-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RPkogpOmEyCtxsQNau8MG/hYSevmiMPsaleBHUVy5uT4jHUk5QfDVg3MICK0Yrl3 x/BUblOIrxxBWy8p9h+OCw== 0000762129-98-000008.txt : 19980319 0000762129-98-000008.hdr.sgml : 19980319 ACCESSION NUMBER: 0000762129-98-000008 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CILCORP INC CENTRAL INDEX KEY: 0000762129 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 371169387 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08946 FILM NUMBER: 98568430 BUSINESS ADDRESS: STREET 1: 300 HAMILTON BLVD STE 300 CITY: PEORIA STATE: IL ZIP: 61602 BUSINESS PHONE: 3096758810 MAIL ADDRESS: STREET 1: 300 LIBERTY STREET CITY: PEORIA STATE: IL ZIP: 61602 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL ILLINOIS LIGHT CO CENTRAL INDEX KEY: 0000018651 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 370211050 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02732 FILM NUMBER: 98568431 BUSINESS ADDRESS: STREET 1: 300 LIBERTY ST CITY: PEORIA STATE: IL ZIP: 61602 BUSINESS PHONE: 3096725271 MAIL ADDRESS: STREET 1: 300 LIBERTY STREET CITY: PEORIA STATE: IL ZIP: 61602 10-K405 1 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.
Assets Revenue Net Income (Loss) (In thousands) 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 ========== ======== =======
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:
1997 1996 1995 (In thousands) 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 ======== ======== ========
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:
1997 1996 1995 (In thousands) 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 ======== ======== ========
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:
Type of Investment At December 31 1997 1996 (In thousands) 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 ======== ========
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:
Available Summer Capability (MW) Station & Unit Installed Actual 1997 Duck Creek Unit 1 1976 366 E. D. Edwards Unit 1 1960 117 Unit 2 1968 262 Unit 3 1972 361
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.
Executive Officers of CILCORP Age as of Positions Held During Initial Name 3/31/98 Past Five Years Effective Date(1) 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 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.
Executive Officers of CILCO Age as of Positions Held During Initial Name 3/31/98 Past Five Years(1) Effective Date(2) 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 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.
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.
Quarter 1996 First Second Third Fourth 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 The number of common shareholders of record as of March 13, 1998, was 11,308.
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 CILCORP INC. Selected Financial Data
For the Years Ended December 31 1997 1996 1995 1994 1993 (In thousands except per share amounts) 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
Central Illinois Light Company Selected Financial Data
For the Years Ended December 31 1997 1996 1995 1994 1993 (In thousands) 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
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
For the Years Ended December 31 1997 1996 1995 (In thousands) 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 ======== ======== ======== The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
Central Illinois Light Company Consolidated Balance Sheets Assets
As of December 31 1997 1996 (In thousands) 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 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these balance sheets.
Central Illinois Light Company Consolidated Balance Sheets Capitalization and Liabilities
As of December 31 1997 1996 (In thousands) 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 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these balance sheets.
Central Illinois Light Company Consolidated Statements of Cash Flows
For the Years Ended December 31 1997 1996 1995 (In thousands) 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 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
Central Illinois Light Company Statements of Segments of Business
Operating Information For the Years Ended December 31 1997 1996 1995 (In thousands) 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
Major Customer for the Years Ended December 31 1997 1996 1995 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% ======= ==== ======= ===== ======= ====
Utility Identifiable Assets as of December 31 1997 1996 1995 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 ========== ========== ========== *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.
Central Illinois Light Company Consolidated Statements of Retained Earnings
For the Years Ended December 31 1997 1996 1995 (In thousands) 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 ======== ======== ======== The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
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:
1997 1996 (In thousands) 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 ======= =======
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:
(In thousands) 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 =========
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:
1997 1996 (In thousands) Cash surrender value of contracts $ 45,297 $ 40,076 Borrowings against contracts (42,898) (37,948) ------- -------- Net investment $ 2,399 $ 2,128 ======== ========
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:
December 31 1997 1996 1995 (In thousands) 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 ======== ======== ========
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:
December 31 1997 1996 (In thousands) 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) ======== ========
Income tax expenses were as follows:
Years Ended December 31 1997 1996 1995 (In thousands) 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 ======= ======= ======= 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.
