<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
February 18, 1997 (December 31, 1996)
Date of Report (Date of Earliest Event Reported)
IWC RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA
(State or other jurisdiction of incorporation)
0-15420 35-1668886
(Commission File Number) (IRS Employer Identification No.)
1220 WATERWAY BOULEVARD
INDIANAPOLIS, INDIANA 46202
(Address of principal (Zip Code)
executive offices)
(317) 639-1501
(Registrant's telephone number, including area code)
<PAGE>
The purpose of this Current Report is to file certain financial information
regarding the Registrant (IWC Resources Corporation) and its subsidiaries. Such
financial information is set forth in the exhibits to this Current Report.
Item 5. Other Events
Exhibits
EXHIBIT
NUMBER DESCRIPTION OF ITEM
(23) Consent of Independent Certified Public Accountants
(27) Financial Data Schedule.
(99) Financial information for the year ended December 31, 1996
- Consolidated Balance Sheet.
- Consolidated Statement of Shareholders' Equity.
- Consolidated Statement of Earnings.
- Consolidated Statement of Cash Flows.
- Notes to Consolidated Financial Statements.
- Independent Auditors' Report.
- Selected Financial Data.
- Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IWC RESOURCES CORPORATION
(Registrant)
Date: February 18, 1997 By:/s/J. A. Rosenfeld
---------------------------------
J. A. Rosenfeld
President, IWC Utilities
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
(23) Consent of Independent Certified Public Accountants.
(27) Financial Data Schedule.
(99) - Consolidated Balance Sheet.
- Consolidated Statement of Shareholders' Equity.
- Consolidated Statement of Earnings.
- Consolidated Statement of Cash Flows.
- Notes to Consolidated Financial Statements.
- Independent Auditors' Report.
- Selected Financial Data.
- Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<PAGE>
[LETTERHEAD OF PEAT MARWICK LLP]
Exhibit 23
Consent of Independent Certified Public Accountants
---------------------------------------------------
The Board of Directors
IWC Resources Corporation:
We consent to incorporation by reference in the Registration Statement No. 33-
30221 on Form S-8 and Registration Statement No. 33-6406 on Form S-3 (originally
on Form S-16) of IWC Resources Corporation of our report dated January 24, 1997,
relating to the consolidated balance sheets of IWC Resources Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of shareholders' equity, earnings and cash flows for each of the
years in the three-year period ended December 31, 1996, which report appears in
the Current Report on Form 8-K of IWC Resources Corporation dated February 18,
1997.
KPMG Peat Marwick LLP
Indianapolis, Indiana
February 18, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1996, and from the consolidated
statements of earnings and cash flows for the year then ended, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 309,957
<OTHER-PROPERTY-AND-INVEST> 34,395
<TOTAL-CURRENT-ASSETS> 29,689
<TOTAL-DEFERRED-CHARGES> 42,586
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 416,627
<COMMON> 102,818
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 16,768
<TOTAL-COMMON-STOCKHOLDERS-EQ> 119,282
0
4,497
<LONG-TERM-DEBT-NET> 112,200
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 13,436
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 6,775
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 160,437
<TOT-CAPITALIZATION-AND-LIAB> 416,627
<GROSS-OPERATING-REVENUE> 183,030
<INCOME-TAX-EXPENSE> 9,731
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 155,604
<OPERATING-INCOME-LOSS> 27,426
<OTHER-INCOME-NET> (8,560)
<INCOME-BEFORE-INTEREST-EXPEN> 18,356
<TOTAL-INTEREST-EXPENSE> 9,424
<NET-INCOME> 8,932
203
<EARNINGS-AVAILABLE-FOR-COMM> 8,932
<COMMON-STOCK-DIVIDENDS> 12,485
<TOTAL-INTEREST-ON-BONDS> 7,254
<CASH-FLOW-OPERATIONS> 34,585
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
<PAGE>
Exhibit 99
IWC RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 5,832 1,771
Accounts receivable, less allowance for
doubtful accounts of $215 and $327 19,831 21,092
Materials and supplies, at cost 2,727 3,194
Other current assets 1,299 4,370
-------- -------
Total current assets 29,689 30,427
-------- -------
Utility plant:
Utility plant in service 376,989 362,610
Less accumulated depreciation 86,989 81,594
-------- -------
Net plant in service 290,000 281,016
Construction work in progress 19,957 7,855
-------- -------
Utility plant, net 309,957 288,871
-------- -------
Construction funds held by Trustee - 14,260
Other property, net 34,395 32,909
Goodwill, net of accumulated amortization 23,081 23,776
Deferred charges and other assets 19,505 18,636
-------- -------
$416,627 408,879
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable to banks $ 13,436 30,589
Current portion of long-term debt 6,775 -
Accounts payable and accrued expenses 23,826 20,282
Customer deposits 1,368 1,369
-------- -------
Total current liabilities 45,405 52,240
-------- -------
Long-term obligations:
Long-term debt, less current portion 112,200 113,375
Customer advances for construction 48,045 51,606
Other liabilities 11,616 9,346
-------- -------
Total long-term obligations 171,861 174,327
-------- -------
Deferred income taxes 39,162 37,347
-------- -------
Contributions in aid of construction 36,420 32,932
-------- -------
Preferred stock of subsidiary and
redeemable preferred stock 4,497 5,705
-------- -------
Shareholders' equity (in thousands):
Common stock, authorized 20,000 common
shares; 9,080 and 8,247 issued
and outstanding in 1996 and 1995 102,818 86,575
Retained earnings 16,768 20,321
-------- -------
119,586 106,896
Less unearned compensation 304 568
-------- -------
Total shareholders' equity 119,282 106,328
-------- -------
Commitments and contingencies
$416,627 408,879
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
IWC RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
Total
Common Stock Retained Unearned Shareholders'
Shares Amount Earnings Compensation Equity
------ ------ -------- ------------- ------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 6,821,953 $ 59,301 $ 17,912 $ (199) $ 77,014
Net earnings - - 10,142 - 10,142
Dividends - $1.40 per share:
Common Stock - - (9,584) - (9,584)
Redeemable preferred stock - - (72) - (72)
Common stock issued:
Dividend Reinvestment Plan 59,257 1,159 - - 1,159
Restricted Stock Plan, net
of 16,189 shares tendered
for tax withholding and
then retired 5,061 80 - (80) -
Compensation expense - - - 279 279
--------- ------- -------- -------- -------
Balance at December 31, 1994 6,886,271 60,540 18,398 - 78,938
Net earnings - - 12,192 - 12,192
Dividends - $1.40 per share:
Common Stock - - (10,197) - (10,197)
Redeemable preferred stock - - (72) - (72)
Common stock issued:
Acquisition of subsidiary 755,148 14,348 - - 14,348
Dividend Reinvestment Plan 576,473 10,809 - - 10,809
Restricted Stock Plan 29,461 878 - (878) -
Compensation expense - - - 310 310
--------- ------- --------- ------- --------
Balance at December 31, 1995 8,247,353 86,575 20,321 (568) 106,328
Net earnings - - 8,932 - 8,932
Dividends - $1.44 per share:
Common Stock - - (12,411) - (12,411)
Redeemable preferred stock - - (74) - (74)
Common stock issued:
Conversion of redeemable
preferred stock 51,612 1,200 - - 1,200
Dividend Reinvestment Plan 779,166 15,004 - - 15,004
Restricted Stock Plan 1,969 39 - (39) -
Compensation expense - - - 303 303
---------- ------- -------- ------- --------
Balance at December 31, 1996 9,080,100 $102,818 $ 16,768 $ (304) $119,282
========= ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
IWC RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Operating revenues:
Water utilities $ 77,989 80,377 73,524
Utility-related services 105,041 66,688 37,855
-------- ------- -------
183,030 147,065 111,379
-------- ------- -------
Operating expenses:
Operation and administration:
Water utilities 41,302 37,352 35,573
Utility-related services 90,112 54,172 28,120
Amortization of acquisition costs 1,341 1,198 1,126
Depreciation 11,503 9,527 7,820
Taxes other than income taxes 11,346 9,390 7,821
-------- ------- -------
Total operating expenses 155,604 111,639 80,460
-------- ------- -------
Operating earnings 27,426 35,426 30,919
-------- ------- -------
Other (income) expense:
Interest expense, net 9,424 9,395 7,959
Interest income (864) (184) (109)
-------- ------- -------
8,560 9,211 7,850
-------- ------- -------
Earnings before income taxes
and dividends on preferred
stock of subsidiary 18,866 26,215 23,069
Income taxes 9,731 13,820 12,724
-------- ------- -------
Earnings before dividends
on preferred stock of subsidiary 9,135 12,395 10,345
Dividends on preferred stock of subsidiary 203 203 203
-------- ------- -------
Net earnings $ 8,932 12,192 10,142
======== ======= =======
Net earnings per common and common
equivalent share $ 1.03 1.64 1.47
======== ======= =======
Average number of common
and common equivalent shares outstanding 8,693 7,438 6,901
======== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
IWC RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 8,932 12,192 10,142
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 14,165 12,903 9,597
Deferred income taxes 1,815 3,838 2,179
Gain on sales of other property (66) (1,370) (783)
Provision for bad debts 564 437 430
Dividends on preferred stock of
subsidiary 203 203 203
Other, net 1,194 (71) (776)
Changes in operating assets and
liabilities:
Accounts receivable 697 (3,135) (1,039)
Materials and supplies 467 382 (535)
Other current assets 1,880 (2,528) (332)
Accounts payable and accrued
expenses 3,499 (390) 1,728
Federal income taxes 1,236 - -
Customer deposits (1) 243 99
-------- ------- -------
Net cash provided by
operating activities 34,585 22,704 20,913
-------- ------- -------
Cash flows from investing activities:
Additions to utility plant and other
property (34,783) (27,914) (28,256)
Proceeds from sales of other property 150 700 424
Customer advances for construction 2,574 8,233 9,175
Refunds of customer advances for
construction (2,647) (2,925) (2,156)
Acquisition of Miller Pipeline
Corporation, net of cash acquired - (5,147) -
Other investing activities, net (841) (2,234) (952)
-------- ------- -------
Net cash used by investing
activities (35,547) (29,287) (21,765)
Cash flows from financing activities:
Increase (decrease) in notes payable
to banks (17,153) 5,515 4,105
Proceeds from long-term debt 5,600 18,076 14,000
Payments of long-term debt - (4,203) (1,277)
Decrease (increase) in construction
funds held by Trustee 14,260 (14,260) 2,010
Cash dividends (12,688) (10,472) (9,859)
Proceeds from issuance of common
stock 15,004 10,809 1,159
-------- ------- -------
Net cash provided by
financing activities 5,023 5,465 1,928
-------- ------- -------
Increase (decrease) in cash and cash
equivalents 4,061 (1,118) 1,076
Cash and cash equivalents at beginning
of year 1,771 2,889 1,813
-------- ------- -------
Cash and cash equivalents at end of year $ 5,832 1,771 2,889
======== ======= =======
Supplemental disclosure of cash flow
information-
Cash paid for:
Interest on long-term debt and
notes payable to banks, net
of capitalized interest $ 9,036 8,992 7,396
Income taxes $ 6,288 11,969 11,480
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
IWC Resources Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
Nature of Operations
IWC Resources Corporation (Resources) is a holding company which owns and
operates seven subsidiaries. The term Company refers to the consolidated
operations of Resources and its subsidiaries.
The Company's operations include two business segments: regulated water
utilities and unregulated utility-related services.
The water utilities segment includes the operations of the two waterworks
subsidiaries which supply water service to approximately 240,000 customers for
residential, commercial, and industrial uses, and fire protection service in
Indianapolis, Indiana, and surrounding areas and serve a territory of
approximately 309 square miles. These subsidiaries are regulated by the Indiana
Utility Regulatory Commission (Commission), and their accounting policies, which
are substantially consistent with generally accepted accounting principles, are
governed by the Commission.
The utility-related services segment includes the operations of the remaining
subsidiaries which are involved in utility line locating, installation, repairs
and maintenance of underground pipelines, data processing and other utility-
related services, and real estate sales and development. This segment
predominately serves other utilities, principally the gas and telecommunications
industries, which operate in Indiana and Ohio and other parts of the midwest and
southwest regions of the country.
Proposed Merger with NIPSCO Industries, Inc.
On December 19, 1996, the Board of Directors of Resources approved the merger of
Resources with NIPSCO Industries, Inc. (Industries) whereby Resources will
become a wholly-owned subsidiary of Industries, and each outstanding Resources
common share will be converted into (i) common shares, without par value, of
Industries having a value of $32.00 (based on the Industries share price
determined as provided in the merger agreement) or (ii) at the election of the
holder, the right to receive $32.00 in cash without interest, subject to certain
limitations.
Prior to the merger, Resources entered into executive employment agreements with
senior executives for the purpose of better assuring the continued service and
loyalty of the executives. The executive agreements provide, among other things,
for various benefits to be paid to the executives in the event of a change in
control of Resources. As a condition to the merger, Resources will agree to pay
to the executives amounts that are the substantial equivalent of the benefits
provided for in the executive agreements, in consideration of which the
executives will agree to cancellation of the executive agreements immediately
prior to the effective date of the merger. As of March 25, 1997, the proposed
closing date for the transaction, the present value of this obligation will
aggregate approximately $14,500,000. It is expected that the executives will
remain employees of Resources after the merger.
As another condition to the merger, Resources will have redeemed the preferred
share purchase rights issued pursuant to the Rights Agreement dated February 9,
1988, between Resources and Fifth Third Bank, as rights agent.
Use of Estimates
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles which require 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.
Summary of Significant Accounting Policies
Principles of Consolidation
The Company's consolidated financial statements include the accounts of
Resources and its subsidiaries.
<PAGE>
In November 1993, a subsidiary of the Company became majority partner in White
River Environmental Partnership (Partnership). In December 1993, the Partnership
was awarded a five-year contract by the city of Indianapolis to manage and
operate its two advanced wastewater treatment plants commencing January 30,
1994. In 1996, the relationship with the city of Indianapolis was expanded to
include the operation and maintenance of the city of Indianapolis' storm and
wastewater collection system and Eagle Creek Reservoir Dam. The Company's share
of Partnership earnings, which are reported on the equity basis, are not
significant to the Company's consolidated earnings and are included in operating
revenues in the utility-related services segment.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
Utility Plant
Utility plant is stated at cost which includes the cost of land, outside
contract work, labor and materials, interest and certain indirect costs incurred
during the construction period. Such indirect costs consist of administration,
general overhead, and other costs applicable to construction projects.
When utility plant in service is retired, except for land and land rights, the
accumulated cost of the retired property plus cost of removal and less salvage
value is charged against accumulated depreciation. If land or land rights are
sold, the net gain or loss is included in earnings. Property not currently used
in utility operations is included in other property.
Depreciation of utility plant for financial statement purposes is computed at a
composite annual rate of 1.9% as approved by the Commission.
Generally, maintenance and repairs and the cost of replacements of minor items
of property are charged to operation expense accounts as incurred.
Other Property
Other property is stated at cost and is depreciated or amortized using the
straight-line method over the estimated useful lives of the assets. The service
lives for the principal assets, vehicles and operating equipment, range from 5
to 20 years.
<PAGE>
Goodwill
The Company recognizes the excess of cost over fair value of tangible and other
identifiable assets acquired in business acquisitions as goodwill which is
amortized by the straight-line method over 20 or 40 years. The Company
continually evaluates the recoverability of goodwill by comparing its annual
amortization to the acquired company's average pretax earnings before
amortization over a 3-year period and by assessing whether the amortization of
the remaining goodwill balance over its remaining life can be recovered through
expected future results. Amortization expense was $695,000, $573,000 and
$511,000 in 1996, 1995 and 1994, respectively. Accumulated amortization at
December 31, 1996 and 1995 was $2,665,000 and $1,970,000, respectively.
Income Taxes
For financial statement purposes, investment tax credits are deferred and
amortized ratably over the lives of the applicable assets as prescribed by the
Commission. For income tax purposes, the credits are deducted in the year in
which the constructed or acquired property was placed in service.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement amounts
for assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates which apply to taxable
income in the years in which those temporary differences are expected to
reverse. Unless deferred as a regulatory asset, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period the
change is enacted.
Customer Advances and Contributions in Aid of Construction
In certain cases, customers advance funds for water main extensions. Effective
for contracts entered into on or after April 1, 1996, Indianapolis Water Company
(IWC) allows developers to install, or provide for the installation of main
extensions, which are to be transferred to IWC upon completion. The amount of
funds advanced or the cost of mains installed are included in customer advances
for construction and are generally refundable to the customer over a period of
ten years. Advances not refunded within ten years are permanently transferred to
contributions in aid of construction.
