ML20093L338

Annual Rept 1983,Public Svc of Indiana

ML20093L338
Person / Time
Site:	Marble Hill
Issue date:	12/31/1983
From:	Barker H, Menscer D, Shields S PSI ENERGY, INC. A/K/A PUBLIC SERVICE CO. OF INDIANA
To:	Harold Denton Office of Nuclear Reactor Regulation
References
NUDOCS 8407310373
Download: ML20093L338 (37)

Text

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ANNUAL RNPORT 1983 PUBLIC ,

SERVICE INDIANA

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HIGHLIGHTS

% Inacase 1983 1982 (Dmease)

Kilowatt-hours sold

• 17 655 17 635 .1 Operating revenues * $ 873.9 $ 809.4 8.0 Net income' $ 255.8 $ 233.2 9.7 Common stock-Per share Earnings Paum operations $ .98 $ 1.02 (3.9)

AFUDC ** 3.48 3.53 M

$ 4.46 $ 4.55 (2.0)

Dividends paid $ 2.82 $ 2.72 3.7 Book value $ 27.32 $ 26.05 4.9 Market prire at year-end $ 11.63 $ 24.88 (53.3)

• • Alknvance For Funds Used During Construction Rate of return (year end) on-Net plant ir.

service and inventories 10.1% 9.2%

Customers at year-end 544 730 541 797 .5 Electric heating customers 102 520 98 832 3.7 Average kilowatt-hours used-domestic customers 10 479 10 411 .7 Fuct cost per million bru consumed $ 1.40 $ 1.45 (3.4)

System peik load in megawatts Summer 3 771 3 517 7.2 Winter 3 583 3 683 (2.7)

Capital Expenditures Utility plant' $ 87.2 $ 217.0 Utility plant-reimbursements' (108.6) (107.4) l Marble Hill nuclear project' 579.7 438.0 Nuclear fuel owned

• 6.5 15.7

$ 564.8 $ 563.3 .3 nus ms

ANNUAL REPORT l983 Public Service Indiana is an investor-owned utility serving the electnc l

PUBLIC l energy needs of over 544,000 customers in central and southern SERVICE Indiana. Our 69-county service area INDIANA embraces a widely diversified industrial, commercial and agricultural economy in a largely rural territory. We burn coal mined in Indiana, Illinois and Kentucky to produce 99 percent of our electrical output.

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Our corporate offices are located at 1000 East Main Street in Plainfield, Indiana 46168. Our phone number is

, (Area 317) 839-9611.

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INDIANA l

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TO THE SHAREHOLDERS e A request for emergency rate reliefofS 105 million on an annual basis was filed January 16,1984 with the Public Service Commission ofIndiana (Indiana Commis-Without question,1983 was the most dif- sion). Hearings were held in February. A ficult year in the Company's history. The Settlement Agreement between the Com-political and financial clouds over the Com- pany, the Utility Consumer Counselor pany's Alarble Hill nuclear project in the latter and certain intervenors was reached on part of the year overshadowed all other February 29, and approved by the Indiana developments dun,ng the penod. Commission on Alarch 8, providing for a As a result of events beyond the Company's 5% interim emergency increase of $37.9 control during the past several months, the million. These addit:onal revenues will be Board of Directors announced on January 16, separately accounted for and will be 1984, that the Company was financially deducted from the Alarble Hill invest-unable to proceed with the construction ofits ment to be amortized; such revenues will portion of Alarble Hill. Formal cancellation of not affect earnings in 1984.

the project, however, is contingent upon the Additional details of the Settlement Agree-actions of the Company s partner, Wabash . .

ment, including regulatory pnnciples to be Valley Power Association, Inc. (WVPA).

applied to Atarble Hill costs, are descnbed As of December 31,1983, the Company's in the " Rates" section on page 8.

investment in the project was $2.3 billion (in-cluding $230 million for nuclear fuel). If e Work has begun on a request to the In-cancelled, the Company's 83% share of the diana Commission seeking authorization final cost ofits investment in the project is to recover the Alarble Hill investment estimated to be in excess of$2.8 billion. Addi- through rates over a period of years. This tional expenditures yet to be made include petition is expected to be filed in late payments for work performed befbir con- SP""B-struction was halted, contractor and material The Company believes that the Atarble settlements, commitments under nuclear fuel Hill expenditures were prudently made on '

contracts and maintenance and secunty to behalf of the customers and that preserve assets at the site. Atarble Hill expen- customers should pay such costs over a ditures for 1984, excluding capital costs, are reasonable time period. The Company in-estimated at $118 million. tends to use all available avenues to defend Because of cash needs ihr these expenditures this position and to protect shareholder at Alarble Hilland throtherconstruction,on. interests.

going senior capital costs, cash operating rc~ e The Company will also file a request with quirements and the m, abihty to selllong term the Federal Energy Regulatory Commis-securities, the Company s imancial condition sion fbr increased rates to its wholesale .

is severely strained. customers at a later date.

Actions which have been taken to meet our short-term financial needs and to rebuild f,or e Negotiations fbr a credit agreement of up to $500 million with a group of banks are the longer term include:

in p ss.

e Stringent measures have been im-plemented to reduce operating costs and Even with these steps, the 1 oard of Directors construction expenditures to levels which C""cluded that further action was necessary to provide minimum service requirements. restrict cash expenditures and reduced the 2

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• E I*N*D*1*A*N*A quarterly dividend on the common stock ,

ly limit the ability of the Company to con-from 72c to 25c per share effective with the tinue dividend payments even at the reduced March 1,1984 dividend. Such action, taken level, with great reluctance, was considered to be Public Service Indiana serves the electric essential m the long-term interests of needs of over 544,000 customers in a shareholders.

69-county area. This job must go on-even though quality of service levels may be en-As m . dicated in the February 6,1984 letter t dangered by inadequate financial resources.

shareholders, the Allowance for Funds Used The great disappointment of 1983 relating to During Construction (AFUDC) -a non-cash Marble Hill will affect both our shareholders credit to income representing the cost of and customers for years to come. The poten-capital applicable to construction-is being tial for shortages ofelectric power in the next discontinued on accumulated Marble Hill decade has been increased substantially, costs as of January 1,1984. The discon-tinuance of AFUDC, together with certain The employees of Public Service Indiana have Marble Hill expenditures ofapproximately $8 demonstrated unusual cooperation and million which will be chargeable to income in understanding during this extremely difficult 1984, will result in a substantial decline in period which saw over 1,700 jobs eliminated.

earnings for the year 1984. It is the Our employees provide dependable electric Company's intention to include all costs of service with dedication and professional-the Marble Hill project, including those in- ism-they remain one of our strengths.

curred subsequent to December 31,1983, in We cannot close without expressing our ap-its petition to recover Marble Hill costs in preciation to you, our shareholders, for your rates. support in the last several months. The impact The Board believes that Marble Hill will be on your investment in the Company has been needed to meet future power requirements in extremely severe-but we pledge our max-Indiana. However, support for this nuclear imum efforts to rebuild the Company's finan-energy source has been severely eroded in re- cial health in the years ahead.

cent months through various state govern-ment actions and the Governor's endorse-ment of recommendations of a special task -

force appointed by him.

HUGH A. BARKER Rebuilding the financial health of the Com- Chairman pany is, and must be, the focus ofour efforts in the next several years. It will be a difficult task-and will require regulatory, political and legislative support as well as consumer g g understanding.

DARRELL V. MENFCER Restoration of the common dividend to President former levels will be a primary goal in rebuilding financial health. However, no March 8,1984 assurances can be given as to timing and amounts. Inadequate rate treatment by regulatory authorities relative to the recovery of Marble Hill costs would further impair the financialintegrity of the Company and severe-3

MARBLE HEL ,

financial integrity of the Company and a iert a severe financial emergency }. the 1984 1986 As 1983 began, construction at Marble Hill period by reducing outside financing re-was proceeding toward the scheduled in- quirements and enabling the attraction of service dates of December 1986 and June capital on reasonable terms.

1988. The total cost of the project was Hearings by the Indiana Commission on estimated at $5.06 billion. the proposed Rate Control Plan and the in-An audit of the Marble Hill project estimate dependent audit report of the estimated costs and schedule by an independent engincring of Marble Hill were held August 8-12,1983.

firm was ordered by the Indiana Comm. on On August 16,1983, the Indiana Attorney in the Company's January 1983 rate order. General issued an opinion to the Indiana The audit report was filed with the Commis- Commission stating that the proposed Rate n sion in May 1983. The report indicated that Control Plan was not authorized by Indiana the total project cost, assuming scheduled in- law. The Company believes that the opinion senice dates of December 1986 and June was not based on authoritative legal analysis 1988, would be $5.5 billion. The report also and reflected a lack of understanding of the indicated that the most pcobable in-senice proposed Plan.

dates were November 1987 fcr Unit 1 and August 1988 for Unit 2 with a total estimated SPECIAL TASK FORCE project cost of slightly less than $6 billion. On August 25,1983, the Indiana Commis-Differences between the Company's revised si n suspended further proceedings m the Rate Control Plan. This action was taken in June 1983 estimate of 55.13 billion and the audit report findings related to additional labor response to a request by Governor Robert D.

costs, the impact of potential regulatory Orr that hearings be suspended while a special Task Force exam,ned i vanous Marble changes and additional financing costs reflect-Hill matters.

ing later in-senice dates. After reviews of the Company's and the independent engineering Th: Task Force, consisting of five business-firm's estimates, the Company concluded that mea, was appointed by the Governor on

, its cost estimate and completion schedule were September 9. The Task Force was to evaluate achievable but would require superior perfor- the desirability of completing Marble Hill mance. and the timing of that completion and to ex- --

• • I"* the full range ofalternative methods of RATE CONTROL PLAN .

financing, including any new legislation In its January 20,1983 retail rate order, the which might be needed to implement their Indiana Commission directed the Company recommendations. ,

and the Commission Staff to establish a plan The Task Force retained Arthur D. Littic, a which would achieve graduahsm in im- consulting firm, and Salomon Brothers, Inc.,

plementing rate increases and avoid

, an investment banking firm, as consultants.

precipitous increases when the Marble Hill The Task Force met for the first time on units were placed m service. September 22.

A proposed Rate Control Plan was fiicd by DurinB the Task Force deliberations, senior .

! the Company with the Indiana Comnussion management of the Company met with the on July 8,1983. The Plan provided for rate Task Force and their consultants on a increases of 8% per year fbr a 6-year period.

number of occasions as they reviewed various The Plan was also designed to maintain the alternatives ranging from completion of both units to cancellation of both units. The ..

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Company stressed the need for Marble Hill curred in the two-year extension of the con-throughout these meetings, including the struction period and $150 million for con-need for capacity to support Indiana's future struction scope changes and design modifica-economic growth, the increasing age of the tions.

Company's present coal-fired generating As a result of the revised estimates, the capacity and the potential for adverse acid Board decided to sharply reduce current ex-ram legislation which could affect those

, penditures at the site, pending determination facilities.

as to the availability of financing. Construc-REVISED MARBLE HILL tion activity at the site was to continue at a ESTIMATE minimum level consistent with the ability to complete the project. Approximately 2,500 As a result of ongoing studies of start-uP craft workers were laid offin early November schedules, the Company announced on Oc- and further reductions to about 4,000 per-tober 10,1983, that the estimated start-uP sonnel were planned from October's peak period for Unit I was being increased 6 months employment level of almost 8,000.

to a revised schedule of 24 months. The start-up period reflects the time between comple- TASK FORCE REPORT tion ofmajor systems and fuel loading when se- On December 21, 1983, the Task Force quential testing ofsuch systems is performed t issued a summary report to the Governor; assure their safety and readiness for operation. two days later, the Governor endorsed the At the same time, the Company considered recommendations of the Task Force. The options available to finish construction more principal recommendation was that Marble rapidly but within the stringent safety and Hill not be completed. The Task Force based quality constraints establishe 1 for the project. its decision on its conclusion that additional generating cap city w uld not be needed un-On October 28, the Company announced til 1993 or later (depending on load growth major changes in cost estimates and time and other assumptions). The Task Force also schedules. During 1983 the project had fallen 70 working days behind schedule. This dday saip that the costs of the plant, which they was largely due to structural steel modifica-estimated at $7.7 bilh,on, compared un-fav rably with the alternative of new coal-tions required to meet scismic requirements fired plants.

which also adversely affected the progress of electrical work. After an analysis of remaining The Task Force also recommended that work, optimum labor force requirements and shareholders absorb the substantial portion productivity rates, and the required exten- of all costs pertinent to Marble Hill.

sion of start-up time, the construction However, ifsuch treatment would impair the schedule was extended 24 months. Ur; der Company's access to capital markets and the revised schedule, it was estimated that result in even higher rate increases and/or Unit I would be placed in commercial opera- deterioration of service, some portion of the tion December 1988 and Unit 2 in cost should be assigned to customer.. If the mid-1990. ratepayer is to pay a portion ofcosts, the Task The revised cost of the project was estimated Force recommended that the Marble Hill c st be written offover 20 years with a 5-year at approximately $7 billion. About 74%, or

$1.4 billion, of the increase was due to the phase-m penod and that the Company should not be allowed to earn a return on the additional cost ofcapital during the const: ac-unam rtized balance. The Task Force m-tion period (Allowance for Funds Used Ft. -

dicated that rate increases during the 5-year ing Construction). The remainder of the in creas(d cost was due to labor costs to be in-l im in penod should average less than 3%

y r y, nr.

