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, 1994 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 10, 1995, the aggregate market value of the voting stock of CILCORP Inc. (CILCORP) held by nonaffiliates was approximately $453 million. On that date, 13,035,756 common shares (no par value) were outstanding. At March 10, 1995, the aggregate market value of the voting stock of Central Illinois Light Company (CILCO) held by nonaffiliates was approximately $57 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, 1995, in connection with its Annual Meeting to be held on April 25, 1995, is incorporated into Part I and Part III hereof. Central Illinois Light Company's Proxy Statement dated March 28, 1995, in connection with its Annual Meeting to be held on April 25, 1995, is incorporated into Part I and Part III hereof. CILCORP Inc.'s Annual Report to Shareholders for the year ended December 31, 1994 -- 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, 1994 -- 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 1994 Form 10-K Annual Report This combined Form 10-K is separately filed 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 10-11 Electric Fuel and Purchased Gas Adjustment Clauses 11 Fuel Supply - Coal 11 Natural Gas Supply 12-13 Financing and Capital Expenditures Programs 13 Environmental Matters 14 Significant Customer 14 Franchises 14 Competition 14-15 Employees 15 Business of ESE 15-17 Customers 17 Regulation of ESE's Clients 18-19 Regulation of ESE 19-20 Competition 20 Subcontractors 20 Government Contracts 20 Patents and Trademark Protection 20-21 Potential Liabilities and Insurance 21-22 Employees 22 Other Businesses 22 CIM/CLM 22 Holding Company 22-23 CVI 23 Employees 23 Item 2. Properties 23-24 Item 3. Legal Proceedings 24-25 Item 4. Submission of Matters to a Vote of Security Holders 25 Executive Officers of the Registrant 25-26 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 27 Item 6. Selected Financial Data 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Item 8. Index - Financial Statements, Supplementary Data and Exhibits 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 52 Part III Item 10. Directors and Executive Officers of the Registrants 52 Item 11. Executive Compensation 52-53 Item 12. Security Ownership of Certain Beneficial Owners and Management 53 Item 13. Certain Relationships and Related Transactions 53 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 54-58 GLOSSARY OF TERMS When used herein, the following terms will have the meanings indicated. AFUDC -- Allowance for Funds Used During Construction BTU -- British Thermal Unit. The quantity of heat required to raise 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 -- Central Illinois Public Service Company CLM -- CILCORP Lease Management Inc. Company -- CILCORP Inc. Cooling Degree Days -- The measure of the degree of warm weather experienced, based on the extent to which average of high and low temperatures for a day falls above 65 degrees Fahrenheit (annual degree days above historic average indicate warmer than average temperatures); 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. EMF -- Electric and magnetic fields EPA -- Environmental Protection Agency (Federal) ESE -- Environmental Science & Engineering, Inc. FAC -- Fuel Adjustment Clause FASB -- Financial Accounting Standards Board FERC -- Federal Energy Regulatory Commission Heating Degree Days -- The measure of the degree of cold weather experienced, based on the extent to which average of high and low temperatures for a day falls below 65 degrees Fahrenheit (annual degree days above historic average indicate cooler than average temperatures); historic average provided by U.S. Weather Bureau for 30- year period. ICC -- Illinois Commerce Commission IEPA -- Illinois Environmental Protection Agency IPCB -- Illinois Pollution Control Board 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 to provide the best value at the least cost to customers. MAIN -- Mid-America Interconnected Network. One of nine regions that make up the National Electric Reliability Council. Its purpose is to ensure the Midwest region will meet its load responsibility. MCF -- One thousand cubic feet MMCF -- One million cubic feet MW -- Megawatt, a million watts MWG -- Midwest Grain Products, Inc. NEPA -- National Energy Policy Act. PCBs -- Polychlorinated biphenyls PGA -- Purchased Gas Adjustment RCRA -- Resource Conservation and Recovery Act. This act deals with solid waste pollution control. SFAS -- Statement of Financial Accounting Standards Therm -- Unit of measurement for natural gas; a therm is equal to one hundred cubic feet (volume) or 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), the Company's principal business subsidiary. The Company's other core business subsidiary is Environmental Science & Engineering, Inc. (ESE). 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, are collectively referred to herein as Other Businesses. The Company owns 100% of the common stock of CILCO. 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. ESE, a wholly-owned subsidiary, was formed in February 1990 to conduct the environmental consulting and analytical services businesses acquired from Hunter Environmental Services, Inc. (Hunter) during that year. ESE provides engineering and environmental consulting, analysis and laboratory services to a variety of governmental and private customers. ESE has nine wholly-owned subsidiaries: Keck Instruments, Inc., which manufactures geophysical instruments used in environmental applications; Chemrox, Inc., which has reduced its presence in the ethylene oxide and chlorofluorocarbon control-equipment market by maintaining only a minimal staff, primarily to concentrate on warranty work; Keck Consulting Services, Inc., which is inactive; ESE Biosciences, Inc., whose on-site biological treatment of contaminated soil and groundwater is now performed by ESE; ESE Architectural Services, Inc., which provides architecture and design services; National Professional Casualty Co., which provides professional liability insurance to ESE; ESE International Ltd., which provides engineering and consulting services in foreign countries; ESE Michigan, Inc. which formerly conducted business as ESE Environmental Science and Engineering, Inc., provides the same services as its parent, ESE; and, Savannah Resources Inc., which acquired land that will be remediated and sold. CIM, a wholly-owned subsidiary, manages the Company's investment portfolio. CIM manages seven 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). CVI, a wholly-owned subsidiary, is a venture capital company which pursues investment opportunities in new ventures and the expansion of existing ventures in environmental services, biotechnology and health care. CVI has an 80% interest in Agricultural Research and Development Corporation and one wholly-owned subsidiary, CILCORP Energy Services, Inc. (CESI). CESI's primary business is the sale of carbon monoxide detectors to utilities for resale to their customers. CILCORP Development Services Inc. (CDS) was organized to construct a steam production plant in Pekin, Illinois, which, following necessary regulatory approvals, was to be owned and operated by CILCO. CILCO now owns and operates this facility. CDS was dissolved voluntarily on December 28, 1994. The following table summarizes the relative contribution of each business group to consolidated assets, revenue and net income for the year ended December 31, 1994.
(In thousands) Assets Revenue Net Income CILCO $1,019,109 $461,370 $29,507 ESE 93,464 132,799 1,824 Other Businesses 125,811 10,970 1,255 ---------- -------- ------- $1,238,384 $605,139 $32,586 ========== ======== =======
CILCORP is an intrastate exempt holding company under the Public Utility Holding Company Act of 1935 (PUHCA). In 1989, the Securities and Exchange Commission (SEC) issued proposed rules, which, if adopted, would require CILCORP to apply for a formal exemptive order from the SEC or come within one of the proposed safe harbors by either seeking passage of Illinois legislation permitting diversification or reducing its interest in non-utility businesses to less than 10% of consolidated assets. The SEC has not taken any public action towards adopting final diversification rules since the proposed rules were issued. On November 3, 1994, the SEC issued a concept release soliciting comments on modernization of utility regulation under the PUHCA. This is part of a continuing effort by the SEC to evaluate the regulatory structure of the utility industry. Both regulatory and legislative changes are possible but cannot be predicted at this time. On February 6, 1995, the Company joined with several other companies in commenting on the concept release. 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. In addition to its principal business, 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. CILCO is continuing to experience, in varying degrees, the impact of developments common to the electric and gas utility industries. These include 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. ELECTRIC SERVICE CILCO furnishes electric service to retail customers in 138 Illinois communities (including Peoria, East Peoria, Pekin, Lincoln and Morton). At December 31, 1994, CILCO had approximately 192,000 retail electric customers. In 1994, 68% of CILCO's total operating revenue was derived from the sale of electricity. Approximately 38% of electric revenue resulted from residential sales, 30% from commercial sales, 28% from industrial sales, 3% from sales for resale and 1% 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:
1994 1993 1992 (In thousands) Residential $120,314 $119,709 $108,562 Commercial 94,867 90,594 86,747 Industrial 86,804 85,384 82,122 Sales for resale 8,182 4,522 8,433 Street lighting and public authorities 2,123 2,062 2,034 Other revenue 795 853 915 -------- -------- -------- Total electric revenue $313,085 $303,124 $288,813 ======== ======== ========
CILCO owns and operates two coal-fired base load generating plants and two natural gas combustion turbine-generators which are used for peaking service. A 21 megawatt (MW) cogeneration plant at Midwest Grain Products, Inc. (MWG) is scheduled to begin generating electricity in June 1995 (see Item 2. Properties-CILCO). CILCO set a new all-time system peak demand of 1,137 MW on July 5, 1994, surpassing the previous all-time system peak demand of 1,120 MW set on August 16, 1988. The system peak demand for 1995 is estimated to be 1,142 MW with a reserve margin of approximately 15.8%. The reserve margin takes into account 70 MW of firm purchased power from Central Illinois Public Service Company (CIPS) and 91 MW of interruptible industrial load and other related Demand Side Management (DSM) programs. The system peak demand includes 10 MW of firm power to be provided to the City of Springfield (City Water, Light and Power Department). CILCO's 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 entered into a firm, wholesale bulk power agreement to purchase capacity from CIPS. The agreement, which expires in 1998, was approved by the Illinois Commerce Commission (ICC) in 1990 as part of CILCO's electric least cost energy plan. In 1992, CILCO filed an updated electric least cost energy plan with the ICC which anticipates CILCO will experience shortages of peak generating capacity ranging from 100 MW in 1998 up to 130 MW by 2001. In 1993, the ICC approved another firm, wholesale power purchase agreement between CIPS and CILCO to meet this shortfall (see CILCO's Note 8, Item 8. Financial Statements and Supplementary Data). In December 1993, CILCORP announced an agreement with MWG, one of CILCO's largest customers, to develop a gas-fired cogeneration plant. In May 1994, the ICC approved the facility as a least-cost alternative. The plant, which began providing steam heat to MWG's Pekin, Illinois, facility on December 16, 1994, will also generate electricity for distribution to CILCO's customers. Installation of the 21 MW turbine generator and auxiliary equipment will be completed in mid-1995, with an expected available summer generating capacity of 16 MW. CILCO is interconnected with CIPS, Commonwealth Edison Company, Illinois Power and the 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 129 Illinois communities (including Peoria, East Peoria, Pekin, Lincoln and Springfield). At December 31, 1994, CILCO had approximately 198,000 gas customers, including 567 industrial and commercial gas transportation customers that purchase gas directly from suppliers for transportation through CILCO's system. In 1994, 32% of CILCO's total operating revenue was derived from the sale or transportation of natural gas. Approximately 67% of gas revenue resulted from residential sales, 22% from commercial sales, 3% from industrial sales, 7% from transportation and 1% 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:
1994 1993 1992 (In thousands) Residential $ 99,567 $104,348 $ 99,096 Commercial 32,553 32,396 30,767 Industrial 4,219 3,013 3,793 Transportation of gas 10,124 10,134 10,541 Other revenue 1,822 863 729 -------- -------- -------- Total gas revenue $148,285 $150,754 $144,926 ======== ======== ========
CILCO's all-time maximum daily send-out of 443,167 thousand cubic feet (MCF) occurred on January 15, 1972. The 1994 peak day send-out of 405,438 MCF occurred on January 18, 1994. CILCO has been able to meet all of its existing customer requirements during the 1994-1995 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 1995-1996 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 Federal Energy Regulatory Commission (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. The Illinois statute governing public utilities requires the ICC to review and adopt electric least cost energy plans (LCP) for public utilities. In general, CILCO's LCP consists of customer demand forecasts and the projected resources that CILCO will rely upon to meet that demand. The planning horizon is 20 years, and the LCP is reviewed by the ICC every three years. CILCO filed its most recent LCP on July 1, 1992; the LCP was approved by the ICC on June 23, 1993. CILCO's next LCP is scheduled for filing on July 1, 1995. The ICC may not issue a certificate of convenience and necessity for any new construction project unless the ICC has determined that the proposed construction is consistent with CILCO's most recently approved LCP, as updated. The law requires that the LCP incorporate economical cogeneration, renewable resources and DSM programs, to the fullest extent possible, as resources for meeting the future energy service needs of CILCO's customers. CILCO's most recent electric LCP contains several DSM programs, including existing residential and commercial heat pump programs and commercial audit programs. It also includes pilot programs whose objective is to verify the cost effectiveness of electric DSM in CILCO's service territory. Based upon a preliminary assessment, electric DSM programs are projected to reduce CILCO's peak demand by 146 MW over the 20 year planning horizon. These projections may change depending on the results of pilot programs currently in progress or scheduled to begin in the next few years. Current pilot programs for electric service include: new interruptible rates, residential air conditioner cycling, natural gas air conditioning, energy audits, high efficiency air conditioning, motor efficiency and new construction energy efficiency incentives. Three additional pilot programs are currently under development: high efficiency interior lighting, high efficiency refrigeration equipment and thermal storage incentives. In 1994, the total cost of the pilot and full-scale programs, excluding interruptible rates, was approximately $360,000. The National Energy Policy Act of 1992 (NEPA) encourages competition by allowing utilities and non-utilities to form non-regulated generation subsidiaries to supply additional electric demand without being restricted by the Public Utility Holding Company Act of 1935. The FERC may order access to utility transmission systems by third- party energy producers on a case-by-case basis and may also order electric utilities to enlarge their transmission systems to transport (wheel) power, subject to certain conditions. NEPA specifically bans federally-mandated wheeling of power for retail customers, but several state public utility regulatory commissions are adopting pilot programs to initiate retail wheeling. Various Illinois trade associations are currently studying retail wheeling implications. CILCO is presently involved with a statewide task force to examine electric utility regulation and competition. The results of this study will be provided to the ICC and the Illinois legislature for educational and planning purposes. ELECTRIC FUEL AND PURCHASED GAS ADJUSTMENT CLAUSES CILCO's tariffs provide for adjustments to its electric rates through the fuel adjustment clause (FAC) 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, and are normally addressed in general ratemaking proceedings. However, by statute effective as of August 27, 1991, any Illinois utility purchasing coal under any contract that was in effect on August 27, 1991, shall, whenever the utility requests, but not later than the conclusion of the utility's next general electric rate proceeding, begin recovering the transportation costs of that coal through the utility's FAC. CILCO's 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. FUEL SUPPLY - COAL Substantially all of CILCO's electric generation capacity is coal-fired, including 100% of its current base load capacity. Approximately 2.4 million tons of coal were burned during 1994. Existing coal contracts with suppliers in central Illinois, eastern Kentucky and West Virginia are expected to supply about 72% of the 1995 requirements. Coal will be purchased on the spot market during the year to meet remaining annual fuel requirements. During the years 1994, 1993 and 1992, the average cost per ton of coal burned, including transportation, was $39.22, $40.30 and $40.13, respectively. The cost of coal burned per million BTU's was $1.71, $1.75 and $1.73, respectively (see Electric Fuel and Purchased Gas Adjustment Clauses). CILCO has several contracts for the purchase of low-sulfur coal burned at E. D. Edwards Station. The contracts are normally 12 to 36 months in length. CILCO negotiated a one-year agreement with a coal supplier to replace a contract which expired in 1994. All low-sulfur coal contracts contain provisions which allow CILCO to terminate the contracts with no monetary penalties if any new governmental or environmental regulations are enacted which restrict the burning of these coals. Furthermore, these contracts contain provisions that permit adjustment of the annual contract quantity in the event of an economic downturn. 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 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. NATURAL GAS SUPPLY During 1994, 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 interconnecting interstate pipeline suppliers and firm and interruptible gas purchase arrangements of varying terms made directly with approximately 35 gas suppliers. Gas purchased was also injected into and withdrawn from CILCO's two natural gas storage fields and the storage fields of various suppliers via contracted storage services. The supply 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 at prevailing market prices. During 1994, CILCO purchased approximately 26,100,000 MCF of natural gas at a cost of approximately $70.8 million, or an average cost of $2.71 per MCF. The average cost per MCF of natural gas purchased was $2.66 in 1993 and $2.86 in 1992. In orders entered on March 9, 1994, and on September 21, 1994, the ICC confirmed the right of Illinois gas utilities to recover 100% of pipeline transition costs resulting from FERC Order 636. CILCO estimates that it could ultimately be billed up to $3 million, excluding interest, for pipeline transition costs. While CILCO cannot at this time determine the outcome of a court appeal of the September 21, 1994, ICC order regarding allocation of transition costs, management believes that, based on existing law and the ICC order, any transition charges or other billings by the pipelines to CILCO as a result of Order 636 will be recoverable from customers through CILCO's gas rates. For a discussion of other gas issues, refer to the caption "Gas Pipeline Supplier Transition Costs" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 21 of CILCORP's 1994 Annual Report to Shareholders which is incorporated herein by reference. 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 1995 are estimated to be $69 million, including Allowance for Funds Used During Construction of approximately $362,000, and pollution control expenditures of $3 million. Expenditures include $41 million for the electric business, $20 million for the gas business and $8 million for general and miscellaneous purposes. Electric expenditures include $13 million for additions and modifications to generating facilities and $28 million for 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 1996-1999 are $267 million. CILCO expects to finance its 1995 capital expenditures with funds provided by operating activities and the issuance of approximately $20 million of medium-term notes. CILCO obtained ICC approval in October 1994, to issue $65 million of secured medium-term notes and not more than $25 million of pollution control bonds. For further discussion of the approved financing refer to the caption "Capital Resources and Liquidity -- CILCO" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation on page 19 of CILCORP's 1994 Annual Report to Shareholders which is incorporated herein by reference. CILCO had $23.4 million of short-term commercial paper outstanding at December 31, 1994, and expects to issue short-term commercial paper throughout 1995. At December 31, 1994, CILCO had bank lines of credit aggregating $30.4 million, all of which were unused. CILCO expects these bank lines will remain unused through 1995. ENVIRONMENTAL MATTERS On April 26, 1994, the United States Environmental Protection Agency (EPA) issued a Notice of Violation (NOV) to CILCO. The NOV states that opacity emission limit violations occurred throughout 1993 at E. D. Edwards Station for two coal-fired boilers. The NOV was issued pursuant to Section 113(a)(1) of the Clean Air Act. On May 24, 1994, a conference was held with EPA representatives to discuss the NOV. CILCO provided additional information in support of its position that the emissions did not exceed acceptable opacity limits. CILCO received a draft consent order from the EPA on November 3, 1994, and submitted a revised draft order to the EPA on January 12, 1995. A final order was signed on February 22, 1995, which requires CILCO to report opacity exceedances and burner tuning efforts through 1998, but no fine was imposed. For additional information refer to the caption "Environmental Matters" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 20 of CILCORP's 1994 Annual Report to Shareholders which is incorporated herein by reference. SIGNIFICANT CUSTOMER Caterpillar Inc. is CILCO's largest industrial customer. Aggregate gas and electric revenues from sales to Caterpillar were 9.4%, 9.1% and 9.3% of CILCO's total operating revenue for 1994, 1993 and 1992, respectively. See CILCO's Consolidated Statements of Segments of Business under Item 8. Financial Statements and Supplementary Data. On June 20, 1994, Caterpillar employees represented by the United Auto Workers Union began a strike at Caterpillar facilities in CILCO's service territory. To date, the strike has not had an adverse effect on CILCO's sales to Caterpillar. CILCO's management cannot predict what effect, if any, a continued strike at Caterpillar will have on CILCO's future revenues or earnings. 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 currently 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. During 1994, CILCO continued to transport gas purchased by commercial and industrial customers directly from producers and marketers. In 1994, approximately $10.1 million of revenue was generated from transportation services provided to 567 customers. Transportation arrangements have made it practical for certain industrial customers to continue to use gas instead of switching to alternate fuels. The amount of gas transported in the future will depend on a number of factors including regulatory and legislative action, the relative cost of gas purchased on the spot market compared to the cost of gas provided by CILCO and the cost of alternate fuels, and the feasibility of customers bypassing the CILCO system. Refer to the caption "CILCO Electric Operations" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 22 of CILCORP's 1994 Annual Report to Shareholders, incorporated herein by reference, for a discussion of competitive trends which may affect CILCO's electric operations. EMPLOYEES The number of full-time and part-time employees at December 31, 1994, was 1,575, excluding CILCO employees assigned to the Other Businesses. Of these, 225 power plant employees were represented by Local 8 of the International Brotherhood of Firemen and Oilers, and 506 gas and elec- tric department employees were represented by Local 51 of the International Brotherhood of Electrical Workers. Both union contracts expire June 30, 1995. BUSINESS OF ESE ESE is an environmental consulting and engineering firm with additional capabilities in laboratory analysis and equipment manufacturing. ESE's services are intended to address the growing concern over the quality of the environment, the promulgation of numerous complex federal, state and local environmental regulations and enforcement efforts in support of environmental laws. As such, ESE'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 ESE's Clients herein). ESE 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. ESE 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. ESE employs environmental, chemical, geotechnical, civil, mechanical, electrical, structural, transportation and process engineers; geologists; hydrogeologists; chemists; biologists; toxicologists; meteorologists; industrial hygienists; architects; and, surveyors. ESE has a nationwide network of offices with its corporate office in Peoria, Illinois. Presently, ESE has three major laboratories located in Englewood, Colorado; Gainesville, Florida; and Peoria, Illinois. Through a wholly-owned subsidiary, Resources, Inc., ESE acquires land that is environmentally impaired, remediates and then sells this property. ESE provides services in the following areas: Air Quality Services: ESE provides ambient air monitoring, source testing, permitting and licensing emissions inventories; planning and compliance strategies; dispersion modeling; data management; indoor air quality; and, engineering design/installation. Analytical Services: ESE provides comprehensive chemical analysis, field sampling services, and interpretation for environmental, wastewater and air pollution chemistry, industrial hygiene and treatability studies. These services include hazardous waste analysis/characterization for inorganics/organics; trace environmental analysis for toxics in water, sediments and tissue; acid rain analysis; analytical methods research and development; priority pollutant analysis; radiochemical analysis (including radon testing); asbestos identification and quantification; drinking water characterization; industrial hygiene analysis; and, chemical data information management. Services are provided to industry, agriculture, commercial firms, consulting engineers and federal, state and local governmental agencies. Asbestos Management/Industrial Hygiene/Lead-Based Paint Services: ESE provides on-site consultation and facility surveys to identify potential asbestos, industrial hygiene, radon and lead-based paint problems. ESE's industrial hygiene staff collects bulk samples of suspect materials, monitors buildings for contamination, and also provides construction management/contract administration services, renovation and restoration services (post-abatement) and health and safety training courses. Civil Engineering: ESE performs a variety of civil engineering services including highway, street and bridge planning and design, hydrological hydraulic studies and drainage design, structural analysis and design foundation engineering, computer-aided drafting and design services and subdivision design and surveying. Construction Management: ESE provides turnkey design and construction services and construction observation services on transportation and site development projects and infrastructure projects. Actual construction services are subcontracted. Environmental Assessment and Toxicology Services: ESE conducts field and laboratory studies involving chemical migration and transport, aquatic toxicology and bioassay, ecological and human health risk assessments, site selection and certification, development of regional impact studies and environmental impact statements. Environmental Audit Service: ESE performs operational audits for clients in industry to verify an operating facility's compliance status with regulatory requirements, identifies potential liabilities associated with past waste management practices and identifies methods for minimizing future waste generation. ESE also performs transactional audits which focus on the transfer of potential liabilities in real estate or business transactions. Environmental Engineering Services: ESE provides environmental engineering services which include applied research and development, water and waste characterization, treatability and disposal studies, process and concept design of treatment and disposal facilities, design of drinking water treatment and distribution facilities, design of wastewater/industrial waste treatment and collection facilities, technical and economic feasibility evaluations, contract operation and maintenance of water and wastewater treatment facilities, pursuit of permit approval for water and solid waste-oriented activities and design of solid waste landfills and recycling facilities. Facilities Engineering and Planning Services: ESE provides services for new building projects, remodeling or additions, and investigations and evaluations of building deficiencies. ESE designs heating, ventilating, air conditioning, plumbing and fire prevention systems for new or existing structures, and designs electrical systems for industrial operations, municipal facilities, health care institutions and commercial buildings. ESE also has experience designing large industrial parks, major highways, wastewater treatment plants and certain types of military installations. Hydrogeology: ESE performs subsurface investigations and evaluations for both geological and engineering studies. Service areas include hydrogeologic investigations, geophysical studies, soils and materials testing, aquifer evaluation, well inventories and consumptive use analysis, saltwater intrusion investigations, leakage-recharge investigations, well field studies, groundwater pollution investigations, groundwater supply permitting and groundwater modeling. Manufacture of Equipment: Through its wholly-owned subsidiary, Keck Instruments, Inc., ESE designs, assembles, and markets instrumentation for measuring, monitoring, detecting and sampling groundwater as well as instruments for mineral exploration and detection, analysis and subsurface mapping. Remediation: ESE develops, designs and implements remediation plans at contaminated sites. ESE has developed and patented the above-ground fixed-film bioreactor under the registered trademark PetroClean bioremediation system, which treats contaminated soil and groundwater in place without excavating and removing affected soil. ESE also provides remediation services for contaminated soil and groundwater using a variety of other technologies. Storage Tank Management Service: ESE provides services for managing environmental issues related to underground and above-ground storage tanks. Key service areas range from pre-planning to assessment and closure of problem sites including site assessments, analytical services, remediation and risk assessment. ESE's tank management programs include tank removal, retrofitting, replacement and conversion of underground systems to above-ground storage. Surface Water Resources Service: ESE offers characterizations of the freshwater, estuarine, and oceanic environments; environmental impact assessments; site selection studies; licensing and permitting studies; field surveys and monitoring; numerical/physical modeling; technical analyses; and hydrologic and hydraulic engineering services including stormwater drainage analysis, floodplain management and receiving water quality evaluations. CUSTOMERS ESE sells its products and services to governmental agencies and public and private companies. Approximately 42% of ESE's revenue for 1994 was generated by services performed for federal, state and local governmental agencies. No single customer accounted for more than 5% of ESE's gross revenues for the year ended December 31, 1994, as compared to 10% for the year ended December 31, 1993. In 1994, approximately 81% of ESE's revenue was generated from environmental consulting and engineering services, 18% from laboratory services and 1% from manufactured equipment sales. REGULATION OF ESE'S CLIENTS The level and nature of ESE'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, and to ensure compliance with air quality standards. The Clean Air Act Amendments of 1990 discussed in CILCORP's 1994 Annual Report to Shareholders under the caption "Environmental Matters" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 20, incorporated herein by reference, will create additional regulation for air toxic emissions, acid rain and attainment of 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 1995 or 1996. 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. 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 until September 30, 1994. CERCLA's reauthorization should occur in 1995 or 1996. 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 is anticipated in 1995 or 1996. Safe Drinking Water Act, as amended in 1986 (SDWA): The SDWA affects numerous public water supplies. Under this Act, the EPA must establish primary drinking water standards. 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 ESE's customers. 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. Some of the activities and risks covered by these statutes and regulations, and which ESE assists its customers in addressing, include: - clean-up and remediation of contaminated soil and groundwater; - identification, inspection and clean-up of leaking underground storage tanks; - the management and disposal of asbestos, polychlorinated biphenyls and other toxic substances; - ambient air quality and the control of emissions into the atmosphere; - compliance with water quality standards, including those related to drinking water; and, - occupational safety and health in the workplace. REGULATION OF ESE The environmental statutes and regulations described above primarily affect ESE's clients, and thus have a significant impact on the volume of ESE's business activity and specific types of services that ESE provides to its clients. These environmental statutes and regulations also govern the manner in which ESE performs services for its clients. ESE 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. ESE 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 ESE'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 ESE, 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 ESE and its clients. COMPETITION The market for ESE's consulting services is highly competitive, and ESE is subject to competition with respect to all of the services it provides. ESE competes primarily on the basis of quality of service, expertise and, to a lesser extent, price. ESE's competitors range from small local firms to major national companies. No single entity currently dominates the environmental consulting and engineering services marketplace. In February 1990, the Company paid Hunter $2 million for a five-year non-compete agreement. Under the terms of this agreement, Hunter agreed not to compete in the environmental consulting businesses conducted by the companies acquired by CILCORP. Hunter also agreed not to solicit employees or customers of the acquired businesses or represent itself as being engaged in the businesses conducted by these companies. SUBCONTRACTORS Because of the nature of the projects in which ESE is involved, ESE often subcontracts a portion of its projects to other contractors in order to utilize their expertise, equipment and experience in areas where ESE may lack the ability to complete the entire project. For example, because ESE does not perform underground storage tank removal or have the necessary equipment to perform drilling services in all parts of the country, such work may be subcontracted to local contractors. In addition, contracts which ESE has with federal, state and local governmental agencies may require, as a matter of law, that on a particular job ESE hire a certain percentage of minority-owned subcontractors. GOVERNMENT CONTRACTS Many of ESE'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 ESE within the limits of the contract. Although ESE 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 government agency. PATENTS AND TRADEMARK PROTECTION ESE has applied for or been assigned certain patents or patent rights. ESE 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 ESE's operations. POTENTIAL LIABILITIES AND INSURANCE ESE 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 ESE's control during the course of a project; damage to ESE'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 ESE'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, ESE assumes contingent liabilities arising out of its need to exercise care in the selection and supervision of subcontractors on various projects. Since ESE 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 ESE maintain a sound risk management and insurance program. ESE carries professional liability insurance which covers design errors and omissions resulting from its typical operations. This policy is extended to include pollution liability losses. Clients may also be named as additional insured parties for specific projects. The current policy, effective April 1, 1994, has a limit of $8 million, with the first $3 million of coverage provided by ESE'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 an ESE 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 ESE is typically involved. Accordingly, in the event of a serious spill or loss resulting from a design error or omission, ESE faces potential liability for the self-insured retention portion of a claim, as well as any amounts in excess of $8 million. ESE's professional and pollution liability insurance coverage has a standard term of one year. ESE expects to renew these policies annually in the normal course of business. The professional 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. ESE also carries insurance policies covering worker's compensation, general liability and auto and property damage claims. The worker's compensation policy provides statutory average limits. It is a loss sensitive program under which insurance premiums vary according to actual claims paid. 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 insurance policies, ESE attempts with its clients to limit and/or transfer its risk contractually. ESE believes it operates in a safe manner and 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 ESE's policy limits. EMPLOYEES At December 31, 1994, ESE employed 1,330 full-time, part-time and on- call employees, many of whom have advanced degrees in a variety of technical disciplines. ESE believes its relations with its employees are good. No ESE employees are represented by a labor union. OTHER BUSINESSES CIM/CLM The investment portfolio of CIM at December 31, 1994, and December 31, 1993, is shown in the following table:
Type of Investment At December 31, 1994 1993 (In thousands) Equity in leveraged leases $120,961 $114,803 Cash and temporary cash investments 76 291 Investment in Energy Investors Fund 1,691 4,116 Other 101 48,204 -------- -------- Total $122,829 $167,414 ======== ========
At December 31, 1994, CIM had equity investments in seven leveraged leases through its wholly-owned subsidiaries, CILCORP Lease Management Inc. (CLM), CIM Air Leasing Inc. and CIM Leasing Inc. CIM made two new leveraged lease investments in 1993. The increase during 1994 in equity in leveraged leases reflects earnings on those investments. 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 $1.7 million in the Energy Investors Fund, L.P.(Fund), representing a 3.13% interest in the Fund at December 31, 1994. 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 the investment. HOLDING COMPANY From December 1993 through March 1994, the Company issued a total of 126,475 shares of common stock through the CILCO Employees' Savings Plan (ESP) and the CILCORP Automatic Reinvestment and Stock Purchase Plan (DRIP). These shares were issued at an average price of $37.08 per share for total proceeds of $4.7 million (refer to the caption "Capital Resources and Liquidity" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 19 of CILCORP's 1994 Annual Report to Shareholders which is incorporated herein by reference.) In March 1994, the Company suspended issuing stock through the ESP and DRIP. Depending on market conditions, the Company may issue additional shares of common stock through these plans or through a conventional stock offering. CVI In 1994, CVI invested an additional $159,000 in Peoria Medical Research Corporation doing business as HEALTH ADVANCE INSTITUTE - Medical Research Centers (HEALTH ADVANCE INSTITUTE). HEALTH ADVANCE INSTITUTE'S objective is to create a clinical research organization which will be paid by pharmaceutical firms to administer clinical trials for new products. CVI invested $500,000 in 1994 in a newly-formed, wholly-owned subsidiary called CILCORP Energy Services Inc. (CESI). CESI's primary business is the sale of carbon monoxide detectors to utilities for resale to their customers. EMPLOYEES At December 31, 1994, there were 36 full-time CILCO employees assigned to CILCORP, CVI and CIM. Item 2. Properties CILCO CILCO owns and operates two steam-electric generating plants and two combustion turbine-generators. These facilities had an available summer capability of 1,136 MW in 1994. In December 1993, CILCORP announced an agreement with MWG to develop a gas-fired cogeneration plant. The cogeneration plant at MWG began producing steam heat at that facility in December 1994. Installation of the 21 MW turbine-generator will be completed by mid-1995. The turbine generator will have an expected available summer capability of 16 MW. (See Electric Service under Item 1. Business.) The major generating facilities of CILCO (representing 96.0% of CILCO's available summer generating capability projected for 1995), all of which are fueled with coal, are as follows:
Available Summer Capability (MW) Station & Unit Installed Actual 1994 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 14 principal substations with an installed capacity of 3,364,200 kilovolt-amperes. The electric distribution system includes approximately 6,212 miles of overhead pole and tower lines and 1,941 miles of underground distribution cables. The distribution system also includes 105 substations with an installed capacity of 2,003,485 kilovolt-amperes. The gas system includes approximately 3,425 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 billion cubic feet (BCF). An additional storage facility near Lincoln, Illinois, has a present recoverable capacity of approximately 5.2 BCF. ESE ESE owns approximately 55 acres of land in Gainesville, Florida, containing 110,000 square feet of offices, laboratory and other space. In Peoria, Illinois, ESE owns approximately 27,000 square feet of offices, laboratory and other space and leases approximately 21,000 square feet of additional space for offices. ESE and its subsidiaries lease additional facilities for offices, laboratories and warehouse space in 29 cities throughout the United States. ESE 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. However, in 1995 ESE plans to spend $1.9 million to expand its Gainesville, Florida, laboratory by approximately 8,000 square feet. Item 3. Legal Proceedings Reference is made to the captions "Environmental Matters" and "Gas Pipeline Supplier Transition Costs" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of CILCORP's 1994 Annual Report to Shareholders incorporated herein by reference, for certain pending legal proceedings and/or proceedings known to be contemplated by governmental authorities. Reference is also made to Note 9 - Rate Matters, included herein. 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 investigation of CILCO's Springfield gas operations described in Note 9 - Rate Matters. CILCO On July 6, 1994, a lawsuit was filed against CILCO in a United States District Court by the current property owner, Vector-Springfield Properties, Ltd., seeking damages related to alleged coal tar contamination from a gas manufacturing plant formerly located at the site which was owned but never operated by CILCO. The lawsuit seeks cost recovery of more than $3 million related to coal tar investigation expenses, operating losses and diminution of market value. CILCO intends to vigorously defend these claims. For a further discussion of gas manufacturing plant sites refer to the caption "Environmental Matters" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 20 of CILCORP's 1994 Annual Report to Shareholders which is incorporated herein by reference. Management cannot currently determine the outcome of this litigation, but does not believe it will have a material adverse impact on CILCO's financial position or results of operations. ESE In June 1994, CILCORP, ESE and the lessor of a building in Shelton, Connecticut, concluded settlement negotiations which released ESE from future lease obligations and litigation related to that lease. At the request of the South Carolina Department of Health and Environmental Control, the U.S. Department of Justice (DOJ) initiated an investigation into an alleged record-keeping violation at an office operated by ESE in Greenville, South Carolina. The office was closed in May 1993. Following its investigation, the DOJ referred this matter to the Attorney General of South Carolina for disposition as a civil matter. Management does not believe that this matter will have a material adverse impact on the Company's financial position or results of operations. 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 1994. CILCO There were no matters submitted to a vote of security holders during the fourth quarter of 1994. Executive Officers of CILCORP Age at Positions Held During Initial Name 3/31/95 Past Five Years Effective Date(2) R. O. Viets 51 President and Chief Executive Officer February 1, 1988 J. G. Sahn(1) 48 Vice President, General March 1, 1994 Counsel and Secretary Vice President and General Counsel February 1, 1989 R. J. Sprowls 37 Treasurer and Assistant Secretary October 1, 1990 Treasurer - CILCO February 1, 1988 T. D. Hutchinson 40 Controller February 1, 1988 Notes: (1) M. J. Murray served as Secretary and Assistant Treasurer from January 22, 1985, until February 28, 1994, when he retired and was replaced as Secretary by J. G. Sahn. (2) The term of each executive officer extends to the organization meeting of CILCORP's Board of Directors following the next annual election of Directors. Executive Officers of CILCO Age as of Positions Held During Initial Name 3/31/95 Past Five Years(1) Effective Date(2) R. W. Slone 59 Chairman of the Board, President and Chief Executive Officer April 23, 1991 President and Chief Executive Officer February 1, 1988(3) T. S. Kurtz 47 Vice President November 1, 1988(4) T. S. Romanowski 45 Vice President October 1, 1986(4) W. M. Shay 42 Vice President January 1, 1993(4)(5) J. F. Vergon 47 Vice President October 1, 1986(4)(5) W. R. Dodds 40 Treasurer and Manager of Treasury Department October 1, 1990 Controller and Manager of Accounting February 1, 1988 R. L. Beetschen 49 Controller and Manager of Accounting October 1, 1990 Supervisor - General Accounting May 1, 1988 J. G. Sahn 48 Secretary March 1, 1993 Notes: (1) The officers listed have been employed by CILCO in executive or management positions for more than five years except Mr. Shay and Mr. Sahn. Mr. Shay was Vice President and Chief Financial Officer of CILCO's parent, CILCORP Inc., from August 15, 1988, through December 31, 1992. 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 Secretary and Assistant Treasurer of CILCORP effective March 1, 1994. (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) R. W. Slone will retire from CILCO effective April 1, 1995. He will be replaced by R. O. Viets as Chairman and Chief Executive Officer. Mr. Viets was previously Chairman of the Board of CILCO and also serves as President and Chief Executive Officer of CILCORP Inc. (4) T. S. Kurtz, T. S. Romanowski, W. M. Shay and J. F. Vergon head the Electric Production Group, the Finance and Administrative Services Group, the Electric Operations Group and the Gas Operations Group, respectively. T. S. Romanowski also serves as CILCO's Principal Financial Officer. J. F. Vergon also serves as Chairman of the Board, President and Chief Executive Officer of CILCORP Investment Management Inc. (5) Effective April 1, 1995, Mr. Shay and Mr. Vergon will become Group Presidents of Electric Operations and Gas Operations, respectively. 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, 1994, there were 15,095 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 1993 First Second Third Fourth Price Range High $43 3/8 $43 3/8 $43 3/4 $43 Low $39 $40 3/8 $41 5/8 $35 3/4 Dividends Paid $ .615 $ .615 $ .615 $ .615 1994 Price Range High $37 1/2 $34 7/8 $31 $32 1/2 Low $33 $28 7/8 $28 3/4 $29 1/4 Dividends Paid $ .615 $ .615 $ .615 $ .615
