Item 1. BUSINESS
SIGCORP and SIGECO
ORGANIZATION
SIGCORP, Inc. (SIGCORP) is a holding company incorporated October 19, 1994 under the laws of the State of Indiana. SIGCORP has nine wholly-owned subsidiaries: Southern Indiana Gas and Electric Company (SIGECO), a gas and electric utility, and eight nonregulated subsidiaries.
On December 20, 1994, SIGECO's Board of Directors authorized the steps required for a corporate reorganization in which a holding company would become the parent of SIGECO. SIGECO's shareholders approved the reorganization at SIGECO's March 28, 1995 annual meeting, and approval by the Federal Energy Regulatory Commission and the Securities and Exchange Commission was granted November 7, 1995 and December 14, 1995, respectively.
Effective January 1, 1996, the new holding company, SIGCORP, became the parent of SIGECO, which accounts for over 90% of SIGCORP's net income, and four of SIGECO's former wholly-owned nonregulated subsidiaries: Energy Systems Group, Inc., Southern Indiana Minerals, Inc., Southern Indiana Properties, Inc. and ComSource, Inc. Because of the significance of SIGECO, the operating results of all nonregulated subsidiaries are included in Other Income in the consolidated financial statements of SIGCORP. All of the shares of SIGECO's common stock were exchanged on a one-for-one basis for shares of SIGCORP, while all of SIGECO's debt securities and all of its outstanding shares of preferred stock remain securities of SIGECO and are unaffected. (See "Nonregulated Subsidiaries - General" and Note 1 of the Notes To Consolidated Financial Statements, page 40, for further discussion.)
The reorganization is in response to the changes created in the electric industry by the Energy Policy Act of 1992 and the need to respond quickly to the more competitive business environment. The new structure will buffer SIGECO and its customers from the effects of pursuing nonregulated opportunities while allowing SIGCORP to engage in closely related, but historically nonregulated, businesses. Providing gas and electric utility service to customers through SIGECO will remain the core business and primary focus of SIGCORP.
SIGECO - GENERAL
SIGECO is an operating public utility incorporated June 10, 1912, under the laws of the State of Indiana, engaged in the generation, transmission, distribution and sale of electric energy and the purchase of natural gas and its transportation, distribution and sale in a service area which covers ten counties in southwestern Indiana.
Electric service is supplied directly to Evansville and 74 other cities, towns and communities, and adjacent rural areas. Wholesale electric service is supplied to an additional eight communities. At December 31, 1996, SIGECO served 122,195 electric customers and was also obligated to provide for firm power commitments to the City of Jasper, Indiana and to maintain spinning reserve margin requirements under an agreement with the East Central Area Reliability Group (ECAR).
At December 31, 1996, SIGECO supplied gas service to 106,237 customers in Evansville and 64 other nearby communities and their environs. Since 1986, SIGECO has purchased its natural gas supply requirements from numerous suppliers. During 1996, thirty-one suppliers were used. Until November 1993, Texas Gas Transmission Corporation (TGTC) was SIGECO's primary contract supplier. In November 1993, TGTC restructured its services so that its gas supplies are sold separately from its interstate transportation services. SIGECO assumed full responsibility for the purchase of all its natural gas supplies. (See Note 2 of the Notes to Consolidated Financial Statements, page 46, for a discussion of the restructuring of interstate pipelines.)
The principal industries served by SIGECO include polycarbonate resin (Lexan) and plastic products, aluminum smelting and recycling, aluminum sheet products, appliance manufacturing, pharmaceutical and nutritional products, automotive glass, gasoline and oil products and coal mining.
The only property SIGECO owns outside of Indiana is approximately eight miles of 138,000 volt electric transmission line which is located in Kentucky and which interconnects with Louisville Gas and Electric Company's transmission system at Cloverport, Kentucky. The original cost of the property is less than $425,000. SIGECO does not distribute any electric energy in Kentucky.
SIGECO - LINES OF BUSINESS
The percentages of operating revenues and operating income before income taxes attributable to the electric and gas operations of SIGECO for the five years ended December 31, 1996, were as follows:
Reference is made to Note 10 of the Notes to Consolidated Financial Statements, page 53, for Segments of Business data.
SIGECO - ELECTRIC BUSINESS
SIGECO supplies electric service to 122,195 customers, including 106,605 residential, 15,391 commercial, 176 industrial, 19 public street and highway lighting, and four municipal customers.
SIGECO's installed generating capacity as of December 31, 1996 was rated at 1,236,000 kilowatts (Kw). Coal-fired generating units provide 1,021,000 Kw of capacity and gas or oil-fired turbines used for peaking or emergency conditions provide 215,000 Kw.
In addition, SIGECO has interconnections with Louisville Gas and Electric Company, Cinergy Services, Inc., Indianapolis Power & Light Company, Hoosier Energy Rural Electric Cooperative, Inc., Big Rivers Electric Corporation, Wabash Valley Power Association, and the City of Jasper, providing an ability to simultaneously interchange approximately 750,000 Kw.
Record-breaking peak conditions occurred on August 17, 1995, when SIGECO's system summer peak load reached 1,021,000 Kw. The 1996 system peak load of 999,800 Kw was 2% lower than the 1995 peak. SIGECO's total load,
including its firm power commitments to the City of Jasper, Indiana, for each of the years 1992 through 1996 at the time of the system summer peak, and the related reserve margin, are presented below.
An all-time record winter peak load of 783,700 Kw occurred during the 1995-1996 season on February 2, 1996, and was 1.5% greater than the previous winter peak of 772,000 Kw reached on January 19, 1994.
SIGECO, primarily as agent of Alcoa Generating Corporation (AGC), operates the Warrick Generating Station, a coal-fired steam electric plant which interconnects with SIGECO's system and provides power for the Aluminum Company of America's Warrick Operations, which includes aluminum smelting and fabricating facilities. Of the four turbine generators at the plant, Warrick Units 1, 2 and 3, with a capacity of 144,000 Kw each, are owned by AGC. Warrick Unit 4, with a rated capacity of 270,000 Kw, is owned by SIGECO and AGC as tenants in common, each having shared equally in the cost of construction and sharing equally in the cost of operation and in the output.
SIGECO (a summer peaking utility) has an agreement with Hoosier Energy Rural Electric Cooperative, Inc. (Hoosier Energy) for the sale of firm peaking power to Hoosier Energy during the annual winter heating season (November 15-March 15). The contract made available 200 Mw during the 1996- 1997 winter season, and allows for a possible increase to 250 Mw by November 15, 1998. The contract will terminate March 15, 2000.
Electric generation for 1996 was fueled by coal (99.6%) and natural gas (0.4%). Oil was used only for testing of gas/oil fired peaking units.
Historically, coal for SIGECO's Culley Generating Station and Warrick Unit 4 has been purchased from operators of nearby Indiana strip mines pursuant to long-term contracts. During 1991, SIGECO pursued negotiations for new contracts with these mine operators and while doing so, purchased coal from the respective operators under interim agreements. In October 1992, SIGECO finalized a new supply agreement effective through 1995 and retroactive to 1991, with one of the operators under which coal is supplied to both locations. Included in the agreement was a provision whereby the contract could be reopened by SIGECO for modification of certain coal specifications. In early 1993, SIGECO reopened the contract for such modifications. Effective July 1, 1993, SIGECO bought out the remainder of its contractual obligations with the supplier, enabling SIGECO to acquire lower-priced spot market coal. SIGECO estimates the savings in coal costs during the 1991-1995 period, net of the total buy out costs, approximate $59 million. The net savings were passed back to SIGECO's electric customers through the fuel adjustment clause. The coal supplier retained the right of first refusal to supply Warrick Unit 4 and the Culley plant during the years 1996- 2000. The coal used in these plants is blended, when necessary, to meet specifications set in conformance with the requirements of the Indiana State Implementation Plan for sulfur dioxide issued under Federal laws regulating air quality (Clean Air Act). Approximately 1,620,000 tons of coal were used during 1996 in the generation of electricity at the Culley Station and Warrick Unit 4. Culley Units 2 and 3 were recently equipped with flue gas desulfurization equipment as part of the Clean Air Act Compliance Plan. (See "Environmental Matters", page 11, for further discussion.) SIGECO's remaining long-term contract coal supplier supplied the A. B. Brown Generating Station. On April 10, 1995, SIGECO reached an agreement with this coal supplier, effective July 16, 1995, to buy out the remainder of SIGECO's contractual obligations, enabling it to acquire lower-priced spot market coal for all coal-fired generation. SIGECO estimates the total savings in coal costs resulting from the buyout, net of total buyout costs, will approximate $58 million through December 31, 1998, the term of the original contract. The net savings from this coal contract renegotiation are also being passed back to SIGECO's electric customers through the fuel adjustment clause. The amount of coal burned at A. B. Brown Generating Station during 1996 was approximately 1,149,000 tons. Both units at the generating station are equipped with flue gas
desulfurization equipment so that coal with a higher sulfur content can be used. There are substantial coal reserves in the southern Indiana area. The average cost (including contract buyout costs) of coal consumed in generating electrical energy for the years 1992 through 1996 was as follows:
The Broadway Turbine Units 1 and 2, Northeast Gas Turbines and A. B. Brown Gas Turbine, when used for peaking, reserve or emergency purposes, use natural gas for fuel. Number 2 fuel oil can also be used in the Broadway Turbine Units and the Brown Gas Turbine.
All metered electric rates contain a provision for adjustment in charges for electric energy to reflect changes in the cost of fuel and the net energy cost of purchased power through the operation of a fuel adjustment clause unless certain criteria contained in the regulations are not met. Effective April 26, 1995, the principal restriction to recovery of fuel cost increases is that such recovery is not allowed to the extent that total operating income for the 60-month period including the twelve-month period provided in the fuel cost adjustment filing exceeds the total operating income authorized by the Indiana Utility Regulatory Commission (IURC) during the same 60-month period. Prior to April 26, 1995, the operating income test period was the twelve-month period provided in the fuel cost adjustment filing. During 1994-1996, neither restriction affected SIGECO. As prescribed by order of the IURC, the adjustment factor is calculated based on the estimated cost of fuel and the net energy cost of purchased power in a designated future quarter. The order also provides that any over- or underrecovery caused by variances between estimated and actual cost in a given quarter will be included in the second succeeding quarter's adjustment factor. This continuous reconciliation of estimated incremental fuel costs billed with actual incremental fuel costs incurred closely matches revenues to expenses.
See "Rate and Regulatory Matters" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 20, and Note 2 of the Notes to Consolidated Financial Statements, page 46, for discussion of SIGECO's general adjustments in electric rates.
SIGECO participates in research and development in which the primary goal is cost savings through the use of new technologies. This is accomplished, in part, through the efforts of the Electric Power Research Institute (EPRI). In 1996, SIGECO paid $1,004,000 to EPRI to help fund research and development programs such as advanced clean coal burning technology.
SIGECO is participating with 14 other electric utility companies through Ohio Valley Electric Corporation (OVEC) in arrangements with the United States Department of Energy (DOE), to supply the power requirements of the DOE plant near Portsmouth, Ohio. The sponsoring companies are entitled to receive from OVEC, and are obligated to pay for, any available power in excess of the DOE contract demand. The proceeds from the sale of power by OVEC are designed to be sufficient to meet all of its costs and to provide for a return on its common stock. During 1996, SIGECO's participation in the OVEC arrangements was 1.5%.
SIGECO participates with 32 other utilities and other affiliated groups located in eight states comprising the east central area of the United States, in the East Central Area Reliability group, the purpose of which is to strengthen the area's electric power supply reliability.
SIGECO - GAS BUSINESS
SIGECO supplies natural gas service to 106,237 customers, including 96,741 residential, 9,274 commercial and 222 industrial customers, through 2,799 miles of gas transmission and distribution lines.