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On February 7,1984, the full Task Force proximately 4,000 pcople, including 900 Report was released. The detailed report In- Company employees. Demobilization is con-cludes the methodology and documentation tinuing consistent with maintenance of the used by the Task Force in reaching their con- project site and preservation of materials, clusions and recommendations, equipment and records.

Major ditrerences between the Task Force LITIGATION Report and Company forecasts relate to load growth, new generating capacity re- s indicated more fully m. Note 13 of the

" Notes to Fmancial Statements , a number quirements and reserve margins. In addition, of shareholder suits have been filed against there are other significant differences in ,

assumptions related to off-system sales, an- the Company, certain directors and certam nual increases in coal prices, retirement of ex-officers of the Company, Morgan Stanley &

isting generating equipment and estimated Co., Incorporated, Dean Witter Reynolds, capital expenditures and financing re- Inc. and Arthur Andersen & Co. The com-quirements to meet potential acid rain legisla- plaints purport to be class actions against the tion. named defendants on behalf of all persons who purchased common stock of the Com- l The ftdl Task Force Report implied that no pany during various periods in 1982 and dividend should be paid on the common 1983. The Company believes it has substan-stock for three years and that common tial defenses to these complaints, but their dividends should be limited thereafter to outcome cannot be determined. Two stock-35% of net income. The report noted that holder derivative actions have been filed on the Task Force's financial consultant had not behalforthe Company against certain officers recommended this particular alternative. and certain directors.

The Company strongly disagrees with the On February 10, 1984, WVPA filed suit Task Force recommendations, including the against the Company in the U.S. District assignment of costs to shareholders. The Court, Indianapolis Division, seeking S466 Marble Hill construction program was aP- million plus interest and other damages to proved by the Indiana Commission as being recover it3 share of Marble Hill. The suit necessary in the public interest. The Com- charges that the Company violated federal pany believes that the Marble Hill expen- securities law in inducing WVPA to buy a ditures were prudently made on behalf of 17% ownership share in Marble Hill and customers and that shareholders thould not alleges various misrepresentations or omis-be required to absorb such costs. The Com- sion ofinformation relating to that project.

pany will act to defend this position as The Company believes that it has substantial vigorously as possible. defenses to this suit, but its outcome cannot The Company also believes that the Task be determined.

Force recommendations on common divi-dends are unrealistic and will not meet the Task Force's stated objective of allowing the Company to have access to capital markets when capital is required.

CONSTRUCTION SUSPENDED Pending further review of the Task Force recommenda ions, the lloard of Directors suspended al; construction activities etrective January 3,1984 resulting in the layoff of ap.

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YEARIN REVIEW . REVENUES-KWH SALES-CUSTOMERS Operating revenues rose s65 million, or 8%

EARNINGS-DIVIDENDS to $874 million and reflected retail and Net income in 1983 was $256 million com. wholesale rate increases placed in effect in ear-pared with 1982's $233 million. Earnings per ly 1983. Total kilowatt-hour sales of 17.6 share of common stock declined from S4.55 billion for the year were virtually the same as to $4.46 and reflected an increase of 5.8 1982.

million average common shares outstanding. Domestic and commercial kilowatt-hour The Allowance for Funds Used During Con- sales both increased 1% for the year. In-struction (AFUDC), pdncipally due to Marble dustrial sales rose 4% for the year reflecting Hill construction, was $221 million in 1983 some recovery in production levels; in 1982, and $198 million in 1982. Earnings per share industrial sales had dropped 6% compared attributable to AFUDC, less deferred tax ex- with the prior year. Auto manufacturing and pense applicable to the debt portion of steel, aluminum and cement production AFUDC, were $3.48 for 1983 and $3.53 for were up sharply m, 1983.

1982. Wholesale sales declined 9% for the year. In Etrective January 1,1984, AFUDC ap- December 1982 and January 1983, two plicable to Marble Hill costs was discon. wholesale groups purchased ownership ofap-tinued. The Company has concluded that Proximately half of the Company's Gibson further accrual of AFUDC, in light of the Unit 5. Such capacity is now used to supply a decision to discontinue further participation portion of their kilowatt-hour requirements.

in the construction of Marble Hill, would Net customer additions for the year totalled not be in accordance with generally accepted 2,933 compared with 996 last year. Space accounting principles. The Company's in- heating customers increased almost 3,700 for dependent public accountants concur with the year to 102,500 or 19% of all customers.

this conclusion and also advised the Com-pany that expenditures on Marble Hill for 1983 maintenance of the project site, and preserva- INDUSTRIAL tion of materials, equipment and records are POWER USE g,, p,g,g, chargeable against current income. Such ex- (thousands) fmm 1982 penditures in 1984 are estimated at $8 h

[tfa"im 8' "*5' 'f, y'  !'i,2>

s million. Motor Vehicics & Equipment 534 746 14.5 Engines & Machinery 330 906 7.4 Dividends per share of common stock paid f,'p' p % ,, 3g (13j) in 1983 were $2.82 and reflected a 5.03 Aiuminum 290 321 12.2 quarterly increase on September 1,1983. As d' pu,,, gs 731 22j previously noted, the Board of Directors Fabricated Metal Pmducts 216 340 5.9 reduced the March 1,1984 quarterly divi- 8',i"*;* pC'oi

',Ya,*d ""' @8'E

, l'(,2t) dend on common stock from $.72 to S.25 Electric Equipment & Machinery 157 524 6.0 Bakery & Beverage Pmducts 133 904 1.0 per share. inou,choid Appiiance. 102 092 19.1 Glass Pmducts 98 567 19.3 Gypsum, stone, sand & Gravel 74 844 5.4 Rubber Pmducts 71 821 12.0 Natural Gas & Petmicum 64 088 (10.4)

Radio & Television 52 881 (26.8)

Fumiture & Fistures 48 982 6.4 Lumber & Wew>d Products 42 782 7.4 Canned & Fmzen Foods 42 295 (12.6) other Diversified Industrics 743 843 4.5 i 5 860 041 7

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RATES -

in rates will be made with both the Indiana i . . Commission and the Federal Energy llegu-Because of m. sufficient mternal cash genera-latory Commission later in the year.

tion, the Company filed an emergency 14%

rate relief petition of $105 million on an an- A 12% retail rate increase totalling $81.2 nual basis with the Indiana Commission on million annually was approved by the Indiana i January 16,1984. As noted in the Letter to Commission on January 20,1983. A negoti-Shareholders, a Settlement Agreement which ated 13.3% increase in rates to wholesale provides fbr a 5% increase in revenues of customers of $15.4 million annually became

$37.9 million was concluded by the parties to efrective February 1,1983.

the emergency rate case proceeding on Feb-OPERATING EXPENSES

ruary 29,1984.

In 1983, total generation increased 11% to The Settlement Agreement also provides 24.3 billion kilowatt-hours. Despite this in-that the Company take further actions to

' crease in proJuction, total fuel expense rose conserve cash and reduce operating expenses, including deferral of all directors' fees,15% nly 5%. Even with increased generation, in-cre sed customers and operating expenses fbr I salary reductions fbr the Chairman and the President and 71/2% for all other otlicers and a f1:11 year on the Company's portion of the e

department heads.

new Gibson Umt 5, placed in service m Oc-tober 1982, operation and maintenance ex-The Agreement also provides that the In- penses increased only nominally in 1983 and

diana Commission's order in this case should reflect extremely tight control of expen-set Ibrth the fbilowing assurances of prin- ditures at all ope' rating levels.

ciples to be applied in the recovery of Marble On a unit cost basis, coal prices declined 3%.

Hill costs to the extent such costs were prudently incurred: Negotiated reductions with coal suppliers were a major factor in this price decline. This

. The regulatory treatment should ensure the decline in fuel costs benefited customers by continued ability of the Company to meet reducing fuel adjustment charges $8 million.

its contractual and franchise obligations and Fuelinventories were also reduced nearly $39 f assist in an orderly recovery to financ'al million, e health.

- Ofrsystem power saics totalled 5.1 billion

[ .The regulatory treatment should enable the kilowatt-hours ihr 1983 compared with 2.9 i

Company to regain access to capital markets billion kilowatt-hours in 1982; demand m to finance required capital expenditures and chaq;es, however, fbr those sales were reduced i meet its utility and financial obligations. in a highly competitive market.

.The regulatory treatment should provide Throughout 1983, all operating and fbr a balancing of the legitimate interests of maintenance expenses, as well as construc-the ratepayers and the investors. tion expenditures, were critically reviewed at The Indiana Commission issued an order on all levels of the Company. "llusiness as March 8,1984 approving the provisions of usual" was not acceptable. Rigorous control

- the Agreement, will continue in 1984.

Because of the filing of the emergency rate Major cost reductions which have been made are

[ petition, the Company requested the Indiana Commission to terminate flirther hearings on 1668 jobs have been climinated since July its Itate Control Plan which was filed July 8, 1982 in non-nuclear operating areas, a 1983.

14% reduction, despite a greater volume of business being served. In addition, work-

Rate filings ihr authority to recover the p Marble I till investment over a period ofyears

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ing hours fbr nearly 600 workers have been ,

D,ECEMBER 24,1983 reduced to fbur days per week. While a new winter peak was not estab-2 Nuclear Division manning was reduced lished on December 24,1983, the peak load from 1,200 to 150.

of that day depicts the impact of weather on 3 No general salary increase will be made in

. . the Company s electrical demand. On that 1984. Barga. . -imng umt employees voted in Christmas Eve Saturday, when industry was January 1984 to extend their current labor largely shut down and the 24-hour tem-contract, which we.s due to expire Alav 1, .

perature ranged from -9' to -17*, with wm. d 1984, fbr an additional year with no chill factors of-70a, the total peak load was change m wages or benefits.. 3,469 A1W. This peak load was within 8% of 4 Stnngent controls will result m total opera-the Company's August 1983 peak load.

tion and maintenance expenses in 1984 re-maining at 1982 and 1983 levels. Because of the severe cold, frozen coal prob-5 Construction expenditures and main- lems and scheduled and other fbreed outages, tenance programs have been cut to the the Company purchased up to 200 A1W of point where reliability of senice to power throughout the day. A number of customers may be impaired. Non-nuclear other major systems from the Rockies to the construction expenditures in 1983 were east coast were also purchasing power; total reduced $25 million from planned levels at demand requirements pushed electrical the beginning of the year; the 1984 con- systems to full utilization of available reserve struction program has been reduced 50% capacity.

from initial estimates. While construction This Christmas Eve experience belies those expenditures are being reduced currently critics who mistakenly assume that every A1W because of financial cotistramts, they can- of capacity will be available fbr senice at any not be deferred indehn,tely.

i given time or that so-called " excess resene PEAK DEMANDS capacity" will supply load. The potential con-sequences of a massive blackout, in the midst In August 1983, a new summer peak of of Huer cold across the nation, would be 3,771 megawatts (A1W) was established, ex- devastating. Clearly, capacity planning thr the cceding the previous peak of 3,707 A1W set future cannot assume that today's resene in July 1981. capacities, which include increasing amounts of In mid-1983, the Company adjusted its aging plants, are adequate. .

long-term load projections fbr the 1983-1994 FINANCING penod. The fbrecast reflects an average an-nual increase of 3.0% lbr winter peak loads In June the Company sold 2.5 million shares compared with the previous estimate of of common stock with net proceeds of $60.4 3.7%. During the same period, summer peak million. Panicipation in the Company's loads are expected to increase 2.2% compared Automatic Dividend Reinvestment Plan (Plan) with the previous threcast of 2.7%. Winter increased during the year from 20,000 to a peak loads are expected to continue to exceed high of 31,000 shareholders. Dividend summer peak loads. Kilowatt-hour sales reinvestment and optional cash payments growth during the twelve-year period is ex- totalled $52.7 million thr the year.

pected to average 2.6% compared with 3.1% Because of the severe price decline late in the m the previous estimate. year in the Company's common stock, the Ibard of Directors authorized the termina-tion of the Plan effective January 1984. In the opinion of the Ibard,it is not in the best interest of the Company nor its shareholders 9

to issue new common shares at prices far ,

RATING AGENCIES below lxmk value, which was $27.32 at Three rating agencies lowered their ratings December 31,1983. Since 1977,7.4 milh,on of the Cmnpany's senior securities in 1983 shares of common stock aggregating $164

, becan of Aiuble Hill developments, exter-nulhon had been issued under the Plan.

nal financing requirements, the inability to Proceeds ofcommon stock issued under two recover financing costs applicable to con-employee stock plans aggregated $12.6 struction on a current basis through rates and million in 1983. Issuance of new common deterioration in coverage ratios. Current stock fbr these plans has also been discon- ratings of the Company's senior securities, tinued. including a further downrating by Atoody's Construction needs fbr the last half of the I"VCSI"'" 8"I" "" I ""3'Y I7' I984' '" "'

year were met mainly from bank loans and I"U"**

other short-term Imrrowings which ag- g; ,

gregated $198.7 million at December 31, First Preferred 1983. ni H<>nds SM Because orits present inability to sell long-term securities, the Company filed a petition Durr& Phelps 12 13 with the Indiana Commission to borrow, ef- Medy's H42 Ha3 fective Alarch 1,1984, up to $500 million 8'*" dd

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from banks or other lenders. Negotiations of LEGAL such an arrangement a c in process.

