SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934
Date of Report March 6, 1998
SIGCORP, Inc.
(Exact name of registrant as specified in charter)
Indiana
(State or other jurisdiction of incorporation)
1-11603
(Commission File Number)
35-1940620
(IRS Employer Identification No.)
20 N.W. Fourth St.,
Evansville, Indiana 47741-0001
(Address of principal executive offices)
Registrant's telephone number,
including area code: (812) 465-5300
<PAGE> 2
Item 5. Other Events
SIGCORP, Inc. reports the availability of audited
consolidated financial statements for the year ended
December 31, 1997.
Item 7. Financial Statements and Exhibits
See Exhibit Index and Exhibits following.
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Date: March 6, 1998
SIGCORP, INC.
Registrant
/s/ R. G. Reherman
R. G. Reherman
Chairman, President and
Chief Executive Officer
<PAGE> 4
<TABLE>
<CAPTION>
EXHIBIT INDEX
The following exhibits are filed herewith and made a part hereof.
<S> <C> <C>
Page No.
Exhibit 12A - Ratio of Earnings to Fixed Charges 5
Exhibit 12B - Ratio of Earnings to Fixed Charges and
Preferred Dividends 6
Exhibit 23 - Consent of Independent Public Accountants 7
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Audited Consolidated Financial Statements
for the year ended December 31, 1997 as
follows:
.1 Consolidated Statements of Income 8
.2 Consolidated Statements of Cash Flow 9
.3 Consolidated Balance Sheets 10-11
.4 Consolidated Statements of Capitalization 12
.5 Consolidated Statements of Retained
Earnings 13
.6 Notes to Consolidated Financial Statements 14-25
.7 Report of Independent Public Accountants 26
.8 Management's Discussion and Analysis of Results
of Operations and Financial Condition 27-37
.9 Selected Financial Data 38
.10 Selected Quarterly Financial Data 39
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
use of our report included in this Form 8 - K.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 6, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000945372
<NAME> SIGCORP, INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 707,605
<OTHER-PROPERTY-AND-INVEST> 102,170
<TOTAL-CURRENT-ASSETS> 129,321
<TOTAL-DEFERRED-CHARGES> 50,800
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 989,896
<COMMON> 78,258
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 270,828
<TOTAL-COMMON-STOCKHOLDERS-EQ> 349,086
0
19,514
<LONG-TERM-DEBT-NET> 276,131
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 41,368
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 46,334
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 257,463
<TOT-CAPITALIZATION-AND-LIAB> 989,896
<GROSS-OPERATING-REVENUE> 433,237
<INCOME-TAX-EXPENSE> 23,861
<OTHER-OPERATING-EXPENSES> 347,655
<TOTAL-OPERATING-EXPENSES> 347,655
<OPERATING-INCOME-LOSS> 85,582
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 85,582
<TOTAL-INTEREST-EXPENSE> 15,581
<NET-INCOME> 46,140
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 27,885
<TOTAL-INTEREST-ON-BONDS> 19,797
<CASH-FLOW-OPERATIONS> 78,126
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.95
</TABLE>
<PAGE> 8
EXHIBIT 99.1
<TABLE>
SIGCORP, Inc.
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (in thousands except for per share amounts)
<S> <C> <C> <C>
1997 1996 1995
OPERATING REVENUES:
Electric utility $ 272,545 $ 276,479 $ 275,495
Gas utility 85,561 96,251 63,203
Energy services and other 75,131 32,008 22,073
Total operating revenues 433,237 404,738 360,771
OPERATING EXPENSES:
Fuel for electric generation 62,630 74,860 81,236
Purchased electric energy 13,985 8,295 9,332
Cost of gas sold 54,060 66,105 40,303
Cost of energy services and other 73,668 28,553 18,401
Other operation expenses 60,726 60,885 53,502
Maintenance 29,224 29,784 32,222
Depreciation and amortization 40,373 39,140 39,442
Property and other taxes 12,989 14,399 13,932
Total operating expenses 347,655 322,021 288,370
OPERATING INCOME 85,582 82,717 72,401
INTEREST AND OTHER CHARGES:
Interest expense on long-term debt 19,797 18,432 18,789
Interest expense on short-term debt 1,519 2,387 1,905
Amortization of premium, discount
and expense on debt 671 690 693
Allowance for funds used
during construction (1,378) (445) (1,001)
Preferred dividend requirements
of subsidiary 1,097 1,097 1,099
Interest income (3,003) (2,135) (1,278)
Other, net (3,122) (2,536) (2,563)
Total interest and other charges 15,581 17,490 17,644
INCOME BEFORE INCOME TAXES 70,001 65,227 54,757
Federal and state income taxes 23,861 21,963 16,232
NET INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 46,140 43,264 38,525
Cumulative effect at January 1, 1995
of adopting the unbilled
revenues method of accounting -
net of income taxes - - 6,294
NET INCOME $ 46,140 $ 43,264 $ 44,819
AVERAGE COMMON SHARES OUTSTANDING 23,631 23,631 23,631
BASIC AND DILUTED EARNINGS PER SHARE
BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 1.95 $ 1.83 $ 1.63
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE - - 0.27
BASIC AND DILUTED EARNINGS PER SHARE $ 1.95 $ 1.83 $ 1.90
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</FN>
</TABLE>
<PAGE> 9
EXHIBIT 99.2
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31 (in thousands) 1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 46,140 $ 43,264 $ 44,819
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 40,373 39,140 39,442
Preferred dividend requirements
of subsidiary 1,097 1,097 1,099
Deferred income taxes and
investment tax credits, net (3,923) 11,474 9,516
Allowance for other funds used
during construction (581) - (380)
Cumulative effect of
accounting change - - (6,294)
Change in assets and liabilities:
Receivables, net (including
accrued unbilled revenues) (19,497) (17,170) (22,167)
Inventories (4,306) 3,721 11,479
Coal contract settlement - 12,928 (5,243)
Accounts payable 14,141 (4,396) 2,813
Accrued taxes (1,855) (1,098) 1,972
Refunds from gas suppliers (915) (1,213) 2,037
Refunds to customers (651) (4,961) (7,348)
Accrued coal liability - - (22,018)
Other assets and liabilities 8,103 5,120 (1,706)
Net cash provided by operating
activities 78,126 87,906 48,021
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (net of allowance for
other funds used during construction) (65,501) (40,302) (44,709)
Demand side management program
expenditures (2,340) (3,633) (9,051)
Investments in leveraged leases - (6,850) -
Purchases of investments (423) - (2,034)
Sales of investments 264 700 4,211
Investments in partnerships 3,166 126 (901)
Change in nonutility property (5,572) 395 2,316
Change in notes receivable (5,592) (11,533) (1,138)
Other (1,120) (84) 4,800
Net cash used in investing
activities (77,118) (61,181) (46,506)
CASH FLOWS FROM FINANCING ACTIVITIES
First mortgage bonds (295) (8,000) (5,300)
Dividends paid (30,482) (28,353) (27,725)
Reduction in preferred stock - - (91)
Change in environmental improvement
funds held by trustee (272) (188) 6,884
Payments on partnership obligations (2,276) (2,787) (3,256)
Change in notes payable 26,980 11,432 9,127
Other 1,973 528 620
Net cash used in financing
activities (4,372) (27,368) (19,741)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (3,364) (643) (18,226)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 9,191 9,834 28,060
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 5,827 $ 9,191 $ 9,834
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</FN>
</TABLE>
<PAGE> 10
EXHIBIT 99.3
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
At December 31 (in thousands) 1997 1996
ASSETS
Utility Plant, at original cost:
Electric $ 1,091,349 $ 1,047,717
Gas 141,646 131,796
1,232,995 1,179,513
Less accumulated provision for depreciation 557,631 524,104
675,364 655,409
Construction work in progress 32,241 25,849
Net utility plant 707,605 681,258
Other Investments and Property:
Investments in leveraged leases 42,964 42,887
Investments in partnerships and
limited liability corporations 21,197 23,983
Environmental improvement funds
held by trustee 4,102 3,830
Notes receivable 21,404 15,812
Nonutility property and other 12,503 6,931
Total other investments and property 102,170 93,443
Current Assets:
Cash and cash equivalents 5,827 9,191
Temporary investments, at market 749 565
Receivables, less allowance of $327,581
and $214,956, respectively 52,496 36,469
Accrued unbilled revenues 22,320 34,744
Inventories 32,930 31,241