Revenues
Utility revenues are recognized based on water usage at rates approved by the
Commission. Service revenues are recognized as services are provided.
Construction revenues are recognized on the percentage of completion method
whereby revenues are recognized in proportion to costs incurred over the life of
each project. Losses are recognized when known.
<PAGE>
Pension Plans and Other Retirement Benefits
The Company has a noncontributory defined benefit pension plan which covers the
majority of its utility employees and certain other employees. Benefits are
based on, among other factors, an employee's services rendered to date and
average monthly earnings for the 36 consecutive calendar months that produce the
highest average. The Company's funding policy is to contribute annually at least
the minimum contribution required to comply with ERISA regulations.
The Company has an unfunded executive supplemental benefit plan which provides
additional retirement benefits to certain officers. Benefits are based on, among
other factors, an employee's age, services rendered to date, and benefits
received from the Company's noncontributory defined benefit pension plan.
The Company also sponsors defined contribution plans covering substantially all
non-bargaining unit employees and an employee stock ownership plan covering
substantially all of its utility employees and certain other employees.
The Company provides postretirement life insurance and healthcare benefits to
certain of its employees. The Company accounts for such benefits by accruing
currently, during the period of employment, the present value of the estimated
cost of such benefits.
Reclassifications
Certain amounts for 1995 and 1994 have been reclassified to conform with the
1996 presentation.
Merger of Miller Pipeline Corporation
On August 22, 1995, the Company merged with Miller Pipeline Corporation (MPC).
MPC installs, repairs and maintains underground pipelines used in gas, water and
sewer utility transmission and distribution systems. MPC also repairs and
provides installation services and products for natural gas, water and sewer
utilities. The cost of the transaction was paid by cash of approximately
$5,513,000 and the issuance of 755,148 shares of the Company's common stock. The
excess of the total acquisition cost over an estimate of the fair value of the
net assets acquired of $7,385,000 is being amortized over 40 years.
Following is a summary of the assets acquired and liabilities assumed in the
acquisition of MPC:
<TABLE>
(in thousands)
<S> <C>
Property and equipment $14,921
Accounts receivable 8,158
Materials and supplies 1,319
Other current assets 1,161
Other noncurrent assets 822
Short-term notes payable
to banks (7,400)
Accounts payable and
other accrued expenses (3,999)
Deferred income taxes (2,056)
-------
Net assets acquired $12,476
=======
</TABLE>
During August 1995, the Company borrowed $5,600,000 in a short-term bank loan
which was used primarily for the acquisition of MPC. In August 1996, this loan
was refinanced into long-term debt.
The consolidated financial statements include the results of MPC's operations
beginning August 22, 1995. Unaudited pro forma operating results, assuming the
merger took place at the beginning of each of the years presented, follow:
<TABLE>
<CAPTION>
(in thousands, except
per share data)
1995 1994
<S> <C> <C>
Operating revenues:
Water utilities $ 80,377 $ 73,524
Utility-related services 94,867 85,550
-------- --------
Total operating revenues $175,244 $159,074
======== ========
Net earnings $ 12,203 $ 12,156
======== ========
Net earnings per
common and common
equivalent share $ 1.54 $ 1.59
======== ========
</TABLE>
Net earnings and net earnings per common and common equivalent share were
$12,192,000 and $1.64, respectively, for the year ended December 31, 1995,
compared to unaudited pro forma net earnings and net earnings per common and
common equivalent share of $12,203,000 and $1.54, respectively, for the same
period. The decrease in unaudited pro forma net earnings per common and common
equivalent share of $.10 is due primarily to the increase in outstanding common
shares issued in the acquisition.
<PAGE>
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methods may have a material effect on the estimated fair value
amount.
The carrying amounts of cash equivalents, accounts receivable, construction
funds held by Trustee, and notes payable to banks approximate fair value because
of the short maturity of those instruments.
The fair value of long-term debt at December 31, 1996, is estimated to be
$116,625,000. The fair value was determined by discounting future payments at
current interest rates for similar issues.
Utility Plant in Service
A summary of utility plant in service at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Land and land rights $ 9,210 $ 8,869
Structures and improvements 56,216 51,279
Pumping station equipment 15,721 15,549
Purification system 26,804 25,820
Transmission and
distribution system 258,384 250,670
Other 10,654 10,423
------- -------
$376,989 $362,610
======= =======
</TABLE>
Other Property
A summary of other property at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Land and improvements $ 656 $ 605
Buildings and improvements 1,506 1,479
Real estate held for sale
or development 8,537 6,984
Utility property held
for future use 1,058 1,395
Vehicles and operating
equipment 29,748 25,491
Other 2,945 2,809
------ ------
$ 44,450 $ 38,763
Accumulated depreciation
and amortization 10,055 5,854
------ ------
$ 34,395 $ 32,909
====== ======
</TABLE>
Regulatory Assets
Deferred charges and other assets include certain costs which are capitalized as
regulatory assets and amortized pursuant to utility rate-making proceedings. The
Commission allows recovery of these assets through rates, but not a return on
investment, over periods ranging from 2 years to 30 years. A summary of
regulatory assets at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Costs of postretirement
benefit obligations other
than pensions $ 3,397 $ 3,609
Income taxes 853 902
Tank painting costs 2,556 2,175
Rate proceeding costs 315 528
Debt issuance costs 1,706 1,803
----- -----
$ 8,827 $ 9,017
===== =====
</TABLE>
In December 1992, the Commission authorized all Indiana utilities, including the
utility subsidiaries of the Company, to record as a regulatory asset the excess
of accrual basis costs of postretirement life insurance and healthcare benefits
(OPRB) over the cash basis costs which were used to establish current rates. The
Company received approval to recover its OPRB costs on an accrual basis in its
rate case settled August 10, 1994, subject to the Company's proposal and
Commission's acceptance of an appropriate restricted fund. On April 26, 1995,
the Commission approved a grantor trust for these funds, as agreed upon by IWC
and the Utility Consumer Counselor (UCC) representing ratepayers, and a related
annual increase in IWC's water rates of approximately $1,800,000, to cover
current costs and the amortization of the regulatory asset through 2014. The
Grantor Trust provides for the transfer to the Trust monthly and subsequent
investing and disbursing by the Trust of all amounts received by IWC in rates to
cover its OPRB obligations. The Trust Agreement contains certain provisions
which limit investment activities, provide for annual reporting and, in the
event that Trust funds are no longer needed for OPRB purposes, directs payment
of the remaining funds to IWC ratepayers. At December 31, 1996 and 1995,
$2,467,000 and $928,000, respectively, is held in the Trust and included in
deferred charges and other assets.
Income taxes represent the effects of the 1993 increase in the federal corporate
tax rate on the Company's water utilities' net deferred tax liabilities and will
be amortized through 2009.
Tank painting and rate proceeding costs are generally being amortized through
2011 and 1997, respectively, and result from costs required to be deferred for
regulatory purposes.
Debt issuance costs include various costs deferred for regulatory purposes which
are to be amortized over the original lives of applicable debt through 2026.
Accounts Payable and Accrued Expenses
<TABLE>
<CAPTION>
A summary of accounts payable and accrued expenses at
December 31 follows:
<S> <C> <C>
1996 1995
(in thousands)
Accounts payable $ 7,157 $ 4,765
Accrued property taxes 5,854 5,570
Accrued interest on notes
payable to banks and
long-term debt 2,193 2,082
Accrued vacations 2,591 1,974
Other accrued expenses 6,031 5,891
------ ------
$ 23,826 $ 20,282
====== ======
</TABLE>
<PAGE>
Notes Payable to Banks and Long-term Debt
At December 31, 1996, the Company had lines of credit with banks aggregating
$44,400,000 which require a compensating cash balance of $100,000. At December
31, 1996, unused lines of credit aggregated $31,809,000. Interest on borrowings
under the lines of credit is variable (an average of 7.29% at December 31,
1996).
The Company has a Controlled Disbursement Agreement with a bank which authorizes
the bank to transfer funds daily between the Company's checking and note payable
accounts. Outstanding checks drawn on this checking account are reported as a
component of notes payable to banks. At December 31, 1996 and 1995, such
outstanding checks amounted to $845,000 and $1,248,000, respectively.
