investment was the first part of a commitment by Blackstone to invest up to $100 million to fund future growth opportunities in fiber optic networks. At the same time, Advanced Communications exchanged 35 percent of its current 49 percent equity interest in SIGECOM LLC for $16.5 million of convertible debt of Holdings. The debt is convertible into class A equity units at a future date or in the event of a public offering of stock. Simultaneous with this transaction, Utilicom was downstreamed to Holdings and the existing equity interests in Utilicom were converted to class A equity units in Holdings. The investment restructuring resulted in an immediate after tax gain to SIGCORP of $4,900,000 in the first quarter of 2000. 65
Selected Quarterly Financial Data (Unaudited) SIGCORP, Inc. June March 30, 31, (in thousands except for per share amounts) 1999 1998 1999 1998 Operating Revenues $ 150,161 $ 141,071 $ 131,920 $ 133,305 Operating Income $ 23,793 $ 23,880 $ 16,157 $ 16,623 Net Income $ 12,620 $ 16,426 $ 8,170 $ 9,007 Basic Earnings Per $ 0.53 $ 0.70 $ 0.35 $ 0.38 Share Diluted Earnings Per Share $ 0.53 $ 0.69 $ 0.34 $ 0.38 Average Common Shares Outstanding 23,631 23,631 23,631 23,631 September 30, December 31, 1999 1998 1999 1998 Operating Revenues $ 157,963 $ 134,035 $ 164,447 $ 148,700 Operating Income $ 32,341 $ 31,557 $ 16,521 $ 14,019 Net Income $ 20,248 $ 17,876 $ 11,019 $ 7,167 Basic Earnings Per $ 0.86 $ 0.76 $ 0.47 $ 0.30 Share Diluted Earnings Per Share $ 0.85 $ 0.75 $ 0.47 $ 0.30 Average Common Shares Outstanding 23,631 23,631 23,631 23,631
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY Quarter Ended March June 30, 31, (in thousands) 1999 1998 1999 1998 Operating Revenues $ 100,685 $ 95,145 $ 84,318 $ 87,821 Operating Income $ 17,147 $ 16,419 $ 12,338 $ 12,518 Net Income $ 12,237 $ 12,763 $ 7,617 $ 7,585 September 30, December 31, 1999 1998 1999 1998 Operating Revenues $ 101,930 $ 93,359 $ 88,848 $ 88,341 Operating Income $ 21,219 $ 21,376 $ 12,722 $ 11,689 Net Income $ 17,601 $ 16,429 $ 8,235 $ 5,670
Information for any one quarterly period is not indicative of the annual results which may be expected due to seasonal variations common in the utility industry. The quarterly earnings per share may not add to the total earnings per share for the year due to rounding. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 66
PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS (a) Identification of Directors John M. Dunn, 61, President and Chief Executive Officer of Dunn Hospitality Group, Evansville, Indiana, hotel development and management company. He is also a director of Old National Bank of Evansville. He has been a director of SIGECO and SIGCORP since 1996. John D. Engelbrecht, 48, President and Chief Executive Officer of South Central Communications, Evansville, Indiana, owner and operator of radio and television stations in Indiana, Kentucky and Tennessee and MUZAK franchises in 14 U.S. cities. He is also a director of Fifth Third Bank, Indiana; Evansville, Indiana. He has been a director of SIGECO and SIGCORP since 1996. Andrew E. Goebel, 52, President of SIGCORP since April 1999; Executive Vice President of SIGCORP 1997-1999; Secretary and Treasurer of SIGCORP 1996-1997; Chief Executive Officer of SIGECO since April 1999; President and Chief Executive Officer of SIGECO 1997- 1999; Senior Vice President, Chief Financial Officer and Secretary of SIGECO 1996-1997; Senior Vice President, Chief Financial Officer, Secretary & Treasurer of SIGECO 1989-1996; and Vice President, Secretary and Treasurer of SIGECO 1984-1989. He is also a director of Old National Bank of Evansville. He has been a director of SIGCORP and SIGECO since September 1997. Robert L. Koch II, 61, President and Chief Executive Officer of Koch Enterprises, Inc., Evansville, Indiana, holding company comprised of manufacturers of aluminum die castings, industrial painting systems and wholesale distributors of heating and air conditioning equipment. He is a director of Fifth Third Bancorp, Cincinnati, Ohio and Bindley Western Industries, Inc. of Indianapolis, Indiana. He has been a director of SIGECO since 1986 and a director of SIGCORP since 1996. Donald A. Rausch, 69, Chairman of the Board, President and Chief Executive Officer 1990-1995, of UF Bancorp, Inc., Evansville, Indiana; Chairman of the Board and President, 1985-1995, of Union Federal Savings Bank, Evansville, Indiana. He has been a director of SIGECO since 1982 and a director of SIGCORP since 1996. Officer of SIGECO 1988-1990; Executive Vice President and General Manager of SIGECO 1985-1988. He is also a director of Ohio Valley Electric Corp., Indiana- Kentucky Electric Corp., National City Bancshares and the National City Bank of Evansville. He has been a director of SIGECO since 1985 and a director of SIGCORP since 1996. Richard W. Shymanski, 63, Chairman of the Board 1995- 1999, and President 1983-1995, of Harding Shymanski & Company, Professional Corporation, Certif ied Public Accountants, Evansville, Indiana. He has been a director of SIGECO since 1989 and a director of SIGCORP since 1996. Retired December 31, 1999 from Harding Shymanski & Company *Donald E. Smith, 73, President and Chief Executive Officer of First Financial Corporation, Terre Haute, Indiana; Chairman and director of Terre Haute First National Bank, Terre Haute, Indiana; President and director of Terre Haute Oil Corp., Chairman and director of Princeton Mining Co., Inc., Chairman and director of Deep Vein Coal Company and Chairman and director of R.J. Oil Co., all of Terre Haute, Indiana; and a director of Blackhawk Coal Corporation. He has been a director of SIGECO since 1964 and a director of SIGCORP since 1996. *Retired as a director of SIGECO and SIGCORP effective December 31, 1999.