The number of common shareholders of record as of March 10, 1995, was 14,954. CILCO CILCO's common stock is not traded on any market. As of March 10, 1995, 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 as described in Note 5 of CILCO's Notes to 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, 1994 1993 1992 1991 1990 1989 (In thousands except per share amounts) Revenue $ 605,139 $ 584,511 $ 581,225 $ 590,165 $ 542,847 $ 463,062 Net income available for common stockholders 32,586 33,583 32,097 39,656 34,504 48,399 Earnings per share 2.50 2.60 2.48 3.14 2.69 3.58 Total assets 1,238,384 1,198,440 1,184,916 1,147,978 1,155,254 1,136,140 Long-term debt 326,695 325,711 307,628 324,998 298,217 301,114 Dividends declared per common share 2.46 2.46 2.46 2.46 2.46 2.46
Central Illinois Light Company Selected Financial Data
For the Years Ended December 31, 1994 1993 1992 1991 1990 1989 (In thousands) Revenue $ 461,370 $453,878 $433,739 $454,602 $432,961 $426,302 Net income available for common stockholders 29,507 33,635 31,195 39,790 36,525 39,989 Total assets 1,019,109 988,325 965,691 942,634 928,304 947,465 Long-term debt 278,359 278,321 257,361 268,006 268,051 268,095 Ratio of earnings to fixed charges 3.01 3.20 3.12 3.74 3.55 3.71
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 18 through 27 of CILCORP's 1994 Annual Report to Shareholders is incorporated herein by reference. Item 8.: Financial Statements and Supplementary Data The financial statements on pages 29 through 44 and Management's Report to the Stockholders of CILCORP Inc. on page 28 of CILCORP's 1994 Annual Report to Shareholders are incorporated herein by reference. Index to Financial Statements: CILCORP Page Report of Independent Public Accountants on Schedules 30 CILCO Management's Report 31 Report of Independent Public Accountants 32 Consolidated Statements of Income 33 Consolidated Balance Sheets 34-35 Consolidated Statements of Cash Flows 36-37 Consolidated Statements of Retained Earnings 38 Statements of Segments of Business 39-40 Notes to Consolidated Financial Statements 41-52 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 February 3, 1995. 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. Our report on the financial statements includes an explanatory paragraph with respect to the change in the method of accounting for income taxes, effective January 1, 1993, as discussed in Note 2 to the financial statements. ARTHUR ANDERSEN LLP Chicago, Illinois February 3, 1995 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. R. W. Slone R. W. Slone Chairman of the Board, President and Chief Executive Officer T. S. Romanowski T. S. Romanowski Vice President and Chief Financial Officer R. L. Beetschen R. L. Beetschen 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, 1994 and 1993, 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, 1994. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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 schedules listed in Item 14(a)2 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic financial statements. These financial statement schedules have been subjected to the auditing procedures applied in our 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. As explained in Note 2 to the Financial Statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. ARTHUR ANDERSEN LLP Chicago, Illinois February 3, 1995 Central Illinois Light Company Consolidated Statements of Income
For the Years Ended December 31, 1994 1993 1992 (In thousands) Operating Revenues: Electric $313,085 $303,124 $288,813 Gas 148,285 150,754 144,926 -------- -------- -------- Total Operating Revenues 461,370 453,878 433,739 -------- -------- -------- Operating Expenses: Cost of Fuel 97,184 92,112 94,133 Cost of Gas 78,696 79,022 77,123 Purchased Power 9,433 8,754 4,295 Other Operation Expenses 81,143 77,125 71,692 Maintenance 28,174 30,648 28,561 Depreciation and Amortization 54,349 53,023 51,395 Income Taxes 21,489 22,226 19,829 State and Local Taxes on Revenue 20,450 19,417 17,823 Other Taxes 11,945 11,364 11,288 -------- -------- -------- Total Operating Expenses 402,863 393,691 376,139 -------- -------- -------- Operating Income 58,507 60,187 57,600 -------- -------- -------- Other Income and Deductions: Cost of Equity Funds Capitalized 530 (23) 122 Company-owned Life Insurance, Net (667) (516) (142) Disallowed Plant Cost (7,523) -- -- Income Tax Reduction for Disallowed Plant Cost 2,982 -- -- Other, Net (1,051) 262 1,626 -------- -------- -------- Total Other Income and (Deductions) (5,729) (277) 1,606 -------- -------- -------- Income Before Interest Expenses 52,778 59,910 59,206 -------- -------- -------- Interest Expenses: Interest on Long-term Debt 19,221 19,753 20,747 Cost of Borrowed Funds Capitalized (510) (222) (215) Other 1,580 2,701 3,038 -------- -------- -------- Total Interest Expenses 20,291 22,232 23,570 -------- -------- -------- Net Income 32,487 37,678 35,636 -------- -------- ------- Dividends on Preferred Stock 2,980 4,043 4,441 -------- -------- -------- Net Income Available for Common Stock $ 29,507 $ 33,635 $ 31,195 ======== ======== ======== 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, 1994 1993 (In thousands) Utility Plant, At Original Cost: Electric $1,092,382 $1,068,818 Gas 355,270 348,541 ---------- ---------- 1,447,652 1,417,359 Less - Accumulated Provision for Depreciation 653,571 618,912 ---------- ---------- 794,081 798,447 Construction Work in Progress 71,105 31,896 Plant Acquisition Adjustments, Net of Amortization 3,355 4,068 ---------- ---------- Total Utility Plant 868,541 834,411 ---------- ---------- Other Property and Investments: Cash Surrender Value of Company-owned Life Insurance (Net of Related Policy Loans of $28,831 in 1994 and $24,923 in 1993) 1,637 1,263 Other 1,041 1,056 ---------- ---------- Total Other Property and Investments 2,678 2,319 ---------- ---------- Current Assets: Cash and Temporary Cash Investments 629 594 Receivables, Less Reserves of $600 and $585 30,543 34,197 Accrued Unbilled Revenue 22,340 25,111 Fuel, at Average Cost 14,765 8,323 Materials and Supplies, at Average Cost 16,731 16,674 Gas in Underground Storage, at Average Cost 17,484 24,548 Prepaid Taxes 2,103 856 Other 7,217 8,657 ---------- ---------- Total Current Assets 111,812 118,960 ---------- ---------- Deferred Debits: Unamortized Loss on Reacquired Debt 6,486 6,950 Unamortized Debt Expense 2,212 2,185 Prepaid Pension Cost 13,312 13,953 Other 14,068 9,547 ---------- ---------- Total Deferred Debits 36,078 32,635 ---------- ---------- Total Assets $1,019,109 $ 988,325 ========== ========== 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, 1994 1993 (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 122,125 108,645 ---------- ---------- Total Common Shareholder's Equity 307,786 294,306 Preferred Stock Without Mandatory Redemption 44,120 44,120 Preferred Stock With Mandatory Redemption 22,000 22,000 Long-term Debt 278,359 278,321 ---------- ---------- Total Capitalization 652,265 638,747 ---------- ---------- Current Liabilities: Notes Payable 23,400 12,400 Accounts Payable 47,536 40,971 Accrued Taxes 6,387 6,083 Accrued Interest 8,477 8,616 PGA Over-Recoveries 2,142 3,029 Level Payment Plan 4,155 2,944 Other 6,809 5,941 ---------- ---------- Total Current Liabilities 98,906 79,984 ---------- ---------- Deferred Liabilities and Credits: Accumulated Deferred Income Taxes 151,856 144,969 Regulatory Liability, Net 59,997 69,477 Investment Tax Credits 26,178 27,871 Capital Lease Obligation 2,665 2,954 Other 27,242 24,323 ---------- ---------- Total Deferred Liabilities and Credits 267,938 269,594 ---------- ---------- Total Capitalization and Liabilities $1,019,109 $ 988,325 ========== ========== 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, 1994 1993 1992 (In thousands) Cash Flows from Operating Activities: Net Income Before Preferred Dividends $ 32,487 $ 37,678 $ 35,636 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Disallowed Plant Costs 7,522 -- -- Income Tax Reduction for Disallowed Plant Costs (2,982) -- -- Depreciation and Amortization 55,062 53,734 52,108 Deferred Taxes, Investment Tax Credits and Regulatory Liability, Net (2,006) (1,512) (4,157) Decrease (Increase) in Accounts Receivable 3,654 1,513 (232) Decrease (Increase) in Fuel, Materials and Supplies, and Gas in Underground Storage 565 (5,609) (2,591) Decrease (Increase) in Unbilled Revenue 2,771 (320) (2,336) Increase in Accounts Payable 6,565 6,098 5,716 Increase in Accrued Taxes and Interest 867 3,304 476 Capital Lease Payments 478 478 -- Decrease (Increase) in Other Current Assets 193 (272) 1,237 Increase (Decrease) in Other Current Liabilities 1,192 (6,398) 3,016 (Increase) Decrease in Other Non-Current Assets (1,631) 3,050 314 Increase in Other Non-Current Liabilities 2,319 81 5,493 -------- -------- -------- Net Cash Provided by Operating Activities 107,056 91,825 94,680 -------- -------- -------- Cash Flows from Investing Activities: Capital Expenditures (90,873) (72,580) (61,701) Cost of Equity Funds Capitalized (530) 23 (122) Other (7,308) 2,581 (5,113) -------- -------- -------- Net Cash Used in Investing Activities (98,711) (69,976) (66,936) -------- -------- -------- Cash Flows from Financing Activities: Common Dividends Paid (16,027) (15,878) (31,787) Preferred Dividends Paid (2,980) (4,043) (4,441) Long-Term Debt Issued 175 107,269 133,001 Preferred Stock Issued -- 46,006 -- Long-Term Debt Retired -- (97,756) (140,318) Preferred Stock Retired -- (46,051) -- Payments on Capital Lease Obligation (478) (478) -- (Decrease) Increase in Short-Term Borrowing 11,000 (12,100) 13,000 -------- -------- -------- Net Cash Used in Financing Activities (8,310) (23,031) (30,545) -------- -------- -------- Net Increase (Decrease) in Cash and Temporary Cash Investments 35 (1,182) (2,801) Cash and Temporary Cash Investments at Beginning of Year 594 1,776 4,577 -------- -------- -------- Cash and Temporary Cash Investments at December 31, $ 629 $ 594 $ 1,776 ======== ======= ======= Supplemental Disclosures of Cash Flow Information Cash Paid During the Period for: Interest (Net of Cost of Borrowed Funds Capitalized) $20,809 $20,271 $20,690 Income Taxes 24,155 13,198 23,838 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
Central Illinois Light Company Consolidated Statement of Retained Earnings
For the Years Ended December 31, 1994 1993 1992 (In thousands) Balance Beginning of Year $108,645 $ 92,433 $ 93,025 Add: Net Income 32,487 37,678 35,636 -------- -------- -------- Total $141,132 $130,111 $128,661 -------- -------- -------- 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 1,287 725 -- 7.56% Series -- 668 1,285 7.72% Series -- 686 1,042 8.28% Series -- 817 1,242 Auction Rate Series (rate at December 31, 1994 was 4.72%) 821 275 -- Common Stock, No Par Value 16,027 15,878 31,787 -------- -------- -------- Total Dividends Declared 19,007 19,921 36,228 -------- -------- -------- Capital Stock Expense -- 720 -- Excess of stated value over purchase price of 135,000 shares 7.72% Series preferred stock and 150,000 shares 8.28% Series preferred stock retired in 1993 -- 825 -- -------- -------- -------- 19,007 21,466 36,228 -------- --------- -------- Balance End of Year $122,125 $108,645 $ 92,433 ======== ======== ======== 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, 1994 1993 1992 (In thousands) Electric Operations: Revenue $313,085 $303,124 $288,813 Expenses 263,462 253,995 243,734 -------- -------- -------- Operating Income 49,623 49,129 45,079 Income Taxes 19,925 17,542 15,747 -------- -------- -------- Operating Income Before Income Taxes $ 69,548 $ 66,671 $ 60,826 ======== ======== ======== Depreciation and Amortization $ 39,130 $ 38,337 $ 37,465 Capital Expenditures $ 66,537 $ 41,880 $ 41,821 Gas Operations: Revenue $148,285 $150,754 $144,926 Expenses 139,401 139,696 132,405 -------- -------- -------- Operating Income 8,884 11,058 12,521 Income Taxes 1,564 4,684 4,082 -------- -------- -------- Operating Income Before Income Taxes $ 10,448 $ 15,742 $ 16,603 ======== ======== ======== Depreciation and Amortization $ 15,219 $ 14,686 $ 13,930 Capital Expenditures $ 24,867 $ 30,677 $ 20,001
Major Customer
For the Years Ended December 31, 1994 1993 1992 Caterpillar Inc. Electric Revenue $41,422 13.2% $39,831 13.1% $38,428 13.3% Gas Revenue 1,719 1.2% 1,581 1.0% 1,847 1.3% ------- ----- ------- ----- ------- ----- Total $43,141 9.4% $41,412 9.1% $40,275 9.3% ======= ===== ======= ===== ======= =====
Identifiable Assets
As of December 31, 1994 1993 1992 Electric $ 718,431 $684,618 $684,968 Gas 260,070 259,462 226,579 Other Utility Assets* 40,608 44,245 47,578 ---------- -------- -------- Total Utility Assets $1,019,109 $988,325 $959,125 ========== ======== ======== *Other investments, miscellaneous accounts receivable, prepaid assets, deferred pension costs and unamortized debt, discount and expense. The accompanying Notes to 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 1994 presentation. 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. As a regulated public utility, CILCO is subject to the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." Regulatory assets represent the probable future revenues to CILCO resulting from the ratemaking action of regulatory agencies. Net regulatory liabilities are approximately $60 million (see Note 2). At December 31, 1994, and 1993, the regulatory assets included on the Consolidated Balance Sheets were as follows:
1994 1993 (In thousands) Included in prepayments and other: Fuel and gas cost adjustments $ 3,682 $ 5,716 Coal tar remediation cost - estimated current 300 263 Gas transition costs 1,171 574 ------- ------- Current costs included in prepayments and other 5,153 6,553 ------- ------- Included in other assets: Coal tar remediation cost, net of recoveries 4,993 4,305 Gas transition costs 2,781 2,780 Unamortized loss on reacquired debt 6,486 6,950 ------- ------- Future costs included in other assets 14,260 14,035 ------- ------- Total regulatory assets $19,413 $20,588 ======= =======
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. 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' credit worthiness and requests deposits or refunds deposits based on that review. At December 31, 1994, CILCO had net receivables of $30.5 million, of which approximately $5.1 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 $2.4 million, $2.3 million and $3.3 million in 1994, 1993 and 1992, 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 1994, 1993 and 1992 were 8.0%, 3.5% and 5.7%, 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 as follows:
1994 1993 1992 Electric 3.8% 3.8% 3.8% Gas 4.6% 4.6% 4.6%
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 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:
1994 1993 (In thousands) Cash surrender value of contracts $30,468 $26,186 Borrowings against contracts (28,831) (24,923) ------- ------- Net investment $ 1,637 $ 1,263 ======= =======
Interest expense related to borrowings against CILCO-owned life insurance, included in CILCO-owned Life Insurance, Net on the Consolidated Statements of Income, was $2 million, $1.4 million and $.9 million for 1994, 1993 and 1992, respectively. NOTE 2 - INCOME TAXES CILCO adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), on January 1, 1993. SFAS 109 requires the use of 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. Adoption of SFAS 109 did not have a material impact on CILCO's financial position, results of operations or cash flows; however, the adoption of SFAS 109 required reclassification of accumulated deferred income taxes on CILCO's Balance Sheet. CILCO established a regulatory liability to account for the net 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 net deferred income tax liability at December 31, 1994, December 31, 1993 and January 1, 1993, were as follows:
Dec. 31, 1994 Dec. 31, 1993 Jan. 1, 1993 (In thousands) Deferred tax liabilities: Property, including allowance for funds used during construction $212,308 $213,056 $212,891 Other 11,105 11,835 8,302 Deferred tax assets: Other (11,560) (10,446) (6,931) Net regulatory liability (59,997) (69,477) (74,321) -------- -------- -------- Deferred income taxes $151,856 $144,968 $139,941 ======== ======== ========
Of the $6,888,000 increase in the net deferred income tax liability at December 31, 1994, from December 31, 1993, $2,592,000 is due to current year deferred federal and state income tax expense. The remainder is attributable to the decrease in the net regulatory deferred tax liability which is principally due to changes in temporary differences for which deferred taxes were not previously provided. Income tax expenses were as follows:
Years Ended December 31, 1994 1993 1992 (In thousands) Current income taxes Federal $18,912 $18,510 $19,254 State 4,165 4,860 4,363 ------- ------- ------- Total operating current taxes 23,077 23,370 23,617 ------- ------- ------- Deferred operating income taxes, net Depreciation and amortization (1,905) (1,786) (1,243) Repair allowance 648 168 (431) Borrowed component of AFUDC (249) 76 (70) Capitalized overhead costs (794) (888) (867) Removal costs 2,176 2,471 2,238 Call premiums 401 2,623 -- Gas take-or-pay settlements (1,244) 1,413 (1,679) Gas storage field 408 (2,856) 12 Taxable salvage 1,229 573 194 Coal tar remediation costs 253 120 (952) Other (819) 1,364 704 ------- ------- ------- Total operating deferred income taxes 104 550 (2,094) ------- ------- ------- Investment tax credit amortization (1,693) (1,694) (1,694) ------- ------- ------- Total operating income taxes 21,488 22,226 19,829 ------- ------- ------- Income tax reduction for disallowed plant costs (2,982) -- -- Other net (1,339) (1,859) (2,106) ------- ------- ------- Total income taxes $17,167 $20,367 $17,723 ======= ======= ======= Total deferred income taxes, net, includes deferred state income taxes of $752,000, $332,000 and $435,000 for 1994, 1993 and 1992, respectively.
1994 1993 1992 Effective income tax rate 36.8% 37.7% 36.2% ----- ----- ----- Equity component of AFUDC not subject to taxation .4 -- .1 Depreciation differences for which deferred taxes have not been provided (1.4) (1.0) (.9) Amortization of investment tax credit 3.6 3.1 3.5 CILCO-owned life insurance 1.0 .6 .5 State income taxes (6.0) (6.2) (6.3) Civil fine (.7) -- -- Other differences 1.3 .8 .9 ----- ---- ---- Total (1.8) (2.7) (2.2) ----- ---- ---- Statutory federal income tax rate 35.0% 35.0% 34.0% ===== ==== ====
NOTE 3 - POSTEMPLOYMENT BENEFITS POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE On January 1, 1994, CILCO adopted Statement of Financial Accounting Standards No. 112, "Employer's Accounting for Postemployment Benefits" (SFAS 112). This standard requires accrual of benefits other than pensions or health care provided to former or inactive employees. CILCO recorded a liability of approximately $1.5 million of which $1 million represents the cumulative effect of applying SFAS 112. Of the $1.5 million, $.4 million has been capitalized. 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:
1994 1993 1992 (In thousands) Operating expenses $2,465 $1,841 $1,995 Utility plant and other 1,189 925 721 ------ ------ ------ Net pension costs $3,654 $2,766 $2,716 ====== ====== ======
Provisions for pension expense are determined under the rules prescribed by Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" (SFAS 87), including the use of the projected unit credit actuarial cost method. SFAS 87 requires employers to recognize an additional minimum liability on the Balance Sheets for plans in which the accumulated benefit obligation exceeds the fair value of plan assets. Information on the plans' funded status, on an aggregate basis follows:
1994 1993 (In thousands) Components of net periodic pension costs: Cost of pension benefits earned by employees $ 5,589 $ 4,401 Interest cost on projected benefit obligation 14,422 13,611 Actual return on plan assets 1,237 (22,053) Net amortization and deferral (17,594) 6,807 -------- -------- Net pension costs $ 3,654 $ 2,766 ======== ======== Actuarial present value of accumulated benefit obligation: Vested benefits - employees' rights to receive benefits no longer contingent upon continued employment $146,875 $157,570 Non-vested benefits - employees' rights to receive benefits contingent upon continued employment 11,258 7,793 -------- -------- Net benefit obligation $158,133 $165,363 ======== ======== Funded status of plans: Pension assets and obligations Pension assets at fair market value $192,427 $200,337 Projected benefit obligation at present value (190,440) (209,416) Unrecognized transition asset (7,842) (8,765) Unrecognized prior service cost 11,179 11,687 Unrecognized net loss 7,199 20,110 Adjustment to recognize minimum liability (111) -- -------- -------- Net prepaid pension costs recorded on Balance Sheets $ 12,412 $ 13,953 ======== ======== The 1994 prepaid pension costs on the Balance Sheets consist of $13.3 million recorded as prepaid pension expense and $.9 million recorded in other deferred credits.
Rates used for calculations: Discount rate 8.00% 7.00% Expected rate of salary increase 4.50% 5.00% Expected long-term rate of return 8.50% 8.50%
POSTEMPLOYMENT HEALTH CARE BENEFITS Provisions for postemployment benefits expenses are determined under the rules of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). 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 postemployment 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. Postemployment health care benefit costs were charged as follows:
1994 1993 1992 (In thousands) Operating expenses $5,253 $5,767 $6,127 Utility plant and other 1,913 2,060 2,098 ------ ------ ------ Net postemployment health care benefit costs $7,166 $7,827 $8,225 ====== ====== ======
Information on the plans' funded status, on an aggregate basis follows:
1994 1993 (In thousands) Components of net postemployment health care benefit costs: Service cost - benefits attributed to service during the period $ 1,496 $ 1,194 Actual return on plan assets 133 (1,732) Interest cost on accumulated postemployment health care benefit obligation 4,469 4,873 Amortization of transition obligation over 18.6 years 2,858 2,858 Other net amortization and deferral (1,790) 634 ------- ------- Net postemployment health care benefit costs $ 7,166 $ 7,827 ======= ======= Accumulated postemployment health care benefit obligation: Retirees $30,849 $44,340 Other fully eligible participants 10,859 12,409 Other active participants 20,046 19,823 -------- ------- Total accumulated postemployment health care benefit obligation 61,754 76,572 Less: Unrecognized actuarial (gain) loss (3,046) 13,093 Unrecognized transition obligation 41,730 44,588 Plan assets at fair value 22,929 18,748 ------- ------- Accrued postemployment health care benefit cost liability $ 141 $ 143 ======= =======
For measurement purposes, a health care cost trend rate of 9% annually was assumed for 1994; the rate was assumed to decrease to 8% for 1995, then decrease gradually to 6% by 2020 and remain at that level thereafter. Increasing the assumed health care cost trend rate by 1% in each year would increase the accumulated postemployment benefit obligation at December 31, 1994, by $2.9 million and the aggregate of the service and interest cost components of net postemployment health care cost for 1994 by $265,000. The discount rate used in determining the accumulated postemployment benefit obligation at December 31, 1994, was 8% and at December 31, 1993, was 7%. 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 $30.4 million at December 31, 1994, all of which were unused. These lines of credit consisted of $7 million maintained by compensating balances and $23.4 million maintained by commitment fees ranging from 1/16 to 2/16 of 1% per annum in lieu of balances. The compensating bank balance arrangements provide that CILCO maintain bank deposits to average annually 3% to 5% of the line, such balances being available to CILCO for operating purposes and as compensation to the bank for other bank services. These bank lines of credit also support CILCO's issuance of commercial paper. Short-term borrowings consisted of commercial paper totaling $23.4 million and $12.4 million at December 31, 1994 and 1993, 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, 1994, was $6.7 million. NOTE 6 - PREFERRED STOCK
At December 31, 1994 1993 (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, 1994 and 1993, were 4.72% and 2.62%, 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, 1994, is $3.3 million, assuming a continuation of the auction dividend rate at December 31, 1994, 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, 1994, 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, 1994 1993 (In thousands) First Mortgage Bonds 5 1/8% series due 1996 $ 16,000 $ 16,000 5 1/2% series due 1997 20,000 20,000 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 10,650 6.4% series due 2000 30,000 30,000 6.82% series due 2003 25,350 25,350 7.8% series due 2023 10,000 10,000 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 -------- -------- 279,200 279,200 Unamortized premium and discount on long-term debt, net (841) (879) -------- -------- Total long-term debt $278,359 $278,321 ======== ========
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 1996-1999 are $16 million, $20 million, $10.6 million and $0, respectively. The 1995 maturities of long-term borrowings have been classified as current liabilities. NOTE 8 - COMMITMENTS & CONTINGENCIES CILCO's 1995 capital expenditures for utility plant are estimated to be $69 million, in connection with which CILCO has normal and customary purchase commitments at December 31, 1994. 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 (CIPS). This agreement, which expires in 1998, provides for an initial purchase of 30 megawatts (MW) of capacity, increasing to 90 MW in 1997. CILCO can increase purchases to a maximum of 100 MW during the contract period, provided CIPS then has the additional capacity available. In November 1992, CILCO entered into a limited-term power agreement to purchase 100 MW of CIPS's capacity from June 1998 through May 2002. At CILCO's request, purchases may be increased to a maximum of 150 MW during the contract period, provided CIPS has the additional capacity available. For a discussion of former gas manufacturing sites, refer to the caption "Environmental Matters" of Item 7 of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 20 of CILCORP's 1994 Annual Report which is incorporated herein by reference. NOTE 9 - RATE MATTERS In December 1994, the Illinois Commerce Commission (ICC) issued a rate order designed to grant CILCO a $10.6 million, or 6.7% annual increase in gas base rate revenues. The order represents approximately 75% of CILCO's original rate increase request filed in January 1994. The new rates, designed to yield an 11.82% return on common equity and a 9.24% return on rate base, were effective the week of December 12, 1994. The ICC denied requests for rehearing which had been filed by CILCO and other parties. No party has appealed the ICC order, and the time for appeal has expired. As a part of its rate order, the ICC disallowed approximately $7.5 million of CILCO's $24 million investment in the Springfield, Illinois, cast iron main renewal project. To reflect the disallowance, CILCO recorded a pre-tax charge of approximately $7.5 million ($4.5 million after-tax) against 1994 earnings. In mid-1992, after a significant number of leaks were detected in CILCO's Springfield cast iron gas distribution system, CILCO began a detailed examination of its Springfield gas distribution system and related operating practices and procedures. CILCO thereafter began an aggressive program to renew its Springfield gas cast iron main system. This project was substantially completed by September 30, 1993. The ICC staff began an informal review of CILCO's Springfield gas operations and record-keeping practices in September 1992. Subsequently, the U.S. Department of Transportation (DOT) and the U.S. Department of Justice (DOJ) began conducting investigations of CILCO which were also focused principally on CILCO's Springfield gas operations and its record-keeping practices. On September 16, 1994, CILCO entered into a federal court civil consent decree with the DOJ which concluded the DOT and DOJ investigations of CILCO. As a part of the settlement with the DOJ, CILCO accepted adjustments recommended by the ICC staff which resulted in a net disallowance from CILCO's gas rate base of approximately $4.6 million of the cost of the Springfield cast iron main renewal project. This charge is part of the $7.5 million disallowance included in the December 1994 rate order. In addition to the rate base disallowance, CILCO agreed to pay an $844,000 civil fine to the United States and agreed to reimburse the ICC, the DOT and the DOJ $156,000 for the costs of their investigations. CILCO also agreed to underwrite the reasonable expense of an outside expert, to be selected by the ICC, to examine its gas operations manuals and systems to ensure they are in compliance with all applicable statutes and regulations. CILCO estimates the cost of the audit will be $350,000. Management expects the audit to conclude by the end of 1995. The DOJ agreed not to seek any additional civil or criminal penalties from CILCO or the Company. The ICC staff also agreed not to seek any additional enforcement penalties from CILCO or the Company. CILCO agreed to continue to cooperate with the DOJ in its investigation and prosecution of any individuals who may be responsible for willful violations of any applicable statute or regulation. For a discussion of other gas and electric rate matters refer to information under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations of CILCORP's 1994 Annual Report to Shareholders, which is incorporated herein by reference. NOTE 10 - LEASES CILCO leases certain equipment, buildings and other facilities under capital and operating leases. Minimum future rental payments under non-cancelable capital and operating leases having remaining terms in excess of one year as of December 31, 1994, are $21 million in total. Payments due during the years ending December 31, 1995, through December 31, 1999, are $5.3 million, $3.5 million, $2.9 million, $2.8 million and $2.7 million, respectively. 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) 1994 Operating revenue $145,386 $101,505 $108,142 $106,337 Operating income 16,007 12,204 18,227 12,069 Net income 10,615 7,057 8,986 5,829 1993 Operating revenue $133,234 $ 94,184 $109,800 $116,660 Operating income 16,978 11,358 19,855 11,996 Net income 11,303 5,862 14,052 6,461
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 1995 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 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 1995 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., CILCORP Ventures Inc. and Environmental Science & Engineering, Inc. (ESE). 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. ESE and the Holding Company entered into an agreement to consolidate ESE's outstanding debt. Under this agreement, ESE can draw on a $15 million revolving line of credit which expires May 2, 1996. At December 31, 1994, ESE had $5.6 million borrowed from CILCORP under this agreement. ESE also borrowed $20 million from the Holding Company on a term credit basis with the principal due May 2, 1998. At December 31, 1994, CILCORP guaranteed $21 million of outstanding debt of CILCORP Lease Management Inc. CILCORP receives a fee for the guarantee. CIM has guaranteed the performance of CIM Leasing Inc. and CIM Air Leasing Inc. with respect to certain obligations arising from the leveraged lease investments held by these subsidiaries. CILCO Certain members of the Board of Directors of CILCORP Inc. are also members of the Board of Directors of CILCO 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 Shareholders (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 1994 Annual Report: Management's Report 28 Report of Independent Public Accountants 28 Consolidated Statements of Income for the three years ended December 31, 1994 29 Consolidated Balance Sheets as of December 31, 1994, and December 31, 1993 30-31 Consolidated Statements of Segments of Business for the three years ended December 31, 1994 32-33 Consolidated Statements of Cash Flows for the three years ended December 31, 1994 34 Consolidated Statements of Common Stockholders' Equity for the three years ended December 31, 1994 35 Notes to the Consolidated Financial Statements 36-44 (a) 2. Financial Statement Schedules The following schedules are included herein: Page No. Form 10-K Schedule II - Valuation and Qualifying Accounts and Reserves for the three years ended December 31, 1994 59 Schedule XIII -Investment in Leveraged Leases at December 31, 1994 61 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 August 20, 1993. ***(4) Instruments defining the rights of security holders, including indentures *(10) CILCO Executive Deferral Plan as amended through February 22, 1994. (Designated in Form 10-K for the year ended December 31, 1993, File No. 1-8946, as Exhibit (10)). *(10)a Executive Deferral Plan II (Designated in Form 10-K for the year ended December 31, 1989, File No. 1-8946, as Exhibit (10)b). (10)b CILCORP Economic Value Added Incentive Compensation Plan (Adopted February 29, 1989 & Revised January 29, 1991.) (10)c CILCORP Compensation Protection Plan. (Adopted June 28, 1994.) *(10)d CILCO Benefit Replacement Plan (Designated in Form 10-K for the year ended December 31, 1991, File No. 1-8946, as Exhibit (10)e). *(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 Shareholder Return Incentive Compensation Plan (included as part of Company's definitive proxy in 1993 Annual Meeting of Stockholders, filed with the Commission on March 26, 1993.) (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 66 (24) Consent of Arthur Andersen LLP 67 (25) Power of Attorney (27) CILCORP Inc. Consolidated Financial Data Schedule (b) 3. Reports on Form 8-K Form 8-K was filed on December 12, 1994, to disclose the issuance by the ICC of a rate order designed to grant CILCO a $10.6 million, or 6.7%, annual increase in gas base rate revenues. * 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. *** 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 31 Report of Independent Public Accountants 32 Consolidated Statements of Income for the three years ended December 31, 1994 33 Consolidated Balance Sheets as of December 31, 1994 and December 31, 1994 34-35 Consolidated Statements of Cash Flows for the three years ended December 31, 1994 36-37 Consolidated Statements of Retained Earnings for the three years ended December 31, 1994 38 Consolidated Statements of Segments of Business for the three years ended December 31, 1994 39-40 Notes to the Consolidated Financial Statements 41-52 (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, 1994 60 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 26, 1994. *(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).) *(4)a Supplemental Indenture dated November 1, 1994. (Designated in Form 8-K dated November 1, 1994, File No. 1-2732, as Exhibit (4).) *(10) CILCO Executive Deferral Plan as amended February 22, 1994. (Designated in Form 10-K for the year ended December 31, 1993, File No. 1-2732, as Exhibit (10).) *(10)a Executive Deferral Plan II. (Designated in Form 10-K for the year ended December 31, 1989, File No. 1-2732, as Exhibit (10)b.) *(10)b CILCO Compensation Protection Plan. (Designated in Form 10-K for the year ended December 31, 1990, File No. 1-2732, as Exhibit (10)c.) *(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. (Designated in Form 10-K for the year ended December 31, 1990, File No. 1-2732, as Exhibit (10)e.) *(10)e Benefit Replacement Plan. (Designated in Form 10-K for the year ended December 31, 1991, File No. 1-2732, as Exhibit (10)f.) *(10)f Shareholder Return Incentive Compensation Plan (included as part of CILCORP Inc.'s definitive proxy in 1993 Annual Meeting of Stockholders, filed with the Commission on March 26, 1993.) (12) Computation of Ratio of Earnings to Fixed Charges (25) Power of Attorney (27) Central Illinois Light Company Financial Data Schedule (b) 3. Reports on Form 8-K A Form 8-K was filed on December 2, 1994, to disclose a Form of Distribution Agreement and Supplemental Indenture dated as of November 1, 1994. A Form 8-K was filed on December 12, 1994, to disclose the issuance by the ICC of a rate order designed to grant CILCO a $10.6 million, or 6.7%, annual increase in gas base rate revenues. *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. SCHEDULE II CILCORP INC. AND SUBSIDIARY COMPANIES Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1994, 1993 and 1992 (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, 1994 Accumulated Provisions Deducted from Assets - Doubtful Accounts $2,255 $2,617 -- $2,581 $2,291 Accumulated Provisions Not Deducted from Assets - Injuries and Damages 2,321 915 -- 636 2,600 Year ended December 31, 1993 Accumulated Provisions Deducted from Assets - Doubtful Accounts $1,943 2,760 -- 2,448 $2,255 Accumulated Provisions Not Deducted from Assets - Injuries and Damages 1,869 1,209 -- 757 2,321 Year ended December 31, 1992 Accumulated Provisions Deduct from Assets - Doubtful Accounts $1,934 2,390 -- 2,381 $1,943 Accumulated Provisions Not Deducted from Assets - Injuries and Damages 1,284 2,237 -- 1,652 $1,869
SCHEDULE II CENTRAL ILLINOIS LIGHT COMPANY Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1994, 1993 and 1992 (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, 1994 Accumulated Provisions Deducted from Assets - Doubtful Accounts $ 585 $1,494 -- $1,479 $ 600 Accumulated Provisions Not Deducted from Assets - Injuries and Damages 2,321 915 -- 636 2,600 Year ended December 31, 1993 Accumulated Provisions Deducted from Assets - Doubtful Accounts $ 799 1,079 -- 1,293 $ 585 Accumulated Provisions Not Deducted from Assets - Injuries and Damages 1,869 1,209 -- 757 2,321 Year ended December 31, 1992 Accumulated Provisions Deduct from Assets - Doubtful Accounts $ 928 957 -- 1,086 $ 799 Accumulated Provisions Not Deducted from Assets - Injuries and Damages 1,284 2,237 -- 1,652 $1,869
SCHEDULE XIII CILCORP INC. AND SUBSIDIARY COMPANIES Investment in Leveraged Leases Year Ended December 31, 1994 (Thousands of dollars)
Cost Amount Leveraged leases of each carried on lease(A) Balance Sheet(B) Office buildings $23,130 $ 46,787 Warehouses 11,746 19,633 Mining equipment 10,244 16,180 Generating station 14,957 22,312 Passenger railway equipment 3,805 4,438 Cargo aircraft 9,583 11,611 -------- -------- Totals $73,465 $120,961 ======== ======== (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 13, 1995 By R. O. Viets 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 R. O. Viets President, Chief March 13, 1995 Executive Officer and Director (iii) Controller T. D. Hutchinson T. D. Hutchinson Controller March 13, 1995 (iv) A majority of the Directors (including the director named above): M. Alexis* Director March 13, 1995 J. R. Brazil* Director March 13, 1995 W. Bunn III* Director March 13, 1995 D. E. Connor* Director March 13, 1995 H. J. Holland* Director March 13, 1995 H. S. Peacock* Director March 13, 1995 R. W. Slone* Director March 13, 1995 K. E. Smith* Director March 13, 1995 R. M. Ullman* Director March 13, 1995 M. M. Yeomans* Director March 13, 1995 R. O. Viets R. O. Viets Director March 13, 1995 *By R. O. Viets 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 13, 1995 By R. W. Slone R. W. Slone Chairman of the Board, 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) Principal executive officer and director: R. W. Slone R. W. Slone Chairman of the Board, March 13, 1995 President, Chief Executive Officer and Director (ii) Principal financial officer: T. S. Romanowski T. S. Romanowski Vice President March 13, 1995 (iii) Controller R. L. Beetschen R. L. Beetschen Controller and March 13, 1995 Manager of Accounting (iv) A majority of the Directors (including the director named above): M. Alexis* Director March 13, 1995 J. R. Brazil* Director March 13, 1995 W. Bunn III* Director March 13, 1995 D. E. Connor* Director March 13, 1995 W. M. Shay* Director March 13, 1995 K. E. Smith* Director March 13, 1995 R. N. Ullman* Director March 13, 1995 J. F. Vergon* Director March 13, 1995 M. M. Yeomans* Director March 13, 1995 R. W. Slone R. W. Slone Director March 13, 1995 *By R. W. Slone R. W. Slone Attorney-in-fact EXHIBIT (12) CILCORP INC. AND SUBSIDIARIES Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Twelve Months Ended 1994 1993 1992 1991 1990 (Thousands of Dollars) Earnings, as Defined: Net Income $32,586 $33,583 $32,097 $ 39,656 $34,504 Income Taxes 18,180 18,069 20,810 29,676 24,344 Interest 26,341 27,363 29,205 28,661 27,934 Preferred Dividends 2,980 4,043 4,441 4,441 4,441 Convertible Preferred Dividends -- -- -- 828 1,839 ------- ------- -------- ------- -------- Total Earnings, as Defined $80,087 $83,058 $86,553 $103,262 $93,062 ======= ======= ======== ======= ======== Fixed charges, as Defined: Interest Expense 24,313 25,929 28,275 27,791 27,066 Interest Expense on COLI 2,028 1,434 930 870 868 Tax Effected Preferred Dividends 4,939 6,701 7,249 8,601 10,251 ------- ------- ------- ------- ------- Total Fixed Charges, as Defined $31,280 $34,064 $36,454 $37,262 $38,185 ======= ======= ======= ======= ======= Ratio of Earnings to Fixed Charges 2.6 2.4 2.4 2.8 2.4 ==== ==== ==== ==== ====
EXHIBIT (12) CENTRAL ILLINOIS LIGHT COMPANY Computation of Ratio of Earnings to Fixed Charges
Twelve Months Ended 1994 1993 1992 1991 1990 (Thousands of Dollars) Earnings, as Defined: Net Income $32,487 $37,678 $35,636 $44,231 $40,966 Income Taxes 17,168 20,368 17,723 22,329 20,500 Fixed Charges, as Below 24,693 26,335 25,130 24,295 24,095 ------- ------- ------- ------- ------- Total Earnings, as Defined $74,348 $84,381 $78,489 $90,855 $85,561 ======= ======= ======= ======= ======= Fixed Charges, as Defined: Interest on COLI $ 2,028 $ 1,434 $ 930 $ 870 $ 868 Interest on Short-term Debt 292 592 180 -- -- Interest on Long-term Debt 19,221 19,753 20,747 21,285 21,399 Amortization of Debt Discount & Expense, Premium and Reacquired Loss 665 624 410 96 97 Miscellaneous Interest Expense 623 1,485 2,448 1,591 1,320 Interest Portion of Rentals 1,864 2,447 415 453 411 ------- ------- ------- ------- ------- Total Fixed Charges, as Defined $24,693 $26,335 $25,130 $24,295 $24,095 ======= ======= ======= ======= ======= Ratio of earnings to Fixed Charges 3.01 3.20 3.12 3.74 3.55 ==== ==== ==== ==== ====
