Annual Report (Form 10-K), fiscal year 1994

Item 1. Business
CIPSCO INCORPORATED AND ITS SUBSIDIARIES ________________________________________
GENERAL. CIPSCO Incorporated (CIPSCO) was incorporated in the State of Illinois on July 11, 1986. CIPSCO has two first-tier subsidiaries: CIPSCO Investment Company (CIC), an investment subsidiary, and Central Illinois Public Service Company (CIPS), an electric and gas public utility engaged in the sale of electricity and natural gas in portions of central and southern Illinois.
Effective October 1, 1990, CIPSCO became the parent holding company of CIPS. CIPSCO owns 100% of the outstanding common stock of CIPS representing in excess of 96% of the voting securities of CIPS.
CIPSCO was created as a holding company to provide the flexibility and capability to respond to increasing competition and risks in the utility business, thereby enhancing the long-term earnings potential of the organization while maintaining the strength of the utility business of CIPS as the predominant part of the holding company.
CIPSCO's business is conducted through properties and employees of CIPS and CIPSCO reimburses CIPS for their use. Each of CIPSCO's officers is also an officer of CIPS. CIPSCO's principal executive office is located in Springfield, Illinois.
CIPSCO is a public-utility holding company as defined in the Public Utility Holding Company Act of 1935, but is exempt, by virtue of an order issued September 18, 1990, from all the provisions of that act except provisions relating to the acquisition of securities of public utility companies. CIPSCO is not subject to regulation as a utility under the Illinois Public Utilities Act or the Federal Power Act.
The ability of CIPSCO to pay dividends on its common stock is dependent upon distributions made to it by CIPS and on amounts earned by CIPSCO on its other investments.
NON-UTILITY SUBSIDIARY - CIPSCO INVESTMENT COMPANY __________________________________________________
GENERAL. CIPSCO Investment Company (CIC), an Illinois corporation and the non-utility subsidiary of CIPSCO, was incorporated on October 2, 1990. CIC was formed for the purpose of managing non-utility investments and providing investment management services to CIPSCO and its affiliates. CIC's investment portfolio includes money-market investments, common stocks, mutual
funds, hedged preferred stocks, hedged common stocks, and equity interests in lease transactions and energy related projects. Investments are held in the four subsidiaries of CIC: CIPSCO Securities Company, CIPSCO Leasing Company, CIPSCO Energy Company and CIPSCO Venture Company. CIPSCO Securities Company invests in marketable securities, CIPSCO Leasing Company makes long-term investments in leveraged lease transactions, CIPSCO Energy Company makes investments in energy-related projects and CIPSCO Venture Company makes investments within the CIPS utility service territory.
UTILITY SUBSIDIARY - CENTRAL ILLINOIS PUBLIC SERVICE COMPANY ____________________________________________________________
GENERAL. Central Illinois Public Service Company (CIPS), an Illinois corporation, was organized in 1902. CIPS is a public utility operating company engaged in the sale of electricity and natural gas in portions of central and southern Illinois. CIPS generates, transmits and distributes electricity and, through interchange agreements with other utility systems, purchases and sells power on a firm basis, in emergency situations or when economical to do so. CIPS sells and distributes natural gas which it purchases from natural gas producers and other suppliers and transports natural gas purchased by end-users directly from suppliers. The principal executive offices of CIPS are located in Springfield, Illinois.
CIPS furnishes electric service to about 317,000 retail customers in 557 incorporated and unincorporated communities and adjacent suburban and rural areas. See Business - Electric Operations and - Electric Power Sales/Participation Agreements regarding certain electric power arrangements with other utility systems.
CIPS also furnishes natural gas service to about 166,000 retail customers in 267 incorporated and unincorporated communities and adjacent suburban and rural areas and provides gas transportation service to about 320 end-users. CIPS furnishes both electric and natural gas service in 236 of the communities served by it.
The territory served by CIPS, located in 66 counties in Illinois, has an estimated population of 820,000 and is devoted principally to agriculture and diversified industrial operations. Key industries include petroleum and petrochemical industries, food processing, metal fabrication and coal mining.
The electric and gas utility business of CIPS is expected to provide the major portion of CIPSCO's assets and earnings for the foreseeable future.
REVENUES. The total operating revenues of CIPS for the year 1994 were $835,882,000 of which about 83% was derived from the sale of electricity and about 17% from the sale of natural gas. The retail electric revenues were derived approximately as follows (percentage of total electric operating revenue): 31% from residential customers, 26% from commercial customers, 17% from industrial customers and 2% from public authorities and other. The
electric revenues from sales for resale were derived approximately as follows (percentage of total electric operating revenue): 11% from power supply agreements, 10% from interchange sales (economy/emergency) and 3% from cooperatives and municipal customers. Sales of power to the petroleum, related petrochemical industries and to the coal mining industry contributed about 6% of total electric revenues. Sales to these three industries accounted for approximately 37% of the 1994 electric revenue derived from the industrial customer group. Revenues from the coal mining industry may decline in the future as a result of declining consumption of Illinois coal, as many industrial coal customers shift to lower sulfur coal or other fuels as a means of complying with the Clean Air Act Amendments of 1990. The natural gas revenues for the year 1994 were derived approximately as follows: 63% from residential customers, 22% from commercial customers, 9% from industrial customers and 6% from transportation service customers and miscellaneous.
The sources of the operating revenues of CIPS for the years indicated were as follows:
Electric 1994 1993 1992 ________ ________ ________ ________ (in thousands)
Residential . . . . . . . . . . . . . . . . $213,377 $219,510 $197,120 Commercial. . . . . . . . . . . . . . . . . 178,723 176,154 169,460 Industrial. . . . . . . . . . . . . . . . . 118,917 112,382 109,648 Public authorities and other. . . . . . . . 13,799 15,144 12,970 ________ ________ ________ Total retail revenues . . . . . . . . . 524,816 523,190 489,198 ________ ________ ________ Power supply agreements . . . . . . . . . . 78,613 69,668 59,768 Interchange sales (economy/emergency) . . . 71,779 74,644 27,094 Cooperatives and municipals . . . . . . . . 22,250 21,347 19,582 ________ ________ ________ Total sales for resale . . . . . . . . . 172,642 165,659 106,444 ________ ________ ________ Total electric revenues. . . . . . . . . $697,458 $688,849 $595,642 ======== ======== ========
Natural Gas 1994 1993 1992 ___________ ________ ________ ________ (in thousands)
Residential . . . . . . . . . . . . . . . . $ 86,919 $ 92,213 $ 86,968 Commercial. . . . . . . . . . . . . . . . . 30,577 32,023 31,036 Industrial. . . . . . . . . . . . . . . . . 12,897 12,139 6,445 Transportation service. . . . . . . . . . . 7,586 8,915 9,269 Miscellaneous . . . . . . . . . . . . . . . 445 417 42 -------- -------- -------- Total gas revenues. . . . . . . . . . . . $138,424 $145,707 $133,760 ======== ======== ========
The portions of operating income of CIPS, before income taxes, attributable to electric operations were approximately $147,070,000 (93%) in 1994, $154,779,000 (95%) in 1993 and $123,228,000 (92%) in 1992. The portions of operating income, before income taxes, attributable to gas operations were approximately $11,528,000 (7%) in 1994, $7,621,000 (5%) in 1993 and $10,916,000 (8%) in 1992.
Identifiable assets relating to electric and gas operations were as follows:
1994 1993 1992 __________ __________ __________ (in thousands)
Electric operations . . . . . . . . . . $1,469,601 $1,459,073 $1,443,578 Gas operations. . . . . . . . . . . . . 176,788 177,857 188,321 Other . . . . . . . . . . . . . . . . . 32,261 31,532 13,160 ---------- ---------- ---------- Total assets. . . . . . . . . . . . . $1,678,650 $1,668,462 $1,645,059 ========== ========== ==========
COMPETITION -- GENERAL. In order to assess the various opportunities in the electric and natural gas energy marketplace and to implement strategies which take advantage of those opportunities, effective January 1, 1995, CIPS established a new marketing function. The efforts of this new function will be directed at product and service development programs and activities.
In early 1994 CIPS undertook a "business process re-engineering" program for the purpose of consolidating and streamlining its electric and natural gas utility business segments, in both its corporate headquarters and in its field operations. The changes resulting from the program are designed to enable CIPS to better serve its customers while controlling and reducing overall operating costs.
Early in 1995, CIPS instituted a voluntary separation plan. Under the plan, eligible employees could leave CIPS and receive a package of benefits. The final date for eligible employees to accept the offer under the separation plan was February 25, 1995. The one-time cost of the plan is expected to be approximately $5 million (pre-tax), but is expected to be partially offset in 1995 and create additional savings in future years by reducing total annual operating expenses.
COMPETITION -- ELECTRIC BUSINESS. Competition among suppliers of electric energy is increasing. In particular, competition for interchange sales, which is based primarily on price and availability of energy, has become much more intense in recent years.