67
James S. Vinson, 58, President and Professor of Physics at the University of Evansville in Evansville, Indiana since 1987. Vice President of Academic Affairs and Professor of Physics at Trinity University of San Antonio, Texas 1983-1987. He has been a director of SIGECO since 1989 and a director of SIGCORP since 1996. (b) Identification of Executive Officers The information required by this item is included in Part I, Item 1. - BUSINESS on page 13, to which reference is hereby made.
Item 11. EXECUTIVE COMPENSATION AND TRANSACTIONS General. The following three tables set forth compensation paid by SIGCORP and SIGECO to the five highest paid executive officers of SIGCORP or SIGECO during the past three years whose total cash compensation for the calendar year 1999 exceeded $100,000. The tables include a Summary Compensation Table (Table 1); a table showing Option Grants in Last Fiscal Year (Table 2), and a table showing Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values (Table 3).
TABLE 1 SUMMARY COMPENSATION TABLE (a) (b) (c) (d) (e) (f) Long Term Compensation Awards: Shares Underlying Name and Principal Annual Compensation Options All Other Position at SIGCORP Year Salary Bonus (#) Compensation or SIGECO Ronald G. Reherman 1999 $ 409,801 $ 159,100 54,529 None Chairman and Chief Executive Officer 1998 363,467 150,500 None None of SIGCORP and Chairman of the 1997 346,875 67,000 52,955 None Board of SIGECO Andrew E. Goebel 1999 275,014 80,156 37,489 None President of SIGCORP and 1998 220,436 65,625 7,007 None Chief Executive Officer of SIGECO 1997 190,208 35,000 20,993 None J. Gordon Hurst 1999 217,048 62,500 25,049 None President and Chief Operating Officer 1998 196,637 59,375 1,974 None of SIGECO 1997 177,083 32,800 19,858 None Ronald G. Jochum 1999 140,563 19,500 4,601 None Vice President 1998 128,127 18,750 4,055 None Power Supply of 1997 123,958 18,000 4,728 None SIGECO Jeffrey L. Davis 1999 123,650 16,500 4,090 None Vice President 1998 107,213 15,000 3,431 None Support Services of SIGECO 1997 98,125 13,650 3,783 None These amounts are cash awards under the Corporate Performance Plan based on performance for the prior plan year.
68
TABLE 2 OPTION GRANTS IN LAST FISCAL YEAR Individual Grants % of Potential Number of Total Realizable Shares Under- lying Options Exercise Value at Assumed Granted Annual Rates of Options to or Base Expira- Stock Granted Employees Price tion Price in Appreciation Fiscal (Per for Option Term Name (#) Year Share)($) Date ($) 5% 10% R.G. Reherman 54,529 26.65 27.0000 7/19/2009 925,911 2,346,440 A.E. Goebel 37,489 18.32 27.0000 7/19/2009 636,569 1,613,191 J.G. Hurst 25,049 12.24 27.0000 7/19/2009 425,336 1,077,885 R.G. Jochum 4,601 2.25 27.0000 7/19/2009 78,126 197,986 J.L. Davis 4,090 2.00 27.0000 7/19/2009 69,449 175,997 The options were granted July 19, 1999. For Messrs. Reherman, Goebel and Hurst, options vest one-half of the total each year after the date of grant with total vesting occurring at the two-year anniversary. For Messrs. Jochum and Davis, options vest one year after the date of grant. Equal to market price on grant date. These values are not a prediction of what SIGCORP believes the market value of its common stock will be in the next 10 years. They are merely assumed values required to be calculated in accordance with SEC Rules.
TABLE 3 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Number of Securities Shares Underlying Underlying Value of Acquired Unexercised Unexercised Unexercised on Value Options at In-the-Money Exercise Realized Year-End Options at Year-End Year Name (#) ($) (#) ($) Exercisable/ Exercisable/ Unexercisable Unexercisable 1999 R.G. Reherman - - 136,691/54,529 $ 362,853/0 1999 A.E. Goebel 4,000 37,833 63,097/37,489 152,085/0 1999 J.G. Hurst - - 57,509/25,049 154,599/0 1999 R.G. Jochum - - 23,802/4,601 31,447/0 1999 J.L. Davis - - 16,519/4,090 15,278/0 Market value of underlying securities at time of exercise minus the exercise price. Options granted in 1996 are restated to reflect 3 for 2 common stock split on March 27, 1997. Market value of underlying securities at fiscal year-end (December 31, 1999) of $22.75 per share minus the exercise price.
69 Change of Control Agreements. In order to insure SIGCORP and SIGECO continuity of management and operations in the event of a change of control of SIGCORP or SIGECO, agreements have been entered into between SIGCORP, SIGECO and Messrs. Reherman, Goebel, Hurst, Jochum and Davis. The agreements provide that in the event of a change of control of SIGCORP or SIGECO, the salary of the named officers will continue for the lesser of a period of three years, or until retirement age, at their existing compensation levels (unless a lesser amount is the maximum amount deductible by SIGCORP for United States Federal income tax purposes, in which case the continued salary would be at such lesser amount). Retirement Plans. All officers participate in SIGECO's trusteed, noncontributory tax qualified Pension Plan for Salaried Employees (the "Pension Plan'). Retirement income, as defined in the Pension Plan, is based on an employee's average monthly earnings during the highest paid five consecutive years in the Pension Plan of the employee's final 10 years of continuous service prior to retirement or other termination of employment and is calculated in two increments: 1.52 percent of such average monthly earnings for each year of accredited service or part thereof up to a maximum of 30 years; plus .69 percent of such average monthly earnings for each year of accredited service or part thereof in excess of 30 years to a maximum of 10 years. Amounts payable under the Pension Plan are not subject to social security or other offset. The years of service in the Pension Plan credited to officers named in the compensation table above are R.G. Reherman-36 years, 6 months; A.E. Goebel-27 years, 1 month; J.G. Hurst-30 years; R.G. Jochum-5 years, 3 months; and J.L. Davis-19 years, 3 months. The following table illustrates the estimated retirement income payable under the Pension Plan, based on the specific remuneration levels and years of service classification shown.
