-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BBHHQvnsI8AUa43uItrEicUh4ofo8XwQ5+H3uCqP0G+vBGXVWVckz9Xip/6i7OQq jFB5/zsVj9ByGnxR2l8fEA== 0000790523-96-000002.txt : 19960329 0000790523-96-000002.hdr.sgml : 19960329 ACCESSION NUMBER: 0000790523-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IWC RESOURCES CORP CENTRAL INDEX KEY: 0000790523 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 351668886 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15420 FILM NUMBER: 96540108 BUSINESS ADDRESS: STREET 1: 1220 WATERWAY BLVD CITY: INDIANAPOLIS STATE: IN ZIP: 46202 BUSINESS PHONE: 3176391501 10-K 1 Document Summary: Document: 9510KEDG Author: Addressee: Operator: Creation Date: 03/27/1996 Modification Date: 03/28/1996 Identification key words: Comments: UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1995, or ( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 0-15420 IWC RESOURCES CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1668886 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1220 Waterway Boulevard, Indianapolis, Indiana 46202 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (317) 639-1501 NONE Securities registered pursuant to Section 12(b) of the Act Common Stock Title of Class Securities registered pursuant to Section 12(g) of the Act Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. (X) $163,286,857 State the aggregate market value of the voting stock held by non-affiliates of the Registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of January 31, 1996. 8,326,366 Indicate the number of shares of common stock outstanding March 1, 1996 DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents have been incorporated by reference into this annual report on Form 10-K: PARTS OF FORM 10-K INTO WHICH IDENTITY OF DOCUMENT DOCUMENT IS INCORPORATED Annual Report to Shareholders of Registrant for the Year Ended December 31, 1995 Parts I and II Definitive Proxy Statement to be filed for the 1996 Annual Meeting of Shareholders of Registrant Part III IWC RESOURCES CORPORATION INDIANAPOLIS, INDIANA ANNUAL REPORT TO SECURITIES AND EXCHANGE COMMISSION December 31, 1995 PART I Item 1. BUSINESS PRODUCTS AND SERVICES IWC Resources Corporation (Resources or, together with its subsidiaries, the Company) is a holding company which owns and operates seven subsidiaries, including two waterworks systems, which supply water for residential, commercial, and industrial uses, and for fire protection service in Indianapolis, Indiana and surrounding areas. The territory served by the two utilities covers an area of approximately 309 square miles, which includes areas in Marion, Hancock, Hamilton, Hendricks, Boone and Morgan counties in central Indiana. Resources' two waterworks systems include Indianapolis Water Company (IWC) and Harbour Water Corporation (HWC). At year's end, IWC was providing service to 232,568 customers. HWC, in the Morse Reservoir area of Hamilton County (north of Indianapolis), was serving 2,722 customers. In addition to the two water utilities, Resources has five other wholly owned subsidiaries; SM&P Utility Resources, Inc. (SM&P), Miller Pipeline Corporation (MPC), Waterway Holdings, Inc., Utility Data Corporation (UDC), and IWC Services, Inc. SM&P performs underground utility locating and marking services in Indiana and other states. MPC's primary function is the installation of underground pipelines for natural gas utilities. In addition, MPC sells products and services related to infrastructure preservation and replacement. The Company, principally through Waterway Holdings, Inc., owns real estate that it expects to sell or develop in the future. UDC provides customer relations, customer billing, and other data processing services for the Company's two water utilities and other water and sewer utilities. IWC Services provides laboratory water testing services, principally for water utilities. The Company, through IWC Services, is a majority partner in the White River Environmental Partnership (WREP) which, under a five-year contract entered into in December, 1993, operates and maintains two advanced wastewater treatment facilities for the city of Indianapolis. WREP is actively seeking new markets and opportunities for contract management service pursuant to expanded governmental privatization efforts. The Company continues to seek expansion and diversification through the acquisition of other water utilities and other related businesses. It is expected, however, that the water utilities will continue as the majority source of earnings for the Company in the forseeable future. The utility subsidiaries of the Company are subject to regulation by the Indiana Utility Regulatory Commission, which has jurisdiction over rates, standards of service, accounting procedures, issuance of securities, and related matters. Utility operations are subject to pollution control and water quality control regulations,including those issued by the Environmental Protection Agency, the Indiana Department of Environmental Management, the Indiana Water Pollution Control Board, and the Indiana Department of Natural Resources. There are competitors operating near the Company's system, which include various municipal water utilities, as well as privately owned water utilities, some of which purchase water from the Company. INDUSTRY SEGMENT FINANCIAL INFORMATION The Company's operations include two business segments: regulated water utilities and unregulated utility-related services. The water utilities segment includes the operations of the Company's two water utility subsidiaries. The utility-related services segment provides utility line locating services, installation, repairs and maintenance of underground pipelines, data processing and billing and payment processing, and other utility-related services to both unaffiliated utilities and to the Company's water utilities, and holds real estate for sale or development. The discussion of segment information, including selected financial data included on pages 36 through 37 of the 1995 Annual Report under "Segment Information", is incorporated herein by reference. -2- SECURITIES AND RATE REGULATION The utility subsidiaries of the Company are subject to regulation by the Indiana Utility Regulatory Commission (Commission) which has jurisdiction over rates, standards of service, accounting procedures, issuance of securities and related matters. The Commission consists of five Commissioners, appointed by the Governor of Indiana from a list of persons selected by a 7-member nominating committee whose members are: appointed by the Governor (3); and the majority (2) and minority (2) leaders of the Indiana House and Senate. Decisions of the Commission are appealable directly to the Indiana Court of Appeals. Securities. The issuance of securities by Resources is not subject to approval by the Commission. The issuance of securities by, and changes in the equity capital of, the Company's utility subsidiaries, including IWC, must be approved. Water Rates. Rates charged by the Company for water service are approved by the Commission. It is the Company's policy to seek rate relief when necessary to maintain its service and financial soundness. The Company is not permitted to submit petitions for general rate relief more frequently than every fifteen months. Rate Case. On May 10, 1995, the Commission approved a Settlement Agreement entered into by the UCC, four intervening customers and IWC, which provided for an annual increase in IWC's rates of $2,547,000, or approximately 4%. The parties further agreed not to seek an adjustment in IWC's basic rates and charges prior to April 1, 1997, subject to IWC's interim right to request approval of new rates to cover operating expenses connected with implementing measures which might be required in connection with new National Pollutant Discharge Elimination System permits which IWC anticipates receiving for wastewater discharges at its Fall Creek and White River Stations (NPDES permits). The parties also agreed that prior to April 1, 1997, IWC may request that the Commission approve, in a separate proceeding, the continuation of the allowance for funds used during construction (debt component only), and the deferral of depreciation, on any capital expenditures made in connection with new NPDES permits at the Fall Creek and White River Stations or IWC's anticipated new South Well Field Station until a rate base determination has been made with respect to these items in IWC's next rate case. -3- On March 22, 1995, the Commission granted IWC authority to issue, on or before December 31, 1996, and aggregate of $30,000,000 in securities, to consist of not more than $18,000,000 in the form of long-term debt and/or preferred equity, and, assuming favorable market conditions, up to $12,000,000 in common equity. IWC issued $18,000,000 of long-term debt in September 1995, in the form of First Mortgage Bonds, 5.85% Series due 2025. Proceeds from the issuance of these securities are being used for the construction, extension and improvement of IWC's facilities, plant and distribution system, reimbursement of IWC's treasury for plant capital expenditures previously made, and the discharge or refunding of short-term debt and higher cost long-term debt. In December 1995, Resources made an equity capital contribution to IWC of $10,505,000. The amount invested by Resources was derived from proceeds of the sale of common shares of the Company through its Dividend Reinvestment and Share Purchase Plan. COMPETITIVE CONDITIONS The Company conducts its water utility operations, subject to regulation by the Commission, under indeterminate permit and related franchise rights, all of which may be revoked for cause. Under such permit and franchise rights, the Company may lay, maintain and operate its mains and conduits in public streets and ways throughout the area which it serves. The permit and franchise rights granted to the Company are not exclusive. There are competitors operating near the Company's service area, which include various municipal water utilities, as well as privately owned water utilities, some of which purchase water from the Company. As the Indianapolis metropolitan area has expanded to include surrounding communities or previously rural areas, the Company has faced competition for new customers from town or rural water utilities. The continuing regulation of the Commission covers, among other things, matters relating to rates, service, acquisition of utility properties, accounting practices, and the issuance of securities by IWC or HWC. The Company does not pay a franchise tax, and its franchise rights are long-term in nature. -4- The Company's unregulated utility-related services segment predominately serve other utilities. Underground facility locating services are provided primarily to the electric, gas and telecommunications industries which operate in the midwest and southwest regions of the country. Installation, repairs and maintenance of underground pipelines are provided primarily to the gas industry which operate principally in Indiana and Ohio. Data processing and billing and payment processing services are provided to the city of Indianapolis, the Company's water utilities, and to other unaffiliated utilities located in the state of Indiana. Services provided by this segment are subject to competitive conditions and are generally contracted for a period of three to five years. RECENT AND PROPOSED CHANGES IN FACILITIES During the year ended December 31, 1995, the Company added $42,835,000 (including $14,921,000 from the acquisition of MPC) to utility plant and other property, of which $20,941,000 is applicable to the water utilities segment. Approximately 93 miles of new mains were placed in service during the year. During the past five years, additions to utility plant and other property have averaged $24,049,000 annually. The Company plans capital expenditures of approximately $150,000,000 during the five-year period 1996-2000 primarily for further extensions and improvements to the Company's utility distribution systems, further additions and improvements to its treatment, pumping and storage facilities and for other operating equipment. In 1995, construction was started on a new laboratory facility at the White River plant to alleviate the crowding conditions in the existing laboratory. The new facility will accommodate the additional equipment and personnel needed to perform the testing and monitoring required to assure water quality. Design commenced on the first phase of a major new plant to be built in the South Well Field in southern Marion County. When completed, this plant will have the capacity to treat 50 million gallons of well water a day, making it the second largest treatment facility owned by the Company and the largest ground water plant in the state of Indiana. For possible capital expenditures relating to environmental matters, which are not included above, see "Environmental Matters." -5- CAPACITY OF FACILITIES AND SOURCES OF WATER SUPPLY The combined maximum daily capacity of the Company's treatment plants, together with the maximum daily capacity of its two primary well fields, is 220 million gallons per day (MGD). During 1995, the average consumption was 129 MGD and the maximum consumption was 207 MGD. See "Operating Information by Industry Segment." The principal sources of IWC's present water supply are (a) the White River, which flows through Indianapolis from north to south and is supplemented by Morse Reservoir on a tributary, Cicero Creek, (b) Fall Creek, which flows from the northeast and is supplemented by Geist Reservoir, (c) the city of Indianapolis' Eagle Creek Reservoir, located on Eagle Creek in northwest Marion County, from which water is purchased under a long-term contract, (d) Geist Well Field, a ground water supply located downstream of Geist Reservoir, and (e) South Well Field located in southern Marion and northern Johnson Counties. See "Properties-Source of Water Supply." The three large surface reservoirs are essential to providing an adequate supply during dry periods. Two are used to supplement low stream flows in the White River and Fall Creek, respectively, and water is drawn directly from the third. The reservoirs are rated at a dependable capacity designed to maintain an adequate supply during a repetition of the worst two-year drought ever recorded in the Indianapolis area. The theoretical dependable supply impounded by the three combined reservoirs represents about 65 percent of the total dependable supply available today with the balance coming from natural stream flow and wells. Wells constitute the source of supply for HWC. The Company has aquifer protections plans for the Geist and South well fields. Once fully developed, the Geist well field will produce 12 to 15 MGD while the South well field will produce 40 to 50 MGD. The protection plans will guide the Company's development of these newest major sources of supply, and result in land use plans to protect the aquifer systems from potential contamination sources. -6- SEASONAL NATURE OF BUSINESS Typically, the seasonal nature of the Company's business results in a higher proportion of operating revenues being realized in the second and third quarters of the year than the first and fourth quarters of the year. ENVIRONMENTAL MATTERS The Company's utility operations are subject to pollution control and water quality control regulations, including those issued by the Environmental Protection Agency (EPA), the Indiana Department of Environmental Management (IDEM), the Indiana Water Pollution Control Board and the Indiana Department of Natural Resources. Under the Federal Clean Water Act and Indiana's regulations, the Company must obtain National Pollutant Discharge Elimination System (NPDES) permits for discharges from its White River, White River North, Fall Creek, Thomas W. Moses and the Geist treatment stations. The Company's current NPDES permits were to have expired on June 30, 1989, for White River and Fall Creek stations, December 31, 1990, for Thomas W. Moses treatment station, April 30, 1994 for Geist treatment station and January 31, 1996, for the White River North Station. Applications for renewal of the permits have been filed with, but not finalized by, IDEM. (These permits continue in effect pending review of the applications.) Under the federal Safe Drinking Water Act (SDWA), the Company is subject to regulation by EPA of the quality of water it sells and treatment techniques it uses to make the water potable. EPA promulgates nationally applicable maximum contaminants levels (MCLs) for contaminants found in drinking water. Management believes that the Company is currently in compliance with all MCLs promulgated to date. EPA has continuing authority, however, to issue additional regulations under the SDWA, and Congress amended the SDWA in July 1986 to require EPA, within a three-year period, to promulgate MCLs for over 80 chemicals not then regulated. EPA has been unable to meet the three-year deadline, but has promulgated MCLs for many of these chemicals and has proposed additional MCLs. -7- Management of the Company believes that it will be able to comply with the promulgated MCLs and those now proposed without any change in treatment technique, but anticipates that in the future, because of EPA regulations, the Company may have to change its method of treating drinking water to include ozonation and/or granular activated carbon (GAC). In either case, the capital costs could be significant (currently estimated at $27,000,000 for ozonation and $105,000,000 for GAC), as would be the Company's increase in annual operating costs (currently estimated at $1,400,000 for ozonation and $5,600,000 for GAC). Actual costs could exceed these estimates. The Company would expect to recover such costs through its water rates; however, such recovery may not necessarily be timely. Under a 1991 law enacted by the Indiana Legislature, a water utility, including the utility subsidiaries of the Company, may petition the Indiana Utility Regulatory Commission (Commission) for prior approval of its plans and estimated expenditures required to comply with provisions of, and regulations under, the Federal Clean Water Act and SDWA. Upon obtaining such approval, the utility may include, to the extent of its estimated costs as approved by the Commission, such costs in its rate base for ratemaking purposes and recover its costs of developing and implementing the approved plans if statutory standards are met. The capital costs for such new systems, equipment or facilities or modifications of existing facilities may be included in the utility's rate base upon completion of construction of the project or any part thereof. While use of this statute is voluntary on the part of a utility, if utilized, it should allow utilities a greater degree of confidence in recovering major costs incurred to comply with environmental related laws on a timely basis. EMPLOYEES At December 31, 1995, Resources, its subsidiaries and affiliated partnership, employed 2,059 full time employees, including 351 water utility employees, 544 MPC employees and 928 SM&P employees. Approximately one-half of the Company's water utility employees are members of the International Brotherhood of Firemen and Oilers Local 131, AFL-CIO (Union). IWC and the Union have a four-year contract through December 31, 1998. -8- OPERATION INFORMATION BY INDUSTRY SEGMENT Operating information by industry segment for each of the past five years follows: Operating Revenues-Industry Segment (in thousands) 1995 1994 1993 1992 1991 Water Utilities: Residential $ 48,907 44,700 41,513 40,633 38,901 Commercial and Industrial 21,999 20,576 18,032 16,696 15,393 Other (1) 9,471 8,248 5,038 6,123 5,636 Total Water Utilities 80,377 73,524 64,583 63,452 59,930 Utility-Related Services (2) 66,688 37,855 19,659 - - Total Operating Revenues (3) $147,065 111,379 84,242 63,452 59,930 ======= ======= ======= ======= ======= (1) Includes $4,698 and $3,611 in income taxes collected from developers in 1995 and 1994, respectively. (2) Reporting by segment was adopted in 1993 as a result of the acquisition of SM&P. Utility-related services for prior periods are not material and, accordingly, have not been reclassified to conform with the 1993 presentation. (3) Certain reclassifications have been made to originally reported amounts for 1994 and 1993 to conform with classifications adopted for 1995. These reclassifications did not have a material effect on amounts previously reported. Operating Statistics-Water Utilities 1995 1994 1993 1992 1991 Water Sold (million gallons) Residential 21,723 21,402 20,232 20,644 22,493 Commercial and Industrial 17,294 17,121 15,337 14,660 15,312 Other 841 1,112 756 837 944 Total Water Sold 39,858 39,635 36,325 36,161 38,749 ====== ====== ====== ====== ====== Daily Pumpage (million gallons) Maximum 207 192 154 161 202 Minimum 100 91 93 90 91 Average 129 122 118 115 124 Utility Customers (end of year, in thousands) 235 229 224 219 214 Fire Hydrants (end of year) 26,525 25,737 24,730 24,215 23,465 Miles of Mains (end of year) 3,033 2,940 2,827 2,759 2,673 -9- Item 2. PROPERTIES GENERAL DESCRIPTION The Company's water utilities' properties consist of land, easements, rights (including water rights), buildings, reservoirs, canal, wells, supply lines, purification plats, pumping stations, transmission and distribution pipes, mains and conduits, meters and other facilities used for the collection, purification, and storage of water, and the distribution of water to its customers. The water systems extend from well fields and raw water reservoirs on Cicero Creek and Fall Creek, north and northeast of Indianapolis, and from the intake structure in Indianapolis' Eagle Creek Reservoir, northwest of Indianapolis, to the service connections of the ultimate consumers. The principal properties are all located in or near Indianapolis and, except for Eagle Creek Reservoir, which is owned by the city of Indianapolis, are all owned by the Company, in fee, with the exception of its easements. Substantially all its utility property rights and interests, both tangible and intangible, are subject to the lien securing first mortgage bonds. The Company's utility-related properties consist of data processing equipment used to provide data processing and billing and payment processing to both unaffiliated utilities and to the Company's water utilities, and land, buildings, vehicles and operating equipment used to provide line locating services and installation, repairs and maintenance of underground pipelines to unaffiliated utilities. The Company also owns parcels of land which it holds for possible sale or development. A general description of the principal properties is set forth in the following paragraphs. SOURCE OF WATER SUPPLY WHITE RIVER: White River, supplemented by Morse Reservoir, furnished 69% of IWC's water supply during 1995, of which 63% was provided by IWC's White River plant and 6% was provided by IWC's White River North plant. The drainage area of the White River above the intake of IWC's canal is approximately 1,200 square miles. In 1956, IWC completed Morse Reservoir on Cicero Creek, a tributary of the White River. It is located on approximately 1,692 acres of land owned by IWC of which about 1,500 acres are inundated. The storage capacity of this reservoir is approximately 6.9 billion gallons. With the reservoir supplementing the natural flow, it is estimated by IWC that the combined dependable flow in the White River can be maintained at a volume sufficient to produce 88 MGD. IWC owns and maintains a dam across White River at Broad Ripple -10- which serves to divert the flow into a canal. Water diverted at the Broad Ripple dam flows by gravity in the open canal to the White River treatment and pumping station. IWC's White River North plant has its intake directly on the White River. FALL CREEK: Fall Creek, supplemented by Geist Reservoir, provided 19% of IWC's water supply in 1995. The area of the watershed drained by Fall Creek upstream from the Fall Creek Station intake is approximately 300 square miles. In 1943, IWC completed the Geist Reservoir on Fall Creek. The reservoir is situated on about 1,983 acres of land owned by IWC, of which 1,890 acres are inundated, and has a storage capacity of approximately 6.1 billion gallons. With the reservoir supplementing the natural flow in Fall Creek, it is estimated by IWC that the combined dependable flow in Fall Creek can be maintained at a volume sufficient to provide 25 MGD. At the Fall Creek Station, IWC owns and maintains a concrete dam which diverts the flow of the creek into the station intake. EAGLE CREEK RESERVOIR: Raw water purchased from Eagle Creek Reservoir, a multipurpose reservoir owned and operated by the city of Indianapolis, provided 9% of IWC's water supply in 1995. On October 18, 1971, IWC and the City signed a 50-year contract, with an option for an additional 25 years, providing for the withdrawal, subject to certain restrictions, of up to 12.4 MGD on an annual average basis. IWC owns and maintains a raw water intake structure, pumping station, and pipeline within the reservoir property, which delivers the allotted supply to its Thomas W. Moses Treatment Plant. WELLS: IWC owns 32 wells, of which 25 are supplementary or auxiliary supply and seven are primary sources of supply. Of the primary wells, three are located at the Geist Well Field and four are the first development of the South Well Field. The Company owns water rights under a total of 984 acres of land, of which 938 acres are located in Marion County and 46 acres are located in Johnson County. It is estimated that the aggregate dependable annual average yield under a repetition of the most severe two-year drought on record is approximately 14 MGD from the wells. In 1995, wells provided approximately 3% of IWC's water supply. The source of supply for HWC consists of six wells having a total rated capacity and actual pumping capacity of 4.2 MGD. -11- PURIFICATION Treatment of surface water in IWC's system involves coagulation and flocculation, after which the water flows through the sedimentation basins and then to gravity-type rapid filters. IWC has four primary surface water filtration and purification plants--two for the White River supply sources, one for the Fall Creek supply source, and one for the Eagle Creek supply source--equipped with rapid filters having a maximum operating capacity aggregating 180 MGD and two ground water treatment plants totaling 10 MGD. The water treatment plant for HWC consists of four packaged filter iron removal units with a combined rated capacity of 3.5 MGD, including the new east plant which increased rated capacity by 1.5 MGD. PUMPING IWC owns seven principal pumping stations and eleven booster stations. The principal pumping stations have a total of 40 primary distribution pumps and have a maximum capacity of 326 MGD. The booster stations have 42 pumps, all of which are electrically or diesel fuel driven with a maximum capacity of 101 MGD. IWC has not to date experienced, nor does it anticipate, any shortage of electrical energy to run its pumps. The high service pumping facilities for HWC consist of six electric motor-driven pumps housed in the same buildings as the treatment plants and have a maximum capacity of approximately 3.5 MGD. In 1995, improvements were made to the piping at the Edmondson Booster Station, which resulted in significantly improved pressure in the southeast portion of the Company's service territory. FILTERED WATER STORAGE The Company's aggregate storage capacity for finished water is approximately 55 million gallons. IWC owns six filtered-water underground reservoirs at its five principal pumping stations which have an aggregate storage capacity of 39 million gallons. The filtered water in storage has been treated and is available to be pumped into the distribution system. Also, there are four elevated storage tanks with an aggregate storage capacity of over four million gallons and two ground storage tanks with an aggregate storage capacity of 12 million gallons. -12- The filtered water in the two ground storage tanks has been pumped by the principal pumping stations and is available to the respective booster stations to be pumped into the distribution system served by these stations. The four outlying elevated storage tanks "ride on" the distribution system and provide water by gravity flow. There are two ground storage tanks at HWC, the first located adjacent to the treatment plant with a storage capacity of 50,000 gallons, and the second located adjacent to the new booster station with a storage capacity of 250,000 gallons. There is also an elevated storage tank in the distribution system which "rides on" the system and has a capacity of 250,000 gallons. TRANSMISSION AND DISTRIBUTION The Company's utility transmission and distribution systems are composed of 3,033 miles of mains, most of which are cast iron and ductile iron. During the past ten years, an aggregate of 765 miles of mains, or approximately 25% of the total, were added to the systems. In general, the mains are located in city streets, other public ways and occasionally in easements. The supply mains are located partly in city streets and partly in rights-of-way and land owned by the Company. The Company furnishes public fire protection service through hydrants owned by the Company and located generally within the limits of street rights-of-way. UTILITY-RELATED PROPERTIES The Company's data processing equipment is located at IWC's general office in Indianapolis, Indiana. The Company also owns land and buildings and leases (operating leases) additional buildings, all of which are used for its line locating services and operations related to installation, repairs and maintenance of underground pipelines. Vehicles, data processing equipment, and other operating equipment used in these operations are located at the various operating offices. REAL ESTATE INTERESTS At December 31, 1995, the Company owned undeveloped non-utility land located primarily north and west of Geist Reservoir in Hamilton County, and several additional parcels in Marion County. The Company continues to explore the possible sale or development of this land. -13- OFFICE BUILDING The Company's main office building and service center was constructed in 1957 on 20 acres of land located approximately two miles from the center of the main business district of Indianapolis. The building houses the general and local commercial offices of the Company and provides a garage and building for storage of materials and vehicles, as well as shop space for repairs to automotive and other equipment. In May 1994, various administrative departments moved into the new General Office addition, west of the original building. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary litigation incidental to the Company's business, to which the Company is a party or of which any of their property is the subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1995 to a vote of security holders of the Registrant, through the solicitation of proxies or otherwise. -14- PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information regarding the trading market for the Company's Common Shares, the range of selling prices for each quarterly period during the past two years with respect to the Common Shares, the approximate number of holders of Common Shares as of December 31, 1995, the frequency and amount of dividends paid during the past two years with respect to the Common Shares and other matters is included under the captions "Stock Statistics" and "Distribution of Shareholders" on page 47 of the 1995 Annual Report, which information is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA The data included on page 40 of the 1995 Annual Report under "Selected Financial Data" is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 1995 Annual Report on pages 41 through 46 is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements included in the 1995 Annual Report and listed in Item 14.1. of this Report are incorporated herein by reference from the 1995 Annual Report. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None -15- PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item regarding nominees for Director of the Company is incorporated herein by reference to the Company's definitive proxy statement for its 1996 annual meeting of common stockholders filed with the Commission pursuant to Regulation 14A (the "1996 Proxy Statement"). The following table sets forth the current officers of IWC Resources Corporation and its principal subsidiary, Indianapolis Water Company, their ages, and (as presented below in parentheses) their positions during the past five years. There is no family relationship between any of the officers of the Company. All officers are elected for a term of one year. IWC RESOURCES CORPORATION Name Age Position James T. Morris 52 Chairman of the Board, Chief Executive Officer and President (President and Chief Operating Officer) Joseph R. Broyles 53 President-IWC Industries J. A. Rosenfeld 64 President-IWC Utilities (Executive Vice President; Senior Vice President and Treasurer; Financial Consultant) Kenneth N. Giffin 52 Senior Vice President- Governmental Relations and Real Estate John M. Davis 44 Vice President, General Counsel and Secretary Alan R. Kimbell 64 Vice President-Marketing James W. Shaffer 46 Vice President-Corporate Affairs Murvin S. Enders 53 Vice President-Administrative Affairs James P. Lathrop 50 Assistant Treasurer and Chief Accounting Officer (Controller) Peggy J. Stinson 58 Assistant Secretary -16- INDIANAPOLIS WATER COMPANY James T. Morris 52 Chairman of the Board and Chief Executive Officer (President and Chief Operating Officer) J. A. Rosenfeld 64 President and Chief Operating Officer (Executive Vice President; Senior Vice President and Treasurer) Kenneth N. Giffin 52 Senior Vice President-Governmental Relations (Senior Vice President- Human Resources and Corporate Relations) John M. Davis 44 Vice President, General Counsel and Secretary Robert F. Miller 51 Vice President-Engineering (Principal Projects Engineer) David S. Probst 57 Vice President-Business Development (Vice President-Engineering Services) Tim K. Bumgardner 47 Vice President-Operations (Vice President-Production) Patricia L. Chastain 58 Vice President-Community Affairs (Director of Special Projects; Corporate Affairs Coordinator) James W. Shaffer 46 Vice President - Corporate Affairs Martha L. Wharton 66 Vice President-Customer Service (Vice President-Customer Relations; Assistant Secretary) L. M. Williams 52 Vice President - Human Resources -17- James P. Lathrop 50 Assistant Treasurer and Chief Accounting Officer Peggy J. Stinson 58 Assistant Secretary (Executive Secretary) All of the above have been employed by the Company for more than five years except for Murvin S. Enders, J. A. Rosenfeld, John M. Davis and James W. Shaffer. Mr. Enders has been employed since October, 1995 and was previously employed by Chrysler Corporation. Additionally, Mr. Enders was a member of the Company's Board of Directors. Mr. Rosenfeld has been employed since January, 1992 and was previously employed by Melvin Simon & Associates. Mr. Davis has been employed since June, 1993 and was previously employed by KPMG Peat Marwick LLP. Mr. Shaffer has been employed since January, 1993 and was previously employed by Creative Concepts, Inc. Item 11. EXECUTIVE COMPENSATION The information required by this Item regarding compensation of the Company's officers and directors is incorporated herein by reference to the Company's 1996 Proxy Statement. The Compensation Committee Report to Shareholders and Comparative Stock Performance sections of the Company's 1996 Proxy Statement shall not be deemed "filed" herewith. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Information required by this item applicable to the Company's Redeemable Preferred Stock follows: Title Name and Address Amount and Nature Percent of of of Beneficial of Class Beneficial Owner Ownership Class Redeemable Patrick J. Baker 17,204 shares 33-1/3% Preferred 1913 W. 116th St. Stock Carmel, IN 46032 Daniel S. Baker (1) 17,204 shares 33-1/3% 7285 Waterview Pt. Noblesville, IN 46060 Diana L. Sosbey 17,204 shares 33-1/3% 8596 Twin Pt. Cir. Indianapolis, IN 46236 (1) Mr. Daniel S. Baker is President of SM&P Utility Resources, Inc., (formerly SM&P Conduit Co., Inc.) a wholly owned subsidiary of the Company. -18- (b) The information required by this Item regarding the number of shares of the Company's Common Stock, beneficially owned by the nominees for Director and the officers of the Company is incorporated herein by reference to the Company's 1996 Proxy Statement. (c) The Company knows of no arrangements the operation of which may at a subsequent date result in a change of control of the Company. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item regarding certain relationships and related transactions is incorporated herein by reference to the Company's 1996 Proxy Statement. -19- PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The documents listed below are filed as a part of this report except as otherwise indicated: 1. Financial Statements. The following described consolidated financial statements found on the pages of the 1995 Annual Report indicated below are incorporated into Item 8 of this Report by reference. Description of Financial Location in 1995 Statement Item Annual Report Independent Auditors' Report Page 39 Consolidated Balance Sheets, December 31, 1995 and 1994 Pages 22 and 23 Consolidated Statements of Shareholders' Equity, Years ended December 31, 1995, 1994 and 1993 Page 24 Consolidated Statements of Earnings, Years ended December 31, 1995, 1994 and 1993 Page 25 Consolidated Statements of Cash Flows, Years ended December 31, 1995, 1994 and 1993 Page 26 Notes to Consolidated Financial Statements, Years ended Pages 27 December 31, 1995, 1994 and 1993 through 38 2. Financial Statement Schedules. All schedules for which provision is made in Regulation S-X have been omitted for the reason that they are not required, are not applicable, or the required information is set forth in the consolidated financial statements or notes thereto. 