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 QST Enterprises Inc. (QST). Formerly a CILCORP first-tier subsidiary, Environmental Science & Engineering, Inc. (ESE) became a subsidiary of QST effective October 29, 1996. The Company also has two other first-tier subsidiaries, CILCORP Investment Management Inc. (CIM) and CILCORP Ventures Inc. (CVI), whose operations, combined with those of the holding company itself (Holding Company), are collectively referred to herein as Other Businesses. CILCORP owns 100% of the common stock of CILCO. All of the other subsidiaries are wholly-owned by CILCORP.
CILCO is engaged in the generation, transmission, distribution and sale of electric energy in an area of approximately 3,700 square miles in central and east-central Illinois, and the purchase, distribution, transportation and sale of natural gas in an area of approximately 4,500 square miles in central and east-central Illinois.
CILCO has two wholly-owned subsidiaries, CILCO Exploration and Development Company (CEDCO) and CILCO Energy Corporation (CECO). CEDCO was formed to engage in the exploration and development of gas, oil, coal and other mineral resources. CECO was formed to research and develop new sources of energy, including the conversion of coal and other minerals into gas. The operations of these subsidiaries are not currently significant.
QST, formed in December 1995, provides energy and energy- related services to a broad spectrum of retail and wholesale customers through its subsidiary, QST Energy Inc. (QST Energy). QST Energy has one wholly-owned subsidiary - QST Energy Trading Inc. (QST Trading), which purchases and sells energy on the wholesale market. QST also provides fiber optic and advanced Internet-based communication services and products through another wholly-owned subsidiary, QST Communications Inc. (QST Com) (formerly CILCORP FiberCom Inc., a subsidiary of CVI). Effective October 29, 1996, ESE also became a wholly-owned subsidiary of QST.
ESE 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, through certain subsidiaries, also acquires or invests in environmentally impaired property for remediation and resale. ESE has six wholly-owned active subsidiaries: Keck Instruments, which manufactures geophysical instruments used in environmental applications; ESE Architectural Services, Inc., which provides architectural services; National Professional Casualty Co., which provides professional and pollution liability insurance to ESE; ESE International Ltd., which provides engineering and consulting services in foreign countries; Environmental Staffing Solutions, Inc. which provides temporary staffing services, and ESE Land Corporation organized to purchase or invest in environmentally impaired parcels of real estate for remediation and resale. ESE Land Corporation has two wholly- owned subsidiaries: ESE Placentia Development Corporation and Savannah Resources Corp. ESE Land Corporation is a member of North Shore at Mandalay Bay L.L.C., Palm City Developers L.L.C., and ELC Makenai L.L.C., which were organized to purchase an environmentally impaired parcel of real estate for resale. ESE is also a member of the DSE Environmental L.L.C., organized to perform environmental and remediation services. In addition, ESE owns a minority interest in ESE Ohio, Inc., which provides professional engineering services in the State of Ohio.
CIM manages the Company's investment portfolio. CIM holds 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). CIM also directly owns limited partnership interests in affordable housing portfolios.
CVI invests in ventures in energy, biotechnology, and health care, and in economic development projects in Central Illinois. CVI has an 80% interest in the Agricultural Research and Development Corporation and has one wholly- owned subsidiary, CILCORP Energy Services, Inc. (CESI). CESI was formed to pursue energy-related opportunities in the non-regulated market. CESI's primary businesses are the sale of carbon monoxide detectors to utilities for resale to their customers, the sale of outdoor lighting to commercial businesses, and the sale of non-regulated energy services. During 1996 CESI provided services to Caterpillar Inc. under the alliance between CILCORP and Caterpillar Inc. (refer to the caption "Competition" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 19 of CILCORP's 1996 Annual Report to Shareholders which is incorporated herein by reference).
The following table summarizes the relative contribution of each business group to consolidated assets, revenue and net income for the year ended December 31, 1996.
CILCORP is an intrastate exempt holding company under the Public Utility Holding Company Act of 1935 (PUHCA). Legislation dealing with the restructuring of the electric utility industry, including repeal of PUHCA, has been introduced in both Houses of Congress. The Company cannot predict whether or when any of these proposals might be enacted, or the ultimate effect on the Company.
BUSINESS OF CILCO
CILCO was incorporated under the laws of Illinois in 1913. CILCO's principal business is the generation, transmission, distribution and sale of electric energy in an area of approximately 3,700 square miles in central and east-central Illinois, and the purchase, distribution, transportation and sale of natural gas in an area of approximately 4,500 square miles in central and east-central Illinois.
CILCO is continuing to experience, in varying degrees, the impact of developments common to the electric and gas utility industries. These include increased competition in wholesale markets and the prospect of competition in retail markets, changes in regulation and legislation affecting utilities, uncertainties as to the future demand for electricity and natural gas, structural and competitive changes in the markets for these commodities, the high cost of compliance with environmental and safety laws and regulations and uncertainties in regulatory and political processes. At the same time, CILCO has sought to provide reliable service at reasonable rates for its customers and a fair return for its investors. Refer to the caption "Competition" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 19 of CILCORP's 1996 Annual Report to Shareholders which is incorporated herein by reference.
ELECTRIC SERVICE
CILCO furnishes electric service to retail customers in 138 Illinois communities (including Peoria, East Peoria, Pekin, Lincoln and Morton). At December 31, 1996, CILCO had approximately 192,000 retail electric customers.
In 1996, 62% of CILCO's total operating revenue was derived from the sale of electricity. Approximately 38% of electric revenue resulted from residential sales, 31% from commercial sales, 24% from industrial sales, 5% from sales for resale and 2% from other sales. Electric sales, particularly residential and commercial sales during the summer months, fluctuate based on weather conditions.
The electric operating revenues of CILCO were derived from the following sources:
CILCO owns and operates two coal-fired base load generating plants, a natural gas-fired cogeneration plant, and two natural gas combustion turbine-generators which are used for peaking service. The 1996 system peak demand was 1,148 MW on August 6, 1996. The all-time system peak demand of 1,188 MW was set on August 17, 1995.
The system peak demand for 1997 is estimated to be 1,198 MW with a reserve margin of approximately 16.5%. The system peak demand estimate does not account for any load loss due to CILCO's retail competition pilot programs (see Competition). The reserve margin takes into account 90 MW of firm purchased power and 87 MW of interruptible industrial load and other related Demand Side Management (DSM) programs. CILCO's planned reserve margin complies with planning reserve margin requirements established by the Mid- America Interconnected Network (MAIN), of which CILCO is a member.
