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HomeMy WebLinkAbout2000-269ORDINANCE NO M-a AN ORDINANCE OF THE CITY OF DENTON, TEXAS APPROVING AND AUTHORIZING THE CITY MANAGER TO EXECUTE A PROFESSIONAL SERVICES AGREEMENT WITH SIGCORP COMMUNICATIONS SERVICES, INC FOR CONSULTING SERVICES PERTAINING TO THE PREPARATION OF AN INDEPENDENT FEASIBILITY EVALUATION RESPECTING TELECOMMUNICATIONS, DARK FIBER, AND BANDWIDTH ISSUES FOR DENTON MUNICIPAL ELECTRIC, AUTHORIZING THE EXPENDITURE OF FUNDS THEREFOR, AND PROVIDING AN EFFECTIVE DATE WHEREAS, the City Council deems it in the public interest to engage SIGCORP Communications Services, Inc, an Indiana Corporation ("SIGCORP"), to provide professional consulting services to the City pertaining to the preparation of an independent feasibility evaluation respecting telecommunications, dark fiber, and bandwidth issues for Denton Municipal Electric, and WHEREAS, the City staff has reported to the City Council that there is a substantial need for the above -referenced professional multi -disciplinary independent consulting services, that limited City staff cannot adequately perform the services and tasks with its own personnel, and that City staff further lacks the specialized expertise necessary to complete such an evaluation, and WHEREAS, Chapter 2254 of the Texas Government Code, known as the "Professional Services Procurement Act", generally provides that a City may not select a provider of professional services on the basis of competitive bids, but must select the provider on the basis of demonstrated competence, knowledge, and qualifications, and for a fair and reasonable price, and WHEREAS, the City Council has provided in the City Budget for the appropriation of funds to be used for the purchase of the professional consulting services, as set forth in the Professional Services Agreement, NOW, THEREFORE, THE COUNCIL OF THE CITY OF DENTON HEREBY ORDAINS SECTION 1 That the City Council approves, and the City Manager is hereby authorized to execute a Professional Services Agreement for Consulting Services with SIGCORP Communications Services, Inc, an Indiana Corporation, for professional consulting services pertaining to the preparation of the independent feasibility evaluation referred to in the preamble above, in substantially the form of the Professional Services Agreement attached hereto and incorporated herewith by reference SECTION 2 That the award of this Agreement by the City is on the basis of the demonstrated competence, knowledge, and qualifications of SIGCORP and the ability of SIGCORP to perform the services needed by the City for a fair and reasonable price SECTION 3 That the expenditure of funds as provided in the attached Professional Services Agreement is hereby authorized SECTION 4 That this ordinance shall become effective immediately upon its passage and approval �l PASSED AND APPROVED this the L ` day of 12000 &'&" Ae'�— EULINE BROCK, MAYOR ATTEST JENNIFER WALTERS, CITY SECRETARY By APPROVED AS TO LEGAL FORM HERBERT L PROUTY, CITY ATTORNEY S \Our Documents\Ordmances\00\SIGCORP PSA Ord - DME Eval 8 2000 doe STATE OF TEXAS § COUNTY OF DENTON § PROFESSIONAL SERVICES AGREEMENT FOR CONSULTING SERVICES THIS AG EEMENT is made and entered into as of the day of 2000, by and between the City of Denton, Texas, a Texas Municipal CorporatAn, with its principal offices at 215 East McKinney Street, Denton, Texas 76201 (hereafter "OWNER") and SIGCORP Communications Services, Inc , an Indiana Corporation, with its offices at 421 John Street, Evansville, Indiana 47713 (hereafter "CONSULTANT"), the parties acting herein, by and through their duly -authorized representatives and officers WITNESSETH, that in consideration of the covenants and agreements herein contained, the parties hereto do mutually AGREE as follows ARTICLE I EMPLOYMENT OF CONSULTANT The OWNER hereby contracts with CONSULTANT, as an independent contractor, and the CONSULTANT hereby agrees to perform the services herein in connection with the Project as stated in the Articles to follow, with diligence and in accordance with the professional standards customarily obtained for such services in the State of Texas The professional services set forth herein are in connection with the following described project (the "Project") CONSULTANT shall prepare an independent feasibility evaluation utilizing a multi -disciplinary approach, regarding the possibility of the OWNER providing telecommunications services as permitted by applicable law and the leasing of dark fiber and/or bandwidth, which evaluation shall consist of, among other things investigation, local market research, high-level engineering estimates, financial analyses, economic modeling, and other related professional services The Project shall culminate in CONSULTANT preparing and delivering a final report to OWNER with recommendations, and presenting the same to the OWNER ARTICLE II SCOPE OF SERVICES The CONSULTANT shall perform the following Basic Services in a professional manner A To perform all those services and tasks as set forth in CONSULTANT's proposal booklet (the "Proposal"), which is an eighteen (18) page document, with a forty-four (44) page Appendix attached thereto, issued on May 23, 2000 by Holly R Green, Regional Manager of CONSULTANT to Ray Wells, Assistant Director, Denton Municipal Electric ("DME"), a copy of which Proposal is attached hereto and incorporated herewith by reference as Attachment "A " Page 1 of 10 B If there is any conflict between the terms of this Agreement and the Attachment attached to this Agreement, the terms and conditions of this Agreement shall control over the terms and conditions of the Attachment ARTIC .F. Tn ADDITIONAL SERVICES Any additional services to be performed by the CONSULTANT, if authorized by the OWNER, which are not included as Basic Services in the Proposal and in the above-descnbed Scope of Services, set forth in Article lI above, shall be later agreed -upon by the parties, who shall detennine, in writing, the scope of such additional services, the amount of compensation for such additional services, and other essential terms pertaining to the provision of such additional services by the CONSULTANT to OWNER ARTIC:I .F. IV PERIOD OF SERVICE This Agreement shall become effective upon execution by the OWNER and the CONSULTANT and upon the issuance of a notice to proceed by the OWNER, and shall remain in force for the period that may reasonably be required for the completion of the Project, including Additional Services, if any, and any required extensions approved by the OWNER This Agreement may be sooner tenrunated in accordance with the provisions hereof Time is of the essence in this Agreement The parties agree that based upon the scope of the services contained in the Proposal and after considering the work to be performed by CONSULTANT, that they reasonably expect that CONSULTANT shall complete the Project in approximately four (4) to six (6) months from and after the date of the issuance of the notice to proceed by OWNER ARTIC I .F, V COMPENSATION A COMPENSATION TERMS 1 "Subcontract Expense" is defined as any expenses incurred by CONSULTANT in the employment of others in outside firms, for services in the nature of professional engineering, or related services Any subcontract or subconsultant billing reasonably incurred by the CONSULTANT in connection with the Project shall be invoiced to OWNER at the actual cost 2 "Direct Non -Labor Expense" is defined as that expense, based upon actual cost plus ten (10%), for any out-of-pocket expense reasonably incurred by the CONSULTANT in the performance of this Agreement, and as provided in the Proposed Project Budget section of Exhibit "A," for long distance telephone charges, telecopy charges, messenger services, printing and reproduction expenses, out-of-pocket expenses for purchased computer time, all reasonable travel expenses, and similar incidental expenses incurred in connection with the Project Page 2 of 10 For and in consideration of the professional services to be performed by the CONSULTANT herein, OWNER agrees to pay CONSULTANT, based upon the satisfactory completion of the Basic Services set forth in the Scope of Services as shown in Article II above, as follows 1 CONSULTANT shall perform its work on this Project on a "lump -sum fee plus additional out-of-pocket direct non -labor expenses" basis CONSULTANT shall bill from time sheets, and in accordance with the provisions of the "Proposed Project Budget" contained at page 7 of the Proposal OWNER agrees to pay to CONSULTANT for its professional services the lump -sum amount of $44,137 00 in fees, plus a further not -to -exceed amount of $4,000 00 for additional out-of-pocket direct non -labor expense as more particularly set forth in Note 3 in the Proposed Project Budget contained on page 7 of the Proposal The total amount payable to CONSULTANT respecting this Agreement shall therefore not exceed $48,137 00 Partial payments to the CONSULTANT will be made monthly based on the percent of actual completion of the basic services, rendered to and approved by the OWNER through its Director of Electric Utilities or her designee However, under no circumstances shall any monthly statement for services exceed the value of the work performed at the time a statement is rendered The OWNER may withhold the final ten (10%) percent of the above professional fee amount until satisfactory completion of the Project by the CONSULTANT Nothing contained in this Article shall require the OWNER to pay for any work which is unsatisfactory as reasonably determined by the Director of Electric Utilities or her designee, or which is not submitted by CONSULTANT to the OWNER in compliance with the terms of this Agreement The OWNER shall not be required to make any payments to the CONSULTANT when the CONSULTANT is in default under this Agreement It is specifically understood and agreed that the CONSULTANT shall not be authorized to undertake any work pursuant to this Agreement that would require additional payments by the OWNER for any charge, expense or reimbursement above the lump -sum fees and the maximum not -to -exceed fees as stated heremabove, without first having obtained the prior written authorization from the OWNER CONSULTANT shall not proceed to perform any services to be later provided for under Article III "Additional Services" without first obtaining prior written authorization from the OWNER C ADDITIONAL SERVICES For additional services authorized in writing by the OWNER in Article III heremabove, CONSULTANT shall be paid based on a to -be -agreed -upon Schedule of Charges Payments for additional services shall be due and payable upon submission by the CONSULTANT, and shall be in accordance with Article V B heremabove Statements for Basic Services and any additional services shall be submitted to OWNER no more frequently than twice monthly, on or about the 151 and 16a' days of each month following the execution of this Agreement D PAYMENT If the OWNER fails to make payments due the CONSULTANT for services and expenses Page 3 of 10 within forty (40) days after receipt of the CONSULTANT'S undisputed statement thereof, the amounts due the CONSULTANT will be increased by the rate of one percent (1%) per month from and after the said fortieth (40th) day, and in addition, thereafter, the CONSULTANT may, after giving ten (10) days written notice to the OWNER, suspend services under this Agreement until the CONSULTANT has been paid in full for all amounts then due and owing, and not disputed by OWNER, for services, expenses and charges Provided, however, nothing herein shall require the OWNER to pay the late charge of one percent (1%) per month as set forth herein, if the OWNER reasonably determines that the CONSULTANT's work is unsatisfactory, in accordance with Article V B of this Agreement ARTICLE VT OBSERVATION AND REVIEW OF THE WORK The CONSULTANT will exercise reasonable care and due diligence in discovering and promptly reporting to the OWNER any defects or deficiencies in the work of the CONSULTANT or any of its subcontractors or subconsultants ARTICLE VTT OWNERSHIP OF DOCUMENTS All documents prepared or furnished by the CONSULTANT (and CONSULTANT's subcontractors or subconsultants) pursuant to this Agreement are instruments of service and shall become the property of the OWNER upon the termination of this Agreement The CONSULTANT is entitled to retain copies of all such documents The documents prepared and furnished by the CONSULTANT are intended only to be applicable to this project and OWNER's use of these documents in other projects shall be at OWNER's sole risk and expense In the event the OWNER uses the Agreement in another project or for other purposes than specified herein any of the information or materials developed pursuant to this agreement, CONSULTANT is released from any and all liability relating to their use in that project The foregoing notwithstanding, the following shall remain the sole and exclusive property of CONSULTANT (1) all work product of CONSULTANT'S attorneys and other third parties, (2) all work product protected by the attorney/client privilege, (3) all work product developed or proposed prior to the date of this Agreement, (4) all work product not created exclusively for use in connection with the provision of services under this Agreement, and (5) all business models and software, if any, developed in connection with the provision of services herein ARTICLE. VM INDEPENDENT CONTRACTOR CONSULTANT shall provide services to OWNER as an independent contractor, not as an employee of the OWNER CONSULTANT shall not have or claim any right arising from employee status ART1C1 E.1X INDEMNITY AGREEMENT The CONSULTANT shall indemnify and save and hold harmless the OWNER and its officials, officers, agents, attorneys and employees from and against any and all liability, claims, Page 4 of 10 demands, damages, losses and expenses, including but not limited to court costs and reasonable attorney's fees incurred by the OWNER, LIMITED HOWEVER, to the extent provided or allowed by applicable law, and including without limitation, damages for bodily and personal injury, death, or property damage, resulting from the negligent acts or omissions of the CONSULTANT or its officers, shareholders, agents, attorneys and employees in the execution, operation, or performance of this Agreement The OWNER shall indemnify and save and hold harmless the CONSULTANT and its officers, agents, attorneys and employees from and against any and all liability, claims, demands, damages, losses and expenses, including but not limited to court costs and reasonable attorney's fees incurred by CONSULTANT, LIMITED HOWEVER, to the extent provided or allowed by applicable law, and including without limitation, damages for bodily and personal injury, death, or property damage, resulting from the negligent acts or omissions of the OWNER or its officials, officers, agents, attorneys and employees in the execution, operation, or performance of this Agreement Nothing in this Agreement shall be construed to create a liability to any person who is not a party to this Agreement and nothing herein shall waive any of the parties' defenses, both at law or equity, to any claim, cause of action or litigation filed by anyone not a party to this Agreement, including the defense of governmental immunity, which defenses are hereby expressly reserved ARTICLE X INSURANCE During the performance of the Services under this Agreement, CONSULTANT shall maintain the following insurance with an insurance company licensed to do business in the State of Texas by the State Insurance Board or any successor agency, that has a rating with A M Best Rate Carvers of at least an "A-" or above A Comprehensive General Liability Insurance with bodily injury limits of not less than $500,000 for each occurrence and not less than $500,000 in the aggregate, and with property damage limits of not less than $100,000 for each occurrence and not less than $100,000 in the aggregate B Automobile Liability Insurance with bodily injury limits of not less than $500,000 for each person and not less than $500,000 for each accident and with property damage limits for not less than $100,000 for each accident C Worker's Compensation Insurance in accordance with statutory requirements and Employer's Liability Insurance with limits of not less than $100,000 for each accident D Professional Liability Insurance with limits of not less than $1,000,000 annual aggregate E CONSULTANT shall furnish insurance certificates or insurance policies at the OWNER's request to evidence such coverages The insurance policies shall name the OWNER as an additional insured on all such policies to the extent legally possible, and shall contain a provision that such insurance shall not be cancelled or modified without thirty (30) days prior written notice to OWNER and CONSULTANT In such event, the CONSULTANT shall, Page 5 of 10 prior to the effective date of the change or cancellation of coverage, deliver copies of any such substitute policies furnishing at least the same policy limits and coverage to OWNER ARTTC T.F. XT ARBITRATION AND ALTERNATE DISPUTE RESOLUTION The parties may agree to settle any disputes under this Agreement by submitting the dispute to arbitration or other means of alternate dispute resolution such as mediation No arbitration or alternate dispute resolution ansing out of or relating to, this Agreement involving one party's disagreement may include the other party to the disagreement without the other's approval ARTTCT.F. X11 TERMINATION OF AGREEMENT A Notwithstanding any other provision of this Agreement, either party may terminate this Agreement by providing forty-five (45) days advance written notice to the other party B This Agreement may alternatively be terminated in whole or in part in the event of either party substantially failing to fulfill its obligations under this Agreement No such termination will be effected unless the other party is given (1) written notice (delivered by certified mail, return receipt requested) of intent to terminate and setting forth the reasons specifying the nonperformance or other reason(s), and not less than thirty (30) calendar days to cure the failure, and (2) an opportunity for consultation with the terminating party prior to termination C If the Agreement is terminated prior to completion of the services to be provided hereunder, CONSULTANT shall immediately cease all services upon receipt of the written notice of termination from OWNER, and shall render a final bill for services to the OWNER within twenty (20) days after the date of termination The OWNER shall pay CONSULTANT for all services properly rendered and satisfactorily performed, and for reimbursable expenses prior to notice of termination being received by CONSULTANT, in accordance with Article V of this Agreement CONSULTANT shall turn over all documents prepared or furnished by CONSULTANT pursuant to this Agreement to the OWNER on or before the date of termination, but may maintain copies of such documents for its files D Upon termination of this Agreement, OWNER shall pay CONSULTANT all amounts due and owing hereunder through the effective date of such termmnation, and CONSULTANT shall immediately stop its work for OWNER ARTICLE XTTT RESPONSIBILITY FOR CLAIMS AND LIABILITIES Approval of the work by the OWNER shall not constitute nor be deemed a release of the responsibility and liability of the CONSULTANT, its officers, employees, agents, subcontractors, and subconsultants for the accuracy and competency of their designs or other work performed pursuant