3. Exhibits The exhibits set forth on the Index to Exhibits are incorporated herein by reference. -20- 4. Reports on Form 8-K On November 6, 1995, the Company filed Amendment No. 1 to its current report on Form 8-K originally filed September 5, 1995 to report the acquisition by merger of Miller Pipeline Corporation. Amendment No. 1 contained pro forma financial information filed under "Item 7. Financial Statements and Exhibits". The pro forma financial information consisted of Pro Forma Condensed Consolidation Balance Sheet of the Registrant as of June 30, 1995 (Unaudited), Pro Forma Condensed Consolidated Statement of Earnings of the Registrant for the Six Months Ended June 30, 1995 (Unaudited), Pro Forma Condensed Consolidated Statement of Earnings of the Registrant for the Year Ended December 31, 1994 (Unaudited), and Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements. -21- OTHER MATTERS For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statement on Form S-8 No. 33-33021 (filed August 17, 1989): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. -22- SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. IWC RESOURCES CORPORATION Registrant Date March 29, 1996 By: J. A. Rosenfeld, President IWC Utilities 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 Registrant and in the capacities and on the dates indicated. Date March 29, 1996 By: James T. Morris, Chairman of the Board, Chief Executive Officer and President and Director Date March 29, 1996 By: Robert B. McConnell, Chairman of the Executive Committee Date March 29, 1996 By: J. A. Rosenfeld, President IWC Utilities and Director (Principal Financial Officer) Date March 29, 1996 By: James P. Lathrop, Assistant Treasurer (Principal Accounting Officer) Date March 29, 1996 By: Joseph R. Broyles, President IWC Industries and Director Date March 29, 1996 By: Joseph D. Barnette, Jr., Director -23- Date March 29, 1996 By: Robert A. Borns, Director Date March 29, 1996 By: Susan O. Connor, Director Date March 29, 1996 By: Otto N. Frenzel III, Director Date March 29, 1996 By: J. B. King, Director Date March 29, 1996 By: J. George Mikelsons, Director Date March 29, 1996 By: Thomas M. Miller, Director Date March 29, 1996 By: Jack E. Reich, Director Date March 29, 1996 By: Fred E. Schlegel, Director Date March 29, 1996 By: Milton O. Thompson, Director -24- INDEX TO EXHIBITS 2 Reorganization Agreement dated as of July 21, 1995 (without exhibits other than the Plan and Agreement of Merger dated as of August 18, 1995), filed as Exhibit 2 to Registrant's Form 8-K filed September 5, 1995, is incorporated herein by reference. 3A-1 Restated Articles of Incorporation of Registrant, as amended to date. The copy of this exhibit filed as Exhibit 3-A to Registrant's Registration Statement on Form S-8 effective August 17, 1989 "Registration No. 33-30221", is incorporated by reference. 3-B Bylaws of Registrant, as amended to date. The copy of this exhibit filed as Exhibit 3-B to Registrant's Registration Statement on Form S-8 effective August 17, 1989 "Registration No. 33-30221", is incorporated by reference. 4.1 Ninth Supplemental Indenture dated as of August 1, 1967. The copy of this exhibit filed as Exhibit 4-B5 to IWC's Annual Report on Form 10-K for the fiscal year ended December 31, 1980, is incorporated herein by reference. 4.2 Eleventh Supplemental Indenture dated as of December 1, 1971. The copy of this exhibit filed as Exhibit 4-B6 to IWC's Annual Report on Form 10-K for the fiscal year ended December 31, 1980, is incorporated herein by reference. 4.3 Seventeenth Supplemental Indenture dated as of March 1, 1989, between Fidelity Bank, National Association, and IWC. The copy of this exhibit filed as Exhibit 4-A9 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 is incorporated herein by reference. 4.4 Eighteenth Supplemental Indenture dated as of March 1, 1989, between Fidelity Bank, National Association and IWC. The copy of this exhibit filed as Exhibit 4-A10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, is incorporated herein by reference. -25- 4.5 Nineteenth Supplemental Indenture dated as of June 1, 1989, between Fidelity Bank, National Association, and IWC. The copy of this exhibit filed as Exhibit 4-A9 to Registrant's Registration Statement on Form S-2 effective December 12, 1991 (Registration No. 33-43939), is incorporated herein by reference. 4.6 Fourteenth Supplemental Indenture dated as of January 15, 1978, between the Fidelity Bank, (formerly Fidelity-Philadelphia Trust Company) and IWC, including as Appendix A the "Restatement of Principal Indenture of Indianapolis Water Company," which, except as otherwise specified, restates the granting clauses and all other sections contained in the First Mortgage dated July 1, 1936, between Fidelity-Philadelphia Trust Company and Registrant as amended by the Fourth, Fifth, Sixth, Eighth, Twelfth and Fourteenth Supplemental Indentures. A copy of this exhibit filed as Exhibit 4-B1 to IWC's Annual Report on Form 10-K for the fiscal year ended December 31, 1980, is incorporated herein by reference. 4.7 Twentieth Supplemental Indenture dated as of December 1, 1992, between Fidelity Bank, National Association, and IWC. The copy of this Exhibit filed as Exhibit 4-A9 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, is incorporated herein by reference. 4.8 Twenty-First Supplemental Indenture dated as of December 1, 1992, between Fidelity Bank, National Association and IWC. The copy of this Exhibit filed as Exhibit 4-A10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, is incorporated herein by reference. -26- 4.9 Rights Agreement, dated as of February 9, 1988, between IWC Resources Corporation and Bank One, Indianapolis, NA (as Rights Agent), which includes the Form of Certificate of Designations of Series A Junior Participating Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C. The copy of this exhibit filed as Exhibit 4 to the Registrant's Current Report on Form 8-K dated February 9, 1988, is incorporated by reference. 4.10 Indenture of Trust dated as of March 1, 1989, between IWC, City of Indianapolis, Indiana, and Merchants National Bank & Trust Company of Indianapolis, as Trustee. The copy of this exhibit filed as Exhibit 10-F to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, is incorporated herein by reference. 4.11 Indenture of Trust dated as of March 1, 1989, between IWC, Town of Fishers, Indiana, and Merchants National Bank & Trust Company of Indianapolis, as Trustee. The copy of this exhibit filed as Exhibit 10-G to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, is incorporated herein by reference. 4.12 Indenture of Trust dated as of December 1, 1992, between City of Indianapolis, Indiana, and IWC to National City Bank, Indiana, as Trustee. The copy of this Exhibit filed as Exhibit 10-J to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, is incorporated herein by reference. 4.13 Indenture of Trust, City of Indianapolis, Indiana, and Indianapolis Water Company to National City Bank, Indiana, as Trustee, dated as of April 1, 1993. The copy of this Exhibit filed as Exhibit 4.14 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, is incorporated herein by reference. -27- 4.14 Twenty-Second Supplemental Indenture dated as of April 1, 1993, between Indianapolis Water Company and Fidelity Bank, National Association. The copy of this Exhibit filed as Exhibit 4.15 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, is incorporated herein by reference. 10.1 Agreement dated October 18, 1971, between IWC and the Department of Public Works of the City of Indianapolis, Indiana, relating to the purchase of water at Eagle Creek Reservoir. The copy of this exhibit filed as Exhibit 5 to IWC's Statement (No. 2-55201), effective January 14, 1976, is incorporated herein by reference. *10.2 The description of "split dollar" life insurance policies owned by IWC with respect to certain officers of Registrant is incorporated hereby by reference to the Company's 1988 Proxy Statement. *10.3 Form of Executive Supplemental Benefits Plan of IWC. The copy of this exhibit filed on Exhibit 10-D to IWC's Annual Report on Form 10-K for the fiscal year ended December 31, 1985, is incorporated herein by reference. 10.4 Loan Agreement dated as of March 1, 1989, between IWC and the City of Indianapolis, Indiana. The copy of this exhibit filed as Exhibit 10-D to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, is incorporated herein by reference. 10.5 Loan Agreement dated as of March 1, 1989, between IWC and Town of Fishers, Indiana. The copy of this exhibit filed as Exhibit 10-E to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, is incorporated herein by reference. -28- 10.6 Guaranty Agreement dated as of March 1, 1989, between Registrant and Merchants National Bank and Trust Company of Indianapolis re: City of Indianapolis, Indiana Industrial Development Bonds. The copy of this exhibit filed as Exhibit 10-H to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, is incorporated herein by reference. 10.7 Guaranty Agreement dated as of March 1, 1989, between Registrant and Merchants National Bank & Trust Company of Indianapolis re: Town of Fishers, Indiana Industrial Development Bonds. The copy of this exhibit filed as Exhibit 10-I to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, is incorporated herein by reference. 10.8 Loan Agreement dated as of December 1, 1992, between IWC and City of Indianapolis, Indiana. The copy of this exhibit filed as Exhibit 10-K to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, is incorporated herein by reference. 10.9 Guaranty Agreement dated as of December 1, 1992, between Resources and National City Bank, Indiana, as Trustee. The copy of this exhibit filed as Exhibit 10-L to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, is incorporated herein by reference. 10.10 Note Agreement dated as of March 1, 1994, between Registrant and American United Life Insurance Company. The copy of this exhibit filed as Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, is incorporated herein by reference. 10.11 Loan Agreement dated as of April 1, 1993, between Indianapolis Water Company and City of Indianapolis. The copy of this exhibit filed as Exhibit 10.11 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, is incorporated herein by reference. -29- 10.12 Guaranty Agreement between Registrant and National City Bank, Indiana, as Trustee, dated as of April 1, 1993. The copy of this exhibit filed as Exhibit 10.12 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, is incorporated herein by reference. 10.13 Agreement for the Operation and Maintenance of the City of Indianapolis, Indiana, Advanced Wastewater Treatment Facilities dated as of December 20, 1993, among the City of Indianapolis, White River Environmental Partnership, the Registrant and certain other parties. The copy of this exhibit filed as Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, is incorporated herein by reference. 10.14 White River Environmental Partnership Agreement between IWC Services, Inc., JMM White River Corporation and LAH White River Corporation, dated as of August 20, 1993. The copy of this exhibit filed as Exhibit 10.14 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, is incorporated herein by reference. 10.15 Plan and Agreement of Merger among Registrant, Resources Acquisition Corp., S.M.& P. Conduit Co., Inc., and its shareholders dated as of June 14, 1993. The copy of this exhibit filed as Exhibit 10.15 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, is incorporated herein by reference. *10.16 Executive Employment Agreement between Registrant and James T. Morris, dated as of December 31, 1993 (substantially similar agreements in favor of J. A. Rosenfeld, Joseph R. Broyles, John M. Davis and Kenneth N. Giffin have been omitted pursuant to Instruction 2 to Item 601 of Regulation S-K). The copy of this exhibit filed as Exhibit 10.16 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, is incorporated herein by reference. -30- *10.17 Employment Agreement between Miller Pipeline Corporation (surviving corporation) and Don W. Miller dated August 22, 1995, filed as Exhibit 10 (1) to Registrant's Form 8-K filed September 5, 1995, is incorporated herein by reference. *10.18 Employment Agreement between Miller Pipeline Corporation (surviving corporation) and Dale R. Miller dated August 22, 1995, filed as Exhibit 10 (2) to Registrant's Form 8-K filed September 5, 1995, is incorporated herein by reference. 13 Registrant's Annual Report to Stockholders for the year ended December 31, 1995. This exhibit, except for the portions thereof that have expressly been incorporated by reference into this Report, is furnished for the information of the Commission and shall not be deemed "filed" as part hereof. 21 Subsidiaries 23 Consent of Independent Certified Public Accountants. 27 Financial Data Schedule *This exhibit relates to executive compensation or benefit plans. -31- EX-13 2 1995 Annual Report IWC RESOURCES CORPORATION TABLE OF CONTENTS Page(s) Letter to Shareholders 2-3 The Company's Business 4 Comparative Highlights 5 IWC Utilities 6-15 IWC Industries 16-19 Financial Review 21 Consolidated Balance Sheets 22-23 Consolidated Statements of Shareholders' Equity 24 Consolidated Statements of Earnings 25 Consolidated Statements of Cash Flows 26 Notes to Consolidated Financial Statements 27-38 Independent Auditors' Report 39 Selected Financial Data 40 Management's Discussion and Analysis of Financial Condition and Results of Operations 41-46 Shareholder Information 47 Company Officers 48 Board of Directors 49 OUR MISSION IS CLEAR IWC Resources Corporation will provide its customers with superior products and outstanding service, while offering our shareholders the highest possible current return consistent with a long-term financial view. We will actively participate in the economic growth and social well-being of the communities in which we operate, and will create and maintain a healthy, safe, and challenging work environment for our employees by offering ample opportunities for personal growth and development. We will continue to stress comprehensive long-range planning as essential to meeting the challenges of the future, and will manage and utilize our corporate resources to encourage community growth and vitality, while ensuring a quality environment. In August 1995, IWC Resources Corporation merged with Miller Pipeline Corporation and reorganized into two divisions. IWC Utilities was established to manage primarily regulated-utility businesses. IWC Industries was formed to manage the other utility-related service companies. SHAREHOLDER LETTER Dear Shareholder: IWC Resources Corporation (Company) had its best year ever in 1995. Total revenues increased from $111,379,000 in 1994 to $147,065,000 in 1995, while earnings per share increased 11-1/2% from $1.47 to $1.64, respectively. Many good things happened during the year that positioned the Company for future growth and success in 1996 and beyond. On August 22, 1995, the Miller Pipeline Corporation was merged into the Company as a wholly owned subsidiary. Miller Pipeline is one of the nation's most highly respected installers of pipelines. While its primary customers are gas companies, it also provides service for water and wastewater utilities, and is acknowledged as a leader in infrastructure repair and replacement. Miller Pipeline's commitment to customer service is extraordinary. Don Miller, the corporation's founder, built a first-rate business, which the Company is privileged and honored to include among its family of companies. Miller enjoyed a very good year financially in 1995 and contributed substantially to Company profits. The addition of Miller Pipeline led to an internal reorganization of the Company's various businesses into two divisions; IWC Utilities and IWC Industries. IWC Industries includes Miller Pipeline and SM&P Utility Resources, Inc. SM&P had spectacular growth in 1995, with a revenue increase of 22%. Profits did not grow proportionately, but the Company is highly optimistic that SM&P will contribute to earnings in a substantial way again in 1996. Joe Broyles, formerly president of the Indianapolis Water Company, serves as president of IWC Industries. IWC Utilities includes the Indianapolis Water Company, Harbour Water Corporation, IWC Services, Inc., Utility Data Corporation, and Waterway Holdings, Inc. J. A. Rosenfeld, formerly executive vice president and chief financial officer of the Company, is serving as this division's president. Each of these individual companies made meaningful contributions to the Company's record year. The Indianapolis Water Company (IWC) settled rate cases in April and May 1995 before the Indiana Utility Regulatory Commission. The settlements contributed to the Company's strong performance. IWC added 91 miles of new main to its system and increased its customers by 5,773. The company operated in a highly satisfactory way in 1995 and offered high quality water service to its customers. It is superbly well-prepared for the future growth in the area. Utility Data Corporation continued to provide outstanding customer service support to a variety of municipal and utility customers. It was engaged in 1995 to provide solid waste billing service for the city of Indianapolis, and water, sewer, and electric billing services to the city of Bargersville. IWC Services, Inc., through its majority ownership of the White River Environmental Partnership, delivered exceptional service to the city of Indianapolis through operation of the city's two advanced wastewater treatment plants. This effort is the hallmark of Mayor Steve Goldsmith's commitment to competition and privatization in local government. Observers come from all around the world to see this endeavor firsthand. Substantial savings were produced for the city of Indianapolis, and the partnership is competing to provide these same services for other municipalities in the midwest. Waterway Holdings, Inc., experienced a very positive 1995 and exceeded the Company's expectations. Ongoing development opportunities appear good in 1996. In 1995, the Company instituted a new dimension to the Dividend Reinvestment and Share Purchase Plan. Customers, employees and shareholders are able to purchase Company stock directly from the Company at a 3% discount with no brokerage fee involved. As a result of the program, the Company, thus far, has added approximately 1,944 new shareholders and generated nearly $11 million of new equity capital. The plan has been well-received and the Company looks forward to its ongoing success. In addition to the promotions of Messrs. Broyles and Rosenfeld, Murvin S. Enders was elected vice president of administrative affairs for the holding Company; Patricia L. Chastain, vice president of community affairs for the Indianapolis Water Company; and Michael B. Stayton, executive vice president for SM&P Utility Resources, Inc. Jay Rosenfeld and Susan O. Conner were added to the board of directors. I am eager for 1996 to unfold. Each of the businesses appears to be well- prepared for the year and I am optimistic that you will see good growth. At the end of 1995 and during the early weeks of 1996, the stock market recognized the growing value of our Company's stock. Improving our relations with shareholders and the brokerage community are priorities for 1996. We have a fascinating story to tell and will work very hard to share the news. The Company has the strongest possible commitment to high-quality customer service and to deliver safe, healthy, reliable products and services to our customers. We take our responsibility seriously and will do everything possible to fulfill our commitments. I am very grateful to our shareholders, customers, and an exceptional group of employees that make our Company what it is today. Sincerely, James T. Morris Chairman February 1996 THE COMPANY'S BUSINESS The term "Company" in this report, unless otherwise indicated, refers to the consolidated operations of IWC Resources Corporation and its subsidiaries. IWC Resources Corporation is a holding company. The Company owns and operates seven subsidiaries, including two waterworks systems, which supply water for residential, commercial, and industrial uses, and fire protection service in Indianapolis, Indiana, and surrounding areas. The territory served by the two utilities covers an area of approximately 309 square miles which includes areas in Marion, Hancock, Hamilton, Hendricks, Boone, and Morgan counties in central Indiana. At year's