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2000-269AN 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 EFFECTWE DATE WHEREAS, the City Council deems it ~n the pubhc ~nterest to engage SIGCORP Commumcatlons Services, Ine, an Indiana Corporation ("SIGCORP"), to provide professional consulting services to the City pertmmng to the preparation of an independent feas~bthty evaluation respecting teleeommtm~eatlons, dark fiber, and bandwidth issues for Denton Mumc~pal Electric, and WHEREAS, the City staff has reported to the City Council that there is a substantial need for the above-referenced professional multl-dlsc~phnary independent consulting services, that hm~ted City staff cannot adequately perform the services and tasks w~th ~ts own personnel, and that C~ty staff further lacks the speemhzed expertise necessary to complete such an evaluation, and WHEREAS, Chapter 2254 of the Texas Government Code, known as the "Professional Services Procurement Act", generally prowdes that a C~ty may not select a provider of professional services on the basis of competitive b~ds, but must select the prowder on the basis of demonstrated competence, knowledge, and quahficatlons, and for a fmr and reasonable price, and WHEREAS, the City Council has prowded m the C~ty Budget for the appropriation of funds to be used for the purchase of the professtonal consulting services, as set forth m the Professtonal Services Agreement, NOW, THEREFORE, THE COUNCIL OF THE CITY OF DENTON HEREBY ORDAINS SECTION 1 That the City Council approves, and the C~ty Manager ~s hereby anthonzed to execute a Professtonal Services Agreement for Consulting Services w~th SIGCORP Commumeatlons Services, Inc, an Indiana Corporation, for professional consulting services pertannng to the preparation of the mdependent feas~bthty evaluation referred to m the preamble above, m substantially the form of the Professional Services Agreement attached hereto and incorporated herewith by reference SECTION 2 That the award of th~s Agreement by the City ~s on the basis of the demonstrated competence, knowledge, and quahficat~ons of SIGCORP and the ablhty of SIGCORP to perform the services needed by the City for a fair and reasonable pnee SECTION 3 That the expenditure of funds as provided in the attached Professional Services Agreement ~s hereby authorized SI~CTION 4 That th~s or&nance shall become effective ~mmedmtely upon ~ts passage and approval PASSED AND APPROVED th~s the /~ day of ~ ,2000 EULINE BROCK, MAYOR ATTEST JENNIFER WALTERS, CITY SECRETARY By .... APPROVED AS TO LEGAL FORM HERBERT L PROUTY, CITY ATTORNEY S \Our Documenta\Ordmanees\00\S1OCORP PSA Ord - DME Eval 8 2000 doc STATE OF TEXAS § COUNTY OF DENTON § PROFESSIONAL SERVICES AGREEMENT FOR CONSULTING SERVICES TI-IT~ AGREEMENT is made and entered into as of the /.~ day of · 2000, by and between the City of Denton, Texas, a Texas Municipal CorporatiOn, with its pnnclpal offices at 215 East McKmney Street, Denton, Texas 76201 (hereafter "OWNER") and SIGCORP Communications Services, Inc, an Inchana Corporation, with ~ts offices at 421 John Street, Evansville, Inchana 47713 (hereafter "CONSULTANT"), the parties acting herein, by and through their duly-authorized representatives and officers W1TNESSETH, that in consideration of the covenants and agreements herein contained, the parties hereto do mutually AGREE as follows ARTT(~I .~ T 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 Amcles to follow, with chhgence and m accordance with the professional standards customarily obtmned 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 mult~-disclphnary approach, regarchng the possibility of the OWNER provi&ng telecommumcat~ons services as penmtted by apphcable law and the leasing of dark fiber and/or bandwidth, which evaluation shall consist of, among other things investigation, local market research, high-level englneenng estimates, financial analyses, econormc modeling, and other related professional services The Project shall culrmnate in CONSULTANT prepanng and dehvenng a final report to OWNER w~th recommendations, and presenting the same to the OWNER ARTICT ~F, IT 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, w~th 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 CDME"), 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 th~s Agreement and the Attachment attached to th, s Agreement, the terms and condat~ons of th,s Agreement shall control over the terms and conchttons of the Attachment ARTIest ,1~, TIT ADDITIONAL SERVICES Any ad(huonal services to be performed by the CONSULTANT, ~f authorized by the OWNER, wtuch are not included as Basic Services m the Proposal and ~n the above-described Scope of Services, set forth in Article II above, shall be later agreed-upon by the parUes, who shall determine, m writing, the scope of such adtht~onal services, the amount of compensation for such addmonal services, and other essantml terms pertmnmg to the provision of such ad(ht~onal services by the CONSULTANT to OWNER p, RTICI ,~ TV PERIOD OF SERVICE Thls Agreement shall become effecUve upon execution by the OWNER and the CONSULTANT and upon the issuance of a not~ce to proceed by the OWNER, and shall remmn in force for the period that may reasonably be reqmred for the completion of the Project, lncluchng AdrhUonal Services, If any, and any reqmred extensions approved by the OWNER Th~s Agreement may be sooner ternunated in accordance with the prows~ons hereof T~me ~s of the essence m th~s Agreement The pames agree that based upon the scope of the services conttuned ~n the Proposal and after considering the work to be performed by CONSULTANT, that they reasonably expect that CONSULTANT shall complete the Project m approximately four (4) to slx (6) months from and after the date of the ~ssuance of the not~ce to proceed by OWNER ARTICI ,F, v COMPENSATION A COMPENSATION TERMS 1 "Subcontract Expense" ~s defined as any expenses ~ncurred by CONSULTANT ~n the employment of others m outside firms, for services ~n the nature of professional engmeenng, or related services Any subcontract or subconsultant bdhng reasonably ~ncurred by the CONSULTANT m connecUon with the Pro3ect shall be ~nvolced 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 recurred by the CONSULTANT m the performance of this Agreement, and as provided ~n the Proposed Project Budget section of Exhibit "A," for long chstance telephone charges, telecopy charges, messenger serwces, pnnt~ng and reproduction expenses, out-of-pocket expenses for purchased computer Ume, all reasonable travel expenses, and smular ~nc~dental expenses incurred ~n connecuon w~th the Project Page 2 of 10 B BII J.ING AND PAYMENT For and m consideration of the professional services to be performed by the CONSULTANT her~ln, 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 li above, as follows 1 CONSULTANT shall perform its work on this ProJect on a "lump-sum fee plus adcht~onal out-of-pocket chrect non-labor expenses" basis CONSULTANT shall bill from time sheets, and in accordance with the provisions of the "Proposed ProJect Budget" contmned 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 ad&tlonal om-of-pocket direct non-labor expense as more particularly set forth in Note 3 in the Proposed ProJect Budget contmned 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 completaon of the basic services, rendered to and approved by the OWNER through its Director of Electric UtshUes 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 saUsfactory completion of the ProJect by the CONSULTANT Nothing contmned in this Article shall reqmre the OWNER to pay for any work which is unsatssfactory as reasonably determined by the Director of Electric Utihtaes or her designee, or which is not submatted 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 ~s specifically understood and agreed that the CONSULTANT shall not be authorized to undertake any work pursuant to this Agreement that would require adchUonal payments by the OWNER for any charge, expense or reimbursement above the lump-sum fees and the maximum not-to-exceed fees as stated hereinabove, without first having obtained the prior written authonzataon from the OWNER CONSULTANT shall not proceed to perform any services to be later provided for under Article 11I "Adrhtsonal Services" without first obtmnmg prior written authorization from the OWNER C ADDITIONAL SERVICES For adchtaonal services authorized in writing by the OWNER in Article III hereinabove, CONSULTANT shall be prod based on a to-be-agreed-upon Schedule of Charges Payments for adchuonal services shall be due and payable upon subnussion by the CONSULTANT, and shall be in accordance with ArUcle V B herelnabove Statements for Basic Services and any adthtlonal services shall be subrmtted to OWNER no more frequently than twice monthly, on or about the 1st and 16th days of each month following the executaon of this Agreement D PAYMENT If the OWNER fmls to make payments due the CONSULTANT for services and expenses Page 3 of 10 w~thin 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 smd fortieth (40th) day, and m addmon, thereafter, the CONSULTANT may, after g~wng ten (10) days written notice to the OWNER, suspend services under this Agreement unul the CONSLrLTANT has been prod ~n full for all amounts then due and owing, and not &sputed by OWNER, for services, expenses and charges Prowded, 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 deterrmnes that the CONSULTANT's work is unsatisfactory, ~n accordance with Article V B of this Agreement ~RTICT .l~. VT OBSERVATION AND REVIEW OF THE WORK The CONSULTANT will exercise reasonable care and due chhgence ~n d~scovenng and promptly reporting to the OWNER any defects or deficiencies in the work of the CONSULTANT or any of its subcontractors or subconsultants ARTICI .F. VII OWNERSHIP OF DOCUMENTS All documents prepared or furnished by the CONSULTANT (and CONSULTANT's subcontractors or subconsultants) pursuant to th~s Agreement are instruments of service and shall become the property of the OWNER upon the ternunatlon of th~s Agreement The CONSULTANT is enutled to retmn copies of all such documents The documents prepared and fum~sbed 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 m another project or for other purposes than specified herein any of the information or materials developed pursuant to this agreement, CONSULTANT ~s released from any and all habfl~ty relating to their use in that project The foregoing notw~thstanding, the following shall remmn 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 attomey/chent pnvtlege, (3) all work product developed or proposed prior to the date of th~s Agreement, (4) all work product not created exclusively for use in connection with the prowslon of services under this Agreement, and (5) all business models and software, if any, developed in connecUon w~th the provision of services herein ARTICI ]~ vm' INDEPENDENT CONTRACTOR CONSULTANT shall prowde services to OWNER as an independent contractor, not as an employee of the OWNER CONSULTANT shall not have or clmm any right anamg from employee status INDEMNITY AGREEMENT The CONSULTANT shall indemnify and save and hold harmless the OWNER and its officials, officers, agents, attorneys and employees from and agmnst any and all lmbtl~ty, clmms, Page 4 of 10 demands, damages, losses and expenses, ~ncluchng but not hrmted to court costs and reasonable attorney's fees incurred by the OWNER, LIM1TED HOWEVER, to the extent provided or allowed by applicable law, and ~ncluchng without hnutat~on, damages for bodily and personal injury, death, or property damage, resultang from the negligent acts or omissions of the CONSULTANT or its officers, shareholders, agents, attorneys and employees in the execution, operation, or performance of th~s Agreement The OWNER shall indemnify and save and hold harmless the CONSULTANT and 1ts officers, agents, attorneys and employees from and agmnst any and all hablhty, clmms, demands, damages, losses and expenses, mcludang but not hnuted to court costs and reasonable attorney's fees incurred by CONSULTANT, LIMITED HOWEVER, to the extent provided or allowed by applicable law, and mcluchng without hn~tatlon, damages for bochly and personal ~njury, death, or property damage, resulting from the neghgent acts or on~sslons of the OWNER or ~ts officmls, officers, agents, attorneys and employees in the execution, operaUon, or performance of this Agreement Nottung in this Agreement shall be construed to create a habthty to any person who ~s not a party to this Agreement and nothing here~n shall wmve any of the parties' defenses, both at law or eqmty, to any clmm, cause of action or ht~gatlon filed by anyone not a party to this Agreement, lncludang the defense of governmental lmmumty, which defenses are hereby expressly reserved ARTTC~I ,F, X INSURANCE Dunng the performance of the Services under this Agreement, CONSULTANT shall mmntmn the following msurance w~th an insurance company licensed to do business m the State of Texas by the State Insurance Board or any successor agency, that has a rating with A M Best Rate Careers of at least an "A-" or above A Comprehensive General Dabfl~ty Insurance with bochly injury hn'uts of not less than $500,000 for each occurrence and not less than $500,000 in the aggregate, and with property damage hmats of not less than $100,000 for each occurrence and not less than $100,000 in the aggregate B Automobde Liability Insurance w~th bochly injury limits of not less than $500,000 for each person and not less than $500,000 for each accident and with property damage hnuts for not less than $100,000 for each accident C Worker's Compensation Insurance ~n accordance wah statutory requirements and Employer's I~ab~hty Insurance w~th hrmts of not less than $100,000 for each accident D Professional Liability Insurance w~th hnuts of not less than $1,000,000 annual aggregate E CONSULTANT shall furmsh insurance certificates or insurance policies at the OWNER's request to evidence such coverages The insurance policies shall name the OWNER as an addttional insured on all such pohcles to the extent legally possible, and shall contmn a provision that such insurance shall not be cancelled or mochfied 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 cancellaUon of coverage, deliver copies of any such substitute policies furnishing at least the same policy hrmts and coverage to OWNER AI~TTCJ .g. XI ARBITRATION AND ALTERNATE DISPUTE RESOLUTION The pames may agree to settle any chsputes under this Agreement by submattmg the chspute to arbitration or other means of alternate d~spute resolution such as medaat~on No arbitration or alternate chspute resolutaon arising out of or relating to, this Agreement ~nvolvlng one party's chsagreement may include the other party to the disagreement w~thout the other's approval p, R TTC. T .g. TERMINATION OF AGREEMENT A Notwlthstanchng any other prowslon of this Agreement, e~ther party may ternunate th~s Agreement by prowdmg forty-five (45) days advance written notice to the other paxty B This Agreement may alternatively be tenmnated in whole or in part in the event of e~ther party substantially fading to fulfill its obhgataons under this Agreement No such terrmnat~on will be effected unless the other party is g~ven (1) written not~ce (dehvered by certified mml, return receipt requested) of intent to tenmnate and semng forth the reasons specifying the nonperformance or other reason(s), and not less than thmy (30) calendar days to cure the fmlure, and (2) an opportunity for consultation with the tenmnatrag party prior to tenmnat~on C If the Agreement ~s terrmnated prior to compleuon of the serwces to be prowded hereunder, CONSULTANT shall immediately cease all services upon receipt of the written notice of tenmnatlon from OWNER, and shall render a final b~ll for services to the OWNER wtth~n twenty (20) days after the date of tenmnatlon The OWNER shall pay CONSULTANT for all services properly rendered and sausfactonly performed, and for reimbursable expenses prior to not~ce of terrmnaUon 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 terrmnatlon, but may mmntmn copies of such documents for its files D Upon tenmnatlon of th~s Agreement, OWNER shall pay CONSULTANT all amounts due and owing hereunder through the effecuve date of such tenmnatmn, and CONSULTANT shall lmmechately stop its work for OWNER A R TTC~T .I~, X'TIT RESPONSIBILITY FOR CLAIMS AND LIABILITIES Approval of the work by the OWNER shall not constitute nor be deemed a release of the responslblhty and hablhty of the CONSULTANT, ~ts 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 assumptton of such responslblhty by the OWNER for any defect m the design or other work prepared by the CONSULTANT, its officers, employees, agents, subcontractors, and subconsultants Page 6 of 10 ,~ R 'T'TiRT ,~,, X1V NOTICES All notices, commumcat~ons, and reports reqmred or perrmtted under th~s Agreement shall be personally dehvered to, or telecop~ed to, or mmled to the respective part~es by deposlt~ng same m the Umted States mml at the add~sses shown below, postage prepaid, certified mml, return receipt requested, unless otherwise specified hereto To CONSULTANT To OWNER SIGCORP Communications Services, Inc City of Denton, Texas Attn John A D~Dormz~o Sharon Mays, D~rector, DME Vice President and General Manager 901-A Texas Street 421 John Street Denton, Texas 76201 Evanswlle, Inchana 47713 All notices under th~s Agreement shall be effective upon their actual receipt by the party to whom such not~ce ~s g~ven, or three (3) days after mmhng of the not~ce, whichever event shall first occur ARTICT ,~, XV ENTIRE AGREEMENT Th~s Agreement consisting of ten (10) pages and one (1) Attachment consUtutes the complete and final expression of the Agreement of the part~es and ~s intended as a complete and exclusive statement of the terms of their agreements, and supersedes all prior contemporaneous offers, promases, representations, negotiations, discussions, commumcat~ons, understanchngs, and agreements which may have been made m connection with the subject matter of th~s Agreement ARTTCI ,F, XVT SEVERABILITY If any provision of this Agreement ~s found or deemed by a court of competent jurisdiction to be ~nvalld or unenforceable, it shall be considered severable from the remmnder of this Agreement, and shall not cause the remmnder to be mvahd or unenforceable In such event, the pafaes shall reform this Agreement, to the extent reasonably possible, to replace such stricken prows~on w~th a valid and enforceable provision which comes as close as possible to expressing the original ~ntentlons of the pagaes respecting any such stricken prowsion AR'rtCI.l~. ×vlt COMPLIANCE WITH LAWS The CONSULTANT shall comply with all federal, state, local laws, rules, regulations, and ordinances apphcable to the work performed by CONSULTANT hereunder, as they may now read or as they may hereafter be amended ARTTC~I ]~. DISCRIMINATION PROHIBITED Page 7 of 10 In perfonmng the services reqmred hereunder, the CONSULTANT shall not