Studies conducted by CILCO indicate that it has sufficient base load generating capacity and purchased capacity to provide an adequate and reliable supply of electricity to satisfy base load demand through the end of the century. To help meet anticipated increases in peak demand and maintain adequate reserve margins, CILCO has entered into three wholesale bulk power agreements to purchase capacity from CIPS since 1990. Each agreement was approved by the Illinois Commerce Commission (ICC) as part of CILCO's electric least cost energy plan filings. (see CILCO's Note 8, Item 8. Financial Statements and Supplementary Data for further discussion of the purchase agreements with CIPS).
CILCO is interconnected with CIPS, Commonwealth Edison Company, Illinois Power Company and the Springfield City Water, Light and Power Department to provide for the interchange of electric energy on an emergency and mutual help basis.
GAS SERVICE
CILCO provides gas service to customers in 129 Illinois communities (including Peoria, East Peoria, Pekin, Lincoln and Springfield). At December 31, 1996, CILCO had approximately 199,000 gas customers, including 974 industrial, commercial and residential gas transportation customers that purchase gas directly from suppliers for transportation through CILCO's system. For further discussion of gas transportation, refer to the captions "Competition" and "CILCO Gas Operations" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on pages 19 and 24 of CILCORP's 1996 Annual Report to Shareholders, incorporated herein by reference.
In 1996, 38% of CILCO's total operating revenue was derived from the sale or transportation of natural gas. Approximately 64% of gas revenue resulted from residential sales, 23% from commercial sales, 3% from industrial sales, 4% from transportation and 6% 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:
CILCO's all-time maximum daily send-out of 443,167 MCF occurred on January 15, 1972. The 1996 peak day send-out of 397,519 MCF occurred on February 2, 1996. CILCO has been able to meet all of its existing customer requirements during the 1996-1997 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 1997-1998 heating season.
REGULATION
CILCO is a public utility under the laws of the State of Illinois and is subject to the jurisdiction of the ICC. The ICC has general power of supervision and regulation with respect to services and facilities, rates and charges, classification of accounts, valuations of property, determination of depreciation rates, construction, contracts with any affiliated interest, the issuance of stock and evidences of indebtedness and various other matters. With respect to certain electric matters, CILCO is subject to regulation by the FERC. CILCO is exempt from the provisions of the Natural Gas Act, but is affected by orders, rules and regulations issued by the FERC with respect to certain gas matters. Refer to the caption "Competition" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 19 of CILCORP's 1996 Annual Report to Shareholders which is incorporated herein by reference.
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 electric LCP on June 30, 1995, and it was approved on May 8, 1996. 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 recently filed LCP contains several existing DSM programs including interruptible and standby generation rates, residential heat pumps, commercial audits and the "In Concert With The Environment" program. The new plan also includes four new DSM programs to help meet system load growth anticipated over the planning period. These include new interruptible contracts, new standby generation contracts, air conditioning cycling and targeted thermal storage cooling programs. Three new informational programs are also proposed, including new construction efficiency, motor efficiency and commercial lighting efficiency programs. Based on a preliminary assessment, electric DSM programs are projected to reduce CILCO's peak demand by 137 MW over the twenty-year planning horizon. In 1996, the total cost of the programs, excluding interruptible rates, was approximately $306,000.
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 2.8 million tons of coal were burned during 1996. Existing coal contracts with suppliers in central Illinois are expected to supply about 70% of the 1997 requirements. Coal will be purchased on the spot market during the year to meet remaining annual fuel requirements.
During the years 1996, 1995 and 1994, the average cost per ton of coal burned, including transportation, was $31.82, $37.21 and $39.22, respectively. The cost of coal burned per million BTU's was $1.49, $1.66 and $1.71, respectively (see Electric Fuel and Purchased Gas Adjustment Clauses).
During 1995, Illinois mid-sulfur coal was successfully test burned at E. D. Edwards Station. A two-year contract signed with the supplier at the end of 1995 will reduce Edwards Station's dependency on east Kentucky low-sulfur coal and contribute to lower station fuel cost.
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. CILCO and Freeman conducted discussions in 1996 concerning coal cost reduction strategies in 1997. Several initiatives identified in those discussions will be pursued. For a discussion of the agreement reached with Freeman regarding the accounting for postretirement benefits costs, refer to the caption "CILCO Electric Operations" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 22 of CILCORP's 1996 Annual Report to Shareholders which is incorporated herein by reference.
NATURAL GAS SUPPLY
During 1996, 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 40 gas suppliers. Reliability was enhanced through natural gas injections and withdrawals at CILCO's two natural gas storage fields and contracted storage facilities. The supply and pipeline capacity portfolio continues to provide reliable supplies at prevailing market prices. CILCO believes that its present and planned supply of gas will continue to be sufficient to serve all of its present and projected firm customer requirements at prevailing market prices.
During 1996, CILCO purchased and delivered approximately 39,500,000 MCF of natural gas at a cost of approximately $121.3 million, or an average cost of $3.07 per MCF. The average cost per MCF of natural gas purchased and delivered was $2.14 in 1995 and $2.71 in 1994 (see Electric Fuel and Purchased Gas Adjustment Clauses).
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 22 of CILCORP's 1996 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 1997 are estimated to be $53.2 million, including pollution control expenditures of $5.8 million. Expenditures include $24.8 million for the electric business, $12.6 million for the gas business and $15.8 million for general and miscellaneous purposes. Electric expenditures include $7.0 million for additions and modifications to generating facilities and $17.8 million for transmission and distribution system additions and improvements. Gas expenditures are primarily for necessary additions, replacements and improvements to existing facilities. Anticipated gas and electric capital expenditures for 1998- 2001 are $217.2 million.
CILCO expects to finance its 1997 capital expenditures with funds provided by operating activities. CILCO retired $16 million of first mortgage bonds due in February 1996. CILCO had $9.9 million of short-term commercial paper outstanding at December 31, 1996, and expects to issue short-term commercial paper throughout 1997. At December 31, 1996, CILCO had bank lines of credit aggregating $20 million, all of which were unused, except in support of commercial paper issuance. CILCO expects the support of commercial paper issuance to be the only use of these bank lines during 1997. Refer to the caption "Capital Resources and Liquidity - CILCO" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 18 of CILCORP's 1996 Annual Report to Shareholders which is incorporated herein by reference.