On June 8,1983, a rederai grana jury in CAPITAL EXPENDITURES Seattle, Washington returned indictments Construction spending in 1983, excluding agai".st six maior electrical coatractors ana Gibson linit 5 and certain transmission and certam of their executives alleging a con-distribution property reimbursements of spiracy to hx pn,ces m violation of antitrust

$109 million, was $667 million, including Id*5 I" ("""" tion with bidding on Alarble

$580 million ihr Atarble 11i11. All other con, liill and two other nuclear plant projects.

struction expenditures fbr production plant, There was no indication that the C<nupany substations, transmission lines, distribution or any ofits employees were connected with facilities and general property totalled $87 the alleged conspiracy.

million. The rederai coun jury trial began in Construction expenditures ihr 1984 are November and was concluded on January 21, estimated at $42 million. 1984 with a verdict of acquittal of all defen-dants.

Aaaitionai expenditures to be maae in 1984 at hiarble Ilill fbr work pertbnned befbre DIRECTORS construction was halted, construction

, Dr. Otis it ik> wen, Ibnner governor of in-demobihtation and contractor and material diana and professor of family medicine at the settlements are estimated at $110 nullion; Indiana University School of hiedicine, and 198a expenditures are estimated at $24 Dr. John C. Ilancock, dean ofengineering at

""III""' Purdue University since 1972, were named to the C<nupany's lloard of Directors on June 10,1983, liceause of acceptance of employment with an out of-state firm, Dr.

Ilancock will not stand ihr election at the an-nual meeting of sharehoklers.

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Richard H. Blacklidge, a Company director . SHAREHOLDERS since 1968, resigned in December due to his The Company's 5 3.8 million shares ofcom-nearly full-time absence from the state. His mon stock outstarding at year-end were held helpful and experienced counsel has been of by 71,994 shareholders, an increase of 7,406 great value to the Company. ~

from the previous year. Preferred stock was M ANAGEMENT CH ANGES held by 4,691 investors. More than 95% of all shareholders are either indiv: duals or f. uni-In September, the Board of Directors as- ly groups and approximately 39% reside in signed broader adm,u ustrative responsibihties Indiana or adjacent states. No shareholder to Jon D. Noland, senior vice president and owned more than 3% of outstanding com-general counsel. Duejean C. Garrett, senior mon shares.

counsel i.nd a member of the Company's legal starf since 1969, was elected vice presi- -

dent and associate general counsel and will be responsible fbr the management of the legal We would be pleased to provide any department. shareholder with additional intbrmation about the Company, including the annual 10-K report to the Securities and lixchange Commission, or the electric utility industry.

All requests fbr intbrmation should bc ,

PliAK LOAD directed to Investor Services, Public Service megawatts Indiana,1000 East Main Street, Plainfield, winter t a summe' IN 46168.

4.txxi KILOWNIT-IlOUR SALES IW CLASS OF SliRVICE 3,(H M) 20 billum 2,(MM) 15 1.(MMI to o_ .. _. m - J 73 75 77 N MI H3 5

o. . m. u . ~ . - m.~ .. .m 74 75 76 77 7N N Mo Mt M2 N3 11

AUDITORS' REPORT -

To the ik>ard of Directors '

of Public Service Gimpany ofIndiana, Inc.

We have examined the balance sheets of Public Senice Company ofIndiana, Inc. (an Indiana corporation) as of Deccmixr 31, 1983 and 1982, and the related statements ofincome, carnings invested in the business, and sources of funds used fi>r capital ex-penditures fi>r each of the three years in the period ended Decem!xr 31,1983. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, induded such tests of the accounting records and such other auditing pro-cedures as we comidcred necessary in the circumstances.

As more fully discussed in Note I to the financial statements, on January 16,1984, the ik>ard of Directors announced that the Gimpany was financially unable to participate in further comtruction of the Starble 1Iill nudcar project (hiarble ilill). The G>m-pany's 83% share of(mts incurred through Decemtwr 31,1983, totalled $2.3 billion, induding $230 million ti>r nuclear fuel.

Wabash Valley Power Association, Inc. (WVPA), the Company's 17% partner in the project, has not announced a final decision regarding further construction. The Company will incur additional costs under existing comtruction and nuc! car fiici contracts of appnnimately $481 million ti>r its 83% share. The Cnmpany intends to seek tidl recovery of all costs aw> dated with Alarble Ilill fnim its customers through rates, but there can be no assurance that the recovery of all costs will be granted.

The Gimpany has filed a petition with the Public Service G>mmiwinn ofIndiana (Gimmission) fi>r emergency rate rdief and ti>r ,

authority to enter into a short-term credit arrangement of up to $500 million as more fully discuwed in Notes 4 and 10 to the financial statements. The Company has entered into a Settlement Agrecment and received an Order from the Commiwion tiir ,

emergency rate relief. 'the G>mpany's ability to obtain a credit arrangement is contingent upon potential lenders' acceptance of the terms of the Settlement Agreement as being adequate to support extemion of additional credit and the Commission's ap-proval of suth arrangement. There can be no anurance that the Company will be able to obtain a credit arrangement.

The facton dewrilwd in the preceding two paragraphs, w hich indude the uncertaintics of the recm cry of all costs awociated with 51arble Ilill and the obtaining of continuing satisfactory short-term credit arrangements, among others, indicate that the Com-pany may be unable to continue in existence. The financial statements do not indude any adjustments relating to the reuncrabihty and clawilication of recorded asset amounts or the amounts and dassification ofliabdities that might be necessary should the Gimpany be unable to continue in existente.

As more fully dncuwed in Note 2 to the finandal statements, WVPA tiled a suit agaimt the G>mpany fi>r $466 million to recover its share of Marble I till tosn, sharging federal securities law violatiom in inducing WVPA to purchase 17% of Marble Ilill. The esentual outcome of this htig.uion cannot prewntly be determined.

As more tiilly diwuwed in Note 13, several purported daw action suits base been filed agaimt the Gimpany and othen on bchalf of purchasen of aimmon stock dunng 1982 and 1983. The suin seek unspecified monetary damaget The eventual outcome of the litigation cannot prewntly be determined.

The htigation referred to in the preteding two paragraphs has been filed agaimt the Company subwquent to the date of our rep >rt on the 1982 and 1981 tinantial statementt These attium daim substantial damages,in part, as a result of the Gimpany's attiom in prior yean. As noted alwn e, the Company is prewntly unable to determine the esentual outcome of this litigation. In our report dated January 26,1983, our opinion on the 1982 and 1981 linancial statements was unquahtied; howeser, in view of the heig.uion referred to abme, our present opinion on the 1982 and 1981 financial statements, as prewnted herein,is different from that esprewed in our presiom repirt.

In our opinion, subjett to the effects on the 1983 linandal statements of such adjmtmeats,if any, as might have been required if ,

the outcome were now known of the uncertainties referred to in the preteding paragrapin ahmt (a) the recoverability of ants awidated with Marble I hit,(b) the reuncrability and dassification of recorded awet amounn and the amounts and dawilication ofliabihties should the Gimpany be unabic to omrinue in existence and (c) the litigation, and subject to the effetts on the 1982 and 1981 finantial statements of such adimiments,if any, as might hase been required if the outcome were now known of the litigation referred to in the preceding paragraph, the finantial statements referred to above present fairly the finandal position of Public Senite Gimpany ofImhana, Inc. as of December 31,1983 and 1982, and the results ofits operatiom and the sources of in funds uwd fi>r capital expenditures for cath of the three >can in the period ended December 31,1983, in amfounity with generally Jccepted acuiunting prIndpIes Jpplied int a OHMistent b. bit Arthur Anderwn & Co.

Indunapitis, Imbana, Marsh 8,1984.

12

P*U*Be L*I C S=E.R V*I.C*E IN.D+IAN*A STATEMENTS OF INCOME 1983 1982 1981 (thousands)

Electric Operating Revenues . . . . . . . . . . ... $873 925 $809 394 $/20126 Operating Expenses Fuel... .............. ......... .... 344 878 327 366 295 160 Purchased power . . ........... .. .. (65 528) (76 660) (63 234J 279 350 250 706 231 926 Taxes (page 18) . . . . . . . . . . . . . . . . . . . . . . . . 153 497 143 562 110 980 Otheroperation . ... ............... 114 009 107 438 93 523 M :ntenance . ............. . .. . . . 59 117 62 040 56 924 Lepreciation . . . . . . ............ ... 82 314 75 993 70 402 688 287 639 739 563 755 Operating Income . . . . . . . . . .... .... 185 638 169 655 156 371 Other Income-Net Allowance for equity funds used during construction . . . . . . . . . . . . . . . . . . . . . . . 130 123 117 629 63 768 Other. . . . . ..... ... .. .. . .. 551 1 485 3 762 130 674 119 114 67 530 Income Before Interest Charges . ..... . 316 312 288 769 223 901 Interest Charges Long-term debt . ........ . . ... . 144 078 128 843 111 069 Otherinten st . .......... . .. ...... 7 719 7 106 7 403 Allowance for debt funds used during construction . . . . . .......... .... (91 332) (80 412) (46 199; 60 465 55 537 72 273 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . 255 847 233 232 151 628 Dividends on Preferred Stock . . . . . . . . . . . . . . . 28 540 28 010 22 600 Common Stock Income Available . . . . . . . . . . . . . . . . . . . . . . $227 307 $205 222 $129 028 Average Shares Outstanding . . . . . . . . . . . . 50 951 45 142 37 777 Earnings Per Share . . . . . . . . . . . . . . . . . . . $4.46 $4.55 $3.42 STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS 1983 1982 1981 (thousands)

Balance January 1. . . . . . . . . . . . . . . . . . . . . . . $324 822 $248 071 $223 080 Ne t Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 847 233 232 151 628 580 669 481 303 374 708 Deduct Cash dividends Prefern d stock . . . . . . . . . . . . . . . . . . . . . . . 28 540 27 529 22 577 Common stock (1983-$2.82; 1982-$2.72; 1981-52.57per share) . . . . . . . . . . . . . . . 143 190 123 567 97 267 Capital stock issuance expenses . . . . . . . . . . . . 4 343 5 385 6 793 176 073 156 481 126 637 Balance December 31. . . . . . . . . . . . . . . . . . . $404 5% $324 822 $248 071 The accompanying notes are an integral part of these financial statements.

13

BALANCE SHEETS ASSETS December 31 1983 1982 (thousands)

Electrie Utility Plant-original cost in Senite Production . .. . . . . .. .. . . .. $1372 891 $1428 943 Transmission . . . . . ..... ... . . . .. . 443 247 409 080 Distribution . . . . . .. ... . . . . .. 550 905 526 592 General . . . . .. .. ... . ... ... 79 898 76 286 2 446 941 2 440 901 Accumulated depreciation .. .. 712 011 639 594 1 734 930 1 801 307 Construction work in progress Marble Hill Unit 1 .. . . 987 105 Marble HillUnit 2 . . . . 496 843 t Other . . .... .. ....... . . 26 414 63 273 26 414 1 547 221 Nuclear fuct 0.vned . . . . 135 831 ,

PIN energy trust . . . . 55 635 191 466 Total FJcctric Utility Plant . .. . . . 1 761 344 3 539 994 Marble Hill Nuclear Project (Note 1)

Unit 1 . .. .. . . 1 413 623 Unit 2 ... . . . . . . . . . 650 002 Nuclear fuel-owned . . .. . .. . 142 381 Nuclear fuel-PIN energy trust . . 87 595 2 293 601 Current Assets Cash . . . . . . . . 6 220 2 819 Temporaiy cash investments . . 20 050 10 800 Funds on deposit to retire Senes K Ik>nds . . 25 000 Pollution controlconstruction fund . . 4 738 Accounts receivable Utility . . .. . .. . . 60 377 47 353 Joint ownership reimbursements . . . .. . . . . 31 467 23 008 Deferred fuel . . . . . . . 4 438 4 607 Fossil fuel-at average cost . . . . . .. 69 369 108 145 Materials and supplies-at average cost . . . 30 105 33 150 Other . . ..... .. .... ... .. .. . ........ . 5 987 6 103 253 013 240 723 Other. .. . . . .. . ... . 36 802 32 481

$4 344 760 $3 813198 The accompanying notes are an integral part of these financial statements.

