UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ........ to ........
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-8946 CILCORP Inc. 37-1169387
(An Illinois Corporation)
300 Hamilton Blvd., Suite 300
Peoria, Illinois 61602
(309) 675-8810
1-2732 CENTRAL ILLINOIS LIGHT COMPANY 37-0211050
(An Illinois Corporation)
300 Liberty Street
Peoria, Illinois 61602
(309) 675-8810
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class so registered on which registered
CILCORP Inc. Common stock, no par value New York and Chicago
CILCO Preferred Stock, Cumulative
$100 par, 4 1/2% series New York
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrants were required to file such reports), and (2)
have been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
At March 13, 1998, the aggregate market value of the voting stock of
CILCORP Inc. (CILCORP) held by nonaffiliates was approximately
$636 million. On that date, 13,610,680 common shares (no par value)
were outstanding.
At March 13, 1998, the aggregate market value of the voting stock of
Central Illinois Light Company (CILCO) held by nonaffiliates was
approximately $62 million. The voting stock of CILCO consists of its
common and preferred stock. On that date, 13,563,871 shares of CILCO's
common stock, no par value, were issued and outstanding and privately
held, beneficially and of record, by CILCORP Inc.
DOCUMENTS INCORPORATED BY REFERENCE
CILCORP Inc.'s Proxy Statement dated March 13, 1998, in connection with
its Annual Meeting to be held on April 28, 1998, is incorporated into
Part I and Part III hereof.
Central Illinois Light Company's Proxy Statement dated March 27, 1998,
in connection with its Annual Meeting to be held on April 28, 1998, is
incorporated into Part I and Part III hereof.
CILCORP Inc.'s Annual Report to Shareholders for the year ended
December 31, 1997 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations is incorporated herein by reference
into Part II Item 7.
CILCORP Inc.'s Annual Report to Shareholders for the year ended
December 31, 1997 -- Financial Statements, Notes to the Financial
Statements and Supplementary Data is incorporated herein by reference
into Part II Item 8.
CILCORP INC.
and
Central Illinois Light Company
1997 Form 10-K Annual Report
This combined Form 10-K is filed separately by CILCORP Inc. and Central
Illinois Light Company (CILCO). Information herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, CILCO makes no representation
as to information relating to any other subsidiary of CILCORP Inc.
Table of Contents
Page
Glossary 5-6
Part I
Item 1. Business
The Company and its Subsidiaries 7-8
Business of CILCO 8-9
Electric Service 9-10
Gas Service 10
Regulation 11
Electric Fuel and Purchased Gas
Adjustment Clauses 11
Fuel Supply - Coal 11-12
Natural Gas Supply 12
Financing and Capital Expenditures Programs 12-13
Environmental Matters 13-14
Significant Customer 14
Franchises 14
Competition 14
Employees 15
Union Contracts 15
Early Retirement Programs 15
Business of QST (Excluding QST Environmental) 15
Energy Supply 16
Competition 16
Employees 16
Business of QST Environmental 16-17
Customers 17
Regulation of QST Environmental's Clients 17-19
Regulation of QST Environmental 19
Competition 19
Subcontractors 19
Government Contracts 19-20
Patents and Trademark Protection 20
Potential Liabilities and Insurance 20-21
Employees 21
Other Businesses 22
CIM 22
CVI 22
Employees 22
Item 2. Properties 23-24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Executive Officers of the Registrant 25-27
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 28
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 29
Item 8. Index - Financial Statements, Supplementary Data
and Exhibits 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 54
Part III
Item 10. Directors and Executive Officers of the Registrants 54-55
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management 55
Item 13. Certain Relationships and Related Transactions 55-56
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 57-61
GLOSSARY OF TERMS
When used herein, the following terms have the meanings indicated.
AFUDC -- Allowance for Funds Used During Construction
BTU -- British Thermal Unit. The quantity of heat required to raise the
temperature of one pound of water one degree Fahrenheit.
Bcf -- Billion cubic feet
Caterpillar -- Caterpillar Inc., CILCO's largest industrial customer
CECO -- CILCO Energy Corporation, a wholly-owned subsidiary of CILCO
CEDCO -- CILCO Exploration and Development Company, a wholly-owned
subsidiary of CILCO
CERCLA -- Comprehensive Environmental Response, Compensation and
Liability Act
CESI -- CILCORP Energy Services Inc.
CILCO -- Central Illinois Light Company
CIM -- CILCORP Investment Management Inc.
CIPS - AmerenCIPS, formerly Central Illinois Public Service Company
CLM -- CILCORP Lease Management Inc.
Company -- CILCORP Inc. and subsidiaries
Cooling Degree Day -- The measure of the degree of warmer than normal
weather experienced, based on the extent to
which the average of high and low temperatures
for a day rises above 65 degrees Fahrenheit
(annual degree days above historic average
indicate warmer than average temperatures); the
historic average provided by U.S. Weather Bureau
for 30-year period.
CVI -- CILCORP Ventures Inc.
DSM -- Demand Side Management. The process of helping customers
control how they use energy resources.
EPA -- Environmental Protection Agency (Federal)
FAC -- Fuel Adjustment Clause
FASB -- Financial Accounting Standards Board
FERC -- Federal Energy Regulatory Commission
Heating Degree Day -- The measure of the degree of colder than normal
weather experienced, based on the extent to
which the average of high and low temperatures
for a day falls below 65 degrees Fahrenheit
(annual degree days above historic average
indicates cooler than average temperatures); the
historic average provided by U.S. Weather Bureau
for 30-year period.
ICC -- Illinois Commerce Commission
KW -- Kilowatt, a thousand watts
KWH -- Kilowatt-hour, one thousand watts used for one hour (unit of
work)
LCP -- Least Cost Energy Plan, a long-term resource acquisition
strategy that balances both supply and demand-side resource
options designed to provide the best value at the least cost to
customers.
MAIN -- Mid-America Interconnected Network. One of nine regions that
make up the North American Electric Reliability Council. Its
purpose is to ensure the Midwest region will meet its load
responsibility.
MCF -- One thousand cubic feet
MW -- Megawatt, a million watts
MWG -- Midwest Grain Products, Inc.
NEPA -- National Energy Policy Act.
PGA -- Purchased Gas Adjustment
QST -- QST Enterprises Inc.
QST Com -- QST Communications Inc.
QST Energy -- QST Energy Inc.
QST Environmental - QST Environmental Inc.
QST Trading -- QST Energy Trading Inc.
RCRA -- Resource Conservation and Recovery Act.
SFAS -- Statement of Financial Accounting Standards
Therm -- Unit of measurement for natural gas; a therm is equal to one
hundred cubic feet (volume); a therm is also equal to 100,000
BTUs (energy).
PART I
Item 1. Business
THE COMPANY AND ITS SUBSIDIARIES
CILCORP Inc. (CILCORP or the Company) was incorporated as a holding
company in the state of Illinois in 1985. The financial condition and
operating results of CILCORP primarily reflect the operations of Central
Illinois Light Company (CILCO) and QST Enterprises Inc. (QST), the
Company's principal business subsidiaries. A former CILCORP first-tier
subsidiary, QST Environmental Inc., formerly known as Environmental
Science & Engineering, Inc. (ESE) became a subsidiary of QST effective
October 29, 1996. Effective June 1, 1997, ESE began operating under the
name QST Environmental Inc. (QST Environmental). The Company also has
two other first-tier subsidiaries, CILCORP Investment Management Inc.
(CIM) and CILCORP Ventures Inc. (CVI), whose operations, combined with
those of the holding company itself (Holding Company), are collectively
referred to herein as Other Businesses. CILCORP owns 100% of the common
stock of all of its subsidiaries.
CILCO is engaged in the generation, transmission, distribution and sale
of electric energy in an area of approximately 3,700 square miles in
central and east-central Illinois, and the purchase, distribution,
transportation and sale of natural gas in an area of approximately 4,500
square miles in central and east-central Illinois.
CILCO has two wholly-owned subsidiaries, CILCO Exploration and
Development Company (CEDCO) and CILCO Energy Corporation (CECO). CEDCO
was formed to engage in the exploration and development of gas, oil,
coal and other mineral resources. CECO was formed to research and
develop new sources of energy, including the conversion of coal and
other minerals into gas. The operations of these subsidiaries are not
currently significant.
QST, formed in December 1995, provides energy and energy-related
services to a broad spectrum of retail and wholesale customers through
its subsidiary, QST Energy Inc. (QST Energy). QST Energy has one wholly-
owned subsidiary - QST Energy Trading Inc. (QST Trading), which
purchases and sells energy in the wholesale market. QST also provides
fiber optic telecommunications services through another wholly-owned
subsidiary, QST Communications Inc. (QST Com). Effective October 29,
1996, ESE (now known as QST Environmental) also became a wholly-owned
subsidiary of QST.
ESE (now known as QST Environmental) was formed in February 1990 to
conduct the environmental consulting and analytical services businesses
acquired from Hunter Environmental Services, Inc. (Hunter) during that
year. QST Environmental provides engineering and environmental
consulting services to a variety of governmental, industrial and
commercial customers. QST Environmental has six wholly-owned active
subsidiaries: Keck Instruments, Inc., which manufactures geophysical
instruments used in environmental applications; QST Architectural
Services, Inc., which provides architectural services in Illinois;
National Professional Casualty Co., which provides professional and
pollution liability insurance to QST Environmental; Chemrox, Inc., which
formerly manufactured products and provided engineering services for the
safe use and control of ethylene oxide and chlorofluorocarbons;
Environmental Staffing Solutions, Inc., which provides temporary
staffing services, and ESE Land Corporation (ESE Land) which, either
directly or through special purpose subsidiaries, maintains interests in
environmentally distressed parcels of real estate acquired for resale.
During the fourth quarter of 1997, QST Environmental completed the sale
of substantially all of the assets of ESE Land for cash and continued
membership interests in the acquiring companies. QST Environmental is
also a member of DSE Environmental L.L.C., organized to perform
environmental and remediation services. In addition, QST Environmental
owns a minority interest in ESE Ohio, Inc., which provides professional
engineering services in the State of Ohio.
CIM manages the Company's investment portfolio. CIM holds eight
leveraged lease investments through three wholly-owned subsidiaries:
CILCORP Lease Management Inc. which was formed in 1985, and CIM Leasing
Inc. and CIM Air Leasing Inc., which were both formed in 1993. CIM's
other wholly-owned subsidiary is CIM Energy Investments Inc., which was
formed in 1989 to invest in non-regulated, independent power production
facilities (see Other Businesses). CIM also directly owns limited
partnership interests in affordable housing portfolios.
CVI primarily invests in ventures in energy-related products and
services. CVI has an 80% interest in the Agricultural Research and
Development Corporation and has one wholly-owned subsidiary, CILCORP
Energy Services, Inc. (CESI). CESI was formed to pursue energy-related
opportunities in the non-regulated market. CESI's primary business is
the sale of non-regulated energy services. During 1996 and 1997 CESI
provided certain energy-related services to Caterpillar Inc. Refer to
the caption "Competition" of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations beginning on
page 19 of CILCORP's 1997 Annual Report to Shareholders which is
incorporated herein by reference.
The following table summarizes the relative contribution of each
business group to consolidated assets, revenue and net income for the
year ended December 31, 1997.
<TABLE>
<CAPTION>
Assets Revenue Net Income
(Loss)
(In thousands)
<S> <C> <C> <C>
CILCO $1,022,655 $546,854 $50,251
QST (excluding QST
Environmental) 97,869 346,290 (9,843)
QST Environmental 46,544 72,235 (21,571)
Other Businesses 167,751 11,106 (2,442)
---------- -------- -------
$1,334,819 $976,485 $16,395
========== ======== =======
</TABLE>
CILCORP is an intrastate exempt holding company under Section 3(a)(1) of
the Public Utility Holding Company Act of 1935 (PUHCA). Federal
legislation dealing with the restructuring of the electric utility
industry, including repeal of PUHCA, has been introduced in both Houses
of Congress. Repeal of PUHCA would, among other things, remove certain
presently applicable restrictions to the merger or combination of non-
contiguous electric and natural gas utility holding companies. The
Company cannot predict whether or when any of these proposals might be
enacted at the federal level or the ultimate effect on the Company.
BUSINESS OF CILCO
CILCO was incorporated under the laws of Illinois in 1913. CILCO's
principal business is the generation, transmission, distribution and
sale of electric energy in an area of approximately 3,700 square miles
in central and east-central Illinois, and the purchase, distribution,
transportation and sale of natural gas in an area of approximately 4,500
square miles in central and east-central Illinois.
CILCO is continuing to experience, in varying degrees, the impact of
developments common to the electric and gas utility industries. These
include increased competition in wholesale markets and the prospect of
competition in retail markets, changes in regulation and legislation
affecting utilities, uncertainties as to the future demand for
electricity and natural gas, structural and competitive changes in the
markets for these commodities, the high cost of compliance with
environmental and safety laws and regulations and uncertainties in
regulatory and political processes. At the same time, CILCO has sought
to provide reliable service at reasonable rates for its customers and a
fair return for its investors. Refer to the caption "Competition" of
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations beginning on page 19 of CILCORP's 1997 Annual
Report to Shareholders which is incorporated herein by reference.
ELECTRIC SERVICE
CILCO furnishes electric service to retail customers in 136 Illinois
communities (including Peoria, East Peoria, Pekin, Lincoln and Morton).
At December 31, 1997, CILCO had approximately 193,000 retail electric
customers.
In 1997, 62% of CILCO's total operating revenue was derived from the
sale of electricity. Approximately 37% of electric revenue resulted
from residential sales, 31% from commercial sales, 24% from industrial
sales, 6% from sales for resale and 2% from other sales. Electric
sales, particularly residential and commercial sales during the summer
months, fluctuate based on weather conditions.
The electric operating revenues of CILCO were derived from the following
sources:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Residential $125,071 $121,668 $129,722
Commercial 103,747 100,944 99,992
Industrial 82,318 79,065 87,491
Sales for resale 19,966 15,206 5,132
Street lighting 1,343 1,283 1,132
Other revenue 5,651 4,619 2,729
-------- -------- --------
Total electric revenue $338,096 $322,785 $326,198
======== ======== ========
</TABLE>
CILCO owns and operates two coal-fired base load generating plants, a
natural gas-fired cogeneration plant, and two natural gas combustion
turbine-generators which are used for peaking service. The 1997 system
peak demand was 1,135 MW on June 24, 1997. The all-time system peak
demand of 1,188 MW was set on August 17, 1995.
The system peak demand for 1998 is estimated to be 1,216 MW with a
reserve margin of approximately 18.9%. The system peak demand estimate
does not account for any load loss due to CILCO's retail competition
pilot programs (see Competition). The reserve margin takes into account
90 MW of firm purchased power and 87 MW of interruptible industrial load
and other related Demand Side Management (DSM) programs. CILCO's planned
reserve margin complies with planning reserve margin requirements
established by the Mid-America Interconnected Network (MAIN), of which
CILCO is a member.
Studies conducted by CILCO indicate that it has sufficient base load
generating capacity and purchased capacity to provide an adequate and
reliable supply of electricity to satisfy base load demand through the
end of the century. To help meet anticipated increases in peak demand
and maintain adequate reserve margins, CILCO has entered into three
wholesale bulk power agreements to purchase capacity from AmerenCIPS
(CIPS), formerly Central Illinois Public Service Company. Each
agreement was approved by the Illinois Commerce Commission (ICC) as part
of CILCO's electric least cost energy plan filings. See also Note 8.
Commitments and Contingencies for further discussion of the purchase
agreements with CIPS.
CILCO is interconnected with CIPS, Commonwealth Edison Company, Illinois
Power Company and the Springfield City Water, Light and Power Department
to provide for the interchange of electric energy on an emergency and
mutual help basis.
GAS SERVICE
CILCO provides gas service to customers in 128 Illinois communities
(including Peoria, East Peoria, Pekin, Lincoln and Springfield). At
December 31, 1997, CILCO had approximately 202,000 gas customers,
including 1,892 industrial, commercial and residential gas
transportation customers (of which 1,769 are Power Quest customers) that
purchase gas directly from suppliers for transportation through CILCO's
system. For further discussion of gas transportation, refer to the
captions "Competition" and "CILCO Gas Operations" of Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations beginning on pages 19 and 24 of CILCORP's 1997 Annual
Report to Shareholders, incorporated herein by reference.
In 1997, 38% of CILCO's total operating revenue was derived from the
sale or transportation of natural gas. Approximately 60% of gas revenue
resulted from residential sales, 24% from commercial sales, 4% from
industrial sales, 3% from transportation and 9% from other sales. Gas
sales, particularly residential and commercial sales during the winter
months, fluctuate based on weather conditions.
The gas operating revenues of CILCO were derived from the following
sources:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Residential $124,440 $125,869 $103,992
Commercial 51,204 44,695 32,792
Industrial 8,276 5,670 3,165
Transportation of gas 6,484 8,388 8,927
Other revenue 18,354 11,148 2,670
-------- -------- --------
Total gas revenue $208,758 $195,770 $151,546
======== ======== ========
</TABLE>
CILCO's all-time maximum daily send-out of 443,167 MCF occurred on
January 15, 1972. The 1997 peak day send-out of 381,384 MCF occurred on
January 10, 1997. CILCO has been able to meet all of its existing
customer requirements during the 1997-1998 heating season. CILCO
believes that its present and planned supplies of gas will continue to
be sufficient to serve all of its existing customer requirements during
the 1998-1999 heating season.
REGULATION
CILCO is a public utility under the laws of the State of Illinois and is
subject to the jurisdiction of the ICC. The ICC has general power of
supervision and regulation with respect to services and facilities,
rates and charges, classification of accounts, valuations of property,
determination of depreciation rates, construction, contracts with any
affiliated interest, the issuance of stock and evidences of indebtedness
and various other matters. With respect to certain electric matters,
CILCO is subject to regulation by the FERC. CILCO is exempt from the
provisions of the Natural Gas Act, but is affected by orders, rules and
regulations issued by the FERC with respect to certain gas matters.
Refer to the caption "Competition" of Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations beginning
on page 19 of CILCORP's 1997 Annual Report to Shareholders, which is
incorporated herein by reference, for changes in the Illinois regulatory
environment enacted in 1997.
ELECTRIC FUEL AND PURCHASED GAS ADJUSTMENT CLAUSES
CILCO's tariffs provide for adjustments to its electric rates through
the fuel adjustment clause (FAC) to recover the cost of energy purchased
from other suppliers and to reflect increases or decreases in the cost
of fuel used in its generating stations. The transportation costs of
coal are not currently included in the FAC, but are collected through
base rates.
CILCO's current tariffs also provide for adjustments to its gas rates
through the purchased gas adjustment clause (PGA) to reflect increases
or decreases in the cost of natural gas purchased for sale to customers.
CILCO is proposing, in a filing made on February 27, 1998, to cap its
natural gas prices for five years, beginning September 1, 1998. It is
the first plan of its type filed with the ICC under a state utility
deregulation law enacted in December 1997. The cap would replace the
PGA. If approved by the ICC, CILCO would assume the risk of gas prices
rising above the cap. The ICC has up to 240 days to act on the CILCO
proposal.
FUEL SUPPLY - COAL
Substantially all of CILCO's electric generation capacity is coal-fired.
Approximately 2.6 million tons of coal were burned during 1997.
Existing coal contracts with suppliers in central Illinois are expected
to supply 100% of the 1998 requirements.
During the years 1997, 1996 and 1995, the average cost per ton of coal
burned, including transportation, was $34.01, $31.82, and $37.21,
respectively. The cost of coal burned per million BTU's was $1.56,
$1.44, and $1.62, respectively (see Electric Fuel and Purchased Gas
Adjustment Clauses).
CILCO has a long-term contract with Freeman United Coal Mining Company
(Freeman) for the purchase of high-sulfur, Illinois coal used
predominantly at the Duck Creek Station. The contract gives CILCO the
flexibility to purchase between 500,000 and 1,000,000 tons annually.
Under the terms of the contract, CILCO's obligation to purchase coal
could be extended through 2010; however, Freeman has the option of
terminating (with two years' notice) the contract after 1997. The
contract requires CILCO to pay all variable coal production costs on
tons purchased and certain fixed costs not affected by the volume
purchased. On August 8, 1997, CILCO filed a demand for arbitration with
Freeman alleging that Freeman has failed to keep and perform its prudent
mining obligations, as required by the parties' contract. The relief
sought by CILCO through this arbitration includes damages and
confirmation of CILCO's termination rights under this contract. CILCO
and Freemen have agreed to continue operating under the present contract
until a ruling on CILCO's claims is reached by the arbitrators, which is
expected in late 1998 or early 1999. CILCO cannot at this time predict
the ultimate outcome or materiality of this dispute. For a discussion
of the agreement reached with Freeman regarding the accounting for
postretirement benefits costs, refer to the caption "CILCO Electric
Operations" of Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations beginning on page 23 of CILCORP's
1997 Annual Report to Shareholders which is incorporated herein by
reference.
NATURAL GAS SUPPLY
During 1997, CILCO continued to maintain a widely diversified and
flexible natural gas supply portfolio. This portfolio is structured
around firm and interruptible gas transportation service provided by
five interstate pipeline suppliers and firm and interruptible gas
purchase arrangements of varying terms made directly with approximately
40 gas suppliers. Reliability was enhanced through natural gas
injections and withdrawals at CILCO's two natural gas storage fields and
contracted storage facilities. The supply and pipeline capacity
portfolio continues to provide reliable supplies at prevailing market
prices. CILCO believes that its present and planned supply of gas will
continue to be sufficient to serve all of its present and projected firm
customer requirements.
During 1997, CILCO purchased and delivered approximately 40,469,000 MCF
of natural gas at a cost of approximately $122.6 million, or an average
cost of $3.03 per MCF. The average cost per MCF of natural gas
purchased and delivered was $3.05 in 1996 and $2.17 in 1995 (see
Electric Fuel and Purchased Gas Adjustment Clauses).
FINANCING AND CAPITAL EXPENDITURES PROGRAMS
CILCO's ongoing capital expenditures program is designed to maintain
reliable electric and gas service and to meet the anticipated demands of
its customers. Capital expenditures for 1998 are estimated to be $51.1
million, including pollution control expenditures of $4.4 million.
Expenditures include $25.2 million for the electric business,
$11.6 million for the gas business and $14.3 million for general and
miscellaneous purposes. Electric expenditures include $9.0 million for
additions and modifications to generating facilities and $16.2 million
for transmission and distribution system additions and improvements.
Gas expenditures are primarily for necessary additions, replacements and
improvements to existing facilities. Anticipated gas and electric
capital expenditures for 1999-2002 are $205.5 million.
The above estimates for 1998 capital expenditures includes $11.7 million
for information technology projects. Included in 1998 information
technology projects is replacement of existing computer software
containing two-digit date fields which will not be able to distinguish
the year 2000 from the year 1900. Modifications of existing programs
will be expensed as incurred, while expenditures for programs replaced
in their entirety will be capitalized. Management continues to evaluate
CILCO's computer software systems and does not currently believe that
Year 2000 issues will materially impact CILCO's operations.
CILCO expects to finance its 1998 capital expenditures with funds
provided by operating activities and external sources of capital.
Future funds provided by operations may be affected by the deregulation
of the electric and natural gas utility industries. CILCO retired $16
million and $20 million of first mortgage bonds due in February 1996 and
March 1997, respectively. CILCO had $21.3 million of short-term
commercial paper outstanding at December 31, 1997, and expects to issue
short-term commercial paper periodically during 1998. At December 31,
1997, CILCO had bank lines of credit aggregating $30 million, all of
which were unused, except in support of commercial paper issuance.
CILCO expects the support of commercial paper issuance to be the only
use of these bank lines during 1998. Refer to the caption "Capital
Resources and Liquidity - CILCO" of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations on page 17 of
CILCORP's 1997 Annual Report to Shareholders which is incorporated
herein by reference.
ENVIRONMENTAL MATTERS
Refer to the caption "Environmental Matters" of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
on page 21 of CILCORP's 1997 Annual Report to Shareholders which is
incorporated herein by reference.
Since the adoption of the United Nations Framework on Climate Change in
1992, there has been a worldwide effort to reduce greenhouse gas (GHG)
emissions to 1990 levels or below. In December of 1997, the Clinton
administration participated in the Kyoto, Japan negotiations, where the
basis of a Climate Change treaty was formulated. Under the treaty, the
United States would have an overall reduction target of 7% in GHG
emissions from 1990 levels by 2008-2012. A key part of the program is a
trading program for GHG emissions, which at this time is undefined.
CILCO estimates that reducing GHG emissions to 7% below the 1990 levels
during the period 2008-2012 could require significant capital outlays
and increases in annual operating expenses associated with electric
generation which could have a material adverse impact on the Company.
The U.S. Senate passed a resolution in 1997 indicating the Senate would
not ratify an agreement that does not involve commitments from
developing nations to limit GHG emissions or one that would damage the
U.S. economy. It is uncertain if the treaty will be presented for
Senate approval during 1998. The Clinton administration is expected to
propose funding for research and development and tax incentives as
necessary elements to reduce the GHG's (primarily carbon dioxide)
associated with the production of fossil-fired electricity.
Many urban areas around the country face the major challenge of
achieving compliance with ozone air quality standards. Ozone is
formed when volatile organic compound (VOC) emissions and/or nitrogen
oxide (NOx) emissions photochemically react in the atmosphere.
Strategies for reduction of ozone levels have targeted mobile, area
and stationary sources (including power plants) of VOCs and NOx.
Under Title I of the Clean Air Act, states are required to develop and
implement State Implementation Plans (SIP) for ozone compliance by
2007. Where boundary area emissions are contributing to the non-
attainment areas, additional VOC/NOx controls in attainment areas are
being considered. This matter is further complicated by the transport
of emissions across state boundaries and regions. CILCO may be
targeted for additional NOx emission reductions of up to 85% at its
power plants pursuant to regional ozone compliance programs, despite
the fact that CILCO's plants are in attainment areas.
CILCO is participating in ozone compliance strategy activities at the
national, regional, and state levels. CILCO's position calls for
(1) equitable consideration among all VOC/NOx sources, (2) credit for
past and planned emission reductions and (3) cost-benefit/risk-benefit
support for control regulation.
On October 10, 1997, the USEPA proposed air pollution rules which
would require substantial reductions of NOx emissions in Illinois and
21 other states. The proposal would require the installation of NOx
controls by no later than September 2002. This proposal is expected
to be finalized by October 1998 with Illinois utility reduction
requirements specified in 1999. The legality of this proposal along
with its technical feasibility is expected to be challenged by a
number of utility groups, including CILCO.
Should additional NOx emission controls be mandated for CILCO's power
plants, new and costly control technology retrofits would be required.
Multiple technologies might be necessary to meet extremely stringent
NOx levels. The exact costs for such compliance cannot be determined
at this time, but they could have a material adverse impact on the
Company.
CILCO is currently in the process of investigating and implementing
potential beneficial re-use for ash (a coal combustion by-product)
generated at both generating stations. Providing alternate uses for the
ash will allow CILCO to avoid potential costs associated with the
construction of additional facilities to store this by-product.
SIGNIFICANT CUSTOMER
Caterpillar Inc. is CILCO's largest industrial customer. Aggregate gas
and electric revenues from sales to Caterpillar were 7.5%, 7.5%, and
8.6% of CILCO's total operating revenue for 1997, 1996 and 1995,
respectively. See CILCO's Consolidated Statements of Segments of
Business under Item 8. Financial Statements and Supplementary Data.
FRANCHISES
CILCO negotiates franchise agreements which authorize it to provide
utility services to the communities in its service area. The franchises
are for various terms, usually 25 to 50 years. Based on past
experience, CILCO anticipates that, as franchises expire, new franchises
will be granted in the normal course of business.
COMPETITION
CILCO, as a regulated public utility, has an obligation to provide
service to retail customers within its defined service territory; thus,
CILCO is not generally in competition with other public utilities for
retail electric or gas customers in these areas. However, electricity
and natural gas compete with other forms of energy available to
customers. For example, within the City of Springfield, CILCO's natural
gas business competes with the City's municipal electric system to
provide customer energy needs.
Refer to the captions "Competition", "CILCO Electric Operations", and
"CILCO Gas Operations" of Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations beginning on pages 19,
23 and 24 of CILCORP's 1997 Annual Report to Shareholders, incorporated
herein by reference, for discussion regarding CILCO's electric and gas
pilot programs (collectively known as Power Quest), Illinois' Electric
Service Customer Choice and Rate Relief Law of 1997, and other
competitive trends which may affect CILCO's electric and gas operations.
EMPLOYEES
The number of full-time and part-time employees at December 31, 1997,
was 1,243, excluding employees assigned to the Holding Company. Of
these, 418 gas and electric department employees were represented by
Local 51 of the International Brotherhood of Electrical Workers (IBEW),
and 202 power plant employees were represented by Local 8 of the
International Brotherhood of Firemen and Oilers (IBF&O).
CILCO'S UNION CONTRACTS
The International Brotherhood of Electrical Workers Local 51 (IBEW)
ratified the Company's contract proposal on October 10, 1997. CILCO's
contract with the IBEW expired on June 30, 1997, and the IBEW membership
had been working without a contract since that time. The new contract
expires on July 1, 2000, and among other items, provides for 3% wage
increases each year of the contract. The current contract with the
International Brotherhood of Firemen and Oilers Local 8 expires June 30,
1998.
CILCO'S EARLY RETIREMENT PROGRAMS
As part of a continuing effort to reduce costs and better position
itself for competition in the energy services industry, in November
1996, CILCO offered Voluntary Early Retirement Programs to eligible
management and office and technical employees and employees represented
by the IBEW. A total of 76 of the 210 eligible employees retired,
effective January 1, 1997. The 1996 programs resulted in an after-tax
charge to earnings of approximately $5.4 million.
In 1995, CILCO offered similar Voluntary Early Retirement Programs to
selected employees. A total of 166 of the 257 eligible employees
accepted the offer, resulting in an after-tax charge of approximately
$7.8 million in 1995.
BUSINESS OF QST (EXCLUDING QST ENVIRONMENTAL)
QST Enterprises Inc. was formed in December 1995 to facilitate CILCORP's
expansion into non-regulated energy and related services businesses.
QST, through its wholly-owned subsidiary QST Energy, provides a
portfolio of non-regulated, energy-related products and services
including wholesale and retail sales of electricity and natural gas in
markets that are open to competition. QST also provides fiber optic
telecommunication services in Central Illinois.
The initial focus of QST was to compete against energy suppliers that
participated in CILCO's Power Quest pilot programs. Refer to the
caption "Competition" of Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations on page 19 of CILCORP's
1997 Annual Report to Shareholders which is incorporated herein by
reference. Power Quest provides a means for certain customers to buy
energy from suppliers other than CILCO. During 1997, QST Energy began
to acquire retail customers outside of Illinois. QST Energy competes
against marketers to provide energy and services to customers of other
utilities and energy providers which offer, or will be required to
offer, retail competition programs, as well as marketing energy to
customers who may already have the ability to choose their supplier.
QST Energy, through its wholly-owned subsidiary QST Energy Trading, also
purchases and sells energy on a wholesale basis. Its customers include
marketers, utilities, and independent power producers. QST Energy is
also engaged in the development of on-site electric generating
facilities.
ENERGY SUPPLY
QST Energy and QST Energy Trading have entered into contracts and
enabling agreements with public utilities, independent electricity or
natural gas producers and transporters, and other marketers to purchase
electricity and natural gas to serve QST's customers. Contracts have
various terms ranging from one month to three years. Electricity is
purchased on either a term basis (which does not exceed one year) or a
spot basis. The majority of QST's gas supply is currently purchased on
a 30-day spot basis. QST has successfully met the energy requirements
of its retail customers during the past year.
COMPETITION
QST currently competes with utilities and marketers to provide
electricity to wholesale customers and to retail customers who may
choose their energy supplier, primarily as a result of retail
competition pilot programs offered by regulated utilities throughout the
United States. QST also competes with other marketers and suppliers to
sell natural gas to wholesale and retail customers in a deregulated
market. Currently, the market for natural gas sales is highly
competitive, particularly on the wholesale level and, in some areas of
the country (including Illinois), for large usage customers on the
retail level. The market for wholesale electricity is also very
competitive and competition in QST's retail electric energy business is
partially a function of the design of retail competition programs.
Competition within both the electric and gas segments of QST's business
is expected to increase with the deregulation of the U.S. energy
industry. Refer to the caption "Competition" in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
beginning on page 19 of CILCORP's Annual Report to Shareholders,
incorporated herein by reference.
EMPLOYEES
At December 31, 1997, QST (exclusive of QST Environmental) employed 109
full-time, part-time and on-call employees.
BUSINESS OF QST ENVIRONMENTAL
QST Environmental is an environmental consulting and engineering firm
with additional capabilities in laboratory analysis and equipment
manufacturing. QST Environmental's services are intended to address the
concern over the quality of the environment, the numerous complex
federal, state and local environmental regulations and enforcement
efforts in support of environmental laws. As such, QST Environmental's
business is affected by the existence and enforcement of various federal
and state statutes and regulations dealing with the environment and the
use, control, disposal and clean-up of hazardous wastes (see Regulation
of QST Environmental's Clients herein). QST Environmental provides a
full-service approach to business, industrial and governmental clients,
commencing with problem identification and analysis, continuing through
regulatory negotiation and engineering, and concluding with the
preparation and implementation of a remediation plan or final design and
construction.
QST Environmental has a wide range of clients in business, industry and
government, including federal agencies, local and state governments,
institutional, commercial and industrial firms and professional service
firms. QST Environmental employs environmental, chemical, geotechnical,
civil, mechanical, structural and transportation engineers; geologists;
hydrogeologists; chemists; biologists; toxicologists; meteorologists;
industrial hygienists; architects; and surveyors. QST Environmental has
a nationwide network of offices with its corporate office in Peoria,
Illinois. Presently, QST Environmental has one laboratory located in
Gainesville, Florida. In late January 1998, QST Environmental entered
into a non-binding letter of intent to sell the assets of the
Gainesville laboratory. On March 2, 1998, the prospective purchaser of
these assets decided not to proceed with this transaction. Management
is currently considering various alternatives regarding the operations
of the Gainesville laboratory.
QST Environmental provides services in the following areas: air
quality, chemical analysis, asbestos and lead-based paint management,
industrial hygiene, environmental assessment and toxicology,
hydrogeology, remediation, construction management, storage tank
management, surface water resources analysis, and environmental audits.
QST Environmental also provides engineering design, and environmental,
transportation, and water/wastewater engineering services. In addition,
QST Environmental manufactures instrumentation for groundwater analysis
and mineral exploration through its wholly-owned subsidiary, Keck
Instruments, Inc.
CUSTOMERS
QST Environmental sells its products and services to governmental
agencies and public and private companies. Approximately 48% of QST
Environmental's revenue for 1997 was generated by services performed for
federal, state and local governmental agencies compared to 43% for 1996.
In the year ended 1997, two federal government customer contracts, EPA
and Department of Defense (DOD), accounted for 7.7% and 6.4% of gross
revenues, respectively. The EPA contract has been rebid with an
expected mid-1998 award date. The DOD contract concludes in March 1998.
No single customer accounted for more than 5% of QST Environmental's
gross revenues for the year 1996.
In 1997, approximately 88% of QST Environmental's revenue was generated
from environmental consulting and engineering services, 10% from
laboratory services and 2% from manufactured equipment sales.
REGULATION OF QST ENVIRONMENTAL'S CLIENTS
The level and nature of QST Environmental's business activity is largely
dependent upon government statutes and regulations relating to the
environment.
Significant legislation includes the following:
Clean Air Act of 1970 (CAA): Provisions of the CAA, as amended in 1977
and 1990, authorize the EPA to set maximum acceptable contaminant levels
in the ambient air, to control emissions of certain toxic materials, to
reduce acid rain, and to ensure compliance with air quality standards.
Clean Water Act of 1972, as amended in 1987 (CWA): CWA requires every
state to set water quality standards for each significant body of water
within its boundaries and to ensure attainment and/or maintenance of
those standards. These standards and limitations are enforced in large
part under a nationwide permit program known as the National Pollutant
Discharge Elimination System (NPDES). CWA's reauthorization by Congress
is anticipated in the next three to five years.
Comprehensive Environmental Response, Compensation and Liability Act of
1980 (Superfund or CERCLA): CERCLA is the most significant federal
statute addressing practices involving hazardous substances and imposing
liability for cleaning up contamination in soil and groundwater. This
legislation has four basic provisions: (i) creation of an information
gathering and analysis program which enables federal and state
governments to identify abandoned waste sites and to set priorities for
investigation and response; (ii) granting of federal authority to
respond to hazardous waste emergencies and to clean up hazardous waste
sites; (iii) imposition of liability on persons responsible for disposal
of hazardous substances that may be released into the environment; and
(iv) creation of a federally managed trust fund to pay for the cleanup
of waste sites where a "potentially responsible party" cannot be
identified or where a threat to the environment requires immediate
response. The EPA and State regulatory authorities are encouraging
"voluntary" clean-up of contaminated sites independent of CERCLA through
state-administered programs. In October 1986, the Superfund Amendments
and Reauthorization Act (SARA) was passed as a five-year extension of
the Superfund program. Title III of SARA, also known as the Emergency
Planning and Community Right-to-Know Act of 1986, established a
reporting and notification system for companies dealing with hazardous
chemicals. The Superfund program was reauthorized in 1990 and was
extended without change through September 30, 1994. Revisions to CERCLA
and reauthorization are anticipated to be considered by Congress in
1998.
Federal Insecticide, Fungicide and Rodenticide Act (FIFRA): FIFRA
regulates the use and manufacture of pesticides and related chemicals.
National Environmental Policy Act of 1970 (NEPA): NEPA requires an
analysis of the environmental impact of any major federal action,
including the issuance of federal environmental permits for industrial
facilities which may significantly affect the quality of the
environment.