Current regulatory assets 11,749 13,687
Other current assets 3,250 3,064
Total current assets 129,321 128,961
Other Assets:
Unamortized premium on reacquired debt 4,704 5,184
Postretirement benefits other than pensions 3,263 5,541
Demand side management programs 24,467 22,757
Allowance inventory 2,093 -
Deferred charges 16,273 15,509
Total other assets 50,800 48,991
TOTAL $ 989,896 $ 952,653
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</FN>
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C> <C>
At December 31 (in thousands) 1997 1996
SHAREHOLDERS' EQUITY AND LIABILITIES
CAPITALIZATION:
Common Stock $ 78,258 $ 78,258
Retained Earnings 270,828 252,626
Total common shareholders' equity 349,086 330,884
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 924 924
Long-Term Debt, net of current maturities 273,707 261,629
Long-Term Partnership Obligations,
net of current maturities 2,424 4,563
Total capitalization, excluding bonds
subject to tender (see Consolidated
Statements of Capitalization) 644,731 616,590
Current Liabilities:
Current Portion of Adjustable Rate
Bonds Subject to Tender 31,500 31,500
Current Maturities of Long-Term Debt,
Interim Financing and Long-Term
Partnership Obligations:
Maturing long-term debt 12,695 659
Notes payable 41,368 38,750
Partnership obligations 2,139 2,276
Total current maturities of long-term
debt, interim financing and
long-term partnership obligations 56,202 41,685
Other Current Liabilities:
Accounts payable 47,741 33,600
Dividends payable 123 123
Accrued taxes 5,868 7,723
Accrued interest 5,216 4,585
Refunds to customers 1,155 2,722
Other accrued liabilities 17,866 31,138
Total other current liabilities 77,969 79,891
Total current liabilities 165,671 153,076
Other Liabilities:
Accumulated deferred income taxes 146,218 147,070
Accumulated deferred investment tax
credits, being amortized over lives
of property 20,249 21,706
Regulatory income tax liability - 1,614
Postretirement benefits other than pensions 11,271 10,084
Other 1,756 2,513
Total other liabilities 179,494 182,987
TOTAL $ 989,896 $ 952,653
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</FN>
</TABLE>
<PAGE>12
<TABLE>
EXHIBIT 99.4
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<S> <C> <C>
At December 31 (in thousands) 1997 1996
COMMON SHAREHOLDERS' EQUITY
Common Stock, without par value, authorized
50,000,000 shares, issued 23,630,568 $ 78,258 $ 78,258
Retained Earnings, $2,194,121 restricted as
to payment of cash dividends on common stock 270,828 252,626
Total common shareholders' equity 349,086 330,884
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
9,237 shares redeemable at $100 per share 924 924
LONG-TERM DEBT, NET OF CURRENT MATURITIES
First mortgage bonds 238,420 251,115
Notes payable 36,000 11,273
Unamortized debt premium and discount, net (713) (759)
Total long-term debt 273,707 261,629
LONG-TERM PARTNERSHIP OBLIGATIONS,
NET OF CURRENT MATURITIES 2,424 4,563
CURRENT PORTION OF ADJUSTABLE RATE POLLUTION
CONTROL BONDS SUBJECT TO TENDER, DUE
2015, Series B, presently 4.05% 31,500 31,500
TOTAL CAPITALIZATION, including bonds
subject to tender $ 676,231 $ 648,090
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</FN>
</TABLE>
<PAGE> 13
<TABLE>
EXHIBIT 99.5
<CAPTION>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<S> <C> <C>
Year Ended December 31 (in thousands) 1997 1996 1995
Balance, January 1 $ 252,626 $ 236,617 $ 218,424
Net income 46,140 43,264 44,819
298,766 279,881 263,243
Common Stock Dividends
($1.18 per share in 1997,
$1.15 per share in 1996 and
$1.13 per share in 1995) 27,938 27,255 26,626
Balance, December 31 (See Consolidated
Statements of Capitalization
for restriction) $ 270,828 $ 252,626 $ 236,617
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</FN>
</TABLE>
<PAGE> 14 EXHIBIT 99.6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION Effective January 1, 1996, a new
holding company, SIGCORP, Inc. (SIGCORP), became the parent of
Southern Indiana Gas and Electric Company (SIGECO), a
regulated gas and electric utility which accounts for over 90%
of SIGCORP's net income, and four of SIGECO's former wholly-owned
subsidiaries: Energy Systems Group, Inc. (ESGI),
Southern Indiana Minerals, Inc. (SIMI), Southern Indiana
Properties, Inc.(SIPI) and ComSource, Inc. (ComSource). 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 remain securities of SIGECO and were unaffected. During
the fourth quarter of 1996, four additional nonregulated
subsidiaries were formed: SIGCORP Energy Services, Inc.
(Energy), SIGCORP Capital, Inc. (Capital), SIGCORP Fuels, Inc.
(Fuels) and SIGCORP Power Marketing, Inc. (Power). During the
third quarter of 1997, SIGCORP Communications Services, Inc.
(Communications) was formed.
SIGECO is a regulated gas and electric utility and engaged
principally in the production, purchase, transmission,
distribution and sale of electricity and the delivery of
natural gas. SIGECO serves 122,937 electric customers in the
city of Evansville and 74 other communities and serves 107,278
gas customers in the city of Evansville and 64 other
communities.
ESGI has a one-third ownership in Energy Systems Group, LLC,
an energy-related performance contracting firm serving
industrial and commercial customers. SIMI processes and
markets coal combustion by-products. 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. ComSource markets telecommunications
services. 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. Capital is
the primary financing vehicle for SIGCORP's nonregulated
subsidiaries. Fuels was formed to provide coal and related
services to SIGECO and other customers. 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. Communications was formed to
undertake telecommunications related strategic initiatives.
All significant intercompany transactions are eliminated.
On May 23, 1997, Energy Systems Group, Inc. (ESGI), IGC Energy
and Citizens By-Products Coal Company formed Energy Systems
Group, LLC (ESG LLC), an equally owned limited liability
corporation. On June 18, 1997, ESGI contributed significantly
all of its assets and liabilities to ESG LLC for a one-third
interest in ESG LLC. ESGI's results of operations through
June 18, 1997 are included in other revenues and the
respective operating expense accounts in SIGCORP's
consolidated financial statements, and subsequent to June 18,
1997, ESGI's share of the pretax earnings and losses of ESG
LLC are included in Other, net.
RECLASSIFICATION Certain amounts in the prior year financial
statements have been reclassified to conform to the current
year financial statement presentation.
USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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 SIGECO are based on generally accepted
accounting principles, which give recognition to the
ratemaking and accounting practices of these agencies.
<PAGE> 15
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 Consolidated Balance
Sheets:
<TABLE>
<CAPTION>
<S> <C> <C>
At December 31 (in thousands) 1997 1996
Regulatory Assets:
Demand side management program costs $ 25,069 $ 23,359
Postretirement benefit costs (Note 1) 5,541 7,819
Unamortized premium on reacquired debt 5,183 5,663
Regulatory study costs 337 718
Fuel and gas costs (Note 1) 9,129 13,237
45,259 50,796
Less current amounts 11,749 13,687
Total long-term regulatory assets $ 33,510 $ 37,109
</TABLE>
Refer to the individual footnotes referenced above for
discussion of specific regulatory assets. See Income Taxes
for regulatory assets and liabilities related to income taxes.
As of December 31, 1997, the recovery of $26,200,000 of
SIGECO's total regulatory assets is reflected in rates charged
to customers over periods ranging up to 26 years. SIGECO
intends to request recovery of its remaining regulatory assets
in future general rate case filings.
If all or a separable portion of SIGECO's operation 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. 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. 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 4 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.
DEPRECIATION Depreciation of utility plant 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
Electric 3.4% 3.4% 3.8%
Gas 3.2% 3.2% 3.3%
</TABLE>
INCOME TAXES SIGCORP 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.
