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Dear Shareholders:
I am very pleased to tell you about fiscal year 1996 - one of the most outstanding years in Indiana
Energy's 51-year history. Benefiting from the coldest weather in a decade and
by growing and managing our core gas
distribution business and related gas marketing business, we realized
superior financial results. We also made progress in dealing with the
future of the evolving energy industry. While we are proud of our past and
current accomplishments,
it is the future upon which we all must focus.
This led us to the theme of this annual report - "The Future: Making Sense
of It All." Before we look to the future, though, let's take a look at
fiscal 1996 financial and operating highlights.
In fiscal 1996, we realized record net income and record earnings per
share (EPS). Net income was $42 million, compared to nearly $33 million in
fiscal 1995. EPS were $1.87 versus $1.46 last year. The previous record
for EPS was $1.62 in 1993. Our return on equity of 14.6 percent
significantly exceeds last year's ROE of 11.9 percent. To establish and
measure performance, we compare ourselves to a group of nearly 30 peer
companies - local distribution companies selected by an independent
investment banking firm. In fiscal 1996, the estimated average ROE
achieved by our peers was 11.8 percent.
Because of the current and future outlook for company earnings, Indiana
Energy's board of directors increased the quarterly dividend in July 1996
from 27 1/2 cents per common share to 28 1/2 cents per share. This
3.6-percent increase brought the year's dividend paid to a record $1.11,
or $1.14 annualized. This is the 24th consecutive year that we increased
dividends paid.
Several factors contributed to our ability to achieve these outstanding
results:
- Weather that was 8 percent colder than normal. This is a marked
contrast to fiscal 1995, when weather was 13 percent warmer than
normal;
- The continued strength of our service area economy, which netted
more than 10,000 new residential and commercial customers and
a 6.3-percent increase in industrial gas throughput;
- A continued strong focus on managing Indiana Gas' core business; and
- Gas marketing affiliates that contributed 8 percent to consolidated net
income.
We believe that our incentive compensation plans were also a key in our
ability to achieve these outstanding results. Bargaining and
non-bargaining employees companywide received maximum payout through our
Performance Incentive Plan because of their dedication and hard work in the
areas of customer service, safety, cost control and achieving the
above-average ROE. Likewise, our management incentive compensation program is linked to achieving
corporate goals, including return on equity and increased shareholder value.
The increased margin resulting from the very cold weather allowed us
to accelerate some projects that will help us maintain and strengthen our
distribution system. It also means we increased our operation and
maintenance (O & M) expenditures from last year's levels. You may recall
that last year's operating expenses were held well below budgeted levels to
offset margins lost due to the extremely warm weather. Despite the
11.3-percent increase in O & M this year, we remain committed to
controlling these costs. While weather may cause year-to-year
fluctuations, long-term, we plan to limit annual expense growth to an
average annual rate below the Consumer Price Index.
Our total return for fiscal year 1996 was about 18 percent, and for the
five-year period ending in 1996 it was about 75 percent. Although these
returns are good, relative weakness in our stock price at fiscal year end
brought our returns to less than the averages for our peer group of nearly 30 companies.
Over the last 10 years, the total return earned for our shareholders ranks us fourth
out of the nearly 30 companies. As I will discuss in the remainder of my letter,
I believe our strategy should help return our performance to the outstanding level we have
achieved in the past.
We believe we are positioned to exceed the industry
average for dividend growth. Some analysts are projecting
2 1/2 - to 3-percent average dividend growth this coming year. We're
optimistic about our performance for several reasons: our growing and
diverse service area; a supportive regulatory climate; competitive prices;
our proven ability to
control costs over time; and an historically conservative dividend payout
ratio that has enabled the company to increase dividends paid year after year.
The continuously changing energy industry requires us
to be thughtful and creative about how we will grow the company,
differentiate ourselves from other utility investments and increase
investor value. So now, let me share with you what we have been doing and
here we are heading.
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