ENVIRONMENTAL MATTERS
Refer to the caption "Environmental Matters" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 21 of CILCORP's 1996 Annual Report to Shareholders which is incorporated herein by reference.
CILCO, through agreements with the U. S. Department of Energy, has developed and implemented voluntary programs pursuant to the Climate Change Action Plan goal of limiting greenhouse gas emissions (primarily carbon dioxide) to 1990 levels by the year 2000. Commitments made by CILCO will build upon current and planned energy and environmental initiatives contained within its Business Plan and will not materially impact CILCO's financial results. Failure of voluntary programs undertaken by the utility industry could result in the imposition of mandatory greenhouse gas reduction programs which could have material impacts on the Company. Past legislative proposals have called for as much as a $30 per ton tax on carbon dioxide, which could cost CILCO approximately $166 million per year if enacted.
Many urban areas around the country face the major challenge of achieving compliance with ozone air quality standards. Ozone is formed when volatile organic compound (VOC) emissions and/or nitrogen oxide (NOx) emissions photochemically react in the atmosphere. Strategies for reduction of ozone levels have targeted mobile, area and stationary sources (including power plants) of VOCs and NOx.
Under Title I of the Clean Air Act, states are required to develop and implement State Implementation Plans (SIP) for ozone compliance by 2007. Where boundary area emissions are contributing to the non-attainment areas, additional VOC/NOx controls in attainment areas are being considered. This matter is further complicated by the transport of emissions across state boundaries and regions. CILCO may be targeted for additional NOx emission reductions of up to 75% at its power plants pursuant to regional ozone compliance programs, despite the fact that CILCO's plants are in attainment areas.
CILCO is participating in ozone compliance strategy activities at the national, regional, and state levels. CILCO's position calls for (1) equitable consideration among all VOC/NOx sources, (2) credit for past and planned emission reductions and (3) cost-benefit/risk-benefit support for control regulation.
Should additional NOx emission controls be mandated for CILCO's power plants, new and costly control technology retrofits would be required. The exact costs for such compliance cannot be determined at this time, and multiple technologies might be necessary to meet extremely stringent NOx levels.
CILCO is currently in the process of investigating potential beneficial re-use for ash (a coal combustion by-product) generated at both generating stations. Recent legislation in Illinois promotes the beneficial re-use of coal combustion by-products. Providing alternate uses for the ash will allow CILCO to avoid potential costs associated with the construction of additional facilities to store this by-product.
SIGNIFICANT CUSTOMER
Caterpillar Inc. is CILCO's largest industrial customer. Aggregate gas and electric revenues from sales to Caterpillar were 7.5%, 8.6%, and 9.4% of CILCO's total operating revenue for 1996, 1995 and 1994, respectively. See CILCO's Consolidated Statements of Segments of Business under Item 8. Financial Statements and Supplementary Data.
FRANCHISES
CILCO negotiates franchise agreements which authorize it to provide utility services to the communities in its service area. The franchises are for various terms, usually 25 to 50 years. Based on past experience, CILCO anticipates that as franchises expire new franchises will be granted in the normal course of business.
COMPETITION
CILCO, as a regulated public utility, has an obligation to provide service to retail customers within its defined service territory; thus, CILCO is not generally in competition with other public utilities for retail electric or gas customers in these areas. However, electricity and natural gas compete with other forms of energy available to customers. For example, within the City of Springfield, CILCO's natural gas business competes with the City's municipal electric system to provide customer energy needs.
In 1996, to lead the movement toward increased customer choice, CILCO began Power Quest, which consists of two electric pilot retail competition programs and a natural gas pilot retail competition program. The programs offer greater choice to customers and provide the opportunity for CILCO and certain of its electric and natural gas customers to participate in a competitive business environment. Management believes that increased consumer choice throughout Illinois and the nation will expand CILCO's business opportunities.
During 1996, CILCO transported gas purchased by residential, commercial and industrial customers directly from producers and marketers. In 1996, approximately $8.4 million of revenue was generated from transportation services provided to 974 customers, which includes $87,000 of transportation revenue from 795 residential transportation customers as a result of the Power Quest gas residential pilot program. 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 available for purchase directly from producers compared to the cost of gas provided by CILCO, the cost of alternate fuels, and the feasibility of customers bypassing the CILCO system. Legislation passed in Illinois exempts qualifying gas transportation customers, beginning January 1, 1996, from paying gross receipts taxes on their purchases of natural gas supply and interstate transportation services from the local gas distribution company. This legislation allows CILCO to more effectively compete with out-of-state gas marketing companies.
Refer to the captions "Competition", "CILCO Electric Operations", and "CILCO Gas Operations" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on pages 19, 22 and 24 of CILCORP's 1996 Annual Report to Shareholders, incorporated herein by reference, for additional discussion of Power Quest, CILCO's introduction of a Consumer Freedom to Choose Electricity Law to be considered by the Illinois General Assembly in 1997, and a discussion of other competitive trends which may affect CILCO's electric and gas operations.
EMPLOYEES
The number of full-time and part-time employees at December 31, 1996, was 1,321, excluding employees assigned to the Holding Company, QST and Other Businesses. These numbers include 76 employees who retired January 1, 1997 (see CILCO's Early Retirement Programs). Of these, 208 power plant employees were represented by Local 8 of the International Brotherhood of Firemen and Oilers (IBF&O), and 460 gas and electric department employees were represented by Local 51 of the International Brotherhood of Electrical Workers (IBEW).
CILCO'S UNION CONTRACTS
A two-year IBEW contract and a three-year IBF&O contract were both ratified effective July 1, 1995. Both the IBEW and the IBF&O contracts provide for annual 3% salary increases during the contracts.
CILCO'S EARLY RETIREMENT PROGRAMS
As part of a continuing effort to better position itself for competition in the energy services industry, in November 1996, CILCO offered Voluntary Early Retirement Programs to eligible management and office and technical employees and employees represented by the IBEW. A total of 76 of the 210 eligible employees retired, effective January 1, 1997. The 1996 programs resulted in an after-tax charge to earnings of approximately $5.4 million. As a result of the 1996 programs, management expects to realize annual after-tax cost savings of approximately $2.6 million beginning in 1997.
In 1995, CILCO offered similar Voluntary Early Retirement Programs to selected employees. A total of 166 of the 257 eligible employees accepted the offer, resulting in an after- tax charge of approximately $7.8 million in 1995. As a result of the 1995 programs, CILCO realized approximately $3.4 million in annual after-tax cost savings in 1996.