Pension Plan Table Years of Service Covered Remuneration 15 20 25 30 35 $100,000 $22,800 $30,400 $38,000 $45,600 $49,050 125,000 28,500 38,000 47,500 57,000 61,300 170,000 38,760 51,680 64,600 77,520 83,380 and above As of January 1, 2000, the OMNIBUS Budget Reconciliation Act of 1993 (OBRA '93) limited annual compensation to $170,000 for purposes of pension calculations under tax qualified pension plans.
SIGECO has a non-qualified Supplemental Retirement Plan (the "Supplemental Plan") covering certain senior officers of SIGECO who qualify under the applicable length of service and other eligibility provisions. It is presently anticipated that Messrs. Goebel, Hurst, Jochum and Davis will qualify for benefits under the Supplemental Plan. The Supplemental Plan provides for supplemental retirement income to be paid such that, when combined with benefits receivable under SIGECO's Pension Plan, total retirement benefits paid will be equal to 50 percent of the average of the senior officer's final three years base salary excluding bonuses. In the case of death, survivor benefits are payable to surviving spouse, if any, at an actuarially adjusted level. SIGECO has entered into an agreement with Mr. Reherman that is similar to the Supplemental Plan except that the retirement income paid is equal to 70 percent of his highest annualized salary as Chief Executive Officer or Chairman of SIGECO. SIGECO has purchased life insurance on the participants sufficient in amount to fund actuarially all of SIGECO's future liabilities under the Supplemental Plan and the Agreement. Death Benefits Plan. SIGECO has a Supplemental Post- Retirement Death Benefits Plan for officers and other senior executives to provide retired participants with the equivalent of 25-35 percent of the pre-retirement group life insurance benefit under SIGECO's group insurance plan for salaried employees. SIGECO has purchased insurance on the lives of the participants, which is projected to allow SIGECO to recover the entire cost of this plan. Stock Option Plan. The 1994 Stock Option Plan was adopted by the Board of Directors at its meeting held December 21, 1993, and by SIGECO's shareholders at their meeting held March 22, 1994. Pursuant to the exchange whereby SIGECO common stockholders became stockholders of SIGCORP, SIGECO's common stockholders, by 70 agreeing to the exchange, also agreed to the amendment of the 1994 Stock Option Plan to provide for the issuance of SIGCORP shares. The 1994 Stock Option Plan authorizes the granting of options to officers and key employees of SIGCORP and SIGECO to purchase up to 750,000 shares of SIGCORP Common Stock (adjusted for 3 for 2 stock split on March 27, 1997). Options granted under the 1994 Stock Option Plan may constitute incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended), or nonqualified stock options (collectively, "options"). To date, a total of 750,000 options have been granted. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Executive Compensation Program is administered and monitored by the Compensation Committees. The Compensation Committees are composed entirely of independent, nonemployee directors. The main objectives of the program are to: * attract and retain an outstanding management team, * motivate and reward outstanding performance results, and * focus attention on plans, goals and initiatives which enhance value to shareholders and customers. In order to achieve these objectives, the executive Compensation Program consists of three elements: a base salary plan, an annual corporate performance incentive plan and a long-term stock option plan. The key elements of the compensation package for executive officers are addressed in greater detail below. Base Salary Plan. The Compensation Committees determine the annual base salaries for senior officers and the salary ranges for all officer positions. The determination of officer salaries and salary ranges is based upon competitive norms (averages) for similar positions in reasonably comparable electric and combination utility companies. An independent consultant is retained to provide such information to the Compensation Committees. Adjustments to actual base salaries take into consideration two key variables: 1) the performance of the officer, and 2) the level of actual salary compared with the midpoint of the applicable salary range, where midpoint is defined as the competitive salary norm for the position. In general, individuals whose performance is deemed fully competent over several years would be expected to achieve a base salary at the midpoint level. Continued superior performance could result in a base salary up to the maximum level of the salary grade. Corporate Performance Incentive Plan. Approximately 24 officers and senior management personnel participate in the Performance Plan (the "Performance Plan"). During 1997, the Performance Plan was revised to reflect changes in the industry and to refocus on goals which are key to the success of the Companies. Corporate goals were established for financial and operating results which served as the basis for award payments granted in 1999. They include the following:
1. earnings per share 2. overall customer satisfaction index 3. total electric operating and maintenance expense (excluding fuel and purchased power) per Kwh sold 4. overall equivalent availability of coal fired generating units 5. reportable safety incident rate