National Pollutant Discharge Elimination System (NPDES) Stormwater
Permitting Regulations of 1990: The intent of these regulations, passed
in November 1990, is to control pollution from stormwater discharges
associated with industrial activity and municipal storm sewer systems.
Occupational Safety and Health Act of 1970 (OSHA): Health and safety at
the workplace are regulated under OSHA. OSHA provides for permissible
exposure levels for certain hazardous substances, including asbestos,
and also establishes an enforcement mechanism for these and other health
and safety standards.
Resource Conservation and Recovery Act of 1976 (RCRA): While Superfund
seeks to remedy the damage caused by inactive or abandoned waste sites,
RCRA imposes comprehensive regulation of the management of hazardous
waste at active facilities. RCRA and the regulations thereunder
establish a comprehensive "cradle to grave" regulatory program
applicable to hazardous waste and impose requirements for performance
testing and recordkeeping for any person generating, transporting,
treating, storing, or disposing of more than the specified minimum
levels of hazardous waste. In November 1984, RCRA was amended by the
Hazardous and Solid Waste Amendments, which extend RCRA to most
industrial and commercial activities in the nation. In addition, RCRA
requires that underground storage tanks be identified and inspected, and
those found to be leaking must be cleaned up. RCRA's reauthorization by
Congress has been delayed and no action is anticipated in 1998.
Legislative actions continue to evolve through regulatory changes such
as risk-based corrective actions and Brownfield remediation programs in
many states.
Safe Drinking Water Act, as amended in 1986 and 1996 (SDWA): The SDWA
affects numerous public water supplies. Under this Act, the EPA
established and amended primary drinking water standards applicable to
public water supplies.
Toxic Substances Control Act of 1976 (TSCA): TSCA authorizes the EPA to
gather information relating to the risks posed by chemicals and to
regulate the use and disposal of asbestos and polychlorinated biphenyls.
State and Local Regulations: In addition to federal statutes and
regulations, numerous state and local statutes and regulations relating
to environmental risks impose additional environmental standards on QST
Environmental's customers.
REGULATION OF QST ENVIRONMENTAL
The environmental statutes and regulations described above primarily
affect QST Environmental's clients, and thus have a significant impact
on the volume of QST Environmental's business activity and specific
types of services that QST Environmental provides to its clients. These
environmental statutes and regulations also govern the manner in which
QST Environmental performs services for its clients. QST Environmental
must comply with specific worker protection requirements and other
health and safety standards. These standards include taking steps to
limit exposure to asbestos and chemical substances in the workplace.
QST Environmental also must comply with regulations pertaining to the
disposal of certain hazardous chemicals and substances pursuant to
guidelines established under federal and state law. Among those
substances are chemicals used in QST Environmental's laboratory
processes as well as materials removed from the properties and
facilities of its clients. Disposal costs for these materials, and
legal compliance costs generally for QST Environmental, have risen
steadily in recent years and are expected to continue to increase.
Management believes that the degree of enforcement of environmental
regulations at the federal, state and local level will continue to
affect the levels of business of QST Environmental and its clients.
COMPETITION
The market for QST Environmental's consulting services is highly
competitive, and QST Environmental is subject to competition with
respect to all of the services it provides. QST Environmental competes
primarily on the basis of quality of service, expertise, and price. QST
Environmental's competitors range from small local firms to major
national companies. No single entity currently dominates the
environmental consulting and engineering services marketplace.
SUBCONTRACTORS
Because of the nature of the projects in which QST Environmental is
involved, QST Environmental often subcontracts a portion of its projects
to other contractors in order to utilize their expertise, equipment and
experience in areas where QST Environmental may lack the ability to
complete the entire project. For example, if QST Environmental does not
have the necessary equipment to perform all aspects of a project, such
work may be subcontracted to local contractors. In addition, contracts
which QST Environmental has with federal, state and local governmental
agencies may require, as a matter of law, that on a particular job QST
Environmental hire a certain percentage of minority-owned
subcontractors.
GOVERNMENT CONTRACTS
Many of QST Environmental's contracts with governmental agencies are
cost-plus, based on a combination of labor cost, overhead cost and
allowable fee. Overhead rates are estimated at the time of contract
negotiations. Following the completion of a contract, actual overhead
is determined and the difference is reimbursed to the government or paid
to QST Environmental within the limits of the contract. Although QST
Environmental enjoys a good working relationship with the governmental
agencies for which it performs these services, these contracts may be
subject to renegotiation of profits or termination at the election of
the governmental agency.
PATENTS AND TRADEMARK PROTECTION
QST Environmental has applied for or been assigned certain patents or
patent rights. QST Environmental believes that its technical expertise,
field experience, understanding of regulatory requirements and
implementation of technological advances will continue to provide
opportunities for ideas to develop which may lead to patents; however,
research and development is not currently significant to QST
Environmental's operations.
POTENTIAL LIABILITIES AND INSURANCE
QST Environmental is exposed to risk of financial loss during its normal
course of business in a variety of ways typically associated with an
environmental and engineering consulting business, including: work-
related injury or illness of employees or third parties; damage to
property in QST Environmental's control during the course of a project;
damage to QST Environmental's property; repair or rectification costs
resulting from failure to detect, analyze, or measure pollutants,
asbestos or other toxic substances; repair or rectification costs due to
faulty design, workmanship, or liability resulting from QST
Environmental's construction or design activities; failure to perform or
delay in project completion; and claims by third parties for alleged
pollution or contamination damage. Also, QST Environmental assumes
contingent liabilities arising out of its need to exercise care in the
selection and supervision of subcontractors on various projects. Since
QST Environmental derives revenues from work involving hazardous
materials, toxic wastes and pollutants, potential losses may surface
many years after a project is completed.
These risks, along with enforcement of environmental regulations and
increasing public awareness regarding environmental issues and
responsibilities, make it mandatory that QST Environmental maintain a
sound risk management and insurance program.
QST Environmental carries professional liability insurance which covers
design errors and omissions resulting from its typical operations. This
policy is extended to include pollution liability losses. The current
policy, effective April 1, 1996, has a limit of $8 million per claim
($10 million in aggregate for the three-year policy term), with the
first $3 million of coverage provided by QST Environmental's wholly-
owned captive insurance subsidiary, National Professional Casualty Co.
(Captive) and the next $5 million of coverage provided by a non-
affiliated company. Captive is capitalized by the combination of a QST
Environmental bank letter of credit and cash. Captive does not transfer
risk and is not reinsured; CILCORP does not provide credit support to
Captive. The policies cover activities in which QST Environmental is
typically involved. Accordingly, in the event of a serious spill or
loss resulting from a design error or omission, QST Environmental faces
potential liability for the self-insured retention portion of a claim,
as well as any amounts in excess of $8 million. QST Environmental
expects to renew these policies annually in the normal course of
business. The professional and pollution liability insurance policies
include standard industry exclusions for: dishonesty, discrimination,
warranties and guarantees, punitive damages, intentional non-compliance
with government regulations or statutes, nuclear energy, war and bodily
injury from the specification, installation, transportation, storage or
disposal of asbestos.
QST Environmental also carries insurance policies covering workers'
compensation, general liability and auto and property damage claims.
The workers' compensation policy provides statutory average limits.
General liability and auto policies provide full insurance coverage with
minor deductible amounts. Also, performance and payment bonds may be
provided for specific projects if required by clients. To supplement
its risk transfer to insurance policies, QST Environmental attempts with
its clients to limit and/or transfer its risk contractually.
QST Environmental believes it operates in a safe manner and, as
described above, purchases insurance to protect against loss and
maintain competitiveness in the marketplace; however, its entire
potential liability may not be covered by insurance. Also, the total
cost of a potential claim could exceed QST Environmental's policy
limits.
EMPLOYEES
At December 31, 1997, QST Environmental employed 591 full-time, part-
time and on-call employees, many of whom have advanced degrees in a
variety of technical disciplines and all of whom are non-union.
OTHER BUSINESSES
CIM
The investment portfolio of CIM at December 31, 1997, and December 31,
1996, is shown in the following table:
<TABLE>
<CAPTION>
Type of Investment
At December 31 1997 1996
(In thousands)
<S> <C> <C>
Investment in leveraged leases $146,458 $133,030
Cash and temporary cash investments 152 53
Investment in Energy Investors Fund 1,158 129
Investment in affordable housing funds 15,557 17,172
Other 156 35
-------- --------
Total $163,481 $150,419
======== ========
</TABLE>
At December 31, 1997, CIM held equity investments in eight leveraged
leases through its wholly-owned subsidiaries, CILCORP Lease Management
Inc. (CLM), CIM Air Leasing Inc. and CIM Leasing Inc. According to the
terms of some of the lease agreements, under certain circumstances,
subsidiaries of CIM may be obligated to incur additional non-recourse
debt to finance the cost of certain alterations, additions, or
improvements required by the lessee.
CIM, through its wholly-owned subsidiary, CIM Energy Investments Inc.,
has a net investment of $1,158,000 in the Energy Investors Fund,
L.P.(Fund), representing a 3.1% interest in the Fund at December 31,
1997. The Fund invests in non-regulated, non-utility facilities for the
production of electricity or thermal energy. The equity method of
accounting is used for this investment.
CIM is a limited partner in eight affordable housing portfolios. The
ownership interests in these partnerships range from 3% to 12% at
December 31, 1997. The equity method of accounting is used for these
investments.
CVI
CVI's net investment in CESI, its wholly-owned subsidiary, is
approximately $70,000. CESI's primary business is the sale of energy
related products and services to commercial and industrial customers,
municipalities, and other utilities. These services include: gas
management services (including commodity purchasing), gas and electric
non-regulated utility services, outdoor lighting services, and carbon
monoxide detectors. In addition, during 1997, costs related to
providing additional value-added services to Caterpillar in connection
with CILCO's Power Quest programs were reflected in CESI's operating
results. Refer to the caption "Competition" of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
beginning on page 19 of CILCORP's 1997 Annual Report to Shareholders
which is incorporated herein by reference.
EMPLOYEES
At December 31, 1997, there were 10 full-time employees assigned to
CILCORP, CVI and CIM.
Item 2. Properties
CILCO
CILCO owns and operates two steam-electric generating plants, a
cogeneration plant and two combustion turbine-generators. These
facilities had an available summer capability of 1,152 MW in 1997. The
two combustion turbine generators have a summer rating of 30 MW (15 MW
each) and are used during peak periods. They typically operate less
than 100 hours per year. The cogeneration plant, which became
operational during 1995, produces steam for Midwest Grain Products, Inc.
(MWG) and also generates electricity for distribution to CILCO's
customers. This turbine-generator has an available summer capability of
16 MW.
The major generating facilities of CILCO (representing 96.0% of CILCO's
available summer generating capability projected for 1998), all of which
are fueled with coal, are as follows:
<TABLE>
<CAPTION>
Available Summer
Capability (MW)
Station & Unit Installed Actual 1997
<S> <C> <C>
Duck Creek
Unit 1 1976 366
E. D. Edwards
Unit 1 1960 117
Unit 2 1968 262
Unit 3 1972 361
</TABLE>
CILCO's transmission system includes approximately 285 circuit miles
operating at 138,000 volts, 48 circuit miles operating at 345,000 volts
and 13 principal substations with an installed capacity of 3,032,700
kilovolt-amperes.
The electric distribution system includes approximately 6,220 miles of
overhead pole and tower lines and 2,050 miles of underground
distribution cables. The distribution system also includes 104
substations with an installed capacity of 2,012,860 kilovolt-amperes.
The gas system includes approximately 3,540 miles of transmission and
distribution mains.
CILCO has an underground gas storage facility located about ten miles
southwest of Peoria near Glasford, Illinois. The facility has a present
recoverable capacity of approximately 4.5 Bcf. An additional storage
facility near Lincoln, Illinois, has a present recoverable capacity of
approximately 5.2 Bcf.
QST ENVIRONMENTAL
QST Environmental owns approximately 53 acres of land in Gainesville,
Florida, containing 118,000 square feet of offices, laboratory and other
space. In Peoria, Illinois, QST Environmental owns approximately 27,000
square feet of offices, laboratory and other space and leases
approximately 21,000 square feet of additional space for offices. QST
Environmental and its subsidiaries lease additional facilities for
offices and warehouse space in 27 cities throughout the United States.
QST Environmental believes its facilities are suitable and adequate for
its current businesses and does not expect to make any material
acquisitions of real property in the near future. Refer to the caption
"Capital Resources and Liquidity - QST Environmental" of Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operation on page 18 of CILCORP's 1997 Annual Report to shareholders
which is incorporated herein by reference.
Item 3. Legal Proceedings
Reference is made to the captions "Environmental Matters" of Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations and to "Note 9 - Commitments and Contingencies" of Item 8.
Financial Statements and Supplementary Data of CILCORP's 1997 Annual
Report to Shareholders, incorporated herein by reference, for certain
pending legal proceedings and/or proceedings known to be contemplated by
governmental authorities.
Pursuant to CILCO's By-Laws, CILCO has advanced legal and other expenses
actually and reasonably incurred by employees, and former employees, in
connection with the Department of Justice's (DOJ) investigation of
CILCO's Springfield gas operations. The DOJ investigation was subject
to a September 1994 settlement agreement.
The Company and its subsidiaries are subject to certain claims and
lawsuits in connection with work performed in the ordinary course of
their businesses. Except as otherwise disclosed or referred to in this
section, in the opinion of management, all such claims currently pending
either will not result in a material adverse effect on the financial
position and results of operations of the Company or are adequately
covered by: (i) insurance, (ii) contractual or statutory
indemnification, or (iii) reserves for potential losses.
Item 4. Submission of Matters to a Vote of Security Holders
CILCORP
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
CILCO
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
<TABLE>
<CAPTION>
Executive Officers of CILCORP
Age as of Positions Held During Initial
Name 3/31/98 Past Five Years Effective Date(1)
<S> <C> <C> <C>
R. O. Viets 54 President and Chief
Executive Officer February 1, 1988
W. M. Shay (2) 45 Executive Vice President
and Chief Legal Officer November 4, 1997
Executive Vice President November 4, 1996
J. G. Sahn 51 Vice President, General
Counsel and Secretary March 1, 1994
Vice President
and General Counsel February 1, 1989
M. D. Austin 39 Treasurer and
Assistant Secretary April 25, 1995
Director - Corporate
Investments April 1, 1990
T. D. Hutchinson (3) 43 Controller January 20, 1997
<FN>
Notes:
(1) The term of each executive officer extends to the organization
meeting of CILCORP's Board of Directors following the next annual
election of Directors.
(2) W. M. Shay served as President and Chief Operating Officer of QST
Enterprises Inc. from January 29, 1996 to November 4, 1996.
Previously, he was Group President of CILCO from April 1, 1995 to
January 29, 1996 and Vice President of CILCO from January 1, 1993
to April 4, 1995.
(3) T. D. Hutchinson served as Controller from February 1, 1988, until
April 1, 1995, when he became CILCO Director - Competitive
Strategy. Mr. Hutchinson later served as Director of Planning and
Administration for QST Enterprises Inc.
</TABLE>
<TABLE>
<CAPTION>
Executive Officers of CILCO
Age as of Positions Held During Initial
Name 3/31/98 Past Five Years(1) Effective Date(2)
<S> <C> <C> <C>
R. O. Viets (3) 54 Chairman of the Board
and Chief Executive
Officer April 1, 1995
J. F. Vergon (4) 50 President and Chief
Operating Officer January 29, 1996
Group President,
Gas Operations April 1, 1995
Vice President October 1, 1986
M. J. Bowling (5) 51 Vice President April 1, 1995
S. A. Cisel (5) 44 Vice President April 1, 1995
C. Gilson (5) 40 Vice President September 23, 1997
K. A. Lockenvitz(5) 41 Vice President September 23, 1997
S. E. Ogden (5) 40 Vice President September 23, 1997
P. M. Ratcliff (5) 37 Vice President September 23, 1997
T. S. Romanowski(5) 48 Vice President October 1, 1986
W. R. Dodds 43 Treasurer and Manager
of Treasury Department October 1, 1990
T. D. Hutchinson(6) 43 Controller and Manager
of Accounting January 1, 1997
J. G. Sahn (7) 51 Secretary March 1, 1993
<FN>
Notes:
(1) The officers listed have been employed by CILCO in executive or
management positions for the past five years except for Mr. Viets
and Mr. Hutchinson.
(2) The term of each executive officer extends to the organization
meeting of CILCO's Board of Directors following the next annual
election of Directors.
(3) Mr. Viets previously served as Chairman of the Board from February
1, 1988 to April 23, 1991. He also serves as President and Chief
Executive Officer of CILCO's parent, CILCORP Inc., a position he
has held since February 1, 1988.
(4) J. F. Vergon also serves as Chairman of the Board of CILCORP
Investment Management Inc.
(5) M. J. Bowling, C. Gilson, K. A. Lockenvitz, S. E. Ogden and
P. M. Ratcliff are leaders of strategic business units involving
local distribution, power generation, technical services, marketing
and sales and customer service, respectively. T. S. Romanowski
serves as CILCO's Chief Financial Officer and S. A. Cisel is
responsible for legislative and regulatory affairs.
(6) Mr. Hutchinson is also Controller of CILCORP, effective January 20,
1997, having previously served as CILCORP Controller from February
1, 1988 to April 1, 1995. He served as CILCO Director-Competitive
Strategy from April 1, 1995 to December 31, 1995 and as Director of
Planning and Administration of QST Enterprises Inc. from January 1,
1996 to January 20, 1997.
(7) Mr. Sahn also serves as Vice President and General Counsel of
CILCORP Inc., a position he has held since February 1, 1989. He
was elected to the additional positions of Secretary and Assistant
Treasurer of CILCORP effective March 1, 1994.
</TABLE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
CILCORP
The Company's common stock is listed on the New York and Chicago Stock
Exchanges (ticker symbol CER). At December 31, 1997, there were 11,542
holders of record of the Company's common stock. The following table
sets forth, for the periods indicated, the dividends per share of common
stock and the high and low prices of the common stock as reported in New
York Stock Exchange Composite Transactions.
<TABLE>
<CAPTION>
Quarter
1996 First Second Third Fourth
<S> <C> <C> <C> <C>
Price Range
High $45 1/8 $44 1/8 $43 1/2 $39 5/8
Low $40 1/2 $40 7/8 $39 1/2 $35 1/2
Dividends Paid $ .615 $ .615 $ .615 $ .615
1997
Price Range
High $39 5/8 $41 3/8 $43 $49
Low $35 5/8 $37 1/2 $38 13/16 $40 1/2
Dividends Paid $ .615 $ .615 $ .615 $ .615
<FN>
The number of common shareholders of record as of March 13, 1998, was
11,308.
</TABLE>
CILCO
CILCO's common stock is not traded on any market. As of March 13, 1998
13,563,871 shares of CILCO's Common Stock, no par value, were issued,
and outstanding and privately held, beneficially and of record, by
CILCORP Inc.
CILCO's requirement for retained earnings before common stock dividends
may be paid is described in Note 5 of CILCO's Notes to the Consolidated
Financial Statements contained in Item 8. Financial Statements and
Supplementary Data.
Item 6. Selected Financial Data
<TABLE>
CILCORP INC.
Selected Financial Data
<CAPTION>
For the Years Ended December 31
1997 1996 1995 1994 1993
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenue $ 976,485 $ 613,082 $ 610,172 $ 605,139 $ 584,511
Net income available
for common
stockholders 16,395 27,943 38,582 32,586 33,583
Earnings per share 1.20 2.07 2.93 2.50 2.60
Total assets 1,334,819 1,285,693 1,279,303 1,238,384 1,198,440
Long-term debt 298,528 320,666 344,113 326,695 325,711
Dividends declared
per common share 2.46 2.46 2.46 2.46 2.46
</TABLE>
<TABLE>
Central Illinois Light Company
Selected Financial Data
<CAPTION>
For the Years Ended December 31
1997 1996 1995 1994 1993
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenue $ 546,854 $ 518,555 $ 477,744 $ 461,370 $453,878
Net income available
for common
stockholders 50,251 41,940 39,099 29,507 33,635
Total assets 1,022,655 1,036,169 1,063,223 1,019,109 988,325
Long-term debt 267,836 278,439 298,397 278,359 278,321
Ratio of earnings to
fixed charges 3.7 3.4 3.3 3.0 3.2
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information under the heading Management's Discussion and Analysis
of Financial Condition and Results of Operations on pages 15 through 29
of CILCORP's 1997 Annual Report to Shareholders is incorporated herein
by reference.
Item 8.: Financial Statements and Supplementary Data
The financial statements on pages 31 through 48 and Management's
Report to the Stockholders of CILCORP Inc. on page 30 of CILCORP's
1997 Annual Report to Shareholders are incorporated herein by
reference.
Index to Financial Statements:
Page
CILCORP
Report of Independent Public Accountants on
Schedules 31
CILCO
Management's Report 32
Report of Independent Public Accountants 33
Consolidated Statements of Income 34
Consolidated Balance Sheets 35-36
Consolidated Statements of Cash Flows 37-38
Statements of Segments of Business 39
Consolidated Statements of Retained Earnings 40
Notes to Consolidated Financial Statements 41-54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To CILCORP Inc.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in CILCORP
Inc.'s Annual Report to Shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 27, 1998.
Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The financial statement schedules listed
in Item 14(a)2 are the responsibility of the Company's management and
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1998
MANAGEMENT'S REPORT
The accompanying financial statements and notes for CILCO and its
consolidated subsidiaries have been prepared by management in accordance
with generally accepted accounting principles. Estimates and judgments
used in developing these statements are the responsibility of
management. Financial data presented throughout this report is
consistent with these statements.
CILCO maintains a system of internal accounting controls which
management believes is adequate to provide reasonable assurance as to
the integrity of accounting records and the protection of assets. Such
controls include established policies and procedures, a program of
internal audit and the careful selection and training of qualified
personnel.
The financial statements have been audited by CILCO's independent public
accountants, Arthur Andersen LLP. Their audit was conducted in
accordance with generally accepted auditing standards and included an
assessment of selected internal accounting controls only to determine
the scope of their audit procedures. The report of the independent
public accountants is contained in this Form 10-K annual report.
The Audit Committee of the CILCORP Inc. Board of Directors, consisting
solely of outside directors, meets periodically with the independent
public accountants, internal auditors and management to review
accounting, auditing, internal accounting control and financial
reporting matters. The independent public accountants have direct
access to the Audit Committee. The Audit Committee meets separately
with the independent public accountants.
J. F. Vergon
President and Chief
Operating Officer
T. S. Romanowski
Vice President and Chief
Financial Officer
T. D. Hutchinson
Controller and Manager of
Accounting
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Central Illinois Light Company:
We have audited the accompanying consolidated balance sheets of Central
Illinois Light Company (an Illinois corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
income, cash flows, segments of business, and retained earnings for each
of the three years in the period ended December 31, 1997. These
financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Central
Illinois Light Company and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule
listed in Item 14(a)2 is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a required part of
the basic financial statements. This financial statement schedule has
been subjected to the auditing procedures applied in our audits of the
basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1998
Central Illinois Light Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Years Ended December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Operating Revenues:
Electric $338,096 $322,785 $326,198
Gas 208,758 195,770 151,546
-------- -------- --------
Total Operating Revenues 546,854 518,555 477,744
-------- -------- --------
Operating Expenses:
Cost of Fuel 92,230 90,715 94,235
Cost of Gas 123,531 108,286 68,948
Purchased Power 22,851 10,907 12,353
Other Operations and Maintenance 109,833 119,334 125,556
Depreciation and Amortization 61,505 59,664 56,765
Income Taxes 29,317 26,548 23,267
State and Local Taxes on Revenue 22,467 22,004 20,867
Other Taxes 11,808 11,419 12,205
-------- -------- --------
Total Operating Expenses 473,542 448,877 414,196
-------- -------- --------
Operating Income 73,312 69,678 63,548
-------- -------- --------
Other Income and Deductions:
Cost of Equity Funds Capitalized 35 36 97
CILCO-owned Life Insurance, Net (1,177) (678) (623)
Other, Net (256) 200 2,581
-------- -------- --------
Total Other Income and (Deductions) (1,398) (442) 2,055
-------- -------- --------
Income Before Interest Expenses 71,914 69,236 65,603
-------- -------- --------
Interest Expenses:
Interest on Long-term Debt 20,024 21,012 20,242
Cost of Borrowed Funds Capitalized (99) (54) (417)
Other 2,622 3,150 3,380
-------- -------- --------
Total Interest Expenses 22,547 24,108 23,205
-------- -------- --------
Net Income Before Extraordinary Item and
Preferred Dividends 49,367 45,128 42,398
Extraordinary Item 4,100 -- --
-------- -------- --------
Net Income Before Preferred Dividends 53,467 45,128 42,398
Dividends on Preferred Stock 3,216 3,188 3,299
-------- -------- --------
Net Income Available for Common Stock $ 50,251 $ 41,940 $ 39,099
======== ======== ========
<FN>
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
Central Illinois Light Company
Consolidated Balance Sheets
Assets
<CAPTION>
As of December 31 1997 1996
(In thousands)
<S> <C> <C>
Utility Plant, At Original Cost:
Electric $1,213,585 $1,186,110
Gas 401,870 393,246
---------- ----------
1,615,455 1,579,356
Less - Accumulated Provision for Depreciation 769,792 724,398
---------- ----------
845,663 854,958
Construction Work in Progress 21,550 15,092
Plant Acquisition Adjustments, Net of
Amortization 1,217 1,930
---------- ----------
Total Utility Plant 868,430 871,980
---------- ----------
Other Property and Investments:
Cash Surrender Value of Company-owned Life
Insurance (Net of Related Policy Loans of
$42,898 in 1997 and $37,948 in 1996) 2,399 2,128
Other 1,214 1,553
---------- ----------
Total Other Property and Investments 3,613 3,681
---------- ----------
Current Assets:
Cash and Temporary Cash Investments 698 1,662
Receivables, Less Reserves of $703 and $1,000 44,550 43,604
Accrued Unbilled Revenue 31,248 30,879
Fuel, at Average Cost 7,816 7,643
Materials and Supplies, at Average Cost 13,685 15,126
Gas in Underground Storage, at Average Cost 22,118 24,222
Prepaid Taxes 1,189 1,183
Other 6,331 9,668
---------- ----------
Total Current Assets 127,635 133,987
---------- ----------
Deferred Debits:
Unamortized Loss on Reacquired Debt 3,581 5,572
Unamortized Debt Expense 2,019 2,198
Prepaid Pension Cost 455 496
Other 16,922 18,255
---------- ----------
Total Deferred Debits 22,977 26,521
---------- ----------
Total Assets $1,022,655 $1,036,169
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these balance sheets.
</TABLE>
<TABLE>
Central Illinois Light Company
Consolidated Balance Sheets
Capitalization and Liabilities
<CAPTION>
As of December 31 1997 1996
(In thousands)
<S> <C> <C>
Capitalization:
Common Shareholder's Equity:
Common Stock, No Par Value; Authorized
20,000,000 Shares; Outstanding 13,563,871
Shares $ 185,661 $ 185,661
Retained Earnings 147,081 136,629
---------- ----------
Total Common Shareholder's Equity 332,742 322,290
Preferred Stock Without Mandatory Redemption 44,120 44,120
Preferred Stock With Mandatory Redemption 22,000 22,000
Long-term Debt 267,836 278,439
---------- ----------
Total Capitalization 666,698 666,849
---------- ----------
Current Liabilities:
Current Maturities of Long-Term Debt 10,650 20,000
Notes Payable 21,300 9,900
Accounts Payable 44,844 46,126
Accrued Taxes 2,593 7,013
Accrued Interest 9,234 9,761
PGA Over-Recoveries 1,666 601
Level Payment Plan 2,375 2,737
Other 4,670 5,831
---------- ----------
Total Current Liabilities 97,332 101,969
---------- ----------
Deferred Liabilities and Credits:
Accumulated Deferred Income Taxes 139,274 135,251
Regulatory Liability 56,807 68,565
Investment Tax Credits 21,117 22,801
Capital Lease Obligation 2,182 2,621
Other 39,245 38,113
---------- ----------
Total Deferred Liabilities and Credits 258,625 267,351
---------- ----------
Total Capitalization and Liabilities $1,022,655 $1,036,169
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these balance sheets.
</TABLE>
<TABLE>
Central Illinois Light Company
Consolidated Statements of Cash Flows
<CAPTION>
For the Years Ended December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income Before Extraordinary Item and
Preferred Dividends $ 49,367 $ 45,128 $ 42,398
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 62,217 60,376 57,478
Deferred Taxes, Investment Tax Credits and
Regulatory Liability, Net (6,585) (1,727) (6,454)
Increase in Accounts Receivable (946) (1,292) (11,769)
(Increase)Decrease in Fuel, Materials and
Supplies, and Gas in Underground Storage 3,372 (5,262) 7,251
Increase in Unbilled Revenue (369) (1,988) (6,551)
Increase(Decrease) in Accounts Payable (1,282) 5,643 (7,053)
Increase(Decrease) in Accrued Taxes
and Interest (4,947) 2,349 (439)
Capital Lease Payments 645 645 590
(Increase)Decrease in Other Current Assets 3,331 7,427 (8,958)
Decrease in Other Current Liabilities (458) (1,106) (2,831)
(Increase)Decrease in Other Non-Current
Assets 6,372 (3,506) 13,792
Increase in Other Non-Current Liabilities 1,273 5,129 3,424
-------- -------- --------
Net Cash Provided by Operating
Activities 111,990 111,816 80,878
-------- -------- --------
Cash Flows from Investing Activities:
Capital Expenditures (55,026) (43,525) (69,412)
Cost of Equity Funds Capitalized (35) (36) (97)
Other (5,950) (2,495) (8,462)
-------- -------- --------
Net Cash Used in Investing Activities (61,011) (46,056) (77,971)
-------- -------- --------
Cash Flows from Financing Activities:
Common Dividends Paid (39,482) (46,121) (20,056)
Preferred Dividends Paid (3,216) (3,188) (3,299)
Long-Term Debt Issued -- 35,765
Long-Term Debt Retired (20,000) (16,000) --
Payments on Capital Lease Obligation (645) (645) (590)
Increase(Decrease) in Short-Term Borrowing 11,400 (14,700) 1,200
-------- -------- --------
Net Cash Provided from (Used in)
Financing Activities (51,943) (80,654) 13,020
-------- -------- --------
Net Increase(Decrease) in Cash and Temporary
Cash Investments (964) (14,894) 15,927
Cash and Temporary Cash Investments at
Beginning of Year 1,662 16,556 629
-------- -------- --------
Cash and Temporary Cash Investments at
December 31 $ 698 $ 1,662 $ 16,556
======== ======== ========
Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Period for:
Interest (Net of Cost of Borrowed Funds
Capitalized) $24,148 $23,475 $22,145
Income Taxes $37,907 $22,079 $35,954
<FN>
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
Central Illinois Light Company
Statements of Segments of Business
<CAPTION>
Operating Information
For the Years Ended December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Utility Segment:
Electric Operations
Revenue $338,096 $322,785 $326,198
Expenses 283,459 270,672 277,429
-------- -------- --------
Operating Income 54,637 52,113 48,769
Income Taxes 21,901 19,576 17,975
-------- -------- --------
Operating Income Before
Income Taxes $ 76,538 $ 71,689 $ 66,744
======== ======== ========
Depreciation and
Amortization $ 43,858 $ 42,530 $ 40,665
Capital Expenditures 35,217 28,032 45,466
Gas Operations
Revenue $208,758 $195,770 $151,546
Expenses 190,083 178,205 136,767
-------- -------- --------
Operating Income 18,675 17,565 14,779
Income Taxes 7,416 6,972 5,292
-------- -------- --------
Operating Income Before
Income Taxes $ 26,091 $ 24,537 $ 20,071
======== ======== ========
Depreciation and
Amortization $ 17,647 $ 17,134 $ 16,100
Capital Expenditures $ 19,844 $ 15,529 $ 24,043
</TABLE>
<TABLE>
<CAPTION>
Major Customer for the Years Ended December 31
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Caterpillar Inc.
Electric Revenue $40,106 11.9% $37,724 11.7% $40,109 12.3%
Gas Revenue 934 .4% 1,053 .5% 1,022 .7%
------- ---- ------- ----- ------- ----
Total $41,040 7.5% $38,777 7.5% $41,131 8.6%
======= ==== ======= ===== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Utility Identifiable Assets as of December 31
1997 1996 1995
<S> <C> <C> <C>
Electric $ 711,445 $ 721,468 $ 735,463
Gas 287,275 292,925 273,428
Other Utility Assets* 22,746 21,776 54,332
---------- ---------- ----------
Total Utility Assets** $1,021,466 $1,036,169 $1,063,223
========== ========== ==========
<FN>
*Other investments, miscellaneous accounts receivable, prepaid assets,
deferred pension costs and unamortized debt, discount and expense.
**Electric utility assets include generation-related assets which will
be deregulated as a result of Illinois legislation.
The accompanying Notes to Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
Central Illinois Light Company
Consolidated Statements of Retained Earnings
<CAPTION>
For the Years Ended December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Balance Beginning of Year $136,629 $140,814 $122,125
Add
Net Income Before Preferred Dividends 53,467 45,128 42,398
-------- -------- --------
Total $190,096 $185,942 $164,523
-------- -------- --------
Deduct
Cash Dividends Declared
Preferred Stock
$100 Par Value
4 1/2% Series 501 501 501
4.64% Series 371 371 371
5.85% Series 1,287 1,287 1,287
Auction Rate Series (rate at
December 31, 1997 was 4.19%) 1,057 1,029 1,140
Common Stock, No Par Value 39,482 46,121 20,056
-------- -------- --------
Total Dividends Declared 42,698 49,309 23,355
-------- -------- --------
Additional Minimum Liability for Non-
Qualified Pension Plan at
December 31, 1997, 1996, and 1995
net of taxes of $208, $3 and $233,
respectively 317 4 354
-------- -------- -------
43,015 49,313 23,709
-------- -------- --------
Balance End of Year $147,081 $136,629 $140,814
======== ======== ========
<FN>
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of CILCO include the accounts
of CILCO and its subsidiaries, CILCO Exploration and Development
Company and CILCO Energy Corporation. CILCO is a subsidiary of
CILCORP Inc. Prior year amounts have been reclassified on a basis
consistent with the 1997 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
REGULATION
CILCO is a public utility subject to regulation by the Illinois
Commerce Commission and the Federal Energy Regulatory Commission with
respect to accounting matters, and maintains its accounts in
accordance with the Uniform System of Accounts prescribed by these
agencies.
CILCO is subject to the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71) for its regulated public utility
operations. Under SFAS 71, assets and liabilities are recorded to
represent probable future increases and decreases, respectively, of
revenues to CILCO resulting from the ratemaking action of
regulatory agencies.
The Electric Service Customer Choice and Rate Relief Law of 1997
(Customer Choice Law) became effective in Illinois in December 1997
(see Management's Discussion - Competition). Among other
provisions, this law begins a nine-year transition process to a
fully competitive market for electricity in Illinois. Electric
transmission and distribution activities are expected to continue
to be regulated, but a customer may choose to purchase electricity
from another supplier. Under these circumstances, a utility will
charge a fee for delivering power and may collect an additional non-
bypassable transition charge. This transition charge, which may
generally be collected through 2006, must be filed with the ICC and
is designed to help utilities recover the costs of past investments
made under the regulated system. However, the transition charge
may not cause customers to pay more than the utility's price per
KWH of electricity before enactment of the Customer Choice Law,
adjusted to reflect base rate reductions required by the law.
The Customer Choice Law contains many other provisions affecting
how CILCO will or may conduct its business in the future. The
Customer Choice Law also requires the ICC to promulgate rules
pertaining to various matters, including accounting and
recordkeeping requirements, electric reliability standards, and
affiliated interest rules. CILCO will adapt its business plans to
take advantage of the competitive opportunities afforded by the new
law.
Due to the transition cost recovery limitations and base rate
reductions of the Customer Choice Law, CILCO's electric generation
activities will no longer be subject to the provisions of SFAS 71.
In such circumstances, CILCO's generation-related regulatory assets
and liabilities must be written off. Regulatory assets included on
the Consolidated Balance Sheets at December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Included in prepayments and other:
Fuel and gas cost adjustments $ 2,954 $ 9,658
Coal tar remediation cost - estimated
current 844 1,071
Gas transition costs 159 1,022
------- -------
Current costs included in
prepayments and other 3,957 11,751
------- -------
Included in other assets:
Coal tar remediation cost, net of
recoveries 2,745 2,839
Regulatory tax asset 7,578 4,777
Deferred gas costs 4,145 4,330
Unamortized loss on reacquired debt 3,581 5,572
------- -------
Future costs included in other assets 18,049 17,518
------- -------
Total regulatory assets $22,006 $29,269
======= =======
</TABLE>
Regulatory assets at December 31, 1997 are those related to CILCO's
regulated electric and gas distribution activities. Regulatory
assets of $1.5 million and liabilities of $5.6 million associated
with electric generating plant were written-off or credited,
respectively, to income in 1997 as a net $4.1 million after-tax
extraordinary item. CILCO does not currently believe the costs
recorded for its generating plants and related assets at December 31,
1997 to be impaired as a result of the Customer Choice Law.
Regulatory liabilities, consisting of deferred tax items primarily
related to CILCO's electric and gas transmission and distribution
operations, are approximately $56.8 million and $68.6 million at
December 31, 1997 and 1996, respectively.