BUSINESS OF QST (EXCLUDING ESE)
QST Enterprises Inc. was formed in December 1995 to facilitate CILCORP's expansion into non-regulated energy and related services businesses. QST provides total energy services -- buying, managing, and controlling energy -- for customers who are able to choose their energy supplier. QST provides a portfolio of non-regulated, energy-related products and services. QST also provides fiber optic and advanced Internet-based communication services and products in Central Illinois.
The initial focus of QST has been to compete against energy suppliers who participate in CILCO's Power Quest pilot programs (refer to the caption "Competition" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 19 of CILCORP's 1996 Annual Report to Shareholders which is incorporated herein by reference). Power Quest provides a means for certain customers to buy energy from suppliers other than CILCO. QST will also compete against marketers to provide energy and services to customers of utilities and other energy providers which will offer, or be required to offer, similar retail competition programs, and to sell energy to customers who may already have the ability to choose their energy supplier. QST, through its subsidiary QST Energy Trading Inc., also purchases and sells energy on a wholesale basis. Its customers include marketers, utilities, and independent power producers. QST is also engaged in the development of on-site electric generating facilities.
ENERGY SUPPLY
QST Energy Inc. and its wholly-owned subsidiary, QST Energy Trading Inc., have entered into contracts and enabling agreements with public utilities, independent electricity or natural gas producers and transporters, and other marketers to purchase electricity and natural gas to serve QST's customers. Contracts typically may be re-negotiated on an annual basis. Electricity is purchased on either a term basis (which does not exceed one year) or a spot basis. The majority of QST's gas supply is currently purchased on a 30- day spot basis. QST has encountered no difficulties in obtaining energy supplies to serve its customers.
COMPETITION
QST currently competes with utilities and marketers to provide electricity to retail customers who may choose their energy supplier, primarily as a result of retail competition pilot programs offered by regulated utilities. QST also competes with other marketers and suppliers to sell natural gas to wholesale and retail customers as those markets become deregulated. Currently, the market for natural gas sales is highly competitive, particularly on the wholesale level and in some areas of the country (including Illinois) for large usage customers on the retail level. Competition in QST's electric energy business is currently a function of the design of retail competition pilot programs offered by utilities. Competition within both the electric and gas segments of QST's business is expected to increase with the deregulation of the U.S. energy industry (refer to the caption "Competition" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 19 of CILCORP's Annual Report to Shareholders, incorporated herein by reference).
EMPLOYEES
At December 31, 1996, there were 38 full-time employees assigned to QST.
BUSINESS OF ESE
ESE is an environmental consulting and engineering firm with additional capabilities in laboratory analysis and equipment manufacturing. ESE, through its subsidiaries, also acquires or invests in environmentally impaired property for remediation and resale. ESE's services are intended to address the concern over the quality of the environment, the numerous complex federal, state and local environmental regulations and enforcement efforts in support of environmental laws. As such, 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, structural and transportation 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 two major laboratories located in Gainesville, Florida and Peoria, Illinois.
Through its wholly-owned subsidiary, ESE Land Corporation, ESE acquires or invests in land that is environmentally impaired, and remediates and then sells this property. ESE is currently evaluating the market for the sale of ESE Land Corporation, its subsidiaries and partnership interests.
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.
Asbestos Management/Industrial Hygiene/Lead-Based Paint Services: ESE provides on-site consultation and facility surveys to identify potential asbestos, industrial hygiene, and lead-based paint problems.
Engineering Design: 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.
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.
Hydrogeology: ESE performs subsurface investigations and evaluations for both geological and engineering studies.
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.
Storage Tank Management Service: ESE provides services for managing environmental issues related to underground and above-ground storage tanks.
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.
Transportation Engineering: ESE has sited, designed and provided construction oversight for numerous transportation systems, including highways and bridges, for state transportation agencies and local governments.
CUSTOMERS
ESE sells its products and services to governmental agencies and public and private companies. Approximately 43% of ESE's revenue for 1996 was generated by services performed for federal, state and local governmental agencies compared to 46% for 1995. No single customer accounted for more than 5% of ESE's gross revenues for the years ended December 31, 1996 and 1995.
In 1996, approximately 80% of ESE's revenue was generated from environmental consulting and engineering services, 15% from laboratory services, 4% from land remediation and resale 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.
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 1997 or 1998.
Comprehensive Environmental Response, Compensation and Liability Act of 1980 (Superfund or CERCLA): CERCLA is the most significant federal statute addressing practices involving hazardous substances and imposing liability for cleaning up contamination in soil and groundwater. This legislation has four basic provisions: (i) creation of an information gathering and analysis program which enables federal and state governments to identify abandoned waste sites and to set priorities for investigation and response; (ii) granting of federal authority to respond to hazardous waste emergencies and to clean up hazardous waste sites; (iii) imposition of liability on persons responsible for disposal of hazardous substances that may be released into the environment; and (iv) creation of a federally managed trust fund to pay for the cleanup of waste sites where a "potentially responsible party" cannot be identified or where a threat to the environment requires immediate response. The EPA and State regulatory authorities are encouraging "voluntary" clean-up of contaminated sites independent of CERCLA through state administered programs. In October 1986, the Superfund Amendments and Reauthorization Act (SARA) was passed as a five-year extension of the Superfund program. Title III of SARA, also known as the Emergency Planning and Community Right-to-Know Act of 1986, established a reporting and notification system for companies dealing with hazardous chemicals. The Superfund program was reauthorized in 1990 and was extended without change until September 30, 1994. CERCLA's reauthorization is anticipated in 1997 or 1998.
Federal Insecticide, Fungicide and Rodenticide Act (FIFRA): FIFRA regulates the use and manufacture of pesticides and related chemicals.
National Environmental Policy Act of 1970 (NEPA): NEPA requires an analysis of the environmental impact of any major federal action, including the issuance of federal environmental permits for industrial facilities which may significantly affect the quality of the environment.
National Pollutant Discharge Elimination System (NPDES) Stormwater Permitting Regulations of 1990: The intent of these regulations, passed in November 1990, is to control pollution from stormwater discharges associated with industrial activity and municipal storm sewer systems.
Occupational Safety and Health Act of 1970 (OSHA): Health and safety at the workplace are regulated under OSHA. OSHA provides for permissible exposure levels for certain hazardous substances, including asbestos, and also establishes an enforcement mechanism for these and other health and safety standards.