d~scnmanate agmnst any person on the bas~s of race, color, rehg~on, sex, national ong~n or ancestry, age, or physical hanchcap ,~R TT~T .F. PERSONNEL A CONSULTANT represents that ~t has or wtll secure at ~ts own expense all personnel reqmred to perform all the services reqmred under th~s Agreement Such personnel shall not be employees or officers of, nor have any contractual relations w~th the OWNER CONSULTANT shall promptly reform the OWNER of any conflict of ~nterest or potential conflict of ~nterest that may arise dunng the term of th~s Agreement B All serwces reqmred hereunder wtll be performed by CONSULTANT or under ~ts chrect supervision All personnel engaged m performing the work prowded for ~n th~s Agreement, shall be quahfled, and shall be authorized and pern~tted under state and local laws to perform such services ARTIC~I .g. ASSIGNABILITY The CONSULTANT shall not assign any ~ntemst ~n th~s Agreement and shall not transfer any ~nterest m th~s Agreement (whether by assignment, novaUon or otherwise) w~thout the prior written consent of the OWNER, which consent shall not be unreasonably w~thheld The fomgmng sentence notwithstanding, CONSULTANT may assign, transfer or convey any of ~ts rights or obhgattons or assign any payments it ~s entitled to receive under th~s Agreement to any affihate, parent or successor company of or to CONSULTANT CONSULTANT shall promptly not~fy OWNER of any change of ~ts name as well as of any s~gmficant change ~n its corporate structure or m ~ts operations ARTIC1.1~ MODIFICATION No wmver or mochficataon of th~s Agreement or of any covenant, conchtaon, hrmtat~on hereto contmned shall be valid unless m writing and duly executed by the party to be charged therewith No evidence of any wmver or mochficat~on shall be offered or received ~n ewdence ~n any proceechng arising between the part~es hereto out of or affecting th~s Agreement, or the rights or obhgat~ons of the part~es hereunder, unless such wmver or mochficat~on ~s ~n writing, duly executed The part~es further agree that the provisions of th~s Artmle will not be wmved unless as bere~n set forth ARTICT .g, XXII MISCELLANEOUS A CONSULTANT agrees that OWNER shall, untd the explratmn of two (2) years after the final payment made by OWNER under th~s Agreement, have access to and the right to exarmne any chrectly pemnent books, documents, papers and records of the CONSULTANT Page 8 of 10 ~nvolwng transactions relaung to th~s Agreement CONSULTANT agrees that OWNER shall have access dunng normal worl~ng hours to all necessary CONSULTANT fac~ht~es and shall be prowded adequate and appropriate workang space in order to conduct exmmnat~ons or auchts m comphance w~th th~s Article OWNER shall g~ve CONSULTANT reasonable advance notme of all intended exarmnauons or auchts B CONSULTANT shall not be m breach of th~s Agreement, shall not be assessed w~th any damages or other habfl~ty, and the deadhne for completmn of ~ts services under th~s Agreement shall be extended due to any loss, habfl~ty, damage, or delay created by acts of God, acts or on~ss~ons of the OWNER or ~ts officers, agents, subcontractors, employees or assigns of the OWNER, acts of c~wl or mlhtary authority, fadure to obtmn customs clearances, governmental priorities, fires, strikes or other labor chsturbances, floods, inclement weather, ep~dermcs, war, not, acts of third part~es hawng the effect of delaying performance of CONSULTANT'S services, ~nab~hty to obtmn or delay m obtmmng, due to causes beyond ~ts reasonable control, statable labor, material, or eqmpment, or the chscovery of contanunat~on, pollution or other hazardous materials at or about the work s~te, or other causes beyond CONSULTANT'S control In the event of any such delay, the t~me for performance shall be extended by a period equal to the t~me lost by reason of such delay, and CONSULTANT shall be entitled to a reasonable, eqmtable adjustment m ~ts fee C Venue of any stat or cause of action under th~s Agreement shall he exclusively ~n Denton County, Texas Th~s Agreement shall be governed by and construed ~n accordance w~th the laws of the State of Texas D For purposes of th~s Agreement, the part~es agree that Holly R Green, Regional Manager of CONSULTANT ("Green") shall serve as the Project Manager of CONSULTANT, respecting th~s engagement Th~s Agreement has been entered ~nto w~th the understanchng 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 w~thhold Nothing hereto shall hrmt CONSULTANT from using other qualified and competent members of ~ts firm to perform the other services reqmred hereto, under ~ts superws~on or control E CONSULTANT shall commence, carry on, and complete ~ts work on the ProJect w~th all apphcable chspatch, and m a sound, economical, efficient manner, and m accordance w~th the provisions hereof In accomphshmg the Project, CONSULTANT shall take such steps as are appropriate to ensure that the work ~nvolved ~s properly coordinated w~th related work being camed on by the OWNER F The OWNER shall assist the CONSULTANT by placing at the CONSULTANT's ahsposal all avmlable ~nformat~on perUnent to the Project, ~nclud~ng previous reports, any other data relatave to the ProJect and arranging for the access to, and make all prows~ons for the CONSULTANT to enter m or upon, pubhc and private property as reqmred for the CONSULTANT to perform professional services under th~s Agreement G The captions of th~s Agreement are for mformataonal purposes only and shall not ~n any way affect the substantive terms or conchUons of th~s 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 ~ts duly-authorized City Manager, and CONSULTANT has ex$9.uted th~s Aged through ~ts duly-authorized undersigned officer, on th~s the /,~ day of ~ ,2000 "OWNER" CITY OF DENTON, TEXAS ~/i!~It~a~l ~ Jez,~anager ATTEST JENNIFER WALTERS, CITY SECRETARY 71'" 7 - APPROVED AS TO LEGAL FORM HERBERT L PROUTY, CITY ATTORNEY By "CONSULTANT" SIGCORP Commumcatmns Services, Inc An Inchana Corporation By J~/h~ A- D~D~z~J'~ V~ce President/General Manager ATTEST By~ Corporate Secretary Page 10 of 10 Telecommunications Feasibility Study Denton Municipal Utilities Denton, TX Proprietary and Confidential Prepared and Submitted May 23, 2000 Unpublished Work © May 2000 ~ Com.municafions Services Denton, TX Telecommumcat~ons Feas~bdlty 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 ,7-{~,?SIGCORP /~ Commumcatlons Ser~ces Denton, TX Telecommumcatlons Feas~b~hty Study The material contained ~n th~s document is propnetary to SIGCORP Commumcat~ons Services, Inc (SCS) Its contents cannot be d~stnbuted to parbes outside of employees of the Denton Mumc[pal Electnc wKhout the prior written consent of SCS STATEMENT OF UNDERSTANDING Denton Mumc~pal Electnc (DENTON) ~s ~nterested ~n ~nvestlgat~ng the benefits, costs and risks associated with a utility owned broadband network and developing a bus~ness case from th~s ~nvesflgat~on DENTON'S primary ~nterest ~s m prowd~ng add~bonal services to its commercial and ~ndustr~al customers SCS ts prowd~ng 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 modehng SCS w~ll prowde DENTON with an ~ndependent feas~blhty evaluation of DENTON providing telecommumcat~ons services (as apphcable by law ~n the state of Texas) and of leasing dark fiber and/or bandwidth A final reportJrecommendat~ons w~ll be provided along w~th an on s~te presentation The final report/recommendations w~ll not only be beneficial ~n the analys~s of opportumt~es for Denton in prowd~ng broadband services to ~ts customers, but tt also serves as an ~ncredlble tool to assist Denton ~n understanding all of ~ts customer sectors The understanding of these customers, their wants, needs and expectations w~ll prowde beneficial as the Ubhty transitions ~nto an electric deregulated enwronment May 23, 2000 Page 2 ~j/~SIGCORP Denton, TX Telecommumcatlons Feas~blhty Study Business Case SCOPE OF SERVICES Market Research 1 Focus Groups w~th Res~denhal and Commercial Customers SCS will conduct two focus groups with residential customers and two w;th commercial customers Residential respondents are randomly selected from a purchased survey sample The objective of these groups ~s to encourage group d~scuss~on regarding customer perceptions of the ut~hty ~n general, as well as customer reactions to the concept of DENTON offenng new services to ~ts customers Resident;al groups wdl focus their d~scusslons on Internet The commercial focus group will d~scuss data apphcabons The results of these groups w;ll allow SCS and the uflhty to deterrmne further top~cs for analyses In addition, the focus group discussions w~il aid SCS ~n developing and reflmng the residential telephone survey ~nstrument As SCS has d~scovered ~n the past, oftentimes customers mention other top~cs or ;tems of concern within the commumty that are ~mportant cons~derabons when analyzing the data collected m the market research phase And, by allowing two-way commumcat;on w~th DENTON customers, SCS obtains a clearer p~cture of customers wants and needs for the community Dunng the focus groups, SCS wdl ubhze the Percephon AnalyzerTM to gather quantitative data from a forum that ~s typically qualitative ~n nature By answenng questions utd~z~ng a handheld d~al, each respondent's answer remains anonymous The value of the Perception AnalyzerTM system ~s that ~t promotes unbiased participation and ehmlnates problems associated w~th "group think" Th~s tool serves a great benefit in a commumty as residents can be so closely connected ~n many ways May 23, 2000 Page 3 ~-?SIGCO.EP ~'× Commumcahons Serwces Denton, TX Telecommunmaflons Fe~h~hty Study Market Reseamh, Conbnued 2 Telephone Interviews w~th Residential Customers After the focus groups am completed, SCS w~ll conduct 400 telephone interv~ews w~th residential customers The objective of these ~nterv~ews ~s to determine customer satisfaction levels with vanous utlhty providers as well as the potential of new product offenngs prowded by DENTON These interv~ews ~ll allow SCS to gather quantitative data for residential services such as Intemet This quantitative data w~ll allow SCS to formulate penetrebon estimates for the vanous services, thereby serving as d~rect inputs ~nto the financial analys~s Therefore, ~t ~s ~mportant that th~s ~nstrument is refined (via the focus group discussions) to meet the community's needs SCS w~ll ubhze 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 atatistically valid and represents a 95% confidence level, with a margin of error of plua or minus five percent 3 In-Person Interviews w~th Lar~le Commercial and Industnal Customers During the same week focus groups ere conducted, SCS w~ll conduct approximately 20 m-person interviews w~th commerc~allmdustr~al customers ~nclud~ng interviews w~th medical famht~es, schools, and c~ty and county government orgamzatlons These interviews w~ll aid ~n determining the data and voice communications needs for large customers The results of th~s research w~ll provide a snapshot of those services most needed by commerclal/~ndustnal customers and their plans for expansion In addition, these interviews will allow SCS to determine which specific DentOn businesses would most likely desire a d~rect fiber or hybrid fiber coaxial (HFC) connection to the network SCS would use th~s mformat~on, ~n the future, as a d~rect ~nput into the design May 23, 2000 Page 4 ~j~$1GCORP ~/ Communlcahons Serwces Denton, TX Telecommunmat~ons Feasibility Study High-Level Engineering Est, mate Scs w~ll provide a high-level englneenng esbmate that determines the physical ~nfrastructure needed to deliver telecommumcatlons/broadband services The engineers w~ll use existing ut~hty maps and ~nformaflon gleaned from ~ntervlews w~th utlhty staff to develop the esbmated costs for the broadband service network The development of a h~gh-level englneenng estimate w~ll prowde DENTON w~th a better understanding of expected costs for the heedend and outside plant equipment associated w~th a broadband system This evaluation w~ll take into account the emphas~s on serving the commercial/industrial sector as the pnonty customer and will address the costs associated w~th creating a Mumclpal Area Network (MAN) SCS's high-level conceptual design will ~nclude the following · Estimated cost for electremcs · Estimated cost for MAN electronics · Estimated cost for outside plant · Number of Nodes · Estimated m~les, type and count for fiber · Estimated m~les of coaxial cable May 23, 2000 Page 5 ~j?SIGCO.RP ~//~ Communications Services / A VECTK~4 Company Denton, TX Telecommumcatlons Feasibility Study Financial AnalyslslEconomm Modehng SCS w~ll prepare a detailed financial analysis using ~nformat~on developed ~n the market research The analys~s w~ll take ~nformat~on on the proposed project, such as the cost and scope of the ~nvestment and the expected customer partlc~pabon, as well as basic financial parameters from the municipality, and produce cost and revenue forecasts and net present values from a number of d~fferent perspectives The financial analys~s w~ll compute cash flows from each aspect of the project over a 1 O-year t~me horizon Th~s analys~s w~ll ~ncorporate the proper accounting treatment of investments, ~nclud~ng depreclabon and debt serwce models, for inclusion ~n projected ~ncome and cash flow statements Estimates of operations and maintenance and incremental investment costs w~ll be computed as well as staffing and overhead costs In addition to examining the financial performance of the ~nvestment using a tred~t~onal accounting perspective, SCS's analysis w~ll also allow an assessment of other benefits that would result from the system expansion Th~s analys~s recogmzes that benefits are more than can be measured by revenue streams to the project The prows~on of additional customer serwces and increases ~n bus~ness efficiency ars also ~mportant benefits In addition to an economic evaluation of the ut~hty, SCS w~ll estimate the customer and sometal perspectives ~n the net present value and benefit-cost analys~s SCS's financial analysis w~ll provide DENTON with three scenanos--a best case, base case, and worst case scenano The outputs of the economic analys~s will ~nclude, but are not hm~ted to · Cash flows over a ten-year period · Present value analysis over a 15-year per~od · Capital cost projection · Estimated working capital requirements · Market penetration analys~s · Estimated operating costs for staff and operations ProJected sources of revenue and vanable costs of services · Economic Analys~s · R~sk Analys~s May 23, 2000 Page 6 ~'; SIGCORP Denton, TX Telecommunmat~ons Feas~b~hty Study PROPOSED PROJECT BUDGET The not-to-exceed project costs for completing the approach defined on previous pages ~s as follows Telecommumcatlon Serwces Business Case -- $44,137.00 Th~s price ~s valid for a penod of thirty days (30) after receipt of b~d NOTE The above pnces do not ~nclude focus group or personal ~ntervlew part~c~pabon fees~ (see notes below), focus group room rental 2, or travel expenses 3 Fees for the professional serwces (pages 2-6) w~th~n th~s quote are fixed, however, SCS w~ll bdl expenses as ~ncurred Expenses typically ~nclude travel, telephone, copying, etc, and are bdled at actual cost plus 10% to cover general and adm~mstrat~ve expenses All add~bonal work wdl be completed at standard bdl~ng rates plus expenses (actual cost plus 10%) No addtt~onal work ~tems w~ll be started w~thout mutual agreement of both DENTON and SCS SCS w~ll invoice on a monthly basra up to the completion of the final task at which time the final ~nvmce w~ll be pa~d on recetpt of the final report All ~nvo~ces shall be pa~d ~n full within thirty days (30) from the date, and interest w~ll be charged at 1 5% per month on all unpaid balances Based upon the tasks defined ~n th~s proposal, ~t ~s anbc~pated that the project wdl take approximately four to s~x months to complete Thru schedule assumes that the SCS project team W~II be able to beg~n shortly after award and that data required for the project wdl be forthcoming from DENTON After award of the project, SCS will prepare a detaded schedule by task for DENTON to rewew ~ Traditionally focus groups ara best attended if the parbclpants ara offerad a small fee and or a meal, this holds true personal ~ntervlews also This fee or offenng will be determined end funded by Denton SCS has seen fees of $15 to $50 2 Most often the Municipal recurs no fees for use of a local room SCS Suggests to find a bank or library community room that does not charge for ~ts use Focus group size rs about 15 people, so the room size does not need to be large SCS will also be raquestlng the use of the Utll~ty's TV and VCR - if one rs not available they can be ranted for approximately $50/day 3 Travel expenses will be tncurrad by the rasearch team conslsbng of approximately thrae people and by two to thrae people making the final presentation In the case of DENTON our estimation for these expenses rs approximately $4,000 (air~ara, hotel, food, otc) SIGCORP May 23, 2000 Page 7 Commumcahons Serv,ces A VECTK~4 Company Denton, TX Telecommun~cabons Feas~bd~ty Study SCS CORPORATE PROFILE Overview SIGCORP Communications Services, Inc (SCS) ~s based in Evansvdle, Indiana, and was ~ncorporeted tn 1997 SCS is a wholly owned subsidiary of Vectren Corporation, which was formed by the merger two Indiana companies with strong balance sheets, Iow-cost operations, growing service areas, diversified product portfolios, and track records of delivering superior shareholder value SCS evolved from and replaced ComSource, Inc, an earher 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 utdibes throughout the United States and offers all of the services a ubl~ty needs to plan, design, procure, install and operate a hybrid fiber-coax network SCS has performed market studies, designed systems and ~nstalled networks at many Iocabons nationwide, and its pnmary services, hsted ~n the order ~n which many municipalities approach projects, are summarized below Services · Feasibility Studies Before ~nvest~ng ~n a broadband network, a mumc~pal~ty needs to know the technological and compeflbve advantages as well as the expected return on ~nvestment, growth potential and other factors that ~nfluence decision-making SCS's feaslbd~ty studies typically include market research within residential and business commumt~es, financial modehng and forecasting and a conceptual design of a suitable hybnd fiber opbc/coaxlal cable (HFC) network Resulting study recommendations are based on economic reaht~es and commumty ~nterests · Implementabon Planning When imtlal market research ~s complete and a mumclpahty ~s ready to begin the precbcal steps required ~n sohc~bng a contract, SCS prowdes a w~de range of services ~n planning assistance SCS helps to develop a statement of work for the RFP, ~denbfy regulatory and legal ~ssues, determine chant approval processes and evaluate potential partners for other apphcet~ons SCS will also help prepare financing packages, attend bond agent negotiations, prepare initial budgets and schedules and project guarantees, form a bus~ness plan and marketing