A summary of First Mortgage Bonds (secured by IWC's utility plant) and other
long-term debt (Senior notes of Resources) outstanding at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
5-7/8% Series due 1997 $ 6,775 $ 6,775
5.20% Series due 2001 11,600 11,600
8% Series due 2001 3,000 3,000
6.31% Senior notes due 2001 14,000 14,000
Variable Bank Loan due 2003 5,600 -
7-7/8% Series due 2019 40,000 40,000
9.83% Series due 2019 5,000 5,000
6.10% Series due 2022 5,000 5,000
8.19% Series due 2022 10,000 10,000
5.85% Series due 2025 18,000 18,000
-------- --------
118,975 113,375
Less current portion 6,775 -
-------- --------
$112,200 $113,375
======== ========
</TABLE>
Provisions of trust indentures related to the 5-7/8% Series Bonds and the 8%
Series Bonds require annual sinking or improvement fund payments amounting to
1/2% of the maximum aggregate amount outstanding. As permitted, this requirement
has been satisfied by substituting a portion of permanent additions to utility
plant. These bonds are redeemable at the option of the Company at varying
premium amounts at different periods prior to the respective dates of maturity.
The 5.20% Series Bonds are due and payable in full May 1, 2001. In the event the
bonds lose their tax-exempt status, mandatory redemption of the bonds is
required.
The 6.31% Senior Notes are due and payable in full March 15, 2001. Optional
redemptions by the Company are allowed in whole on or after March 15, 1997, at
the greater of par or the present value of the notes discounted 1/2% over the
applicable Treasury rate.
<PAGE>
The variable bank loan is due and payable in full in August 2003. Optional
redemptions by the Company are allowed at any time. Interest on the loan is at
an annual fixed LIBOR rate plus 1.0% (6.5% at December 31, 1996).
The 7-7/8% Series Bonds include issues of $10,000,000 and $30,000,000, both of
which are due and payable in full March 1, 2019. In the event the bonds lose
their tax exempt status, mandatory redemption of the bonds is required.
Optional redemptions by the Company are allowed on or after March 1, 1998, and
are generally subject to a premium.
The 9.83% Series Bonds are redeemable at the option of the Company, on or after
June 15, 2014, with final redemption by June 15, 2019. Early redemptions are
subject to a premium.
The 6.10% Series Bonds are due and payable in full December 1, 2022. In the
event the bonds lose their tax exempt status, mandatory redemption of the bonds
is required. Optional redemptions by the Company are allowed on or after
December 1, 1999, and are generally subject to a premium.
The 8.19% Series Bonds are due and payable in full December 1, 2022. Optional
redemptions by the Company are allowed at any time at the greater of par or the
present value of the bonds discounted at 1/2% over the applicable Treasury rate.
The 5.85% Series Bonds are due and payable in full September 1, 2025. In the
event the bonds lose their tax exempt status, mandatory redemption of the bonds
is required. Optional redemptions by the Company are allowed on or after
September 1, 2002, and are generally subject to a premium.
Required principal payments on long-term debt for the five years following
December 31, 1996, exclusive of obligations which may be satisfied by permanent
additions to utility plant, amount to $6,775,000 in 1997 and $28,600,000 in
2001.
Interest expense is net of an allowance for funds used during construction
(AFUDC) which is an amount capitalized for construction projects as authorized
by the Commission. AFUDC amounts capitalized were $372,000, $98,000 and $212,000
during 1996, 1995 and 1994, respectively. At December 31, 1996, the Company's
AFUDC rate was 9.35% (4.51% debt component and 4.84% equity component).
Preferred Stock of Subsidiary
The preferred stock of subsidiary represents 44,966 and 45,049 shares of IWC
cumulative preferred stock of $100 par value per share at December 31, 1996 and
1995, respectively. The preferred stock is redeemable at the option of the
subsidiary upon proper notice at prices ranging from $100 to $105 per share plus
accrued dividends (an aggregate redemption value of $4,649,000 and $4,658,000 at
December 31, 1996 and 1995, respectively).
Dividends on the preferred stock are payable at rates ranging from 4% to 5% per
annum.
Redeemable Preferred Stock
At December 31, 1996, 60,000 special shares of Series B Convertible Redeemable
Preferred Stock, no par value, have been authorized. In 1993, 51,612 shares were
issued in connection with the acquisition of SM&P and were convertible by the
holder at any time, in whole, into shares of common stock at a conversion rate
of one common share for each share of preferred stock. In December 1996, these
shares were converted into common stock at $23.25 per share. Prior to
conversion date, holders were entitled to the same voting and dividend rights as
common shareholders and such shares were considered common share equivalents in
the calculation of earnings per share.
Common Stock
The Company's authorized capital stock consists of 20,000,000 common shares and
2,000,000 special shares with no par value. No special shares have been issued
other than the 60,000 shares designated as Series B Convertible Redeemable
Preferred Stock.
The Company has a Dividend Reinvestment and Share Purchase Plan (Plan) which
allows common shareholders the option of receiving their dividends in cash or
common stock and permits optional cash purchases of shares at current market
values. Effective March 10, 1995, the Plan was amended to allow certain
employees and utility customers of the Company or its subsidiaries to purchase
common shares. Purchases are allowed with a minimum investment of $10 by
employees and $100 by customers up to a total of $100,000 annually. A total of
1,500,000 authorized but unissued common shares have been registered for sale
under the Plan. The price of common shares purchased with reinvested dividends
or optional cash payments is 97% of the average of the means between the high
and low sale prices of the common shares as determined for the five consecutive
trading days ending on the day of purchase. Shareholders who do not choose to
participate in the Plan continue to receive their dividends in cash.
Effective October 1, 1996, due to the significant number of shares sold and
resulting reduction in shares available for issuance under the Plan, the Company
suspended sales of its common stock under the Plan's optional cash purchase
feature. Effective February 1, 1997, as a result of the proposed merger with
NIPSCO Industries, Inc., the Plan has been discontinued. With the exception of
additional purchases of common shares, all rights to shareholders participating
in the Plan will continue until the terms of the merger are finalized.
The Company has a Restricted Stock Plan under which 200,000 common shares have
been reserved and may be awarded to officers and key employees. Restricted stock
plan participants are entitled to cash dividends and voting rights on their
awarded shares. Restrictions generally limit the sale, transfer, or pledge of
shares during a three-year measurement period following the issuance of such
shares. The initial three-year measurement period concluded December 31, 1994.
The number of shares awarded under the plan are subject to adjustment at the end
of the measurement period as determined by the provisions of the plan. The
adjustment at the end of the initial three-year measurement period was an
incremental award of 21,250 shares, of which 16,189 shares were tendered to the
Company to satisfy tax withholding requirements, and retired.
Participants may vest in certain restricted shares upon death, disability or
retirement as described in the plan. In the event of a change in control of the
Company, all restrictions expire and participants may receive additional shares
as determined by provisions of the plan.
In January 1995, the Company commenced its second three-year measurement period
and awarded 29,461 restricted shares. In 1996, the Company awarded an
additional 1,969 restricted shares.
Unearned compensation recorded as of the effective dates of the awards is
amortized to expense during the three-year measurement period. At December 31,
1996, 119,104 shares were reserved for future awards.
In January 1988, the Company's board of directors adopted a Shareholder Rights
Plan pursuant to which a dividend distribution of one preferred share purchase
right for each outstanding share of common stock was made to shareholders of
record on February 18, 1988. Under the plan, each right will initially entitle
shareholders to purchase one one-hundredth of a share of a new series of
preferred stock of the Company at an exercise price of $45. The rights become
exercisable when a person or group acquires 20% or more of the Company's common
stock or commences a tender offer for 30% or more of the Company's common stock.
Upon the happenings of certain events, each right not owned by a 20% shareholder
or shareholder group will entitle its holder to purchase, at the right's then
current exercise price, shares of the Company's common stock having a value of
twice that price. The rights expire in February 1998. See Proposed Merger with
NIPSCO Industries, Inc.
<PAGE>
Taxes
Components of taxes other than income taxes follow:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Property taxes $ 5,374 $5,333 $4,879
Other 5,972 4,057 2,942
------ ----- -----
$11,346 $9,390 $7,821
====== ===== =====
</TABLE>
Currently payable federal income taxes of $45,000 is included in amounts payable
and accrued expenses and refundable federal income taxes of $1,191,000 is
included in other current assets at December 31, 1996 and 1995, respectively.