Resource Conservation and Recovery Act of 1976 (RCRA): While Superfund seeks to remedy the damage caused by inactive or abandoned waste sites, RCRA imposes comprehensive regulation of the management of hazardous waste at active facilities. RCRA and the regulations thereunder establish a comprehensive "cradle to grave" regulatory program applicable to hazardous waste and impose requirements for performance testing and recordkeeping for any person generating, transporting, treating, storing, or disposing of more than the specified minimum levels of hazardous waste. In November 1984, RCRA was amended by the Hazardous and Solid Waste Amendments, which extend RCRA to most industrial and commercial activities in the nation. In addition, RCRA requires that underground storage tanks be identified and inspected, and those found to be leaking must be cleaned up. RCRA's reauthorization by Congress has been postponed through 1997. Legislative actions continue to evolve through regulatory changes such as risk-based corrective actions.
Safe Drinking Water Act, as amended in 1986 and 1996 (SDWA): The SDWA affects numerous public water supplies. Under this Act, the EPA established and amended primary drinking water standards applicable to public water supplies.
Toxic Substances Control Act of 1976 (TSCA): TSCA authorizes the EPA to gather information relating to the risks posed by chemicals and to regulate the use and disposal of asbestos and polychlorinated biphenyls.
State and Local Regulations: In addition to federal statutes and regulations, numerous state and local statutes and regulations relating to environmental risks impose additional environmental standards on ESE's customers.
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 and also effect the market and business operations of ESE Land Corporation. 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 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.
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 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. The current policy, effective April 1, 1996, has a limit of $8 million per claim ($10 million in aggregate for the three year policy term), with the first $3 million of coverage provided by 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 bank letter of credit and cash. Captive does not transfer risk and is not reinsured; CILCORP does not provide credit support to Captive. The policies cover activities in which 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 and pollution liability insurance policies include standard industry exclusions for: dishonesty, discrimination, warranties and guarantees, punitive damages, intentional non-compliance with government regulations or statutes, nuclear energy, war and bodily injury from the specification, installation, transportation, storage or disposal of asbestos.
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, as described above, purchases insurance to protect against loss and maintain competitiveness in the marketplace; however, its entire potential liability may not be covered by insurance. Also, the total cost of a potential claim could exceed ESE's policy limits.
EMPLOYEES
At December 31, 1996, ESE employed 734 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
The investment portfolio of CIM at December 31, 1996, and December 31, 1995, is shown in the following table:
At December 31, 1996, CIM held equity investments in seven leveraged leases through its wholly-owned subsidiaries, CILCORP Lease Management Inc. (CLM), CIM Air Leasing Inc. and CIM Leasing Inc. According to the terms of some of the lease agreements, under certain circumstances, subsidiaries of CIM may be obligated to incur additional non-recourse debt to finance the cost of certain alterations, additions, or improvements required by the lessee.
CIM, through its wholly-owned subsidiary CIM Energy Investments Inc., has a net investment of $129,000 in the Energy Investors Fund, L.P.(Fund), representing a 3.1% interest in the Fund at December 31, 1996. CIM's 1996 operating results include a $1.3 million pre-tax loss resulting from the write-down of this investment. The Fund invests in non-regulated, non-utility facilities for the production of electricity or thermal energy. The equity method of accounting is used for this investment.
CIM is a limited partner in seven affordable housing portfolios. The ownership interests in these partnerships range from 3% to 10% at December 31, 1996. The equity method of accounting is used for these investments.
CVI
CVI's net investment in CESI, its wholly-owned subsidiary, is approximately $330,000. CESI's primary business is the sale of carbon monoxide detectors to utilities for resale to their customers and the sale of outdoor lighting services to commercial businesses. In addition, during 1996 costs related to providing additional value-added services to Caterpillar in connection with CILCO's Power Quest programs were reflected in CESI's operating results (refer to the caption "Competition" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 19 of CILCORP's 1996 Annual Report to Shareholders which is incorporated herein by reference).
EMPLOYEES
At December 31, 1996, there were 28 full-time employees assigned to CILCORP, CVI and CIM.
Item 2.
Item 2. Properties
CILCO
CILCO owns and operates two steam-electric generating plants, a cogeneration plant and two combustion turbine- generators. These facilities had an available summer capability of 1,152 MW in 1996. The two combustion turbine generators have a summer rating of 30 MW (15 MW each) and are used during peak periods. They typically operate less than 100 hours per year. The cogeneration plant, which became operational during 1995, produces steam for MWG and also generates electricity for distribution to CILCO's customers. This turbine-generator has an available summer capability of 16 MW.
The major generating facilities of CILCO (representing 96.0% of CILCO's available summer generating capability projected for 1997), all of which are fueled with coal, are as follows:
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 6,214 miles of overhead pole and tower lines and 2,008 miles of underground distribution cables. The distribution system also includes 105 substations with an installed capacity of 2,007,860 kilovolt-amperes.
The gas system includes approximately 3,540 miles of transmission and distribution mains.
CILCO has an underground gas storage facility located about ten miles southwest of Peoria near Glasford, Illinois. The facility has a present recoverable capacity of approximately 4.5 BCF. An additional storage facility near Lincoln, Illinois, has a present recoverable capacity of approximately 5.2 BCF.
ESE
ESE owns approximately 53 acres of land in Gainesville, Florida, containing 118,000 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 30 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, other than the purchases of land for remediation and resale through its subsidiaries. Refer to the caption "Capital Resources and Liquidity - ESE" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation on page 18 of CILCORP's 1996 Annual Report to shareholders which is incorporated herein by reference.
Item 3.
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 1996 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.
In July 1996, a United States District Court judge entered an order summarily dismissing a lawsuit filed against CILCO seeking damages related to alleged coal tar contamination from a gas manufacturing plant which was owned but never operated by CILCO. This decision which was on the grounds that the applicable statute of limitations had expired has been appealed. 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 21 of CILCORP's 1996 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.
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.
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 1996.
CILCO
There were no matters submitted to a vote of security holders during the fourth quarter of 1996.
PART II
Item 5.
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, 1996, there were 12,770 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.
CILCO
CILCO's common stock is not traded on any market. As of March 11, 1997, 13,563,871 shares of CILCO's Common Stock, no par value, were issued, and outstanding and privately held, beneficially and of record, by CILCORP Inc.
CILCO's requirement for retained earnings before common stock dividends may be paid is described in Note 5 of CILCO's Notes to the Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data.
Item 6.
Item 6. Selected Financial Data
Item 7.
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 16 through 27 of CILCORP's 1996 Annual Report to Shareholders is incorporated herein by reference.