CILCO's electric generation-related identifiable assets included in
the balance sheet at December 31, 1997 were:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Property, Plant and Equipment $ 535,065
Less: Accumulated Depreciation (259,988)
---------
275,077
Construction Work in Progress 1,979
---------
Net Property, Plant and Equipment 277,056
Fuel, at Average Cost 8,520
Materials and Supplies, at Average Cost 8,202
---------
Total Electric Generation-Related
Identifiable Assets $ 293,778
=========
</TABLE>
Accumulated deferred income taxes associated with electric generation
property at December 31, 1997 were approximately $79 million.
UTILITY OPERATING REVENUES, FUEL COSTS AND COST OF GAS
Electric and gas revenues include service provided but unbilled at
year end. Substantially all electric rates and gas system sales rates
of CILCO include a fuel adjustment clause and a purchased gas
adjustment clause, respectively. These clauses provide for the
recovery of changes in electric fuel costs, excluding coal
transportation, and changes in the cost of gas on a current basis in
billings to customers. CILCO adjusts the cost of fuel and cost of gas
to recognize over or under recoveries of allowable costs. The
cumulative effects are deferred on the Balance Sheets as a current
asset or current liability (see Regulation, above) and adjusted by
refunds or collections through future billings to customers. Under
the Customer Choice Law, a regulated utility may elect to eliminate
its fuel or purchased gas adjustment clauses. On February 27, 1998,
CILCO filed tariffs designed to eliminate the purchased gas adjustment
clause. For further discussion, refer to the caption, "Electric Fuel
and Purchased Gas Adjustment Clauses" of Item 1. Business.
CONCENTRATION OF CREDIT RISK
CILCO, as a public utility, must provide service to customers within
its defined service territory and may not discontinue service to
residential customers when certain weather conditions exist. CILCO
continually reviews customers' creditworthiness and requests or
refunds deposits based on that review. At December 31, 1997, CILCO
had net receivables of $44.5 million, of which approximately $5.9
million was due from its major industrial customers.
TRANSACTIONS WITH AFFILIATES
CILCO, which is a subsidiary of CILCORP, incurs certain corporate
expenses such as legal, shareholder and accounting fees on behalf of
CILCORP and its other subsidiaries. These expenses are billed monthly
to CILCORP and its other subsidiaries based on specific identification
of costs except for shareholder-related costs which are based on the
relative equity percentages of CILCORP and its subsidiary
corporations. A return on CILCO assets used by CILCORP and its other
subsidiaries is also calculated and billed monthly. Total billings
to CILCORP and its other subsidiaries amounted to $5.7 million, $5.4
million, and $1.7 million in 1997, 1996 and 1995, respectively.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
The allowance, representing the cost of equity and borrowed funds used
to finance construction, is capitalized as a component of the cost of
utility plant. The amount of the allowance varies depending on the
rate used and the size and length of the construction program. The
Uniform System of Accounts defines AFUDC, a non-cash item, as the net
cost for the period of construction of borrowed funds used for
construction purposes and a reasonable rate upon other funds when so
used. On the income statement, the cost of borrowed funds capitalized
is reported as a reduction of total interest expense and the cost of
equity funds capitalized is reported as other income. In accordance
with the FERC formula, the composite AFUDC rates used in 1997, 1996
and 1995 were 7.2%, 7.8% and 6.7%, respectively.
DEPRECIATION AND MAINTENANCE
Provisions for depreciation of utility property for financial
reporting purposes are based on straight-line composite rates. The
annual provisions for utility plant depreciation, expressed as a
percentage of average depreciable utility property, were 3.8% and 4.6%
for electric and gas, respectively, for each of the last three years.
Utility maintenance and repair costs are charged directly to expense.
Renewals of units of property are charged to the utility plant
account, and the original cost of depreciable property replaced or
retired, together with the removal cost less salvage, is charged to
the accumulated provision for depreciation.
INCOME TAXES
CILCO follows a policy of comprehensive interperiod income tax
allocation. Investment tax credits related to utility property have
been deferred and are being amortized over the estimated useful lives
of the related property. CILCORP and its subsidiaries file a
consolidated federal income tax return. Income taxes are allocated to
the individual companies based on their respective taxable income or
loss.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CILCO considers all highly liquid debt instruments purchased with a
remaining maturity of three months or less to be cash equivalents for
purposes of the Consolidated Statements of Cash Flows.
CILCO-OWNED LIFE INSURANCE POLICIES
The following amounts related to CILCO-owned life insurance
contracts, issued by one major insurance company, are recorded on the
Consolidated Balance Sheets:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Cash surrender value of contracts $ 45,297 $ 40,076
Borrowings against contracts (42,898) (37,948)
------- --------
Net investment $ 2,399 $ 2,128
======== ========
</TABLE>
Interest expense related to borrowings against CILCO-owned life
insurance, included in CILCO-owned Life Insurance, Net on the
Consolidated Statements of Income, was $3.5 million, $2.7 million and
$2.3 million for 1997, 1996 and 1995, respectively.
NOTE 2 - INCOME TAXES
CILCO uses the liability method to account for income taxes. Under
the liability method, deferred income taxes are recognized at
currently enacted income tax rates to reflect the tax effect of
temporary differences between the financial reporting basis and the
tax basis of assets and liabilities. Temporary differences occur
because the income tax law either requires or permits certain items to
be reported on CILCO's income tax return in a different year than they
are reported in the financial statements. CILCO has recorded a
regulatory asset and liability to account for the effect of expected
future regulatory actions related to unamortized investment tax
credits, income tax liabilities initially recorded at tax rates in
excess of current rates, the equity component of Allowance for Funds
Used During Construction and other items for which deferred taxes had
not previously been provided. The temporary differences related to
the consolidated deferred income tax asset and liability at
December 31, 1997, 1996, and 1995 were as follows:
<TABLE>
<CAPTION>
December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Deferred Tax Assets:
Deferred Tax Asset $ 16,752 $ 14,967 $ 13,086
Adjustment to reflect regulatory
asset (7,578) (4,777) (3,232)
-------- -------- --------
Net deferred tax asset $ 9,174 $ 10,190 $ 9,854
======== ======== ========
Deferred Tax Liabilities:
Deferred Tax Liability-property $205,777 $211,517 $213,187
Adjustment to reflect regulatory
liability (56,807) (68,565) (62,714)
-------- -------- --------
Net Deferred Tax Liability-
property 148,970 142,952 150,473
Deferred Tax Liability-other (522) 2,489 3,759
-------- -------- --------
Accumulated Deferred Income Tax
Liability $148,448 $145,441 $154,232
======== ======== ========
Accumulated Deferred Income Tax
Liability, net of deferred tax
assets $139,274 $135,251 $144,378
======== ======== ========
</TABLE>
The following table reconciles the change in the accumulated deferred
income tax liability to the deferred income tax expense included in
the income statement for the period:
<TABLE>
<CAPTION>
December 31 1997 1996
(In thousands)
<S> <C> <C>
Net change in deferred income tax
liability per above table $ 4,023 $ (9,127)
Change in tax effects of income
tax related regulatory assets
and liabilities (14,559) 4,306
Deferred taxes related to
extraordinary item 5,634 --
Other 208 3
-------- --------
Deferred income tax expense
(benefit) for the period $ (4,694) $ (4,818)
======== ========
</TABLE>
Income tax expenses were as follows:
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Current income taxes
Federal $29,244 $27,260 $26,712
State 6,350 5,504 5,780
------- ------- -------
Total operating current
taxes 35,594 32,764 32,492
------- ------- -------
Deferred operating income
taxes, net
Depreciation and
amortization (6,080) (3,937) (3,642)
Repair allowance 1,384 (197) 1,917
Borrowed component of AFUDC 80 136 396
Capitalized overhead costs (807) (750) (893)
Removal costs 2,515 4,832 2,130
Gas take-or-pay settlements (339) (706) (751)
Gas storage field (191) 405 861
Taxable salvage 220 351 654
Environmental remediation
costs 46 (642) 642
Pension expense (1,798) (1,726) (6,673)
Other 377 (2,298) (2,173)
------- ------- -------
Total operating deferred
income taxes, net (4,593) (4,532) (7,532)
Investment tax credit
amortization (1,684) (1,684) (1,693)
------- ------- -------
Total operating income taxes 29,317 26,548 23,267
Income tax reduction for
disallowed plant costs 144 156 168
Other, net (3,192) (2,622) (902)
------- ------- -------
Total income taxes before
extraordinary item 26,269 24,082 22,533
Deferred taxes related to
extraordinary item (5,634) -- --
------- ------- -------
Total income taxes $20,635 $24,082 $22,533
======= ======= =======
<FN>
The 1997 income tax provision has been reduced to reflect the
crediting to income as an extraordinary item the regulatory liability
related to electric generation property deferred taxes which were
recorded at tax rates in excess of the current rate (see Note 1).
Total operating deferred income taxes, net, includes deferred state
income taxes of $(65,000), $(62,000) and $(493,000) for 1997, 1996 and
1995, respectively. Other, net, includes deferred state income taxes
of $(18,000), $(51,000) and $(40,000) for 1997, 1996 and 1995,
respectively.
</TABLE>
The following table represents a reconciliation of the effective tax
rate with the statutory federal income tax rate:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
==== ==== ====
Equity component of AFUDC not subject to
taxation -- -- (0.1)
Amortization of property-related deferred
taxes provided at tax rates in excess of
the current rate (1.4) (2.2) (2.0)
Amortization of investment tax credit (2.4) (2.6) (2.7)
CILCO-owned life insurance (1.1) (1.1) (1.0)
State income taxes 5.0 5.0 5.8
Preferred dividends and other permanent
differences 2.1 2.0 2.0
Other differences (0.2) 0.5 (0.4)
---- ---- ----
Total 2.0 1.6 1.6
---- ---- ----
Effective income tax rate before effect of
extraordinary item 37.0 36.6 36.6
Tax effect of extraordinary item (7.9) -- --
---- ---- ----
Effective income tax rate 29.1% 36.6% 36.6%
==== ==== ====
</TABLE>
NOTE 3 - POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE
CILCO has recorded a liability of approximately $1.5 million and
$1.4 million at December 31, 1997 and 1996, respectively, for benefits
other than pensions or health care provided to former or inactive
employees.
PENSION BENEFITS
Substantially all of CILCO's full-time employees, including those assigned
to the Holding Company, are covered by trusteed, non-contributory defined
benefit pension plans. Benefits under these qualified plans reflect the
employee's years of service, age at retirement and maximum total
compensation for any consecutive sixty-month period prior to retirement.
CILCO also has an unfunded nonqualified plan for certain employees.
Pension costs for the past three years were charged as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Operating expenses $ 493 $ 9,700 $15,528
Utility plant and other 125 922 994
------ ------- -------
Net pension costs $ 618 $10,622 $16,522
====== ======= =======
</TABLE>
Provisions for pension expense reflect the use of the projected unit
credit actuarial cost method. At December 31, 1997 and 1996, CILCO
recognized an additional minimum liability on the Balance Sheets for
the plan in which the accumulated benefit obligation exceeds the fair
value of plan assets.
The components of net periodic pension costs follow:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Cost of pension benefits earned by employees $ 4,384 $ 4,998
Interest cost on projected benefit obligation 17,561 16,666
Actual return on plan assets (51,534) (34,173)
Net amortization and deferral 30,207 15,213
Special termination benefits -- 7,918
-------- --------
Net pension costs $ 618 $ 10,622
======== ========
</TABLE>
During 1996, CILCO recognized $7.9 million of net pension costs in
accordance with Statement of Financial Accounting Standards No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits." This amount
represented the costs associated with additional benefits extended in
connection with a voluntary early retirement program.
Information on the funded status of plans in which assets exceed
accumulated benefits follows:
<TABLE>
<CAPTION>
Actuarial present value of benefit obligation: 1997 1996
(In thousands)
<S> <C> <C>
Vested benefits - employees' rights to receive
benefits no longer contingent upon continued
employment $(200,232) $(191,301)
Non-vested benefits - employees' rights to
receive benefits contingent upon continued
employment (15,287) (11,293)
--------- ---------
Accumulated benefit obligation (215,519) (202,594)
Provision for future pay increases (35,718) (30,224)
--------- ---------
Projected benefit obligation (251,237) (232,818)
Pension assets at fair market value 289,091 254,824
--------- ---------
Projected benefit obligation (greater) less
than plan assets 37,854 22,006
Unrecognized transition asset (4,899) (5,787)
Unrecognized prior service cost 6,978 8,006
Unrecognized net gain (49,341) (33,488)
--------- ---------
Pension liability recorded on Balance Sheets $ (9,408) $ (9,263)
========= =========
</TABLE>
Information on the funded status of the plan in which accumulated
benefits exceed assets follows:
<TABLE>
<CAPTION>
Actuarial present value of benefit obligation: 1997 1996
(In thousands)
<S> <C> <C>
Vested benefits - employees' rights to receive
benefits no longer contingent upon continued
employment $(2,614) $(1,938)
Non-vested benefits - employees' rights to
receive benefits contingent upon continued
employment (288) (169)
------- -------
Accumulated benefit obligation (2,902) (2,107)
Provision for future pay increases (790) (515)
------- -------
Projected benefit obligation (3,692) (2,622)
Pension assets at fair market value -- --
------- -------
Projected benefit obligation greater than
plan assets (3,692) (2,622)
Unrecognized prior service cost 455 495
Unrecognized net loss 1,911 1,111
Additional minimum liability (1,576) (1,091)
------- -------
Pension liability recorded on Balance Sheets $(2,902) $(2,107)
======= =======
</TABLE>
<TABLE>
<CAPTION>
Significant assumptions used for calculations: 1997 1996
<S> <C> <C>
Discount rate 7.25% 7.75%
Expected rate of salary increase 4.50% 4.50%
Expected long-term rate of return 8.50% 8.50%
</TABLE>
POSTRETIREMENT HEALTH CARE BENEFITS
Provisions for postretirement benefits expenses are determined under
the accrual method of accounting.
Substantially all of CILCO's full-time employees, including those
assigned to the Holding Company, are currently covered by a trusteed,
non-contributory defined benefit postretirement health care plan. The
plan pays stated percentages of most necessary medical expenses
incurred by retirees, after subtracting payments by Medicare or other
providers and after a stated deductible has been met. Participants
become eligible for the benefits if they retire from CILCO after
reaching age 55 with 10 or more years of service.
Postretirement health care benefit costs were charged as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Operating expenses $3,989 $5,096 $5,108
Utility plant and other 1,825 1,883 1,882
------ ------ ------
Net postretirement health care
benefit costs $5,814 $6,979 $6,990
====== ====== ======
</TABLE>
Information on the plans' funded status follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Components of net postretirement health care
benefit costs:
Service cost - benefits attributed
to service during the period $ 1,298 $ 1,429
Actual return on plan assets (9,906) (4,290)
Interest cost on accumulated
postretirement health care
benefit obligation 5,047 4,545
Amortization of transition
obligation over 18.6 years 2,858 2,858
Other net amortization and
deferral 6,517 1,441
Special termination benefits -- 996
-------- --------
Net postretirement health care
benefit costs $ 5,814 $ 6,979
======== ========
Actuarial present value of
accumulated postretirement health
care benefit obligation:
Retirees $(49,737) $(41,287)
Other fully eligible participants (3,368) (3,904)
Other active participants (19,437) (18,079)
-------- --------
Accumulated postretirement health
care benefit obligation (72,542) (63,270)
Plan assets at fair value 52,263 39,601
-------- --------
Accumulated health care benefit
obligation greater than plan assets (20,279) (23,669)
Unrecognized actuarial gain (12,977) (13,447)
Unrecognized transition obligation 33,155 36,013
-------- --------
Postretirement health care benefit
liability recorded on Balance
Sheets $ (101) $ (1,103)
======== ========
</TABLE>
For measurement purposes, the annual health care cost trend rate
averaged 7.2% for 1997; the rate was assumed to decrease gradually to
5.7% by 2025 and remain at that level thereafter.
Increasing the assumed health care cost trend rate by 1% in each year
would increase the accumulated postretirement benefit obligation at
December 31, 1997, by $3.0 million and the aggregate of the service
and interest cost components of net postretirement health care cost
for 1997 by $268,000. The discount rate used in determining the
accumulated postretirement benefit obligation at December 31, 1997,
was 7.25% and at December 31, 1996, was 7.75%. The weighted average
expected return on assets net of taxes was 8.1%, where taxes are
assumed to decrease return by 0.4%.
NOTE 4 - SHORT-TERM DEBT
CILCO had arrangements for bank lines of credit totaling $30.0 million
at December 31, 1997, all of which were unused. These lines of credit
were maintained by commitment fees of 1/20 of 1% per annum in lieu of
balances. These bank lines of credit support CILCO's issuance of
commercial paper. Short-term borrowings consisted of commercial paper
totaling $21.3 million and $9.9 million at December 31, 1997 and 1996,
respectively.
NOTE 5 - RETAINED EARNINGS
CILCO's Articles of Incorporation provide that no dividends shall be
paid on the common stock if, at the time of declaration, the balance
of retained earnings does not equal at least two times the annual
dividend requirement on all outstanding shares of preferred stock.
The amount of retained earnings so required at December 31, 1997, was
$6.4 million.
NOTE 6 - PREFERRED STOCK
<TABLE>
<CAPTION>
At December 31 1997 1996
(In thousands)
<S> <C> <C>
Preferred stock, cumulative
$100 par value, authorized 1,500,000 shares
Without mandatory redemption
4.50% series - 111,264 shares $11,126 $11,126
4.64% series - 79,940 shares 7,994 7,994
Class A, no par value, authorized
3,500,000 shares
Flexible auction rate - 250,000
shares (a) 25,000 25,000
With mandatory redemption
5.85% series - 220,000 shares 22,000 22,000
------- -------
Total preferred stock $66,120 $66,120
======= =======
<FN>
(a) Dividend rates at December 31, 1997 and 1996, were 4.18% and
4.05%,respectively.
</TABLE>
All classes of preferred stock are entitled to receive cumulative
dividends and rank equally as to dividends and assets, according to their
respective terms.
The total annual dividend requirement for preferred stock outstanding at
December 31, 1997, is $3.2 million, assuming a continuation of the auction
dividend rate at December 31, 1997, for the flexible auction rate series.
PREFERRED STOCK WITHOUT MANDATORY REDEMPTION
The call provisions of preferred stock redeemable at CILCO's option
outstanding at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Series Callable Price Per Share (plus accrued dividends)
<S> <C>
4.50% $110
4.64% $102
Flexible auction rate $100
</TABLE>
PREFERRED STOCK WITH MANDATORY REDEMPTION
CILCO's 5.85% Class A preferred stock may be redeemed in 2003 at $100 per
share. A mandatory redemption fund must be established on July 1, 2003.
The fund will provide for the redemption of 11,000 shares for $1.1 million
on July 1 of each year through July 1, 2007. On July 1, 2008, the
remaining 165,000 shares will be retired for $16.5 million.
PREFERENCE STOCK, CUMULATIVE
No Par Value, Authorized 2,000,000 shares, of which none have been issued.
NOTE 7 - LONG-TERM DEBT
<TABLE>
<CAPTION>
At December 31 1997 1996
(In thousands)
<S> <C> <C>
First Mortgage Bonds
7 1/2% series due 2007 $ 50,000 $ 50,000
8 1/5% series due 2022 65,000 65,000
Medium-Term Notes
5.7% series due 1998 -- 10,650
6.4% series due 2000 30,000 30,000
6.82% series due 2003 25,350 25,350
6.13% series due 2005 16,000 16,000
7.8% series due 2023 10,000 10,000
7.73% series due 2025 20,000 20,000
Pollution Control Refunding Bonds
6.5% series F due 2010 5,000 5,000
6.2% series G due 2012 1,000 1,000
6.5% series E due 2018 14,200 14,200
5.9% series H due 2023 32,000 32,000
-------- --------
268,550 279,200
Unamortized premium and discount on
long-term debt, net (714) (761)
-------- --------
Total CILCO long-term debt $267,836 $278,439
======== ========
</TABLE>
CILCO's first mortgage bonds are secured by a lien on substantially
all of its property and franchises. Unamortized borrowing expense,
premium and discount on outstanding long-term debt are being
amortized over the lives of the respective issues.
Scheduled maturities of long-term debt for 2000 are $30 million.
There are no scheduled maturities of long-term debt for 1999, 2001 or
2002. The 1998 maturities of long-term borrowings have been
classified as current liabilities.
NOTE 8 - COMMITMENTS & CONTINGENCIES
CILCO's 1998 capital expenditures for utility plant are estimated to
be $51.1 million, in connection with which CILCO has normal and
customary purchase commitments at December 31, 1997.
CILCO's policy is to act as a self-insurer for certain insurable
risks resulting from employee health and life insurance programs.
In August 1990, CILCO entered into a firm, wholesale power purchase
agreement with Central Illinois Public Service Company, now
AmerenCIPS (CIPS). This agreement provides for a minimum contract
delivery rate from CIPS of 90 MW until the contract expires in 1998.
In March 1995, CILCO and CIPS renegotiated a limited-term power
agreement reached in November 1992. This agreement, which now expires
in May 2009, provides for CILCO to purchase up to 150 MW of CIPS'
capacity from June 1998 through May 2002, and 50 MW from June 2002
through May 2009.
In January 1997, CILCO intervened in a proceeding pending before the
FERC to challenge the validity of the power agreements with CIPS
because of CIPS' failure to obtain FERC approval of the agreements.
In the alternative, CILCO requested that FERC provide an "open
season" during which CILCO may cancel the power agreements in whole
or in part. In an order issued in October 1997, FERC rejected the
challenge to the validity of the agreements and denied CILCO's
request for an open season. However, FERC ordered CIPS to file the
agreements with FERC and on its own motion initiated a separate
proceeding to investigate the terms of the agreements. In February
1998, FERC denied CILCO's request for a rehearing of the October
order, but directed that issues related to the justness and
reasonableness of the provisions of the power agreement be reviewed.
CILCO also has requested the FERC to order CIPS to pay penalties to
CILCO for CIPS failure to file and seek approval for the agreements
with the FERC.
For a discussion of former gas manufacturing sites, refer to the
caption "Environmental Matters" of Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations on
page 21 of CILCORP's 1997 Annual Report which is incorporated herein
by reference.
NOTE 9 - LEASES
CILCO leases certain equipment, buildings and other facilities under
capital and operating leases. Minimum future rental payments under
non-cancellable capital and operating leases having remaining terms in
excess of one year as of December 31, 1997, are $14.5 million in
total. Payments due during the years ending December 31, 1998,
through December 31, 2002, are $5.4 million, $4.1 million, $2.1
million, $1.4 million and $1.2 million, respectively.
NOTE 10 - FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT
CILCO utilizes various commodity-based financial instruments (future
contracts, options and swaps) to reduce the impact of natural gas
price fluctuations related to natural gas supply and its storage
program, including the price risk related to physical location of
natural gas (basis risk). This program is designed to provide a
higher level of price stability relative to winter market prices for
natural gas injected in CILCO-owned storage fields. CILCO hedged
approximately 19% of its owned natural gas storage in 1997.
In hedging the acquisition cost of gas injected into storage, gain or
loss on derivative financial instruments is deferred as an adjustment
to gas in underground storage on the balance sheet. As natural gas is
withdrawn from storage, these gains or losses are passed to customers
through the PGA, which is included in Cost of Gas on the income
statement. If a derivative financial instrument contract is
terminated early for any reason, including regulatory concerns, any
gain or loss resulting will be deferred and recorded concurrent with
the related purchases and sales of natural gas. In December 1997,
CILCO suspended the storage hedging program and closed out all open
futures and options positions due to the uncertainty of future
recovery of costs through the PGA. At December 31, 1997, CILCO had
open positions in derivative financial instruments used to hedge basis
of 1.4 Bcf.
NOTE 11 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly operating results are unaudited, but, in the
opinion of management, include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of CILCO's
operating results for the periods indicated. The results of
operations for each of the fiscal quarters are not necessarily
comparable to, or indicative of, the results of an entire year due to
the seasonal nature of CILCO's business.
<TABLE>
<CAPTION>
For the Three Months Ended March 31 June 30 September 30 December 31
(In thousands)
<S> <C> <C> <C> <C>
1997
Operating revenue $165,795 $111,520 $123,355 $146,184
Operating income 19,197 14,382 22,491 17,242
Net income before
extraordinary item 13,051 8,567 16,337 11,412
Extraordinary item -- -- -- 4,100
Net income after
extraordinary item 13,051 8,567 16,337 15,512
1996
Operating revenue $154,731 $108,434 $114,864 $140,526
Operating income 20,192 12,188 22,489 14,809
Net income 13,918 6,310 16,234 8,666
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
CILCORP
Not applicable.
CILCO
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
CILCORP
The information required by Item 10 relating to directors is set forth
in the Company's definitive proxy statement for its 1998 Annual Meeting
of Stockholders filed with the United States Securities and Exchange
Commission (Commission) pursuant to Regulation 14A. Such information is
incorporated herein by reference to the material appearing under the
caption "Election of Directors" of such proxy statement. Information
required by Item 10 relating to executive officers of the Company is set
forth under a separate caption in Part I hereof.
CILCO
The information required by Item 10 relating to directors is set forth
in CILCO's definitive proxy statement for its 1998 Annual Meeting of
Stockholders filed with the Commission pursuant to Regulation 14A. Such
information is incorporated herein by reference to the material
appearing under the caption "Election of Directors" of such proxy
statement. Information required by Item 10 relating to executive
officers of CILCO is set forth under a separate caption in Part I
hereof.
Item 11. Executive Compensation
CILCORP
The Company has filed with the Commission a definitive proxy statement
pursuant to Regulation 14A. The information required by Item 11 is
incorporated herein by reference to the material appearing under the
caption "Executive Compensation" of such proxy statement.
CILCO
CILCO has filed with the Commission a definitive proxy statement
pursuant to Regulation 14A. The information required by Item 11 is
incorporated herein by reference to the material appearing under the
caption "Executive Compensation" of such proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
CILCORP
The Company has filed with the Commission a definitive proxy statement
pursuant to Regulation 14A. The information required by Item 12 is
incorporated herein by reference to the material appearing under the
caption "Voting Securities and Principal Holders" of such proxy
statement.
CILCO
CILCO has filed with the Commission a definitive proxy statement
pursuant to Regulation 14A. The information required by Item 12 is
incorporated herein by reference to the material appearing under the
caption "Voting Securities and Principal Holders" of such proxy
statement.
Item 13. Certain Relationships and Related Transactions
CILCORP
CILCORP Inc. (CILCORP or Company), a holding company, is the parent of
its direct subsidiaries Central Illinois Light Company (CILCO), CILCORP
Investment Management Inc. (CIM), CILCORP Ventures Inc. (CVI), and QST
Enterprises Inc. (QST). A former CILCORP first-tier subsidiary, QST
Environmental Inc., formerly known as Environmental Science &
Engineering, Inc. (ESE) became a subsidiary of QST effective October 29,
1996. Effective June 1, 1997, ESE began operating under the name QST
Environmental Inc. (QST Environmental). In the course of business, the
Company carries on certain relations with affiliated companies such as
shared facilities, utilization of employees and other business
transactions. Central Illinois Light Company is reimbursed at cost by
the Company and the other subsidiaries for any services it provides.
CILCORP has been authorized by the Board of Directors to guarantee up to
$30 million of obligations incurred by QST Enterprises Inc. (QST) and
its subsidiaries. Through February 28, 1998, CILCORP has guaranteed
$15.7 million of QST's and its subsidiaries' obligations. CILCORP
receives a fee for providing these guarantees.
QST has been authorized to guarantee up to $50 million of obligations
incurred by its subsidiaries. Through February 28, 1998, QST has
guaranteed $13.7 million of its subsidiaries' obligations. QST receives
a fee for providing these guarantees.
QST has outstanding debt of $3.6 million (all to the Holding Company) at
the end of 1997.
QST Environmental's cash flow is supplemented by a $15 million revolving
line of credit with the Holding Company which expires on May 2, 1998.
This line of credit was unused at December 31, 1997. QST Environmental
had outstanding debt at the end of 1997 of $12.5 million (all to the
Holding Company), less advances to the Holding Company of $2.4 million.
This term debt also expires on May 2, 1998.
CIM had outstanding debt of $41 million (all to the Holding Company) at
the end of 1997. In 1997, CIM retired $3 million of third party debt
and spent $6.9 million to acquire a new leveraged lease asset. Both of
these transactions were funded with cash borrowed from the Holding
Company.
Through December 31, 1997, CIM has paid $10.2 million to fund affordable
housing commitments, $4.2 million of which was paid during 1997. CIM
funded these commitments with cash borrowed from the Holding Company.
CIM has guaranteed the performance of CIM Leasing Inc., CIM Air Leasing
Inc. and CLM Inc. VI (a second tier subsidiary) with respect to certain
obligations arising from the leveraged lease investments held by these
subsidiaries.
CILCO
One member of the Board of Directors of CILCORP Inc. is also a member of
the Board of Directors of CILCO. The Chairman and Chief Executive
Officer of CILCO is also the President and Chief Executive Officer of
CILCORP and the secretary of CILCO is also Vice President, General
Counsel and Secretary of CILCORP Inc.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
CILCORP
Page in
Annual Report to
Stockholders
(a) 1. Financial Statements
The following statements are included in
Exhibit 13 of this filing and are incorporated
herein by reference from CILCORP Inc.'s 1997
Annual Report:
Management's Report 30
Report of Independent Public Accountants 30
Consolidated Statements of Income for the three
years ended December 31, 1997 31
Consolidated Balance Sheets as of
December 31, 1997, and December 31, 1996 32-33
Consolidated Statements of Segments of Business for
the three years ended December 31, 1997 34-35
Consolidated Statements of Cash Flows for the three
years ended December 31, 1997 36
Consolidated Statements of Common Stockholders' Equity
for the three years ended December 31, 1997 37
Notes to the Consolidated Financial Statements 38-48
(a) 2. Financial Statement Schedules
The following schedules are included herein:
Page No.
Form 10-K
---------
Schedule II - Valuation and Qualifying Accounts
and Reserves 62
Schedule XIII -Investment in Leveraged Leases at
December 31, 1997 64
Other schedules are omitted because of the absence of
conditions under which they are required or because the
required information is given in the financial statements or
notes thereto.
(a) 3. Exhibits
*(3) Articles of Incorporation (Designated in Form 10-K for the
year ended December 31, 1991, File No. 1-8946, as Exhibit
3)).
*(3)a By-laws as amended effective April 25, 1995. [Designated in
Form 10-K for the year ended December 31, 1995, File No. 1-
8946, as Exhibit (3)a]
***(4) Instruments defining the rights of security holders, including
indentures
*(10) CILCO Executive Deferral Plan. As amended through January 29,
1996. (Designated in Form 10-K for the year ended December 31,
1995, File No. 1-8946, as Exhibit (10)).
*(10)a CILCO Executive Deferral Plan II. As amended January 29, 1996
(Designated in Form 10-K for the year ended December 31, 1995,
File No. 1-8946, as Exhibit (10)a).
*(10)b CILCORP Economic Value Added Incentive Compensation Plan
(Adopted February 29, 1989 & Revised January 29, 1991 and
January 30, 1996.) [Designated in Form 10-K for the year ended
December 31, 1995. File No. 1-8946, as Exhibit 10(b)]
**(10)c Employment Agreement between CILCORP and Robert O. Viets,
President and Chief Executive Officer (effective September 23,
1997).
(10)d CILCO Benefit Replacement Plan (as amended effective
September 23, 1997).
*(10)e CILCORP Deferred Compensation Stock Plan (Designated in Form
10-K for the year ended December 31, 1991, File No. 1-8946, as
Exhibit (10)f).
(10)f CILCORP Shareholder Return Incentive Compensation Plan (as
amended effective October 28, 1997).
(12) Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
Page No.
Form 10-K
----------
(13) Annual Report to Security Holders 69
(23) Consent of Arthur Andersen LLP 70
(24) Power of Attorney
(27) CILCORP Inc. Consolidated Financial Data Schedule
(b) 3. Reports on Form 8-K
A Form 8-K was filed on January 8, 1998 to disclose the
write-off of goodwill associated with CILCORP's environmental
services business.
*These exhibits have been previously filed with the Securities and
Exchange Commission (SEC) as exhibits to registration statements or
to other filings of CILCORP or CILCO with the SEC and are incorporated
herein as exhibits by reference. The file number and exhibit
number of each such exhibit (where applicable) are stated in the
description of such exhibit.
**Comparable Employment Agreements, also effective September 23, 1997,
exist between the Company and William M. Shay, between Central
Illinois Light Company and James F. Vergon and between QST
Enterprises Inc. and J. Mark Elliott. The only material difference
in these Agreements pertains to annual base salary in effect on the
date of each Agreement. Annual base salary specified in the
Agreements are as follows: Mr. Shay $210,000; Mr. Vergon $210,000
and Mr. Elliott $235,000.
***Pursuant to Paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K,
the Company has not filed as an exhibit to this Form 10-K any
instrument with respect to long-term debt as the total amount of
securities authorized thereunder does not exceed 10 percent of the
total assets of the Company and its subsidiaries on a consolidated
basis, but hereby agrees to furnish to the SEC on request any such
instruments.
CILCO
Page No.
Form 10-K
----------
(a) 1. Financial Statements
The following are included herein:
Management's Report 32
Report of Independent Public Accountants 33
Consolidated Statements of Income for the three years
ended December 31, 1997 34
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996 35-36
Consolidated Statements of Cash Flows for the three
years ended December 31, 1997 37-38
Consolidated Statements of Segments of Business for
the three years ended December 31, 1997 39
Consolidated Statements of Retained Earnings for the
three years ended December 31, 1997 40
Notes to the Consolidated Financial Statements 41-54
(a) 2. Financial Statement Schedules
The following schedule is included herein:
Schedule II - Valuation and Qualifying Accounts and
Reserves for the three years ended
December 31, 1997 63
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in
the financial statements or notes thereto.
(a) 3. Exhibits
*(3) Articles of Incorporation. As amended July 26, 1993.
*(3) a Bylaws. As amended effective April 23, 1996.
[Designated in Form 10-K for the year ended December 31, 1996,
File No. 1-2732, as Exhibit (3)a.]
*(4) Indenture of Mortgage and Deed of Trust between
Illinois Power Company and Bankers Trust Company, as Trustee,
dated as of April 1, 1933, Supplemental Indenture between the
same parties dated as of June 30, 1933, Supplemental Indenture
between the Company and Bankers Trust Company, as Trustee,
dated as of July 1, 1933 and Supplemental Indenture between
the same parties dated as of January 1, 1935, securing First
Mortgage Bonds, and indentures supplemental to the foregoing
through November 1, 1994. (Designated in Registration No. 2-
1937 as Exhibit B-1, in Registration No. 2-2093 as Exhibit B-
1(a), in Form 8-K for April 1940, File No. 1-2732-2, as
Exhibit A, in Form 8-K for December 1949, File No. 1-2732-2,
as Exhibit A, in Form 8-K for December 1951, File No. 1-2732,
as Exhibit A, in Form 8-K for July 1957, File No. 1-2732, as
Exhibit A, in Form 8-K for July 1958, File No. 1-2732, as
Exhibit A, in Form 8-K for March 1960, File No. 1-2732, as
Exhibit A, in Form 8-K for September 1961, File No. 1-2732, as
Exhibit B, in Form 8-K for March 1963, File No. 1-2732, as
Exhibit A, in Form 8-K for February 1966, File No. 1-2732, as
Exhibit A, in Form 8-K for March 1967, File No. 1-2732, as
Exhibit A, in Form 8-K for August 1970, File No. 1-2732, as
Exhibit A, in Form 8-K for September 1971, File No. 1-2732, as
Exhibit A, in Form 8-K for September 1972, File No. 1-2732, as
Exhibit A, in Form 8-K for April 1974, File No. 1-2732, as
Exhibit 2(b), in Form 8-K for June 1974, File No. 1-2732, as
Exhibit A, in Form 8-K for March 1975, File No. 1-2732, as
Exhibit A, in Form 8-K for May 1976, File No. 1-2732, as
Exhibit A, in Form 10-Q for the quarter ended June 30, 1978,
File No. 1-2732, as Exhibit 2, in Form 10-K for the year ended
December 31, 1982, File No. 1-2732, as Exhibit (4)(b), in Form
8-K dated January 30, 1992, File No. 1-2732, as Exhibit (4) in
Form 8-K dated January 29, 1993, File No. 1-2732, as Exhibit
(4) and in Form 8-K dated December 2, 1994, File No. 1-2732,
as Exhibit (4).)
*(10) CILCO Executive Deferral Plan. As amended
January 29, 1996. (Designated in Form 10-K for the year ended
December 31, 1995, File No. 1-2732, as Exhibit (10).)
*(10)a CILCO Executive Deferral Plan II. As amended
January 29, 1996. (Designated in Form 10-K for the year ended
December 31, 1995, File No. 1-2732, as Exhibit (10)a.)
**(10)b Employment Agreement between CILCORP and Robert O. Viets,
Chairman and Chief Executive Officer of CILCO (effective
September 23, 1997).
*(10) c CILCO Deferred Compensation Stock Plan.
(Designated in Form 10-K for the year ended December 31, 1990,
File No. 1-2732, as Exhibit (10)d.)
*(10) d CILCO Economic Value Added Incentive
Compensation Plan (adopted January 29, 1991 and revised
January 29, 1996). (Designated in Form 10-K for the year
ended December 31, 1995, File No. 1-2732, as Exhibit (10)d.)
(10) e Benefit Replacement Plan (as amended effective
September 23, 1997).
(10) f CILCORP Shareholder Return Incentive Compensation
Plan (as amended effective October 28, 1997)
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Central Illinois Light Company Financial Data Schedule
(b) 3. Reports on Form 8-K
None
* These exhibits have been previously filed with the Securities and
Exchange Commission (SEC) as exhibits to registration statements or
to other filings of CILCO with the SEC and are incorporated herein
as exhibits by reference. The file number and exhibit number of
each such exhibit (where applicable) are stated in the description
of such exhibit.