approach and carry out additional research ~f needed · Design Se~wces If a mumc~pahty dec~des to ~nvest ~n a broadband network, SCS offers an integrated design, procurement and construcbon program The first phase ~s detaded design, and SCS has the resources and expenence to May 23, 2000 Page 8 ~SIGCORP ~'× Communications Services / A VECTIL~ Company Denton, TX Telecommumcat~ons Feas~blhty Study design a complete HFC network for any Iocahty Working w~th the chent, SCS reviews all options ~dentlfied dunng the research phase then designs the system that best meets the mumc~pahty's current reeqmrements w~th~n budget gu~dehnes wh~le prowdlng for possible future expansion · Procurement SCS staff is very familiar with the techmcal components of a broadband network and the related infrastructure and maintains a constant awareness of the changes and advances m the industry The company has an excellent relationship w~th many of the matenals manufacturers and, whenever possible, ~t purchases supplies d~rectly and passes the savings to ~ts clients SCS plans for long lead bme purchases when developing project schedules and ~s also able to expedite on-t~me dehvery of matenals · Construction After a design ~s accepted and procurement ~s ~mtlated, SCS's field team plans and executes the installat~on according to a comprehensive schedule developed dunng the design effort An on-s~te office ~s estabhshed, and a supenntendent manages the construction effort by d~rectly coordinating the installation w~th chent representatives · Operation and Maintenance Services SCS prowdes comprehensive start-up and trelmng services as well as a follow-on operations and maintenance program for the systems ~t ~nstalls Th~s ~s parbcularly beneficial when advanced energy servmes (~ e, load management, secunty, energy momtonng, surge protection, outage notification and automatic meter reading) are included m the ~nstallat~on Projects SCS's projects are broadly d~wded into five categories, although the categories can overlap and are frequently combined under a single contract or a senes of follow-on contracts The cetegones are general consultmg, feas~b~hty studies, design, project management/construction and operations General Coneultlng · Hawaii (lg98) SCS performed a study for commercial load management program for an investor-owned utlhty This project consisted of developing program costs for load momtonng and equipment required for the p~lot program customers, prowdmg supporting data for cost components, and providing p~lot program plan and cost esbmates to the Ut~hty Commission SCS also developed an ~mplementatlon plan for the p~lct program Feas,blhty Studies May 23, 2000 Page 9 ;-~x~/$1C-K:ORP ~/'/ Communications Services Denton, TX Telecommunications Feaslb~hty Study · California (1999) SCS prowded market research and an economic analys~s to evaluate and provide a h~gh level proforma SCS w~ll design, construct, and eventually operate an HFC system for the same city · Indiana (1998) SCS completed a feaslb~hty study, a conceptual design and proiect management for a mumcipal utility The feas~blhty study ~ncluded primary market research, which consisted of telephone surveys, focus groups and in-person interviews and a complete analys~s of the data · Iowa (1998) SCS conducted follow-up market research to determine market penetration of, and customer satisfaction w~th, the services being provided by the broadband network SCS ~nstalled ~n a c~ty · Minnesota (1999) SCS conducted a feas~b~hty study and developed a conceptual design for a c~ty The scope of the study ~ncluded residential telephone surveys, commercial and ~ndustnal ~n-person ~ntervlews, focus groups and an economic analya~s ~n preparation for the conceptual design · Missouri (1996) SCS worked with a local electnc company to evaluate the posslblhty of becoming a broadband network prowder · New Yo~k (1997) A mumc~pal electnc department contracted with SCS to conduct a feaslbihty study for an HFC network · Texas (1998) SCS evaluated the posslb~hty of braiding a fiber backbone to coordinate c~ty offices and functions SCS provided project management as well as market research through focus groups and ~n- person ~ntervlews w~th the c~ty's commercial and ~ndustrlal customer base · Texas (1999) SCS provided market research and a high-level proforma regarding a city's plans to enter the broadband market and ~s currently prowd~ng the conceptual design for an HFC network Design · California (1999) SCS w~ll design an HFC broadband system for a c~ty · Indiana (1999) SCS was awarded a contract to prowde a detailed fiber optic design to connect school buildings, c~ty offices and ut~hty fac~hbes The mfrestructure design ~ncluded 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 commumty building was completed Project Management/Construction 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 · 10we (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 CATV system ~n a c~ty · Iowa (1998) SCS installed a network distnbutlon system, which consisted of buned fiber optic and coaxial cable and buned service 2000 Page 10 ~/~SIGCORP May 23, CommunKahons Se~lCeS A VECTIGI Company Denton, TX Telecommunications Feasibility Study entrances over forty route miles of construction Ex~st~ng cable telews~on systems were extended to the broadband headend where they were ~ntegrated in a new communications faclhty · Iowa (1998) SCS ~nstalled a network d~stnbut~on system, which consisted of buried and aerial fiber optic and coaxial cable and buried and aerial service entrances over forty route m~les of construction, and an entirely new broadband system was built · Iowa (1998) SCS was awarded construction of a headend cable telews~on (CATV) system The scope of work included hnal design and documentation of a CATV headend system, furmsh~ng CATV headend equipment, ~nstallat~on of the complete headend system and off-a~r tower and satellite antennas Integration of commercial ~nsert~on, an emergency alert system and status monitoring with the headend was also ~ncluded ~n the scope of the work · Ohio (1998) SCS was awarded a materials and labor ~nstallat~on contract for headend equipment for a broadband system for a c~ty The scope ~ncluded furmshmg active (power consuming) components of a broadband, two-way, HFC system to supply wdeo and data services Integration of commercial ~nsert~on, an emergency alert system and status momtonng with the headend was also included ~n the scope of the work · Washington (1997) SCS was awarded a project to prowde and ~nstall CATV headend equipment and construct s~x hub buildings to house fiber optm network equipment Integrabon of commercial insertion, an emergency alert system and status momtonng w~th the headend was also ~ncluded ~n the scope of the work Operations · California (1999) SCS will operate an HFC system for a c~ty SCS prowded market research, an economic analys~s, design and construct for the same city Th~s turnkey dehvery ~ncludes developing a market strategy, creating promotions, educating customers, tra~mng customer service personnel, billing for servmes, h~nng quahf~ed technicians to maintain the system, momtonng the system for continued quahty, and prowdtng new service offenngs Financial Informatmn SCS ~s a wholly owned subsidiary of Vectren Corporation, a holding company w~th nearly $2 b~lhon tn assets Vectren's utility companies (SIGECO and Indiana Gas) serve 650,000 natural gas and electnc customers ~n Indiana These substantial resources make SCS a valuable partner ~n broadband network design and development, particularly ~n the arrangements for performance bonding A SIGCORP Annual Report ~s ~ncluded ~n the Appendix May 23, 2000 Page 11 2-i~'~; SlGCORP Denton, TX Telecommunmahons Feaslbdity Study Orgamzational Structure SCS employs a full-hme corporate staff w~th the skdls and experience required for the broadband network industry Each employee has contributed to the success of SCS and can work indlwdually in a consulting capacity or as part of the umfied team SCS presents, for the '~urnkey" projects The orgamzatlon chart below shows the current orgamzational structure Vice preeldentJGM ,John DIDomlz~o Ronofta Smith Executive A~tant I I Dlre~or Dlractor of Marketing of 8ysteme Operation and Sale~ Finance & Human Re~ource~ Jar, k T#bb~ Dwayne Tutt IDen Hayden Accounting Manage; Manager Director of ,' MerkeSng Aeelsteet Judy Smith of Alameda Operatiofls of Technical ~er~[ce~ Trady Rubelra Dan MaenMamtan Lou DeMeria Purchaalng Annette Hume ] I Manager of t National Sale~ RlchaM Iorio Operation& I Infom~n 8e~ Ph[lly Jone~ Darfln Lloyd Engineering Manager Sam Wilson Engineering Tech Brfdget Bray , Tim Lmpop 8upewlsor 8alee , .... Teny Lohr Bobble BITchier Craig McCqetal Reeeerch Holly Ore~ Dorothy Niekamp Jim MatSngly Beth Will Bill Lee Cara Cox Heber Weller Salee Support Engineering Susan Keller Bdan Hirshberg Kerrl poMJelhewelght Matt Plnkofon Guy Hanmtond Kyle Jonee Dolmle lhomm Jack French Marketing Stephanle 8tewa~J ApdlWa~l J Malvln Chase ] May 23, ,2000 Page 12 ~$1G¢O .RP ,//'/ Communications Services Denton, TX Telecommumcat~ons Feasibility Study Bnef b~ograph~es of the selected staff of SCS are as follows John DIDomlzio, Vice Preaident and General Manager After receiving h~s BS ~n Mechamcal Eng~neenng from the Umvers~ty of Evansville, Mr D~Domlzio spent eight years at Southern Indiana Gas and Electric Company (SIGECO) as an engineer on a number of key projects H~s respons~bd~t~es ~ncluded the development of bid specifications, contractor management, markebng efforts, and staff tra~mng and supervlmon He was ~nstrumental in the development and ~mplementat~on of SIGECO's demand side management programs, ~nclud~ng strategic marketing and the regulatory ~ssues of conservation programs For the past three years, Mr DiDomiz~o has focused on opportun~bes ut~hbes have for expansion into the broadband services field, spec~ahz~ng ~n the design and construcbon of turnkey broadband networks He is most recently responsible for the startup and management of SCS, whmh handles all aspects of project management, from pre- construction market research and feas~bd~ty studies, through the design and construction phase, to explonng new opportunlbes for the commumty once the system ~s ~n place He ~s currently pursuing an MBA at the Umvers~ty of Southern Indiana Dwayne Tuft, Director of Marketing, Sales and Engineering Mr Tutt has been ~nvolved ~n marketing and market research for the last eleven years, with s~x of those years ~n the ubhty market and three years ~n broadband servmes He has been ~nvolved ~n broadband network feas~b~hty studies, branding, loyalty and customer retention efforts for utilities, advertising studies, as well as customer sat~sfaction tracking studies, sales forecasting, and project~on of program and product penetration levels He bnngs an extensive statistical analys~s background, w~th expenence m factor analysis, structural equation modehng, conjoint analysis, and survey design and methodology to the market reseamh staff at SCS He has been an Economics Instructor for the Umvers~ty of Kentucky for the last four years and an Associate Professor of Stabst~cs at the Umvers~ty of Southern Indiana for s~x years He holds a BA ~n Government and Economics from Morehead State Umvers~ty and a Masters degree ~n Economics from the Umvers~ty of Kentucky Tim L,Ilpop, National Sales Manager Mr Ldlpop joined SCS ~n September of 1998, and h~s respons~b~ht~es ~nclude coordinating the sales force effort for the Umted States, including management of 5 regional sales representabves He works ~n 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 orgamzes and presents materials at conferences, seminars, and workshops Pnor to jmmng SCS, Mr Ldlpop worked ~n vanous capacities for Southern Indiana Gas and Electnc Company for s~xteen years Mr L~llpop was the Project Manager for SIGECO's Load Management Program ~mmed~ately pnor to jo~mng SCS His responslbdltles ~ncluded management of installat~on contractors, supervision of the May 23, 2000 Page 13 2-~; SIGCORP /;;'/ Commumcahons Services Denton, TX Telecommumcat~ons Feasibility Study marketing plan, maintenance of the customer database and program reporhng He supported Demand S~de 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 rune years Mr LIIIpop holds his BS ~n Management from Oakland C~ty College in Oakland, Indiana Holly Green, Regional Salea Manager Ms Green leads SCS's sales efforts ~n 11 states ~n the Midwest Region She works w~th customers in all aspects of the telecommumcat~on process from ~dentlficatmn of needs, to project construcbon through completion and beyond She ~s ~nvolved ~n all aspects of the project and serves as the primary point of contact for the customer Pnor to joining SCS, Ms Green worked at Harlan Mummpal Utd~hes (HMU) for three years, most recently as the Assistant General Manager HMU serves approximately 5000 customers ~n Harlan, Iowa Ms Green was actively revolved ~n the development and construcbon of HMU's broadband network (~nstalled by SCS) prior to jo~mng SCS Her experience ~n the municipal envlronmen0t has enabled her to assist her customers w~th an ~ns~der's understanding of the ~ssues facing a mumc~pal prowder Ms Green holds a BA ~n Marketing from the Umvers~ty of Northern Iowa and ~s a member of the Amencan Marketing Assoc, Amencan Assoc of Ubhty Marketing Execubves and Iowa Assoc of Mumclpal Ut~hbes Bridget Bray, Manager of Engineering Ms Bray has over nme years of expenence ~n consulting and project management services Working for a large consulting firm, she has gained extensive expenence ~n managing broadband service projects, prowd~ng techmcal support for WAN and LAN topologies, developing corporate network standards for fiber, and developing a network- momtonng center In addition, Ms Bray was raspons~ble for performing a business analys~s for technology upgrades, evaluating and des~gmng w~reless communications networks, consulting global sites on data network ~nfrastructuras, and designing and managing manufacturing networks In her prewous expenence as an ~ndependent consultant, Ms Bray provided new business strategy development, orgamzat~onal analys~s, technology bus~ness analys~s, operating procedures development and bus~nesS plan development Ms Bray received a BS ~n Electncal Engmeenng from the Umvers~ty of Evanswlle Dorothy Nmkamp, Supervisor of Research Ms Nlekamp joined the SCS staff in May 1999 after ten years w~th St Mary's Medical Center where she was employed as an analyst m the Strategic Information and Planning Department After conduchng pnmary and secondary health care-related marketing and planmng research, Ms N~ekamp assisted m wnhng situational, environmental, and commumty health needs assessments Ms Nlekamp also prowded data to serwce hne managers for their bus~ness and development plans, compded comprehenmve physician productivity and supply and demand studies, accomphshed a nsk-adjusted charge companson analysis of local hospitals, and tabulated and reported results of patient, physician, and employee satisfaction surveys May 23, 2000 Page 14 .7~j~ $1GCORP /× Communications Services ./ A VECTIIEN Company Denton, TX Telecommumcat~ons Feas~bd~ty Study Ms Nlekamp recetved a BA tn L~beral Arts from Ambassador Umvers~ty and a BA in Psychology from the Umvers~ty of Southern Indtana She ~s currently working on an MS ~n Health Care adm~ntstratlon at the Umvers~ty of Evansvtlle and an MSW at the Umvers~ty of Southern Indiana May 23, 2000 Page 15 2-.~/SIGCORP ~-× Commumcatmns Serwces / A VECTREN Company Denton, TX Telecoi~umcabons Feas~b~hty Study References Alameda Power & Telecom 2000 Grand St Alameda, CA 94501 Phone (510) 748-3913 B~II Garvlne, Markebng Manager SCS completed a vahdat~on of a third party feas~bd~ty study SCS's methodology, used to venfy the network's feas~bd~ty, 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 antlolpated completion date of 2002 Tell City Electric Department P O Box 9 700 Ma~n Street Tell C~ty, Indiana 47586 Jack Joyce, Superintendent Phone (812) 547-3411 The SCS team conducted a Broadband Network Feas~bd~ty Study to guide Tell City ~n the strategic planmng of ~ts broadband servmes endeavor The purpose of the study was to ~dentlfy, quanbfy and prioritize major communications and energy service opportumtles for the future SCS was awarded a contract ~n 1999 to prowde a detailed fiber opbc network design connecting school buildings, c~ty offices and ut~hbes famhtles Harlan Municipal Utilities 405 Chatburn Avenue, Box 71 Hartan, Iowa 51537 Gerald Quick, General Manager Phone (712) 755-5182 SCS (as the ComSource, Inc subsidiary of Vectren Corporation) was the turnkey contractor for ~nstallatlon of a cable telews~on headend and constructmn of the outside plant faclhfles Harlan applies the network for Internet, entertainment, utility services and h~gh-speed data commumcatlona In 1998, SCS conducted reseamh to determine market penetration and customer satisfaction w~th the services May 23, 2000 Page 16 ~-~/~SIGCORP ~/ Commumcahons Services Denton, TX Telecommumcat~ons Feaslb~hty Study Clickl Network 3628 South 35th Street Tacoma, Washington 98409 Peter Rumble, HeadendlHub Techmclan Phone (253) 502-8143 SCS was awarded a contract in 1998 by Tacoma C~ty L~ghts and ~nstalied the cable television headend equipment and provided project management for the construction of s~x 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 Pubhc Information SCS completed a feaslblhty study to assess the wabfl~ty of a fiber backbone to serve c~ty offices SCS provided market research, ~nclud~ng focus groups and personal ~ntervlews with the city's large commercial and ~ndustnal customers In addition, the SCS team completed the preliminary drawing of a fiber network along w~th a financial analys~s Grand Rapids Public Utilities PO Box 658 500 SE Fourth Street Grand Rapids, MN 55744 Mr James Hietala, Electnc Department Manager Phone (218) 326-7182 SCS completed a broadband feasibility study m August 1999 for Grand Rapids Pubhc Utilities (GRPU) The market research ~ncluded focus groups w~th residential and commercial customers, telephone interviews, and one-on-one interviews to determine the broadband needs ~n 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 prowded a presentation for GRPU board members May 23, 2000 Page 17 ~-?SlGCO .RP ,//"/ Commumcatlons Services / A VKTRENCompany Denton, TX Telecommumcat~ons Feas~b~hty Study Conclusion The mulb-d~sclphnary approach applied by SCS ~ntegrates ubhty, telecommumcabons, markebng and sales experience and ensures a umfied team response to customer ~nterests The staff becomes acquainted with the background and enwronment of the commun~y so that ~t can adequately respond to an ~nd~v~dual chent's needs Each client receives total support from SCS representatives, and the home office provides necessary resources for keeping each project on schedule and w~thln budget In add~bon, there are suffiment corporate resources and staff to manage several projects s~multaneously SCS ~s ready and wllhng to deliver a top quahty Telecommumcat~ons Feaslblhty Study for DENTON and looks forward to d~scuss~ng the proposed study ~n more detad w~th DENTON representabves ~?SIGCORP May23, 2000 Page 18 ~-~ Commumcatmnss~n.