to this Agreement, nor shall such approval by the OWNER be deemed as an assumption of such responsibility by the OWNER for any defect in the design or other work prepared by the CONSULTANT, its officers, employees, agents, subcontractors, and subconsultants Page 6 of 10 ARTTCT.F. XTV NOTICES All notices, communications, and reports required or pernutted under this Agreement shall be personally delivered to, or telecopied to, or mailed to the respective parties by depositing same in the United States mail at the addresses shown below, postage prepaid, certified mail, return receipt requested, unless otherwise specified herein To CONSULTANT SIGCORP Communications Services, Inc Arm John A DiDomizio Vice President and General Manager 421 John Street Evansville, Indiana 47713 To OWNER City of Denton, Texas Sharon Mays, Director, DME 901-A Texas Street Denton, Texas 76201 All notices under this Agreement shall be effective upon their actual receipt by the party to whom such notice is given, or three (3) days after mailing of the notice, whichever event shall first occur I ►YYI;''r : ' :: 1•r This Agreement consisting of ten (10) pages and one (1) Attachment constitutes the complete and final expression of the Agreement of the parties and is intended as a complete and exclusive statement of the terms of their agreements, and supersedes all prior contemporaneous offers, promises, representations, negotiations, discussions, communications, understandings, and agreements which may have been made in connection with the subject matter of this Agreement ARTTCT.F. XVT SEVERABILITY If any provision of this Agreement is found or deemed by a court of competent jurisdiction to be invalid or unenforceable, it shall be considered severable from the remainder of this Agreement, and shall not cause the remainder to be invalid or unenforceable In such event, the parties shall reform this Agreement, to the extent reasonably possible, to replace such stricken provision with a valid and enforceable provision which comes as close as possible to expressing the original intentions of the parties respecting any such stricken provision ARTICT F XVTI COMPLIANCE WITH LAWS The CONSULTANT shall comply with all federal, state, local laws, rules, regulations, and ordinances applicable to the work performed by CONSULTANT hereunder, as they may now read or as they may hereafter be amended It I II •" • 11: P Page 7 of 10 In performing the services required hereunder, the CONSULTANT shall not discriminate against any person on the basis of race, color, religion, sex, national origin or ancestry, age, or physical handicap • 11 'OC_• A CONSULTANT represents that it has or will secure at its own expense all personnel required to perform all the services required under this Agreement Such personnel shall not be employees or officers of, nor have any contractual relations with the OWNER CONSULTANT shall promptly inform the OWNER of any conflict of interest or potential conflict of interest that may anse during the term of this Agreement B All services required hereunder will be performed by CONSULTANT or under its direct supervision All personnel engaged in performing the work provided for in this Agreement, shall be qualified, and shall be authorized and permitted under state and local laws to perform such services ARTICLE XX ASSIGNABILITY The CONSULTANT shall not assign any interest in this Agreement and shall not transfer any interest in this Agreement (whether by assignment, novation or otherwise) without the prior written consent of the OWNER, which consent shall not be unreasonably withheld The foregoing sentence notwithstanding, CONSULTANT may assign, transfer or convey any of its rights or obligations or assign any payments it is entitled to receive under this Agreement to any affiliate, parent or successor company of or to CONSULTANT CONSULTANT shall promptly notify OWNER of any change of its name as well as of any significant change in its corporate structure or in its operations No waiver or modification of this Agreement or of any covenant, condition, limitation herein contained shall be valid unless in writing and duly executed by the party to be charged therewith No evidence of any waiver or modification shall be offered or received in evidence in any proceeding ansing between the parties hereto out of or affecting this Agreement, or the rights or obligations of the parties hereunder, unless such waiver or modification is in writing, duly executed The parties further agree that the provisions of this Article will not be waived unless as herein set forth ARTICLE XXII NUSCELLANEOUS A CONSULTANT agrees that OWNER shall, until the expiration of two (2) years after the final payment made by OWNER under this Agreement, have access to and the right to examine any directly pertinent books, documents, papers and records of the CONSULTANT Page 8 of 10 involving transactions relating to this Agreement CONSULTANT agrees that OWNER shall have access during normal working hours to all necessary CONSULTANT facilities and shall be provided adequate and appropriate working space in order to conduct examinations or audits in compliance with this Article OWNER shall give CONSULTANT reasonable advance notice of all intended examinations or audits B CONSULTANT shall not be in breach of this Agreement, shall not be assessed with any damages or other liability, and the deadline for completion of its services under this Agreement shall be extended due to any loss, liability, damage, or delay created by acts of God, acts or omissions of the OWNER or its officers, agents, subcontractors, employees or assigns of the OWNER, acts of civil or military authority, failure to obtain customs clearances, governmental priorities, fires, strikes or other labor disturbances, floods, inclement weather, epidemics, war, not, acts of third parties having the effect of delaying performance of CONSULTANT'S services, inability to obtain or delay in obtaining, due to causes beyond its reasonable control, suitable labor, material, or equipment, or the discovery of contamination, pollution or other hazardous materials at or about the work site, or other causes beyond CONSULTANT'S control In the event of any such delay, the time for performance shall be extended by a period equal to the time lost by reason of such delay, and CONSULTANT shall be entitled to a reasonable, equitable adjustment in its fee C Venue of any suit or cause of action under this Agreement shall lie exclusively in Denton County, Texas This Agreement shall be governed by and construed in accordance with the laws of the State of Texas D For purposes of this Agreement, the parties agree that Holly R Green, Regional Manager of CONSULTANT ("Green") shall serve as the Project Manager of CONSULTANT, respecting this engagement This Agreement has been entered into with the understanding that Green shall serve as the CONSULTANT's key person serving the OWNER on the Project Any proposed changes requested by CONSULTANT, respecting Green serving as the key person on the Project, shall be subject to the approval of the OWNER, which approval the OWNER shall not unreasonably withhold Nothing herein shall limit CONSULTANT from using other qualified and competent members of its firm to perform the other services required herein, under its supervision or control E CONSULTANT shall commence, carry on, and complete its work on the Project with all applicable dispatch, and in a sound, economical, efficient manner, and in accordance with the provisions hereof In accomplishing the Project, CONSULTANT shall take such steps as are appropriate to ensure that the work involved is properly coordinated with related work being carried on by the OWNER F The OWNER shall assist the CONSULTANT by placing at the CONSULTANTSs disposal all available information pertinent to the Project, including previous reports, any other data relative to the Project and arranging for the access to, and make all provisions for the CONSULTANT to enter in or upon, public and private property as required for the CONSULTANT to perform professional services under this Agreement G The captions of this Agreement are for informational purposes only and shall not in any way affect the substantive terms or conditions of this Agreement Page 9 of 10 IN WITNESS WHEREOF, the City of Denton, Texas has executed this Agreement in four (4) original counterparts, by and through its duly-authonzed City Manager, and CONSULTANT has exgg��uted this Agre ment by and through its duly-authonzed undersigned officer, on this the / 5z" day of , 2000 ATTEST JENNIFER WALTERS, CITY SECRETARY By i �� APP OVED AS TO By� ATTEST By Corporate Secretary "OWNER" CITY OF DENTON, TEXAS QI "CONSULTANT" SIGCORP Communications Services, Inc An Indiana Corporation By J n A DiDomiz Vice PresidentlGeneral Manager Page 10 of 10 Telecommunications Feasibility Study Denton Municipal Utilities Denton, TX Proprietary and Confldential Prepared and Submitted May 23, 2000 Unpublished Work ® May 2000 SOPp Communications SOP Services Denton, TX Telecommunications Feasibility Study TABLE OF CONTENTS SECTION 1 STATEMENT OF UNDERSTANDING SECTION 2 SCOPE OF SERVICES - BUSINESS CASE MARKET RESEARCH HIGH-LEVEL ENGINEERING ESTIMATE FINANCIAL ANALYSIS/ECONOMIC MODELING SECTION 3 PROPOSED PROJECT BUDGET SECTION 4 SCS CORPORATE PROFILE OVERVIEW SERVICES PROJECTS FINANCIAL OVERVIEW ORGANIZATION STRUCTURE REFERENCES SECTION 5 CONCLUSION SECTION 6 APPENDIX May 23, 2000 Page 1 W.,ISIGCORP jCommunications Semces A VECTAni Campmry Denton, TX Telecommunications Feasibility Study The material contained in this document is proprietary to SIGCORP Communications Services, Inc (SCS) Its contents cannot be distributed to parties outside of employees of the Denton Municipal Electric without the prior written consent of SCS STATEMENT OF UNDERSTANDING Denton Municipal Electric (DENTON) is interested in investigating the benefits, costs and risks associated with a utility owned broadband network and developing a business case from this investigation DENTON'S primary interest is in providing additional services to its commercial and industrial customers SCS is providing the following Scope of Services in response to DENTON's request for a description and pricing of such services including local market research and financial analysis/economic modeling SCS will provide DENTON with an independent feasibility evaluation of DENTON providing telecommunications services (as applicable by law in the state of Texas) and of leasing dark fiber and/or bandwidth A final report/recommendations will be provided along with an on site presentation The final reporttrecommendations will not only be beneficial in the analysis of opportunities for Denton in providing broadband services to its customers, but it also serves as an incredible tool to assist Denton in understanding all of its customer sectors The understanding of these customers, their wants, needs and expectations will provide beneficial as the Utility transitions into an electric deregulated environment May 23, 2000 Page 2 SIOCORP Communications services A WaRIN Company Denton, TX Telecommunications Feasibility Study Business Case SCOPE OF SERVICES Market Research 1 Focus Groups with Residential and Commercial Customers SCS will conduct two focus groups with residential customers and two with commercial customers Residential respondents are randomly selected from a purchased survey sample The objective of these groups is to encourage group discussion regarding customer perceptions of the utility in general, as well as customer reactions to the concept of DENTON offering new services to its customers Residential groups will focus their discussions on Internet The commercial focus group will discuss data applications The results of these groups will allow SCS and the utility to determine further topics for analyses In addition, the focus group discussions will aid SCS in developing and refining the residential telephone survey instrument As SCS has discovered in the past, oftentimes customers mention other topics or items of concern within the community that are important considerations when analyzing the data collected in the market research phase And, by allowing two-way communication with DENTON customers, SCS obtains a clearer picture of customers wants and needs for the community During the focus groups, SCS will utilize the Perception AnalyzWm to gather quantitative data from a forum that is typically qualitative in nature By answering questions utilizing a handheld dial, each respondent's answer remains anonymous The value of the Perception AnalyzerTm system is that it promotes unbiased participation and eliminates problems associated with "group think " This tool serves a great benefit in a community as residents can be so closely connected in many ways -; May 23, 2000 Page 3 ' zl CcmmuOniRcahons serwcec A11MUNCompany Denton, TX Telecommunications Feasibility Study Market Research, Continued 2 Telephone Interviews with Residential Customers After the focus groups are completed, SCS will conduct 400 telephone interviews with residential customers The objective of these interviews is to determine customer satisfaction levels with various utility providers as well as the potential of new product offerings provided by DENTON These interviews all allow SCS to gather quantitative data for residential services such as Internet This quantitative data will allow SCS to formulate penetration estimates for the various services, thereby serving as direct inputs into the financial analysis Therefore, it is important that this instrument is refined (via the focus group discussions) to meet the community's needs SCS will utilize the survey sample purchased for the residential focus groups to obtain a random sample of residential customers The data collected via the telephone Interviews is statistically valid and represents a 96% confidence level, with a margin of error of plus or minus five percent 3 In Person Interviews with Large Commercial and Industrial Customers During the same week focus groups are conducted, SCS will conduct approximately 20 in -person interviews with commercial/industrial customers including interviews with medical facilities, schools, and city and county government organizations These interviews will aid in determining the data and voice communications needs for large customers The results of this research will provide a snapshot of those services most needed by commercial/industrial customers and their plans for expansion In addition, these interviews will allow SCS to determine which specific Denton businesses would most likely desire a direct fiber or hybrid fiber coaxial (HFC) connection to the network SCS would use this information, in the future, as a direct input into the design May 23, 2000 Page 4 / ISIGCUm ahons Sernces Denton, TX Telecommunications Feasibility Study High -Level Engineering Estimate SCS will provide a high-level engineering estimate that determines the physical infrastructure needed to deliver telecommunications/broadband services The engineers will use existing utility maps and information gleaned from interviews with utility staff to develop the estimated costs for the broadband service network The development of a high-level engineering estimate will provide DENTON with a better understanding of expected costs for the headend and outside plant equipment associated with a broadband system This evaluation will take into account the emphasis on serving the commercial/industrial sector as the priority customer and will address the costs associated with creating a Municipal Area Network (MAN) SCS's high-level conceptual design will include the following ■ Estimated cost for electronics • Estimated cost for MAN electronics • Estimated cost for outside plant ■ Number of Nodes ■ Estimated miles, type and count for fiber ■ Estimated miles of coaxial cable May 23, 2000 Page 5 ISIdCCtRP /Communications Services AV EN Company Denton, TX Telecommunications Feasibility Study Financial Analysis/Economic Modeling SCS will prepare a detailed financial analysis using information developed in the market research The analysis will take information on the proposed project, such as the cost and scope of the investment and the expected customer participation, as well as basic financial parameters from the municipality, and produce cost and revenue forecasts and net present values from a number of different perspectives The financial analysis will compute cash flows from each aspect of the project over a 10-year time horizon This analysis will incorporate the proper accounting treatment of investments, including depreciation and debt service models, for inclusion in projected income and cash flow statements Estimates of operations and maintenance and incremental investment costs will be computed as well as staffing and overhead costs In addition to examining the financial performance of the investment using a traditional accounting perspective, SCS's analysis will also allow an assessment of other benefits that would result from the system expansion This analysis recognizes that benefits are more than can be measured by revenue streams to the project The provision of additional customer services and increases in business efficiency are also important benefits In addition to an economic evaluation of the utility, SCS will estimate the customer and societal perspectives in the net present value and benefit -cost analysis SCS's financial analysis will provide DENTON with three scenarios --a best case, base case, and worst case scenario The outputs of the economic analysis will include, but are not limited to • Cash flows over a ten-year period • Present value analysis over a 15-year period • Capital cost projection • Estimated working capital requirements • Market penetration analysis • Estimated operating costs for staff and operations • Projected sources of revenue and variable costs of services • Economic Analysis • Risk Analysis Page 6 SIGCORP May 23, 2000 g j Av Communications Seances Denton, TX Telecommunications Feasibility Study - PROPOSED PROJECT BUDGET The not -to -exceed project costs for completing the approach defined on previous pages is as follows Telecommunication Services Business Case -- $44,137.00 This price is valid for a period of thirty days (30) after receipt of bid NOTE The above prices do not include focus group or personal interview participation fees' (see notes below), focus group room rental 2, or travel expenses 3 Fees for the professional services (pages 2-6) within this quote are fixed, however, SCS will bill expenses as incurred Expenses typically include travel, telephone, copying, etc, and are billed at actual cost plus 10% to cover general and administrative expenses All additional work will be completed at standard billing rates plus expenses (actual cost plus 10%) No additional work items will be started without mutual agreement of both DENTON and SCS SCS will invoice on a monthly basis up to the completion of the final task at which time the final invoice will be paid on receipt of the final report All invoices shall be paid in full within thirty days (30) from the date, and interest will be charged at 1 5% per month on all unpaid balances Based upon the tasks defined in this proposal, it is anticipated that the project will take approximately four to six months to complete This schedule assumes that the SCS project team will be able to begin shortly after award and that data required for the project will be forthcoming from DENTON After award of the project, SCS will prepare a detailed schedule by task for DENTON to review ' Traditionally