**A comparable Employment Agreement, also effective September 23,
1997, exists between the Company and James F. Vergon. The only
material difference in these Agreements pertains to the annual base
salary in effect on the date of each Agreement. Annual base salary
specified in Mr. Vergon's Agreement is $210,000.
<TABLE>
SCHEDULE II
CILCORP INC. AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1997, 1996 and 1995
(Thousands of dollars)
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at Charged Charged Balance at
Beginning to to Other End of
Description of Period Income Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Accumulated Provisions
Deducted from Assets -
Doubtful Accounts $2,600 $2,803 -- $2,949 $2,454
Accumulated Provisions
Not Deducted from Assets -
Injuries and Damages 1,381 814 -- 985 1,210
Year ended December 31, 1996
Accumulated Provisions
Deducted from Assets -
Doubtful Accounts $2,223 $3,464 -- $3,087 $2,600
Accumulated Provisions
Not Deducted from Assets -
Injuries and Damages 2,550 1,328 -- 2,497 1,381
Year ended December 31, 1995
Accumulated Provisions
Deducted from Assets -
Doubtful Accounts $2,291 $2,216 -- $2,284 $2,223
Accumulated Provisions
Not Deducted from Assets -
Injuries and Damages 2,600 1,279 -- 1,329 2,550
</TABLE>
<TABLE>
SCHEDULE II
CENTRAL ILLINOIS LIGHT COMPANY
Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1997, 1996 and 1995
(Thousands of dollars)
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at Charged Charged Balance at
Beginning to to Other End of
Description of Period Income Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Accumulated Provisions
Deducted from Assets -
Doubtful Accounts $1,000 $2,438 -- $2,735 $ 703
Accumulated Provisions
Not Deducted from Assets -
Injuries and Damages 1,381 814 -- 985 1,210
Year ended December 31, 1996
Accumulated Provisions
Deducted from Assets -
Doubtful Accounts $ 650 $2,832 -- $2,482 $1,000
Accumulated Provisions
Not Deducted from Assets -
Injuries and Damages 2,550 1,328 -- 2,497 1,381
Year ended December 31, 1995
Accumulated Provisions
Deducted from Assets -
Doubtful Accounts $ 600 $1,299 -- $1,249 $ 650
Accumulated Provisions
Not Deducted from Assets -
Injuries and Damages 2,600 1,279 -- 1,329 2,550
</TABLE>
<TABLE>
SCHEDULE XIII
CILCORP INC. AND SUBSIDIARY COMPANIES
Investment in Leveraged Leases
<CAPTION>
Year Ended December 31, 1997
(Thousands of dollars)
Amount
Cost of each carried on
lease(A) Balance Sheet(B)
<S> <C> <C>
Office buildings $ 23,130 $ 56,912
Warehouses 11,746 19,855
Mining equipment 10,244 19,391
Generating stations 21,890 29,759
Passenger railway equipment 3,805 5,742
Cargo aircraft 9,583 14,799
-------- --------
Totals $ 80,398 $146,458
======== ========
<FN>
(A) This value is the original cost of the leveraged lease net of
original nonrecourse debt.
(B) The amount carried on the balance sheet includes current rents
receivable and estimated residual value, net of unearned and
deferred income and nonrecourse debt.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CILCORP INC.
March 18, 1998 By
R. O. Viets
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
(i) and (ii) Principal executive officer, director and principal
financial officer:
R. O. Viets President, Chief March 18, 1998
Executive Officer
and Director
(iii) Controller
T. D. Hutchinson Controller March 18, 1998
(iv) A majority of the Directors
(including the director named above):
M. Alexis* Director March 18, 1998
J. R. Brazil* Director March 18, 1998
W. Bunn III* Director March 18, 1998
J. D. Caulder* Director March 18, 1998
H. J. Holland* Director March 18, 1998
H. S. Peacock* Director March 18, 1998
K. E. Smith* Director March 18, 1998
R. M. Ullman* Director March 18, 1998
M. M. Yeomans* Director March 18, 1998
R. O. Viets Director March 18, 1998
*By
R. O. Viets
Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CENTRAL ILLINOIS LIGHT COMPANY
March 18, 1998 By
J. F. Vergon
President and Chief
Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
(i) Principal executive officer and director:
J. F. Vergon President and Chief March 18, 1998
Operating Officer
and Director
(ii) Principal financial officer and director:
T. S. Romanowski Vice President March 18, 1998
(iii) Controller
T. D. Hutchinson Controller and March 18, 1998
Manager of Accounting
(iv) A majority of the Directors
(including the directors named above):
T. S. Romanowski Director March 18, 1998
J. F. Vergon Director March 18, 1998
R. O. Viets Director March 18, 1998
<TABLE>
EXHIBIT (12)
CILCORP INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
<CAPTION>
Twelve Months Ended 1997 1996 1995 1994 1993
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Earnings, as Defined:
Net Income $16,395 $27,943 $38,582 $32,586 $33,583
Income Taxes 16,940 14,505 23,274 18,180 18,069
Interest 27,913 29,068 29,861 26,341 27,363
Interest Portion of Rentals 2,819 2,844 1,905 1,864 2,447
Preferred Dividends 3,216 3,188 3,299 2,980 4,043
------- ------- ------- ------- -------
Total Earnings, as Defined $67,283 $77,548 $96,921 $81,951 $85,505
======= ======= ======= ======= =======
Fixed Charges, as Defined:
Interest Expense $24,422 $26,337 $27,512 $24,313 $25,929
Interest Expense on COLI 3,491 2,731 2,349 2,028 1,434
Interest Portion of Rentals 2,819 2,844 1,905 1,864 2,447
Tax Effected Preferred
Dividends 5,331 5,284 5,468 4,939 6,701
-------- ------- ------- ------- -------
Total Fixed Charges, as
Defined $36,063 $37,196 $37,234 $33,144 $36,511
======== ======= ======= ======= =======
Ratio of Earnings to Fixed
Charges* 1.9 2.1 2.6 2.5 2.3
=== === === === ===
<FN>
*The fixed charge coverage ratio without the effects of the QST Environmental
discontinued operations and the CILCO extraordinary item would have been
1.8, 2.1 and 2.6 for 1997, 1996 and 1995, respectively. Furthermore, if the
effect of the goodwill write-off was also excluded from operating results,
the 1997 fixed charge coverage ratio would have been 2.5.
</TABLE>
<TABLE>
EXHIBIT (12)
CENTRAL ILLINOIS LIGHT COMPANY
Computation of Ratio of Earnings
to Fixed Charges
<CAPTION>
Twelve Months Ended 1997 1996 1995 1994 1993
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Earnings, as Defined:
Net Income $ 53,467 $45,128 $42,398 $32,487 $37,678
Income Taxes 20,633 24,082 22,534 17,168 20,368
Fixed Charges, as Below 29,434 28,504 27,876 24,693 26,335
-------- ------- ------- ------- -------
Total Earnings, as Defined $103,534 $97,714 $92,808 $74,348 $84,381
======== ======= ======= ======= =======
Fixed Charges, as Defined:
Interest on COLI $ 3,491 $ 2,731 $ 2,349 $ 2,028 $ 1,434
Interest on Short-term Debt 281 149 744 292 592
Interest on Long-term Debt 20,024 21,012 20,242 19,221 19,753
Amortization of Debt Discount
& Expense, Premium and
Reacquired Loss 2,218 681 669 665 624
Miscellaneous Interest
Expense 1,658 2,320 1,967 623 1,485
Interest Portion of Rentals 1,762 1,611 1,905 1,864 2,447
-------- ------- ------- ------- -------
Total Fixed Charges, as
Defined $ 29,434 $28,504 $27,876 $24,693 $26,335
======== ======= ======= ======= =======
Ratio of Earnings to Fixed
Charges* 3.5 3.4 3.3 3.0 3.2
=== === === === ===
<FN>
*The 1997 fixed charge coverage ratio would have been 3.7 without the
effects of the extraordinary item.
</TABLE>
NOTICE
This copy of CILCORP Inc.'s and Central Illinois Light Company's Form 10-K
does not include our 1997 Consolidated Annual Report. If you have not
received our 1997 Consolidated Annual Report and would like one, please
let us know.
Telephone:
In Peoria 675-8808
Elsewhere in Illinois 1-800-322-3569
Outside Illinois 1-800-622-5514
TDD 1-309-675-8892
Or you can write to us at:
Investor Relations Department
CILCORP Inc.
300 Hamilton Blvd.
Suite 300
Peoria, IL 61602-1238
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports, dated January 27, 1998, included herein or
incorporated by reference in this Form 10-K, into CILCORP Inc.'s previously
filed Registration Statements File No. 33-45318, 33-51241 and 33-62105.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 18, 1998
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The financial condition and operating results of CILCORP Inc. and its
subsidiaries (the Company) primarily reflect the operations of Central
Illinois Light Company (CILCO) and QST Enterprises Inc. (QST), the Company's
principal business subsidiaries. The Other Businesses segment includes the
operations of the holding company itself (Holding Company), its investment
subsidiary, CILCORP Investment Management Inc. (CIM), and its venture capital
subsidiary, CILCORP Ventures Inc. (CVI).
CILCO is a regulated public utility engaged in the generation, transmission
and distribution of electric energy and the purchase, transportation and
distribution of natural gas in Central Illinois.
QST, formed in December 1995, provides energy and energy-related services to
a broad spectrum of retail and wholesale customers through its subsidiary,
QST Energy Inc. (QST Energy) which began operations in 1996. QST also
provides fiber optic telecommunications services through QST Communications
Inc. (QST Communications). QST's operations also include those of QST
Environmental Inc. (QST Environmental), a former first-tier CILCORP
subsidiary which became a QST subsidiary in October 1996. QST
Environmental's results are reported as a separate business segment from
QST's energy and telecommunications operations.
QST Environmental is an environmental consulting and engineering firm
serving governmental, industrial and commercial customers. During the
fourth quarter of 1997, QST Environmental completed the sale of
substantially all the assets of ESE Land Corporation (ESE Land), a wholly-
owned subsidiary, which acquired environmentally impaired property for
remediation and resale.
OVERVIEW
Contributions to the Company's earnings per share for the last three
calendar years are shown below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CILCO (excluding
extraordinary item) $3.39 $3.11 $2.97
CILCO Extraordinary Item .30 -- --
QST (excluding QST
Environmental) (.72) (.30) --
QST Environmental
(excluding discontinued
operations) (1.78) (.43) (.04)
QST Environmental
Discontinued Operations .19 (.01) .05
Other Businesses (.18) (.30) (.05)
----- ----- -----
Earnings Per Common
Share - Basic and
Diluted $1.20 $2.07 $2.93
===== ===== =====
</TABLE>
CILCO's earnings before the extraordinary item increased by 9% in 1997
primarily due to a decline in operations and maintenance expense. Results
for 1996 included a $5.4 million after-tax charge ($.40 per share) related
to an early retirement program (see CILCO's Early Retirement Programs).
Decreased residential gas sales resulting from warmer weather during the
heating season and increased power plant maintenance expense due to a
scheduled outage at the Duck Creek generating station partially offset the
decline in expenses associated with the early retirement program. CILCO's
1997 earnings included a credit of $4.1 million ($.30 per share) for an
after-tax extraordinary item related to the write-off of regulatory assets
and liabilities associated with electric generating plant (see Note 1).
CILCO's earnings increased by 5% in 1996 compared to 1995. Electric gross
margin increased by 1%, while gas gross margin increased by 5% due to
increased sales resulting from colder weather during the heating season.
Other factors contributing to CILCO's favorable results were decreased
operating expenses due to the deferral of a maintenance outage at a
generating station, lower wage expense due to the 1995 early retirement
program, and a lower after-tax charge related to the 1996 early retirement
program compared to the 1995 program. These favorable items were partially
offset by increased outside services costs and a write-off of inventory.
Earnings for 1995 include a $7.8 million ($.59 per share) after-tax charge
related to CILCO's 1995 early retirement programs, partially offset by the
sale of two parcels of land at the former R.S. Wallace electric generating
plant site which generated an after-tax gain of $2.1 million, or $.16 per
share.
QST's earnings are reflective of a company in the early stages of
development. Negative natural gas gross margin, primarily caused by gas
trading activities, contributed $(.21) to QST's net loss in 1997, while a
negative gross margin from retail operations in electric deregulation pilot
programs contributed an additional $(.04) loss. General and administrative
expenses increased due to growing retail and wholesale operations.
QST Environmental's net revenues decreased by $11 million or 19% in 1997
due primarily to continuing industry overcapacity resulting from changes in
the regulatory climate at both the federal and state levels. Operating
expenses decreased by $16.6 million as employment and administrative and
general expenses were reduced to reflect the decline in business. The 1997
net loss of $1.78 includes a $22.6 million ($1.66 per share) write-off of
goodwill (see Note 1). QST Environmental realized an after-tax gain on
discontinued operations of $2.7 million ($.19 per share) due to the sale of
substantially all the assets of ESE Land.
In addition to the effect of reduced levels of business related to industry
overcapacity, QST Environmental's earnings declined in 1996 due to charges
related to the downsizing or closing of operations, including the Denver
laboratory, the drilling operations and certain consulting offices.
Other Businesses results improved in 1997 due to a $.5 million after-tax
gain resulting from CIM's share in the sale of one of the facilities of the
Energy Investors Fund, L.P., in which CIM has a 3% interest. Increased tax
credits from affordable housing investments, a decline in Holding Company
costs related to corporate repositioning, and increased leveraged lease
income from CIM's investment in a new lease also contributed to improved
results, partially offset by increased costs related to services provided
to Caterpillar Inc. (see Competition).
Other Businesses results declined in 1996 due to the write-down of an
investment held by CIM, increased Holding Company costs relating to
corporate repositioning and costs related to services provided to
Caterpillar Inc. (see Competition). Also, revenue from CIM's lease
portfolio was lower in 1996 compared to 1995 due to the normal maturation
of the lease portfolio.
The following table summarizes each business segment's contribution to net
income (see Results of Operations for further discussion).
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
(In thousands)
Electric operating income $54,637 $52,113 $48,769
Gas operating income 18,675 17,565 14,779
------- ------- -------
Total utility operating income 73,312 69,678 63,548
Utility interest expense and other (27,305) (28,053) (24,743)
Utility extraordinary item 4,100 -- --
Non-regulated energy and energy
services net loss (9,843) (3,998) --
Environmental and engineering
services loss from continuing
operations (24,229) (5,803) (528)
QST Environmental Discontinued
Operations net income (loss) 2,658 (196) 641
Other Businesses net loss (2,298) (3,685) (336)
------- ------- -------
Net income $16,395 $27,943 $38,582
======= ======= =======
</TABLE>
Return on average common equity was 4.5% in 1997 compared to 7.7% in 1996
and 11% in 1995. Without the effects of the CILCO extraordinary item and
the goodwill write-off, return on equity would have been 9.5%. The ratio
of common equity to total capitalization, including short-term debt, was
44% in 1997, 46% in 1996, and 43% in 1995. The fixed charge coverage ratio
decreased to 1.8 in 1997 (2.3 without the extraordinary item and the
goodwill write-off) compared to 2.1 in 1996 and 2.7 in 1995.
Inflation may have a significant impact on the Company's future operations
and its ability to contain costs. To help protect CILCO from the effects
of inflation, substantially all electric and gas sales rates include a fuel
adjustment clause (FAC) or a purchased gas adjustment (PGA) to provide for
changes in electric fuel costs, excluding coal transportation, and changes
in the cost of natural gas (see Competition). Over the past five years,
the annual rate of inflation, as measured by the Consumer Price Index, has
ranged from 2.4% to 3.0%.
Forward-Looking Information
Forward-looking information is included in Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A). Certain
material contingencies are also described in Note 9 to the Consolidated
Financial Statements.
Some important factors could cause actual results or outcomes to differ
materially from those discussed in MD&A. The business and profitability of
CILCORP and its subsidiaries are influenced by economic and geographic
factors, including ongoing changes in environmental laws, regulations and
policies which affect demand for QST Environmental's services; weather
conditions; the extent and pace of development of competition for retail and
wholesale energy customers; pricing and transportation of commodities; market
demand for energy and for environmental consulting and analytical services;
inflation; capital market conditions; and environmental protection and
compliance costs. Prevailing governmental policies, statutory changes, and
regulatory actions with respect to rates, industry structure and recovery of
various costs incurred by CILCO in the course of business affect its earnings.
All such factors are difficult to predict, contain uncertainties that may
materially affect actual results, and to a significant degree are beyond the
control of CILCORP and its subsidiaries. CILCORP and its subsidiaries
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of changes in actual results, assumptions or
other factors.
CAPITAL RESOURCES AND LIQUIDITY
The Company believes that internal and external sources of capital which are
or are expected to be available to the Holding Company and its subsidiaries
will be adequate during the coming year to fund its capital expenditures,
pay its financial obligations, meet working capital needs and retire or
refinance debt as it matures. The Company's long-term ability to pay
dividends depends upon the ability of its subsidiaries to generate cash from
their operations, future business conditions, earnings, and the financial
condition of the Company.
THE COMPANY
The Company did not issue any new shares of common stock during 1997, but
issued 275,074 shares of common stock during 1996 at an average price of
$41.55 through the CILCO Employees' Savings Plan and the CILCORP Inc.
Investors Choice Automatic Reinvestment and Stock Purchase Plan. Depending
on market conditions and corporate needs, the Company may issue additional
shares of common stock in the future. The proceeds from any newly-issued
stock have been, and will continue to be, used to retire CILCORP short-term
debt, to meet working capital and capital expenditure requirements at
subsidiaries other than CILCO, and for other corporate purposes.
CILCORP is currently authorized by its Board of Directors to borrow up to
$60 million on a short-term basis. The Company had $60 million and $50
million of committed bank lines at the end of 1997 and 1996, respectively.
At December 31, 1997, $40.9 million of the lines were used, compared to $18
million in use at December 31, 1996.
The Company had $42 million of medium-term notes outstanding at year-end
and may issue an additional $27 million under its existing medium-term note
program to retire maturing debt and to provide funds for other purposes.
CILCO
In 1997, CILCO spent $55.1 million for capital additions and improvements,
consisting primarily of replacements and improvements to the existing
electric transmission and distribution and natural gas distribution
systems. Estimated 1998 capital expenditures are $51.1 million, including
$9.8 million for electric energy supply and transmission projects, $.3
million for gas supply and transmission projects, $26.7 million for
electric and gas distribution system improvements, and $11.7 million for
information technology projects. Estimated total 1999 capital expenditures
are $51.7 million. Included in 1998 information technology projects is
replacement of existing computer software containing two digit date fields
which will not be able to distinguish the year 2000 from the year 1900.
Modifications of existing programs will be expensed as incurred, while
expenditures for programs replaced in their entirety will be capitalized.
Management continues to evaluate CILCO's computer software systems and does
not currently believe that Year 2000 issues will materially impact CILCO's
operations. Actual capital expenditures may vary from these estimates due
to a number of factors, including changes in costs of labor, equipment,
capital, environmental regulations, and load growth estimates.
CILCO's short-term debt increased to $21.3 million at December 31, 1997,
from $9.9 million at December 31, 1996. CILCO expects to issue commercial
paper periodically during 1998, and is currently authorized by its Board of
Directors to issue up to $66 million of short-term debt. At December 31,
1997, committed bank lines of credit totaled $30 million, all of which were
unused except in support of commercial paper issuance. During 1998, CILCO
expects the support of commercial paper issuance to be the sole use of
these bank lines of credit.
CILCO retired $16 million and $20 million of first mortgage bonds in February
1996 and March 1997, respectively. CILCO plans to finance its 1998 and 1999
capital expenditures with funds provided by operations and external sources of
capital. Future funds provided by operations may be affected by the
deregulation of the electric and natural gas utility industries (see
Competition).
QST (Excluding QST Environmental)
Capital expenditures totaled approximately $5.4 million for 1997, and are
estimated to be $8.7 million for 1998, primarily for construction of fiber
optic and other communication facilities by QST Communications. Working
capital balances increased by approximately $4.9 million in 1997 with the
expansion of QST Energy's business and are expected to increase in 1998 with
continued business expansion. QST expects to finance capital expenditures
and working capital needs during 1998 with funds provided by the Holding
Company. Management does not currently expect that Year 2000 computer
software issues will materially impact QST's operations.
The property management firm which operates the Sears Tower (Tower) in
Chicago has contracted with QST to install a $10 million cogeneration system
that would supply electricity to the Tower and its tenants; expenditures for
the system are not included in projected 1998 capital expenditures. The
Tower's current utility provider, Commonwealth Edison (ComEd), has refused
QST necessary access to its distribution system. In April 1997, QST and
Tower filed a joint complaint with the Illinois Commerce Commission (ICC)
alleging that ComEd's refusal to permit an interconnection constituted a
violation of the Illinois Public Utilities Act. Hearings began in December
1997, and are expected to continue in 1998. If QST's complaint before the
ICC is successful, it expects to finance the cogeneration project with a
combination of external long-term debt and funds provided by CILCORP.
QST Environmental
QST Environmental spent $.8 million for capital additions and improvements
in 1997 and plans to spend $.3 million in 1998 on capital additions.
Management does not currently expect that Year 2000 computer software issues
will materially impact QST Environmental's operations.
QST Environmental generated $.4 million of cash from operations in 1997, and
$8.2 million from the operation and sale of the assets of ESE Land, which is
reported as a discontinued operation.
QST Environmental's cash flow is supplemented by a $15 million revolving
line of credit with the Holding Company which expires on May 2, 1998. This
line of credit was unused at December 31, 1997 and 1996. QST
Environmental's outstanding term debt at December 31, 1997, was
$12.5 million, less advances to the Holding Company of $2.4 million. This
term debt also expires on May 2, 1998. QST Environmental had cash and short-
term investments of $1.1 million, net of these advances, at December 31,
1997, compared to $3.0 million at December 31, 1996. QST Environmental
anticipates that cash and short-term investments, funds generated by
operations and amounts available under the Holding Company revolving line of
credit and term debt, which will be renegotiated prior to their expiration,
will be sufficient to meet its anticipated working capital requirements.
CIM
CIM had outstanding debt of $41 million (all to the Holding Company) and $29
million at the end of 1997 and 1996, respectively. In 1997, CIM retired
$3 million of third party debt and spent $6.9 million to acquire a new
leveraged lease asset. Both of these transactions were funded with cash
borrowed from the Holding Company.
During 1996 and prior years, CIM committed to invest $16.1 million in
affordable housing funds, and in 1997 committed an additional $.5 million to
a similar fund. Through December 31, 1997, CIM has paid $10.2 million to
fund these commitments, $4.2 million of which was paid during 1997. CIM
expects to pay approximately $4.7 million of the remaining $6.4 million
commitment in 1998, $.6 million in 1999 and lesser amounts in each year
thereafter through 2006. CIM funded these commitments with cash borrowed
from the Holding Company.
CIM expects to finance new investments and working capital needs during 1998
with a combination of funds generated internally and with funds provided by
the Holding Company.
COMPETITION
The electric utility industry at both the wholesale and retail levels will
change significantly throughout the country in the coming years. The industry
is becoming increasingly competitive as it transitions from its past status as
a regulated monopoly. The gas industry is also expected to become more
competitive at the retail level. In the future, the Company anticipates that
the present electric and gas distribution functions will remain regulated
monopolies while other segments, including electric power generation and the
marketing of electricity and gas to both wholesale and retail customers, will
be highly competitive. While management cannot predict the ultimate effect of
these changes, it believes that eventually all customers will have the
opportunity to select the energy supplier of their choice and that low
operating costs, improved efficiency, and new and better services and products
will be the key competitive factors for this restructured energy industry.
Various mergers and business combinations are occurring in the utility
industry. Many utilities are merging with or acquiring other utilities to
achieve greater economies of scale, to enter new markets, to complement
strengths and weaknesses, and to exploit the expected convergence of the
electric and gas energy industries. Management will continue to monitor this
activity to position the Company for a competitive future.
The pace of change toward a competitive environment currently varies state by
state. Legislative proposals have been introduced in the United States
Congress to deal with these issues on a nationwide basis, but these proposals
have not been enacted into law. The operations and marketing activities of
CILCO and QST are currently most affected by deregulation legislation enacted
in three states - Illinois, Pennsylvania, and California - with the impact of
1997 changes in Illinois law currently being the most significant.
Illinois
The Electric Service Customer Choice and Rate Relief Law of 1997 (Customer
Choice Law) became effective in December. This law affects all of the major
investor-owned electric utilities in Illinois. Among other provisions, the
Customer Choice Law begins a nine-year transition process to a fully
competitive market for electricity. Large industrial customers and one-third
of other businesses will be able to choose their electric supplier beginning
October 1, 1999, with all other non-residential customers having a choice
after December 31, 2000. Residential customers will be able to choose their
electricity supplier on May 1, 2002. If a customer chooses to leave its
present electricity supplier, that utility will charge a fee for delivering
power and may collect an additional non-bypassable transition charge. This
charge must be filed with the ICC and is designed to help utilities recover
the cost of past investments made under a regulated system. The imposition of
transition charges will reduce a customer's economic incentive to switch
suppliers. Transition charges may be collected through 2006 (2008 upon the
ICC's finding that a utility's financial condition is impaired), but may not
cause customers to pay more than the utility's present base rate per kwh of
electricity, after reflecting residential base rate reductions required by the
law.
The Customer Choice Law requires residential electric base rate reductions
which vary by utility. CILCO must reduce its residential base rates by 2% in
August 1998, by an additional 2% in October 2000, and by 1% in October 2002.
Also, CILCO's electric return on common equity will be capped at a percentage,
determined by a formula, which will initially equal 16% and, after August
1999, 17%. Fifty percent of earnings in excess of the applicable caps in any
year must be refunded to customers in the following year. The Customer Choice
Law also provides that a utility may eliminate its fuel and/or purchased gas
adjustment clauses and substitute a fixed level of these costs in its base
rates.
With the enactment of the Customer Choice Law, electric generation in Illinois
will become deregulated. As a result, the accounting principles applicable to
rate-regulated enterprises will no longer apply to the electric generation
portion of CILCO's business (see Note 1) and any regulatory assets, net of
regulatory liabilities, must be written off, as must the cost of assets whose
recovery will be impaired by the transition to a competitive marketplace.
This adjustment resulted in an increase to net income (recorded as an
extraordinary item) of $4.1 million because regulatory liabilities exceeded
regulatory assets associated with electric generation. The effect of similar
adjustments which may be made in the future is not currently expected to be
material to CILCO's financial position and results of operation. The present
depreciated cost of CILCO's generation assets is approximately $240 per kw of
capacity, which is significantly below the construction cost of new generating
capacity. CILCO's ability to keep total production costs competitive in a
deregulated market will determine whether and to what extent the value of its
generating assets may be impaired in the future.
The ultimate market price for electricity, the cost for a utility to produce
or buy electricity, and the number and type of customers which may be gained
or lost due to customer choice of supplier in Illinois cannot be predicted.
As a result, management cannot predict the ultimate impact that the Customer
Choice Law will have on CILCO's financial position or results of operation,
but the effect could be significant. For each 1% that CILCO's residential
base rates are reduced by the mandated rate reduction, its net income will
decline by approximately $.7 million annually. However, CILCO is currently a
low cost provider of electricity, and management will continue to position
CILCO for competition by controlling costs, maintaining good customer
relations, and developing flexibility to respond to individual customer
requirements.
In 1996, to prepare for increased customer choice, CILCO began Power Quest,
which consists of two electric pilot retail competition programs and a natural
gas pilot retail competition program. The programs offer greater choice to
customers and provide the opportunity for CILCO and certain of its electric
and gas customers to participate in a competitive business environment.
CILCO has experienced a reduction in electric profit margin because some
eligible customers are purchasing some or all of their power from other
suppliers as a result of Power Quest. The amount of such reduction depends
largely upon the extent of customer participation in the programs. Depending
on market conditions, CILCO may offset the reduced profit margin by increased
wholesale sales outside its service territory. Also, in 1996 QST began
competing with non-regulated marketers for customers in the pilot areas and is
currently serving over 90% of the Power Quest customers who have chosen a
supplier other than CILCO.
One of CILCO's electric pilot programs permits eight of CILCO's largest
industrial customers to secure part or all of their electric power
requirements from suppliers other than CILCO, subject to the limitation that
at no time shall total purchases from other suppliers exceed 50 megawatts
(approximately 10% of CILCO's industrial load). Industrial customers began
receiving electricity under this two-year program in May 1996. For the first
year of the pilot, Caterpillar Inc. (Caterpillar), the largest of the
industrial customers eligible to participate, remained a full requirements
customer of CILCO. In exchange, CILCORP provided to Caterpillar additional
value-added services and innovative solutions to energy and environmental
needs. During the second year of the pilot, Caterpillar elected to receive a
portion of its energy needs from a supplier other than CILCO, and a lesser
amount of non-regulated services was provided by CILCORP. The costs of these
services provided by CILCORP are included in Other Business Operations.
Based on the participation levels of eligible industrial customers during
1997, CILCORP experienced a reduction of $6.3 million of pre-tax income
(including costs associated with services provided to Caterpillar and gross
margins earned by QST from these industrial customers and by CILCO from
increased wholesale sales). The industrial pilot program will end on
April 30, 1998 as scheduled.
In the other Power Quest electric program, CILCO designated six areas within
its service territory as Open Access Sites for up to five years, beginning in
May 1996. During the pilot period, approximately 5,500 customers are eligible
to purchase some or all of their power from suppliers other than CILCO. If
all eligible customers in Open Access Sites participate in Power Quest,
CILCO's pre-tax net income would be reduced by $1.5 million on an annual
basis. During 1997, CILCORP experienced a reduction to pre-tax income of $.7
million.
In October 1996, CILCO began a five-year gas pilot program which allows
residential gas customers in Springfield, Illinois and three of the four Power
Quest electric program sites to select their natural gas supplier, with CILCO
continuing to provide distribution and metering services. No more than 8,000
residential customers from Springfield may participate in the program. This
program has not had, nor does management expect it to have, a material adverse
effect on CILCO's financial position or results of operations.
Pennsylvania
In December 1996, the Electricity Generation Customer Choice and Competition
Act (Act) was enacted in Pennsylvania. The Act directed the Pennsylvania
Public Utility Commission (PA PUC) to implement electric pilot programs
throughout the service territories of the state's investor-owned utilities to
allow for the orderly transition to a competitive retail electric market. QST
is a licensed power supplier under the pilot programs and began providing
power to Pennsylvania customers in November 1997. At December 31, 1997, QST
served approximately 25,000 customers under various utilities' electric pilot
programs and also provided gas service to over 4,500 customers under a pilot
program of Columbia Gas. QST has entered into a venture with Philadelphia Gas
Works to provide joint marketing and sales to customers within the city limits
of Philadelphia and is negotiating an alliance with Susquehanna Energy
Ventures, Inc. to market electric services in various utility service
territories throughout Pennsylvania, outside of the city limits of
Philadelphia.
The pilot programs are the first step toward competition in the Pennsylvania
retail electric market. Currently, the Act provides that one-third of all
customer classes will be able to choose their electric suppliers by January 1,
1999, and that all customers will be able to choose their electric suppliers
by January 1, 2001.
California
In 1996, the California Assembly enacted a law to implement competition in the
California retail electric market in 1998. Most California customers will be
able to buy electric services from their current utility, neighboring
utilities, municipal utilities, utilities from other states, or energy
marketers such as QST. Two new entities will oversee the competitive market -
the California Independent System Operator (CA ISO) and the Power Exchange (CA
PX). In December 1997, the CA ISO and the CA PX Board of Governors announced
a delay of their operations and the formal assumption of control of the
transmission systems of the three major utilities of California until all
necessary features of the new organization are in place to ensure reliable
grid operations and until sufficient pre-operational testing has been
performed. QST has obtained commercial electric customers at approximately
300 locations and will begin delivering power as soon as all operational
requirements of the CA ISO and CA PX have been satisfied.
CILCO'S EARLY RETIREMENT PROGRAMS
As part of a continuing effort to better position itself for competition in
the energy services industry, in November 1996, CILCO offered Voluntary Early
Retirement Programs to eligible management and office and technical employees
and employees represented by the International Brotherhood of Electrical
Workers (IBEW). A total of 76 of the 210 eligible employees retired,
effective January 1, 1997. The 1996 programs resulted in an after-tax charge
to earnings of approximately $5.4 million.
In 1995, CILCO offered similar Voluntary Early Retirement Programs to selected
employees. A total of 166 of the 257 eligible employees accepted the offer,
resulting in an after-tax charge of approximately $7.8 million in 1995.
ENVIRONMENTAL MATTERS
CILCO's capital expenditures related to pollution control facilities are
estimated to be $4.4 million in 1998. The acid rain provisions of the Clean
Air Act Amendments of 1990 (Amendments) require additional sulfur dioxide
(SO2) and nitrogen oxide (NOx) emission reductions at CILCO's generating
facilities. CILCO's facilities are exempt from Phase I of the Amendments
due to previous emission reductions, but are subject to Phase II of the
Amendments, which requires additional emission reductions by the year 2000.
CILCO's final compliance strategy is being developed based upon regulations
issued under the Amendments. CILCO has not yet determined definitive
compliance costs. CILCO continues to monitor regulatory actions and develop
compliance strategies to minimize any financial impact. Due to the
deregulation of the electric industry resulting from the Customer Choice
Law, recovery of compliance costs in the future will depend upon the number
of retail customers CILCO serves and the marketability of the power it
generates in a competitive environment. CILCO's present strategy includes
use of an existing SO2 scrubber, limited fuel switching and SO2 allowance
purchases to meet Phase II SO2 emissions targets, and combustion control
modifications to meet Phase II NOx emissions targets. The U.S.
Environmental Protection Agency (USEPA) established SO2 emission allowance
reserves for power plants in Phase II. Allowances are transferable to third
parties at market prices. CILCO continues to weigh the costs of purchasing
additional allowances against alternative operating scenarios. Under this
strategy, CILCO's generating units will not require additional SO2
scrubbers. During 1998, CILCO expects to spend $3.1 million for boiler
retrofits and emissions monitoring equipment related to the Amendments.
Various initiatives are being discussed both in the United States and
worldwide to reduce so-called "greenhouse gases" such as carbon dioxide and
other by-products of burning fossil fuels. Reductions of emissions below
already mandated levels could result in significant capital outlays or
material increases in annual operating expenses.
Neither CILCORP, CILCO, nor any of their affiliates has been identified as a
potentially responsible party under federal or state environmental laws
governing waste storage or disposal.
CILCO continues to investigate and/or monitor four former gas manufacturing
plant sites located within its present gas service territory. The purpose
of these studies is to determine if waste materials, principally coal tar,
are present, whether such waste materials constitute an environmental or
health risk and if CILCO is responsible for the remediation of any remaining
waste materials at those sites. Remediation work at one of the four sites
was completed in 1991. A risk assessment/remedial alternatives study at a
second site was completed in 1996, taking into consideration new clean-up
options under current Illinois law. A remedial action plan for the second
site was determined during 1997, with remediation of the site expected to
begin in April 1998. CILCO has not determined the ultimate extent of its
liability for, or the ultimate cost of any remediation of, the remaining two
sites, pending further studies. Investigation of the third site is planned
for 1999.
CILCO spent approximately $.3 million for former gas manufacturing plant
site monitoring, legal fees and feasibility studies in 1997. A $3.7 million
regulatory asset and a corresponding liability are recorded on the Balance
Sheets representing the minimum amount of future coal tar investigation and
remediation costs CILCO expects to incur. Coal tar remediation costs
incurred through December 1997 have been deferred on the Balance Sheets, net
of amounts recovered from customers (see Note 1).
Through December 31, 1997, CILCO has recovered approximately $4.9 million in
coal tar remediation costs from its customers through a gas rate rider
approved by the ICC. Currently, that rider allows recovery of coal tar
remediation costs in the year they are incurred. Under these circumstances,
management believes that the cost of coal tar remediation will not have a
material adverse effect on CILCO's financial position or results of
operations.
RESULTS OF OPERATIONS
CILCO ELECTRIC OPERATIONS
The following table summarizes electric operating revenue and expenses by
component.
<TABLE>
<CAPTION>
Components of Electric Operating Income 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Revenue:
Electric retail $318,130 $307,579 $321,066
Sales for resale 19,966 15,206 5,132
-------- -------- --------
Total revenue 338,096 322,785 326,198
-------- -------- --------
Cost of sales:
Cost of fuel 92,230 90,715 94,235
Purchased power expense 22,851 10,907 12,353
Revenue taxes 15,388 14,504 14,244
-------- -------- --------
Total cost of sales 130,469 116,126 120,832
-------- -------- --------
Gross margin 207,627 206,659 205,366
-------- -------- --------
Operating expenses:
Operation and maintenance
expenses 78,648 84,174 89,113
Depreciation and amortization 43,858 42,530 40,665
Income taxes 21,901 19,576 17,975
Other taxes 8,583 8,266 8,844
-------- -------- --------
Total operating expenses 152,990 154,546 156,597
-------- -------- --------
Electric operating income $ 54,637 $ 52,113 $ 48,769
======== ======== ========
</TABLE>
Electric gross margin remained constant in 1997 primarily due to level retail
kilowatt hour (kwh) sales. Residential sales volumes increased 1% while
commercial sales remained constant. Cooling degree days were 5% higher in
1997 than 1996. Industrial sales volumes increased 1% compared to 1996.
Industrial sales continue to be negatively impacted by customers switching to
off-system suppliers under CILCO's Power Quest program. The industrial pilot
program will expire on April 30, 1998.