In addition, changes were made to provide award opportunities which are more competitive with industry practice. For the revised Plan, the following award opportunities apply: 25-55% of base salary for the Chairman; 20-50% of base salary for the Chief Executive Officer; 15-45% for the Chief Operating Officer; and 5-35% of base salary for all other participants. However, total payout under the Plan is limited to a maximum of 2% of net income. An independent consultant is retained to assist in the process of goal formulation and to provide an independent assessment of goal achievement to the Compensation Committees at the end of each Performance Plan year. The annual awards paid under the Performance Plan for years 1997, 1998 and 1999 are shown in column (d) of the Summary Compensation Table (Table 1) for the individuals named therein. 71 Long-Term Stock Option Plan. As indicated above, the 1994 Stock Option Plan was approved by the stockholders during 1994. Approximately 29 officers and senior management personnel are eligible to participate in the plan. On July 19, 1999, the Compensation Committees granted stock options to the plan participants. None of the options granted in 1999 are exercisable prior to July 19, 2000. The stock option awards for executive officers along with additional details are included in Tables 2 and 3. Discussion of CEO Pay. Consistent with overall executive compensation program philosophy, the Compensation Committees structured the CEOs' total compensation during 1999 based on the overall performance of SIGCORP and SIGECO, competitive pay levels for CEOs at comparable companies and a multi-year plan for the CEO to achieve a base salary level at or about the established midpoint for the position. During 1999, the Compensation Committees took the following actions regarding the CEO of SIGCORP: 1. Increased base salary to $400,000 per year. This represents an increase of 8.1%, which brought the CEO's base salary to its 1999 competitive norm. 2. Provided a cash incentive of $159,100 based on results achieved under the Corporate Performance Incentive Plan for the plan year 1998. During 1999, the Compensation Committees also took the following actions regarding the CEO of SIGECO: 1. Increased base salary to $275,000 per year. This represents an increase of 22.2%, which brought the CEO's base salary closer to its 1999 competitive norm. 2. Provided a cash incentive of $80,156 based on results achieved under the Corporate Performance Incentive Plan for the plan year 1998. During the Performance Plan Year 1998, performance as measured against the five corporate goals resulted in the following:
Goal Actual Achieved Earnings Per Share (SIGCORP): Threshold $2.00 Target $2.10 2.14 Target Maximum $2.20 Customer Satisfaction Index: 91% 97% Yes Total Electric O&M (excluding fuel and purchased power) per Kwh sold 1.153 cents 1.162 cents No Overall Equivalent Availability 85% 82% No Safety Record (OSHA reportable incidents per 100 FTEs) 4.41 2.82 Yes
Under the Performance Plan formula, these performance ratings earned an incentive award of 43% of base salary for the CEO of SIGCORP and 35.6% of base salary for the CEO of SIGECO. Compensation Committee Donald A. Rausch, Chairman R.W. Shymanski Robert L. Koch II Donald E. Smith 72 Performance Comparisons Set forth below is a table comparing the yearly change in the cumulative total shareholder return on SIGCORP Common Stock, assuming reinvestment of all dividends, against the cumulative total return of the S&P Composite 500 Stock Index and the EEI Index of Investor-Owned Electric Utilities, over the past five years.
Comparison of Cumulative Total Return 12/94 12/95 12/96 12/97 12/98 12/99 SIGCORP, INC. $100 $138 $145 $193 $244 $179 S & P 500 Index 100 137 169 225 290 351 EEI Index of Investor- Owned Electric Utilities 100 131 132 168 192 156 $100 invested on 12/31/94 in stock or index including reinvestment of dividends. Fiscal year ending December 31.
Compensation Committee Interlocks and Insider Participation. Under applicable Securities and Exchange Commission Rules, there were no interlocks or insider participation on the Compensation Committee during 1999. 73 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners As of December 31, 1999, each of the following stockholders was known to the management to be the beneficial owner of more than five percent of the outstanding shares of any class of voting securities as set forth below.
Amount and Nature of Name and Address of Beneficial Percent Title of Class Beneficial Owner Ownership of Class IDS Certificate $100 Par Preferred Company 75,000 Shares 40.3% Stock of SIGECO %IDS Financial Registered Owner Services, Inc. 3000 IDS Tower 10 Minneapolis, MN 55440 Common Stock of SIGECO SIGCORP, Inc. 15,754,826 Shares 100% 20 N.W. Fourth Street Registered Owner P.O. Box 3606 Evansville, IN 47735-3606
Security Ownership of Directors and Executive Officers The following table shows the beneficial ownership, as of December 31, 1999, of SIGCORP Common Stock, by each director, the Chief Executive Officer, and each of the other executive officers named in the Compensation Table found under "Executive Compensation". Also shown is the total ownership for such persons and other executive officers as a group. No member of the group is the beneficial owner of any of SIGECO's Preferred Stock.