focus groups are best attended if the participants are offered a small fee and or a meal, this holds true personal interviews also This fee or offering will be determined and funded by Denton SCS has seen fees of $15 to $50 2 Most often the Municipal incurs no fees for use of a local room SCS Suggests to rind a bank or library community room that does not charge for its use Focus group size is about 15 people, so the room size does not need to be large SCS will also be requesting the use of the Utility's TV and VCR — if one is not available they can be rented for approximately $50/day 3 Travel expenses will be incurred by the research team consisting of approximately three people and by two to three people making the final presentation In the case of DENTON our estimation for these expenses is approximately $4, 000 (airfare, hotel, food, etc) May 23, 2000 Page 7 516CORP � Communications Services A VKYRIN Company Denton, TX Telecommunications Feasibility Study SCS CORPORATE PROFILE Overview SIGCORP Communications Services, Inc (SCS) is based in Evansville, Indiana, and was incorporated in 1997 SCS is a wholly owned subsidiary of Vectren Corporation, which was formed by the merger two Indiana companies with strong balance sheets, low-cost operations, growing service areas, diversified product portfolios, and track records of delivering superior shareholder value SCS evolved from and replaced ComSource, Inc, an earlier Vectren (SICGORP, Inc) Corporation subsidiary, and was formed specifically to serve the growing broadband market The company focus is on broadband networks and related technical services for municipal utilities throughout the United States and offers all of the services a utility needs to plan, design, procure, install and operate a hybrid —fiber -coax network SCS has performed market studies, designed systems and installed networks at many locations nationwide, and its primary services, listed in the order in which many municipalities approach projects, are summarized below Services Feasibility Studies Before investing in a broadband network, a municipality needs to know the technological and competitive advantages as well as the expected return on investment, growth potential and other factors that influence decision -making SCS's feasibility studies typically include market research within residential and business communities, financial modeling and forecasting and a conceptual design of a suitable hybrid fiber optic/coaxial cable (HFC) network Resulting study recommendations are based on economic realities and community interests Implementation Planning When initial market research is complete and a municipality is ready to begin the practical steps required in soliciting a contract, SCS provides a wide range of services in planning assistance SCS helps to develop a statement of work for the RFP, identify regulatory and legal issues, determine client approval processes and evaluate potential partners for other applications SCS will also help prepare financing packages, attend bond agent negotiations, prepare initial budgets and schedules and project guarantees, form a business plan and marketing approach and carry out additional research if needed Design Services If a municipality decides to invest in a broadband network, SCS offers an integrated design, procurement and construction program The first phase is detailed design, and SCS has the resources and experience to May 23, 2000 Page 8 SIGCCIRP y jCommunications Services AVICTUNCaepuey Denton, TX Telecommunications Feasibility Study design a complete HFC network for any locality Working with the client, SCS reviews all options identified during the research phase then designs the system that best meets the municipality's current requirements within budget guidelines while providing for possible future expansion Procurement SCS staff is very familiar with the technical components of a broadband network and the related infrastructure and maintains a constant awareness of the changes and advances in the industry The company has an excellent relationship with many of the materials manufacturers and, whenever possible, it purchases supplies directly and passes the savings to its clients SCS plans for long lead time purchases when developing project schedules and is also able to expedite on -time delivery of materials Construction After a design is accepted and procurement is initiated, SCS's field team plans and executes the installation according to a comprehensive schedule developed during the design effort An on -site office is established, and a superintendent manages the construction effort by directly coordinating the installation with client representatives operation and Maintenance Services SCS provides comprehensive start-up and training services as well as a follow-on operations and maintenance program for the systems it installs This is particularly beneficial when advanced energy services (i e , load management, security, energy monitoring, surge protection, outage notification and automatic meter reading) are included in the installation Projects SCS's projects are broadly divided into five categories, although the categories can overlap and are frequently combined under a single contract or a series of follow-on contracts The categories are general consulting, feasibility studies, design, project management/construction and operations General Consulting Hawaii (1998) SCS performed a study for commercial load management program for an investor -owned utility This project consisted of developing program costs for load monitoring and equipment required for the pilot program customers, providing supporting data for cost components, and providing pilot program plan and cost estimates to the Utility Commission SCS also developed an implementation plan for the pilot program Feasibility Studies May 23, 2000 Page 9 ISIGCORP Communications services AVCaAENCompomy Denton, TX Telecommunications Feasibility Study e California (1999) SCS provided market research and an economic analysis to evaluate and provide a high level proforma SCS will design, construct, and eventually operate an HFC system for the same city • Indiana (1998) SCS completed a feasibility study, a conceptual design and protect management for a municipal utility The feasibility study included primary market research, which consisted of telephone surveys, focus groups and in -person interviews and a complete analysis of the data e Iowa (1998) SCS conducted follow-up market research to determine market penetration of, and customer satisfaction with, the services being provided by the broadband network SCS installed in a city e Minnesota (1999) SCS conducted a feasibility study and developed a conceptual design for a city The scope of the study included residential telephone surveys, commercial and industrial in -person interviews, focus groups and an economic analysis in preparation for the conceptual design e Missouri (1996) SCS worked with a local electric company to evaluate the possibility of becoming a broadband network provider e Now York (1997) A municipal electric department contracted with SCS to conduct a feasibility study for an HFC network e Toxas (1998) SCS evaluated the possibility of budding a fiber backbone to coordinate city offices and functions SCS provided protect management as well as market research through focus groups and in - person interviews with the city's commercial and industrial customer base e Texas (1999) SCS provided market research and a high-level proforma regarding a city's plans to enter the broadband market and is currently providing the conceptual design for an HFC network Design California (1999) SCS will design an HFC broadband system for a city Indiana (1999) SCS was awarded a contract to provide a detailed fiber optic design to connect school buildings, city offices and utility facilities The infrastructure design included strand mapping, a make-ready survey and complete specifications for the 144-strand ADSS fiber optic route In addition, a MAN conceptual design and detailed infrastructure plan for the local community budding was completed Project Management/ Construction e Iowa (2000) SCS was awarded a contract to build the outside plant for a city • California (1999) SCS has begun construction of an HFC broadband system for a city e Iowa (1995) SCS (as the ComSource, Inc, subsidiary of Vectren Corporation) was awarded a contract to install headend equipment and construct the outside HFC plant for a CAN system in a city • Iowa (1998) SCS installed a network distribution system, which consisted of buried fiber optic and coaxial cable and buried service May 23, 2000 Page 10 ' , SIGCORiw nhons services A VECIAW Company Denton, TX Telecommunications Feasibility Study entrances over forty route miles of construction Existing cable television systems were extended to the broadband headend where they were integrated in a new communications facility Iowa (1998) SCS installed a network distribution system, which consisted of buried and aerial fiber optic and coaxial cable and buried and aerial service entrances over forty route miles of construction, and an entirely new broadband system was built Iowa (1998) SCS was awarded construction of a headend cable television (CATV) system The scope of work included final design and documentation of a CATV headend system, furnishing CATV headend equipment, installation of the complete headend system and off -air tower and satellite antennas Integration of commercial insertion, an emergency alert system and status monitoring with the headend was also included in the scope of the work Ohio (1998) SCS was awarded a materials and labor installation contract for headend equipment for a broadband system for a city The scope included furnishing active (power consuming) components of a broadband, two-way, HFC system to supply video and data services Integration of commercial insertion, an emergency alert system and status monitoring with the headend was also included in the scope of the work Washington (1997) SCS was awarded a project to provide and install CAN headend equipment and construct six hub buildings to house fiber optic network equipment Integration of commercial insertion, an emergency alert system and status monitoring with the headend was also included in the scope of the work Operations California (1999) SCS will operate an HFC system for a city SCS provided market research, an economic analysis, design and construct for the same city This turnkey delivery includes developing a market strategy, creating promotions, educating customers, training customer service personnel, billing for services, hiring qualified technicians to maintain the system, monitoring the system for continued quality, and providing new service offerings Financial Information SCS is a wholly owned subsidiary of Vectren Corporation, a holding company with nearly $2 billion in assets Vectren's utility companies (SIGECO and Indiana Gas) serve 650,000 natural gas and electric customers in Indiana These substantial resources make SCS a valuable partner in broadband network design and development, particularly in the arrangements for performance bonding A SIGCORP Annual Report is included in the Appendix May 23, 2000 Page 11 �'SIGCORP ICommumcathons services A VEaaN COIIII,CR Denton, TX Telecommunications Feasibility Stud Organizational Structure SCS employs a full-time corporate staff with the skills and experience required for the broadband network industry Each employee has contributed to the success of SCS and can work Individually in a consulting capacity or as part of the unified team SCS presents, for the "turnkey" projects The organization chart below shows the current organizational structure Vice PnreMentIGM John DIDanhdo Ronda SmO Executive Aasbhnt Dlro*r DirectorofMerkedng Didector of of Sysyma Opxadon end Ssdes Finance S Humm Resources Jack Tubbs Dwayne Tull Den Hayden Accounting kcaracoxHoberWeller Can Darrel Broom ssltlant Judy San Manager Manager jLou rof ofAlameIsOperadops ofTechnkelWON ctlon Trudy Rubelm Dan Muen$Mmin MapPi'alloeB Annetls Nurre Operatlons. InfomNtlon Service. r of Nadonel Sales Richard Inds Phllty Jones Damn Lloyd BrayrIng Tim Manager Sam Wilson Engbredrry Tech BridgetBret' 8upervNor hchlor Salr Terry Lohr Craig McCrystal mb Holy Green elramp Jim Maltingy VAN Bill Le Cox Heber Weller Sales support Engineering Susan Keller BdanHirshberg Kerd Poatiethenelght MedPinkskm Guy Hammnnd Kyle Jones DonnNThomas Jack French Apol Wand Melvin Chase May 23,12000 Page 12 'SIGCORP y jCommunications services Ae WN Cnmpnm Denton, TX Telecommunications Feasibility Study Brief biographies of the selected staff of SCS are as follows John DiDomizio, Vice President and General Manager After receiving his BS in Mechanical Engineering from the University of Evansville, Mr DiDomizio spent eight years at Southern Indiana Gas and Electric Company (SIGECO) as an engineer on a number of key projects His responsibilities included the development of bid specifications, contractor management, marketing efforts, and staff training and supervision He was instrumental in the development and implementation of SIGECO's demand side management programs, including strategic marketing and the regulatory issues of conservation programs For the past three years, Mr DiDomizio has focused on opportunities utilities have for expansion into the broadband services field, specializing in the design and construction of turnkey broadband networks He is most recently responsible for the startup and management of SCS, which handles all aspects of project management, from pre - construction market research and feasibility studies, through the design and construction phase, to exploring new opportunities for the community once the system is in place He is currently pursuing an MBA at the University of Southern Indiana Dwayne Tuft, Director of Marketing, Sales and Engineering Mr Tuft has been involved in marketing and market research for the last eleven years, with six of those years in the utility market and three years in broadband services He has been involved in broadband network feasibility studies, branding, loyalty and customer retention efforts for utilities, advertising studies, as well as customer satisfaction tracking studies, sales forecasting, and projection of program and product penetration levels He brings an extensive statistical analysis background, with experience in factor analysis, structural equation modeling, conjoint analysis, and survey design and methodology to the market research staff at SCS He has been an Economics Instructor for the University of Kentucky for the last four years and an Associate Professor of Statistics at the University of Southern Indiana for six years He holds a BA in Government and Economics from Morehead State University and a Masters degree in Economics from the University of Kentucky Tim Lillpop, National Sales Manager Mr Lillpop joined SCS in September of 1998, and his responsibilities include coordinating the sales force effort for the United States, including management of 5 regional sales representatives He works in conjunction with regional sales managers to help customers determine broadband service needs and wants, and then to develop a plan of action specific to each customer He organizes and presents materials at conferences, seminars, and workshops Prior to joining SCS, Mr Lillpop worked in various capacities for Southern Indiana Gas and Electric Company for sixteen years Mr Lillpop was the Project Manager for SIGECO's Load Management Program immediately prior to joining SCS His responsibilities included management of installation contractors, supervision of the May 23, 2000 Page 13 51000RP Communications services AVa7Aal Company Denton, TX Telecommunications Feasibility Study - marketing plan, maintenance of the customer database and program reporting He supported Demand Side Management programs as an Energy Sales Representative for three years and was part of the Performance Assurance Department at one of the power plants for nine years Mr Lillpop holds his BS in Management from Oakland City College in Oakland, Indiana Holly Green, Regional Sales Manager Ms Green leads SCS's sales efforts in 11 states in the Midwest Region She works with customers in all aspects of the telecommunication process from identification of needs, to project construction through completion and beyond She is involved in all aspects of the project and serves as the primary point of contact for the customer Prior to joining SCS, Ms Green worked at Harlan Municipal Utilities (HMU) for three years, most recently as the Assistant General Manager HMU serves approximately 5000 customers in Harlan, Iowa Ms Green was actively involved in the development and construction of HMU's broadband network (installed by SCS) prior to joining SCS Her experience in the municipal environmenOt has enabled her to assist her customers with an insider's understanding of the issues facing a municipal provider Ms Green holds a BA in Marketing from the University of Northern Iowa and is a member of the American Marketing Assoc, American Assoc of Utility Marketing Executives and Iowa Assoc of Municipal Utilities Bridget Bray, Manager of Engineering Ms Bray has over nine years of experience in consulting and project management services Working for a large consulting firm, she has gained extensive experience in managing broadband service projects, providing technical support for WAN and LAN topologies, developing corporate network standards for fiber, and developing a network - monitoring center In addition, Ms Bray was responsible for performing a business analysis for technology upgrades, evaluating and designing wireless communications networks, consulting global sites on data network infrastructures, and designing and managing manufacturing networks In her previous experience as an independent consultant, Ms Bray provided new business strategy development, organizational analysis, technology business analysis, operating procedures development and business plan development Ms Bray received a BS in Electrical Engineering from the University of Evansville Dorothy Niekamp, Supervisor of Research Ms Niekamp joined the SCS staff in May 1999 after ten years with St Mary's Medical Center where she was employed as an analyst in the Strategic Information and Planning Department After conducting primary and secondary health care -related marketing and planning research, Ms Niekamp assisted in writing situational, environmental, and community health needs assessments Ms Niekamp also provided data to service line managers for their business and development plans, compiled comprehensive physician productivity and supply and demand studies, accomplished a risk -adjusted charge comparison analysis of local hospitals, and tabulated and reported results of patient, physician, and employee satisfaction surveys May 23, 2000 Page 14 , SIGCORP /i Communications Services / A=REN Company Denton, TX Telecommunications Feasibility Study Ms Niekamp received a BA in Liberal Arts from Ambassador University and a BA in Psychology from the University of Southern Indiana She is currently working on an MS in Health Care administration at the University of Evansville and an MSW at the University of Southern Indiana May 23, 2000 Page 15 SIGCORP Cmunications Services AomREN Company Denton, TX Telecommunications Feasibility Study References Alameda Power & Telecom 2000 Grand St Alameda, CA 94501 Phone (510) 748-3913 Bill Garvine, Marketing Manager SCS completed a validation of a third party feasibility study SCS's methodology, used to verify the network's