Electric gross margin increased 1% in 1996. A retail kwh sales decrease of 4%
was offset by increased sales for resale. Residential sales volumes decreased
4% while commercial sales volumes increased 2%. The residential sales
decreases were primarily due to cooler summer weather. Cooling degree days
were 26% lower in 1996 than in 1995. The commercial sales increases were due
primarily to an increase in the number of commercial customers. Industrial
sales volumes decreased due to decreased demand by several large customers and
due to customers switching to off-system suppliers under CILCO's Power Quest
program.
Sales for resale increased 31% in 1997 and 196% in 1996 due to favorable
market conditions. Sales for resale vary based on the energy requirements of
neighboring utilities and power marketers, CILCO's capacity for bulk power
sales and the price of power available for sale. In the future, CILCO
expects increased competition and reduced margins in the sales for resale and
purchased power markets.
The overall level of business activity in CILCO's service territory and
weather conditions are expected to continue to be the primary factors
affecting electric sales in the near term. CILCO's electric sales will also
be affected in the near term by the Power Quest pilot programs, and in the
long term by deregulation and increased competition in the electric utility
industry.
The cost of fuel for generation increased 2% in 1997 primarily due to an
increase in the cost of coal burned, partially offset by decreased generation.
Substantially all of CILCO's electric generation capacity is coal-fired. The
cost per ton of coal burned, including transportation cost, increased 7% in
1997 compared to 1996 due primarily to increased costs from one of CILCO's
coal suppliers, Freeman United Coal Mining Company (Freeman). In 1996,
Freeman changed from the cash method of billing for postretirement benefit
costs other than pensions to the accrual basis, retroactive to January 1,
1993. Under a settlement agreement with Freeman, CILCO paid approximately
$5.8 million of prior period postretirement benefit costs which it recovered
from customers through the FAC.
Purchased power expense varies based on CILCO's need for energy and the price
of power available for purchase. CILCO makes use of purchased power when it
is economical to do so, or when required to meet its power requirements, such
as during maintenance outages at CILCO plants. Costs and savings realized
from the purchase of power are passed on to CILCO's customers via the FAC.
CILCO expects the wholesale power market to become increasingly competitive.
Electric operations and maintenance expenses decreased 7% in 1997 compared to
1996. The 1997 decreases were primarily due to lower pensions and benefits,
outside services, and injury and damages costs. Pension costs in 1996 include
the effect of the 1996 early retirement program. The 1997 expense decreases
were partially offset by increased power plant maintenance expenses due to a
scheduled outage at the Duck Creek generating station. Lower 1996 expenses
were primarily due to lower wage expense resulting from the 1995 early
retirement program and the deferral of a scheduled maintenance outage at Duck
Creek until 1997. Pension expense also decreased in 1996 due to the lower
cost of the 1996 early retirement program relative to the 1995 program. The
decreases were partially offset by increased outside service expenses, higher
bad debt expense, and a charge for disposal of obsolete materials and
inventory.
The increase in depreciation and amortization expense in 1997 and 1996
reflects additions and replacements of utility plant at costs in excess of the
original cost of the property retired and amortization of computer software
costs.
The changes in income taxes in 1997 and 1996 were primarily the result of
changes in pre-tax income.
CILCO GAS OPERATIONS
The following table summarizes gas operating revenue and expenses by
component.
<TABLE>
<CAPTION>
Components of Gas Operating Income 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Revenue:
Sale of gas $202,274 $187,432 $142,619
Transportation services 6,484 8,338 8,927
-------- -------- --------
Total revenue 208,758 195,770 151,546
-------- -------- --------
Cost of sales:
Cost of gas 123,531 108,286 68,948
Revenue taxes 7,079 7,500 6,623
-------- -------- --------
Total cost of sales 130,610 115,786 75,571
-------- -------- --------
Gross margin 78,148 79,984 75,975
-------- -------- --------
Operating expenses:
Operation and maintenance
expenses 31,185 35,160 36,443
Depreciation and
amortization 17,647 17,134 16,100
Income taxes 7,416 6,972 5,292
Other taxes 3,225 3,153 3,361
-------- -------- --------
Total operating
expenses 59,473 62,419 61,196
-------- -------- --------
Gas operating income $ 18,675 $ 17,565 $ 14,779
======== ======== ========
</TABLE>
Gas gross margin decreased 2% in 1997 compared to 1996. Residential sales
volumes decreased 9% primarily due to warmer weather during the heating
season. Heating degree days were 6% lower in 1997 than in 1996. Commercial
sales increased 10% in 1997 due to customers switching from gas
transportation to CILCO system supply as a result of the competitiveness of
CILCO's gas prices and a 1996 Illinois law which exempts certain customers
from a portion of the state gross receipts tax on sales of natural gas. The
overall level of business activity in CILCO's service territory and weather
conditions are expected to be the primary factors affecting gas sales in the
near term. CILCO's gas sales may also be affected by further deregulation
in the natural gas industry.
Gas gross margin increased 5% in 1996 compared to 1995. Residential and
commercial sales volumes increased 7% and 21%, respectively, primarily due
to colder weather during the heating season. Heating degree days were 7%
higher in 1996 than in 1995. Commercial sales were also positively impacted
by commercial customers switching back to CILCO system supply from gas
transportation.
The cost of gas increased 14% in 1997 and 57% in 1996, primarily due to
increases in natural gas prices. These changes were passed through to
customers via the PGA.
Gas operations and maintenance expenses decreased 11% in 1997 and 4% in
1996. The decrease for 1997 was due to lower pensions and benefits, outside
services and injury and damages expenses. Pension costs in 1996 include the
cost of the 1996 early retirement program. Lower 1996 expenses were
primarily due to lower wage expense resulting from the 1995 early retirement
programs. Pension expense also decreased due to the lower cost of the 1996
early retirement program relative to the 1995 programs. The decreases were
partially offset by increased outside services expenses and higher bad debt
expense.
Revenue from gas transportation services decreased 22% in 1997 and 7% in
1996, while the volume of gas transported increased 4% in 1997 and decreased
4% in 1996. Despite increased transportation sales volumes in 1997,
transportation revenues decreased due to increased gas transportation by
customers using Rate 800 contract service, which has a lower per unit charge
than other classes of transportation service. Rate 800 customers have the
ability to connect directly to interstate pipelines and bypass CILCO's gas
system and may negotiate rates individually with CILCO. Transportation
revenues have decreased primarily due to a continuing decline in the number
of commercial transportation customers. There were 123 commercial and
industrial transportation customers in 1997 compared to 179 customers in
1996 and 391 in 1995.
During 1997, 1996 and 1995, CILCO utilized NYMEX (New York Mercantile
Exchange) futures contracts and over-the-counter financial instruments to
hedge CILCO-owned natural gas in storage (see Note 12). The ICC is
currently reviewing CILCO's 1996 gas costs included in the PGA. The ICC
staff has submitted testimony which criticized the hedging program, but it
does not recommend disallowance of the 1996 hedging costs from the PGA.
CILCO believes the costs related to this program were prudent and provided a
benefit to customers. If the costs were ultimately excluded from the PGA,
CILCO's net income would be reduced by $1.4 million in the year a final
decision was rendered. In December 1997, CILCO suspended its storage
hedging program and closed out all open NYMEX positions due to the
uncertainty of the future PGA treatment of hedging activity.
The increases in depreciation and amortization expenses in 1997 and 1996
reflect additions and replacements of utility plant at costs in excess of
the original cost of the property retired and amortization of computer
software.
The changes in income taxes in 1997 and 1996 were primarily the result of
changes in taxable income.
CILCO OTHER
Utility other income increased in 1997 compared to 1996 primarily due to
decreased interest expense. Interest expense decreased in 1997 from 1996
primarily due to a partial year of interest expense on $20 million of
medium-term notes retired in March 1997.
Utility other income decreased in 1996 from 1995 primarily due to the sale
in December 1995 of two parcels of land at the former R. S. Wallace
electric generating plant site. Interest expense increased in 1996 from
1995 primarily due to a full year of interest expense on $36 million of
medium-term notes issued during 1995, partially offset by interest on $16
million of long-term notes retired in February 1996.
An extraordinary income item was recorded in 1997 to reflect the effects of
deregulation resulting from the Customer Choice Law (see Note 1).
QST (Excluding QST Environmental)
The following table summarizes the revenue and expenses for QST.
<TABLE>
<CAPTION>
1997 1996
Components of QST Net Loss (In thousands)
<S> <C> <C>
Revenue:
Electric revenue $ 25,123 $ 1,433
Gas revenue 320,563 1,816
Telecommunications revenue 604 132
-------- -------
Total revenue 346,290 3,381
-------- -------
Cost of sales:
Cost of electricity 25,898 1,308
Cost of gas 325,436 1,947
Cost of sales - Telecommunications 15 --
-------- -------
Total cost of sales 351,349 3,255
-------- -------
Gross margin (5,059) 126
-------- -------
Other expenses:
General and administrative 10,399 6,594
Depreciation and amortization 551 83
Interest 303 77
-------- -------
Total other expenses 11,253 6,754
-------- -------
Net loss before taxes (16,312) (6,628)
Income taxes (6,469) (2,630)
-------- -------
QST net loss $ (9,843) $(3,998)
======== =======
</TABLE>
QST was formed in December 1995 to facilitate CILCORP's expansion into non-
regulated energy and related services businesses. Its initial focus through
QST Energy was to compete against energy suppliers participating in CILCO's
Power Quest programs. After successfully competing for Power Quest program
customers, QST Energy has begun to establish and expand the infrastructure
required to supply energy to customers outside of the CILCO service territory.
QST Energy competes against marketers, brokers and utility affiliates to
provide energy and related services to customers of utilities and other energy
providers which offer, or will be required to offer, similar retail
competition programs, as well as marketing energy to customers who already
have the ability to choose their supplier. QST provides a portfolio of non-
regulated, energy-related products and services, and communication services
based on a Central Illinois fiber optic system.
QST Energy's wholly-owned subsidiary, QST Energy Trading Inc. (QST Trading),
is a wholesale natural gas and electric power marketer which purchases, sells
and brokers energy and capacity at market-based rates to other marketers,
including QST Energy, utilities and other customers. QST Energy and QST
Trading currently have offices in Peoria, Chicago, Pittsburgh and Houston.
In May 1997, QST Trading acquired Trebor Energy Resources, a Houston-based
natural gas marketing and trading company. The acquisition complements QST's
growing wholesale and retail energy business and enhances QST's ability to
purchase, transport and sell natural gas to utilities and industrial and
commercial customers in the Gulf Coast, Midwest and Northeast markets. The
final acquisition price, based on a deferred payment arrangement using
predetermined performance measures, cannot currently be determined.
QST's earnings for 1997 are reflective of a company in the early stages of
development which is participating in retail markets with the incumbent
inefficiencies associated with partial regulation. A negative electric gross
margin at QST Energy resulting from retail operations in Power Quest and the
pilot program of another Illinois utility contributed $.5 million to QST's
after-tax net loss in 1997, which was partially offset by a positive electric
wholesale trading margin. Wholesale electric sales began in the second
quarter of 1997 and totaled approximately 709,000 megawatt hours for the year.
The negative electric retail margin was the result of purchased power cost
increases during the summer cooling season and difficulties encountered with
other Illinois utilities transmitting contracted power to Illinois retail
customers. These difficulties caused QST Energy to purchase uneconomic power
on a spot basis. QST has filed a complaint before the ICC regarding this
situation.
Negative natural gas gross margin contributed approximately $2.9 million to
QST's after-tax loss for 1997. The negative gas gross margin was primarily
due to wholesale natural gas sales and trading transactions by QST Trading.
Wholesale trading losses were incurred primarily when natural gas prices
decreased approximately 35% during November and December. QST Trading had
previously purchased the majority of its supply requirements physically and
financially, and had to sell gas at a time of rapidly declining prices to
balance its position. Physical natural gas volumes have increased from
approximately 11,000 MMBTU per day in December 1996 to approximately 767,000
MMBTU per day in December 1997, due to the Trebor Energy Resources acquisition
and marketing growth initiatives. QST Energy also participated in the Power
Quest gas pilot program for all of 1997 and the Columbia Energy of
Pennsylvania gas pilot program for two months of 1997. Revenue from these
programs was $3 million during 1997.
QST Communications' gross margin increased to $.6 million in 1997 due to an
increase in customers. Gross revenue is anticipated to nearly triple in 1998
due to future customer growth and a full year's revenue from its current
customers.
QST's general and administrative expenses increased in 1997 due to the
acquisition of Trebor Energy Resources, an increase in the number of QST
employees to support growing retail and wholesale operations, increased
marketing expenses to acquire retail electric and gas customers, and an
increase in staffing costs at QST Communications. Net losses are expected to
continue in 1998 as QST continues to develop its businesses which are focused
on the newly emerging deregulated energy markets throughout the United States.
Revenues are anticipated to increase as QST participates in additional pilot
programs, expands it retail sales of energy to additional commercial and
industrial customers, and increases the level of its wholesale natural gas and
electric business (see Competition).
In addition to the 1997 marketing ventures discussed earlier (see
Competition), QST Energy entered into an agreement with R. Hadler and Company,
Inc. (Hadler), of Washington, D.C., under which Hadler will work with QST to
market natural gas and electricity to commercial and industrial companies in
Michigan, Pennsylvania, and various other states. The primary focus will be
the development of the Midwest and Mid-Atlantic industrial and commercial
customer base. Hadler will expand QST's delivery system through the Hadler
network, arranging for the sale of energy to new customers. QST Energy will
provide supply, logistics, trading and retail sales support through existing
functions.
QST Environmental Operations
The following table summarizes QST Environmental's revenue and expenses.
<TABLE>
<CAPTION>
Components of QST Environmental's
Net Income (Loss) 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Revenue:
Environmental and
engineering services revenue $ 72,235 $82,641 $122,962
Direct non-labor project costs 26,267 26,136 47,390
-------- -------- --------
Net revenue 45,968 56,505 75,572
-------- -------- --------
Expenses:
Direct salaries and other costs 24,444 30,137 35,056
General and administrative 19,747 29,310 33,177
Depreciation and amortization 3,743 5,063 5,644
Goodwill write-off 22,613 -- --
-------- -------- --------
Operating expenses 70,547 64,510 73,877
-------- -------- --------
Interest expense 440 1,236 1,815
-------- -------- --------
(Loss) before income taxes (25,019) (9,241) (120)
Income taxes (790) (3,438) 408
-------- -------- --------
(Loss) from continuing
operations (24,229) (5,803) (528)
Income (loss) from operations of
discontinued business, net of
tax of $(39), $(129) and $439 (54) (196) 641
Gain on sale of assets of
discontinued business, net of
tax of $1,889 2,712 -- --
-------- -------- --------
QST Environmental net income
(loss) $(21,571) $(5,999) $ 113
======== ======== ========
</TABLE>
QST Environmental's net loss increased in 1997 primarily due to the write-
off of $22.6 million in goodwill during the fourth quarter (see Note 1).
Partially offsetting this increased loss was an after-tax gain of
$2.7 million from the sale of the discontinued operations of QST
Environmental's subsidiary, ESE Land, and improved performance of the
environmental consulting operations due to cost control. Excluding the
effects of the goodwill write-off, QST's loss from continuing operations in
1997 was $1.6 million.
Poor performance by QST Environmental's laboratories contributed $2.0
million to the after-tax loss. In June 1997, QST Environmental sold assets
and leased the equipment and facility of its Peoria laboratory to Katalyst
Analytical Technologies, Inc. In late January 1998, QST Environmental
entered into a non-binding letter of intent to sell the assets of its
remaining laboratory in Gainesville, Florida.
QST Environmental incurs substantial direct non-labor project costs from
the use of subcontractors on projects. These costs are passed directly to
clients. As a result, a better measure of operating performance is net
revenue, which is determined by deducting such direct non-labor project
costs from gross revenue. Net revenue decreased by $11 million or 19% in
1997 compared to 1996 after decreasing by 25% in 1996. The 1997 decrease
was due to reduced levels of business caused by a variety of factors,
including industry overcapacity resulting from changes in the regulatory
climate at both the federal and state levels. The environmental industry
has been affected by the delayed governmental reauthorizations of air,
water and toxic waste programs as both private clients and governmental
agencies have postponed environmental clean-up programs in response to
regulatory uncertainty. The continuing budget curtailment of all federal
agencies, including the USEPA, resulted in slowdowns and significant delays
in regulatory enforcement of existing programs.
These conditions have left the industry with excess capacity, resulting in
increased competitive pressures. QST Environmental significantly reduced
its workforce during the past year from 734 employees at December 31, 1996,
to 591 employees at December 31, 1997. QST Environmental will continue to
adjust its workforce to meet business volume.
Direct salaries and other costs reflect the labor and associated benefit
costs of project and technical staff, excluding marketing time. Such costs
consist of salaries and related fringe benefits, including employer-paid
insurance, payroll taxes, vacation, sick leave, and retirement plan
contributions. General and administrative expenses include non-billable
employee time devoted to administration, marketing, proposals, supervision
and professional development; supplies expense; and corporate
administrative expenses.
Direct salaries and other costs decreased by $6 million or 19% in 1997,
after decreasing by 14% in 1996. The decreases reflect QST Environmental's
adjustment of its staffing levels to respond to changing business
conditions.
General and administrative expenses decreased by $10 million or 33% in
1997, after decreasing by 12% in 1996. Significant overall reductions in
administrative, marketing and proposal salaries, plus reduced equipment
costs, accounted for 63% of the 1997 decrease in general and administrative
expenses. QST Environmental incurred significant losses in 1996 as a
result of the general downsizing of many operations, and the closing of the
Denver laboratory, the drilling operations, and various consulting offices.
During 1996, severance and out-placement costs totaled $1.5 million, the
write-off of assets totaled $1.5 million, fees for outside consulting and
for technology marketing rights were $.7 million and other similar charges
totaled $.6 million.
Depreciation and amortization expense decreased by $1.3 million in 1997 and
by $.6 million in 1996. The 1997 decrease was due primarily to an increase
in fully depreciated assets coupled with reduced capital expenditures,
while the 1996 decrease was due to the full amortization in early 1995 of a
non-compete agreement associated with the acquisition of ESE and an
increase in fully depreciated assets.
Interest expense decreased by 64% in 1997 and 32% in 1996 because of an
increase in the level of interest capitalized to ESE Land projects.
In November 1997, QST Environmental sold substantially all the assets of
ESE Land for $9.5 million in cash and residual interests in three newly-
formed limited liability corporations. These activities are shown as
discontinued operations in the statement of earnings.
QST Environmental's future business activity and profitability will
continue to be impacted by the level of demand for its services, which is
affected by government funding levels, the enforcement of various federal
and state statutes and regulations dealing with the environment and the
use, control, disposal, and clean-up of hazardous wastes. The market for
QST Environmental's services is highly competitive; however, no single
entity currently dominates the environmental and engineering consulting
services marketplace.
OTHER BUSINESSES
The following table summarizes Other Businesses revenue and expenses.
Other Businesses results include income earned and expenses incurred at the
Holding Company, CIM, CVI and non-operating interest income of CILCO.
<TABLE>
<CAPTION>
Components of Other Businesses
Net Loss 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Revenue:
Leveraged lease revenue $ 6,539 $ 5,933 $6,224
Other revenue 4,567 2,572 3,242
------- ------- ------
Total revenue 11,106 8,505 9,466
------- ------- ------
Expenses:
Operating expenses 13,531 11,657 5,064
Depreciation and
amortization 198 198 203
Interest expense 3,473 3,411 4,227
Income and other taxes (3,798) (3,076) 308
------- ------- ------
Total expenses 13,404 12,190 9,802
------- ------- ------
Other businesses net loss $(2,298) $(3,685) $ (336)
======= ======= ======
</TABLE>
Leveraged lease revenue increased in 1997 due to CIM's investment in an
additional leveraged lease in July 1997. CIM expects leveraged lease
revenue to increase in 1998 due to a full year's revenue from the new lease.
Leasing revenue will decline in subsequent years, absent new leveraged lease
investments.
Other revenue increased in 1997 due to a $.9 million pre-tax gain resulting
from CIM Energy Investments Inc.'s (CEII) share in the sale of one of the
facilities of the Energy Investors Fund, L.P. CEII, a subsidiary of CIM,
holds a 3% limited partnership interest in this fund, which invests in non-
regulated, non-utility facilities for the production of electricity or
thermal energy. CIM's investment in this fund at December 31, 1997, is $1.2
million.
Operating expenses increased in 1997 primarily due to higher expenses for
services provided to Caterpillar under CILCO's industrial pilot program (see
Competition). Also contributing to the increase were higher expenses
related to the leveraged lease portfolio in 1997 compared to 1996.
Income and other taxes decreased in 1997 primarily due to tax credits
generated by CIM's investment in affordable housing projects.
<PAGE>
Management's Report
To the Stockholders of CILCORP Inc.:
Management has prepared the accompanying financial statements and notes for
CILCORP Inc. and its consolidated subsidiaries in accordance with generally
accepted accounting principles. Estimates and judgments used in developing
these statements are the responsibility of management. Financial data
presented throughout this report is consistent with these statements.
CILCORP Inc. maintains a system of internal accounting controls which
management believes is adequate to provide reasonable assurance as to the
integrity of accounting records and the protection of assets. Such controls
include established policies and procedures, a program of internal audit and
the careful selection and training of qualified personnel.
The financial statements have been audited by CILCORP's independent public
accountants, Arthur Andersen LLP. Their audit was conducted in accordance
with generally accepted auditing standards and included an assessment of
selected internal accounting controls only to determine the scope of their
audit procedures. The report of the independent public accountants is
contained in this annual report.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, meets periodically with the independent public accountants,
internal auditors and management to review accounting, auditing, internal
accounting control, and financial reporting matters. The independent public
accountants have direct access to the Audit Committee. The Audit Committee
meets separately with the independent public accountants.
R. O. Viets
President and Chief Executive Officer
T. D. Hutchinson
Controller
Report of Independent Public Accountants
To the Stockholders of CILCORP Inc.:
We have audited the accompanying consolidated balance sheets of CILCORP Inc.
(an Illinois corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, cash flows, stockholders'
equity and segments of business for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CILCORP Inc. and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 27, 1998
<PAGE>
<TABLE>
Consolidated Statements of Income
CILCORP Inc. and Subsidiaries
<CAPTION>
For the Years Ended December 31 1997 1996 1995
(In thousands except per share amounts)
<S> <C> <C> <C>
Revenue:
Electric $338,096 $322,785 $326,198
Gas 208,758 195,770 151,546
Non-Regulated Energy and Energy
Services 346,290 3,381 --
Environmental and Engineering
Services 72,235 82,641 122,962
Other Businesses 11,106 8,505 9,466
-------- -------- --------
Total 976,485 613,082 610,172
-------- -------- --------
Operating Expenses:
Fuel for Generation and
Purchased Power 140,979 102,930 106,588
Gas Purchased for Resale 448,967 110,233 68,948
Other Operations and Maintenance 203,091 221,294 239,642
Depreciation and Amortization 66,730 65,726 63,326
Goodwill Write-off 22,613 -- --
State and Local Revenue Taxes 22,467 22,004 20,866
Other Taxes 14,739 15,277 16,844
-------- -------- --------
Total 919,586 537,464 516,214
-------- -------- --------
Fixed Charges and Other:
Interest Expense 27,913 29,068 29,774
Preferred Stock Dividends
of Subsidiary 3,216 3,188 3,299
Allowance for Funds Used During
Construction (134) (90) (514)
Other 1,177 679 623
-------- -------- --------
Total 32,172 32,845 33,182
-------- -------- --------
Income from Continuing Operations
Before Income Taxes 24,727 42,773 60,776
Income Taxes 15,090 14,634 22,835
-------- -------- --------
Net Income from Continuing
Operations Before
Extraordinary Item 9,637 28,139 37,941
Income (Loss) from Operations of
Discontinued Business, Net of
Tax of $(39), $(129) and $439 (54) (196) 641
Gain on Sale of Assets of
Discontinued Business, Net of
Tax of $1,889 2,712 -- --
Extraordinary Item (see Note 1) 4,100 -- --
------- ------- -------
Net Income $16,395 $27,943 $38,582
======= ======= =======
Earnings Per Common Share - Basic
and Diluted
Continuing Operations $ .71 $2.08 $2.88
Discontinued Operations .19 (.01) .05
Extraordinary Item .30 -- --
----- ----- -----
Net Income Per Common Share $1.20 $2.07 $2.93
===== ===== =====
Average Common Shares Outstanding
- Basic 13,611 13,480 13,147
Average Common Shares Outstanding
- Diluted 13,627 13,480 13,147
Dividends per Common Share $2.46 $2.46 $2.46
<FN>
The accompanying Notes to Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
CILCORP Inc. and Subsidiaries
<CAPTION>
Assets (As of December 31) 1997 1996
(In thousands)
<S> <C> <C>
Current Assets:
Cash and Temporary Cash Investments $ 10,576 $ 4,941
Receivables, Less Reserves of $2,454 and $2,600 141,234 78,309
Accrued Unbilled Revenue 38,775 39,851
Fuel, at Average Cost 7,816 7,643
Materials and Supplies, at Average Cost 13,685 15,126
Gas in Underground Storage, at Average Cost 22,666 24,723
Prepayments and Other 10,971 11,614
---------- ----------
Total Current Assets 245,723 182,207
---------- ----------
Investments and Other Property:
Investment in Leveraged Leases 146,458 133,030
Other Investments 21,074 21,807
---------- ----------
Total Investments and Other Property 167,532 154,837
---------- ----------
Property, Plant and Equipment:
Utility Plant, at Original Cost
Electric 1,213,585 1,186,110
Gas 401,870 393,246
---------- ----------
1,615,455 1,579,356
Less - Accumulated Provision for Depreciation 769,792 724,398
---------- ----------
845,663 854,958
Construction Work in Progress 21,550 15,092
Other, Net of Depreciation 22,188 21,554
---------- ----------
Total Property, Plant and Equipment 889,401 891,604
---------- ----------
Other Assets:
Cost in Excess of Net Assets of Acquired Businesses,
Net of Accumulated Amortization of $4,997 in 1996 -- 23,141
Other 32,163 33,904
---------- ----------
Total Other Assets 32,163 57,045
---------- ----------
Total Assets $1,334,819 $1,285,693
========== ==========
<FN>
The accompanying Notes to Financial Statements are an integral part of these
balance sheets.
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
CILCORP Inc. and Subsidiaries
<CAPTION>
Liabilities and Stockholders' Equity (As of December 31)
1997 1996
(In thousands)
<S> <C> <C>
Current Liabilities:
Current Portion of Long-Term Debt $ 22,185 $ 23,057
Notes Payable 62,150 27,900
Accounts Payable 132,286 63,434
Accrued Taxes 2,810 8,801
Accrued Interest 9,473 10,711
Purchased Gas Adjustment Over-Recoveries 1,666 601
Other 19,798 22,867
---------- ----------
Total Current Liabilities 250,368 157,371
---------- ----------
Long-Term Debt 298,528 320,666
---------- ----------
Deferred Credits and Other Liabilities:
Deferred Income Taxes 241,013 235,239
Regulatory Liability of Regulated Subsidiary 56,807 68,565
Deferred Investment Tax Credit 21,117 22,801
Other 48,273 46,726
---------- ----------
Total Deferred Credits 367,210 373,331
---------- ----------
Preferred Stock of Subsidiary 66,120 66,120
---------- ----------
Stockholders' Equity:
Common Stock, no par value; Authorized
50,000,000 shares - Outstanding 13,610,680 and
13,610,680 shares 192,567 190,760
Retained Earnings 160,026 177,445
---------- ----------
Total Stockholders' Equity 352,593 368,205
---------- ----------
Total Liabilities and Stockholders' Equity $1,334,819 $1,285,693
========== ==========
<FN>
The accompanying Notes to Financial Statements are an integral part of these
balance sheets.
</TABLE>
<PAGE>
<TABLE>
Statements of Segments of Business
CILCORP Inc. and Subsidiaries
<CAPTION>
Operating Information For the Years Ended December 31
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Utility Segment:
Electric Operations
Revenue $338,096 $322,785 $326,198
Expenses 283,459 270,672 277,429
-------- -------- --------
Operating Income 54,637 52,113 48,769
Income Taxes 21,901 19,576 17,975
-------- -------- --------
Operating Income Before
Income Taxes $ 76,538 $ 71,689 $ 66,744
======== ======== ========
Depreciation and
Amortization $ 43,858 $ 42,530 $ 40,665
======== ======== ========
Capital Expenditures $ 35,217 $ 28,032 $ 45,466
======== ======== ========
Gas Operations
Revenue $208,758 $195,770 $151,546
Expenses 190,083 178,205 136,767
-------- -------- --------
Operating Income 18,675 17,565 14,779
Income Taxes 7,416 6,972 5,292
-------- -------- --------
Operating Income Before
Income Taxes $ 26,091 $ 24,537 $ 20,071
======== ======== ========
Depreciation and Amortization
$ 17,647 $ 17,134 $ 16,100
======== ======== ========
Capital Expenditures $ 19,844 $ 15,529 $ 24,043
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Major Customer For the Years Ended December 31
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Caterpillar Inc.
Electric Revenue $40,106 11.9% $37,724 11.7% $40,109 12.3%
Gas Revenue 934 .4% 1,053 .5% 1,022 .7%
------- ----- ------- ----- ------- ----
Total $41,040 7.5% $38,777 7.5% $41,131 8.6%
======= ===== ======= ===== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Utility Identifiable Assets as of December 31
1997 1996 1995
<S> <C> <C> <C>
Electric $ 711,445 $ 721,468 $ 735,463
Gas 287,275 292,925 273,428
Other Utility Assets (1) 22,746 20,593 46,354
---------- ---------- ----------
Total Utility Assets (2) $1,021,466 $1,034,986 $1,055,245
========== ========== ==========
<FN>
(1) Other investments, miscellaneous accounts receivable, prepaid assets,
deferred pension costs, and unamortized debt, discount, and expense
(2) Electric utility assets include generation-related assets which will be
deregulated as a result of Illinois legislation (see Note 1)
The accompanying Notes to Financial Statements are an integral part of
these statements.
</TABLE>
<PAGE>
<TABLE>
Non-Regulated Energy and Energy Services Segment
<CAPTION>
For the Years Ended December 31 1997 1996
(In thousands)
<S> <C> <C>
Revenue $346,290 $ 3,381
Expenses 362,602 10,009
-------- --------
Loss Before Income Taxes $(16,312) $ (6,628)
======== ========
Capital Expenditures $ 5,385 $ 2,447
======== ========
</TABLE>
<TABLE>
<CAPTION>
Non-Regulated Energy and Energy Services Identifiable
Assets as of December 31 1997 1996
(In thousands)
<S> <C> <C>
Accounts Receivable and Unbilled Revenue $80,517 $11,991
Cash and Temporary Cash Investments 4,908 470
Property, Plant and Equipment 7,230 2,385
Other Assets 5,214 444
------- -------
Total Non-Regulated Energy and Energy
Services Assets $97,869 $15,290
======= =======
</TABLE>
<TABLE>
Environmental and Engineering Services Segment
<CAPTION>
For the Years Ended December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Revenue $ 72,235 $ 82,641 $122,962
Operating Expenses 96,814 90,646 121,267
-------- -------- --------
Operating Income (Loss) Before
Income Taxes $(24,579) $ (8,005) $ 1,695
======== ======== ========
Depreciation and Amortization $ 3,743 $ 5,063 $ 5,644
======== ======== ========
Capital Expenditures $ 803 $ 593 $ 4,537
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Environmental and Engineering Services
Identifiable Assets as of December 31 1997 1996 1995
<S> <C> <C> <C>
Property, Plant and Equipment $13,142 $16,494 $21,961
Cost in Excess of Net Assets of
Acquired Businesses, Net of
Amortization -- 23,141 23,845
Accounts Receivable and Unbilled
Revenue 21,875 28,825 37,238
Cash and Temporary Cash
Investments 3,484 2,130 --
Other Assets 8,043 8,612 4,908
------- ------- -------
Total Environmental and
Engineering Services Assets $46,544 $79,202 $87,952
======= ======= =======
<FN>
</TABLE>
<TABLE>
Other Businesses Segment
<CAPTION>
For the Years Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Revenue $11,106 $ 8,505 $ 9,466
Expenses 17,202 15,266 9,494
------- ------- -------
Loss Before Income Taxes $(6,096) $(6,761) $ (28)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Other Businesses Identifiable
Assets as of December 31 1997 1996 1995
<S> <C> <C> <C>
Leveraged Leases $146,457 $133,030 $127,140
Cash and Temporary Cash
Investments 1,486 680 544
Other Assets 20,997 22,505 8,422
-------- -------- --------
Total Other Businesses Assets $168,940 $156,215 $136,106
======== ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
CILCORP Inc. and Subsidiaries
<CAPTION>
For the Years Ended December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income from Continuing Operations
Before Preferred Dividends $ 12,853 $ 31,327 $ 41,239
-------- -------- --------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Non-Cash Income (4,102) (4,297) (6,224)
Depreciation and Amortization 66,719 65,721 63,325
Write-off of Goodwill 22,613 -- --
Deferred Income Taxes, Investment
Tax Credit and Regulatory
Liability of Subsidiary, Net (2,541) (2,197) (4,188)
Changes in Operating Assets and
Liabilities:
Increase in Accounts Receivable
and Accrued Unbilled Revenue (64,849) (6,839) (15,068)
(Increase) Decrease in Inventories 3,325 (5,341) 6,829
Increase (Decrease) in Accounts
Payable 68,974 18,417 (7,602)
(Increase) Decrease in Other Assets (1,885) 1,939 9,419
Increase (Decrease)in Other
Liabilities (8,782) 10,923 2,276
-------- -------- --------
Total Adjustments 79,472 78,326 48,767
-------- -------- --------
Net Cash Provided by Operating
Activities 92,325 109,653 90,006
Net Cash Provided by (Used in)
Operating Activities of
Discontinued Operations (1,311) (7,277) 783
-------- -------- --------
Cash Flow from Operations 91,014 102,376 90,789
-------- -------- --------
Cash Flows from Investing Activities:
Additions to Plant (61,245) (46,741) (74,046)
Purchase of Long-Term Investments (6,933) (4,713) (1,617)
Proceeds from Sale of Long-Term
Investments -- -- 500
Proceeds from Sale of Assets of
Discontinued Operations 9,500 -- --
Other (1,242) 461 (8,836)
-------- -------- --------
Net Cash Used in Investing
Activities (59,920) (50,993) (83,999)
-------- -------- --------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Short-Term
Debt 34,250 (19,200) 17,700
Proceeds from Issuance of Long-Term
Debt -- -- 36,473
Repayment of Long-Term Debt (23,011) (19,442) (21,203)
Common Dividends Paid (33,482) (33,142) (32,308)
Preferred Dividends Paid (3,216) (3,188) (3,299)
Common Stock Issued -- 11,430 11,343
-------- -------- --------
Net Cash Provided by (Used in)
Financing Activities (25,459) (63,542) 8,706
-------- -------- --------
Net Increase (Decrease) in Cash and
Temporary Cash Investments 5,635 (12,159) 15,496
Cash and Temporary Cash Investments
at Beginning of Year 4,941 17,100 1,604
-------- -------- --------
Cash and Temporary Cash Investments
at End of Year $ 10,576 $ 4,941 $ 17,100
======== ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
CILCORP Inc. and Subsidiaries
<CAPTION>
Common Stock Retained
Shares Amount Earnings Total
(In thousands except share amounts)
<S> <C> <C> <C> <C>
Balance at December 31, 1994 13,035,756 $167,987 $176,728 $344,715
Common Stock Issued 299,850 11,343 11,343
Cash Dividend Declared on
Common Stock ($2.46 per
share) (32,308) (32,308)
Additional Minimum Liability
of Non-Qualified Pension
Plan at December 31, 1995,
net of $233 taxes (354) (354)
Net Income 38,582 38,582
---------- -------- -------- --------
Balance at December 31, 1995 13,335,606 $179,330 $182,648 $361,978
Common Stock Issued 275,074 11,430 11,430
Cash Dividend Declared on
Common Stock ($2.46 per
share) (33,142) (33,142)
Additional Minimum Liability
of Non-Qualified Pension
Plan at December 31, 1996,
net of $3 taxes (4) (4)
Net Income 27,943 27,943
---------- -------- -------- --------
Balance at December 31, 1996 13,610,680 $190,760 $177,445 $368,205
CILCORP Shareholder Return
Incentive Compensation 1,807 1,807
Cash Dividend Declared on
Common Stock ($2.46 per
share) (33,482) (33,482)
Additional Minimum Liability
of Non-Qualified Pension
Plan at December 31, 1997,
net of $208 taxes (317) (317)
Other (15) (15)
Net Income 16,395 16,395
---------- -------- -------- --------
Balance at December 31, 1997 13,610,680 $192,567 $160,026 $352,593
========== ======== ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part of these
statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CILCORP Inc.
(CILCORP or the Holding Company), Central Illinois Light Company (CILCO),
QST Enterprises Inc. (QST), QST Environmental Inc., formerly known as
Environmental Science & Engineering, Inc. (ESE) and CILCORP's other
subsidiaries (collectively, the Company) after elimination of significant
intercompany transactions. Formerly a CILCORP first-tier subsidiary, ESE
became a subsidiary of QST effective October 29, 1996. Effective June 1,
1997, ESE began operating under the name QST Environmental Inc. (QST
Environmental). Prior year amounts have been reclassified on a basis
consistent with the 1997 presentation.
CILCORP is an investor-owned public utility holding company. CILCO, the
Company's principal business subsidiary, is engaged in the generation,
transmission, distribution and sale of electric energy in an area of
approximately 3,700 square miles in central and east-central Illinois, and
the purchase, distribution, transportation and sale of natural gas in an
area of approximately 4,500 square miles in central and east-central
Illinois. QST has three first-tier subsidiaries. QST Energy Inc. (QST
Energy) provides energy and energy-related services to a broad spectrum of
retail and wholesale customers. QST Communications Inc. (QST
Communications) provides fiber optic communication services. QST
Environmental provides engineering and environmental consulting services
for governmental, industrial and commercial customers. Other CILCORP
first-tier subsidiaries are CILCORP Investment Management Inc. (CIM),
which manages the Company's investment portfolio and CILCORP Ventures Inc.