Components of income taxes follow:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Federal:
Currently
payable $5,416 $ 7,514 $ 8,122
Deferred 1,786 3,411 1,971
----- ------ ------
7,202 10,925 10,093
----- ------ ------
State:
Currently
payable 2,500 2,468 2,423
Deferred 29 427 208
----- ------ ------
2,529 2,895 2,631
----- ------ ------
$9,731 $13,820 $12,724
===== ====== ======
</TABLE>
The differences between actual income taxes and expected federal income taxes
using statutory rates follow:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Expected federal
income taxes $6,432 $ 7,531 $ 6,810
Taxes on advances
collected from
developers 490 4,698 3,611
Taxable
customer
advances
for construction 95 137 454
State income
taxes, net of
federal income
tax benefit 1,582 1,284 1,251
Other, net 1,132 170 598
----- ------ ------
$9,731 $13,820 $12,724
===== ====== ======
</TABLE>
The tax effects of significant temporary differences represented by deferred tax
assets and deferred tax liabilities at December 31 follow:
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Deferred tax assets:
Customer advances
for construction $ 211 $ 972
Accrued pension costs 260 984
Accrued vacations 916 655
OPRB's 1,248 587
Other 1,141 861
------ ------
Total deferred
tax assets 3,776 4,059
------ ------
Deferred tax liabilities:
Utility plant and other
property, principally
due to differences in
depreciation and
capitalized costs 37,199 34,857
Unamortized investment
tax credits 4,685 4,801
Debt redemption
premiums 612 572
Other property bases 226 428
Equity in earnings
of investee 83 390
Other 133 358
------ ------
Total deferred
tax liabilities 42,938 41,406
------ ------
Net deferred
tax liabilities $39,162 $37,347
====== ======
</TABLE>
Customer advances for construction received after 1986 are includible in taxable
income when received and are deductible if subsequently refunded to customers.
Prior to 1994, such advances were excluded from financial statement income.
Effective September 8, 1993, the Commission granted IWC permission to surcharge
developers for income taxes on advances and reduce its water rates by a
corresponding amount. In 1994, IWC began collecting surcharges on advances from
developers. Income tax surcharges collected from developers, net of refunds,
amounted to $490,000 in 1996, $4,698,000 in 1995, and $3,611,000 in 1994, and
are reported as a component of water utilities operating revenues and income
taxes and, accordingly, have no effect on net earnings.
<PAGE>
On August 20, 1996, the law which required the Company to include advances
collected from developers in taxable income was repealed generally effective for
all advances collected after June 12, 1996. Accordingly, advances collected
after this date are excluded from water utilities operating revenues and income
taxes.
Pension Plans and Other Retirement Benefits
The Company has two defined benefit pension plans: (1) a noncontributory plan
which covers the majority of its utility employees and certain other employees,
and (2) an executive supplemental plan which provides additional retirement
benefits to certain officers.
The following tables set forth the plans' funded status and accrued pension cost
amounts recognized in the Company's consolidated financial statements at
December 31:
<TABLE>
<CAPTION>
Majority Plan Supplemental Plan
1996 1995 1996 1995
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Accumulated benefit obligation $ 9,541 $ 9,084 $3,053 $2,782
======= ======= ====== ======
Vested benefit obligation $ 8,540 $ 8,174 $3,020 $2,647
======= ======= ====== ======
Projected benefit obligation $15,772 $15,192 $3,629 $3,468
Plan assets at fair value,
primarily listed stocks and
bank fixed income funds 15,910 13,471 - -
------- ------- ------ ------
Projected benefit obligation
in excess of (less than)
plan assets (138) 1,721 3,629 3,468
Unrecognized net asset
(obligation) at transition 661 789 (32) (44)
Unrecognized prior service costs (356) (386) (527) (587)
Unrecognized loss (365) (1,558) (642) (815)
Additional minimum liability - - 625 760
------- ------- ------ ------
Accrued (prepaid) pension cost $ (198) $ 566 $3,053 $2,782
======= ======= ====== ======
</TABLE>
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the projected benefit obligation were 7-1/2% and 4%,
respectively, for 1996, 7-1/4% and 4%, respectively, for 1995, and 8-1/2% and
5%, respectively, for 1994. The expected long-term rate of return on assets was
8% for 1996, 1995 and 1994.
Net periodic pension costs for the years ended December 31 include the following
components:
Majority Plan Supplemental Plan
1996 1995 1994 1996 1995 1994
(in thousands) (in thousands)
Service cost - benefits
earned during year $ 940 $ 758 $ 903 $ 210 $ 174 $ 150
Interest cost on
projected benefit
obligation 1,123 1,042 1,006 245 231 167
Return on plan assets (1,896) (2,641) 387 - - -
Net amortization
and deferrals 713 1,657 (1,345) 111 82 67
- --------------------------------------------------------------------------------
Net periodic
pension cost $ 880 $ 816 $ 951 $ 566 $ 487 $ 384
====== ====== ====== ====== ====== ======
Contributions to the Company's defined contribution plans and its employee stock
ownership plan amounted to $1,043,000 and $298,000 in 1996, $724,000 and
$249,000 in 1995, and $489,000 and $292,000 in 1994, respectively.
The Company also participates in several industry-wide, multi-employer pension
plans for certain of its union employees at MPC. These plans provide for monthly
benefits based on length of service. Specified amounts per compensated hour for
each employee are contributed to the trustees of these plans. Contributions by
the Company to these plans amounted to $1,627,000 in 1996 and $623,000 in 1995.
The relative position of each employer participating in these plans with respect
to the actuarial present value of accumulated plan benefits and net assets
available for benefits is not available.
<PAGE>
The Company provides OPRBs to certain employees. The following tables set forth
the accumulated postretirement benefit obligation and net periodic
postretirement benefit cost amounts recognized in the Company's consolidated
financial statements at December 31:
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Active employees $ 10,751 $ 11,158
Retired employees 8,598 8,330
-------- --------
19,349 19,488
Unrecognized transition
obligation (13,217) (14,042)
Unrecognized gain 1,476 259
-------- --------
Accrued postretirement
benefit cost $ 7,608 $ 5,705
======== ========
</TABLE>
The weighted-average discount rate used to measure the accumulated
postretirement benefit obligation was 7-1/2% and 7-1/4% for the years ended
December 31, 1996 and 1995, respectively. The Company used premium growth rates
to compute assumed healthcare cost trend rates. In 1996, these rates ranged from
8-1/2% in 1997 to 4.5% in 2004 and thereafter and in 1995 these rates ranged
from 9-2/5% in 1996 to 6.0% in 2004 and thereafter. Had these healthcare cost
trend rates been higher by 1%, the net periodic postretirement benefit cost
would have been higher by $299,000 in 1996 and the accumulated postretirement
benefit obligation would have been higher by $2,490,000 in 1996.
Net periodic postretirement benefit costs for the years ended December 31
include the following components:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Service cost-benefits
earned during year $ 572 $ 521 $ 555
Interest cost on accumulated
postretirement benefit
obligation 1,344 1,439 1,271
Amortization of transition
obligation 826 826 826
------ ------ ------
Net periodic postretirement
benefit cost $2,742 $2,786 $2,652
====== ====== ======
</TABLE>
<PAGE>
For the years ended December 31, 1996, 1995, and 1994, the excess of net
periodic postretirement benefit cost over the amount capitalized amounted to
$2,423,000, $1,954,000 and $177,000, respectively.
Segment Information
The Company's operations include two business segments: regulated water
utilities and unregulated utility-related services. The water utilities segment
includes the operations of the Company's two water utility subsidiaries. The
utility-related services segment provides utility line locating services,
installation, repairs and maintenance of underground pipelines, data processing
and billing and payment processing, and other utility-related services to both
unaffiliated utilities and to the Company's water utilities, and holds real
estate for sale or development.
Intersegment activity primarily represents certain operating cost allocations
between affiliates.
Identifiable assets are those assets used exclusively in the operations of each
business segment. Corporate assets are principally comprised of cash,
miscellaneous receivables, and certain other property.