Amount and Nature of Beneficial Ownership Name of Beneficial Owner Percent Direct Indirect Total of Class John M. Dunn 3,169 - 3,169 .02 John D. Engelbrecht 3,260 - 3,260 .02 Robert L. Koch II 3,627 - 3,627 .02 Donald A. Rausch 12,762 - 12,762 .06 Ronald G. Reherman 12,290 559 12,849 .06 Richard W. Shymanski 2,475 8,464 10,939 .04 Donald E. Smith 17,128 555 17,683 .08 James S. Vinson 997 - 997 - Andrew E. Goebel 11,098 - 11,098 .05 J. Gordon Hurst 1,944 - 1,944 .01 Ronald G. Jochum 400 - 400 - Jeffrey L. Davis 168 - 168 - All of the above and other executive officers as a group (14) 83,902 .36 Beneficial ownership includes those shares over which an individual has sole or shared voting, or investment powers, such as shares in which the spouse, minor children or other relatives living in the home of the named person have a beneficial interest, and shares held in SIGCORP's Dividend Reinvestment Plan and other trust accounts. Includes shares held jointly or in other capacities, as to which in some cases beneficial ownership is disclaimed. Does not include shares which the named individual has the right to acquire under the 1994 Stock Option Plan. See Table 3 for the number of shares that can currently be acquired. Donald E. Smith is a director and President of Princeton Mining Company, which owns 360,186 shares of Common Stock; director and President of R.J. Oil and Refining Co., Inc., which owns 129,331 shares of Common Stock; director of Blackhawk Coal Corporation, which owns 188,599 shares of Common Stock; Chairman, CEO, President and director of Terre Haute First National Bank, which holds 28,931 shares of Common Stock as trustee; and President and director of Terre Haute Oil Corporation, which owns 3,199 shares of Common Stock. The aggregate number of such shares represents 3.01 percent of Common Stock outstanding.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Richard W. Shymanski is Chairman of the Board of Harding Shymanski & Company, Certified Public Accountants, which firm in 1999 performed certain consulting and accounting services for SIGCORP subsidiaries, and is expected to perform such services in 2000. During 1999, the cost of such services was $401,703, which the Company believes to be a fair and reasonable price for the services rendered. Andrew E. Goebel is President and Chief Operating Officer of SIGCORP and Chief Executive Officer of Southern Indiana Gas and Electric Company. During 1999, Hasgoe Cleaning Systems, a cleaning company owned by Mr. Goebel's brother, performed certain cleaning services for SIGCORP subsidiaries and is expected to perform such services in 2000. During 1999, the cost of such services was $28,670, which the Company believes to be a fair and reasonable price for the services rendered. 75 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2) The financial statements, including supporting schedule, are listed in the Index to Financial Statements, page 27, filed as part of this report. (a) 3) Exhibits: SIGCORP and SIGECO EX-2(a) Agreement and Plan of Exchange, of common stock between Southern Indiana Gas and Electric Company and SIGCORP, Inc., dated February 23, 1995. (Physically filed and designated as Exhibit 2(a) in Amendment No. 1 to Form S- 4 Registration Statement filed January 20, 1995, File No. 33-57381.) SIGCORP EX-2(a) Agreement and Plan of Merger by and among Indiana Energy, Inc., SIGCORP, Inc. and Vectren Corporation, dated as of June 11, 1999. (Physically filed and designated as Exhibit 2 to Form 8-K filed June 15, 1999, File No. 01-11603.) EX-3(a) Restated Articles of Incorporation of SIGCORP, Inc. (Physically filed and designated as Exhibit 3(a) in Amendment No. 1 to Form S-4 Registration Statement, filed February 23, 1995, File No. 33-57381.) EX-3(b) By-Laws of SIGCORP, Inc. . (Physically filed and designated as Exhibit 3(b) in Amendment No. 1 to Form S- 4 Registration Statement, filed February 23, 1995, File No. 33-57381.) EX-4(a) Rights Agreement, between SIGCORP, Inc. and Continental Stock Transfer & Trust Company, Rights Agent, dated as of December 31, 1995. (Physically filed and designated as Exhibit 4.1 in Form 8-B Registration Statement filed December 15, 1995, File No. 1-11603.) EX-4(b) Stock Option Agreement, between SIGCORP, Inc. and Indiana Energy, Inc., dated as of June 11, 1999. (Physically filed and designated as Exhibit 4-1 to Form 8-K filed June 15, File No. 01-11603.) SIGECO EX-3(a) Amended Articles of Incorporation as amended March 26, 1985. (Physically filed and designated in Form 10-K, for the fiscal year 1985, File No. 1-3553, as Exhibit 3- A.) Articles of Amendment of the Amended Articles of Incorporation, dated March 24, 1987. (Physically filed and designated in Form 10-K for the fiscal year 1987, File No. 1-3553, as Exhibit 3-A.) Articles of Amendment of the Amended Articles of Incorporation, dated November 27, 1992. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 3- A). EX-3(b) By-Laws as amended through December 18, 1990. (Physically filed in Form 10-K for the fiscal year 1990, File No. 1-3553, as Exhibit 3-B.) By-Laws as amended through September 22, 1993. (Physically filed and designated in Form 10-K for the fiscal year 1993, File No. 1-3553, as EX-3 (b).) By-Laws as amended through January 1, 1995. (Physically filed and designated in Form 10-K for the fiscal year 1995, File No. 1-3553, as EX-3(b).) EX-4(a)* Mortgage and Deed of Trust dated as of April 1, 1932 between Southern Indiana Gas and Electric Company and Bankers Trust Company, as Trustee, and Supplemental Indentures thereto dated August 31, 1936, October 1, 1937, March 22, 1939, July 1, 1948, June 1, 1949, October 1, 1949, January 1, 1951, April 1, 1954, March 1, 1957, October 1, 1965, September 1, 1966, August 1, 1968, May 1, 1970, August 1, 1971, April 1, 1972, October 1, 1973, April 1, 1975, January 15, 1977, April 1, 1978, June 4, 1981, January 20, 1983, November 1, 1983, March 1, 1984, June 1, 1984, November 1, 1984, July 1, 1985, November 1, 1985, June 1, 1986. (Physically filed and designated in Registration No. 2- 2536 as Exhibits B-1 and B-2; in Post-effective Amendment No. 1 to Registration No. 2-62032 as Exhibit (b)(4)(ii), in Registration No. 2-88923 as Exhibit 4(b)(2), in Form 8-K, File No. 1-3553, dated June 1, 1984 as Exhibit (4), File No. 1-3553, dated March 24, 1986 as Exhibit 4-A, in Form 8-K, File No. 1-3553, dated June 3, 1986 as Exhibit (4).) July 1, 1985 and November 1, 1985 (Physically filed and * Pursuant to paragraph (b)(4)(iii)(a) of Item 601 of Regulation S-K, SIGECO agrees to furnish to the Commission on request any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of SIGECO, and has therefore not filed such documents as exhibits to this Form 10-K.