14

-P*U*B*L*I*C S*E*R*V*1*C*E I*N*DI*A*N*A CAPITALIZATION AND LIABILITIES December 31 1983 1982 (thousands)

Common Stock Equity Common stock-without par value-authorized 60,000,000 shares-outstanding 53,809,113 shares in 1983 and 48,472,129 shares in 1982 . . . . ... ....... $1065 492 $ 938 025 Earnings invested in the business . . . . . . . . . . . . . . . . . . . . . 404 5 % 324 822 Total common stock cquity . . . . . . ...... ..... 1 470 088 1 262 847 Cumulative Preferred Stock (page 17) j Not subject to mandatory redemption . ... .. .. .. 235 000 235 000 ,

Subject to mandatory redemption . .. ..... ........ 95 000 95 000 )

Long-Term Debt (page 17) . . . . . ......... .. . .. .. 1 337 778 1 362 621 Total capitalization . . . . . . . . . . . . . . .... . . 3 137 866 2 955 468 PIN Energy Trust Obligations. . . . .. ... . .. 87 595 55 635 ,

1 Current Liabilities long-term debt due January 1,1984. . . . . . . . . ....... 25 000 Notes payable Trust demand . . . . ... ... . ........ . ... 10 000 Bank kuns . . . . . .... .... ............. .... . 149 400 Other . . . . . . . . . .... ... .. ................ 49 288 Accounts payab!c . . . . . ......... ... . ........ 139 673 141 501 Accrued taxes . . . . . . ... ... .................... 31 553 30 456 Accrued interest . . ... ..... ..... ............... 47 312 44 862 Customers' deposits .......... . .... ......... 1964 1699 444 190 228 518 Other Deferred income taxes . . . . . . . .... .... ... ........ 424 059 352 327 Unamortized investment tax credits . . . . . . . . . . . . . . . . . . 233 044 207 749 Miscellaneous . . ........ . ... ................. 18 006 ~

13 501 675 109 573 577

$4 344 760 53 813 198 15

STATEMENTS OF SOURCES OF FUNDS USED FOR CAPITAL EXPENDITURES ,

1983 1982 1981 (thousands)

Funds Generated Internally Reinvested earnings Net income . . . . . .. . . . .... $255 847 $233 232 $151628 lesscashdividends . .. .. . . . 171 730 151 096 119 844 84 117 82 136 31 784 Depreciation . . . . . . . . . . . . . 82 314 75 993 70 402 Deferred income taxes-net . . ... ... . . 75 181 66 606 42 853 Investment tax credit-net . . . .... 30 934 32 319 26 772 Allowance for equity funds used during construction . . 1130 123) 1117 629) j63 768) 142 423 139 425 108 043 Funds from Financing and Other Sources Common stock Public offerings . . . . 60 438 98 083 1291%

Automatic dividend reinvestment and stock purchase plan . . . . . . . . 50 350 40 388 24 124 Employee stock purchase plans . . .. 6 123 4 211 3 756 Preferred stock .. . . .. 24 000 21 O(X)

First mortgage bonds . . .... .. . . .. I15 000 250 000 Iktiremen offirst mortgage bonds. .

(25 000) (75 000)

Pollution control note ... . . 45 000 Net change in woiking capita! and other items Temporary cash investments . . .

(9 250) (239) (10 561)

Pollution controlconstruction fund . 4 738 (4738)

Accounts receivable . . . . .

(21 314) 26 595 (37 653)

Federalincome tax refunds . . . 18 650 Fueland materials and supplies . . . . 41 821 (29 783) 28 306 Notes payable . .. . .. 188 688 43 (40 251)

Accounts payable . . . . .. ... .

(2 478) 10 214 20 555 Other items-net ... . .

_(26 875) _ 2 473 _ 4_136 292 241 306 247 336 258 Allowance for equity funds used during constmetion . 130 123 117 629 63 768

$564 787 $563 301 $508 069 Capital Expenditures Utility plant . . . . . .. $ 87153 $217 000 $221315 Utility plant-reimbursements . . . .

(108 593) (107 435) (35 001)

Marble I till nuclear project . . . .. . 579 677 438 029 278 396 Nuc! car fuel owned . . .... . . 6 550 15 707 43 359 TotalCapital Expenditures . ... .. . ... $564 787 $563 301 $508 069 The accompanying notes are an integral part of these financial statements.

16

P*U*B*L*I*C S*E*R*Ve !*C*E I*N*D*1*A*N*A CUMULATIVE PREFERRED STOCK '

December 31 1983 1982 (thousands)

Not subject to mandatory redemption Par salue $25 per share-aatharized 5,000,000 shares-outstanding 800,000sh ares, 4.32% Scries . . . . . . . . . . . . . . . . . . . . . . . . . $ 20 000 $ 20 000 600,000 sharcs, 4.16% Scrics . . . . . . . . . . . . . . . . . . . . . . . . . 15 000 15 000 Par value $100 per share-authorized 5,000,000 shares-outstanding 150,000 shares, 3 1/2% Series . . . . . . . . . . . . . . . . . . . . ... 15 000 15 000 300,000 shares, 7.15% Series. . . . . . . ....... ... ..... 30 000 30 000 350,000 shares, 9.44% Series . . . . . . . . . . . . . . . . . . . . . . . . . 35 000 35 000 400,000 shares, 8.52% Series. . . . . ................... 40 000 40 000 450,000 shares, 8.38% Series. .................... . 45 000 45 000 350.000 shares, 8.%% Series. . . . . . . . . . . ............ 35 000 35 000

$ 235 000 $ 235 (XX)

Subject to mandatory redemption 500,000 shares, 9.60% Scrics . . . . . . . . . . . . . . . . . . . . . . . . . $ 50 000 $ 50 0(X) 450,000 sharcs,13.2 5% Senes . . . . . . . . . . . . . . . . . . . . . . . 45 000 45 (XX)

$ 95 000 $ 95 000 LONG-TERM DEBT December 31 1983 1982 (thouundi)

First Alortgage Ikmds (Exduding amounts Jue within one year)

Series K, 3 3/8%, due January 1,1984 . . . . . . . . . . . . . . $ $ 25 000 Series L, 4 7/8%, duc October 1,1987 . . . . . . . . . . . . . 35 000 35 000 Series Al, 4 3/8%, due February 1,1989 . . . . . . . . . . . . . . . 25 000 25 000 Series N, 4 3/4%, due Augus 1,1990 . . . ........... 30 000 30 000 Series P, 71/8%, duc Janu uy 1,1999. . . ..... ..... 40 000 40 0(X)

Series 1( 7 5/8%, duc January 1,2001. . . . . . . . . . . . . . . . 50 000 50 (XX)

Series S, %, duc Janu.ny 1,2002 . . . . . . . . . . . . . . 50 000 50 000 Series T, 8%, due February 1,2m)4 . . . . . . . . . . . . . . . 50 000 50 000 Series W, 9.60%, due At. gust 1,2005 . . . . . . . . . . . . . . . . 80 000 80 Om)

Series Y, 7 5/8%, due January 1,2007. . . . . . . . . . . . . 85 000 85 mX)

Series Z, 8 1/8%, duc October 1,2007 . . . . . . . . . . . . . . 85 000 85 000 Series AA. 8 7/8%, due October 1,2008 . . . . . . . . . . . . . . . 100 000 100 000 Series BB, 6 5/8%, due Alarch 1,2004(Pollution Contrut) . . 5 000 5000 Series CC, 9 1/2%, due hlay 1,1985 . . . . . . . . . . . . . . . . . . 50 000 50 mx)

Series DD, 14%, duc hlarch 1,1987. . . . . . . . . . . . . . . 100 000 100 (XX)

Series EE, 121/8%, due September 1,1990 .. .. ...... 125 000 128i000 Series FF, 14 3/4%, duc February 1,2011. . . . . . . ..... 125 00() 125 000 Serics GG,15 3/8%, due serially August 1,1986 1989...... 50 000 50 mx)

Scrics 1111, 15 3/4 %, duc December l . 20ll . . . . . . . . . . . . 75 000 75 000 Scrics JJ, 12 7/8%, due December 1,2012. . . . . . . . . . . . . I15 000 115 000 Total first mortgage Imnds . . . . . . . . . . . . . . . . . . . . . . . . . . . ~D'/5 000 1 300 000 Pollution Control Notes 5 3/4%,duc December 15,1989 to 2003 . . . . . . . . . . . . . . . . . 22 000 22 000 12 3/8%, due A pnl I,1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 000 10 000 12 3/4%, duc A pril I ,1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 000 35 000 Unamortised premium and divount-nct . . . . . . . . . . . . . . . . (4 222) (4 379)

Total......................................... $1337 778 $1362 621 17

- _ _ _ _ _ _ _ l

TAXES CHARGED TO OPERATING EXPENSES 1983 1982 1981 (thousands)

Federal and State income Curren tly payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9 780 $ 6 995 $ 7 100 De fe rred - n e t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 181 66 600 42 853 Investment tax credit-net . ...................... 30 934 32 319 26 772 115 895 105 924 76 725 State, Local and Other Real estate and penonal property . . . . . . . . . . . . . . . . . . . 17 441 16 597 16 239 Indiana gross income . . . . . . . . . . . . . . . . . . . ......... 12 273 11 679 10 600 Social secu rity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 857 8 661 673 Other........................................ 1031 701 63 37 602 37 63h 34 2!5 Total taxes charged to operning expcmes . . . . . . . . . . . $153 497 $143 562 $110 980 Taxes per dollar ofoperating revenue . . . . . . . . . . . . . .. 17.64 17.74 15.44 NOTES TO FINANCIAL STATEMENTS-ANNUAL REPORT 1983

1. Marble 11111 Nuclear Project. On January 16, 1984, unable to participate in further construction of the htarble theIlilllioard nuclearofpn>

Directors announced ject. Starble Ilill's two 1130the O>mpany megawatt (A1% was financiall nuclear uruts wcre scheduled to go in service in 1988 and 1990 at a total estimated cost of $7 billion.

The G>mpany's 83% share of costs incurred through December 31,1983 totalled $2.3 billion, including $230 million ihr nuclear fuel. Wabah Valley Power Aw>ciation, Inc. (WVPA), the Company's 17% partner in the project, has not an-nounced a final decision regarding further construction (see Note 2)

The Gimpany's decision to discontinue participation in further construction was bawd on its inability to obtain the financ-ing and rate relid rcquired for complction of the project. 'the decision wa brought about by a wrics of state government and regulatory actium bcginning with the Augmt 25,1983 smpcmion of heanap on the O>mpany's propmed Rate Om- l trol Plan to increne retal clect ic rates by 8% per year for a six. year period begmning in 1984. l

'this plan, filed in July 1983 at the request of the Public Service O>mmission of Indana (Indiana O>mmission), was desiped to alkiw the O>mpany to reawmably fin.uwe the pmject and to mitipte the impact of higher rates w hen the Atarble Ilill units were placed in scruce. 'the Gimm'mi<m's smpcmion of hearing on tha plan, made at the request ofIndiana Gwcmor ik>bert D. Orr, was to alk>w time for a review of the project by a live member tak force appointed by the Gwemor on September 9,1983.

On Ostober 28,1983, after a review ofihe statm ofcomtruction at the project, the Gimpany announced a two.ycar exten-sion in the estimated completion dates for both units to late 1988 for Umt I and mid 1990 for Unit 2. 'the estimate of total project cmts was increned from $5.1 billion to $7 billion of which the Gimpany's 83% share was $5.8 billion. Approx-imately 74%, or $1.4 billion, of the increase reprewnted the additional cmt of capital to be incurred during the comtruction period. In connection with the announcement ofincrenes in cmt and schedule, current expenditures at Atarble 11:11 were sharply reduced, pending rewilution of the O>mpany's ability to finance its participation in completing comtruction of the projCct.

On Darmber 21,1983, the Governor's Tak Forcc relcawd its recommendatiom on Atarble Ilill, The principal recom-mendation wn that Atarble Ilill not be completed became oflack of need ihr additional generating capac ty until 1993 or later. The Task I:orce aho stated the unts of the project, which they estimated at $7.7 bilhon, compared unfavorably with the attemative of new coal fired plants.

With respat to the nonomic impact, the Tek 1:orce recommended:

"ePSI and its shareholden alworb the substantial portion of all onts pertinent to Starbic I bil.

ePSI and its shareho!&rs should not be required to alvorb :he entire ont if such treatment impain PSI's anew to capital markets which would result in even higher rate increaws and/or detenoration of wrvice fbr (mtomers of PSI.

18

4 P*U .

B L*ItC f S E It

• V . I . C . E I N*D=I ACN.A

~.

ePSI should be required to demonstrate that it has exercised all cther financial remedies, including reassessing its dividend policy, prior to seeking ratepayer participation.

. elf the ratepayer participates, the total cost pertinent to Marble Hill should be amortized over a twenty-year period and PSI should not be allowed to cam a rerum on its investment in Marble Hill.

- eTo further minimize the impact on the ratepayer, any neccaary rate increase should be phased in over a five-year

. period."

In its full report, released February 7,1984, the Task Force a'so implied that no dividends shou?d be paid on the common stock for three years and that common dividends should be limited thereafter to 35% of net income.

'Ihe Governor endorsed these recommendations on December 23,1983 and asked the Indiana Commission to reopen the

. proceedings on the Company's Rate Control Plan. On January 16,1984, the Company filed a motion to terminate these J

proceedings.

On December 30,1983, the Board of Directors suspended a!! construction activity on the Marble Hill project, pending fur-ther review of the Task Forte's recommendations and consideration of attematives available to the Company regarding the l

pmject.

In reaching its decision announced on January 16,1984, the Board of Directors concluded that the Company's access to capital markets, for purposes ofcontinuing partkipation in construction of the project, had been eliminated by the series of state government actions described above.

In addition to the $2.3 billion of costs incurred by the Company as of December 31,1983, the Company will incur addi-4 tional costs for which it is contractually liable under existing construction and nuclear fuel contracts. These costs, which are estimated to be $134 million for construction contracts and $347 million for nuclear fuel contracts, will be charged to a -

deferred asset account pending regulatory decision as to recoverability through rates. Existing nuclear fuel contracts provide for the termination payments, referred to above, to be made over a period of years ending in 1993 with the largest annual payment being $174 milbon in 1992. Costs of Company personnel and other costs incidental to maintenance of the project site and preservation ofmaterials, equipment and records, which are estimated to be $18 million, will be charged to expense as incurredc The Company discontinued capitalization of Allowance for Funds Used During Construction (AFUDC) on Marble Hill effective January 1,1984. For a discussion of %TPA's expenditures see Note 2.