CIPS is responding to overall increased competition in a number of ways designed to lower its costs and increase sales. Since instituting an economic development incentive rate in 1985, the CIPS economic development program has
been expanded to include new customer and community development initiatives. The Key Account Program is an ongoing program in which senior management plays a critical role in communicating CIPS' competitive advantages to its largest industrial customers. Additional services to customers have included energy technology assistance and market development programs. CIPS works in partnership with communities throughout the service area to implement projects to respond to growth opportunities. This, in combination with the ongoing business development initiatives including industrial site location assistance, community profiles and technical development services, is designed to maximize economic development throughout the CIPS territory. In addition to a general program of controlling costs, in 1987 CIPS initiated a major program of renegotiating long-term coal supply contracts. Savings from these renegotiation efforts continued during 1994. Further renegotiation is expected in 1995. This program has helped and will continue to help CIPS control its fuel costs.
CIPS faces competition from non-utility generators of power. The National Energy Policy Act of 1992 ("NEPA"), among other things, creates exempt wholesale generators who are largely exempt from traditional utility regulation. Under NEPA these producers may gain access to utility transmission lines. (See Management's Discussion and Analysis of Financial Condition and Results of Operations.) These and other developments will enhance competition over time and will give customers and CIPS opportunities to take advantage of competitive markets. In addition to non-utility generators, large retail customers may decide to install cogeneration or other facilities and supply their own electricity which will increase pressures on CIPS to be a low cost provider. It is possible that retail wheeling legislation could be introduced at any time in Illinois. The Illinois Commerce Commission (the "Illinois commission") has established a task force to gather information on these issues and help formulate an approach for Illinois.
During 1994, CIPS had generating capacity sales agreements with other utility systems which represented approximately 530 megawatts or 19% of CIPS' total generating capacity. Under one such agreement a utility system reduced its participation by 115 megawatts as a result of a scheduled contract reduction, which represents about 4% of total generating capacity, effective January 1, 1995. Earlier this year CIPS reached an agreement with Union Electric Company for the sale of 150 megawatts of capacity and energy beginning June 1998 through May 2005. Over the next several years CIPS will have about 300 megawatts of capacity available to market. At the present time CIPS has offers pending to other electric systems for medium- and long-term contracts that would total 1,220 megawatts of capacity per year, subject to availability. (See Business - Utility Subsidiary - Central Illinois Public Service Company - Electric Power Sales/Participation Agreements.)
COMPETITION -- GAS BUSINESS. Competition in the natural gas industry is increasing. For a number of years, CIPS customers have had the ability to purchase natural gas from producers or other suppliers and transport that gas through the interstate pipelines and the CIPS system. CIPS collects a rate
for transportation through its system. Recent policies of the Federal Energy Regulatory Commission ("FERC") such as Order 636 (see Gas Operations below) have increased the competitive nature of the gas business. In certain cases customers have the ability to receive their gas supply directly from pipelines and bypass the CIPS system. CIPS has negotiated or is currently negotiating with a number of its larger industrial gas customers regarding flexible rates to address the more competitive environment in which CIPS is operating. While CIPS has had to provide lower rates to retain some customers, CIPS has used this same flexibility to obtain some new loads.
UTILITY INDUSTRY. CIPS is experiencing some of the problems common to electric and gas utility companies, namely, increased competition for customers, increased construction costs, delays and uncertainties in the regulatory process and costs of compliance with environmental and other laws and regulations.
CONSTRUCTION PROGRAM AND FINANCING. Total construction expenditures for CIPS for 1995 through 1999 are estimated at $449 million. For 1995, anticipated construction expenditures are $98 million for replacements and improvements and consist of about $27 million for electric production facilities, $13 million for electric transmission facilities, $47 million for electric distribution and general facilities, and $11 million for gas utility facilities. Included in the 5-year construction forecast is an estimate of $40 million for environmental compliance, including compliance with regulations under the Clean Air Act Amendments of 1990. CIPS is evaluating alternatives for reducing fuel costs and other expenses while maintaining environmental compliance. Maintaining the current compliance strategy, or adoption of certain alternatives in fuel and/or environmental strategies, could result in substantial increases in capital expenditures in the 1995-1999 period from the amounts shown above. Additional external financing could be required. (See Management's Discussion and Analysis of Financial Condition and Results of Operations - Central Illinois Public Service Company - Capital and Financing Requirements and CIPS Results of Operations (1992-1994) - Fuel Strategies and - Clean Air Act.)
CIPS continuously reviews its construction program, which may be affected by numerous factors, including the rate of load growth, escalation of construction costs, fuel shortages, changes in governmental and environmental regulations, customers' patterns of consumption and conservation of energy, the adequacy of rate relief and the ability of CIPS to raise necessary capital. Load growth projections are subject to a number of uncertainties due to various influences on customer consumption, economic conditions and the effect of rates on consumption and peak load demand.
CIPS has no electric generating units under construction. On May 11, 1993, the Illinois commission approved CIPS' most recent "least cost resource" plan which includes the 20-year generating unit plan of the utility. As demonstrated by the plan, CIPS will not require additional generating capacity or demand-side resources during the 1993-2013 planning period. Pursuant to the plan, CIPS will engage in several demand-side management activities
intended to enhance its capability to deliver demand-side management resources in the future. CIPS is in the process of developing its next "least cost resource" plan to be filed with the Illinois commission by July 1, 1995. CIPS does not anticipate any significant changes in its least cost resource plan.
For a discussion of the funds requirements for the period 1995-1999 and the assumptions as to the sources of funds to meet those requirements, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Central Illinois Public Service Company - Capital and Financing Requirements.
Under an effective shelf registration statement on file with the Securities and Exchange Commission CIPS may issue an aggregate of up to $50 million of first mortgage bonds, medium-term notes and/or preferred stock. Current authority for such securities issuances granted by the Illinois commission extends through December 31, 1996. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Central Illinois Public Service Company - Capital and Financing Requirements.
The issuance by CIPS of first mortgage bonds, medium-term notes and/or other secured debt securities, common stock, preferred stock and certain unsecured debt securities is subject to the receipt of necessary regulatory approvals. (See Business - Utility Subsidiary - Central Illinois Public Service Company - Regulation.)
The Mortgage Indenture of CIPS, as presently operative, permits the issuance of additional first mortgage bonds up to 60% of available net expenditures for bondable property, provided the "net earnings" of CIPS (determined after deducting income taxes and otherwise as provided in the Mortgage Indenture) for a recent 12-month period equal at least twice the annual interest requirements on all first mortgage bonds outstanding (and on all equally secured and prior lien indebtedness) and on the bonds then to be issued. At December 31, 1994, the more restrictive of these requirements was the "net earnings" test. The "net earnings" of CIPS for the year ended December 31, 1994, so computed, were equal to 5.73 times the interest for one year on the aggregate amount of bonds outstanding under the Mortgage Indenture at December 31, 1994. Based on the "net earnings" of CIPS (so computed) for the year ended December 31, 1994, and the bonds outstanding under the Mortgage Indenture at December 31, 1994, CIPS could have issued about $450 million of additional first mortgage bonds under the foregoing interest coverage provision (assuming an annual interest rate of 8.3% on such bonds).
The Articles of Incorporation of CIPS provide, in effect, that so long as any CIPS preferred stock is outstanding, CIPS shall not, without the requisite vote of the holders of preferred stock, unless the retirement of such stock is provided for, (a) issue any preferred or equal ranking stock (except to retire or in exchange for an equal amount thereof) unless the "gross income available for interest" of CIPS for a recent 12-month period is at least one and one- half (1-1/2) times the sum of (i) one year's interest on all funded debt and notes maturing more than 12 months after the date of issuance of such shares and (ii) one year's dividend requirement on all preferred stock to be
outstanding after such issue, or (b) issue or assume any unsecured debt securities maturing less than two years from the date of issuance or assumption (except for certain refunding or retirement purposes) if immediately after such issuance or assumption the total amount of all such unsecured debt securities would exceed 20% of the sum of all secured debt securities and the capital and surplus of CIPS. For the year ended December 31, 1994, the "gross income available for interest" of CIPS equalled 3.17 times the sum of the annual interest charges and dividend requirements on all such funded debt, notes and preferred stock outstanding at December 31, 1994. Such "gross income available for interest" was sufficient under the test to support the issuance of additional preferred stock (assuming an annual dividend rate on such preferred stock of 8.25%) in an amount in excess of the maximum amount ($185 million) of authorized and unissued preferred stock under the Articles.
RATE MATTERS. The most recent CIPS retail rate case before the Illinois commission resulted in electric and natural gas rate increases which became effective March 20, 1992. In its decision, the Illinois commission allowed a return on net original cost rate base of 9.77% (electric) and 9.88% (natural gas) and a return on common equity of 12.28% (electric) and 12.50% (natural gas).