<PAGE> 16
The components of the net deferred income tax liability are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
At December 31 (in thousands) 1997 1996
Deferred Tax Liabilities:
Depreciation and cost recovery
timing differences $ 117,357 $ 115,095
Deferred fuel costs, net 1,252 4,778
Leveraged leases 31,625 30,702
Regulatory assets recoverable
through future rates 25,687 25,668
Deferred Tax Assets:
Unbilled revenue (1,593) (2,499)
Regulatory liabilities to be settled
through future rates (25,229) (27,282)
Other, net (2,881) 608
Net deferred income tax liability $ 146,218 $ 147,070
</TABLE>
The $852,000 decrease in the net deferred income tax liability
from December 31, 1996 to December 31, 1997, is due to the
current year deferred federal and state income tax benefit of
$3,030,000. This decrease was partially offset by a
$2,178,000 increase which resulted from a change in the net
regulatory assets and liabilities.
The components of current and deferred income tax expense are
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31 ( in thousands) 1997 1996 1995
Current
Federal $ 24,387 $ 8,743 $ 7,031
State 3,961 1,891 1,601
Deferred, net
Federal (2,858) 10,967 7,771
State (172) 1,805 1,385
Investment tax credit, net (1,457) (1,443) (1,556)
Total income tax expense related
to net income before
cumulative effect of accounting change 23,861 21,963 16,232
Current income tax expense related to
cumulative effect of accounting change - - 3,845
Total income tax expense $ 23,861 $ 21,963 $ 20,077
</TABLE>
A reconciliation of the statutory tax rates to SIGCORP's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31 1997 1996 1995
Statutory federal and state rate 37.9% 37.9% 37.9%
Equity portion of allowance for funds
used during construction (0.3) - (0.2)
Book depreciation over related tax
depreciation - nondeferred 1.8 1.7 2.0
Amortization of deferred investment
tax credit (2.1) (2.2) (2.4)
Low-income housing credit (4.0) (4.2) (4.3)
Preferred dividend requirements
of subsidiary 0.6 0.6 0.6
Other, net 0.2 (0.1) (2.7)
Effective tax rate 34.1% 33.7% 30.9%
</TABLE>
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, 1997
consist of investments in interest-bearing obligations and
common stocks.
<PAGE> 17
The components of net pension cost related to these plans are
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31 (in thousands) 1997 1996 1995
Service cost - benefits earned
during the period $ 2,166 $ 2,288 $ 1,700
Interest cost on projected
benefit obligation 4,661 4,433 4,044
Actual return on plan assets (12,638) (7,409) (12,243)
Net amortization and deferral 7,143 2,379 8,000
Net pension cost charged to operations,
construction and other accounts $ 1,332 $ 1,691 $ 1,501
</TABLE>
The funded status of the trusteed retirement plans is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
At December 31 (in thousands) 1997 1996
Actuarial present value of:
Vested benefit obligation $ (55,038) $ (49,098)
Accumulated benefit obligation $ (56,566) $ (50,461)
Projected benefit obligation $ (72,914) $ (63,999)
Plan assets at fair value 76,587 66,011
Excess of plan assets over projected
benefit obligation 3,673 2,012
Remaining unrecognized transitional asset (2,233) (2,651)
Prior service cost 1,412 1,560
Unrecognized net loss (8,117) (5,797)
Accrued pension liability $ (5,265) $ (4,876)
</TABLE>
The projected benefit obligation at December 31, 1997 and 1996
was determined using an assumed discount rate of 7.0% and 7.5%,
respectively. For both periods, the long-term rate of
compensation increases was assumed to be 5%, and
the long-term rate of return on plan assets was assumed to be
8%. The transitional asset is being amortized over
approximately 15, 18 and 14 years for the Salaried, Hourly and
Hoosier plans, respectively.
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. Annual service cost related to these benefits is
approximately $300,000.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS SIGECO provides
certain postretirement health care and life insurance benefits
for retired employees and their dependents through fully
insured plans. SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," requires the
expected cost of these benefits be recognized during the
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.
The components of the net periodic other postretirement
benefit cost are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31 (in thousands) 1997 1996 1995
Service cost - benefits earned
during the period $ 890 $ 925 $ 903
Interest cost on accumulated
benefit obligation 2,056 2,028 2,272
Actual return on assets (534) (292) (107)
Net amortization and deferral 1,172 1,267 1,259
Net periodic postretirement
benefit cost 3,584 3,928 4,327
Amortization of prior years' deferred
postretirement benefit obligation 2,278 2,569 549
5,862 6,497 4,876
Deferred postretirement
benefit obligation - 314 2,112
Total charged to operations,
construction and other accounts $ 5,862 $ 6,183 $ 2,764
</TABLE>
<PAGE> 18
The net periodic cost determined under the standard includes
the amortization of the discounted present value of the
obligation at the adoption date, $29,400,000, over a 20-year
period.
Reconciliation of the accumulated postretirement benefit
obligation to the accrued liability for postretirement
benefits is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
At December 31 (in thousands) 1997 1996
Accumulated other postretirement
benefit obligation:
Retirees $ (11,090) $ (10,041)
Other fully eligible participants (5,717) (5,916)
Other active participants (14,117) (13,317)
Total accumulated benefit obligation (30,924) (29,274)
Plan assets at fair value 7,318 5,205
Excess of accumulated benefit obligation
over plan assets (23,606) (24,069)
Unrecognized transition obligation 22,076 23,547
Unrecognized net gain (9,741) (9,562)
Accrued postretirement benefit liability $ (11,271) $ (10,084)
</TABLE>
The assumptions used to develop the accumulated
postretirement benefit obligation at December 31, 1997 and
1996 included discount rates of 7.0% and 7.5%, respectively,
and a health care cost trend rate of 8% declining to 4.5% in
2006 and 9% declining to 5% in 2004 at December 31, 1997 and
1996, respectively. 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% increase in the assumed health
care cost trend rate each year would increase the aggregate
service and interest costs for 1997 by $565,000 and the
accumulated postretirement benefit obligation by $5,196,000.
In 1995, SIGECO 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 the purposes of the Consolidated
Balance Sheets and the Consolidated Statements of Cash
Flows, SIGCORP considers all highly liquid debt instruments
purchased with an original maturity of three months or less
to be cash equivalents.
During 1997, 1996 and 1995, SIGCORP paid interest (net of
amounts capitalized) of $19,888,000, $20,328,000 and
$20,085,000, respectively, and income taxes of $29,552,000,
$12,237,000 and $10,334,000, respectively. SIGCORP is
involved in several partnerships which are partially
financed by partnership obligations amounting to $4,563,000
and $6,839,000 at December 31, 1997 and 1996, 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 average cost method.
<TABLE>
<CAPTION>
<S> <C> <C>
At December 31 (in thousands) 1997 1996
Fuel (coal and oil) for electric generation $ 8,920 $ 6,539
Materials and supplies 14,103 15,614
Emission allowances 2,616 -
Gas in underground storage - at LIFO cost 9,046 9,088
- at average cost 862 -
Total inventories $ 35,547 $ 31,241
</TABLE>
Based on the December 1997 price of gas purchased, the cost
of replacing SIGECO's current portion of gas in underground
storage at December 31, 1997 exceeded the amount stated on a
LIFO basis by approximately $16,000,000.
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
<PAGE> 19
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.
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.
NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the
Financial Accounting Standards Board (FASB) issued
Statement0 of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), and Statement of Financial
Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" (SFAS 129). SFAS 128 specifies the
computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common
stock. SFAS 129 was issued in conjunction with the FASB's
earnings per share project and incorporated related
disclosure requirements from APB Opinion No. 10, "Disclosure
of Long-Term Obligations," and Statement of Financial
Accounting Standards No. 47, "Disclosure of Long-Term
Obligations." Both statements are effective for fiscal
years ending after December 15, 1997. SIGCORP adopted the
statements for year end 1997 (see Note 7 Capital Stock).
In June 1997, FASB issued Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," and No.
131, "Disclosures about Segments of an Enterprise and
Related Information," effective for periods beginning after
December 15, 1997. These statements do not affect the
accounting recognition or measurement of transactions, but
rather require expanded disclosures regarding financial
results. The Company will adopt these standards in 1998 as
required by the FASB.