SIGECO owns and operates three underground gas storage fields with an estimated ready delivery from storage of 3.9 million Dth of gas. Natural gas purchased from SIGECO's suppliers is injected into these storage fields during periods of light demand which are typically periods of lower prices. The injected gas is then available to supplement the contracted volumes during periods of peak requirements. It is estimated that approximately 119,000 Dth of gas per day can be withdrawn from the three storage fields during peak demand periods on the system.
The gas procurement practices of SIGECO and several of its major customers have been altered significantly during the past ten years as a result of changes in the natural gas industry. In 1985 and prior years, SIGECO purchased nearly its entire gas requirements from TGTC compared to 1996 when a total of 31 suppliers sold gas to SIGECO. In total, SIGECO purchased 19,375,378 Dth in 1996. In November 1993, TGTC restructured its services so that its gas supplies are sold separately from its interstate transportation services, and SIGECO assumed full responsibility for the purchase of all its natural gas supplies. (See subsequent reference in this section to the restructuring of interstate pipelines.) During 1996, twenty-seven of SIGECO's major gas customers took advantage utilized SIGECO's gas transportation program to procure a portion of their gas supply needs from suppliers other than SIGECO. A total of 11,801,376 Dth, 38% of total gas throughput, was transported for these major customers in 1996 compared to 12,083,838 Dth transported in 1995. SIGECO receives fees for the use of its facilities in transporting such gas.
See "Rate and Regulatory Matters" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 20, for discussion of SIGECO's general adjustment in gas rates, and refer to Note 2 of the Notes to Consolidated Financial Statements, page 46, for discussion of FERC Order No. 636, which required interstate pipelines to restructure their services so that gas supplies are sold separately from interstate transportation services.
The all-time record send out occurred during the 1993- 1994 winter season on January 18, 1994, when 247,449 Dth of gas were delivered to SIGECO's customers. Of this amount, 97,946 Dth was purchased, 106,558 Dth was taken out of SIGECO's three underground storage fields, and 42,945 Dth was transported to customers under transportation agreements. The 1995-1996 winter season peak day send out was 230,505 Dth on February 2, 1996.
The average cost per Dth of gas purchased by SIGECO during the past five calendar years was as follows: 1992, $2.77; 1993, $2.85; 1994, $2.54, 1995, $2.48; and 1996, $3.47.
The State of Indiana has established procedures which result in SIGECO passing on to its customers the changes in the cost of gas sold unless certain criteria contained in the regulations are not met. Effective April 26, 1995, the principal restriction to recovery of gas cost increases is that such recovery is not allowed to the extent that total operating income for the 60-month period including the twelve-month period provided in the gas cost adjustment filing exceeds the total operating income authorized by the IURC during the same 60-month period. Prior to April 26, 1995, the operating income test period was the twelve-month period provided in the gas cost adjustment filing. During 1994-1996, neither restriction affected SIGECO. Additionally, these procedures provide for scheduled quarterly filings and IURC hearings to establish the amount of price adjustments for a designated future quarter. The procedures also provide for inclusion in a later quarter of any variances between estimated and actual costs of gas sold in a given quarter. This reconciliation process with regard to changes in the cost of gas sold closely matches revenues to expenses. SIGECO's rate structure does not include a weather normalization-type clause whereby a utility would be authorized to recover the gross margin on sales established in its last general rate case, regardless of actual weather patterns. Natural gas research is supported by SIGECO through the Gas Research Institute in cooperation with the American Gas Association. Since passage of the Natural Gas Act of 1978, a major effort has gone into promoting gas exploration by both conventional and unconventional sources. Efforts continue through various projects to extract gas from tight gas sands, shale and coal. Research is also directed toward the areas of conservation, safety and the environment.
On December 23, 1993, SIGECO entered into a definitive agreement to acquire Lincoln Natural Gas Company, Inc. (LNG), a small gas distribution company serving approximately 1,400 customers contiguous to the eastern boundary of SIGECO's gas service territory. On June 30, 1994, SIGECO completed its acquisition of LNG after receiving the necessary regulatory and shareholder approvals, and in July 1996, merged LNG into SIGECO. The applicable financial data in this filing has been restated to reflect this acquisition.
SIGCORP
NONREGULATED SUBSIDIARIES - GENERAL
In addition to its wholly-owned utility subsidiary, SIGECO, SIGCORP has eight wholly-owned nonutility subsidiaries, of which six were active by December 1996. Southern Indiana Properties, Inc., formed in 1986, invests principally in partnerships (primarily real estate), leveraged leases and marketable securities. Energy Systems Group, Inc., incorporated in April 1994, provides equipment and related design services to industrial and commercial customers. Southern Indiana Minerals, Inc., incorporated in May 1994, processes and markets coal combustion by-products. ComSource, Inc., incorporated in June 1995, markets telecommunications services. SIGCORP Energy Services, Inc., incorporated in October 1996, provides natural gas, pipeline management, storage service and other natural gas-related services to SIGECO and other customers. SIGCORP Capital, Inc., also incorporated in October 1996, will be the primary financing vehicle for SIGCORP's nonregulated subsidiaries. SIGCORP Fuels, Inc., incorporated in December 1996, was formed to provide coal supply procurement and related services, such as transportation of coal, to SIGECO and other customers. SIGCORP Power Marketing, Inc., also incorporated in December 1996, was formed to procure electric power supplies for SIGECO and other customers, and will market SIGECO's excess electric generation capacity.
SIGCORP and SIGECO
PERSONNEL
The holding company, SIGCORP, had no employees as of December 31, 1996.
SIGECO's network of gas and electric operations directly involves 785 employees with an additional 166 employed at Alcoa's Warrick Power Plant. Alcoa reimburses SIGECO for the entire cost of the payroll and associated benefits at the Warrick Plant, with the exception of one- half of the payroll costs and benefits allocated to Warrick Unit 4, which is jointly owned by SIGECO and Alcoa. The total payroll and benefits for SIGECO employees in 1996 (including all Warrick Plant employees) were $53.4 million. In 1995, total payroll and benefits were $50.7 million.
On July 1, 1994, SIGECO signed a new four-year contract with Local 702 of the International Brotherhood of Electrical Workers. The contract provides for annual wage increases of 3.5%, 3.5%, 3.75% and 4.0%. Improvements in productivity, work practices and the pension plan are also included, along with initiatives to increase labor/management cooperation. Additionally, SIGECO's Hoosier Division signed a five-year labor contract with Local 135 of the Teamsters, Chauffeurs, Warehousemen and Helpers. The contract provides for annual wage increases of 3.5%, 3.5%, 3.75%, 4.0% and 4.0%. Also included are improvements in health care coverage costs and pension benefits.
As of December 31, 1996, Southern Indiana Properties, Inc. had 2 employees; Energy Systems Group, Inc. had 19 employees; Southern Indiana Minerals, Inc. had 9 employees; ComSource, Inc. had 13 employees; and SIGCORP Energy Services, Inc. had 3 employees. SIGCORP Capital, Inc., SIGCORP Power, Inc. and SIGCORP Fuels, Inc. had no employees as of December 31, 1996. There were no labor organizations representing employees of the nonregulated entities.
CONSTRUCTION PROGRAM AND FINANCING
SIGCORP's demand for capital is primarily related to SIGECO's construction of utility plant and equipment necessary to meet customers' electric and gas energy needs, as well as environmental compliance requirements. See "Liquidity and Capital Resources" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 22, for discussion of construction expenditures and financing during 1996.
For 1997, SIGECO's construction expenditures are presently estimated to be $55.6 million, which includes $1.8 million for demand side management (DSM) programs. Expenditures in the power production area are expected to total $11.2 million. The balance of the 1997 construction program consists of $21.5 million for additions and improvements to other electric system facilities, $10.5 million for additions and improvements to the gas system, and $10.6 million for several strategic information systems and for common utility plant buildings and equipment.
In keeping with SIGECO's objective to bring new facilities on line as needed, the construction program and amount of scheduled expenditures are reviewed periodically to factor in load growth projections, system planning requirements, environmental compliance and other considerations. As a result of this program of periodic review, construction expenditures may change in the future from the program as presented herein.
Currently it is estimated that SIGECO's construction expenditures will total about $260 million, including allowance for funds used during construction, for the years 1997-2001 as follows: 1997 - $55 million; 1998 - $66 million; 1999 - $46 million; 2000 - $44 million and 2001 - $49 million. This construction program reflects approximately $25 million for the design and implementation of several comprehensive information systems initiated in 1996 and $9 million for DSM programs. While SIGCORP expects the majority of SIGECO's construction requirements to be provided by internally generated funds, external financing requirements of $60-70 million are anticipated and will be used primarily to redeem an estimated $57 million of the total $69.8 million of SIGCORP long-term debt redemptions anticipated during the five year period.
REGULATION
Because of its ownership of SIGECO, SIGCORP is a "Holding Company" as defined by the Public Utility Holding Company Act of 1935 (PUHCA). Furthermore, SIGECO is also a "Holding Company" as defined by PUHCA due to SIGECO's ownership of 33% of Community Natural Gas Company. Both SIGCORP and SIGECO are exempt from regulation under the PUHCA except for the provisions of Section 9(A)(2), which pertain to acquisitions of other utilities.
Operating as a public utility under the laws of Indiana, SIGECO is subject to regulation by the Indiana Utility Regulatory Commission as to its rates, services, accounts, depreciation, issuance of securities, acquisitions and sale of utility properties or securities, and in other respects as provided by the laws of Indiana. See subsequent discussion under "Competition" regarding the restructuring of the electric utility industry and possible deregulation of certain segments or functions of electric utility service.
In addition, SIGECO is subject to regulation by the Federal Energy Regulatory Commission with respect to the sale and transmission of electric energy in interstate commerce, its rates for sales for resale, interconnection agreements with other utilities, the classification of its accounts and the acquisition and sale of utility property in certain circumstances as provided by the Federal Power Act.
See "SIGECO-Electric Business", page 5 and "SIGECO-Gas Business", page 8 for further discussion regarding regulatory matters.
SIGECO is subject to regulations issued pursuant to federal and state laws, pertaining to air and water pollution control. The economic impact of compliance with these laws and regulations is substantial, as discussed in detail under "Environmental Matters." SIGECO is also subject to multiple regulations issued by both federal and state commissions under the Federal Public Utility Regulatory Policies Act of 1978.
COMPETITION
As part of its efforts to develop a national energy strategy, Congress amended PUHCA and the Federal Power Act by enacting the National Energy Policy Act of 1992 (NEPA), which will affect the traditional structure of the electric utility industry. As a result of changes brought about by NEPA, SIGECO may be required to compete (or have the opportunity to compete) with other utilities and wholesale generators for sales of electricity to existing wholesale customers of SIGECO and other potential wholesale customers. SIGECO currently competes with other utilities in connection with intersystem bulk power sales. SIGECO does not presently compete for retail electric or gas customers with the other utilities within its assigned service areas. However, various federal and state legislators, including members of the Indiana General Assembly, have introduced proposed legislation addressing retail wheeling and other related issues. Under the proposed legislation, the electric generation function (and the marketing function under some proposals) would be subject to competition and deregulated, while other functions such as transmitting and distributing power, would continue to be regulated. See "National Energy Policy Act of 1992" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 20, for discussion of the major changes effected by NEPA and FERC Orders 888 and 889, issued during 1996. The new Orders mandate the filing of open access transmission tariffs and stipulate that the tariffs and other transmission service information be made available to all potential customers through an Open Access Same-time Information System, among other requirements.