On March 6, 1991, the Illinois commission commenced a generic proceeding (Docket No. 91-0081 for CIPS) to consider whether costs related to the cleanup and restoration of former manufactured gas plant sites (environmental remediation sites) should be recoverable from ratepayers by Illinois utilities (including CIPS) and, if recoverable, what recovery mechanism should be utilized. See Note 2 of Notes to Consolidated Financial Statements included under Item 8 of this report for a discussion of the regulatory and legal proceedings related to the recovery of remediation and related costs. On March 26, 1993, the Illinois commission entered an order accepting the proposed riders filed by CIPS designed to recover environmental cleanup costs and associated legal expenses relating to its environmental remediation sites (including costs previously incurred and deferred). The riders were filed in response to the Illinois commission's generic order described in Note 2 of Notes to Consolidated Financial Statements. CIPS began recovering amounts under the riders in April, 1993. A total of $2.9 million was collected from customers through December 31, 1994 under the electric environmental adjustment clause rider and the gas environmental adjustment clause rider. In April 1994 the Illinois commission initiated reconciliation proceedings to determine whether the costs incurred by CIPS for environmental remediation activities were prudently incurred costs and whether revenues collected under the riders can be reconciled with the level of prudent costs incurred for environmental remediation activities. CIPS has filed testimony and provided data to the Illinois commission regarding the reconciliation proceeding. A status hearing is scheduled for May 1995. The Illinois commission can order refunds to customers if it determines that costs incurred for environmental remediation activities were not prudently incurred or revenues collected under the riders were in excess of costs properly recoverable under the riders.
The Illinois commission conducts annual proceedings to determine whether the electric fuel and purchased gas charges collected by CIPS in each year pursuant to the applicable fuel adjustment and purchased gas adjustment clauses reflect the actual costs of electric fuel and natural gas prudently purchased in that year and to reconcile revenues collected under the clauses during the year with actual costs incurred. The Illinois commission can order refunds to customers if it determines that actual costs of fuel or purchased gas were less than the amounts charged to customers pursuant to the clauses or if it finds that CIPS was imprudent in its purchases of fuel or gas. The Illinois commission has completed its review of fuel adjustment and purchased gas adjustment charges for all years prior to 1993. No significant refunds or adjustments were required for those years. Fuel reconciliation proceedings for the year 1993 commenced in July 1994. (See Business - Utility Subsidiary - - Central Illinois Public Service Company - Fuel.)
The most recent general rate increase of CIPS approved by the FERC became effective in 1984. There are currently no rate proceedings pending at the FERC, and CIPS has no plans for any such rate increase filings. All of CIPS' requirements sales to cooperatives and municipals for resale are through negotiated service agreements.
As a result of the retail rate increase granted to CIPS in 1992 referred to above, a corresponding rate adjustment was granted by the FERC for certain customers who purchase power from CIPS for resale. This rate adjustment was provided for in the service agreements between CIPS and these customers.
In January 1985, CIPS received approval from the Illinois commission for an economic development rate which is designed to encourage industrial expansion and stimulate job creation in the service territory of CIPS. Under the economic development rate, each qualifying electric customer receives incentive rates for a maximum period of five years. In June 1986, CIPS received further approval which grants flexibility to negotiate agreements to fit the specific needs of certain industrial prospects. Effective June 13, 1994 the Illinois commission granted CIPS approval to offer qualifying customers the economic development rate through January 1, 2000. The scope of the rate was broadened to include those cutomers who receive service under the commercial time of use rate classification. In addition, the minimum of incremental load necessary to qualify for the special contract rate was lowered to 500 KW from 2,000 KW. Since the rate was instituted in 1985, about 150 new or existing business expansions have led to the creation of over 10,000 new jobs in the CIPS service territory.
ELECTRIC OPERATIONS. Since late 1977 CIPS has been a net off-system seller of electricity and during 1994 it generated 123% of its system requirements.
The maximum gross system load to date on the CIPS electrical system, on a one-hour integrated basis, occurred on July 5, 1994, and was 2,194,000 kilowatts. Gross system load includes sales to electric cooperative and
municipal customers (but excludes emergency and interchange sales). The 1994 maximum gross system load of 2,194,000 kilowatts was 1.7% greater than the historical maximum gross system load of 2,157,000 which occurred in 1993.
CIPS, Illinois Power Company and Union Electric Company are parties to an Interconnection Agreement providing for the coordination and interconnected operation of their respective electric systems and the interchange of power and energy at rates and under conditions set forth therein, including the maintenance by the parties of minimum reserve capacity positions. The Agreement provides that CIPS will maintain a minimum 15% system reserve capacity. CIPS, Illinois Power and Union Electric are parties to an Interconnection Agreement with Tennessee Valley Authority (TVA) providing for the interconnection of the TVA system with the systems of the three companies to exchange economy and emergency power and for other working arrangements.
In addition, CIPS has interconnection agreements with various other neighboring utilities, including Central Illinois Light Company, Commonwealth Edison Company, Indiana Michigan Power Company, Public Service Company of Indiana, Inc., Iowa Electric Light and Power Company and Northern Indiana Public Service Company. These agreements provide for various interchanges, emergency services and other working arrangements.
CIPS owns 20% (and three other utilities own the remaining 80%) of the common stock of Electric Energy, Inc., and is entitled to receive from it varying amounts of power. Electric Energy, Inc. owns and operates a 1,015,000 kilowatt coal-fired power station located in Joppa, Illinois.
CIPS is a member of the Mid-America Interconnected Network reliability council made up of utilities, public power generators, power marketers and others, which has as its purpose the promotion of maximum coordination of planning, construction and utilization of generation and transmission facilities on a regional basis in order to assure the reliability of electric bulk power supply in the area served.
One municipal agency, two municipal electric systems, one cooperative agency and one cooperative are engaged in the generation of electricity within, or in close proximity to, portions of the territory served by CIPS.
Electric and magnetic fields (sometimes referred to as EMF) surround electric wires or conductors of electricity, such as electrical tools, household wiring and appliances and electric transmission and distribution lines, such as those owned by CIPS. A number of statistical and laboratory studies have investigated whether EMF pose human health risks. The United States Environmental Protection Agency (USEPA) stated in its December 1992 brochure "Questions and Answers about Electric and Magnetic Fields" that "Some epidemiological evidence is suggestive of an association between surrogate measurements of magnetic field exposure and certain cancer outcomes. Though the body of evidence cannot be dismissed, it is not complete enough at this time to draw meaningful conclusions." The nation's electric utilities, including CIPS, have participated in the sponsorship of millions of dollars of
EMF research. CIPS has also agreed to participate in the National EMF Research and Public Information Dissemination Program, a 5-year $65 million effort headed by the United States Department of Energy aimed at furthering EMF research. Through its participation with Electric Power Research Institute, CIPS will continue its investigation and research with regard to the possible health effects posed by exposure to EMF.
ELECTRIC POWER SALES/PARTICIPATION AGREEMENTS. As shown in the table below, CIPS currently has contracts with Norris Electric Cooperative, City of Newton, Village of Greenup and Mt. Carmel Public Utility Company for the sale of electric power. These contracts provide for firm full requirements service which obligates CIPS to maintain adequate system reserves to support the contracts, or to supply the requirements with off-system purchases.
Peak Contract Demand Expiration Contract (Megawatts) Date ________ ___________ __________
Norris Electric Cooperative. . . . . . . . . 49 MW 2007 City of Newton . . . . . . . . . . . . . . . 5 MW 1999 Village of Greenup . . . . . . . . . . . . . 2 MW 1999 Mt. Carmel Public Utility Co. . . . . . . . 40 MW 2001
In 1990, CIPS entered into an agreement with Central Illinois Light Company ("CILCO") to sell to CILCO, beginning January 1, 1991, limited term power through May, 1998. The agreement calls for a minimum contract delivery rate of 70 megawatts in 1995 rising to 90 megawatts by the end of the contract period. At CILCO's request, and provided the capacity is available, purchases can be increased to 100 megawatts at any time during the contract period with prior written notice. In November 1992, CIPS entered into an agreement with CILCO to sell to CILCO limited term power for the period of June, 1998 through May, 2002. The agreement calls for a minimum contract delivery rate of 100 megawatts for the entire period. At CILCO`s request, and provided the capacity is available, purchases can be increased to 150 megawatts with prior written notice.