The following table represents a reconciliation of the effective tax rate with the statutory federal income tax rate:
1997 1996 1995 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% ==== ==== ====
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:
1997 1996 1995 (In thousands) Operating expenses $ 493 $ 9,700 $15,528 Utility plant and other 125 922 994 ------ ------- ------- Net pension costs $ 618 $10,622 $16,522 ====== ======= =======
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:
1997 1996 (In thousands) 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 ======== ========
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:
Actuarial present value of benefit obligation: 1997 1996 (In thousands) 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) ========= =========
Information on the funded status of the plan in which accumulated benefits exceed assets follows:
Actuarial present value of benefit obligation: 1997 1996 (In thousands) 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) ======= =======
Significant assumptions used for calculations: 1997 1996 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%
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:
1997 1996 1995 (In thousands) 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 ====== ====== ======
Information on the plans' funded status follows:
1997 1996 (In thousands) 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) ======== ========
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
At December 31 1997 1996 (In thousands) 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 ======= ======= (a) Dividend rates at December 31, 1997 and 1996, were 4.18% and 4.05%,respectively.
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:
Series Callable Price Per Share (plus accrued dividends) 4.50% $110 4.64% $102 Flexible auction rate $100
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
At December 31 1997 1996 (In thousands) 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 ======== ========
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.
For the Three Months Ended March 31 June 30 September 30 December 31 (In thousands) 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
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. SCHEDULE II CILCORP INC. AND SUBSIDIARY COMPANIES Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1997, 1996 and 1995 (Thousands of dollars)
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 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
SCHEDULE II CENTRAL ILLINOIS LIGHT COMPANY Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1997, 1996 and 1995 (Thousands of dollars)
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 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
SCHEDULE XIII CILCORP INC. AND SUBSIDIARY COMPANIES Investment in Leveraged Leases
Year Ended December 31, 1997 (Thousands of dollars) Amount Cost of each carried on lease(A) Balance Sheet(B) 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 ======== ======== (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.
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 EXHIBIT (12) CILCORP INC. AND SUBSIDIARIES Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Twelve Months Ended 1997 1996 1995 1994 1993 (Thousands of Dollars) 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 === === === === === *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.
EXHIBIT (12) CENTRAL ILLINOIS LIGHT COMPANY Computation of Ratio of Earnings to Fixed Charges
Twelve Months Ended 1997 1996 1995 1994 1993 (Thousands of Dollars) 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 === === === === === *The 1997 fixed charge coverage ratio would have been 3.7 without the effects of the extraordinary item.
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 EX-13 2 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:
1997 1996 1995 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 ===== ===== =====
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).
1997 1996 1995 (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 ======= ======= =======
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.
Components of Electric Operating Income 1997 1996 1995 (In thousands) 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 ======== ======== ========
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.
Components of Gas Operating Income 1997 1996 1995 (In thousands) 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 ======== ======== ========
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.
1997 1996 Components of QST Net Loss (In thousands) 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) ======== =======
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.
Components of QST Environmental's Net Income (Loss) 1997 1996 1995 (In thousands) 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 ======== ======== ========
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.
Components of Other Businesses Net Loss 1997 1996 1995 (In thousands) 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) ======= ======= ======
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. 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 Consolidated Statements of Income CILCORP Inc. and Subsidiaries
For the Years Ended December 31 1997 1996 1995 (In thousands except per share amounts) 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 The accompanying Notes to Financial Statements are an integral part of these statements.
Consolidated Balance Sheets CILCORP Inc. and Subsidiaries
Assets (As of December 31) 1997 1996 (In thousands) 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 ========== ========== The accompanying Notes to Financial Statements are an integral part of these balance sheets.
Consolidated Balance Sheets CILCORP Inc. and Subsidiaries
Liabilities and Stockholders' Equity (As of December 31) 1997 1996 (In thousands) 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 ========== ========== The accompanying Notes to Financial Statements are an integral part of these balance sheets.
Statements of Segments of Business CILCORP Inc. and Subsidiaries
Operating Information For the Years Ended December 31 1997 1996 1995 (In thousands) 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 ======== ======== ========
Major Customer For the Years Ended December 31 1997 1996 1995 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% ======= ===== ======= ===== ======= ====
Utility Identifiable Assets as of December 31 1997 1996 1995 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 ========== ========== ========== (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.