Some of SIGECO's gas customers have, or in the future could acquire, access to energy sources other than those available through SIGECO. (See "SIGECO-Gas Business", page 8, for discussion of gas transportation.) Although federal statute allows for bypass of a local distribution company, Indiana law disallows bypass in most cases and SIGECO would likely litigate such an attempt in the Indiana courts. There is also increasing interest in research on the development of sources of energy other than those in general use. Such competition from other energy sources has not been a material factor to SIGECO in the past. SIGECO is unable, however, to predict the extent of competition in the future or its potential effect on SIGECO's operations.
ENVIRONMENTAL MATTERS
Testing of five of the six sites utilized for the manufacture of gas by predecessors of SIGECO was substantially completed in 1995. The sixth, and last, site is currently being investigated. Under current regulations, no remedial action is necessary or required unless the soil is disturbed. If remediation efforts are required in the future, SIGECO estimates the related costs would not exceed $250,000 on a current basis. At the present time, SIGECO does not anticipate that remediation efforts will be required at any of these sites and therefore has not provided for such costs. If, however, significant remedial action is required on the sixth, or any other sites, SIGECO will seek recovery of all related costs in excess of amounts recovered from other potentially responsible parties or insurance carriers through rates. SIGECO has not been named a potentially responsible party by the Environmental Protection Agency (EPA) for these, or any other, sites.
SIGECO is subject to federal, state and local regulations with respect to environmental matters, principally air, solid waste and water quality. Pursuant to environmental regulations, SIGECO is required to obtain operating permits for the electric generating plants which it owns or operates and construction permits for any new plants which it might propose to build. Regulations concerning air quality establish standards with respect to both ambient air quality and emissions from SIGECO's facilities, including particulate matter, sulfur dioxide and nitrogen oxides. Regulations
concerning water quality establish standards relating to intake and discharge of water from SIGECO's facilities, including water used for cooling purposes in electric generating facilities. Because of the scope and complexity of these regulations, SIGECO is unable to predict the ultimate effect of such regulations on its future operations, nor is it possible to predict what other regulations may be adopted in the future. SIGECO intends to comply with all applicable valid governmental regulations, but will contest any regulation it deems to be unreasonable or impossible to comply with or which is otherwise invalid.
The implementation of federal and state regulations designed to protect the environment, including those hereinafter referred to, involves or may involve review, certification or issuance of permits by federal and state agencies. Compliance with such regulations may limit or prevent certain operations or substantially increase the cost of operation of existing and future generating installations, as well as seriously delay or increase the cost of future construction. Such compliance may also require substantial investments above those amounts stated under "Construction Program and Financing", page 10.
All existing SIGECO electric generation facilities have operating permits from the Indiana Air Board or other agencies having jurisdiction. In order to secure approval for these permits, SIGECO has installed electrostatic precipitators on all coal-fired units and is operating flue gas desulfurization (FGD) units to remove sulfur dioxide from the flue gas at its A. B. Brown Units 1 and 2 generating facilities. The FGD units at the Brown Station remove most of the sulfur dioxide from the flue gas emissions by way of a scrubbing process, thereby allowing SIGECO to burn high sulfur southern Indiana coal at the station.
In October 1990, the U.S. Congress adopted major revisions to the Federal Clean Air Act. The revisions require reduction in emissions of sulfur dioxide (SO2) and nitrogen oxide (NOX) from coal-burning electric generating facilities, including those owned and operated by SIGECO. Two of SIGECO's principal coal-fired facilities (A. B. Brown Units 1 and 2, totaling 500 megawatts of capacity) were equipped with sulfur dioxide removal equipment (scrubbers) and were not severely affected by the new legislation. However, 523 megawatts of SIGECO's coal-fired generating capacity were significantly impacted by the lower emission requirements. SIGECO was required to reduce total emissions from Culley Unit 3 (250 megawatts), Warrick Unit 4 (135 megawatts) and Culley Unit 2 (92 megawatts) by approximately 50% to 2.5 lb/MMBTU by January 1995 (Phase I) and to 1.2 lb/MMBTU by January 2000 (Phase II). SIGECO met all of the Phase I emission requirements and some of the Phase II requirements by January 1995 with the implementation of its Clean Air Act Compliance Plan which includes equipping Culley Units 2 and 3 with a sulfur dioxide scrubber, among other provisions. Unit 1 at Culley Station (46 megawatts) is also subject to the 1.2 lb/MMBTU restriction by January 2000. Current regulatory policy allows for the recovery through rates of all authorized and approved pollution control expenditures. Refer to "Clean Air Act" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 21, for further discussion of SIGECO's Clean Air Act Compliance Plan, and the associated costs. SIGECO filed Title V (of the 1990 Amendments to the Federal Clean Air Act) permit applications for all of its applicable generation facilities during the fourth quarter of 1996. The applications have been approved for completeness and are being processed by the Indiana Air Board. Warrick Unit 4 (50% owned by SIGECO) is covered by Title V permit applications filed by Alcoa Generating Corporation, majority owner of the Warrick Generating Station.
With the addition of the scrubber at the Culley generating station, SIGECO is exceeding the minimum compliance requirements of Phase I and intends, at this time, to utilize resulting "overcompliance allowances" and fuel blending (with low sulfur coal) strategies to meet the remaining Phase II requirements effective January 2000. No material capital expenditures are anticipated to meet Phase II requirements, and thus, none are reflected in the projected construction requirements for the years 1997-2001 discussed in "Liquidity and Capital Resources" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 22.
In October 1996, SIGCORP received a notice of violation (NOV) from the federal EPA for alleged violations of Indiana air pollution regulations regarding particulate matter emissions in October 1995 by the Unit 1 boiler of SIGECO's Culley Station. The notice is a preliminary finding of violation and is being discussed with the EPA.
In December 1996 and January 1997, the federal EPA issued proposed regulations regarding new national ambient air quality standards for regional ozone and particulate matter concentration levels, which could reduce SIGECO's allowed NOx and particulate matter emissions. SIGECO is currently evaluating the proposed regulations and the potential impact on SIGECO if ultimately adopted.
In connection with the use of sulfur dioxide removal equipment at the A. B. Brown Generating Station, SIGECO operates a solid waste landfill for the disposal of approximately 200,000 tons of residue per year from the scrubbing process. Application for renewal of the landfill operating permit was filed with the Indiana Department of Environmental Management (IDEM) in August 1996. The existing permit will remain in effect until action is taken by IDEM on the renewal application. SIGECO also has a solid waste landfill available for the disposal of the gypsum by- product being produced by the new sulfur dioxide scrubber at the Culley Generating Station. SIGECO was granted a five- year operating permit for the landfill in June 1995, but anticipates using this landfill only when the gypsum by- product does not meet contract specifications. Refer to "Clean Air Act" in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, page 21 of this report, for discussion of the sale of the gypsum by-product to a wallboard manufacturer.
Under the Federal Water Pollution Control Act of 1972 and Indiana law and regulations, SIGECO is required to obtain permits to discharge effluents from its existing generating stations into the navigable waterways of the United States. The State of Indiana has received authorization from the EPA to administer the Federal discharge permits program in Indiana. Variances from effluent limitations may be granted by permit on a plant-by- plant basis where the utility can establish the limitations are not necessary to assure the protection of aquatic life and wildlife in and on the body of water into which the discharge is to be made. SIGECO has been granted National Pollution Discharge Elimination System (NPDES) permits covering miscellaneous waste water and thermal discharges for all its generating facilities to which the NPDES is applicable, namely the Culley Station, A. B. Brown Station, Broadway Station (gas turbines) and Warrick Unit 4. Such discharge permits are limited in time and must be renewed at five-year intervals. During 1994, SIGECO submitted renewal applications for these permits, which are currently pending, as they are for most industries. The existing permits will remain in effect until action is taken by IDEM on the renewal applications. SIGECO anticipates renewal of the permits by IDEM. At present, there are no known enforcement proceedings concerning water quality pending or threatened against SIGECO.
Item 2.

Item 2. PROPERTIES
SIGCORP and SIGECO
SIGCORP has no significant properties other than common stock of affiliates.
SIGECO's installed generating capacity as of December 31, 1996 was rated at 1,236,000 Kw. SIGECO's coal-fired generating facilities are: the Brown Station with 500,000 Kw of capacity, located in Posey County about eight miles east of Mt. Vernon, Indiana; the Culley Station with 386,000 Kw of capacity, and Warrick Unit 4 with 135,000 Kw of capacity. Both the Culley and Warrick Stations are located in Warrick County near Yankeetown, Indiana. SIGECO's gas- fired turbine peaking units are: the 80,000 Kw Brown Gas Turbine located at the Brown Station; two Broadway Gas Turbines located in Evansville, Vanderburgh County, Indiana, with a combined capacity of 115,000 Kw; and two Northeast Gas Turbines located northeast of Evansville in Vanderburgh County, Indiana with a combined capacity of 20,000 Kw. The Brown and Broadway turbines are also equipped to burn oil. Total capacity of SIGECO's five gas turbines
is 215,000 Kw and are generally used only for reserve, peaking or emergency purposes due to the higher per unit cost of generation.
SIGECO's transmission system consists of 804 circuit miles of 138,000 and 69,000 volt lines. The transmission system also includes 31 substations with an installed capacity of 3,866,590 kilovolt amperes (Kva). The electric distribution system includes 3,178 pole miles of lower voltage overhead lines and 199 trench miles of conduit containing 1,115 miles of underground distribution cable. The distribution system also includes 85 distribution substations with an installed capacity of 1,587,734 Kva and 46,501 distribution transformers with an installed capacity of 1,943,668 Kva.
SIGECO owns and operates three underground gas storage fields with an estimated ready delivery from storage capability of 3.9 million Dth of gas. The Oliver Field, in service since 1954, is located in Posey County, Indiana, about 13 miles west of Evansville. The Midway Field is located in Spencer County, Indiana, about 20 miles east of Evansville near Richland, Indiana, and was placed in service in December 1966. The third field is the Monroe City Field, located in Knox County, about 10 miles east of Vincennes, Indiana. The field was placed in service in 1958.
SIGECO's gas transmission system includes 341 miles of transmission mains, and the gas distribution system includes 2,458 miles of distribution mains.
SIGECO's properties are subject to the lien of the First Mortgage Indenture dated as of April 1, 1932 between SIGECO and Bankers Trust Company, New York, as Trustee, as supplemented by various supplemental indentures, all of which are exhibits to this report and collectively referred to as the "Mortgage".
Subsidiaries other than SIGECO have no significant properties other than investments in real estate partnerships, leveraged leases and marketable securities.
Item 3.

Item 3. LEGAL PROCEEDINGS
SIGCORP and SIGECO
There are no pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant is a party.
No material legal proceedings were terminated during the fourth quarter of 1996.
Item 4.

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
SIGCORP and SIGECO
None PART II
Item 5.

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
SIGCORP and SIGECO
Effective January 1, 1996, all shares of common stock of SIGECO were exchanged for an equal number of shares of common stock of SIGCORP. As of February 21, 1997, SIGCORP had 8,377 holders of record of common stock. The principal market on which SIGCORP's common stock is traded is the New York Stock Exchange, Inc. where the common stock is listed. The high and low sales prices for SIGCORP's stock as reported in the consolidated transaction reporting system for each quarterly period during the two most recent fiscal years were:
Dividends declared and paid per share of SIGCORP common stock during the past two years were:
The quarterly dividend on common stock was increased to 44-1/4 cents per share in January 1997, payable March 20, 1997.
DIVIDEND RESTRICTIONS
The following restrictions pertain to SIGECO but, to the extent that the dividends of SIGCORP depend on SIGECO earnings, may have an effect on SIGCORP.