(CVI), which pursues investment opportunities in new ventures.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Accounting pronouncements issued by the Financial Accounting Standards
Board in 1997, or which became effective in 1997, did not and will not
have a material impact on the Company's financial position, results of
operations, or cash flows.
REGULATION
CILCO is a public utility subject to regulation by the Illinois Commerce
Commission (ICC) and the Federal Energy Regulatory Commission (FERC) with
respect to accounting matters, and maintains its accounts in accordance
with the Uniform System of Accounts prescribed by these agencies.
CILCO is subject to the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71) for its regulated public utility operations. Under
SFAS 71, assets and liabilities are recorded to represent probable future
increases and decreases, respectively, of revenues to CILCO resulting
from the ratemaking action of regulatory agencies.
The Electric Service Customer Choice and Rate Relief Law of 1997
(Customer Choice Law) became effective in Illinois in December (see
Management's Discussion - Competition). Among other provisions, this law
begins a nine-year transition process to a fully competitive market for
electricity in Illinois. Electric transmission and distribution
activities are expected to continue to be regulated, but a customer may
choose to purchase electricity from another supplier. Under these
circumstances, a utility will charge a fee for delivering power and may
collect an additional non-bypassable transition charge. This charge,
which may generally be collected through 2006, must be filed with the ICC
and is designed to help utilities recover the costs of past investments
made under the regulated system. However, the transition charge may not
cause customers to pay more than the utility's price per kwh of
electricity before enactment of the Customer Choice Law, adjusted to
reflect base rate reductions required by the law.
Due to the transition cost recovery limitations and base rate reductions
of the Customer Choice Law, CILCO's electric generation activities will
no longer be subject to the provisions of SFAS 71. In such
circumstances, CILCO's generation-related regulatory assets and
liabilities must be written off. Regulatory assets included on the
Consolidated Balance Sheets at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Included in prepayments and other:
Fuel and gas cost adjustments $ 2,954 $ 9,658
Coal tar remediation cost - estimated
current 844 1,071
Gas transition costs 159 1,022
------- -------
Current costs included in
prepayments and other 3,957 11,751
------- -------
Included in other assets:
Coal tar remediation cost, net of
recoveries 2,745 2,839
Regulatory tax asset 7,578 4,777
Deferred gas costs 4,145 4,330
Unamortized loss on reacquired debt 3,581 5,572
------- -------
Future costs included in other assets 18,049 17,518
------- -------
Total regulatory assets $22,006 $29,269
======= =======
</TABLE>
Regulatory assets at December 31, 1997 are related to CILCO's regulated
electric and gas distribution activities. Regulatory assets of $1.5
million and liabilities of $5.6 million associated with electric generating
plant were written-off or credited, respectively, to income in 1997 as a
net $4.1 million after-tax extraordinary item. CILCO does not currently
believe the costs recorded for its generating plants and related assets at
December 31, 1997 to be impaired as a result of the Customer Choice Law.
Regulatory liabilities, consisting of deferred tax items primarily related
to CILCO's electric and gas transmission and distribution operations, are
approximately $56.8 million and $68.6 million at December 31, 1997 and
1996, respectively.
CILCO's electric generation-related identifiable assets included in the
balance sheet at December 31, 1997 were:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Property, Plant and Equipment $ 535,065
Less: Accumulated Depreciation (259,988)
--------
275,077
Construction Work in Progress 1,979
--------
Net Property, Plant and Equipment 277,056
Fuel, at Average Cost 8,520
Materials and Supplies, at Average Cost 8,202
--------
Total Electric Generation-Related
Identifiable Assets $ 293,778
========
</TABLE>
Accumulated deferred income taxes associated with electric generation
property at December 31, 1997 were approximately $79 million.
OPERATING REVENUES, FUEL COSTS AND COST OF GAS
Electric, gas, and non-regulated energy and energy services revenues include
service provided but unbilled at year end. Substantially all electric rates
and gas system sales rates of CILCO include a fuel adjustment clause and a
purchased gas adjustment clause, respectively. These clauses provide for
the recovery of changes in electric fuel costs, excluding coal
transportation, and changes in the cost of gas on a current basis in
billings to customers. CILCO adjusts the cost of fuel and cost of gas to
recognize over or under recoveries of allowable costs. The cumulative
effects are deferred on the Balance Sheets as a current asset or current
liability (see Regulation, above) and adjusted by refunds or collections
through future billings to customers. Under the Customer Choice Law, a
regulated utility may elect to eliminate its fuel or purchased gas
adjustment clauses.
CONCENTRATION OF CREDIT RISK
CILCO, as a public utility, must provide service to customers within its
defined service territory and may not discontinue service to residential
customers when certain weather conditions exist. CILCO continually reviews
customers' creditworthiness and requests deposits or refunds deposits based
on that review. At December 31, 1997, CILCO had net receivables of
$44.5 million, of which approximately $5.9 million was due from its major
industrial customers.
QST, through QST Energy and QST Energy Trading Inc. (QST Trading), has a
number of customers which are in the gas distribution industry, gas
marketing industry, and industrial and commercial entities. These industry
concentrations have the potential to impact QST's overall exposure to credit
risk, either positively or negatively, in that the customers may be
similarly affected by changes in economic, industry or other conditions.
Receivables generally are not collateralized; however, QST believes that the
credit risk is offset by the diversity and creditworthiness of its customer
base. QST's losses on receivables in these industries have not been
material.
See Note 6 for a discussion of receivables related to CILCORP Investment
Management Inc.'s leveraged lease portfolio.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of Cash and Temporary Cash Investments, Other
Investments, and Notes Payable approximates fair value. The estimated fair
value of the Company's Preferred Stock with Mandatory Redemption was
$23 million at December 31, 1997 and $22 million at December 31, 1996, based
on current market interest rates for other companies with comparable credit
ratings, capital structure, and size. The estimated fair value of the
Company's Long-Term Debt, including current maturities, was $352 million at
December 31, 1997, and $365 million at December 31, 1996. The fair market
value of these instruments was based on current market interest rates for
other companies with comparable credit ratings, capital structures, and
size.
ENVIRONMENTAL AND ENGINEERING SERVICES REVENUES
QST Environmental performs professional environmental and engineering
consulting under time and material, cost-plus and fixed-price contracts.
These service revenues include amounts for services provided but unbilled at
year end. Revenues from time and material and cost-plus contracts are
recognized as costs are incurred. Revenues from fixed-price contracts are
recognized under the percentage-of-completion method.
DEPRECIATION AND MAINTENANCE
Provisions for depreciation of utility property for financial reporting
purposes are based on straight-line composite rates. The annual provisions
for utility plant depreciation, expressed as a percentage of average
depreciable utility property, were 3.8% and 4.6% for electric and gas,
respectively, for each of the last three years. Utility maintenance and
repair costs are charged directly to expense. Renewals of units of property
are charged to the utility plant account, and the original cost of
depreciable property replaced or retired, together with the removal cost
less salvage, is charged to the accumulated provision for depreciation.
Non-utility property is depreciated over estimated lives ranging from 3 to
40 years.
GOODWILL
Goodwill (Cost in Excess of Net Assets of Acquired Businesses) is amortized
over 40 years using the straight-line method. The Company periodically
evaluates the carrying value of goodwill based on an analysis of operating
results (including a continuing pattern of operating losses) and
consideration of other significant events or changes in the business
environment. If business conditions have changed and such changes are
likely to continue, the Company evaluates whether an impairment exists
based on expected future undiscounted net cash flows.
Significant downsizing has occurred at QST Environmental over the past two
years to reflect declining business levels. The Company believes that
industry overcapacity and increased competition are likely to continue. As
a result, the Company's original projections of growth in this business
segment are unlikely to be met. Due to 1997 changes in Illinois utility
regulation, CILCORP will channel its efforts toward energy-related products
and services, and QST Environmental's resources will be increasingly
devoted to providing technical services in support of QST's energy-related
business strategy.
As a result of these developments, the Company determined that an
impairment existed and, in the fourth quarter of 1997, wrote-off the $22.6
million unamortized goodwill balance.
INCOME TAXES
The Company follows a policy of comprehensive interperiod income tax
allocation. Investment tax credits related to utility property have been
deferred and are being amortized over the estimated useful lives of the
related property. CILCORP and its subsidiaries file a consolidated federal
income tax return. Income taxes are allocated to the individual companies
based on their respective taxable income or loss.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company considers all highly liquid debt instruments purchased with a
remaining maturity of three months or less to be cash equivalents for
purposes of the Consolidated Statements of Cash Flows.
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Interest $28,710 $28,988 $27,615
Income taxes 28,537 13,572 32,673
------- ------- -------
</TABLE>
COMPANY-OWNED LIFE INSURANCE POLICIES
The following amounts related to Company-owned life insurance contracts,
issued by one major insurance company, are included in Other Investments:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Cash surrender value of contracts $ 45,297 $ 40,076
Borrowings against contracts (42,898) (37,948)
------- -------
Net investment $ 2,399 $ 2,128
======= =======
</TABLE>
Interest expense related to borrowings against Company-owned life insurance,
included in "Other" on the Consolidated Statements of Income, was
$3.5 million, $2.7 million and $2.3 million for 1997, 1996 and 1995,
respectively.
NOTE 2 - INCOME TAXES
The Company uses the liability method to account for income taxes. Under
the liability method, deferred income taxes are recognized at currently
enacted income tax rates to reflect the tax effect of temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities. Temporary differences occur because the income tax law either
requires or permits certain items to be reported on the Company's income tax
return in a different year than they are reported in the financial
statements. CILCO has recorded a regulatory asset and liability to account
for the effect of expected future regulatory actions related to unamortized
investment tax credits, income tax liabilities initially recorded at tax
rates in excess of current rates, the equity component of Allowance for
Funds Used during Construction and other items for which deferred taxes had
not previously been provided. The temporary differences related to the
consolidated deferred income tax asset and liability at December 31, 1997,
1996, and 1995 were as follows:
<TABLE>
<CAPTION>
December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Deferred tax asset $18,347 $16,452 $15,171
Adjustment to reflect
regulatory asset (7,578) (4,777) (3,232)
------- ------- -------
Net deferred tax asset $10,769 $11,675 $11,939
======= ======= =======
<FN>
</TABLE>
<TABLE>
<CAPTION>
December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Deferred tax liabilities:
Deferred tax liability-property $207,460 $214,356 $217,049
Adjustment to reflect
regulatory liability (56,807) (68,565) (62,714)
-------- -------- --------
Net deferred tax
liability-property 150,653 145,791 154,335
Deferred tax liability-leases 101,005 97,964 93,566
Deferred tax liability-other 124 3,159 5,641
-------- -------- --------
Accumulated deferred income tax
liability $251,782 $246,914 $253,542
======== ======== ========
Accumulated deferred income tax
liability, net of deferred
tax assets $241,013 $235,239 $241,603
======== ======== ========
<FN>
</TABLE>
The following table reconciles the change in the accumulated deferred income
tax liability to the deferred income tax expense included in the income
statement:
<TABLE>
<CAPTION>
December 31 1997 1996
(In thousands)
<S> <C> <C>
Net change in deferred income tax
liability per above table $ 5,774 $ (6,364)
Change in tax effects of income tax
related regulatory assets and
liabilities (14,559) 4,306
Deferred taxes related to extraordinary
item 5,634 --
Other 124 949
-------- --------
Deferred income tax benefit for the
period $ (3,027) $ (1,109)
======== ========
<FN>
</TABLE>
Income tax expenses were as follows:
<TABLE>
<CAPTION>
December 31 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Current income taxes
Federal $17,814 $15,129 $25,024
State 3,836 2,169 5,320
------- ------- -------
Total current taxes 21,650 17,298 30,344
------- ------- -------
Deferred income taxes, net
Property-related deferred
income taxes (841) (2,346) 516
Leveraged leases 3,040 4,398 6,341
Unbilled revenue (885) 425 (2,982)
Gas take-or-pay settlements (339) (706) (751)
Environmental remediation
costs 46 (642) 642
Pension expenses (1,798) (1,726) (6,673)
Other post-employment
benefits expenses (617) 187 (172)
Customer advances (438) (40) (1,467)
Other (1,195) (659) (831)
------- ------- -------
Total deferred income
taxes, net (3,027) (1,109) (5,377)
------- ------- -------
Investment tax credit
amortization (1,684) (1,684) (1,693)
------- ------- -------
Total income tax
provisions before
extraordinary item 16,939 14,505 23,274
Deferred taxes related to
extraordinary item (5,634) -- --
------- ------- -------
Total income tax provisions $11,305 $14,505 $23,274
======= ======= =======
<FN>
</TABLE>
The 1997 income tax provision has been reduced to reflect the crediting to
income as an extraordinary item the regulatory liability related to electric
generation property deferred taxes which were recorded at tax rates in
excess of the current rate (see Note 1).
Total deferred income taxes, net, includes deferred state income taxes of
$229,000, $538,000, and $(67,000) for 1997, 1996 and 1995, respectively.
The following table represents a reconciliation of the effective tax rate
with the statutory federal income tax rate.
<TABLE>
<CAPTION> Years Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Statutory federal income tax 35.0% 35.0% 35.0%
----- ----- -----
Amortization of property related deferred
taxes provided at tax rates in excess of
current rate (3.9) (3.4) (2.0)
Amortization of investment tax credit (6.1) (4.0) (2.7)
State income taxes 9.0 4.8 5.9
Goodwill write-off and amortization 29.2 .6 .4
Preferred dividends of subsidiary and
other permanent differences 2.3 1.9 1.1
Tax provision adjustment (1.6) (.4) .5
Affordable housing tax credits (3.4) (.1) --
Other differences .7 (.2) (.6)
----- ----- -----
Total 26.2 (.8) 2.6
----- ----- -----
Effective income tax rate before effect of
extraordinary item 61.2 34.2 37.6
Tax effect of extraordinary item (20.4) -- --
----- ----- -----
Effective income tax rate 40.8% 34.2% 37.6%
===== ===== =====
</TABLE>
NOTE 3 - POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE
CILCO has recorded a liability of approximately $1.5 million and $1.4 million
at December 31, 1997 and 1996, respectively, for benefits other than pensions
or health care provided to former or inactive employees.
PENSION BENEFITS
Substantially all of CILCO's full-time employees, including those assigned to
the Holding Company, are covered by trusteed, non-contributory defined
benefit pension plans. Benefits under these qualified plans reflect the
employee's years of service, age at retirement and maximum total compensation
for any consecutive sixty-month period prior to retirement. CILCO also has
an unfunded nonqualified plan for certain employees.
Pension costs for the past three years were charged as follows:
<TABLE>
<CAPTION> 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Operating expenses $493 $ 9,700 $15,528
Utility plant and other 125 922 994
---- ------- ------
Net pension costs $618 $10,622 $16,522
==== ======= ======
</TABLE>
Provisions for pension expense reflect the use of the projected unit credit
actuarial cost method. At December 31, 1997 and 1996, CILCO recognized an
additional minimum liability on the Balance Sheets for the plan in which the
accumulated benefit obligation exceeds the fair value of plan assets.
The components of net periodic pension costs follows:
<TABLE>
<CAPTION> 1997 1996
(In thousands)
<S> <C> <C>
Cost of pension benefits earned by employees $ 4,384 $ 4,998
Interest cost on projected benefit obligation 17,561 16,666
Actual return on plan assets (51,534) (34,173)
Net amortization and deferral 30,207 15,213
Special termination benefits -- 7,918
------- -------
Net pension costs $ 618 $10,622
======= =======
</TABLE>
During 1996, CILCO recognized $7.9 million of net pension costs in accordance
with Statement of Financial Accounting Standards No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits." This amount represented the costs associated
with additional benefits extended in connection with a voluntary early
retirement program.
Information on the funded status of plans in which assets exceed accumulated
benefits follows:
<TABLE>
<CAPTION>
Actuarial present value of benefit 1997 1996
obligation: (In thousands)
<S> <C> <C>
Vested benefits - employees' rights to receive
benefits no longer contingent upon continued
employment $(200,232) $(191,301)
Non-vested benefits - employees' rights to
receive benefits contingent upon continued
employment (15,287) (11,293)
--------- ---------
Accumulated benefit obligation (215,519) (202,594)
Provisions for future pay increases (35,718) (30,224)
--------- ---------
Projected benefit obligation (251,237) (232,818)
Pension assets at fair market value 289,091 254,824
--------- ---------
Projected benefit obligation less than plan
assets 37,854 22,006
Unrecognized transition asset (4,899) (5,787)
Unrecognized prior service cost 6,978 8,006
Unrecognized net gain (49,341) (33,488)
--------- ---------
Pension liability recorded on Balance Sheets $ (9,408) $ (9,263)
========= =========
</TABLE>
Information on the funded status of the plan in which accumulated benefits
exceed assets follows:
<TABLE>
<CAPTION>
Actuarial present value of benefit 1997 1996
obligation: (In thousands)
<S> <C> <C>
Vested benefits - employees' rights to receive
benefits no longer contingent upon continued
employment $(2,614) $(1,938)
Non-vested benefits - employees' rights to
receive benefits contingent upon continued
employment (288) (169)
------ ------
Accumulated benefit obligation (2,902) (2,107)
Provision for future pay increases (790) (515)
------ ------
Projected benefit obligation (3,692) (2,622)
Pension assets at fair market value -- --
------- -------
Projected benefit obligation greater than plan
assets (3,692) (2,622)
Unrecognized prior service cost 455 495
Unrecognized net loss 1,911 1,111
Additional minimum liability (1,576) (1,091)
------- -------
Pension liability recorded on Balance Sheets $(2,902) $(2,107)
======= =======
</TABLE>
<TABLE>
<CAPTION>
Significant assumptions used for calculations: 1997 1996
<S> <C> <C>
Discount rate 7.25% 7.75%
Expected rate of salary increase 4.50% 4.50%
Expected long-term rate of return 8.50% 8.50%
</TABLE>
POSTRETIREMENT HEALTH CARE BENEFITS
Provisions for postretirement benefits expenses are determined under the
accrual method of accounting.
Substantially all of CILCO's full-time employees, including those assigned
to the Holding Company, are currently covered by a trusteed, non-
contributory defined benefit postretirement health care plan. The plan pays
stated percentages of most necessary medical expenses incurred by retirees,
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants become eligible for the benefits if
they retire from CILCO after reaching age 55 with 10 or more years of
service. QST Enterprises does not provide health care benefits to retired
employees.
Postretirement health care benefit costs were charged as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Operating expenses $3,989 $5,096 $5,108
Utility plant and other 1,825 1,883 1,882
------ ------ ------
Net postretirement health care
benefit costs $5,814 $6,979 $6,990
====== ====== ======
</TABLE>
Information on the plans' funded status follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Components of net postretirement health care
benefit costs:
Service cost - benefits attributed
to service during the period $ 1,298 $ 1,429
Actual return on plan assets (9,906) (4,290)
Interest cost on accumulated
postretirement health care
benefit obligation 5,047 4,545
Amortization of transition
obligation over 18.6 years 2,858 2,858
Other net amortization and
deferral 6,517 1,441
Special termination benefits -- 996
------- -------
Net postretirement health care
benefit costs $ 5,814 $ 6,979
======= =======
Actuarial present value of
accumulated postretirement health
care benefit obligation:
Retirees $(49,737) $(41,287)
Other fully eligible participants (3,368) (3,904)
Other active participants (19,437) (18,079)
------- -------
Accumulated postretirement health
care benefit obligation (72,542) (63,270)
Plan assets at fair value 52,263 39,601
------- -------
Accumulated health care benefit
obligation greater than plan
assets (20,279) (23,669)
Unrecognized actuarial gain (12,977) (13,447)
Unrecognized transition obligation 33,155 36,013
------- -------
Postretirement health care benefit
liability recorded on Balance
Sheets $ (101) $ (1,103)
======= =======
</TABLE>
For measurement purposes, the annual health care cost trend rate averaged
7.2% for 1997; the rate was assumed to decrease gradually to 5.7% by 2025
and remain at that level thereafter.
Increasing the assumed health care cost trend rate by 1% in each year would
increase the accumulated postretirement benefit obligation at
December 31, 1997, by $3.0 million and the aggregate of the service and
interest cost components of net postretirement health care cost for 1997 by
$268,000. The discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1997, was 7.25% and at
December 31, 1996, was 7.75%. The weighted average expected return on
assets net of taxes was 8.1%, where taxes are assumed to decrease return by
.4%.
NOTE 4 - CILCORP SHAREHOLDER RETURN INCENTIVE COMPENSATION PLAN
Under the Company's Shareholder Return Incentive Compensation Plan (the
Plan), eligible key employees of the Company and its subsidiaries are
entitled to receive shares of the Company's common stock based on a
performance methodology established and periodically amended by the
Compensation Committee of the Company's Board of Directors. During 1997,
350,000 fully-vested performance shares were distributed. Such shares are
convertible into common stock at any time until December 31, 1998. The
number of common shares received is based upon the number of performance
shares exercised multiplied by the difference between the average market
price of the Company's common stock for the fifteen days prior to exercise
and $36, divided by the market price of common stock at the exercise date.
The compensation expense recognized under this plan, based on the
provisions of Statement of Financial Accounting Standards No. 123, was $1.8
million in 1997. The fair value of each performance share granted under
the Plan was $5.98 - estimated using the Black-Scholes option-pricing model
assuming a risk-free interest rate of 5.7%, dividend yield of 5.9%,
expected life of one year and volatility of 16.1%.
NOTE 5 - SHORT-TERM DEBT
Short-term debt at December 31, 1997, consisted of $40.9 million of Holding
Company bank borrowings and $21.3 million of CILCO commercial paper. Short-
term debt at December 31, 1996, included $18 million of Holding Company
bank borrowings and $9.9 million of CILCO commercial paper.
The Holding Company had arrangements for bank lines of credit totaling
$60 million at December 31, 1997, of which $40.9 million was used. These
lines were maintained by commitment fees of 1/8 of 1% per annum in lieu of
balances.
CILCO had arrangements for bank lines of credit totaling $30 million at
December 31, 1997, all of which were unused. These lines of credit were
maintained by commitment fees of 1/20 of 1% per annum in lieu of balances.
These bank lines of credit support CILCO's issuance of commercial paper.
NOTE 6 - LEVERAGED LEASE INVESTMENTS
The Company, through subsidiaries of CILCORP Investment Management Inc.
(CIM), is a lessor in eight leveraged lease arrangements under which mining
equipment, electric production facilities, warehouses, office buildings,
passenger railway equipment and an aircraft are leased to third parties.
The economic lives and lease terms vary with the leases. CIM's share of
total equipment and facilities cost was approximately $350 million at
December 31, 1997, and $305 million at December 31, 1996.
The cost of the equipment and facilities owned by CIM is partially financed
by non-recourse debt provided by lenders, who have been granted, as their
sole remedy in the event of a lessee default, an assignment of rents due
under the leases and a security interest in the leased property. Such debt
amounted to $237 million at December 31, 1997, and $208 million at
December 31, 1996. Leveraged lease residual value assumptions, which are
conservative in relation to independently appraised residual values of the
lease portfolio, are tested on a periodic basis. CIM's net investment in
leveraged leases at December 31, 1997 and 1996 is shown below:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Minimum lease payments receivable $136,916 $122,669
Estimated residual value 94,367 94,368
Less: Unearned income 84,826 84,007
-------- --------
Investment in lease financing
receivables 146,457 133,030
Less: Deferred taxes arising from
leveraged leases 101,005 97,964
-------- --------
Net investment in leveraged leases $ 45,452 $ 35,066
======== ========
</TABLE>
NOTE 7 - PREFERRED STOCK
PREFERRED STOCK OF SUBSIDIARY
<TABLE>
<CAPTION>
At December 31 1997 1996
(In thousands)
<S> <C> <C>
Preferred stock, cumulative
$100 par value, authorized 1,500,000 shares
Without mandatory redemption
4.50% series - 111,264 shares $11,126 $11,126
4.64% series - 79,940 shares 7,994 7,994
Class A, no par value, authorized
3,500,000 shares
Flexible auction rate - 250,000
shares (*) 25,000 25,000
With mandatory redemption
5.85% series - 220,000 shares 22,000 22,000
------- -------
Total preferred stock $66,120 $66,120
======= =======
<FN>
(*) Dividend rates at December 31, 1997 and 1996, were 4.18% and 4.05%,
respectively.
</TABLE>
All classes of preferred stock are entitled to receive cumulative dividends
and rank equally as to dividends and assets, according to their respective
terms.
The total annual dividend requirement for preferred stock outstanding at
December 31, 1997, is $3.2 million, assuming a continuation of the auction
dividend rate at December 31, 1997, for the flexible auction rate series.
PREFERRED STOCK WITHOUT MANDATORY REDEMPTION
The call provisions of preferred stock redeemable at CILCO's option outstanding
at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Series Callable Price Per Share (plus accrued dividends)
<S> <C>
4.50% $110
4.64% $102
Flexible Auction Rate $100
</TABLE>
PREFERRED STOCK WITH MANDATORY REDEMPTION
CILCO's 5.85% Class A preferred stock may be redeemed in 2003 at $100 per share.
A mandatory redemption fund must be established on July 1, 2003. The fund will
provide for the redemption of 11,000 shares for $1.1 million on July 1 of each
year through July 1, 2007. On July 1, 2008, the remaining 165,000 shares will
be retired for $16.5 million.
PREFERENCE STOCK OF SUBSIDIARY, CUMULATIVE
No Par Value, Authorized 2,000,000 shares, of which none have been issued.
PREFERRED STOCK OF HOLDING COMPANY
No Par Value, Authorized 4,000,000 shares, of which none were outstanding at
December 31, 1997 and 1996.
COMMON STOCK RIGHTS
On October 29, 1996, the Board of Directors of CILCORP authorized and declared a
dividend distribution of one right for each share of common stock of the Company
to stockholders of record at November 12, 1996, and for each share of common
stock issued thereafter. Each right gives the stockholder the right to purchase
one one-hundredth of a share of preferred stock of the Company for $100, subject
to the conditions set forth in the agreement governing the rights plan.
NOTE 8 - LONG-TERM DEBT
<TABLE>
<CAPTION>
At December 31 1997 1996
(In thousands)
<S> <C> <C>
CILCO first mortgage bonds
7 1/2% series due 2007 $ 50,000 $ 50,000
8 1/5% series due 2022 65,000 65,000
Medium-term notes
5.7% series due 1998 -- 10,650
6.4% series due 2000 30,000 30,000
6.82% series due 2003 25,350 25,350
6.13% series due 2005 16,000 16,000
7.8% series due 2023 10,000 10,000
7.73% series due 2025 20,000 20,000
Pollution control refunding bonds
6.5% series F due 2010 5,000 5,000
6.2% series G due 2012 1,000 1,000
6.5% series E due 2018 14,200 14,200
5.9% series H due 2023 32,000 32,000
-------- --------
268,550 279,200
Unamortized premium and discount on
long-term debt, net (714) (761)
-------- --------
Total CILCO $267,836 $278,439
-------- --------
CILCORP Inc. Unsecured medium-term notes;
various maturities 1999 through 2001;
interest rates ranging from 8.33% to
9.10% 30,500 42,000
Other 192 227
-------- --------
Total long-term debt $298,528 $320,666
======== ========
</TABLE>
CILCO's first mortgage bonds are secured by a lien on substantially all of
its property and franchises. Unamortized borrowing expense, premium and
discount on outstanding long-term debt are being amortized over the lives
of the respective issues.
Total consolidated maturities of long-term debt for 1999-2001 are
$13 million, $30 million and $18 million, respectively. The remaining
maturities of long-term debt of $238 million, occur in 2003 and beyond.
The 1998 and 1997 maturities of long-term borrowings have been classified as
current liabilities.
NOTE 9 - COMMITMENTS & CONTINGENCIES
CILCO's 1998 capital expenditures are estimated to be $51.1 million and
QST's are estimated to be $9 million, in connection with which CILCO and
QST have normal and customary purchase commitments at December 31, 1997.
CILCO and QST act as self-insurers for certain insurable risks resulting
from employee health and life insurance programs.
In August 1990, CILCO entered into a firm, wholesale power purchase
agreement with Central Illinois Public Service Company, now AmerenCIPS
(CIPS). This agreement provides for a minimum contract delivery rate from
CIPS of 90 MW until the contract expires in 1998.
In March 1995, CILCO and CIPS renegotiated a limited-term power agreement
reached in November 1992. This agreement, which now expires in May 2009,
provides for CILCO to purchase up to 150 MW of CIPS' capacity from June 1998
through May 2002, and 50 MW from June 2002 through May 2009.
In January 1997, CILCO intervened in a proceeding pending before the FERC
to challenge the validity of the power agreements with CIPS because of
CIPS' failure to obtain FERC approval of the agreements. In the
alternative, CILCO requested that FERC provide an "open season" during
which CILCO may cancel the power agreements in whole or in part. In an
order issued in October 1997, FERC rejected the challenge to the validity
of the agreements and denied CILCO's request for an open season. However,
FERC ordered CIPS to file the agreements with FERC and on its own motion
initiated a separate proceeding to investigate the terms of the agreements.
In February 1998, FERC denied CILCO's request for a rehearing of the
October order, but directed that issues related to the justness and
reasonableness of the argument be reviewed.
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations, Environmental Matters (regarding
former gas manufacturing sites) for a discussion of that item.
NOTE 10 - QST ENVIRONMENTAL DISCONTINUED OPERATIONS
On November 20, 1997, QST Environmental sold substantially all the assets of
its wholly-owned subsidiary, ESE Land Corporation, for $9.5 million in cash
and residual interests in three newly-formed limited liability corporations.
Accordingly, the discontinued activities are shown as discontinued
operations in the statement of earnings. Prior year financial statements
have been reclassified to conform to the current year presentation.
NOTE 11 - LEASES
The Company and its subsidiaries lease certain equipment, buildings and
other facilities under capital and operating leases. Several of the
operating leases provide that the Company pay taxes, maintenance and other
occupancy costs applicable to these premises.
Minimum future rental payments under non-cancellable capital and operating
leases having remaining terms in excess of one year as of December 31, 1997,
are $23.2 million in total. Payments due during the years ending December
31, 1998, through December 31, 2002, are $8.2 million, $6.5 million, $3.7
million, $2.6 million and $2.0 million, respectively.
NOTE 12 - FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT
CILCO utilizes various commodity-based financial instruments (futures
contracts, options and swaps) to reduce the impact of natural gas price
fluctuations related to natural gas supply and its storage program, including
the price risk related to physical location of natural gas (basis risk). This
program is designed to provide a higher level of price stability relative to
winter market prices for natural gas injected in CILCO-owned storage fields.
CILCO hedged approximately 19% of its owned natural gas storage in 1997.
In hedging the acquisition cost of gas injected into storage, gain or loss on
derivative financial instruments is deferred as an adjustment to gas in
underground storage on the balance sheet. As natural gas is withdrawn from
storage, these gains or losses are passed to customers through the PGA, which
is included in Gas Purchased for Resale on the income statement. If a
derivative financial instrument contract is terminated early for any reason,
including regulatory concerns, any gain or loss resulting will be deferred and
recorded concurrent with the related purchases and sales of natural gas. In
December 1997, CILCO suspended the storage hedging program and closed out all
open futures and options positions due to the uncertainty of future recovery
of costs through the PGA. At December 31, 1997, CILCO had open positions in
derivative financial instruments used to hedge basis of 1.4 billion cubic feet
(Bcf).
QST utilizes commodity futures contracts, options, and swaps in the normal
course of its natural gas business activities. Gains and losses arising from
derivative financial instrument transactions which hedge the impact of
fluctuations in energy prices are recognized in income concurrent with the
related purchases and sales of natural gas. Realized and unrealized gains and
losses on derivative transactions which do not qualify as hedges are
recognized in income on a current basis. If a derivative financial
instruments contract is terminated because it is probable that a transaction
or forecasted transaction will not occur, any gain or loss as of such date is
immediately recognized. If a derivative financial instruments contract is
terminated early for other economic reasons, any gain or loss as of the
termination date is deferred and recorded concurrently with the related
purchases and sales of natural gas.
As of December 31, 1997, the fair value of natural gas derivative financial
instruments entered into for trading purposes was a loss of $.3 million and
the net open fixed price position of these financial instruments was balanced.
As of December 31, 1997, QST had open derivative financial instruments
representing hedges of natural gas sales of 20.5 Bcf and natural gas purchases
and inventories of 18.4 Bcf for commitments through 1998. The net deferred
loss on these derivatives as of December 31, 1997, was $.9 million. The net
loss reflected in operating results arising from financial instruments entered
into by QST for hedging and trading purposes was $.9 million for the year
ended December 31, 1997.
Physical and derivative financial instruments positions give rise to market
risk, which represents the potential loss that can be caused by a change in
the market value of a particular commitment. Market risks are actively
monitored to ensure compliance with risk management policies. Policies are in
place which limit the amount of the Company's total net exposure at any point
in time. Procedures exist which allow for the monitoring of all commitments
and positions with timely reporting to senior management.
NOTE 13 - EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock. The shares calculated for dilutive potential result
from the CILCORP Shareholder Incentive Compensation Plan.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Income available to common shareholders $16,395
Weighted average number of common shares used
in Basic Earnings Per Share 13,611
Weighted number of dilutive potential common
stock used in Diluted Earnings Per Share 16
</TABLE>
The Company has adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share, for the year ended December 31, 1997. Restatement of
years 1996 and 1995 is not applicable as no potential common stock dilution
occurred until 1997.
NOTE 14 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly operating results are unaudited, but, in the opinion
of management, include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the Company's operating
results for the periods indicated. The results of operations for each of
the fiscal quarters are not necessarily comparable to, or indicative of, the
results of an entire year due to the seasonal nature of the Company's
business and other factors. The sum of earnings per average common share
for the four quarters of 1996 does not equal the total for the year because
the average number of shares outstanding changed.
<TABLE>
<CAPTION>
For the Three Months Ended March 31 June 30 September 30 December 31
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1997
Revenue $192,206 $173,083 $228,503 $382,693
Income (loss) from
continuing operations
before income taxes 14,080 8,106 20,475 (17,934)
Income taxes 4,263 2,541 7,556 730
Net income (loss) from
continuing operations
before extraordinary
item 9,817 5,565 12,919 (18,664)
Income (loss) from
operations of
discontinued business,
net of tax of $(88),
$176, $107, $(254) (98) 252 155 (363)
Gain on sale of assets of
discontinued business,
net of tax of $1,889 -- -- -- 2,712
Extraordinary item -- -- -- 4,100
Net income (loss) $ 9,719 $ 5,817 $ 13,074 $(12,215)
Earnings per average
common share - basic and
diluted
Continuing operations $0.72 $0.41 $0.95 $(1.37)
Discontinued operations (0.01) 0.02 0.01 0.17
Extraordinary item -- -- -- 0.30
Net income (loss) $0.71 $0.43 $0.96 $(0.90)
1996
Revenue $177,977 $131,909 $138,547 $164,649
Income from continuing
operations before income
taxes 17,165 3,949 20,159 1,500
Income taxes 6,661 1,313 7,610 (950)
Net income from continuing
operations 10,504 2,636 12,549 2,450
Income (loss) from
operations of
discontinued business,
net of tax of $(72),
$(73), $(51), $67 (110) (109) (77) 100
Net income $ 10,394 $ 2,527 $ 12,472 $ 2,550
Earnings per average
common share - basic and
diluted
Continuing operations $0.79 $0.20 $0.93 $0.18
Discontinued operations (0.01) (0.01) (0.01) 0.01
Net income $0.78 $0.19 $0.92 $0.19
</TABLE>
Information related to the nine graphs included in the CILCORP Inc. Annual
Report in Management's Discussion and Analysis and Financial Statements follows.
A bar graph titled "Fixed Charge Coverage (Scale: # of Times)" depicting the
following information appears in the right hand column on Page 15 of
Management's Discussion and Analysis.
1993 2.4
1994 2.6
1995 2.7
1996 2.1
1997 1.8
A bar graph titled "Utility Plant Expenditures (Scale: $ Millions)" depicting
the following information appears in the left hand column on page 16 of
Management's Discussion and Analysis.
1993 73
1994 91
1995 70
1996 44
1997 55
A bar graph titled "Electric Sales (Scale: Millions of kilowatt-hours)"
depicting the following information appears in the left hand column on page 22
of Management's Discussion and Analysis. Each bar consists of four sections
which build on one another.
1997 1996 1995 1994 1993
BAR 1 RESIDENTIAL 1,725 1,713 1,783 1,672 1,664
BAR 2 COMMERCIAL 1,568 1,564 1,537 1,470 1,396
CUMULATIVE 3,293 3,277 3,320 3,142 3,060
BAR 3 INDUSTRIAL 2,140 2,123 2,325 2,303 2,238
CUMULATIVE 5,433 5,400 5,645 5,445 5,298
BAR 4 OTHER 909 783 270 390 234
CUMULATIVE 6,342 6,183 5,915 5,835 5,532
A bar graph titled "Cooling Degree Days Per Year Compared to Normal" depicting
the following information appears in the right hand column on page 23 of
Management's Discussion and Analysis. A horizontal bar depicting normal cooling
days is shown at approximately 1,058 days.
1993 1,056.0
1994 1,104.0
1995 1,222.0
1996 909.0
1997 953.0
A bar graph titled "Gas Sales (Scale: Millions of mcf)" depicting the following
information appears in the left hand column on page 24 of Management's
Discussion and Analysis. Each bar consists of three sections which build on one
another.