~e$ S!GCORP, Inc., is an Evansvine, Ind.-based public company Energy Services (NYSE:SIG) that provides electric and gas service to Southwest Indiana and energy-related and telecommunications products and services to [] $IGCORPEnergy Services markets wholesale natural gas to customers throughout the greater Midwest and elsewhere, industrial and other large-volume customers throughout a seven-state region, and offers customers a wide range of other energy management Nonregulated subsidiaries either extend SIGCORP's ability to reach services. services or provide opportunities for creating shareholder value by [] Energy Systems Group, an affiliate owned jointly by SIGCORP, investing in other areas. These subsidiaries are projected to provide Indiana Energy and Citizens Gas and Coke Utility, provides energy more than 25 percent of SIGCORP's earnings by the year 2002. conservation savings to institutions, governmental units and Utili Services equipmentC°mmercialupgrades.entities through risk-free building improvements and [] Southern Indiana Gas and Electric Company (SIGECO), is the [] Air Quality Services, a joint venture firm, owned by SIGCORP and largest and oldest part of the company. Its operations are focused in two Environmental Management Consultants Inc., was created in 1998 to areas to prepare for the deregulated market, offer air quality monitoring and testing services for industry and utilities The first area is power supply. SIGECO's power production plants in the region. Telecomm nications have a generating capacity of 1,256 megawatts and have among the U lowest operating costs in the industry. A planned cogeneration plant is projected to bring an additional 42 megawatts of capacity to the system [] $IGECOM, a partnership between SIGCORP and the Massachusetts by 2001. Power is marketed to municipalities, other utilities and power technology company, UtiliCom Networks, is investing $60 million to resellers when it is not needed for retail customers, build a fiber-optic-based network that offers leading edge telecommtmication services to greater Evansville, The project's first The second area is energy delivery. This business unit serves more phase, when complete, will have the potential to provide service to more than 124,000 residential, commercial and industrial electricity customers than 80,000 homes and businesses. and 108,000 natural gas customers in a 10-county area in Southwest Indiana. SIGECO also generates revenues by transporting gas and [] SIGCORP Communications Services builds high-speed fiber-optic electricity across its systems for other marketers, communications networks for municipal utilities, enabling them to r. nero Products manage power loads more efficiently and offer communication services such as cable television. [] SIGCORPFuels provides SIGECO's generating plants with a Financial dependable, low-cost source of coal. It also markets coal to other utilities. Southern Indiana Properties participates in structured finance and investment transactions, including leveraged leases of real estate and [] Southern Indiana Minerals processes power plant combustion by- equipment, which have provided above-average returns to the company. products and markets these industrial minerals to the paint, coatings and construction industries. [] SIGCORP Capital provides financing and cash management services for SIGCORP's nonregulated subsidiaries. r-: 98 ~ The deregulated energy frontier offers tremendous opportunities for companies willing to pursue a progressive vision of the future. S IGCORPg emphasis on growth in this new environment has resulted in increased value to shareholders. About the cove~ $1OCORP management remains focused growing share value. A $ i00 investment at the end of 1993 would have expanded to $203 by the end of fiscal 1998 PERFORMANCE HIGHLIGHTS (Dollars ~n thousands, except per share statistics) 1998 1997 % Change_ Ut~htyRevenues $ 364,666 $ 358,106 1 8% ~ 192,445 75,131 156 1% Non ut~hty RevenUes Total Operating EFpenses 471,032 347,655 35 5% 86,079 85,582 0 6% Operating Income Net Income 50,476 46,140 9 4% Earnings Per Share - Basic $ 2 14 $ 1 95 9 7% Earnings Per Share - D~luted $ 2 12 $ 1 95 8 7% D~wdends Per Share $ 1 21 $ 1 18 2 5% Return on Average Equity 14 4% 13 6% 6 1% Total Assets $1,029,538 $ 989,896 4 0% EJectnc~ty Sales (MWh) 6,859,181 6,284,528 9 1% Gas Sold & Transported (MDth) 28,965 29,370 (1 4)% RETURN ON AVERAOE EQUITY' 25o TOTAL SHAREHOLDER RETURN I. ,o i i i I 1~ ~ I I ~ I I 1994 1995 ~ 1996 1997 1998 50 ~c ~ ~ 9~ ~ 95 ~ ~ ~ ~ 98 ~ SIGCORP ~ SI~ORP ~ Indus~y ~ EEl 100 Combma~on Ut~h~ Index Inside front cover SIGCORP at la glance 2-13 Letter to shareholders 14-40 Financial set, ton 41 Growth record 42-43 Board of directors, SIGCORP officers and subsidiary management Shareholder mformahon SIGCORP lnc 1998 ANNUALREPORT Dear Shareholders: 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 mdust~3z, 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 utthty boundaries begin g~vmg way to competition In Indiana, the avmlabfllty of low-cost power has temporarily stalled the drive for electric deregulation Salelhte &shes prowde a h~gh te~ h ba~ kdrop [ur SIGCORP ~ c~o,,rf, o~ Re,, Redefine,, rl~'; o,,~ ~.,,,~ V,~ ~,os,~,, But change has only been delayed Dem~la~on w~ll come 5IOE('OM ofhhote access to vast telov,s,~ n ptogtammm~ Compehtlon will arrive q~eater Evansv& SIGECOM ~s one o/the way3 51('( ORP We're not wmtmg for ~e inevitable We're mowng ahead ~, &~,~d ~,,~,~ ............ , w~th strategies and mves~ents to boost SIGCO~'s service capablhhes ~d grow the value of your comply During 1998, we continued to budd upon our current advantage as a low-cost prowder of energy while also taking steps to prepare for the market ch~ges that will soon be upon us Spurred by favorable results m several of our non-regulated businesses, we posted a third consecuhve year of record earnings As the cover of our armual t 1'] g~ow both our report illustrates, We,ye already take many steps to shareholders continued to ut~lity-r~d~ted and nonutihty activities. But change brings benefit ~om the company's more opportunzty. performance Including -- ~ ~ : reinvested d~vldends, total return was 28 percent m 1998, following a 33 percent gain m 1997 For both years, shareholder value rose at a pace that ranked among the very h~ghest m the industry Return on average equity 1 percent) and market-to-book value (2 3 tm~es) reached the (14 MARKET PRICE/BOOK VALUE PER COMMON SHARE top quartile once again Among tho most slgruflcant achons we took m 1998 was the ,~ creation of a telecommumcahons subsidiary that will offer a ,,bundle,, of advanced telecom services to the greater Evansville area through a $60 mllhon fiber-opt,c-based netw°rk We successfully started our first coal mmmg operahon and moved closer toward construchon of a $100 rmlhon cogenerat~on plant slated to supply addlhonal power to the region and steam to area mdustry We've already taken many steps to grow both our utility- ~99~ 1995 1996 1997 1998 related and nonuhhty achvthes But change brings more · Book Value opportumty Thus, we began a comprehensive study in late 1998 i~l Market Price to further define our strategic direction We intend to take full advantage of the opportunity created for compames wzllmg to pursue a progressive vision of the future Rewew ofi998 results Net income during 1998 rose 9 4 percent to a record $50 5 .... ~ mdhon from $46 1 million m 1997 Basic earmngs per share rose to Only three investor.owned~ $214 from $1 95 the prev,ous year electric utilities ~n the natbn have h~gher As a group, SIGCORP's nonregulated subsidiaries accounted fi~ancial strength ratings for all of the increase m net income These businesses contributed than does SIGECO 15 9 percent of overall net income m 1998, compared with 4 1 ......................... percent m 1997, moving us closer to our previously announced goal of deriving 20 percent of consolidated earnings from nonregulated business by 2000 TOTAL ELECTRIC SALES Overall, regulated utility contributions to 1998 eanm~gs fell (Megawa~t-haurs ~n Thousands) ~,~q shghtly below 1997 Much warmer summer weather slgmficantly boosted wholesale power sales margins and increased residenlaal electric sales Addltionall~ Southwest Indiana's robust economy ~,q~ ~,~ expanded electricity sales to nearly every class of retail power customer However, the benefit from these greater electric sales volumes and the tugher wholesale power margms were offset by tncreased expenses for planned and emergency maintenance at our power produchon faclhttes and by fewer deliveries of natural gas due to milder wrater temperatures 1994 1995 1996 1997 1998 Our strong fmanclal positron 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 uhhhes m the nahon have htgher financial strength ratings than does SIGECO Bringing tomorrow's opportunities in focus It appears that the Indiana General Assembly won't seriously address deregulahon m its 1999 session, and that any leg~slahon opening the state's retail electricity market won't happen rmh12000 or 2001 To proachvely manage the deregulahon process, we've met with other state uhhttes to develop comprehensive leg~slahon Although agreement exasts among the group on most issues, thus far these meehngs have produced no overall consensus Our primary concern is that any new law deregulahng the market must maintain a level playing field for all classes of customers and for all energy providers Unlike the case m most states that have deregulated their markets, we beheve that low-cost compames such as SIGECO must not be penahzed for prudent tustoncal cost management Wl~le the discussion continues, we have been taking a multt-faceted approach to prepare SIGCORP and SIGECO for the eventuality of deregulatton and competition We are Work began m lc)g8 to bring together the technology components needed for SIOECOM lo offer bund/ed h~gh [] Separating SIGECO's generating and energy service dehvery speed In~eroe~ oc~s robie rV omd ~ele,h ........... ~o functions, and seelang further opportumt~es to enhance SIG ECO's g,eo~e, ~n~,lle r~ ~,,~, ~e of~,~ ~0 re,Il, ....... ~,,~,~ competitiveness through continuous ~mpr~vement ,~ expecled to be complete by m,d 2000 m our per-umt operating, maintenance and fuel costs []Aggressively pursuing additional growth opportumt~es and operating synerg~es through our nonregulated substd~anes [] Expanding our products and servzces to ant~clpate and meet traditional and nontrad~t~onal customer needs, wherever those customers may be located []Ded~cat~ng more resources to the tratmng and educatton of our valued work force, our most ~mportant asset m the compet~ttve arellt~ o. f tomoyrou~ [] S~gmficantly ratsmg our mformatlon technology capab~ht~es and modermzmg our computer znfrastructure to respond more quzckly to the ~nformat~on needs of our customers and our employees Preparing our electricity business .for competition Our history as a utility has been one o£ lean operahons and low production costs In 1997, our electric produchon costs were eighth lowest among all U S investor-owned ut~hties That translated to some of the lowest consumer electric rates m the industry In 1998, our average retail electric rate was about 4 7 cents per kdowatt-hour, or about 32 percent below the national average of 6 9 cents TI:us history provides a sohd foundation m our efforts to contmue to enhance produchvlty and prepare for competition We anhclpate that when deregulation leglslahon passes, our power genera'aon busmess w~ll be the first part of our electric uhhty to be deregulated To gam addlhonal $1OECO launched plans to budd a combmatton ~tearn and experience necessary to thrive m a truly competitive ,roy, de ~ ..... ~s~eor~, ~ ...... ~y ,od, 5,y r~,~ ~00,,,,~ ..... enwromnent, on January 1, 1999, we functionally separated SIGECO's power supply and energy delivery functaons into two distract busmess umts Tl:us allows us to operate the Power Supply business urut as a separate profit center 6 SIGCORP Inc 1998ANNUAL REPORT We couldn't have divided the supply and delivery funchons without emphaslzmg process improvements over the past several years or implementing an advanced business management information system Tlms improved cost measurement tool will track business results and related costs by activity, allowmg us to more accurately and efficiently measure busmess processes, analyze TOgain addttzonal experiencenecessary areas for ,mprovement, and define to thrive in a truly cornpeti~ive enw'ronment, on futur~ strategies January I, 1999, we functionally separated ~he Service Oellvery u~t win SIGECO' s power supply and energy delivery provide power transunsslon and functions into two distinct business units, dlstrlbuhon of electricity and natural gas to homes, busmesses and mdustry within our utrhty area and, rmhally, will continue to include customer service and other retad marketmg functions These operations will be enhanced by other contmumg mformahon technology ~ruhatlves Anew customer mformat~on system -- scheduled to be m use by trod-1999 -- will change the way mformahon is processed and lay the groundwork for further product additions and service improvements Addlhonally, the first stage of an automated mappmg and facihhes management system is expected to be launched m und-year, enhancing productivity m planning system extensions and reducmg tame needed for restormg service after outages Until retail deregulation occurs, utthttes m Indiana are permitted to sell power at market prices only to other utahhes or power marketers SIGECO's low fuel costs have contributed to a significant increase m margms from these market-based wholesale power sales ~~ SIGCORP lnc 1998 ANNUAL REPORT 7 Inside our assigned retail utility territory, sales of energy to SIGECO's mdnstnal, commercial and residential customers increased again m 1998 This rise m energy use tracked positive economm developments as Southwest In&ana's economy slgnlflCantJy out-paced the country's growth rate Toyota completed ..... ..... ~ ~..~. ~.~.~ Phase I of its "Tundra" pickup track assembly ---lOyota comptetea'-' Phase I -oJ its "Tundra" plant and announced plans for a second vehicle, pickup truck assern~ly" plant'- and announced which wm bring total employment at the r ' plans fo a second vehicle, which will Pr~ceton, Ind, faahty to 2,300 m the year 2001 ' '~r~ng total employment'- at the Princeton, 1nd., Production operations began months a~eaa of facility to 2,300 ~n the year 2001. schedule at AK Steel's new $1 ~ banon ~ ................................ Rockport, Ind, plant Commercial development contmued unabated as new support services and ex~stmg industry expansions brought people and businesses mto the area Record numbers of homes are being constructed PEAK LOAD/CAPACITY (Megawatt) This growth has narrowed SIGECO's generating capacity <,P~ .,,~ x~~ '~ 4'~ reserves To prowde needed capaaty untal we build mom power I1 ~ ~d~I generation, we've executed a three-year contract to purchase t I ~x,~-l~ 50 megawatts begmmng January 2000 from a neighboring uhhty- iii [[;J afflhated power marketer "~ [Ii By late 2001 or early 2002, our new cogenerat~on plant is I1 ' scheduled to be completed This $100 mflhon project will brmg 42 megawatts of ad&t~onal power to meet the region's growmg [ I [ I [ energy needs and provide industry a low-cost source of steam 1994 1995 1996 1997 1998 with improvements m ama mr quality · Peak Load The plant will feature advanced clean coal combushon n Capaaty tectmology and e~uss~on controls TI'us advanced technology uses local low-cost coal while allowing the plant to achieve emissions J~ ~ ~t'.~ ~ ,~ J below exlstmg federal and state environmental standards 8 SIGCORP Inc 1998 ANNUAL RFPORT Co inuing our achievements in environmental protection Protectmg the environment, of course, rs of great concern to us Over the years, our company has built a prermere reputahon for not just meeting comphance standards, but by overacfuevmg Most of the Clean Ant Act's requirements were met years m advance of the regulatory deadlines Nonetheless, new environmental challenges continue to arise In 1998, the Envrronmental Protection Agency issued rules &rectmg 22 midwestern states to reduce nitrogen oyade (NOx) emissions The essence of this new reqmrement rs that Indiana uhhties, as a group, could be required to reduce NOx emissions by 85 percent wlthm five years, SIGECO could be required to lower its NOx emissions 70% NOx emissions am hnked to grotmd level ozone formation By lowermg NOx ermssions m the Midwest, the EPA intends to reduce ozone levels m the Northeast We adamantly chsagree with the EPA's position Along with most of the 22 states, Inchana reminded the EPA that thexr own sclentrfic evidence dearly shows that long- range transport of ozone precursors such as NOx simply does not happen We share Indiana's factual position 1'ne EPA rules would, ff upheld, have a major impact on ~,o,,, o/~ clo,se~ o~ ~,~om~ ~oug~,o0~ so~we,~ SIGECO and Its customers wl-ule brmgmg no benefit to ~.0~.~ o~j ~,~..~ Northeastern states If we must meet those reqmrements, we may have to spend as much as $90 million on enussions control equipment and $10 mflhon to $15 rmlhon annually on operations and maintenance expenses to achieve the compliance targets · 1 Despite our opposition to the rules, we re evaluating tecfmo ogy options and least-cost solutions for each generating plant Winle the EPA's ozone reduchon rules are overreachmg, they will not necessarily erode our compehhve position against other mldwestern uhhhes Indeed, these uhht~es also must address tins issue The proposed rules will, however, dumrush the compehhve poslhon of the rmdwestern states for econoauc development and will have ramifications for the coal mmmg industry and support jobs Extending products and services through nonregulated businesses Even though our core utthty business will remain our primary business and, we believe, a source of steady earnings growth, SIGCORP's nonregulated businesses play a very slgmficant role m our strategy for increasing earnmgs These subsidiaries will be prowdmg ad&t~onal products and services that anticipate customer needs, wherever those customers may be located and however "nontra&honal' those needs nught be Thus far, our nonregulated subsidiaries have emerged as natural offshoots from the regulated ut~hty busmess For example, our coal mmmg company, SIGCORP Fuels, was SIGCORPs Eno,oy Systems Group llC aff, hc~te f.,ov,des formed to provide an ad&honal, low cost source of fuel for .... ~.~c~,o,~ ~o. Sr.~ol/~ye~ SW,S~ .o t~,.