Note 2 Rate and Regulatory Matters
GAS MATTERS On September 7, 1995, SIGECO petitioned the
IURC seeking a general increase in gas rates. On July 3,
1996, the IURC issued its order, effective July 15, 1996,
granting a 7.3%, or $4.8 million, increase in annual
revenues.
ELECTRIC MATTERS On June 21, 1995, the IURC approved the
third of three planned general electric rate increases
related to SIGECO's Clean Air Act Compliance project
(primarily the addition of a sulfur dioxide scrubber to
serve Culley Units 2 and 3), which began commercial
operation February 1995. The third adjustment also covered
certain nonscrubber-related operating costs such as
additional costs incurred for postretirement benefits other
than pensions beginning in 1993, and the recovery of demand
side management program expenditures. The effective dates
and impact on annual electric revenues of the three
adjustments are summarized below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Additional
Effective Annual Revenue
Date Revenues Increase
Adjustment 1 October 1, 1993 $1.8 million 1.0%
Adjustment 2 June 29, 1994 4.2 million 2.3
Adjustment 3 June 26, 1995 4.5 million 2.1
</TABLE>
On April 10, 1995, SIGECO reached an agreement with its
remaining long-term contract coal supplier, to buy out the
remainder of SIGECO's contractual obligations for $45.5
million, 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, will
approximate $58 million through December 31, 1998, the term
of the original contract. The net savings are being passed
back to SIGECO's electric customers through the fuel
adjustment clause.
Note 3 Revenues Accounting Change
Prior to 1995, SIGECO recognized electric and gas revenues
when customers were billed on a cycle billing basis. The
utility service rendered after monthly meter reading dates
through the end of a calendar month (unbilled revenues)
became a part of operating revenues in the following month.
To more closely match revenues with expenses, effective
January 1, 1995, SIGECO changed its method of accounting to
accrue the amount of revenue for sales unbilled at the end
of each month. The cumulative effect of the change on prior
years, net of income taxes, is included in net income for
1995. The effect of the change was to increase 1995 net
income $7.9 million ($.34 per share), of which an increase
of $1.6 million ($.07 per share), was reflected in
operations and an increase of $6.3 million ($.27 per share),
the cumulative effect of the change as of January 1, 1995,
was reported as a separate component of net income.
<PAGE> 20
Note 4 Leveraged Leases
Southern Indiana Properties, Inc. is a lessor in five
leveraged lease agreements under which an office building, a
part of a reservoir, an interest in a paper mill, a gas
turbine electric generating peaking unit and passenger
railroad cars are leased to third parties. The economic
lives and lease terms vary with the leases. The total
equipment and facilities cost was approximately $110,800,000
at December 31, 1997 and 1996, 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 $79,100,000 and
$81,700,000 at December 31, 1997 and 1996, respectively.
SIGCORP's net investment in leveraged leases at those dates
was $11,339,000 and $12,185,000, respectively, as shown:
<TABLE>
<CAPTION>
<S> <C> <C>
At December 31 (in thousands) 1997 1996
Minimum lease payments receivable $ 63,877 $ 65,363
Estimated residual value 29,073 29,073
Less unearned income 49,986 51,549
Investment in lease financing
receivables and loan 42,964 42,887
Less deferred taxes arising
from leveraged leases 31,625 30,702
Net investment in leveraged leases $ 11,339 $ 12,185
</TABLE>
Note 5 Short-Term Financing
SIGECO has trust demand note arrangements totaling
$17,000,000 with several banks, of which $15,000,000 was
utilized at December 31, 1997. 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 $63,350,000 at December 31, 1997 of
which $26,368,000 was utilized at that date.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
At December 31 (in thousands) 1997 1996 1995
Notes Payable
Balance at year end $ 41,368 $ 38,750 $ 30,500
Weighted average interest
rate on year end balance 6.21% 5.94% 6.09%
Average daily amount outstanding
during the year $ 11,510 $ 24,430 $ 16,790
Weighted average interest
rate on average daily amount
outstanding during the year 6.08% 5.74% 6.32%</TABLE>
Note 6 Long-Term Debt
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 1998
sinking fund requirement by this means and, accordingly, the
sinking fund requirement for 1998 is excluded from current
liabilities on the balance sheet. At December 31, 1997,
$259,419,000 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.
Additionally, SIGCORP's investments in leveraged leases have
been partially financed through notes payable to banks. Of
the amount of first mortgage bonds, notes payable and
partnership obligations outstanding at December 31, 1997,
the following amounts mature in the five years subsequent to
1997: 1998 - $14,539,000; 1999 - $47,097,000; 2000 -
$1,054,000; 2001 - $873,000 and 2002 - $3,000,000.
In addition, $31,500,000 of adjustable rate pollution
control series first mortgage bonds could, at the election
of the bondholder, be tendered to SIGECO in May 1998. 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 1998
are shown as current liabilities.
<PAGE> 21
First mortgage bonds, notes payable and partnership
obligations outstanding and classified as long-term are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
At December 31 (in thousands) 1997 1996
First Mortgage Bonds due:
1998, 6-3/8% $ - $ 12,000
1999, 6% 45,000 45,000
2003, 5.60% Pollution Control Series A 3,945 4,640
2008, 6.05% Pollution Control Series A 22,000 22,000
2014, 7.25% Pollution Control Series A 22,500 22,500
2016, 8-7/8% 25,000 25,000
2023, 7.60% 45,000 45,000
2025, 7- 5/8% 20,000 20,000
Adjustable Rate Pollution Control:
2015, Series A, presently 4.60% 9,975 9,975
Adjustable Rate Environmental Improvement:
2023, Series B, presently 6% 22,800 22,800
2028, Series A, presently 4.65% 22,200 22,200
Total first mortgage bonds $ 238,420 $ 251,115
Notes Payable:
Banks $ - $ 10,273
Insurance Company, due 2012, 7.43% 35,000 -
Tax Exempt, due 2003, 6.25% 1,000 1,000
Total notes payable $ 36,000 $ 11,273
Partnership Obligations, due 1999
through 2003, without interest $ 2,424 $ 4,563
</TABLE>
Note 7 Capital Stock
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 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.
On January 21, 1997, the Board of Directors of SIGCORP
approved a split of SIGCORP's issued shares of common stock
without par value on a three-for-two basis. The stock
split, effective March 27, 1997, increased SIGCORP'S
outstanding shares from 15,754,826 to 23,630,568. Average
common shares outstanding, earnings per share of common
stock and dividends paid per share for all periods presented
reflect the stock split.
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
<PAGE> 22
installments beginning one year after the grant date, and
generally expire in 10 years. The expiration dates for
options outstanding as of December 31, 1997, ranged from
July 13, 2004 to July 14, 2007. Stock option activity for
the past three years was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
At December 31 1997 1996 1995
Outstanding at beginning of year 327,901 282,478 230,499
Granted 139,348 46,173 54,342
Exercised (9,080) (750) (2,363)
Outstanding at end of year 458,169 327,901 282,478
Exercisable at end of year 318,821 226,044 113,132
Reserved for future grants
at end of year 279,638 418,986 465,159
Average Option Price - Exercised $18.42 $18.42 $18.42
- Outstanding at
end of year $21.58 $19.43 $18.80
</TABLE>
SIGCORP accounts 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," SIGCORP's net
income would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
At December 31 1997 1996 1995
Net Income:
As reported $46,140 $43,264 $44,819
Pro forma 45,998 43,175 44,778
Basic and Diluted Earnings Per Share:
As reported $ 1.95 $ 1.83 $1.90
Pro forma 1.95 1.83 1.90
</TABLE>
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, 1997, 1996 and 1995: risk-free
interest rate of 5.75%, 6.50% and 6.47%, respectively;
expected option term of five years; expected volatilities of
15.65%, 14.69% and 16.25%, respectively; and dividend rates
of 4.46%, 4.96% and 5.52%, respectively.
EARNINGS PER SHARE The following table illustrates the
basic and diluted earnings per share calculations.