In addition, CIPS sells electric power to three power pooling agencies through negotiated capacity participation agreements identified in the following table. These agencies include Soyland Power Cooperative (Soyland), Illinois Municipal Electric Agency (IMEA) and Wabash Valley Power Association (WVPA). Maximum Capability Contract Entitlement Expiration Contract (Megawatts) Date ________ ___________ __________
Soyland . . . . . . . . . 102 MW 1999 IMEA. . . . . . . . . . . 122 MW 2014 WVPA. . . . . . . . . . . 65 MW 2011
GAS OPERATIONS. CIPS distributes and sells natural gas to 267 incorporated and unincorporated communities located in 41 counties of central and southern Illinois. The CIPS service territory is predominantly made up of small towns and rural areas. Of the communities served, only 5 have populations greater than 15,000. CIPS operates 4,551 miles of transmission and distribution mains, and its customer density is approximately 36 customers per mile of main.
Six interstate pipelines pass through various portions of the CIPS service area: Panhandle Eastern Pipe Line Company, Texas Eastern Transmission Corporation, Natural Gas Pipeline Company, Texas Gas Transmission Company, Midwestern Gas Transmission Company and Trunkline Gas Company. CIPS has multiple interconnections with each of these pipelines, with the total of all such interconnections being 46. Most of the CIPS system is integrated by virtue of CIPS owned pipelines, or by transportation agreements with interstate pipelines.
CIPS owns and operates four underground storage fields which provide a total peak day capacity of 41,500 thousand cubic feet per day (mcf/day). CIPS also operates one propane-air peak shaving facility which has a peak day capacity rating of 10,000 mcf/day.
The peak day firm demand recorded by CIPS in 1994 was 306,859 mcf which was reached on January 15, 1994. This demand level is 3.8% less than the all- time peak demand of 319,033 mcf which occurred on December 24, 1983. During 1994, the CIPS throughput (total of sales and transportation) was 35.6 billion cubic feet (bcf) compared to 36.5 bcf experienced in 1972, the year of highest historical throughput. In 1994, CIPS transported 12.0 bcf of customer-owned gas which represented 34% of the total system throughput. Volumes of customer-owned gas transported in 1993 and 1992 were 10.8 bcf and 11.8 bcf, respectively. The average cost per mcf of natural gas purchased from all suppliers was about $3.41 in 1994, $3.66 in 1993 and $3.66 in 1992.
The rate schedules of CIPS applicable to all of its gas sales include a uniform purchased gas adjustment clause, which permits CIPS to adjust its rates to its customers to reflect substantially all changes in the cost of purchased gas. (See Note 1 of Notes to Consolidated Financial Statements included under Item 8 of this report. See Business - Utility Subsidiary - Central Illinois Public Service Company - Rate Matters.)
In 1992, the FERC issued orders (together called Order 636) which address pipeline service restructuring. Order 636 required interstate pipelines to "unbundle" their sales service, and offer separately the components of that service (i.e., gas supply, transportation and storage). Order 636 essentially precludes interstate pipelines from selling natural gas. However, many pipelines have established separate unregulated marketing affiliates which function as gas merchants in competition with producers and other sellers of gas. The Illinois commission order permitting CIPS to collect transition costs from customers was upheld on appeal.
Each of the six pipelines providing service to CIPS have made restructured services filings at FERC to comply with Order 636. The last such filing was effective December 1, 1993.
See Note 2 of Notes to Consolidated Financial Statements included under Item 8 of this report for a discussion of various matters related to Order 636 transition costs.
Full implementation of Order 636 has resulted in several changes in CIPS' gas supply portfolio. Pipeline sales service contracts have been replaced by direct purchase gas supply contracts coupled with gas transportation contracts with various pipelines and storage contracts with pipelines or other independent storage service providers. In some cases CIPS has also contracted for so-called "no-notice" services with interstate pipelines. Under such contracts, the pipeline company combines and manages a number of independent transportation and storage contracts in order to provide flexibility in the amount of gas actually delivered to CIPS on any day. Such flexibility, which was formerly provided by the pipeline sales service, is needed for CIPS to economically meet the highly weather sensitive needs of its firm service customers.
In addition to its diversified portfolio of gas supply, transportation, leased storage and no-notice service contracts, CIPS owned storage and propane-air facilities provide additional reliability and flexibility to meet peak day and peak season requirements. In recent years CIPS has made investments to construct additional pipeline interconnections, increase CIPS owned storage capacity, improve reliability of existing storage facilities, modernize propane-air facilities and improve data acquisition capabilities. At the same time CIPS has reorganized and enhanced its gas supply planning and procurement functions.
FUEL. Over 99% of the net kilowatthour generation of CIPS in 1994 was provided by coal-fired generating units and the remainder by an oil-fired unit.
The average costs of fuel consumed by CIPS, per ton and per million Btu, for the periods shown were as follows:
1994 1993 1992 ----- ----- ----- Per ton ($) . . . . . . . . . . . . 35.44 36.62 36.46 Per million Btu ($) . . . . . . . . 1.65 1.67 1.67
In 1994, approximately 19.6% of the coal purchased for electric generation was purchased on a spot basis at average delivered costs of $30.20 per ton and $1.36 per million Btu.
The retail fuel adjustment clause (FAC) of CIPS is consistent with the uniform FAC mandated by the Illinois commission for all electric utilities as applicable to retail electric sales in Illinois. The FAC provides for the recovery of changes in electric fuel costs, including certain transportation
costs of coal, in billings to retail customers. CIPS adjusts fuel expense to recognize over- or under-recoveries of allowable fuel costs. The cumulative effect is deferred on the Balance Sheet as a Current Asset or Current Liability, pending automatic reflection in future billings to customers. In 1992, CIPS received Illinois commission approval to include certain coal transportation costs in the FAC in accordance with the August 1991 modifications to the Illinois Public Utilities Act.
CIPS also has contractual arrangements with certain other utility system customers which contain a fuel adjustment clause or provide for a sharing of fuel costs which permit CIPS to adjust its rates to such customers to reflect substantially all changes in the cost of fuel (including all transportation costs) used to supply those customers.
The amount of coal supplies on hand at the generating stations of CIPS varies from time to time. CIPS generally attempts to maintain a 65-day supply. Approximately 80% of the annual coal requirements of the generating facilities of CIPS are being met by long-term coal contracts expiring at various dates from 1995 to 2010. As contracts approach their expiration, or when appropriate, CIPS evaluates alternative supply arrangements based on then current and expected market conditions for coal. CIPS believes there are adequate reserves reasonably available to supply its existing generating units with the quantity and quality of coal required for the foreseeable future.
See Management's Discussion and Analysis of Financial Condition and Results of Operations - Central Illinois Public Service Company - Capital and Financial Requirements and - CIPS Results of Operations (1992-1994) - Fuel Strategies and - Clean Air Act.
REGULATION. CIPS is subject to regulation by the Illinois commission as to rates, accounting practices, issuance of certain securities and in other respects as provided by Illinois law. The Electric Supplier Act of Illinois permits utilities and electric cooperatives to delineate their respective service areas, subject to the approval of the Illinois commission, and gives the Illinois commission power to determine, pursuant to guidelines provided in the Act, whether a prospective electric customer will be furnished service by a public utility or by a cooperative. (See Item 3. Legal Proceedings.)
The FERC has jurisdiction under the Federal Power Act over certain of the electric utility facilities and operations, accounting practices, issuance or acquisition of certain securities and electric rates of CIPS for resale and interchange customers. CIPS has been classified as a "public utility" within the meaning of that Act. CIPS has been declared exempt from the federal Natural Gas Act.
CIPS is presently exempt from all the provisions of the Public Utility Holding Company Act of 1935, except provisions thereof relating to the acquisition of securities of other public utility companies, until further action by the Securities and Exchange Commission, by virtue of an annual exemption statement filed by CIPS with the Commission pursuant to Rule 2 under the Act.
ENVIRONMENTAL MATTERS. CIPS is subject to regulation with respect to air and water quality standards, standards relating to the discharge and disposal of solid and hazardous wastes and other environmental matters by various federal, state and local authorities. The Illinois Pollution Control Board (the "Board") has jurisdiction over all phases of environmental control by the State of Illinois and has authority to grant variances from environmental requirements. The Illinois Environmental Protection Agency (the "Agency") has authority to issue permits, investigate violations and recommend enforcement cases. The Illinois Attorney General has the authority to prosecute enforcement cases. The USEPA has jurisdiction to promulgate and enforce air and water quality standards in addition to those standards which relate to the discharge and disposal of solid and hazardous wastes.
Air pollution control regulations promulgated by the Board impose restrictions on emissions of particulate, sulfur dioxide, nitrogen oxides and other air pollutants and require that CIPS obtain permits from the Agency for the construction and operation of its generating facilities in compliance with these regulations. CIPS has secured all necessary operating permits for all of its existing generating facilities and is in substantial compliance with the provisions contained therein. Future construction projects may require additional construction permits.