feasibility, was instrumental in Alameda's efforts to obtain financing The SCS team was awarded the contract for design, build and operate of the broadband network that has an anticipated completion date of 2002 Tell City Electric Department P O Box 9 700 Main Street Tell City, Indiana 47586 Jack Joyce, Superintendent Phone (812) 547-3411 The SCS team conducted a Broadband Network Feasibility Study to guide Tell City in the strategic planning of its broadband services endeavor The purpose of the study was to identify, quantify and prioritize major communications and energy service opportunities for the future SCS was awarded a contract in 1999 to provide a detailed fiber optic network design connecting school buildings, city offices and utilities facilities Harlan Municipal Utilities 405 Chatburn Avenue, Box 71 Harlan, Iowa 51537 Gerald Quick, General Manager Phone (712) 755-5182 SCS (as the ComSource, Inc subsidiary of Vectren Corporation) was the turnkey contractor for installation of a cable television headend and construction of the outside plant facilities Harlan applies the network for Internet, entertainment, utility services and high-speed data communications In 1998, SCS conducted research to determine market penetration and customer satisfaction with the services May 23, 2000 Page 16 �; SIGCORP j nvcnom�onsServices Denton, TX Telecommunications Feasibility Study Clickl Network 3628 South 35" Street Tacoma, Washington 98409 Peter Rumble, Headend/Hub Technician Phone (253) 502-8143 SCS was awarded a contract in 1998 by Tacoma City Lights and installed the cable television headend equipment and provided project management for the construction of six hub buildings to house fiber optic network equipment City of Brenham P O Box 1059 210 North Park Street Brenham, Texas 77834-1059 Angela Hahn, Director of Public Information SCS completed a feasibility study to assess the viability of a fiber backbone to serve city offices SCS provided market research, including focus groups and personal interviews with the city's large commercial and industrial customers In addition, the SCS team completed the preliminary drawing of a fiber network along with a financial analysis Grand Rapids Public Utilities PO Box 658 500 SE Fourth Street Grand Rapids, MN 55744 Mr James Hietala, Electric Department Manager Phone (218) 326-7182 SCS completed a broadband feasibility study in August 1999 for Grand Rapids Public Utilities (GRPU) The market research included focus groups with residential and commercial customers, telephone interviews, and one-on-one interviews to determine the broadband needs in Grand Rapids, MN Based on market research results, a detailed economic analysis and conceptual design was performed At the conclusion of the study, SCS submitted a formal report and provided a presentation for GRPU board members May 23, 2000 Page 17 I�SIGCORP communkations Services A VECIEENCompany Denton, TX Telecommunications Feasibility Stud Conclusion The multi -disciplinary approach applied by SCS integrates utility, telecommunications, marketing and sales experience and ensures a unified team response to customer interests The staff becomes acquainted with the background and environment of the community so that it can adequately respond to an individual client's needs Each client receives total support from SCS representatives, and the home office provides necessary resources for keeping each project on schedule and within budget In addition, there are sufficient corporate resources and staff to manage several protects simultaneously SCS is ready and willing to deliver a top quality Telecommunications Feasibility Study for DENTON and looks forward to discussing the proposed study in more detail with DENTON representatives May 23, 2000 Page 18 SIGCORP Y Communications Somms A VCaACN Compmry SIGCORP, Inc, is an Evansville, Ind. -based public company (NYSE:SIG) that provides electric and gas service to Southwest Indiana and energy -related and telecommunications products and services to customers throughout the greater Midwest and elsewhere. Nonregulated subsidiaries either extend SIGCORP's ability to reach ne:v markets wi+l � en-r gl' an- tele-cor mi-inicntions prndurtc and services or provide opportunities for creating shareholder value by investing in other areas. These subsidiaries are projected to provide more than 25 percent of SIGCORP's earnings by the year 2002. Utility Services E Southern Indiana Gas and Electric Company (SIGECO), is the largest and oldest part of the company. Its operations are focused in two areas to prepare for the deregulated market. The first area is power supply. SIGECO's power production plants have a generating capacity of 1,256 megawatts and have among the lowest operating costs in the industry. A planned cogeneration plant is projected to bring an additional 42 megawatts of capacity to the system by 2001. Power is marketed to municipalities, other utilities and power resellers when it is not needed for retail customers. The second area is energy delivery. This business unit serves more than 124,000 residential, commercial and industrial electricity customers and 108,000 natural gas customers in a 10-county area in Southwest Indiana. SIGECO also generates revenues by transporting gas and electricity across its systems for other marketers. Energy Products SIGCORPFuels provides SIGECO's generating plants with a dependable, low-cost source of coal. It also markets coal to other utilities. ® Southern Indiana Minerals processes power plant combustion by- products and markets these industrial minerals to the paint, coatings and construction industries. Energy Services E SIGCORPEnergy Services markets wholesale natural gas to industrial and other large -volume customers throughout a seven -state region, and offers customers a wide range of other energy management services. Energy Systems Group, an affiliate owned jointly by SIGCORP, Indiana Energy and Citizens Gas and Coke Utility, provides energy conservation savings to institutions, governmental units and commercial entities through risk -free building improvements and equipment upgrades. Air Quality Services, a joint venture firm, owned by SIGCORP and Environmental Management Consultants Inc., was created in 1998 to offer air quality monitoring and testing services for industry and utilities in the region. leleco rnunications SIGECOM, a partnership between SIGCORP and the Massachusetts technology company, UtiliCom Networks, is investing $60 million to build a fiber -optic -based network that offers leading edge telecommunication services to greater Evansville, The project's first phase, when complete, will have the potential to provide service to more than 80,000 homes and businesses. SIGCORP Communications Services builds high-speed fiber-optic communications networks for municipal utilities, enabling them to manage power loads more efficiently and offer communication services such as cable television. Financial Southern Indiana Properties participates in structured finance and investment transactions, including leveraged leases of real estate and equipment, which have provided above -average returns to the company. SIGCORP Capital provides financing and cash management services for SIGCORP's nonregulated subsidiaries. m EtectricCe�mpatty(SIGVC4 v i;«''i i- A -,_�, M �w p5.,ryty.'G: t S x^,'s Mkb A K*`twiro-, 5. aotnrlti'cut« ,Serrlecrs",� ;.. r: ,I kagbyMm"M cpp E U R O P E A N LOCATIONS The deregulated energy frontier offers tremendous opportunities for companies willing to pursue a progressive vision of the future. SIGCORPs emphasis on growth in this new environment has resulted in increased value to shareholders. About the covet SIGCORP management remains focused growing share value. A $ 700 investment at the end of 1993 would have expanded to $203 by the end of fiscal 1998 PERFORMANCE HIGHLIGHTS (Dollars in thousands, except per share statistics) Utility Revenues Non utility Revenues Total Operating Expenses Operating Income Net Income Earnings Per Share - Basic Earnings Per Share - Diluted Dividends Per Share Return on Average Equity Total Assets Electricity Sales (MWh) Gas Sold & Transported (MDth) RETURN ON AVERAGE EQUITY �p 250 �A � 200 150 100 1994 1995 �19% 1997 1998 ■ SIGCORP E3lndustry 1998 1997 %Change $ 358,106 1 8% $ 364,666 192,445 75,131 156 1 % 471,032 347,655 35 5% 86,079 85,582 0 6% 50,476 46,140 9 4% $ 2 14 $ 1 95 9 7% $ 2 12 $ 1 95 8 7% $ 121 $ 118 25% 144% 136% 61% $1,029,538 $ 989,896 4 0% 6,859,181 6,284,528 91% 28,965 29,370 (14)% TOTAL SHAREHOLDER RETURN 50 Dec 93 Dec 94 Dec 95 ■ SIGCORP ED EEI 100 Combination Utility Index SIGCORP at la glance Letter to shareholders Financial section Growth record Board of directors, SIGCORP officers and subsidiary management Shareholder information r N21 Dec97 Dec 98 Inside front cover 2-13 14-40 41 42-43 44 SIGCORP Inc 1998 ANNUAL REPORT 1 Dear Shareholders: Satellite dishes provide a high ter h backdrop for SIGCORP Inc Chouman Ron Reherman (lehl and Lre, ulive Vice Piosdenl Andy Goebel The egmprrent wdl p oodo the company s SIGECOM afhbei, access to vast televe, n pioryanrmrny .,it beJds a hbei optic system olfeunq c,bt, TV high speed Internet access telephone and ofhcr high Lei h services to greater Evansville SIGECOM is one of the wovs SICC ORP is expanding services divers lying ewnmgv and preponng for o deregulated uhht, envuonmenl It has been said that "if anything is certain, it is change" and "if you're not growing, you're falling behind " These observations apply to a wide range of human endeavors They also describe the utility industry, the worldwide energy services marketplace and your company's strategy for continued success The pace of change is accelerating as states deregulate their energy markets and utility boundaries begin giving way to competition In Indiana, the availability of low-cost power has temporarily stalled the drive for electric deregulation But change has only been delayed Deregulation will come Competition will arrive We're not waiting for the inevitable We're moving ahead with strategies and investments to boost SIGCORP's service capabilities and grow the value of your company During 1998, we continued to build upon our current advantage as a low-cost provider of energy while also taking steps to prepare for the market changes that will soon be upon us 2 sic coitP Inc 1998 ANNUAL REPORT Spurred by favorable results in several of our non -regulated businesses, we posted a third consecutive year of record earnings As the cover of our annual report illustrates, shareholders continued to benefit from the company's We've already taken many steps to grow both our utihty4,elated and nonutility activities. But change brings more opportunity. performance Including reinvested dividends, total return was 28 percent in 1998, following a 33 percent gam in 1997 For both years, shareholder value rose at a pace that ranked among the very lughest in the industry Return on average equity (141 percent) and market -to -book value (2 3 tunes) reached the top quartile once again Among the most significant actions we took in 1998 was the creation of a telecommunications subsidiary that will offer a "bundle" of advanced telecom services to the greater Evansville area through a $60 million fiber -optic -based network We successfully started our first coal mining operation and moved closer toward construction of a $100 million cogeneration plant slated to supply additional power to the region and steam to area industry We've already taken many steps to grow both our utility - related and nonutility activities But change brings more opportunity Thus, we began a comprehensive study in late 1998 to further define our strategic direction We intend to take full advantage of the opportunity created for companies willing to pursue a progressive vision of the future MARKET PRICE/BOOK VALUE PER COMMON SHARE 4iS$ r , E z 1994 1995 1996 1997 1998 Book Value El Market Price SIGCORP Inc 199E ANNUAL REPORT 3 Review of 1998 results Only three investor -owned electric utilities in the nation have higher financial strength ratings than does 9IGECO TOTAL ELECTRIC SALES (MegowaM-hours In Thousands) eQ bl' 1994 1995 1996 1997 1998 . PM — 1 Net income during 1998 rose 9 4 percent to a record $50 5 million from $461 million in 1997 Basic earnings per share rose to $2 14 from $1 95 the previous year As a group, SIGCORp's nonregulated subsidiaries accounted for all of the increase in net income These businesses contributed 15 9 percent of overall net income in 1998, compared with 41 Percent in 1997, moving us closer to our previously announced goal of deriving 20 percent of consolidated earnings from nonregulated business by 2000 Overall, regulated utility contributions to 1998 earnings fell slightly below 1997 Much warmer summer weather significantly boosted wholesale power sales margins and increased residential electric sales Additionally, Southwest Indiana's robust economy expanded electricity sales to nearly every class of retail power customer However, the benefit from these greater electric sales volumes and the higher wholesale power margins were offset by increased expenses for planned and emergency maintenance at our power production facilities and by fewer deliveries of natural gas due to milder winter temperatures Our strong financial position continued to be an advantage Debt refundmgs brought our embedded cost of debt down to approximately 6 0 percent We have low "stranded assets " Only three mvestor-owned electric utilities in the nation have higher financial strength ratings than does SIGECO Bringing tomorrow's opportunities in focus It appears that the Indiana General Assembly won't seriously address deregulation in its 1999 session, and that any legislation 4 SIGCORI Inc 1998 ANNUAL REPOR P opening the state's retail electricity market won't happen until 2000 or 2001 To proactively manage the deregulation process, we've met with other state utilities to develop comprehensive legislation Although agreement exists among the group on most issues, thus far these meetings have produced no overall consensus Our primary concern is that any new law deregulating the market must maintain a level playing field for all classes of customers and for all energy providers Unlike the case in most states that have deregulated their markets, we behove that low-cost companies such as SIGECO must not be penalized for prudent lustorical cost management While the discussion continues, we have been taking a multi -faceted approach to prepare SIGCORP and SIGECO for the eventuality of deregulation and competition We are ® Separating SIGECO's generating and energy service delivery functions, and seeking further opportunities to enhance SIGECO's competitiveness through continuous improvement in our per -unit operating, maintenance and fuel costs ® Aggressively pursuing additional growth opportunities and operating synergies through our nonregulated subsidiaries ® Expanding our products and services to anticipate and meet traditional and nontraditional customer needs, wherever those customers may be located ® Dedicating more resources to the training and education of our valued workforce, our most important asset in the competitive arena of tomorrow ® Significantly raising our information technology capabilities and modernizing our computer infrastructure to respond more quickly to the information needs of our customers and our employees Work began in 1998 to bring together the technology components needed for SIGECOM to offer bundled high speed Internet access cable N and telephone service to greater Evansville The first phase of this $60 million n.tmcnt is expected to be complete by mid 2000 SIOCORP Inc 1998 ANNUAL REPORT 5 Preparing our electricity business for competition Our history as a utility has been one of lean operations and low production costs In 1997, our electric production costs were eighth lowest among all U S investor -owned utilibes That translated to some of the lowest consumer electric rates in the industry In 1998, our average retail electric rate was about 4 7 cents per kilowatt-hour, or about 32 percent below the national average of 6 9 cents This history provides a solid foundation in our efforts to continue to enhance productivity and prepare for competition We anticipate that when deregulation legislation passes, our power generation business will be the first part of our electric utility to be deregulated To gain additional SIGECO launched plans to budd o mmbmahon steam and experience necessary to thrive in a truly competitive eleOnctygenembng plonl such as this laahly m Ebe,sbng Pemuylvamn to mast the rnga, s growing power needs and environment, on January 1,1999, we functionally separated p,omde lowcost steam to neo,by end, ssy The 8100 .... man plant e especwl to be completed by 2001 or 2002 SIGECO's power supply and energy delivery functions into two distinct business units Tlus allows us to operate the Power Supply business unit as a separate profit center 6 SIGCORP Inc 1998 ANNUAL REPORT We couldn't have divided the supply and delivery functions without emphasizing process improvements over the past several years or implementing an advanced business management information system This improved cost measurement tool will track business results and related costs by activity, allowing us to more accurately and efficiently measure business processes, analyze areas for improvement, and define future strategies The Service Delivery unit will provide power transrrussion and distribution of electricity and natural To gain additional experience necessary to thrive in a truly competitive environment, on January 1,1999, we f unctionally separated SIGECO's power supply and energy delivery functions into two distinct business units, gas to homes, businesses and industry within our utility area and, initially, will continue to include customer service and other retail marketing functions These operations will be enhanced by other continuing information technology initiatives Anew customer information system — scheduled to be in use by mid-1999 — will change the way information is processed and lay the groundwork for further product additions and service improvements Additionally, the first stage of an automated mapping and facilities management system is expected to be launched in mid -year, enhancing productivity in planning system extensions and reducing time needed for restoring service after outages Until retail deregulation occurs, utilities in Indiana are permitted to sell power at market prices only to other utilities or power marketers SIGECO's low fuel costs have contributed to a significant increase in margins from these market -based wholesale power sales SIGCORPIua 1998 ANNUAL REPORT 7 Inside our assigned retail utility territory, sales of energy to SIGECO's industrial, commercial and residential customers increased again in 1998 This rise in energy use tracked positive economic developments as Southwest Indiana's economy significantly outpaced the country's growth rate Toyota completed Toyota completed Phase I of its "Tundra" pickup truck assembly plant and announced plans for a second vehicle, which will bring total employment at the Princeton, Ind., ; facility to 2,300 in the year 2001. PEAK LOAD/CAPACITY (Megawatt) 0 b ry5b �ryry �ryry 1!L^P 1�'9b 1, 1994 1995 1996 1997 1998 ■ Peak Load CI capacity Phase I of its "Tundra" pickup truck assembly plant and announced plans for a second vehicle, which will bring total employment at the Princeton, Ind, facility to 2,300 in the year 2001 Production operations began months ahead of schedule at AK Steel's new $1 1 billion