end, the Company's two water utilities -- Indianapolis Water Company and Harbour Water Corporation -- were providing service to approximately 235,000 customers. In addition to the two water utilities, the Company has five other wholly owned subsidiaries: SM&P Utility Resources, Inc. (SM&P), Miller Pipeline Corporation (MPC), Waterway Holdings, Inc., Utility Data Corporation (UDC), and IWC Services, Inc. SM&P performs underground utility locating and marking services in Indiana and other states. MPC's primary function is the installation of underground pipelines for natural gas utilities. In addition, MPC sells products and services related to infrastructure preservation and replacement. The Company, principally through Waterway Holdings, Inc., owns real estate that it expects to sell or develop in the future. UDC provides customer relations, customer billing, and other data processing services for the Company's two water utilities and other water and sewer utilities. IWC Services provides laboratory water testing services, principally for water utilities. The White River Environmental Partnership (WREP), in which the Company participates through IWC Services as the majority partner (52%), entered into a five-year contract, which commenced in January 1994, to operate and maintain the two advanced wastewater treatment facilities for the city of Indianapolis. WREP is actively seeking new markets and opportunities for contract management service pursuant to expanded governmental privatization efforts. The Company continues to seek expansion and diversification through the acquisition of other water utilities and other related businesses. It is expected, however, that the water utilities will continue as the majority source of earnings for the Company in the foreseeable future. The utility subsidiaries of the Company are subject to regulation by the Indiana Utility Regulatory Commission, which has jurisdiction over rates, standards of service, accounting procedures, issuance of securities, and related matters. Utility operations are subject to pollution control and water quality control regulations, including those issued by the Environmental Protection Agency, the Indiana Department of Environmental Management, the Indiana Water Pollution Control Board, and the Indiana Department of Natural Resources. There are competitors operating near the Company's system, which include various municipal water utilities as well as privately owned water utilities, some of which purchase water from the Company. COMPARATIVE HIGHLIGHTS 1995 1994 1993 1992 1991 (in thousands, except per share data) Operating revenues $ 147,065 $111,379 84,242 $63,452 $ 59,930 Operating earnings 35,426 30,919 25,994 24,113 22,304 Income taxes 13,820 12,724 9,328 9,197 7,905 Net earnings applicable to common and common equivalent shareholders $12,192 $ 10,142 $ 9,376 $ 8,113 $7,737* Average number of common and common equivalent shares outstanding during year 7,438 6,901 6,658 6,379 5,335 Per common and common equivalent shares: Net earnings $ 1.64 $ 1.47 $ 1.41 $ 1.27 $ 1.45* Dividends declared 1.40 1.40 1.40 1.395 1.38 Book value 12.81 11.38 11.20 10.49 10.54 Capital additions 27,914 28,256 13,967 15,751 14,416 Total assets 408,879 335,382 312,443 275,112 279,608 *Excludes cumulative effect of an accounting change of $1,280 or $.24 per common and common equivalent shares CONNECTING CUSTOMERS IWC UTILITIES The establishment of IWC Utilities and IWC Industries in August 1995 provides the Company the opportunity to more effectively manage separate business sectors. IWC Utilities manages the direct utility-regulated and other service companies that include Indianapolis Water Company, Harbour Water Corporation, IWC Services, Inc., Utility Data Corporation, and Waterway Holdings, Inc. J.A. Rosenfeld, former executive vice president and chief financial officer of the Company, was promoted to president of IWC Utilities and Indianapolis Water Company. Indianapolis Water Company (IWC) The oldest member in the Company's family of subsidiaries, IWC had the best year ever in its 115-year history serving customers in the metropolitan Indianapolis area. The company's performance significantly contributed to the Company's record year. IWC's service area continues to grow with expansion of the system in 1995, which included 91 miles of new main installed and 5,773 new customers connected to increase the customer base to 232,568. Settlement of rate case issues in April and May 1995, contributed to the company's strong performance. The company's rate petitions were warranted due to increased operating and capital costs, and issues related to postretirement benefits other than pensions. In March, the IURC granted IWC authority to issue securities consisting of not more than $18 million of long-term debt and/or preferred equity and at least $12 million in common equity. In September 1995, IWC issued $18 million of 30-year 5.85% First Mortgage Bonds to secure a like amount of Economic Development Bonds, issued by the city of Indianapolis. Proceeds from the issuance of these bonds are being used for the construction, extension and improvement of facilities, plant, and distribution system and to reimburse IWC's treasury for previously made plant capital expenditures. In December 1995, the Company contributed equity capital to IWC in the amount of $10,505,000. A new four-year agreement was reached in February 1995, between IWC and Local 131 of the Service Employees International Union - Firemen and Oilers Conference, A.F.L.-C.I.O. Applications for renewal of IWC's permits required under the National Pollutant Discharge Elimination System (NPDES) for the discharge of water treatment residuals from IWC's White River and Fall Creek stations are pending before the Indiana Department of Environmental Management (IDEM). It is expected that the residuals from these plants will be discharged into the city of Indianapolis' sewer system. Experimental discharges of IWC's residuals to the sewer system during the latter half of 1995 and into 1996 allowed IWC and the city of Indianapolis to gain valuable technical information for the design of retention and release facilities at both stations, and to evaluate the potential impact at the city's treatment plant. Completion of testing is scheduled for the end of February 1996, with a final contract with the city to follow if appropriate. Improvements at the White River and Fall Creek stations required to discharge the residuals to the city's sewer system will then be completed in late 1997. Design of IWC's South Well Field Station, its next major treatment plant, began in June. Construction of the plant is expected to start in May 1996. The plant's first phase will be a 12-million-gallon-per-day (mgd) groundwater treatment plant receiving raw water from nine wells, and a 22- mgd pumping facility designed to send water to the southeastern and western parts of IWC's service area. When completed, the South Well Field Station will be Indiana's largest groundwater treatment plant, with a capacity to treat 48 mgd and pump 75 mgd. Construction of the new White River Plant Laboratory was started in 1995. This expansion will accommodate the additional equipment and personnel to perform the testing and monitoring required to assure water quality. Remodeling of office and work space for many IWC employees took place during the year, with other improvements planned in 1996. The company employed 351 people at year's end. Harbour Water Corporation (HWC) HWC serves areas near Morse Reservoir in Hamilton County, one of Indiana's fastest-growing counties, north of Indianapolis. At the end of 1995, the corporation served 2,722 customers, representing an 8% increase over 1994. The nearby town of Westfield purchased 65.8 million gallons of water from HWC under a long-term water service agreement. CONNECTING NEIGHBORHOODS Waterway Holdings, Inc. Waterway Holdings has contributed to consolidated net earnings in recent years by carefully managed sales of non-utility land. In each of the last three years, revenue of approximately $1,500,000 has been achieved. In 1996, a new 42-lot residential development near Morse Reservoir is planned, and with some selected sales in the Geist Reservoir area, real estate revenues are expected to increase. With minimal overhead and sales staff, Waterway Holdings has managed the sale and lease of Company real estate and continues to look for other opportunities for growth consistent with IWC's wellhead and groundwater protection policies. CONNECTING SERVICES Utility Data Corporation (UDC) Utility Data Corporation provides customer billing, customer relations, and data processing services for the Company's water utilities, the city of Indianapolis sewer operations, and similar services for other municipal and private utilities in Indiana. Additionally, UDC markets a line of personal computer software for record-keeping systems for the utility industry. At the end of 1995, over 1,200 programs had been sold. Several new agreements were reached in 1995. Solid waste billing and customer relations for the city of Indianapolis commenced in January 1996. The town of Bargersville, Indiana, accepted a billing system proposal for approximately 6,000 customers that began in February 1996. The city of Vincennes, Indiana, awarded its stormwater service project that includes a stormwater study and implementation of a quarterly stormwater billing system in 1996. UDC also provides quarterly billing inserts for customers of Indianapolis Water Company and Harbour Water Corporation. Two new personal computer software programs were released during the year the manhole inventory management program, and the main/collector sewer management program. UDC is continuing to develop innovative personal computer software as part of its agreement with the American Water Works Association. UDC employed 60 people at the conclusion of 1995. CONNECTING RESOURCES IWC Services, Inc. IWC Services, Inc. is the majority partner (52%) of the White River Environmental Partnership (WREP), which completed its second year of contract operations and management of the city of Indianapolis' two large advanced wastewater treatment facilities. WREP's contribution to the Company's operating earnings exceeded one-half million dollars. By all operational standards, including effluent quality, minority vendor participation, worker safety, and preventive maintenance, WREP's performance under the Indianapolis contract has been superb. WREP is currently competing for two major new opportunities in Indiana and Ohio. The partnership is responding to numerous inquiries from mayors and other local officials who face strong pressures to contain costs. At year's end, WREP had 168 employees operating the Indianapolis advanced wastewater treatment plants. When WREP took over the plants, the employee count was 323. CONNECTING PRODUCTS & SERVICES IWC INDUSTRIES Reorganization in August 1995 established IWC Industries to manage the Company's other utility service businesses. The division was formulated as a result of the merger of Miller Pipeline Corporation into the Company as a wholly owned subsidiary. This merger continued the Company's strategy of diversification into business closely related to utilities. Joseph R. Broyles, former president of the Indianapolis Water Company, was promoted to president of IWC Industries. Besides overseeing activities of MPC, IWC Industries also manages SM&P Utility Resources, Inc. Miller Pipeline Corporation (MPC) MPC was founded as a gas line contractor in 1953 and has earned a reputation for quality work and integrity. The corporation has enjoyed steady growth over the years, fueled by an innovative workforce committed to complete customer satisfaction and by ongoing research and development. Although pipeline construction remains MPC's core business, state-of-the-art trenchless pipeline rehabilitation technologies are offered to an emerging marketplace. Some examples of the technologies offered by MPC aimed at solving pipeline problems for utility, municipal, and industrial customers are: EXPANDIT - pipebursting "trenchless" pipe replacement; INSERTEC/PLUS - advanced live gas insertion for "trenchless" gas main renewal; AMEX 2000 - "Trenchless" inversion lining for gas mains; AMEX-10/WEKO-SEAL - internal joint sealing system; VAC-HOE - vacuum excavation equipment and pipeline rehabilitation techniques; EX METHOD - formed-in-place PVC "trenchless" lining techniques for wastewater. MPC has a history of building on its successes through management of its resources, serving its customers well, and ongoing market evaluation. MPC is in position to capitalize on the opportunities in the pipeline rehabilitation market. Dale R. Miller, MPC's president, will be honored in March 1996 as an honorary member of the Distribution Contractors Association (DCA). The organization is recognizing Mr. Miller with its highest honor for ". . . outstanding contributions and tireless service during the better part of the past four decades to the association, to the industry, and as a DCA director, our 20th president and most recently chairman of the DCA Labor Committee." The merger of MPC made major contributions to the Company's record revenues and net earnings in 1995. The corporation employed 544 people at year's end. CONNECTING BUSINESSES SM&P Utility Resources, Inc. (SM&P) Underground facility locating remains the primary focus of the company. SM&P continues to experience rapid growth. With almost 1,000 employees serving clients in 11 states, SM&P enjoyed a 22% increase in revenues in 1995. However, earnings declined in 1995 as SM&P had to absorb pricing concessions required by several of its major clients, most of whom are in the telecommunications industry. The location and marking of underground utilities is a very competitive business. Management believes, however, that the company provides better protection from damage than does its competition. As utilities strive to improve their levels of service, we believe that SM&P's assurance of quality will be seen as more and more valuable to them. In an effort to restore its profitability to historical levels, SM&P has begun partnering with the companies that are the most quality-oriented and need to eliminate their service outages caused by underground damages. As the telecommunications industry continues to restructure under enormous competitive pressures, SM&P is positioning itself to serve the upper quality-oriented end of the market where it can realize reasonable profit margins for quality service delivered at a fair price. SM&P had 928 employees at the end of 1995 compared to 758 at the conclusion of 1994. CONNECTING COMMUNITIES Youth development, education, community involvement, and other civic responsibilities have always been and remain a major focus of the Company's mission. One example is the Company's commitment to the United Way Campaign of Central Indiana. Over the past several years, the Company and its employees have been the top per-capita contributor to the United Way in the Indianapolis corporate community. The Company and its generous employees care a great deal about serving and supporting the communities they serve. FINANCIAL REVIEW Consolidated net earnings increased to $12,192,000 for 1995 compared to $10,142,000 for 1994. Improved operating results in the water utilities segment, due primarily to three rate increases, and continued diversification in the utility-related services segment through the merger of Miller Pipeline Corporation (MPC) in August 1995 helped produce record earnings for 1995. As a result, earnings available for common and common equivalent shareholders increased to $1.64 for 1995 compared to $1.47 for 1994. During 1995, the average number of common and common equivalent shares outstanding increased 537,000 shares over 1994 due to the issuance of common shares in August 1995 for the acquisition of MPC and the tremendous success associated with the Company's Dividend Reinvestment and Share Purchase Plan. Cash dividends declared on common shares outstanding totaled $1.40 per share in 1995 and 1994. Details and a discussion of financial and operating results follow: Results of Operations The Company's operations include two business segments: regulated water utilities and unregulated utility-related services. The water utilities segment includes the operations of the Company's two water utility subsidiaries. The utility-related services segment provides utility line locating services, installation, repairs and maintenance of underground pipelines, data processing and billing and payment processing, and other utility-related services to both unaffiliated utilities and to the Company's water utilities. SM&P Utility Resources, Inc. (SM&P) acquired in June 1993 and MPC acquired in August 1995 are included in the utility- related services segment. Operating Revenues Total operating revenues were $147,065,000 in 1995 compared to $111,379,000 in 1994. Water utilities segment revenues increased to $80,377,000 in 1995 from $73,524,000 in 1994 primarily due to three rate increases since August 1994. Customer growth also continued in this segment and at the end of 1995, approximately 235,000 customers were being served compared to approximately 229,000 customers at the end of 1994. Utility-related services segment revenues increased to $66,688,000 in 1995 compared to $37,855,000 in 1994 mostly due to the merger of MPC. Operating Expenses Total operating expenses were $111,639,000 in 1995 compared to $80,460,000 in 1994. Total water utilities segment operating expenses were $49,973,000 in 1995 compared to $47,497,000 in 1994. The $2,476,000 (5.2%) increase in operating expenses in the water utilities segment is due primarily to increased production costs, largely labor, power and chemical costs, and labor related costs, most significantly the cost of postretirement benefits other than pensions. Depreciation and property taxes also increased due to additional plant placed in service. Utility-related services segment operating expenses were $61,666,000 in 1995 compared to $32,963,000 in 1994. The increase of $10,503,000 (31.9%) (excluding $18,200,000 applicable to MPC) is due primarily to the expansion of business. SM&P realized a 22% increase in its operating revenues which required the addition of approximately 170 employees to its workforce. As a result, labor costs and related fringe benefits, transportation costs, and cable cuts increased significantly. During 1996, SM&P is positioning itself to reduce costs and focus on increased profitability. IWC Resources Corporation and Subsidiaries Consolidated Balance Sheets December 31, 1995 and 1994 ASSETS 1995 1994 (in thousands) Current assets: Cash and cash equivalents $ 1,771 $ 2,889 Accounts receivable, less allowance for doubtful accounts of $327 and $190 21,092 10,124 Materials and supplies, at cost 3,194 2,257 Other current assets 4,370 1,099 Total current assets 30,427 16,369 Utility plant: Utility plant in service 362,610 343,488 Less accumulated depreciation 81,594 75,801 Net plant in service 281,016 267,687 Construction work in progress 7,855 7,407 Utility plant, net 288,871 275,094 Construction funds held by Trustee 14,260 -- Other property, net 32,909 13,053 Goodwill, net of accumulated amortization 23,776 16,964 Deferred charges and other assets 18,636 13,902 $408,879 $335,382 LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 (in thousands) Current liabilities: Notes payable to banks $ 30,589 $ 17,674 Current portion of long-term debt -- 1,150 Accounts payable and accrued expenses 20,282 16,551 Customer deposits 1,369 1,126 Total current liabilities 52,240 36,501 Long-term obligations: Long-term debt, less current portion 113,375 98,225 Customer advances for construction 51,606 48,750 Other liabilities 9,346 6,079 Total long-term obligations 174,327 153,054 Deferred income taxes 37,347 31,003 Contributions in aid of construction 32,932 30,181 Preferred stock of subsidiary and redeemable preferred stock 5,705 5,705 Shareholders' equity (in thousands): Common stock, authorized 10,000 common shares; 8,247 and 6,886 issued and outstanding in 1995 and 1994 86,575 60,540 Retained earnings 20,321 18,398 106,896 78,938 Less unearned compensation 568 -- Total shareholders' equity 106,328 78,938 Commitments and contingencies $408,879 $335,382 The accompanying notes are an integral part of the consolidated financial statements. IWC Resources Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity Years ended December 31, 1995, 1994 and 1993