~./;. ~o~ ESC SIGECO's power pl~ts Ener~ Syste~ Group, a business ~,o ~s,o~ bringing ener~ efficiency measures to org~ahons, emerged from the comp~y's demand-s~de energy m~agement programs Our subs~&~es offer opera~g s~er~es, as we~ as the~ own set of growth oppor~hes SIGECOM, our telecommumcahons partnerstup with UhhCom Networks. exemplifies the slgmficant long-term growth potenhal 10 SIGCORP lnc 1998 ANNUAL RLI ORT and commttmty benefits to be gamed by entering nonutfllty businesses Formed m rind-1998, SIGECOM immediately began construclnon on a two-way fiber-optic-based network to provide lmgh-speed data, voice and video applications to greater Evansville Busmess and residential customers wdl have ~ ............ ~ ~ Our subsidiaries the oppormmty to buy expanded cable TV, local 0~er Op~gZl~lg and long-distance phone service and l'ugh-speed synergies, as well as their own set,of Intemet apphcations aU f~om the same local growttt,op~ortun~t~es, provider The first phase of flus $60 mflhon project '~ ........ ~ ~ will make these "bundled" servmes available to more than 75,000 homes and 7,000 busmesses by nmd-2000 SIGECOM has received the necessary regulatory approvals to prowde phone service, and has estabhshed local cable television franctuses ComSource, our former lntemet access subsidiary, was folded into SIGECOM I These new markets offer slgntficant opportumty for SIGCORP No other single commumcations company locally offers the option to bundle these telecommumcatton servmes Another telecommumcattons venture, SIGCORP Commumcattons Servtces, also expanded dramahcally with five major new projects TNs subsldmry focuses on designing and constructmg fiber-ophc systems to allow mttmclpal utrhtms to offer cable TV, energy momtormg and other services Subsldlarms sellmg energy-related products and services also performed well SIGCORP Energy Services doubled its mdustnal customer base and its revenues, and today manages natural gas and energy programs for 130 industrial and large commerctal customers m eight states It launched a proprietary online product called SIG net that provides data and analysis, helping customers momtor and manage thmr energy flows A 33-percent owned affihate, Energy Systems Group LLC, also contmued its aggressive expansion with new offices m Indianapolis and Cmctm~ah and new mshtuhonal and commercial clients Major new projects include contracts to build an $11 mllhon steam plant for Bristol-Myers Squibb m Evansville, construct a $20 rmlhon energy center for a Johnson City, Tenn, Veterans Admtmstrahon hospital complex, and bring energy savings unprovements to the venerable Chicago Sun-Tm~es budding £-~erprising companies - those willing SIGCORP's coal mmmg subsidiary, SIGCORP to zaise the stakes to preserve and enhance Fuels, continued to provide SIGECO's Culley shareholder value - will be the winners. Generahng Stahon with a low-cost supply of fuel, _~,, .......... helping SIGECO acfueve coal costs lower than any uhhty east of the Mississippi SIGCORP Fuels dehvenes to Culley of about 800,000 tons m 1998 represents about a quarter of SIGECO's AYERAO[ ¢OA/. ¢O$T$ coal supply requirements Tfus subsidiary is testmg alternahve fuels {Cents per Kwh) x~ and coal blends and is evaluating other coal properhes to create x~'~ addlhonal value for SIGECO and SIGCORP Southern Indiana Minerals converts power plant emission ~c~~ ~,~ byproducts into industrial addlhves, winch are used m paint, coating and construction products A sister energy services affiliate, Air Quality Services, was formed m 1998 to provide emissions testing services to uhht~es and industries Other subsidiaries provide financial fleyabfllty and earnings potenhal for SIGCORP and its nonregulated busmess SIGCORP Capital provides short-term financing ophons and pooled cash 1994 1995 1996 1997 1998 management services for the nonregulated subsl&anes Southern Indiana Properhes pursues mvestment opportumhes m real estate and busmess eqmpment that have the potential for above-average returns Southern Indiana Properhes contributed nearly $7 mflhon to SIGCORP's bottom line m 1998 ~he electric and gas uhhty P dently moving forward to reach our goals industries are headed for dramahc, ~rrevocable change Yet, monumental opportttmhes are emerging from fins evoluhon Enterpnsmg compames -- those wilhng to rinse the stakes to preserve and enhance shareholder value -- will be the winners SIGCORP will be among that group How we will get there ~s the focus of a slgruficant board-level strategic growth ~mhahve When completed m early 1999, fins very comprehensive planning endeavor will have formulated speoflc earnings growth targets and evaluated current and potential lines of business to determine strategies to achteve those goals We will keep you mformed of the strategnc plan More than strategies or management's desire for achievement is necessary The contnbutnons of our 1,000 employees w~ll continue to be the most important ingredient mbutldmg this enterprise We acknowledge their dedicahon and thetr contribution to our past and f~ture Success We also thank you, our shareholders, for your confidence and support We're enthuslasl~c about the future, and beheve that our proactive steps to transform $IGCORP will continue to create superior value on your behalf Smcerely, Ronald G Reherman Andrew E Goebel Cha~rman~ President and CEO Execuhve V~ce Pres~deni SIGCORP, lnc SIGCORE lnc President and CEO~ Southern In&aha Gas and Electric Co March 22 1999 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The consohdated fmenclal statements of SIGCORP, Inc (SIGCORP), an investor-owned holding company, include SIGCORP's prtnclpal subs~&ary, Southem Indiana Gas and Electric Company (SIGECO), a regulated gas and electric uhhty, and ten nonregulated subsidiaries The following discussion and analysis includes those factors Much have affected, or may materially affect the results of operahons and financial con&hon of SIGCORP and its subsl&anes ~ RESULTS OF OPERATIONS Strong results from nonuhhty operahons, sustamed econonuc growth within its serwce territory, warmer summer temperatures, end the ability to aggressively compete m the wholesale power market produced record basic earnings per share for SIGCORP of $2 14 m 1998, compared to $1 95 for 1997 and $1 83 for 1996 Uhhty operahons contributed $1 80 of the 1998 per share eamlngs and nonregulated operataons contributed $ 34 per share, for 1997, utility net income provided $1 87 and nonregulated results contributed the remaanng $ 08 of total basic earnings per share The factors effectmg the $19 increase m 1998 earnings follow Period ended December 31,1997 $1 95 Weather and customer usage 08 Electric sales to other uttllhes and power marketers 17 Utthty O&M expense i~l (23) Uhhty depreciahon expense (06) Nonregulated gas energy services end nonut~hty operahons 26 Other (03) Period ended December 31,1998 $ 2 14 1997 199~1 i~llncludes $ 05 per share pre, vision for tmcollectlble Federal Energy Sales revenues ReYenoos Electric uhhty revenues rose $25 3 milhon (9 3%) during 1998, reflecting a ~, attributed ~ 9 1% increase m total sales to retail mid wholesale customers and Ingher umt prices for power sales to other utilities and power marketers In 1997, the increase m electric uhhty revenues due to greater nonftrm wholesale sales was fully offset by the recovery of lower ttmt fuel costs through retail rates and fewer sales to retail customers, resulting m a $3 9 million (1 4%) decrease m elecmc revenues Much warmer temperatures (46% warmer than 1997 and 18% warmer than normal m terms of cooling degree-days) end continued economic growth m SIGECO's service area resulted m an increase m 1998 electric sales to retail and firm wholesale customers of 7 3% compared to 1997 The increase followed Thousands) a 1% decrease m 1997 sales to these customers resulting from 8% milder temperatures Sales to nonfirm wholesale customers, excluding sales to Alcoa Generating Corporation ,~,%.~.% (AGC), tncreased 6 7% m 1998, after nsmg 35% durmg 1997 Sales to IGC were up 62% ~]I due to a scheduled major outage of one of AGC's generating umts The warmer weather, coupled with market supply constraints, caused wholesale power prices to be substanhally l'ugher durmg much of 1998, mcreasmg average wholesale umt sales margins compare~t .d~ to the same period tn 1997 SIGECO's abthty to aggressively compete m the wholesale ~ power market conh'tbuted en additional $12 to earnings compared to 'die previous year Fewer sales to retail gas customers and the recovery of lower per umt gas costs reflected m customer rates resulted m a 22% ($18 8 rmthon) decrease m 1998 gas uhhty revenues, following 11% ($10 7 rmlhon) lower gas revenues m 1997 Total gas sales were down 22% m 1998, after a 23% dechne tn 1997, reflecting the unpact of 21% milder temperatures (tn terms of heating deg~e days) on weather-sensitive sales end fewer sales to conunerclal and industrial transportation customers Resldentaal sales declined 19% during 1998 due to the mtlder weather, after a 12% decrease m 1997 Total sates to commercial and industrial customers m 1998 were down 27% because more of these customers pur&ased gas supphes from supphers other than SIGECO, total natural gas sold and transported to gas customers declined only 1% as increased deliveries to commercial and industrial transportataon customers offset the rmpact of weather on residentaal sales 7he continued growth of S1GCORP Energy Services (Energy), Much markets natural gas and related services, during its second full year of operation raised SIGCORP's 1998 revenues $108 0 million, following a $70 2 walhon increase m Energy's revenues m 1997 19~96 1997 1998 A $9 4 million increase in other revenues, which includes the operatmg revenues of gui flected th ye per f SIGCORP's SIGCORP's other nonre ated subslchanes, re e full- ar o at,on o Communications Servtces (Commumcahons) subsidiary The $271 milhon decrease tn 1997 revenues from SIGCORP's other nonregulated opera'aons was c~efly due to lower 14 SIGCORP lnc 1998 ANNUAL REPORT MAINTENANCE EXPENSE (Dollars Jn Thousands) 1994 1995 1996 1997 1998 · Generahon [] Ali Oh~er COST OF LONG-TERM DEBT 1994 1995 1996 1997 1998 ~ SIGCORP ~ Indusky deferred as regulatory assets untal recovered by SIGECO Criteria that could g~ve rise !o the discontinuance of SFAS 71 include (1) increasing compeht~on that restricts SIGECO s ability to establish prices to recover specific costs, and (2) a significant change m the manner m whzch rates are set by regulators from cost-based mgulahon 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 nnpact could be an extraordinary noncash charge to operattons of an amount that could be material SFAS 121, "Accounting for the Impmrment of Long-Lived Assels and for Long-Lived Assets to be D~sposed Of', imposes a stricter criterion for these regulatory assets by reqmrmg that such assets be probable of future recovery at each balance sheet date Under SIGECO's present rek. x~latory envrronment and g~ven its current compehhve poslhon m the industry, SIGECO~oeheves 1ts use of regulatory accounting is appropriate Over the past several years, SIGECO has been actively revolved m intensive contract negotiahons 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 suppher, effechve July 1995, to buy out the ~mamder of SIGECO's contractual obhgattons, enabling it to acqutre lower-priced spot market coal In 1997, the full benefit of the contract buyout was reflected m average coal costs per kWh generated, winch were down 21% from 1996 and were 30% lower than 1995 per urat costs SIGECO estimates the total savings m coal costs resulting from the buyout, net of total buyout costs, approximated $58 rmlhon through December 31,1998, the term of the original contract The net savings are being passed back to SIGECO's retail and firm wholesale electric customers through the fuel adlustrnent clause On October 1,1998, SIGECO announced plans and filed for regulatory approval with the Indiana Department of Envneonmental Management (IDEM~ and the IURC to braid a ,$100 rmlhon~co ,gen,erahon faah~, ,pending regolatory approval and placement of perman~mt unancmg me factory, an atmospnenc tim&zed-bed coal-fu~d phnt, wrll have production capacity to sell approx~mately one million pounds of steam to industrial customers and fproduce approxm~ately 42 megawatts of electricity for SIGECO, winch plans to lease the acihty through an operating lease Regulatory reviews by the IDEM 0a~d IURC are m progress, as are prelLrmnary financing discussions The final outcome of these matters are uncer tam at tins ttme, however, SIGECO beheves these issues will be favorably resolved Pending final resolutton, constructton of the fac~hty rs expected to begin m nmd.1999, with conunercial operahon to begin m 2001 C~mP~/~t~ SIGCORP's predominant subslchary, SIGECO, rs presently a fully integrated provider of retad gas and electric uhhty service within a franchised, monopoly service area The production of electricity is the most significant functtonal component of the integrated SIGECO operattons, representing approromately 60% of regulated assets and, as a result of wholesale sales of electricity, a greater portion of the net income of the utthty A fundamental change vath respect to the monopoly stmchm~ of the electric uhhty industry is occurring m the Umted States, brought about by the National Enet, gy Pohcy Act of 1992 (NEPA) The prunary purpose of the electric provisions of NEPA ~s to increase competttion m electric generahon, end under authonty granted by NEPA, the Federal Energy Regulatory Colmmsszon (FERC) has aggressively undertaken the introduction of competttton into the wholesale electric business The results of the changes m the wholesale electric business on SIGECO have been generally favorable Because SIGECO has below average vanable costs of generatton, it has been an aggressive seller of electnc~ty to power marketers and other pro~nders seeking electncaty to fulftll wholesale sales contracts The results of the increased wholesale sales are drsctrssed further m "Results of Operations "Conversely, SIGECO has m:tuced puces to finn wholesale customers, or offered to do so, to retam their business after the expirahon of existing contracts These discounts m pricing terms, when fully effective, result m gross margins wInch are several rmlhon 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 con&tton FERC does not have jtmschction over the reta~l sales of electncity States retamjunschctton over the perauttmg of retail competttton, the terms of such competitton and the recovery of any costs or other transihon charges resulting from mad competttion 16 SIGCORP Inc 1998 ANNUAL REPORT AVERAGE RESIDENTIAL GAS RATES Quarter Ended 9/30/98 (Dollars per Dth Based on 10 Dth per Month) ,the OVERALL CUSTOMER SATISFACTION RATING 1994 1995 1996 1997 1998 tO0% Environmental Matters To meet the Phase I requirements of the Clean Air Act Amendments of 1990 (CAAA), effective 1995, and some of the Phase II requirements (effec~ve 2000), SIGECO installed a single suiinr chorade scrubber at the Culley Generatarg Stahon to serve Culley Umts 2 and 3 and installed low mtrogen oxide (NOx) burners on the two units With the addition of the scrubber, SIGECO is encattmg lower sulfur thoxlde quanhhes than the aummum comphance reqmrements of Phase I of the CAAA and has avadable unused allowances, called "overeomphance allowances", for retenhon by SIGECO to ~m~t stncter post-2000 en~asslon hraitat~ons SIGECO ~s purchasing adtht~onal allowances to muy meet Phase II mqmrements hr July 1997, the United States Environmental Protection Agency (USEPA) issued its final rule which revrsed the nahonal ambient mr quahty standard for ozone by setting a lower concentrahon lumt and changing measurement methods It rs anticipated that the number of ozone nonattau~aent count,es m the Umted States will increase slgruficantly The USEPA has encouraged states to target uhhty coal-fired boilers for the majority of the mduc~_ons mqurred, especially NOx enusslons, because they believe tbs approach is the most cost effective Northeastern states have clahmed that ozone transport from nmdwestem states (mduchng Inchana) ~s the primary reason for their ozone concentrahon problems Although ttus prermse ts challenged by others based on vanous air quahty modeling stuches, mdudmg studies commu~sloned by the USEPA, the USEPA intends to incorporate a regional control strategy to reduce ozone transport In October 1997, the USEPA promded each state a proposed budget of allowed NOx emissions, a key mgrethent of ozone, which reqmres a sigmficant reduc~on of such mons Under that budget, uhht~es may be requaed to reduce ~O~,.,em~ ~l ,on~. t.o a t~ate of 015 lb/r~.. Btu from levels already anposed by Phase I and Phase ot me ~.~,a Mlawestem states (the alhance) have been working together to determine th? most appropnate comphance strategy as an altemahve to the USEPA proposal The alhance sut>rmtted its proposal, wi'ach calls for a smaller, phased m reduction of NOx levels, to the USEPA and the IDEM m June 1998 In July 1998, Inchana subn~tted its proposed pkan to the USEPA m response to the USEPA's proposed new NOx role oa~d the emissions budget proposed for Indiana The Indiana plan, wtuch calls for a reduchon of NOx eausslons to a rate of 0 25 lb/mmBtu by 2003, is Mess stringent than the USEPA proposal but more stringent than the alliance proposal The USEPA rssued its final ruling on September 24,1998, wtuch was essentially unchanged from its July 1997 proposed rule, after considering all filed comments The USEPA's final ruling is being hhgated m the federal courts by approximately ten midwestern states, including Indiana The proposed NOx emissions budget for Indiana strpulated m the USEPA s final ruling requires a 36 '/o reduchon m total NOx emissions from Indiana The ruling could re.