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designated in Form 10-K, for the fiscal year 1985, File No. 1-3553, as Exhibit 4-A.) November 15, 1986 and January 15, 1987. (Physically filed and designated in Form 10-K, for the fiscal year 1986, File No. 1-3553, as Exhibit 4-A.) December 15, 1987. (Physically filed and designated in Form 10-K, for the fiscal year 1987, File No. 1-3553, as Exhibit 4-A.) December 13, 1990. (Physically filed and designated in Form 10-K, for the fiscal year 1990, File No. 1- 3553, as Exhibit 4-A.) April 1, 1993. (Physically filed and designated in Form 8-K, dated April 13, 1993, File 1-3553, as Exhibit 4.) June 1, 1993 (Physically filed and designated in Form 8-K, dated June 14, 1993, File 1-3553, as Exhibit 4.) May 1, 1993. (Physically filed and designated in Form 10-K, for the fiscal year 1993, File No. 1-3553, as Exhibit 4(a).) July 1, 1999. (Physically filed and designated in Form 10-Q, dated August 16, 1999, File 1- 3553, as Exhibit 4(a).) EX-10.1 Agreement, dated, January 30, 1968, for Unit No. 4 at the Warrick Power Plant of Alcoa Generating Corporation ("Alcoa"), between Alcoa and Southern Indiana Gas and Electric Company. (Physically filed and designated in Registration No. 2-29653 as Exhibit 4(d)-A.) EX-10.2 Letter of Agreement, dated June 1, 1971, and Letter Agreement, dated June 26, 1969, between Alcoa and Southern Indiana Gas and Electric Company. (Physically filed and designated in Registration No. 2-41209 as Exhibit 4(e)-2.) EX-10.3 Letter Agreement, dated April 9, 1973, and Agreement dated April 30, 1973, between Alcoa and Southern Indiana Gas and Electric Company. (Physically filed and designated in Registration No. 2-53005 as Exhibit 4(e)-4.) EX-10.4 Electric Power Agreement (the "Power Agreement"), dated May 28, 1971, between Alcoa and Southern Indiana Gas and Electric Company. (Physically filed and designated in Registration No. 2-41209 as Exhibit 4(e)- 1.) EX-10.5 Second Supplement, dated as of July 10, 1975, to the Power Agreement and Letter Agreement dated April 30, 1973 - First Supplement. (Physically filed and designated in Form 12-K for the fiscal year 1975, File No. 1-3553, as Exhibit 1(e).) EX-10.6 Third Supplement, dated as of May 26, 1978, to the Power Agreement. (Physically filed and designated in Form 10-K for the fiscal year 1978 as Exhibit A-1.) EX-10.7 Letter Agreement dated August 22, 1978 between Southern Indiana Gas and Electric Company and Alcoa, which amends Agreement for Sale in an Emergency of Electrical Power and Energy Generation by Alcoa and Southern Indiana Gas and Electric Company dated June 26, 1979. (Physically filed and designated in Form 10-K for the fiscal year 1978, File No. 1-3553, as Exhibit A-2.) EX-10.8 Fifth Supplement, dated as of December 13, 1978, to the Power Agreement. (Physically filed and designated in Form 10-K for the fiscal year 1979, File No. 1- 3553, as Exhibit A-3.) EX-10.9 Sixth Supplement, dated as of July 1, 1979, to the Power Agreement. (Physically filed and designated in Form 10-K for the fiscal year 1979, File No. 1-3553, as Exhibit A-5.) EX-10.10 Seventh Supplement, dated as of October 1, 1979, to the Power Agreement. (Physically filed and designated in Form 10-K for the fiscal year 1979, File No. 1- 3553, as Exhibit A-6.) EX-10.11 Eighth Supplement, dated as of June 1, 1980 to the Electric Power Agreement, dated May 28, 1971, between Alcoa and Southern Indiana Gas and Electric Company. (Physically filed and designated in Form 10-K for the fiscal year 1980, File No. 1-3553, as Exhibit (20)-1.)
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EX-10.13** Agreement dated July 22, 1986 between Southern Indiana Gas and Electric Company and A. E. Goebel regarding continuation of employment. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-13.) EX-10.14** Agreement dated July 25, 1986 between Southern Indiana Gas and Electric Company and Ronald G. Reherman regarding continuation of employment. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-14.) EX-10.15** Agreement dated July 22, 1986 between Southern Indiana Gas and Electric Company and James A. Van Meter regarding continuation of employment. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-15.) EX-10.16** Agreement dated February 22, 1989 between Southern Indiana Gas and Electric Company and J. Gordon Hurst regarding continuation of employment. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553 as Exhibit 10-A-16.) EX-10.17** Summary description of Southern Indiana Gas and Electric Company's nonqualified Supplemental Retirement Plan (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-17.) EX-10.18** Supplemental Post Retirement Death Benefits Plan, dated October 10, 1984. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-18.) EX-10.19** Summary description of Southern Indiana Gas and Electric Company's Corporate Performance Incentive Plan. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-19.) EX-10.20** Southern Indiana Gas and Electric Company's Corporate Performance Incentive Plan as amended for the plan year beginning January 1, 1994. (Physically filed and designated in Form 10-K for the fiscal year 1993, File No. 1-3553, as Exhibit 10-A-20.) EX-10.21** Southern Indiana Gas and Electric Company 1994 Stock Option Plan (Physically filed and designated in Southern Indiana Gas and Electric Company's Proxy Statement dated February 22, 1994, File No. 1-3553, as Exhibit A.) EX-10.22** Summary description of Southern Indiana Gas and Electric Company's Corporate Performance Incentive Plan as amended for the plan year beginning January 1, 1997. (Physically filed and designated in the SIGCORP, Inc. and Southern Indiana Gas and Electric Company's Joint Proxy Statement dated March 23, 1998, File No. 1-11603 and File No. 1- 3553, under "Compensation Committee Report On Executive Compensation", page 9.) EX-10.23** Agreement dated September 1, 1997 between Southern Indiana Gas and Electric Company and Andrew E. Goebel regarding continuation of employment, which supercedes such agreement dated July 22, 1986. (Physically filed and designated in Form 10-K for the fiscal year 1997, File No. 1-3553, as Exhibit 10.23.) EX-10.24** Agreement dated September 1, 1997 between Southern Indiana Gas and Electric Company and J. Gordon Hurst regarding continuation of employment, which supercedes such agreement dated February 22, 1989. (Physically filed and designated in Form 10-K for the fiscal year 1997, File No. 1-3553, as Exhibit 10.24.) EX-10.25** Agreement dated January 10, 1997 between Ronald G. Jochum and Southern Indiana Gas and Electric Company regarding continuation of employment. (Physically filed and designated in Form 10-K for the fiscal year 1997, File No. 1-3553, as Exhibit 10.25.) EX-10.26** Agreement dated January 10, 1997 between Southern Indiana Gas and Electric Company and Ronald G. Reherman regarding continuation of employment, which supercedes such agreement dated May 6, 1991. (Physically filed and designated in Form 10-K for the fiscal year 1997, File No. 1-3553, as Exhibit 10.26.)