Item 8.
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 1996 Annual Report to Shareholders are incorporated herein by reference.
Index to Financial Statements: CILCORP
Page
Report of Independent Public Accountants on Schedules 35
CILCO Management's Report 36 Report of Independent Public Accountants 37 Consolidated Statements of Income 38 Consolidated Balance Sheets 39-40 Consolidated Statements of Cash Flows 41-42 Statements of Segments of Business 43-44 Consolidated Statements of Retained Earnings 45 Notes to Consolidated Financial Statements 46-60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To CILCORP Inc.:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in CILCORP Inc.'s Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 27, 1997. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedules listed in Item 14(a)2 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois January 27, 1997
MANAGEMENT'S REPORT
The accompanying financial statements and notes for CILCO and its consolidated subsidiaries have been prepared by management in accordance with generally accepted accounting principles. Estimates and judgments used in developing these statements are the responsibility of management. Financial data presented throughout this report is consistent with these statements.
CILCO maintains a system of internal accounting controls which management believes is adequate to provide reasonable assurance as to the integrity of accounting records and the protection of assets. Such controls include established policies and procedures, a program of internal audit and the careful selection and training of qualified personnel.
The financial statements have been audited by CILCO's independent public accountants, Arthur Andersen LLP. Their audit was conducted in accordance with generally accepted auditing standards and included an assessment of selected internal accounting controls only to determine the scope of their audit procedures. The report of the independent public accountants is contained in this Form 10-K annual report.
The Audit Committee of the CILCORP Inc. Board of Directors, consisting solely of outside directors, meets periodically with the independent public accountants, internal auditors and management to review accounting, auditing, internal accounting control and financial reporting matters. The independent public accountants have direct access to the Audit Committee. The Audit Committee meets separately with the independent public accountants.
J. F. Vergon President and Chief Operating Officer
T. S. Romanowski Vice President and Chief Financial Officer
T. D. Hutchinson Controller and Manager of Accounting
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Central Illinois Light Company:
We have audited the accompanying consolidated balance sheets of Central Illinois Light Company (an Illinois corporation) and subsidiaries as of December 31, 1996 and 1995, 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, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Central Illinois Light Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This financial statement schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP Chicago, Illinois January 27, 1997
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 1996 presentation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
REGULATION
CILCO is a public utility subject to regulation by the Illinois Commerce Commission and the Federal Energy Regulatory Commission with respect to accounting matters, and maintains its accounts in accordance with the Uniform System of Accounts prescribed by these agencies.
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" (SFAS71). Regulatory increases and decreases, respectively, of assets and liabilities represent probable future increases and decreases, respectively, of revenues to CILCO resulting from the ratemaking action of regulatory agencies. Regulatory liabilities, consisting of deferred tax items, are approximately $68.6 million and $62.7 million at December 31, 1996 and 1995, respectively (see Note 2). At December 31, 1996, and 1995, the regulatory assets included on the Consolidated Balance Sheets were as follows:
If a portion of CILCO's operations becomes no longer subject to the provisions of SFAS 71, a write-off of related regulatory assets and liabilities would be required, unless some form of transition cost recovery continues through rates established and collected for CILCO's remaining regulated operations. In addition, CILCO would be required to determine any impairment to the costs recorded for deregulated plant and inventory assets.
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' creditworthiness and requests deposits or refunds deposits based on that review. At December 31, 1996, CILCO had net receivables of $43.6 million, of which approximately $9.2 million was due from its major industrial customers.
TRANSACTIONS WITH AFFILIATES
CILCO, which is a subsidiary of CILCORP, incurs certain corporate expenses such as legal, shareholder and accounting fees on behalf of CILCORP and its other subsidiaries. These expenses are billed monthly to CILCORP and its other subsidiaries based on specific identification of costs except for shareholder-related costs which are based on the relative equity percentages of CILCORP and its subsidiary corporations. A return on CILCO assets used by CILCORP and its other subsidiaries is also calculated and billed monthly. Total billings to CILCORP and its other subsidiaries amounted to $5.4 million, $1.7 million and $2.4 million in 1996, 1995 and 1994, 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 1996, 1995 and 1994 were 7.8%, 6.7% and 8.0%, respectively.
DEPRECIATION AND MAINTENANCE
Provisions for depreciation of utility property for financial reporting purposes are based on straight-line composite rates. The annual provisions for utility plant depreciation, expressed as a percentage of average depreciable utility property, were 3.8% and 4.6% for electric and gas, respectively, for each of the last three years. Utility maintenance and repair costs are charged directly to expense. Renewals of units of property are charged to the utility plant account, and the original cost of depreciable property replaced or retired, together with the removal cost less salvage, is charged to the accumulated provision for depreciation.
INCOME TAXES
CILCO follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property. CILCORP and its subsidiaries file a consolidated federal income tax return. Income taxes are allocated to the individual companies based on their respective taxable income or loss.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CILCO considers all highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash equivalents for purposes of the Consolidated Statements of Cash Flows.
CILCO-OWNED LIFE INSURANCE POLICIES
The following amounts related to CILCO-owned life insurance contracts, issued by one major insurance company, are recorded on the Consolidated Balance Sheets:
Interest expense related to borrowings against CILCO-owned life insurance, included in CILCO-owned Life Insurance, Net on the Consolidated Statements of Income, was $2.7 million, $2.3 million and $2 million for 1996, 1995 and 1994, respectively.
NOTE 2 - INCOME TAXES
CILCO uses the liability method to account for income taxes. Under the liability method, deferred income taxes are recognized at currently enacted income tax rates to reflect the tax effect of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. Temporary differences occur because the income tax law either requires or permits certain items to be reported on CILCO's income tax return in a different year than they are reported in the financial statements. CILCO has recorded a regulatory asset and liability to account for the effect of expected future regulatory actions related to unamortized investment tax credits, income tax liabilities initially recorded at tax rates in excess of current rates, the equity component of Allowance for Funds Used During Construction and other items for which deferred taxes had not previously been provided. The temporary differences related to the consolidated deferred income tax asset and liability at December 31, 1996, December 31, 1995 and December 31, 1994, were as follows:
The following table reconciles the change in the accumulated deferred income tax liability to the deferred income tax expense included in the income statement for the period:
Income tax expenses were as follows:
The following table represents a reconciliation of the effective tax rate with the statutory federal income tax rate.
NOTE 3 - POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE
CILCO has recorded a liability of approximately $1.4 million and $.9 million at December 31, 1996 and 1995, respectively, for benefits other than pensions or health care provided to former or inactive employees.