The payment of cash dividends on SIGECO's common stock to SIGCORP is, in effect, restricted by the Mortgage to accumulated surplus, available for distribution to the common stock, earned subsequent to December 31, 1947, subject to reduction if amounts deducted from earnings for current repairs and maintenance and provisions for renewals, replacements and depreciation of all the property of SIGECO are less than amounts specified in the Mortgage. (See Section 1.02 of the Supplemental Indenture dated as of July 1, 1948, as supplemented.) No amount was restricted against cash dividends on common stock as of December 31, 1996 under this restriction.
The payment of cash dividends on common stock is, in effect, restricted by SIGECO's Amended Articles of Incorporation to accumulated surplus, available for distribution to the common stock, earned subsequent to December 31, 1935. The Amended Articles of Incorporation require that, immediately after such dividends, there shall remain to the credit of earned surplus an amount at least equal to two times the annual dividend requirements on all then outstanding Preferred Stock, No Par Value. (See Art. VI, Terms of Capital Stock, General Provisions (B)). The amount restricted against cash dividends on common stock at December 31, 1996 under this restriction was $2,194,121, leaving $211,493,949 unrestricted for the payment of dividends. In addition, the Amended Articles of Incorporation provide that surplus otherwise available for the payment of dividends on common stock shall be restricted to the extent that such surplus is included in a calculation required to permit SIGECO to issue, sell or dispose of preferred stock or other stock senior to the common stock (Art. VI, Terms of Capital Stock, General Provisions (E)).
An order of the Securities and Exchange Commission dated October 12, 1944 under the Public Utility Holding Company Act of 1935 in effect restricts the payment of cash dividends on common stock to 75% of net income available for distribution to the common stock, earned subsequent to December 31, 1943, if the percentage of common stock equity to total capitalization and surplus, as defined, is less than 25%. At December 31, 1996, such ratio amounted to approximately 49%.
Item 6.

Item 6. SELECTED FINANCIAL DATA
SIGCORP and SIGECO
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
References to "Notes" pertain to the Notes to Consolidated Financial Statements.
SIGCORP and SIGECO
SIGCORP, Inc. (SIGCORP) is an investor-owned holding company with nine wholly-owned subsidiaries. Southern Indiana Gas and Electric Company (SIGECO), a regulated gas and electric utility, accounts for over 90% of SIGCORP's net income. Because of the significance of SIGECO, the operating results of all other subsidiaries, which are nonregulated, are included in Other Income in the consolidated statements of SIGCORP. Refer to Note 1, page 40, for further discussion of the restructuring of SIGECO effective January 1, 1996.
Earnings per share for SIGCORP and SIGECO were $2.75 and $2.65, respectively, in 1996, compared to 1995 earnings before the cumulative effect of an accounting change of $2.44 and 1994 earnings of $2.53.
The 1996 earnings were favorably impacted by a number of items, including: * Increased sales to retail gas and electric customers * Higher sales margins resulting from approved increases in gas and electric rates * Lower maintenance expenditures * Record high sales to other electric utilities and power marketers
The above listed items were partially offset by: * Increased operating expenses related to the additional costs of postretirement benefits other than pensions * Higher full-year operating expenses of SIGECO's new Culley sulfur dioxide removal facility which began operation in 1995 * Fewer sales to Alcoa Generating Corporation
SALES AND REVENUES Electric revenue increases due to greater electric sales and full year implementation of the third step of a three-step increase in retail electric rates (see "Rate and Regulatory Matters") were substantially offset by the recovery of lower unit fuel costs through retail rates, resulting in a slight increase in electric revenues during 1996. In 1995, electric revenues rose 5.6% ($14.6 million) due to implementation of the second and third steps of the rate increase and to increased sales to retail and wholesale electric customers. Total sales to retail and firm contract wholesale customers were up 3.4% in 1996, following an increase of 3.2% in 1995, and were led by stronger commercial and industrial sales resulting from continued economic growth in SIGECO's service area. Excluding sales to Alcoa Generating Corporation, which declined after rising 53% in 1995, nonfirm wholesale electric sales increased 22% in 1996 following a 23% increase in 1995. These sales represented approximately 11% of total 1996 electric sales.
Stronger sales to all retail gas customers, higher unit gas costs recovered through retail rates (see "Cost of Gas Sold") and the impact of approved increases in base gas rates (see "Rate and Regulatory Matters") resulted in a 52% ($33 million) increase in 1996 gas operating revenues, following an 8.5% ($5.9 million) decline in 1995 gas revenues caused by the recovery of lower unit gas costs and fewer sales to residential customers. Gas sales were up 24% in 1996, with residential and commercial sales rising 19% and 21%, respectively. The increased sales reflected 17% colder winter temperatures in the region when measured in heating degree days, and the continued economic development in SIGECO's service area. Sales to industrial customers rose 43% during the year due to greater sales to transportation customers and the continued economic growth.
FUEL AND PURCHASED ELECTRIC ENERGY Fuel for electric generation, the most significant electric operating cost, declined 7.8% ($6.4 million) in 1996 due to 12% lower unit coal costs resulting from SIGECO's coal contract reformation efforts (see "Rate and Regulatory Matters"). Average coal costs per kWh generated were $.0124, $.0141 and $.0149 for 1996, 1995 and 1994, respectively. SIGECO continues to pursue further reductions in coal prices as a key component of its strategy to remain a low-cost provider of electricity and anticipates that 1997 unit coal costs will decline further. The 1995 fuel for electric generation expense was 2.6% lower than 1994 costs due to the lower unit coal costs.
Due to the reduced requirements of Alcoa Generating Corporation, SIGECO decreased its purchases of electricity from other utilities by 15% in 1996. Conversely, purchases of electric energy in 1995 were 69% greater than in 1994.
COST OF GAS SOLD The generally downward trend of natural gas market prices experienced over the past several years was drastically reversed in 1996 when the combination of greater demand for gas caused by colder winter temperatures nationwide and fewer available natural gas supplies caused unit gas costs to be 37% higher than those incurred in 1995. The higher unit costs combined with the increase in sales resulted in a 64% ($25.8 million) increase in cost of gas sold in 1996, the major component of gas operating expenses. The higher unit costs during the current period followed declines in 1995 and 1994 of 7.7% and 7.9%, respectively. Changes in the unit costs of gas sold are passed on to customers through an Indiana Utility Regulatory Commission (IURC) approved gas cost recovery mechanism.
OTHER OPERATION AND MAINTENANCE EXPENSES Other operation expenses rose 11% ($5.5 million) during 1996 mainly due to the additional costs of postretirement benefits other than pensions applicable to retail electric and gas operations. Those costs total about $2.8 million on an annual basis beginning June 1995 and an additional $1.1 million on an annual basis beginning July 1996. The costs were previously deferred pending inclusion in electric and gas rates (see "Rate and Regulatory Matters"). The increased operation expenses also reflected full-year operating costs of the new sulfur dioxide scrubber placed in commercial service February 1, 1995 (see "Clean Air Act"), and higher other operating expenses. In 1995, other operation expenditures were 3.7% ($1.8 million) greater than 1994 expenses, due primarily to the additional postretirement benefit costs applicable to retail electric operations and to the operating costs of the new scrubber.
No major power generation maintenance projects were performed during 1996. As a result, power generation maintenance expenditures were lower than in 1995, when a scheduled major turbine generator maintenance overhaul was performed at SIGECO's A. B. Brown Generating Station. Additionally, on June 8, 1995, SIGECO's service area experienced a storm requiring $3.5 million to restore service to its customers. Of that amount, approximately $2 million was related to system repairs; the remainder represented capital replacements. These were the chief reasons for an 8% ($2.5 million) decrease in 1996 maintenance expenses, following a 5.9% ($1.8 million) increase in 1995 maintenance expenditures resulting from the storm repairs.
DEPRECIATION AND AMORTIZATION Depreciation and amortization expense declined slightly in 1996, the result of lower depreciation rates on electric utility plant related to SIGECO's retail electric rate adjustment. The 1996 decrease followed 4.2% ($1.6 million) higher expenses in 1995, due primarily to the depreciation of SIGECO's $103 million investment in its Clean Air Act Compliance Plan facilities (see "Clean Air Act") beginning February 1, 1995. Depreciation of gas plant increased slightly during 1996 and 1995 due to SIGECO's continued investment in facilities required by new business development and improvements to the existing gas distribution system.
While inflation has a significant impact on the replacement cost of SIGECO's facilities, only the historical cost of electric and gas plant investment is recoverable in revenues as depreciation under the ratemaking principles followed by the IURC, under whose regulatory jurisdiction SIGECO is subject. With the exception of adjustments for changes in fuel and gas costs and margin on sales lost under SIGECO's demand side management programs, SIGECO's electric and gas rates remain unchanged until a rate application is filed and a general rate order is issued by the IURC.
TAXES Federal and state income taxes were $5.9 million greater during 1996 due to the higher pretax operating income and to a $1.2 million downward adjustment to income tax reserves during 1995. Taxes other than income taxes in 1996 were comparable to 1995 costs, which were up $3.5 million from 1994. Included in 1994 was a $3.3 million adjustment to prior years' provisions for property taxes related to the favorable outcome of a property tax appeal.
OTHER INCOME AND INTEREST CHARGES Other income for SIGCORP was $2.2 million lower during 1996 due primarily to lower earnings of certain SIGCORP nonregulated subsidiaries. Although allowance for equity funds used during construction decreased $3.6 million in 1995 due to the completion of the scrubber construction, the initial sale to another utility under a five-year sales agreement of SIGECO's allotment of "bonus" sulfur dioxide emission allowances and improved results of certain SIGCORP nonregulated subsidiaries partially offset the impact on Other Income. Other income for SIGECO during 1996 was an additional $1.5 million lower due to the absence of SIGECO's nonregulated subsidiary earnings effective January 1, 1996.
Interest and other charges were relatively unchanged from 1995 when such charges were $1.8 million higher than in 1994 chiefly due to lower capitalized interest resulting from completion of the scrubber.
RATE AND REGULATORY MATTERS SIGECO complies with the provisions of Financial Accounting Standard (FAS) 71, "Accounting for the Effects of Certain Types of Regulation" that allows certain costs incurred by SIGECO that have been, or are expected to be, approved by regulatory authorities for recovery through rates, to be deferred as regulatory assets until recovered by SIGECO. Criteria that could give rise to the discontinuance of FAS 71 include (1) increasing competition that restricts SIGECO's ability to establish prices to recover specific costs, and (2) a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation. SIGECO periodically reviews these criteria to ensure the continuing application of FAS 71 is appropriate. In the event SIGECO determines that it no longer meets the criteria for following FAS 71, the accounting impact could be an extraordinary noncash charge to operations of an amount that could be material. FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", issued in March 1995 and effective January 1, 1996, imposes a stricter criterion for these regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. SIGECO adopted this new standard for 1996, which did not have a material impact on financial position or results of operations. SIGECO believes its regulatory assets are fully recoverable under SIGECO's present regulatory environment and given its competitive position in the industry (see "National Energy Policy Act of 1992" and Note 1, page 40).
In September 1995, SIGECO petitioned the IURC seeking a general increase in gas rates. On July 3, 1996, the IURC issued its order, effective July 15, granting a 7.3%, or $4.8 million, increase in annual revenues. The adjustment in rates is necessary to recover increases in operating and maintenance costs and additional investment in gas distribution facilities. The adjustment includes recovery of additional costs incurred for postretirement benefits other than pensions related to gas operations approximating $1.1 million annually (see Note 2, page 46).
In June 1995, the IURC approved the third of three retail electric rate increases related to its Clean Air Act Compliance project, representing an increase of 2.1%, or $4.5 million, in revenues (see Note 2, page 46). The final adjustment was necessary to cover financing costs related to the balance of the project construction expenditures, costs related to the operation of the scrubber, and certain nonscrubber - related operating costs such as additional costs incurred for postretirement benefits other than pensions beginning in 1993 and the recovery of demand side management program expenditures (see "Demand Side Management").