78
EX-10.27** Agreement dated April 16, 1997 between Southern Indiana Gas and Electric Company and Ronald G. Reherman regarding supplemental pension and disability benefits, which supercedes such agreement dated February 1, 1995. (Physically filed and designated in Form 10-K for the fiscal year 1997, File No. 1-3553, as Exhibit 10.27.) EX-10.28** Agreement dated January 10, 1997 between Southern Indiana Gas and Electric Company and Jeffrey L. Davis regarding continuation of employment. (Physically filed and designated in Form 10-K for the fiscal year 1997, File No. 1-3553, as Exhibit 10.28.) EX-10.29** Southern Indiana Gas and Electric Company's nonqualified Supplemental Retirement Plan as amended, effective April 16, 1997. (Physically filed and designated in Form 10-K for the fiscal year 1997, File No. 1-3553, as Exhibit 10.29.) ** Filed pursuant to paragraph (b)(10)(iii)(A) of Item 601 of Regulation S-K. SIGECO EX-12 Computation of Ratio of Earnings to Fixed Charges SIGCORP EX-21 Subsidiaries of the Registrant SIGCORP and SIGECO EX-24 Power of Attorney SIGCORP and SIGECO EX-27 Financial Data Schedule
(b) Reports on Form 8-K On October 21, 1999, SIGCORP, Inc. announced its revenues and earnings for the quarter ended September 30, 1999. The press release dated October 21, 1999 was filed with the SEC on November 2, 1999. On December 15, 1999, Indiana Energy, Inc. (IEI) and Dayton Power & Light, Inc. (DPL) announced that their respective boards of directors have approved a definitive agreement under which IEI will acquire DPL's natural gas distribution business for $425 million in cash. On June 14, 1999, IEI and SIGCORP, Inc. (SIGCORP) announced their agreement to merge in a $1.9 billion merger of equals to form a new holding company which will be named Vectren Corporation. The board of directors of SIGCORP authorized an amendment to the merger agreement to permit IEI to enter into the transaction with DPL. The press release dated December 15, 1999 announcing the acquisition was filed with the SEC on December 16, 1999. On February 2, 2000, SIGCORP, Inc. announced its revenues and earnings for the quarter and year ended December 31, 1999. The press release dated February 2, 2000 was filed with the SEC on February 11, 2000. Because SIGECO intended to reprice two series of pollution control bonds and refund a third series of pollution control bonds before the filing of the combined Annual Report on Form 10-K, SIGCORP, Inc. and Southern Indiana Gas and Electric Company filed their audited financial statements for the fiscal year ended December 31, 1999 with the SEC on February 25, 2000. 79
SCHEDULE II Southern Indiana Gas And Electric Company VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Column A Column B Column C Column D Column E Additions Balance Charged Charged Deductions Balance Beginning to to Other from End of Reserves, Description of Year Expenses Accounts Net Year (in thousands) VALUATION AND QUALIFYING ACCOUNTS: Year 1999 - Accumulated provision for uncollectible accounts $ 2,156 $ 604 $ - $ 622 $ 2,138 Year 1998 - Accumulated provision for uncollectible accounts $ 328 $2,797 $ - $ 969 $ 2,156 Year 1997 - Accumulated provision for uncollectible accounts $ 215 $1,517 $ - $ 1,404 $ 328 OTHER RESERVES: Year 1999 - Reserve for injuries and damages $ 782 $ 661 $ - $ 396 $ 1,047 Year 1998 - Reserve for injuries and damages $ 1,047 $ 68 $ 261 $ 594 $ 782 Year 1997 - Reserve for injuries and damages $ 1,737 $(253) $ 356 $ 793 $ 1,047 Charged to construction accounts
82 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. Date: March 29, 2000 SIGCORP, Inc. By R. G. Reherman, Chairman and Chief Executive Officer BY s/s R. G. Reherman R. G. Reherman SOUTHERN INDIANA GAS AND ELECTRIC COMPANY By R. G. Reherman, Chairman BY s/s R. G. Reherman R. G. Reherman 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 registrants and in the capacities and on the dates indicated.