PENSION BENEFITS
Substantially all of CILCO's full-time employees, including those assigned to the Holding Company, are covered by trusteed, non-contributory defined benefit pension plans. Benefits under these qualified plans reflect the employee's years of service, age at retirement and maximum total compensation for any consecutive sixty-month period prior to retirement. CILCO also has an unfunded nonqualified plan for certain employees.
Pension costs for the past three years were charged as follows:
Provisions for pension expense reflect the use of the projected unit credit actuarial cost method. At December 31, 1996 and 1995, CILCO recognized an additional minimum liability on the Balance Sheets for the plan in which the accumulated benefit obligation exceeds the fair value of plan assets.
The components of net periodic pension costs follow:
During 1996 and 1995, CILCO recognized $7.9 million and $13.1 million, respectively, of net pension costs in accordance with Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." These amounts represented the costs associated with additional benefits extended in connection with voluntary early retirement programs.
Information on the funded status of plans in which assets exceed accumulated benefits follows:
Information on the funded status of the plan in which accumulated benefits exceed assets follows:
POSTRETIREMENT HEALTH CARE BENEFITS
Provisions for postretirement benefits expenses are determined under the accrual method of accounting.
Substantially all of CILCO's full-time employees, including those assigned to the Holding Company, are currently covered by a trusteed, non-contributory defined benefit postretirement health care plan. The plan pays stated percentages of most necessary medical expenses incurred by retirees, after subtracting payments by Medicare or other providers and after a stated deductible has been met. Participants become eligible for the benefits if they retire from CILCO after reaching age 55 with 10 or more years of service.
Postretirement health care benefit costs were charged as follows:
Information on the plans' funded status follows:
For measurement purposes, the annual health care cost trend rate averaged 7.2% for 1996; the rate was assumed to decrease gradually to 5.7% for 2025 and remain at that level thereafter.
Increasing the assumed health care cost trend rate by 1% in each year would increase the accumulated postretirement benefit obligation at December 31, 1996, by $2.4 million and the aggregate of the service and interest cost components of net postretirement health care cost for 1996 by $211,000. The discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1996, was 7.75% and at December 31, 1995, was 7.25%. 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 $20.0 million at December 31, 1996, all of which were unused. These lines of credit were maintained by commitment fees of 1/20 of 1% per annum in lieu of balances. These bank lines of credit support CILCO's issuance of commercial paper. Short-term borrowings consisted of commercial paper totaling $9.9 million and $24.6 million at December 31, 1996 and 1995, 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, 1996, was $6.3 million.
NOTE 6 - PREFERRED STOCK
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, 1996, is $3.1 million, assuming a continuation of the auction dividend rate at December 31, 1996, 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, 1996, are as follows:
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
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 1998 and 2000 are $10.6 million and $30 million, respectively. There are no scheduled maturities of long-term debt for 1999 or 2001. The 1997 maturities of long-term borrowings have been classified as current liabilities.
NOTE 8 - COMMITMENTS & CONTINGENCIES
CILCO's 1997 capital expenditures for utility plant are estimated to be $53.2 million, in connection with which CILCO has normal and customary purchase commitments at December 31, 1996.
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 provides for a minimum contract delivery rate from CIPS of 80 megawatts (MW) of capacity through May 1997, then increasing to 90 MW until the contract expires in 1998.
In March 1995, CILCO and CIPS renegotiated a limited-term power agreement reached in November 1992. This agreement, which now expires in May 2009, provides for CILCO to purchase 150 MW of CIPS' capacity from June 1998 through May 2002, and 50 MW from June 2002 through May 2009. This renegotiated agreement was subject to the ICC's final approval of CILCO's 1995 electric least cost energy plan, which was granted on May 8, 1996.
For a discussion of former gas manufacturing sites, refer to the caption "Environmental Matters" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 21 of CILCORP's 1996 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 new rates, designed to yield an 11.82% return on common equity and a 9.24% return on rate base, were effective in December 1994.
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 completed in November 1995.
As a part of the 1994 rate order, the ICC disallowed approximately $7.5 million of CILCO's $24 million investment in the Springfield 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 September 1994, CILCO entered into a federal court civil consent decree with the U.S. Department of Justice (DOJ) which concluded investigations by the DOJ and U.S. Department of Transportation (DOT) of CILCO's Springfield gas operations. 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 $4.5 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, selected by the ICC, to examine CILCO's gas operations manuals and systems to ensure they are in compliance with all applicable statutes and regulations. The audit was completed in October 1995 at a total cost of $356,000.
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, 1996, are $16.2 million in total. Payments due during the years ending December 31, 1997, through December 31, 2001, are $4.6 million, $4.4 million, $3.2 million, $1.7 million and $1.1 million, respectively.
NOTE 11 - DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS
During 1996 and 1995, CILCO utilized NYMEX (New York Mercantile Exchange) futures contracts to hedge approximately 19% and 3%, respectively, of owned natural gas storage. The purpose of the program is to provide a higher level of natural gas price stability for CILCO's natural gas customers and reduce the cost of natural gas injected into CILCO-owned storage fields. The program includes investments in derivative financial instruments such as futures, options and swap agreements. CILCO does not trade these financial instruments and accounts for them as hedges under SFAS No. 80, "Accounting for Futures Contracts." Any gains or losses from these financial instruments are reflected as adjustments to Gas in Underground Storage on the balance sheets. As natural gas is withdrawn from storage, gains or losses are passed to customers through the purchased gas adjustment clause, which is included in Gas Purchased for Resale on the income statement.
NOTE 12 - 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.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
CILCORP
Not applicable. CILCO
Not applicable.
PART III
Item 10.
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 1997 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 1997 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.
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.
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.
Item 13. Certain Relationships and Related Transactions
CILCORP
CILCORP Inc. (CILCORP or Company), a holding company, is the parent of its direct subsidiaries Central Illinois Light Company (CILCO), CILCORP Investment Management Inc. (CIM), CILCORP Ventures Inc. (CVI), and QST Enterprises Inc. (QST). Formerly a CILCORP first-tier subsidiary, Environmental Science & Engineering, Inc. (ESE) became a subsidiary of QST effective October 29, 1996. 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, 1998. At December 31, 1996, ESE had no borrowings 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, 1996, CILCORP guaranteed $3 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.