NOTICE This copy of CILCORP Inc.'s and Central Illinois Light Company's Form 10-K does not include our 1994 Consolidated Annual Report. If you have not received our 1994 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 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports, dated February 3, 1995, included herein or incorporated by reference in this Form 10-K, into CILCORP Inc.'s previously filed Registration Statements File No. 33-45318, 33-51315 and 33-51241. ARTHUR ANDERSEN LLP Chicago, Illinois March 8, 1995 EX-10 2 CILCORP INC. EVA-BASED INCENTIVE COMPENSATION PLAN (REVISED) CILCORP Inc. EVA-BASED INCENTIVE COMPENSATION PLAN adopted by the Board of Directors of CILCORP Inc. on 28 February 1989 and revised this 29th day of January 1991. ARTICLE I Statement of Purpose 1.1 The purpose of the PLAN is to provide an incentive to officers and employees of CILCORP Inc. to increase and maintain shareholder value by rewarding the achievement of this objective. ARTICLE II Definitions Unless the context provides a different meaning, whenever used in this PLAN, the following terms shall have the following meanings: 2.1 "Award" means the amount of money credited annually to the award bank of each Participant in accordance with the terms and conditions of the PLAN. 2.2 "Bank" means the account maintained for each PLAN Participant which includes the award(s) credited annually to the Participant plus interest earned thereon. 2.3 "Board" means the Board of Directors of the Company. 2.4 "Capital" means, except where specifically noted on a Schedule attached hereto pertaining to each Participating Unit, the following components of Capital for each Participating Unit of the Company: Current Assets Less: Non-interest bearing current liabilities Plus: Long Term Assets Less: Construction in Progress (CWIP) Accumulated Depreciation Plus: Adjustments (if they exist) LIFO Reserve Present Value of Noncapitalized Leasesa Cumulative Amortization of Goodwill Cumulative FAS-90 Writedown Less: Deferred Expenses & Payments Notes: a. Minimum lease commitments discounted at long-term borrowing rate 2.5 "Capital Asset Pricing Model" or "CAPM" is a method for calculation of the cost of capital of a participating unit. 2.6 "Committee" means the Compensation Committee of the Board of Directors of the Company or such other committee to which the Board has delegated the responsibility for administering the PLAN. 2.7 "Company" means CILCORP Inc. 2.8 "Cost of Capital" or "C*" means the weighted average of the (after tax) cost of debt, common equity and preferred equity for the year in question. The Capital Asset Pricing Model (CAPM) is used to estimate equity costs. Cost of capital is calculated on a quarterly basis. The Schedules attached hereto set forth the methodology for calculation of the Cost of Capital for each Participating Unit of the Company. Cost of Capital is the same as "required return." 2.9 "Discretionary Award" has the meaning given at Paragraph 5.3 hereof. 2.10 "Economic value added" or "EVA" is an amount equal to the difference between the return management actually earns on Capital and Cost of Capital. It is calculated as follows: EVA = (return earned - Cost of Capital) x Capital 2.11 "Employee" means a person who is employed by the Company. 2.12 "Established Award" has the meaning given at Paragraph 5.2 hereof. 2.13 "Improvement Award" means a percent of each year's increase in EVA. 2.14 "Maintenance Award" means a percent of a moving three-year average of the level of EVA. 2.15 "Net operating profit after tax" or "NOPAT" means the adjusted cash earnings attributable to the capital employed in the Participating Unit for the Plan year to date. The components of NOPAT are as follows: Operating Revenues Less: Operating Expensesa Depreciation Expenses Sales, General and Administrative Expenses Non-Operating Incomea Cash Taxes on Operating Profitsb Plus: Goodwill Amortization Expense Plus: Increases in: LIFO Reserve Deferred Sales & Credits Less: Increases in: Deferred Expenses & Debits Notes: a. Non-operating revenues, expenses, and income will not ordinarily exist. Only extremely unusual items should be classed as non-oper ating . b. "Cash Taxes on Operating Profits" is calculated as follows: Book Tax Provision Less: Increase in deferred taxesc Increase in deferred ITC's Tax at appropriate rate on any non-operating incomed Plus: Tax saved on interest expensee Sub-Notes: c. Except for CILCO d. See footnote above e. Calculate as: (Interest Expensef) x (Marginal Tax Rate) Sub-Sub-Note: f. Include implicit interest expense on non-capitalized leases: (PV of Non-capitalized leases) x (capitalization rate) 2.16 "Participant" means an employee who is participating in the PLAN. 2.17 "Participating Unit" or "Unit" means the Company and each subsidiary or business unit of the Company whose results are determined by the Committee to be included in the PLAN. 2.18 "PLAN" means the CILCORP EVA-BASED INCENTIVE COMPENSATION PLAN, as set forth herein. 2.19 "Plan Year" shall be the period from 1 October through 30 September. 2.20 "Prime interest rate" means the month-end prime rate charged by the First National Bank of Chicago in Chicago, Illinois. 2.21 "Required return" means Cost of Capital or C*. 2.22 "Return on capital" or "R" or "Return" means NOPAT divided by beginning Capital balances for each of the four quarters contained within the Plan Year. 2.23 "Total Performance Award" means the aggregate of the Award in any PLAN year for EVA improvement, EVA Maintenance and the Award based upon the value of the Leveraged lease portfolio and any change therein. ARTICLE III Participation 3.1 Participants. The Participants will include those employees who most directly affect value creation. A list of Participants shall be established as soon as possible after commencement of each PLAN year. 3.2 Change in Participants. The addition or deletion of Participants shall be made upon the request of the Chief Executive Officer (CEO) of the Company subject to approval by the Committee. The Award Bank of each additional Participant shall be primed in the manner set forth at Paragraph 4.4 hereof. The addition or deletion of a Participant during any PLAN year may require an amendment to the Established Award allocation as described herein at Article V. Notice of any such amendment shall be given to each Participant whose allocable share of the Established Award is thereby changed. 3.3 Partial Participation. In any PLAN year the CEO may include Partial Participant(s) who share only in the Discretionary Award. Partial Partici pants may be added or deleted at the discretion of the CEO of the Company without notice to other PLAN participants. No Award Bank shall be established for Partial Participants. Awards to Partial Participants shall be paid in cash. ARTICLE IV Awards 4.1 Use of EVA. The Total Performance Award shall be based upon the sum of the EVA calculated for each participating unit including the Company. EVA is reduced by bonuses paid by operating units other than the Company. It is not reduced by award payments to PLAN Participants or partial-Participants. 4.2 Calculation of EVA. The calculation of awards requires a separate calculation of EVA for each Participating Unit. Two performance results are calculated for each Participating Unit. These include the following: a. Improvement in EVA b. Three-year average of EVA A percentage of each is added to the incentive award pool. The percentages are specified at Schedules A through C attached hereto. In any PLAN year in which the Company maintains a leveraged lease portfolio, the calculation of EVA shall also include a calculation pertaining to the change in EVA attribut ed to said leveraged lease portfolio. (See Appendix I to Schedule C hereof.) 4.3 Total Performance Award Components. The total performance award in any Plan year is determined based upon the sum of EVA measurements for improving performance and for maintaining value. 4.3.1. EVA Improvement. The EVA target for each year is the EVA from the previous year. The percent, specified on the Schedules attached hereto, of each year's change in EVA is credited to the Total Performance Award. In the event of a decrease in EVA, a negative percent is calcu- lated and the Total Performance Award is decreased accordingly. 4.3.2. EVA Maintenance. The moving three-year average of the level of EVA is calculated and the percent, specified on the Schedules attached hereto of the three-year average EVA, is added to or subtracted from the Total Performance Award. 4.4 Priming the Award Bank. To allow full incentives to be paid to an employee in his or her first year of full participation in the PLAN, each such Award Bank shall be primed with an amount sufficiently large that, if an average award is earned, an average payment can be made. This amount shall be equal to twice the targeted bonus percentage of base salary. In that the amounts used to prime the Award Banks have not been earned by the Partici pants, no interest is earned on said amounts. The loan is amortized evenly over a five year period commencing in the third year of the PLAN. The loan shall be repaid without interest. 4.5 Adjustments to EVA. In order that the calculation of EVA will be fair during each separate year of the PLAN, adjustments will be made in the calculation of EVA where certain one-time events, acquisitions or dives titures would otherwise significantly distort the award calculations. 4.5.1. One Time Events. In the event assets are sold, it is possible for EVA to increase or decrease sharply when gains or losses are realized. Although EVA in the year of such event is calculated to include the event, the target for the following years' EVA Improvement Award will exclude the event. The Maintenance Award in all years will include the event. Determination of what constitutes a one-time event will be made by the Committee. 4.5.2. Acquisitions and Divestitures. In the event of acquisitions or divestitures, the EVA calculated for the operating results of an acquired or divested entity is added to or subtracted from, as the case may be, the ongoing calculations. The full price paid for the acquisition (including good will) is the capital base for the acquired company. A partial adjustment is made for transac tions which occur during the year. One time gains from divesti tures are treated as discussed at Paragraph 4.5.1 above. In the event of an acquisition of a company whose earnings are expected to increase substantially (e.g., a company with a high P/E ratio), EVA may be negative at first and thereby discourage otherwise prudent acquisitions. In such cases, the Capital of the acquisition may be divided in two parts. The first, which will be used for the award calculation, is an amount equal to an amount sufficient to allow the acquisition to exactly earn its Cost of Capital in the first year. The remainder of the purchase price is placed in a reserve account which is increased each year at an interest rate equal to the Acquisition's Cost of Capital. The reserve is amortized into the Capital base of the acquisition over a period of time equal to the earnings growth period. If the reserve amount is negative, no adjustment is made. 4.5.3. Changes In Calculation of NOPAT, Capital or C*. To the extent the PLAN may be amended from time to time and such amendments result in changes in the manner of calculating NOPAT, Capital or C*, the calculation of EVA for previous years included in deter mining EVA Improvement (Paragraph 4.3.1 hereof) and EVA mainte nance (Paragraph 4.3.2 hereof) shall be modified in a manner consistent with the calculation of EVA for the then current PLAN year. 4.5.4. Aggregate Awards. EVA is calculated annually for each Partici pating Unit as soon as possible after conclusion of each PLAN year. The Total Performance Award is the aggregate of the award for improvement of EVA and for maintenance of EVA and for any change in the value of the leveraged lease portfolio. 4.5.5. Award Allocation Cap. Unless the Committee approves an alloca tion of awards in any PLAN year in which the Total Performance Award equals more than 200% of the aggregate base salaries, no allocation of awards in excess of 200% of aggregate base salaries shall be paid to Participants during the PLAN year. Failure of the Committee to approve a Total Performance Award in excess of 200% of salaries may, at the Committee's discretion, result in allocation of a portion of such excess, deferral of all or a portion of the allocation of any such excess until the next PLAN year or forfeiture of said excess amount. ARTICLE V Allocation of Award 5.1 Annual Allocation. The Total Performance Award is allocated annually among Participants. Except as provided at Paragraph 3.3 regarding Partial Participants, each Participant's award is credited to the Award Bank main tained for each Participant. Such crediting will occur as soon as possible after conclusion of each PLAN year. Although an Award Bank may, as a result of negative EVA, have a deficit, no PLAN Participant shall be required, at any time, to reimburse his/her Award Bank. 5.2 Established Award. Except in the event of an amendment as provided at Paragraph 3.2 herein and further as provided at Paragraph 5.4 hereof, in each PLAN year, the Committee, upon recommendation by the CEO, shall pre-determine an allocation to PLAN Participants such that 80% of the Total Performance Award will be allocated. This is the Established Award. Each Participant will be notified of his/her allocable share of the Established Award as soon as possible after commencement of the PLAN year. 5.3 Discretionary Award. The Discretionary Award is the remaining 20% of the Total Performance Award. It will be utilized to reward outstanding perfor mance for one or more Participants or partial Participants. The Discretionary Award shall be allocated by the CEO of the Company, with the approval of the Committee at the conclusion of each PLAN year, provided that the allocation to the CEO of the Company of a Discretionary Award shall be at the same percent age as his/her allocable share of the Established Award for the PLAN year. The Committee may, in their discretion, increase or decrease the Discretionary Award to the CEO which increase or decrease shall not alter the Discretionary Awards determined by the CEO for other Participants and partial Participants. 5.4 Committee Adjustment or Suspension of Plan. In any PLAN year in which the CEO fails to recommend the allocation of the Established Award (paragraph 5.2 hereof), the Plan shall be suspended, except that the Plan shall not be suspended in the event the Committee in their discretion, either apply the allocation percentages from the previous PLAN year or establish new allocation percentages for the PLAN year. 5.5 Annual Review. Prior to the payment of the Awards in any PLAN year, the calculation of such Awards shall be reviewed by an independent party selected by the Audit Committee of the Board. The report of the independent party shall be delivered to the Committee as soon as possible after allocation of the Total Performance Award has been calculated. ARTICLE VI Payment of Awards 6.1 Reporting Status of the Plan. A report of the current status of the Plan shall be provided to Participants within 45 days after the close of each calendar quarter. 6.2 Award Banks. All allocations from the PLAN shall be credited to an individual Award Bank for each PLAN Participant. The Award Bank shall include the Award plus interest earned thereon less any payments therefrom. Award Banks are not secured by the Company and are 100 percent at risk. The Award Bank balance increases in the event of an Award and decreases if the Award is negative. Following the crediting of the Award for the prior year, one-third of the Award Bank balance of each Participant who has a positive Bank balance shall be distributed in cash to the Participant. No distribution shall be made in the event of a negative Bank balance. Although an Award Bank may, as a result of negative EVA or otherwise, have a deficit, no Plan Participant shall be required, except in the event of an overpayment, to reimburse his/her Award Bank. 6.3 Interest. Except as provided at (Paragraph 4.4) regarding loans to prime Award Banks, the amounts in the Award Banks will be credited monthly with interest at the prime interest rate. Negative bank balances will not earn or accrue interest. 6.4 Deferral of Payment. Amounts not paid from the Award Bank as specified hereinabove will be deferred and maintained in individual Award Banks for each Participant. 6.5 Accelerated Payment. Notwithstanding any other provisions of the PLAN to the contrary, upon the occurrence of a successful tender offer, where the purchase is by a person, or by a group as defined in Section 14 (d)(2) of the Securities Exchange Act of 1934, of 40% or more of the voting stock of the Company and subject to approval by the Committee, all Participants may receive immediate distribution of the entire amount in their Award Banks less any amounts used to prime an Award Bank as provided herein at Paragraph 4.4. Each Bank balance shall be payable upon demand from the Participant, with interest to the date of distribution. ARTICLE VII Termination 7.1 Termination by the Company. 7.1.1. Termination of Plan. The PLAN may be terminated by the Board at any time and for any reason or no reason. Payment of Award Banks shall proceed as specified hereinabove at Paragraph 6.5 for accelerated payment. 7.1.2. Committee Action. Upon recommendation by the CEO and with or without cause, any Participant may be terminated by the Committee from participation in the PLAN whether or not the Participant continues to be an employee. In such event, the Participant shall have no further right to any distribution from his/her Award Bank except that, at the discretion of the Committee, he/she may be granted a pro-rata allocation for the PLAN year in which he/she ceases to be a Participant and may be granted a full or partial distribution of his/her Bank balance. 7.1.3. Sale of the Company. In the event a Participant ceases to be an employee because of a sale or transfer of the business of the Company to a person or entity not controlled, directly or indi rectly, by the Company or a sale, lease, exchange or transfer of all or substantially all the assets of the Company, the Partici pant shall receive a distribution of the entire balance of his/her Bank at the time when distributions are made in the year following the year that he/she ceases to be an employee less any amounts used to prime the Award Bank (paragraph 4.4). 7.2 Termination by the Participant. 7.2.1. Death or Disability. Termination of participation in the PLAN results from death or disability of the Participant. Disability will be determined in accordance with other benefit provisions of the Company which define "disability." The entire Award Bank, less any amounts used to prime the Award Bank (paragraph 4.4), shall be distributed to the Participant or his/her legal repre sentative when distributions are made in the year following the PLAN year in which the Participant died or became disabled. 7.2.2. Retirement. A Participant who retires from the employment of the Company, as retirement shall, from time to time, be defined by the Company for purposes of awarding pension and other similar benefits, shall continue to receive distribution from his/her Award Bank as though he/she had continued to be an employee for a period of two (2) Plan years following the Plan year in which he/she retires. The distributions to such a retired Participant shall be the entire balance of his/her Award Bank less an amount used to prime the Award Bank (paragraph 4.84). The amount used to prime the Award Bank shall be deducted from the Participant's Award Bank on the first day of the EVA Plan Year following the date of retirement. 7.2.3. Voluntary Quit. A Participant who voluntarily terminates employ ment with the Company other than to retire shall be deemed to have forfeited the balance in his/her Award Bank. However, at the recommendation of the CEO and upon approval by the Committee, the Participant may be granted a pro-rata allocation for the PLAN year in which his/her employment terminates and may be granted full or partial distribution of his/her Award Bank. ARTICLE VIII Forfeiture 8.1 Voluntary Quit. In the event a Participant voluntarily terminates employment with the Company and thereby forfeits all or a portion of his/her Award Bank, the balance remaining in the Award Bank shall be distributed or deleted and the Award Bank terminated. 8.2 Non-Allocation of Award. In the event of a suspension of the PLAN in any PLAN year, as provided herein at Paragraph 5.4, the Total Performance Award for the subject PLAN year shall be deemed forfeited and no portion thereof shall be allocated to Participants. Any such forfeiture shall not affect the calculation of EVA in any subsequent year. ARTICLE IX Limitations 9.1 No Continued Employment. Nothing contained herein shall provide any employee with any right to continued employment or in any way abridge the rights of the Company and its Participating Units to determine the terms and conditions of employment and whether to terminate employment of any employee. 9.2 No Vested Rights. Except as otherwise provided herein, no employee or other person shall have any claim of right (legal, equitable, or otherwise) to any award, allocation, or distribution or any right, title, or vested interest in any amounts in his/her Award Bank and no officer or employee of the Company or any Participating Unit or any other person shall have any authority to make representations or agreements to the contrary. No interest conferred herein to a Participant shall be assignable or subject to claim by a Participant's creditors. 9.3 Not Part of Other Benefits. The benefits provided in this PLAN shall not be deemed a part of any other benefit provided by the Company to its employ ees. The Company assumes no obligation to PLAN Participants except as speci fied herein. This is a complete statement, along with the Schedules and Appendices attached hereto, of the terms and conditions of the PLAN. ARTICLE X Authority 10.1 Committee Authority. Except as otherwise expressly provided herein, full power and authority to interpret and administer this PLAN shall be vested in the Committee. 10.2 Board of Directors Authority. The Board shall be ultimately responsible for administration of the PLAN. References made herein to the 'Committee' assume that the Board of Directors has created a committee of its membership to administer the PLAN. In the event a Committee is not so designated, the Board shall administer the PLAN. The Board or its Committee, as appropriate, shall work with the CEO of the Company in all aspects of the administration of the PLAN. 10.3 Annual Review. The PLAN shall be reviewed at least annually by the Audit Committee of the Board. It shall report its findings to the Board. The report prepared annually in accordance with the provisions of Paragraph 5.5 shall be provided to the Audit Committee. ARTICLE XI Notice 11.1 Any notice to be given pursuant to the provisions of the PLAN shall be in writing and directed to the appropriate recipient thereof at his/her business address or office location. ARTICLE XII Effective Date 12.1 This Revised PLAN shall be effective as of 1 October 1990. ARTICLE XIII Amendments 13.1 This PLAN may be amended, suspended or terminated at any time at the sole discretion of the Board upon the recommendation of the Committee. Provided, however, that no such change in the PLAN shall be effective to eliminate or diminish the distribution of any Award that has been allocated to the Bank of a Participant prior to the date of such amendment, suspension or termination. Notice of any such amendment, suspension or termination shall be given prompt ly to each Participant. ARTICLE XIV Applicable Law 14.1 This PLAN shall be construed in accordance with the laws of the State of Illinois. CILCORP INC. EVA-BASED INCENTIVE COMPENSATION PLAN (REVISED) Schedule A: CILCORP and all non-regulated Participating Units except CILCORP Investment Management Inc. (CIM). I. Components of Capital: (As defined in PLAN) II. Cost of Capital (C*): Calculate C* using Method A or B described at Exhibit 1 to the Plan III. Components of NOPAT: (As defined in PLAN) IV. Award Payment Percentages: EVA Improvement 5.0% of EVA allocated to Total Performance Award EVA Maintenance 2.5% of EVA allocated to Total Performance Award 1] 1] To be calculated using three-year average of EVA CILCORP INC. EVA-BASED INCENTIVE COMPENSATION PLAN (REVISED) Schedule B: CILCO and all regulated Participating Units I. Components of Capital: Components of Capital are as defined in the PLAN except that "De ferred Taxes" are deducted therefrom. II. Cost of Capital (C*): Calculate C* using Method B described at Exhibit 1 to the PLAN. III. Components of NOPAT: Components of NOPAT are as defined in the PLAN except that the "Increase in deferred taxes" is not deducted from "cash taxes or operating profits." IV. Award Payment Percentages: EVA Improvement 2.5% of EVA allocated to Total Performance Award EVA Maintenance 7.5% of EVA allocated to Total Performance Award 1] 1] To be calculated using three-year average of EVA CILCORP INC. EVA-BASED INCENTIVE COMPENSATION PLAN (REVISED) Schedule C: CILCORP Investment Management Inc. (CIM) I. Components of Capital (excludes all leveraged lease portfolio items: (As defined in PLAN) II. Cost of Capital (C*): C* calculation differs for the leverage lease and general investment portfolios. 1. Investment portfolio: Calculate C* using the PLAN year average of the cost of capital for each class of investment weighted by its proportion to the total portfolio. Investment classes and their respective capital cost rates are as follows: Investment Class Capital Cost Rates Short term government bonds STGB rate Cash, MM, CP STGB rate + 0% Long term government bonds LTGB rate Common stock LTGB rate + 4.5% Preferred Stock & Municipals STGB + 0.75% Investment Grade Debt LTGB + 1.0% High Yield Debt LTGB + 2.5% Note: abbreviations are explained in the Glossary at Exhibit 1 to the Plan 2. Lease Portfolio a. Residual value cash flow The cost of capital for residual cash flows shall be calculated as follows: Cost of Equity = (Beta x 4.5%) + (20 year govt. bond rate) Cost of Capital = Cost of Equity x (Equity/Total Capital) + Cost of Debt x (1 - tax rate) x (Debt/Total Capital) In calculating the cost of capital for the residual value, the cost of debt and the capitalization ratios should be typical for companies in the same industry as the leased asset, and not the specific cost and ratios of the lessee. Similarly, the beta should be that of the industry of the leased asset. b. For all other cash flows (tax deferrals, P & I payments, initial cost, etc.) C* shall be calculated as follows: Cost of Capital = Lessee's Debt Rate x (CILCORP's Equity Investment/Total Investment in Transaction) + Non-recourse Debt Rate x (1 - tax rate) x (Non-recourse Debt Balance/Total Invest) + Recourse Debt Rate x (1 - tax rate) x (Recourse Debt Bal./Total investment) In all cases, the debt rates used are current market debt rates. III. Components of NOPAT (excludes all cash flow, tax deferrals, direct increases to investment, etc. from leveraged leases): (As defined in PLAN) IV. Award Payment Percentages: EVA Improvement 5.0% of EVA allocated to Total Performance Award EVA Maintenance 2.5% of EVA allocated to Total Performance Award 1] Note: A separate calculation of EVA for the CIM leveraged lease portfolio is to be made for each PLAN year. Said calculation shall be made in the manner set forth at Appendix I to this Schedule C. 1] To be calculated using three-year average of EVA CILCORP INC. EVA-BASED INCENTIVE COMPENSATION PLAN (REVISED) Appendix I to Schedule C: Calculation of EVA for CIM Leveraged Lease Portfolio Note: A separate calculation of value is made for the leveraged lease portfolio because the method of calculation of EVA, otherwise expressed in the Plan, fails to accurately account for the leases and their patterns of cash flow. The beginning point for all leases owned by the Company on the effective date of the Plan shall be at "booked residual value." Calculation of EVA for Each Leveraged Lease: I. Original Calculation: A. Upon the effective date of the lease, all cash flows except those pertaining to the residual value of the asset (initial purchase price, tax deferrals, net principal and interest payments, etc.) are discounted at the rate specified at Sched ule C, Paragraph II.2.b. B. All cash flows from the booked amount of the asset's residual value are discounted at the rate specified at Schedule C, paragraph II.2.a. C. The results from A and B (above) are added to determine total net present value and 2.5% thereof is added to the Total Performance Award. II. Change-In-Value Calculation Changes in the estimated value of each lease caused by tax rate changes, by changes in the estimate of the lease asset's residual value, and by any difference between actual value and estimated value realized upon termination of each lease are calculated in each year that these events occur. 2.5% of the change in these values is added to (or subtracted from) the Total Performance Award in the year that they are calculated. A. Upon reappraisal, the change in value of the lease will be calculated as the difference between 80% of the previous appraised residual value and 80% of the new appraised residual value discounted to the then current year using a then current discount rate (see Schedule C, paragraph II.2.a.). If the new appraisal is the first reappraisal, the full booked residual value will be used instead of 80% of the previous appraised residual value in the calculation. B. If the lease is terminated, the change in value of the lease will be the realization from the termination, less 80% of the previous appraised residual value discounted to the current year using a then current discount rate, less all cash flows except those from the residual value discounted to the current year using a then current discount rate. (see Schedule C, Paragraph II.2.b.) C. If tax rates change, discount rates for the residual value and for the other lease cash flows are calculated using then current interest rates and both the previous tax rates and the new tax rates. All cash flows from the lease (including those from the disposal of the lease) are recalculated using the new tax rates. The difference between the present value of the previous cash flow and residual value discounted to the then current year using the previous discount rates, and the present value of the new cash flows and residual value discounted using the new discount rates is calculated. 2.5% of this difference is added to (or subtracted from) the Total Performance Award. Note: The re-valuation of each lease for the purpose of determining the estimate of the residual value thereof shall be made in accordance with a schedule submitted, from time to time, by the CEO to the Audit Committee. CILCORP INC. EVA-BASED INCENTIVE COMPENSATION PLAN (REVISED) Exhibit 1: Cost of Capital (C*) - Methods of Calculation, Glossary of Terms and Recommended Sources of Data Calculation Method A: (to be used when Beta is known) C* = weighted average of the following components: Cost of debt = (current borrowing rate) (1-t) Cost of equity = [Quarterly avg. B) x 4.56%] + Quarterly avg. LTGB Cost of preferred = Quarterly avg. yield on preferred Calculation Method B: (to be used when Beta is unknown, usually because the entity is not publicly traded) Calculation Method B is the same as Method A except that Beta is deter mined using an appropriate peer group of companies. Note: For new acquisitions, calculate C* using Method A if Beta is known. If Beta is unknown, Method B is used. For both methods, the D/C ratio is adjusted to reflect an estimate which neither improves nor detracts from the Company's overall credit i.e. D/C should be the Participating Units targeted capital structure. For calculation of the weighted cost of capital for utility subsidiaries deferred taxes shall not be considered a component of common equity. Glossary: Avg = Average Beta = Beta Coefficient CP = Commercial Paper D/C = Debt/Capital LTGB = Long term government bond rate (30 years) MM = Money Market STGB = Short term government bond rate (1 year) t = Marginal tax rate YTD = Plan Year-to-date Sources: The following sources are recommended for Cost of Capital calculations: 1. LTGB rate available from Federal Reserve Bulletin, Salomon Bros., Moody's Bond Record etc. 2. Beta calculated by the Company using methodology provided by ALCAR. 3. Current borrowing rate and YTD yield available from current rating. 4. Debt, equity and preferred percents taken against capital, as defined. EX-10 3 CILCORP INC. COMPENSATION PROTECTION PLAN APPROVED BY THE BOARD OF DIRECTORS JUNE 28, 1994 I. PURPOSE AND OBJECTIVE This Plan provides compensation protection benefits to "Eligible Employ ees" (as defined herein) in order to ease the financial burden associated with being involuntarily and permanently terminated by CILCORP Inc. (CILCORP) or a successor thereof as a result of a "Change in Control" (as defined herein) or a sale of CILCORP. II. BENEFITS A. Salary Continuation Allowance Upon the occurrence of a "Covered Termination" (as defined herein), an "Eligible Employee" shall receive a "Salary Continuation Allow ance" expressed in terms of weeks of "Base Salary" ( as defined herein) as follows: Years of Continuous Weeks of Base Salary Service Completed Less than 4 years 38 4 years but less than 6 41 6 years but less than 8 44 8 years but less than 10 47 10 years but less than 12 50 12 years but less than 14 53 14 years but less than 15 56 15 years but less than 16 59 16 years but less than 17 62 17 years but less than 18 65 18 years but less than 19 68 19 years but less than 20 71 20 years but less than 21 74 21 years but less than 22 77 22 years but less than 23 80 23 years but less than 24 83 24 years but less than 25 86 25 years but less than 26 89 26 years but less than 27 92 27 years but less than 28 95 28 years but less than 29 98 29 years but less than 30 101 30 years or more 104 provided that the President and all Vice Presidents of the Company shall, regardless of Years of Continuous Service Completed, receive a Salary Continuation Allowance as if each such President and Vice President had 30 years or more of continuous service. B. Employee Benefit Coverage Allowance In addition to the aforementioned Salary Continuation Allowance and during the period of receipt thereof, an Eligible Employee shall receive a continuation of "Employee Benefit Coverage" (as defined herein). III. PROCEDURE The Salary Continuation Allowance (Section II, A hereof) and the Employee Benefit Coverage Allowance (Section II, B hereof) (together, the "Bene fits") shall be paid (or made available) during the "Weeks of Base Salary" specified at paragraph A thereof. The Salary Continuation Allowance shall be paid in installments in the same manner and according to the same schedule as existed at the time of termination of employment or, in the event of a Change in Control, the salary in effect immediately prior to the Change in Control, whichever is greater. Except as other wise specified herein, all such payments shall be subject to customary payroll tax withholding and excise tax withholding, if any. To the extent that Benefits provided hereunder shall result in liability of the employee for the payment of excise taxes pursuant to Section 280G of the Internal Revenue Code of 1986, as amended (or any successor provision thereof), the Company shall reimburse the employee, to the extent such reimbursement can be accurately calculated, for any such excise tax actually paid by the employee through withholding or otherwise. Notwithstanding the foregoing, and subject to the provisions of Section V., the Board of Directors may, in its complete discretion, adopt an alternative procedure for payment which accelerates payment of Benefits to an Eligible Employee. Any such accelerated payments shall be at their full, undiscounted value. IV. DESIGNATION OF ELIGIBLE EMPLOYEES "Eligible Employees" shall include the President and all Vice Presidents of the Company. It may also include any other highly compensated, key employees of the Company's management staff who may be designated, from time to time, by the Board of Directors. V. AMENDMENT OF PLAN This Plan may be terminated or amended from time to time by the Board of Directors. However, no termination, amendment or change to this Plan which would have the effect of reducing Benefits hereunder, which would rescind an alternative procedure for accelerated payment previously adopted or which would otherwise have an adverse effect on the determina tion 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. Eligible Employees shall be given written notice of any such termination, amendment or change within a reasonable time after any such action is taken. VI. DEFINITIONS Terms used herein shall have their ordinary meanings except as noted below: "Affiliate" means any company controlled by, controlling or under common control with CILCORP. "Base Salary" means the annual base pay rate in effect during the month immediately preceding termination or, in the case of a Change in Control, the annual base pay rate in effect during the month immediately prior to a Change in Control (whichever is greater). "Benefits" means benefits as defined in Section II A and Section II B of this Plan. "Board of Directors" means the Board of Directors of CILCORP Inc. "Change in Control" means the occurrence of any of the following: (1) the sale or transfer of the business of the Company to a person or entity not controlled, directly or indirectly, by the Company, whether such sale of the business of the Company, as the case may be, is effected through the (a) sale, directly or indirectly, of the voting stock of the Company, (b) merger or consolidation of the Company, (c) sale, lease, exchange or transfer of all or substantially all of the assets of the Company 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 Compa ny's common stock are converted into cash, securities or other property; (3) the acquisition of beneficial ownership, directly or indirectly, of more than 30 percent of the voting power of the outstanding stock of the Company by any "person" (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended, and as in effect on the date of adoption of the Plan) coupled with or followed by the failure of Continuing Directors (as defined herein) to constitute a majority of the board of directors of the Company; or 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 of Directors of the Company or any successor thereto and the holders of the Company's common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation after the merger. "CILCORP" means CILCORP Inc., an Illinois corporation, and any successor thereto. "Company" means CILCORP. "Continuing Director" means any member of the board of directors of the Company, 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 subsequent ly becomes a member of the board of directors of the Company, while such person is a member of such board of directors, if such person's nomina tion for election or election to such board of directors is recommended or approved by resolution of a majority of the Continuing Directors. "Continuous Service" means employment by one or more of the Company or any of its Affiliates, or any combination of them, on a full or part-time basis, without interruption, except for leave authorized by the Board of Directors. "Covered Termination" occurs when an Eligible Employee: 1. Is terminated within two years after a Change in Control for a reason other than Unacceptable Performance, death, or disability. 2. Terminates his/her employment for "Good Reason" (as defined herein) within two years following Change in Control. "Employee Benefit Coverage" means comprehensive hospital and medical expense, dental, life insurance, disability insurance, accidental death and dismemberment insurance and other benefits in effect either at the time of the Change in Control or at the time of termination of the Eligible Employee, whichever is more beneficial to the Eligible Employee, to the extent that the plan documents and applicable law permit the continuation of such benefits. In the event such benefits cannot be continued, the Company or its successor shall otherwise arrange for continuation or purchase comparable benefits for the Eligible Employee. The taxability to the employee of a continuation of such benefits or the non-deductibility to the Company shall not be deemed to prevent a contin uation of such benefits for an Eligible Employee. Such coverage does not include the travel accident insurance, Executive Deferral Plan, tuition reimbursement plan, pension plan, bonus plan, Employees' Savings Plan, matching gift plan, Company sponsored physical examinations and member ship dues. "Good Reason" shall be deemed to exist when, for reasons not related to Unacceptable Performance, an Eligible Employee experiences (1) a reduc tion in Base Salary; (2) elimination or significant reduction of basic benefit plans (medical, basic life, dental or salary continuation, etc.) without an equitable substitute; (3) a reduction of duties, responsibili ty or authority; or (4) involuntary transfer to a new business location. "Unacceptable Performance" means an Eligible Employee's failure to perform his job duties as established by objective and measurable stan dards, or engaging in serious misconduct or neglect in the discharge of his/her duties (including, without limitation, any violation of the provisions of the Company's Employee Handbook, the CILCORP Inc. Code of Conduct, or any statutory or common law duty to the Company, any affili ate or subsidiary thereof, or a successor thereto). After having been given specific written notice of his/her Unacceptable Performance and having been afforded a reasonable opportunity to cure any such Unaccept able Performance. VII. MISCELLANEOUS A. Waiver of Rights Receipt of the Benefits provided herein by an Eligible Employee shall constitute a waiver by said employee of all claims or causes of action which he/she may have against the Company pertaining to this Plan. B. Not a Contract of Employment Neither this Plan nor any of its provisions shall be deemed a contract of employment or terms thereof, and either party may terminate the employment relationship at any time and without notice provided that the Benefits specified herein shall be available for an Eligible Employee upon occurrence of the events identified herein. C. Effect of Re-Employment Re-employment of an Eligible Employee shall not reduce the Benefits provided herein except: 1. Employee Benefit Coverage shall be secondary to any benefits actually provided under a subsequent employer's plan; and 2. In the event the employee is re-employed at any time during the payment of Benefits pursuant to Section II.A. of this Plan by the Company or a majority-owned subsidiary or by the successor to the Company or a majority-owned subsidiary at compensation equal to or greater than the Benefits provided herein at Section II.A., then the payment of such Benefits shall cease during such period of re-employment provided, however, that such Employee may again become eligible for Benefits in the event of Covered Termination. D. Additional Benefit The Benefits provided herein are in addition to and not in lieu of any other benefits provided by the Company. The provisions hereof shall not be deemed to limit an employee's entitlement to continuing benefits pursuant to any pension plan, savings plan, deferred compensation plan or post-retirement benefits in which the employee participated prior to a covered termination. E. Legal Fees and Expenses In the event an Eligible Employee retains legal counsel to enforce the terms and conditions hereof subsequent to a "Change in Control," the Company shall reimburse such employee for all reasonable attor ney fees and expenses thereby incurred by such employee. F. Governing Law and Plan Interpretation To the extent not preempted by the laws of the United States, this Plan shall be construed in accordance with the laws of the State of Illinois. The Board of Directors of the Company or its designee have full authority and discretion to make, amend, interpret and enforce all appropriate rules and regulations for the administration of the Plan and to decide or resolve any and all questions arising under the Plan including the interpretation of any provision of the Plan and the calculation of benefits thereunder as may arise in connection with the Plan. EX-25 4 [DESCRIPTION] POWER OF ATTORNEY FOR CILCO & CILCORP '94 10-K'S January 30, 1995 Mr. R. W. Slone Mr. T. S. Romanowski 300 Liberty Street 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 Central Illinois Light Company to sign and cause to be filed with the Securities and Exchange Commission Central Illinois Light Company's annual report on Form 10-K for the fiscal year ended December 31, 1994 and any appropriate amendment or amendments to said report and any necessary exhibits. The undersigned, Central Illinois Light Company, 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, CENTRAL ILLINOIS LIGHT COMPANY By /s/ R. W. Slone R. W. Slone, Chairman, President and Chief Executive Officer Power of attorney related to execution and filing of Central Illinois Light Company 1994 annual report on Form 10-K. /s/ M. Alexis /s/ R. W. Slone M. Alexis R. W. Slone /s/ J. R. Brazil /s/ K. E. Smith J. R. Brazil K. E. Smith /s/ W. Bunn III /s/ R. N. Ullman W. Bunn III R. N. Ullman /s/ D. E. Connor /s/ J. F. Vergon D. E. Connor J. F. Vergon /s/ W. M. Shay /s/ M. M. Yeomans W. M. Shay M. M. Yeomans /s/ R. L. Beetschen /s/ T. S. Romanowski R. L. Beetschen T. S. Romanowski EXHIBIT (25) Extract from Minutes of Meeting of the Board of Directors of Central Illinois Light Company held January 30, 1995 Upon motion duly made and seconded, the following resolution was unanimously adopted: RESOLVED: That for the purpose of executing and completing Central Illinois Light Company's annual report on Form 10-K for the fiscal year ended December 31, 1994 to be filed with the Securities and Exchange Commission, and of remedying any deficiencies with respect thereto by appropriate amendment or amendments, this Company, its officers and members of its Board of Directors are authorized to give their several powers of attorney to R. W. Slone, T. S. Romanowski, J. H. Byington, Jr. and D. P. Falck, or any one of them, in such form as the officers of the Company may determine and as counsel may advise. * * * * * * * * * * * I, John G. Sahn, Secretary of Central Illinois Light Company, do hereby certify that the foregoing is a true and correct copy of a resolution duly and regularly adopted at meeting of the Board of Directors of Central Illinois Light Company, duly held January 30, 1995, at which a quorum was in attendance and voting throughout, and that said resolution has not since been rescinded, but is still in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company this 14th day of March, 1995. /s/ John G. Sahn John G. Sahn Secretary (S E A L) EX-25 5 January 31, 1995 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, 1994 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 /s/ R. O. Viets R. O. Viets, President Power of attorney related to execution and filing of CILCORP Inc. 1994 annual report on Form 10-K. /s/ M. Alexis /s/ R. W. Slone M. Alexis R. W. Slone /s/ J. R. Brazil /s/ K. E. Smith J. R. Brazil K. E. Smith /s/ W. Bunn III /s/ R. N. Ullman W. Bunn III R. N. Ullman /s/ D. E. Connor /s/ R. O. Viets D. E. Connor R. O. Viets /s/ H. J. Holland /s/ M. M. Yeomans H. J. Holland M. M. Yeomans /s/ H. S. Peacock /s/ T. D. Hutchinson H. S. Peacock T. D. Hutchinson EXHIBIT (25) Extract from Minutes of Meeting of the Board of Directors of CILCORP Inc. held January 31, 1995 Upon motion duly made and seconded, the following resolution was unanimously adopted: RESOLVED: That for the purpose of executing and completing CILCORP Inc.'s annual report on Form 10-K for the fiscal year ended December 31, 1994 to be filed with the Securities and Exchange Commission, and of remedying any deficiencies with respect thereto by appropriate amendment or amendments, this Company, its officers and members of its Board of Directors are authorized to give their several powers of attorney to R. O. Viets, J. G. Sahn, J. H. Byington, Jr. and D. P. Falck, or any one of them, in such form as the officers of the Company determine and as counsel may advise. * * * * * * * * * * * I, John G. Sahn, Secretary of CILCORP Inc., do hereby certify that the foregoing is a true and correct copy of a resolution duly and regularly adopted at meeting of the Board of Directors of CILCORP Inc., duly held January 31, 1995, at which a quorum was in attendance and voting throughout, and that said resolution has not since been rescinded, but is still in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company this 14th day of March, 1995. /s/ John G. Sahn John G. Sahn Secretary (S E A L) EX-3 6 [DESCRIPTION] CILCO EXHIBIT (3) - ARTICLES OF INCORPORATION AS AMENDED CENTRAL ILLINOIS LIGHT COMPANY (Organized April 11, 1913) ARTICLES OF INCORPORATION Composite As Amended From Time to Time to and Including the Amendment Filed in the Office of the Secretary of State of Illinois on July 26, 1993 ARTICLE 1. The name of such corporation is Central Illinois Light Company. ARTICLE 2. The object for which it is formed is to manufacture or generate and sell and distribute light, heat and power to the public in the form of gas, electricity, steam, hot water, or other agency, in the City of Peoria, County of Peoria, State of Illinois, and other cities, towns and villages in said State. ARTICLE 3. The aggregate number of shares which the Company is authorized to issue is 27,000,000 divided into four (4) classes. The designation of each class, the number of shares of each class (and the par value, if any, of the shares of each class, or a statement that the shares of any class are without par value), are as follows: Class Series No. of Shares Par Value Per Share Common None 20,000,000 No par value Preferred 4 1/2% 111,264 $100 Preferred 4.64% 79,940 $100 Preferred Undesignated 1,308,796 $100 Class A 5.85% 220,000 No par value Preferred Class A Flexible Auction 250,000 No par value Preferred Rate Class A Undesignated 3,030,000 No par value Preferred Preference Undesignated 2,000,000 No par value 27,000,000 Shares of Common Stock without par value may be issued for such consideration as may be fixed from time to time by the Board of Directors and the entire amount of the consideration received for any such shares so issued shall be stated capital. The preferences, qualifications, limitations, restrictions and the special or relative rights in respect of the shares of each class, the provisions, if any, for the division into and issue in series of shares of August 27, 1993 each class, the designation of each series authorized by the Articles of Incorporation, the variations in the relative rights and preferences as between the different series of any class insofar as the same are to be fixed in the Articles of Incorporation, and the statement of the authority vested in the Board of Directors to establish series of any class and fix and determine the variations in the relative rights and preferences as between series of any class, are as follows: PREFERRED STOCK Provision for Division Into and Issue in Series of Preferred Stock and Grant of Authority to Board of Directors The shares of the Preferred Stock may be divided into and issued in series. Each series shall be designated so as to distinguish the shares thereof from the shares of all other series and classes and all shares of the Preferred Stock irrespective of series shall be identical except as to the following relative rights and preferences in respect of any or all of which there may be variations between different series and authority is hereby expressly vested in the Board of Directors, to the extent that series are not established by the Articles of Incorporation and the variations and the relative rights and preferences as between series fixed and determined therein, to establish series and to fix and determine the following relative rights and preferences of the shares thereof in accordance with the provisions of the Business Corporation Act of Illinois applicable thereto: (a) The rate of dividend; (b) The price at which shares may be redeemed, such price to be not less than $100.00 nor more than $115.00 per share, plus accrued dividends to the date of redemption; (c) The amount payable upon shares in event of involuntary liquidation, which amount shall not be less than $100.00 per share nor more than $115.00 per share, plus accrued dividends; (d) The amount payable upon shares in event of voluntary liquidation, which amount shall not be less than $100.00 per share nor more than $115.00 per share, plus accrued dividends. The Board of Directors is hereby authorized to issue and sell all the authorized and unissued shares of Preferred Stock as shares of any series which shall have been duly established, and in the event that the Company