1997 1996 1995 1994 1993
BAR 1 RESIDENTIAL 19,593 21,547 20,080 18,929 20,263
BAR 2 COMMERCIAL 9,794 8,948 7,374 6,686 6,748
CUMULATIVE 29,387 30,495 27,454 25,615 27,011
BAR 3 INDUSTRIAL 2,538 1,659 1,242 1,186 756
CUMULATIVE 31,925 32,154 28,696 26,801 27,767
A bar graph titled "Heating Degree Days Per Year Compared to Normal" depicting
the following information appears in the right hand column on page 25 of
Management's Discussion and Analysis. A horizontal bar depicting normal heating
degree days is shown at approximately 5,891 days.
1993 5,882.0
1994 5,443.5
1995 5,920.5
1996 6,321.0
1997 5,966.5
Two pie charts titled "Consolidated Assets by Segment" as percentage of the
whole by year are printed on page 32 below the Asset portion of the Balance
Sheets.
1997 1997 1996 1996
Electric 725,093 54.3% 734,004 57.1%
Gas 296,373 22.2% 300,982 23.4%
Non-Regulated Energy &
Energy Services 97,869 7.3% 15,290 1.2%
Environmental and
Engineering Services 46,544 3.5% 79,202 6.2%
Other 168,940 12.7% 156,215 12.1%
Total 1,334,819 100.0% 1,285,693 100.0%
Two pie charts titled "Consolidated Capitalization Including Short-Term Debt" as
percentages of the whole by year are printed on page 33 below the Liability
portion of the Balance Sheets.
1997 1997 1996 1996
S-T Debt 84,335 11% 50,957 6%
L-T Debt 298,528 37% 320,666 41%
Preferred Stock 66,120 8% 66,120 8%
Common Stock 352,593 44% 368,205 45%
Total 801,576 100% 805,948 100%
Three pie charts titled "Consolidated Revenue by Component" as percentages of
the whole by year is printed on page 34 below the Statements of Segments of
Business.
1997 1997 1996 1996 1995 1995
Electric 338,096 35% 322,785 53% 326,198 53%
Gas 208,758 21% 195,770 32% 151,546 25%
Non-Regulated Energy &
Energy Services 346,290 36% 3,381 1% -- --
Environmental and
Engineering Services 72,235 7% 82,641 13% 122,962 20%
Other 11,106 1% 8,505 1% 9,466 2%
Total 976,485 100% 613,082 100% 610,172 100%
EMPLOYMENT AGREEMENT
This Agreement is effective as of September 23, 1997 between CILCORP
Inc., an Illinois Corporation with offices at 300 Hamilton Blvd., Suite 300,
Peoria, Illinois 61602 (the "Company") and
ROBERT O. VIETS
whose address is: 11305 Pawnee Road
Peoria, IL 61615
(the "Officer")
W I T N E S S E T H
WHEREAS, the Officer is employed by the Company as an officer of the
Company with the title and salary current at the effective date of this
Agreement as set forth in this Agreement; and
WHEREAS, the Company wishes to attract and retain highly qualified
executives and to achieve this goal it is in the best interests of the Company
to secure the continued services of the Officer; and
WHEREAS, the Company is willing, in order to provide the Officer a
measure of security with respect to his employment with the Company and to
encourage the Officer to remain employed by the Company, to agree that
employment of the Officer shall be terminable only "for Cause" as that term is
hereinafter defined; and
WHEREAS, the public utility industry is experiencing increasing
uncertainty as deregulation occurs at state and federal levels and by
providing the Officer a measure of security with respect to employment with
the Company, the Officer will be better able to perform the Officer's duties
in a manner that is consistent with the best interests of the Company and its
shareholders without the Officer being unduly concerned about his personal
financial security.
NOW, THEREFORE, the Company and the Officer agree as follows:
Employment
1.1 Term. The Company shall employ the Officer as President and
Chief Executive Officer and the Officer shall remain in employment with the
Company for a period of three years from the effective date of this Agreement
(the "Term") unless terminated prior to the expiration of the Term pursuant to
Section 2. Prior to the annual anniversary of the Effective date, the Board
of Directors of the Company shall review the Officer's performance, and may,
in its discretion, resolve to extend the Term for one or more additional
years, provided that the years remaining in the Term after such extension
shall not exceed three years. All such extensions shall be in writing and
executed by a representative of the Board other than the Officer.
1.2 Compensation. As compensation for services provided to the
Company by the Officer pursuant to this Agreement, the Company shall pay the
Officer an annual base salary of $410,000 which salary may be increased from
time to time by the Company (hereinafter referred to as "Compensation"). The
Officer shall also be eligible to participate in any other compensation and
benefit plans (whether provided by the Company or any of its affiliates)
generally available to executive employees of the Company of like grade and
salary including, but not limited to, retirement plans, group life,
disability, accidental death and dismemberment, travel and accident, and
health and dental insurance plans, incentive compensation plans, stock or
stock based compensation plans, deferred compensation plans, supplemental
retirement plans and excess benefit plans, but excluding the plans referred to
in Section 2.9 of this Agreement. Such other compensation and benefit plans
are hereinafter referred to collectively as the "Compensation and Benefit
Plans".
1.3 Duties. The Officer shall perform such duties and functions as
are assigned to him by: (i) the bylaws of the Company, as amended or
restated, (ii) the Board of Directors of the Company, (iii) a duly authorized
committee of the Board of Directors of the Company, or (iv) an officer of more
senior rank than the Officer.
1.4 Duty of Loyalty. The Officer shall work full-time for the Company
only, provided that:
(a) with the consent of the Board of Directors, he
may serve as a director of other business organizations, or
engage in charitable, civic and other similar activities;
and
(b) he may make such investments and reinvestment in
business activities as shall not require a substantial
portion of his time.
1.5 Duty Not to Disclose Confidential Information. The Officer
acknowledges that his relationship with the Company is one of high trust and
confidence and that he has access to Confidential Information (as hereinafter
defined) of the Company. The Officer shall not, directly or indirectly,
communicate, deliver, exhibit or provide any Confidential Information to any
person, firm, partnership, corporation, organization or entity, except as
required in the normal course of the Officer's duties or as required by law.
The duties contained in this paragraph shall be binding upon the Officer
during the time that he is employed by the Company and following the
termination of such employment for a period of ten years, provided that any
disclosure thereafter does not violate the Officer's fiduciary duty to the
Company. Such duties will not apply to any such Confidential Information
which is or becomes in the public domain through no action on the part of the
Officer, is generally disclosed to third parties by the Company without
restriction on such third parties, or is approved for release by written
authorization of the Board of Directors of the Company. The term
"Confidential Information" shall mean any and all confidential, proprietary,
or secret information relating to the Company's business, services, customers,
business operations, strategies, or activities and any and all trade secrets,
products, methods of conducting business, information, skills, knowledge,
ideas, know-how or devices used in, developed by, or pertaining to the
Company's business and not generally known, in whole or in part, in any trade
or industry in which the Company is engaged.
Termination
2.1 Termination of Agreement. Unless sooner terminated in accordance
with the terms of this Section 2, this Agreement shall terminate at the
expiration of the Term, and all obligations of the Company hereunder shall
terminate except as specifically set forth in Section 2.5. The Officer may,
with the consent of the Company, continue in the employ of the Company after
the expiration of the Term on such terms and conditions as may be agreed upon
by the Company and the Officer.
2.2 Termination by the Officer. The Officer may voluntarily terminate
this Agreement by providing two weeks notice to the Company, in which event
the Company shall have no further obligation to the Officer hereunder from the
date of such termination (except the payment of any accrued benefits), and the
Officer shall have no further obligation to the Company hereunder except the
duty to not disclose Confidential Information in accordance with Section 1.5.
In the event the Officer's employment with the Company is terminated due to
the Officer's death, the Company shall have no further obligation to the
Officer, his heirs or legatees hereunder from the date of such termination,
except to pay any benefits due under the Compensation and Benefit Plans. In
the event the Officer's employment with the Company is terminated due to the
Officer's
Permanent Disability, the Company shall have no further obligation to the
Officer, except to pay any benefits due under the Compensation and Benefit
Plans.
For purposes of this Agreement, the term "Permanent Disability" means a
physical or mental condition of the Officer which, in the Company's
determination:
(a) has continued uninterrupted for six months;
(b) is expected to continue indefinitely; and
(c) renders the Officer incapable of adequately
performing his duties under Section 1.3 of this Agreement.
Prior to any final determination that the Officer has a Permanent
Disability, the Board shall provide reasonable notice to the Officer of its
intent to determine whether the Officer has a Permanent Disability and afford
the Officer, along with any counsel, the opportunity to address the Board.
2.3 Termination by the Company With Cause. The Company may
terminate this Agreement for Cause. For purposes of this Agreement, Cause
shall mean:
(a) the Officer's willful and material breach of the
provisions of this Agreement, other than such breach
resulting from incapacity due to physical or mental
disability, after the Board of Directors delivers a written
demand to cure such breach which specifically identifies the
manner in which the Board of Directors believes that the
Officer has not substantially performed his duties, and a 30-
day period has passed in which the breach has not been
cured, or
(b) the Officer willfully engages in illegal conduct
or gross misconduct which, in either case, injures the
Company.
For purposes of this determining whether "Cause" exists, no act or failure to
act, on the Officer's part shall be considered "willful," unless it is done,
or omitted to be done, by the Officer in bad faith or without reasonable
belief by the Officer that his action or omission was in the best interests of
the Company. Any act or failure to act, based upon authority given pursuant
to a resolution adopted by the Board of Directors shall be conclusively
presumed to be done, or omitted to be done, by the Officer in good faith and
in the best interests of the Company. The cessation of the Officer's
employment shall not be deemed for "Cause," unless and until the Officer
receives a copy of a resolution adopted by the affirmative vote of not less
than two-thirds of the membership of the Board of Directors, who are not
employees of the Company or a direct or indirect subsidiary of the Company, at
a meeting of the Board of Directors called and held for such purpose (after
reasonable notice is provided to the Officer, and the Officer is given the
opportunity, together with counsel, to be heard before the Board of
Directors), finding that, in the good faith opinion of the Board of Directors,
the Officer's termination is for Cause.
In the event of the Officer's termination for Cause, the Company will
have no further obligation to the Officer under the Agreement from the date of
such termination (except the payment of any accrued benefits).
2.4 Termination by the Company without Cause. If, prior to the
expiration of the Term,
(a) the Officer's employment hereunder is
terminated by the Company other than for Cause, as defined
in Section 2.3; or
(b) the Officer resigns from his employment
hereunder upon thirty days written notice given to the
Company within thirty days following
(i) a reduction in the compensation or a
material and substantial reduction in benefits
provided pursuant to this Agreement or the
Compensation and Benefit Plans, other than a reduction
in incentive compensation or benefits that are
generally applicable to senior officers of the
Company, or
(ii) notice to the Officer of a change of
the Officer's principal place of employment without
his consent to a city different from the city which is
the principal place of the Officer's employment,
then the Officer shall be entitled to receive the damage payments described in
Section 2.5. The date of the Officer's termination of employment under
subsection (a) or (b) shall be referred to in this Agreement as the
"Termination Date."
2.5 Damage Payments. Upon any of the events described in Section 2.4,
the Company shall, as damages for not honoring the terms of this Agreement,
pay the Officer Compensation and benefits for the three year period
immediately following the Termination Date (the "Continuation Period"), as
follows:
(a) during the Continuation Period, the Officer
shall (i) continue to receive Compensation under Section
1.2, and (ii) continue to participate in the Compensation
and Benefit Plans, except as otherwise provided below, that
he participated in as of the Termination Date as though he
continued in the employment of the Company, provided,
however, that any benefit to be provided by a Compensation
and Benefit Plan may be provided by the Company through cash
of equivalent value or through a nonqualified arrangement or
arrangements if, in the judgment of the Company, permitting
the Officer to participate in such plan after the
Termination Date would adversely affect the tax status of
such plan; and
(b) the Officer shall receive a payment which is
equal to: (i) the sum of the Officer's last three annual
incentive awards (expressed as a dollar value) under the
Company's EVA-Based Incentive Compensation Plan or similar
annual incentive compensation plan applicable to the
Officer, and (ii) the Officer's Award Bank balance, less any
amounts used to prime the Award Bank, from the Company's EVA
Based Incentive Compensation Plan. In the event that the
Officer has been covered by an annual incentive compensation
plan for less than three years, the amount of payment in
Section 2.5(b)(i) shall be the product of three and an
arithmetical average based on the actual amount of annual
awards received by the Officer divided by the number of
years the Officer was covered by the annual incentive
compensation plan.
To the extent damages to be provided pursuant to this Section 2.5 are
determined on the basis of the Officer's base salary, the base salary to be
used to determine such damages after the Officer's Termination Date shall be
the greater of the Officer's base salary used to determine such damages
immediately prior to any reduction in base salary following which the Officer
elected to terminate employment pursuant to Section 2. 4(b) of this Agreement,
or the Officer's base salary used to determine such damages immediately prior
to the Officer's Termination Date. To the extent damages payable pursuant to
this Section 2.5, including, not by way of limitation, retiree health care and
pension benefits, are determined by reference to the Officer's years of
service with the Company, such as the determination of the Officer's accrued
benefits under the Company's qualified or nonqualified retirement plans, such
years of service shall be determined by including years that occur during the
Continuation Period.
For purposes of determining an Officer's right under this Section 2.5 to
accrue benefits during the Continuation Period under the Central Illinois
Light Company Management, Office and Technical Employees' Retirement Plan (the
"Retirement Plan") or Benefit Replacement Plan, the Officer's accrued benefits
(including any early retirement subsidies, if applicable) shall be calculated
by taking into account the years of service that the Officer would have
accrued during the Continuation Period and the Officer's compensation, as such
term is defined in the Retirement Plan ("Retirement Compensation"), payable
for the Continuation Period.
2.6 Non-Compete Provisions. As consideration for the first year of
the three years of damage payments set forth in Section 2.5 of this Agreement,
the Officer agrees not to compete with the Company, its affiliates and
subsidiaries pursuant to the following terms and conditions. For a period
of one year following the Termination Date, the Officer shall not engage in
any employment activity or directly or indirectly own (except for passive
investments in which the Officer owns less than a 5% ownership interest),
manage, operate, control or be employed by, participate in or be connected in
any manner with the ownership, operation or control of any business that
engages in the sale, supply, transmission, or distribution of electricity,
natural gas, or other forms of energy, which are competitive with or
substantially similar to the services or products of the Company, its
subsidiaries and other affiliates, at any location in the State of Illinois.
If any court shall determine that the duration or geographical limit of any
restriction contained in this covenant not to compete (the "Covenant") is
unenforceable under applicable law, this Covenant shall not thereby be
terminated, but shall be deemed amended to the extent required to render it
valid and enforceable, such amendment to apply only with respect to the
operation of the Covenant in the jurisdiction of the Court that has made such
determination.
Other than amendments that are deemed to be made pursuant to the
preceding paragraph of this Agreement, no change or modification of this
Covenant shall be valid unless the same be in writing and signed by the
Company and Officer.
Upon a breach by Officer of this Covenant, the Company shall be entitled
to recover, as liquidated damages, the first year of damage payments to be
made to the Officer pursuant to Section 2.5 of this Agreement. This amount
shall be deducted from the payments due to the Officer pursuant to Section 2.5
of this Agreement. In the event that all payments pursuant to Section 2.5
have been made to the Officer, the Officer shall pay the aforementioned amount
to the Company. The Company shall also be entitled to seek injunctive relief
to prevent the Officer's continued breach of this Covenant.
2.7 Timing of Payments. All salary payments to be made by the Company
pursuant to Section 2.5 shall be made in monthly installments during the
Continuation Period, according to the Company's regular payroll practices and
procedures. Any lump-sum payment to be made to the Officer shall be equal to
the present value of the payments otherwise payable to the Officer, using an
interest rate assumption equal to the annual, short-term, adjusted applicable
federal interest rate, as determined for the month during which the lump-sum
payment is made pursuant to Section 1274(d) of the Internal Revenue Code of
1986 (the "Code"), except that the lump-sum payment of any nonqualified
retirement benefit payable to the Officer shall be calculated pursuant to the
actuarial assumptions of the Retirement Plan in effect on the Termination
Date. The Company shall withhold any applicable taxes from any amounts
payable to the Officer pursuant to this Agreement, which the Company
determines, in good faith, it is required to withhold pursuant to applicable
law.
2.8 Officer's Costs of Enforcement. The Company shall pay all
expenses of the Officer, including but not limited to attorney fees, incurred
in enforcing the Company's obligations pursuant to this Agreement.
2.9 Waiver of Other Termination Benefits; Execution of Release and
Covenant Not To Sue. By executing this Agreement, the Officer waives,
renounces, and forfeits any and all rights to participate in or receive
benefits from any employment severance plan or compensation protection plan
(including the CILCO, QST and CILCORP Compensation Protection Plans), whether
in existence at the time of execution or at any time thereafter. The Company
reserves the right to condition the payment of any amounts under this
Agreement on the Officer's execution of a Release and Covenant Not To Sue.
2.10 Mitigation of Damages. If the Officer becomes entitled to
payments under Section 2.5 of this Agreement, the Officer shall make
reasonable efforts to mitigate damages by seeking other employment of
substantially equal dignity, importance and character as the highest position
which the Officer had held with the Company. The Officer also shall not be
required to accept any position which would involve competition with the
company or disclosure of company confidential information. The Officer also
shall not be required to accept any position outside of the State of Illinois.
To the extent that the Officer shall actually receive compensation or
benefits from such other employment described in this Section, the payments
made to the Officer under Section 2.5 of this Agreement shall be
correspondingly reduced, but not below the amount payable pursuant to Section
2.6 of this Agreement.
2.11 Additional Payments to Officer. In the event it shall be
determined that any payment by the Company (other than payments pursuant to
the terms of a retirement plan qualified under Section 401(a) of the Code in
which employees of the Company participate) to or for the benefit of the
Officer (whether paid or payable pursuant to the terms of this Agreement, but
determined without regard to any additional payments required by this Section
2.11) (a "Payment") would be subject to the excise tax imposed by Section 4999
of the Code or any interest or penalties are incurred by the Officer with
respect to such excise tax (such excise tax, together with any such interest
and penalties are hereinafter collectively referred to as the "Excise Tax"),
then the Officer shall be entitled to receive an additional payment (an
"Additional Payment") in an amount such that after payment by the Officer of
all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the
Additional Payment, the Officer retains an amount of the Additional Payment
equal to the Excise Tax imposed upon the Payments. The amount of the
Additional Payment shall be determined as set forth in Exhibit "A" to this
Agreement.
Miscellaneous
3.1 Assignment of Officer's Rights The Officer may not assign, pledge
or otherwise transfer any of the benefits of this Agreement either before or
after termination of employment, and any purported assignment, pledge or
transfer of any payment to be made by the Company hereunder shall be void and
of no effect. No payment to be made to the Officer hereunder shall be subject
to the claims of creditors of the Officer.
3.2 Agreements Binding on Successors. This Agreement shall be binding
and inure to the benefit of the parties hereto and their respective
successors, assigns, personal representatives, heirs, legatees and
beneficiaries.
3.3 Notices. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing and sent by first class mail to
the Officer or the Company at his or its address as set forth above, or to
such other address of which either the Officer or the Company shall notify the
other in writing.
3.4 Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by either the Officer or the Company.
3.5 Entire Agreement. This Agreement contains the entire
understanding of the parties. Except as provided in Section 2.6 of this
Agreement, it may be modified or amended only by an agreement in writing
signed by the party against whom enforcement of any change or amendment is
sought.
3.6 Severability of Provisions. If for any reason any paragraph, term
or provision of this Agreement is held to be invalid or unenforceable, all
other valid provisions herein shall remain in full force and effect and all
paragraphs, terms and provisions of this Agreement shall be deemed to be
severable in nature.
3.7 Governing Law. This Agreement is made in, and shall be governed
by, the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first set forth above.
CILCORP INC.
Attest:
By:
Secretary
Its:
Chairman, Compensation Committee
of the Board of Directors
OFFICER
EXHIBIT "A"
Subject to the remaining provisions of this Exhibit A, all
determinations required to be made under Section 2.11, including whether and
when an Additional Payment is required and the amount of such Additional
Payment and the assumptions to be utilized in arriving at such determination,
shall by made by an accounting firm designated by the Company (the "Accounting
Firm"). All fees and expenses of the Accounting Firm shall be borne by the
Company. Any Additional Payment, as determined pursuant to this Exhibit A,
shall be paid by the Company to the Officer within thirty days of the receipt
of the Accounting Firm's determination. Any determination by the Accounting
Firm shall be binding upon the Company and the Officer. As a result of
possible uncertainty in the application of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
Additional Payments which will not have been made by the Company should have
been made (an "Underpayment"), consistent with the calculations required to be
made hereunder. In the event that the Company exhausts its remedies pursuant
to provisions of this Exhibit A below, and the Officer thereafter is required
to make a payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Underpayment that has occurred and any such Underpayment shall
be promptly paid by the Company to or for the benefit of the Officer.
The Officer shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Additional Payment or Underpayment. Such notification shall be
given as soon as practicable but no later than ten business days after the
Officer is informed in writing of such claim and shall apprise the Company of
the nature of such claim and the date on which such claim is requested to be
paid. The Officer shall not pay such claim prior to the expiration of the
thirty day period following the date on which he gives such notice to the
Company (or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If the Company notifies the Officer in
writing prior to the expiration of such period that it desires to contest such
claim, the Officer shall:
(a) give the Company any information reasonably
requested by the Company relating to such claim,
(b) take such action in connection with contesting
such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by
an attorney selected by the Company,
(c) cooperate with the Company in good faith in
order to effectively contest such claim, and
(d) permit the Company to participate in any
proceedings relating to such claim,
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Officer harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing, the
Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the Officer
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Officer agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Officer to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Officer, on an interest-free basis and shall indemnify and hold
the Officer harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such
advance; and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Officer with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which an Additional Payment or Underpayment
would be payable hereunder and the Officer shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
If, after the receipt by the Officer of any amount advanced by the
Company pursuant to the preceding paragraph, the Officer becomes entitled to
receive any refund with respect to such claim, the Officer shall (subject to
the Company's complying with the requirements of the preceding paragraph)
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after
the receipt by the Officer of an amount advanced by the Company pursuant to
the preceding paragraph, a determination is made that the Officer shall not be
entitled to any refund with respect to such claim and the Company does not
notify the Officer in writing of its intent to contest such denial of refund
prior to the expiration of thirty days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount of the
Additional Payment or Underpayment required to be paid.
CENTRAL ILLINOIS LIGHT COMPANY
BENEFIT REPLACEMENT PLAN
(Effective January 1, 1991)
Amended Effective January 1, 1997
CENTRAL ILLINOIS LIGHT COMPANY
BENEFIT REPLACEMENT PLAN
(Amended Effective January 1, 1997)
TABLE OF CONTENTS
Article I. Establishment and Construction
1.1 The Plan and its Effective Date 1
1.2 Purpose 1
1.3 Application of the Plan 1
Article II. Definitions and Construction
2.1 Definitions 2
2.2 Gender and Number 6
2.3 Severability 6
2.4 Applicable Law 6
Article III. Participation
3.1 Eligibility 7
3.2 Participation in the Plan 7
Article IV. Benefits
4.1 Benefits 8
4.2 Vesting 9
4.3 Timing and Form of Retirement Benefits 9
4.4 Death Benefits 10
Article V. Financing
5.1 Unfunded Plan 12
5.2 Grantor Trust 12
5.3 Unsecured Interest 12
5.4 Nonalienation 12
Article VI. Administration
6.1 Administration 13
6.2 No Enlargement of Employee Rights 13
6.3 Appeals from Denial of Claim 13
6.4 Notice of Address and Missing Persons 14
6.5 Data and Information for Benefits 15
6.6 Indemnity for Liability 15
6.7 Tax Liability 15
Article VII. Amendment and Termination
7.1 Amendment 17
7.2 Termination 17
7.3 Change in Control 17
Article VIII. Participation in and Withdrawal
from the Plan by an Employer
8.1 Participation in the Plan Withdrawal from the Plan 18
8.2 Withdrawal from the Plan 19
CENTRAL ILLINOIS LIGHT COMPANY
BENEFIT REPLACEMENT PLAN
(Amended Effective January 1, 1997)
Article I. Establishment and Construction
1.1 The Plan and its Effective Date. The CENTRAL ILLINOIS LIGHT COMPANY
BENEFIT REPLACEMENT PLAN (the "Plan") is hereby established by Central
Illinois Light Company (the "Company") effective January 1, 1991.
1.2 Purpose. The purpose of the Plan is to provide each Eligible
Employee of the Employer with additional retirement income that, when combined
with retirement benefits payable from the Pension Plan For Management, Office
and Technical Employees of Central Illinois Light Company ("MOT Plan"), will
equal the retirement benefit such Eligible Employee would have received if he
continued to accrue benefits under the MOT Plan through the date of his actual
retirement, but without regard to(a)the limitations imposed under Code
sections 415 and 401(a)(17), or (b) the exclusion of amounts deferred under
the Central Illinois Light Company Executive Deferral Plan and the Central
Illinois Light Company Executive Deferral Plan II (collectively "EDP Plans"),
and the Central Illinois Light Company Deferred Compensation Stock Plan from
the definition of "Earnings" under the MOT Plan.
1.3 Application of the Plan. The provisions of this Plan are applicable
only to those Eligible Employees who, on or after January 1, 1991, are either
(a) in the active employ of the Employer or (b) retired key management and
executive staff who are receiving or who are eligible to receive benefit
payments under the EDP Plans. Any other Eligible Employee who retired or whose
active employment relationship with the Employer was terminated prior to
January 1, 1991 shall not be covered under this Plan.
Article II. Definitions and Construction
2.1 Definitions. The terms used in this Plan shall have the same meaning
set forth below, except as otherwise indicated herein. The definition of any
term in the singular shall also include the plural.
(a) "Actuarial Equivalent" means a benefit having the same value as
the benefit which it replaces, computed on the basis of the
factors specified in the definition of "Actuarial Equivalent" in
the MOT Plan.
(b) "Affiliate" means any subsidiary or affiliated or associated
corporation of the Company that is an "Affiliate" within the
meaning of that term in the MOT Plan.
(c) "Average Monthly Earnings" means "Average Monthly Earnings" as
defined under the MOT Plan.
(d) "Change in Control" means the occurrence of any of the following:
(1) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of
30% or more of either (i) the then outstanding shares of
common stock of CILCORP (the "Outstanding CILCORP Common
Stock") or (ii) the combined voting power of the then
outstanding voting securities of CILCORP entitled to vote
generally in the election of directors (the "Outstanding
CILCORP Voting Securities"); provided, however, that for
purposes of this subsection (a), the following acquisitions
shall not constitute a Change in Control: (i) any
acquisition directly from CILCORP, (ii) any acquisition by
CILCORP or an affiliate of CILCORP, (iii) any acquisition by
any employee benefit plan (or related trust) sponsored or
maintained by CILCORP or any corporation controlled by
CILCORP (a "CILCORP Affiliate") or (iv) any acquisition by
any Person pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (3) of this
Section; or
(2) The failure for any reason of individuals who, as of the
date hereof, constitute the Board of Directors of CILCORP
(the "Incumbent Board") to constitute at least a majority of
the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or
nomination for election by CILCORP shareholders, was
approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual
or threatened election contest with respect to the election
or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(3) Approval by the shareholders of CILCORP of a reorganization,
merger, joint venture or consolidation or sale or other
disposition of all or substantially all of the assets of
CILCORP (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or
substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding
CILCORP Common Stock and Outstanding CILCORP Voting
Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting
from such Business Combination (including, without
limitation, a corporation which as a result of such
transaction owns CILCORP or all or substantially all of
CILCORP's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of
the Outstanding CILCORP Common Stock and Outstanding CILCORP
Voting Securities, as the case may be, (ii) no Person
(excluding any employee benefit plan (or related trust) of
CILCORP, CILCORP Affiliate or such corporation resulting
from such Business Combination) beneficially owns, directly
or indirectly, 30% or more of, respectively, the then
outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of
such corporation except to the extent that such ownership
existed prior to the Business Combination, and (iii) at
least a majority of the members of the board of directors
of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action
of the Board, providing for such Business Combination: or
(4) Approval by the shareholders of CILCORP of a complete
liquidation or dissolution of CILCORP; or
(5) The acquisition by a Person of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange
Act) of more than 50% of either (i) the then outstanding
shares of common stock of the Employer (the "Outstanding
Employer Common Stock") or (ii) the combined voting power of
the then outstanding voting securities of the Employer
entitled to vote generally in the election of directors (the
"Outstanding Employer Voting Securities"); provided,
however, that for purposes of this subsection (e), the
following acquisitions shall not constitute a Change in
Control: (i) any acquisition directly from the Employer,
(ii) any acquisition by CILCORP or a CILCORP Affiliate,
(iii) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by CILCORP or a
CILCORP Affiliate or (iv) any acquisition by any corporation
pursuant to a transaction which complies with clauses (i)
and (ii) of subsection (f) of this Section; or
(6) Approval by the shareholders of the Employer of a
reorganization, merger, joint venture or consolidation or
sale or other disposition of all or substantially all of the
assets of the Employer, or a Business Unit (a "Spin-Off"),
in each case, unless, following such Spin-Off, (i) CILCORP
or a CILCORP Affiliate owns, directly or indirectly, more
than 50% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the
corporation resulting from such Spin-Off (including, without
limitation, a corporation which as a result of such
transaction owns the Employer or all or substantially all of
the Employer's assets either directly or through one or more
subsidiaries), and (ii) CILCORP or a CILCORP Affiliate
continues to have the right to elect a majority of the Board
of Directors of the corporation resulting from such Spin-
Off.
(7) Approval by the shareholders of the Employer of a complete
liquidation or dissolution of the Employer or a Business
Unit of the Employer.
(e) "CILCORP" means CILCORP Inc., an Illinois corporation, and any
successor thereto.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Company" means the Central Illinois Light Company, an Illinois
corporation, and any successor thereto.
(h) "Compensation Protection Plan" means the CILCORP Inc.,
Compensation Protection Plan.
(i) "Continuing Director" means any member of the board of directors
of CILCORP, while such person is a member of such board of
directors, who was a member of such board of directors prior to
the date of adoption of this Plan. A "Continuing Director" also
means any person who subsequently becomes a member of the board
of directors of CILCORP, while such person is a member of
such board of directors, if such person's nomination
for election or election to such board of directors is
recommended or approved by resolution of a majority of
the Continuing Directors.
(j) "Deferred Compensation Stock Plan" means the Central
Illinois Light Company Deferred Compensation Stock
Plan.
(k) "EDP Plans" means, individually or collectively (as the
context requires), the Central Illinois Light Company
Executive Deferral Plan and the Central Illinois Light
Company Executive Deferral Plan II.
(l) "Effective Date" means January 1, 1991.
(m) "Eligible Employee" means--
(1) an employee of the Employer who is in a select
group of management or highly compensated
employees, participates in the MOT Plan, and has
his benefits limited under the MOT Plan by:
(A) the limits under Code section 415 or
401(a)(17); or
(B) the "Earnings" definition which excludes
deferrals under the EDP Plans or the Deferred
Compensation Stock Plan;
and is designated as an Eligible Employee by the
Employer's board of directors;
(2) any retired key management and executive employee
of the Employer who, as of the Effective Date, is
receiving or is eligible to receive benefit
payments under the EDP Plans; and
(3) any other highly compensated, key employee of the
Employer's management staff who may be designated, from
time to time, by the Employer's board of directors.
(n) "Employer" means the Company and any Affiliate that,
with the consent of the Company, has adopted the MOT
Plan and this Plan for the benefit of its Eligible
Employees.
(o) "Grantor Trust Agreement" means an agreement establishing a
grantor trust referred to in section 5.2.
(p) "MOT Plan" means the Pension Plan For Management, Office and
Technical Employees of Central Illinois Light Company.
(q) "Participant" means an Eligible Employee of the Employer who
meets the participation requirements set forth in section 3.1.
(r) "Plan" means the Central Illinois Light Company Benefit
Replacement Plan.
(s) "Plan Year" means the calendar year.
(t) "Service" means "Service" as defined under the MOT Plan.
(u) "Trustee" means the trustee or trustees of a Grantor Trust.
(v) "Unit of the Company" or "Business Unit" means an
organizational department of the Employer as may be so designated
from time to time on the official organization chart maintained by
the CILCORP or the Company, and for which at least 10% of the
Employer's revenue is attributable for the fiscal year ending
immediately prior to the date as of which the status of the
organizational department as a Business Unit is being determined.
2.2 Gender and Number. Except when otherwise indicated by the context,
words in the masculine gender shall include the feminine and neuter genders;
the plural shall include the singular and the singular shall include the
plural.
2.3 Severability. In the event any provision of the Plan shall be held
invalid or illegal for any reason, any illegality or invalidity shall not
affect the remaining parts of the Plan, but the Plan shall be construed and
enforced as if the illegal or invalid provision had never been inserted, and
the Company shall have the privilege and opportunity to correct and remedy
such questions of illegality or invalidity by amendment as provided in the
Plan.
2.4 Applicable Law. The Plan shall be governed and construed in
accordance with the laws of the State of Illinois to the extent not superseded
by the laws of the United States.
Article III. Participation
3.1 Eligibility. An Eligible Employee of the Employer shall become a
Participant if benefits under the MOT Plan are limited, on or after the
Effective Date, due to any of the following limitations:
(a) Limit on Compensation under Code Section 401(a)(17).
The Eligible Employee's benefits under the MOT Plan are
limited to ensure compliance with Code section
401(a)(17).
(b) Limit on Accruals under Code Section 415. The Eligible Employee's
benefits under the MOT Plan are limited to ensure compliance with
Code section 415.
(c) Limit on "Earnings" Considered under the MOT Plan. The
Eligible Employee's Average Monthly Earnings under the
MOT Plan are limited because (1) the Eligible Employee
participates in the MOT Plan and in the EDP Plans or
the Deferred Compensation Stock Plan, and (2)
"Earnings" under the MOT Plan formula is defined to
exclude deferrals made under the EDP Plans or the
Deferred Compensation Stock Plan, thus reducing Average
Monthly Earnings.
3.2 Participation in the Plan. An Eligible Employee shall become a
Participant as of the later of--
(a) the first day as of which it is determined that his benefit under
the MOT Plan, which would be payable at or after the earliest date
on which he could receive a retirement benefit under the MOT Plan,
is limited by the limitations described in section 3.1; or
(b) the Effective Date.
Article IV. Benefits
4.1 Benefits. When a Participant's benefits under the MOT Plan are
limited in accordance with the limits described in section 3.1(a),(b), or (c)
for Plan Years beginning on or after January 1, 1991, this Plan shall provide
a benefit determined as follows:
(a) General Rule. This Plan shall provide a benefit equal to the
excess of (1) over (2) below:
(1) The benefit which, but for the limitations described in
section 3.1(a), (b), or (c) of this Plan, would have been
provided under the MOT Plan, calculated as of the
determination date and payable at the time and in the form
payable pursuant to section 4.3.
(2) The benefit which has actually been provided under
the MOT Plan, calculated as of the determination
date, and expressed as a benefit payable at the
time and in the form payable pursuant to section
4.3.
(b) Exception. Notwithstanding the foregoing, if payment of the
Participant's benefit under the MOT Plan
commences prior to the date his benefit under this Plan
is made or commences, this Plan shall provide a benefit
equal to the sum of (1) and (2) below:
(1) The amount determined as described in (a) above as
if the Participant had elected, pursuant to
section 4.3 of this Plan, the same benefit
commencement date as he elected under the MOT Plan
(the MOT Plan benefit commencement date).
(2) An annuity which is payable at the time actually
elected pursuant to section 4.3 (this Plan's
benefit commencement date) and in the form elected
pursuant to section 4.3 and which is the Actuarial
Equivalent of the benefits which would have been
paid under this Plan between the MOT Plan benefit
commencement date and this Plan's benefit
commencement date, had the Participant elected, pursuant to
section 4.3 of this Plan, to commence receiving benefits
under this Plan on the MOT Plan benefit commencement date.
(c) Additional Benefits. In the event of a Change in Control, each
Participant who experiences a Covered Termination, as defined in
the Compensation Protection Plan, shall accrue an additional
benefit under this Plan equal to the benefit the Participant would
have accrued under the MOT Plan and this Plan for the period that
benefits are payable to the Participant pursuant to the
Compensation Protection Plan, based on the Participant's projected
age, service and compensation as of the end of such period. Such
additional benefit shall be paid in accordance with Section 4.5.
In the case of an individual, who is a party to an employment
agreement with the Company or CILCORP, any additional benefit to
be accrued under this Plan beyond such individual's termination of
employment shall be determined in accordance with such employment
agreement, this Plan constituting a supplemental pension plan and
an excess benefit plan.
4.2 Vesting. A Participant who completes at least five years of Service
for purposes of vesting under the MOT Plan shall be fully vested in his
benefit under this Plan. In addition, a Participant who attains age 65 while
employed by an Employer shall be fully vested in his benefit under this Plan.
Subject to the special Service rules for rehired Participants, any other
Participant shall forfeit his benefit upon termination of employment with the
Employer. Upon a Change in Control, all Participants, who are employed by the
Company or Business Unit subject of the Change in Control, shall become fully
vested in their benefits under this Plan. Upon a Change in Control of
CILCORP, all Participants shall become fully vested in their benefits under
this Plan.