Current compliance strategy regarding the sulfur dioxide emission requirements of Phase I (effective in 1995) and Phase II (effective in 2000) of the Clean Air Act Amendments of 1990 is expected to be accomplished through switching to lower sulfur coal for several generating units. In addition, CIPS is evaluating various alternatives to determine whether renovations to the existing scrubber at Newton Unit 1 are required to allow existing or additional levels of scrubbing or if the compliance strategy should be changed to place more reliance on fuel switching. (See Management's Discussion and Analysis of Financial Condition and Results of Operations - CIPS Results of Operations (1992-1994) - Fuel Strategies and - Clean Air Act.) In January 1991, CIPS entered into a long-term contract for the purchase of lower sulfur Illinois coal at its Coffeen Power Station to meet the requirements under the Clean Air Act Amendments. This new contract replaced an existing contract and, in addition to providing the source of coal for clean air compliance, resulted in lower fuel costs. The new contract provides for certain charges in the event of termination of the contract as described in Note 2 of Notes to Consolidated Financial Statements included under Item 8 of this report. Under the Clean Air Act Amendments each utility must have, beginning in 1995, sufficient emission allowances, which are granted by the USEPA, to cover the amount of sulfur dioxide to be emitted each year from its generating stations. Any emission allowances in excess of a utility's needs for a year can be retained by it for future use or sold. Based upon CIPS' current compliance program, CIPS expects to have available allowances (after consideration of allowances sold) in excess of its requirements.
Water pollution control regulations promulgated by the Board impose restrictions on effluent discharges, set water quality standards and require CIPS to obtain construction permits for certain facilities and National Pollutant Discharge Elimination System ("NPDES") permits for discharges into
public waters. CIPS has secured all necessary NPDES permits for all of its generating units and is in substantial compliance with the currently effective provisions contained therein. In 1994, CIPS appealed to the Illinois Pollution Control Board the permit conditions then imposed in renewed permits for the Coffeen and Newton power stations, which were scheduled to take effect in 1997, on the basis that it would not be feasible to comply with certain conditions of the permits. In January 1995, the subject permits were reissued with revised conditions and the appeal was withdrawn. CIPS expects to be able to comply with the revised permit conditions.
Pollution control regulations promulgated by the Board impose restrictions on the discharge and disposal of solid and hazardous waste, and determine design standards to prevent contamination of groundwater. CIPS has secured all necessary permits and authorizations for disposal and is in substantial compliance with the provisions contained therein. Future construction projects may require additional authorizations or permits.
See the subcaption "Environmental Remediation Costs" under Note 2 of the Notes to Consolidated Financial Statements, included under Item 8 of this report, for information relating to costs incurred and to be incurred in connection with the remediation of certain sites where gas had been manufactured from coal and which contain potentially harmful materials.
EMPLOYEES. The business of CIPSCO is conducted through the use of employees of CIPS and CIPSCO reimburses CIPS for the cost of using those employees.
The composition of the work force of CIPS at the payroll period nearest year-end 1994 and 1993 was as follows:
Number of Employees ------------------- Employee Group 1994 1993 - -------------- ----- -----
Salaried. . . . . . . . . . . . . . . . . 1,201 1,218 IBEW - 702. . . . . . . . . . . . . . . . 915 922 IUOE - 148. . . . . . . . . . . . . . . . 476 479 ----- -----
Total . . . . . . . . . . . . . . . . . . 2,592 2,619 ===== =====
Contracts with IBEW - 702 and IUOE - 148 extend through June 30, 1995. See Management's Discussion and Analysis of Financial Condition and Results of Operations - CIPS Results of Operations (1992-1994) -- Labor Disputes for a discussion of matters involving those employees represented by labor unions.
Item 2.



Item 2. Properties.
Currently, CIPSCO principally conducts its business through the use of the properties of CIPS. CIC leases office space pursuant to a lease expiring August 31, 1995. CIPSCO has no other material properties.
The electric generating facilities of CIPS consist of the following:
Estimated 1995 Summer Year Capability Station and Unit Fuel Installed (KW) - ---------------- ---- --------- -----------
Newton Unit 1 . . . . . . . . . . . . . . Coal 1977 555,000 Unit 2 . . . . . . . . . . . . . . Coal 1982 555,000 Coffeen Unit 1 . . . . . . . . . . . . . . Coal 1965 325,000 Unit 2 . . . . . . . . . . . . . . Coal 1972 550,000 Grand Tower Unit 3 . . . . . . . . . . . . . . Coal 1951 82,000 Unit 4 . . . . . . . . . . . . . . Coal 1958 104,000 Hutsonville Unit 3 . . . . . . . . . . . . . . Coal 1953 76,000 Unit 4 . . . . . . . . . . . . . . Coal 1954 77,000 Diesel Unit. . . . . . . . . . . . Oil 1968 3,000 Meredosia Unit 1 . . . . . . . . . . . . . . Coal 1948 62,000 Unit 2 . . . . . . . . . . . . . . Coal 1949 62,000 Unit 3 . . . . . . . . . . . . . . Coal 1960 215,000 Unit 4 . . . . . . . . . . . . . . Oil 1975 168,000
__________
Total . . . . . . . . . . . . . 2,834,000 ==========
All of the generating stations are located in Illinois on land owned in fee by CIPS.
At December 31, 1994, CIPS owned 13,013 pole miles of overhead electric lines and 891 miles of underground electric lines. At that date, CIPS also owned 4,551 miles of natural gas transmission and distribution mains, four underground gas storage fields and one propane-air gas plant used to supplement the available pipeline supply of natural gas during periods of abnormally high demands.
Substantially all of the permanent fixed utility property of CIPS is subject to the lien of the Mortgage Indenture securing CIPS first mortgage bonds.
Item 3.

Item 3. Legal Proceedings.
CIPSCO is not involved in any material legal proceedings.
With respect to CIPS, actions were brought against CIPS by Southwestern Electric Cooperative, Inc. ("Southwestern") on October 30, 1991 in the Macon County, Illinois Circuit Court and by Wayne-White Counties Electric Cooperative ("Wayne-White" and together with Southwestern, the "Distribution Cooperatives") on August 15, 1991 in the White County, Illinois Circuit Court. Soyland Power Cooperative ("Soyland"), a generating and transmission cooperative that supplies power to the Distribution Cooperatives, was also a plaintiff in the actions. In various prior cases brought before the Illinois commission and finally determined on appeal, the Distribution Cooperatives prevailed in disputes between each of them and CIPS as to which of them was entitled to serve certain electric customers under the Illinois Electric Supplier Act ("ESA") and certain service area agreements entered into pursuant to the ESA. Based on the results of the prior proceedings, these suits, in general, sought actual damages for breach of the service area agreements and punitive damages based on various grounds, such as tortious interference with contractual relationships and business expectancies and violation of the Illinois Public Utilities Act.
A CIPS motion to dismiss the Southwestern/Soyland case was successful only as to certain counts. In the remaining counts, Southwestern sought $182,000 in alleged actual damages for breach of the service area agreement and an additional $5 million in punitive damages for both interference with a contractual relationship and a business expectancy (it was not clear whether these claims were intended as separate bases for the recovery of $5 million in punitive damages or were cumulative). In addition, Soyland sought $323,000 in alleged actual damages and $5 million in punitive damages for interference with a business expectancy. In the Wayne-White/Soyland action, Wayne-White sought unspecified alleged actual damages for breach of the service area agreement and additional unspecified punitive damages for violation of the Public Utilities Act and interference with a business expectancy. In addition, Soyland claimed $819,000 in alleged actual damages based on breach of the service area agreement and an additional $5 million in punitive damages based on interference with both a contractual relationship and a business expectancy and based on violation of the Public Utilities Act (again, it was not clear whether these claims were intended as separate bases for the recovery of $5 million in punitive damages or were cumulative). On March 11,
1993, Soyland was dismissed from the Wayne-White action on statute of limitations grounds and the claims by Wayne-White under the Illinois Public Utilities Act were dismissed. Soyland filed an appeal of its dismissal.
In early 1995, all parties (CIPS, Soyland and the Distribution Cooperatives) to the above listed legal claims and other matters entered into a settlement agreement, subject to final approval by all parties. By the terms of the settlement agreement the parties agreed that 1) the lawsuits brought against CIPS by Soyland, Southwestern and Wayne-White would be dismissed; 2) CIPS would credit $400,000 against the monthly billings CIPS issues to Soyland for electric energy Soyland purchases from CIPS and CIPS would recognize that, in certain instances, Soyland has rights under the Service Area Agreements between CIPS and Soyland's Distribution Cooperative customers.
In May and Hryhorysak v. Central Illinois Public Service Company and Hanson Engineers, Inc., Docket 91-L-56, the plaintiffs brought an action in the Circuit Court for the Fourth Judicial Circuit, Christian County, Illinois claiming that, as a result of exposure to carcinogens contained in coal tar at the CIPS Taylorville gas plant site, plaintiffs' children had suffered from a rare childhood cancer known as "neuroblastoma." As amended, the complaint seeks damages on behalf of four children, one of whom is deceased. A plaintiffs' motion to amend the complaint to seek punitive damages was denied in 1994. Substantial discovery has been conducted in the case which is scheduled for trial in late summer 1995. CIPS is vigorously defending the action and believes it has meritorious defenses. Management believes that insurance may be available with respect to the defense of these claims. Management believes that final disposition of this matter will not have a material adverse effect on financial position or results of operations.