Signatures Title Date R. G. Reherman Chairman and Chief Executive Officer of SIGCORP, Inc. (Principal Executive Officer) Chairman of Southern Indiana Gas and Electric Company March 29, 2000 A. E. Goebel* President and Chief Operating Officer of SIGCORP, Inc. Chief Executive Officer of Southern Indiana Gas and Electric Company (Principal Executive Officer) March 29, 2000 J. G. Hurst* President and Chief Operating Officer of Southern Indiana Gas March 29, 2000 and Electric Company T. L. Burke* Secretary and Treasurer of SIGCORP, Inc. and Southern Indiana Gas and Electric Company (Principal Financial Officer) March 29, 2000 S. M. Kerney* Controller of SIGCORP, Inc. and Southern Indiana Gas and Electric Company (Principal Accounting Officer) March 29, 2000 John M. Dunn* ) ) John D. Engelbrecht* ) ) Robert L. Koch II* ) ) Donald A. Rausch* ) Directors of SIGCORP, Inc. and March 29, 2000 ) Southern Indiana Gas and Electric Richard W. Company Shymanski* ) ) James S. Vinson* ) *By R. G. Reherman, Attorney-in-fact
SIGECO 10-K EXHIBIT INDEX Sequential Page Number Exhibits incorporated by reference are found on 75 - 78 EX-12 Computation of Ratio of Earnings to Fixed Charges 80 EX-24 Power-of-Attorney 87 - 88 EX-27 Financial Data Schedule N/A
EX-24 82 EX-24 2 March 21, 2000 Mr. R. G. Reherman Mr. T. L. Burke Southern Indiana Gas and Electric Company 20 N.W. Fourth Street Evansville, Indiana 47741 J. H. Byington, Jr., Esq. Winthrop, Stimson, Putnam & Roberts One Battery Park Plaza New York, New York 10004-1490 Dear Gentlemen: SIGCORP, Inc. and Southern Indiana Gas and Electric Company will each file an Annual Report on Form 10-K for the fiscal year ended December 31, 1999 ("Form 10-K") before April 1, 2000 which will be accompanied by certain exhibits. We hereby authorize you, or any one of you, to complete said Forms 10-K and to remedy any deficiencies with respect to said Forms 10-K by appropriate amendment or amendments; and we hereby make, constitute and appoint each of you our true and lawful attorney for each of us and in each of our names, places and steads, both in our individual capacities as directors and that of officers of SIGCORP, Inc. and Southern Indiana Gas and Electric Company, to sign and cause to be filed with the Securities and Exchange Commission said Forms 10-K, any appropriate amendment or amendments thereto, and any exhibits thereto. The undersigned, SIGCORP, Inc. and Southern Indiana Gas and Electric Company, also authorize you and any one of you to sign said Forms 10-K and any amendment or amendments thereto on its behalf as attorney-in- fact for its respective officers, and to file the same as aforesaid together with exhibits. Very truly yours, SIGCORP, INC. and SOUTHERN INDIANA GAS AND ELECTRIC COMPANY By s/s R. G. Reherman R. G. Reherman Chairman and CEO, SIGCORP, Inc. Chairman, Southern Indiana Gas & Electric Company s/s John M. Dunn s/s Ronald G. Reherman John M. Dunn Ronald G. Reherman s/s John D. Engelbrecht s/s Richard W. Shymanski John D. Engelbrecht Richard W. Shymanski s/s Andrew E. Goebel s/s James S. Vinson Andrew E. Goebel James S. Vinson s/s Robert L. Koch II s/s Timothy L. Burke Robert L. Koch II Timothy L. Burke s/s Donald A. Rausch s/s S. Mark Kerney Donald A. Rausch S. Mark Kerney EX-27 3
UT 0000092195 SOUTHERN INDIANA GAS & ELECTRIC CO 12-MOS DEC-31-1999 DEC-31-1999 PER-BOOK 738,916 3,782 104,004 48,057 0 894,759 78,258 0 256,312 334,570 0 19,282 238,282 22,880 0 0 53,700 0 0 0 226,045 894,759 375,781 26,427 285,927 312,354 63,426 601 64,027 17,259 46,768 1,078 45,690 31,302 16,121 110,622 0 0
EX-12 4 EX-12
Southern Indiana Gas And Electric Company COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES For the Five Years Ended December 31, 1999 1999 1998 1997 1996 1995 (in thousands) Earnings as Defined Net income $46,768 $43,542 $45,363 $42,841 $39,624 Add: Income Taxes: Current: Federal 19,836 19,521 28,402 11,773 7,031 State 3,192 2,849 4,265 1,934 1,601 Deferred, net: Federal 4,080 3,270 (3,673) 10,081 7,771 State 749 842 (278) 1,690 1,385 Deferred investment tax credit, net (1,430) (1,447) (1,457) (1,443) (1,556) Interest on long-term debt, net of AFUDC borrowed 13,614 15,911 17,223 17,987 18,168 Amortization of premium, discount and expense on debt 487 690 671 690 694 Interest on short-term debt 3,158 2,614 1,769 2,350 1,894 Interest component of rent expense 605 486 456 438 565 Earnings as defined $91,059 $88,278 $92,741 $88,341 $77,177 Fixed Charges as Defined Interest on long-term debt $16,121 $17,376 $18,020 $18,432 $18,789 Amortization of premium, discount and expense on debt 487 690 671 690 694 Interest on short-term 3,158 2,614 1,769 2,350 1,894 debt Interest component of rent expense 605 486 456 438 565 Fixed charges as defined $20,371 $21,166 $20,916 $21,910 $21,942 Ratio of Earnings to Fixed Charges 4.47 4.17 4.43 4.03 3.52 NOTES: Net income, as defined, is before preferred dividend requirements. One-third of rentals represents a reasonable approximation of the interest factor.
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