shall acquire, by purchase or redemption or otherwise, any issued shares of its Preferred Stock of any series, the Board of Directors may resell or convert and sell, in their discretion, any shares so acquired as shares of the same or of any other series of Preferred Stock which shall have been duly established. Series of Preferred Stock Established by Articles of Incorporation Without limitation of the foregoing authority conferred upon the Board of Directors, there is hereby established a series of Preferred Stock designated as 4 1/2% Preferred Stock. The relative rights and preferences of the shares of said series in those respects in which the shares thereof may vary from the shares of other series, shall be as follows: (a) The rate of dividend shall be 4 1/2%; (b) The price at which shares may be redeemed shall be $110.00 per share, plus accrued dividends to the date of redemption; (c) The amount payable in event of involuntary liquidation shall be $100.00 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation shall be $105.00 per share, plus accrued dividends. Series of Preferred Stock Established by the Board of Directors Pursuant to the foregoing authority conferred upon the Board of Directors, 80,000 of the authorized but unissued shares of Preferred Stock of the Company shall be established as a series of Preferred Stock which is hereby designated 4.64% Preferred Stock, and the relative rights and preferences of the shares of said series in those respects in which the shares thereof may vary from the shares of other series, shall be as follows: (a) The rate of dividend shall be 4.64%; (b) The price at which shares may be redeemed shall be $106.00 per share if the date of redemption is on or prior to July 1, 1961, $104.00 per share if the date of redemption is after July 1, 1961 and on or prior to July 1, 1966 and $102.00 per share if the date of redemption is after July 1, 1966 plus accrued dividends in each case to the date of redemption; (c) The amount payable in event of involuntary liquidation shall be $100.00 per share, plus accrued dividends; (d) The amount payable in event of voluntary liquidation shall be $100.00 per share, plus accrued dividends. General Provisions The following provisions shall apply to all the Preferred Stock irrespective of series: (1) The holders of the Preferred Stock of each series shall be entitled to receive dividends, payable quarterly on the first days of January, April, July and October of each year, when and as declared by the Board of Directors, at the rates determined for the respective series, from the first day of the current dividend period within which such stock shall have been originally issued except that, as to any share of Preferred Stock originally issued subsequent to December 31, 1973, from the date upon which such share shall have been originally issued, before any dividends shall be declared or paid upon or set apart for the Common Stock or any other class of stock of the Company not having preference over the Preferred Stock as to payment of dividends. Such dividends shall be cumulative so that if for any dividend period or periods dividends shall not have been paid or declared and set apart for payment upon all outstanding Preferred Stock at the rates determined for the respective series, the deficiency shall be fully paid, or declared and set apart for payment, before any dividends shall be declared or paid upon the Common Stock or any other class of stock of the Company not having preference over the Preferred Stock as to payment of dividends. Dividends shall not be declared and set apart for payment, or paid, on the Preferred Stock of any one series, for any dividend period, unless dividends have been or are contemporaneously declared and set apart for payment or paid on the Preferred Stock of all series for all dividend periods terminating on the same or an earlier date. (2) When full cumulative dividends as aforesaid upon the Preferred Stock of all series then outstanding for all past dividend periods and for the current dividend period shall have been paid or declared and set apart for payment, the Board of Directors may, subject to the provisions of the laws of the State of Illinois and of the Articles of Incorporation, declare dividends on the Common Stock or any other class of stock over which the Preferred Stock has a preference as to payment of dividends, and no holders of any series of the Preferred Stock as such shall be entitled to share therein; provided, however, that no dividends shall be paid on Common Stock or on any other class of stock over which the Preferred Stock has preference as to payment of dividends or as to assets, either out of paid-in surplus or any surplus created by a reduction of stated capital or capital stock, or if, at the time of declaration thereof there shall not remain to the credit of earned surplus account, (after deducting therefrom the amount of such dividends), an amount at least equal to two times the annual dividend requirements on all then outstanding shares of the Preferred Stock and of all other classes of stock over which the Preferred Stock does not have preference as to the payment of dividends or as to assets. (3) Upon any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of Preferred Stock of each series, without any preference of the shares of any series of Preferred Stock over the shares of any other series of Preferred Stock, shall be entitled to receive out of the assets of the Company, whether capital, surplus or other, before any distribution of the assets to be distributed shall be made to the holders of Common Stock or of any other class of stock not having preference as to assets over the Preferred Stock, the amount determined to be payable on the shares of such series in the event of voluntary or involuntary liquidation, as the case may be. After payment to the holders of the Preferred Stock of the full preferential amounts hereinbefore provided for, the holders of the Preferred Stock as such shall have no right or claim to any of the remaining assets of the Company, either upon any distribution of such assets or upon dissolution, liquidation or winding up, and the remaining assets to be distributed, if any, upon a distribution of such assets or upon dissolution, liquidation or winding up, may be distributed, subject to the provisions of the laws of the State of Illinois and the Articles of Incorporation, among the holders of the Common Stock or of any other class of stock over which the Preferred Stock has preference as to assets. Without limiting the right of the Company to distribute its assets or to dissolve, liquidate or wind up in connection with any sale, merger or consolidation, the sale of all the property of the Company to, or the merger or consolidation of the Company into or with any other corporation shall not be deemed to be a distribution of assets or a dissolution, liquidation or winding up for the purposes of this paragraph. (4) At the option of the Board of Directors of the Company, the Company may redeem any series of Preferred Stock determined to be redeemable, or any part of any series, at any time at the redemption price determined for such series; provided, however, that not less than thirty nor more than sixty days previous to the date fixed for redemption a notice of the time and place thereof shall be given to the holders of record of the Preferred Stock so to be redeemed, by mail or publication, in such manner as may be prescribed by the Bylaws of the Company or by resolution of the Board of Directors; and, provided, further, that in every case of redemption of less than all of the outstanding shares of any one series of Preferred Stock, the shares of such series to be redeemed shall be chosen by lot in such manner as may be prescribed by resolution of the Board of Directors. At any time after notice of redemption has been given in the manner prescribed by the Bylaws of the Company or by resolution of the Board of Directors to the holders of stock so to be redeemed, the Company may deposit, or may cause its nominee to deposit, the aggregate redemption price with some bank or trust company named in such notice, payable on the date fixed for redemption as aforesaid and in the amounts aforesaid to the respective orders of the holders of the shares so to be redeemed, on endorsement to the Company or its nominee, or otherwise, as may be required, and upon surrender of the certificates for such shares. Upon the deposit of said money as aforesaid, or, if no such deposit is made, upon said redemption date (unless the Company defaults in making payment of the redemption price as set forth in such notice), such holders shall cease to be shareholders with respect to said shares, and from and after the making of said deposit, or, if no such deposit is made, after the redemption date (the Company not having defaulted in making payment of the redemption price as set forth in such notice), the said holders shall have no interest in or claim against the Company or its nominee with respect to said shares, but shall be entitled only to receive said moneys on the date fixed for redemption as aforesaid from said bank or trust company, or if no such deposit is made, from the Company, without interest thereon, upon endorsement, if required, and surrender of the certificates as aforesaid. If such deposit shall be made by a nominee of the Company as aforesaid, such nominee shall upon such deposit become the owner of the shares with respect to which such deposit was made and certificates of stock may be issued to such nominee in evidence of such ownership. In case the holder of any such Preferred Stock shall not, within six years after said deposit, claim the amount deposited as above stated for the redemption thereof, the Depositary shall upon demand pay over to the Company such amounts so deposited and the Depositary shall thereupon be relieved from all responsibility to the holder thereof. Nothing herein contained shall limit any legal right of the Company to purchase any shares of the Preferred Stock. (5) At all meetings of the shareholders of the Company, the holders of the Preferred Stock shall be entitled to one vote for each share of such Preferred Stock held by them respectively. (6) So long as any shares of the Preferred Stock are outstanding, no amendment to the Articles of Incorporation shall be adopted without the affirmative vote of the holders of at least 66-2/3% of the shares of Preferred Stock outstanding at the time of the adoption of such amendment, which would either (a) create any class of shares preferred as to dividends or assets over the Preferred Stock, or (b) change the designations, preferences, qualifications, limitations, restrictions or other special or relative rights of the then outstanding Preferred Stock; provided, however, that nothing in this paragraph contained shall authorize the adoption of any amendment of the Articles of Incorporation by the vote of the holders of a less number of shares of Preferred Stock, or of any other class of stock, or of all classes of stock, than is required for the adoption of such amendment by the laws of the State of Illinois at that time applicable thereto. (7) So long as any shares of the Preferred Stock shall be outstanding, the Company shall not issue or assume any evidences of indebtedness maturing more than twelve months from the date of issue or assumption in an amount at any one time outstanding exceeding 15% of the aggregate, at the time of such issue or assumption, of the stated capital represented by the outstanding shares of Preferred Stock and any other class of stock over which the Preferred Stock has a preference as to dividends or assets and of the surplus of the Company (paid-in, earned, and other, if any), unless (i) such evidences of indebtedness are either (a) bonds issued under the Mortgage and Deed of Trust to Bankers Trust Company, New York, as Trustee, dated as of April 1, 1933, assumed by the Company, or (b) bonds or other evidences of indebtedness issued under another mortgage and deed of trust on substantially all the mortgageable property of the Company, under which mortgage and deed of trust bonds or other evidences of indebtedness have been issued, upon the basis, directly or indirectly, of the refunding of bonds issued under said Mortgage and Deed of Trust, dated as of April 1, 1933 and permitting the issuance of additional bonds or evidences of indebtedness upon the basis directly or indirectly, of the refunding of the remainder thereof, if any, or (c) indebtedness secured by the pledge of bonds or evidences of indebtedness issued under said Mortgage and Deed of Trust, dated as of April 1, 1933, or such other mortgage and deed of trust, to an equal principal amount of such bonds or such evidences of indebtedness pledged, or (ii) the issue and assumption of said evidence of indebtedness has been submitted to the vote of the shareholders of the Company at any annual or special meeting thereof, has been approved at such meeting by the affirmative vote of the holders of a majority of the outstanding shares of the Company, irrespective of class, and has not been voted against at such meeting by the holders of 33-1/3% or more of the outstanding shares of Preferred Stock. (8) So long as any shares of Preferred Stock shall be outstanding (a) No shares of Preferred Stock or of any other class of stock over which the Preferred Stock does not have preference as to the payment of dividends and as to assets, shall be issued, sold or otherwise disposed of unless the net income of the Company available for the payment of dividends for a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the issuance, sale or disposition of such stock is at least equal to 2 1/2 times the annual dividend requirements of all outstanding shares of Preferred Stock and of all other classes of stock over which the Preferred Stock does not have preference as to the payment of dividends and as to assets, including the shares proposed to be issued; (b) After the Company has issued 131,464 shares of Preferred Stock, no additional shares of Preferred Stock shall be issued unless prior thereto, the total of the stated capital of the Company represented by shares of stock over which the Preferred Stock has a preference as to the payment of dividends and as to assets, shall have been increased over the stated capital represented by the Common Stock on March 31, 1936 by an amount at least equal to the aggregate par value of the additional shares of Preferred Stock proposed to be issued. (9) The term "accrued dividends" shall be deemed to mean in respect of any share of the Preferred Stock of any series, as of any given date, the amount, if any, by which the product of the rate of dividend per annum, determined upon the shares of such series, multiplied by the number of years and any fractional part of a year which shall have elapsed from the date after which dividends on such stock became cumulative to such given date, exceeds the total dividends actually paid on such stock and the dividends declared and set apart for payment. Accumulations of dividends shall not bear interest. The term "outstanding", whenever used herein with respect to shares of Preferred Stock or of any other class of stock which are by their terms redeemable, shall not include any such shares which have been called for redemption in accordance with the provisions applicable thereto, of which call for redemption notice shall have been given as required by such provisions, and for the redemption of which a sum of money sufficient to pay the amount payable on such redemption shall have been deposited with a bank or trust company, irrevocably in trust for such purpose. CLASS A PREFERRED STOCK Provision for Division Into and Issue in Series of Class A Preferred Stock and Grant of Authority to Board of Directors The shares of the Class A Preferred Stock may be divided into and issued in series. Each series shall be designated so as to distinguish the shares thereof from the shares of all other series and classes and all shares of the Class A Preferred Stock irrespective of series shall be identical except as to the following relative rights and preferences in respect of any or all of which there may be variations between different series and authority is hereby expressly vested in the Board of Directors, to the extent that series are not established by the Articles of Incorporation and the variations and the relative rights and preferences as between series fixed and determined therein, to establish series and to fix and determine the following relative rights and preferences of the shares thereof in accordance with the provisions of the Business Corporation Act of Illinois applicable thereto: (a) The rate of dividend; (b) The price at and the terms and conditions on which shares may be redeemed; (c) The amount payable upon shares in event of involuntary liquidation; (d) The amount payable upon shares in event of voluntary liquidation; (e) Sinking fund provisions for the redemption or purchase of shares (the term "sinking fund", as used herein, including any analogous fund, however designated). The Board of Directors is hereby authorized to issue and sell all the authorized and unissued shares of Class A Preferred Stock as shares of any series which shall have been duly established, and in the event that the Company shall acquire, by purchase or redemption or otherwise, any issued shares of its Class A Preferred Stock of any series, the Board of Directors may resell or convert and sell, in their discretion, any shares so acquired as shares of the same or of any other series of Class A Preferred Stock which shall have been duly established. Shares of any series of Class A Preferred Stock, without par value, may be issued for such consideration, not less than the aggregate preferential amount payable upon such shares in the event of involuntary liquidation, as may be fixed by the Board of Directors prior to the time of such issuance and, except as otherwise determined by the Board of Directors in accordance with the provisions of the Business Corporation Act of Illinois applicable thereto, the entire amount of such consideration shall be stated capital. The General Provisions heretofore set forth in this Article 3 following the heading, "Preferred Stock" shall be applicable in all respects to the Class A Preferred Stock and any reference therein to "Preferred Stock" shall in each instance include, within the meaning of that term, the Class A Preferred Stock. In applying said General Provisions, the reference in paragraph (b) thereof to "aggregate par value" shall, in the case of the Class A Preferred Stock, be deemed to refer to the aggregate amount payable in event of involuntary liquidation upon the additional shares of Class A Preferred Stock proposed to be issued. In addition to the requirement concerning the declaration of dividends on the Common Stock or any class of stock over which the Preferred Stock and the Class A Preferred Stock have preference as to payment of dividends, which are contained in paragraph (2) under the General Provisions referred to in the preceding paragraph, it shall also be a condition to the declaration of dividends on the Common Stock or any class of stock over which the Preferred Stock and the Class A Preferred Stock have preference as to payment of dividends, by the Board of Directors as contemplated in said paragraph (2) that all amounts required to be paid or set aside for any sinking fund for the retirement of Class A Preferred Stock of any series, with respect to all preceding sinking fund dates, shall have been paid or set aside. Series of Class A Preferred Stock Established by the Board of Directors Pursuant to the foregoing authority conferred upon the Board of Directors, 220,000 of the authorized but unissued shares of Class A Preferred Stock of the Company shall be established as a series of Class A Preferred Stock which is hereby designated 5.85% Class A Preferred Stock, and the relative rights and preferences of the shares of said series in those respects in which the shares thereof may vary from the shares of other series, shall be as follows: (a) The rate of dividend shall be $5.85 per annum. (b) The shares will not be redeemable prior to July 1, 2003. On and after July 1, 2003, the shares will be redeemable at the option of the Company, in whole or in part, at a price of $100 per share plus accrued dividends to the date of redemption. (c) The amount payable in event of involuntary liquidation shall be $100 per share, plus accrued dividends. (d) The amount payable in event of voluntary liquidation shall be $100 per share, plus accrued dividends. (e) The 5.85% Class A Preferred Stock will be entitled to a sinking fund as follows: 11,000 shares of such stock shall be redeemed on July 1, 2003 and on each July 1 thereafter to and including July 1, 2007, and 165,000 shares of such stock shall be redeemed on July 1, 2008, in each case at $100 per share, plus accrued dividends to the redemption date. This sinking fund requirement may be satisfied in whole or in part by crediting against such requirement shares of such stock redeemed by the Company at its option, purchased by the Company in the open market or acquired by the Company otherwise than through the sinking fund. Series of Class A Preferred Stock Established by the Board of Directors Pursuant to the foregoing authority conferred upon the Board of Directors, 250,000 of the authorized but unissued shares of Class A preferred stock of the Company shall be established as a series of Class A preferred stock which is hereby designated Flexible Auction Rate Preferred Stock, without par value, and that the relative rights and preferences of the shares of said series in those respects in which shares thereof may vary from the shares of other series, shall be as follows: Definitions. As used herein, the following terms shall have the following meanings, unless the context otherwise requires. To the extent definitions contain procedures or specifications concerning the determination of time periods, rates or other matters, such procedures and specifications shall be applicable to the shares of the Flexible Auction Rate Preferred Stock, without par value, as fully as if set forth independently from such definitions. (i) "60-day 'AA' Composite Commercial Paper Rate", on any date, shall mean (i) the interest equivalent of the 60-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the equivalent of either or both of such ratings by such agencies or another rating agency, as such 60-day rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York on the Business Day immediately preceding such date or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average of the interest equivalent of the 60-day rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by the Commercial Paper Dealers, to the Auction Agent for the close of business on the Business Day immediately preceding such date. If any Commercial Paper Dealer does not quote a rate required to determine the 60-day "AA" Composite Commercial Paper Rate, the 60-day "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer and any Substitute Commercial Paper Dealer or Dealers selected by the Company to provide such rate or rates not being supplied by any Commercial Paper Dealer or Dealers, as the case may be, or, if the Company does not select any such Substitute Commercial Paper Dealer or Dealers, by the remaining Commercial Paper Dealer. If the number of Dividend Period Days in a Short-Term Dividend Period shall be (i) fewer than 70 days, such rate shall be the interest equivalent of the 60-day rate on such commercial paper, (ii) 70 or more days but fewer than 85 days, such rate shall be the arithmetic average of the interest equivalent of the 60-day and 90-day rates on such commercial paper, and (iii) 85 or more days but fewer than 3 months, such rate shall be the interest equivalent of the 90-day rate on such commercial paper. For the purpose of this definition, any arithmetic average shall be rounded to the nearest one-thousandth (.001) of one percent (or, if there is no nearest one-thousandth (.001) of one percent, to the next highest one-thousandth (.001) of one percent), and "interest equivalent" means the equivalent yield on a 360-day basis of a discount-basis security to an interest-bearing security. (ii) "90-day 'AA' Composite Commercial Paper Rate", on any date, shall mean (i) the interest equivalent of the 90-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the equivalent of either or both of such ratings by such agencies or another rating agency, as such 90-day rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York on the Business Day immediately preceding such date or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average of the interest equivalent of the 90-day rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by the Commercial Paper Dealers, to the Auction Agent for the close of business on the Business Day immediately preceding such date. If any Commercial Paper Dealer does not quote a rate required to determine the 90-day "AA" Composite Commercial Paper Rate, the 90-day "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer and any Substitute Commercial Paper Dealer or Dealers selected by the Company to provide such rate or rates not being supplied by any Commercial Paper Dealer or Dealers, as the case may be, or, if the Company does not select any such Substitute Commercial Paper Dealer or Dealers, by the remaining Commercial Paper Dealer. For the purpose of this definition, any arithmetic average shall be rounded to the nearest one-thousandth (.001) of one percent (or, if there is no nearest one-thousandth (.001) of one percent, to the next highest one-thousandth (.001) of one percent), and "interest equivalent" means the equivalent yield on a 360-day basis of a discount-basis security to an interest-bearing security. (iii) "Affiliate" shall mean any Person known to the Auction Agent to be controlled by, in control of or under common control with the Company. (iv) "Agent Member" shall mean the member of or participant in the Securities Depository that will act on behalf of a Bidder and is identified as such in such Bidder's Master Purchaser's Letter. (v) "Applicable 'AA' Composite Commercial Paper Rate", for any Multiple Quarterly Dividend Period or Long-Term Dividend Period, on any date, shall mean in the case of any Multiple Quarterly Dividend Period or Long-Term Dividend Period having a term (i) more than 49 days but fewer than 120 days, the interest equivalent of the 90-day rate, (ii) 120 days or more but fewer than 148 days, the arithmetic average of the interest equivalent of the 90-day and 180-day rates, (iii) 148 days or more but fewer than 210 days, the interest equivalent of the 180-day rate, (iv) 210 days or more but fewer than 238 days, the arithmetic average of the interest equivalent of the 180-day and 270-day rates, and (v) 238 or more days but less than one year, the interest equivalent of the 270-day rate, on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's, or the equivalent of either or both of such ratings by such agencies or such rating by another rating agency, as made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date or in the event that the Federal Reserve Bank of New York does not make available any such rate, then the arithmetic average of such rates, as quoted on a discount basis or otherwise by the Commercial Paper Dealers to the Auction Agent for the close of business on the Business Day next preceding such date. If any Commercial Paper Dealer does not quote a rate required to determine the Applicable "AA" Composite Commercial Paper Rate, the Applicable "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer and any Substitute Commercial Paper Dealer or Dealers selected by the Company to provide such rate or rates not being supplied by any Commercial Paper Dealer or Dealers, as the case may be, or, if the Company does not select any such Substitute Commercial Paper Dealer or Dealers, by the remaining Commercial Paper Dealer. For the purpose of this definition, any arithmetic average shall be rounded to the nearest one-thousandth (.001) of one percent (or, if there is no nearest one-thousandth (.001) of one percent, to the next highest one-thousandth (.001) of one percent) and "interest equivalent" means the equivalent yield on a 360-day basis of a discount-basis security to an interest-bearing security. (vi) "Applicable Rate" shall mean dividend rate per annum applicable to the shares of Flexible Preferred during a Dividend Period. If an Auction is not held on an Auction Date for any reason (other than because of the discontinuation of Auctions that results in the Applicable Rate becoming the Default Rate or because of the prior call for redemption of all shares of Flexible Preferred then outstanding), except in certain limited circumstances discussed under paragraph (f) of the definition of Auction Procedures, the dividend rate for the next succeeding Dividend Period shall be the Maximum Applicable Rate for a Quarterly Dividend Period or, if the next succeeding Dividend Period is a Seven-Day Dividend Period, a Short-Term Dividend Period, determined as of such Auction Date. (vii) "Applicable Treasury Rate", on any date, with respect to Flexible Preferred with a Multiple Quarterly Dividend Period or a Long-Term Dividend Period of one year or more, means the interest equivalent of the rate for direct obligations of the United States Treasury having an original maturity which is equal to, or next lower than, the length of such Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be, or thirty years, in the case of a Perpetual Dividend Period, as published weekly by the Federal Reserve Board in "Federal Reserve Statistical Release H.15(519)--Selected Interest Rates", or any successor publication by the Federal Reserve Board, within five Business Days preceding such date. In the event that the Federal Reserve Board does not publish such weekly per annum interest rate, or if such release is not yet available, the Applicable Treasury Rate will be the arithmetic average of the secondary market bid rates as of approximately 3:30 PM, New York City time, on the Business Day next preceding such date, of Kidder, Peabody & Co. Incorporated and Smith Barney, Harris Upham & Co. Incorporated or, in lieu of either thereof, their respective affiliates or successors (the "U.S. Government Securities Dealers") obtained by the Auction Agent (or in lieu thereof, the Company) for the issue of direct obligations of the United States Treasury, in an aggregate principal amount of at least $1,000,000 with a remaining maturity equal to, or next lower than, the length of such Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be, or thirty years, in the case of a Perpetual Dividend Period. If any U.S. Government Securities Dealer does not quote a rate required to determine the Applicable Treasury Rate, the Applicable Treasury Rate shall be determined on the basis of the quotation or quotations furnished by the remaining U.S. Government Securities Dealer or any Substitute U.S. Government Securities Dealer or Dealers selected by the Company to provide such rate or rates not being supplied by any U.S. Government Securities Dealer or Dealers, as the case may be, or, if the Company does not select any such Substitute U.S. Government Securities Dealer or Dealers, by the remaining U.S. Government Securities Dealer; provided, that in the event the Company is unable to cause such quotations to be furnished to the Auction Agent (or, if applicable, to the Company) by such sources, the Company may cause the Applicable Treasury Rate to be furnished to the Auction Agent (or, if applicable, to the Company) by such alternative source or sources as the Company in good faith deems to be reliable. For the purpose of this definition, (i) any arithmetic average shall be rounded to the nearest one-thousandth (.001) of one percent (or, if there is no nearest one-thousandth (.001) of one percent, to the next highest one-thousandth (.001) of one percent), (ii) the "interest equivalent" means the equivalent yield on a 360-day basis of a discount-basis security to an interest-bearing security and (iii) "Substitute U.S. Government Securities Dealer" means any dealer in United States Treasury obligations, the principal office of which is located in New York City, that is a nationally recognized leading dealer in the market for United States Treasury obligations, provided that no such dealer may be a U.S. Government Securities Dealer or any affiliate of the Company. (viii) "Articles" shall mean the Articles of Incorporation of the Company, as amended. (ix) "Auction" shall mean the periodic implementation of the Auction Procedures. (x) "Auction Agent" shall mean Bankers Trust Company (together with any successor bank or trust company or other entity entering into an Auction Agent Agreement with the Company). (xi) "Auction Agent Agreement" shall mean an agreement entered into by the Company with a bank or trust company or other entity which will provide, among other things, that such bank or trust company or other entity will follow the Auction Procedures for the purposes of determining the Applicable Rate. (xii) "Auction Date" shall mean the Business Day immediately preceding the first day of each Dividend Period which commences after the initial Dividend Period and, in connection with an Auction with respect to a Quarterly Dividend Period or a Multiple Quarterly Dividend Period that was cancelled because of an event or events not within the control of the Company and not directly involving the Company or its properties, the first Business Day following the date of such cancelled Auction that the Auction Agent determines an Auction can be held. (xiii) "Auction Procedures" shall mean the following procedures pursuant to which the Applicable Rate is determined: (a) The headings of the various subdivisions below are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. (b) Orders by Existing Holders and Potential Holders. (i) Prior to the Submission Deadline on each Auction Date: (A) each Existing Holder may submit to a Broker-Dealer information as to: (1) the number of Outstanding shares, if any, of Flexible Preferred held by such Existing Holder which such Existing Holder desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period; (2) the number of Outstanding shares, if any, of Flexible Preferred that such Existing Holder desires to sell, provided that the Applicable Rate for the next succeeding Dividend Period shall be less than the rate per annum specified by such Existing Holder; and/or (3) the number of Outstanding shares, if any, of Flexible Preferred held by such Existing Holder which such Existing Holder offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and (B) each Broker-Dealer, using a list of Potential Holders that shall be maintained by such Broker-Dealer in good faith for the purpose of conducting a competitive Auction, shall contact Potential Holders, including Persons that are not Existing Holders, on such list to determine the number of shares, if any, of Flexible Preferred that each such Potential Holder offers to purchase, provided that the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Potential Holder. For the purposes hereof, the communication to a Broker-Dealer of the information referred to in this paragraph (b)(i) is hereinafter referred to as an "Order" and each Existing Holder and each Potential Holder placing an Order is hereinafter referred to as a "Bidder"; an Order containing the information referred to in clause (A)(1) of this paragraph (b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the information referred to in clause (A)(2) or (B) of this paragraph (b)(i) is hereinafter referred to as a "Bid"; and an Order containing the information referred to in clause (A)(3) of this paragraph (b)(i) is hereinafter referred to as a "Sell Order". Each Order by an Existing Holder or a Potential Holder must specify the number of shares of Flexible Preferred subject to such Order in whole Units. Any Order that specifies a number of shares other than in whole Units will not be accepted by the Auction Agent and will not be considered a Submitted Order for purposes of the Auction. (ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer to sell: (1) the number of Outstanding shares of Flexible Preferred specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than the rate per annum specified in such Bid; (2) the number of Outstanding shares of Flexible Preferred specified in such Bid or a lesser number of Outstanding shares of Flexible Preferred to be determined as set forth in paragraph (e)(i)(D) if the Applicable Rate determined on such Auction Date shall be equal to the rate per annum specified in such Bid; or (3) the number of Outstanding shares of Flexible Preferred specified in such Bid or a lesser number of Outstanding shares of Flexible Preferred to be determined as set forth in paragraph (e)(ii)(C) if the rate per annum specified in such Bid shall be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not exist. (B) A Sell Order by an Existing Holder shall constitute an irrevocable offer to sell: (1) the number of Outstanding shares of Flexible Preferred specified in such Sell Order if Sufficient Clearing Bids do exist; or (2) the number of Outstanding shares of Flexible Preferred specified in such Sell Order or a lesser number of Outstanding shares of Flexible Preferred to be determined as set forth in paragraph (e)(ii)(C) if Sufficient Clearing Bids do not exist. (C) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase: (1) the number of Outstanding shares of Flexible Preferred specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than the rate per annum specified in such Bid; or (2) the number of Outstanding shares of Flexible Preferred specified in such Bid or a lesser number of Outstanding shares of Flexible Preferred to be determined as set forth in paragraph (e)(i)(E) if the Applicable Rate determined on such Auction Date shall be equal to the rate per annum specified in such Bid. (c) Submission of Orders by Broker-Dealers to Auction Agent. (i) Each Broker-Dealer shall submit in writing to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer and shall specify with respect to each Order: (A) the name of the Bidder placing such Order; (B) the aggregate number of shares of Flexible Preferred that are subject of such Order; (C) to the extent that such Bidder is an Existing Holder; (1) the number of shares, if any, of Flexible Preferred subject to any Hold Order placed by such Existing Holder; (2) the number of shares, if any, of Flexible Preferred subject to any Bid placed by such Existing Holder and the rate specified in such Bid; and (3) the number of shares, if any, of Flexible Preferred subject to any Sell Order placed by such Existing Holder; and (D) to the extent that such Bidder is a Potential Holder, the rate and the number of shares of Flexible Preferred specified in such Potential Holder's Bid. (ii) If any rate specified on any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next higher one thousandth (.001) of one percent. (iii) If any Order or Orders covering all of the Outstanding shares of Flexible Preferred held by an Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted on behalf of such Existing Holder covering the number of Outstanding shares of Flexible Preferred held by such Existing Holder and not subject to Orders submitted to the Auction Agent. (iv) If one or more Orders covering in the aggregate more than the number of Outstanding shares of Flexible Preferred held by an Existing Holder are submitted to the Auction Agent, such Orders shall be considered valid as follows and in the following order of priority: (A) Any Hold Order submitted on behalf of such Existing Holder shall be considered valid up to and including the number of Outstanding shares of Flexible Preferred held by such Existing Holder; provided that if more than one Hold Order is submitted on behalf of such Existing Holder and the number of shares of Flexible Preferred subject to such Hold Orders exceeds the number of Outstanding shares of Flexible Preferred held by such Existing Holder, the number of shares of Flexible Preferred subject to such Hold Orders shall be reduced pro rata in whole Units so that such Hold Orders shall cover the number of Outstanding shares of Flexible Preferred held by such Existing Holder. (B) Any Bid shall be considered valid to the extent and in the order of priority specified in this clause (B): (1) any Bid shall be considered valid up to and including the excess (the "Bid Excess") of the number of Outstanding shares of Flexible Preferred held by such Existing Holder over the number of shares of Flexible Preferred subject to Hold Orders referred to in paragraph (c)(iv)(A); and (2) subject to clause (1) above, if more than one Bid with the same rate is submitted on behalf of such Existing Holder and the number of Outstanding shares of Flexible Preferred subject to such Bids is greater than the Bid Excess, the number of shares of Flexible Preferred subject to such Bids shall be reduced pro rata in whole Units so that such Bids shall cover the number of shares of Flexible Preferred equal to the Bid Excess; and (3) subject to clause (1) above, if more than one Bid with different rates is submitted on behalf of such Existing Holder, such Bids shall be considered valid in the ascending order of their respective rates up to and including the Bid Excess, provided that, in any event, the number, if any, of Outstanding shares subject to Bids not valid under this clause (B) shall be treated as the subject of a Bid by a Potential Holder. (C) Any Sell Order shall be considered valid to the extent and in the order of priority specified in this clause (C): (1) any Sell Order shall be considered valid up to and including the excess (the "Sell Excess") of the number of Outstanding shares of Flexible Preferred held by such Existing Holder over the number of shares of Flexible Preferred, subject to Hold Orders referred to in paragraph (c)(iv)(A) and Bids referred to in paragraph (c)(iv)(B); and (2) subject to clause (1) above, if more than one Sell Order is submitted on behalf of such Existing Holder and the number of Outstanding shares of Flexible Preferred subject to such Sell Orders is greater than the Sell Excess, the number of shares of Flexible Preferred subject to such Sell Orders shall be reduced pro rata in whole Units so that such Sell Orders shall cover the number of shares of Flexible Preferred equal to the Sell Excess. (v) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate and number of shares of Flexible Preferred therein specified. (vi) Each Order by an Existing Holder or a Potential Holder must specify numbers of shares subject to such Order in whole Units. Any Order that specifies a number of shares other than in whole Units will not be accepted and will not be considered a Submitted Order for purposes of an Auction. (d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate. (i) Not earlier than the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as a "Submitted Order") and shall determine: (A) the excess of the total number of Outstanding shares of Flexible Preferred over the number of Outstanding shares of Flexible Preferred that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available Flexible Preferred"); (B) from the Submitted Orders whether the number of Outstanding shares of Flexible Preferred that are the subject of Submitted Bids by Potential Holders specifying one or more rates equal to or lower than the Maximum Applicable Rate exceeds or is equal to the sum of: (x) the number of Outstanding shares of Flexible Preferred that are the subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Applicable Rate; and (y) the number of Outstanding shares of Flexible Preferred that are subject to Submitted Sell Orders (if such excess or such equality exists (other than because the number of shares of Flexible Preferred in clauses (x) and (y) is each zero because all of the Outstanding shares of Flexible Preferred are the subject of Submitted Hold Orders), such Submitted Bids by Potential Holders being hereinafter referred to collectively as "Sufficient Clearing Bids"); and (C) If Sufficient Clearing Bids exist, the lowest rate specified in the Submitted Bids (the "Winning Bid Rate") which if the Auction Agent accepted: (1) each Submitted Bid from Existing Holders specifying such lowest rate and all other Submitted Bids from Existing Holders specifying rates lower than such lowest rate; and (2) each Submitted Bid from Potential Holders specifying such lowest rate and all other Submitted Bids from Potential Holders specifying rates lower than such lowest rate would result in such Existing Holders described in subclause (1) continuing to hold an aggregate number of Outstanding shares of Flexible Preferred that, when added to the number of Outstanding shares of Flexible Preferred to be purchased by such Potential Holders described in subclause (2), would equal not less than the Available Flexible Preferred. (ii) Promptly after the Auction Agent has made the determinations pursuant to paragraph (d)(i), the Auction Agent shall advise the Company of the Maximum Applicable Rate and, based on such determinations, the Applicable Rate for the related Dividend Period as follows: (A) if Sufficient Clearing Bids exist, that the Applicable Rate for such Dividend Period shall be equal to the Winning Bid Rate so determined; (B) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding shares of Flexible Preferred are the subject of Submitted Hold Orders), then (a) if the Company has not given a Notice of Adjustment of Dividend Period with respect to the next succeeding Dividend Period or has given a Notice of Revocation with respect thereto, that such next succeeding Dividend Period will be a Quarterly Dividend Period, unless the existing Dividend Period is a Short-Term Period or a Long-Term Dividend Period, in either of such cases the succeeding Dividend Period will be a Short-Term Dividend Period, and that the Applicable Rate for the applicable Dividend Period will be the Maximum Applicable Rate on the Auction Date for a Quarterly Dividend Period or a Short-Term Dividend Period, as applicable, and (b) if the Company has given a Notice of Adjustment of Dividend Period with respect to the next succeeding Dividend Period and has not given a Notice of Revocation with respect thereto, that such next succeeding Dividend Period will, notwithstanding such Notice of Adjustment of Dividend Period, be a Quarterly Dividend Period, unless the existing Dividend Period is a Short-Term Dividend Period or a Long-Term Dividend Period, in either of such cases the succeeding Dividend Period will be a Seven-Day Dividend Period, all Bids and Sell Orders will be rejected and that the Applicable Rate for the applicable Dividend Period will be the greater of (1) the Maximum Applicable Rate on the Auction Date for a Quarterly Dividend Period or a Short-Term Dividend Period, as applicable, and (2) the dividend rate in effect for the Dividend Period during which such Auction occurred; if Sufficient Clearing Bids have not been made, Existing Holders that have submitted Sell Orders will not be able to sell in the Auction all, and may not be able to sell in the Auction any, shares which are the subject of such submitted Sell Orders; (C) if all of the Outstanding shares of Flexible Preferred are the subject of Submitted Hold Orders, that the Applicable Rate for the next succeeding Dividend Period shall (1) in the case of a Short-Term Dividend Period, be equal to 59% of the 60-day "AA" Composite Commercial Paper Rate in effect on such Auction Date, (2) in the case of a Quarterly Dividend Period, be equal to 59% of the 90-day "AA" Composite Commercial Paper Rate in effect on such Auction Date and (3) in the case of a Multiple Quarterly Dividend Period or a Long-Term Dividend Period, 59% of the Reference Rate in effect on such Auction Date, subject in each case to a maximum of 25% per annum. (e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocations of Shares. Existing Holders shall continue to hold shares of Flexible Preferred that are the subject of Submitted Hold Orders and, based on the determinations made pursuant to paragraph (d)(i), the Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall take such other action as set forth below: (i) If Sufficient Clearing Bids have been made, subject to the provisions of paragraph (e)(iii), Submitted Bids and Submitted Sell Orders shall be accepted or rejected in the following order of priority and all other Submitted Bids shall be rejected: (A) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bid of each of the Existing Holders specifying any rate that is higher than the Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to sell the shares of Flexible Preferred that are the subject of such Submitted Sell Order or Submitted Bid; (B) the Submitted Bid of each of the Existing Holders specifying any rate that is lower than the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the shares of Flexible Preferred that are the subject of such Submitted Bid; (C) the Submitted Bid of each of the Potential Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Potential Holder to purchase the number of shares of Flexible Preferred subject to such Submitted Bid; (D) the Submitted Bid of each of the Existing Holders specifying a rate that is equal to the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the shares of Flexible Preferred that are the subject of such Submitted Bid, unless the number of Outstanding shares of Flexible Preferred subject to all such Submitted Bids shall be greater than the number of shares of Flexible Preferred ("Remaining Shares") equal to the excess of the Available Flexible Preferred over the number of shares of Flexible Preferred subject to Submitted Bids described in paragraphs (e)(i)(B) and (e)(i)(C), in which event the Submitted Bids of each such Existing Holder shall be accepted, and each such Existing Holder shall be required to sell shares of Flexible Preferred, but only in an amount equal to the difference between (1) the number of Outstanding shares of Flexible Preferred then held by such Existing Holder subject to such Submitted Bid and (2) the number of shares of Flexible Preferred obtained by multiplying (x) the number of Remaining Shares by (y) a fraction, the numerator of which shall be the number of Outstanding shares of Flexible Preferred held by such Existing Holder subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding shares of Flexible Preferred subject to such Submitted Bids made by all such Existing Holders that specified a rate equal to the Winning Bid Rate; and (E) the Submitted Bid of each of the Potential Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted, but only in an amount equal to the number of shares of Flexible Preferred obtained by multiplying the difference between the Available Flexible Preferred and the number of shares of Flexible Preferred subject to Submitted Bids described in paragraphs (e)(i)(B), (e)(i)(C) and (e)(i)(D) by a fraction, the numerator of which shall be the number of Outstanding shares of Flexible Preferred held by such Potential Holder subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding shares of Flexible Preferred subject to such Submitted Bids made by all such Potential Holders that specified a rate equal to the Winning Bid Rate. (ii) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding shares of Flexible Preferred are subject to Submitted Hold Orders) in an Auction relating to a Quarterly Dividend Period, subject to the provisions of paragraphs (e)(iii) and (e)(iv), Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (A) the Submitted Bid of each Existing Holder specifying any rate that is equal to or lower than the Maximum Applicable Rate shall be rejected, thus entitling such Existing Holder to continue to hold the shares of Flexible Preferred that are the subject of such Submitted Bid; (B) the Submitted Bid of each Potential Holder specifying any rate that is equal to or lower than the Maximum Applicable Rate shall be accepted, thus requiring such Potential Holder to purchase the shares of Flexible Preferred that are the subject of such Submitted Bid; and (C) the Submitted Bids of each Existing Holder specifying any rate that is higher than the Maximum Applicable Rate shall be accepted and the Submitted Sell Orders of each Existing Holder shall be accepted, in both cases only in an amount equal to the difference between (1) the number of outstanding shares of Flexible Preferred then held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and (2) the number of shares of Flexible Preferred obtained by multiplying (x) the difference between the Available Flexible Preferred and the aggregate number of shares of Flexible Preferred subject to Submitted Bids described in paragraphs (e)(ii)(A) and (e)(ii)(B) by (y) a fraction, the numerator of which shall be the number of Outstanding shares of Flexible Preferred held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the number of Outstanding shares of Flexible Preferred subject to all such Submitted Bids and Submitted Sell Orders. (iii) If, as a result of the procedures described in paragraph (e)(i) or (e)(ii), any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase on any Auction Date, shares of Flexible Preferred other than in whole Units, the Auction Agent shall, in such manner as, in its sole discretion, it shall determine, (x) round up or down the number of shares of Flexible Preferred to be sold or purchased by any Existing Holder or Potential Holder on such Auction Date so that the number of shares sold or purchased by each Existing Holder or Potential Holder on such Auction Date shall be in whole Units of Flexible Preferred and (y) allocate such whole Units for purchase among Potential Holders even if such allocation results in one or more of such Potential Holders purchasing no shares of Flexible Preferred. (iv) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding shares of Flexible Preferred are subject to Submitted Hold Orders) in an Auction relating to a Short-Term Dividend Period, a Multiple Quarterly Dividend Period or a Long-Term Dividend Period, all Submitted Bids and all Submitted Sell Orders shall be rejected, thus requiring each Existing Holder to continue to hold the shares of Flexible Preferred held by such Existing Holder immediately prior to such Auction and the next succeeding Dividend Period will be, in the case of an Auction relating to a Multiple Quarterly Dividend Period, a Quarterly Dividend Period, and, in the case of an Auction relating to a Short-Term Dividend Period or a Long-Term Dividend Period, a Seven-Day Dividend Period. (v) If all of the Outstanding shares of Flexible Preferred are the subject of Submitted Hold Orders, all Submitted Bids shall be rejected. (vi) Based on the results of each Auction, the Auction Agent shall determine the aggregate number of shares of Flexible Preferred to be purchased and the aggregate number of shares of Flexible Preferred to be sold by Potential Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell Orders, and, with respect to each Broker-Dealer, to the extent that such aggregate number of shares to be purchased and such aggregate number of shares to be sold differ, determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, shares of Flexible Preferred. (f) Cancelled Auctions. Notwithstanding anything contained herein to the contrary, if an Auction with respect to a Quarterly Dividend Period or a Multiple Quarterly Dividend Period is cancelled because of an event or events not within the control of the Company and not directly involving the Company or its properties, an Auction will be held on the first Business Day following the date of such cancelled Auction that the Auction Agent determines an Auction can be held. The Applicable Rate for the Dividend Period commencing on the Quarterly Dividend Payment Date on or immediately prior to the rescheduled Auction will be the Applicable Rate resulting from such Auction. Unless Existing Holders who sell Units at the rescheduled Auction make arrangements with their Agent Member to assure that they will receive unpaid dividends that accrued prior to the rescheduled Auction, such Existing Holders will not be entitled to receive dividends on such Units on the Quarterly Dividend Payment Date following such Auction. (g) Miscellaneous. An Existing Holder (A) may sell, transfer or otherwise dispose of shares of Flexible Preferred only in whole Units and only pursuant to a Bid or Sell Order in accordance with the procedures described above to or through a Broker-Dealer or to a Person that has delivered a signed copy of a Master Purchaser's Letter to the Auction Agent, provided that in the case of all transfers other than pursuant to Auctions such Existing Holder, its Broker-Dealer or its Agent Member advises the Auction Agent of such transfer, and (B) shall have the beneficial ownership of the shares of Flexible Preferred held by it maintained in book-entry form by the Securities Depository in the account of its Agent Member, which in turn will maintain records of such Existing Holder's beneficial ownership. The Company and its Affiliates shall not submit any Order in any Auction except as set forth in the next sentence. Any Broker-Dealer that is an Affiliate of the Company may submit Orders in Auctions but only if such Orders are not for its own account, except that if such affiliated Broker-Dealer holds shares of Flexible Preferred for its own account, it must submit a Sell Order in the next Auction with respect to such shares of Flexible Preferred. If Sufficient Clearing Bids have been made, or all outstanding shares of Flexible Preferred are subject to Submitted Hold Orders, with respect to an Auction held during a Seven-Day Dividend Period, the next succeeding Dividend Period will be a Short-Term Dividend Period, otherwise the next succeeding Dividend Period will be a Seven-Day Dividend Period. (xiv) "Available Flexible Preferred" shall have the meaning specified in paragraph (d)(i)(A) of the definition of Auction Procedures. (xv) "Bid" shall have the meaning specified in paragraph (b)(i) of the definition of Auction Procedures. (xvi) "Bidder" shall have the meaning specified in paragraph (b)(i) of the definition of Auction Procedures. (xvii) "Bid Excess" shall have the meaning specified in paragraph (c)(iv)(B)(1) of the definition of Auction Procedures. (xviii) "Broker-Dealer" shall mean any broker-dealer or other entity permitted by law to perform the functions required of a Broker-Dealer in connection with the Auction Procedures that has been selected by the Company to perform such functions and has entered into a Broker-Dealer Agreement with the Auction Agent that remains effective. (xix) "Broker-Dealer Agreement" shall mean an agreement between the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the Auction Procedures. (xx) "Business Day" shall mean a day on which the New York Stock Exchange is open for trading and which is not a day on which banking institutions in New York City are authorized or required by law or executive order to close. (xxi) "Commercial Paper Dealers" shall mean Kidder, Peabody & Co. Incorporated and Smith Barney, Harris Upham & Co. Incorporated and their respective successors or affiliates. (xxii) "Default Rate" shall have the meaning specified in the second paragraph of paragraph (a) following these definitions. (xxiii) "Dividend Payment Date" shall mean each date that dividends on shares of Flexible Preferred are payable. Such dates shall be (a) the first days of January, April, July and October with respect to Quarterly Dividend Periods and Multiple Quarterly Dividend Periods, (b) each seventh Wednesday following the preceding Dividend Payment Date with respect to Short-Term Dividend Periods, (c) the Business Day next succeeding the last day of the Dividend Period, and if payable prior to that date, on a selected day of the second, third or fourth month (as specified in the related Notice of Adjustment of Dividend Period) after the commencement of the Dividend Period, and quarterly thereafter on the same day of each succeeding third month, with respect to Long-Term Dividend Periods and (d) on the seventh day following the Business Day next succeeding the date of the Auction giving rise to the Seven-Day Dividend Period with respect to Seven-Day Dividend Periods. (xxiv) "Dividend Period" shall mean the initial Dividend Period (date of initial issuance to September 30, 1993), a Quarterly Dividend Period, a Multiple Quarterly Dividend Period, a Short-Term Dividend Period, a Long-Term Dividend Period or a Seven-Day Dividend Period. If an Auction is not held on an Auction Date for any reason (other than because of the discontinuation of Auctions due to a failure to pay dividends or the redemption price when due or the prior call for redemption of all shares of Flexible Preferred then outstanding), whether or not a Notice of Adjustment of Dividend Period has been given with respect thereto, the related Dividend Period will be a Quarterly Dividend Period unless the existing Dividend Period is a Short-Term Period or a Long-Term Dividend Period, in either of such cases, the related Dividend Period will be a Seven-Day Dividend Period. If the Company does not give a Notice of Adjustment of Dividend Period with respect to a next succeeding Dividend Period, or gives a Notice of Revocation with respect thereto, such next succeeding Dividend Period will be a Quarterly Dividend Period, unless the existing Dividend Period is a Short-Term Dividend Period or a Long-Term Dividend Period, in either of such cases, the next succeeding Dividend Period shall be a Short-Term Dividend Period. In addition, in the event the Company has given a Notice of Adjustment of Dividend Period with respect to a next succeeding Dividend Period, but Sufficient Clearing Bids are not made in the related Auction (other than because all shares of Flexible Preferred are the subject of Submitted Hold Orders), such next succeeding Dividend Period will, notwithstanding such Notice of Adjustment of Dividend Period, be a Quarterly Dividend Period, unless the existing Dividend Period is a Short-Term Dividend Period or a Long-Term Dividend Period, in either of such cases and in the case of the failure to receive Sufficient Clearing Bids (other than because all shares of Flexible Preferred are the subject of Submitted Hold Orders) relating to a Short-Term Dividend Period, the next succeeding Dividend Period shall be a Seven-Day Dividend Period and the Company may not again give a Notice of Adjustment of Dividend Period that specifies a term which is a Multiple Quarterly Dividend Period or Long-Term Dividend Period (and any such notice shall be null and void) until Sufficient Clearing Bids have theretofore been made (or all shares were the subject of Submitted Hold Orders) in an Auction with respect to a Quarterly Dividend Period or a Short-Term Dividend Period, as the case may be. Notwithstanding the foregoing, if the Dividend Payment Date with respect to any Dividend Period (other than a Seven-Day Dividend Period) is a day that would result in the number of days in such Dividend Period not being at least equal to the then current Minimum Holding Period, then such Dividend Period shall be extended to a date that results in the number of days included in such Dividend Period being at least equal to the Minimum Holding Period and dividends payable on the final Dividend Payment Date of such Dividend Period shall be payable, (i) in respect of a Quarterly Dividend Period or a Multiple Quarterly Dividend Period, on the first Quarterly Dividend Payment Date next succeeding such date, and (ii) in respect of a Short-Term Dividend Period or a Long-Term Dividend Period, on the first day following such date that is next succeeded by a Business Day. In addition, notwithstanding the foregoing, in the event of a change in law altering the Minimum Holding Period, the Board of Directors may adjust the period of time between Dividend Payment Dates in connection with Short-Term Dividend Period so as to adjust uniformly the number of days (such number of days, without giving effect to the adjustments referred to above, being referred to herein as "Dividend Period Days") in between successive Dividend Payment Dates commencing after the date of such change in law to equal or exceed the then current Minimum Holding Period, provided that the number of Dividend Period Days shall not exceed by more than nine days the length of such then current Minimum Holding Period and shall be evenly divisible by seven, and the maximum number of Dividend Period Days, as adjusted pursuant to these provisions, shall in no event exceed 98 days. Upon any such change in the number of Dividend Period Days as a result of a change in law, the Company will give notice of such change to all Existing Holders of Flexible Preferred. Although any particular Dividend Payment Date may not occur on the originally scheduled Dividend Payment Date because of the foregoing adjustments or because such originally scheduled Dividend Payment Date is not a Business Day, each succeeding Dividend Payment Date shall be, subject to such adjustments, the date determined as set forth in this definition of Dividend Payment Date as if each preceding Dividend Payment Date had occurred on the respective originally scheduled Dividend Payment Date. (xxv) "Dividend Period Days" shall have the meaning specified in the penultimate paragraph under the definition of Dividend Period. (xxvi) "Dividend Quarter" shall mean the period from the preceding Dividend Payment Date to the next Dividend Payment Date during a Multiple Quarterly Dividend Period or a Long-Term Dividend Period in the case where such Dividend Payment Dates are on the same date of the month and the next Dividend Payment Date is in the third calendar month after the preceding Dividend Payment Date. (xxvii) "Enabling Event" shall mean the designation by the Company of a Short-Term Dividend Period after such amendments to the Articles as are necessary to accommodate the payment of dividends on the Flexible Preferred on a basis other than quarterly have been duly adopted by the Company's shareholders and the Company has provided the Auction Agent and the Broker-Dealers with copies of such amendments to the Articles, together with an opinion of counsel, satisfactory to the Auction Agent and the Broker-Dealers, to the effect that such amendments have been duly adopted and filed with the Secretary of State of the State of Illinois and that the Company's designation of a Dividend Period other than a Quarterly Dividend Period or a Multiple Quarterly Dividend Period with respect to the Flexible Preferred will not conflict with or violate the Articles or the laws of Illinois. (xxviii) "Existing Holder" shall mean a person who has signed a Master Purchaser's Letter and is listed as the beneficial owner of shares of Flexible Preferred in the records of the Auction Agent. (xxix) "Flexible Preferred" shall mean the shares of Flexible Auction Rate Class A Preferred Stock, without par value, subject to an Auction on any Auction Date. (xxx) "Hold Order" shall have the meaning specified in paragraph (b)(i) of the definition of Auction Procedures. (xxxi) "Long-Term Dividend Period" shall mean a period greater than 49 days and either not exceeding 25 years or without end, which (unless it is without end) contains a number of days evenly divisible by 7. Each Long-Term Dividend Period shall commence on a Dividend Payment Date and end, unless it is a Perpetual Dividend Period, on the day next preceding a Dividend Payment Date. (xxxii) "Master Purchaser's Letter" shall mean a letter addressed to the Company, the Auction Agent, a Broker-Dealer and others in which a Person agrees, among other things, to offer to purchase, purchase, offer to sell and/or sell shares of Flexible Preferred pursuant to the Auction Procedures. (xxxiii) "Maximum Applicable Rate" on any date shall mean the lesser of 25% per annum and (a) in the case of a Quarterly Dividend Period, a per annum rate equal to the product of the 90-day "AA" Composite Commercial Paper Rate in effect on such date multiplied by the Rate Multiple in effect on such date, (b) in the case of a Short-Term Dividend Period, a per annum rate equal to the product of the 60-day "AA" Composite Commercial Paper Rate in effect on such date multiplied by the Rate Multiple in effect on such date or (c) in the case of a Multiple Quarterly Dividend Period or a Long-Term Dividend Period, a per annum rate equal to the product of the Reference Rate in effect on such date multiplied by the Rate Multiple in effect on such date. (xxxiv) "Minimum Holding Period" shall mean the minimum holding period under the federal tax laws of the United States required for corporate taxpayers to be entitled to claim a deduction with respect to dividends on preferred stock received by them. (xxxv) "Moody's" shall mean Moody's Investors Service, Inc. or its successor. (xxxvi) "Multiple Quarterly Dividend Period" shall mean a period greater than 3 months and either not exceeding 25 years or without end, which (unless it is without end) contains a number of months evenly divisible by 3. Each Multiple Quarterly Dividend Period shall commence on a Quarterly Dividend Payment Date and end, unless it is a Perpetual Dividend Period, on the day next preceding a Quarterly Dividend Payment Date. (xxxvii) "No Call Period" shall have the meaning specified in the definition of Notice of Adjustment of Dividend Period. (xxxviii) "Notice of Adjustment of Dividend Period" shall mean a written notice by the Company to the Auction Agent and the Securities Depository (which may be revoked by a Notice of Revocation) given not less than 10 nor more than 20 days prior to an Auction Date specifying the term of the next succeeding Dividend Period will be a Multiple Quarterly Dividend Period, a Long-Term Dividend Period or the initial Short-Term Dividend Period. For any Auction occurring after the initial Auction, the Company may not give a Notice of Adjustment of Dividend Period (and any such notice shall be null and void) unless Sufficient Clearing Bids were made (or all shares of the Flexible Preferred were subject to Hold Orders) in the last occurring Auction, and full cumulative dividends on shares of the Flexible Preferred, whether or not earned or declared payable prior to such Auction Date have been paid in full. Each Notice of Adjustment of Dividend Period shall state (i) the term thereof if not a Perpetual Dividend Period, (ii) the length of the period, beginning on the first day of a Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be, during which the shares will not be redeemable at the option of the Company (a "No-Call Period"), subject to any Special Redemption or Sinking Fund Redemption stated to be applicable during such No-Call Period as described in clause (vi) or (vii) below; (iii) the premium per share, if any, that the Company will pay as part of the redemption price if shares of Flexible Preferred are redeemed by the Company otherwise than pursuant to a Special Redemption or a Sinking Fund Redemption (the "Redemption Premium"), provided that no such Redemption Premium will be stated in a Notice of Adjustment of Dividend Period unless duly authorized by the Board of Directors and provided, further, that any Redemption Premium may be specified by the Company to decline over time to not less than 0% in the applicable Notice of Adjustment of Dividend Period; (iv) the terms, if any, on which the Applicable Rate for a Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be, will be adjusted upon the occurrence of specified events relating to the U.S. federal income tax consequences of the receipt of dividends on the Flexible Preferred, which terms shall be specified in the applicable Notice of Adjustment of Dividend Period; (v) the applicable Broker-Dealer fee for such Auction; (vi) whether or not the Flexible Preferred will be subject to a Special Redemption at the option of the Company during a Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be, and, if so, the applicable Triggering Rate, or the formula or other basis for determining the applicable Triggering Rate for such Special Redemption; and (vii) whether or not the Flexible Preferred will be subject to Sinking Fund Redemption during a Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be, and the period or periods within which, and the terms and conditions upon which, the Flexible Preferred will be redeemed, in whole or in part, pursuant to a Sinking Fund Redemption obligation, provided that no Sinking Fund Redemption obligation will be stated in a Notice of Adjustment of Dividend Period unless duly authorized by the Board of Directors. If in a Notice of Adjustment of Dividend Period the Company has specified that the next succeeding Dividend Period will be an initial Short-Term Dividend Period, such initial Short-Term Dividend Period will end on a Tuesday specified in such Notice of Adjustment of Dividend Period which will be no earlier than the 46th day and no later than the eighth Tuesday following the last day of the preceding Dividend Period (subject to adjustment for a change in the Minimum Holding Period). Once the Company has exercised its option to specify an initial Short-Term Dividend Period, each succeeding Dividend Period shall be either a Short-Term Dividend Period, a Long-Term Dividend Period or a Seven-Day Dividend Period. If in a Notice of Adjustment of Dividend Period the Company has specified a Perpetual Dividend Period and Sufficient Clearing Bids are made in the Auction relating to such designation (or all shares of Flexible Preferred are the subject of Submitted Hold Orders); (i) such Perpetual Dividend Period will be the last Dividend Period, (ii) such Auction will be the final Auction with respect to the Flexible Preferred, (iii) the services of the Auction Agent (except in its capacities as dividend disbursement agent, redemption agent, registrar and transfer agent) and of the Broker-Dealers will end; (iv) transferability of the shares of Flexible Preferred will not be restricted to persons who have executed Master Purchaser's Letters; (v) Master Purchaser's Letters will no longer be required with respect to shares of Flexible Preferred; (vi) there will be no adjustment to the dividend rate following the commencement of such Perpetual Dividend Period for payment failures or otherwise; and (vii) if so stated in the Notice of Adjustment of Dividend Period, shares of Flexible Preferred will no longer be required to be transferred in Units during such Perpetual Dividend Period. (xxxix) "Notice of Revocation" shall mean a telephonic notice given by the Company to the Auction Agent, the Broker-Dealers and the Security Depository at or prior to 10 AM on the related Auction Date, and promptly confirmed in writing, that the Company has revoked the Notice of Adjustment of Dividend Period previously given by it with respect to such Auction Date. (xl) "Order" shall have the meaning specified in paragraph (b)(i) in the definition of Auction Procedures. (xli) "Outstanding" shall mean, as of any date, shares of Flexible Preferred theretofore issued by the Company except, without duplication, (A) any shares of Flexible Preferred theretofore cancelled or delivered to the Auction Agent for cancellation, or redeemed by the Company or as to which a notice of redemption shall have been given by the Company, (B) any shares of Flexible Preferred as to which the Company or any Affiliate thereof (other than an Affiliate which is a Broker-Dealer) shall be an Existing Holder and (C) any shares of Flexible Preferred represented by any certificate in lieu of which a new certificate has been executed and delivered by the Company. (xlii) "Perpetual Dividend Period" shall mean a Multiple Quarterly Dividend Period or a Long-Term Dividend Period without end. (xliii) "Person" shall mean and include an individual, a partnership, a corporation, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof. (xliv) "Post-Enabling Event" shall mean the failure of an Auction related to a Short-Term Dividend Period or a Long-Term Dividend Period because Sufficient Clearing Bids do not exist (other than because all of the outstanding shares of Flexible Preferred are the subject of Submitted Hold Orders) or an Auction is not held on an Auction Date for any reason (other than because of a discontinuation of Auctions that results in the Applicable Rate becoming the Default Rate). (xlv) "Potential Holder" shall mean any Person, including any Existing Holder, (A) who shall have executed a Master Purchaser's Letter and (B) who may be interested in acquiring shares of Flexible Preferred (or, in the case of an Existing Holder, additional shares of Flexible Preferred). (xlvi) "Quarterly Dividend Payment Date" shall mean the first days of January, April, July and October. (xlvii) "Quarterly Dividend Period" shall mean a period of 3 months. Each Quarterly Dividend Period shall commence on a Quarterly Dividend Payment Date and end on the day next preceding the next succeeding Quarterly Dividend Payment Date. (xlviii) "Rate Multiple" shall mean the percentage, determined as set forth below, based on the prevailing rating of the Flexible Preferred in effect at the close of business on the Business Day preceding the applicable Auction Date (each Rate Multiple appearing in the below table opposite a prevailing rating being referred to as the "Original Rate Multiple" for such prevailing rating): Rate Prevailing Ratings Multiple AA/aa or Above 125% A/a 150% BBB/baa 200% Below BBB/baa 250% Notwithstanding the foregoing, with respect to any Auction Date, (i) the Company may, by telephonic and written notice to the Auction Agent by 10 AM New York City time, on such Auction Date, increase the Rate Multiple to be in effect on such Auction Date, such increased Rate Multiple to remain in effect thereafter unless and until the Company gives notice, as provided in clauses (i) and (ii) of this paragraph, to the Auction Agent and, if required, the Broker-Dealers of a subsequent change to such Rate Multiple, and (ii) the Company may, by telephonic and written notice to the Auction Agent and the Broker-Dealers delivered not less than 10 days prior to any Auction Date, decrease the Rate Multiple to be in effect on such Auction Date (but in no event to a Rate Multiple for any prevailing rating which is less than the Original Rate Multiple for such prevailing rating), such decreased Rate Multiple to remain in effect thereafter unless and until the Company gives notice, as provided in clauses (i) and (ii) of this paragraph, to the Auction Agent and if required, the Broker-Dealers of a subsequent change to such Rate Multiple; provided that in each case there has been delivered to the Company and the Auction Agent an opinion of counsel to the Company to the effect that the use of such higher or lower, as the case may be, Rate Multiple will not adversely affect the tax treatment of the Flexible Preferred. For purposes of this definition, the "prevailing rating" of Flexible Preferred shall be (i) AA/aa or Above, if the Flexible Preferred has a rating of AA- or better by S&P and aa3 or better by Moody's or the equivalent of both of such ratings by such agencies or a substitute rating agency or agencies selected as provided below, (ii) if not AA/aa or Above, then A/a, if the Flexible Preferred has a rating of A- or better by S&P and a3 or better by Moody's or the equivalent of both of such ratings by such agencies or a substitute rating agency or agencies selected as provided below, (iii) if not AA/aa or Above or A/a, then BBB/baa, if the Flexible Preferred has a rating of BBB- or better by S&P and baa3 or better by Moody's or the equivalent of both of such ratings by such agencies or a substitute rating agency or agencies selected as provided below, and (iv) if not AA/aa or Above, A/a or BBB/baa, then Below BBB/baa. Accordingly, for purposes of the foregoing, the "prevailing rating" of the Flexible Preferred will be based upon the lower of the two ratings provided by S&P and Moody's or a substitute rating agency or agencies. The Company shall take all reasonable action necessary to enable S&P and Moody's to provide a rating for the Flexible Preferred. If either or both of S&P or Moody's shall not make such a rating available, the Company shall select a nationally recognized statistical rating organization (as that term is used in the rules and regulations of the Commission under the Securities Exchange Act of 1934, as amended) or two nationally recognized statistical rating organizations to act as substitute rating agency or substitute rating agencies, as the case may be. (xlix) "Reference Rate" shall mean for Multiple Quarterly Dividend Periods and Long-Term Dividend Periods having a term (i) fewer than 270 days, the Applicable "AA" Composite Commercial Paper Rate, (ii) 270 days or more and less than one year, the higher of the 270-day Applicable "AA" Composite Commercial Paper Rate and the one-year Applicable Treasury Rate and (iii) one year or more, the Applicable Treasury Rate. (l) "S&P" shall mean Standard & Poor's Corporation or its successor. (li) "Securities Depository" shall mean The Depository Trust Company and its successors and assigns or any other securities depository selected by the Company which agrees to follow the procedures required to be followed by such securities depository in connection with shares of Flexible Preferred. (lii) "Sell Excess" shall have the meaning specified in paragraph (c)(iv)(C)(1) of the definition of Auction Procedures. (liii) "Sell Order" shall have the meaning specified in paragraph (b)(i) of the definition of Auction Procedure. (liv) "Seven-Day Dividend Period" shall mean a period of 7 days. Each Seven-Day Dividend Period shall commence on a Dividend Payment Date and end on the day next preceding a Dividend Payment Date. (lv) "Short-Term Dividend Period" shall mean a period of 49 days or, in the event the Minimum Holding Period shall exceed 49 days, a period designated by the Company which is not greater than the lesser of (a) the length of the Minimum Holding Period plus 9 days and (b) 98 days, which contains a number of days evenly divisible by 7. Each Short-Term Dividend Period shall commence on a Dividend Payment Date and end on the day next preceding a Dividend Payment Date. (lvi) "Sinking Fund Redemption" shall have the meaning specified in paragraph (e) following these definitions. (lvii) "Special Redemption" shall have the meaning specified in paragraph (b) following these definitions. (lviii) "Submission Deadline" shall mean 1 PM, New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Auction Agent as specified by the Auction Agent from time to time. (lix) "Submitted Bid" shall have the meaning specified in paragraph (d)(i) of the definition of Auction Procedures. (lx) "Submitted Hold Order" shall have the meaning specified in paragraph (d)(i) of the definition of Auction Procedures. (lxi) "Submitted Order" shall have the meaning specified in paragraph (d)(i) of the definition of Auction Procedures. (lxii) "Submitted Sell Order" shall have the meaning specified in paragraph (d)(i) of the definition of Auction Procedures. (lxiii) "Substitute Commercial Paper Dealer" shall mean any commercial paper dealer (other than the Commercial Paper Dealers), the principal office of which is located in New York City, that is a nationally recognized leading dealer in the domestic commercial paper market, provided that no such dealer may be an affiliate of the Company. (lxiv) "Sufficient Clearing Bids" shall have the meaning specified in paragraph (d)(i)(B) of the definition of Auction Procedures. (lxv) "Triggering Rate" shall have the meaning specified in paragraph (b) following these definitions. (lxvi) "Unit" shall mean a unit of Flexible Preferred consisting of 1,000 shares of Flexible Preferred. (lxvii) "Winning Bid Rate" shall have the meaning specified in paragraph (d)(i)(C) of the definition of Auction Procedures. [End of Definitions] (a) The rate of dividend shall be 2.45% per annum until September 30, 1993. Thereafter the rate of dividend for each subsequent Dividend Period (which shall be a Quarterly Dividend Period prior to the Enabling Event and a Short-Term Dividend Period after the Enabling Event, unless a Notice of Adjustment of Dividend Period has been given which has not been revoked by a Notice of Revocation or a Post-Enabling Event has occurred, in which case, the Dividend Period shall be as specified in such Notice of Adjustment of Dividend Period or a Seven-Day Dividend Period if a Post-Enabling Event has occurred), except as provided in the next succeeding paragraph, shall be the rate that the Auction Agent advises the Company is the Applicable Rate for such Dividend Period resulting from the implementation of the Auction Procedures. Except during a Perpetual Dividend Period, in the event of the failure by the Company to pay to the Auction Agent by 12 Noon, New York City time, (i) on the Business Day next preceding any Dividend Payment Date, the full amount of any dividend (whether or not earned or declared) to be paid on such Dividend Payment Date on any share or (ii) on the Business Day next preceding any redemption date, the full redemption price to be paid on such redemption date for any share after a notice of redemption has been (or should have been) given, and any such failure shall not have been cured within three Business Days thereafter by payment to the Auction Agent, by 12 Noon, New York City time, on such third Business Day, of the full amount of all such dividends or the full amount of the aggregate redemption price for the shares that have been (or should have been) called for redemption, plus accrued and unpaid dividends from the date of redemption to the date of such cure, as the case may be, then until such time as the full amount due shall have been paid to the Auction Agent, (a) Auctions will be discontinued and (b) the Applicable Rate for each Dividend Period, or, in the case of a Multiple Quarterly Dividend Period or a Long-Term Dividend Period, each Dividend Quarter, commencing on or after any such Dividend Payment Date (or redemption date, as the case may be) shall be equal to the Default Rate for such Dividend Period or Dividend Quarter. The foregoing shall continue until, at least one Business Day prior to a Dividend Payment Date, the full amount of any dividends (whether or not earned or declared) payable on each Dividend Payment Date prior to such Dividend Payment Date, and the full amount of any redemption price then or theretofore due shall have been paid to the Auction Agent, and thereupon, (a) Auctions shall resume on the terms stated herein and (b) with respect to a Multiple Quarterly Dividend Period or a Long-Term Dividend Period, dividend payments shall resume at the Applicable Rate established by the Auction with respect to such Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be. With respect to any such failure, the "Default Rate" will be the higher of 250% of the 90-day "AA" Composite Commercial Paper Rate determined as of the date of such failure (unless such failure occurs during a Short-Term Dividend Period or a Long-Term Dividend Period, in either of such cases 250% of the 60-day "AA" Composite Commercial Paper Rate determined as of the date of such failure) and (i) if the Company has failed timely to pay dividends in respect of a Quarterly Dividend Period, Multiple Quarterly Dividend Period, Short-Term Dividend Period, Long-Term Dividend Period, or Seven-Day Dividend Period, the dividend rate in effect for the Quarterly Dividend Period, Multiple Quarterly Dividend Period, Short-Term Dividend Period, Long-Term Dividend Period or Seven-Day Dividend Period, as the case may be, in respect of which such failure occurred or (ii) if the Company has failed timely to pay the redemption price of shares called for redemption, the dividend rate in effect for the Dividend Period in which the applicable redemption was to have occurred; but in no event higher than 25% per annum. Notwithstanding the occurrence of any payment failure described in the preceding paragraph, the dividend rate with respect to a Perpetual Dividend Period will not change. The amount of dividends per share of the Flexible Preferred payable for each Quarterly Dividend Period and for each Dividend Quarter during any Multiple Quarterly Dividend Period or Long-Term Dividend Period shall be computed by multiplying the Applicable Rate for such Quarterly Dividend Period, Multiple Quarterly Dividend Period or Long-Term Dividend Period, as applicable, by $100 per share ($100,000 per Unit) and dividing the amount so obtained by 4. The amount of dividends per share of the Flexible Preferred payable for the initial Dividend Period and each Short-Term Dividend Period, Seven-Day Dividend Period and each Dividend Period during a Long-Term Dividend Period (other than a Dividend Quarter) shall be computed by multiplying the Applicable Rate for each such Dividend Period by a fraction, the numerator of which shall be the number of days in the Dividend Period that such share was outstanding and the denominator of which shall be 360 and multiplying the amount so obtained by $100 per share ($100,000 per Unit). Each dividend, other than with respect to a Perpetual Dividend Period (for which the Board of Directors may establish a different record date) shall be payable to the holder or holders of record of the Flexible Preferred as of the close of business on the Business Day immediately preceding the applicable Dividend Payment Date. Dividends in arrears for any past Dividend Period (and for any past Dividend Quarter during a Multiple Quarterly Dividend Period or a Long-Term Dividend Period) may be declared and paid at any time, on a regular Dividend Payment Date or otherwise, to the holder or holders of record of the Flexible Preferred as of the applicable record date fixed by the Board of Directors, which shall not be more than 15 days prior to the date fixed for the payment of such dividends. Any dividend payment made on shares of Flexible Preferred shall first be credited against the dividends accrued with respect to the earliest Dividend Period (or, if applicable, the earliest Dividend Quarter) for which dividends have not been paid. (b) At the option of the Company, shares of Flexible Preferred may be redeemed out of funds legally available therefor, in whole or in part, in whole Units only, (i) with respect to a Quarterly Dividend Period, a Short-Term Dividend Period or a Seven-Day Dividend Period, on any Dividend Payment Date and (ii) with respect to a Multiple Quarterly Dividend Period or a Long-Term Dividend Period, on any Dividend Payment Date on or after the expiration of any applicable No-Call Period specified by the Company in the related Notice of Adjustment of Dividend Period, in each case at a redemption price equal to the sum of (a) $100,000 per Unit ($100 per share), (b) accrued and unpaid dividends on the shares subject to redemption to the date fixed for redemption and (c) with respect to Multiple Quarterly Dividend Periods or Long-Term Dividend Periods, the Redemption Premium, if any, in effect on the date of redemption. Notwithstanding any applicable No-Call Period, in the event that in any Notice of Adjustment of Dividend Period specifying a Multiple Quarterly Dividend Period or a Long-Term Dividend Period, the Company elects that a Special Redemption provision will be applicable, then, if Sufficient Clearing Bids are made in an Auction relating to such Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be, but the Applicable Rate for such Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be, equals or exceeds any rate (the "Triggering Rate") specified in, or determinable from a formula or description contained in, such Notice of Adjustment of Dividend Period on the date of determination of such Applicable Rate, the Company may, as its option, redeem (a "Special Redemption") the Flexible Preferred in whole but not in part, at a redemption price equal to $100,000 per Unit ($100 per share) plus accrued and unpaid dividends to the date fixed for redemption, on any date during the 10-day period commencing on the day which is 46 days (or in the event of a change in law lengthening the Minimum Holding Period, the first day after the expiration of such Minimum Holding Period) following the first day of such Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be. Notice of exercise of such option must be given within two Business Days after the date of the Auction establishing such Applicable Rate by written or telephonic notice to the Auction Agent and the Securities Depository. If the Company shall duly give notice of redemption, and the Company shall have deposited a sum sufficient to redeem the shares of Flexible Preferred as to which notice of redemption has been given in trust with the Auction Agent, with irrevocable instructions and authority to pay the redemption price to the holders thereof, or if no such deposit is made, then upon such date fixed for redemption (unless the Company shall default in making payment of the redemption price), all rights of holders with respect to the shares so called for redemption shall cease and terminate, except the right of the holders of such shares to receive the redemption price thereof, but without interest, and such shares shall no longer be deemed to be outstanding for any purpose. The Company shall be entitled to receive, from time to time, the interest, if any, earned on such money deposited with the Auction Agent, and the holders of any shares so redeemed shall have no claim to any such interest. Any funds so deposited which are unclaimed at the end of six years from such redemption date shall, at the request of the Company, be repaid to the Company, after which the Auction Agent shall be relieved of all responsibility to the holders of the shares of Flexible Preferred so called for redemption and such holders shall look only to the Company for payment thereof. So long as shares of Flexible Preferred are held for record by the nominee of the Securities Depository, the redemption price for such shares will (unless the Company shall default in making payment of the redemption price) be paid to the Securities Depository on the redemption date. If shares of Flexible Preferred are called for redemption by the Company, unless the Company shall default in making payment of the redemption price, the dividend rate for such shares until the commencement of the next Dividend Period and for each subsequent Period until the redemption date shall be the Applicable Rate in effect on the date the notice of redemption is given. (c) The amount payable in event of involuntary liquidation shall be $100 per share ($100,000 per Unit), plus accrued dividends. (d) The amount payable in event of voluntary liquidation shall be $100 per share ($100,000 per Unit), plus accrued dividends. (e) In the event that in any Notice of Adjustment of Dividend Period specifying a Multiple Quarterly or a Long-Term Dividend Period, the Company elects that Sinking Fund Redemption provisions will be applicable to the Flexible Preferred, then, during such Multiple Quarterly Dividend Period or Long-Term Dividend Period, as the case may be, the Company will redeem (a "Sinking Fund Redemption"), out of funds legally available therefor, on each Dividend Payment Date specified in such Notice of Adjustment of Dividend Period, the number or percentage of shares of Flexible Preferred (in whole Units only, unless a Perpetual Dividend Period) set forth in such Notice of Adjustment of Dividend Period, at a redemption price equal to the sum of (a) $100,000 per Unit ($100 per share) and (b) accrued and unpaid dividends on the shares subject to redemption of the date fixed for redemption. If so provided in the Notice of Adjustment of Dividend Period, the Company may, at its option, on such Dividend Payment Date, redeem (also a "Sinking Fund Redemption") such additional number or percentage of shares (in whole Units only, unless a Perpetual Dividend Period) as may be specified in such Notice of Adjustment of Dividend Period at such redemption price. The right to make such additional sinking fund redemption in each period will, unless otherwise specified in such Notice of Adjustment of Dividend Period, be noncumulative. If so specified in the Notice of Adjustment of Dividend Period, any mandatory Sinking Fund Redemption requirement will be subject to decrease, at the election of the Company, by the application thereto (at $100,000 per Unit or $100 per share) of any Flexible Preferred theretofore purchased, redeemed or otherwise acquired (other than through the mandatory Sinking Fund Redemption requirement) which have not previously been applied in reduction of any mandatory Sinking Fund Redemption requirement. PREFERENCE STOCK Provision for Division Into and Issue in Series of Preference Stock and Grant of Authority to Board of Directors The shares of the Preference Stock may be divided into and issued in series. Each series shall be designated so as to distinguish the shares thereof from the shares of all other series and classes and all shares of the Preference Stock irrespective of series shall