It is the Company's intention to seek full recovery ofall costs associated with Marble Hill from its customers. The Company i expects to file a retail rate cue with tile Indiana Commission in the spring of 1984 and a wholesale case thereafter, but the period ofrecovery to be requested has not been determined. There has been one previous rate case in Indiana where a utility requested recovery of costs associated with a cancellal nuclear generating plant. In that case, the Indiana Commission granted recovery of the total costs ($191 million) over a 15-year period. However, an appeal of that decision by certain in-tervenors is currently pending before the Court of Appeals ofIndiana Second District. There can be no assurance that the recovery ofcosts incurred by the Com my will be granted, in whole or in part, or that the ndiana Commission will follow treatment similar to the case discusse above.

To the extent recovery of Marble Hill costs is not granted, such costs would be charged, net of tax benefits, against net in-come. This action could, depending on the amount of nonrecovery, result in a reducnon ofcommon stock equity to a level below 25% of total capitalization, wh% would restrict the level ofcommon stock dividends which could be paid (see Note 5); or could result in an elimination of wmmon stock equity in the event no recovery ofcosts is granted. Depending on the

amount of nonrecovery, the Company's financial integrity could be further damaged and the Company's ability to raise

needed capital on any reasonable baus, repay existing debt, or continue to pay dividends to its common shareholders could j be virtually climinated.

2. Marble Hill Purchase and Ownctship Participation Agreement. The rights and responsibilities of the Company and WTPA are described in the Marble Hill Nuclear Plant Purchase and Ownership Participation Agreement (Agreement). This

, Agreement provides that in the event the Company is financially. unable to complete construction of the project, WTPA l may invest additional funds to complete the project and acquire an additional ownership interest in the project. Under the

. terms of the Agreement, %TPA would hase the option to retain its additional ownership interest. If%YPA does not exer-cise this option within five years after the date of commercial operation of Unit 2, then the Company is obligated to pur-chase WTPA's ownership interest resulting from the additionalinvestment.

Additionally, until such time as %TPA would exercise its option to retain additional ownership, the Company would be re.

quired to purchase, at %TPA's option, capacity and energy entitlements fmm %TPA related to its additionalinvestment in the project. . .

L 19 -

NOTES TO FINANCIAL STATEMENTS-CONTINUED Among other things, the Agreement further provides that:

ecach puty shall be responsible for its ownership share of all costs, obligations and liabilities incurred by the Company for the construction and/or termination of the project.

ein the event of default, by either party, the other party has the right to complete or cancel the project. Should WVPA choose not to cancel the project in the event of default by the Company, then WVPA would have the right to continue the project under the terms described in the preceding paragraphs.

encither party shall be responsible for any delay or inability to perform if such delay or inability results from force majeure, including, among other things, an order or absence of necessary orders from the State ofIndiana or any agency thereof.

epayments between the Company s. .d WVPA cannot be withhcld or delayed on the basis ofdisputes between the two par-tics as to the operations of the Agreement.

edisputes relating to the Agreement shall be submitted to binding arbitration at the request of either patty. The findings and award of arbitration would be subject to appeal in accordance with Indiana law.

The Q>mpany has not received notification from WVPA ofits decision regarding completion or cancellation of the project.

1Iowever, on February 10,1984, WVPA discontinued payments to the Company for their 17% share of the Marble Hill project. On February 24,1984 the Company notified WVPA that the nonpayment on Februny 10,1984 constituted a default under the terms of the Agreement. WVPA has 180 days to remedy the default by paying all amounts due plus in-terest. Until paid, amounts due the Company constitute a tien against WVPA's ownership mterest in the project. WVPA's portion of Marble iIill expenditures are estimated to be $26 million in 1984, of which approximately $10 million has been paid, $11 million in 1985 and $65 million for the 1986-1993 period.

Also on February 10,1984, WVPA filed a suit against the Company in the U.S. District Court, Indianapolis Division, scck-ing $466 million plus interest and other damages to recover its share of Marble Hill. The suit charges that the Comp'ny violated federal securitics law in inducing WVPA to buy a 17% ownership share in Manble Hill. The Company believes that it has substantial defenses to this complaint, but its outcome cannot be determined.

Following WVPA's actions on February 10,1984, the Company notified WVPA on Februny 17,1984 that the remaining construction contracts would be terminated unless WVPA makes other arrangements within 10 days to maintain such con-tracts. Such notice was given by the Company on February 28,1984.

The Company believes its actions are in accordance with the terms of the Agreement and that WVPA continues to be liable fbr its ownership share of costs associated with construction and/or termination of the Muble Hill project.

3. Summary of Significant Accounting Policies:

(a) Depreciation and Maintenance The G>mpany's provision for depreciation is determined by usmg the straight-line method applied to the cost ofdepreciable plant in service. The composite depreciation rate was 3.5% for 1983,1982 and 1981.

Maintenance and repairs of property units and renewals of minor items of property are charged to maintenance expense ac-counts except repain of an msigmhcant amount charged to clearing accounts. The costs of renewals and betterments of units of propeny are charged to utility plant accounts and the original cost of depreciable units retired and cost of removal, less salvage recovered, are charged to accumulated depreciation.

(b) Allowance for Funds Used During Construction (AFUDC)

F.trective April 1,1983, the Company adopted an AFUlX' pretax rate of 12.0% with semi-annual compounding. The rate is based on the Company's cost of capital determined by the Indiana Commission in its rate order of January 20,1983. The previous AFUDC pretax rate of 12.5% with semi-annual compounding had been in cifect since January 1,1982. The related income tax cifects applicable to the capitalized interest component are recorded as deferred income tax expense.

(c) Federal and State Income Taxes Income tax timing differences, due primarily to accelerated tax depreciation and deduction of certain utility plant costs capitaliicd per books, receive comprehensive income tax allocation treatment in dercrmining the provision for taxes.

20

P*U*B=L*I+C S.E.R.V I.C E I.N.D*I*A.N.A  ;

1 The Company is deferring investment tax credits utilized and amortizing the accumulated balance over the useful life of the property which gave rise to such credits. Re.. Company for 1982 and 1981 generated an additional 1 1/2% investment tax credit for the Investment Tax Credit Employee Stock Ownership Plan (ESOP). For 1983, the additional 1 1/2% investment tax cardit was replaced by a 1/2% payroll based ESOP. The elecnon ofcredits applicable to ESOP will not be determined til the 1983 Federal Corporate het Income Tax Return is ftled.

(d) Unamortized Debt Discount, Premium and Expense Debt discount, premium and expense on outstanding long-term debt is being amortized over the lives of the respective issues.

(e) Operating Revenues and Fuel Costs The Company records revenues as billed to its customers on a cycle billing basis. Revenue is not recorded for energy delivered and unbilled at the end of each fiscal period.

Fuel cost charge factors, applicabk to all of the Company's metered kwh sales, are based on estimated costs of fuel; as actual costs of fuel are determined, any differences are deferred and billed in subsequent months.

4. Rates. On January 20,1983, the Indiana Commission granted the Company a 12% increase in retail rates; the approved rates were designed to produce additional annual revenues of $31.2 million. The state appointed Utility Consumer Counselor has appealed the January 20,1983 order.To the extent that the rates authorized by the Commission are not sus-tained, the Company could be subject to refund requirements. The Company believes the 1983 order will be upheld.

In February 1983, the Federal Energy Regulatory Commission (FERC) approved an increase in wholesale rates, negotiated by the Company with its wholesal: customers, designed to produce additional annual revenues of appmximately $15.4 million effective February 1,1983.

On March 1,1983, the Court of Appeals ofIndiana 9irmed the Indiana Commission's oriter of June 10,1981, which granted the Company a $112.7 million increase in retan rates.

On January 16,1984, the Company fded a petition for emergency rate reliefwith the Indiana Commission requesting an in-crease in retail rates of 14% or additional revenues of $105 million on an annual bask. Hearings on this petition comms aced February 14, 1984. On February 29, 1984, a Settlemen; Agreement between the Company, the Utility Consumer Counselor and certain intervenors was submitted to the Indiana Commission for appmval.

The Agreement provides for an emergency rate increase of 5% or additional revenues of $37.9 million on an annual basis.

The amounts received fmm this rate increase will be separately accounted for and will be deducted from the Marble Hill in-vestment to be amortized; such revenues would not affect camings in 1984.

Among other things, the Agreement requires the Company to continue negotiations for the arrangement of a revohing credit agreement and to negotiate pn payments fmm major customers and defer payrnents to contrac: ors and suppliers, where possible.

The Agreement further provides for Indiana Commission assurances of the regulatory principles to be applied in the recovery of Marble Hill costs, to the extent such costs were prudently incurred. These principles are: insuring the continued ability of the Company to meet its contractual and franchise obligations and assist in an orderly recovery by the Company to financial health; regaming access to capital markets to finance required capital expenditures and meet its utility and financial obligations; and providing for a balancing of the legitimate interests of the ratepayers and the investors.

The Agreement also provides that this proceeding may be reopened for further hearings if external credit sources are not available to the Company. He Indiana Commision approved the Settlement Agreement in an order dated March 8,1984.

5. Capital Stock. The Automatic Dividend Reinvestment And Stock Purchase Plan (ADR) was terminated effective Janu-ary 2,1984.

The Fmployee Stock Purchase Plan (ESPP) and ESOP were amended effective January 1984. With the amendment, the is-suance of new common stock for these plans has been discontinued.

At December 31,1983, the Company had reserved 740,291 shares of common stock for issuance under the ADR, ESPP and ESOP. .

21

NOTES TO FINANCIAL STATEMENTS-CONTINUED

'Ihe changes in common stock for 1983,1982 and 1981 were as follows:

Shares Issued Amount 1983 1982 1981 1983 1982 1981 (millions)

Public Offerings . . . . .. 2.5 4.0 6.7 $ 62.2 $100.8 $134.2 ADR. . . . . . . .. .. 2.3 1.8 1.3 52.7 42.3 25.3 ESPP and ESOP . . . . . . . . .5 .4 .3 12.6 8.7 5.4 5.3 6.2 8.3 $127.5 $151.8 $164.9 Charter provisions limit dividends on common stock to 75% of net income available if the ratio ofcommon stock equity to total capitalization of the Gimpany is less than 25%, or to 50% of such net income if such ratio is less than 20%. As of December 31,1983, the ratio of common stock equity to total capitalization was 47%.

The Mongage Indenture pnnides that, so long as any Nmds are outstanding under the Indenture, the G>mpany shall not declare or pay cash dividends on shares ofits capital stock (other than on preferred stock) except out ofcarned surplus or net profits of the Company.

6. Long-Term Dcht. 'Ihc sinking fund requirements with respect to first mongage hmds of the Gimpany outstanding at December 31, 1983, aggregated (exclusive of redemption premium) $8.3 million in 1984,1985,1986,1987 and $8.0 million in 1988. Additionally under the Indenture, the Gimpany is required annually to expend the greater of 15% ofgross operating revenues as defined by the Indenture or 21/4% of depreciable property as of January 1 of such year fbr maintenance and repair of mortgage property, the construction or acquisition of Nmdable property, or the retirement of hmds issued under the Indenture. For 1984, the maintenance and renewal fund requirements are estimated to be $48.1 million. While the Company has met sinking timd and maintenance and renewal requirements by certifying N ndable prop-crty additions in the past, the present lack of bondable property additions is expected to require cash payments or purchase of outstanding bonds to meet sinking fund and maintenance and renewal requirements m 1984.

First mortgage Nmd maturitics are $25 million in 1984, $50 million in 1985, $12.5 million in 1986, $147.5 million in 1987 and $12.5 million in 1988. 'Ihe Series K, $25 million, First Mortgage lionds, duc January 1,1984, were retired on that date.

7. Preferred Stock with Mandatory Redemption. Ilolders of the 9.60% Cumulative Preferred Stock, $100 par value, and the 13.25% Cumulative Preferred Stock, $100 par value, are entitled to the same rights and preferences as other $100 par value cumulative preferred sharcholders as stated in the Amended Anides of Gmsolidation of the Company except with respect to redemption prices and sinking fund requirements.

Optional right of redemption Ihr preferred stock with mandatory redemption will not be cumulative and will not reduce the mandatory sinking ftmd requ rement in any subsequent year. The sinking timd requirement may be satisfied in whole or part by crediting shares acquired by the Gimpany. To the extent the Company does not satisfy its mandatory sinking fimd obligation in any year, such obligation must be satisfied in succeeding years. If the Company is in arrears in the redemption of the shares pursuant to the mandatory sinking fund requirement, the Company shall not purchase or othenvise acquire for value or pay dividends on Common Stock.

The mandatory sinking fund fbr the 9.60% Cumulative Preferred Stock requires the Company to acquire by redemption 13.750 shares on December 1,1987, and on each December 1 thereatier to and including December 1,2018. and 60,000 sh res, or such lesser number of shares as shall be then outstanding, on December 1,2019.

The mandatory sinking timd ihr the 13.25% Cumulative Preferred Stock requires the Company to acquire by redemption 30,000 shares on March 1,1988, and on cach March I thereafier to and including March 1,2002.

'the a te amount of the sinking ftmd requirements for cumulative preferred stock outstanding at December 31,1983 totalle 1.4 million for 1987 and $4.4 million for 1938.