<TABLE>
<CAPTION>
At December 31
(in thousands except for per share amounts)
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Per Per
Income Shares Share Income Shares Share Income Share Shares
Amount Amount Amount
Basic EPS
Income before cumulative effect of accounting change
$46,140 23,631 $1.95 $43,264 23,631 $1.83 $38,525 23,631 $1.63
Accounting change
- - - - - - 6,294 23,631 0.27
$46,140 23,631 $1.95 $43,264 23,631 $1.83 $44,819 23,631 $1.90
Diluted EPS
Effect of dilutive securities
56 40 21
$46,140 23,687 $1.95 $43,264 23,671 $1.83 $44,819 23,652 $1.90
</TABLE>
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. The adoption of SFAS No.
128 had no impact on prior year reported earnings per share.
<PAGE> 23
Options to purchase 139,348 shares of common stock at $26.44
per share were granted in July 1997, 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 SUBSIDIARY 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 SUBSIDIARY 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 SUBSIDIARY The
Cumulative Special Preferred Stock contains a provision
which allows the stock to be tendered on any of its dividend
payment dates. On March 8, 1995, SIGECO repurchased 913
shares of the Cumulative Special Preferred Stock at a cost
of $91,300 as a result of a tender within the provision of
the issuance.
Note 8 Ownership of Warrick Unit 4
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, 1997 is $31,728,000
with accumulated depreciation totaling $23,787,000. 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 9 Commitments and Contingencies
SIGECO presently estimates that approximately $70,000,000
will be expended for construction purposes in 1998,
including those amounts applicable to SIGECO's demand side
management (DSM) programs. Commitments for the 1998
construction program are approximately $33,032,000 at
December 31, 1997.
Note 10 Lease Obligations
In 1995, SIMI sold its manufacturing facility and related
equipment for $3,881,000 resulting in no gain or loss and
concurrently entered into an agreement to lease the property
back 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:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31 (in thousands)
1998 $ 1,755
1999 2,896
2000 2,896
2001 2,896
2002 2,896
Thereafter 5,905
Total lease payments $ 19,244
</TABLE>
Total rental expense under all operating leases was
$578,454, $558,282 and $238,671 for the years ended December
31, 1997, 1996 and 1995, respectively.
<PAGE> 24
Note 11 Segments of Business
The principal business segments of SIGCORP are the
generation, transmission, distribution and sale of electric
energy by SIGECO and the purchase, transportation,
distribution and sale of natural gas by SIGECO and Energy.
Certain financial information relating to SIGCORP's
significant segments of business is presented below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31 (in thousands) 1997 1996 1995
Operating Information-
Operating revenues:
Electric $ 272,545 $ 276,479 $ 275,495
Gas 157,230 97,697 63,203
Total 429,775 374,176 338,698
Operating expenses:
Electric 194,462 200,788 206,071
Gas 145,010 88,355 60,661
Total 339,472 289,143 266,732
Operating income:
Electric 78,083 75,691 69,424
Gas 12,220 9,342 2,542
Total $ 90,303 $ 85,033 $ 71,966
Other Information-
Depreciation and amortization expense:
Electric $ 36,217 $ 35,018 $ 35,802
Gas 3,979 3,599 3,500
Total $ 40,196 $ 38,617 $ 39,302
Capital expenditures:
Electric (a) $ 55,735 $ 34,836 $ 44,465
Gas 12,687 9,099 9,675
Total $ 68,422 $ 43,935 $ 54,140
Investment Information-
Identifiable assets (b):
Electric $ 715,593 $ 696,600 $ 708,310
Gas 136,030 139,030 115,266
Subtotal 851,623 835,630 823,576
Other assets 138,273 117,023 100,405
Total assets $ 989,896 $ 952,653 $ 923,981
<FN>
(a) Includes $2,340,000, $3,633,000 and $9,051,000 of demand
side management program expenditures for 1997, 1996 and 1995,
respectively.
(b) Utility plant less accumulated provision for depreciation,
inventories, receivables (less allowance), regulatory assets
and other identifiable assets.
</FN>
</TABLE>
<PAGE> 25
Note 12 Disclosures About Fair Value
Except for the following financial instruments, fair value
of SIGCORP's financial instruments is equivalent to carrying
value due to their short-term nature.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
At December 31
(in thousands) 1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Long-Term Debt (including
current portion) $ 318,597 $ 381,489 $ 293,788 $ 335,771
Partnership Obligations
(including current portion) 4,563 6,163 6,839 8,231
Redeemable Preferred Stock
of Subsidiary 7,500 8,091 7,500 7,367
</TABLE>
At December 31, 1997 and 1996, respectively, the fair value
of SIGCORP's debt relating to utility operations exceeded
carrying amounts by $58,000,000 and $41,000,000.
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 The fair value of SIGECO's long-term debt
was estimated based on the current quoted market rate of
utilities with a comparable debt rating. Nonutility long-term
debt was valued based upon the most recent debt
financing.
REDEEMABLE PREFERRED STOCK OF SUBSIDIARY The fair value of
SIGECO's redeemable preferred stock was estimated based on
the current quoted market rate of utilities with a
comparable debt rating.
PARTNERSHIP OBLIGATIONS The fair value of SIGCORP's
partnership obligations was estimated based on the current
quoted market rate of comparable debt.
Note 13 Disclosures about Market Risk
COMMODITY PRICE RISK Prices of natural gas are subject to
fluctuations resulting from changes in supply and demand.
To reduce price risk caused by these market fluctuations,
Energy has established a policy to back all fixed price
sales transactions longer than one month with similar
purchase obligations. Since some sales obligations consist
of variable volumes (end user sales), Energy targets planned
consumption and purchases this amount and adds additional
margin to these sales to cover the additional risk.
<TABLE>
<CAPTION>
<S> <C> <C>
At December 31 (in thousands) 1997
Carrying
Amount Fair Value
Commodity Position
Inventory $ 862 $ 723
Fixed-price obligations
to purchase gas - 5,575
Fixed-price obligations
to sell gas - 5,428
</TABLE>
<PAGE> 26
EXHIBIT 99.7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF SIGCORP, Inc.
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of SIGCORP, Inc. (an Indiana
Corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of SIGCORP, Inc.'s
management. Our responsibility is to express an opinion on these
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
SIGCORP, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 3, effective January 1, 1995, SIGECO changed its
method of accounting for unbilled revenues.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 23, 1998
<PAGE> 27
EXHIBIT 99.8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
References to "Notes" pertain to the Notes to Consolidated Financial
Statements.
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 eight nonregulated subsidiaries. The following
discussion and analysis includes those factors which have, or may,
materially affect the results of operations and financial condition
of SIGCORP and its subsidiaries.
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,
availability and cost of capital, and other similar factors.
RESULTS OF OPERATIONS
Earnings per share were a record $1.95 in 1997, compared to $1.83
for 1996 and $1.63 for 1995 before the cumulative effect of an
accounting change. Utility operations contributed $1.87 of the 1997
per share earnings and nonregulated operations contributed $.08 per
share; for 1996, utility net income represented $1.77 and
nonregulated subsidiary results contributed $.06 per share of the total
earnings. The factors effecting the $.12 increase in 1997 earnings
follow:
Period ended December 31, 1996 $ 1.83
Weather (.10)
Customer growth and usage .08
Electric sales to other utilities
and power marketers .06
Adjustment in base gas rates .03
Utility O&M expense .03
Nonregulated gas energy services
and nonutility operations .02
Period ended December 31, 1997 $ 1.95
REVENUES The increase in electric utility revenues due to greater
nonfirm wholesale electric sales was fully offset by the recovery
of lower unit fuel costs through retail rates and fewer sales to
retail customers, resulting in a $3.9 million (1.4%) decrease in
electric revenues during 1997. In 1996, electric revenues
rose slightly when revenue increases from greater electric sales
and the full year impact of an increase in retail electric rates
were offset by the recovery of
<PAGE> 28
lower unit fuel costs. Although cooling degree days were 19%
below normal and 8% below 1996, sales to retail and firm wholesale
customers declined only slightly (1%) in 1997 following a 3.4%
increase in 1996, due to continued strong economic growth in
SIGECO's service area. Excluding sales to Alcoa Generating
Corporation, which declined in 1997, nonfirm wholesale electric
sales increased 35% in 1997, after a 15% increase in 1996,
reflecting SIGECO's low electric energy costs and aggressive
marketing efforts. These sales represented approximately 19%
of total 1997 electric sales.