Over the past several years, SIGECO has been actively involved in intensive contract negotiations and legal actions to reduce coal costs and thereby lower electric rates. In April 1995, SIGECO reached an agreement with its remaining long-term contract coal supplier, effective July 1995, to buy out the remainder of SIGECO's contractual obligations, enabling it to acquire lower-priced spot market coal. SIGECO estimates the total savings in coal costs resulting from the buyout, net of total buyout costs, will approximate $58 million through December 31, 1998, the term of the original contract. The net savings are being passed back to SIGECO's electric customers through the fuel adjustment clause.
NATIONAL ENERGY POLICY ACT OF 1992 Key provisions of the National Energy Policy Act of 1992 (NEPA) are causing some of the most significant changes in the history of the electric industry. The primary purpose of the electric provisions is to increase competition in electric generation by enabling virtually nonregulated entities, such as exempt wholesale generators, to develop power plants, and by providing the Federal Energy Regulatory Commission (FERC) authority to require a utility to provide transmission services, including the expansion of the utility's transmission facilities necessary to provide such services, to any entity selling or purchasing electricity at wholesale. Although the FERC may not order retail wheeling (the transmission of electricity directly to an ultimate consumer), it may order wheeling of electricity generated by an exempt wholesale generator or another utility to a wholesale customer of a regulated utility.
On April 24, 1996, FERC issued Order 888 which finalized the key provisions of its Notice of Proposed Rulemaking (Mega- NOPR) on Open Access issued in March 1995. Order 888 provides for mandatory filing of open access
transmission tariffs, provides for functional unbundling of all transmission services, requires utilities to use the tariffs for their own bulk power transactions, and allows recovery of stranded costs in certain circumstances. In December 1995, SIGECO filed a Point-To-Point Transmission Service Tariff and a Network Integration Transmission Service Tariff which closely conform to the pro forma tariffs required by the Mega-NOPR and Order 888, under which SIGECO will offer firm and nonfirm point-to-point transmission service, network integration transmission service and certain ancillary services to any entity eligible for mandatory wholesale transmission service under Order 888.
Also on April 24, 1996, FERC issued Order 889 which requires each public utility that owns, controls or operates facilities used for the transmission of electric energy in interstate commerce to create or participate in an Open Access Same-time Information System for posting information about available transmission capacity, prices and other information that will enable customers to obtain open access nondiscriminatory transmission service. Order 889 requires the filing of detailed Standards of Conduct defining how a transmission provider will functionally separate its transmission and wholesale power merchant functions. SIGECO has implemented the necessary changes to comply with Order 889.
In addition to FERC Orders 888 and 889, various federal and state legislators, including members of the Indiana General Assembly, have introduced proposed legislation addressing retail wheeling, stranded cost recovery, unbundling of services and other related issues. Several state regulatory commissions have adopted new regulations addressing the above issues but most states, including Indiana, are continuing to evaluate the issues. While the electric generation function (and the marketing function under some proposals) of utilities would be subject to competition under the proposed legislation, all other functions, such as transmitting and distributing power, would continue to be regulated. Generally, under some versions of the proposed legislation, customers would be able to choose their power supplier by paying a market access charge which is designed to recover the respective utility's stranded generation costs; in other versions of the proposed legislation, all customers would be assessed a charge to repay utilities for so-called transition costs, similar to the transition costs paid as a result of gas pipeline deregulation. SIGCORP anticipates proposed legislation will not be enacted in 1997.
Although SIGECO is uncertain of the timing and/or final outcome of these developments, it is committed to pursuing, and is moving rapidly to implement, its corporate strategy of positioning itself as a low-cost energy producer and the provider of high-quality service to its retail as well as wholesale customers. SIGECO has some of the lowest per-unit administrative, operation and maintenance costs in the industry, and with the completion of its coal supply reformation strategy will also rank among the lowest cost power producers (see "Rate and Regulatory Matters" for discussion of coal contract negotiations).
SIGCORP
NEW NONREGULATED SUBSIDIARIES During the fourth quarter of 1996, four additional nonregulated subsidiaries were formed: SIGCORP Energy Services, Inc. (Energy), SIGCORP Capital, Inc. (Capital), SIGCORP Fuels, Inc. (Fuels) and SIGCORP Power Marketing, Inc. (Power). Energy was established to provide natural gas, pipeline management, storage service and other natural gas energy-related services to SIGECO and other customers, and is seeking regulatory approval to become SIGECO's gas procurement and transportation manager. Capital, a financial subsidiary, will be the primary financing vehicle for SIGCORP's nonregulated subsidiaries. Fuels was established to provide coal and related services, such as transportation of coal, to SIGECO and other customers, and will seek regulatory approval to do so. Power was formed to procure electric power supplies for SIGECO and other customers and will market SIGECO's excess electric generation capacity. Power will begin operation after FERC approval of its power marketer status.
SIGCORP and SIGECO
CLEAN AIR ACT To meet the Phase I requirements of the Clean Air Act Amendments of 1990 (effective 1995) and some of the Phase II requirements (effective 2000), SIGECO installed a single sulfur dioxide scrubber at the Culley Generating Station to serve Culley Units 2 and 3 and installed low nitrogen oxide (NOx) burners on the two units. The facilities were constructed at a total cost of $103 million and began commercial operation February 1, 1995.
By installing a scrubber, SIGECO was entitled to apply to the federal EPA for extra allowances, called "extension allowances." SIGECO will receive about 88,500 extension allowances, which it has sold to another utility. SIGECO is crediting approximately $2.5 million per year from the sale for the period 1995 through 1999 to retail customers to reduce the rate impact of its compliance plan. Additionally, SIGECO is selling gypsum produced from the scrubbing process to a major wallboard manufacturer and reducing certain operating costs with the proceeds, further mitigating the rate impact of the compliance plan.
With the addition of the scrubber, SIGECO is exceeding the minimum compliance requirements of Phase I of the Clean Air Act and has available unused allowances, called "overcompliance allowances", for retention by SIGECO to meet stricter post-2000 emission limitations.
ENVIRONMENTAL MATTERS In December 1996 and January 1997, the federal EPA issued proposed regulations regarding new national ambient air quality standards for regional ozone and particulate matter concentration levels, which could reduce SIGECO's allowed NOx and particulate matter emissions. SIGECO is currently evaluating the proposed regulations and the potential impact on SIGECO if ultimately adopted.
DEMAND SIDE MANAGEMENT Since 1991, SIGECO has invested in certain demand side management (DSM) programs as part of its integrated resource planning initiatives. The primary purpose of the DSM programs is to reduce the demand on SIGECO's generating capacity at the time of system peak requirements, thereby postponing or avoiding the addition of generating capacity. For that reason, the accounting and ratemaking treatment of DSM program expenditures generally parallel the treatment of construction of new generating facilities (see Note 1, page 40).
In November 1995, SIGECO filed the latest update of its Integrated Resource Plan (IRP) with the IURC, requesting approval to greatly reduce previously ordered future DSM programs due to the anticipated changes precipitated by the NEPA. In July 1996, the IURC approved the reduction of projected DSM program expenditures during the 1997-2012 period from a total of $138 million to $39 million (see "Liquidity and Capital Resources"). Although future DSM expenditures will be substantially reduced, the IRP projections indicate that by 2000, 60 megawatts of capacity are expected to have been postponed or eliminated due to these programs.
SIGECO will continue to monitor the benefits of its DSM programs and additional changes are possible. Although SIGECO is already recognized as one of the most competitive electric utilities in the nation, the reductions were requested by SIGECO to enable it to be even more cost competitive in the future with very low stranded investment exposure.
Although SIGECO does not currently anticipate the need for future additional base-load generation, the purchase of short-term summer peaking capacity is anticipated beginning in 1997 due to the continuing strong economic growth in SIGECO's service area.
LIQUIDITY AND CAPITAL RESOURCES In 1996, financial performance continued to be solid. Internally generated cash (net income less dividends plus charges to net income not requiring cash) fully funded SIGECO's construction and DSM program expenditures. SIGCORP's and SIGECO's ratio of earnings to fixed charges (SEC method) was 4.0:1, and embedded cost of long-term debt and preferred stock is 6.6% and 5.6%, respectively. SIGCORP's financial strength is reflected in high quality credit ratings. SIGECO's senior secured debt continues to be rated AA, or equivalent, by major credit rating agencies.
SIGCORP's demand for capital is primarily related to SIGECO's construction of utility plant and equipment necessary to meet customers' electric and gas energy needs, as well as environmental compliance requirements, and to expenditures for SIGECO's DSM programs. Construction expenditures totaled $43.9 million during 1996, and consisted of normal replacements and improvements to gas and electric facilities. Those expenditures included $3.6 million for DSM programs and $2.8 million for facilities under construction to serve the new Toyota truck manufacturing plant. The 1996 expenditures compare to $54.1 million and $84.8 million expended in 1995 and 1994, respectively, which included the construction of the new scrubber and the 1995 replacement and upgrade of the turbine on one of SIGECO's turbine generators.
Construction requirements for the years 1997-2001 are projected to total approximately $260 million, including approximately $25 million to design and implement several comprehensive information systems necessary to meet expanding customer service needs and better manage SIGECO's resources. Construction requirements also include approximately $9 million of capitalized expenditures to develop and implement DSM programs.
Other than an $8.5 million increase in SIGCORP's short-term debt, no financing activity occurred during 1996, which was comparable to 1995, when the only financing activity was an $8.4 million increase in short-term debt. At year end, SIGCORP had $38.8 million in short-term borrowings, leaving unused lines of credit and trust demand note arrangements totaling $19.2 million. SIGECO's short-term debt rose $1.9 million during 1996, and no other financing occurred. SIGECO's total long-term debt and long-term partnership obligations declined $12.9 million during 1996 due to dividending its nonregulated subsidiaries to SIGCORP January 1, 1996.
SIGECO redeemed $8.0 million of 6% first mortgage bonds during 1996 with a like amount of short-term debt. During the five-year period of 1997-2001, SIGCORP anticipates that a total of $69.8 million of debt securities, primarily those of SIGECO, will be redeemed.
SIGCORP expects the majority of the 1997-2001 construction program and debt redemption requirements to be provided by internally generated funds. External financing requirements of $60-70 million are anticipated and will be used primarily to redeem long-term debt.
SIGCORP is confident that its long-term financial objectives, which include maintaining a capital structure near 45-50% long-term debt, 3-7% preferred stock and 43-48% common equity, will continue to be met, while providing for future construction and other capital requirements.
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SOUTHERN INDIANA GAS AND ELECTRIC COMPANY:
We have audited the consolidated balance sheets and consolidated statements of capitalization of SOUTHERN INDIANA GAS AND ELECTRIC COMPANY (an Indiana corporation) as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the supplemental schedule referred to below are the responsibility of SIGECO's management. Our responsibility is to express an opinion on these financial statements and supplemental schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern Indiana Gas and Electric Company as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 3, effective January 1, 1995, the Company changed its method of accounting for unbilled revenues.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule listed under Item 8 (3) is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois January 24, 1997
SIGCORP, Inc. and Subsidiaries
Southern Indiana Gas And Electric Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
SIGCORP and SIGECO
PRINCIPLES OF CONSOLIDATION Effective January 1, 1996, a new holding company, SIGCORP, Inc. (SIGCORP), became the parent of Southern Indiana Gas and Electric Company (SIGECO), a regulated gas and electric utility which accounts for over 90% of SIGCORP's net income, and four of SIGECO's former wholly-owned subsidiaries: Energy Systems Group, Inc. (ESGI), Southern Indiana Minerals, Inc. (SIMI), Southern Indiana Properties, Inc.(SIPI) and ComSource, Inc. (ComSource). All of the shares of SIGECO's common stock were exchanged on a one-for-one basis for shares of SIGCORP, while all of SIGECO's debt securities and all of its outstanding shares of preferred stock remain securities of SIGECO and are unaffected. During the fourth quarter of 1996, four additional nonregulated subsidiaries were formed: SIGCORP Energy Services, Inc. (Energy), SIGCORP Capital, Inc. (Capital), SIGCORP Fuels, Inc. (Fuels) and SIGCORP Power Marketing, Inc. (Power).