8. Preferred Stock. If dividends on all Cumulative Prefened Stock outstanding are in arrears in an amount equivalent to fbur or more quarters, the recordholders of the Cumulative Preferred Stock shall elect a majority of he floard of Directors at each meeting of shareholders at which directors are elected until such time as all of the dividends in arrears are paid.

9. Pension Plan. The G>mpany's non-contributory pension plan covers all employces meeting certain minimum age and ser-vice requirements. The unfimded actuarial liability of $3.1 million at January 1,1983 is being funded over a period of 25 years. 'the Company's policy is to fimd pension costs accrued, which amounted to $6.8 million in 1983, $6.1 million in 22

.P*U B+L.I.C S

• E

• It

• V = I . C . E I*N*De I=A+N*A 1982 and $6.0 million in 1981. However, the Company will elect to fund its pension costs for 1983 at a minimum funding I level of $5.0 million as pr: scribed by tax laws. The actuarial calculations include interest assumptions of 7.5% for 1983 and 1982 and 6.0% for 1981. Accumulated plan benefits and assets are presented below:

January 1 1983 1982 1981 (millions)

Actuarial present value of accumulated plan benefits Vest ed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62.3 $52.3 $54.2 Non -vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 .5 .6

$63.0 $52.8 $54.8 Plan assets available for benefits ........ ........ $90.5 $79.9 $71.1

10. Short-Term Borrowings and Compensating Balances. At December 31,1983, the Company had bank lines ofcredit ag-gregating $138.4 million, (excluding lines of credit totalling $8.1 million which expired December 31,1983 and were not renewed) of which $36.0 million required compensating balances; $43.0 million had commitment fees for the lines and compensating balances for any bormwings; $56.5 million had commitment fees only and $2.9 million was available without compensating balances or commitment fees. Bank loans under these lines are at the bank's prime lending rate. The sale of the Company's commercial paper is supported by a portion of these lines of credit. During 1983, three banks cancelled the Company's lines of credit totalling $26.5 million. Subsequent to December 31,1983, a fourth bank advised the Comper.y that $1.5 million remaining unborrowed under their commitment would not be available to the Company.

'Ihe Company has a nuclear fuel leasing and credit arrangement (see Note 15), which also permits the Company to issue pmmissory notes for general corporate bormwing; $58.4 million was available at December 31,1983, of which $49.3 million was utilized. ,

3- e On January 9,1984, the Company filed a petition with the Indiana Commission requesting authority to enter into a short-term credit arrangement of up to $500 million. Current authorization by the Indiana Commission pmvides for short-term credit of up to $275 million. The Company is currently negotiating with a group of banks to arrange such credit facility.

The Company's ability to obtain a credit arrangement is contingent upon potential lenders' acceptance of the terms of the Settlement Agirement described in Note 4 as being adequate to support extension of additional credit. Without access to additional credit, maintaining the Company's short-term financial viability would require arrangements with contractors

and suppliers for deferral of payments and further cuts in operations, which would adversely affect quality of service. The Company's ability to continue payments of dividends to common shareholders could also be adversely affected. There can be no assurance that a credit agreement can be obtained. Iong-term financial viability will depend on adequate and timely recovery of Marble Hill costs as discussed in Note 1.

For the years 1983 and 1982, the Comp.ny had short. term borrowings outstanding at various times as follows:

Weighted Weighted Maximum Average Average Average Amount Amount Interest 4 Inteiest Outstanding Outstanding Rate Balance at Rate at at any during the duringthe Dec.31' Dec. 31 Month End' Year

• Year l

1983 Bank Loans . . . . . . . . . . . . $149.4 11.0 % $149.4 $32.2 10.2%

Commercial Paper . . . . . . . 10.0 .9 9.7 Trust Demand Note . . . . . 10.0 4.5 9.0 Other................. 49.3 9.9 49.3 7.6 10.2 1982 Bank Loans . . . . . . . .. 5117.8 $34.6 10.6%

Commercial Paper . . . . . . 60.7 7.6 10.6 Trust Demand Note. . . . . . $10.0 8.8% 10.0 10.0 12.3 Other . . . . . . ... ....... 15.0 5.2 12.3

' millions

11. Income Tax Expense. Defened income taxes (net) are due to timing differences between book and income tax deductions.

_ Deferred income taxes arising from the debt component of AFUDC were $43.3 million for 1983, $38.1 million for 1982 and $21.5 million for 1981; deferred taxes due to accelerated tax depreciation were $20.6 million for 1983, $20.2 million for 23

NOTES TO FINANCIAL STATEMENTS-CONTINUED 1982 r.nd $15.3 million for 1981; and deferred taxes due to the capitalization of certain administrative costs were $4.3 million in 1983, $7.7 million in 1982 and $5.8 million in 1981.

%c computation of combined federal and state income taxes, including amounts in other income-net, is as follows:

1983 1982 1981 (millions)

Book net income. . . . . . , . . . . ..... ........... $255.8 $233.2 $151.6 Income tax expense . . . . . . . . . . . .............. 116.4 107.2 80.0 Pn:t2x income . . . . . . . . . . . . . . . . . . . . ......... 372.2 340.4 231.6 Ixss:

AFUDC-nontaxable cquity component . . . ..... 130.1 117.6 63.8 Other . ......... .... ...... .... .... .4 .2 (.1)

Taxable income . . . . . ...... ................ 241.7 222.6 167.9 Federal and state income taxes at statutory rates of 48.16% for 1983 and 1982, and 47.62% for 1981 .. .... . . ... .. ... $116.4 $107.2 $ 80.0 Investment tax cardits generated during the years 1983,1982 and 1981 have been in excess of the investment tax credit limitations established by law. For the year 1983, up to $38.8 million of unused investment tax credits will be carried for-ward to offset future years' tax liabilities as permitted by law. Prior year carryforwards were utilized in 1983 :.nd 1982, respectively.

If the Marble Hill project were to be written off for tax purposes by the Company, related investment tax credits would be recaptured.

12. Other Construction Commitments. The Company estimates that $108 million will be expended for construction during the 1984-1985 period.

13. Other Contingencies. On January 9,1984, two Complaints were filed in the United States District Court for the Southern District ofIndiana by shareholders against the Company, certain directors, certain officers of the Company, Morgan Stanley

& Co. Incorporated, Dean Witter Reynolds Inc. (as a class consisting of 92 other underwriters) and Arthur Andenen & Co.

Each Complaint purports to be a class action against the named defendants on behalf of all shareholders who purchased Common Stock of the Company in the open market from January 28,1983 throu December 22,1983, including per-sona who purchased shares of stock thmugh a public offering commenced on or a ut June 22,1983.

Each Complaint alleges that the defendants violated the Securities Act of 1933, the Exchange Act of 1934, rules pro-mulgated thereunder, and the common law in issuing or causing to be issued untrue statements of material facts or omis-sions of material facts in the 1982 Annual Rcport to Shareholders and other communications to shareholders and other documents filed with the Securities and Exchange Commission, including the Prospectus dated June 22,1983, with respect to the Marble Hill project, its estimated cost, in-sewice dates, its need, the financial condition of the Company and the con-

. sequences of cancellation or termination.

Each Complaint also charEcs the defendants with fraud and deceit in the making of materially false and misleading statements, and with negligence in the permitting of making materially false and misicading statements.

The Complaints seek unspecified monetary damages, with interest, costs and fees assessed against the defendants. Specifical-ly, the Complaints charge that the plaintiffs were m!3!cd by representations of continuing dividend growth, the need for Marble Hill, the estimates ofcost and scheduling of Marble Hill, the failure to mention cost overruns, cost control failures, the possibility of termination or cancellation, the ultimate cost at which the pmject would be uneconomical, and the failure to disclose the effects of cancellation on the financial viability of the Company.

- As of February 29,1984, a total of thirteen Complaints have been filed by shareholders against the Company and others.

The Complaints purport to be class actions against the named defendants on behalfof all persons who purchased Common Stock of the Company during various periods in 1982 and 1983. The basis and allegations of all Complaints are similar to those described above.

He Company is uninsured with respect to these actions, except to the extent that it is required or permitted to indemnify directors and otlicers for their losses pursuant to statutory or common law or pursuant to duly effective Charter or By-law provisions. The policy limits are $55 million with a $100,000 deductible applicab!c to the Company.

24

P+U+B+L*I*C S+E+R*V+1+C+E IN+D+I+A+N+A Based on the events and circumstances resulting in the above Complaints, it is reasonably likely that other claims will be asserted by shareholders. The amount and basis of any such claims cannot now be determined.

The Company believes it has substantial defenses to these Complaints, but their outcome cannot be determined.

As of March 5,1984, two stockholder derivative actions had been fded on behalf of the Company against certain officers and certain directors.

14. Jointly Owned Plant. The Company has joint ownership agreements with WVPA and Indiana Municipal Power Agency (IMPA) for Gibson Unit 5. The Company's investment in such Unit was $198 million at December 31,1983, which represents the Company's 50.05% ownership interest. Proportionate operating expenses are billed currently and are reflected as a reduction m the applicable operating expenses on the Statements ofIncome.

15. Leases. The Company has a nuclear fuellease arrangement with the PIN Energy Trust which has a borrowing capability of up to $150 million for the acquisition of nuclear fuel. At December 31,1983, nuclear fuel lease obligations totalled $87.6 million (see Note 10).

Rentals incurred under financing leases not capitalized and operating leases are less than one percent of electric operating revenues. The effect on the financial statements, if all financing ! cases had been capitalized, is not material.

16. 1983 and 1982 Quarterly Financial Data (Unaudited).

Operating Operating Net Earnings Quarter Ended Revenues

• Income

• Income

• Per Share 1983 March 31. . . . . . . . . $219.8 $ 43.5 $ 57.8 $1.04 J une 30 . . . . . . . . . . 208.0 42.9 59.6 1.07 September 30 . . . . . 233.9 53.2 72.0 1.24 December 31. . . . . . 212.2 46.0 66.4 1.11 Total $873.9 $185.6 $255.8 $4.46 1982 March 31 . $222.8 5 50.1 5 64.2 $1.36 June 30 . .. 191.1 40.1 58.9 1.16 September 30 205.2 43.6 62.5 1.20 December 31. 190.3 35.9 47.6 .83 Tctal $809.4 $169.7 S233.2 $4.55

' millions I

1 25 i

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION CAPITAL RESOURCES AND LIQUIDITY The Company continued to experience inadequate leve6 ofinternal cash generation in 1983. The G>mpany's inability to recover the cost orcapital associated with the hiarble Hill construction program through rates continued to be the primary factor for con-tinued reliance on external capital markets.

The Company's proposed Rate O ntrol Plan would have increased internal cash generation and reduced the requirements for i capital from externdsources for the hiarble flill construction program. J I

The series of state government and regulatory actions beginning with the suspension of hearings on the Company's Rate Control Plan and culminatmg with the Task Force recommendations to cancel Marble Hill, and the Governor's endorsement of those term capital markets. As a result on '

recommendations, January 16.1984, the Board have resulted of Directors in an climination announced that the Umpany ofwas thefinancially Company's una ability to access longble to p Marble Hill construction program.

Expenditures fbr construction have been significant in the last several years. In 1983 capital expenditures totalled $674 million, compared with $670 million in 1982 and $543 million in 1981. These amounts exdude reimbursements in connection with the transfer of 49.95% of Gibson Unit 5 and certain transmission and distribution property in the amounts of $109 million, $107 million and $35 million, respectively, to other parties. Marb!c Hill expenditures, included above, were $587 million in 1983,

$453 million in 1982 and $322 million in 1981. A portion of the construction needs for 1983 were met through short-term bor-rowing <. which aggregated $198.7 million at December 31,1983.

A sharply reduced construction program is planned fbr the next severa! years. The Company's construction expenditures are estimated at $42 million fbr 1984 and $66 million ihr 1985. Expenditures fbr Marble Hill are estimated at $110 million fbr 1984 and $24 million for 1985. Expenditures for nuclear fuel and commitments under nuc! car fuel contracts are estimated at $6 million for 1984 and $341 million fbr the 1985 -1993 period. WVPA has indicated it is discontinuing its Marble Hill and nuclear fuci payments (See Note 2). This could require the G>mpany to make additional expenditures of $16 million in 1984, $11 million in 1985 and $65 million during the 1986-1993 period.

The Company has taken action to maintain short-term finan:ial viability including reductions in operating expenditures and a reduction of the quarterly dividend on its common stock, payable March 1,1984, from 72c to 25c per share. Also on January 16, 1984, the Company fded a petition with the Indiana Commission for emergency rate reliefamounting to $105 million on an annual basis. On March 8,1984, a Settlement Agreement betwecn the Company, the Utility Consumer Counselor and certain intervenors was approved by the Indiana Commission. The Agreement provides ihr an cmergency rate increase of 5% or additional revenues of

$37.9 million on an annual basis. The Agreement prevides that these additional revenues will be accounted thr separately and will be deducted from the Marble Hillinvestment to be cmortized; such revenues will not atrect earnings in 1984. Additionally, the Com-pany has petitioned the Indiana Commission fbr authority to arrange a credit facdity ofup to $500 million with a number ofbanks.

The ability to obtain a credit arrangement is contingent up n potential lenders' acceptance of the terms of the Agreement as being adequate to support extension of additional credit. Without access to additional credit, maintair.ing the Company's short-term financial viability w ould require arrangements wit h contractors and su ppliers for deferral ofpayn' .nts and further cuts in operations, w hich would adversely atrect quality ofservice. The Company's ability to continue payment < r dividends to common shareholders could also be adversely atrected. There can be no assurance that a credit arrangement can be +ained.