be identical except as to the following relative rights and preferences in respect of any or all of which there may be variations between different series and authority is hereby expressly vested in the Board of Directors to the extent that series are not established by the Articles of Incorporation and the variations and the relative rights and preferences as between series fixed and determined therein, to establish series and to fix and determine the following relative rights and preferences of the shares thereof in accordance with the provisions of the Business Corporation Act of Illinois applicable thereto: (a) The rate of dividend; (b) The price at and the terms and conditions on which shares may be redeemed; (c) The amount payable upon shares in event of involuntary liquidation; (d) The amount payable upon shares in event of voluntary liquidation; (e) Sinking fund provisions for the redemption or purchase of shares (the term "sinking fund" as used herein, including any analogous fund, however designated); (f) The terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion. The Board of Directors is hereby authorized to issue and sell all the authorized and unissued shares of Preference Stock as shares of any series which shall have been duly established, and in the event that the Company shall acquire, by purchase or redemption or otherwise, any issued shares of its Preference Stock of any series, the Board of Directors may resell or convert and sell, in their discretion, any shares so acquired as shares of the same or of any other series of Preference Stock which shall have been duly established. Shares of any series of Preference Stock, without par value, may be issued for such consideration, not less than the aggregate preferential amount payable upon such shares in the event of involuntary liquidation, as may be fixed by the Board of Directors prior to the time of such issuance and, except as otherwise determined by the Board of Directors in accordance with the provisions of the Business Corporation Act of Illinois applicable thereto, the entire amount of such consideration shall be stated capital. General Provisions The following provisions shall apply to all shares of the Preference Stock irrespective of series: (A) The shares of Preference Stock shall be subordinate to the Preferred Stock and the Class A Preferred Stock but in preference to the Common Stock as to the payment of dividends. The holders of the Preference Stock of each series shall be entitled to receive dividends payable quarterly on the first day of January, April, July and October of each year, when and as declared by the Board of Directors, at such rates as shall be determined for the respective series, from the date upon which such shares shall have been originally issued, before any dividends shall be declared or paid upon or set apart for the Common Stock or any other stock of the Company not having preference over the Preference Stock as to payment of dividends. Such dividends shall be cumulative so that if for any dividend period or periods dividends shall not have been paid or declared and set apart for payment upon all outstanding Preference Stock at the rates determined for the respective series, the deficiency shall be fully paid, or declared and set apart for payment, before any dividends shall be declared or paid upon the Common Stock or any other stock of the Company not having preference over the Preference Stock as to payment of dividends. Dividends shall not be declared and set apart for payment, or paid, on the Preference Stock of any one series, for any dividend period, unless dividends have been or are contemporaneously declared and set apart for payment or paid on the Preference Stock of all series for all dividend periods terminating on the same or an earlier date. (B) When full cumulative dividends as aforesaid upon the Preference Stock of all series then outstanding for all past dividend periods and for the current dividend periods shall have been paid or declared and set apart for payment, the Board of Directors may declare dividends on the Common Stock or any other stock over which the Preference Stock has a preference as to payment of dividends, and no holders of any series of Preference Stock as such shall be entitled to share therein. (C) The shares of Preference Stock shall be subordinate to the Preferred Stock and the Class A Preferred Stock but in preference to the Common Stock upon any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary. Upon any such dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of Preference Stock of each series, without any preference of the shares of any series of Preference Stock over the shares of any other series of Preference Stock, shall be entitled to receive out of the assets of the Company, whether capital, surplus or other, before any distribution of the assets to be distributed shall be made to the holders of Common Stock or of any other stock not having preference as to assets over the Preference Stock, the amount determined to be payable on the shares of such series in the event of voluntary or involuntary liquidation, as the case may be. In case the assets shall not be sufficient to pay in full the amounts determined to be payable on all the shares of Preference Stock in the event of voluntary or involuntary liquidation, as the case may be, then the assets available for such payment shall be distributed ratably among the holders of the Preference Stock of all series in accordance with the amounts determined to be payable on the shares of each series, in the event of voluntary or involuntary liquidation, as the case may be, in proportion to the full preferential amounts to which they are respectively entitled. After payment to the holders of the Preference Stock of the full preferential amounts hereinbefore provided for, the holders of the Preference Stock as such shall have no right or claim to any of the remaining assets of the Company, either upon any distribution of such assets or upon dissolution, liquidation or winding up, and the remaining assets to be distributed, if any, upon a distribution of such assets or upon dissolution, liquidation or winding up, may be distributed, subject to the laws of the State of Illinois and the Articles of Incorporation, among the holders of the Common Stock or of any other stock over which the Preference Stock has preference as to assets. Without limiting the right of the Company to distribute its assets or to dissolve, liquidate or wind up in connection with any sale, merger, or consolidation, the sale of all the property of the Company to, or the merger or consolidation of the Company into or with any other corporation shall not be deemed to be a distribution of assets or a dissolution, liquidation or winding up for the purposes of this paragraph. (D) At the option of the Board of Directors of the Company, the Company may redeem any series of Preference Stock determined to be redeemable, or any part of any series, at any time at the redemption price determined for such series; provided, however, that not less than thirty nor more than sixty days previous to the date fixed for redemption a notice of the time and place thereof shall be given to the holders of record of the Preference Stock so to be redeemed, by mail or publication, in such manner as may be prescribed by the Bylaws of the Company or by resolution of the Board of Directors; and, provided further, that in every case of redemption of less than all of the outstanding shares of any one series of Preference Stock, the shares of such series to be redeemed shall be chosen by lot in such manner as may be prescribed by resolution of the Board of Directors. At any time after notice of redemption has been given in the manner prescribed by the Bylaws of the Company or by resolution of the Board of Directors to the holders of stock so to be redeemed, the Company may deposit or may cause its nominee to deposit, the aggregate redemption price with some bank or trust company named in such notice, payable on the date fixed for redemption as aforesaid and in the amounts aforesaid to the respective orders of the holders of the shares so to be redeemed, on endorsement to the Company or its nominee or otherwise, as may be required, and upon surrender of the certificates for such shares. Upon the deposit of said money as aforesaid, or if no such deposit is made, upon said redemption date (unless the Company defaults in making payment of the redemption price as set forth in such notice), such holders shall cease to be shareholders with respect to said shares and from and after the making of said deposit, or if no such deposit is made, after the redemption date (the Company not having defaulted in making payment of the redemption price as set forth in such notice), the said holders shall have no interest in or claim against the Company or its nominee with respect to said shares, but shall be entitled only to receive said moneys on the date fixed for redemption as aforesaid from said bank or trust company, or if no such deposit is made, from the Company, without interest thereon, upon endorsement (if required) and surrender of the certificates as aforesaid. If such deposit shall be made by a nominee of the Company as aforesaid, such nominee shall upon such deposit become the owner of the shares with respect to which such deposit was made and certificates of stock may be issued to such nominee in evidence of such ownership. In case the holder of any such Preference Stock shall not, within six years after said deposit, claim the amount deposited as above stated for the redemption thereof, the Depositary shall upon demand pay over to the Company such amounts so deposited and the Depositary shall thereupon be relieved from all responsibility to the holder thereof. Nothing herein contained shall limit any legal right of the Company to purchase any shares of the Preference Stock. (E) At all meetings of the shareholders of the Company, the holders of the Preference Stock shall be entitled to one vote for each share of such Preference Stock held by them respectively. (F) So long as any shares of the Preference Stock are outstanding, no amendment to the Articles of Incorporation shall be adopted without the affirmative vote of the holders of at least 66-2/3% of the shares of Preference Stock outstanding at the time of the adoption of such amendment, which would either (a) create any class of shares preferred as to dividends or assets over the Preference Stock, or (b) change the designations, preferences, qualifications, limitations, restrictions or other special or relative rights of the then outstanding Preference Stocks, provided however, that nothing in this paragraph contained shall authorize the adoption of any amendment of the Articles of Incorporation by the vote of the holders of a less number of shares of Preference Stock, or of any other class of stock, or of all classes of stock, than is required for the adoption of such amendment by the laws of the State of Illinois at that time applicable thereto. COMMON STOCK There shall be a class of stock of the Company designated Common Stock and each share of Common Stock shall be equal to every other share of said stock in every respect. At all meetings of the shareholders of the Company the holders of the Common stock shall be entitled to one vote for each share of such Common Stock held by them respectively. Limitation of Preemptive Rights of Holders of Preferred, Class A Preferred, Preference and Common Stock No holder of the shares of the capital stock of any class of the Company shall have any preemptive or preferential right of subscription for or to purchase any shares of any class of the capital stock of the Company, whether now or hereafter authorized, or any bonds, debentures or other obligations or rights or options convertible into or exchangeable for or entitling the holder or owner to subscribe for or purchase any shares of the capital stock of the Company, other than such right or rights, if any, and at such price as the Board of Directors in its discretion, from time to time may determine, and the Board of Directors may issue such shares of stock, bonds, debentures, obligations, rights or options without offering the same in whole or in part to the shareholders of the Company. Should the Board of Directors as to any portion of the shares of the Company, whether now or hereafter authorized, or any such bonds, debentures, obligations, rights or options, offer the same to the shareholders, such offer shall not constitute a waiver or release of the right of the Board of Directors subsequently to dispose of other portions thereof without so offering the same to the shareholders. ARTICLE 4. (Deleted) ARTICLE 5. (Deleted) ARTICLE 6. The location of the principal office is the City of Peoria, County of Peoria, and State of Illinois. ARTICLE 7. The duration of the corporation shall be perpetual. ARTICLE 8. The number of the members of the Board of Directors shall be fixed by the Bylaws of the corporation and shall not be less than three. Except to the extent otherwise provided by law, vacancies in the Board of Directors arising between meetings of shareholders, by reason of an increase in the number of directors or otherwise, may be filled by a majority of directors then in office and any director so selected shall serve until the next annual meeting of shareholders. A majority of the outstanding shares represented in person or by proxy shall constitute a quorum at a meeting of shareholders; provided however, that at any such meeting a lower percentage (but not less than one-third) of the outstanding shares shall constitute a quorum, if, prior to such meeting, such lower percentage has been determined as sufficient for such purpose by the vote in person or by proxy of a majority of the outstanding shares at any annual meeting of shareholders or at any special meeting thereof called for that purpose and such determination has not been modified or revoked by a subsequent determination of shareholders similarly voted. EX-3 7 [DESCRIPTION] EXHIBIT (3)a - CILCO BYLAWS BYLAWS of CENTRAL ILLINOIS LIGHT COMPANY As Amended Effective April 26, 1994 ARTICLE I: LOCATION OF OFFICES Section 1 - Principal Office: The principal office of the Company shall be in the City of Peoria, Illinois, at such place as the Board of Directors may designate. Section 2 - Other Offices: The Company may have and maintain such other offices as the Board of Directors may deem expedient. ARTICLE II: CORPORATE SEAL Section 1 - The Company shall have a corporate seal with the name of the Company described about a circle and the words "Incorporated 1913 Illinois" within such circle. ARTICLE III: FISCAL YEAR Section 1 - The fiscal year of the Company shall begin with the first day of January and end with the thirty-first day of December of each year. ARTICLE IV: SHAREHOLDERS' MEETINGS Section 1 - Annual Meeting: The annual meeting of the shareholders shall be held at the principal office of the Company on the fourth Tuesday of April in each year if not a legal holiday, and if a legal holiday, then on the next day following which is not a legal holiday nor a Saturday or a Sunday. Such annual meeting shall commence at a time determined by the Board of Directors specified in a notice of such annual meeting sent to shareholders, which shall not be earlier than 9:00 AM, nor later than 3:00 PM, local time at the place of the meeting. Section 2 - Special Meetings: Unless otherwise provided by law, special meetings of the shareholders may be called by the Board of Directors, by the Chairman of the Board, by the President, by the Secretary under the written direction of a majority of the Directors, or by shareholders holding not less than one-fifth of the total capital stock. Such meetings shall be held at the principal office of the Company, or if the Board of Directors or the Chairman of the Board or the President shall designate another place, then at such other place as may be so designated. Section 3 - Notices: Written notice of either annual or special meetings shall be mailed at least ten days prior to the meeting, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets at least twenty days prior to the meeting, to each shareholder at his last known address as the same appears on the stock books of the Company. Such notice shall specify the time and place of holding the meeting and shall further specify the dates for closing and opening the stock transfer books of the Company, provided the Board of Directors shall have ordered them closed. Notices of special meetings shall further specify the purpose for which the meeting is called and no other business shall be transacted at such special meeting. No notice of a special meeting shall be necessary provided every shareholder shall have signed a written waiver of such notice or shall be present or represented by proxy at the meeting. No notice of the holding of an adjourned meeting shall be necessary. Section 4 - Quorum: The holders of a majority of the stock of the Company issued and outstanding shall constitute a quorum for the transaction of business at any meeting but a less number may convene and adjourn. Section 5 - Voting: Shareholders may vote at all meetings in person or by proxy. At all meetings, each share of stock shall be entitled to one vote on all questions and a majority of the votes cast at any such meeting shall be sufficient for the adoption or rejection of any question presented, unless otherwise provided by law. In the election of Directors, each shareholder shall have the right to cast as many votes in the aggregate as shall equal the number of shares of stock held by such shareholder, multiplied by the number of Directors to be then elected, and each shareholder may cast the whole number of votes for one candidate or distribute them among two or more candidates. ARTICLE V: DIRECTORS Section 1 - Number: The Board of Directors of this Company shall consist of ten members. Section 2 - Election: The Directors shall be elected annually at the annual meeting of the shareholders, provided that in the event of failure to hold such meeting or to hold said election thereat, it may be held at any special meeting of shareholders called for that purpose. Unless sooner terminated by any other provision hereof, the term of any director shall automatically expire at the first annual meeting of the shareholders following his or her attainment of the age of 67. Provided, however, that the term of any director serving in such capacity and over the age of 60 on August 20, 1993 shall automatically expire at the first annual meeting of the shareholders following his or her attainment of the age of 70. No Director who is an officer or full-time employee of the Company, except the Chief Executive Officer, shall be re-elected to the Board after retirement. The Chief Executive Officer may be re-elected as a Director for one full term after retirement. The Chief Executive Officer may appoint inspectors or judges for such election who shall pass upon the validity of all proxies, receive and count the votes cast, and make a report thereof to the shareholders' meeting. Section 3 - Term of Office: The Directors shall hold office from the date of their election until the next succeeding annual meeting or until their successors are elected and shall qualify. Section 4 - Vacancies: Any vacancy occurring in the Board of Directors and any directorship to be filled by reason of an increase in the number of Directors shall be filled in the manner provided by the laws of Illinois then in effect. Section 5 - Fees: Directors shall be reimbursed for expenses, if any, incurred in attending meetings of the Board of Directors and in otherwise performing duties of such Directors. Directors' fees shall be fixed by the Board of Directors, provided that any Director who receives compensation from the Company as an officer or full-time employee shall not receive Director's fees. Section 6 - Executive or Other Committees: The Board of Directors may authorize appointment of an Executive Committee or other committees of the Board as the Board of Directors determines to be desirable, and may fix the number of members and designate the chairman of each such committee. The powers, terms of office, and method of filing vacancies shall be as defined in the resolution or resolutions of the Board of Directors relating to the authorization of such committees. Each such committee shall make a written report or recommendation following its meetings or keep minutes of all of its meetings. ARTICLE VI: DIRECTORS' MEETINGS Section 1 - Regular Meetings: Regular meetings of the Board of Directors shall be held at the principal office of the Company or at such other place or places, within or without the State of Illinois, at such time and day as the Board of Directors may designate. Section 2 - Special Meetings: Unless otherwise provided by law, special meetings of the Board of Directors may be held at any time, at the principal office of the Company or elsewhere, within or without the state. The Secretary or Assistant Secretary shall call a special meeting whenever so requested by the Chairman of the Board, the President, a Vice President, or by three Directors. Section 3 - Organization Meeting: As soon as possible after their election, the Board of Directors shall meet and organize and they may also transact such other business as may be presented, provided the same shall receive the affirmative votes of a majority of the constituent membership of the Board. Section 4 - Notice: No notice shall be required for a regular meeting. No notice shall be required for an "Organization Meeting," if held on the same day as the shareholders' meeting at which the Directors were elected. No notice of the holding of an adjourned meeting shall be necessary. A reasonable notice of special meetings, in writing or otherwise, shall be given to each Director or sent to his residence or place of business. Notice of special meeting shall specify the time and place of holding the meeting and, unless otherwise stated, any and all business may be transacted at such special meeting. Notice of any meeting may be waived in writing. Section 5 - Quorum: At all meetings of the Board of Directors, a majority shall constitute a quorum, but a less number may convene and adjourn. Section 6 - Voting: All questions coming before any meeting of the Board of Directors for action shall be decided by a majority vote of the Directors present at said meeting, unless otherwise provided by law or by these Bylaws. ARTICLE VII: OFFICERS Section 1 - General: The principal officers of the Company shall be elected by the Board of Directors. They shall include a President, one or more Vice Presidents, one or more of whom may be designated as Executive or Senior Vice President, one or more Assistant Vice Presidents, a Secretary and a Treasurer, and may include a Chairman of the Board. The Board of Directors may appoint or remove such other officers and agents of the Company as it may deem proper or may delegate such authority to the Chief Executive Officer. The Chief Executive Officer of the Company shall be the President or Chairman of the Board, as designated by the Board of Directors. In the event that a Chairman of the Board has not been elected, the President shall be the Chief Executive Officer. Section 2 - Qualifications: The Chairman of the Board, if one is elected, and the President shall be chosen from among the Board of Directors. Section 3 - Election: The principal officers shall be elected annually at the organization meeting of the Directors, provided that any such officers not elected at such meeting may be elected at any succeeding meeting of the Directors. Section 4 - Term of Office: The principal officers shall hold office from the date of their election until the next succeeding organization meeting of Directors or until their successors are elected and shall qualify, provided that the Directors shall at all times have the power to remove any officer, when in their judgment such removal may be to the best interests of the Company. Section 5 - Vacancies: Any vacancy or vacancies among the officers, arising from any cause, shall be filled by the Directors as provided above. Section 6 - Compensation: The compensation of the principal officers shall be fixed by the Board of Directors. The compensation of other officers shall, in the absence of any action by the Board of Directors, be fixed by the Chief Executive Officer. Section 7 - Combining Offices: Except to the extent otherwise provided by law, any two or more of such offices may be held by the same person but no officer shall execute, acknowledge, or verify any instrument in more than one capacity if such instrument is required by law or by the Bylaws to be executed, acknowledged, or verified by any two or more officers. ARTICLE VIII: AGENTS Section 1 - Depositories: The funds of the Company, from any source, shall be deposited in the name of the Company with such depositories as may be designated by the Board of Directors. ARTICLE IX: POWERS AND DUTIES Section 1 - Directors: The Board of Directors shall have and exercise all power and authority in the government of the affairs of the Company except where specifically excepted by law or by these Bylaws. Section 2 - Chairman of the Board: The Chairman of the Board, if one is elected, shall preside at all meetings of the shareholders and the Board of Directors. He shall do and perform all acts and things incident to the position of Chairman of the Board and such other duties as may be assigned to him by the Board of Directors. Section 3 - President: The President shall have the general control and management of the business and affairs of the Company, subject, however, to the supervision of the Board of Directors. He shall perform and do all acts and things incident to the position of President and such other duties as may be assigned to him by the Board of Directors. In the absence or disability of the Chairman of the Board, or if a Chairman of the Board has not been elected, he shall have and exercise all of the powers and duties of that office. He shall appoint such agents and employees as he may deem necessary for the proper conduct of the business of the Company and shall prescribe their duties and fix their compensation, provided that the Board of Directors shall at all times have the power to remove any agent or employee, when, in their judgment, such removal may be to the best interest of the Company. Section 4 - Vice Presidents: The Vice Presidents shall perform such of the duties of the President and such other duties on behalf of the Company as may be respectively assigned to them by the Board of Directors, or the Chief Executive Officer. In the absence or disability of the President or in the case of his death, resignation, or removal from office, the powers and duties of the President shall temporarily pass to such one of the Vice Presidents as the Board of Directors shall have designated or shall designate, and the Vice President so designated shall have and exercise all the powers and duties of the President during such absence or disability or until the vacancy in the office of President shall be filled. Section 5 - Assistant Vice Presidents: The Assistant Vice Presidents shall perform such of the duties of the Vice Presidents and such other duties on behalf of the Company as may be respectively assigned to them by the Board of Directors, the Chief Executive Officer or a Vice President who would otherwise perform such duties. Section 6 - Secretary: Subject to the supervision of the Board of Directors and the Chief Executive Officer, the Secretary shall have the custody of the corporate seal and records of the Company and shall prepare and file all reports required by law to be made to any and all public authorities and officials. He shall act as Secretary at meetings of the shareholders and Directors and shall be responsible for keeping and recording the minutes of all meetings in a suitable minute book and shall attend to publishing, giving, and serving all official notices of the Company. He shall be responsible for keeping the capital stock records. He shall perform such other duties as may be assigned to him by the Board of Directors and the Chief Executive Officer. Section 7 - Treasurer: Subject to the supervision of the Board of Directors and Chief Executive Officer, the Treasurer shall have the custody of all funds and securities of the Company and charge of the collection of amounts due the Company. He shall disburse the funds of the Company only upon receipt of properly authorized vouchers and shall keep a record of all receipts and disbursements of funds by him. He shall have authority to give receipts for moneys paid to the Company and to endorse checks, drafts, and warrants in the name of the Company. He shall perform such other duties as may be assigned to him by the Board of Directors and Chief Executive Officer. Section 8 - Other Officers and Agents: The powers and duties of such other officers and agents shall be prescribed by the Board of Directors or the Chief Executive Officer. ARTICLE X: STOCK Section 1 - Stock Certificates: The shares of stock of the Company shall be represented by certificates signed by the President or a Vice President and the Secretary or an Assistant Secretary and sealed with the seal of the Company. Such seal may be a facsimile. Where such certificate is countersigned by a Transfer Agent other than the Company itself or an employee of the Company, or by a Transfer Clerk and registered by a Registrar, the signatures of the President or Vice President and the Secretary or Assistant Secretary upon such certificate may be facsimiles engraved or printed. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Company with the same effect as if such officer had not ceased to be such at the date of its issue. Section 2 - Stock Transfer Books: The stock shall be transferable on the stock transfer books of the Company in person or by proxy duly authorized, and upon surrender and cancellation of the old certificates therefor. Section 3 - Replacing Certificates: In case of the loss or destruction of any certificate of stock and the submission of proper proof thereof by the owner, a new certificate may be issued in lieu thereof under such regulations and restrictions as the Board of Directors may prescribe. ARTICLE XI: DIVIDENDS Section 1 - The Directors may declare, from the net profits or surplus of the Company, dividends upon its capital stock, payable at such times and for such amounts as they may determine in conformity with the Articles of Incorporation of the Company, as amended, and the laws of the State of Illinois. ARTICLE XII: AUTHORIZED SIGNATURES Section 1 - All checks, drafts, and other negotiable instruments issued by the Company shall be made in the name of the Company and shall be signed by such officer or officers of the Company, or by such other person or persons as the Board of Directors may designate. To the extent authorized by the Board of Directors, facsimile signatures may be used. ARTICLE XIII: FIDELITY BONDS Section 1 - The officers and employees of the Company shall, in the discretion of the President, give bonds for the faithful discharge of their respective duties, in such form and for such amounts as may be directed by the President. ARTICLE XIV: AMENDMENTS Section 1 - The Bylaws of the Company may be altered, amended, or repealed by either the shareholders or the Board of Directors. ARTICLE XV: INDEMNIFICATION Section 1 - The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he or she is or was a director, officer, employee or agent of the Company, or who is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. Section 2 - The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company, provided that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Company, unless, and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. Section 3 - To the extent that a director, officer, employee or agent of the Company has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to in Sections l and 2 of this Article, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Section 4 - Any indemnification under Sections l and 2 of this Article (unless ordered by a court) shall be made by the Company only as authorized in the specific case, upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section l or 2 of this Article. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the shareholders. Section 5 - Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding, as authorized by the Board of Directors in the specific case, upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount, unless it shall ultimately be determined that he or she is entitled to be indemnified by the Company as authorized in this Article. Section 6 - The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent, and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 7 - The Company shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the Company would have the power to indemnify such person against such liability under the provisions of this Article. Section 8 - If the Company has paid indemnity or has advanced expenses to a director, officer, employee or agent, the Company shall report the indemnification or advance in writing to the shareholders with or before the notice of the next shareholders' meeting. Section 9 - For purposes of this Article, references to "the Company" shall include, in addition to the surviving Company, any merging Company (including any Company having merged with a merging Company) absorbed in a merger which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers and employees or agents, so that any person who was a director, officer, employee or agent of such merging Company, or was serving at the request of such merging Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the surviving Company as such person would have with respect to such merging Company if its separate existence had continued. Section 10 - For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he or she reasonably believed to be in the best interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Article. EX-3 8 [DESCRIPTION] EX-(3)a - BY-LAWS OF CILCORP BY-LAWS of CILCORP Inc. (As Amended Effective August 20, 1993) ARTICLE I OFFICES The corporation shall continuously maintain in the State of Illinois a registered office and a registered agent whose business office is identical with such registered office, and may have other offices within or without the State. ARTICLE II SHAREHOLDERS SECTION l. ANNUAL MEETING. An annual meeting of the shareholders shall be held on the fourth Tuesday of April in each year commencing in 1986, such meeting to be held at such time as determined by the Board of Directors and specified in the notice of such annual meeting for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holi day, such meeting shall be held on the next succeeding business day. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may be called by the Chief Executive Officer, by the Board of Directors, or by the holders of not less than one-fifth of all the outstanding shares entitled to vote on the matter for which the meeting is called, for the purpose or purposes stated in the call of the meeting. SECTION 3. PLACE OF MEETING. The Board of Directors may designate any place as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be at the principal office of the corporation in the City of Peoria, Illinois. SECTION 4. NOTICE OF MEETINGS. Written notice stating the place, date and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty nor more than sixty days before the meeting, either personally or by mail, by or at the direction of the President, or the Secretary, or the officer or persons calling the meet ing, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his or her address as it appears on the records of the corporation, with postage thereon prepaid. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. SECTION 5. FIXING OF RECORD DATE. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of sharehold ers, or to receive payment of any dividend, or for the purpose of determining shareholders for any other proper purpose, the Board of Directors may fix in advance a record date which shall not be more than sixty days and, for a meeting of shareholders, not less than ten days, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty days, before the date of such meeting. If no record date is fixed, the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be the date on which notice of the meeting is mailed, and the record date for the determination of shareholders for any other purpose shall be the date on which the Board of Directors adopts the resolution relating thereto. A determina tion of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting. SECTION 6. VOTING LISTS. The officer or agent having charge of the transfer books for shares of the corporation shall make, within twenty days after the record date for a meeting of shareholders or ten days before such meeting, whichever is earlier, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten days prior to such meeting, shall be kept on file at the registered office of the corpo ration and shall be subject to inspection by any shareholder, and to copying at the shareholder's expense, for any purpose germane to the meeting, at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and may be inspected by any share holder during the whole time of the meeting. The original share ledger or transfer book, or a duplicate thereof kept in this State, shall be prima facie evidence as to who are the shareholders entitled to examine such list or share ledger or transfer book or to vote at any meeting of shareholders. SECTION 7. QUORUM. A majority of the outstanding shares of the corporation entitled to vote on a matter, represented in person or by proxy, shall constitute a quorum for consideration of such matter at a meeting of shareholders; provided, that if less than a majority of the outstanding shares entitled to vote on a matter are represented at said meeting, a majority of the shares so represented may adjourn the meeting as to that matter at any time without further notice. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on a matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Business Corporation Act of 1983, or the Articles of Incorporation. At any adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the original meeting. Withdrawal of shareholders from any meeting shall not cause failure of a duly constituted quorum at that meeting. SECTION 8. PROXIES. Each shareholder entitled to vote at a meeting of shareholders or to express consent or assent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be valid after eleven months from the date thereof, unless otherwise provided in the proxy. SECTION 9. VOTING OF SHARES. Each outstanding share shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders. SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares registered in the name of another corporation, domestic or foreign, may be voted by any officer, agent, proxy or other legal representative authorized to vote such shares under the law of incorporation of such corporation. Shares registered in the name of a deceased person, a minor ward or person under legal disability, may be voted by his or her administrator, executor or court appointed guardian, either in person or by proxy, without a transfer of such shares into the name of such administrator, executor or court appointed guardian. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy. Shares registered in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his or her name if authori ty so to do is contained in an appropriate order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Shares of the corporation held by it in a fiduciary capacity may be voted and shall be counted in determining the total number of outstanding shares entitled to vote at any given time. SECTION 11. INSPECTORS. At any meeting of shareholders, the chairman of the meeting may, or upon the request of any shareholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting, based upon their determination of the validity and effect of proxies; count all votes and report the results; and do such other acts as are proper to conduct the election and voting with impartiality and fairness to all the shareholders. Each report of an inspector shall be in writing and signed by him or her or by a majority of them if there be more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspec tors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. SECTION 12. VOTING BY BALLOT. Voting on any question or in any election may be by voice unless the chairman of the meeting shall order or any shareholder entitled to vote shall demand that voting be by ballot. ARTICLE III DIRECTORS SECTION l. GENERAL POWERS. The business and affairs of the corpo ration shall be managed by or under the direction of its Board of Directors. SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. The number of direc tors of the corporation shall be eleven. Directors need not be residents of Illinois or shareholders of the corporation. Unless sooner terminated by any other provision hereof, the term of any director shall automatically expire at the first annual meeting of the shareholders following his or her attainment of the age of 67. Provided, however, that the term of any director serving in such capacity and over the age of 60 on August 20, 1993 shall automatically expire at the first annual meeting of the shareholders following his or her attainment of the age of 70. Notwithstanding any other provision hereof, the term of any director who is an officer or other full time employee of the corporation shall automatically expire at the first annual meeting of the shareholders following his or her retirement from employment by the corporation unless such retiree was the Chief Executive Officer of the corporation at the time of retirement, in which case his or her term as a director (unless such term otherwise sooner termi nates) shall automatically terminate at the second annual meeting of share holders following his or her retirement. Any such retiree shall not thereafter be eligible to stand for election to the Board of Directors, except that any such retiree who was the Chief Executive of the corporation at the time of retirement and whose term expires at the annual meeting of shareholders next following his or her retirement shall be eligible to stand for election to a single, additional term of one year, which one-year term shall commence at the annual meeting of shareholders next following the retirement of such Chief Executive Officer. If a vacancy occurs in the Board of Directors prior to the end of what would have been a three-year term but for the provisions of this paragraph, the vacancy shall be filled for the balance of said three-year term in accordance with the provisions of Section 9 of this Article. SECTION 3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held without other notice than this By-law, immediately after the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the Chief Executive Officer or any two directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place as the place for holding any special meeting of the Board of Directors called by them. SECTION 5. NOTICE. Notice of any special meeting shall be given by written notice to each director at his business address. If mailed, such notice shall be given at least seven days prior to the meeting, and shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram, or overnight delivery service, such notice shall be given at least three days prior to the meeting and shall be deemed to be delivered when, in the case of a telegram, it is delivered to the telegraph company, or in the case of overnight delivery service, it is delivered to the carrier. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the trans action of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 6. QUORUM. A majority of the number of directors fixed by these By-laws shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, provided that if less than a majority of such number of directors are present at said meeting, a majority of the directors present may adjourn the meeting at any time without further notice. The presence of a director who is directly or indirectly a party to a transac tion to be acted upon by the Board of Directors, or who is otherwise not disinterested, may be counted in determining whether a quorum is present, but the vote of such director may not be counted when the Board of Directors or a committee of the Board takes action on the transaction. SECTION 7. MANNER OF ACTING. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the act of a greater number is required by these By-laws or the Articles of Incorporation. Members of the Board of Directors or of any committee of the Board may participate in and act at a meeting through the use of a conference telephone or other communication equipment by means of which all persons participating in the meeting can hear each other. Participation in such meeting shall constitute attendance and presence in person at the meeting of the person or persons so participating. SECTION 8. RESIGNATIONS. A director may resign at any time by giving written notice to the Board of Directors, its chairman, or to the President or Secretary of the corporation. A resignation is effective when the notice is given unless the notice specifies a future date. SECTION 9. VACANCIES. Any vacancy occurring in the Board of Directors, including any vacancy occurring by reason of an increase in the number of directors, shall be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose, provided that the Board of Directors may fill by appointment any such vacancy occurring between meetings of the shareholders. A director appointed by the Board of Directors pursuant to this Section to fill a vacancy shall serve until the next meeting of shareholders at which directors are to be elected. A director elected by the shareholders to fill a vacancy shall hold office for the balance of the term for which he or she was elected. SECTION 10. ACTION WITHOUT A MEETING. Any action required to be taken at a meeting of the Board of Directors, or any other action which may be taken at a meeting of the Board of Directors or a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all the directors entitled to vote with respect to the subject matter thereof, or by all the members of such committee, as the case may be. The consent shall be evidenced by one or more written approvals, each of which sets forth the action taken and bears the signature of one or more directors. All such approvals shall be delivered to the Secretary to be filed in the corporate records. The action taken shall be effective when all the directors have approved the consent unless the consent specifies a different effective date. Any such consent signed by all the directors or all the members of a committee shall have the same effect as a unanimous vote, and may be stated as such in any document filed with the Secretary of State of Illinois or with anyone else. SECTION 11. COMPENSATION. The Board of Directors, by the affirmative vote of a majority of directors then in office, and irrespective of any personal interest of any of its members, shall have authority to establish reasonable compensation of all directors for services to the corporation as directors, officers or otherwise. The directors shall be paid their expenses, if any, of attendance at each meeting of the Board. No such payment previously mentioned in this Section shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. SECTION 12. REMOVAL OF DIRECTORS. If the notice of a meeting of shareholders shall state that a purpose of the meeting is to vote upon the removal of one or more directors named in the notice, then one or more of such directors may be removed at such meeting by the affirmative vote of the holders of a majority of the outstanding shares then entitled to vote at an election of directors. Only the named director or directors may be removed at such meeting and directors may only be removed for cause. SECTION 13. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his or her dissent is entered in the minutes of the meeting or unless he or she (a) files his or her written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof, or (b) forwards such dissent by registered or certified mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent does not apply to a director who voted in favor of such action. SECTION 14. COMMITTEES. A majority of the directors may create one or more committees and appoint members of the Board to serve on the committee or committees. Each committee shall have two or more members, who serve at the pleasure of the Board. Each committee, to the extent specified by the Board of Directors, may exercise the authority of the Board of Directors in the management of the corporation, except as otherwise provided by law. Vacancies in the membership of the committee shall be filled by the Board of Directors at a regular or special meeting of the Board of Directors. Each committee shall render a report of its proceedings to the Board when required. Unless the resolution of appointment by the Board of Directors requires a greater number, a majority of any committee shall constitute a quorum, and a majority of a quorum shall be necessary for committee action. A committee may act by unanimous consent in writing without a meeting and, subject to the provisions of these By-laws or action of the Board of Directors, the committee by majority vote of its members shall determine the time and place of meetings and the notice required therefor. SECTION 15. NOMINATIONS OF DIRECTORS. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors by any nominating committee or person appointed by the Board or, (b) by any shareholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 15. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary. To be timely, a shareholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the corporation not less than sixty (60) days prior to the first anniversary of the date of the last annual meeting of shareholders. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the corporation which are beneficially owned by the person, and (iv) such other information relating to the person that would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission as then in effect; and (b) as to the shareholder giving the notice (i) the name and record address of the shareholder, and (ii) the class and number of shares of the corporation which are beneficially owned by the shareholder. If the Chairman of the meeting of shareholders shall determine that a nomination was not made in accordance with the foregoing procedure, he or she shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE IV OFFICERS SECTION l. NUMBER. The officers of the corporation shall be a Chairman of the Board (if one is elected by the Board of Directors), a Presi dent, one or more Vice Presidents (the number thereof to be determined by the Board of Directors), a Treasurer, and a Secretary to be elected by the Board of Directors, and such Assistant Treasurers, Assistant Secretaries, Controller or other officers as may be elected by the Board of Directors or appointed by the Board of Directors or the Chief Executive Officer of the corporation. The Chief Executive Officer of the corporation shall be the Chairman of the Board or the President as designated by the Board of Directors. In the event that a Chairman of the Board is not elected, the President shall be the Chief Executive Officer. Any two or more offices may be held by the same person. SECTION 2. ELECTION AND TERM OF OFFICE. The elected officers of the corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as shall be convenient. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified or until his or her death or until he or she shall resign or shall have been removed in the manner hereinafter provided. Election or appointment of an officer shall not of itself create contract rights. SECTION 3. REMOVAL. Any elected officer may be removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any appointed officer may be similarly removed by either the Board of Directors or the Chief Executive Officer of the corporation. SECTION 4. CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors shall have such duties and functions as shall be assigned or delegated to him or her from time to time by the Board of Directors. The chairman shall report to the Board of Directors, and shall preside at the meetings of the shareholders and of the Board of Directors. SECTION 5. PRESIDENT. Subject to the direction and control of the Board of Directors, the President shall be in charge of the business of the corporation; he or she shall see that the resolutions and directions of the Board of Directors are carried into effect except in those instances in which that responsibility is specifically assigned to some other person by the Board of Directors; and, in general, he or she shall discharge all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. In the absence of the Chairman of the Board, the President shall preside at all meetings of the shareholders and of the Board of Directors. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the corporation or a different mode of execution is expressly prescribed by the Board of Directors or these By-laws, the President may execute for the corporation certificates for its shares, and any contracts, deeds, mortgages, bonds, or other instruments which the Board of Directors has authorized to be executed, and may accomplish such execution either under or without the seal of the corporation and either individually or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors, according to the requirements of the form of the instrument. The President may vote all securities which the corporation is entitled to vote except to the extent such authority shall be vested in a different officer or agent of the corporation by the Board of Directors. SECTION 6. THE VICE PRESIDENTS. Each Vice President shall assist the President in the discharge of his or her duties, as the President may direct, and shall perform such other duties as from time to time may be assigned to him or her by the President or by the Board of Directors. In the absence of the President or in the event of his or her inability or refusal to act, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the Board of Directors, or by the President if the Board of Directors has not made such a designation, or in the absence of any designation, then in the order of seniority of tenure as Vice President) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the corporation or a different mode of execution is expressly prescribed by the Board of Directors or these By-laws, the Vice President (or each of them if there are more than one) may execute for the corporation certificates for its shares and any contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, and he or she may accomplish such execution either under or without the seal of the corporation and either individually or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors, according to the requirements of the form of the instrument. SECTION 7. THE TREASURER. Subject to the supervision of the Board of Directors and Chief Executive Officer, the Treasurer shall have the custody of all funds and securities of the corporation and charge of the collection of amounts due the corporation. He or she shall disburse the funds of the corporation only upon receipt of properly authorized vouchers and shall keep a record of all receipts and disbursements of funds by him or her. He or she shall have authority to give receipts for moneys paid to the corporation and to endorse checks, drafts and warrants in the name of the corporation. SECTION 8. THE SECRETARY. The Secretary shall: (a) record the minutes of the shareholders' and the Board of Directors' meetings in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-laws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder; (e) sign with the President or a Vice President, or any other officer thereunto authorized by the Board of Directors, certificates for shares of the corporation, the issue of which shall have been authorized by the Board of Directors, and any contracts, deeds, mortgages, bonds, or other instruments which the Board of Directors has authorized to be executed, according to the requirements of the form of the instrument, except when a different mode of execution is expressly prescribed by the Board of Directors or these By-laws; (f) have general charge of the stock transfer books of the corporation; and (g) perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the President or by the Board of Directors. The Secretary shall have the authority to certify the By-laws, resolutions of the shareholders and Board of Directors and committees thereof, and other docu ments of the corporation as true and correct copies thereof. SECTION 9. ASSISTANT TREASURERS, ASSISTANT SECRETARIES, CONTROLLER, AND OTHER OFFICERS. The Assistant Treasurers and Assistant Secretaries shall perform such duties as shall be assigned to them by the Treasurer or the Secretary, respectively, or by the President or the Board of Directors. The Assistant Secretaries may sign with the President, or a Vice President, or any other officer thereunto authorized by the Board of Directors, certificates for shares of the corporation, the issue of which shall have been authorized by the Board of Directors, and any contracts, deeds, mortgages, bonds, or other instruments which the Board of Directors has authorized to be executed, according to the requirements of the form of the instrument, except when a different mode of execution is expressly prescribed by the Board of Directors or these By-laws. The Assistant Treasurers shall respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The Controller, if one be elected or appointed, shall be the principal accounting officer of the corporation and as such shall have and perform all duties normally incident to the office of principal accounting officer. The Assistant Treasurers, the Assistant Secretaries, the Controller and any other officers shall have and perform such other duties as may be assigned from time to time by the Board of Directors or the Chief Executive Officer of the corporation. SECTION 10. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors or, if authorized by the Board, by the Chief Executive Officer of the corporation. No officer shall be prevented from receiving any salary by reason of the fact that he or she is also a director of the corporation. ARTICLE V CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION l. CONTRACTS. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. SECTION 2. LOANS. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. SECTION 4. DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as the Board of Directors may select. ARTICLE VI CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION l. CERTIFICATES FOR SHARES. Certificates representing shares of the corporation shall be signed by the President or a Vice President or by such officer as shall be designated by resolution of the Board of Directors and by the Secretary or an Assistant Secretary, and shall be sealed with the seal or a facsimile of the seal of the corporation. If both of the signatures of the officers be by facsimile, the certificate shall be manually signed by or on behalf of a duly authorized transfer agent or clerk. Each certificate representing shares shall be consecutively numbered or otherwise identified, and shall also state the name of the person to whom issued, the number and class of shares (with designation of series, if any), the date of issue, and that the corporation is organized under Illinois law. If the corporation is authorized and does issue shares of more than one class or of a series within a class, the certificate shall also contain such information or statement with respect thereto as may be required by law. The name and address of each shareholder, the number and class of shares held and the date on which the certificates for the shares were issued shall be entered on the books of the corporation. The person in whose name shares stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation. SECTION 2. LOST CERTIFICATES. If a certificate representing shares allegedly has been lost or destroyed, the Board of Directors may in its discretion, except as may be required by law, direct that a new certificate be issued upon such indemnification and other reasonable requirements as it may impose. SECTION 3. TRANSFERS OF SHARES. Transfers of shares of the corporation shall be recorded on the books of the corporation and, except in the case of a lost or destroyed certificate, shall be made only upon surrender for cancellation of the certificate for such shares. A certificate presented for transfer must be duly endorsed and accompanied by proper guaranty of signature and other appropriate assurances that the endorsement is effective. ARTICLE VII INDEMNIFICATION SECTION l. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation or, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. SECTION 2. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, provided that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his or her duty to the corporation, unless, and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. SECTION 3. To the extent that a director, officer, employee or agent of the corporation has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to in Sections l and 2 of this Article, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. SECTION 4. Any indemnification under Sections l and 2 of this Article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case, upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section l or 2 of this Article. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or even if obtainable, if a quorum of disinterested direc tors so directs, by independent legal counsel in a written opinion, or (c) by the shareholders. SECTION 5. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding, as authorized by the Board of Directors in the specific case, upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount, unless it shall ultimately be determined that he or she is entitled to be indemnified by the corporation as authorized in this Article. SECTION 6. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent, and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7. The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Article. SECTION 8. If the corporation has paid indemnity or has advanced expenses to a director, officer, employee or agent, the corporation shall report the indemnification or advance in writing to the shareholders with or before the notice of the next shareholders' meeting. SECTION 9. For purposes of this Article, references to "the corporation" shall include, in addition to the surviving corporation, any merging corporation (including any corporation having merged with a merging corporation) absorbed in a merger which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers and employees or agents, so that any person who was a director, officer, employee or agent of such merging corporation, or was serving at the request of such merging corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the surviving corporation as such person would have with respect to such merging corporation if its separate existence had continued. SECTION 10. For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he or she reasonably believed to be in the best interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article. ARTICLE VIII FISCAL YEAR The fiscal year of the corporation shall begin on the first day of January in each year and end on the last day of December in each year. ARTICLE IX DISTRIBUTIONS The Board of Directors from time to time may authorize, and the corporation may make, distributions to its shareholders in the manner and upon the terms and conditions provided by law and its Articles of Incorporation. ARTICLE X SEAL The corporation shall have a corporate seal with the name of the corporation and the word "Illinois" inscribed about a circle and the phrase "Incorporated 1985" within such circle. Such seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. ARTICLE XI WAIVER OF NOTICE Whenever any notice is required to be given under the provisions of these By-laws, the Articles of Incorporation or the Business Corporation Act of 1983, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance at any meeting shall constitute waiver of notice thereof unless the person at the meeting objects to the holding of the meeting because proper notice was not given. ARTICLE XII AMENDMENTS In furtherance of, and not in limitation of, the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized and empowered to adopt, amend or repeal the By-laws (or any portion thereof) of the Corporation. The shareholders of the Corporation are authorized and empowered to adopt, amend or repeal the By-laws only by an affirmative vote of 75% of the shares outstanding and entitled to vote thereon. The By-laws may contain any provisions for the regulation and management of the affairs of the Corporation not inconsistent with law or the Articles of Incorporation. EX-13 9 [DESCRIPTION] EXHIBIT 13 TO 1994 CILCORP/CILCO 10K Management's Discussion and Analysis of Financial Condition and Results of Operations, Management's Report to the Stockholders of CILCORP Inc., Report of Independent Public Accountants to the Stockholders of CILCORP Inc. and Financial Statements of CILCORP Inc.'s 1994 Annual Report to Stockholders CILCORP and Subsidiaries The financial condition and operating results of CILCORP Inc. (the Company) primarily reflect the operations of Central Illinois Light Company (CILCO), the Company's principal business subsidiary. The Company's other core business subsidiary is Environmental Science & Engineering, Inc. (ESE). 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. ESE is an environmental consulting and engineering firm with additional capabilities in laboratory analysis and equipment manufacturing. OVERVIEW Contributions to the Company's earnings per share for the last three calendar years are shown below:
1994 1993 1992 CILCO $2.26 $2.60 $2.41 ESE .14 (.17) .15 Other Businesses .10 .17 (.08) ----- ----- ----- Earnings per share $2.50 $2.60 $2.48 ===== ===== =====
CILCO's earnings declined in 1994 primarily due to a $4.5 million after-tax charge against income to reflect the Illinois Commerce Commission's disallowance of a portion of CILCO's investment in renewing its Springfield, Illinois, gas system. CILCO also paid $1 million in fines and expenses related to a U.S. Department of Justice and U.S. Department of Transportation review of CILCO's gas operations (See Note 9). These one- time charges reduced earnings per share of common stock by $.42. In addition, gas operating income was lower due to warmer than normal weather. Heating degree days were 8% below normal in 1994 and were 8% lower than in 1993. ESE's results improved significantly in 1994 primarily due to lower general and administrative expenses. Other Businesses' results declined in 1994 due to the termination payment made on a lease at an ESE facility and other outside services costs. Also, 1993 results reflected the favorable settlement of a federal tax dispute related to CIM's lease portfolio. The following table summarizes each business segment's contribution to net income (see Results of Operations for further discussion).
1994 1993 1992 Electric operating income $49,623 $49,129 $45,079 Gas operating income 8,884 11,058 12,521 ------- ------- ------- Total utility operating income 58,507 60,187 57,600 Utility interest expense and other (24,686) (26,828) (27,014) Disallowed plant cost of regulated subsidiary, net of tax (4,541) -- -- Environmental and engineering services net income (loss) 1,824 (2,266) 1,938 Other businesses net income (loss) 1,482 2,490 (427) ------- ------- ------- Net income $32,586 $33,583 $32,097 ======= ======= =======
Return on average common equity was 9.5% in 1994 compared to 10% in 1993 and 9.5% in 1992. The ratio of common equity to total capitalization, including short-term debt, remained stable in 1994 at approximately 44%. The fixed charge coverage ratio increased to 2.6 in 1994 compared to 2.4 in 1993 and 1992. Inflation may have a significant impact on the Company's future operations, its ability to contain costs and the need for CILCO to seek timely and adequate utility rate increases. To help protect CILCO from the effects of inflation, substantially all electric and gas sales rates include a fuel adjustment clause or a purchased gas adjustment clause to provide for the recovery of changes in electric fuel costs, excluding coal transportation, and changes in the cost of gas. Over the past five years, the rate of inflation, as measured by the Consumer Price Index, has ranged from 2.5% to 5.4% annually. 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 the Company's capital expenditures program, pay interest and dividends, meet working capital needs and retire (or refinance) debt as it matures. The Company's long-term ability to declare and 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 From December 1993 through March 1994, the Company issued 126,475 shares of common stock at an average price of $37.08 per share through the CILCO Employees' Savings Plan (ESP) and the CILCORP Inc. Automatic Reinvestment and Stock Purchase Plan (DRIP). Depending on market conditions, the Company may issue additional shares of common stock through the ESP, the DRIP or through a conventional stock offering. The proceeds from 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 CILCO and for other corporate purposes. CILCORP is currently authorized by its Board of Directors to borrow up to $50 million on a short-term basis. At the end of 1994 and 1993, the Company had $40 million of committed bank lines and $5 million of discretionary bank lines. At December 31, 1994, $6 million of the lines were used, compared to $18.8 million of short- term debt outstanding at December 31, 1993. The Company plans to have $50 million of committed lines and $10 million of discretionary lines available by the end of February 1995 through six different banks. The Company uses a competitive bidding process for its short-term borrowings and has arranged facilities in excess of its authorized limit so that all of its borrowings can be competitively bid. During December 1994, the Company issued $22 million of medium-term notes to refinance $18 million of CILCORP Lease Management Inc. (CLM) term debt maturing in March 1995. CLM is a wholly-owned subsidiary of CIM. The maturing CLM debt carries prepayment penalties, so the proceeds of the notes have been used temporarily to reduce CILCORP short-term debt. The remaining $4 million will be used to refinance short-term debt supporting investments at CIM. As part of the 1992 restructuring of the Springerville Unit No. 1 lease, CLM received approximately 1.2 million shares of Tucson Electric Power Company (TEP) common stock, and warrants to purchase approximately 895,000 additional shares. During 1994 and 1993, CLM sold all of the TEP stock and warrants, realizing pre-tax gains of $1.8 million and $2 million in 1994 and 1993, respectively. The proceeds were used to reduce CILCORP short-term debt. CIM and CLM had minimal cash and temporary cash investments at the end of 1994 and 1993. In July 1994, Standard & Poor's (S&P) lowered CILCORP's rating of unsecured medium-term notes to A+ from AA-. In September 1994, Moody's Investor Service (Moody's) lowered its rating on CILCORP's unsecured medium-term notes to A1 from Aa3. CILCO In 1994, CILCO spent $91.4 million for capital additions and improvements. These expenditures consisted primarily of replacements and improvements to the existing electric and gas systems, including $15.7 million for the steam boilers and related auxiliary equipment of a cogeneration plant at Midwest Grain Products, Inc. (MWG), one of CILCO's major gas customers. Utility capital projects were financed during 1994 with funds from operating activities and issuance of short-term debt. CILCO's net cash flow from operations in 1994 was $107 million. CILCO paid $16 million in cash dividends to CILCORP during 1994. CILCO's short-term debt increased to $23.4 million at December 31, 1994, from $12.4 million at December 31, 1993. CILCO expects to issue short-term commercial paper periodically during 1995, and is currently authorized by its Board of Directors to issue up to $66 million of short-term debt. At December 31, 1994, committed bank lines of credit totaled $30.4 million, all of which were unused. CILCO expects these bank lines will remain unused through 1995. Estimated capital expenditures for 1995 and 1996 are $69 million and $76 million, respectively. The 1995 estimate includes $13 million for electric energy supply and transmission projects, $3 million for gas supply and transmission projects, $45 million for electric and gas distribution system improvements and $2.4 million to complete the installation of the 21 megawatt electric generating equipment for the MWG project. Anticipated total capital expenditures for 1997-1999 are $191 million. In October 1994, CILCO obtained Illinois Commerce Commission (ICC) approval to issue not more than $65 million of secured medium-term notes and not more than $25 million of pollution control bonds. In November 1994, the Securities and Exchange Commission declared effective a shelf registration statement for the $65 million of secured medium-term notes. During 1995, CILCO plans to issue approximately $20 million of the medium-term notes to finance capital expenditures. CILCO plans to finance the remainder of its 1995 and 1996 capital expenditures with funds provided by operations. CILCO intends to issue $36 million of secured medium-term notes to retire outstanding long-term debt as it matures in 1996 and 1997. CILCO expects to issue the $25 million of pollution control bonds in 1996 and later years to finance pollution control facilities, including new solid waste disposal facilities at CILCO's Duck Creek generating station. The timing of the issuance and use of the remaining $9 million of medium-term notes has not yet been determined. During 1993, CILCO issued $108 million of medium-term notes and first mortgage pollution control bonds, $22 million of preferred stock and $25 million of flexible auction-rate preferred stock. CILCO used the proceeds from these issuances to retire $96.4 million of first mortgage bonds and $45.5 million of preferred stock. The balance of the financing proceeds was used to retire short-term debt. In 1994, annual interest expense decreased $730,000 as a result of the bond refinancings. Also, annual preferred dividend requirements decreased by $1.5 million between 1992 and 1994 as a result of refinancing with a combination of lower fixed-rate and flexible auction-rate preferred stocks. In July 1994, S&P lowered CILCO's rating of senior secured debt to AA- from AA and preferred stock to A+ from AA-. Moody's affirmed its Aa2 rating of CILCO's long-term debt. ESE ESE spent $4.4 million for capital additions and improvements in 1994. In addition, through a newly formed wholly-owned subsidiary, Savannah Resources Inc., ESE spent $2.3 million to acquire land that will be remediated and sold in 1995. ESE expects to spend $4.1 million for capital additions and improvements in 1995, of which $1.9 million will be for the continued construction of a mixed waste laboratory in Gainesville, Florida. ESE has a $15 million revolving line of credit and a $20 million term note with the Holding Company. The revolving line of credit expires on May 2, 1996, while principal on the term note is due on May 2, 1998. At December 31, 1994, ESE had $5.6 million outstanding on the revolving line of credit, compared to $.9 million outstanding at December 31, 1993. ESE also has a $7.5 million bank line of credit to collateralize performance bonds issued in connection with ESE projects, of which $4.5 million was used as of December 31, 1994. ESE expects to finance its capital expenditures and working capital needs for 1995 with a combination of funds generated internally and periodic short-term borrowings from the Holding Company. ENVIRONMENTAL MATTERS CILCO's capital expenditures related to pollution control facilities are estimated to be $3.4 million and $14 million for 1995 and 1996, respectively. 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 in Phase I of the Amendments due to previous emission reductions, but are subject to Phase II of the Amendments which require additional emission reductions by the year 2000. CILCO's final compliance strategy will depend upon regulations issued under the Amendments; therefore, CILCO cannot currently determine definitive compliance costs and schedules. CILCO will continue to monitor regulatory actions and develop compliance strategies to minimize any financial impact. Under current regulatory policies, CILCO expects to recover compliance costs associated with the Amendments and other environmental regulations through rates charged to customers. CILCO's present strategy includes use of an existing SO2 scrubber and limited fuel switching to reduce SO2 emissions, and combustion control modifications to reduce NOx emissions. CILCO's generating units will not require additional SO2 scrubbers. Through 1996, CILCO expects to spend $15.8 million for boiler retrofits and emissions monitoring equipment related to the Amendments, including $5.4 million spent in 1994 and $3.5 million in 1993. In 1993, the U. S. Environmental Protection Agency established acid rain emission allowance reserves for power plants in Phase II. Allowances are transferable to third parties at market prices. The number of allowances allocated to CILCO approximates its future needs, so CILCO expects it will buy or sell minimal amounts of allowances. Some studies suggest that magnetic fields produced by electric current, known as "electric and magnetic fields" or EMF, may be associated with illness or disease. However, research conducted to date has found no conclusive evidence that EMF has an adverse impact on health. CILCO is participating in utility industry funded studies on this subject. There are also claims that EMF may contribute to losses in the market value of property near certain electric transmission lines. CILCO will continue to monitor these issues, but their ultimate impact cannot be predicted at this time. Neither CILCORP, CILCO, nor any of their affiliates has been identified as a potentially responsible party (PRP) under federal or state environmental laws. CILCO continues to investigate and/or monitor five former gas manufacturing plant sites (Sites A, B, C, D, and E) located within CILCO's 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. CILCO previously operated plants at three of the five sites (Sites A, B, and C) and currently owns two (Sites A and B). In cooperation with the Illinois Environmental Protection Agency, CILCO completed remedial action in 1991 at Site A, at a cost of $3.3 million. In 1994, CILCO investigated Site B to define the extent of waste materials on site. A risk assessment for Site B is currently being developed, which will be followed by a feasibility study of remedial alternatives in 1995. CILCO has not yet formulated a remediation plan for Site C. Until more detailed site specific testing has been completed, CILCO cannot determine the ultimate extent or cost of any remediation of Site C. CILCO does not currently own Sites D and E. CILCO has no remediation responsibility for Site E and has not yet determined the extent, if any, of its remediation responsibility for Site D. In addition, CILCO paid approximately $650,000 through 1994 to outside parties to investigate and/or test Sites A and B. CILCO expects to spend approximately $300,000 for site monitoring, legal fees and feasibility studies in 1995, and has recorded a regulatory asset and corresponding liability on the Balance Sheets for this amount (see Note 1). CILCO has recorded a $5 million liability and a corresponding regulatory asset on its Balance Sheets representing the minimum amount of future coal tar investigation and remediation costs CILCO expects to incur (see Note 1). Coal tar remediation costs incurred through 1994 have been deferred on the Balance Sheets, net of amounts recovered from customers. CILCO is presently allowed to recover prudently incurred coal tar remediation costs paid to outside parties pursuant to a gas rate rider which authorizes recovery over a five- year period. Through December 31, 1994, CILCO has recovered approximately $3.9 million in coal tar remediation costs from its customers. The gas rate rider allowing recovery of remediation costs is currently being appealed to the Illinois Supreme Court by several parties. CILCO cannot predict the outcome of the appeal, but believes most or all of its future coal tar remediation costs will continue to be recoverable from customers. Therefore, although the total cost to CILCO of any action with respect to the unremediated sites and the possibility of recovering that cost from insurance carriers or any PRPs cannot now be determined, management believes that such cost will not have a material adverse effect on CILCO's financial position or results of operations. GAS PIPELINE SUPPLIER TRANSITION COSTS In 1992, the Federal Energy Regulatory Commission (FERC) issued Orders 636, 636A, and 636B (collectively Order 636). Order 636 substantially restructured the relationship between gas pipelines and distribution companies, such as CILCO, for the sale, transportation and storage of natural gas. These services, which traditionally had been "bundled" by interstate pipeline companies, are now individually arranged by CILCO. CILCO believes it is well-positioned to ensure the continued acquisition of adequate and reliable gas supplies despite the regulatory changes. Order 636 also permitted pipeline suppliers to recover from gas distribution companies prudently incurred transition costs attributed to compliance with Order 636. As of December 31, 1994, pipeline suppliers have billed CILCO, subject to refund, for approximately $1.4 million of transition costs, including interest. These charges have been, or will be, recovered from CILCO's customers through its purchased gas adjustment clause (PGA). The PGA allows CILCO to adjust customer billings to reflect changes in the cost of natural gas. Presently, CILCO cannot determine its actual allocation of suppliers' transition costs but believes that it could ultimately be billed up to $3 million, excluding interest. During 1994, the ICC affirmed the right of Illinois gas distribution companies to recover pipeline transition costs from their customers; therefore, management does not expect that Order 636 will materially impact CILCO's financial position or results of operations. Under FERC Order 500, and subsequent Orders 528 and 528A, interstate gas pipelines may bill gas distribution utilities for take-or-pay and other charges related to the transition to a more competitive gas industry. Through December 1994, gas pipelines have billed CILCO $22.2 million for take-or-pay charges and certain costs related to one supplier's liquefied natural gas project. This amount includes $3.9 million of interest. CILCO estimates that it could ultimately be directly billed approximately $25.6 million, excluding interest, for these costs. CILCO is allowed by the ICC to recover these charges via a factor incorporated into the PGA, and through December 31, 1994, has recovered $21.1 million, including interest, from its customers. CILCO has recorded a regulatory asset and corresponding liability of $4 million on its Balance Sheets as of December 31, 1994, of which $1.2 million will be due in one year (see Note 1). The remaining $2.8 million represents the minimum amount of the estimated range of such future costs which CILCO expects to incur related to take-or-pay and transition costs. ACCOUNTING PRONOUNCEMENTS In 1992, the Financial Accounting Standards Board (FASB) issued Statement No. 112, "Employer's Accounting for Postemployment Benefits" (SFAS 112). The FASB issued Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) in 1993 and Statement No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" (SFAS 119) in 1994. The Company adopted SFAS 112 on January 1, 1994 (see Note 3). The Company also adopted SFAS 115 and SFAS 119 on January 1, 1994, but to date, these statements have not had a material effect on the Company's financial position, results of operations or cash flows. During 1994, CILCO entered into a pilot program to hedge its gas costs. The program, which includes investments in derivatives as defined by SFAS 119, is immaterial to the Company's financial position, results of operations and cash flows. RESULTS OF OPERATIONS CILCO ELECTRIC OPERATIONS The following table summarizes electric operating revenue and expenses by component.
Components of Electric Operating Income 1994 1993 1992 (In thousands) Revenue: Electric retail $304,903 $298,602 $280,380 Sales for resale 8,182 4,522 8,433 -------- -------- -------- Total revenue 313,085 303,124 288,813 -------- -------- -------- Cost of sales: Cost of fuel 97,184 92,112 94,133 Purchased power expense 9,433 8,754 4,295 Revenue taxes 13,260 12,378 11,276 -------- -------- --------- Total cost of sales 119,877 113,244 109,704 -------- -------- --------- Gross margin 193,208 189,880 179,109 -------- -------- --------- Operating expenses: Operation and maintenance expenses 75,806 76,287 72,212 Depreciation and amortization 39,130 38,337 37,465 Income taxes 19,925 17,542 15,747 Other taxes 8,724 8,585 8,606 -------- -------- -------- Total operating expenses 143,585 140,751 134,030 -------- -------- -------- Electric operating income $ 49,623 $ 49,129 $ 45,079 ======== ======== ========
Electric gross margin increased 2% in 1994, primarily due to a 3% increase in retail kilowatt hour (kwh) sales. The ratio of gross margin to revenue has remained relatively constant for the last three years. Increases in the number of residential and commercial customers, higher demand by commercial customers and warmer summer weather contributed to the increased sales volumes. Cooling degree days were 5% higher in 1994 than in 1993. Industrial sales volumes increased 3% compared to 1993, due to greater demand by several of CILCO's large industrial customers. CILCO set a new all-time system peak demand of 1,137,000 kwh on July 5, 1994. Electric gross margin increased 6% in 1993 from 1992, primarily due to a 7% increase in retail kilowatt hour sales. The increase in retail sales was partially offset by a decrease in sales for resale revenue. Residential sales volumes increased 10%, while commercial sales volumes increased 5%. These increases were primarily due to warmer summer weather. Cooling degree days were 30% higher in 1993 than in 1992. Industrial sales volumes increased 6% compared to 1992 due to greater demand by several of CILCO's large industrial customers. Sales for resale increased in 1994 from 1993 due to greater demand from neighboring utilities. Sales for resale vary based on CILCO's available capacity for bulk power sales, energy requirements of neighboring utilities and the price of power available for sale. The National Energy Policy Act of 1992 (NEPA) encourages competition by allowing utilities and non-utilities to form non-regulated generation subsidiaries to supply additional electric demand without being restricted by the Public Utility Holding Company Act of 1935. The FERC may order access to utility transmission systems by third- party energy producers on a case-by-case basis and may also order electric utilities to enlarge their transmission systems to transport (wheel) power, subject to certain conditions. NEPA specifically bans federally-mandated wheeling of power for retail customers, but several state public utility regulatory commissions are adopting pilot programs to initiate retail wheeling. Various Illinois trade associations are currently studying retail wheeling implications. CILCO is presently involved with a statewide task force to examine electric utility regulation and competition. The results of this study will be provided to the ICC and the Illinois legislature for educational and planning purposes. With growing competition in the electric utility industry, CILCO's largest customers may have increased opportunities to select their electric supplier. In response to this changing environment, CILCO has entered into long-term contracts with various industrial customers to be the exclusive provider of their electric power requirements at prices consistent with current rates. These contracts, which typically have terms ranging from five to eight years, accounted for 17% of CILCO's total 1994 retail kwh sales. CILCO's largest customer is Caterpillar Inc., which represented 13% of 1994 electric revenues. On June 20, 1994, Caterpillar employees represented by the United Auto Workers Union began a strike at Caterpillar facilities in CILCO's service territory. To date, the strike has not had an adverse effect on CILCO's sales to Caterpillar. CILCO's management cannot predict what, if any, impact a continued strike at Caterpillar will have on CILCO's future revenues or earnings. 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 and gross margin may also be affected in the long-term by increased competition in the electric utility industry. Substantially all of CILCO's electric generation capacity is coal- fired. The cost of fuel increased 6% in 1994 primarily due to an 8% increase in electric generation. Sales to retail customers and other utilities were higher than 1993 due to warmer summer weather. Lower coal prices partially offset the effects of increased generation. The cost per ton of coal burned, including transportation cost, decreased 3% in 1994 compared to 1993. Purchased power expense increased in 1994 compared to 1993. 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 fuel adjustment clause (FAC). The FAC allows CILCO to pass increases and decreases in the cost of fuel through to customers. CILCO expects the wholesale power market to become increasingly competitive due to certain provisions of NEPA. Electric operation and maintenance expenses decreased slightly in 1994, but increased 6% in 1993 from 1992. The 1994 decreases were primarily due to lower power plant and overhead line maintenance expense, injury and damage claims and other post employment benefit (OPEB) costs. The 1994 decreases were partially offset by increased employee benefit costs, including costs resulting from the implementation of SFAS 112 (see Note 3), development expenses of a new customer information system and general inflationary trends. The increase in 1993 from 1992 was primarily due to greater power plant maintenance expenses. The increases in depreciation and amortization expense in 1994 and 1993 reflect additions and replacements of utility plant at costs in excess of the original cost of the property retired. The changes in income taxes in 1994 and 1993 were primarily the result of changes in pre-tax income. A higher federal corporate income tax rate due to the passage of the Revenue Reconciliation Act of 1993 also contributed to the 1993 increase (see Note 2). CILCO GAS OPERATIONS The following table summarizes gas operating revenue and expenses by component.
Components of Gas Operating Income 1994 1993 1992 (In thousands) Revenue: Sale of gas $138,161 $140,620 $134,385 Transportation services 10,124 10,134 10,541 -------- -------- -------- Total revenue 148,285 150,754 144,926 -------- -------- -------- Cost of sales: Cost of gas 78,696 79,022 77,123 Revenue taxes 7,190 7,039 6,547 -------- -------- -------- Total cost of sales 85,886 86,061 83,670 -------- -------- -------- Gross margin 62,399 64,693 61,256 -------- -------- -------- Operating expenses: Operation and maintenance expenses 33,511 31,486 28,041 Depreciation and amortization 15,219 14,686 13,930 Income taxes 1,564 4,684 4,082 Other taxes 3,221 2,779 2,682 -------- -------- -------- Total operating expenses 53,515 53,635 48,735 -------- -------- -------- Gas operating income $ 8,884 $ 11,058 $ 12,521 ======== ======== ========
Gas gross margin decreased 4% in 1994, primarily due to a 4% decrease in retail sales volumes. Residential and commercial sales volumes decreased 7% and 1%, respectively, primarily due to milder weather during the heating season. Increases in sales volumes by certain classes of industrial customers partially offset the decreases in retail sales. Heating degree days were 8% lower in 1994 than in 1993. The cost of gas decreased in 1994. The decrease was primarily due to decreased retail sales volumes and lower natural gas prices. On December 12, 1994, the ICC approved an increase in CILCO's gas base rates designed to increase CILCO's annual gas revenues by approximately $10.6 million (see Note 9). Gas gross margin increased 6% in 1993 from 1992, primarily due to an 8% increase in retail sales volumes. Residential and commercial sales volumes increased 10% and 9%, respectively, primarily due to colder weather during the heating season. Heating degree days were 11% higher in 1993 than in 1992. Revenue from gas transportation services decreased slightly in 1994 and 4% in 1993, while the volume of gas transported increased 8% in 1994 and decreased 11% in 1993. Revenues for 1994 declined primarily due to decreased purchases of gas by commercial transportation customers from suppliers other than CILCO. The revenue changes in 1994 and 1993 were not proportional to the changes in volume because certain large volume transportation customers can negotiate lower unit charges for service. Transportation arrangements have made it practical for certain industrial customers to continue to use gas instead of switching to alternate fuels. There were 567 transportation customers in 1994 compared to 668 customers in 1993 and 635 in 1992. As a result of CILCO's new gas rates (see Note 9), CILCO's system rates are more competitive with transportation rates. Various transportation customers switched back to CILCO's system in December 1994, and CILCO expects this trend to continue into 1995. Weather conditions, the ability of large customers to purchase gas on the open market at competitive rates, the continuing trend toward more efficient gas appliances and overall economic conditions in CILCO's service area will affect future gas sales. Gas operation and maintenance expenses increased 6% in 1994 and 12% in 1993. The 1994 increases were primarily due to increased regulatory costs associated with CILCO's recent gas rate case and higher employee benefit costs. Implementation of SFAS 112 (see Note 3) contributed to the increase in employee benefit costs. Decreased OPEB costs and gas maintenance expenses partially offset the increases. Maintenance expenses decreased as a result of the completion of repairs to the Springfield gas distribution system in 1993 (see Note 9). Operation and maintenance expenses are also affected by general inflationary trends. The increases in depreciation and amortization expenses in 1994 and 1993 reflect additions and replacements of utility plant at costs in excess of the original cost of the property retired. The changes in income taxes in 1994 and 1993 were primarily the result of changes in taxable income and the effects of adjustments which increased the 1993 tax provision. A higher federal corporate income tax rate due to the passage of the Revenue Reconciliation Act of 1993 also contributed to the 1993 increase (see Note 2). CILCO OTHER INCOME AND DEDUCTIONS Utility other deductions increased substantially in 1994 from 1993. Disallowed gas plant costs, net of related income taxes, which resulted from the December 1994, ICC rate order, significantly increased CILCO's other deductions (see Note 9). The civil fine and other costs CILCO agreed to pay as a result of the U.S. Department of Justice and the U.S. Department of Transportation investigations also contributed to the increase in other deductions. Interest expense decreased partially due to a settlement of an Internal Revenue Service audit. Lower interest rates on bonds refinanced in 1993 contributed to the decrease in interest expense. The weighted- average interest rate of long-term debt decreased to 6.89% in 1994 from 7.19% in 1993 (see Capital Resources and Liquidity). In 1994, CILCO entered into an option agreement to sell for $7 million the 95 acre site of the former R. S. Wallace Station, a retired electric generating plant. On January 5, 1995, the ICC approved the sale and the accounting treatment of the proceeds. Various significant terms and conditions must be satisfied in order for the sale to be completed. CILCO expects a portion of the sale will be completed in 1995, with the remainder to be completed during 1996 and 1997. Gain on the sale will be included in other income during 1995, 1996 and 1997. ESE The following table summarizes environmental and engineering services revenue and expenses.