~u~e SIGECO to lower its system-wide ermssions by approramately 70% Depending on me level of system-wide ermsslons reductmns ultunately reqtured, and the control technology ut~hzed to achieve the reductrons, the eshmated constructron cost of the control equipment could reach $90 million, and related additional operation and maintenance expenses could be an eshrnated $I0 rmlhon to $15 aulhon, annually Under the USEPA lmplementatron schedule, the emissions reductions and required control equipment must be unplemented and m place by May 15, 2003 Also m July 1997, the USEPA announced a new 2 5-rmcron particulate matter (PM) standard wlule retawang the existing 10-nucron PM standard The regulatory anpacts of flus achon cannot be determined untrl appropriate momtormg data is collected and subsequent national ambient air quality area desrgnahons are detemm~ed The extent of the unpact on SIGECO, if any, is unknown Demand Side Management (DSM) In the latest update of its Integrated Resource Plan (IRP), filed m November 1997, SIGECO detemuned that certain of its DSM pro,rams ? ,m. no~t~c~t,,? .e?ve an,d were to be ,d~contmued As a result, prelected DSM expen~tures for me tuuu-zm~- perioa are expected to total $22 nulhon The ~ prolections mdmate that by 2000, approximately 52 megawatts of reqmred capacity are expected to have been postponed or ehmmated due to these pmgrama SIGECO wdl continue to momtor the benefits of its DSM programs and addlhonal changes are possible Although SIGECO is already recognized as one of the most competrtlve electric uhhttes m the naO. on the redu~ons enable SIGECO to be even more cost compe'ahve m the future with very low stranded investment exposure 18 $1GCORP lnc I~98 ANNUAL REPORT NUMBER OF SIGECO's ELECTRIC CUSTOMERS 1994 1995 1996 1997 1998 NUMBER OF SIGECO's GAS CUSTOMERS 1994 1995 1996 1997 1998 Market Risk SIGCORP is exposed to market risk due to changes m mterest rates and changes m the market pnce for electnoty and natural gas resulting from changes tn supply and demand Exposure for interest rate changes relates to its long-term debt and preferred equity and partnersl'up obligations Exposure to electrtclty market price risk relates to forward contracts to effectively manage the supply of, and demand for, the electric generation capability of SIGECO's generating plants related to its wholesale power marketrng achvitres Exposure to natural gas price nsk relates to forward contracts taken by Energy to manage its exposure to commodity price risks m pmmdmg natural gas su~p~lles to its customers SIGECO is not currently exposed to market risk for pumhases or eiectnc power and natural gas for its retad customers due to current ln&ana regulattons wlmch allow for full cost recovery of such purchases through SIGECO's fuel and natural ~as cost adjustment mechamsms SIGECO and Energy do not utdtze financtal instruments for tmdmg or speculative purposes, at th~s tnne The table below provides the fatr value and average interest, or fixed dividend rate, of outstandtng debt, preferred stock equity instruments and partnership obligations at December 31,1998 The Series A and C Adjustable Rate Polluhon Control Bonds are hsted as vartable rate long-term debt due to annual adjustment of thetr interest rates to current market rates on March 1 Fair Expected Matunty Date Value SIGCORP and as of Submdmnes (atllhons) 1999 20~0 2001 2002 2003 Thereafter T0~OJ 12/31/98 Long Term Debt Fixed Rate $450 $10 $2040 $2500 $3195 Average h~terest Rate 60% 63% 69% VanableRate $537 $ 537 $ 572 Average lnterest Rate Preferred Stock Not Subject to Mandatory Rederaphon $ 75 $ 75 $ 90 Average Dlwdend Rate 65% Partnersh~pObhgatlons $ 24 $ 24 $ 34 Average Interest Rate 83% SIGECO uttllzes contracts for the forward sale of electricity to effecttvely manage the uhhzatton of its avatlable generatmg capablhty Such contracts include forward physic,al contracts for wholesale sales of its generating capablh~, dmmg periods when SIGECO s avatlable generattng capabdlty is expected to exceed the demands of its retail, or nalave load, customers To ~ the risk related to these forward contracts, SIGECO utflrze may call optmn contracts to hedge agatnst the unexpected loss of its generating capablhty during periods of heavy demand SIGECO also uhhzes forward physical contracts for fire wholesale purchase of generating capablltty to resell to other uttllties and vower marketers through nortflrm "buy-resell" transactions where the sale and purchase*prices of power are concurrently set As of December 31, 1998, management believes exposure from these postttons was not material Energy utfltzes forward physical contrac~ for both the purchase and sale of natural gas to tts customers, pnmanly through '"oack-to-back" transactions where the sale and purchase pnces of natural gas are concurrently set As of December 31,1998, approyamately 10% of ~rgy's forward sal.es contracts were not covered by forward purchase contracts, management roves exposure trom these positrons was not matenalEnergy sells hxed-pnce and capped-prtce products, and reduces its market price risk through the use of fixed-price suppher contracts and storage assets As of December 31,1998, the estrmated fan' market value of Energy's forward sales contracts was appmxrmately $8 5 rmlhon, and the estwnated fan: market value of its forward purchase contracts was approxunately $7 7 radllon SIGECO and Energy are also exposed to counterparty credit risk when a customer or supplter defaults upon a contract to pay or deliver product To mahgate this risk, they have estabhshed procedures to determine and momtor the cmchtworthmess of counterparttes LIQUIDITY AND CAPITAL RESOURCES In 1998, finanoal performance continued to be sohd Internally generated cash (net,m, come less chmdends plus charges to net income not requmng cash) fully funded SIGECO s 1998 construction and DSM program expenditures, these expenditures were 78% funded wtth internally generated cash m 1997 Cash provided fi.om operations decreased $11 7 rmlhon 2o SIGCORP Inc 1998 ANNUAL REPORT STANDARD & POOR'S CREDIT RATINGS (Comparison of 136 electric utd~tms) SIGECO 2 46% 3 28% AA+ AA 9 02% 40 16% BBB+ ~ 18o3 14 75% 30% A EARNINGS/DIVIDENDS PER COMMON SHARE 1994 1995 1996 1997 1998 [] Basic Earmngs per Share · Dw~dends per Share Excludes the effect of a $6 3 mllhon accounting change or $0 27per share CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (,n thousands except [or I~er share amounts) 1998 1997 1996 OPERATING REVENUES~ Electric uhhly $ 297,865 $272,545 $276,479 Gas utd~ly 66,801 85,561 96,251 Energy serwces and other 192,445 75,131 32,008 Total operating revenues 55~,111 4~3,237 404,738 OPERATING EXPENSES: Fuel for electric generation 65,222 62,630 74,860 Purchased electric energy 20,762 13,985 8,295 Cost of gas sold 39,627 54,060 66,105 Cost of energy services and other 187,742 73,668 28,553 Other operation expenses 64,430 60,726 60,885 Maintenance 37,553 29,224 29,784 Depreaat~on and amomzahon 42,733 40,373 39,140 Properly and other taxes 12,963 12,989 14,399 Total operating expenses ____4_7.1,032 347,655 322,021 OPERATING INCOME 86,079 85,582 82,717 INTEREST AND OTHER CHARGES: Interest expense on long term debt 17,604 19,797 18,432 Interest expense on shortterm debt 5,686 1,519 2,387 Amortization of premium, &scount and expense on debt 690 671 690 Allowance for funds used during construchon (1,392) (1,378) (445) Preferred &vldend requirements of subsJ&ary 1,095 1,097 1,097 Interest income (5,488} (3,003) (2,135) Other, net (6,602) (3,122) (2,536) Total interest and other charges ---1 t,593 15,581 17,490 INCOME BEFORE INCOME TAXES 74,486 70,001 65,227 Federal and state ~ncome taxes 24,010 23,861 21,963 NETINCOME = -$ 50,476 $=46,140 $ 43,~64 AVERAGE COMMON SHARES OUTSTANDING 23,631 23,631 23,631 BASIC EARNINGS PER SHARE OF COMMON STOCK $ 2 14 $ 1 95 $ 1 83 DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 2 12 $ 1 95 $ 1 83 The accompanying Notes to Consohdated Flnanaal Statements are an ~ntegral part of these statements 22 SIGCORP lne 1998 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (~n thousands) 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Netmcome $ 50,476 $ 46,140 $ 43,264 Adlustments to reconab net ~ncome to net cash prowded by operating actlwt~es Depreaat~on and amomzat~on 42,733 40,373 39,140 Preferred d~vldend requirements of subs~&ary 1,095 1,097 1,097 Deferred ~ncome taxes and investment tax cre&ts, net (3,684) (3,899) 11,500 Allowance for other funds used during construchon - (581) - Change m assets and I~abht~es Rece~vabbs, net (including accrued unbdled revenues) (11,608) (19,497) (17,170) bventones (12,421 ) (4,306) 3,721 - 12,928 Coal contract seltlement - Accounts payable 5,650 14,141 (4,396) Accrued taxes (1,005) (1,855) (1,098) Refunds from gas supphers (346) (915) (1,213) Refunds to customers 1,347 (651) (4,961) Other assets and habht~es 9,322 8,103 5,120 Net cash proVided_by operating act~wt~es --§ 1,559 78,150 87,932 CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (net of allowance for other funds used during construchon) (55,313) (65,501) (40,302) Demand s~de management program expen&tures (1,182) (2,340) (3,633) Investments m leveraged leases 6,961 (6,850) Purchases of investments (1,940) (423) - Sales of ~nvestments 80 264 700 Investments m partnersbps and other corporations (11,419) 3,166 126 Change m nonuhhty property (279) (5,572) 395 Change ~n notes receivable 1,033 (5,592) (11,533) Other (2,176) (1,181) (150) Net cash use~_ m investing act~whes (64,235) (77,179) (61,247) CASH FLOWS FROM FINANCING ACTIVITIES First mortgage bonds (14,000) (295) (8,000) Dlwdends prod (30,188) (30,482) (28,353) Reduction m preferred stock (116) - Change m environmental improvement funds held by trustee (198) (272) (188) Payments on partnership obhgahons (2,205) (2,276) (2,787) Change m notes payable 28,578 26,980 11,432 Other 27 2,010 568 Net cash use.~ ,n fmanc,ng act,wt~es (1~,,1(~2~ (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 CASHANDCA=S_H_EOUiVALENTSAT~NDOF_PERIO~ $ 5,049 $ 5,827 $ 9,191 The accompanying Notes to Consolidated Financial Statements are on integral part of these statements 23 SIGCORP lnc 1998 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS At December 3 ( (,n thousands) -- - 1998 1997 A~$ET~ -- 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 prows~on for depreaat~on 593,901 557,631 698,105 675,364 Construction work m progress 24,306 32,241 Net ut~hly plant 722,411 707,605 OTHER INVESTMENTS AND PROPERTY: Investments ~n leveraged leases 36,003 42,964 Investments ~n partnersbps and other corporations 32,389 21,197 Enwronmental ~mprovement funds held by trustee 4,300 4,102 Notes receivable 20,372 21,404 Nonut~hly properly and other 14,901 12,503 Total other investments and properly 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 unblled 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 OtI'IER ASSETS: Unamortized premium on reacquired debt 4,226 4,704 Postret~rement benefits other than pensions 985 3,263 Demand s~de 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 $ 990,0~3 The accompanying Notes to Consohdated Fmanaal Statements are an ~ntegral part of these statements 24 SIGCORP ln¢ 1998 ANNUAL REPORT 1998 1997 At December 31 (,n thousands) _ SHAREHOLDERS' EQUITY AND UABILITIES CAPITALIZATION: Common Stock $ 78,258 $ 78,258 Retained Earmngs 292,717 270,828 Accumulated Other Comprehensive Income (12) 77 Total common s~are~oldeis' eqully 37~),963 349,163 Cumulative Nonredeemable Preferred Stock of Subs~&ary 11,090 11,090 Cumubt~ve Redeemable Preferred Stock of Subsidiary 7,500 7,500 Cumulative Speaal Preferred Stock of Subsl&ary 808 924 Long Term Debt, net of current maturities 204,771 273,707 Long Term Partnership Obhgat~ons, net of current matunt~es 781 2,424 Total cap~tahza~on, excluding bonds sublect to tender (see Consolidated Statements of Cap~tahzatlon) 595,913 644,808 CURRENT UABILITIES: Current Port~on of~Adlustable Rate Bonds Subject to Tender 53,7_00 31,500 Current Maturities of Long Term Debt, Interim Financing and Long Term Partnership Obhgat~ons Matunng long term debt 45,000 12,695 Notes payable 69,508 41,368 1,577 2,139 Partnersbp obhgat~ons _ Total current ~natunt~es of]ong term d~bt, ~ntenm financing and long term~:~artnershlp obhgat~ons 116,085 56,202 Other Current habht~es Accounts payable 53,391 47,741 Dividends payable 120 123 Accrued taxes 4,863 5,868 Accrued ~nterest 5,140 5,216 Refunds to customers 2,156 1,155 Other accrued I~abht~es 21,320 17,866 Total other current I,abht~es 8_6~f~0 77,969 Total current i~abht~es 256,775 165,671 OTHER LIABILITIE$~ Accumulated deferred ~ncome taxes 144,032 146,268 Accumulated deferred investment tax credits, being amortized over hves of properly 18,802 20,249 Postret~rement benefits other than pensions 11,337 11,271 Other 2,659 1,756 Total other IJab~htles 176,830 179,544 TOTAL - $1,029,518 $ 990,023 The accompanying Notes to Consohdated F~nanaal Statements are an integral part at these statements SIGCORP lnc 1998 ANNUAL REPORT 25 CONSOLIDATED STATEMENTS OF CAPITALIZATION A~ I~ecember 31 ),n thousands) 1998 1997 COMMON SHAREHOLDERS'EQUITY -- Common Stock, w~thout par value, authorized 50,000,000 shares, issued 23,630,568 $ 78,258 $ 78,258 Retained Earmngs, $2,194 restricted as to payment of cash &wdends on common stock 292,717 270,828 Accumulated Other Comprehensive Income (12) 77 Total common shareholders' equity 370,~-6J 349,163 PREFERRED STOCK OF SUBSIDIARY Cumulative, $100 par value, authorized 800,000 shares, ~ssuable m senes Nonredeemable 4 8% Series, outstanding 85,895 shares, callable at $110 per share 8,590 8,590 4 75% Senes, outstan&ng 25,000 shares, callable at $101 per share 2,500 2,500 Total nonredeemable preferred stock of subs~&ary 11,090 11,090 Redeemable 6 50% Series, outstanding 75,000 shares, redeemable at $100 per share December 1,2002 7;500 7,500 SPECIAL PREFERRED STOCK OF SUBSIDIARY Cumulative, no par value, authorized 5,000,000 shares, ~ssuab)e ~n senes 8~% senes, outstanding 8,077 and 9,237 shares, respectively, redeemable at $1 O0 per share 808 924 LONG-TERM DEBT, NET OF CURRENT MATURITIES First mortgage bonds 169,915 238,420 Notes payable 36,009 36,000 Unamortized debt premium and d~scount, net (1,153) (713) Total long term debt 204,771 273,707 LONG-TERM PARTNERSHIP OBLIGATIONS. NET OF CURRENT MATURITIES 781 2,424 CURRENT PORTION OF ADJUSTABLE RATE POLLUTION CONTROL BONDS SUBJECT TO TENDER, DUE 2025, Series A, presently 3 65% 31,500 31,500 2030, Series C, presently 3 70% 22,200 53,700 31,500 TOTAL CAPITALIZATION, ~nclud,ng bonds sublect to tender _-$_6~49,613 _ $676,308 The accompanying Notes to Consohdated F~nanaal Statements are an integral part of these statements 26 SIGCORP lnc 1998 ANNUAL REPORT CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY -- - Accumulated Other Common Retmned Comprehensive Income I~n t_housands} Total Stock_ _Earmng-s Balances, December31, 1995 $314,882 $78,258 $ 236,617 $ 7 Net Income 43,264 43,264 - Unrealized GammOn Secuntles (net of tax) 33 - 33 Comprehensive Income 43,297 43,264 33 Common Sfock Dividends ($1 15 per share) (27,255) (27,255) - Balances, ~e-mb~r 31, 1996 330,924 78,258 252,626 40 Net Income 46,140 46,140 - Unreahzed Gm~n 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 (Loss~On Securities (net of fax) (89) - (89) Comprehensive Income 50,387 - 50,476 (84) Common Stock Dividends ($1 21 per share) (28,587) - (28,587) B~lance_~,~De~_~mber ~-j~jT~] $ 370,~)_63 $ 78,2~58 $ 292,717 ~ (1~) The accompanying Notes to Consohdated Finanaal Statements are an ~ntegral part of these statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note I Summary of Sigmficant Accounting Poliaes Prinaples of Consolidahon SIGCOR]?, Inc (SIGCORP), an Indiana holding compan}5 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 utthty and engaged prmapally m the pmduchon, purchase, transmission, dlstrlbuhon and sale of electricity and the delivery of natural gas SIGECO serves 124,340 electric customers m the city of Evansville and 74 other commumt~es and serves 108,335 gas customers m the city of Evansville and 64 other commumtaes Energy Systems Group, Inc (ESGI) has a one-thud ownersbap m Energy Systems Group, LLC, an energy related performance contracting firm serving industrial and commercial customers Southern Indiana Minerals, Inc (SIMI) processes and markets coal combushon by-products Southern Inchana Properttes, Inc (SIPI) invests m leveraged leases of real estate and equipment, real estate partnerships and lorot ventures and private placement subordinated debt instruments Cash balances are mvested m marketable securihes 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 utfl~hes and customers SIGCORP Capital, Inc (Capital) ~s the pnmary financing vetude for SIGCORP's nonregubled subsichanes SIGCORP Fuels, lnc (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 Commumcat~ons Services (Commumcahons) was formed to utrdertake telecommumcalaons-related strategic mtt~ahves SIGCORP Environmental Services, Inc (Environmental Services) holds SIGCORP's investment in wr quality services, a joint venture created to provide air quality momtormg and testmg services to industry and uttht~es SIGECO Advanced Commumcahons, Inc (Advanced Commumcahons) holds SIGCORP's investment m SIGECOM, LLC and Ut~hcom Networks, Inc (Utflcom) SIGECOM, LLC, is a joint venture between Advanced Commumcatlous and Utthcom to provide and market enhanced commumcahons services over a Ingh capacity fiber optic network m a multi-state area encompassing SIGECO's service territory Effective June 30, 1998, ComSource, Inc, a former subsidiary of SIGCORP, was merged mto Advanced Commumcahous All significant intercompany transactions are ehurmated SIGCORP Inc 1998 ANNUAL REPORT 27 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles reqtures management to make estimates and assumphons that affect the reported amounts of assets and habtht~es and disclosure of contmgent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporhng period Actual results could differ from those estimates Regulation The hrdIana Unllty Regulatory Cornrmssion (IURC) has jurisdiction over all investor-owned gas and electric ut~htles m Indiana The Federal Energy Regulatory Commission (FERC) has lurisdiction over those investor-owned utrhties that make wholesale energy sales These agencies regulate SiGECO's utihty business operations, rates, accounts, depreciation allowances, services, security ~ssues and the sale and acquisition of properties The financial statements of SIGECO are based on generally accepted accounting principles, winch give recogmhon to the ratemakmg and accounting praclaces of these agencies Regulatory Assets SIGECO is subject to the provisions of Statement of Financial Accountmg Standards (SFAS) No 71, 'Accounting for the Effects of Certain Types of Regulahon ' Regulatory assets represent probable future revenues to SIGECO associated with certain recurred costs which will be recovered from customers through the ratemakmg process Generally accepted accounhng principles for rate regulated compames also reqmre that regulatory assets wtuch are no longer probable of recovery through future revenues, at the balance sheet date, be charged to eammgs The following regulatory assets are reflected m the Consolidated Balance Sheets At December 31 (,n thousands} - 1998 1997 Regulatory Assets Demand s~de management program costs $ 25,648 $ 25,069 Postretlrement benefit costs * 3,263 5,541 Unamortized premium on reacquired debt 4,705 5,183 Regulatory study costs 107 337 Fuel and gas costs * 5,931 9,129 39,654 45,259 Less current amounts 9,527 11,749 Total Iongterm regulatory assets $ 30,127 $ 33,510 · Refer to the mdwidual paragraphs m th~s Note for discussion of specific regulatory assets See Income Zaxes for regulatory assets and hab~httes related to income taxes As of December 31, 1998, the recovery of $19,]36,000 of S]GECO's total regulatory assets is currently reflected m rates charged to customers Recovery periods range up to 22 years for certain regulatory assets $IGECO intends to request recovery of its remaining regulatory assets m future general rate case filings If all or a separable portion of SIGECO s operation becomes no longer subject to the prowslons of SFAS No 71, a write off of related regulatory assets would be required, unless some form of transition cost recovery con~anues through rates estabhshed and collected for SiGECO s remaining regulated operations that would meet the requirements under generally accepted accounting principles for contmued accounting as regulatory assets