Rockport, Ind, plant Commercial development continued unabated as new support services and existing industry expansions brought people and businesses into the area Record numbers of homes are being constructed This growth has narrowed SIGECO's generating capacity reserves To provide needed capacity until we build more power generation, we've executed a three-year contract to purchase 50 megawatts beginning January 2000 from a neighboring utility - affiliated power marketer By late 2001 or early 2002, our new cogeneration plant is scheduled to be completed This $100 million project will bring 42 megawatts of additional power to meet the region's growing energy needs and provide industry a low-cost source of steam with improvements in area air quality The plant will feature advanced clean coal combustion technology and emission controls This advanced technology uses local low-cost coal while allowing the plant to achieve emissions below existing federal and state environmental standards 8 SIOCORP Inc 1998 ANNUAL RFPORT Continuing our achievements in environmental protection Protecting the environment, of course, is of great concern to us Over the years, our company has built a preuuere reputation for not lust meeting compliance standards, but by overachieving Most of the Clean Air Act's requirements were met years in advance of the regulatory deadlines Nonetheless, new environmental challenges continue to arise In 1998, the Environmental Protection Agency issued rules directing 22 midwestem states to reduce nitrogen oxide (NOx) emissions The essence of this new requirement is that Indiana utilities, as a group, could be required to reduce NOx emissions by 85 percent within five years, SIGECO could be required to lower its NOx emissions 70% NOx emissions are linked to ground level ozone formation By lowering NOx emissions in the Midwest, the EPA intends to reduce ozone levels in the Northeast We adamantly disagree with the EPA's position Along with most of the 22 states, Indiana reminded the EPA that their own scientific evidence clearly shows that long- range transport of ozone precursors such as NOx simply does not happen We share Indiana's factual position The EPA rules would, if upheld, have a major impact on SIGECO and its customers while bringing no benefit to Northeastern states If we must meet those requirements, we may have to spend as much as $90 million on emissions control equipment and $10 million to $15 million annually on operations and maintenance expenses to achieve the compliance targets Despite our opposition to the rules, we're evaluating technology options and least -cost solutions for each generating plant Rapid emnornie growth spawned increased power do mood fiom all classes of customers throughout Somhwesi Indiana New monk,, mnng fa,dn,s lot Toyota (pickup km,k assembly) and AK Steel Isleol I shing) and other comF.mao lured now busmcsses and .,,dews SIGCORP Inc 199E ANNUAI REPORT 9 While the EPA's ozone reduction rules are overreaching, they will not necessarily erode our competitive position against other midwestern utilities Indeed, these utilities also must address this issue The proposed rules will, however, dumnish the competitive position of the midwestern states for economic development and will have ramifications for the coal mining industry and support lobs Extending products and services through nonregulated businesses SIGCORP s Energy Sysrems Group I I C affiliate provides energy effiaenmes to mshfunons and corpombone lhiough prolects such as this $1 1 mrlhon steam mdny planl under ronslmctron (or Bnstol Myers Sgwbb in Evansville Now ESC offices in Crnannah and Indionopolis oversee protects ar toss lha region Even though our core utility business will remain our primary business and, we believe, a source of steady earnings growth, SIGCORP's nonregulated businesses play a very significant role in our strategy for increasing earnings These subsidiaries will be providing additional products and services that anticipate customer needs, wherever those customers may be located and however "nontraditional" those needs might be Thus far, our nonregulated subsidiaries have emerged as natural offshoots from the regulated ubhty business For example, our coal mining company, SIGCORP Fuels, was formed to provide an additional, low cost source of fuel for SIGECO's power plants Energy Systems Group, a business bringing energy efficiency measures to organizations, emerged from the company's demand -side energy management programs Our subsidiaries offer operating synergies, as well as their own set of growth opportunities SIGECOM, our telecommunications partnership with UtiliCom Networks, exemplifies the significant long-term growth potential 10 SIGCORP Inc 1998 ANNUAL RLIORT and community benefits to be gamed by entering nonutility businesses Formed in rind-1998, SIGECOM immediately began construction on a two-way fiber -optic -based network to provide high-speed data, voice and video applications to greater Evansville Business and residential customers will have the opportunity to buy expanded cable TV, local and long-distance phone service and high-speed Internet applications all from the same local provider The first phase of this $60 million project Our subsidiaries offer operating synergies, as well as their own set,of growth opportunities. will make these "bundled" services available to more than 75,000 homes and 7,000 businesses by n-4d-2000 SIGECOM has received the necessary regulatory approvals to provide phone service, and has established local cable television franchises ComSource, our former Internet access subsidiary, was folded into SIGECOM These new markets offer significant opportunity for SIGCORP No other single communications company locally offers the option to bundle these telecommunication services Another telecommunications venture, SIGCORP Communications Services, also expanded dramatically with five major new projects This subsidiary focuses on designing and constructing fiber-optic systems to allow municipal utilities to offer cable TV, energy morutormg and other services Subsidiaries selling energy -related products and services also performed well SIGCORP Energy Services doubled its industrial customer base and its revenues, and today manages natural gas and energy programs for 130 industrial and large commercial customers in eight states It launched a proprietary online product called SIG net that provides data and analysis, helping customers monitor and manage their energy flows SIGCORP Inc 1998 ANNUAL REPORI 11 A 33-percent owned affiliate, Energy Systems Group LLC, also continued its aggressive expansion with new offices in Indianapolis and Cincinnati and new institutional and commercial clients Major new projects include contracts to build an $11 million steam plant for Bristol-Myers Squibb in Evansville, construct a $20 million energy center for a Johnson City, Tenn, Veterans Admuustration hospital complex, and bring energy savings improvements to the venerable Chicago Sun -Tunes building Enterprising companies — those willing to raise the stakes to preserve,and enhance shareholder value — will be the winners. AVERAGE COAL COSTS (Cents per Kwh) 1994 1995 1996 1997 19" j r.a SIGCORP's coal musing subsidiary, SIGCORP Fuels, continued to provide SIGECO's Culley Generating Station with a low-cost supply of fuel, helping SIGECO achieve coal costs lower than any utility east of the Mississippi SIGCORP Fuels deliveries to Culley of about 800,000 tons in 1998 represents about a quarter of SIGECO's coal supply requirements This subsidiary is testing alternative fuels and coal blends and is evaluating other coal properties to create additional value for SIGECO and SIGCORP Southern Indiana Minerals converts power plant emission byproducts into industrial additives, which are used in paint, coating and construction products A sister energy services affiliate, Air Quality Services, was formed in 1998 to provide emissions testing services to utilities and industries Other subsidiaries provide financial flexibility and earnings potential for SIGCORP and its nonregulated business SIGCORP Capital provides short-term financing options and pooled cash management services for the nomegulated subsidiaries Southern Indiana Properties pursues investment opportunities in real estate and business equipment that have the potential for above -average returns Southern Indiana Properties contributed nearly $7 million to SIGCORP's bottom line in 1998 12 SIGCORP Inc 1998 ANNUAL REPORT The electric and gas utility industries are headed for dramatic, irrevocable change Yet, monumental opportunities are emerging from this evolution Enterprising companies — those willing to raise the stakes to preserve and enhance shareholder value — will be the winners SIGCORP will be among that group How we will get there is the focus of a significant board -level strategic growth Prudently movingforward to reach our goals initiative When completed in early 1999, this very comprehensive planning endeavor will have formulated specific earnings growth targets and evaluated current and potential lines of business to determine strategies to achieve those goals We will keep you informed of the strategic plan More than strategies or management's desire for achievement is necessary The contributions of our 1,000 employees will continue to be the most important ingredient in building thus enterprise We acknowledge their dedication and their contribution to our past and future success We also thank you, our shareholders, for your confidence and support We're enthusiastic about the future, and beheve that our proactive steps to transform SIGCORP will continue to create superior value on your behalf Ronald G Reherman Chairman, President and CEO SIGCORP, Inc March 22 1999 Rom t, nearby Cypress Creak ne properly SIG( ORP Fuels pfooded coal delivers that helped SIGECO achieve ooa) costs lower than any uh61y east of he Mis issppi River That advantage kept overage electnaly rotes among the lowest , the country Andrew E Goebel Executive Vice President SIGCORP, Inc President and CEO, Southern Indiana Gas and Electric Co SIGCORP Inc 1998 ANNUAI RFPORT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION „o WCOME YFlof 1)n,Thousands) The consolidated financial statements of SIGCORP, Inc (SIGCORP), an investor -owned holding company, include SIGCORP's principal subsidiary, Southern Indiana Gas and Electric Company (SIGECO), a regulated gas and electric utility, and ten nonregulated subsidiaries The following discussion and analysis includes those factors which have affected, or may materially affect the results of operations and financial condition of SIGCORP and its subsidiaries RESULTS OF OPERATIONS p' �p}1 e#i Strong results from nonublity operations, sustained economic growth within its service territory, wanner summer temperatures, and the ability to aggressively compete in the wholesale power market produced record basic earrings per share for SIGCORP of $214 d: in 1998, compared to $195 for 1997 and $183 for 1996 Utibtyoperations contnbuted $180 of the 1998 per share earnings and nomegulated operations contributed $ 34 per share, for 1997, utility net income provided $187 and nonregulated results contributed the W+ remaining $ 08 of total basic earnings per share The factors effecting the $19 increase in 1998 earnings follow I1 Period ended December 31,1997 $195 Weather and customer usage 08 t r [ Electric sales to other utilities and power marketers 17 t Utility O&M expense °1 (23) r Ublity depreciation expense (06) i' Nonregulated gas energy services and nonutihty operations 26 Other '04 41; l I Period ended December 31,1998 $ 2114) )994 �, 14 } I990 1497 1949 01i cludes $ 05 per share provision for uncouect,ble Federal Energy Sales revenues s Revenues Electric utility revenues rose $25 3 million (9 3%) during 1998, reflecting a Exddfle3 Income onributed to 91 % increase in total sales to retail and wholesale customers and lugher unit prices for c147i151aNvi{set6f aFcovnnng change power sales to other utilities and power marketers In 1997, the increase in electric utility revenues due to greater nonfuTn wholesale 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 (14%) decrease in electric revenues Much warmer temperatures (46% warmer f" than 1997 and 18% warmer than normal in terms of cooling degree-days) and continued economic growth in SIGECO's service area resulted in an increase in 1998 electric sales to retail and firm wholesale customers of 7 3% compared to 1997 The increase followed FOi1 a REVENUES a 1% decrease in 1997 sales to these customers resulting from 8% milder temperatures flei))prr in Thousands) Sales to nonhrm wholesale customers, excluding sales to Alcoa Generating Corporation {+ (AGC), increased 6 7% in 1998, after rising 35% during 1997 Sales to AGC were up 62% ,; due to a scheduled major outage of one of AGC's generating units The warmer weather, coupled with market supply constraints, caused wholesale power prices to be substantially higher during much of 1998, increasing average wholesale unit sales margins compared to the same period in 1997 SIGECO's ability to aggressively compete in the wholesale „ power market contributed an additional $12 to earnings compared to the previous year Fewer sales to retail gas customers and the recovery of lower per unit gas costs reflected IF , ,' {14 ) in customer rates resulted in a 22% ($18 8 million) decrease in 1998 as utilityrevenues, following 11% ($10 7 million) lower gas revenues in 1997 Total gas sales were own 22% " +# in 1998, after a 23% dechne in 1997, reflecting the impact of 21% milder temperatures (in f terms of heating degree days) on weather -sensitive sales and fewer sales to commercial 1, + and industrial transportation customers Residential sales declined 19% during 1998 due v to the milder weather, after a 12%decrease in 1997 Total sales to commercial and industrial = 6 ' customers in 1998 were down 27%because more of these customers purchased gas supplies { from suppliers other than SIGECO, total natural gas sold and transported to gas customers declined only 1% as increased deliveries to commercial and industrial transportation ' customers offset the impact of weather on residential sales + 11'q The continued growth of SIGCORP Energy Services (Energy), which markets natural gas y. Lt and related services, during its second full year of operation raised SIGCORP's 1998 revenues $108 0 million, following a $70 2 million increase in Energy's revenues in 1997 19$A f499 t ,19% 1997 1998 j; ,� , A $9 4 million increase in other revenues, which includes the operating revenues of SIGCORP's other nonregulated subsidiaries, reflected the full -year operation of SIGCORP's i , Communications Services (Communications) subsidiary The $271 million decrease in „ 1997 revenues from SIGCORP's other nonregulated operations was chiefly due to lower 14 SIGCORP Inc 1998 ANNUAL REPORT •a1 min 'aY :ewp.,•p az l• .1 u'T.- -I g a •:1 •'K 1 s{ V i 1': • :1 p :1 j . u a e a b ecw: •5 • •� �9 b e f "! • m • ® I m Oa•: 10' s r MAINTENANCE EXPENSE (Dollars in Thousands) 51411p 1994 1995 1996 1997 1998 N Generahon 0 All Other COST OF LONG-TERM DEBT �o 1994 1995 1996 1997 1998 ■ SIGCORP 0 Industry 15 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 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 sup her, 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 and were 30% lower than 1995 per unit costs SIGECO estimates the total savings in coal costs resulting from the buyout, net of total buyout costs, approximated $58 million through December 31,1998, the term of the origmal contract The net savings are being passed back to SIGECO's retail and firm wholesale electric customers through the fuel adjustment clause On October 1,1998, SIGECO announced plans and filed for regulatory approval with the Indiana Department of Environmental Management (IDEM and the IURC to build a $100 million cogeneration facility, pending regulatory approval and placement of permanent financing The facility, an atmospheric fluidized -bed coal-fired plant, will have production capacity to sell approximately one million pounds of steam to industrial customers and produce approximately 42 megawatts of electricity for SIGECO, which plans to lease the facility through an operating lease Regulatory reviews by the IDEM and IURC are in progress, as are preliminary financing discussions The final outcome of these matters are uncertain at this time, however, SIGECO believes these issues will be favorably resolved Pending final resolution, construchon of the facility is expected to begin in rrd-1999, with commercial operation to begin in 2001 Compelihon SIGCORP's predommant 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 with respect to the monopoly structure of the electric utility industry is occurring in the United States, brought about by the National Energy Policy Act of 1992 (NEPA) The primary purpose of the electric provisions of NEPA is to increase competition in electric generation, and under authority granted by NEPA, the Federal Energy Regulatory Commission (FERC) has aggressively undertaken the introduction of competition into the wholesale electric business The results of the changes in the wholesale electric business on SIGECO have been generally favorable Because SIGECO has below average variable costs of generation, it has been an aggressive seller of electricity to power marketers and other providers seeking electricity to fulfill wholesale sales contracts The results of the increased wholesale sales are discussed further in "Results of Operations "Conversely, SIGECO has reduced prices to from 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 changes on its results of operations or financial condition FERC does not have jurisdiction over the retail sales of electricity States retain jurisdiction over the permitting of retail competition, the terms of such competition and the recovery of any costs or other transition charges resulting from retail competition 16 5IGCORP Inc 1998 ANNUAL REPORT Yk p) ;tsl Q, i 1 It 'fit 6' tt ni ro m in m i AVERAGE RESIDENTIAL GAS RATES er ' Quarter Ended 9130198 td , k (Dollars per Dth Based on 10 Dth per Month) {)1 file, 5h nti` spry 'St op se 5 as 0h1mII ne' Ys WS rig in, w- ed he Ito Ito their �I�t�t■1■1■1■ mat lace o = lower access W� F = ? CZ 9 difficult for 3"a ya ea 4 4` 0 liprodttcbon iF Ji L" 9 vc Wye acttons final op�.rome mandngg, its lenravfder of 1 a s R aaa bi re aet" e Y iR . e Y Y: Y Y 11 • Y ifie:.+- eYc YV Y-Y ar :Y `a i°R B l:d a V• Y 0U 1 00 ka B�4{fl0 'YB {: i Y Y• a. rY Y I nxl a'R� a Y �.li r i ar a - lu e r i •, Qt Yb u � �� �� • � r �I a ' + Y RY da A :n a�i :R it � "'P` eb c Y• •• 'x "e a Yb' Y al 9b 0Y0 IO. � 'e 1YY .Ya • 0 '& : 4 b f i1 b a i a Yi it Y pe R •. 9 Y a r: o.'�. Y 'Y' aY �' . 0 0 tl 0 ® i '�':oi" ittl 0 i a• e `. fl It � � ��° •4 0• Y Y 4 4 "0 &p•4i Jw jt �Y ti '41 °0` aY- Y• YB• .0 •�.. 