Total Common Stock Retained Unearned Shareholers' Shares Amount Earnings Compensation Equity Balance at December 31, 1992 6,407,591 $ 49,728 $17,826 $ (349) $ 67,205 Net earnings 9,376 9,376 Dividends - $1.40 per share: Common stock (9,254) (9,254) Redeemable preferred stock (36) (36) Common stock issued: Acquisition of subsidiary 356,991 8,300 8,300 Dividend Reinvestment Plan 55,646 1,236 1,236 Restricted Stock Plan 1,725 37 (37) Compensation expense 187 187 Balance at December 31, 1993 6,821,953 59,301 17,912 (199) 77,014 Net earnings 10,142 10,142 Dividends - $1.40 per share: Common stock (9,620) (9,620) Redeemable preferred stock (36) (36) Common stock issued: Dividend Reinvestment Plan 59,257 1,159 1,159 Restricted Stock Plan, net of 16,189 shares tendered for tax withholding and then retired 5,061 80 (80) Compensation expense 279 279 Balance at December 31, 1994 6,886,271 60,540 18,398 78,938 Net earnings 12,192 12,192 Dividends - $1.40 per share: Common stock (10,233) (10,233) Redeemable preferred stock (36) (36) Common stock issued: Acquisition of subsidiary 755,148 14,348 14,348 Dividend Reinvestment Plan 576,473 10,809 10,809 Restricted Stock Plan 29,461 878 (878) Compensation expense 310 310 Balance at December 31, 1995 8,247,353 $ 86,575 $20,321 $ (568) $106,328 The accompanying notes are an integral part of the consolidated financial statements.
IWC Resources Corporation and Subsidiaries Consolidated Statements of Earnings Years ended December 31, 1995, 1994 and 1993 1995 1994 1993 (in thousands, except per share data) Operating revenues: Water utilities $80,377 $73,524 $64,583 Utility-related services 66,688 37,855 19,659 147,065 111,379 84,242 Operating expenses: Operation and administration: Water utilities 37,352 35,573 32,074 Utility-related services 54,172 28,120 13,037 Amortization of acquisition costs 1,198 1,126 674 Depreciation 9,527 7,820 6,556 Taxes other than income taxes 9,390 7,821 5,907 Total operating expenses 111,639 80,460 58,248 Operating earnings 35,426 30,919 25,994 Other income (expense): Interest expense, net 9,395 7,959 7,295 Interest income (184) (109) (208) 9,211 7,850 7,087 Earnings before income taxes and dividends on preferred stock of subsidiary 26,215 23,069 18,907 Income taxes 13,820 12,724 9,328 Earnings before dividends on preferred stock of subsidiary 12,395 10,345 9,579 Dividends on preferred stock of subsidiary 203 203 203 Net earnings $12,192 $10,142 $ 9,376 Net earnings per common and common equivalent share $ 1.64 $ 1.47 $ 1.41 Average number of common and common equivalent shares outstanding 7,438 6,901 6,658 The accompanying notes are an integral part of the consolidated financial statements. IWC Resources Corporation and Subsidiaries Consolidated Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993 1995 1994 1993 (in thousands) Cash flows from operating activities: Net earnings $12,192 $ 10,142 $ 9,376 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 12,903 9,597 7,808 Deferred income taxes 3,838 2,179 1,241 Gain on sales of other property (1,370) (783) (1,052) Provision for bad debts 437 430 335 Dividends on preferred stock of subsidiary 203 203 203 Other, net (71) (776) 137 Changes in operating assets and liabilities: Accounts receivable (3,135) (1,039) 353 Materials and supplies 382 (535) (425) Other current assets (2,528) (332) 1,741 Accounts payable and accrued expenses (390) 1,728 511 Customer deposits 243 99 83 Net cash provided by operating activities 22,704 20,913 20,311 Cash flows from investing activities: Additions to utility plant and other property (27,914) (28,256) (13,967) Proceeds from sales of other property 700 424 1,517 Customer advances for construction 8,233 9,175 5,748 Refunds of customer advances for construction (2,925) (2,156) (2,242) Acquisition of Miller Pipeline Corporation, net of cash acquir ed (5,147) -- -- Acquisition of SM&P Utility Resources, Inc., net of cash aquired -- -- (12,482) Other investing activities, net (2,234) (952) (963) Net cash used by investing activities (29,287) (21,765) (22,389) Cash flows from financing activities: Increase (decrease) in notes payable to banks 5,515 4,105 (12,775) Proceeds from long-term debt 18,076 14,000 11,600 Payments of long-term debt (4,203) (1,277) (12,780) Decrease (increase) in construction funds held by Trustee (14,260) 2,010 (52) Cash dividends (10,472) (9,859) (9,493) Proceeds from issuance of common stock 10,809 1,159 1,236 Net cash provided by financing activities 5,465 1,928 3,286 Increase (decrease) in cash and cash equivalents (1,118) 1,076 1,208 Cash and cash equivalents at beginning of year 2,889 1,813 605 Cash and cash equivalents at end of year $ 1,771 $ 2,889 $ 1,813 Supplemental disclosure of cash flow information- Cash paid for: Interest on long-term debt and notes payable to banks, net of capitalized interes $ 8,992 $ 7,396 $ 7,104 Income taxes $11,969 $ 11,480 $ 7,488 The accompanying notes are an integral part of the consolidated financial statements. IWC Resources Corporation and Subsidiaries Notes to Consolidated Financial Statements Years ended December 31, 1995, 1994 and 1993 Nature of Operations IWC Resources Corporation (Resources) is a holding company which owns and operates seven subsidiaries. The term Company refers to the consolidated operations of Resources and its subsidiaries. The Company's operations include two business segments: regulated water utilities and unregulated utility-related services. The water utilities segment include the operations of the two waterworks subsidiaries which supply water service to approximately 235,000 customers for residential, commercial, and industrial uses, and fire protection service in Indianapolis, Indiana, and surrounding areas and serve a territory of approximately 309 square miles. These subsidiaries are regulated by the Indiana Utility Regulatory Commission (Commission), and their accounting policies, which are substantially consistent with generally accepted accounting principles, are governed by the Commission. The utility-related services segment include the operations of the remaining subsidiaries which are involved in utility line locating, installation, repairs and maintenance of underground pipelines, data processing and other utility- related services, and real estate sales and development. This segment predominately serves other utilities, principally the gas and telecommunications industries, which operate in Indiana and Ohio and other parts of the midwest and southwest regions of the country. Use of Estimates The Company's consolidated financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Summary of Significant Accounting Policies Principles of Consolidation The Comany's consolidated financial statements include the accounts of Resources and its subsidiaries. In November 1993, a subsidiary of the Company became majority partner in White River Environmental Partnership (Partnership). In December 1993, the Partnership was awarded a five-year contract by the city of Indianapolis to manage and operate its two advanced wastewater treatment plants commencing January 30, 1994. The Company's share of Partnership earnings, which are reported on the equity basis, are not significant to the Company's consolidated earnings and are included in operating revenues in the utility-related services segment. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash Equivalents The Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. Utility Plant Utility plant is stated at cost which includes the cost of land, outside contract work, labor and materials, interest and certain indirect costs incurred during the construction period. Such indirect costs consist of administration, general overhead, and other costs applicable to construction projects. When utility plant in service is retired, except for land and land rights, the accumulated cost of the retired property plus cost of removal and less salvage value is charged against accumulated depreciation. If land or land rights are sold, the net gain or loss is included in earnings. Property not currently used in utility operations is included in other property. Depreciation of utility plant for financial statement purposes is computed at a composite annual rate of 1.9% as approved by the Commission. Generally, maintenance and repairs and the cost of replacements of minor items of property are charged to operation expense accounts as incurred. Other Property Other property is stated at cost and is depreciated or amortized using the straight-line method over the estimated useful lives of the assets. The service lives for the principal assets, vehicles and operating equipment, range from 5 to 20 years. Goodwill The Company recognizes the excess of cost over fair value of tangible and other identifiable assets acquired in business acquisitions as goodwill which is amortized by the straight-line method over 20 or 40 years. The Company continually evaluates the recoverability of goodwill by comparing its annual amortization to the acquired company's average pretax earnings before amortization over a 3-year period and by assessing whether the amortization of the remaining goodwill balance over its remaining life can be recovered through expected future results. Amortization expense was $573,000, $511,000 and $319,000 in 1995, 1994 and 1993, respectively. Accumulated amortization at December 31,1995 and 1994 was $1,970,000 and $1,397,000, respectively. Income Taxes For financial statement purposes, investment tax credits are deferred and amortized ratably over the lives of the applicable assets as prescribed by the Commission. For income tax purposes, the credits are deducted in the year in which the constructed or acquired property was placed in service. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts for assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates which apply to taxable income in the years in which those temporary differences are expected to reverse.The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period the change is enacted. Customer Advances and Contributions in Aid of Construction In certain cases, customers advance funds for water main extensions. These advances are included in customer advances for construction and are generally refundable to the customer over a period of ten years. Advances not refunded within ten years are permanently transferred to contributions in aid of construction. Revenues Utility revenues are recognized based on water usage at rates approved by the Commission. Service revenues are recognized as services are provided. Construction revenues are recognized on the percentage of completion method whereby revenues are recognized in proportion to costs incurred over the life of each project. Losses are recognized when known. Pension Plans and Other Retirement Benefits The Company has a noncontributory defined benefit pension plan which covers the majority of its utility employees and certain other employees. Benefits are based on, among other factors, an employee's services rendered to date and average monthly earnings for the 36 consecutive calendar months that produce the highest average.The Company's funding policy is to contribute annually at least the minimum contribution required to comply with ERISA regulations. The Company has an unfunded executive supplemental benefit plan which provides additional retirement benefits to certain officers. Benefits are based on, among other factors, an employee's age, services rendered to date, and benefits received from the Company's noncontributory defined benefit pension plan. The Company also sponsors defined contribution plans covering substantially all non-bargaining unit employees and an employee stock ownership plan covering substantially all of its utility employees and certain other employees. The Company provides postretirement life insurance and healthcare benefits to certain of its employees. The Company accounts for such benefits by accruing currently, during the period of employment, the present value of the estimated cost of such benefits. Reclassifications Certain amounts for 1994 and 1993 have been reclassified to conform with the 1995 presentation. Merger of Miller Pipeline Corporation On August 22, 1995, the Company merged with Miller Pipeline Corporation (MPC). MPC installs, repairs and maintains underground pipelines used in gas, water and sewer utility transmission and distribution systems. MPC also repairs and provides installation services and products for natural gas, water and sewer utilities. The cost of the transaction was paid by cash of approximately $5,513,000 and the issuance of 755,148 shares of the Company's common stock. The excess of the total acquisition cost over an estimate of the fair value of the net assets acquired of $7,385,000 is being amortized over 40 years. Following is a summary of the assets acquired and liabilities assumed in the acquisition of MPC: (in thousands) Property and equipment $ 14,921 Accounts receivable 8,158 Materials and supplies 1,319 Other current assets 1,161 Other noncurrent assets 822 Short-term notes payable to banks (7,400) Accounts payable and other accrued expenses (3,999) Deferred income taxes (2,506) Net assets acquired $ 12,476 During August 1995, the Company borrowed $5,600,000 in a short-term bank loan which was used primarily for the acquisition of MPC. Interest on this loan is based on the LIBOR rate plus .75% (6.418% at December 31, 1995). Interest on short-term notes payable to banks assumed in the acquisition of MPC is based on prime less .50% (8.0% at December 31, 1995). The consolidated financial statements include the results of MPC's operations beginning August 22, 1995. Unaudited pro forma operating results, assuming the merger took place at the beginning of each of the years presented, follow: (in thousands, except per share data) 1995 1994 Operating revenues: Water utilities $ 80,377 $ 73,524 Utility-related services 94,867 85,550 Total operating revenues $ 175,244 $ 159,074 Net earnings $ 12,203 $ 12,156 Net earnings per common and common equivalent share $ 1.54 $ 1.59 Net earnings and net earnings per common and common equivalent share were $12,192,000 and $1.64, respectively, for the year ended December 31, 1995, compared to unaudited pro forma net earnings and net earnings per common and common equivalent share of $12,203,000 and $1.54, respectively, for the same period. The decrease in unaudited pro forma net earnings per common and common equivalent share of $.10 is due primarily to the increase in outstanding common shares issued in the acquisition. Acquisition of SM&P Utility Resources, Inc. On June 14, 1993, the Company acquired SM&P Utility Resources, Inc. (formerly SM&P Conduit Co., Inc.) (SM&P) in a transaction accounted for as a purchase. SM&P is engaged in the business of providing a single source facility locating service for all utilities including: gas, electric, telephone, cable television, water and sewer. The Company also entered into not to compete agreements with SM&P shareholders at a cost of $3,000,000. The cost of the acquisition and agreements not to compete was paid by cash of $12,503,000 and the issuance of 356,991 shares of the Company's common stock and 51,612 shares of the Company's Series B Redeemable Preferred Stock. Goodwill of $16,379,000 is being amortized over 40 years, and the cost of agreements not to compete is being amortized over their five-year lives. The consolidated financial statements include the results of SM&P's operations beginning June 14, 1993. A summary of the SM&P assets acquired and liabilities assumed follows: (in thousands) Property and equipment $ 5,021 Accounts receivable 2,968 Other current assets 1,456 Short-term notes payable (3,933) Accounts payable and accrued expenses (2,524) Federal income taxes payable (364) Net assets acquired $ 2,624 Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amount. The carrying amounts of cash equivalents, accounts receivable, construction funds held by Trustee, and notes payable to banks approximate fair value because of the short maturity of those instruments. The fair value of long-term debt at December 31, 1995, is estimated to be $116,431,000. The fair value was determined by discounting future payments at current interest rates for similar issues. Utility Plant in Service A summary of utility plant in service at December 31 follows: 1995 1994 (in thousands) Land and land rights $ 8,869 $ 7,009 Structures and improvements 51,279 49,767 Pumping station equipment 15,549 14,746 Purification system 25,820 25,492 Transmission and distribution system 250,670 236,541 Other 10,423 9,933 $362,610 $ 343,488 Other Property A summary of other property at December 31 follows: 1995 1994 (in thousands) Land and improvements $ 605 $ 26 Buildings and improvements 1,479 281 Real estate held for sale or development 6,984 3,985 Utility property held for future use 1,395 82 Vehicles and operating equipment 25,491 9,290 Other 2,809 2,349 38,763 16,013 Accumulated depreciation and amortization 5,854 2,960 $32,909 $13,053 Regulatory Assets Deferred charges and other assets include certain costs which are capitalized as regulatory assets and amortized pursuant to utility rate-making proceedings. The Commission allows recovery of these assets through rates, but not a return on investment, over periods ranging from 2 years to 30 years. A summary of regulatory assets at December 31 follows: 1995 1994 (in thousands) Costs of postretirement benefit obligations other than pensions $3,609 $ 3,722 Income taxes 902 950 Tank painting costs 2,175 710 Rate proceeding costs 528 668 Debt issuance costs 1,803 1,661 $9,017 $ 7,711 In December 1992, the Commission authorized all Indiana utilities, including the utility subsidiaries of the Company, to record as a regulatory asset the excess of accrual basis costs of postretirement life insurance and healthcare benefits (OPRB) over the cash basis costs which were used to establish current rates. The Company received approval to recover its OPRB costs on an accrual basis in its rate case settled August 10, 1994, subject to the Company's proposal and Commission's acceptance of an appropriate restricted fund. On April 26, 1995,the Commission approved a grantor trust for these funds, as agreed upon by IWC and the Utility Consumer Counselor (UCC) representing ratepayers, and a related annual increase in IWC's water rates of approximately $1,800,000, to cover current costs and the amortization of the regulatory asset through 2014. The Grantor Trust provides for the transfer to the Trust monthly and subsequent investing and disbursing by the Trust of all amounts received by IWC in rates to cover its OPRB obligations. The Trust Agreement contains certain