during such recovery period In addition, SIGECO would be reqmred to determine any impairment to the carrying costs of deregulated plant and mventory assets Concentration of Credit Risk SIGECO s customer receivables from gas and electric sales and gas transportation services are pnmanly derived from a dlversrfled base of residential, commercial and industrial customers located m a southwestern region of Indiana SIGECO continually reviews customers credltworthmess and requests deposits or refunds deposits based on that re'~ew SIGECO also sells electnc~ty to wholesale marketers which increases its exposure to potential crecht losses Energy's customer receivables from gas sales and transportahon services are pnmarfly derived from a diversified base of commerckal and mdnstnal customers located in the mldwestern 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 U~lJ~t Plant Utihty plant is stated at the l'ustorical original cost of construction The cost of repairs and minor renewals is charged to mamtenance expense as recurred Property mt replacements are capitahzed and the depreciation reserve ~s charged with the cost, less net salvage, of urats retired 28 SlGCORP lnc 1998 ANNUAL REPORT Depreciahon Depreciation of utrhty property is provided using the stratght-hne method over the estunated service lives of the depreclable plant Provisions for deprectat~on, expressed as an annual percentage of the cost of average depreoable plant tn service, were as follows 1998 1997 1996 Ebctnc 3 4% 3 4% 3 4% Gas 3 3% 3 2% 3 2% Income Taxes SIGCORP utilizes the habthty method of accounting for mcome taxes, providing deferred taxes on temporary differences Investment tax credits have been deferred and are amorhzed through credits to income over the lives of the related property The components of the net deferred raceme tax lmblhty are as follows 1998 1997 At December 31 (~. thousands) _ Deferred/ax Llabht~es Depreciation and cost recovery t~m~ng &fferences $117,866 $117,357 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 Asssts Unbdled revenue (1,394) (1,593) Regulatory hab~ht~es to be seltbd through future rates (22,993) (25,229) Other, net (4,271) (2,831) $144,032 $146,268 Net deferred mco__me tax habht./ _ The $2,236,000 decrease m the net deferred raceme tax habthty from December 31, 1997 to December 31, 1998 represents a $5,850,000 decrease m the net regulatory assets and habdtties offset by the current year deferred federal and state raceme tax expense of $3,614,000 The components of current and deferred raceme tax expense are as follows Year Ended December 31 I," thousandsl __ __ _ 1998 ?97_ __ 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) $-24,010_ $ 23,861 $ 21,963 Total raceme tax ex,oense A reconciliation of the statutory tax rates to SIGCORP's effective raceme tax rate is as follows Year Ended December 31 1998 1997 1996 Statutory federal and state rate 37 9% 37 9% 3~ 9% Equity portion of allowance for funds used dunng construction (0 3) Book depreaat~on over related tax depreciation - nondeferred 1 7 1 8 1 7 Amortization of deferred investment tax cre&t (1 9) (2 1) (2 2) Low raceme housing cre&t (3 8) (4 0) (4 2) Preferred &wdend reqmrements of subsidiary 0 6 0 6 0 6 Excess deferred tax (2 8) (1 2) (1 7) Other, net 0 5 1 4 1 6 -- 3-22% 34 1% 337% Effective tax rate _ 29 SIGCORP Inc 1998 ANNUAL REPORT l~mdon ~ SIGECO has ~usteed, noncontributory defined benefit plans which cover ehg~ble full-ttme regular employees The plans provide rettrement benefits based on years of service and the employee's highest 60 consecutive months' compensahon during the last 120 months of employment The funding policy of SIGECO is to contribute amounts to the plans equal to at least the mmtmum fundmg requirements of the Employee Retirement Income Security Act of 1974 (ERISA) but not m excess of the T ' maxtmum deductible for federal income tax purposes he plans assets as of December 31, 1998 consist of investments in mterest-bearmg obhgattons and common stocks Change m benefit obligation Year Ended December 31 (,n thousa_nds) 1998 1997 Benefit obhgat~on at beg~nnlng of year $ 72,914 $ 63,999 Service cost- benefits earned dunng the year 2,639 2,165 Interest cost on prolected benefit obhgat~on 5,020 4,661 Plan amendments 2,220 - Benefits pa~d (3,t 76) (3,005) Actuarial loss 126 5,094 Benefit obhgat~on at end of year $ 79,743 $ 72,914. Change m plan assets At De~:ember 31 (,n thousands) 1998 1997 Plan assets at fair value at begmmng of year $ 76,587 $ 66,011 Actual return on plan assets 9,926 12,638 Employer contribution - 943 Benefits pa~d (3,176) (3,005) Fa~r value of plan assets at end of year $ 83,337 $ 76,587 Reconcihahon of funded status At December 31 I~n thousands) 1998 1997 Excess of plan assets over prolected benefit obhgatlon $ 3,594 ~; 3,673 Remaining unrecogmzed transitional asset (1,815) (2,233) Unrecogmzed serwce cost 3,455 1,412 Unrecogmzed net gain (11,864) (8,117) Accrued pens,on benefit habhty $ _ (6_,630~_)_$ (5,26~5) Components of net periodic pension benefit cost Yeast Ende~d December 31 (,n thousands) - 1998 1997 Servlcecost $ 2,639 $ 2,166 Interest cost 5,020 4,661 Expected return on plan assets (5,985) (5,182) Amortization of prior serwce cost 178 147 Amortization of transitional asset (418) (418) Recogmzed actuarial gain (47) (4) Net per,od,c benefit cost $ ],3_87 $ 1,37~ The prolected benefit obhgatton at December 31, 1998 and 1997 was determined using an assumed discount rate of 7 0% For both periods, the long-term rate of compensahon increases was assumed to be 5 0%, and the long-term rate of return on plan assets was assumed to be 8 0% The transittona] asset is being amortized over approxrmately 15, 18 and 14 years for the Salaried, Hourly and Hoosier plans, respectively 3O SIGCORP Inc 1998 ANNUAL REPORT In addlhon to the trusteed pension plans discussed above, SIGECO provides supplemental pension benefits to certain currant and former officers under nonquahfied and nonfunded plans The accrued pension habihty for flus 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 ]~'~Jr~t ~ ~ ~11~/l~l~J~l~ SIGECO provides certain postrehrement 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 nmurance costs SFAS No 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires the expected cost of these benefits be recogntzed 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 actaally paid after date of adoptaon, but prior to inclusion m rates Subsequently, the IURC authorized SIGECO to include m rates SFAS No 106 costs and to recover the amounts previously deferred over a 60-month period Change m benefit obligation Year Ended December 31 (,n thousands) 1998 1997 Benefit obhgat~on at beginning of year $ 30,924 $ 29,275 Serwce cost - benefits earned during the period 578 890 Interest cost on accumulated benefit obhgat~on 1,664 2,056 Actuaaal gain (4,201) (443) Benders paid net of part~apant contributions (1,024) (854) Plan amendments (2,412) - Benefit obhElat~on _at_end o~ear = $ 2,~,5~-9~ $ 30,924 The net peno&c cost determined under the standard includes the amorhzation of the discounted present value of the obhgahon at the adoption date, $29,400,000, over a 20-year period Change m plan assets At December 31 (m thousands) 1998 1997 Plan assets at fair value at begmmng of year $ 7,336 $ 5,205 Actual return on plan assets 1,031 597 Employer contribution 2,168 2,388 Benefits pa~d net of participant contributions (1,024) (854) Fo,rvalueofplana_ssets_~Lend_~)~ear : ~ 9,5~ $ 7,336 Reconc~hation of funded status At December 31 (*n thousands) 1998 1997 Excess of prolected benefit obhgatlon over plan assets $ (16,018) $ (23,588) Unrecogmzed actuarial gain (13,671) (9,759) Unrecogmzed transition obhgat~on 18,353 22,076 Accrued postret, re~ent~b~f,ti,abJ,ty $ [11,336~ $ (11,271) Components of net periodic other postrehrement benefit cost Year Ended December 31 (mthousonds) ~998- 1997 Service cost $ 578 $ 890 Interest cost 1,664 2,056 Expected return on plan assets (577) (399) Amortization of prior serwce cost - - Amortization of transitional obhgatlon 1,311 1,472 Recogmzed actuarial gain (743) (499) Net periodic bene[~tcost $ 2,23~3~ $ 3,520 SIGCORP Inc 1998 ANNUAL REPORT 3~ The assumptions used to develop the accumulated postrehrement benefit obligation at December 31, 1998 and 1997 mcluded discount rates of 7 0% As of December 31, 1998 the health care cost trend rate is 8 0% declining to 4 5% m 2006 The accrued health care cost trend rate for 1999 is 8 0% The estimated cost of these future benefits could be slgmficantly affected by future changes m health care costs, work force demograpJucs, interest rates or plan changes A 1 0% mcrease m 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 pos~rehrement benefit obhgahon by $3,900,000 A 10% decrease m the assumed health care cost trend rate each year would decrease the aggregate service and mterest costs for 1998 by $308,000 and the accumulated postretLrement benefit obhgation by $3,169,000 In 1995, SIGECO adopted Voluntary Employee Beneficiary Association (VEBA) Trust Agreements for the ftmdu~g of postretu~,ment 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 postretlrement benefits are ftmded, the benefits will not be shown as a liability on SIGECO's fmanclal statements Casfi Flaw Infi~'tnatlon 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 Dunng 1998, 1997 and 1996, SIGCORP paid interest (net of amounts capitalized) of $21,900,000, $19,888,000 and $20,328,000, respectively, and mcome taxes of $27,594,000, $29,552,000 and $12,237,000, respectively SIGCORP is involved in several partnerships wl'~ch are partially financed by partnership obhgations amotmtmg to $2,358,000 and $4,563,000 at December 31, 1998 and 1997, respectively Inventories SIGECO accounts for mventorles under the average cost method except for gas m underground storage wtuch is accounted for under the last-m, first-out (LIFO) method At December 31 I~n thousands) 1998 1997 Fuel (coal and o~1) for ebctnc generation $ 15,701 $ 8,920 Materials and supphes 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 ~nventones $ 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 approxnnately $13,000,000 OI;~r~ R~v~noo~ and Fo~l ¢o~s SIGECO accrues an eshmate of revenues unbdled for electric and gas service furmshed 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 wluch allows for adjustment in charges for electric energy to reflect changes m the cost of fuel and the net energy cost of purchased power SIGECO also collects through a quarterly rate adjustment mechamsm, the margin on electric sales lost due to the implementation of demand side management programs SIGECO records any adjustment clanse under or overrecovery each month m revenues A corresponding asset or habrhty rs 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 ¢om~r~h,n~iv. In¢om~ SIGCORP adopted Statement of Financial Accounting Standards (SFAS) No 130 Reporting Comprehensive Income' n 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 gams (losses) on available for sale securities ]~ ~¢¢~on11~ ~ro~oon~."~m~n~ In Jtme 1997, the Financial Accotmtmg Standards Board (FASB) issued SFAS No 131, 'Drsclosures about Segments of an Enterpr se and Related Information" In February 1998, FASB issued SFAS No 132, "Employers' Disclosures about Pens OhS and Other Postretlrement Benefits ' These statements, wl'uch 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 Achvlties, wl'uch is effecti 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 certam derivative instruments embedded in other contracts, be recorded on Consohdated Balance Sheets as either an asset or liability measured at fair value The accountmg for change~ m the fair value of a derivative depends on the mtended use of the derivative and resultmg designahon SFAS No 133 requlres that changes m the denvative's fair value be recogmzed m the current period's earnings, unless specific hedge accounting criteria are met If an entity quahfies for hedge accounting, gams and losses on derivatives, generall~ will offset the related effects of the hedged items m 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 adoptmg SFAS No 133 on its financial statements and has not deterrmned the tmung or method of its adoption of this statement However, adoption of SFAS No 133 could increase the volatility m earnings and other comprehensive income Hote 2 Loveraged leases SIPI ~s a lessor m four leveraged lease agreements under which an office building, a part of a reservoir, a gas turbme electric generatmg peaking unit and passenger railroad cars are leased to third parties In early 1998, SIPI sold its leveraged lease in a paper mill The econotmc hves 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 famhties was parhalty fmanced by nonrecourse debt provided by lenders, who have been granted an assignment of rentals due under the leases and a security interest m the leased property, which they accepted as their sole remedy m 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 m leveraged leases at those dates was $10,673,000 and $11,339,000, respectively, as shown At December 31 (in thousands) 1998 1997 Minimum lease payments receivable $ 51,443 $ 63,877 Estimated residual value 29,073 29,073 Less unearned ~ncome 44,513 49,986 investment ~n lease financing receivables and loan 36,003 42,964 Less deferred taxes arising from leveraged leases 25,330 31,625 N%~lnvestment in!everaged leases __ = $ 10,673 $ 11,339 Note 3 Short. Term Financing 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 lines of credit S1GECO has available lines 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) 1998 1997 1996 Notes Payable Balance at year end $ 69,508 $ 41,368 $ 38,750 Weighted average interest rate on year end balance 5 86% 6 21% 5 94% Average da~ly amount outstan&ng dunng the year $ 38,408 $14,510 $ 24,430 Weighted average interest rate on average da~ly amount outstanding dunng the year 6 22% 6 08% 5 74% Note 4 Long-Term Debt The aramal stoking fund reqmrement of SIGECO's first mortgage bonds is 1% of the greatest amount of bonds outstanding under the Mortgage Indenture TI, as requirement may be satisfied by certification to the Trustee of unfunded property additions in the prescribed amount as provided m the Mortgage Indenture SIGECO mtends to meet the 1999 su~kmg fund requirement by this means and, accordingly; the stoking fund reqmrement for 1999 is excluded from current liabilities on the balance sheet At December 31, 1998, $296,605,000 of SIGECO% utihty plant remained unfunded under SIGECO's Mortgage Indenture SIGCORI Inc 1998 ANNUAL REPORT 33 Several of SIGCOILP's partners~p investments have been financed through obligahons with such partnerships Of the amount of first mortgage bonds, notes payable and partnership obhgahons outstanding at December 31,1998, the following amounts which mature m the five years subsequent to 1998 am as follows 1999 - $46,577,000, 2000 - $~532,000 and 2001 - $249,000 In addition, $53,700,000 of adjustable rate pollution control series first mortgage bonds could, at the election of the bondholder, be tendered to SIGECO in March 1999 If SIGECO's agent is unable to mmarket any bonds tendered at that time, SIGECO would be required to obtain addlhonal funds for payment to bondholders For financial statement presentation purposes those bonds subject to tender m 1999 are shown as current liabilities First mortgage bonds, notes payable and partnership obhgahons outstanding and classified as long-term arc as follows At December 31 (,n thousands) 1998 1997 First Mortgage Bonds due 1999, 6% $ - $ 45,000 2020, 4 40% Pollution Control Series B 4,640 3,945 2030, 4 40% Pollution Control Series B 22,000 22,000 2014, 7 25% Pollution Control Series A 22,500 22,500 2016, 8 875% 23,000 25,000 2023, 7 60% 45,000 45,000 2025, 7 625% 20,000 20,000 Adlustable Rate Pollution Control 2015, Series A, presently 4 60% 9,975 9,975 Adlustable Rate Enwronmental Improvement 2023, Series B, presently 6% 22,800 22,800 2030, Series C, presently 3 70% 22,200 Total first mortgage bonds ~ 6~9,c~1-5 $2~8,420 Notes Payable Insurance Company, due 2012, 7 43% $ 35,000 $ 35,000 Tax Exempt, due 2003, 6 25% 1,000 1,000 Bank, due 2000, 2 90% 9 - Total notes payable $ 36,009 $ 36,000 Parteersbp Obhgatlons, due 2000 through 2004, without interest $ 781 $ 2,424 Note 5 Capital Stock ~ ~ Each outstanding share of SIGCORP s common stock contains anght wruch entitles mg~stercd holders to purchase from SIGCORP one-hundredth of a share of SIGCORP s common stock, at an tmtlal price of $65 per share (Purchase Price) subject to adjustment The rights will not be exercisable until a party acqmms beneficial ownersrup of 10% of common shams or makes a tender offer for at least 10% of its common shams The rights expire December 31, 2005 If not exercisable, the rights m whole may be redeemed by SIGCORP at a price of $ 01 per right at any tLme prior to their exptrat~on If at any tune after the rights become exercisable and are not redeemed and SIGCORP is revolved m a merger or other business combmahon transachon, proper provision shall be made to entitle a holder of a right to buy common stock of the acqmrmg 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 shams of common stock without par value on a three-for-two basis The stock spht, effective March 27, 1997, increased SIGCORP'S outstanding shams from 15,754,826 to 23,630,568 Average common sharcs outstanding, eammgs per share of common stock and dividends paid per sharc for all periods presented rcflect the stock spht 34 SIGCORP Inc 1998 ANNUAL REPORT SIGECO has a common stock optton plan for its key management employees The ophon price for all stock options is at least 100% of the fmr market value of SIGCORP common stock at the grant date Options generally vest and become exercisable between one and three years m equal annual installments beginning one year after the grant date, and generally expire m 10 years 2"ae exp~rahon dates for ophons outstanding as of December 31, 1998, ranged from July 13, 2004 to July 14, 2007 Stock ophon activity for the past three years was as follows Atbec~mb~r 31 - 1 ~98 ~ 997 1996 Outstan&ng at beginning of year 458,169 327,901 282,478 Granted 74,999 139,348 46,173 Exercised (29,500) (9,080) (750) Outstan&ng 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 AverageOptlonPnce-Exerased $ 21 16 $ 1842 $ 1842 - Outstandmg at end of year $ 2328 $ 21 58 $ 1943 SIGCORP accounts for stock compensahon tn accordance with Accounting Principles Board Optmon No 25, Accounting for Stock Issued to Employees" Under Accountrog Principles Board Opn~on No 25, no compensation cost has been recogruzed for stock ophons Had compensation cost for stock ophons been determined consistent with SFAS No 123 "Accounting for Stock-based Compensation," SIGCORP's net income would have been reduced to the followrog pro forma amotmts At December 3-1 1998 1997 1996 Net Income As reported $ 50,476 $ 46,140 $ 43,264 Pro forma 49,961 45,848 43,176 Basic Earmngs Per Share As reported $ 2 14 $ 1 95 $ 1 83 Pro forma 2 11 1 94 1 83 Dduted Earnmgs 