Fewer sales to all retail gas customers, net of the impact of
an approved July 1996 increase in base gas rates, resulted in
an 11% ($10.7 million) decrease in 1997 gas utility revenues,
following 52% ($33 million) greater gas revenues in 1996 chiefly
due to stronger sales to all retail gas customers and higher
unit gas costs recovered through retail rates. Gas sales were
down 23% in 1997, after a 24% rise in 1996, reflecting the impact
of 12% milder temperatures on weather-sensitive sales during the
first quarter of 1997 and fewer sales to commercial and
industrial transportation customers. Residential sales declined
12% during 1997 due to the milder weather, after a 19% increase
in 1996 when weather was 17% colder than in 1995. Sales to
commercial and industrial customers were down 22% and 63%,
respectively, because transportation customers purchased
more of their 1997 gas supplies from suppliers other than SIGECO;
total natural gas sold and transported to commercial and
industrial customers declined only 2% as continued economic
development in the area partially offset the impact of
weather on commercial sales.
The full year operation of SIGCORP Energy Services, Inc.
(Energy), which currently markets natural gas and related
services, added $70.2 million to SIGCORP's 1997 revenues.
A $27.1 million decrease in other revenues, which includes
the operating revenues of SIGCORP's other nonregulated
subsidiaries, reflected the absence of new performance
contracts at Energy Systems Group, Inc. (ESGI) during the
first six months of 1997; during the last half of 1997,
several major contracts, including a $15 million contract
with the Evansville-Vanderburgh School Corporation, were
awarded to Energy Systems Group, LLC, of which ESGI is a
one-third owner (see "Energy Systems Group, Inc." for further
discussion of the change of ownership). The $9.9 million
increase in 1996 revenues from SIGCORP's nonregulated
operations was chiefly due to greater revenues from ESGI.
OPERATING EXPENSES Although electric generation increased 4.2%,
related fuel expenses, the most significant electric operating
cost, declined 16.3% ($12.2 million) in 1997 due to 21% lower
unit coal costs resulting from SIGECO's coal contract reformation
efforts. Average coal costs per kWh generated were $.0098,
$.0124 and $.0141 for 1997, 1996 and 1995, respectively. SIGECO
will continue to aggressively manage its fuel expenses as a key
component of its strategy to remain a low-cost provider of
electricity. The 1996 fuel for electric generation expense
was 7.8% lower than 1995 expense due to 12% lower unit
coal 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.
<PAGE> 29
While the majority of SIGECO's sales of electric energy to
nonfirm wholesale customers is from excess capacity, SIGECO
increased its purchases of electricity from other utilities
24% in 1997 for resale to nonfirm electric wholesale
customers. Conversely, purchases of electric energy in 1996
were 15% lower than in 1995. Higher average market prices
also contributed to the $5.7 million increase in cost of
purchased electric energy during 1997.
The cost of gas sold, the major component of gas operating
expenses, declined 18.2% ($12 million) in 1997 due to the
decrease in gas sales. The 64% ($25.8 million) increase in
cost of gas sold in 1996 was attributed to 37% higher
average unit gas costs and 24% greater sales of gas compared
to 1995. The generally downward trend of natural gas market
prices experienced several years prior to 1996 was reversed
in 1996 when the combination of greater demand for gas caused
by colder winter temperatures nationwide and fewer
available natural gas supplies caused higher unit gas costs.
During 1997, the cost of energy services and other revenues,
which was chiefly the cost of natural gas purchased for resale
by Energy and performance contract costs at ESGI, rose $45.1
million compared to 1996 due to the full year operation
of Energy, partially offset by significantly lower performance
contract costs at ESGI. Conversely, additional performance
contracts in 1996 caused related costs to be greater than those
incurred in 1995.
Other operation expenses for 1997 were comparable to the $60.9
million incurred in 1996; lower expenses at SIGECO and ESGI
offset higher full year operation expenses at Energy. In 1996,
other operation expenses were up 14% ($7.4 million) due
primarily to an 11% ($5.5 million) increase in such expenses at
SIGECO, to additional performance contract sales activity at
ESGI and to higher expenses at SIGCORP's other nonregulated
subsidiaries. Additional expenses for postretirement benefits
other than pensions deferred until 1996 and full-year
operating costs of the new sulfur dioxide scrubber at SIGECO's
Culley Generating Station represented the majority of the
increase in other operation expenses at SIGECO in 1996.
Maintenance expenses, essentially all incurred at SIGECO,
declined 1.9% ($.6 million) in 1997, following a 7.6%
($2.4 million) decrease in 1996. Higher power generation
maintenance expenditures during 1997 related to turbine generator
and boiler repairs were offset by lower maintenance expenditures
on gas and electric transmission and distribution facilities.
Maintenance expenses in 1995 reflected a major turbine generator
maintenance overhaul and system repairs caused by a devastating
storm in SIGECO's service area.
Depreciation and amortization expense increased 3.2%
($1.2 million) in 1997 due to utility plant additions for the
major refurbishment of the Culley Unit 3 turbine generator and
boiler ($16.3 million), a new $4.4 million gas transmission
line to serve a rapidly developing industrial sector in SIGECO's
service territory, and for SIGECO's continued investment in
other gas and electric utility facilities required to serve
new business development and upgrade existing energy
delivery systems. Depreciation and amortization expense
declined slightly in 1996, the result of lower depreciation
rates on electric utility plant related to SIGECO's retail
electric rate adjustment.
<PAGE> 29
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 IURC.
The favorable outcome of contested prior year property tax
assessments resulted in a $1.4 million decline in 1997 property
and other taxes expense, following a 3.4% increase in 1996.
INTEREST AND OTHER CHARGES Additional capitalized interest and
allowance for equity funds related to several large construction
projects during 1997 was the primary reason for the $1.9 million
reduction in total interest and other charges in 1997. Increases
in total interest expense and in interest income during 1997
reflected increased financial investment activities by Southern
Indiana Properties, Inc. and the related costs. Interest and
other charges declined slightly in 1996 when greater interest
income more than offset lower capitalized interest and the
allowance for equity funds.
INCOME TAX EXPENSE Federal and state income taxes rose $1.9 million
during 1997 due to the increase in pretax income. Federal and
state income taxes were $5.7 million greater during 1996 due to
the higher pretax income and to a $1.2 million downward adjustment
to income tax reserves during 1995.
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 environment and given its current
competitive position in the industry, SIGECO believes its use of
regulatory accounting is appropriate. In September 1995, SIGECO
petitioned the IURC seeking a general increase in
gas rates. On July 3, 1996, the IURC issued its order, effective
July 15, 1996, granting a 7.3%, or $4.8 million, increase in
annual revenues. The adjustment in rates was necessary to recover
<PAGE> 31
increases in operating and maintenance costs and additional
investment in gas distribution facilities. The adjustment
includes recovery of additional costs incurred for postretirement
benefits other than pensions related to gas operations
approximating $1.1 million annually.
In June 1995, the IURC approved the third of three retail electric
rate increases related to its Clean Air Act Compliance project,
representing an increase of 2.1%, or $4.5 million, in revenues.
The final adjustment was necessary to cover financing costs related
to the balance of the project construction expenditures,
costs related to the operation of the scrubber, and certain
nonscrubber-related operating costs such as additional costs
incurred for postretirement benefits other than pensions beginning
in 1993 and the recovery of demand side management program
expenditures.
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. In April 1995,
SIGECO reached an agreement with its remaining long-term contract
coal supplier, effective July 1995, to buy out the remainder of
SIGECO's contractual obligations, enabling it to acquire
lower-priced spot market coal. In 1997, the full benefit of the
contract buyout was reflected in average coal costs per kWh
generated, which were down 21% from 1996. SIGECO estimates the
total savings in coal costs resulting from the buyout, net of total
buyout costs, will approximate $58 million through December 31,
1998, the term of the original contract. The net savings are
being passed back to SIGECO's retail and firm wholesale electric
customers through the fuel adjustment clause.