See Item 1. Business - Utility Subsidiary - Central Illinois Public Service Company - Rate Matters, - Gas Operations and - Environmental Matters with respect to certain matters involving CIPS. See also Note 2 of Notes to Consolidated Financial Statements included under Item 8 of this report.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of either CIPSCO or CIPS during the three months ended December 31, 1994.
Executive Officers of CIPSCO (ages at December 31, 1994).
Name Age Positions Held _____ ___ ______________
C. L. Greenwalt 61 President and Chief Executive Officer of CIPSCO* President and Chief Executive Officer of CIPS and Chairman of the Board of CIC
Name Age Positions Held _____ ___ ______________
R. W. Jackson 64 Senior Vice President, Secretary and Chief Financial Officer of CIPSCO* Senior Vice President - Finance and Secretary of CIPS President and Chief Executive Officer of CIC
J. C. Fiaush 64 Controller, Chief Accounting Officer and Assistant Treasurer of CIPSCO and Controller of CIPS
C. D. Nelson 41 Treasurer, Assistant Secretary and Assistant Controller of CIPSCO and Treasurer and Assistant Secretary of CIPS
______________________ * Messrs. Greenwalt and Jackson are directors of CIPSCO.
The present term of office of the above executive officers extends to the first meeting of CIPSCO's Board of Directors after the next annual election of Directors, scheduled to be held on April 26, 1995. There is no family relationship between any executive officer and any other executive officer or any director.
Each of the officers named above has been employed by CIPSCO and/or CIPS for more than the past five years in various executive capacities.
Executive Officers of CIPS (ages at December 31, 1994).
Name Age Positions Held _____ ___ ______________
C. L. Greenwalt 61 President and Chief Executive Officer* R. W. Jackson 64 Senior Vice President Finance and Secretary* L. A. Dodd 56 Senior Vice President Operations J. G. Bachman 46 Vice President Marketing W. A. Koertner 45 Vice President Corporate Services G. W. Moorman 51 Vice President Power Supply W. R. Morgan 58 Vice President Division Operations W. R. Voisin 59 Vice President Public Relations J. C. Fiaush 64 Controller (Principal Accounting Officer)* C. D. Nelson 41 Treasurer and Assistant Secretary*
______________________ * Messrs. Greenwalt and Jackson are directors of CIPS and are also officers and directors of CIPSCO. Mr. Fiaush and Mr. Nelson are also officers of CIPSCO.
The present term of office of the above executive officers extends to the first meeting of the Board of Directors of CIPS after the next annual election of Directors, scheduled to be held on April 26, 1995. There is no family relationship between any executive officer and any other executive officer or any director.
All of the officers named above have been employed by CIPS in their present positions for more than the past five years except as indicated below:
Mr. Dodd served as Vice President Division Operations from August 1, 1989 to July 1, 1990 when he was named Senior Vice President Operations.
Mr. Bachman served as Vice President Corporate Planning from August 1, 1989 to January 1, 1995, when he was named Vice President Marketing.
Mr. Koertner served as Vice President Financial Services from August 1, 1989 to April 1, 1993, when he was named Vice President Corporate Services.
Mr. Morgan served as Vice President Corporate Services from August 5, 1980 to July 1, 1990, when he became Vice President Division Operations.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
CIPSCO
CIPSCO's common stock is publicly held and traded on both the New York Stock Exchange and the Chicago Stock Exchange. The table below sets forth, for the periods indicated, the dividends per share of common stock of CIPSCO and the high and low sales prices of the CIPSCO common stock as reported in New York Stock Exchange Composite listings.
Quarter _______
1994 First Second Third Fourth ____ _____ ______ _____ ______
Price Range High $30 5/8 $30 1/4 $28 1/2 $28 3/8 Low 27 7/8 25 1/4 25 1/2 26 1/4 Close 28 1/8 25 1/2 27 1/8 27 ______ ______ ______ ______ Cash dividends declared (cents) $ .49 $ .50 $ .50 $ .50 ====== ====== ====== ======
____
Price Range High $32 3/4 $33 5/8 $33 3/4 $33 3/8 Low 29 1/4 31 1/4 32 29 1/4 Close 32 3/4 32 33 5/8 30 3/4 ______ ______ ______ ______ Cash dividends declared (cents) $ .48 $ .49 $ .49 $ .49 ====== ====== ====== ======
The approximate number of CIPSCO common shareholders of record as of December 31, 1994, was 40,221.
CIPS
All the common stock of CIPS is owned by CIPSCO and is not publicly traded. The following table sets forth the cash distributions on common stock paid to CIPSCO by CIPS, which, in some cases, were used to repurchase common shares of CIPS for the periods indicated:
1994 1993 ____ ____
First Quarter . . . . . . . . . . $17,000,000 $16,500,000* Second Quarter . . . . . . . . . . $17,200,000 $16,750,000* Third Quarter . . . . . . . . . . $17,200,000 $16,750,000 Fourth Quarter . . . . . . . . . . $17,200,000 $16,750,000
* Reflects the repurchase of common shares of CIPS.
DIVIDEND RESTRICTIONS
CIPSCO and CIPS are subject to restrictions on the use of retained earnings for cash dividends on common stock as described in Note 6 of Notes to Consolidated Financial Statements included under Item 8 of this report. The ability of CIPSCO to pay dividends on its common stock is dependent upon distributions made to it by CIPS and on amounts earned by CIPSCO on its other investments.
Item 6.

Item 6. Selected Financial Data.
CIPSCO
For the Years Ended December 31, 1994 1993 1992 1991 1990 __________ __________ __________ __________ __________ (in thousands, except per share data)
Operating Revenues $ 844,615 $ 844,760 $ 739,877 $ 722,081 $ 699,721 Operating Income 165,345 170,735 142,986 154,820 144,063 Net Income 83,954 85,498 72,499 72,065 65,756 Earnings per common share 2.46 2.51 2.13 2.11 1.92 Dividends declared per common share 1.99 1.95 1.91 1.87 1.83
As of December 31,
Total Assets $1,777,357 $1,757,750 $1,725,456 $1,751,574 $1,720,059 Long-Term Debt 474,619 494,323 503,700 496,420 496,319
CIPS
For the Years Ended December 31, 1994 1993 1992 1991 1990 __________ __________ __________ __________ __________ (in thousands)
Operating Revenues $ 835,882 $ 834,556 $ 729,402 $ 710,205 $ 685,226 Operating Income 110,678 113,651 97,372 104,039 97,135 Net Income 81,913 84,011 72,601 75,683 71,562 Preferred Dividends 3,510 3,718 4,549 5,396 5,617 Earnings for Common Stock 78,403 80,293 68,052 70,287 65,945
As of December 31,
Total Assets $1,678,650 $1,668,462 $1,645,059 $1,691,843 $1,665,614 Long-Term Debt 474,619 494,323 503,700 496,420 496,319 Preferred Stock subject to mandatory redemption - - - 18,245 21,245
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS ____________________________________
CIPSCO Incorporated is a holding company incorporated under the laws of Illinois. Its principal subsidiary is Central Illinois Public Service Company (CIPS), an electric and natural gas utility. Another subsidiary, CIPSCO Investment Company (CIC), has subsidiaries engaged in non-utility investing activities. Material changes in the consolidated financial condition and results of operations are primarily attributable to CIPS operations, except where noted.
CIPSCO Incorporated
Fundamental strengths of the financial position of CIPSCO and its subsidiaries remained intact during 1994. CIPSCO's business activities are conducted by CIPS and CIC. A discussion of the financial condition of CIPS and CIC follows in the sections below. CIPSCO may become involved in additional businesses or investments directly, through a subsidiary or through the formation of one or more additional subsidiaries. The sources of capital to finance these activities will depend on the nature of the investment and market conditions.
The total number of shares of common stock authorized under CIPSCO's articles of incorporation is 100 million. At year-end 1994, a total of 34,069,542 shares of common stock was outstanding. This was 38,164 shares, or 0.1 percent, lower than at year-end 1993 reflecting the repurchase of shares by the Company from holders of less than 100 shares through an oddlot repurchase program. No underwritten offerings of common stock are planned through 1999. CIPSCO is authorized to issue 4.6 million shares of preferred stock, none of which has been issued. There are no constraints in the CIPSCO articles of incorporation as to the amount of debt which may be issued. However, CIPSCO has had no debt outstanding. At year-end 1994, CIPSCO had no temporary investments or short-term borrowings.