The Company tulieves that in order to rebuild long-term financial stability, it must be allowed to recover its Marble Hill invest-ment through rates. The Company intends to seek such authority by tiling a retail rate case in the spring of 1984 and a wholesale rate case thereafter.

RESULTS OF OPERATIONS kwh sales and revenues Total kw h sales increased .1% in 1983 compared with a decrease of 6.1% in 1982 and a .6% decrease in 1981. Increased economic l activity and the above normal temperatures during the summer of 1983 attributed to the increased kwh sales. Increases in retail sales were otrset by a decrease in sales for resale resulting from the previous transfer of a ponion of Gibson Generating Station Unit 5 to WVPA. Sales data fbr the periods were as fbl!ows:

increase (decrease) from prior year 1983 1982 1981 Kwh Sales Domestic 1.1% 1.1% (3.5)%

Commercial 1.1 4.2 1.7 Industrial 4.0 (6.1) _(.5)

Total Retai!- 2.2 (1.2) (1.0) l Sales fbr Wsale (8_.8) (22.6) l_.0 l Total Sales .1% (6.1)% (.6)%

Operating Res enues 8.0% 12.4% 11.5 %

increases in operating revenues fbr the 1983,1982 and 1981 periods primarily retlect rate increases.

m 26

p.U.B.L.I.C S.E.R.V.I.C.E I.N.D.I.A.N.A I fuel costs Fuel costs per million bru for 1983 was $1.40, compared to $1.45 in 1982 and $1.29 in 1981. In 1983 total fuel costs increased due to increased generation, which was partially otiset by decreased fossil fuel prices, whereas the 1982 and 1981 increases were due primarily to mcreased fossil fuel prices.

other power sales Short-term power sales increased significantly as a result of negotiated reductions in coal prices with the major coal suppliers.

However, these off-system sales were in part offset by purchases from the Company's Gibson 5 partners in accordance with con-tractual " buy-back" arrangements.

taxes Income tax expense and its components varied due to fluctuations in taxable income and investment tax credit pmvisions (See Note 11 of the " Notes to Financial Statements" for additional discussion).

operation and maintenance Despite a full year's operation of Gibson Unit 5, other operation and maintenance expenses incirased only slightly during 1983.

This was made possible by the Company's cost containment efforts offsetting the effects ofinflation and higher wage levels. The increases during 1982 and 1981 were the result of the effects ofinflation, higher wage levels, customer growth, additions to the transmission and distribution systems and the addition of Gibson Unit 5.

capital cost: and allowance for funds used during construction (AFUDC)

Increases in interest charges in 1983 reflect the annualized interest charges for securities issued in December 1982 to finance the Company's construction program he increase in AFUDC primarily reflects the rising level of construction work in progress for the Alarble Hill project.

carnings Income available to commen stockholders increased in 1983 principally due to increases in AFUDC. However, earnings per share decreased to $4.46, reflecting increased shares ofcommon stock outstanding. Earnings per share for 1982 and 1981 were $4.55 and $3.42, respectively.

Earnings per share of common stock, excluding AFUDC, less the related income tax effects applicable to the capitalized interest component, for 1983,1982 and 1981 were $.98, $1.02 and $1.09, irspectively.

The discontinuance of AFUDC and the charging to income ofcertain Alarble Hill costs will result in a substantial decline in earn-ings for the year 1984 (See Note 1 of the " Notes to Financial Statements").

rate matters See Note 4 of the " Notes to Financial Statements".

dividends Because of the Company's cunrnt cash needs and financial condition, common stock dividends payable Alarch 1,1984, were trdaced from 72c to 25c per share. Future dividend policy will be dependent on the Company's financial condition and recovery of the Alarble Hillinvestment through rates.

inflation t The estimated effects ofinflation on the Company's operations are presented on pages 28 and 29 " Supplementary Data on Changing Prices". The continued impact ofinflation on operations, as well as construction costs, may require periodic rate ad-justments to maintain adequate camings levels.

l selected financial data 1983 1982 1981 1980 1979 Operating revenues. $ 873.9 $ 809.4 $ 720.1 $ 645.7 $ 628.5 l Net income

• 255.8 233.2 151.6 122.7 123.0 i Common stock Eamings per share 4.46 4.55 3.42 3.21 3.79 Dividends paid per share 2.82 2.72 2.57 2.44 2.28 Total assets

• 4 344.8 3 813.2 3 285.5 2 808.9 2 342.1 Cumulative preferred stock subject to mandatory

redemption' 95.0 95.0 71.0 50.0 Long-temi debt

• 1 367.0 1 367.0 1 232.0 1 057.0 832.0 PIN nuclear fuel tritst obligations

• 87.6 55.6 24.1

'millkms 27

SUPPLEMENTARY DATA ON CHANGING PRICES Supplementary Data on Changing Prices (Unaudited). He following supplementary data are provided in accordance with the requirements of the Financial Accounting Standards Board (FASB) Statement No. 33, Financial Reporting and Changing Prices, for the purpose of reporting certain information as to the effects of changing prices on the Company's operations. The Company s financial statements are prepared based on historical prices in effect when the transactions occurred; the FASB state-ment requires the statement ofincome and certain other information to be prepared on two additional bases: the constant dollar basis and the current cost basis. The constant doll.:r basis represents the restatement of historical costs to current-day price levels, utilizing the Consumer Price Index for All Urban Consumers (CPI). He current cost basis represents the erstatement of historical costs of net utility plant to current reproducnon cost utilizing the Handy-Whitman Index of Public Utility Construc-tion Costs. i Changing prices impact common stock equity in two ways. First, under ratemaking procedures prescribed by the regulatory com-missions to which the Company is subject, only the original cost of utility plant ts recoverable in revenues as depreciation. The cost of utility plant, determined on the constant dollar and/or current cost basis in excess of original cost, is not presently recoverable in rates as depreciation, nor as a deduction for income tax purposes, and is defined as a reduction to net recoverable cost. Second, ' monetary assets', such as cash and claims to cash, lose purchasing power dunng inflationary periods because monetary assets ' cay fewer goods and services as the general price level increases. Conversely, ' monetary liabilitics', such as long-term debt, gain because the liabilities will be repaid by dollars having less purchasing power. The net change in monetary assets and liabilities (which excludes utility plant, unamortized investment tax credits and common stock equity) is retlected as a gain (or loss) in purchasing power.

Operating revenues and other operating expenses (exclusive of depreciation) in the statement ofincome have not been restated since such amounts would not be materially different if determined on a constant dollar or cucrent cost basis. The cost of fuel used in generation is not restated due to the' current recovery of actual fuel costs through fuel cost charge factors or adjustments in basic rate schedules. Depreciation expense has been restate'd by applying current Company depreciation rates to indexed utility plant amounts.

The data presented in the following statements should be viewed as an estimate of the effect ofchanging prices, rather than as a precise measure.

STATEMENTS OF INCOME For the Year Ended December 31,1983 lbstoncal Basis Conuant Ibilar Basis Current Gnt Basis (average 1983 dollars) undhons)

Income Available for Common Stock-Actual S 227.3 $ 227.3 S 227.3 Change in Depreciation due to Changing Prices (96.7) (113.0)

Income Available After Adjustments S 227.3 $ 130.6 5 114.3 Earnings Per Share on Adjusted Income S 4.46 S 2.56 5 2.24 Other impacts of Changing Prices increase in current reproduction cost of net plant 5 141.8 Irss increase in net plant based on CPI Index 232.8 Increase (Decirase) in cuntnt repmduction cost over CPI (91.0)

Adjustment of restated plant costs to net recoverable cost S (63.0) 44.3 Gain due to repayment of debt with dollars ofless purchasing power 93.3 93.3 Income Available for Common Stock (As Adjusted) S 160.9 $ 160.9 Earnings per Common Share (As Adjusted) S 3.16 5 3.16 i

28

P Ue B.LI.C S E R V I.C.E- IN.DIA*N.A

'Ihc following summary is a five-year comparison ofselected supplementary financial data (historical) which have been restated in average 1983 dollars (except actual data where indicated):

Ycan Ended December 31 1983 1982 1981 1980 1979 (millions)

Operating revenues Actual $ 873.9 $ 809.4 5 720.1 - $645.7 $628.5 As adjusted by CPI Index $ 873.9 $ 835.7 5 789.1 $780.9 $863.0 Constant dollar information (Based on CPI Index)

Net income $ 159.1 $ 134.4 $ 75.4 $ 64.4 $ 99.5 Eamings per common share As aJt usted for additional depreciation 2.56 2.33 1.34 1.20 2.73 As adjusted for total impact on common stock equity 3.16 3.32 1.11 (.50) .45 Net assets (common stock equity) at year-end at net recoverable cost 1438.8 L 1 280.5 1 096.7 972.1 956.4 Current cost information (Based on current reproduction cost)

Net income $ 142.8 $ 118.4 $ 58.8 $ 52.3 $ 78.5 Eamings per common share As adjusted for additional depreciation 2.24 1.98 .90 .81 1.98 As adjusted for totalimpact on common stock equity 3.16 3.32 1.11 (.50) .45 Increase in CPI Index over current reproduction cost-net plant 91.0 (29.5) (104.3) 231.9 153.1 Net assets (common stock equity) at year-end at net recoverabic cost 1438.8 L 1 280.5 1 096.7 972.1 956.4 General information Gain due to repayment of debt with dollars ofless purchasing power S 93.3 $ 90.1 $ 156.2 $204.3 $199.5 Cash dividends declared per common share Actual 5 2.82 S 2.72 $ 2.57 $ 2.44 $ 2.28 As adjusted by CPI Index $ 2.82 $ 2.81 $ 2.82 S 2.95 $ 3.13 Market price per common share at year-end Actual $ 11.63 S 24.88 $ 20.25 $20.63 $23.38 As adjusted by CPI Index S 11.63 $ 25.69 S 22.19 $24.95 S32.10 Average CPI Index 298.5 289.1 272.4 246.8 217.4 l_/ At December 31,1983, the constant dollar and current cost bases of plant, net of accumulated depreciation, were $5,895.3 million and $5,787.9 million, respectively, compared with net original cost of plant of $4,054.9 million.

29

10 YEARS OF PROGRESS l

1983 1982 l J

KILOWATT-HOURS SOLD (millions)  !

lbmestic . . . 4,983 4,927 >

Commercial . .. .. 3,694 3,654 Industrial . . . .. 5,860 5,635 REMCs . . . . . 1,526 1,826 Municipals . . 1,529 1,525 All Other. . , , . . 63 68 Total . 17,655 17,535 OPERATING REVENUES (thousands)

Domestic . . . .. $ 319,124 $ 285,293 Commercial . 192,372 181,553 Industrial . . ,, 232,712 215,187 REMCs . . . . . .. . 54,405 60,039 Munkipals . . . 51,779 50,501 AllOther. . 23,533 16,821 SALES AND Total . . .... . . . $ 873,925 $ 809,394 CUSTOMERS Average Pnce per Kilowatt-hour . 4.864 4.53c CUSTOMERS (annual averages)

Ibmestic . . . . 475,539 473,260 Gimmercial 63,618 63,543 Industrul . . ..... 2,469 2,479 REMCs (dclivery points served). . 39 39 Municipals . 25 43 All Other. . 986 982 Total . . . ......... . 542,676 540,346 Ilcaring Customers (included above) . 100,466 97,106 DOMESTIC SERVICE (average per customer)

Annual Uw (kikiwatt. hours) . 10,479 10,411 AnnualRevenue . . $ 671.08 $ 602.83 Price pcr Kdowatt-hour. 6.404 5.79c KILOWATT-ilOUR OUTPUT (milhons)

Generated (nct) . .

24,309 21,841 Purchawd . (5,068) (2,912)

Total . . .... . 19,241 18,929 losses and Gimpany Use . 1,586 1,294 TotalSales . 17,655 17,635 ELECTRIC SYSTEM GENERATING CAPABILITY (megawatts)

OPERATIONS Owned . 5,687 5,843 Unit Power . 265 -

Total . 5,952 5,843 MAXIMUM SYSTEM DEMAND (mcgawarts)

Summer . . 3,771 3,517 Winter .. .. .

3,583 3,923 FUEL COST-per million BTUs tonsumed ... $ 1.40 $ l.45 f

UTILITY PLANT CONSTRUCTED ADDITIONS (thouunds). , $ 558,237 $ 547,594 Marble Ilill Additx>ns included above (thouunds) . 579,677 438,029 COMMON STOCK EQUITY (thouunds)* . $1,470,088 $1,262,847 Dnidends per Sharc .. .

2.82 2.72 Average Shares Outstanding . 50,951 45,142 CAPrrALIZATION Farninp per Share . ... ..... .. ..

$ 4.46 5 4.55 (themtwr 31) CUMULATIVE PREFERRED STOCK (thouunds) . $ 330,000 $ 330,000 Disidend . . . . . 28,540 27,529 Average Dividend Rate . . .. . . 8.65% 8.65%

LONG-TERM DEBT (thousands). $1,367,000 $1,367,000 Intereston Debt . . 143,120 127,981 Average Interest Rate . 10.47% 10.47%

EMPLOYEE NUMBER OF EMPLOYEES (ar December 31) . . . 5,267 5.351 DATA SALARIES, WAGES AND BENEFITS (thousands). $ 174,853 $ 161,616

' Ret 1ctts 34w.2 stock spht in Apnl 1976.