The following table shows operating revenues, operating earnings and other
summary financial information by segment as of and for the years ended December
31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Utility-
Water Related
Utilities Services Corporation Consolidated
<S> <C> <C> <C> <C>
1996 (in thousands)
Operating revenues:
Unaffiliated $ 77,989 $105,041 $ - $183,030
Affiliated 118 4,235 (4,353) -
------- ------- ------ -------
Total 78,107 109,276 (4,353) 183,030
Operating earnings 23,887 3,539 - 27,426
Depreciation 6,707 4,796 - 11,503
Identifiable assets 340,115 73,777 2,735 416,627
Capital expenditures 27,510 7,273 - 34,783
Utility-
Water Related
Utilities Services Corporation Consolidated
1995 (in thousands)
Operating revenues:
Unaffiliated $ 80,377 $ 66,688 $ - $147,065
Affiliated 87 4,249 (4,336) -
------- ------- ------ -------
Total 80,464 70,937 (4,336) 147,065
Operating earnings 30,404 5,022 - 35,426
Depreciation 6,439 3,088 - 9,527
Identifiable assets 330,058 74,162 4,659 408,879
Capital expenditures
excluding merger of MPC 20,941 6,894 79 27,914
Utility-
Water Related
Utilities Services Corporation Consolidated
1994 (in thousands)
Operating revenues:
Unaffiliated $ 73,524 $ 37,855 $ - $111,379
Affiliated 87 4,147 (4,234) -
------- ------- ------ -------
Total 73,611 42,002 (4,234) 111,379
Operating earnings 26,027 4,892 - 30,919
Depreciation 6,017 1,803 - 7,820
Identifiable assets 297,354 37,212 1,104 335,382
Capital expenditures 23,462 4,774 20 28,256
</TABLE>
<PAGE>
Commitments and Contingencies
Recently enacted (August 1996) amendments of the Safe Drinking Water Act (SDWA)
provide for new standards pursuant to which the United States Environmental
Protection Agency (EPA) is required to propose, promulgate and review drinking
water standards. The 1996 Amendments allow the Administrators of EPA more
authority to weigh the costs and benefits of regulations being considered in
some (but not all) cases, but do not reduce the number of new standards required
by the 1986 amendments of the Act. Such standards, if promulgated, could be
costly and require substantial changes in current operations of the Company.
Additionally, the Indiana Department of Environmental Management issues permits
for discharges from the Company's treatment stations, the terms and limitations
of which can, and may well be, onerous. As a result, compliance with such
permits may be expensive.
On January 15, 1997, the Commission approved a Stipulation and Settlement
Agreement entered into by the Utility Consumer Counselor representing ratepayers
and IWC, which authorized IWC to use individual depreciation rates for each
plant account to produce a composite depreciation rate of 2.21% based on IWC's
plant as of December 31, 1995. The Agreement provides that the new depreciation
rates should be made effective as of the effective date of the final order in
IWC's next general rate case.
The Company has agreements with five key executives which provide that in the
event of change of control of the Company, each executive vests in a three-year
employment contract at his then existing level of compensation. In the case of
three of these key executives, in the event of change of control of the Company,
a supplemental pension applies pursuant to their contracts that provides the
difference between their benefits under the regular benefit plans and that which
would be available upon attaining age 65. See proposed merger with NIPSCO
Industries, Inc.
<TABLE>
<CAPTION>
Quarterly Financial Data (Unaudited)
Quarters
First Second Third Fourth
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1996
Operating revenues $35,412 $47,893 $55,146 $44,579
Operating earnings 2,341 7,782 13,325 3,978
Net earnings (loss) (716) 2,529 6,260 859
Net earnings (loss)
per common and common
equivalent share (.09) .31 .72 .09
1995
Operating revenues(a) $24,455 $33,002 $43,831 $45,777
Operating earnings(a) 3,798 9,473 13,632 8,523
Net earnings 282 3,255 5,517 3,138
Net earnings per common
and common equivalent
share .04 .46 .73 .41
</TABLE>
(a) Certain reclassifications have been made to originally reported amounts to
conform with classifications adopted for December 31, 1995. These
reclassifications did not have a material effect on the quarterly results as
originally reported.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
IWC Resources Corporation:
We have audited the accompanying consolidated balance sheets of IWC Resources
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of shareholders' equity, earnings, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IWC Resources
Corporation and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
January 24, 1997
<PAGE>
Selected Financial Data
The selected consolidated financial data presented below has been derived from
and should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Summary of Operations Data:
Year Ended December 31,
1996 1995 1994 1993 1992
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating revenues $183,030 $147,065 $111,379 $84,242 $63,452
Operating earnings 27,426 35,426 30,919 25,994 24,113
Net earnings $ 8,932 $ 12,192 $ 10,142 $ 9,376 $ 8,113
======== ======== ======== ======= =======
Net earnings per common
and common equivalent
share $ 1.03 $ 1.64 $ 1.47 $ 1.41 $ 1.27
Cash dividends per
common share $ 1.44 $ 1.40 $ 1.40 $ 1.40 $ 1.395
Average number of common
and common equivalent
shares outstanding 8,693 7,438 6,901 6,658 6,379
Summary of Balance Sheet Data:
December 31,
1996 1995 1994 1993 1992
(in thousands)
Utility plant, net $309,957 $288,871 $275,094 $260,663 $253,786
Total assets 416,627 408,879 335,382 312,443 275,112
Capitalization:
Long-term debt
(excluding current
portion) $112,200 $113,375 $ 98,225 $ 85,375 $ 86,275
Preferred stock
of subsidiary and
redeemable preferred
stock 4,497 5,705 5,705 5,705 4,505
Common shareholders'
equity 119,282 106,328 78,938 77,014 67,205
-------- -------- -------- -------- --------
Total capitalization $235,979 $225,408 $182,868 $168,094 $157,985
======== ======== ======== ======== ========
</TABLE>
<PAGE>
IWC Resources Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
- -------
The most significant changes in the consolidated financial condition and results
of operations of IWC Resources Corporation and subsidiaries (Company) are
attributable to the combined operations of its two segments: (1) water
utilities and (2) utility-related services. These segments are discussed more
fully in Notes to Consolidated Financial Statements, Segment Information.
Beginning in 1993, the Company has grouped its operations according to major
segments. The Company acquired SM&P Utility Resources, Inc. (formerly SM&P
Conduit Co., Inc.) (SM&P) in June 1993, and Miller Pipeline Corporation (MPC) in
August 1995. As a result of these acquisitions, many of the differences between
results of operations in the utility-related services segment for 1996, 1995 and
1994 are due primarily to the operations of MPC and/or SM&P, which are included
in this segment.
1996 Compared to 1995
Operating earnings in the water utilities segment decreased to $23,887,000
(30.6% of revenues) in 1996 from $30,404,000 (37.8% of revenues) in 1995. The
reduction in operating earnings and the operating margin in 1996 is primarily
due to the net effects of an increase in operating revenues of $1,820,000, a
decrease of $4,208,000 in income taxes collected from developers, and an
increase of $4,129,000 in total segment operating expenses. Operating earnings
in the utility-related services segment decreased to $3,539,000 (3.4% of
revenues) in 1996 as compared to $5,022,000 (7.5% of revenues) in 1995. The
reduction in operating earnings and the operating margin in 1996 is primarily
due to a reduction in gain on sales of other property from $1,370,000 in 1995 to
$66,000 in 1996 resulting from a reduction in revenues from land sales of
$1,595,000 in 1995 as compared to $323,000 in 1996, and increased labor and
other operating costs incurred related to the expansion of business contracts at
SM&P. Management is continuing its efforts to improve operating earnings by
positioning itself to serve the upper quality-oriented end of its market and
increasing partnering efforts with companies in this market to eliminate service
outages caused by underground damage.
Total operating revenues increased $35,965,000 (24.5%). Operating revenues
applicable to the water utilities segment increased $1,820,000, excluding a
decrease of $4,208,000 in income taxes collected from developers, representing a
2.4% increase over 1995, and is primarily due to the two rate increases during
1995. Water consumption is affected by the frequency and pattern of rainfall,
temperatures, the level of economic activity, and conservation efforts.
The increase in utility-related services segment operating revenues of
$38,353,000 (57.5%) is primarily due to an increase of $29,556,000 in operating
revenues at MPC (twelve months of operations in 1996 as compared to
approximately four months in 1995) and the continued expansion of business
contracts at SM&P.
Total operation and administration expenses increased $39,890,000 (43.6%) of
which $35,940,000 is applicable to the utility-related services segment. The
increase in water utilities segment expenses of $3,950,000 which is discussed
below represents a 10.6% increase over 1995 and is primarily due to the effects
of inflation on the Company's costs and other factors. Labor expenses increased
$1,728,000 (12.7%) mainly due to an increase of $516,000 in bonuses paid to
employees during 1996 as compared to 1995, an increase in maintenance activity
during 1996 as compared to 1995 and a general wage increase effective January 1,
1996. Chemical costs increased $88,000 (5.8%) primarily due to increased usage
and higher chemical costs. Materials and transportation costs increased $435,000
(16.6%) primarily due to increased maintenance activities. The cost of outside
services increased $383,000 (6.0%) chiefly due to an increase in consulting and
other services. Insurance expense increased $787,000 (18.9%) primarily due to an
increase in group insurance premiums. Costs of the Company's pension and other
benefit plans increased $405,000 (12.9%) primarily due to twelve months
amortization of the cost of postretirement benefits other than pensions in 1996
as compared to eight months amortization in 1995.