CIPSCO Investment Company
At year-end 1994 there were $98 million of non-utility investments managed by CIC and subsidiaries. One of those subsidiaries, CIPSCO Securities Company, invests in marketable securities. At year end it had invested approximately $44 million in hedged portfolios of preferred and common stocks and other marketable securities. Another subsidiary, CIPSCO Leasing Company, invests in long-term leveraged lease transactions. At year end, $34 million was invested in leased assets consisting of a commercial jet aircraft, an interest in a natural gas liquids plant, natural gas processing equipment and retail department store properties. A third subsidiary, CIPSCO Energy Company (CEC), seeks energy-related investment opportunities. Through 1994, it purchased existing leases, or interests in such leases, for nine combustion turbine generating units leased to five investor-owned utilities in the United States. At year-end 1994 CEC had $16 million invested. A fourth subsidiary, CIPSCO Venture Company (CVC), was established in 1994 primarily to invest within the CIPS service territory. CVC's initial investment consisted of $.5 million for the construction of a building which is leased to a manufacturing firm. In the near term, CIC will seek additional investments which yield higher returns than the types of temporary investments available to CIPS. The long- term goal of CIC's investment policy is to earn returns that exceed the allowed return in the regulated utility business. CIC may become involved in additional non-utility activities directly, through a subsidiary or through the formation of one or more additional subsidiaries. The sources of capital to finance these activities will depend on the nature of the investment and market conditions. At year-end 1994, CIC had $3.3 million of temporary investments and no short-term borrowings.
Central Illinois Public Service Company
FINANCIAL CONDITION. The utility's financial position remained fundamentally strong during 1994. In recent years a strong capital structure and ample cash flows have minimized the need to access capital markets, other than for refinancings. Neither CIPSCO nor CIPS has had to raise additional capital through the sale of common stock to the general public since 1980. Common stock was issued and sold to existing shareholders by CIPS through a dividend reinvestment plan until 1984. The long-range financial objectives for the capital structure of the utility subsidiary are: a debt ratio of no more than 45 percent, a common equity ratio of no less than 45 percent, and a preferred equity ratio of no more than 10 percent. At December 31, 1994, capitalization consisted of 42 percent long-term debt, 51 percent common equity and 7 percent preferred stock. At year end, 25,452,373 shares of CIPS common stock were outstanding, all of which were held by CIPSCO Incorporated.
CAPITAL AND FINANCING REQUIREMENTS. Construction expenditures were $97 million in 1994. Of that amount, $83 million and $14 million related to improvements and replacements to the electric and natural gas systems, respectively. In 1995 construction expenditures are expected to be about $98 million. Of that amount, $87 million is scheduled for electric facilities, while gas system expenditures are estimated at $11 million. For the five-year period 1995-1999, construction expenditures are estimated at $449 million. This is $47 million, or 9 percent, less than was spent in the preceding five years. The projected five-year amounts include about $40 million for environmental compliance including compliance with the Clean Air Act Amendments of 1990. In addition to construction funds, projected capital requirements for the 1995-1999 period include $123 million for scheduled debt retirements. Capital requirements for the 1995-1999 period are expected to be met primarily through internally generated funds. External financing to fund scheduled debt retirements may be required. If external financing were needed to fund the construction program, such financing could consist of funds from the parent, including the issuance of CIPS common stock to the parent, the issuance of short-term debt, long-term debt or preferred stock, or any combination of the four. Refinancings to lower the costs of capital may also occur, depending on market conditions. During the year, CIPS received extended authority from the Illinois Commerce Commission to issue up to $60 million of first mortgage bonds, medium-term notes and/or preferred stock through December 31, 1996. Capital and financing requirements may be affected by such factors as availability and cost of capital, load growth, changes in construction expenditures, regulatory developments, changes in environmental regulations and other governmental activities.
CIPS is evaluating alternatives for reducing fuel costs and other expenses while maintaining environmental compliance. The current compliance strategy, or adoption of certain alternatives in fuel and/or environmental strategies, could result in substantial increases in capital expenditures in the 1995-1999 period from the amounts shown above. Additional external financing could be required. (See Fuel Strategies and Clean Air Act below.)
FINANCING FLEXIBILITY AND LIQUIDITY. The utility's ability to finance the construction program at reasonable cost and to provide for other capital needs is dependent upon its ability to earn a fair return on capital. Financing flexibility is enhanced by providing a high percentage of total capital requirements from internal sources and having the ability, if necessary, to issue long-term securities and to obtain short-term credit. Flexibility also is provided by the parent corporation which is capable of providing additional capital if circumstances warrant. Security issues by the utility are subject to regulatory approvals. The utility's mortgage indenture limits the amount of first mortgage bonds which may be issued. At December 31, 1994, CIPS could have issued about $450 million of additional first mortgage bonds under the indenture, assuming an annual interest rate of 8.3 percent. CIPS' articles of incorporation limit amounts of preferred stock which may be issued. Assuming a preferred dividend rate of 8.25 percent, the utility could have issued all $185 million of authorized, but unissued preferred stock remaining as of year end. At year-end 1994, CIPS had $2.6 million of temporary investments and $15.0 million of short-term borrowings.
CONSOLIDATED RESULTS OF OPERATIONS ---------------------------------- (1992-1994)
EARNINGS. Net income and earnings per share declined 1.8 percent in 1994 to $84.0 million and $2.46, respectively, compared with an increase of 18 percent in 1993. The return on average common equity for 1994 was 13.1% compared with 13.7% in 1993 and 11.8% in 1992. The declines in net income, earnings per share, and return on average common equity in 1994 were in line with expectations, as the increases in 1993 were primarily attributable to unusually high interchange sales by CIPS to other utilities caused by hot weather, a coal miners' strike and Midwest flooding. Contributing to the declines in 1994 were higher operating expenses primarily attributable to labor settlement costs and higher maintenance costs.
INVESTMENT REVENUES. Investment revenues are comprised of income from temporary investments, long-term marketable securities, and leveraged leases. Investment revenues declined $1.5 million in 1994 due principally to reduced revenue from leasing investment transactions. In 1993, investment revenues decreased slightly due to a decline in average temporary investment balances in 1993 compared with 1992.
CIPS RESULTS OF OPERATIONS -------------------------- (1992-1994)
ELECTRIC OPERATIONS. Electric kilowatthour sales, including interchange sales, declined 3 percent in 1994. Cooling degree days for 1994 were 11 percent lower than in 1993 and 9 percent lower than average. The 1994 electric margin (revenues less revenue taxes, fuel and purchased power) was $421.6 million compared to $418.2 million in 1993 and $381.4 million in 1992. The 1994 margin was favorably impacted by sales growth to commercial and industrial customers and by higher margin ratios on interchange economy and emergency sales to other utilities. The 1993 margin was favorably impacted by hot summer weather and increased interchange sales opportunities resulting from the hot weather, a coal miner's strike and Midwest flooding. Fuel costs were $1.65 per million Btu in 1994 and $1.67 per million Btu in 1993 and 1992. Purchased power amounts fluctuated between years according to system requirements and sales opportunities.
GAS OPERATIONS. Therm sales declined 1.3 percent in 1994 due principally to the mild weather in the fourth quarter of 1994 as compared to the same quarter in 1993. Heating degree days for 1994 were 8 percent lower than in 1993 and 4 percent lower than average. The 1994 gas margin (revenue less revenue taxes and gas costs) was $46.1 million compared to $48.2 million in 1993 and $44.6 million in 1992. The 1994 gas margin was negatively impacted by mild weather during 1994. Gas costs fluctuated according to system requirements in each year. The average price paid for gas from suppliers declined two and one-half cents per therm in 1994 and remained unchanged in 1993 and 1992.
OPERATING EXPENSES. Other operation expenses declined 2 percent in 1994, due principally to a reduction in the postretirement medical costs and deferral of certain litigation expenses involved with an environmental matter. Consistent with the ratemaking treatment for environmental remediation site costs, $1.9 million expensed in 1993 was credited to expense and deferred in 1994. Other operation expenses increased 9 percent in 1993 compared with 1992 due principally to postretirement medical costs which CIPS began accruing in April 1992. Maintenance expense changes between years are due to the normal planning and scheduling of major power plant maintenance outages. Depreciation and amortization expense increases are primarily due to property additions. Taxes other than income taxes generally will change as retail revenues change; however, taxes other than income taxes increased in 1994 compared to 1993, primarily due to payroll taxes which were reduced in 1993 due to the lockout of union-represented employees. Interest on long-term debt decreased in both 1994 and 1993 due to retirement of debt in 1994 and refinancing of long-term debt in 1993 at lower interest rates.
Miscellaneous, net, for 1993 decreased due to a one-time increase in miscellaneous income in 1992 resulting from a Federal Energy Regulatory Commission (FERC) order involving wholesale customers. Income tax expense reflects the changes in pre-tax income between years. In addition, the federal tax rate changed from 34 percent to 35 percent effective January 1, 1993.