provisions which limit investment activities, provide for annual reporting and, in the event that Trust funds are no longer needed for OPRB purposes, directs payment of the remaining funds to IWC ratepayers. At December 31, 1995, $928,000 is held in the Trust and included in deferred charges and other assets. Income taxes represent the effects of the 1993 increase in the federal corporate tax rate on the Company's water utilities' net deferred tax liabilities and will be amortized through 2009. Tank painting and rate proceeding costs are generally being amortized through 2011 and 1997, respectively, and result from costs required to be deferred for regulatory purposes. Debt issuance costs include various costs deferred for regulatory purposes which are to be amortized over the original lives of applicable debt through 2026. Accounts Payable and Accrued Expenses A summary of accounts payable and accrued expenses at December 31 follows: 1995 1994 (in thousands) Accounts payable $ 4,765 $ 3,364 Accrued property taxes 5,570 5,039 Accrued interest on notes payable to banks and long-term debt 2,082 1,864 Accrued vacations 1,974 1,732 Other accrued expenses 5,891 4,552 $20,282 $ 16,551 Notes Payable to Banks and Long-term Debt At December 31, 1995, the Company had lines of credit with banks aggregating $43,000,000 which require a compensating cash balance of $100,000. At December 31, 1995, unused lines of credit aggregated $13,659,000. Interest on borrowings under the lines of credit is variable (an average of 6.58% at December 31, 1995). The Company has a Controlled Disbursement Agreement with a bank which authorizes the bank to transfer funds daily between the Company's checking and note payable accounts. Outstanding checks drawn on this checking account are reported as a component of notes payable to banks. At December 31, 1995 and 1994, such outstanding checks amounted to $1,248,000 and $604,000, respectively. A summary of First Mortgage Bonds (secured by IWC's utility plant) and other long-term debt (Senior notes of Resources) outstanding at December 31 follows: 1995 1994 (in thousands) 5-7/8% Series due 1997 $ 6,775 $ 6,775 5.20% Series due 2001 11,600 11,600 8% Series due 2001 3,000 3,000 6.31% Senior notes due 2001 14,000 14,000 12-7/8% Series due 2002 -- 4,000 7-7/8% Series due 2019 40,000 40,000 9.83% Series due 2019 5,000 5,000 6.10% Series due 2022 5,000 5,000 8.19% Series due 2022 10,000 10,000 5.85% Series due 2025 18,000 -- 113,375 99,375 Less current portion -- 1,150 $113,375 $98,225 Provisions of trust indentures related to the 5-7/8% Series Bonds and the 8% Series Bonds require annual sinking or improvement fund payments amounting to 1/2% of the maximum aggregate amount outstanding. As permitted, this requirement has been satisfied by substituting a portion of permanent additions to utility plant. These bonds are redeemable at the option of the Company at varying premium amounts at different periods prior to the respective dates of maturity. The 5.20% Series Bonds are due and payable in full May 1, 2001. In the event the bonds lose their tax-exempt status, mandatory redemption of the bonds is required. The 6.31% Senior Notes are due and payable in full March 15, 2001. Optional redemptions by the Company are allowed in whole on or after March 15, 1997, at the greater of par or the present value of the notes discounted 1/2% over the applicable Treasury rate. In January and December 1995, the Company prepaid the remaining principal amount of the 12-7/8% Series Bonds at a premium of $203,000. The 7-7/8% Series Bonds include issues of $10,000,000 and $30,000,000, both of which are due and payable in full March 1, 2019. In the event the bonds lose their tax exempt status, mandatory redemption of the bonds is required. Optional redemptions by the Company are allowed on or after March 1, 1998, and are generally subject to a premium. The 9.83% Series Bonds are redeemable at the option of the Company, on or after June 15, 2014, with final redemption by June 15, 2019. Early redemptions are subject to a premium. The 6.10% Series Bonds are due and payable in full December 1, 2022. In the event the bonds lose their tax exempt status, mandatory redemption of the bonds is required. Optional redemptions by the Company are allowed on or after December 1, 1999, and are generally subject to a premium. The 8.19% Series Bonds are due and payable in full December 1, 2022. Optional redemptions by the Company are allowed at any time at the greater of par or the present value of the bonds discounted at 1/2% over the applicable Treasury rate. The 5.85% Series Bonds are due and payable in full September 1, 2025. In the event the bonds lose their tax exempt status, mandatory redemption of the bonds is required. Optional redemptions by the Company are allowed on or after September 1, 2002, and are generally subject to a premium. Required principal payments on long-term debt for the five years following December 31, 1995, exclusive of obligations which may be satisfied by permanent additions to utility plant, amount to $6,775,000 in 1997. Interest expense is net of an allowance for funds used during construction (AFUDC) which is an amount capitalized for construction projects as authorized by the Commission. AFUDC amounts capitalized were $98,000, $212,000 and $160,000 during 1995, 1994 and 1993, respectively. At December 31, 1995, the Company's AFUDC rate was 9.35% (4.51% debt component and 4.84% equity component). Preferred Stock of Subsidiary The preferred stock of subsidiary represents 45,049 shares of Indianapolis Water Company cumulative preferred stock of $100 par value per share. The preferred stock is redeemable at the option of the subsidiary upon proper notice at prices ranging from $100 to $105 per share plus accrued dividends (an aggregate redemption value of $4,658,000). Dividends on the preferred stock are payable at rates ranging from 4% to 5% per annum. Redeemable Preferred Stock At December 31, 1995, 60,000 special shares of Series B Convertible Redeemable Preferred Stock, no par value, have been authorized, of which 51,612 shares have been issued and are outstanding. The preferred stock was issued in connection with the acquisition of SM&P and is convertible by the holder at any time, in whole, into shares of common stock at a conversion rate of one common share for each share of preferred stock. Mandatory redemption of the preferred stock is required on July 14, 1998, at $23.25 per share plus accrued dividends (an aggregate redemption value of $1,200,000). Holders of the preferred stock are entitled to the same voting and dividend rights as common shareholders and such shares are considered common share equivalents in the calculation of earnings per share. Common Stock The Company's authorized capital stock consists of 10,000,000 common shares and 2,000,000 special shares with no par value. No special shares have been issued other than the 60,000 shares designated as Series B Convertible Redeemable Preferred Stock. The Company has a Dividend Reinvestment and Share Purchase Plan which allows common shareholders the option of receiving their dividends in cash or common stock and permits optional cash purchases of shares at current market values. Effective March 10, 1995, the plan was amended to allow certain employees and utility customers of the Company or its subsidiaries to purchase common shares. Purchases are allowed with a minimum investment of $10 by employees and $100 by customers up to a total of $100,000 annually. A total of 1,500,000 authorized but unissued common shares have been registered for purchase under the plan. The price of common shares purchased with reinvested dividends or optional cash payments is 97% of the average of the means between the high and low sale prices of the common shares as determined for the five consecutive trading days ending on the day of purchase. Shareholders who do not choose to participate in the plan continue to receive their dividends in cash. At December 31, 1995, 900,676 shares of common stock were reserved for issuance under the plan. The Company has a Restricted Stock Plan under which 200,000 common shares have been reserved and may be awarded to officers and key employees. Restricted stock plan participants are entitled to cash dividends and voting rights on their awarded shares. Restrictions generally limit the sale, transfer, or pledge of shares during a three-year measurement period following the issuance of such shares. The initial three-year measurement period concluded December 31, 1994. The number of shares awarded under the plan are subject to adjustment at the end of the measurement period as determined by the provisions of the plan. The adjustment at the end of the initial three-year measurement period was an incremental award of 21,250 shares, of which 16,189 shares were tendered to the Company to satisfy tax withholding requirements, and retired. Participants may vest in certain restricted shares upon death, disability or retirement as described in the plan. In the event of a change in control of the Company, all restrictions expire and participants may receive additional shares as determined by provisions of the plan. In January 1995, the Company commenced its second three-year measurement period and awarded 29,461 restricted shares. Unearned compensation recorded as of the effective dates of the awards is amortized to expense during the three-year measurement period. At December 31, 1995, 121,073 shares were reserved for future awards. In January 1988, the Company's board of directors adopted a Shareholder Rights Plan pursuant to which a dividend distribution of one preferred share purchase right for each outstanding share of common stock was made to shareholders of record on February 18, 1988. Under the plan, each right will initially entitle shareholders to purchase one one-hundredth of a share of a new series of preferred stock of the Company at an exercise price of $45. The rights become exercisable when a person or group acquires 20% or more of the Company's common stock or commences a tender offer for 30% or more of the Company's common stock. Upon the happenings of certain events, each right not owned by a 20% shareholder or shareholder group will entitle its holder to purchase, at the right's then current exercise price, shares of the Company's common stock having a value of twice that price. The rights expire in February 1998. Taxes Components of taxes other than income taxes follow: 1995 1994 1993 (in thousands) Property taxes $ 5,333 $ 4,879 $ 4,092 Other 4,057 2,942 1,815 $ 9,390 $ 7,821 $ 5,907 Refundable federal income taxes of $1,191,000 is included in other current assets and currently payable federal income taxes of $256,000 is included in accounts payable and accrued expenses at December 31, 1995 and 1994, respectively. Components of income taxes follow: 1995 1994 1993 (in thousands) Federal: Currently payable $ 7,514 $8,122 $5,864 Deferred 3,411 1,971 1,119 10,925 10,093 6,983 State: Currently payable 2,468 2,423 2,223 Deferred 427 208 122 2,895 2,631 2,345 $13,820 $12,724 $9,328 The differences between actual income taxes and expected federal income taxes using statutory rates follow: 1995 1994 1993 (in thousands) Expected federal income taxes $ 7,531 $ 6,810 $6,617 Taxes on advances collected from developers 4,698 3,611 -- Taxable customer advances for construction 137 454 1,309 State income taxes, net of federal income tax benefit 1,284 1,251 1,524 Other, net 170 598 (122) $13,820 $12,724 $9,328 The tax effects of significant temporary differences represented by deferred tax assets and deferred tax liabilities at December 31 follow: 1995 1994 (in thousands) Deferred tax assets: Customer advances for construction $ 972 $ 1,854 Accrued pension costs 984 694 Accrued vacations 655 617 OPRB's 587 119 Other 861 1,005 Total deferred tax assets 4,059 4,289 Deferred tax liabilities: Utility plant, principally due to differences in depreciation and capitalized costs 34,857 29,324 Unamortized investment tax credits 4,801 4,913 Debt redemption premiums 572 508 Other property bases 428 105 Equity in earnings of investee 390 181 Other 358 261 Total deferred tax liabilities 41,406 35,292 Net deferred tax liabilities $ 37,347 $31,003 Customer advances for construction received after 1986 are includible in taxable income when received and are deductible if subsequently refunded to customers. Prior to 1994, such advances were excluded from financial statement income. Effective September 8, 1993, the Commission granted IWC permission to surcharge developers for income taxes on advances and reduce its water rates by a corresponding amount. In 1994, IWC began collecting surcharges on advances from developers. Income tax surcharges collected from developers amounted to $4,698,000 in 1995 and $3,611,000 in 1994 and are reported as a component of water utilities operating revenues and income taxes and, accordingly, have no effect on net earnings. Pension Plans and Other Retirement Benefits The Company has two defined benefit pension plans: (1) a noncontributory plan which covers the majority of its utility employees and certain other employees, and (2) an executive supplemental plan which provides additional retirement benefits to certain officers. The following tables set forth the plans' funded status and accrued pension cost amounts recognized in the Company's consolidated financial statements at December 31: Majority Plan Supplemental Plan 1995 1994 1995 1994 (in thousands) (in thousands) Accumulated benefit obligation $ 9,084 $ 5,856 $ 2,782 $ 1,798 Vested benefit obligation $ 8,174 $ 5,165 $ 2,647 $ 1,726 Projected benefit obligation $15,192 $11,918 $ 3,468 $ 2,362 Plan assets at fair value, primarily listed stocks and bank fixed income funds 13,471 10,834 -- -- Projected benefit obligation in excess of plan assets 1,721 1,084 3,468 2,362 Unrecognized net asset (obligation) at transition 789 917 (44) (55) Unrecognized prior service costs (386) (417) (587) (306) Unrecognized loss (1,558) (1,444) (815) (315) Additional minimum liability 760 112 Accrued pension cost $ 566 $ 140 $ 2,782 $ 1,798 The weighted-average discount rate and rate of increase in future compensation levels used in determining the projected benefit obligation were 7-1/4% and 4%, respectively, for 1995, 8-1/2% and 5%, respectively, for 1994, and 7-1/4% and 4- 1/2%, respectively, for 1993. The expected long-term rate of return on assets was 8% for 1995, 1994 and 1993. Net periodic pension costs for the years ended December 31 include the following components: Majority Plan Supplemental Plan 1995 1994 1993 1995 1994 1993 (in thousands) (in thousands) Service cost - benefits earned during year $ 758 $ 903 $ 769 $174 $ 150 $ 86 Interest cost on projected benefit obligation 1,042 1,006 902 231 167 149 Return on plan assets (2,641) 387 (562) Net amortization and deferrals 1,657 (1,345) (393) 82 67 45 Net periodic pension cost $ 816 $ 951 $ 716 $487 $ 384 $280 Contributions to the Company's defined contribution plans and its employee stock ownership plan amounted to $724,000 and $249,000 in 1995, $489,000 and $292,000 in 1994, and $352,000 and $274,000 in 1993, respectively. The Company also participates in several industry-wide, multi-employer pension plans for certain of its union employees at MPC. These plans provide for monthly benefits based on length of service. Specified amounts per compensated hour for each employee are contributed to the trustees of these plans. Contributions by the Company to these plans amounted to $623,000 in 1995. The relative position of each employer participating in these plans with respect to the actuarial present value of accumulated plan benefits and net assets available for benefits is not available. The Company provides OPRBs to certain employees. The following tables set forth the accumulated postretirement benefit obligation and net periodic postretirementbenefit cost amounts recognized in the Company's consolidated financial statements at December 31: 1995 1994 (in thousands) Accumulated postretirement benefit obligation: Active employees $ 11,158 $ 10,710 Retired employees 8,330 6,495 19,488 17,205 Unrecognized transition obligation (14,042) (14,868) Unrecognized gain 259 1,449 Accrued postretirement benefit cost $ 5,705 $ 3,786 The weighted-average discount rate used to measure the accumulated postretirement benefit obligation was 7-1/4% and 8-1/2% for the years ended December 31, 1995 and 1994, respectively. The Company used premium growth rates to compute assumed healthcare cost trend rates. In 1995, these rates ranged from 9-2/5% in 1996 to 6.0% in 2004 and thereafter and in 1994 these rates ranged from 11-1/5% in 1995 to 5-1/4% in 2001 and thereafter. Had these healthcare cost trend rates been higher by 1%, the net periodic postretirement benefit cost would have been higher by $313,000 in 1995 and the accumulated postretirement benefit obligation would have been higher by $2,238,000 in 1995. Net periodic postretirement benefit costs for the years ended December 31 include the following components: 1995 1994 1993 (in thousands) Service cost-benefits earned during year $ 521 $ 555 $ 462 Interest cost on accumulated postretirement benefit obligation 1,439 1,271 1,322 Amortization of transition obligation 826 826 826 Net periodic postretirement benefit cost $2,786 $2,652 $ 2,610 For the years ended December 31, 1995, 1994, and 1993, the excess of net periodic postretirement benefit cost over the amount capitalized amounted to $1,954,000, $177,000 and $135,000, respectively. Segment Information The Company's operations include two business segments: regulated water utilities and unregulated utility-related services. The water utilities segment includes the operations of the Company's two water utility subsidiaries. The utility- related services segment provides utility line locating services, installation, repairs and maintenance of underground pipelines,data processing and billing and payment processing, and other utility-related services to both unaffiliated utilities and to the Company's water utilities, and holds real estate for sale or development. Intersegment activity primarily represents certain operating cost allocations between affiliates. Identifiable assets are those assets used exclusively in the operations of each business segment. Corporate assets are principally comprised of cash, miscellaneous receivables, and certain other property. The following table shows operating revenues, operating earnings and other summary financial information by segment as of and for the year ended December 31, 1995, 1994 and 1993. Utility- Water Related Utilities Services Corporation Consolidated 1995 (in thousands) Operating revenues: Unaffiliated $80,377 $ 66,688 $ -- $147,065 Affiliated 87 4,249 (4,336) Total 80,464 70,937 (4,336) 147,065 Operating earnings 30,404 5,022 -- 35,426 Depreciation 6,439 3,088 -- 9,527 Identifiable assets 330,058 74,162 4,659 408,879 Capital expenditures, excluding merger of MPC 20,941 6,894 79 27,914 Utility- Water Related Utilities Services Corporation Consolidated 1994 (in thousands) Operating revenues: Unaffiliated $73,524 $ 37,855 $ -- $111,379 Affiliated 87 4,147 (4,234) -- Total 73,611 42,002 (4,234) 111,379 Operating earnings 26,027 4,892 -- 30,919 Depreciation 6,017 1,803 -- 7,820 Identifiable assets 297,354 37,212 1,104 335,382 Capital expenditures 23,462 4,774 20 28,256 Utility- Water Related Utilities Services Corporation Consolidated 1993 (in thousands) Operating revenues: Unaffiliated $64,583 $ 19,659 $ -- $ 84,242 Affiliated 242 4,025 (4,267) -- Total 64,825 23,684 (4,267) 84,242 Operating