4 .0 9 a Y 0 11 ' ill Y 0 '0 00 4 ,q♦ '�� I•w �It`� •0• a 1 •�: 0 8 a: b. tl i '. � I a OVERALL CUSTOMER SATISFACTION RATING e 1994 1995 1996 1997 1998 17 Environmental MaHers 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 choxide scrubber at the Colley Generating Stahon to serve Culley Units 2 and 3 and installed low nitrogen oxide (NOx) burners on the two units With the addition of the scrubber, SIGECO is emitting lower sulfur dioxide quantities than the muumum compliance requirements of Phase I of the CAAA and has available unused allowances, called "overcomphance allowances", for retention by SIGECO to meet stricter post-2000 emission hmrtations SIGECO Is purchasing additional allowances to fully meet Phase II requirements In July 1997, the United States Environmental Protection Agency (USEPA) Issued its final rule which revised the national ambient air quality standard for ozone by setting a lower concentration limit and changing measurement methods It Is anticipated that the number of ozone nonattamment counties in the United States will increase significantly The USEPA has encouraged states to target utility coal-fired boilers for the majority of the reductions required, especially NOx emissions, because they believe this approach is the most cost effective Northeastern states have claimed that ozone transport from midwestem states (including Inchana) Is the primary reason for their ozone concentration problems Although this premise is challenged by others based on various air quality modeling studies, including studies commissioned by the USEPA, the USEPA intends to incorporate a regional control strategy to reduce ozone transport In October 1997, the USEPA provided each state a proposed budget of allowed NOx emissions, a key ingredient of ozone, which requires a significant reduction of such emissions Under that budget, utilities may be required to reduce NOx emissions to a rate of 0151b/mmBtu from levels already unposed by Phase I and Phase II of the CAAA Midwestern states (the alliance) have been working together to determine the most appropriate compliance strategy as an alternative to the USEPAproposal The alliance subnutted its proposal, which calls for a smaller, phased in reduction of NOx levels, to the USEPA and the IDEM in June 1998 In July 1998, Indiana submitted its proposed plan to the USEPA in response to the USEPA's proposed new NOx rule and the emissions budget proposed for Indiana The Indiana plan, which calls for a reduction of NOx emissions to a rate of 0 251b/mmBtu by 2003, is less stringent than the USEPA proposal but more stringent than the alliance proposal The USEPA Issued its final ruling on September 24,1998, which was essentially unchanged from its July 1997 proposed rule, after considering all fled comments The USEPA's final ruling is being litigated in the federal courts by approximately ten mrdwestem states, including Indiana The proposed NOx emissions budget for Indiana stipulated in the USEPA's final ruling requires a 36% reduction in total NOx emissions from Indiana The ruling could require SIGECO to lower its system -wide errussrons by approximately 70% Depending on the level of system -wide enssions reductions ultimately required, and the control technology utilized to achieve the reductions, the estimated construction cost of the control equipment could reach $90 million, and related additional operation and maintenance expenses could be an estimated $10 million to $15 million, annually Under the USEPA implementation schedule, the emissions reductions and required control equipment must be implemented and in place by May 15, 2003 Also in July 1997, the USEPA announced a new 2 5-nucron particulate matter (PM) standard while retamung the existing 10-msron PM standard The regulatory impacts of this action cannot be determined until appropriate monitoring data is collected and subsequent national ambient au quality area designations are determined The extent of the impact on SIGECO, if any, is unknown Demand Side Management (DSM) In the latest update of its Integrated Resource Plan (IRP), filed in November 1997, SIGECO determined that certain of its DSM programs were not cost effective and were to be discontinued As a resultTh, projected DSM expenditures for the 1999-2014 period are expected to total $22 rrulllon e IRP projections indicate that by 2000, approximately 52 megawatts of required 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 18 51GCORP Inc TN8 ANNUAL REPORT Markel Rlak SIGCORP is exposed to market risk due to changes in interest rates and AT105 changes in the market price for electricity and natural gas resulting from changes in supply ° and demand Exposure for interest rate changes relates to Its long-term debt and preferred equity and partnership obligations Exposure to electricity market price risk relates to forward contracts to effectively the manage supply of, and demand for, the electric SIGECO's .�° generation capability of generating plants related to its wholesale power marketing activities Exposure to natural gas price risk relates to forward contracts taken by Energy tv to manage its exposure to commodity price risks in providing natural gas 7 supplies to its customers SIGECO is not currently exposed to market risk for purchases of electric power and natural gas for its retail customers due to current Indiana regulations which allow for full cost recovery of such purchases through SIGECO's fuel and natural „ gas cost adjustment mechanisms SIGECO and Energy do not utilize financial instruments for trading or speculative purposes, at this time ' The table below provides the fair value and average interest, or fixed dividend rate, of e=, _' , + outstanding debt, preferred stock equity instruments and partnership obligations at December 31,1998 The Series A and C Adjustable Rate Pollution i i Control Bonds are listed as variable rate long-term debt due to annual adjustment of their interest rates to current market rates on March 1 }997 =+ 1990 SIP, , Farr SIGCORP and Expected Maturity Date Value Term as of Subsidiaries +maLonel 199 2M MR � M-3 Thereafter TTotal 12/31/98 ' Long TermmDebt Fixed Rate $450 $10 $2040 $2500 $3195 Average Interest Rate 60% 63% 69% Variable Rate $537 $ 537 $ 572 Average Interest Rate 3 7% Preferred Stock Not Subject to Mandatory Redemption $ 75 $ 75 $ 90 i Average Dividend Rate 6 5% + Partnership Obligations $ 24 $ 24 $ 34 t Average Interest Rate 88% SIGECO utilizes contracts for the forward sale of electricity to effectively manage the utilization of its available generating capability Such contracts include forward physical contracts for wholesale sales of its generating capability, during periods when SIGECO's available generating capability is expected to exceed the demands of its retail, or native load, customers To minimize the risk related to these forward contracts, SIGECO may utilize call option contracts to hedge against the unexpected loss of Its generating capability during periods of heavy demand SIGECO also utilizes forward physical contracts for the wholesale purchase of generating capability to resell to other utilities and power marketers through nonfirm "buy -resell" transactions where the sale and purchase prices of power are concurrently set As of December 31,1998, management believes exposure from these positions was not material Energy utilizes forward physical contracts for both the purchase and sale of natural gas to its customers, primarily through"back-to-back" transactions where the sale and purchase prices of natural gas are concurrently set As of December 31,1998, approximately 10% of Energy's forward sales contracts were not covered by forward purchase contracts, management believes exposure from these positions was not material Energy sells fixed -price and capped -price products, and reduces its market price risk through the use of fixed -price supplier contracts and storage assets As of December 31,1998, the estimated fair market value of Energy's forward sales contracts was approximately $8 5 million, and the estimated fair market value of its forward purchase contracts was approximately $7 7 million SIGECO and Energy are also exposed to counterparty, credit risk when a customer or supplier defaults upon a contract to pay or deliver product To mitigate this risk, they have established procedures to determine and monitor the creditworthiness of munterparlies LIQUIDITY AND CAPITAL RESOURCES In 1998, financial performance continued to be solid hitemally generated cash (net income less dividends plus charges to net income not requiring cash) fully funded SIGECO's 1998 construction and DSM program expenditures, these expenditures were 78% funded with internally generated cash in 1997 Cash provided from operations decreased $117 million 20 SIGCORP Inc 1998 ANNUAL REPORT i STANDARD & POOR'S CREDIT RATINGS (Comparison of 136 electric utilities) s >a y :t ?s' 4016 't `= BBB+ and below i= s, t' =3 i x yre+0ll 3 ' A EARNINGS/DIVIDENDS PER COMMON SHARE 5,,°H I14,,y11 ;.ra I Iy 18 03% A+ 1994 1995 1996 1997 1998 Cl Basic Earnings per Share E Dividends per Share " Excludes the effect of a $6 3 million accounting change or $0 27per share 21 CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (m thousands except for per share amounts) 1998 1997 1996 OPERATING REVENUES: Electric utility $297,865 $272,545 $276,479 Gas utility 66,801 85,561 96,251 Energy services and other 192,445 75,131 32,008 Total operating revenues 557,111 433,237 404,738 OPERATING EXPENSES: Fuel for electric generation 65,222 62,630 74,860 Purchased electric energy 20,762 13,985 8,295 Cost of gas sold 39,627 54,060 66,105 Cost of energy services and other 187,742 73,668 28,553 Other operation expenses 64,430 60,726 60,885 Maintenance 37,553 29,224 29,784 Depreciation and amortization 42,733 40,373 39,140 Property and other taxes 12,963 12,989 14,399 Total operating expenses 4_71,032 347,655 322,0_21 OPERATING INCOME 86,079 85,582 8.2,717 INTEREST AND OTHER CHARGES: Interest expense on long term debt 17,604 19,797 18,432 Interest expense on short term debt 5,686 1,519 2,387 Amortization of premium, discount and expense on debt 690 671 690 Allowance for funds used during construction (1,392) (1,378) (445) Preferred dividend requirements of subsidiary 1,095 1,097 1,097 Interest income (5,4881 (3,003) (2,135) Other, net (6,602) (3,122) (2,536) Total interest and other charges _ 11,593 15,581 17,490 INCOME BEFORE INCOME TAXES 74,486 70,001 65,227 Federal and state income taxes 24,010 23,861 21,963 NET INCOME $ 50,476 $ 46,140 $ 43,264 AVERAGE COMMON SHARES OUTSTANDING 23,631 23,631 23,631 BASIC EARNINGS PER SHARE OF COMMON STOCK $ 214 $ 1 95 $ 1 83 DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 2 12 $ 1 95 $ 1 83 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements 22 SIGCORP Inc 1998 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (in thousands) 1998 1997 _ _ 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 50,476 $ 46,140 $ 43,264 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 42,733 40,373 39,140 Preferred dividend requirements of subsidiary 1,095 1,097 1,097 Deferred income taxes and investment tax credits, net (3,684) (3,899) 11,500 Allowance for other funds used during construction - (581) - Change in assets and liabilities Receivables, net (including accrued unbilled revenues) (11,608) (19,497) (17,170) Inventories (12,421) (4,306) 3,721 Coal contract settlement - - 12,928 Accounts payable 5,650 14,141 (4,396) Accrued taxes (1,005) (1,855) (1,098) Refunds from gas suppliers (346) (915) (1,213) Refunds to customers 1,347 (651) (4,961) Other assets and liabilities 9,322 8,103 5,120 Net cash provided by operating activities 81_559 78,150 87,932 CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (net of allowance for other funds used during construction) (55,313) (65,501) (40,302) Demand side management program expenditures (1,182) (2,340) (3,633) Investments in leveraged leases 6,961 - (6,850) Purchases of investments (1,940) (423) - Sales of investments 80 264 700 Investments in partnerships and other corporations (11,419) 3,166 126 Change in nonutiliy property (279) (5,572) 395 Change in notes receivable 1,033 (5,592) (11,533) Other (2,176) (1,181) (150) Net cash used in mvest� activities (64,235) (77,179) (61,247) CASH FLOWS FROM FINANCING ACTIVITIES First mortgage bonds (14,000) (295) (8,000) Dividends paid (30,188) (30,482) (28,353) Reduction in preferred stock (116) - Change in environmental improvement funds held by trustee (198) (272) (188) Payments on partnership obligations (2,205) (2,276) (2,787) Change in notes payable 28,578 26,980 11,432 Other 27 2,010 568 Net cash used in financing activities _(18,102) (4,335) (27,328) NET DECREASE IN CASH AND CASH EQUIVALENTS (778) (3,364) (643) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,827 9,191 9,834 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ _ 5,049 $ 5,827 $ 9,191 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements 23 SIGCORP Inc 1998 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS At December 31 (-in thousands) 1998 1997 --- UTILITY PLANT, at original cost Electric $1,141,870 $1,091,349 Gas 150,136 141,646 1,292,006 1,232,995 Less accumulated provision for depreciation 593,901 557,631 698,105 675,364 Construction work in progress 24,306 32,241 Net utility plant 722,411_ 707,605 OTHER INVESTMENTS AND PROPERTY: Investments in leveraged leases 36,003 42,964 Investments in partnerships and other corporations 32,389 21,197 Environmental improvement funds held by trustee 4,300 4,102 Notes receivable 20,372 21,404 Nonuhlity property and other 14,901 12,503 Total other investments and property 107,965 102,170 CURRENT ASSETS: Cash and cash equivalents 5,049 5,827 Temporary investments, at market 793 876 Receivables, less allowance of $2,204 and $361, respectively 65,829 52,496 Accrued unbilled revenues 20,595 22,320 Inventories 45,351 32,930 Current regulatory assets 9,527 11,749 Other current assets 3,777 3,250 Total current assets - _ 150,921 129,448 OTHER ASSETS: Unamortized premium on reacquired debt 4,226 4,704 Postrehrement benefits other than pensions 985 3,263 Demand side management programs 25,046 24,467 Allowance inventory 2,093 2,093 Deferred charges 15,871 16,273 Total other assets _ 48,221 50,800 TOTAL $1,029,518 $ 990,023 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements 24 RIOCORP1nc 1998 ANNUAL REPORT At December 31 (in thousands) SHAREHOLDERS' EQUITY AND LIABILITIES CAPITALIZATION: Common Stock Retained Earnings Accumulated Other Comprehensive Income Total common shareholders' equity_ Cumulative Nonredeemable Preferred Stock of Subsidiary Cumulative Redeemable Preferred Stock of Subsidiary Cumulative Special Preferred Stock of Subsidiary Long Term Debt, net of current maturities Long Term Partnership Obligations, net of current maturities Total capitalization, excluding bonds subject to tender (see Consolidated Statements of Capitalization) CURRENT LIABILITIES: Current Portion of Adjustable Rate Bonds Subject to Tender Current Maturities of Long Term Debt, Interim Financing and Long Term Partnership Obligations Maturing longterm debt Notes payable Partnership obligations Total current maturities of long term debt, interim financing and longterm partnership obligations Other Current Liabilities Accounts payable Dividends payable Accrued taxes Accrued interest Refunds to customers Other accrued liabilities Total other current liabilities Total current habilities OTHER LIABILITIES: Accumulated deferred income taxes Accumulated deferred investment tax credits, being amortized over lives of property Postrehrement benefits other than pensions Other Total other liabilities TOTAL The accompanying Notes to Consolidated Financial Statements are an integral part of these statements 1998 1997 $ 78,258 $ 78,258 292,717 270,828 (12) 77 370,963 349,163 11,090 11,090 7,500 7,500 808 924 204,771 273,707 781 2,424 595,913 644,808 53,700 31,500 45,000 12,695 69,508 41,368 1,577 2,139 116,085 56,202 53,391 47,741 120 123 4,863 5,868 5,140 5,216 2,156 1,155 21,320 17,866 86,990 77,969 256,775 165,671 144,032 146,268 18,802 20,249 11,337 11,271 2,659 1,756 176,830 179,544 $1,029,518 $ 990,023 SIGCORP Inc 1998 ANNUAL REPORT 25 CONSOLIDATED STATEMENTS OF CAPITALIZATION At December 31 (in thousands) 1998 199_7 _ _ 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 restricted as to payment of cash dividends on common stock 292,717 270,828 Accumulated Other Comprehensive Income (12) 77 Total common shareholders' equity 370,963 349,163 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 1 1,090 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�% series, outstanding 8,077 and 9,237 shares, respectively, redeemable at $100 per share 808 924 LONG-TERM DEBT, NET OF CURRENT MATURITIES First mortgage bonds 169,915 238,420 Notes payable 36,009 36,000 Unamortized debt premium and discount, net (1,153) (713) Total long term debt 204,771 273,707 LONG-TERM PARTNERSHIP OBLIGATIONS, NET OF CURRENT MATURITIES 781 2,424 CURRENT PORTION OF ADJUSTABLE RATE POLLUTION CONTROL BONDS SUBJECT TO TENDER, DUE 2025, Series A, presently 3 65% 31,500 31,500 2030, Series C, presently 3 70% 22,200 - 53,700 31,500 TOTAL CAPITALIZATION, including bonds subject to tender $649,613 $676,308 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements 26 9IGCORP Inc 1998 ANNUAL REPORT CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY -- — Accumulated Other Common Retained Comprehensive (in thousands) Total Stock_ _ _Earnings _ _ _ Income _ Balances, December 31, 1995 $ 314,882 $ 78,258 $ 236,617 $ 7 Net Income 43,264 - 43,264 - Unrealized Gain On Securities (net of tax) 33 - - 33 Comprehensive Income 43,297 - 43,264 33 Common Stock Dividends ($1 15 per share) (27,255) - (27,255) - Balances, December 31, 1996 330,924 78,258 252,626 40 Net Income 46,140 - 46,140 - Unrealized Gain On Securities (net of tax) 37 - - 37 Comprehensive Income 46,177 - 46,140 37 Common Stock Dividends ($1 18 per share) (27,938) - (27,938) - Balances, December 31, 1997 349,163 78,258 270,828 77 Net Income 50,476 - 50,476 - Unrealized (LossJOn Securities (net of tax) (89) - - (89) Comprehensive Income 50,387 - 50,476 (84) Common Stock Dividends ($1 21 per share) (28,587) - (28,587) - Belances, Dece{mbar 31, 1998 $ 370,963 $ 78,258 $ 292,717_ $ (12)_ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Summary of Significant Accounting Policies Principles of Consolidation SIGCORP, Inc (SIGCORP), an Indiana holding company, has 11 wholly -owned subsidiaries Southern Indiana Gas and Electric Company (SIGECO), a gas and electric utility which accounts for over 80% of SIGCORP's net income for the twelve months ended December 31,1998, and ten nonregulated subsidiaries 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 124,340 electric customers in the city of Evansville and 74 other communities and serves 108,335 gas customers in the city of Evansville and 64 other communities Energy Systems Group, Inc (ESGI) has a one-third ownership in Energy Systems Group, LLC, an energy related performance contracting firm serving industrial and commercial customers Southern Indiana Minerals, Inc (SIMI) processes and markets coal combustion by-products Southern Indiana Properties, Inc (SIPI) invests in leveraged leases of real estate and equipment, real estate partnerships and joint ventures and private placement subordinated debt instruments Cash balances are invested in marketable securities SIGCORP Energy Services, Inc (Energy) was established to market energy and related services and is currently providing natural gas, pipeline management, storage service and other natural gas -related services to SIGECO, other utilities and customers SIGCORP Capital, Inc (Capital) is the primary financing vehicle for SIGCORP's nonregulated subsidiaries SIGCORP Fuels, Inc (Fuels) was formed to provide coal and related services to SIGECO and other customers SIGCORP Power Marketing, Inc (Power), not yet active, was formed to procure electric power supplies for SIGECO and other customers, and will market SIGECO's excess electric generation capacity SIGCORP Communications Services (Communications) was formed to undertake telecommunications -related strategic initiatives SIGCORP Environmental Services, Inc (Environmental Services) holds SIGCORP's investment in air