SIGECO is a regulated gas and electric utility and engaged principally in the production, purchase, transmission, distribution and sale of electricity and the delivery of natural gas. SIGECO serves 122,195 electric customers in the city of Evansville and 74 other communities and serves 106,237 gas customers in the city of Evansville and 64 other communities.
ESGI provides equipment and related design services to industrial and commercial customers. SIMI processes and markets coal combustion by-products. SIPI invests principally in partnerships (primarily in real estate), leveraged leases and marketable securities. ComSource markets telecommunications services. Energy, incorporated in October 1996, was established to provide natural gas, pipeline management, storage service and other natural gas- related services to SIGECO and other customers. Capital, also incorporated in October 1996, will be the primary financing vehicle for SIGCORP's nonregulated subsidiaries. Fuels, incorporated in December 1996, was formed to provide coal supply procurement and related services, such as transportation of coal, to SIGECO and other customers. Power, incorporated in December 1996, was formed to procure electric power supplies for SIGECO and other customers, and will market SIGECO's excess electric generation capacity. Because SIGECO is the principal subsidiary of SIGCORP, the operating results of all nonregulated subsidiaries are included in "Other, net" in the Consolidated Statements of Income. All significant intercompany transactions are eliminated.
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
REGULATION The Indiana Utility Regulatory Commission (IURC) has jurisdiction over all investor-owned gas and electric utilities in Indiana. The Federal Energy Regulatory Commission (FERC) has jurisdiction over those investor-owned utilities that make wholesale energy sales. These agencies regulate SIGECO's utility business operations, rates, accounts, depreciation allowances, services, security issues and the sale and acquisition of properties. The financial statements of SIGECO are based on generally accepted accounting principles, which give recognition to the ratemaking and accounting practices of these agencies.
REGULATORY ASSETS SIGECO is subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Regulatory assets represent probable future revenues to SIGECO associated with certain incurred costs which will be recovered from customers through the ratemaking process. SIGECO adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ", on January 1, 1996. SFAS No. 121 requires that impairment losses for long-lived assets and identifiable intangibles to be held and used, be based on the fair value of the asset. Long-lived assets and certain identifiable intangibles to be disposed of should be reported at the lower of carrying amount or fair value less cost to sell. It also requires that regulatory assets which are no longer probable of recovery through future
revenues, at the balance sheet date, be charged to earnings. Adoption of the new standard did not have a material impact on financial position or results of operation. The following regulatory assets are reflected in the Consolidated Balance Sheets:
Refer to the individual footnotes referenced above for discussion of specific regulatory assets. See Income Taxes for regulatory assets and liabilities related to income taxes.
As of December 31, 1996, $33,800,000 of SIGECO's total regulatory assets are being reflected in rates charged to customers over periods ranging from 5 to 28 years. SIGECO intends to request recovery of its remaining regulatory assets in a future general rate case filing.
If all or a separable portion of SIGECO's operation becomes no longer subject to the provisions of SFAS No. 71, a write off of related regulatory assets would be required, unless some form of transition cost recovery continues through rates established and collected for SIGECO's remaining regulated operations. In addition, SIGECO would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets.
CONCENTRATION OF CREDIT RISK SIGECO's customer receivables from gas and electric sales and gas transportation services are primarily derived from a broadly diversified base of residential, commercial and industrial customers located in a southwestern region of Indiana. SIGECO continually reviews customers' creditworthiness and requests deposits or refunds deposits based on that review. See Note 4 for a discussion of receivables related to its leveraged lease investments.
UTILITY PLANT Utility plant is stated at the historical original cost of construction. The cost of repairs and minor renewals is charged to maintenance expense as incurred. Property unit replacements are capitalized and the depreciation reserve is charged with the cost, less net salvage, of units retired.
DEPRECIATION Depreciation of utility plant is provided using the straight-line method over the estimated service lives of the depreciable plant. Provisions for depreciation, expressed as an annual percentage of the cost of average depreciable plant in service, were as follows:
INCOME TAXES SIGCORP utilizes the liability method of accounting for income taxes, providing deferred taxes on temporary differences. Investment tax credits have been deferred and are amortized through credits to income over the lives of the related property.
The components of the net deferred income tax liability are as follows:
Of the $14,277,000 increase in SIGCORP's net deferred income tax liability from December 31, 1995 to December 31, 1996, $12,771,000 is due to current year deferred federal and state income tax expense and the remaining $1,506,000 increase is primarily a result of the change in the net regulatory assets and liabilities. The $16,420,000 decrease in SIGECO's net deferred income tax liability from December 31, 1995 to December 31, 1996 is primarily the result of dividending SIGECO's nonregulated subsidiaries to SIGCORP. See the following "Cash Flow Information" for further discussion.
The components of current and deferred income tax expense are as follows:
A reconciliation of the statutory tax rates to the effective income tax rate is as follows:
PENSION BENEFITS SIGECO has trusteed, noncontributory defined benefit plans which cover eligible full-time regular employees. The plans provide retirement benefits based on years of service and the employee's highest 60 consecutive months' compensation during the last 120 months of employment. The funding policy of SIGECO is to contribute amounts to the plans equal to at least the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) but not in excess of the maximum deductible for federal income tax purposes. The plans' assets as of December 31, 1996 consist of investments in interest-bearing obligations and common stocks of 47% and 53%, respectively.
The components of net pension cost related to these plans are as follows:
The funded status of the trusteed retirement plans is as follows:
The projected benefit obligation at December 31, 1996 and 1995 was determined using an assumed discount rate of 7%. For both periods, the long-term rate of compensation increases was assumed to be 5%, and the long-term rate of return on plan assets was assumed to be 8%. The transitional asset is being amortized over approximately 15, 18 and 14 years for the Salaried, Hourly and Hoosier plans, respectively.
In addition to the trusteed pension plans discussed above, SIGECO provides supplemental pension benefits to certain current and former officers under nonqualified and nonfunded plans. Annual service cost related to these benefits is approximately $240,000.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS SIGECO provides certain postretirement health care and life insurance benefits for retired employees and their dependents through fully insured plans. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires the expected cost of these benefits
be recognized during the employees' years of service. As authorized by the IURC, SIGECO deferred as a regulatory asset the additional SFAS No. 106 costs accrued over the costs of benefits actually paid after date of adoption, but prior to inclusion in rates. In June 1995, the IURC authorized SIGECO to include in electric rates SFAS No. 106 cost and to recover the amounts previously deferred over a 60-month period beginning June 1995. In July 1996, the IURC authorized SIGECO to include in gas rates SFAS No. 106 cost and to recover the amounts previously deferred over a 60- month period beginning July 1996.
The components of the net periodic other postretirement benefit cost are as follows:
The net periodic cost determined under the new standard includes the amortization of the discounted present value of the obligation at the adoption date, $29,400,000, over a 20- year period.
Reconciliation of the accumulated postretirement benefit obligation to the accrued liability for postretirement benefits is as follows:
The assumptions used to develop the accumulated postretirement benefit obligation at December 31, 1996 and 1995 included a discount rate of 7.25% and a health care cost trend rate of 9% declining to 5% in 2004. The estimated cost of these future benefits could be significantly affected by future changes in health care costs, work force demographics, interest rates or plan changes. A 1% increase in the assumed health care cost trend rate each year would increase the aggregate service and interest costs for 1996 by $560,000 and the accumulated postretirement benefit obligation by $5,000,000.
In 1995, SIGECO adopted Voluntary Employee Beneficiary Association (VEBA) Trust Agreements for the funding of postretirement health benefits for retirees and their eligible dependents and beneficiaries. Annual funding is discretionary and is based on the projected cost over time of benefits to be provided to covered persons consistent with acceptable actuarial methods. To the extent these postretirement benefits are funded, the benefits will not be shown as a liability on SIGECO's financial statements.
CASH FLOW INFORMATION For the purposes of the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows, SIGCORP considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
During 1996, 1995 and 1994, SIGCORP paid interest (net of amounts capitalized) of $20,328,000, $20,085,000 and $18,053,000, respectively, and income taxes of $12,237,000, $10,334,000 and $15,447,000, respectively. SIGCORP is involved in several partnerships which are partially financed by partnership obligations amounting to $6,839,000 and $9,625,000 at December 31, 1996 and 1995, respectively. During 1996, 1995 and 1994, SIGECO paid interest (net of amounts capitalized) of $19,591,000, $20,085,000 and $18,053,000, respectively, and income taxes of $15,746,000, $10,334,000 and $15,447,000, respectively.
The following decreases in SIGECO's assets and liabilities were caused by dividending the nonregulated subsidiaries to SIGCORP and are noncash in nature.
Deferred income taxes (29,783) Investments in Leveraged Leases (35,609) Investments in Partnerships (25,307) Partnership obligations (9,625) Other, net (3,771)
INVENTORIES SIGECO accounts for inventories under the average cost method except for gas in underground storage which is accounted for under the last-in, first-out (LIFO) method. Effective January 1, 1996, SIGECO's Hoosier Division changed from the average cost to the last-in, first-out method of valuing gas in underground storage. This change had an immaterial effect on financial statements. Inventories are as follows:
Based on the December 1996 price of gas purchased, the cost of replacing the current portion of gas in underground storage at December 31, 1996 exceeded the amount stated on a LIFO basis by approximately $23,000,000.
OPERATING REVENUES AND FUEL COSTS SIGECO accrues an estimate of revenues unbilled for electric and gas service furnished from the meter reading dates to the end of each accounting period.
All metered gas rates contain a gas cost adjustment clause which allows for adjustment in charges for changes in the cost of purchased gas. The calculation of the adjustment factor is based on the estimated cost of gas in a future quarter, and provides that any under- or overrecovery caused by variances between estimated and actual cost in a given quarter, as well as refunds from its pipeline suppliers, will be included in adjustment factors of four future quarters beginning with the second succeeding quarter's adjustment factor.
All metered electric rates contain a fuel adjustment clause which allows for adjustment in charges for electric energy to reflect changes in the cost of fuel and the net energy cost of purchased power. The calculation of the adjustment factor is based on the estimated cost of fuel and the net energy cost of purchased power in a future quarter, and provides that any under- or overrecovery caused by variances between estimated and actual cost in a given quarter will be included in the second succeeding quarter's adjustment factor.
SIGECO also collects through a quarterly rate adjustment mechanism, the margin on electric sales lost due to the implementation of demand side management programs.
SIGECO records monthly any adjustment clause under- or overrecovery as an asset or liability, respectively, until such time as it is billed or refunded to its customers. The IURC reviews for approval the adjustment clause factors on a quarterly basis.
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.
Note 2 Rate and Regulatory Matters
SIGCORP and SIGECO
GAS MATTERS On September 7, 1995, SIGECO petitioned the IURC seeking a general increase in gas rates. The requested adjustment in rates, over those granted in 1993, is necessary to recover increases in operating and maintenance costs and additional investment in gas distribution facilities. The adjustment included recovery of additional costs incurred for postretirement benefits other than pensions related to gas operations approximating $1.1 million annually beginning in 1993 which had been deferred pending inclusion in rates. The petition also requested the merger into SIGECO of its Lincoln Natural Gas Company subsidiary (LNG) and the consolidation of gas rates for customers of SIGECO's Evansville and Hoosier divisions and of LNG into one set of rates. On July 3, 1996, the IURC issued its order, effective July 15, 1996, granting a 7.3%, or $4.8 million, increase in annual revenues.