4.3 Timing and Form of Retirement Benefits. No payments shall be made to
a Participant under this Plan prior to the Participant's termination of
employment with the Company and all Affiliates. After such termination of
employment, benefits under section 4.1 shall become payable, at the
Participant's election, in one of the forms available to the Participant under
the MOT Plan, equal to the Actuarial Equivalent of his benefit under this
Plan; provided, however, that upon becoming a Participant (or as soon as
practicable after it is ascertained that he is a Participant) he shall elect-
(a) the form in which his benefits under this Plan will be paid if he
is married on the date as of which such benefits become payable;
and
(b) the form in which his benefits under this Plan will be
paid if he is unmarried on the date as of which such
benefits become payable.
For purposes of the preceding sentence-
(1) If the Participant is married at the time he elects the
form of payment under this Plan, the normal form of
payment if he is married when his benefits under this
Plan become payable shall be a joint and 100 percent
spouse's annuity determined on the same basis as the annuity
described in section 4.7(b) of the MOT Plan, and his spouse's
consent, as described in section 4.9(a) of the MOT Plan, shall be
required for the Participant to reject such joint and 100 percent
spouse's annuity;
(2) At the time he elects the form of payment under this Plan, the
Participant shall elect the date as of which such payment will be
made or commence, provided that (A) such date shall not be before
the earliest date as of which the Participant can begin receiving
benefit payments under the MOT Plan and (B) such payment will not
commence before the Participant's employment with the Employer is
terminated;
(3) Once the Participant has elected the timing of his benefit
payments as described in this section 4.3, he shall not be
permitted to change such election;
(4) Once the Participant has elected the form of his benefit payments
as described in this section 4.3, he shall not be permitted to
change such election, provided that if his final election on form
of payment made pursuant to sections 4.7, 4.8, and 4.9 of the
MOT Plan differs from his election on form of payment made
pursuant to the preceding provisions of this section 4.3, his
election pursuant to this section 4.3 shall automatically be
changed to match said final election under the MOT Plan; and
(5) Notwithstanding the preceding provisions of this
section 4.3, no election will be available to any
Participant who is a retired employee described in
section 2.1(1)(2); instead, such Participant's benefits under this
Plan shall be payable in the same form and at the same times as
the benefits the Participant was receiving under the MOT Plan
immediately prior to the Effective Date.
4.4 Death Benefits. Upon the death of a Participant (including a
Participant who has suffered a Disability) before payment of his benefits
under this Plan has commenced, if the Participant leaves a surviving spouse to
whom he had been continuously married for the one-year period ending on the
date of his death, this Plan shall provide a benefit to such spouse equal to
the excess of (a) over (b), where--
(a) is the monthly benefit which would have been payable for the life
of the surviving spouse under section 4.6 of the MOT Plan, but for
the limitations described in section 3.1(a), (b), and (c) of this
Plan; and
(b) is the monthly benefit actually payable for the life of the
surviving spouse under section 4.6 of the MOT Plan.
Benefit payments under this section 4.4 shall commence as of the earliest date
on which the surviving spouse is entitled to receive benefit payments under
section 4.6 of the MOT Plan, regardless of the date on which the spouse
actually begins to receive payments under said section 4.6. The amount of such
payments shall be adjusted for the timing of the payments, in accordance with
Article IV of the MOT Plan.
4.5 Payment upon Change in Control. Within ninety days following a
Change in Control, all Participants, who are employed by the Company or
Business Unit subject of the Change in Control, shall receive a lump sum
payment of their benefits under this Plan. Within ninety days following a
Change in Control of CILCORP, all Participants shall receive a lump sum
payment of their benefits under this Plan. Such lump sum payments will be
determined by reference to the actuarial assumptions of the MOT Plan, which
are used to determine "Actuarial Equivalent" forms of benefits.
Article V. Financing
5.1 Unfunded Plan. Except as otherwise provided pursuant to section
5.2, the benefits under this Plan shall be paid in cash out of the general
assets of the Company.
5.2 Grantor Trust. Notwithstanding section 5.1, the Company and each
other Employer may establish a trust for the purpose of accumulating assets to
assist it in fulfilling its obligations under the Plan, provided that--
(a) such trust shall be a "grantor trust" with the result that the
corpus and income of the trust be treated as assets and income of
the Employer pursuant to sections 671 through 679 of the Code; and
(b) the Plan shall be an "unfunded plan" within the meaning
of that term under the Code and the Employee Retirement
Income Security Act of 1974 as amended.
5.3 Unsecured Interest. No Participant hereunder shall have any
interest whatsoever in any specific asset of the Employer. To the extent that
any person acquires a right to receive payments under this Plan, such right
shall be no greater than the right of any unsecured general creditor of the
Employer.
5.4 Nonalienation. Except as otherwise provided by law, no Participant
entitled to receive benefits in accordance with the provisions hereof shall
have power to sell, assign, transfer, pledge, or mortgage the benefits so
payable to the Participant, nor shall benefits be subject to levy, sale,
seizure, attachment, garnishment, or any other judicial process issued by or
on behalf of any creditor of a Participant.
Article VI. Administration
6.1 Administration. The Company shall be responsible for the
administration of the Plan. The Company shall have all such powers as may be
necessary to carry out the provisions hereof and may, from time to time,
establish rules for the administration of the Plan and the transaction of the
Plan's business. The Company shall have the exclusive right to make any
finding of fact necessary or appropriate for any purpose under the Plan
including, but not limited to, the determination of the eligibility for and
the amount of any benefit payable under the Plan. The Company shall have the
exclusive right to interpret the terms and provisions of the Plan and to
determine any and all questions arising under the Plan or in connection with
the administration thereof, including, without limitation, the right to remedy
or resolve possible ambiguities, inconsistencies, or omissions, by general
rule or particular decision. The Company shall make, or cause to be made, all
reports or other filings, if any, necessary to meet the reporting and
disclosure requirement of ERISA. To the extent permitted by law, all findings
of fact, determinations, interpretations, and decisions of the Company shall
be conclusive and binding upon all persons having or claiming to have any
interest or right under the Plan.
6.2 No Enlargement of Employee Rights. Nothing contained in the Plan
shall be deemed to give any employee the right to be retained in the service
of the Employer or to interfere with the right of the Employer to discharge or
retire any employee at any time.
6.3 Appeals from Denial of Claim. If any claim for benefits under the
Plan is wholly or partially denied, the claimant shall be given notice in
writing within a reasonable period of time after receipt of the claim by the
Plan (not to exceed 90 days after receipt of the claim or, if special
circumstances require an extension of time, written notice of the
extension shall be furnished to the claimant and an additional 90 days will be
considered reasonable) by registered or certified mail of such denial, written
in a manner calculated to be understood by the
claimant, setting forth the following information:
(a) the specific reasonings for such denial;
(b) specific reference to pertinent Plan provisions on
which the denial is based;
(c) a description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why
such material or information is necessary; and
(d) an explanation of the Plan's claim review procedure.
The claimant also shall be advised that he or his duly authorized
representative may request a review by the Company of the decision denying the
claim by filing with the Company, within 60 days after such notice has been
received by the claimant, a written request for such review, and that he may
review pertinent documents, and submit issues and comments in writing within
the same 60-day period. If such request is so filed, such review shall be made
by the Company within 60 days after receipt for such request, unless special
circumstances require an extension of time for processing, in which case the
claimant shall be so notified and a decision shall be rendered as soon as
possible, but not later than 120 days after receipt of the request for review.
The Participant or beneficiary shall be given written notice of the decision
resulting from such review, which notice shall include specific reasons for
the decision, written in a manner calculated to be understood by the claimant,
and specific references to the pertinent Plan provisions on which the decision
is based.
6.4 Notice of Address and Missing Persons. Each person entitled to
benefits under the Plan must file with the Company, in writing, his post
office address and each change of post office address. Any communication,
statement, or notice addressed to such a person at his latest reported post
officeaddress will be binding upon him for all purposes of the Plan and
neither the Company nor any Trustee shall be obliged to search for or
ascertain his whereabouts. In the event that such person cannot be located,
the Company may direct that such benefit and all further benefits with respect
to such person shall be discontinued and all liability for the payment thereof
shall terminate; provided, however, that in the event of the subsequent
reappearance of the Participant or beneficiary prior to the termination of the
Plan, the benefits which were due and payable and which such person missed
shall be paid in a single sum, and the future benefits due such person shall
be reinstated in full.
6.5 Data and Information for Benefits. All persons claiming benefits
under the Plan must furnish to the Company or its designated agent such
documents, evidence, or information as the Company or its designated agent
consider necessary or desirable for the purpose of administering the Plan, and
such person must furnish such information promptly and sign such documents as
the Company or its designated agent may require before any benefits become
payable under the Plan.
6.6 Indemnity for Liability. The Company shall indemnify any individual
who is directed by the Company to carry out responsibilities and duties
imposed by this Plan against any and all claims, losses, damages, and
expenses, including counsel fees, approved by the Company, and any liability,
including any amounts paid in settlement with the Company's approval, arising
from the individual's action or failure to act, in connection with such
person's responsibilities and duties under the Plan, except when the same is
judicially determined to be attributable to the gross negligence or willful
misconduct of such person.
6.7 Tax Liability. The Company may withhold from any payment of
benefits hereunder any taxes required to be withheld and such sum as the
Company may reasonably estimate to be necessary to cover any taxes for which
the Employer may be liable and Which may be assessed with regard to such
payment.
Article VII. Amendment and Termination
7.1 Amendment. The Company reserves the right to amend the Plan at any
time by action of its board of directors, provided that retroactive Plan
amendments may not decrease the accrued benefits of any Participant determined
as of the time the amendment is adopted.
7.2 Termination. The Company reserves the right to terminate the Plan
at any time by action of its Board of Directors.
7.3 Change in Control. Notwithstanding the preceding provisions of this
Article VII, no termination, amendment, or change to this Plan which would
have the effect of reducing benefits or benefit accruals hereunder, which
would rescind an alternative procedure for accelerated payment previously
adopted, or which would otherwise have an adverse effect on the determination
of benefits hereunder shall be made after a Change in Control occurs, and this
Plan shall be, and the Company shall require this Plan to be, a continuing
obligation of the surviving entity resulting from any Change in Control.
Participants shall be given written notice of any such termination, amendment,
or change within a reasonable time after any such action is taken.
Article VIII. Participation in and Withdrawal
from the Plan by an Employer
8.1 Participation in the Plan. Any Affiliate which desires to become an
Employer hereunder may elect, with the consent of the Company's board of
directors, to become a party to the Plan and any Grantor Trust Agreement by
adopting the Plan for the benefit of its eligible employees, effective as of
the date specified in such adoption--
(a) by filing with the Company a certified copy of a resolution of its
board of directors to that effect, and such other instruments as
the Company may require; and
(b) by the Company's filing with the then Trustee (if any)
a copy of such resolution, together with a certified copy of
resolutions of the Company's board of directors approving such
adoption.
The adoption resolution or decision may contain such specific changes and
variations in Plan or Grantor Trust Agreement terms and provisions applicable
to such adopting Employer and its employees as may be acceptable to the
Company and the Trustee. However, the sole, exclusive right of any other
amendment of whatever kind or extent to the Plan or any Grantor Trust
Agreement is reserved by the Company. The Company may not amend specific
changes and variations in the Plan or any Grantor Trust Agreement terms and
provisions as adopted by the Employer in its adoption resolution without the
consent of such Employer. The adoption resolution or decision shall become, as
to such adopting organization and its employees, a part of this Plan as then
amended or thereafter amended and any related Grantor Trust Agreement. It
shall not be necessary for the adopting organization to sign or execute the
original or then amended Plan or any Grantor Trust Agreement documents. The
coverage date of the Plan for any such adopting organization shall be that
stated in the resolution or decision of adoption, and from and after such
effective date, such adopting organization shall assume all
the rights, obligations, and liabilities of an individual employer entity
hereunder and under any Grantor Trust Agreement. The administrative powers and
control of the Company, as provided in the Plan and any Grantor Trust
Agreement, including the sole right to amendment, and of appointment and
removal of the Trustee and successor Trustees, shall not be diminished by
reason of the participation of any such adopting organization in the Plan and
any Grantor Trust Agreement.
8.2 Withdrawal from the Plan. Any Employer, by action of its board of
directors or other governing authority, may withdraw from the Plan and any
Grantor Trust Agreement after giving 90 days' notice to the Company's board of
directors, provided the Company's board of directors consents to such
withdrawal. Distribution of vested benefits (if any) to Participants affected
by such a withdrawal may be implemented through any method determined by the
Company and agreed to by the withdrawing Employer.
CILCORP Inc.
Shareholder Return Incentive Compensation Plan
February 1993
Amended effective November 4, 1997
TABLE OF CONTENTS
Article 1. Establishment and Purpose 1
1.1 Establishment of the Plan 1
1.2 Purposes 1
Article 2. Definitions 1
Article 3. Administration 4
3.1 The Committee 4
3.2 Authority of the Committee 4
3.3 Decisions Binding 4
Article 4. Shares Subject to the Plan 5
4.1 Number of Shares 5
4.2 Lapsed Shares 5
4.3 Adjustments in Shares 5
Article 5. Eligibility and Participation 5
5.1 Eligibility 5
5.2 Actual Participation 5
5.3 Timing of Participation 6
Article 6. Grants of Shares 6
6.1 Grant Timing and Frequency 6
6.2 Number of Shares Granted 6
6.3 Performance Measures and Performance Periods 6
6.4 Earning of Shares 7
6.5 Share Ledger Account 7
6.6 Award Agreements 7
6.7 Form and Timing of Payment of Shares 7
6.8 Restrictions on Sales 7
Article 7. Termination of Employment 8
7.1 Termination of Employment Due to Death, Disability or
Retirement 8
7.2 Termination for Reasons Other Than Death, Disability or
Retirement 8
Article 8. Change in Control 8
Article 9. Beneficiary Designation 9
9.1 Designation of Beneficiary 9
9.2 Death of Beneficiary 9
Article 10. Rights of Participants 9
10.1 Employment 9
10.2 Participation 9
10.3 Nontransferability 9
10.4 Voting and Dividend Rights 9
10.5 Rights to Common Stock 10
Article 11. Amendment, Modification and Termination 10
11.1 Amendment, Modification and Termination 10
11.2 Awards Previously Granted 10
Article 12. Miscellaneous Provisions 10
12.1 Costs of the Plan 10
12.2 Share Withholding 10
12.3 Tax Withholding 11
12.4 Successors 11
12.5 Notice 11
12.6 Severability 11
12.7 Gender and Number 11
12.8 Requirements of Law 12
12.9 Governing Law 12
CILCORP Inc. Shareholder Return Incentive Compensation Plan
Article 1. Establishment and Purpose
1.1 Establishment of the Plan.
The Company hereby establishes an incentive compensation plan to be known as
the "CILCORP Inc. Shareholder Return Incentive Compensation Plan" (the
"Plan"), as set forth in this document.
The Plan shall become effective as of February 23, 1993, the date of its
adoption by the Board of Directors of the Company, subject to approval by the
Company's shareholders. The Plan shall remain in effect until the tenth
anniversary of its effective date, unless terminated earlier by the Committee,
with the Board's approval.
1.2 Purposes.
The purposes of the Plan are to promote the achievement of long-term corporate
objectives by tying executives' long-term incentive compensation opportunities
to preestablished financial goals; to attract and retain executives of
outstanding competence, and to encourage teamwork among them; and to reward
performance based on the successful achievement of the preestablished
corporate objectives.
Article 2. Definitions
Whenever used in the Plan, the following terms shall have the meanings set
forth below and, when the meaning is intended, the initial letter of the word
is capitalized:
(a) "Award Agreement" means an agreement setting forth the terms and
provisions applicable to each grant of Shares.
(b) "Board" means the Board of Directors of the Company.
(c) "Change in Control" means the occurrence of any of the following:
(1) the sale or transfer of the business of CILCO or a Unit of
CILCO to a person or entity not controlled, directly or indirectly,
by the Company, whether such sale of the business of CILCO or a Unit
of CILCO, as the case may be, is effected through the (a) sale,
directly or indirectly, of the voting stock of CILCO, (b) merger or
consolidation of CILCO, (c) sale, lease, exchange or transfer of all
or substantially all of the assets of CILCO or of a Unit of CILCO or
(d) a combination of the foregoing;
(2) a merger or consolidation of the Company with one or more
corporations, as a result of which the Company is not the surviving
corporation or pursuant to which substantially all shares of the
Company's common stock are converted into cash, securities or other
property;
(3) the acquisition of beneficial ownership (determined in
accordance with Rule 13d-3 of the Exchange Act), directly or
indirectly, of more than 30 percent of the voting power of the
outstanding stock of the Company by any Person coupled with or
followed by the failure of Continuing Directors to constitute a
majority of the Board; or
(4) the sale, lease, exchange or transfer of all or
substantially all the assets of the Company;
provided, however, that the term "Change in Control" shall not apply
to any merger, consolidation, internal reorganization, or
recapitalization of the Company initiated voluntarily by the Company
in which Continuing Directors constitute a majority of the members
of the Board or any successor thereto and the holders of common
stock immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation after the
merger.
However, in no event shall a Change in Control be deemed to have
occurred, with respect to a Participant, if that Participant is part
of a purchasing group which consummates the Change-in-Control
transaction. A Participant shall be deemed "part of a purchasing
group" for purposes of the preceding sentence if the Participant is
an equity participant or has agreed to become an equity participant
in the purchasing company or group (except for: (i) passive
ownership of less than 3% of the shares of voting securities of the
purchasing company, or (ii) ownership of equity participation in the
purchasing company or group which is otherwise not deemed to be
significant, as determined prior to the Change in Control by a
majority of the disinterested Directors).
(d) "CILCO" means Central Illinois Light Company, an Illinois
corporation, and any successor thereto.
(e) "Committee" shall mean the Compensation Committee of the Board, or
any other committee appointed by the Board to administer the Plan,
pursuant to the terms of Article 3 herein.
(f) "Continuing Director" means any member of the Board, while such
person is a member of the Board, who was a member of the Board prior
to the date of adoption of this Plan. A "Continuing Director" also means
any person who subsequently becomes a member of the Board, while such
person is a member of the Board, if such person's nomination for
election or election to the Board is recommended or approved by
resolution of a majority of the Continuing Directors.
(g) "Company" means CILCORP Inc., an Illinois corporation, and any
successor thereto.
(h) "Director" means an individual who is a member of the Board.
(i) "Disability" means a permanent and total disability within the
meaning of Internal Revenue Code Section 22(e)(3), or any successor
statute, as determined by the Committee in good faith, upon receipt
of and in reliance on sufficient competent medical advice from one or
more individuals, selected by the Committee, who are qualified to give
professional medical advice.
(j) "Effective Date" means the date this Plan becomes effective, as set
forth in Section 1.1 herein.
(k) "Employee" means any full-time, nonunion employee of the Company or
any Subsidiary. Directors who are not otherwise employed by the Company
or a Subsidiary shall not be considered Employees under this Plan.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.
(m) "Insider" shall mean an Employee who is, on the relevant date, an
officer, a director, or a ten percent beneficial owner of the
Company, as defined under Section 16 of the Exchange Act.
(n) "Key Employee" means an Employee who, by the nature and scope of his
position, is determined by the Committee in its discretion to be
"key" in that he regularly and directly makes or influences policy
decisions which impact the overall long-term results or success of
the Company.
(o) "Participant" means an Employee who has received a grant of Shares
under the Plan.
(p) "Performance Measure" shall mean one or more financial objectives
selected by the Committee prior to the beginning of each Performance
Period, the degree of achievement of which shall determine the number
of Shares earned by Participants under the Plan.
(q) "Performance Period" means the period designated by the Committee,
during which the degree of achievement of the Performance Measures
shall determine the number of Shares earned by Participants under the
Plan.
(r) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and
14(d) thereof, including a "group" as defined in Section 13(d) of the
Exchange Act.
(s) "Retirement" means termination of employment with the Company or any
Subsidiary after attaining age 62.
(t) "Subsidiary" shall mean any corporation in which the Company owns
directly or indirectly through its Subsidiaries, at least fifty
percent (50%) of the total combined voting power of all classes of
stock, or any other entity (including, but not limited to,
partnerships and joint ventures) in which the Company owns at least fifty
percent (50%) of the combined equity thereof.
(u) "Share" means a measure of participation under the Plan, as set
forth in Article 6 herein.
(v) "Unit of CILCO" means an operating group of CILCO as may be so
designated from time to time on the official organization chart
maintained by CILCO.
Article 3. Administration
3.1 The Committee.
The Plan shall be administered by the Compensation Committee of the Board, or
by any other committee appointed by the Board consisting of not less than two
(2) Directors who are Non-Employee Directors (within the meaning of Rule 16b-
3). The members of the Committee shall be appointed from time to time by, and
shall serve at the discretion of, the Board.
3.2 Authority of the Committee.
Subject to the provisions herein and to the approval of the Board, the
Committee shall have full power to select employees to whom Shares are
granted; to determine the size and frequency of grants (which need not be the
same for each Participant); to determine the terms and conditions of each
grant in a manner consistent with the provisions of the Plan; to establish
Performance Measures and Performance Periods; to set forth guidelines
governing the number of Shares which will be earned by Participants with
respect to various levels of achievement of the Performance Measures during
the Performance Period; subject to the terms of Section 4.3 herein, to revise
the number of Shares available for grant under the Plan and the number of
Shares held by Participants; subject to the provisions of Section 6.3 herein,
to revise the Performance Measures during a Performance Period to the extent
necessary to preserve the integrity of the Performance Measures, and to the
extent necessary to prevent enlargement or dilution of Participants' rights;
to construe and interpret the Plan and any agreement or instrument entered
into under the Plan; to establish, amend, rescind, or waive rules and
regulations for the Plan's administration; and, subject to the provisions of
Article 11 herein, to amend, modify, and/or terminate the Plan. Further, the
Committee shall have the full power to make all other determinations which may
be necessary or advisable for the administration of the Plan, to the extent
consistent with the provisions of the Plan, and subject to the approval of the
Board.
As permitted by law, the Committee may delegate its authority as identified
hereunder; provided, however, that the Committee may not delegate certain of
its responsibilities hereunder if such delegation may jeopardize compliance
with Rule 16b-3 of the Exchange Act.
3.3 Decisions Binding.
All determinations and decisions made by the Committee pursuant to the
provisions of the Plan, and all related orders or resolutions of the Board
shall be final, conclusive, and binding on all persons, including the Company,
its stockholders, Employees, Participants, and their estates, and
beneficiaries.
Article 4. Shares Subject to the Plan
4.1 Number of Shares.
Subject to adjustment as provided in Section 4.3 herein, the total number of
Shares available for grant under the Plan may not exceed one hundred twenty-
five thousand (125,000).
While a Share is outstanding, it shall be counted against the authorized pool
of Shares, regardless of its vested status.
4.2 Lapsed Shares.
If any Share granted under the Plan is canceled, terminates, expires, or
lapses for any reason, such Share shall again be available for grant under the
Plan.
However, in the event that prior to the Share's cancellation, termination,
expiration, or lapse, the holder of the Share at any time received one or more
"benefits of ownership" pursuant to such Share (as defined by the Securities
and Exchange Commission, pursuant to any rule or interpretation promulgated
under Section 16 of the Exchange Act), the Share shall not be made available
for regrant under the Plan.
4.3 Adjustments in Shares.
In the event of any merger, reorganization, consolidation, recapitalization,
stock dividend, split-up, or any other change affecting the common stock of
the Company, the Committee may make such adjustment(s) in the number of Shares
available for grant hereunder and Shares held by Participants, as the
Committee deems to be appropriate and equitable, in its sole discretion.
Article 5. Eligibility and Participation
5.1 Eligibility.
Eligibility for participation in the Plan shall be limited to Key Employees.
5.2 Actual Participation.
Subject to the provisions of the Plan, prior to the beginning of each
Performance Period the Committee will identify which, if any, Key Employees
shall receive a grant of Shares for that Performance Period.
As soon as practicable following selection, a Participant shall execute an
Award Agreement with the Company, as provided in Section 6.7 herein, which
shall describe the Shares, and which shall detail the number of Shares
granted, as well as all of the terms and conditions to which the Shares are
subject.
5.3 Timing of Participation.
Participation in the Plan shall begin on the first day of each Performance
Period. However, the Committee, in its sole discretion, may allow an
individual who becomes eligible during a Performance Period to participate in
the Plan. In such cases, the Participant's degree of participation for such
Performance Period normally shall be prorated, based on the number of days of
participation during such Performance Period. A Participant who receives a
grant of Shares as part of the initial grant of Shares for the first
Performance Period shall be deemed to have begun participating in the Plan on
the first day of the first Performance Period.
Article 6. Grants of Shares
6.1 Grant Timing and Frequency.
Subject to the terms and provisions of the Plan, Shares may be granted to
Participants as of the first day of each Performance Period. In addition,
subject to the terms of Section 5.3 herein, the Committee may make Share
grants during a Performance Period. Shares granted as part of the initial
grant of Shares for the first Performance Period shall be deemed to be granted
as of the first day of the first Performance Period. The Committee shall have
complete discretion in determining the number and frequency of grants to each
Participant.
6.2 Number of Shares Granted.
The number of Shares to be granted to each Participant shall be determined by
the Committee in its sole discretion, subject to the limitation on aggregate
Shares available under the Plan, as set forth in Section 4.1 herein.
6.3 Performance Measures and Performance Periods.
The Committee shall set Performance Measures in its discretion which,
depending on the extent to which they are met, will determine the number of
Shares that will be available to be earned by the Participants. Subject to the
last sentence of this paragraph, the Committee shall establish Performance
Periods in its discretion during which the degree of achievement of the
Performance Measures shall determine the number of Shares earned by
Participants. Performance Periods shall, in all cases, exceed six (6) months
in length. The first Performance Period shall be the five-year period
beginning January 1, 1993 and ending December 31, 1997.
The Committee also shall have the right to adjust the determination of the
degree of achievement of the Performance Measures during and/or at the end of
any Performance Period, to keep Participants whole or to preserve the
integrity of the Performance Measures from the effects of infusions or
distributions of cash or property to or from the Company and its Subsidiaries
(including dividends), from the effects of accounting rules that do not
reflect economic reality or that change over time, or from the effect of any
change in the capitalization or operations of the Company and its Subsidiaries
that affects the financial objectives and over which the Participants had no
control; provided that any such adjustment shall be consistent with the
purposes of the Plan.
Any such adjustments under this Section 6.3 can consist of changes in the
number of Shares held by each Participant, and/or adjustments to the
Performance Measures.
6.4 Earning of Shares.
Prior to the beginning of each Performance Period, the Committee shall
establish maximum, target, and threshold levels of Share payout opportunities
under the Plan, which shall correspond to the degree of the achievement of the
Performance Measures during the Performance Period. The established Share
payout opportunities may vary in relation to each Participant's duties and
responsibilities, and together with the preestablished Performance Measures,
shall be described in the Award Agreements delivered to Participants at the
beginning of each Performance Period.
After the applicable Performance Period has ended, the holder of Shares
granted at the beginning of such Performance Period shall be entitled to
receive payout with respect to the number of Shares earned by the Participant
over the Performance Period, to be determined as a function of the extent to
which the corresponding Performance Measures have been achieved.
6.5 Share Ledger Account.
A Share ledger account (the "Account") shall be established and maintained by
the Company for each Participant who receives a grant under the Plan. If
additional Shares are granted, the Account shall be adjusted accordingly. The
Account of a Participant shall be the record of the Shares granted to that
Participant under the Plan, and is solely for accounting purposes, and shall
not require a segregation of any Company assets.
6.6 Award Agreements.
Each grant under the Plan shall be evidenced by an Award Agreement. Each
Agreement shall be signed by an officer of the Company and by the Participant,
and shall contain the terms and conditions that apply to the grant, which
shall include, but shall not be limited to, the number of Shares granted to
the Participant, the Performance Measures, the maximum, target and threshold
levels of Share payout opportunities, and the length of the Performance
Period. The included terms and conditions need not be the same for each
Participant, nor for each grant.
6.7 Form and Timing of Payment of Shares.
Payment of earned Shares shall be made in shares of common stock of the
Company, at the rate of one share of common stock for each earned Share, and,
subject to Section 6.8 below, shall be made within forty-five (45) calendar
days following the close of the applicable Performance Period.
6.8 Restrictions on Sales.
A Participant shall not be permitted to sell more than one-third of the shares
of common stock of the Company distributed to him under the Plan with respect
to a Performance Period during the first twelve (12) months after the end of
the Performance Period, nor more than two-thirds of the shares of common stock
distributed to him under the Plan with respect to a Performance Period during
the first twenty-four (24) months after the end of the Performance Period. The
Committee may direct the Company to withhold the delivery of stock
certificates to Participants until the shares of common stock of the Company
covered by such certificates may be sold by the Participant under this
Section 6.8.
The above restrictions on a Participant's sale of shares of common stock of
the Company received under the Plan shall terminate immediately in the event
of the Participant's death or the occurrence of a Change in Control which the
Committee determines in its discretion to affect the Participant.
Article 7. Termination of Employment
7.1 Termination of Employment Due to Death, Disability or Retirement.
In the event a Participant's employment is terminated by reason of Disability
or Retirement during a Performance Period, the Participant shall be entitled
to a prorated award for such Performance Period. The award shall be reduced by
multiplying the number of Shares which would otherwise have been earned by
such Participant during the Performance Period by a fraction; the numerator of
which is the number of days of participation during the Performance Period
through the date of employment termination, and the denominator of which is
the number of days in the Performance Period. The award thus determined shall
be paid as soon as practicable following the end of the Performance Period.
In the event a Participant's employment is terminated by reason of the
Participant's death during a Performance Period, the Participant shall be
entitled to a prorated award for such Performance Period. The award shall be
reduced by multiplying the number of Shares which would otherwise have been
earned by such Participant during the Performance Period (using the actual
performance achieved during the first Performance Period ending after the
Participant's death as the performance achieved for all of such Participant's
Performance Periods which have not yet ended at the time of his death) by a
fraction; the numerator of which is the number of days of participation during
the Performance Period through the date of the Participant's death, and the
denominator of which is the number of days in the Performance Period. The
final awards thus determined shall be paid as soon as practicable following
the end of the first Performance Period ending after the Participant's death.
7.2 Termination for Reasons Other Than Death, Disability or Retirement.
In the event a Participant's employment is terminated for reasons other than
death, Disability or Retirement, all rights to any unpaid awards under the
Plan shall be forfeited.
Article 8. Change in Control
Upon the occurrence of a Change of Control, all outstanding Shares of
Participants determined by the Committee in its discretion to be affected by
the Change in Control shall be treated as follows:
(i) in the event the Corporation does not
survive, all outstanding shares shall be converted to an
equivalent number of shares of the surviving entity as
determined by the Committee in its discretion and shall
remain exercisable until the last day of the Performance
Period, or
(ii) in the event the Corporation does survive,
all outstanding shares shall be adjusted in accordance with
Section 4.3 hereof and shall remain exercisable until the
last day of the Performance Period.
Subject to Article 11 herein, prior to the effective date of an imminent
change in control, the Committee shall have the authority to make any
modifications of outstanding shares as determined by the Committee to be
necessary to provide Participants with an appropriate payout with respect to
their shares.
Article 9. Beneficiary Designation
9.1 Designation of Beneficiary.
Each Participant shall be entitled to designate a beneficiary or beneficiaries
who, following the Participant's death, will be entitled to receive any
amounts that otherwise would have been paid to the Participant under the Plan.
All designations shall be signed by the Participant, and shall be in such form
as prescribed by the Committee. Each designation shall be effective as of the
date delivered to the Secretary of the Company by the Participant. The
Participant may change his or her designation of beneficiary on such form as
prescribed by the Committee. The payment of any amounts owing to a Participant
pursuant to his or her outstanding Shares shall be in accordance with the last
unrevoked written designation of beneficiary that has been signed by the
Participant and delivered by the Participant to the Secretary of the Company
prior to the Participant's death.
9.2 Death of Beneficiary.
In the event that all of the beneficiaries named by a Participant pursuant to
Section 9.1 herein predecease the Participant, any amounts that would have
been paid to the Participant or the Participant's beneficiaries under the Plan
shall be paid to the Participant's estate.
Article 10. Rights of Participants
10.1 Employment.
Nothing in the Plan shall interfere with or limit in any way the right of the
Company or any of its Subsidiaries to terminate any Participant's employment
at any time, nor confer upon any Participant any right to continue in the
employ of the Company or Subsidiary.
10.2 Participation.
No Participant or other employee shall at any time have a right to be selected
for participation in the Plan for any Performance Period, despite having been
selected for participation in a previous Performance Period.
10.3 Nontransferability.
No Share or other right or interest granted to a Participant under the Plan
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
10.4 Voting and Dividend Rights.
No Participant shall be entitled to any voting rights, or, except as provided
by the Committee, in its sole discretion, to receive any dividends, or to have
his or her Account credited or increased as a result of any dividends or other
distributions with respect to the ownership of the Company.
10.5 Rights to Common Stock.
Grants of Shares under the Plan do not give a Participant any rights
whatsoever with respect to shares of the Company's common stock until such
shares are distributed to the Participant pursuant to the terms of the Plan.
Article 11. Amendment, Modification and Termination
11.1 Amendment, Modification and Termination.
With the approval of the Board, at any time and from time to time, the
Committee may terminate, amend or modify the Plan. However, without the
approval of the shareholders of the Company (as may be required by the insider
trading rules of Section 16 of the Exchange Act, by any national securities
exchange or system on which the Company's shares of common stock are then
listed or reported, or by a regulatory body having jurisdiction with respect
hereto) no such termination, amendment or modification may:
(a) Materially increase the total number of Shares which may be issued
under this Plan, except as provided in Section 4.3 herein; or
(b) Materially modify the eligibility requirements to add a class of
Insiders; or
(c) Materially increase the benefits accruing to Participants under the
Plan.
11.2 Awards Previously Granted.
No termination, amendment or modification of the Plan shall in any manner
adversely affect any outstanding Shares under the Plan, without the written
consent of the Participant holding such Shares.
Article 12. Miscellaneous Provisions
12.1 Costs of the Plan.
All costs of the Plan including, but not limited to, payout of Shares and
administrative expenses, shall be incurred by the Company out of the Company's
general assets. Although not prohibited from doing so, the Company is not
required in any way to segregate assets in any manner or to specifically fund
the benefits provided under the Plan.
12.2 Share Withholding.
With respect to withholding required upon any taxable event hereunder,
Participants may elect, subject to the approval of the Committee, to satisfy
the withholding requirement, in whole or in part, by having the Company
withhold shares of Company common stock having a fair market value on the date
the tax is to be determined equal to the minimum statutory total tax which
could be imposed on the transaction. All elections shall be irrevocable, made
in writing, and signed by the Participant.
12.3 Tax Withholding.
The Company shall have the right to require Participants to remit to the
Company an amount sufficient to satisfy Federal, state, and local withholding
tax requirements, or to deduct from all payments under this Plan amounts
sufficient to satisfy all withholding tax requirements.
12.4 Successors.
All obligations of the Company under the Plan with respect to payout of
Shares, and the corresponding rights granted hereunder, shall be binding on
any successor to the Company, whether the existence of such successor is the
result of a direct or indirect purchase, merger, consolidation, or other
acquisition of all or substantially all of the business and/or assets of the
Company.
12.5 Notice.
Any notice or filing required or permitted to be given to the Company under
the Plan shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail to the Secretary of the Company. Notice to the
Secretary of the Company, if mailed, shall be addressed to the principal
executive offices of the Company. Notice mailed to a Participant shall be at
such address as is given in the records of the Company. Notices shall be
deemed given as of the date of delivery or, if delivery is made by mail, as of
the date shown on the postmark on the receipt for registration or
certification.
12.6 Severability.
In the event that any provision of the Plan shall be held illegal or invalid
for any reason, the illegality or invalidity shall not affect the remaining
parts of the Plan, and the Plan shall be construed and enforced as if the
illegal or invalid provision had not been included.
12.7 Gender and Number.
Except where otherwise indicated by the context, any masculine term used
herein also shall include the feminine; the plural shall include the singular,
and the singular shall include the plural.
12.8 Requirements of Law.
The granting and payout of Shares under the Plan shall be subject to all
applicable laws, rules, and regulations and to such approvals by any
governmental agencies or national securities exchanges as may be required.
12.9 Governing Law.
To the extent not preempted by Federal law, the Plan, and all agreements
hereunder, shall be construed in accordance with and governed by the laws of
the State of Illinois.
January 27, 1998
Mr. R. O. Viets
Mr. J. G. Sahn
300 Hamilton Boulevard, Suite 300
Peoria, Illinois 61602
Mr. J. H. Byington, Jr.
Mr. D. P. Falck
One Battery Park Plaza
New York, New York 10004-1490
Gentlemen:
We hereby make, constitute and appoint each of you and any one of you our true
and lawful attorney for each of us and in each of our names, places or steads,
both in our individual capacities as directors and/or that of officers of
CILCORP Inc., to sign and cause to be filed with the Securities and Exchange
Commission CILCORP Inc.'s annual report on Form 10-K for the fiscal year ended
December 31, 1997 and any appropriate amendment or amendments to said report
and any necessary exhibits.
The undersigned, CILCORP Inc., also authorizes you and any one of you to sign
said annual report and any amendment or amendments thereto on its behalf as
attorney-in-fact for its respective officers, and to file the same as
aforesaid together with any exhibits.
Very truly yours,
CILCORP Inc.
By_______________________
R. O. Viets, President
January 27, 1998
Power of attorney related to execution and filing of CILCORP Inc. 1997 annual
report on Form 10-K.
____________________________________ __________________________________
M. Alexis H. S. Peacock
____________________________________ __________________________________
J. R. Brazil K. E. Smith
____________________________________ __________________________________
W. Bunn III R. N. Ullman
____________________________________ __________________________________
J. D. Caulder R. O. Viets
____________________________________ __________________________________
H. J. Holland M. M. Yeomans
____________________________________
T. D. Hutchinson
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