Components of ESE Net Income (Loss) 1994 1993 1992 (In thousands) Environmental and engineering services revenue $132,799 $123,162 $137,858 Direct non-labor project costs 52,896 43,627 52,531 -------- -------- -------- Net revenue 79,903 79,535 85,327 -------- -------- -------- Expenses: Direct salaries and other costs 39,720 40,180 41,667 General & administrative 29,319 34,418 32,737 Depreciation and amortization 5,867 6,064 5,472 -------- -------- -------- Operating expenses 74,906 80,662 79,876 -------- -------- -------- Interest 1,915 1,719 2,167 -------- -------- -------- Income before income taxes 3,082 (2,846) 3,284 Income taxes 1,258 (580) 1,346 -------- -------- -------- ESE net income (loss) $ 1,824 $(2,266) $ 1,938 ======== ======== ========
ESE incurs substantial direct non-labor project costs from the use of subcontractors on projects. These costs are passed directly through to ESE's 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 revenues. Net revenue remained virtually unchanged in 1994 after decreasing by 7% in 1993. Direct salaries and other costs decreased by 1% in 1994, after decreasing by 4% in 1993. The decreases resulted from changes in ESE's work force to reflect the change in business volume. Because the consulting industry is labor intensive, ESE can adjust staffing levels appropriately to respond to changing business conditions. ESE's earnings improved significantly in 1994 primarily due to a reduction in general and administrative expenses. General and administrative expenses decreased by 15%, following a 5% increase in 1993. In 1994, staffing levels were managed to reflect business volume, resulting in decreases in salary expense, benefit costs and hiring costs. Bad debt expense also decreased from the previous year due to improved collection experience. During 1994, ESE was able to renegotiate several leases which resulted in lower facilities cost. The increase in 1993 general and administrative expenses resulted from general inflation and higher medical benefit costs. Depreciation expense declined by 3% in 1994, primarily due to the expiration of capital leases and to an increase in fully depreciated assets. Amortization expense relates to a non-compete agreement executed in 1990, which is being amortized over its five-year duration, and to the Cost in Excess of Net Assets of Acquired Businesses, which is being amortized over forty years. Depreciation expense increased in 1993 due to fixed asset additions. Interest expense increased in 1994 after decreasing in 1993, primarily because of increased average debt balances and higher interest rates. The increase in income taxes is due to ESE's higher pre-tax income. ESE's future business activity will continue to be affected by the level of demand for its services, which is affected by governmental 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 ESE's services is 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 Income (Loss) 1994 1993 1992 (In thousands) Revenue: Leveraged lease revenue $ 6,907 $ 4,280 $ 5,903 Other revenue 4,063 3,191 3,725 ------- ------- ------- Total revenue 10,970 7,471 9,628 ------- ------- ------- Expenses: Operating expenses 5,527 2,637 3,814 Depreciation and amortization 214 177 148 Interest expense 3,624 3,190 3,253 Income and other taxes 123 (1,283) 2,392 Minority interest -- 260 448 ------- ------- ------- Total expenses 9,488 4,981 10,055 ------- ------- ------- Other businesses' net income (loss) $ 1,482 $ 2,490 $ (427) ======= ======= =======
Leveraged lease revenues in 1994 reflect a full year's revenue from two leveraged lease investments made in late 1993. The effect of this increase was partially offset by a decline in 1994 revenues from CIM's other leveraged leases. Under generally accepted accounting principles pertaining to leveraged leases, revenues decline as the lease portfolio matures. During 1995, CIM expects leveraged lease revenues to decline by $700,000, absent investment in new leases. Other revenues increased in 1994 due to revenues from CILCORP Energy Services Inc. (CESI), a newly-formed subsidiary of CVI. During 1994, CESI had revenues of $969,000, primarily from the sale of carbon monoxide detectors to utilities other than CILCO for resale to their customers. Other revenues also reflect a $1.8 million gain from the sale of 193,000 shares of Tucson Electric Power (TEP) stock and 895,000 TEP warrants in 1994. In 1993, CIM sold one million shares of TEP stock for a $2 million gain. Interest income on temporary cash investments, which is included in other revenues, declined due to lower investment balances. Operating expenses in 1994 include CESI cost of goods sold of $829,000. Operating expenses also increased due to higher professional services costs and several one-time charges, including termination of a lease at an ESE facility which it no longer plans to use. The lease was entered into during negotiations which led to CILCORP's 1990 acquisition of ESE. Interest expense increased due to higher interest rates and average debt balances. Income and other taxes in 1993 include a $3.1 million reversal of tax expense which had been recorded in prior years to reflect the potential unfavorable outcome of a tax dispute between the Company and the Internal Revenue Service (IRS) regarding the depreciable life of the Springerville Unit No. 1 lease. Offsetting this reduction in 1993 was an additional $1.1 million of income tax expense to record the effect of an increase in the federal income tax rate on the Company's lease portfolio. Income tax expense in 1994 includes a reduction in tax expense to reflect the settlement of several issues contested with the IRS which were unrelated to CIM's lease portfolio. In December 1993, CIM purchased the 19% minority interest in CILCORP Lease Management, Inc. for $1.4 million. 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, whose appointment was ratified by stockholders. 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 R. O. Viets President and Chief Executive Officer T. D. Hutchinson T. D. Hutchinson Controller Consolidated Statements of Income CILCORP Inc. and Subsidiaries
For the Years Ended December 31, 1994 1993 1992 (In thousands except per share amounts) Revenue: Electric $313,085 $303,124 $288,813 Gas 148,285 150,754 144,926 Environmental and Engineering Services 132,799 123,162 137,858 Other Businesses 10,970 7,471 9,628 -------- -------- -------- Total 605,139 584,511 581,225 -------- -------- --------- Operating Expenses: Fuel for Generation and Purchased Power 106,617 100,866 98,428 Gas Purchased for Resale 78,696 79,022 77,123 Other Operations and Maintenance 234,323 225,135 227,111 Disallowed Plant Cost of Regulated Subsidiary 7,522 -- -- Depreciation and Amortization 61,143 59,975 57,727 State and Local Revenue Taxes 20,485 19,466 17,874 Other Taxes 16,640 16,412 16,156 -------- -------- -------- Total 525,426 500,876 494,419 -------- -------- -------- Fixed Charges and Other: Interest Expense 26,341 27,363 29,205 Preferred Stock Dividends of Subsidiary 2,980 4,043 4,441 Allowance for Funds Used During Construction (1,040) (199) (337) Other 666 516 142 -------- -------- -------- Total 28,947 31,723 33,451 -------- -------- -------- Income Before Income Taxes 50,766 51,912 53,355 Income Taxes 18,180 18,069 20,810 -------- -------- -------- Net Income Including Minority Interest 32,586 33,843 32,545 Minority Interest -- 260 448 -------- -------- -------- Net Income Available for Common Stockholders $ 32,586 $ 33,583 $ 32,097 ======== ======== ======== Average Common Shares Outstanding 13,026 12,914 12,924 Net Income Per Common Share $2.50 $2.60 $2.48 ======== ======== ======== 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) 1994 1993 (In thousands) Current Assets: Cash and Temporary Cash Investments $ 1,604 $ 1,440 Receivables, Less Reserves of $2,291 and $2,255 55,779 58,350 Accrued Unbilled Revenue 40,474 38,179 Fuel, at Average Cost 14,765 8,323 Materials and Supplies, at Average Cost 16,731 16,674 Gas in Underground Storage, At Average Cost 17,484 24,548 Prepayments and Other 12,402 11,153 ---------- --------- Total Current Assets 159,239 158,667 ---------- --------- Investments and Other Property: Investment in Leveraged Leases 120,961 114,803 Other Investments 5,427 7,453 ---------- --------- Total Investments and Other Property 126,388 122,256 ---------- ---------- Property, Plant and Equipment: Utility Plant, at Original Cost Electric 1,092,382 1,068,818 Gas 355,270 348,541 ---------- --------- 1,447,652 1,417,359 Less - Accumulated Provision for Depreciation 653,571 618,912 ---------- --------- 794,081 798,447 Construction Work in Progress 71,105 31,896 Plant Acquisition Adjustments, being Amortized to 1999 3,355 4,068 Other, Net of Depreciation 23,152 24,173 ---------- ---------- Total Property, Plant and Equipment 891,693 858,584 ---------- ---------- Other Assets: Prepaid Pension Expense 13,312 13,953 Cost in Excess of Net Assets of Acquired Businesses, Net of Accumulated Amortization of $3,589 and $2,886 24,548 25,251 Other 23,204 19,729 ---------- ---------- Total Other Assets 61,064 58,933 ---------- ---------- Total Assets $1,238,384 $1,198,440 ========== ========== 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) 1994 1993 (In thousands) Current Liabilities: Current Portion of Long-Term Debt $ 21,200 $ 193 Notes Payable 29,400 31,200 Accounts Payable 51,952 47,668 Accrued Taxes 7,729 5,666 Accrued Interest 9,024 9,632 Purchased Gas Adjustment Over-Recoveries 2,142 3,029 Other 16,557 12,915 ---------- ---------- Total Current Liabilities 138,004 110,303 ---------- ---------- Long-Term Debt 326,695 325,711 ---------- ---------- Deferred Credits and Other Liabilities: Deferred Income Taxes 246,815 229,897 Net Regulatory Liability of Regulated Subsidiary 59,997 69,477 Deferred Investment Tax Credit 26,178 27,871 Customers' Advances for Construction and Other 29,860 27,185 ---------- ---------- Total Deferred Credits 362,850 354,430 ---------- ---------- Preferred Stock of Subsidiary 66,120 66,120 ---------- ---------- Stockholders' Equity: (See Statements on page 27) Common Stock, no par value; Authorized 50,000,000 shares - Outstanding 13,035,756 and 12,971,501 shares 167,987 165,662 Retained Earnings 176,728 176,214 ---------- ---------- Total Stockholders' Equity 344,715 341,876 ---------- ---------- Total Liabilities and Stockholders' Equity $1,238,384 $1,198,440 ========== ========== The accompanying Notes to Financial Statements are an integral part of these balance sheets.
Consolidated Statements of Cash Flows CILCORP Inc. and Subsidiaries
For the Years Ended December 31, 1994 1993 1992 (In thousands) Cash Flows from Operating Activities: Net Income Before Preferred Dividends $ 35,566 $ 37,626 $ 36,538 -------- -------- -------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Non-Cash Lease & Investment Income (7,121) (4,280) (7,616) Depreciation and Amortization 61,143 59,975 57,727 Disallowed Plant Cost of Regulated Subsidiary 7,522 -- -- Deferred Income Taxes, Investment Tax Credit and Regulatory Liability of Subsidiary, Net 5,745 6,354 (1,464) Changes in Operating Assets and Liabilities: (Increase) Decrease in Accounts Receivable and Accrued Unbilled Revenue 276 9,476 (5,005) (Increase) Decrease in Inventories 565 (5,609) (2,591) Increase in Accounts Payable 4,284 8,067 5,394 (Increase) in Other Assets (4,509) (7,831) (1,734) Increase (Decrease) in Other Liabilities 6,885 (6,565) 17,200 -------- -------- -------- Total Adjustments 74,790 59,587 61,911 -------- -------- -------- Net Cash Provided by Operating Activities 110,356 97,213 98,449 -------- -------- -------- Cash Flows from Investing Activities: Additions to Plant (95,762) (76,933) (69,111) Purchase of Long-Term Investments and Leveraged Lease Property (11) (13,595) (803) Proceeds from Sale of Long-Term Investments and Leveraged Lease Property 4,667 3,787 11,378 Purchase of Minority Interest in Consolidated Subsidiary -- (1,425) -- Other (6,559) 2,625 (5,673) -------- -------- -------- Net Cash Used in Investing Activities (97,665) (85,541) (64,209) -------- -------- -------- Cash Flows from Financing Activities: Net Increase (Decrease) in Short-Term Debt (1,800) 1,949 17,721 Proceeds from Issuance of Long-Term Debt 22,000 107,269 133,334 Repayment of Long-Term Debt -- (108,781) (140,318) Proceeds from Issuance of Preferred Stock by Wholly-owned Subsidiary -- 46,006 -- Retirement of Preferred Stock by Wholly-owned Subsidiary -- (46,051) -- Common Dividends Paid (32,063) (31,757) (31,788) Preferred Dividends Paid (2,980) (4,043) (4,441) Common Stock Issued 2,325 2,365 -- Preferred and Common Stock Issuance Costs (9) (1,590) -- Common Stock Repurchased -- -- (1,732) -------- -------- -------- Net Cash Used in Financing Activities (12,527) (34,633) (27,224) -------- -------- -------- Net Increase (Decrease) in Cash and Temporary Cash Investments 164 (22,961) 7,016 Cash and Temporary Cash Investments at Beginning of Year 1,440 24,401 17,385 -------- -------- -------- Cash and Temporary Cash Investments at End of Year $ 1,604 $ 1,440 $ 24,401 ======== ======== ======== 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, 1991 12,959,124 $165,029 $175,669 $340,698 Repurchase of Common Stock (49,843) (1,732) (1,732) Cash Dividend Declared on Common Stock ($2.46 per share) (31,788) (31,788) Net Income 32,097 32,097 ---------- -------- -------- -------- Balance at December 31, 1992 12,909,281 $163,297 $175,978 $339,275 Common Stock Issued 62,220 2,365 2,365 Cash Dividend Declared on Common Stock ($2.46 per share) (31,757) (31,757) Preferred and Common Stock Issuance Costs (1,590) (1,590) Net Income 33,583 33,583 ---------- -------- -------- -------- Balance at December 31, 1993 12,971,501 $165,662 $176,214 $341,876 Common Stock Issued 64,255 2,325 2,325 Cash Dividend Declared on Common Stock ($2.46 per share) (32,063) (32,063) Preferred and Common Stock Issuance Costs (9) (9) Net Income 32,586 32,586 ---------- -------- -------- -------- Balance at December 31, 1994 13,035,756 $167,987 $176,728 $344,715 ========== ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
Statements of Segments of Business CILCORP Inc. and Subsidiaries
Operating Information For the Years Ended December 31, 1994 1993 1992 (In thousands) Utility Segment: Electric Operations Revenue $313,085 $303,124 $288,813 Expenses 263,462 253,995 243,734 -------- -------- -------- Operating Income 49,623 49,129 45,079 Income Taxes 19,925 17,542 15,747 -------- -------- -------- Operating Income Before Income Taxes $ 69,548 $ 66,671 $ 60,826 ======== ======== ======== Depreciation and Amortization $ 39,130 $ 38,337 $ 37,465 Capital Expenditures $ 66,537 $ 41,880 $ 41,821 Gas Operations Revenue $148,285 $150,754 $144,926 Expenses 139,401 139,696 132,405 -------- -------- -------- Operating Income 8,884 11,058 12,521 Income Taxes 1,564 4,684 4,082 -------- -------- -------- Operating Income Before Income Taxes $ 10,448 $ 15,742 $ 16,603 ======== ======== ======== Depreciation and Amortization $ 15,219 $ 14,686 $ 13,930 Capital Expenditures $ 24,867 $ 30,677 $ 20,001
Major Customer for the Years Ended December 31, 1994 1993 1992 Caterpillar Inc. Electric Revenue $41,422 13.2% $39,831 13.1% $38,428 13.3% Gas Revenue 1,719 1.2% 1,581 1.0% 1,847 1.3% ------- ----- ------- ----- ------- ----- Total $43,141 9.4% $41,412 9.1% $40,275 9.3% ======= ===== ======= ===== ======= =====
Utility Identifiable Assets as of December 31, 1994 1993 1992 Electric $ 718,431 $684,618 $684,968 Gas 260,070 259,462 226,579 Other Utility Assets* 38,505 44,245 47,578 ---------- -------- -------- Total Utility Assets $1,017,006 $988,325 $959,125 ========== ======== ======== *Other investments, miscellaneous accounts receivable, prepaid assets, deferred pension costs, and unamortized debt, discount, and expense The accompanying Notes to Financial Statements are an integral part of these statements.
Environmental and Engineering Services Segment
For the Years Ended December 31, 1994 1993 1992 (In thousands) Revenue $132,799 $123,162 $137,858 Operating Expenses 127,802 124,289 132,407 -------- -------- -------- Operating Income (Loss) Before Income Taxes $ 4,997 $(1,127) $ 5,451 ======== ======== ======== Depreciation and Amortization $ 5,867 $ 6,064 $ 5,472 Capital Expenditures $ 4,358 $ 4,300 $ 6,804
Environmental and Engineering Services
Identifiable Assets as of December 31, 1994 1993 1992 Property, Plant and Equipment $22,254 $23,116 $22,347 Cost in Excess of Net Assets of Acquired Businesses, Net of Amortization 24,548 25,251 26,551 Accounts Receivable and Unbilled Revenue 42,199 36,637 42,681 Other Assets* 4,463 2,433 4,699 ------- ------- ------- Total Environmental and Engineering Services Assets $93,464 $87,437 $96,278 ======= ======= ======= *Non-compete agreement, real estate held for resale and other current assets
Other Businesses Segment
For the Years Ended December 31, 1994 1993 1992 Revenue $10,970 $ 7,471 $ 9,628 Expenses 9,365 6,264 7,663 ------- ------- ------- Income Before Income Taxes $ 1,605 $ 1,207 $ 1,965 ======= ======= =======
Other Businesses Identifiable Assets as of December 31, 1994 1993 1992 Leveraged Leases $120,961 $114,803 $ 97,133 Cash and Temporary Cash Investments 1,179 1,564 21,879 Other Assets 5,774 6,311 10,501 -------- -------- -------- Total Other Businesses Assets $127,914 $122,678 $129,513 ======== ======== ======== 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 Company), Central Illinois Light Company (CILCO), Environmental Science & Engineering, Inc. (ESE) and CILCORP's other subsidiaries after elimination of significant intercompany transactions. Prior year amounts have been reclassified on a basis consistent with the 1994 presentation. 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. As a regulated public utility, CILCO is subject to the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation". Regulatory assets represent the probable future revenues to CILCO resulting from the ratemaking action of regulatory agencies. Net regulatory liabilities are approximately $60 million (see Note 2). At December 31, 1994, and 1993, the regulatory assets included on the Consolidated Balance Sheets were as follows:
1994 1993 (In thousands) Included in prepayments and other: Fuel and gas cost adjustments $ 3,682 $ 5,716 Coal tar remediation cost - estimated current 300 263 Gas transition costs 1,171 574 ------- ------- Current costs included in prepayments and other 5,153 6,553 ------- ------- Included in other assets: Coal tar remediation cost, net of recoveries 4,993 4,305 Gas transition costs 2,781 2,780 Unamortized loss on reacquired debt 6,486 6,950 ------- ------- Future costs included in other assets 14,260 14,035 ------- ------- Total regulatory assets $19,413 $20,588 ======= =======
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. 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' credit worthiness and requests deposits or refunds deposits based on that review. At December 31, 1994, CILCO had net receivables of $30.5 million, of which approximately $5.1 million was due from its major industrial customers. See Note 5 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, Preferred Stock with Mandatory Redemption and Notes Payable approximates fair value. The Company's investment in Tucson Electric Power Company stock and warrants had a carrying amount at December 31, 1993, of approximately $266,000 and a fair market value of $1.9 million. This investment was sold during 1994. The estimated fair value of the Company's Long-Term Debt including current maturities was $340 million at December 31, 1994, and $358 million at December 31, 1993, based on current market interest rates for other companies with comparable credit ratings, capital structures, and size. ENVIRONMENTAL AND ENGINEERING SERVICES REVENUES ESE performs professional environmental and engineering consulting services under time and material, cost-plus and fixed-price contracts. Consulting services 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 as follows:
1994 1993 1992 Electric 3.8% 3.8% 3.8% Gas 4.6% 4.6% 4.6%
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 5 to 40 years. COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES Cost in excess of net assets of acquired businesses is being amortized using the straight-line method over forty years. The amortization is related to ESE and is a component of depreciation and amortization expense on the Consolidated Statements of Income. 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 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:
1994 1993 1992 (In thousands) Interest $27,663 $24,514 $27,425 Income taxes 13,103 14,760 16,207
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.
1994 1993 (In thousands) Cash surrender value of contracts $ 30,468 $26,186 Borrowings against contracts (28,831) (24,923) -------- ------- Net investment $ 1,637 $ 1,263 ======== =======
Interest expense related to borrowings against company-owned life insurance, included in "Other" on the Consolidated Statements of Income, was $2 million, $1.4 million and $.9 million for 1994, 1993 and 1992, respectively. NOTE 2 - INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), on January 1, 1993. SFAS 109 requires the use of 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. Adoption of SFAS 109 did not have a material impact on the Company's financial position, results of operations or cash flows; however, the adoption of SFAS 109 required reclassification of accumulated deferred income taxes on CILCO's Balance Sheet. CILCO established a regulatory liability to account for the net 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 net deferred income tax liability at December 31, 1994, December 31, 1993 and January 1, 1993, were as follows:
Dec. 31, 1994 Dec. 31, 1993 Jan., 1993 (In thousands) Deferred tax liabilities: Property, including allowance for funds used during construction $216,304 $216,897 $216,190 Leveraged leases 88,308 80,129 74,850 Other 13,760 14,427 10,586 Deferred tax assets: Other (11,560) (12,079) (8,585) Net regulatory liability of regulated subsidiary (59,997) (69,477) (74,321) -------- -------- -------- Deferred income taxes $246,815 $229,897 $218,720 ======== ======== ======== Of the $16,918,000 increase in the consolidated net deferred income tax liability at December 31, 1994, from December 31, 1993, $5,810,000 is due to current year deferred federal and state income tax expense. The remaining increase relates to an adjustment of deferred taxes due to the utilization of alternative minimum tax credits and a decrease in the net regulatory liability, principally due to changes in temporary differences for which deferred taxes were not previously provided.
Income tax expenses were as follows:
Years Ended December 31, 1994 1993 1992 (In thousands) Current income taxes Federal $11,825 $10,102 $22,153 State 2,238 3,352 4,077 ------- ------- ------- Total current 14,063 13,454 26,230 ------- ------- ------- Deferred income taxes, net Property-related deferred income taxes (1,094) (2,316) 249 Leveraged leases 8,179 5,257 (1,742) Unbilled revenue 222 758 -- Gas take-or-pay settlements (1,244) 1,413 (1,679) Coal tar remediation costs 253 120 (952) Other (506) 1,077 398 ------- ------- ------- Total deferred income taxes, net 5,810 6,309 (3,726) ------- ------- ------- Investment tax credit amortization (1,693) (1,694) (1,694) ------- ------- ------- Total income tax provisions $18,180 $18,069 $20,810 ======= ======= ======= Total deferred income taxes, net, includes deferred state income taxes of $1,801,000, $1,827,000 and $236,000 for 1994, 1993 and 1992, respectively.
The following table represents a reconciliation of the effective tax rate with the statutory federal income tax rate.
1994 1993 1992 Statutory federal income tax 35.0% 35.0% 34.0% ----- ----- ----- Equity component of AFUDC not subject to taxation (.4) -- (.1) Depreciation differences for which deferred taxes have not been provided 1.2 1.0 .8 Amortization of investment tax credit (3.3) (3.3) (3.2) State income taxes 5.3 7.1 5.4 Excess of book over tax basis of assets .5 .5 .5 Preferred dividends of subsidiary and other permanent differences 2.3 2.5 2.8 Dividends received deduction -- (.1) -- Tax provision adjustment (1.3) (5.3) 3.2 Civil fine .7 -- -- Other differences (4.2) (2.6) (4.4) ----- ----- ----- Total .8 (0.2) 5.0 ----- ----- ----- Effective income tax rate 35.8% 34.8% 39.0% ===== ===== =====
NOTE 3 - POSTEMPLOYMENT BENEFITS POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE On January 1, 1994, CILCO adopted Statement of Financial Accounting Standards No. 112, "Employer's Accounting for Postemployment Benefits" (SFAS 112). This standard requires accrual of benefits other than pensions or health care provided to former or inactive employees. CILCO recorded a liability of approximately $1.5 million of which $1 million represents the cumulative effect of applying SFAS 112. Of the $1.5 million, $.4 million has been capitalized. The financial effect of benefits ESE provides to former or inactive employees is not material. 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:
1994 1993 1992 (In thousands) Operating expenses $2,465 $1,841 $1,995 Utility plant and other 1,189 925 721 ------ ------ ------ Net pension costs $3,654 $2,766 $2,716 ====== ====== ======
Provisions for pension expense are determined under the rules prescribed by Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" (SFAS 87), including the use of the projected unit credit actuarial cost method. SFAS 87 requires employers to recognize an additional minimum liability on the Balance Sheets for plans in which the accumulated benefit obligation exceeds the fair value of plan assets. Information on the plans' funded status, on an aggregate basis follows:
1994 1993 (In thousands) Components of net periodic pension costs: Cost of pension benefits earned by employees $ 5,589 $ 4,401 Interest cost on projected benefit obligation 14,422 13,611 Actual return on plan assets 1,237 (22,053) Net amortization and deferral (17,594) 6,807 ------- ------- Net pension costs $ 3,654 $ 2,766 ======= ======= Actuarial present value of accumulated benefit obligation Vested benefits - employees' rights to receive benefits no longer contingent upon continued employment $146,875 $157,570 Non-vested benefits - employees' rights to receive benefits contingent upon continued employment 11,258 7,793 -------- -------- Net benefit obligation $158,133 $165,363 ======== ======== Funded status of plans: Pension assets and obligations Pension assets at fair market value $192,427 $200,337 Projected benefit obligation at present value (190,440) (209,416) Unrecognized transition asset (7,842) (8,765) Unrecognized prior service cost 11,179 11,687 Unrecognized net loss 7,199 20,110 Adjustment to recognize minimum liability (111) -- -------- -------- Net prepaid pension costs recorded on Balance Sheets $ 12,412 $ 13,953 ======== ======== The 1994 prepaid pension costs on the Balance Sheets consist of $13.3 million recorded as prepaid pension expense and $.9 million recorded in other deferred credits. Rates used for calculations: Discount rate 8.00% 7.00% Expected rate of salary increase 4.50% 5.00% Expected long-term rate of return 8.50% 8.50%
POSTEMPLOYMENT HEALTH CARE BENEFITS Provisions for postemployment benefits expenses are determined under the rules of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). 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 postemployment 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. ESE does not provide health care benefits to retired employees. Postemployment health care benefit costs were charged as follows:
1994 1993 1992 (In thousands) Operating expenses $5,253 $5,767 $6,127 Utility plant and other 1,913 2,060 2,098 ------ ------ ------ Net postemployment health care benefit costs $7,166 $7,827 $8,225 ====== ====== ======
Information on the plans' funded status, on an aggregate basis follows:
1994 1993 (In thousands) Components of net postemployment health care benefit costs: Service cost - benefits attributed to service during the period $ 1,496 $ 1,194 Actual return on plan assets 133 (1,732) Interest cost on accumulated postemployment health care benefit obligation 4,469 4,873 Amortization of transition obligation over 18.6 years 2,858 2,858 Other net amortization and deferral (1,790) 634 -------- ------- Net postemployment health care benefit costs $ 7,166 $ 7,827 ======== ======= Accumulated postemployment health care benefit obligation: Retirees $ 30,849 $ 44,340 Other fully eligible participants 10,859 12,409 Other active participants 20,046 19,823 -------- -------- Total accumulated postemployment health care benefit obligation 61,754 76,572 Less: Unrecognized actuarial (gain) loss (3,046) 13,093 Unrecognized transition obligation 41,730 44,588 Plan assets at fair value 22,929 18,748 -------- -------- Accrued postemployment health care benefit cost liability $ 141 $ 143 ======== ========
For measurement purposes, a health care cost trend rate of 9% annually was assumed for 1994; the rate was assumed to decrease to 8% for 1995, then decrease gradually to 6% by 2020 and remain at that level thereafter. Increasing the assumed health care cost trend rate by 1% in each year would increase the accumulated postemployment benefit obligation at December 31, 1994, by $2.9 million and the aggregate of the service and interest cost components of net postemployment health care cost for 1994 by $265,000. The discount rate used in determining the accumulated postemployment benefit obligation at December 31, 1994, was 8% and at December 31, 1993, was 7%. 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 Short-term debt at December 31, 1994, consisted of $6 million of Holding Company bank borrowings and $23.4 million of CILCO commercial paper. Short-term debt at December 31, 1993, included $12.4 million of commercial paper and $18.8 million of other notes payable. CILCO had arrangements for bank lines of credit totaling $30.4 million at December 31, 1994, all of which were unused. These lines of credit consisted of $7 million maintained by compensating balances and $23.4 million maintained by commitment fees ranging from 1/16 to 2/16 of 1% per annum in lieu of balances. The compensating bank balance arrangements provide that CILCO maintain bank deposits to average annually 3% to 5% of the line, such balances being available to CILCO for operating purposes and as compensation to the bank for other bank services. These bank lines of credit also support CILCO's issuance of commercial paper. At December 31, 1994, ESE had a $7.5 million bank line of credit, of which $4.5 million was used at year-end to collateralize performance bonds issued in connection with ESE projects. NOTE 5 - LEVERAGED LEASE INVESTMENTS The Company, through subsidiaries of CILCORP Investment Management Inc. (CIM), is a lessor in seven 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 $305 million at December 31, 1994 and 1993. 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 $223 million at December 31, 1994, and $229 million at December 31, 1993. Leveraged lease residual value assumptions, which are conservative in relation to independently appraised residual values, are tested on a periodic basis. CIM's net investment in leveraged leases at December 31, 1994, and 1993 is shown below:
1994 1993 (In thousands) Minimum lease payments receivable $122,757 $122,869 Estimated residual value 94,368 94,368 Less: Unearned income 96,164 102,434 -------- -------- Investment in lease financing receivables 120,961 114,803 Less: Deferred taxes arising from leveraged leases 88,308 80,129 ------- -------- Net investment in leveraged leases $ 32,653 $ 34,674 ======== ========
NOTE 6 - PREFERRED STOCK PREFERRED STOCK OF SUBSIDIARY
At December 31, 1994 1993 (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, 1994 and 1993, were 4.72% and 2.62%, 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, 1994, is $3.3 million, assuming a continuation of the auction dividend rate at December 31, 1994, 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, 1994, 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, 1994 and 1993. NOTE 7 - LONG-TERM DEBT
AT DECEMBER 31, 1994 1993 (In thousands) CILCO first mortgage bonds 5 1/8% series due 1996 $ 16,000 $ 16,000 5 1/2% series due 1997 20,000 20,000 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 10,650 6.4% series due 2000 30,000 30,000 6.82% series due 2003 25,350 25,350 7.8% series due 2023 10,000 10,000 Pollution control refunding series F, 6.5% due 2010 5,000 5,000 Pollution control refunding series G, 6.2% due 2012 1,000 1,000 Pollution control refunding series E, 6.5% due 2018 14,200 14,200 Pollution control refunding series H, 5.9% due 2023 32,000 32,000 -------- -------- 279,200 279,200 Unamortized premium and discount on long-term debt, net (841) (879) -------- -------- Total CILCO 278,359 278,321 -------- -------- CILCORP Lease Management Inc. Unsecured financial institution borrowings; interest rate of 9.55%; maturities by year are as follows: 1995 -- 18,000 1997 3,000 3,000 -------- -------- Total CLM 3,000 21,000 -------- -------- CILCORP Inc. Unsecured medium-term notes; varying in term from 2 years to 8 years; interest rates ranging from 8.25% to 9.10%. 45,000 26,000 Other 336 390 -------- -------- Total long-term debt $326,695 $325,711 ======== ========
The first mortgage bonds of CILCO 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 1996-1999 are $19 million, $23 million, $22 million and $13 million, respectively. The 1995 maturities of long-term borrowings have been classified as current liabilities. NOTE 8 - COMMITMENTS & CONTINGENCIES CILCO's capital expenditures for 1995 are estimated to be $69 million, in connection with which CILCO has normal and customary purchase commitments at December 31, 1994. CILCO's policy is to act as a self-insurer for certain insurable risks resulting from employee health and life insurance programs. ESE's capital expenditures for 1995 are estimated to be $4.1 million, in connection with which ESE has normal and customary purchase commitments at December 31, 1994. ESE's policy is to act as a self-insurer for certain insurable risks resulting from employee health programs and professional liability claims. In August 1990, CILCO entered into a firm, wholesale power purchase agreement with Central Illinois Public Service Company (CIPS). This agreement, which expires in 1998, provides for an initial purchase of 30 megawatts (MW) of capacity, increasing to 90 MW in 1997. CILCO can increase purchases to a maximum of 100 MW during the contract period, provided CIPS then has the additional capacity available. In November 1992, CILCO entered into a limited-term power agreement to purchase 100 MW of CIPS's capacity from June 1998 through May 2002. At CILCO's request, purchases may be increased to a maximum of 150 MW during the contract period, provided CIPS has the additional capacity available. Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations and Environmental Matters (regarding former gas manufacturing sites) for a discussion of that item. NOTE 9 - RATE MATTERS In December 1994, the Illinois Commerce Commission (ICC) issued a rate order designed to grant CILCO a $10.6 million, or 6.7% annual increase in gas base rate revenues. The order represents approximately 75% of CILCO's original rate increase request filed in January 1994. The new rates, designed to yield an 11.82% return on common equity and a 9.24% return on rate base, were effective the week of December 12, 1994. The ICC denied requests for rehearing which had been filed by CILCO and other parties. It is unknown at this time whether any party will appeal the ICC order to the Illinois Appellate Court. As a part of its rate order, the ICC disallowed approximately $7.5 million of CILCO's $24 million investment in the Springfield, Illinois, cast iron main renewal project. To reflect the disallowance, CILCO recorded a pre-tax charge of approximately $7.5 million ($4.5 million after-tax) against 1994 earnings. In mid-1992, after a significant number of leaks were detected in CILCO's Springfield cast iron gas distribution system, CILCO began a detailed examination of its Springfield gas distribution system and related operating practices and procedures. CILCO thereafter began an aggressive program to renew its Springfield gas cast iron main system. This project was substantially completed by September 30, 1993. The ICC staff began an informal review of CILCO's Springfield gas operations and record-keeping practices in September 1992. Subsequently, the U.S. Department of Transportation (DOT) and the U.S. Department of Justice (DOJ) began conducting investigations of CILCO which were also focused principally on CILCO's Springfield gas operations and its record-keeping practices. On September 16, 1994, CILCO entered into a federal court civil consent decree with the DOJ which concluded the DOT and DOJ investigations of CILCO. As a part of the settlement with the DOJ, CILCO accepted adjustments recommended by the ICC staff which resulted in a net disallowance from CILCO's gas rate base of approximately $4.6 million of the cost of the Springfield cast iron main renewal project. This charge is part of the $7.5 million disallowance included in the December 1994, rate order. In addition to the rate base disallowance, CILCO agreed to pay an $844,000 civil fine to the United States and agreed to reimburse the ICC, the DOT and the DOJ $156,000 for the costs of their investigations. CILCO also agreed to underwrite the reasonable expense of an outside expert, to be selected by the ICC, to examine its gas operations manuals and systems to ensure they are in compliance with all applicable statutes and regulations. CILCO estimates the cost of the audit will be $350,000. The DOJ agreed not to seek any additional civil or criminal penalties from CILCO or the Company. The ICC staff also agreed not to seek any additional enforcement penalties from CILCO or the Company. CILCO agreed to continue to cooperate with the DOJ in its investigation and prosecution of any individuals who may be responsible for willful violations of any applicable statute or regulation. Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations and Environmental Matters for a discussion of other gas and electric rate matters. NOTE 10 - 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-cancelable capital and operating leases having remaining terms in excess of one year as of December 31, 1994, are $25.7 million in total. Payments due during the years ending December 31, 1995, through December 31, 1999, are $8.5 million, $5.9 million, $4.4 million, $3.6 million and $3.3 million, respectively. 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 CILCORP Inc.'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.
For the Three Months Ended March 31, June 30, September 30, December 31, (In thousands except per share amounts) 1994 Revenue $177,436 $137,146 $145,854 $144,703 Income before income taxes 15,577 11,469 15,158 8,562 Net income 9,701 6,940 9,570 6,375 Earnings per average common share $.75 $.53 $.73 $.49 1993 Revenue $164,923 $125,695 $141,740 $152,153 Income before income taxes 15,401 6,965 21,270 8,276 Net income 9,334 4,008 12,645 7,596 Earnings per average common share $.72 $.31 $.98 $.59
EX-27 10
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-31-1994 JAN-01-1994 DEC-31-1994 PER-BOOK 868,541 149,540 159,239 0 61,064 1,238,384 167,987 0 176,728 344,715 22,000 44,120 326,695 23,400 0 0 21,200 0 2,665 288 453,301 1,238,384 605,139 18,180 (374) 525,426 79,713 0 61,907 26,341 35,566 2,980 32,586 32,063 19,221 110,356 2.50 2.50
EX-27 11
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000018651 CENTRAL ILLINOIS LIGHT COMPANY 1,000 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 PER-BOOK 868,541 2,678 111,812 36,078 0 1,019,109 185,661 0 122,125 307,786 22,000 44,120 278,359 0 0 23,400 0 0 2,665 288 340,491 1,019,109 461,370 17,167 381,374 402,863 58,507 (10,051) 52,248 19,761 32,487 2,980 29,507 16,027 19,221 107,056 0 0
EX-13 12 [DESCRIPTION] Graph Data attached to EXHIBIT 13 Information related to the nine graphs included in the CILCORP Inc. 1994 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 left hand column on page 18 of Management's Discussion and Analysis. 1990 2.4 1991 2.8 1992 2.4 1993 2.4 1994 2.6 A bar graph titled "Utility Plant Expenditures (Scale: $ Millions)" depicting the following information appears in the right hand column on page 19 of Management's Discussion and Analysis. 1990 50 1991 56 1992 62 1993 73 1994 91 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 one on the other. 1994 1993 1992 1991 1990 BAR 1 RESIDENTIAL 1,672 1,664 1,508 1,680 1,525 BAR 2 COMMERCIAL 1,452 1,379 1,311 1,300 1,217 CUMMULATIVE 3,124 3,043 2,819 2,980 2,742 BAR 3 INDUSTRIAL 2,303 2,238 2,119 2,202 2,237 CUMMULATIVE 5,427 5,281 4,938 5,182 4,979 BAR 4 OTHER 408 251 474 446 317 CUMMULATIVE 5,835 5,532 5,412 5,628 5,296 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 1,073 days. 1990 1,013.5 1991 1,344.0 1992 811.5 1993 1,056.0 1994 1,104.0 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 four sections which build one on the other. 1994 1993 1992 1991 1990 BAR 1 RESIDENTIAL 18,929 20,263 18,427 18,993 18,016 BAR 2 COMMERCIAL 6,684 6,746 6,203 6,368 5,823 CUMMULATIVE 25,613 27,009 24,630 25,361 23,839 BAR 3 INDUSTRIAL 1,186 756 960 736 928 CUMMULATIVE 26,799 27,765 25,590 26,097 24,767 BAR 4 OTHER 2 2 2 3 2 CUMMULATIVE 26,801 27,767 25,592 26,100 24,769 A bar graph titled "Heating Degree Days Per Year Compared to Normal" depicting the following information appears in the left hand column on page 24 of Management's Discussion and Analysis. A horizontal bar depicting normal heating degree days is shown at approximately 5,450 days. 1990 5,193.5 1991 5,410.5 1992 5,320.0 1993 5,882.0 1994 5,443.5 Three pie charts titled "Consolidated Assets by Segment" as percentages of the whole by year are printed on page 30 below the Asset portion of the Balance Sheet. 1994 1994 1993 1993 1992 1992 Electric 741,578 59.9% 714,669 59.6% 713,515 60.2% Gas 275,428 22.3% 272,800 22.8% 245,610 20.7% Environmental and Engineering Ser 93,464 7.5% 87,437 7.3% 96,278 8.1% Other 127,914 10.3% 123,534 10.3% 129,513 11.0% Total 1,238,384 100.0% 1,198,440 100.0% 1,184,916 100.0% Three pie charts titled "Consolidated Capitalization Including Short-Term Debt" as percentages of the whole by year are printed on page 31 below the Liability portion of the Balance Sheet. 1994 1994 1993 1993 1992 1992 S-T Debt 50,600 6% 31,393 4% 46,753 6% L-T Debt 326,695 42% 325,711 43% 307,628 41% Preferred Stock 66,120 8% 66,120 8% 64,620 8% Common Stock 344,713 44% 341,876 45% 340,434 45% Total 788,128 100% 765,100 100% 759,435 100% Three pie charts titled "Consolidated Revenue by Component" as percentages of the whole by year is printed on page 33 below the Statements of Segments of Business. 1994 1994 1993 1993 1992 1992 Electric 313,085 52% 303,124 52% 288,813 50% Gas 148,285 24% 150,754 26% 144,926 25% Environmental and Engineering Ser 132,799 22% 123,162 21% 137,858 24% Other 10,970 2% 7,471 1% 9,628 1% Total 605,139 100% 584,511 100% 581,225 100%