Non-Regulated Energy and Energy Services Segment
For the Years Ended December 31 1997 1996 (In thousands) Revenue $346,290 $ 3,381 Expenses 362,602 10,009 -------- -------- Loss Before Income Taxes $(16,312) $ (6,628) ======== ======== Capital Expenditures $ 5,385 $ 2,447 ======== ========
Non-Regulated Energy and Energy Services Identifiable Assets as of December 31 1997 1996 (In thousands) 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 ======= =======
Environmental and Engineering Services Segment
For the Years Ended December 31 1997 1996 1995 (In thousands) 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 ======== ======== ========
Environmental and Engineering Services Identifiable Assets as of December 31 1997 1996 1995 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 ======= ======= =======
Other Businesses Segment
For the Years Ended December 31 1997 1996 1995 Revenue $11,106 $ 8,505 $ 9,466 Expenses 17,202 15,266 9,494 ------- ------- ------- Loss Before Income Taxes $(6,096) $(6,761) $ (28) ======= ======= =======
Other Businesses Identifiable Assets as of December 31 1997 1996 1995 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 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
Consolidated Statements of Cash Flows CILCORP Inc. and Subsidiaries
For the Years Ended December 31 1997 1996 1995 (In thousands) 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 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
Consolidated Statements of Stockholders' Equity CILCORP Inc. and Subsidiaries
Common Stock Retained Shares Amount Earnings Total (In thousands except share amounts) 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 ========== ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
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:
1997 1996 (In thousands) 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 ======= =======
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:
(In thousands) 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 ========
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:
1997 1996 1995 (In thousands) Interest $28,710 $28,988 $27,615 Income taxes 28,537 13,572 32,673 ------- ------- -------
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:
1997 1996 (In thousands) Cash surrender value of contracts $ 45,297 $ 40,076 Borrowings against contracts (42,898) (37,948) ------- ------- Net investment $ 2,399 $ 2,128 ======= =======
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:
December 31 1997 1996 1995 (In thousands) 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 ======= ======= =======
December 31 1997 1996 1995 (In thousands) 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 ======== ======== ========
The following table reconciles the change in the accumulated deferred income tax liability to the deferred income tax expense included in the income statement:
December 31 1997 1996 (In thousands) 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) ======== ========
Income tax expenses were as follows:
December 31 1997 1996 1995 (In thousands) 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 ======= ======= =======
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.
Years Ended December 31 1997 1996 1995 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% ===== ===== =====
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:
1997 1996 1995 (In thousands) Operating expenses $493 $ 9,700 $15,528 Utility plant and other 125 922 994 ---- ------- ------ Net pension costs $618 $10,622 $16,522 ==== ======= ======
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:
1997 1996 (In thousands) 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 ======= =======
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:
Actuarial present value of benefit 1997 1996 obligation: (In thousands) 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) ========= =========
Information on the funded status of the plan in which accumulated benefits exceed assets follows:
Actuarial present value of benefit 1997 1996 obligation: (In thousands) 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) ======= =======
Significant assumptions used for calculations: 1997 1996 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%
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:
1997 1996 1995 (In thousands) 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 ====== ====== ======
Information on the plans' funded status follows:
1997 1996 (In thousands) 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) ======= =======
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:
1997 1996 (In thousands) 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 ======== ========
NOTE 7 - PREFERRED STOCK PREFERRED STOCK OF SUBSIDIARY
At December 31 1997 1996 (In thousands) 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 ======= ======= (*) Dividend rates at December 31, 1997 and 1996, were 4.18% and 4.05%, respectively.
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:
Series Callable Price Per Share (plus accrued dividends) 4.50% $110 4.64% $102 Flexible Auction Rate $100
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
At December 31 1997 1996 (In thousands) 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 ======== ========
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.
(In thousands) 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
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.
For the Three Months Ended March 31 June 30 September 30 December 31 (In thousands except per share amounts) 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
EX-13 3 GRAPH DATA ATTACHED TO EXHIBIT 13 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% EX-10 4 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. EX-10 5 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. EX-10 6 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. EX-24 7 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 EX-27 8
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000762129 CILCORP INC. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 868,430 188,503 245,723 32,163 0 1,334,819 192,567 0 160,026 352,593 22,000 44,120 298,528 40,850 0 21,300 22,185 0 2,182 439 530,622 1,334,819 995,383 11,305 933,976 945,281 50,102 1,177 48,925 29,314 19,611 3,216 16,395 33,482 20,024 91,014 1.20 1.20
EX-27 9
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000018651 CENTRAL ILLINOIS LIGHT COMPANY 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 868,430 3,613 127,635 22,977 0 1,022,655 185,661 0 147,081 332,742 22,000 44,120 267,836 0 0 21,300 10,650 0 2,182 439 321,386 1,022,655 546,854 23,682 444,225 467,907 78,947 (1,398) 77,549 24,082 53,467 3,216 50,251 39,482 20,024 111,990 0 0
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