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 estm~ated as of the date of grant using the Black- Scholes ophon pnctng model with the following weighted average asstunphons used for grants m the twelve month periods ended December 31,1998,1997 and 1996 risk-free interest rate of 4 44%, 5 75% and 6 50%, respectively, expected ophon term of five years, expected volatrhhes of 3316%, 36 62% and 13 83%, respechvely, and dividend rates of 3 77%, 4 46% and 4 96%, respeciavely ]~a~'nl'~gs P~l' Shar~ The followmg table illustrates the basic and diluted earrtmgs per share calculations At December 31 (~n thousands except for Imf shore amountsI 1998 1997 1996 Income Shares P~r Share Income Shares Per Share Income Shar~s 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 d~lut~ve secunt~es 134 56 40 Ddu~:J EPS $50,476 23~,_7_6_5 $2 12 $46,140 23,687 $1 95 $43,264 23,671 $1 83 Basic earnings per common share were computed by chwdmg net income by the weighted average number of shares of common stock outstanding during the year Diluted earnings per common sham were determined usmg the treasury stock method for dilutive stock options Options to purchase 74,999 shams of common stock at $32 06 per share were granted m July 1998, but were not included m the computahon of diluted earnings per share because the exercise price was greater than the average market price of the common shams SIGCORP lnc 1998 ANNUAL REPORT 35 Cumulative Pr~ferr~ Sto~k of Subsidiary The amount payable m the event of involuntary hqmdat~on of each series of the $100 par value preferred stock is $100 per share, plus accrued dividends This nonredeemable preferred stock is callable at the ophon of SIGECO as follows the 4 8% Senes at $110 per share, plus accrued dividends, and the 4 75% Series at $101 per share, plus accrued dividends Cumulafive R~l~mablo Proferr~d Sto~k of Subsidi'ary The Series has a dividend rate of 6 50% and is redeemable at $100 per share on December 1, 2002 In the event of ~nvoluntary liquidation of this series of $100 par value preferred stock, the amount payable is $100 per share, plus accrued dividends Cumulahve Speaal Preferred Stock of Subsidiary The Cumulative Special Preferred Stock contains a provision which allows the stock to be tendered on any of 1ts 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 Umt 4 SIGECO and Alcoa Generating Corporation (AGC), a subsl&ary of Aluminum Company of America, own the 270 MW Unit 4 at the Warnck Power Plant as tenants m common SiGECO's share of the cost of this umt at December 31, 1998 is $36,295,000 with accmnulated depreciation totalmg $25,472,000 AGC and SIGECO also share equally m the cost of operation and output of the umt SIGECO's share of operating costs is included m operating expenses m the Consolidated Statements of h~come Note 7 Commitments and Cont~ngenaes 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 w~th a uhhty- affiliated power marketer to purchase 50 MW of electric power begmnmg January, 2000 through December, 2002 Note 8 Lease Obl~ga~ons 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 operatmg lease agreements for mmmg equipment Tbe aggregate future minimum rental payments required under the above leases are as follows Year Ended December 31 {,n thousands} 1999 $ 2,319 2000 2,319 2001 2,319 2002 2,319 2003 2,144 Thereafter 9,041 Total lease payments $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, 1997 and 1996, respectively Note 9 Segments of Bus~ness SIGCORP adopted SFAS No 131 Disclosures about Segments of an Enterprise and Related Lrfformat~on m 1998 SFAS No 131 estabhshes standards for reporting mformahon about operating segments m financial statements and disclosures about products and services and geographic areas Operating segments are defined as components of an enterprise for wlmch separate financial reformation is avadable and is evaluated regularly by the chief operating decision maker re decldmg how to allocate resources and m assessmg 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 quanhtat~ve thresholds required by SFAS No 131 A descnphon of the segments' products and serwces ~s included m Note 1 "Prmc2ples of Consohdat~op~ The accounting pohcles 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 mformatton relating to SIGCORP's slgruflcant segments of busmess ts presented below Year Ended December 31 (~n thousands) ~1998 1997 1996 Operatmg revenues Electric $ 297,865 $ 272,545 $ 276,479 Gas 66,801 85,561 96,251 Gas marketing 179,613 71,669 1,446 Investment c ~erat~ons 963 955 930 All other 28,664 2,507 29,632 Total ~,9D6 433,237 404,738 Interest revenue Electric (a) 309 492 392 Gas (a) 31 49 39 Gas marketing 71 27 - Investment c )erat~ons 3,702 2,305 1,392 All other 4,880 2,912 312 Total 8,993 5,785 2,135 Interest expense Electric (a) 18,191 18,009 18,207 Gas (a) 1,799 1,781 1,801 Gas marketing 155 15 - Investment e )erat~ons 2,749 2,242 773 All other 3,901 2,051 38 Total 2~,7-95 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 o )erat~ons (1,517) 2,564 (2,314 All other 154 1,078 348 Total 24,010 23,861 21,963 Net ~ncome Electnc 38,342 37,861 37,029 Gas 4,106 6,404 4,714 Gas marketing 543 405 (26) Investment o )erat~ons 6,899 3,528 2,391 All other 586 (2,058) (844) Total 50,476 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 o )erat~ons 189 91 410 All other 107 87 113 Total 42,7~3§ 40,373 39,140 Capital expendaures Electnc 47,114 55,735 34,836 Gas 9,381 12,687 9,099 Gas marketing - 20 72 Investment o )erat~ons 196 547 297 All other 11,754 592 952 Total 6~,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 Totalassets $1,4~5,~31 $1,380,128 $1,295,824 (a) SIGECO allocates interest revenue and expe~se based on the net plant ratio which 1~ gl % electric and 9°~ gas (b) Utfllbj plant le~s accumulated prows~on for depreciation, inventories, receivables (le~s allowance) regulatory assets and other ~dentlfiable assets SIGCORP lnc 1998 ANNUAL REPORT 37 The following is a reconc~hation to the financial statements Year Ended December 31 (,n lhousandsI 1998 1997 1996 Operating revenues Total revenues for segments $ 573,906 $ 433,237 $ 404,738 Ehmlnatlon of mtersegment revenues (16,795) - Total consohdated revenues _-557,111 433,237 404,~§8 Interest revenue Total ~nterest revenue for segments 8,993 5,785 2,135 Ehmmat~on of mtersegment interest (3,505) (2,782) - Total consohdated interest revenue 5,488 3,003 2,[35 Interest expense Total interest expense for segments 26,795 24,098 20,819 Ehm~nat~on of mtersegment interest (3,505) (2,782) - Total consohdated ~nterest expense 23,290 21,316 20,819 Identifiable assets Total assets for segments 1,455,531 1,380,128 1,295,824 Ehmmat~on of mtersegment assets (426,013) (390,105) (343,104) Total consohdated assets $ 1,02~9,518~- $ 990,02J $ 952,720 Note I0 D~s¢losures About Fair Value Except for the following financial mstruments, fair value of SIGCORP's financial ~nstruments is equivalent to carrymg value due to their shert-term nature At December 31 (~n thousandsl 19~ 1997 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Long Term Debt (,nclud,ng current port,on) $303,471 ~3~,~.2~4 $318,597 $381,489 Partnersbp Obhgat~ons (including current port~on) 2,358 3,446 4,563 6,163 Redeemabb Preferred Stock of Subsidiary 7,500 9,044 7,500 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 $58,000,00 Anhclpated regulatory treatment of the excess or deficiency of fair value over carrying amounts of SIGECO s long-term debt, ff m fact settled at amounts appmx~nahng those above, would d~ctate that these araounts be used to reduce or increase SIGECO's rates over a prescnbed amor0zat~on period Accordingly, any settlement would not result m a material impact on SIGECO's financial poslhon or results of operahons Lon$-'lbrm D~bt The fair value of SIGECO s long-term debt was eshmated based on the current quoted market rate of utthl~es with a comparable debt ratmg Nonut~hty 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 utiht~es with a comparable debt rating Parteer~hip Obllgalio~$ 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 SIGCORP, INC We have audited the accompanying consolidated balance sheets and consolidated statements of capltahzahon of SIGCORP, ]nc (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 m 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 m accordance with generally accepted auditing standards Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the fmanclal statements are free of material misstatement An audit includes examining, on a test basis, evidence supporhng the amounts and disclosures m the financial statements An audit also includes assessmg the accounhng principles used and significant eshmates made by management, as well as evaluating the overall financLal statement presentatton We beheve that our auchts provide a reasonable basks for our oprmon In our oprruon, the consohdated fman{nal statements referred to above present fairly, tn all material respects, the financial pos~hon of SIGCORP, ]nc and subsidiaries as of December 31, 1998 and 1997, and the results of their operahons and thetr cash flows for each of the three years m the period ended December 31,1998, tn conformity with generally accepted accountmg prtnclples ARTHUR ANDERSEN LLP C]ncago, Illmms January 29,1999 SIGCORP Inc 1~98 ANNUAL REPORT 39 SELECTED FINANCIAL DATA Year Ended December 31 (~n thousands except for per share amounts) 1998 1997 1996 1995 1994 Operating Revenues $ 557,111 $ 433,237 $404,738 $360,771 $330,899 Operatlnglncome $ 86,079 $ 85,582 $ 82,717 $ 72,401 $ 70,779 Net Income Before Cumu)at~ve Effect of Accounting Change $ 50,476 $ 46,140 $ 43,264 $ 38,525 $ 39,920 Netlncome $ 50,476 $ 46,140 $ 43,264 $ 44,B19 $ 39,920 Average Common Shares Outstan&ng 23,631 23,631 23,631 23,631 23,631 Earmngs Per Share ot Common Stock Before Cumulative Effect of Accounting Change $ 2 14 $ 1 95 $ 1 83 $ I 63 $ 1 69 Cumulative Effect of Accounllng Change $ $ $ $ 0 27 $ Basic Earmngs Per Share $ 2 14 $ 1 95 $ 1 83 $ 1 90 $ 1 69 Dduted Earmngs Per Share $ 2 12 $ 1 95 $ 1 83 $ 1 90 $ 1 69 D~wdends Per Share of Common Stock $ 1 21 $ 1 18 $ 1 15 $ 1 13 $ 1 10 Total Assets $1,029,518 $990023 $952,720 $923,981 $917,310 Redeemable Preferred Stock $ 8,308 $ 8,424 $ 8,424 $ 8,424 $ 8,515 LongTerm Obhgat~ons $ 206,705 $ 276,844 $266,951 $265,085 $274,467 SELECTED QUARTERLY FINANCIAL DATA (Unau&ted) Quarter Ended March~l, June 30, September 30, December 31, (~n thousands except for per share amounts) 1998 1997 1998 1997 1998 1997 1998 1997 OperatmgRevenues $141,071 $107,572 $133,305 $85,609 $134,035 $108,795 $148,700 $131,261 Operatmglncome $23,880 $ 23,443 $ 16,623 $13,497 $ 31,557 $ 34,627 $ 14,019 $14,015 Netlncome $ 16,426 $ 13 113 $ 9,007 $ 6,263 $ 17,876 $ 19,947 $ 7,167 $ 6,817 Bas~cEarmngsPerShare $ 070 $ 055 $ 038 $ 027 $ 076 $ 084 $ 030 $ 029 DdutedEarn~ngsPerShare $ 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 ~s not ~nd~cat~ve of the annual results wbch may be expected due to seasonal variations common m the ut~hty ~ndustry The quarterly earnings per share may not add to the total earmngs per share for the year due to rounding COMMON STOCK - MARKET PRICE AND DIVIDENDS PER SHARE 1998 1997 High Low Dlwdends ~gh-_ _ Low D~wden~ds Quarter Ended March 31 $325/~, $27 ~/~, $0 3025 $24 ~/~ $22 9/~6 $0 2950 June 30 323/~ 28 ~/~ 0 3025 26~y~ 21 ~/s 0 2950 September 30 33 ~/16 30 I/4 0 3025 26~Y~ 24/8 0 2950 December 31 36 '~/~s 3213/16 0 3025 30 ~/B 24 ~/~6 0 2950 40 SIGCORP lnc 1998 ANNUAL REPORT SIGCORP'S GROWTH RECORD 1998, 1997 - 1996- 199~ 1994~ [ 1988 SUMMARY OF OPERATIONS (m thousands except for per share amounts) EbctncUt~l~tyRevenue $ 297,865 $ 272,545 $ 276,479 $ 275,495 $ 260,936 $ 250,586 Gas Ut~llly Revenue 66~801 85,561 96,251 63,203 69,099 62,261 Energy Services and Other Revenue 192~445 75~131 32~008 22~073 864 695 Total Operating Revenues 557,111 433,237 404,738 360,771 330,899 313,542 Operation and Maintenance Expenses 428,299 307,282 282,881 248,928 222,337 204,503 Depreaat~on and Amortization of Plant 42~733 40~373 39~ 140 39~442 37~783 32~768 Operating Income 86~079 85,582 82,717 72,401 70,779 76,271 Interest on Long Term Debt 17,6~04 19,797 18,432 18 789 18,604 17,804 AFUDC (1,$92) (1,378) (445) (1 001) (6,030) (328) Other Income, net (5,714) (3,935) (I ,594) (1 243) 1,018 (1,324) Preferred Dlwdend R~u~rements of Subsidiary 1~095 1 ~097 1 ~097 1 ~099 1,105 Income Before Income Taxes 74,486 70,001 65,227 54,757 56,082 58,719 Income Taxes 24~0'10 23~861 21~963 16,232 16,162 21,949 Net Income Bebre Cumulative Effect of Accounting Change 50~476 46,140 43,264 38,525 39,920 36,770 Cumulative Effect of Accounting Change ,~. 6~294 . Netlncome .$ 50~476 $ 46,140 ~ 43264 $ 44,819 ~ 39,920 $ 36,770 Average Common Shares Outstanding 23,631 23,631 23,631 23,631 23,631 24,833 Earmngs per Share of Common Stock Before Cumulative Effect of Account~ngChange $ 214 $ 195 $ 183 $ 163 $ 169 148 Cumulative Effect of Accounting Change ~ - 0 27 Basic Earnings Per'Share $ 2 14 $ 1 95 $ 1 83 $ 1 90 $ I 69 1 48 D~lutedEarmngsPerShare $ 212 $ 195 $ 183 $ 190 $ 169 148 D~wdends Per Share of Common Stock $ 1 21 $ 1 18 $ 1 15 $ 1 13 $ I 10 085 Pa.,Lout Ratio-% _ _ 5.6 5 60~5 62 8 69 3 65 57 4 PLANT AND PR~)PERTI;(m thousands) GrossPlant-hrstofyear $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 Ret~remer~ts 4,237 6,207 4,627 10~252 6,038 2,664 GrossPlant-endofy~ _$!,316~12_ $1,26~236 $1,205~362 $1,169,693 $1,134,858 $ 834,509 ELECTRIC SALES [MWh) Residential 1,326,024 1,251,376 1,318,043 1 275 674 1,245,800 148,145 Commeraal 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 Mumapal~t~es and Jasper 623,659 566,354 553 160 562,194 508 156 412,259 Other Ut~ht~es 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 1 006,359 Other 20~155 20,936 20,737 20~675 20,584 21,251 Total ~6,_859,181 6,284,528 6,084,521 5,980,890 5,566,310 5,463,460 GAS SOLD AND TRANSPORTED (MDth) Residential 7~764 9,587 10,913 9,145 9,526 8 772 Commeraal and Industrial 21,201 19,783 20,152 18,492 17,776 15 634 Total ~ 29,370 31,065 27,637 27,302 24,406 ELECTRIC CUSTOMIRS Res~dentlal 108,241 107,046 106,605 105,322 104,049 99,117 Commeraal 15,9001 15,692 15,391 15,024 14,741 13,632 Industrial 175 176 176 178 179 189 Other 24~ 23 23 23 23 23 Total 124,340 122,937 122,195 120,547 118,992 112,961 Average Residential kWh Use 12,435 11,913 12 286 12,228 12,038 11,669 Average Residents_al Rate Per kWh-¢ 6 65 6 58 6 78 6 62 6 67 6 59 GAS CUSTOMERS Residential 98,636 97,671 96,741 95,519 93,719 84,663 Commeraal 9,485 9,390 9,274 8,991 8,984 7,954 Industrial 214 217 222 222 226 220 Total 108,335 107 278 106,237 104,732 102,929 92,837 Average Residential Dth Use 81 I00 109 97 103 108 Average Residential Rate Per Dth-$ 6 17 5 77 4 36 4 21 4 73 4 28 Board Of Directors SIGCORP, INC AND SOUTHERN INDIANA GAS AND ELECTRIC COMPANY JAMES S DONALD E DONALD A RICHARD W JOHN D JOHN M ROBERT L VINSON SMITH RAUSCH SHYMANSKI ENGELBRECHT DUNN KOCH Evan~wJJe /erre Havre f vatlswlle fvanswlle Evansville Evansville fvanswlle ?resident P~es~dent and Ch~d Former Cha~rrr~r~n C'ha~rr~lan ?resdenl and President ?re,~dent and Chief Unlverslly of Executive Off~cer of the Board and Harding Shynlanskl Chief Executive Ofhcer Dunn Ho,~pltall~y Executive O['f~cer EvanswJle Fl~sl Financial President & Company PC Soulh Central Group Kuch Enterprises Inc Cbrporal~on UF Bancorp Inc Communications Carp ANDREW E GOEBEL RONALD G REHERiVdtN L w~n,~wlle Evansville E,;ec~,l~ve V~ce President SICCORP ]nc Chairman Pres~den~ and Chief Executive Offzcer SIGCORP Presdent and Chief Executive Officer Challman Southern bd~ana Oa,~ and Electlvc Company Soulhem hldlana Gas and Electllc Cumpany SIGCORP, INC RONALD G REHERMAN ANDREW E GOEBEL TIMOTHY L BURKE S MARK KERNEY L1NDA K TIEMANN Chairman President a~ld Executive V~ce President Secrelary and Treasurer Controller Ass~slant Secretary Chief Execul~ve Officer RONALDO RE.ER Officers And Staff Chairman SOUTHERN INDIANA GAS AND ELECTRIC COMPANY ANDREW E GOEBEL Presdent and Chid Executive Of[~cer S MARK KERNEY Controller I GORDON HURST Executive Vtce President and Chief LINDAK TIEMANN Operattng Officer Assistant Secretary RONALD G JOCHUM RILEY G HAP. ROD Vrce Presdent Power Supply D~rector of Purchasing and Mater~a[ Contrd JEFFREY L DAVIS GARY W HUSKY V~ce Presdenl Support Services D~rector of Energy Dehvery Operations WILLIAM S DOTY MILLARD W NEW V~ce Presdent Energy Dehvery Manager of Worrlck Power Planl GREGG M McMANUS MICHAEL L NIEMEYER V~ce Presldenl and D~rector of Governmental Relations D~ws~on Manager Hoosier Gas Operat~on,s RODNEY C PENEIELD TIMOTHY L BURKE D~redor of Human Resources Secretary and Eeasurer General Management Southern Indiana Properhes, Inc NONREGULATED SUBSIDIARIES OF SIGCORP, INC GLENN E JUNGEN Presde,l and General Manager S[GCORP Captal, Icc ANDREW E GOEBEL SIGCORP Commumcahons President JOHN A D]~)OMIZIO A~r Quality Services, LLC (51% o'~med) Vrce President and General Manager DANIEL L TODD General Manager SIGCORP Energy Services, Inc JOHN M BOHLS SIGECOM [kC {49% owned) Presdent and General Manager RICHARD M WADMAN Presrdent and General Manager SIGCORP Fuels, lee KENT H STUMP Energy Systems Group LLC (33% owned) Pres denl and Genera[ Manager JAMES L ADAMS Presdent and General Manager Southern In&aha Minerals, Ina ROBERT W SPARKS V~ce P~es~den~ and General Manager SHAREHOLDER INFORMATION SIG New York Stock Exchange SIGCORP, Inc. - -- - - Attn Shareholder Services Department 20 N W Fourth Street PO Box 3606 Evansville, Indiana 47735-3606 Conhnental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 Commo~ Stock o~ SIGCORP and 4.8% Preferred Stock, 6.$0% Preferred Stock and 8½% Special Preferred Stock of SIGECO: Th N alCtyB nk fE llle Evansville, Indiana 47705 Continental Stock Transfer & Trust Compan~ 2 Broadway, New York, New York 10004 4.75% Preferred Stock: Continental Stock Transfer & Trust Compan~ 2 Broadway, New York, New York 10004 $IGCORP, Inc. Attn Shareholders Services Department ,, 20 N W Fourth Street PO Box 3606 · Evansville, 1N 47735-3606 4 75% Series-payable on the first day of March, June, September and December 4 8% Series-payable on the first day of February, May, August and November 50 Yo Series-payable on the first day of March, June, September and December 872% Series-payable on the frrst day of January, April, July and October Common Stock: Payable when declared It is the present mtenhon 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 meetmg of shareholders of SIGCORP, Inc and Southern Indiana Gas and Electric Company will be held at 3 00 p m on Tuesday, Aprd 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 Secunhes and Exchange Conmusslon A copy of th~s report will be furmshed to shareholders ~ on request to the Investor Relahons Department of the Company financial Address SIGCORP, Inc. gh~reh~ld~' Attn Shareholder ~rvlces Department 20 N W Fourth Street addressed PO Box 3606 /h~I~j~o/der SerY/ce~ Evansville, Indiana 47735-3606 Website http //www slgcorpmc coin Telephone Numbers 1-800-227-8625 (812) 464-4528 (812) 464-4599 (812) 461-2187 (FAX) 44 SIGCORP Inc 1998 ANNUAL REPORT