Operation and administration expenses applicable to the utility-related services
segment, excluding an increase of $25,006,000 in expenses applicable to the
operations of MPC, increased $10,934,000 (29.2%). Labor expenses increased
$7,634,000 (33.9%) primarily due to an increase of $232,000 in bonuses paid to
employees during 1996 as compared to 1995, the addition of employees and
overtime costs resulting from the expansion of business contracts at SM&P and a
general wage increase. Transportation costs increased $1,571,000 (51.0%)
primarily due to the increase in the number of vehicles, leasing costs and
associated maintenance costs. Fringe benefit costs, including pension related
benefits, increased $1,765,000 (84.7%) primarily due to the cost of increased
benefits to an increasing employee base.
Amortization of acquisition costs increased $143,000 (11.9%) primarily due to
the acquisition of MPC. Depreciation increased $1,976,000 (20.7%) of which
$1,708,000 is applicable to the utility-related services segment. The increase
in water utilities segment and utility-related services segment depreciation is
primarily due to additional utility plant and other property placed in service.
<PAGE>
Taxes other than income taxes increased $1,956,000 (20.8%) of which $2,045,000
is applicable to the utility-related services segment which results primarily
from payroll related taxes. The remaining decrease of $89,000 applicable to the
water utilities segment is primarily due to the net effects of an increase in
property taxes resulting from additional plant in service offset by a refund of
prior years' taxes paid.
The increase in interest expense, net, of $29,000 (.3%) is primarily due to
higher average debt outstanding offset by an increase in capitalized interest.
Income taxes decreased $4,089,000 (29.6%) primarily due to a decrease of
$4,208,000 in income taxes collected from developers.
1995 Compared to 1994
Operating earnings in the water utilities segment increased to $30,404,000
(37.8% of revenues) in 1995 from $26,027,000 (35.4% of revenues) in 1994.
Improvement in operating earnings in this segment is primarily due to the net
effects of three increases in water rates approved by the Indiana Utility
Regulatory Commission effective August 10, 1994, April 26, 1995, and May 10,
1995, and an increase of $1,087,000 in income taxes collected from developers,
offset by a moderate increase in total operating expenses. Operating earnings
in the utility-related services segment increased $130,000 in 1995 as compared
to 1994; however, the operating margin decreased to 7.5% in 1995 as compared to
12.9% in 1994. The reduction in the operating margin is primarily due to
increased labor and other operating costs incurred related to the expansion of
business contracts at SM&P.
Total operating revenues increased $35,686,000 (32.0%). Operating revenues
applicable to the water utilities segment increased $5,766,000, excluding an
increase of $1,087,000 in income taxes collected from developers, representing
an 8.2% increase over 1994, and is primarily due to the three rate increases and
a moderate increase in total water consumption.
The increase in utility-related services segment operating revenues of
$28,833,000 (76.2%) is primarily due to $21,200,000 in operating revenues at MPC
and the continued expansion of business contracts at SM&P.
Total operation and administration and maintenance expenses increased
$27,831,000 (43.7%) of which $26,052,000 is applicable to the utility-related
services segment. The increase in water utilities segment expenses of
$1,779,000 which is discussed below represents a 5.0% increase over 1994 and is
primarily due to the effects of inflation on the Company's costs and other
factors. Labor expenses increased $80,000 (.6%) mainly due to the net effects
of a reduction in maintenance repairs experienced resulting from milder weather
in 1995 as compared to the extremely cold weather in January and February of
1994, an increase in capitalized labor due to increased construction and other
factors, offset by a general wage increase, effective January 1, 1995. Power
costs increased $229,000 (8.2%) primarily due to increased power rates.
Chemical costs increased $322,000 (26.7%) primarily due to increased usage and
higher chemical costs. The cost of outside services increased $284,000 (4.7%)
chiefly due to an increase in consulting and other services. Insurance expense
decreased $114,000 (2.7%) primarily due to an insurance rebate received in June
1995. Regulatory expenses increased $200,000 (104.1%) primarily due to increased
rate case expenses. Costs of the Company's pension and other benefit plans
increased $756,000 (31.7%) primarily due to the amortization of cost of
postretirement benefits other than pensions commencing May 1995 resulting from
the settlement of IWC's rate case on April 26, 1995.
Operation and administration expenses applicable to the utility-related services
segment, excluding $16,668,000 in expenses applicable to the operations of MPC,
increased $9,384,000 (33.4%). Labor expense increased $3,986,000 (21.5%)
primarily due to the addition of employees resulting from the expansion of SM&P.
Materials expense increased $511,000 (25.8%) primarily due to the expansion of
business of SM&P. Transportation costs increased $1,259,000 (69.0%) primarily
due to the increase in the number of vehicles, leasing costs and associated
maintenance costs. Insurance expense increased $644,000 (24.4%) primarily due
to higher healthcare premiums resulting from increased numbers of employees and
increases in general liability and worker's compensation insurance premiums.
Other fringe benefit costs, including pension related benefits, increased
$1,121,000 (66.3%) primarily due to the cost of increased benefits to an
increasing employee base. Cable cut costs increased $640,000 (55.3%) primarily
due to the expansion of business and the increased costs associated with cable
cuts.
Amortization of acquisition costs increased $72,000 (6.4%) primarily due to the
acquisition of MPC. Depreciation increased $1,707,000 (21.8%) of which
$1,285,000 is applicable to the utility-related services segment. The increase
in water utilities segment and utility-related services segment depreciation is
primarily due to additional utility plant and other property placed in service
including other property added through the acquisition of MPC.
<PAGE>
Taxes other than income taxes increased $1,569,000 (20.1%) of which $1,294,000
is applicable to the utility-related services segment which results primarily
from payroll related taxes. The remaining increase of $275,000 applicable to
the water utilities segment is primarily due to an increase in property taxes
resulting from additional plant in service.
The increase in interest expense, net, of $1,436,000 (18.0%) is largely due to
the effect of higher average debt outstanding.
Income taxes increased $1,096,000 (8.6%) primarily due to an increase of
$1,087,000 in income taxes collected from developers.
Liquidity and Capital Resources
At the present time, the Company's business activities are conducted through its
regulated water utilities and unregulated utility-related businesses. The
Company acquired SM&P in June 1993 and MPC in August 1995 which diversified the
Company's operations. The Company may, in the future, become involved in other
water utilities and utility-related activities through the acquisition or
formation of additional subsidiaries. The source of capital to finance these
subsidiaries will be determined at the time they are established or acquired.
However, the Company does not intend to enter into any business that would
impair the Company's primary commitment to maintain and develop its water
utilities to meet the current and future needs of its customers.
Cash Flows From Operating Activities
Cash flows from operating activities result primarily from net earnings adjusted
for non-cash items such as depreciation and deferred taxes and changes in
operating assets and liabilities. The seasonal nature of the Company's
businesses typically results in higher operating revenues in the second and
third quarters of the year than in the first and fourth quarters. Fluctuations
in accounts payable and accrued expenses result primarily from property taxes
and timing of payments, whereas federal income taxes vary with pretax earnings
and the level of income taxes collected from developers, net of refunds, on
customer advances for construction.
Cash Flows From Investing Activities
Cash flows from investing activities fluctuate primarily as a result of
additions to utility plant and other property and the level of customer advances
for construction, net of refunds.
The Company continues to experience significant growth in its distribution
system. The Company added $34,783,000 to utility plant and other property
during 1996 compared to $27,914,000 during 1995. Approximately 45 miles of new
mains were placed in service in 1996 compared with approximately 85 miles in
1995. The Company received $2,574,000 in new customer advances and refunded
$2,647,000 in customer advances during 1996 compared to $8,233,000 and
$2,925,000, respectively, during 1995. Such advances are subject to refund over
a ten-year period based on the addition of new customers to the constructed
mains. Effective for contracts entered into on or after April 1, 1996, IWC
allows developers to install, or provide for the installation of, main
extensions, which are to be transferred to IWC upon completion. This is a
departure from the past, when IWC was responsible for the installation of all
new mains.