In 1992, FERC issued Order No. 636 which required interstate pipelines to restructure their services by unbundling pipeline sales service so that gas supplies are sold separately from interstate transportation services. FERC authorized the pipelines to seek recovery of certain transition costs associated with the restructuring from their customers. SIGECO's total transition costs will approximate $4.2 million. Through 1995, SIGECO was billed $3 million of these transition costs by its former major pipeline supplier, Texas Gas Transmission Corporation, $1.8 million of which it deferred pending authorization by the IURC of recovery of such costs. During 1996, SIGECO was billed an additional $.6 million of these costs. On November 2, 1995, the IURC approved SIGECO's request for recovery of transition costs through the gas cost adjustment and, during 1996, SIGECO recovered all previously deferred costs.
ELECTRIC MATTERS On June 21, 1995, the IURC approved the third of three planned general electric rate increases related to SIGECO's Clean Air Act Compliance project (primarily the addition of a sulfur dioxide scrubber to serve Culley Units 2 and 3), which began commercial operation February 1995 . The third adjustment also covered certain nonscrubber-related operating costs such as additional costs incurred for postretirement benefits other than pensions beginning in 1993, and the recovery of demand side management program expenditures. The effective dates and impact on annual electric revenues of the three adjustments are summarized below:
Over the past several years, SIGECO has been actively involved in intensive contract negotiations and legal actions to reduce its coal costs and thereby lower its electric rates. During 1992, SIGECO was successful in negotiating a new coal supply contract with one of its major coal suppliers effective through 1995. Included in the agreement was a provision whereby the contract could be reopened by SIGECO for modification of certain coal specifications. In early 1993, SIGECO reopened the contract for such modifications. In response, the coal supplier elected to terminate the contract enabling SIGECO to buy out the remainder of its contractual obligations and acquire lower-priced spot market coal. The cost of the contract buyout totaled approximately $18.6 million. The IURC approved SIGECO's request to amortize all buyout costs to coal inventory during the period July 1, 1993 through December 31, 1995 and to recover such costs through the fuel adjustment clause beginning February 1994. SIGECO estimates the total savings in coal costs during the 1991-1995 period resulting from the renegotiation and subsequent buyout, net of the total buyout costs, approximated $59 million. The net savings were passed back to SIGECO's electric customers through the fuel adjustment clause.
On April 10, 1995, SIGECO reached an agreement with its remaining long-term contract coal supplier, effective July 16, 1995, to buy out the remainder of SIGECO's contractual obligations for $45.5 million, enabling it to
acquire lower-priced spot market coal. SIGECO had been in litigation with this coal supplier for several years. Under the terms of the original contract, SIGECO was allegedly obligated to take a minimum of 600,000 tons of coal annually. In early 1993, SIGECO informed the supplier that it would not require shipments under the contract until later in 1993. On March 26, 1993, SIGECO and the supplier agreed to resume coal shipments under the terms of a letter agreement which were effective until final resolution of the litigation. Under the letter agreement, the invoiced price per ton was substantially lower than the contract price. As approved by the IURC, SIGECO charged the full contract price to coal inventory for recovery through the fuel adjustment clause. The difference between the contract price and the invoice price, $28.9 million at July 15, 1995, was deposited in an escrow account and subsequently applied to the buyout premium. The remaining buyout costs, about $16.6 million, were amortized to coal inventory over a 14-month period ending September 1996 and will be fully recovered through the fuel adjustment clause by mid-1997. SIGECO estimates the total savings in coal costs resulting from the buyout, net of total buyout costs, will approximate $58 million through December 31, 1998, the term of the original contract. The net savings are being passed back to SIGECO's electric customers through the fuel adjustment clause. All issues in litigation were dismissed as a condition of the settlement agreement, and all other interim agreements with this coal supplier were terminated as of July 16, 1995.
Note 3 Revenues Accounting Change
SIGCORP and SIGECO
SIGECO previously recognized electric and gas revenues when customers were billed on a cycle billing basis. The utility service rendered after monthly meter reading dates through the end of a calendar month (unbilled revenues) became a part of operating revenues in the following month. To more closely match revenues with expenses, effective January 1, 1995, SIGECO changed its method of accounting to accrue the amount of revenue for sales unbilled at the end of each month. The cumulative effect of the change on prior years, net of income taxes, is included in net income for 1995. The effect of the change was to increase 1995 net income $7.9 million ($.50 per share), of which an increase of $1.6 million ($.10 per share), was reflected in operations and an increase of $6.3 million ($.40 per share), the cumulative effect of the change as of January 1, 1995, was reported as a separate component of net income.
Summarized below is the pro forma effect of the accounting change, as if the change had been effective during the periods:
Note 4 Leveraged Leases
SIGCORP
Southern Indiana Properties, Inc. is a lessor in five leveraged lease agreements under which an office building, a part of a reservoir, an interest in a paper mill, a gas turbine electric generating peaking unit and passenger railroad cars are leased to third parties. The economic lives and lease terms vary with the leases. The total equipment and facilities cost was approximately $110,800,000 and $101,200,000 at December 31, 1996 and 1995, respectively. The cost of the equipment and facilities was partially financed by nonrecourse debt provided by lenders, who have been granted an assignment of rentals due under the leases and a security interest in the leased property, which they accepted as their sole remedy in the event of default by the lessee. Such debt amounted to approximately $81,700,000 and $80,970,000 at December 31, 1996 and 1995, respectively. SIGCORP's net investment in leveraged leases at those dates was $12,185,000 and $5,862,000, respectively, as shown:
Note 5 Short-Term Financing
SIGCORP and SIGECO
SIGECO has trust demand note arrangements totaling $17,000,000 with several banks, of which $15,000,000 was utilized at December 31, 1996. Funds are also borrowed periodically from banks on a short-term basis, made available through lines of credit. SIGECO has available lines of credit totaling $22,000,000 at December 31, 1996 of which $16,000,000 was utilized at that date. SIGCORP has available lines of credit totaling $41,000,000 at December 31, 1996 of which $23,750,000 was utilized at that date.
Note 6 Long-Term Debt
SIGCORP and SIGECO
The annual sinking fund requirement of SIGECO's first mortgage bonds is 1% of the greatest amount of bonds outstanding under the Mortgage Indenture. This requirement may be satisfied by certification to the Trustee of unfunded property additions in the prescribed amount as provided in the Mortgage Indenture. SIGECO intends to meet the 1997 sinking fund requirement by this means and, accordingly, the sinking fund requirement for 1997 is excluded from current liabilities on the balance sheet. At December 31, 1996, $215,725,000 of SIGECO's utility plant remained unfunded under SIGECO's Mortgage Indenture.
Several of SIGCORP's partnership investments have been financed through obligations with such partnerships. Additionally, SIGCORP's investments in leveraged leases have been partially financed through notes payable to banks. Of the amount of first mortgage bonds, notes payable and partnership obligations outstanding at December 31, 1996, the following amounts mature in the five years subsequent to 1996:
In addition, $31,500,000 of adjustable rate pollution control series first mortgage bonds could, at the election of the bondholder, be tendered to SIGECO in May 1997. If SIGECO's agent is unable to remarket any bonds tendered at that time, SIGECO would be required to obtain additional funds for payment to bondholders. For financial statement presentation purposes those bonds subject to tender in 1997 are shown as current liabilities.
First mortgage bonds, notes payable and partnership obligations outstanding and classified as long-term are as follows:
Note 7 Capital Stock
SIGCORP and SIGECO
COMMON STOCK Each outstanding share of SIGCORP's common stock contains a right which entitles registered holders to purchase from SIGCORP one one-hundredth of a share of SIGCORP's common stock, at an initial price of $65 per share (Purchase Price) subject to adjustment. The rights will not be exercisable until a party acquires beneficial ownership of 10% of common shares or makes a tender offer for at least 10% of its common shares. The rights expire December 31, 2005. If not exercisable, the rights in whole may be redeemed by SIGCORP at a price of $.01 per right at any time prior to their expiration. If at any time after the rights become exercisable and are not redeemed and SIGCORP is involved in a merger or other business combination transaction, proper provision shall be made to entitle a holder of a right to buy common stock of the acquiring company having a value of two times such Purchase Price.
SIGECO has a common stock option plan for its key management employees. The option price for all stock options is at least 100% of the fair market value of SIGCORP common stock at the grant date. Options generally vest and become exercisable between one and three years in equal annual installments beginning one year after the grant date, and generally expire in 10 years. The expiration dates for options outstanding as of
December 31, 1996, ranged from July 13, 2004 to July 14, 2006. Stock option activity for the past two years was as follows:
SIGCORP adopted SFAS No. 123, "Accounting for Stock-Based Compensation," in 1996 by continuing to account for stock compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." If SIGCORP had recognized compensation expense for its stock-based compensation plan according to the new standard, the effect on net income and earnings per share for each of the three years in the period ended December 31, 1996 would have been insignificant.
CUMULATIVE PREFERRED STOCK OF SIGECO The amount payable in the event of involuntary liquidation of each series of the $100 par value preferred stock is $100 per share, plus accrued dividends. This nonredeemable preferred stock is callable at the option of SIGECO as follows: the 4.8% Series at $110 per share, plus accrued dividends; and the 4.75% Series at $101 per share, plus accrued dividends.
CUMULATIVE REDEEMABLE PREFERRED STOCK OF SIGECO The Series has an interest rate of 6.50% and is redeemable at $100 per share on December 1, 2002. In the event of involuntary liquidation of this series of $100 par value preferred stock, the amount payable is $100 per share, plus accrued dividends.
CUMULATIVE SPECIAL PREFERRED STOCK OF SIGECO The Cumulative Special Preferred Stock contains a provision which allows the stock to be tendered on any of its dividend payment dates. On March 8, 1995, SIGECO repurchased 913 shares of the Cumulative Special Preferred Stock at a cost of $91,300 as a result of a tender within the provision of the issuance.
Note 8 Ownership of Warrick Unit 4
SIGCORP and SIGECO
SIGECO and Alcoa Generating Corporation (AGC), a subsidiary of Aluminum Company of America, own the 270 MW Unit 4 at the Warrick Power Plant as tenants in common. SIGECO's share of the cost of this unit at December 31, 1996 is $31,571,000 with accumulated depreciation totaling $22,096,000. AGC and SIGECO also share equally in the cost of operation and output of the unit. SIGECO's share of operating costs is included in operating expenses in the Consolidated Statements of Income.
Note 9 Commitments and Contingencies
SIGCORP and SIGECO
SIGECO presently estimates that approximately $55,000,000 will be expended for construction purposes in 1997, including those amounts applicable to SIGECO's demand side management (DSM) programs. Commitments for the 1997 construction program are approximately $18,200,000 at December 31, 1996.
Note 10 Segments of Business
SIGCORP and SIGECO
SIGCORP's principal subsidiary, SIGECO, is a public utility operating company engaged in distributing electricity and natural gas. The reportable items for electric and gas departments are as follows:
Note 11 Disclosures About Fair Value of Financial Instruments
SIGCORP and SIGECO
Except for the following financial instruments, fair value of SIGCORP's and SIGECO's financial instruments is equivalent to carrying value due to their short-term nature.
At December 31, 1996 and 1995, respectively, the fair value of SIGCORP's debt relating to utility operations exceeded carrying amounts by $41,000,000 and $36,000,000. Anticipated regulatory treatment of the excess or deficiency of fair value over carrying amounts of SIGECO's long-term debt, if in fact settled at amounts approximating those above, would dictate that these amounts be used to reduce or increase SIGECO's rates over a prescribed amortization period. Accordingly, any settlement would not result in a material impact on SIGECO's financial position or results of operations.