3()

P*U Be L*I.C S.E Re VICE IN.D+1+A.N.A 1981' -1980 1979 1978 1977 1976 1975 1974 1973

- 4,874 5,049 4,763 4,731 4,568 4,136 4,068 3,657 3,632 3,508 3,450 3,295 3,080 3,248 3,025 2,924 2,617 2,653 c,000 6,029 6,291 5,813 5,711 5,279 4,602 4,986 5,136 2,794 2,769 2,288 2,216 2,147 1,305 1,582 1,555 1,189 1,535 1,517 1,502 1,454 1,389 1,204 1,146 989 892 79 84 84 76 83 83 82 81 78 18,790 18,898 18,223 17,370 17,146 15,532 14,404 13,885 13,580 243,485 $ 218,199 $209,152 $184,771 $162,703 $141,897 $111,081 $ 93,962 5 90,295 154,074 136,752 131,799 111,344 103,709 90,031 72,628 60,687 59,083 194,533 169,681 176,334 148,7 % 126,469 105,077 77,115 70,170 67,190 76,706 74,096 64,078 52,268 44,905 33,656 23,204 19,503 12,994 0,067 36,317 35,620 31,221 25,329 19,416 15,186 11,335 8,673 11,261 10,643 11,555 10,023 7,805 7,665 6,6G1 5,205 5,130 720,126 5 645,688 $628,538 $538,423 $470,911 $397,742 $305,398 $260,862 $243,365 3.80c 3.39c 3.41c 3.07c 2.73c 2.54c 2.10c 1.86c 1.78c 471,825 466,974 460,258 451,491 442,674 435,512 429,186' 423,663 415,772 63,436 62,641 61,865 61,039 60,131 59,359 58,600 57,204 55,953 2,524 2,518 2,522 2,514 2,485 2,461 2,451 2,438 2,437 124 121 116 115 112 108 102 98 96 43 43 43 43 44 44 44 44 44 976 847 834 827 836 836 839 820 805 538,928 533,144 525,638 516,029 506,282 493,320 491,222 484,267 475,107 94,277 89,711 82,552 72,315 61,812 53,164 46,460 39,708 32,837 10,329 10,812 10,349 10,478 10,319 9,497 9,479 8,631 8,736 516.05 $ 467.26 $ 454.42 $ 409.25 5 367.55 5 325.02 5 258.83 $ 221.79 $ 217.17 5.00c 4.32c 4.39c 3.91c 3.56c 3.43c 2.73c 2.57c 2.49c 22,809 23,938 23,690 19,276 20,012 18,698 16,002 14,579 14,977 (2,517) (3,390) (4,011) (652) (1,504) (1,840) (350) 492 (347) 20,292 20,548 19,679 18,624 18,508 16,85h 15,652 15,071 14,630 1,502 1,650 1,456 1,254 1,362 1,326 1,248 1,186 1,050 18,790 18,898 18,223 17,370 17,146 15,532 14,404 13,885 13,580 5,374 5,261 5,678 5,028 4,378 4,378 3,730 3,239 3,254 (152) (310) (423) (229) 183 (156) 93 361 30 5,222 4,951 5,255 4,799 4,561 4,222 3,823 3,600 3,284 3,942 3,896 3,598 3,381 3,320 2,922 2,924 2,706 2,751 3,895 3,554 3,718 3,676 3,388 3,138 2,845 2,567 2,430 1.29 $ l.17 $ 1.07 $ 1.06 $ .80 $ .66 5 .52 $ .39 $ .30 464,710 $ 487,099 $364,1 % $297,880 $267,288 $209,392 $148,974 $160,661 $134,710 l278,3% 325,749 214,589 136,906 66,125 14,770 5,608 3,059 717

' 34,284 0 5 844,401 $736,640 $624,707 $543,938 $462,427 $395,228 $343,157 $326,559 2.57 2.44 2.28 2.13 2.01 1.89% 1.73% 1.66 1.55%

37,777 31,383 27,962 25,211 23,690 22,054 20,921 19,084 17,834 3.42 5 3.21 $ 3.79 $ 2.92 5 3.28 5 3.01 $ 2.33 $ 2.53 $ 2.43 106,000 $ 285,000 $235,000 $200,000 $155,000 $155,000 $115,000 $ 80,000 $ 80,000 22,577 21,680 16,634 13,761 10,870 8,370 5,397 4,158 3,878 8.29c 7.92% 7.56% 7.32% 7.01% 7.01% 6.49% 5.20% 5.20%

232,000 $1,057,000 $832,000 $787,000 $689,000 $534,000 $534,000 $502,000 $395,000

'110,316 79,556 61,622 52,131 44,491 37,068 33,161 26,226 21,704 10.02 % 8.77% 7.64 % 7.46 % 7.25% 6.94 % 6.94% 6.15% 5.49%

5,120 4,868 4,351 4,025 3,855 3,701 3,533 3,449 3,290 134,964 $ 115,136 $ 90,764 5 78,301 5 69,330 $ 60,177 5 52,684 5 46,991 $ 42,618 31

9 RESPONSIBILITY FOR Management utilizes an intemal auditing program to FINANCIAL STATEMENTS evaluate the adequacy and application of fmancial and operating controls, compliance with Company The financial statements of Public Service Indiana and policies and procedures and the accountability and other financial information included herein are safeguarding of Company assets. Management believes representations of the management of the Company; that the Company's accounting controls provide accordingly, the integrity, accuracy, objectivity and reasonable assurance that errors or irregularities that consistency of presentation is assumed by Company could be material to the financial statements are management. Financial statement preparation is in prevented or would be detected within a timely period conformity with generally accepted accounting prin- by employees in the normal course of performing their ciples and follows accounting policies and principles assigned functions.

prescribed by the Public Service Commission of In- '

, ne Board of Directors, through its Audit Committee diana and the Federal Energy Regulatory Commission.

composed of Directors other than Compcny In meeting its responsibilities for the reliability of the employees, pursues its responsibilities for these finan-finincial statements, management depends on the cial statements by meeting periodically with manage-Company's system of intemal accounting control. ment, the intemal auditors and the independent This system is designed to provide reasonable auditors to assure that they ar- carrying out their assurance that assets are safeguarded and transactions respective responsibilities. The Audit Committee has are executed in accordance with management's full access to the intemal and independent auditors authorization and recorded properly to permit the and meets with them, with and without management preparation of financial statements in accordance with being present, to discuss auditing and financial report-the policies and principles described above. The Com- ing matters.

pany also seeks to assure the objectivity and integrity of its accounts by careful selection of its managers, Hugh A. Barker division ofresponsibilities, delegatiois ofauthority and ,

Chairman and Chief Executive Officer communication programs for the entire organization to assure that policies and standards are understood.

security markets, prices and dividends The principal organized markets in which the Company's common stock is traded are:

The New York Stock Exchange ne Midwest Stock Exchange In addition the Company's common stock has unlisted trading privileges on the Cincinnati, Detroit and l'hiladelphia exchanges. All cumulative preferred stock sold publicly is listed on the New York Stock Exchange and the 31/2%,

4.16% and 4.32% Series are also listed on the Midwest Stock Exchange.

Company bonds sold publicly since 1%9 have been listed for trading on the New York Stock Exchange.

j The following table shows the quarterly high and low sale prices of the Company's common stock on the composite tape and dividends paid fbr the past two years.

1983 1982 high low dividend high low dividend first $27 3/8 $241/2 S.69 $231/4 $201/8 S.65 second 27 1/4 23 3/4 .69 24 1/4 21 1/2 .69 l third 26 1/4 24 .72 24 5/8 21 3/4 .69 l fourth 27 3/8 10 7/8 .72 27 1/2 22 7/8 .69 I

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P*U*B+L*I+C S* E R* V +'Ia'd. E I.N+D*I*A N A BOARD OF DIRECTORS Hugh A. Barker DaIrell V. Menscer audit committee brman and Oief Execuuve Officer Prcadent and Oief Operating Ofhccr W. George Pinnell, chairman of the Company of the Company Shelton M. Hannig, vice chairman McMn Perelman, Ph.D. D28 mar Riley Jones Otis R. Bowen, M.D. Hugh A. Barker, ex omcio Professor and Dinctor, Prendent, Eli Lilly International Department of Family Medacme, Corporation Phar ==MA Indsana Univenity School of Indunapohs compensation and ,

Medicine, Indianapola, Indiana nominating comnuttee W. GeoIge Pm, nell, D.B.A. Richard B. Stoner, chairman Charles W. Campbell Executive Vice Pnadent, Mehin Perelman Retired Senior Vice Patr. dent Indaana Univenity, Bloonungton 3urr 3. 3wezey, yr.

and General M dthe Company Richard B. Stoner Hugh A. Barker, ex oma,o Vice arman orthe Board, John C. Hancock Cumnuns Engme Company, Inc.,

corporate citizenship comm:ttee Dean, SJ.ools of En6meenng Puniue Univenity, West Lafayette, Indsana Diesel Engine Manufactunng, Columbus Otis R. Bowen, cha rman Dagmar Riley Jones Shciton M. Hannig Burr S. Swczey, Jr. Richard B. Stoner President and Oairman of the Board, Chairman of the Board, -

Lafayette National Bank, Lafayette; Hugh A. Barker, ex ogcio Marsh, Inc., Design and C stmcti n, Tent Haine Oaannan d the Board finance committee Union Bank and Trust Company Delph'i Hugh A. Barker, chairman Dagmar Riley Jones Retind Publisher, Charles W. Campbell The Bloonungton Herald-Telephone Darre3 V. Menscer and Bedford Daily Times-Mail.

Bloonungeon technology committee John C. Hancock, chairman Shelton M. Hannig Mehin Perelman Darrell V. Menscer, ex omcio OFFICERS Hugh A. Barker Duejean C. Garrett William M. Cook Chairman and Chief Executive Oflicer Vice Fresident and Associate General Counsel Vice President-Northern Division Darrell V. Menscer Barton G. Grabow Harold L. IsaacS President and Chief Operating officer Vice President-Corporate Afrain Vice President-Southern Division W. E. George Gerald Hofmockel Richard E. Willis Senior Vice President-Fossil Power Vice President-Power Supply Vice President-Western Division Jon D. Noland Danny L. Littell W. J. Hebble Senbr Vice President and General Counsel Vice President-Technical Senices Treasurer Vernley R. Rchnstrom John P. Masselink Joe E. Rogers Senior Vice President-Finance Vice President Fossil Fuels and Mining Secretary Seth W. Shields James H. Pennington G. W. Roberts Senior Vice President. Nuclear Division Vice President Customer Operations Support Assistant Treasurer and Assistant Secretary Willard Twyman William M. Petro Donald W. Schlehuser Senbr Vice President-Customer Operations Vice President-Nuclear Senices Comptroller William F. Brown Richard P. Stein James L. Koenig Vice President Labor Relations Vice President Public Affairs Assistant Comptrouer Lloyd A. Crews Larry E. Thomas Vice President-Construction Vice President-Administrative Services Greg K. Kimberlin

^"i"*"* '"cr i Counsei John P. Edwards Charles E. Uhl Vice President-Corporate Communicatiosas Vice President-Marketing and Customer Senices

stock transfer agents and registrars

• Continental Illinois National Bank and Trust Company of Chicago )

30 North LaSalle Street, Chicago 60693 Bradford Trust Company 67 Broad Street, New York 10004 l

dividend disburning ofHee Investor Services Toll Free Telephone Numbers:

Put>lic Service Indiana Indiana 800-382-1174 1000 East Main Street Other States 800-428-4337 Plainfield, Indiana 46168 He annual meeting of shareholders will be held at the Murat Theatre, 502 N. New Jersey Street, Indianapolis, Indiana, on April 30,1984. Shareholders of record at the close of business on March 12,1984 will be entitled to vote at the meeting. Formal notice, proxy statement and proxy form will be mailed about March 23.

His annual report and the GamMal staternents contained herein are submitted for the general infonnation of the shareholders of Public Service Company of Indiana, Inc., and are not intended for use in connection with any sale or pur-chase of, or any offer or solicitation of offers to buy or sell, any securities of the Company.

PUBLIC SERVICE INDIANA 1000 East Main Street PLtinfeki, Indiana 46168 l

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-w m emo-PUBLIC SERVICE INDIANA July 20, 1984 Mr. Harold R. Denton Docket Nos.: STN 50-546 Director of Nuclear Reactor Regulation STN 50-547 U. S. Nuclear Regulatory Ccanission Construction Permit Nos.:

Washington, D. C. 20555 CPPR - 170 CPPR - 171 Marble Hill Nuclear Generating Station - Units 1 and 2

Dear Mr. Denton:

In accordance with 10 CFR 50.71(b), we are filing one (1) copy of the annual financial report for 1983 for Public Service Caqnny of Indiana, Inc. (PSI).

This annual report contains an auditor's report by Arthur Anderson and Carpany for PSI at page 12 of the report. Please advise if you have questions.

Sincerely, S. W. Shields SWS: MEN:bjl Attachment cc: Director of Inspection and Enforcenent U. S. Nuclear Regulatory Ccmnission Washington, D. C. 20555 J. E. Konklin (w/o attachnent)

J. R. Schapker (w/o attachment E. P. Martin (w/o attachment) g P. W. O'Connor (w/o attachment) a e

E n

N, i

P.O. Box 190, New Washington, Indiana 47162 812 289 3000 l