This change has caused reductions in cash inflows from developers, as deposits
to pay the cost of main extensions are now invested by the developer directly in
the new mains, as well as cash outflows no longer necessary to pay for these
installations.
Cash Flows From Financing Activities
Cash flows from financing activities consist primarily of the Company's
borrowings, dividend payments and sales of common stock. The Company utilizes
borrowings against its lines of credit with local banks for its short-term cash
needs.
In August 1996, the Company refinanced its $5,600,000 short-term bank loan which
was used primarily for the acquisition of MPC into a long-term bank loan. The
new loan is payable in August 2003.
In March 1995, the Commission granted IWC authority to issue, on or before
December 31, 1996, an aggregate of $30,000,000 in securities, to consist of not
more than $18,000,000 in the form of long-term debt and/or preferred equity, and
assuming favorable market conditions, at least $12,000,000 in common equity. In
September 1995, IWC issued $18,000,000 of 5.85% Series First Mortgage Bonds to
secure a like amount of Economic Development Bonds issued by the City of
Indianapolis due September 1, 2025. Proceeds from this issue were deposited
with a trustee and were fully used during 1995 and 1996 for the construction,
extension and improvement of IWC's facilities, plant and distribution system and
reimbursement of IWC's treasury for plant capital expenditures previously made.
In December 1995 and March 1996, Resources made equity capital contributions to
IWC of $10,505,000 and $1,495,000, respectively, which amounts to the
$12,000,000 authorized by the Commission. The amounts invested by Resources
were derived from proceeds of the sale of common shares of Resources through its
Dividend Reinvestment and Share Purchase Plan.
The increase in the payout percentage of net earnings applicable to common and
common equivalent shareholders declared payable in cash dividends in 1996 is due
primarily to reduced net earnings resulting from higher operating costs. Cash
dividends declared payable to common and common equivalent shareholders, as a
percentage of net cash provided by operating activities, decreased to 36.1%
during 1996, compared to 45.2% and 46.2% in 1995 and 1994, respectively. Long-
term debt, as a percentage of total capital and long-term debt, decreased to
48.5% at December 31, 1996, compared to 51.6% at December 31, 1995. The decrease
in the "debt ratio" was primarily due to the net effects of the issuance of new
long-term debt of $5,600,000, the reclassification of $6,775,000 in long-term
debt to short-term debt, issuance of common stock primarily through the
Company's dividend reinvestment plan of $15,004,000, and a decrease in retained
earnings of $3,553,000.
At December 31, 1996, the Company had lines of credit with banks aggregating
$44,400,000 which require a compensating cash balance of $100,000. At December
31, 1996, unused lines of credit aggregated $31,809,000. Interest on borrowings
under the lines of credit is variable (an average of 7.29% at December 31, 1996.
Capital Expenditures
Capital expenditures for 1997 are budgeted at approximately $73,700,000 and are
expected to be financed primarily from internally generated cash, customer
advances for construction, short-term bank borrowings, and long-term financing.
Capital expenditures for the five-year period 1997 through 2001 are budgeted at
approximately $199,900,000 with the major portion for new mains and distribution
and plant facilities and other operating equipment. The Company anticipates
that it will be necessary during the five-year period 1997 through 2001 to
secure additional outside financing from both short- and long-term debt and
equity capital markets, to finance and refinance planned capital expenditures
and long-term debt maturities.
Projected capital expenditures do not include any construction projects that IWC
could be required to undertake to comply with legislative or regulatory
environmental or water quality requirements that may be imposed in the future.
In addition to SDWA requirements imposed by the EPA, IWC is subject to
regulatory requirements of the State of Indiana regarding discharges from its
treatment plants. The Company estimates that the cost to comply with
anticipated changes to existing regulatory requirements for discharges
approximate $2,000,000 in increased annual operating expenses and approximately
$9,000,000 in capital costs. Such capital costs and increased annual operating
expenses should be recoverable through water rates, but only after appropriate
regulatory action.
Environmental Matters
The Company's utility operations are subject to pollution control and water
quality control regulations, including those issued by the Environmental
Protection Agency (EPA), the Indiana Department of Environmental Management
(IDEM), the Indiana Water Pollution Control Board and the Indiana Department of
Natural Resources. Under the Federal Clean Water Act and Indiana's regulations,
the Company must obtain National Pollutant Discharge Elimination System (NPDES)
permits for discharges from its White River, White River North, Fall Creek,
Thomas W. Moses and the Geist treatment stations. The Company's current NPDES
permits were to have expired June 30, 1989, for White River and Fall Creek
stations, December 31, 1990, for Thomas W. Moses, April 30, 1994, for Geist
treatment station, and January 31, 1996 for White River North station.
Applications for renewal of the permits have been filed and are the subject of
ongoing discussions with, but not finalized by, IDEM. (These permits continue
in effect pending review of the applications).
Under the federal Safe Drinking Water Act (SDWA), the Company is subject to
regulation by EPA of the quality of water it sells and treatment techniques it
uses to make the water potable. EPA promulgates nationally applicable maximum
contaminant levels (MCLs) for contaminants found in drinking water. Management
believes that the Company is currently in compliance with all MCLs promulgated
to date. EPA has continuing authority, however, to issue additional regulations
under the SDWA. In August 1996, Congress amended the SDWA to allow EPA more
authority to weigh the costs and benefits of regulations being considered in
some (but not all) cases. The 1996 amendments do not, however, reduce the number
of new standards required by the 1986 amendments. Such standards promulgated
could be costly and require substantial changes in the Company's operations. The
Company would expect to recover the costs of such changes through its water
rates; however, such recovery may not necessarily be timely.
Under a 1991 law enacted by the Indiana Legislature, a water utility, including
the utility subsidiaries of the Company, may petition the Indiana Utility
Regulatory Commission (Commission) for prior approval of its plans and estimated
expenditures required to comply with provisions of, and regulations under, the
Federal Clean Water Act and SDWA. Upon obtaining such approval, the utility may
include, to the extent of its estimated costs as approved by the Commission,
such costs in its rate base for ratemaking purposes and recover its costs of
developing and implementing the approved plans if statutory standards are met.
The capital costs for such new systems, equipment or facilities or modifications
of existing facilities may be included in the utility's rate base upon
completion of construction of the project or any part thereof. While use of
this statute is voluntary on the part of a utility, if utilized, it should allow
utilities a greater degree of confidence in recovering major costs incurred to
comply with environmentally related laws on a timely basis.
<PAGE>
Rate Case
On May 10, 1995, the Commission approved a Settlement Agreement entered into by
the UCC, four intervening customers and IWC. As part of the Agreement, the
parties agreed not to seek an adjustment in IWC's basic rates and charges prior
to April 1, 1997, subject to IWC's interim right to request approval of new
rates to cover operating expenses connected with implementing measures which
might be required in connection with new National Pollutant Discharge
Elimination System permits which IWC anticipates receiving for wastewater
discharges at its Fall Creek and White River Stations (NPDES permits). The
parties also agreed that prior to April 1, 1997, IWC may request that the
Commission approve, in a separate proceeding, the continuation of the allowance
for funds used during construction (debt component only), and the deferral of
depreciation, on any capital expenditures made in connection with new NPDES
permits at the Fall Creek and White River Stations or IWC's anticipated new
South Well Field Station (ground for which was broken in August 1996) until a
rate base determination has been made with respect to these items in IWC's next
rate case.
On January 15, 1997, the Commission approved a Stipulation and Settlement
Agreement entered into by the Utility Consumer Counselor, representing
ratepayers and IWC, which authorized IWC to use individual depreciation rates
for each plant account to produce a composite depreciation rate of 2.21% based
on IWC's plant as of December 31, 1995. The Agreement provides that the new
depreciation rates should be made effective as of the effective date of the
final order in IWC's next general rate case.
Inflation, Rate Changes and Seasonality
Under normal conditions and particularly during periods of inflation, water
utility revenues from increased water consumption will not keep pace with the
increase in operating costs. Therefore, periodic water rate and service charge
adjustments are necessary, with the frequency of such increases being partially
determined by the amount of inflation.
Results for any interim period are not indicative of results to be expected for
the year. Typically, the seasonal nature of the Company's
business results in a higher proportion of operating revenues being realized in
the second and third quarters of the year than the first and fourth quarters of
the year.