LONG-TERM DEBT The fair value of SIGECO's long-term debt was estimated based on the current quoted market rate of utilities with a comparable debt rating. Nonutility long- term debt was valued based upon the most recent debt financing.
REDEEMABLE PREFERRED STOCK OF SIGECO The fair value of SIGECO's redeemable preferred stock was estimated based on the current quoted market rate of utilities with a comparable debt rating.
PARTNERSHIP OBLIGATIONS The fair value of SIGCORP's partnership obligations was estimated based on the current quoted market rate of comparable debt.
Item 9.

Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
(a) Identification of Directors
The information required by this item is included in SIGCORP, Inc.'s and Southern Indiana Gas and Electric Company's Joint Proxy Statement (the Joint Proxy Statement), dated March 21, 1997 definitive copies of which were filed with the Commission pursuant to Regulation 14A.
(b) Identification of Executive Officers
The information required by this item is included in Part I, Item 1. - BUSINESS on page 14, to which reference is hereby made.
Item 11.

Item 11. EXECUTIVE COMPENSATION AND TRANSACTIONS
The information required by this item is included in the Joint Proxy Statement, definitive copies of which were filed with the Commission pursuant to Regulation 14A.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Joint Proxy Statement, definitive copies of which were filed with the Commission pursuant to Regulation 14A.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Joint Proxy Statement, definitive copies of which were filed with the Commission pursuant to Regulation 14A.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2) The financial statements, including supporting schedule, are listed in the Index to Financial Statements, page 24, filed as part of this report. (a) 3) Exhibits: SIGCORP and SIGECO EX-2(a) Agreement and Plan of Exchange, of common stock between Southern Indiana Gas and Electric Company and SIGCORP, Inc., dated February 23, 1995. (Physically filed and designated as Exhibit 2(a) in Amendment No. 1 to Form S- 4 Registration Statement filed January 20, 1995, File No. 33-57381.) SIGCORP EX-3(a) Restated Articles of Incorporation of SIGCORP, Inc. (Physically filed and designated as Exhibit 3(a) in Amendment No. 1 to Form S-4 Registration Statement, filed February 23, 1995, File No. 33-57381.)
EX-3(b) By-Laws of SIGCORP, Inc. . (Physically filed and designated as Exhibit 3(b) in Amendment No. 1 to Form S- 4 Registration Statement, filed February 23, 1995, File No. 33-57381.)
EX-4(a) Rights Agreement, between SIGCORP, Inc. and Continental Stock Transfer & Trust Company, Rights Agent, dated as of December 31, 1995. (Physically filed and designated as Exhibit 4.1 in Form 8-B Registration Statement filed December 15, 1995, File No. 1-11603.) SIGECO EX-3(a) Amended Articles of Incorporation as amended March 26, 1985. (Physically filed and designated in Form 10-K, for the fiscal year 1985, File No. 1-3553, as Exhibit 3-A.) Articles of Amendment of the Amended Articles of Incorporation, dated March 24, 1987. (Physically filed and designated in Form 10-K for the fiscal year 1987, File No. 1-3553, as Exhibit 3-A.) Articles of Amendment of the Amended Articles of Incorporation, dated November 27, 1992. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 3-A).
EX-3(b) By-Laws as amended through December 18, 1990. (Physically filed in Form 10-K for the fiscal year 1990, File No. 1-3553, as Exhibit 3-B.) By-Laws as amended through September 22, 1993. (Physically filed and designated in Form 10-K for the fiscal year 1993, File No. 1-3553, as EX-3 (b).) By-Laws as amended through January 1, 1995. (Physically filed and designated in Form 10-K for the fiscal year 1995, File No. 1-3553, as EX-3(b).)
EX-4(a)* Mortgage and Deed of Trust dated as of April 1, 1932 between Southern Indiana Gas and Electric Company and Bankers Trust Company, as Trustee, and Supplemental Indentures thereto dated August 31, 1936, October 1, 1937, March 22, 1939, July 1, 1948, June 1, 1949, October 1, 1949, January 1, 1951, April 1, 1954, March 1, 1957, October 1, 1965, September 1, 1966, August 1, 1968, May 1, 1970, August 1, 1971, April 1, 1972, October 1, 1973, April 1, 1975, January 15, 1977, April 1, 1978, June 4, 1981, January 20, 1983, November 1, 1983, March 1, 1984, June 1, 1984, November 1, 1984, July 1, 1985, November 1, 1985, June 1, 1986. (Physically filed and designated in Registration No. 2-2536 as Exhibits B-1 and B-2; in Post-effective Amendment No. 1 to Registration No. 2-62032 as Exhibit (b)(4)(ii), in Registration No. 2-88923 as Exhibit 4(b)(2), in Form 8-K, File No. 1-3553, dated June 1, 1984 as Exhibit (4), File No. 1-3553, dated March 24, 1986 as Exhibit 4-A, in Form 8-K, File No. 1-3553, dated June 3, 1986 as Exhibit (4).) July 1, 1985 and November 1, 1985 (Physically filed and designated in Form 10-K, for the fiscal year 1985, File No. 1-3553, as Exhibit 4-A.) November 15, 1986 and January 15, 1987. (Physically filed and designated in Form 10-K, for the fiscal year 1986, File No. 1-3553, as Exhibit 4-A.) December 15, 1987. (Physically filed and designated in Form 10-K, for the fiscal year 1987, File No. 1-3553, as Exhibit 4-A.) December 13, 1990. (Physically filed and designated in Form 10-K, for the fiscal year 1990, File No. 1-3553, as Exhibit 4-A.) April 1, 1993. (Physically filed and designated in Form 8-K, dated April 13, 1993, File 1-3553, as Exhibit 4.) June 1, 1993 (Physically filed and designated in Form 8-K, dated June 14, 1993, File 1-3553, as Exhibit 4.) May 1, 1993. (Physically filed and designated in Form 10-K, for the fiscal year 1993, File No. 1-3553, as Exhibit 4(a).)
*Pursuant to paragraph (b)(4)(iii)(a) of Item 601 of Regulation S-K, SIGECO agrees to furnish to the Commission on request any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of SIGECO, and has therefore not filed such documents as exhibits to this Form 10-K.
EX-10.1 Agreement, dated, January 30, 1968, for Unit No. 4 at the Warrick Power Plant of Alcoa Generating Corporation ("Alcoa"), between Alcoa and Southern Indiana Gas and Electric Company. (Physically filed and designated in Registration No. 2-29653 as Exhibit 4(d)-A.)
EX-10.2 Letter of Agreement, dated June 1, 1971, and Letter Agreement, dated June 26, 1969, between Alcoa and Southern Indiana Gas and Electric Company. (Physically filed and designated in Registration No. 2-41209 as Exhibit 4(e)-2.)
EX-10.3 Letter Agreement, dated April 9, 1973, and Agreement dated April 30, 1973, between Alcoa and Southern Indiana Gas and Electric Company. (Physically filed and designated in Registration No. 2-53005 as Exhibit 4(e)-4.)
EX-10.4 Electric Power Agreement (the "Power Agreement"), dated May 28, 1971, between Alcoa and Southern Indiana Gas and Electric Company. (Physically filed and designated in Registration No. 2-41209 as Exhibit 4(e)-1.)
EX-10.5 Second Supplement, dated as of July 10, 1975, to the Power Agreement and Letter Agreement dated April 30, 1973 - First Supplement. (Physically filed and designated in Form 12-K for the fiscal year 1975, File No. 1-3553, as Exhibit 1(e).)
EX-10.6 Third Supplement, dated as of May 26, 1978, to the Power Agreement. (Physically filed and designated in Form 10-K for the fiscal year 1978 as Exhibit A-1.)
EX-10.7 Letter Agreement dated August 22, 1978 between Southern Indiana Gas and Electric Company and Alcoa, which amends Agreement for Sale in an Emergency of Electrical Power and Energy Generation by Alcoa and Southern Indiana Gas and Electric Company dated June 26, 1979. (Physically filed and designated in Form 10-K for the fiscal year 1978, File No. 1-3553, as Exhibit A-2.)
EX-10.8 Fifth Supplement, dated as of December 13, 1978, to the Power Agreement. (Physically filed and designated in Form 10-K for the fiscal year 1979, File No. 1-3553, as Exhibit A-3.)
EX-10.9 Sixth Supplement, dated as of July 1, 1979, to the Power Agreement. (Physically filed and designated in Form 10-K for the fiscal year 1979, File No. 1-3553, as Exhibit A-5.)
EX-10.10 Seventh Supplement, dated as of October 1, 1979, to the Power Agreement. (Physically filed and designated in Form 10-K for the fiscal year 1979, File No. 1-3553, as Exhibit A-6.)
EX-10.11 Eighth Supplement, dated as of June 1, 1980 to the Electric Power Agreement, dated May 28, 1971, between Alcoa and Southern Indiana Gas and Electric Company. (Physically filed and designated in Form 10-K for the fiscal year 1980, File No. 1-3553, as Exhibit (20)-1.)
EX-10.12** Agreement dated May 6, 1991 between Southern Indiana Gas and Electric Company and Ronald G. Reherman for consulting services and supplemental pension and disability benefits. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-12.)
EX-10.13** Agreement dated July 22, 1986 between Southern Indiana Gas and Electric Company and A. E. Goebel regarding continuation of employment. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-13.)
EX-10.14** Agreement dated July 25, 1986 between Southern Indiana Gas and Electric Company and Ronald G. Reherman regarding continuation of employment. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-14.)
EX-10.15** Agreement dated July 22, 1986 between Southern Indiana Gas and Electric Company and James A. Van Meter regarding continuation of employment. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-15.)
EX-10.16** Agreement dated February 22, 1989 between Southern Indiana Gas and Electric Company and J. Gordon Hurst regarding continuation of employment. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553 as Exhibit 10-A-16.)
EX-10.17** Summary description of Southern Indiana Gas and Electric Company's nonqualified Supplemental Retirement Plan (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-17.)
EX-10.18** Supplemental Post Retirement Death Benefits Plan, dated October 10, 1984. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-18.)
EX-10.19** Summary description of Southern Indiana Gas and Electric Company's Corporate Performance Incentive Plan. (Physically filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-19.)
EX-10.20** Southern Indiana Gas and Electric Company's Corporate Performance Incentive Plan as amended for the plan year beginning January 1, 1994. (Physically filed and designated in Form 10-K for the fiscal year 1993, File No. 1-3553, as Exhibit 10-A-20.)
** Filed pursuant to paragraph (b)(10)(iii)(A) of Item 601 of Regulation S-K.
EX-10.21** Southern Indiana Gas and Electric Company 1994 Stock Option Plan (Physically filed and designated in Southern Indiana Gas and Electric Company's Proxy Statement dated February 22, 1994, File No. 1-3553, as Exhibit A.)
** Filed pursuant to paragraph (b)(10)(iii)(A) of Item 601 of Regulation S-K.
SIGECO EX-12 Computation of Ratio of Earnings to Fixed Charges
SIGCORP EX-21 Subsidiaries of the Registrant
SIGCORP and SIGECO EX-24 Power of Attorney
(b) Reports on Form 8-K
No Form 8-K reports were filed by SIGCORP or SIGECO during the fourth quarter of 1996.
page> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1997 SIGCORP, Inc.
By R. G. Reherman, Chairman, President and Chief Executive Officer
BY: R. G. Reherman R. G. Reherman
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
By R. G. Reherman, Chairman, President and Chief Executive Officer
BY: R. G. Reherman R. G. Reherman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the dates indicated.
SIGECO 10-K