CILCORP has been authorized by the Board of Directors to guarantee up to $10 million of obligations incurred by QST Enterprises Inc. (QST). In turn, QST has been authorized to guarantee up to $10 million of obligations incurred by its subsidiary, QST Energy Inc., and its subsidiary QST Energy Trading Inc. Through February 28, 1997, CILCORP has guaranteed $3.9 million of QST obligations, and QST has guaranteed $2.5 million of QST Trading Inc. obligations.
CILCO
One member of the Board of Directors of CILCORP Inc. is also a member of the Board of Directors of CILCO. The Chairman and Chief Executive Officer of CILCO is also the President and Chief Executive Officer of CILCORP and the secretary of CILCO is also Vice President, General Counsel and Secretary of CILCORP Inc.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
CILCORP Page in Annual Report to Stockholders (a) 1. Financial Statements
The following statements are included in Exhibit 13 of this filing and are incorporated herein by reference from CILCORP Inc.'s 1996 Annual Report:
Management's Report 28
Report of Independent Public Accountants 28
Consolidated Statements of Income for the three years ended December 31, 1996 29
Consolidated Balance Sheets as of December 31, 1996, and December 31, 1995 30-31
Consolidated Statements of Segments of Business for the three years ended December 31, 1996 32-33
Consolidated Statements of Cash Flows for the three years ended December 31, 1996 34
Consolidated Statements of Common Stockholders' Equity for the three years ended December 31, 1996 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 69
Schedule XIII -Investment in Leveraged Leases at December 31, 1996 71
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
(a) 3. Exhibits
*(3) Articles of Incorporation (Designated in Form 10-K for the year ended December 31, 1991, File No. 1-8946, as Exhibit 3)).
*(3)a By-laws as amended effective April 25, 1995. [Designated in Form 10-K for the year ended December 31, 1995, File No. 1-8946, as Exhibit (3)a]
***(4) Instruments defining the rights of security holders, including indentures
*(10) CILCO Executive Deferral Plan. As amended through January 29, 1996. (Designated in Form 10-K for the year ended December 31, 1995, File No. 1-8946, as Exhibit (10)).
*(10)a CILCO Executive Deferral Plan II. As amended January 29, 1996 (Designated in Form 10-K for the year ended December 31, 1995, File No. 1-8946, as Exhibit (10)a).
*(10)b CILCORP Economic Value Added Incentive Compensation Plan (Adopted February 29, 1989 & Revised January 29, 1991 and January 30, 1996.) [Designated in Form 10-K for the year ended December 31, 1995. File No. 1-8946, as Exhibit 10(b)]
*(10)c CILCORP Compensation Protection Plan. (Adopted June 28, 1994.) [Designated in Form 10-K for the year ended December 31, 1994, File No. 1-8946, as Exhibit 10(c)]
*(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 CILCORP Shareholder Return Incentive Compensation Plan (as amended effective January 28, 1997).
(12) Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Page No. Form 10-K ---------- (13) Annual Report to Security Holders 76
(24) Consent of Arthur Andersen LLP 77
(25) Power of Attorney
(27) CILCORP Inc. Consolidated Financial Data Schedule
(b) 3. Reports on Form 8-K
A Form 8-K was filed on October 29, 1996 to disclose the authorization and declaration of a dividend distribution of one right for each outstanding share of common stock, subject to the terms and conditions of a certain Rights Agreement dated October 29, 1996.
A Form 8-K was filed on November 25, 1996 to disclose the announcement by CILCO of a voluntary early retirement incentive plan. * 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 36
Report of Independent Public Accountants 37
Consolidated Statements of Income for the three years ended December 31, 1996 38
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995 39-40
Consolidated Statements of Cash Flows for the three years ended December 31, 1996 41-42
Consolidated Statements of Segments of Business for the three years ended December 31, 1996 43-44
Consolidated Statements of Retained Earnings for the three years ended December 31, 1996 45
Notes to the Consolidated Financial Statements 46-60
(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, 1996 70
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
(a)3. Exhibits
*(3) Articles of Incorporation. As amended July 26, 1993.
(3)a Bylaws. As amended effective April 23, 1996.
*(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 January 29, 1996. (Designated in Form 10-K for the year ended December 31, 1995, File No. 1- 2732, as Exhibit (10).)
*(10)a CILCO Executive Deferral Plan II. As amended January 29, 1996. (Designated in Form 10-K for the year ended December 31, 1995, File No. 1-2732, as Exhibit (10)a.)
*(10)b 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 (adopted January 29, 1991 and revised January 29, 1996). (Designated in Form 10-K for the year ended December 31, 1995, File No. 1-2732, as Exhibit (10)d.)
*(10)e Benefit Replacement Plan. (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 (as amended effective January 28, 1997)
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Central Illinois Light Company Financial Data Schedule
(b) 3. Reports on Form 8-K
A Form 8-K was filed on November 25, 1996 to disclose the announcement of a voluntary early retirement incentive plan.
*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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CILCORP INC.
March 18, 1997 By R. O. Viets President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
(i) and (ii) Principal executive officer, director and principal financial officer:
R. O. Viets President, Chief March 18, 1997 Executive Officer and Director
(iii) Controller
T. D. Hutchinson Controller March 18, 1997
(iv) A majority of the Directors (including the director named above):
M. Alexis* Director March 18, 1997 J. R. Brazil* Director March 18, 1997 W. Bunn III* Director March 18, 1997 J. D. Caulder* Director March 18, 1997 H. J. Holland* Director March 18, 1997 H. S. Peacock* Director March 18, 1997 K. E. Smith* Director March 18, 1997 R. M. Ullman* Director March 18, 1997 M. M. Yeomans* Director March 18, 1997
R. O. Viets Director March 18, 1997
*By
R. O. Viets Attorney-in-fact
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CENTRAL ILLINOIS LIGHT COMPANY
March 18, 1997 By J. F. Vergon President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
(i) Principal executive officer and director:
J. F. Vergon President and Chief March 18, 1997 Operating Officer and Director
(ii) Principal financial officer and director:
T. S. Romanowski Vice President March 18, 1997
(iii) Controller
T. D. Hutchinson Controller and March 18, 1997 Manager of Accounting
(iv) A majority of the Directors (including the directors named above):
T. S. Romanowski Director March 18, 1997
J. F. Vergon Director March 18, 1997
R. O. Viets Director March 18, 1997
NOTICE
This copy of CILCORP Inc.'s and Central Illinois Light Company's Form 10-K does not include our 1996 Consolidated Annual Report. If you have not received our 1996 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 January 27, 1997, 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 18, 1997