quality services, a joint venture created to provide air quality monitoring and testing services to industry and utilities SIGECO Advanced Communications, Inc (Advanced Communications) holds SIGCORP's investment in SIGECOM, LLC and Uhlicom Networks, Inc (Utilcom) SIGECOM, LLC, is a joint venture between Advanced Communications and Utilicom to provide and market enhanced communications services over a lugh capacity fiber optic network in a multi -state area encompassing SIGECO's service territory Effective June 30,1998, ComSource, Inc, a former subsidiary of SIGCORP, was merged into Advanced Communications All significant intercompany transactions are eliminated SIGCORP Inc 1998 ANNUAL REPORT 27 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 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 At December 31 (in thousands) Regulatory Assets Demand side management program costs Postretirement benefit costs * Unamortized premium on reacquired debt Regulatory study costs Fuel and gas costs * Less current amounts Total long term regulatory assets 1998 1997 $ 25,648 $ 25,069 3,263 5,541 4,705 5,183 107 337 5,931 9,129 39,654 45,259 9,527 11,749 $ 30,127 $ 33,510 "Refer to the individual paragraphs in this Note for discussion of specific regulatory assets See Income Taxes for regulatory assets and liabilities related to income taxes As of December 31,1998, the recovery of $19,136,000 of SIGECO's total regulatory assets is currently reflected in rates charged to customers Recovery periods range up to 22 years for certain regulatory assets 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 that would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period In addition, SIGECO would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets Concentration of Credit Risk SIGECO s customer receivables from gas and electric sales and gas transportation services are primarily derived from a diversified base of residential, commercial and industrial customers located in a southwestern region of Indiana SIGECO continually reviews customers creditworthiness and requests deposits or refunds deposits based on that review SIGECO also sells electricity to wholesale marketers which increases its exposure to potential credit losses Energy's customer receivables from gas sales and transportation services are primarily derived from a diversified base of commercial and industrial customers located in the midwestern region of the United States Energy investigates the creditworthiness of its potential customers See Note 2 for a discussion of receivables related to SIPI's leveraged lease investments Utility Plant Utility plant is stated at the historical original cost of construction The cost of repairs and minor renewals is charged to maintenance expense as incurred Property unit replacements are capitalized and the depreciation reserve is charged with the cost, less net salvage, of units retired 28 SIGCORP Inc 1998 ANNUAL REPORT Depreciation Depreciation of utility property is provided using the straight-line method over the estimated service lives of the depreciable plant Provisions for depreciation, expressed as an annual percentage of the cost of average depreciable plant in service, were as follows 1998 1997 1996 Electric 3 A% 3 4% 3 4% Gas 3 3% 3 2% 3 2% 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 The components of the net deferred income tax liability are as follows At December 31 an thousandsl _ 1998 1997 Deferred Tax Liabilities Depreciation and cost recovery timing differences $117,866 $1 17,357 Deferred fuel costs, net 3,446 1,252 Leveraged leases 25,330 31,625 Regulatory assets recoverable through future rates 26,048 25,687 Deferred Tax Assets Unbilled revenue (1,394) (1,593) Regulatory liabilities to be settled through future rates (22,993) (25,229) Other, net (4,271) (2,831) Net deferred income tax liability $144,032 $146,268 The $2,236,000 decrease in the net deferred income tax liability from December 31, 1997 to December 31, 1998 represents a $5,850,000 decrease in the net regulatory assets and liabilities offset by the current year deferred federal and state income tax expense of $3,614,000 The components of current and deferred income tax expense are as follows Year Ended December 31 (in thousands) 1998 1997 1996 Current Federal $ 18,984 $ 24,387 $ 8,743 State 2,859 3,961 1,891 Deferred, net Federal 3,558 (2,858) 10,967 State 56 (172) 1,805 Investment tax credit, net (1,447) (1,457) (1,443) Total income tax expense $ 24,010 $ 23,861 $ 21,963 A reconciliation of the statutory tax rates to SIGCORP's effective income tax rate is as follows Year Ended December 31 _ 1998 _ 1997 19_96 Statutory federal and state rate 37 9% 37 9% 37 9% Equity portion of allowance for funds used during construction — (0 3) — Book depreciation over related tax depreciation — nondeferred 1 7 1 8 1 7 Amortization of deferred investment tax credit (1 9) (2 1) (2 2) Low income housing credit (3 8) (4 0) (4 2) Preferred dividend requirements of subsidiary 06 06 06 Excess deferred tax (2 8) (1 2) (1 7) Other, net 05 1 4 1 6 Effective tax rate 32 2a/o 34 1 % 33 7% 29 SIGCORP Inc 1998 ANNUAL REPORT Pension Beneft SIGECO has trusteed, noncontributory defined benefit plans Much cover eligible full -rime regular employees The plans provide retirement benefits based on years of service and the employee's lughest 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 mirumum 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, 1998 consist of investments in interest -bearing obligations and common stocks Change in benefit obligation Year Ended December 31 (in thousands) _ _ _ _ 1998 _ 1997 Benefit obligation at beginning of year $ 72,914 $ 63,999 Service cost — benefits earned during the year 2,639 2,165 Interest cost on projected benefit obligation 5,020 4,661 Plan amendments 2,220 — Benefits paid (3,176) (3,005) Actuarial loss 126 5,094 Benefit obligation at end of year $ 79,743 $ 72,914 Change in plan assets At December 31 (in thousands) 1998 1997 Plan assets at fair value at beginning of year _ $ 76,587 $ 66,011 Actual return on plan assets 9,926 12,638 Employer contribution — 943 Benefits pad (3,176) (3,005) Fair value of plan assets at end of year $ 83,337 $ 76,587 Reconciliation of funded status At December 31 (in thousands) 1998 1997 Excess of plan assets over projected benefit obligation $ 3,594 $ 3,673 Remaining unrecognized transitional asset (1,815) (2,233) Unrecognized service cost 3,455 1,412 Unrecognized net gain (11,864) (8,117) Accrued pension benefit liability $ (6,630) $ (5,265) Components of net periodic pension benefit cost Year Ended December 31 (in thousands_) 1998 1997 Service cost $ 2,639 $ 2,166 Interest cost 5,020 4,661 Expected return on plan assets (5,985) (5,182) Amortization of prior service cost 178 147 Amortization of transitional asset (418) (418) Recognized actuarial gain (47) (4) Net periodic benefit cost $ 1,387 $ 1,370 The projected benefit obligation at December 31,1998 and 1997 was determined using an assumed discount rate of 7 0% For both periods, the long-term rate of compensation increases was assumed to be 5 0%, and the long-term rate of return on plan assets was assumed to be 8 0% The transitional asset is being amortized over approximately 15,18 and 14 years for the Salaried, Hourly and Hoosier plans, respechvely 30 SIGCORP Inc 1998 ANNUAL REPORT In addition to the trusteed pension plans discussed above, SIGECO provides supplemental pension benefits to certain current and former officers under nonquahfied and nonfunded plans The accrued pension liability for this plan at December 31,1998 and 1997 was $3,820,000 and $3,255,000, respectively Annual service cost related to these benefits is approximately $700,000 Posh efinBntenl Bono% Older' Than Pensions SIGECO provides certain postretirement health care and life insurance benefits for retired employees and their dependents through a combination of self -insured and fully -insured plans In 1998, SIGECO amended these benefits for salaried employees aged 49 years and younger to require retiree contributions towards the related health care insurance costs SFAS No 106, "Employers' Accounting for Postretrement 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 EJRC authorized SIGECO to include in rates SFAS No 106 costs and to recover the amounts previously deferred over a 60-month period Change in benefit obligation Year Ended December 31 (in thousands) 1998 1997 Benefit obligation at beginning of year _ $ 30,924 $ 29,275 Service cost — benefits earned during the period 578 890 Interest cost on accumulated benefit obligation 1,664 2,056 Actuarial gain (4,201) (443) Benefits paid net of participant contributions (1,024) (854) Plan amendments (2,412) — Benefit obligation at end of $ 25,529_ $ 30,924 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 Change in plan assets At December 31 (in thousands) 1998 1997 Plan assets at fair value at beginning of year _ $ 7,336 $ 5,205 Actual return on plan assets 1,031 597 Employer contribution 2,168 2,388 Benefits paid net of participant contributions (1,024) (854) Fair value of plan assets at end of year $ 9,511 $ 7,336 Reconciliation of funded status At December 31 (in thousands) 1998 1997 _ _ _ Excess of projected benefit obligation over plan assets $ (16,018) $ (23,588) Unrecognized actuarial gain (13,671) (9,759) Unrecognized transition obligation 18,353 22,076 Accrued postretirement benefit liability $ (11,336 $ (11,271) Components of net periodic other postretirement benefit cost Year Ended December 31 (in thousands) 1998 1997_ _ Service cost _ $ 578 $ 890 Interest cost 1,664 2,056 Expected return on plan assets (577) (399) Amortization of prior service cost — — Amortization of transitional obligation 1,311 1,472 Recognized actuarial gain (743) (499) Net periodic benefit cost $ 2,233_ $ 3,520 SIGCORP Inc 1998 ANNUAL REPORT 31 The assumptions used to develop the accumulated postretirement benefit obligation at December 31, 1998 and 1997 included discount rates of 7 0% As of December 31, 1998 the health care cost trend rate is 8 0% declining to 4 5% in 2006 The accrued health care cost trend rate for 1999 is 8 0% The estimated cost of these future benefits could be significantly affected by future changes in health care costs, work force demographics, interest rates or plan changes A 10% increase in the assumed health care cost trend rate each year would increase the aggregate service and interest costs for 1998 by $385,000 and the accumulated postretirement benefit obligation by $3,900,000 A 10% decrease in the assumed health cam cost trend rate each year would decrease the aggregate service and interest costs for 1998 by $308,000 and the accumulated postretirement benefit obligation by $3,169,000 In 1995, SIGECO adopted Voluntary Employee Beneficiary Association (VEBA) Trust Agreements for the funding of postretuement 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 1998, 1997 and 1996, SIGCORP paid interest (net of amounts capitalized) of $21,900,000, $19,888,000 and $20,328,000, respectively, and income taxes of $27,594,000, $29,552,000 and $12,237,000, respectively SIGCORP is involved in several partnerships which are partially financed by partnership obligations amounting to $2,358,000 and $4,563,000 at December 31, 1998 and 1997, 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 At December 31 (in thousands) 1998 1997 _ Fuel (coal and oil( for electric generation $ 15,701 $ 8,920 Materials and supplies 15,179 13,579 Emission allowances 5,133 2,616 Gas in underground storage — at LIFO cost 10,762 9,046 Other 669 862 Total inventories $ 47,444 $ 35,023 Based on the December 1998 price of gas purchased, the cost of replacing SIGECO's current portion of gas in underground storage at December 31,1998 exceeded the amount stated on a LIFO basis by approximately $13,000,000 Ope►ohng Revenues and Fuel Costs SIGECO accrues an estimate of revenues unbilled for electric and gas service furnished from the meter reading dates to the end of each accounting period All metered gas rates contain a gas cost adjustment clause which allows for adjustment in charges for changes in the cost of purchased gas Metered electric rates typically contain a fuel adjustment clause which allows for adjustment in charges for electric energy to reflect changes in the cost of fuel and the net energy cost of purchased power SIGECO also collects through a quarterly rate adjustment mechanism, the margin on electric sales lost due to the implementation of demand side management programs SIGECO records any adjustment clause under or ovenecovery each month in revenues A corresponding asset or liability is recorded until such time as the under or overrecovery is billed or refunded to its customers The cost of gas sold is charged to operating expense as delivered to customers and the cost of fuel for electric generation is charged to operating expense when consumed Comprehensive Income SIGCORP adopted Statement of Financial Accounting Standards (SEAS) No 130 Reporting Comprehensive Income" in 1998 The objective of the statement is to report comprehensive income which is a measure of all changes in equity of an enterprise which result from transactions or other economic events during the period other than transactions with shareholders This information is reported in the Consolidated Statements of Common Shareholders' Equity SIGCORP s components of accumulated other comprehensive income includes unrealized gains (losses) on available for sale securities New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No 131, "Disclosures about Segments of an Enterprise and Related Information " In February 1998, FASB issued SFAS No 132, "Employers' Disclosures about Pensions and Other Postrehrement Benefits " These statements, which were adopted by SIGCORP during 1998, do not affect the accounting recognition or measurement of transactions, but rather, require expanded disclosures 32 SIGCORP Inc 1998 ANNUAL REPORT In June 1998, the FASB issued SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities,' which is effective for fiscal years beginning after June 15,1999, but may be adopted earlier SFAS No 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on Consolidated Balance Sheets as either an asset or liability measured at fair value The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation SFAS No 133 requires that changes in the derivative's fair value be recognized in the current period's earnings, unless specific hedge accounting criteria are met If an entity qualifies for hedge accounting, gains and losses on derivatives, generally, will offset the related effects of the hedged items in the current period income statement SFAS No 133 requires that formal documentation be maintained and that the effectiveness of the hedge be assessed quarterly SIGCORP has not yet quantified the effects of adopting SFAS No 133 on its financial statements and has not determ ned the tiimng or method of its adoption of this statement However, adoption of SFAS No 133 could increase the volatility in earnings and other comprehensive income Note 2 Leveraged Leases SIM is a lessor in four leveraged lease agreements under which an office building, a part of a reservoir, a gas turbine electric generating peaking unit and passenger railroad cars are leased to third parties In early 1998, SIFT sold its leveraged lease in a paper mill The economic lives and lease terms vary with the leases The total equipment and facilities cost was approximately $86,700,000 and $110,800,000 at December 31,1998 and 1997, 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 $66,700,000 and $79,100,000 at December 31, 1998 and 1997, respectively SIGCORP's net investment in leveraged leases at those dates was $10,673,000 and $11,339,000, respectively, as shown At December 31 )in thousands) Minimum lease payments receivable Estimated residual value Less unearned income Investment in lease financing receivables and loan Less deferred taxes arising from leveraged leases Net investment in leveraged leases Note 3 Short -Term Financing ---- - 1998 - _ - 1997 $ 51,443 $ 63,877 29,073 29,073 44,513 49,986 36,003 42,964 25,330 31,625 $ 10,673 $ 11,339 SIGECO has trust demand note arrangements totaling $17,000,000 with several banks, of which $16,500,000 was utilized at December 31, 1998 Funds are also borrowed periodically from banks on a short-term basis, made available through Imes of credit SIGECO has available Imes of credit totaling $79,000,000 at December 31,1998 of which $33,008,000 was utilized at that date SIGECO, also, has a $20,000,000 short-term loan outstanding At December 31 )in thousands) Notes Payable Balance at year end Weighted average interest rate on year end balance Average daily amount outstanding during the year Weighted average interest rate on average daily amount outstanding during the year Note 4 Long -Term Debt 1998 1997 1996 $ 69,508 $ 41,368 5 86% 6 21 % $ 38,408 $ 14,510 6 22% 6 08% $ 38,750 5 94% $ 24,430 5 74% The annual smkmg 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 1999 sinking fund requirement by this means and, accordingly, the sinking fund requirement for 1999 is excluded from current liabilities on the balance sheet At December 31, 1998, $296,605,000 of SIGECO's utility plant remained unfunded under SIGECO's Mortgage Indenture SIGCORP Inc 1998 ANNUAL REPORT 33 Several of SIGCORP's partnership investments have been financed through obligations with such partnerships Of the amount of first mortgage bonds, notes payable and partnership obligations outstanding at December 31,1998, the following amounts which mature in the five years subsequent to 1998 are as follows 1999 - $46,577,000, 2000 - $532,000 and 2001- $249,000 In addition, $53,700,000 of adjustable rate pollution control series fast mortgage bonds could, at the election of the bondholder, be tendered to SIGECO in March 1999 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 1999 are shown as current liabilities First mortgage bonds, notes payable and partnership obligations outstanding and classified as long-term are as follows At December 31 (in thousands) 1998 _ _ First Mortgage Bonds due 1999, 6% $ _ 2020, 4 40% Pollution Control Series B 4,640 2030, 4 40% Pollution Control Series B 22,000 2014, 7 25% Pollution Control Series A 22,500 2016, 8 875% 23,000 2023, 7 60% 45,000 2025, 7 625% 20,000 Adjustable Rate Pollution Control 2015, Series A, presently 4 60% 9,975 Adjustable Rate Environmental Improvement 2023, Series B, presently 6% 22,800 2030, Series C, presently 3 70% — Total first mortgage bonds $169 915 Notes Payable Insurance Company, due 2012, 7 43% $ 35,000 Tax Exempt, due 2003, 6 25% 1,000 Bank, due 2000, 2 90% 9 Total notes payable $ 36,009 Partnership Obligations, due 2000 through 2004, without interest $ 781 Note 5 Capital Stock 1997 $ 45,000 3,945 22,000 22,500 25,000 45,000 20,000 9,975 22,800 22,200 $238,420 $ 35,000 1,000 $ 36,000 $ 2,424 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 tunes 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 34 SIGCORP Inc 1998 ANNUAL REPORT SIGECO has a common stock option plan for its key management employees The option price for all stock options is at least 100% of the fair market value of SIGCORP common stock at the grant date Options generally vest and become exercisable between one and three years in equal annual installments beginning one year after the grant date, and generally expire in 10 years The expiration dates for options outstanding as of December 31, 1998, ranged from July 13, 2004 to July 14, 2007 Stock option activity for the past three years was as follows At December 31 _ _ _ 1998 _ 1997 1996 Outstanding at beginning of year 458,169 327,901 282,478 Granted 74,999 139,348 46,173 Exercised (29,500) (9,080) (750) Outstanding at end of year 503,668 458,169 327,901 Exercisable at end of year 381,765 318,821 226,044 Reserved for future grants at end of year 204,639 279,638 418,986 Average Option Price - Exercised $ 21 16 $ 1842 $ 1842 - Outstanding at end of year $ 2328 $ 21 58 $ 1943 SIGCORP accounts for stock compensation in accordance with Accounting Principles Board Opimon No 25, Accounting for Stock Issued to Employees " Under Accounting Principles Board Opuuon 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 At December 31 1998 1997 1996 Net Income As reported $ 50,476 $ 46,140 $ 43,264 Pro forma 49,961 45,848 43,176 Basic Earnings Per Share As reported $ 2 14 $ 1 95 $ 1 83 Pro forma 2 11 1 94 1 83 Diluted Earnings Per Share As reported $ 2 12 $ 1 95 $ 1 83 Pro forma 2 10 1 94 1 82 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 penods ended December 31,1998,1997 and 1996 nsk-free interest rate of 4 44o/o, 5 75% and 6 50%, respectively, expected option term of five years, expected volatilities of 3316%, 36 62% and 13 83%, respectively, and dividend rates of 3 77%, 4 4694n and 4 96%, respectively Earnings Per Share The following table illustrates the basic and diluted earnings per share calculations At December 31 (in thousands except _ _ _ for per share amounts) 1998 1997 1996 Income Shares Per Share Income Shares Per Share Income Shares Per Share Amount Amount Amount Basic EPS $50,476 23,631 $2 14 $46,140 23,631 $1 95 $43,264 23,631 $1 83 Effect of dilutive securities 134 56 40 Diluted EPS $50,476 23,765 $2 12 $46,140 23,687 $1 95 $43,264 23,671 $1 83 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 earrungs per common share were determined using the treasury stock method for dilutive stock options Options to purchase 74,999 shares of common stock at $32 06 per share were granted in July 1998, but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares SIGCORP Inc 1998 ANNUAL REPORT 35 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 nomedeemable 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 September 2,1998, SIGECO repurchased 1,160 shares of the Cumulative Special Preferred Stock at a cost of $118,500 as a result of a tender within the provision of the issuance Note 6 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 31,1998 is $36,295,000 with accumulated depreciation totaling $25,472,000 AGC and SIGECO also share equally in the cost of operation and output of the unit SIGECO's share of operating costs is included in operating expenses in the Consolidated Statements of Income Note 7 Commitments and Contingencies SIGECO presently estimates that approximately $66,000,000 will be expended for construction purposes in 1999, including those amounts applicable to SIGECO's demand side management (DSM) programs Commitments for the 1999 construction program are approximately $23,853,000 at December 31,1998 Additionally, SIGECO has a three-year contract with a utility - affiliated power marketer to purchase 50 MW of electric power beginning January, 2000 through December, 2002 Note 8 Lease Obligations SIMI has entered into an agreement to lease back a previously sold manufacturing facility and related equipment at $532,000 per year through 2010 under a noncancelable operating lease In December 1997, Fuels entered operating lease agreements for mining equipment The aggregate future minimum rental payments required under the above leases are as follows Year Ended December 31 (in thousands) 1999 2000 2001 2002 2003 Thereafter Total lease payments $ 2,319 2,319 2,319 2,319 2,144 9,041 $20,461 Total rental expense under all operating leases was $1,206,977, $578,454 and $558,282 for the years ended December 31,1998, 1997and 1996,respectively Note 9 Segments of Business SIGCORP adopted SFAS No 131 Disclosures about Segments of an Enterprise and Related Information in 1998 SFAS No 131 establishes standards for reporting information about operating segments in financial statements and disclosures about products and services and geographic areas Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance SIGCORP has four reportable segments They are SIGECO's electric and gas utility operations, Energy Services gas marketing services and SIPI's investment operations All other subsidiary operations and corporate activities are included in Other SIGCORP s reportable segments are operations that are managed separately and meet the quantitative thresholds required by SFAS No 131 A description of the segments' products and services is included in Note 1 "Principles of Consolidation The accounting policies of the segments are those described in Note 1 Revenues for each of SIGCORP s segments are attributable principally to customers in the United States 36 SIGCORP Inc 1998 ANNUAL REPORT Certain financial information relating to SIGCORP's significant segments of business is presented below Year Ended December 31 (in thousands) 1998 19.97_ 1996 Operating revenues _ Electric $ 297,865 $ 272,545 $ 276,479 Gas 66,801 85,561 96,251 Gas marketing 179,613 71,669 1,446 Investment operations 963 955 930 All other 28,664 2,507 29,632 Total _ _ 573,906 433,237 404,738 Interest revenue Electric (a) 309 492 392 Gas (a) 31 49 39 Gas marketing 71 27 - Investment operations 3,702 2,305 1,392 All other 4,880 2,912 312 Total 8,993 5,785 2,135 Interest ex ense Electric �a) 18,191 18,009 18,207 Gas (a) 1,799 1,781 1,801 Gas marketing 155 15 - Investment operations 2,749 2,242 773 All other 3,901 2,051 38 Total 26,795 24,098 20,819 Income taxes Electric 22,881 23,714 21,603 Gas 2,153 3,545 3,037 Gas marketing 339 244 (15 Investment operations (1,517) 2564 (2 314 All other 154 �1:078' (348 Total _ 24,010 23,861 21,963 Net income Electric 38,342 37,861 37,029 Gas 4,106 6,404 4,714 Gas marketing 543 405 (26) Investment operations 6,899 3,528 2,391 All other 586 (2,058) (844) Total _ 50,_4_76 46,140 43,264 Depreciation and amortization expense Electric 38,077 36,217 35,018 Gas 4,324 3,974 3,599 Gas marketing 36 4 - Investment operations 189 91 410 All other 107 87 113 Total 42,733 40,373 39,140 Capital expenditures Electric 47,114 55,735 34,836 Gas 9,381 12,687 9,099 Gas marketing - 20 72 Investment operations 196 547 297 All other 11,754 592 952 Total 68,445 69,581 45,256 Identifiable assets Electric (b) 740,746 726,507 710,791 Gas (b) 141,174 137,956 141,534 Gas marketing 25,905 22,372 1,468 Investment operations 87,000 94,365 92,337 All other 460,706 398,928 349,694 Total assets _ $1,455,531 $ 1,380,128 $ 1,295,824 (a) SIGECO allocates interest revenue and expense based on the net plant ratio which Is 91 % electric and 9% gas (b) Utility plant less accumulated prevision for depreciation, inventories, receivables (less allowance) regulatory assets and other identifiable assets SIGCORP In< 1998 ANNUAL REPORT 37 The following is a reconciliation to the financial statements Year Ended December 31 (in thousands) Operating revenues Total revenues for segments Elimination of intersegment revenues Total consolidated revenues Interest revenue Total interest revenue for segments Elimination of intersegment interest Total consolidated interest revenue Interest expense Total interest expense for segments Elimination of intersegment interest Total consolidated interest expense Identifiable assets Total assets for segments Elimination of intersegment assets Total consolidated assets 1998 1997 1996 $ 573,906 $ 433,237 $ 404,738 (16,795) - - 557,111 433,237 404,738 8,993 5,785 2,135 (3,505) (2,782) - 5,488 3,003 2,135 26,795 24,098 20,819 (3,505) (2,782) - 23,290 21,316 20,819 1,455,531 1,380,128 1,295,824 (426,013) (390,105) (343,104) $ 1,029,518 $ 990,023 $ 952,720 Note 10 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 At December 31 tin thousands) Long Term Debt (including current portion) Partnership Obligations (including current portion) Redeemable Preferred Stock of Subsidiary Carrying Estimated Amount Fair Value $303,471 $376,424 2,358 3,446 7,500 9,044 Carrying Amount $318,597 4,563 7,500 1997 Estimated Fair Value $381,489 6,163 8,091 At December 31,1998 and 1997, respectively, the fair value of SIGCORP's debt relating to utility operations exceeded carrying amounts by $65,000,000 and $58,000,00 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 Nonutihty 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 38 SIGCORP Inc 1998 ANNUAL REPORT REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS OF SIGCORF, 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 31,1998 and 1997, and the related consolidated statements of income, common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998 These 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 31,1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31,1998, in conformity with generally accepted accounting principles ARTHUR ANDERSEN LLP Chicago, Illinois January 29,1999 SICCORP 1. 1"S ANNUAL REPORT 39 SELECTED FINANCIAL DATA Year Ended December 31 )in thousands except for per share amounts) 1998 1997 1996 1995 Operating Revenues $ 557,111 $433,237 $404,738 $360,771 Operating Income $ 86,079 $ 85,582 $ 82,717 $ 72,401 Net Income Before Cumulative Effect of Accounting Change $ 50,476 $ 46,140 $ 43,264 $ 38,525 Net Income Average Common Shares Outstanding Earnings Per Share of Common Stock Before Cumulative Effect of Accounting Change Cumulative Effect of Accounting Change Basic Earnings Per Share Diluted Earnings Per Share Dividends Per Share of Common Stock Total Assets Redeemable Preferred Stock Long Term Obligations SELECTED QUARTERLY FINANCIAL DATA (Unaudited) $ 50,476 $ 46,140 $ 43,264 $ 44,819 23,631 23,631 23,631 23,631 1994 $ 330,899 $ 70,779 $ 39,920 $ 39,920 23,631 $ 214 $ 195 $ 183 $ 163 $ 169 $ $ $ $ 027 $ $ 214 $ 195 $ 183 $ 190 $ 169 $ 212 $ 195 $ 183 $ 190 $ 169 $ 1 21 $ 1 18 $ 1 15 $ 1 13 $ 1 10 $1,029,518 $990023 $952,720 $923,981 $917,310 $ 8,308 $ 8,424 $ 8,424 $ 8,424 $ 8,515 $ 206,705 $276,844 $266,951 $265,085 $274,467 Quarter Ended March 31, June 30, September 30, December 31, (in thousands except for per share amounts) 1998 1997 1998 1997 1998 1997 1998 1997 Operating Revenues $141,071 $107,572 $133,305 $85,609 $134,035 $108,795 $148,700 $131,261 Operating Income $ 23,880 $ 23,443 $ 16,623 $ 13,497 $ 31,557 $ 34,627 $ 14,019 $ 14,015 Net Income $ 16,426 $ 13113 $ 9,007 $ 6,263 $ 17,876 $ 19,947 $ 7,167 $ 6,817 Basic Earnings Per Share $ 070 $ 055 $ 038 $ 027 $ 076 $ 084 $ 030 $ 029 Diluted Earnings Per Share $ 069 $ 055 $ 038 $ 026 $ 075 $ 084 $ 030 $ 029 Average Common Shares Outstanding 23,631 23,631 23,631 23,631 23,631 23,631 23,631 23,631 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 COMMON STOCK - MARKET PRICE AND DIVIDENDS PER SHARE 1998 1997 High Low Dividends High LOW Dividends_ Quarter Ended _ _ _ March 31 $32 s/6 $27 5/16 $0 3025 $24 9/16 $22 9/16 $0 2950 June 30 32 3/a 28'/16 03025 26's/16 21 7/s 02950 September 30 33 7/16 301/4 03025 26'%6 24 %s 02950 December 31 36 9/6 3213/16 03025 30'/e 24 15/16 02950 40 SIGCORP Inc 1998 ANNUAL REPORT SIGCORP'S GROWTH RECORD 1998 1997� - -- 1996 _1995 1994 1988 _- SUMMARY OF OPERATIONS (in thousands except for per share amounts) Electric Utility Revenue $ 297,865 $ 272,545 $ 276,479 $ 275,495 $ 260,936 $ 250,586 Gas Utility Revenue 66,801 85,561 96,251 63,203 69,099 864 62,261 695 Energy Services and Other Revenue 192,445 557,111 75,131 433,237 32,008 404,738 22,073 360,771 330,899 313,542 Total Operating Revenues Operation and Maintenance Expenses 428,299 307,282 282,881 248,928 222,337 204,503 Depreciation and Amortization of Plant 42,733 40,373 39,140 39,442 37,783 32 768 Operating Income Debt 86,079 17,604 85,582 19,797 82,717 18,432 72,401 18 789 70,779 18,604 76,271 17,804 Interest on Long Term AFUDC (1,392) (1,378) (445) (1001) 16,030) (328) Other Income, net (5,714) (3,935) (1,594) (12431 1,018 (1,324) Preferred Dividend Requirements of Subsidiary 1095 1,097 1,097 1099 1,105 1,400 Income Before Income Taxes 74,466 70,001 65,227 54,757 56,082 58,719 Income Taxes 24,010 23,861 21963 16,232 16,162 21,949 Net Income Before Cumulative Effect of Accounting Change 50,476 46,140 43,264 38,525 39,920 36,770 Cumulative Effect of Accounting Change Income , - 50 476 $ - 46,140 $ - 43 264 6,294 $ 44,819 - $ 39,920 - $ 36,770 24,833 Net 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 $ 214 $ 1 95 $ 1 83 $ 1 63 $ 1 69 $ 1 48 Cumulative Effect of Accounting Change - 2 14 $ - 1 95 $ - 1 83 027 $ 1 90 - $ 1 69 - $ 1 48 Basic Earnings Per'Shore Diluted Earnings Per Share $ 2 12 $ 1 95 $ 1 83 $ 1 90 $ 1 69 $ 1 48 Dividends Per Share of Common Stock $ 121 $ 1 18 $ 1 15 $ 1 13 $ 1 10 $ 085 Payout Ratio-%_ ___ _ __ - _ 565 605 628 693 65 1 574 PLANT AND PROPERTY (m thousands) Gross Plant -first of year $1,265,236 $1,205,362 $1,169,693 $1,134,858 $1,059,955 $ 795,718 Net Additions 55,313 66,081 40,296 45,087 80,941 41,455 Net Retirements Gross Plant -end of y ar _ - 4,237 6,207 -_ $1 316 312 $11,265 236 $ 4,627 1,205,362 10,252 $1,169,693 6,038 $1,134,858 2,664 $ 834,509 ELECTRIC SALES (MWh) Residential 1,326,024 1,251,376 1,318,043 1 275 674 1,245,800 1 148,145 Commercial 1,243,329 1,192,220 1,173,856 1,129,904 1,137,203 943,918 Industrial 2,256,116 2,067,355 2,074,404 1984221 1,927,919 1,818,970 Municipalities and Jasper 623,659 566,354 553160 562,194 508156 412,259 Other Utilities and Power Marketers 1,026,737 962,502 659,199 539 670 419,508 112,558 Alcoa Generating Corporation 363,161 223,785 285,122 468,552 307,140 1006,359 Other 20,155 20,936 20,737 20,675 20,584 21,251 Total _ 68541 81 6,284,528 6,084,521 5,980,890 5,566,310 5,463,460 GAS SOLD AND TRANSPORTED (MDth) 7,764 9,587 10,913 9,145 9,526 8772 Residential Commercial and Industrial 21,201 19,783 20,152 18,492 17,776 15 634 24,406 Total _ __ 28,_965 29,370 31,065 27,637 27,302 ELECTRIC CUSTOMERS Residential 108,241 107,046 106,605 105,322 104,049 99,117 Commercial 15,900, 15,692 15,391 15,024 14,741 13,632 Industrial 175 176 176 178 179 189 Other Total 24, 124,340 23 122,937 23 122,195 23 120,547 23 118,992 23 112,961 11,669 Average Residential kWh Use 12,435 11,913 12 286 12,228 12,038 Average Residential Rate Per kWh-4 _ 665 658 678 662 667 659 GAS CUSTOMERS Residential 98,636 97,671 96,741 95,519 93,719 84,663 Commercial 9,485 9,390 9,274 8,991 8,984 7,954 Industrial 214 217 222 222 226 220 92,837 Total 106,335 107 278 106,237 104,732 102,929 108 428 Average Residential Dth Use 81 100 109 97 103 436 421 473 Average Residential Rate Per Dth-$ 617 -- 577 41 Board t0f Directors SIGCORP, INC AND SOUTHERN INDIANA GAS AND ELECTRIC COMPANY N,,, I k11 t, 9b) JAMES S DONALD E DONALD A RICHARD W VINSON SMITH RAUSCH SITYMANSKI Evansville terse Haute Evansville Evansville President President and Chief Former Chairman Chairman University of Executive Officer of the Board and Harding Shymanski Evansville First financial President & Company PC Corporation OF Bancorp Inc RONALDG REHERMAN Char -man President and Chief Executive Officer JOHN D JOHN M ROBERT L ENGELBRECHT DUNN KOCHB Evansvlle Evansville Evansville President and President President and Chief Chief Executive Officer Dunn Hospitality Executive Officer South Central Group Koch Enterprises Inc Communications Corp Isvri��d td�,� riamt ANDREW E GOEBEL RONALD G REHERMAN LvonsvJle Evansville Executive Vice President SICCORP Inc Chauman President and Chief Executive Officer SIGCORP Inc President and Chief Executive Office, Chairman Southern Indiana Gas and Electric Company Southern Indiana Gas and Electric Company Officers SIGCORP, INC ANDREW E GOEBEL TIMOTHY L BURKE S MARK KERNEY LINDA K TIEMANN Executive Vice President Secretary and Treasurer Controller Assistant Secretary 42 SIGCORP 1., 1998 ANNUAL REPORT RONALDG REHERMAN ii77 lll���777 O fterE And Staff Chairman SOUTHERN Lr {7���YLllll���� J1 INDIANA GAS AND ELECTRIC COMPANY ANDREW E GOEBEL Presdent and Chief Executive Officer S MARK KERNEY Controller J GORDON HURST Executive Vice President and Chief LINDAK TIEMANN Operating Officer Assistant Secretary RONALD G JOCHUM RILEY G HARROD Vice President Power Supply Director of Purchasing and Material Control JEFFREY L DAVIS GARY W HUSKY Vice President Support Services Director of Energy Delivery Operations WILLIAMS DOTY MILLARD W NEW Vice President Energy Delivery Manager of Warrick Power Plant GREGG M McMANUS MICHAELL NIEMEYER Vice President and Duector of Division Manager Hoosier Gas Operations Governmental Relations TIMOTHY L BURKE RODNEY C PENFIELD Secretary and Treasurer Director of Human Resources General AlLmagement Southern Indiana Properties, Inc NONREGULATED SUBSIDIARIES OF SIGCORP, INC GLENN h JUNGEN President and General Manager SIGCORP Capital, Inc ANDREW E GOEBEL SIGCORP Communications President Services, Inc JOHN A DIDOMIZIO Air Quality Services, LLC (51 %owned) Vice President and General Manager DANIEL L TODD General Manager SIGCORP Energy Services, Inc SIGECOM LLC (A9% owned) JOHN M BOHLS President and General Manager RICHARDM WADMAN President and General Manager SIGCORP Fuels, Inc Energy Systems Group LLC (33% owned) KENT H STUMP Pres dent and General Manager JAMESL ADAMS President and General Manager Southern Indiana Minerals, Inc ROBERT W SPARKS Vice President and General Manager SIGCORP Inc 1998ANNUAL REPORT 43 SHAREHOLDER INFORMATION 4 nnmen Stock '111lriglSymbol i$*k'Bxahange Rtnisfor Agents 'R�Prs, r 't glRelnvestment P%af1,'`Ayent Dlwdends r i Annaall osling � f ,i sh4�al` Ia4dB�s it Annr+cl► Aepprt to the SEC R=06s0ifor finanolal py 1*100"s,or information concerning shareholder ageqWNmay be addressed E' goholder Services SIG New York Stock Exchange SIGCORP, Inc.- - - - - - - - - --- — — -- Attn Shareholder Services Department 20 N W Fourth Street PO Box 3606 Evansville, Indiana 47735-3606 Conhnentol Sock Transfer & Trust Company 2 Broadway New York, New York 10004 Common Stock of SIGCORP and 4.8% Preferred Stock, 6.so% Preferred Stock and 8%% Special Preferred Stock of SIGECO: The National City Bank of Evansville, Evansville, Indiana 47705 Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004 4.75% Preferred Stock: Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004 SIGCORP, Inc. -- - - - - - - --- Attn Shareholders Services Department • 20 NW Fourth Street PO Box 3606 • Evansville, IN 47735-3606 Preferred Stock: - - - --- - 4 75% Senes-payable on the first day of March, June, September and December 4 8% Senes-payable on the first day of February, May, August and November 6 50% Senes-payable on the first day of March, June, September and December 8'/z% Series —payable on the first day of January, April, July and October Common Stock: Payable when declared It is the present intention of the management, subject to future earnings and other factors, to pay dividends on the 20th day of March, June, September and December The annual meeting of shareholders of SIGCORP, Inc and Southern Indiana Gas and Electric Company will be held at 3 00 p in on Tuesday, April 27,1999, at the Company s Norman P Wagner Operations Center, One North Main Street, Evansville, Indiana The number of registered common shareholders as of November 20, 1998 was 8,672 The Company will file an annual report on Form 10-K with the Securities and Exchange Commission A copy of this report will be furnished to shareholders on request to the Investor Relations Department of the Company Address SIGCORP, Inc. Attn Shareholder Services Department 20 N W Fourth Street PO Box 3606 Evansville, Indiana 47735-3606 Websbe http //wwwsigcorpinc com Telephone Numbers 1-800-227-8625 (812) 464-4528 (812) 464-4599 (812) 461-2187 (FAX) 44 SIGCORP 1., 1998 ANNUAL REPORT