earnings 21,645 4,349 -- 25,994 Depreciation 5,757 799 -- 6,556 Identifiable assets 280,823 29,739 1,881 312,443 Capital expenditures, excluding acquisition of SM&P 13,049 778 140 13,967 Commitments and Contingencies Pursuant to the 1986 Amendments of the Safe Drinking Water Act, the United States Environmental Protection Agency (EPA) continues to propose new drinking water standards and requirements which, if promulgated, could be costly and require substantial changes in current operations of the Company. The outcome of EPA's proposals are uncertain at this time. Additionally, the Indiana Depart- ment of Environmental Management issues permits for discharges from the Company's treatment stations, the terms and limitations of which can, and may well be, onerous. As a result, compliance with such permits may be expensive. On May 10, 1995, the Commission approved a Settlement Agreement entered into by the UCC, four intervening customers and IWC, which provided for an annual increase in IWC's rates of $2,547,000, or approximately 4%. The parties further agreed not to seek an adjustment in IWC's basic rates and charges prior to April 1, 1997, subject to IWC's interim right to request approval of new rates to cover operating expenses connected with implementing measures which might be required in connection with new National Pollutant Discharge Elimination System permits which IWC anticipates receiving for wastewater discharges at its Fall Creek and White River Stations (NPDES permits). The parties also agreed that prior to April 1, 1997, IWC may request that the Commission approve, in a separate proceeding, the continuation of the allowance for funds used during construction (debt component only), and the deferral of depreciation, on any capital expenditures made in connection with new NPDES permits at the Fall Creek and White River Stations or IWC's anticipated new South Well Field Station until a rate base determination has been made with respect to these items in IWC's next rate case. On March 22, 1995, the Commission granted IWC authority to issue, on or before December 31, 1996, an aggregate of $30,000,000 in securities, to consist of not more than $18,000,000 in the form of long-term debt and/or preferred equity,and, assuming favorable market conditions, up to $12,000,000 in common equity. IWC issued $18,000,000 of long-term debt in September 1995, in the form of First Mortgage Bonds, 5.85% Series due 2025. Proceeds from the issuance of these securities may be used for the construction, extension and improvement of IWC's facilities, plant and distribution system, reimbursement of IWC's treasury for plant capital expenditures previously made, and the discharge or refunding of short-term debt and higher cost long-term debt. In December 1995, Resources made an equity capital contribution to IWC of $10,505,000. The amount invested by Resources was derived from proceeds of the sale of common shares of the Company through its Dividend Reinvestment and Share Purchase Plan. The Company has agreements with five key executives which provide that in the event of change of control of the Company, each executive vests in a three-year employment contract at his then existing level of compensation. In the case of three of these key executives, in the event of change of control of the Company, a supplemental pension applies pursuant to their contracts that provides the difference between their benefits under the regular benefit plans and that which would be available upon attaining age 65. Quarterly Financial Data (Unaudited) Quarters First Second Third Fourth (in thousands, except per share data) 1995 Operating revenues (a) $ 24,455 $33,002 $ 43,831 $45,777 Operating earnings (a) 3,798 9,473 13,632 8,523 Net earnings 282 3,255 5,517 3,138 Net earnings per common and common equivalent share .04 .46 .73 .41 1994 Operating revenues (a) $ 21,514 29,056 32,632 28,177 Operating earnings (a) 3,118 8,599 11,386 7,816 Net earnings 423 3,227 4,238 2,254 Net earnings per common and common equivalent share .06 .47 .61 .33 (a) Certain reclassifications have been made to originally reported amounts to conform with classifications adopted for December 31, 1995. These reclassifications did not have a material effect on the quarterly results as originally reported. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders IWC Resources Corporation: We have audited the accompanying consolidated balance sheets of IWC Resources Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of shareholders' equity, earnings, and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IWC Resources Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Indianapolis, Indiana January 25, 1996 Selected Financial Data The selected consolidated financial data presented below has been derived from and should be read in conjunction with the Company's Consolidated Financial Statements and related Notes thereto included elsewhere in this report. Summary of Operations Data: Year Ended December 31, 1995 1994 1993 1992 1991 (in thousands, except per share data) Operating revenues $147,065 $111,379 $ 84,242 $ 63,452 $ 59,930 Operating earnings 35,426 30,919 25,994 24,113 22,304 Cumulative effect of accounting change -- -- -- -- 1,280 Net earnings $ 12,192 $ 10,142 $ 9,376 $ 8,113 $ 9,017 Per common and common equivalent share: Earnings before cumulative effect of accounting change 1.64 1.47 1.41 1.27 1.45 Cumulative effect of accounting change -- -- -- -- .24 Net earnings $ 1.64 $ 1.47 $ 1.41 $ 1.27 $ 1.69 Cash dividends per common share $ 1.40 $ 1.40 $ 1.40 $ 1.395 $ 1.38 Average number of common and common equivalent shares outstanding 7,438 6,901 6,658 6,379 5,335 Summary of Balance Sheet Data: December 31, 1995 1994 1993 1992 1991 (in thousands) Utility plant, net $ 288,871 $ 275,094 260,663 $253,786 $243,573 Total assets 408,879 335,382 312,443 275,112 279,608 Capitalization: Long-term debt (excluding current portion) $ 113,375 $ 98,225 $ 85,375 $ 86,275 $ 72,675 Preferred stock of subsidiary and redeemable preferred stock 5,705 5,705 5,705 4,505 4,505 Common shareholders' equity 106,328 78,938 77,014 67,205 66,695 Total capitalization $ 225,408 $ 182,868 $168,094 $157,985 $143,875 Management's Discussion and Analysis of Financial Condition and Results of Operations General The most significant changes in the consolidated financial condition and results of operations of IWC Resources Corporation and subsidiaries (Company) are attributable to the combined operations of its two segments: (1) water utilities and (2) utility-related services. These segments are discussed more fully in Notes to Consolidated Financial Statements, Segment Information. Beginning in 1993, the Company has grouped its operations according to major segments. The Company acquired SM&P Utility Resources, Inc. (formerly SM&P Conduit Co., Inc.) (SM&P) in June 1993, and Miller Pipeline Corporation (MPC) in August 1995. As a result of these acquisitions, many of the differences between results of operations in the utility-related services segment for 1995, 1994 and 1993 are due primarily to the operations of MPC and/or SM&P, which are included in this segment. 1995 Compared to 1994 Operating earnings in the water utilities segment increased to $30,404,000 (37.8% of revenues) in 1995 from $26,027,000 (35.4% of revenues) in 1994. Improvement in operating earnings in this segment is primarily due to the net effects of three increases in water rates approved by the Indiana Utility Regulatory Commission effective August 10, 1994, April 26, 1995, and May 10, 1995, and an increase of $1,087,000 in income taxes collected from developers, offset by a moderate increase in total operating expenses. Operating earnings in the utility-related services segment increased $130,000 in 1995 as compared to 1994; however, the operating margin decreased to 7.5% in 1995 as compared to 12.9% in 1994. The reduction in the operating margin is primarily due to increased labor and other operating costs incurred related to the expansion of business contracts at SM&P. Management is aware of the circumstances which caused this decrease and is taking steps to improve the operating margin in this segment during 1996 by introducing procedures to position itself to serve the upper quality-oriented end of its market and commence partnering efforts with companies in this market to eliminate service outages caused by underground damage. Total operating revenues increased $35,686,000 (32.0%). Operating revenues applicable to the water utilities segment increased $5,766,000, excluding an increase of $1,087,000 in income taxes collected from developers, representing an 8.2% increase over 1994, and is primarily due to the three rate increases and a moderate increase in total water consumption. Water consumption is affected by the frequency and pattern of rainfall, temperatures, the level of economic activity, and conservation efforts. The increase in utility-related services segment operating revenues of $28,833,000 (76.2%) is primarily due to $21,200,000 in operating revenues at MPC and the continued expansion of business contracts at SM&P. Total operation and administration and maintenance expenses increased $27,831,000 (43.7%) of which $26,052,000 is applicable to the utility-related services segment. The increase in water utilities segment expenses of $1,779,000 which is discussed below represents a 5.0% increase over 1994 and is primarily due to the effects of inflation on the Company's costs and other factors. Labor expenses increased $80,000 (.6%) mainly due to the net effects of a reduction in maintenance repairs experienced resulting from milder weather in 1995 as compared to the extremely cold weather in January and February of 1994, an increase in capitalized labor due to increased construction and other factors, offset by a general wage increase,effective January 1, 1995.Power costs increased $229,000 (8.2%) primarily due to increased power rates. Chemical costs increased $322,000 (26.7%) primarily due to increased usage and higher chemical costs. The cost of outside services increased $284,000 (4.7%) chiefly due to an increase in consulting and other services. Insurance expense decreased $114,000 (2.7%) primarily due to an insurance rebate received in June 1995. Regulatory expenses increased $200,000 (104.1%) primarily due to increased rate case expenses. Costs of the Company's pension and other benefit plans increased $756,000 (31.7%) primarily due to the amortization of cost of postretirement benefits other than pensions commencing May 1995 resulting from the settlement of IWC's rate case on April 26, 1995. Operation and administration expenses applicable to the utility-related services segment, excluding $16,668,000 in expenses applicable to the operations of MPC, increased $9,384,000 (33.4%). Labor expense increased $3,986,000 (21.5%) primarily due to the addition of employees resulting from the expansion of SM&P. Materials expense increased $511,000 (25.8%) primarily due to the expansion of business of SM&P.Transportation costs increased $1,259,000 (69.0%) primarily due to the increase in the number of vehicles, leasing costs and associated maintenance costs. Insurance expense increased $644,000 (24.4%) primarily due to higher healthcare premiums resulting from increased numbers of employees and increases in general liability and worker's compensation insurance premiums. Other fringe benefit costs, including pension related benefits, increased $1,121,000 (66.3%) primarily due to the cost of increased benefits to an increasing employee base. Cable cut costs increased $640,000 (55.3%) primarily due to the expansion of business and the increased costs associated with cable cuts. Amortization of acquisition costs increased $72,000 (6.4%) primarily due to the acquisition of MPC. Depreciation increased $1,707,000 (21.8%) of which $1,285,000 is applicable to the utility- related services segment. The increase in water utilities segment and utility-related services segment depreciation is primarily due to additional utility plant and other property placed in service including other property added through the acquisition of MPC. Taxes other than income taxes increased $1,569,000 (20.1%) of which $1,294,000 is applicable to the utility-related services segment which results primarily from payroll related taxes. The remaining increase of $275,000 applicable to the water utilities segment is primarily due to an increase in property taxes resulting from additional plant in service. The increase in interest expense, net, of $1,436,000 (18.0%) is largely due to the effect of higher average debt outstanding. Income taxes increased $1,096,000 (8.6%) primarily due to an increase of $1,087,000 in income taxes collected from developers. 1994 Compared to 1993 Operating earnings in the water utilities segment was $26,027,000 (35.4% of revenues) in 1994 compared to $21,645,000 (33.5% of revenues) in 1993. Improvement in operating earnings in this segment is due primarily to the inclusion in revenues of $3,611,000 in income taxes collected from developers in 1994. Operating earnings in the utility-related services segment was $4,892,000 (12.9% of revenues) in 1994 compared to $4,349,000 (22.1% of revenues) in 1993. The reduction in the operating margin is primarily due to additional expenses incurred to expand SM&P's business in 1994, and 12 months of amortization of acquisition costs applicable to SM&P compared to 6 months of amortization in 1993. Operating revenues increased $27,137,000 (32.2%) of which $18,196,000 is applicable to the utility-related services segment. The increase in water utilities segment revenues of $5,330,000, excluding $3,611,000 in income taxes collected from developers, represents an 8.2% increase over 1993, and is primarily due to an 8.8% increase in total water consumption, reflecting more normal weather conditions experienced during summer 1994 as compared to conditions experienced during summer 1993. Operation and administration expenses increased $18,582,000 (41.2%) of which $15,083,000 is applicable to the utility-related services segment. The increase in water utilities segment expenses of $3,499,000 which is discussed below represents a 10.9% increase over 1993 and is primarily due to the effects of inflation on the Company's costs and other factors. Labor expenses increased $435,000 (3.3%) mainly due to a general wage increase, effective January 1, 1994. Power costs increased $181,000 (7.0%) primarily due to increased pumpage. Chemical costs increased $454,000 (60.1%) primarily due to increased usage and higher chemical costs. Materials and transportation costs increased $477,000 (22.6%) largely due to an increase in maintenance activities. The cost of outside services increased $279,000 (4.8%) chiefly due to an increase in consulting and other services. Insurance expense increased $1,009,000 (30.8%) reflecting higher health and general liability insurance premium costs and nonrecurring credits recognized in 1993. Regulatory expenses decreased $97,000 (33.5%) primarily due to decreased rate case expenses. Costs of the Company's pension and other benefit plans increased $841,000 (54.5%) primarily due to the higher costs of benefits provided. Depreciation increased $1,264,000 (19.3%) of which $1,004,000 is applicable to the utility- related services segment. The increase in water utilities segment depreciation of $260,000 represents a 4.5% increase over 1993, and is primarily due to additional plant placed in service. Taxes other than income taxes increased $1,914,000 (32.4%) of which $1,114,000 is applicable to the utility-related services segment. The remaining increase of $800,000 applicable to the water utilities segment is primarily due to an increase in property taxes resulting from additional plant in service. The increase in interest expense, net, of $664,000 (9.1%) is largely due to the combined effects of higher average debt outstanding and higher interest rates. The increase in amortization of acquisition costs of $452,000 (67.1%) is primarily due to the acquisition of SM&P in 1993. Income taxes increased $3,396,000 (36.4%) primarily due to $3,611,000 in income taxes collected from developers. Liquidity and Capital Resources At the present time, the Company's business activities are conducted through its regulated water utilities and unregulated utility-related businesses. The Company acquired SM&P in June 1993 and MPC in August 1995 which diversified the Company's operations. The Company may, in the future, become involved in other water utilities and utility-related activities through the acquisition or formation of additional subsidiaries. The source of capital to finance these subsidiaries will be determined at the time they are established or acquired. However, the Company does not intend to enter into any business that would impair the Company's primary commitment to maintain and develop its water utilities to meet the current and future needs of its customers. Cash Flows from Operating Activities Cash flows from operating activities result primarily from net earnings adjusted for non-cash items such as depreciation and deferred taxes and changes in operating assets and liabilities. The seasonal nature of the Company's business typically results in higher operating revenues in the second and third quarters of the year than in the first and fourth quarters. Fluctuations in accounts payable and accrued expenses result primarily from property taxes and timing of payments, whereas federal income taxes vary with pretax earnings. Cash Flows from Investing Activities Cash flows from investing activities fluctuate primarily as a result of additions to utility plant and other property and the level of customer advances for construction, net of refunds. In August 1995, the Company used the proceeds from additional short-term borrowings of $5,600,000 to acquire the net assets of MPC.During 1995 and 1994, the Company added $42,835,000 (including $14,921,000 from the acquisition of MPC) and $28,256,000, respectively, to utility plant and other property. The Company continues to experience significant growth in its distribution system. Approximately 85 miles of new mains were placed in service in 1995 compared with approximately 113 miles during 1994. The Company received $8,233,000 in new customer advances for construction of new mains in 1995 and $9,175,000 in 1994. Such advances are subject to refund over a ten-year period based on the addition of new customers to the constructed mains. The Company refunded approximately $2,900,000 during 1995 and $2,200,000 during 1994. Cash Flows from Financing Activities Cash flows from financing activities consist primarily of the Company's borrowings, dividend payments and sales of common stock. The Company utilizes borrowings against its lines of credit with local banks for its short-term cash needs. In January 1994, the Company prepaid $1,200,000 in principal amount of its 12- 7/8% Series Bonds at a premium of $77,000. In February 1995, the Company prepaid an additional $1,150,000 in principal amount of these bonds at a premium of $65,000 and in December 1995, the Company prepaid the remaining $2,850,000 principal balance of these bonds at a premium of $138,000. Funds used to prepay these amounts were derived from proceeds of the sale of common shares through the Company's Dividend Reinvestment and Share Purchase Plan. During March 1994, the Company issued $14,000,000 of 6.31% Senior Notes due March 15, 2001. Proceeds from these notes were used to repay $13,700,000 in short-term notes with banks incurred for the acquisition of SM&P. In March 1995, the