COMPETITION SIGCORP's predominant subsidiary, SIGECO, is presently a
fully integrated provider of retail gas and electric utility
service within a franchised, 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 is occurring in the United States with respect
to the monopoly structure of the electric utility industry. The
National Energy Policy Act of 1992 (NEPA) initiated some of the most
significant changes in the history of the electric industry. The
primary purpose of the electric provisions of NEPA is to increase
competition in electric generation by enabling virtually nonregulated
entities, such as exempt wholesale generators, to develop power
plants, and by granting the Federal Energy Regulatory Commission
(FERC) authority to require a utility to provide transmission
services, including the expansion of the utility's transmission
facilities necessary to provide such services, to any entity selling
or purchasing electricity at wholesale. Although the FERC may
not order retail wheeling (the transmission of electricity directly
to an ultimate consumer), it may order wheeling of electricity
generated by an exempt wholesale generator or
another utility to a wholesale customer of a regulated utility.
<PAGE> 31
FERC has aggressively undertaken the introduction of competition
into the wholesale electric business. On April 24, 1996, FERC
issued Order 888 which finalized the key provisions of its Notice
of Proposed Rulemaking (Mega-NOPR) on Open Access issued in March 1995.
Order 888 provided for mandatory filing of open access transmission
tariffs, provided for functional unbundling of all transmission
services, required utilities to use the tariffs for their own bulk
power transactions, and allowed recovery of stranded costs in
certain circumstances. SIGECO has filed the mandatory tariffs to
comply with Order 888.
Also on April 24, 1996, FERC issued Order 889 which required
each public utility that owns, controls or operates facilities
used for the transmission of electric energy in interstate commerce
to create or participate in an Open Access Same-time Information
System for posting information about available transmission
capacity, prices and other information that will enable customers
to obtain open access nondiscriminatory transmission service.
Order 889 required the filing of detailed Standards of Conduct
defining how a transmission provider will functionally separate
its transmission and wholesale power merchant functions.
SIGECO has implemented the necessary changes and filed the
Standards of Conduct to comply with Order 889.
The results of Orders 888 and 889 on SIGECO have been generally
favorable. Because SIGECO has below average variable costs of
generation, it has been an aggressive seller of electricity to
power marketers and other providers seeking low-priced 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 after the expiration of existing contracts. 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 rules on its
results of operations or financial condition.
FERC does not have jurisdiction over the retail sales of
electricity. The various 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, more than a dozen 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 1997, and again in 1998,
such legislation was introduced in the Indiana Senate. The 1997
proposal did not pass out of its committee of origin in its
original form. The 1998 legislation, although passed out of its
committee of origin, did not receive widespread acceptance by
the legislature and was not voted upon by the full Senate. A
substitute proposal, which addressed only the participation of
Indiana utilities in multi-state transmission pools under the
control of an Independent System Operator (or ISO), was
rejected by the Senate. The 1997 legislative proposal,
initially a comprehensive proposal to introduce retail competition
in the year 2000, was altered to only authorize a joint
Senate/House study committee, called the Regulatory Flexibility
Committee, to study the issue. That committee met numerous times
in 1997, hearing testimony from a broad cross-section of
consultants, utilities, customer groups and regulators.
<PAGE> 33
It is anticipated by SIGECO that pressure on the Indiana legislature
could intensify if other states successfully implement retail
competition for electricity. SIGECO will continue to participate
in the debate to represent the interest 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 being historically low-cost. 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.
SIGCORP and SIGECO are 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 is rapidly
implementing, its corporate strategy of positioning itself
as a low-cost energy producer and the provider of high-quality
service to its retail as well as wholesale customers. Based on
a recent Edison Electric Institute survey, SIGECO industrial
rates were 8th lowest among 135 electric utilities in
1996.
SIGECO also provides retail integrated natural gas service in
Indiana. However, SIGECO does not currently earn a margin on
the direct sale of the commodity natural gas. 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, 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.
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, coal production and so on. As such,
the financial results of the nonregulated entities depend upon
their ability to successfully compete in their respective markets.
ENERGY SYSTEMS GROUP, INC. On May 23, 1997, Energy Systems Group,
Inc. (ESGI), IGC Energy and Citizens By-Products Coal Company formed
Energy Systems Group, LLC (ESG LLC) an equally owned limited liability
corporation. On June 18, 1997, ESGI, an energy- related performance
contracting firm, contributed significantly all of its assets and
liabilities to ESG LLC for a one-third interest in ESG LLC, which
assumed the operations and responsibilities of ESG. ESGI's results
of operations through June 18, 1997 are included in other revenues
and the respective operating expense accounts in SIGCORP's
consolidated financial statements. Subsequent to June 18, 1997,
ESGI's share of the pretax earnings and losses of ESG LLC are
included in Other, net.
SIGCORP FUELS, INC. Incorporated in December 1996, SIGCORP Fuels, Inc.
(Fuels) was formed to provide coal and related services to SIGECO
and other customers. In June 1997, SIGECO obtained approval from
the IURC to purchase coal from Fuels under a fixed price schedule
and to recover the respective costs from SIGECO's retail and firm
wholesale electric customers. In late 1997, Fuels purchased coal
reserves located in SIGECO's service area and took delivery of
coal mining equipment. The first shipments of coal to SIGECO
were delivered in January 1998. Currently, Fuels anticipates providing
approximately 25% of SIGECO's total coal supply requirements.
SIGCORP COMMUNICATIONS SERVICES, INC. Incorporated in August 1997,
SIGCORP Communications Services, Inc. was formed to undertake various
telecommunications-related strategic initiatives for SIGCORP. Its
activities have focused on broadband and fiber optic systems
installations for small to mid-size communities thoughout the
United States.
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. The facilities were constructed at
a total cost of $103 million and began commercial operation
February 1, 1995. With the addition of the scrubber, SIGECO is
exceeding 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 anticipates that purchases
of additional allowances will be required 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 as determined by the concentration of
nitrogen oxide (NOx), a key ingredient of ozone. 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 the primary reason
for their ozone concentration
<PAGE> 34
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 NOx budget of allowed 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. There remains much uncertainty
as to the extent that SIGECO would be affected by this ruling.
An alliance of electric utilities, including SIGECO, from the
midwestern states are working together to determine the most
appropriate compliance strategy as an alternative to the
USEPA proposal. Depending on the level of system-wide emissions
reductions ultimately required, and the control technology
utilized to achieve the reductions, control equipment expenditures
ranging from estimates of $10 million to $90 million could be
required. This is in addition to expenditures previously made to
bring SIGECO in compliance with the CAAA requirements. Under the
current USEPA implementation schedule, the emissions reductions
and required control equipment must be implemented and in place by 2004.
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 In November 1995, SIGECO filed an update of
its Integrated Resource Plan (IRP) with the IURC, requesting approval
to greatly reduce previously ordered future DSM programs due to
the anticipated changes precipitated by NEPA. In July 1996, the
IURC approved the reduction of projected DSM program expenditures
during the 1997-2012 period from a total of $138 million to $39
million. In the latest update of its IRP, filed in November
1997, SIGECO determined that certain of these programs were not
cost effective and were to be discontinued. As a result,
projected DSM expenditures for the 1998-2013 period are expected
to further decline from a total of $38 million to
$22 million. Although future DSM expenditures will be
substantially reduced, the IRP projections indicate that by 2000,
approximately 52 megawatts of capacity are expected to have been
postponed or eliminated due to these programs.
SIGECO will continue to monitor the benefits of its DSM programs
and additional changes are possible. Although SIGECO is already
recognized as one of the most competitive electric utilities
in the nation, the reductions enable SIGECO to be even more cost
competitive in the future with very low stranded investment
exposure.
<PAGE> 36
YEAR 2000 COMPLIANCE COSTS SIGECO has several major information
systems projects in progress, to be completed before 2000, that will
replace applications identified that may not have been year 2000
compliant. Based on SIGECO's preliminary investigation, which
is ongoing, all other critical systems are year 2000 compliant.
SIGCORP does not expect the amounts required to be
expensed for year 2000 compliance modifications to have a material
effect on its financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, financial performance continued to be solid. Internally
generated cash (net income less dividends plus charges to net
income not requiring cash) funded 78% of SIGECO's 1997 construction
and DSM program expenditures; these expenditures were fully funded
with internally generated cash in 1996. SIGCORP's ratio of
earnings to fixed charges (SEC method) was 4.1:1, and its
embedded cost of long-term debt and preferred stock is 6.6 %
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,
environmental compliance requirements, and to expenditures for
SIGECO's DSM programs. Construction expenditures totaled $68.4
million during 1997, including $16.3 million expended
on the major refurbishment of the F. B. Culley Generating Station
Unit 3 turbine generator and boiler, $4.9 million for facilities
under construction to serve the new Toyota truck manufacturing
plant, $4.4 million for construction of a new gas transmission
line to serve the rapidly developing Mt. Vernon, Indiana industrial
area, $5.8 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, and $2.3 million for DSM programs. The 1997
expenditures compare to $43.9 million and $54.1 million expended
in 1996 and 1995, respectively.
Construction requirements for the years 1998-2002 are projected to
total approximately $315 million, including approximately $15
million to complete the information systems projects and
approximately $5 million of capitalized expenditures for DSM
programs, but exclude construction expenditures that
may be required to comply with new USEPA air quality standards
discussed under "Environmental Matters". SIGECO does not
currently anticipate the need for construction of new base-load
generation.
FINANCING ACTIVITIES Financing activity during 1997 included a
$24.7 million increase in long-term notes payable incurred
primarily for structured financial investments by Southern
Indiana Properties, Inc. In 1996, the only financing
activity was an $8.5 million increase in short-term debt.
At year end, SIGCORP had $41.4 million in short-term borrowings,
leaving unused lines of credit and trust demand note arrangements
totaling $39 million.
<PAGE> 37
During the five-year period of 1998-2002, SIGCORP anticipates that a
total of $65.6 million of debt securities, primarily those of SIGECO,
will be redeemed. SIGCORP expects the majority of the 1998-2002
construction program and debt redemption requirements to be
provided by internally generated funds. External financing
requirements of $60-70 million are anticipated and will be used
primarily to redeem long-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 future
construction and other capital requirements.
<PAGE> 38
EXHIBIT 99.9
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Year Ended December 31
(in thousands except for per share amounts)
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Operating Revenues $433,237 $404,738 $360,771 $330,899 $330,317
Operating Income $85,582 $82,717 $72,401 $70,779 $69,403
Net Inc Before Cumulative
Effect of Accounting
Change $46,140 $43,264 $38,525 $39,920 $38,483
Net Income $46,140 $43,264 $44,819 $39,920 $38,483
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 $1.95 $1.83 $1.63 $1.69 $1.63
Cumulative Effect
of Accounting
Change $- $- $0.27 $- $-
Basic and Diluted
Earnings Per
Share $1.95 $1.83 $1.90 $1.69 $1.63
Dividends Per Share
of Common Stock $1.18 $1.15 $1.13 $1.10 $1.07
Total Assets $989,896 $952,653 $923,981 $917,416 $860,841
Redeemable Preferred
Stock $8,424 $8,424 $8,424 $8,515 $8,515
Long-Term
Obligations $276,844 $266,951 $265,085 $274,467 $274,884
</TABLE>
<PAGE> 39
EXHIBIT 99.10
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
Quarter Ended (in thousands
except for per share amounts)
<S><C> <C> <C> <C> <C> <C> <C> <C>
March 31, June 30, September 30, December 31,
1997 1996 1997 1996 1997 1996 1997 1996
Operating Revenues
$107,572 $117,154 $85,609 $92,022 $108,795 $99,247 $131,261 $96,315
Operating Income
$23,443 $23,174 $13,497 $17,554 $34,627 $29,336 $14,015 $12,653
Net Income
$13,113 $13,272 $6,263 $8,837 $19,947 $15,948 $6,817 $5,207
Basic Earnings Per Share
$0.55 $0.56 $0.27 $0.37 $0.84 $0.67 $0.29 $0.22
Diluted Earnings Per Share
$0.55 $0.56 $0.26 $0.37 $0.84 $0.67 $0.29 $0.22
Average Common Shares Outstanding
23,631 23,631 23,631 23,631 23,631 23,631 23,631 23,631
<FN>
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.
</FN>
</TABLE>
<PAGE> 5
<TABLE>
EXHIBIT 12A
<CAPTION>
SIGCORP, Inc.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Five Years Ended December 31, 1997
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
(in thousands)
Earnings as Defined
Net income (Note 1) $47,237 $44,361 $39,624 $41,025 $39,588
Add:
Income Taxes:
Current:
Federal 24,387 8,743 7,031 15,257 5,880
State 3,961 1,891 1,601 2,519 1,310
Deferred, net:
Federal (2,858) 10,967 7,771 (80) 9,682
State (172) 1,805 1,385 314 1,581
Deferred investment
tax credit, net (1,457) (1,443) (1,556) (1,846) (1,868)
Interest on long-term
debt, net of AFUDC
borrowed 18,999 17,987 18,168 16,546 17,012
Amortization of premium,
discount and expense
on debt 671 690 694 852 773
Interest on short-
term debt 1,519 2,387 1,905 1,589 747
Interest component of
rent expense (Note 2) 695 682 565 416 405
Earnings as defined $92,982 $88,070 $77,188 $76,592 $75,110
Fixed Charges as Defined
Interest on long-term
debt $19,797 $18,432 $18,789 $18,604 $18,437
Amortization of premium,
discount and expense
on debt 671 690 694 852 773
Interest on short-term
debt 1,519 2,387 1,905 1,589 747
Interest component of
rent expense (Note 2) 695 682 565 416 405
Fixed charges as
defined $22,682 $22,191 $21,953 $21,461 $20,362
Ratio of Earnings to
Fixed Charges (Note 3) 4.10 3.97 3.52 3.57 3.69
<FN>
NOTES:
<F1> Net income, as defined, is before preferred dividend
requirements.
<F2> One-third of rentals represents a reasonable
approximation of the interest factor.
<F3> The ratios shown above do not reflect the fixed charge
component in SIGECO's power contract with OVEC . Inclusion
of the component in the computation would not have a
significant effect on the ratios.
</FN>
</TABLE>
<PAGE> 6
EXHIBIT 12B
<TABLE>
<CAPTION>
SIGCORP, Inc.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
For the Five Years Ended December 31, 1997
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
(in thousands)
Earnings as Defined
Net income (Note 1) $47,237 $44,361 $39,624 $41,025 $39,588
Add:
Income Taxes:
Current:
Federal 24,387 8,743 7,031 15,257 5,880
State 3,961 1,891 1,601 2,519 1,310
Deferred, net:
Federal (2,858) 10,967 7,771 (80) 9,682
State (172) 1,805 1,385 314 1,581
Deferred investment
tax credit, net (1,457) (1,443) (1,556) (1,846) (1,868)
Interest on long-term
debt, net of AFUDC
borrowed 18,999 17,987 18,168 16,546 17,012
Amortization of premium,
discount and expense
on debt 671 690 694 852 773
Interest on short-term
debt 1,519 2,387 1,905 1,589 747
Interest component of
rent expense (Note 2) 695 682 565 416 405
Earnings as defined $92,982 $88,070 $77,188 $76,592 $75,110
Fixed Charges as Defined
Interest on long-term
debt $19,797 $18,432 $18,789 $18,604 $18,437
Amortization of premium,
discount and expense
on debt 671 690 694 852 773
Interest on short-
term debt 1,519 2,387 1,905 1,589 747
Interest component of
rent expense (Note 2) 695 682 565 416 405
Preferred stock
dividends (pretax) 1,097 1,097 1,099 1,105 1,105
Fixed charges as
defined $23,779 $23,288 $23,052 $22,566 $21,467
Ratio of Earnings to
Fixed Charges (Note 3) 3.91 3.78 3.35 3.39 3.50
<FN>
NOTES:
<F1> Net income, as defined, is before preferred dividend
requirements.
<F2> One-third of rentals represents a reasonable
approximation of the interest factor.
<F3> The ratios shown above do not reflect the fixed charge
component in SIGECO's power contract with OVEC . Inclusion
of the component in the computation would not have a
significant effect on the ratios.
</FN>
</TABLE>