Commission granted IWC authority to issue, on or before December 31, 1996, an aggregate of $30,000,000 in securities, to consist of not more than $18,000,000 in the form of long-term debt and/or preferred equity, and assuming favorable market conditions, at least $12,000,000 in common equity. In September 1995, IWC issued $18,000,000 of 5.85% Series First Mortgage Bonds to secure a like amount of Economic Development Bonds issued by the City of Indianapolis bonds due September 1, 2025. Proceeds from this issue were deposited with a trustee and will be used for the construction, extension and improvement of IWC's facilities, plant and distribution system and reimbursement of IWC's treasury for plant capital expenditures previously made. In December 1995, Resources made an equity capital contribution to IWC of $10,505,000. The amount invested by Resources was derived from proceeds of the sale of common shares of the Company through its Dividend Reinvestment and Share Purchase Plan. The Company's goal is to reduce the percentage of net earnings applicable to common and common equivalent shareholders declared payable in cash dividends to a level which allows the Company greater flexibility in operating its businesses. Approximately 84%, 95%, and 99% of net earnings applicable to common and common equivalent shareholders were declared payable in cash dividends during 1995, 1994, and 1993, respectively. The reduction in the payout percentage in 1995 is due primarily to improved net earnings resulting from diversification of the Company's businesses and improved operating results in the water utilities segment. Cash dividends declared payable to common and common equivalent shareholders, as a percentage of net cash provided by operating activities, decreased to 45.2% during 1995, compared to 46.2% and 45.7% in 1994 and 1993, respectively. Long-term debt, as a percentage of total capital and long-term debt, decreased to 51.6% at December 31, 1995, compared to 55.4% at December 31, 1994. The decrease in the "debt ratio" was primarily due to the net effects of the issuance of new long-term debt of $18,000,000, the payment of long-term debt of $2,850,000, issuance of common stock through the Company's dividend reinvestment plan of $10,809,000, the issuance of common stock for the acquisition of MPC of $14,348,000, and an increase in retained earnings of $1,923,000. At December 31, 1995, the Company had lines of credit with banks aggregating $43,000,000 which require a compensating cash balance of $100,000. At December 31, 1995, unused lines of credit aggregated $13,659,000. Interest on borrowings under the lines of credit is variable (an average of 6.58% at December 31, 1995). Capital Expenditures Capital expenditures for 1996 are budgeted at approximately $48,000,000 and are expected to be financed primarily from internally generated cash, customer advances for construction, short-term bank borrowings, and long-term financing. Capital expenditures for the five-year period 1996 through 2000 are budgeted at approximately $150,000,000 with the major portion for new mains and distribution and plant facilities and other operating equipment. The Company anticipates that it will be necessary during the five-year period 1996 through 2000 to secure additional outside financing from both short-and long-term debt and equity capital, to finance planned capital expenditures and long-term debt maturities. Projected capital expenditures do not include any construction projects that IWC could be required to undertake to comply with legislative or regulatory environmental or water quality requirements that may be imposed in the future.If IWC is required to adopt new methods of water treatment, the costs involved may be substantial. Capital costs are presently estimated at $27,000,000 for ozonation and $105,000,000 for granular activated carbon (GAC). Additionally,IWC is subject to regulatory requirements regarding discharges from its treatment plants. The Company estimates that the cost to comply with possible changes to existing regulatory requirements for discharges approximate $2,000,000 in increased annual operating costs. Such costs and expenses should be recoverable through water rates, but only after appropriate regulatory action. Environmental Matters The Company's utility operations are subject to pollution control and water quality control regulations, including those issued by the Environmental Protection Agency (EPA), the Indiana Department of Environmental Management (IDEM), the Indiana Water Pollution Control Board and the Indiana Department of Natural Resources. Under the Federal Clean Water Act and Indiana's regulations, the Company must obtain National Pollutant Discharge Elimination System (NPDES) permits for discharges from its White River, White River North, Fall Creek, Thomas W. Moses, and the Geist treatment stations. The Company's current NPDES permits were to have expired on June 30, 1989, for White River and Fall Creek stations, December 31, 1990, for Thomas W. Moses, April 30, 1994, for Geist treatment station and January 31, 1996, for White River North Station. Applications for renewal of the permits have been filed with, but not finalized by, IDEM. (These permits continue in effect pending review of the applications.) Under the federal Safe Drinking Water Act (SDWA), the Company is subject to regulation by EPA of the quality of water it sells and treatment techniques it uses to make the water potable. EPA promulgates nationally applicable maximum containment levels (MCLs) for contaminants found in drinking water. Management believes that the Company is currently in compliance with all MCLs promulgatedto date. EPA has continuing authority, however, to issue additional regulations under the SDWA, and Congress amended the SDWA in July 1986 to require EPA, within a three-year period, to promulgate MCLs for over 80 chemicals not then regulated.EPA has been unable to meet the three-year deadline, but has promulgated MCLs for many of these chemicals and has proposed additional MCLs. Management of the Company believes that it will be able to comply with the promulgated MCLs and those now proposed without any change in treatment technique, but anticipates that in the future, because of EPA regulations, the Company may have to change its method of treating drinking water to include ozonation and/or GAC. In either case, the capital costs could be significant (currently estimated at $27,000,000 for ozonation and $105,000,000 for GAC), as would be the Company's increase in annual operating costs (currently estimated at $1,400,000 for ozonation and $5,600,000 for GAC). Actual costs could exceed these estimates. The Company would expect to recover such costs through its water rates; however, such recovery may not necessarily be timely. Under a 1991 law enacted by the Indiana Legislature, a water utility, including the utility subsidiaries of the Company, may petition the Indiana Utility Regulatory Commission (Commission) for prior approval of its plans and estimated expenditures required to comply with provisions of, and regulations under, the Federal Clean Water Act and SDWA. Upon obtaining such approval, the utility may include, to the extent of its estimated costs as approved by the Commission, such costs in its rate base for ratemaking purposes and recover its costs of developing and implementing the approved plans if statutory standards are met. The capital costs for such new systems, equipment or facilities or modifications of existing facilities may be included in the utility's rate base upon completion of construction of the project or any part thereof. While use of this statute is voluntary on the part of a utility, if utilized it should allow utilities a greater degree of confidence in recovering major costs incurred to comply with environmentally related laws on a timely basis. Rate Case On May 10, 1995, the Commision approved a Settlement Agreement entered into by the UCC, four intervening customers and IWC, which provided for an annual increase in IWC's rates of $2,547,000, or approximately 4%. The parties further agreed not to seek an adjustment in IWC's basic rates and charges prior to April 1, 1997, subject to IWC's interim right to request approval of new rates to cover operating expenses connected with implementing measures which might be required in connection with new National Pollutant Discharge Elimination System permits which IWC anticipates receiving for wastewater discharges at its Fall Creek and White River Stations (NPDES permits). The parties also agreed that prior to April 1, 1997, IWC may request that the Commission approve, in a separate proceeding, the continuation of the allowance for funds used during construction (debt component only), and the deferral of depreciation, on any capital expenditures made in connection with new NPDES permits at the Fall Creek and White River Stations or IWC's anticipated new South Well Field Station until a rate base determination has been made with respect to these items in IWC's next rate case. Securities On March 22, 1995, the Commission granted IWC authority to issue, on or before December 31, 1996, an aggregate of $30,000,000 in securities, to consist of not more than $18,000,000 in the form of long-term debt and/or preferred equity, and,assuming favorable market conditions, up to $12,000,000 in common equity. IWC issued $18,000,000 of long-term debt in September 1995, in the form of First Mortgage Bonds, 5.85% Series due 2025. Proceeds from the issuance of these securities may be used for the construction, extension and improvement of IWC's facilities, plant and distribution system, reimbursement of IWC's treasury for plant capital expenditures previously made, and the discharge or refunding of short-term debt and higher cost long-term debt. In December 1995, Resources made an equity capital contribution to IWC of $10,505,000. The amount invested by Resources was derived from proceeds of the sale of common shares of the Company through its Dividend Reinvestment and Share Purchase Plan. Trends, Inflation and Changing Prices Under normal conditions and particularly during periods of inflation, water utility revenues from increased water consumption will not keep pace with the increase in operating costs. Therefore, periodic water rate and service charge adjustments are necessary, with the frequency of such increases being partially determined by the amount of inflation. Results for any interim period are not indicative of results to be expected for the year. Typically, the seasonal nature of the Company's business results in a higher proportion of operating revenues being realized in the second and third quarters of the year than the first and fourth quarters of the year. Shareholder Information Annual Meeting The annual meeting of shareholders will be held at University Place Conference Center and Hotel, Room 132, 850 West Michigan Street, Indianapolis, Indiana, at 11:00 a.m. (EST) on Thursday, April 18, 1996. Notice of the meeting, a proxy statement and a form of proxy were mailed on or about March 14, 1996, to all shareholders of record February 29, 1996. Form 10-K and Financial Information A copy of the Company's annual report on Form 10-K (including financial statements, but without exhibits) filed with the Securities and Exchange Commission is available without charge upon request.Requests should be addressed to the Shareholder Relations Department, IWC Resources Corporation, P. O. Box 1220, Indianapolis, Indiana 46206. Dividend Reinvestment and Share Purchase Plan The Dividend Reinvestment and Share Purchase Plan (the "Plan") provides a convenient way to purchase common shares of the Corporation's stock and without payment of any brokerage or other fees. The "Plan" provides for a 3% discount from the current average market price on reinvested dividends and optional cash purchases. Holders of record of common shares, any series of the Corporation's special shares,certain employees and utility customers of the Corporation or its subsidiaries are eligible to participate. Participants in the plan can automatically reinvest cash dividends on all shares registered in their names; reinvest cash dividends on less than all shares and continue to receive cash dividends on the remaining shares in their names; invest by making optional cash purchases of common shares in any amount in excess of $100 ($10 in the case of employees). Brokers, nominees, and investment companies are not eligible to elect these options. A prospectus describing the "Plan" is available upon request by writing or calling the Shareholder Relations Department, (317) 263-6407. Shareholder Inquiries Shareholders with questions concerning their accounts, dividend checks, or stock certificates should contact the Company's stock transfer and dividend disbursing agent as follows: FIFTH THIRD BANK CORPORATE TRUST SERVICES MD-1090F5 38 Fountain Square Plaza Cincinnati, OH 45263 (800) 837-2755 or (513) 579-5320 Stock Statistics The common stock of the Company is traded over-the-counter under the NASDAQ National Market System symbol of IWCR. The following table sets forth, on a per-share basis, the high and low sale prices of the Company's common stock and dividends paid per share during the last two years. Common Stock Dividends Declared High Low Per Share(cent) 1995 Fourth Quarter $ 20 1/2 $ 18 3/4 35 Third Quarter 19 3/4 18 3/4 35 Second Quarter 20 1/4 18 35 First Quarter 20 3/4 18 1/4 35 1994 Fourth Quarter 21 1/2 18 1/2 35 Third Quarter 20 1/2 17 3/4 35 Second Quarter 22 1/4 21 35 First Quarter 23 20 3/4 35 Distribution of Shareholders December 31, 1995, of Record Other States & Foreign Indiana Countries Total Holders 4,780 1,928 6,708 71% 29% Shares 3,210,766 5,036,587 8,247,353 61% 39% IWC Resources Corporation Officers James T. Morris Chairman of the Board, Chief Executive Officer and President Joseph R. Broyles President - IWC Industries J. A. Rosenfeld President - IWC Utilities Kenneth N. Giffin Senior Vice President - Governmental Relations and Real Estate John M. Davis Vice President, General Counsel and Secretary Alan R. Kimbell Vice President - Marketing James W. Shaffer Vice President - Corporate Affairs Murvin S. Enders Vice President - Administrative Affairs James P. Lathrop Assistant Treasurer and Chief Accounting Officer Peggy J. Stinson Assistant Secretary Indianapolis Water Company Officers James T. Morris Chairman of the Board and Chief Executive Officer J. A. Rosenfeld President and Chief Operating Officer Paul J. Doane Executive Vice President Kenneth N. Giffin Senior Vice President - Governmental Relations John M. Davis Vice President, General Counsel and Secretary Robert F. Miller Vice President - Engineering David S. Probst Vice President - Business Development Tim K. Bumgardner Vice President - Operations Patricia L. Chastain Vice President - Community Affairs James W. Shaffer Vice President - Corporate Affairs Martha L. Wharton Vice President - Customer Service L. M. Williams Vice President - Human Resources James P. Lathrop Assistant Treasurer and Chief Accounting Officer Peggy J. Stinson Assistant Secretary Miller Pipeline Corporation Officers Don W. Miller Chairman of the Board Dale R. Miller President and Chief Operating Officer David D. Waters Senior Vice President E. Paul Miller Vice President Henry Topf, Jr. Vice President Douglas S. Banning, Jr. Secretary/Treasurer Michael Kempf Assistant Secretary SM&P Utility Resources, Inc. Officers James T. Morris Chairman of the Board Daniel S. Baker President Michael B. Stayton Executive Vice President J. A. Rosenfeld Executive Vice President and Treasurer John M. Davis Corporate Secretary Utility Data Corporation Officers James T. Morris Chairman of the Board and President James D. Kiefner Executive Vice President J.A. Rosenfeld Vice President and Treasurer Martha L. Wharton Vice President - Customer Service Arthur K. Smith Vice President - Data Services John M. Davis Corporate Secretary James P. Lathrop Assistant Secretary and Assistant Treasurer IWC Resources Corporation Board of Directors Joseph D. Barnette, Jr. Chairman and Chief Executive Officer Bank One, Indianapolis, NA Robert A. Borns Chairman of the Board Borns Management Indianapolis Joseph R. Broyles* President IWC Industries Susan O. Conner Sr. Vice President, Public Affairs USA Group, Inc. Indianapolis Murvin S. Enders (Ret. 1/19/96) President Team Enders, Inc. Indianapolis (Not pictured) Otto N. Frenzel III* Chairman of the Executive Committee National City Bank, Indiana Indianapolis J. B. King Vice President and General Counsel Guidant Corporation Indianapolis Robert B. McConnell* Chairman of the Executive Committee IWC Resources Corporation and Indianapolis Water Company J. George Mikelsons Chairman of the Board and Chief Executive Officer Amtran, Inc. Indianapolis Thomas M. Miller* Associate Schenkel, McVey & Associates (Retired Chairman, NBD Indiana) Indianapolis James T. Morris* Chairman of the Board and Chief Executive Officer IWC Resources Corporation and Indianapolis Water Company Jack E. Reich* Chairman of the Board Emeritus American United Life Insurance Company Indianapolis (Not pictured) J. A. Rosenfeld President IWC Utilities Fred E. Schlegel Partner Baker & Daniels, Attorneys Indianapolis Milton O. Thompson (Appointed 1/19/96) President Grand Slam Companies Indianapolis *Member of Executive Committee Resources Corporation 1220 Waterway Boulevard P.O. Box 1220 Indianapolis, Indiana 46206 (317) 639-1501 IWC Resources Corporation used recycled paper for its annual report. EX-21 3 Document Summary: Document: EX-21-95 Author: Addressee: Operator: Creation Date: 03/28/1996 Modification Date: 03/28/1996 Identification key words: Comments: Exhibit 21 SUBSIDIARIES IWC Resources Corporation has seven wholly owned subsidiaries, each of which is incorporated under the laws of the State of Indiana. These corporations are Indianapolis Water Company, Harbour Water Corporation, Utility Data Corporation, IWC Services, Inc., SM&P Utility Resources, Inc., Waterway Holdings, Inc., and Miller Pipeline Corporation. EX-23 4 Document Summary: Document: EX-23-95 Author: Addressee: Operator: Creation Date: 03/28/1996 Modification Date: 03/28/1996 Identification key words: Comments: Exhibit 23 Consent of Independent Certified Public Accountants The Board of Directors IWC Resources Corporation: We consent to incorporation by reference in the Registration Statement No. 33-30221 on Form S-8 and Registration Statement No. 33-6406 on Form S-3 (originally on Form S-16) of IWC Resources Corporation of our reports dated January 25, 1996, relating to the consolidated balance sheets of IWC Resources Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of shareholders' equity earnings and cash flows for each of the years in the three-year period ended December 31, 1995, which report appears in the 1995 Annual Report to Shareholders and has been incorporated by reference in the December 31, 1995 annual report on Form 10-K of IWC Resources Corporation. KPMG PEAT MARWICK LLP Indianapolis, Indiana March 22, 1996 EX-27 5
UT This schedule contains summary financial information extracted from the consolidated balance sheet as of December 31, 1995, and from the consolidated statements of earnings and cash flows for the year then ended, and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1995 DEC-31-1995 PER-BOOK 288,871 47,169 30,427 42,412 0 408,879 86,575 0 20,321 106,328 1,200 4,505 113,375 0 30,589 0 0 0 0 0 152,882 408,879 147,065 13,820 0 111,639 35,426 (9,211) 21,587 9,395 12,192 203 12,192 10,269 7,943 22,704 1.64 1.64
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