OTHER MATTERS. Customer usage of electricity and natural gas varies with weather conditions, general business conditions, the state of the economy and the cost of energy services. The level of sales also is impacted by conditions in the interchange market. Further, certain large gas customers can purchase gas from alternative suppliers or bypass the utility system by switching to other fuels or by connecting directly to pipelines. Rates for retail electric and gas service are regulated by the Illinois Commerce Commission. Non-retail electric rates are regulated by FERC. The utility's rates are designed to recover operating costs including depreciation on utility plant investment. Changes in the cost of fuel for electric generation and gas costs generally are reflected in billings to customers on a timely basis through fuel and purchased gas adjustment clauses. Inflation continues to be a factor affecting operations, earnings, shareholders' equity and financial performance. The capacity participation agreement with one of CIPS's wholesale customers calls for a 115-megawatt reduction for the customer starting in 1995. This scheduled contract reduction will reduce wholesale power supply participation revenues for CIPS by approximately $9 million ($5.5 million after tax) per year. The reduction in revenues is expected to be partially offset by increases in revenues through normal growth and other marketing initiatives. Taking into account the recent reduction, CIPS has about 300 megawatts of uncommitted generating capacity over the next several years. CIPS expects other sales opportunities in the retail and wholesale electric markets will be forthcoming. A new marketing group was established January 1, 1995 in order to enhance the ability of CIPS to increase its market share. Recently CIPS reached an agreement with Union Electric Company to sell 150 megawatts of capacity and energy from 1998 to 2005. The sale to UE is subject to regulatory approval. On January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). Under the statement, the Company's investments in debt and marketable securities are reported at fair value with unrealized gains and losses reported as a net amount in a separate component of shareholders' equity until realized. The adoption of SFAS No. 115 did not have a material effect on financial position or results of operations. During 1994, CIPS initiated a business process re-engineering study to review all aspects of the utility's business. Initial recommendations to make operations more efficient and cost effective have been made. The study will continue into 1995 when final recommendations and implementation of plans to streamline the utility's business processes will take place. CIPS plans to accomplish personnel reductions of 13 to 15 percent over the next several years through voluntary separation and attrition. Early in 1995, CIPS offered a voluntary separation program to most regular salaried
employees. The voluntary separation program provides eligible employees the option of leaving the utility and receiving a package of benefits. The program is expected to cost about $5 million (pre-tax), but will be partially offset in 1995 and create additional savings in future years by reducing total annual operating expenses.
ENVIRONMENTAL REMEDIATION COSTS. The utility has identified 13 former manufactured gas plant sites (environmental remediation sites) which contain potentially harmful materials. In 1990, one site was added to the United States Environmental Protection Agency (USEPA) Superfund list. The utility is implementing an approved long-term remedial plan for the site. Costs and associated legal expenses related to studies and remediation work have been incurred at other sites. Since 1987, the estimated incurred costs related to studies and remediation at these 13 sites and associated legal expenses and certain carrying charges are being accrued and deferred rather than expensed currently, pending recovery either from rates, from insurance carriers or from other parties. Management believes that costs incurred in connection with the sites that are not recovered from insurance carriers or other parties will be recovered through utility rates. Accordingly, management believes that costs incurred in connection with these sites will not have a material adverse effect on financial position or results of operations. (See Note 2 to Consolidated Financial Statements.)
FUEL STRATEGIES. In order to reduce fuel costs and other expenses while remaining in compliance with environmental requirements, CIPS is evaluating various alternatives. These alternatives involve one or more of the following; renegotiation of existing fuel contracts; buyout, buydown, replacement or termination of fuel contracts; switching to other coal suppliers; switching to lower sulfur coal; discontinuance of, or renovation and continued operation of, the scrubber at Newton Unit 1. The study of these alternatives is not complete and management has not decided whether its fuel and environmental compliance strategies will change. Maintaining the current compliance strategy, or adoption of certain alternatives in fuel and/or environmental strategies, could have a significant effect on operation and maintenance expense, fuel expense, construction expenditures, financing needs and rate-making treatment. Capital expenditures for the various alternatives could range from $20 to $80 million over the 1995-1999 period. External financing to fund such additional capital requirements may be required. If the entire additional amount were financed with new debt capital, management anticipates the debt ratio would not exceed the stated financial objective of maintaining a debt ratio of no more than 45 percent.
CLEAN AIR ACT. CIPS' current compliance strategy for Phases I and II of the Clean Air Act Amendments of 1990 is to switch to lower sulfur coal at some generating units along with increased scrubbing at Newton Unit 1. The currently estimated capital costs of compliance based on the current strategy are included in the five-year construction budget. As described under "Fuel Strategies" above, however, the five-year construction costs may increase if studies being undertaken by CIPS indicate that renovations to the Newton Unit
1 scrubber are required to allow existing or additional levels of scrubbing or if such studies indicate that CIPS should change its compliance strategy to place more reliance on fuel switching. (See Note 2 to Consolidated Financial Statements.)
FERC ORDER 636. During 1992, FERC issued Order No. 636. This and successor orders have resulted in substantial restructuring of the service obligations of interstate pipeline suppliers. (See Note 2 to Consolidated Financial Statements.)
ENERGY POLICY ACT. The National Energy Policy Act of 1992 (NEPA) contains, among other provisions, legislation designed to promote competition in the development of wholesale power generation in the electric utility industry. NEPA exempts a new class of independent power producers from traditional utility regulation. This new class of producers may build generating plants and sell electricity in wholesale markets without the same constraints as regulated utilities. NEPA also allows FERC to order wholesale "wheeling" by public utilities to provide utility and non-utility generators access to public utility transmission facilities. Public utilities not voluntarily providing access to their transportation system at agreed upon rates may be ordered to deliver power at rates to be established by FERC. Although the final impact of the provisions of NEPA cannot be predicted, management believes increased competition in generation and transmission may affect the traditional marketing and pricing strategies of the utility business.
LABOR DISPUTES. The International Union of Operating Engineers Local 148 and the International Brotherhood of Electrical Workers Local 702 each filed unfair labor practice charges in 1993 with the National Labor Relations Board (NLRB) relating to the legality of a lockout by CIPS of both unions during 1993. The Peoria Regional Office of the NLRB has issued complaints against CIPS concerning its lockout of both unions. The unions seek, among other things, back pay and other benefits for the period of the lockout. CIPS estimates the amount of back pay and other benefits for both unions to be less than $12 million. Management believes the lockout was both lawful and reasonable and that the final resolution of the disputes will not have a material adverse effect on financial position or results of operations of the Company or CIPS. (See Note 2 to Consolidated Financial Statements.)
GRAPHIC MATERIAL APPENDIX [Graph]
This bar graph displays the six-year (1989-1994) comparison of the rate of return on average common equity and would relate to the Financial Condition portion of the preceeding Management's Discussion and Analysis.
Rate of Return on Average Common Equity (in percent)
11.0% 11.0% 11.9% 11.8% 13.7% 13.1% Year '89 '90 '91 '92 '93 '94
[Graph]
This bar graph displays the six-year (1989-1994) comparison of CIPSCO capitalization (total dollar amount for each year is either slightly above or slightly below $1.2 billion (rounded)) and would relate to the Financial Condition portion of the preceeding Management's Discussion and Analysis.
CIPSCO CAPITALIZATION (in billions of dollars and percent)
Long-Term Debt 42% 42% 42% 42% 41% 39% Preferred Stock 7 7 7 6 7 7 Common Equity 51 51 51 52 52 54 Year '89 '90 '91 '92 '93 '94
[Graph]
This bar graph displays the six-year (1989-1994) comparison of market value to book value and would relate to the Capital and Financing Requirements portion of the preceeding Management's Discussion and Analysis.
(in dollar per common share at year end)
Market Value 22.88 21.75 27.88 30.25 30.75 27.00 Book Value 17.52 17.63 17.86 18.08 18.60 19.01 Year '89 '90 '91 '92 '93 '94
[Graph]
This bar graph displays the six-year (1989-1994) comparison of system generating capability at the time of peak to gross system peak and would relate to the Capital and Financing Requirements portion of the preceeding Management's Discussion and Analysis.
(in megawatts)
System Generating Capability at Time of Peak 2,637 2,647 2,679 2,707 2,727 2,844 Gross System Peak 1,954 2,027 2,093 1,930 2,157 2,194 Year '89 '90 '91 '92 '93 '94
[Graph]
This bar graph displays the six-year (1989-1994) comparison of heating and cooling degree days matched against normal temperatures and would relate to the Electric Operations portion of the preceeding Management's Discussion and Analysis.
(Degree days based on average daily temperature of 65 degrees)
Heating Degree Days 5,632 4,681 5,013 5,030 5,702 5,222 Compared to Normal 5,441 5,441 5,441 5,441 5,441 5,441 Cooling Degree Days 1,171 1,178 1,543 884 1,213 1,078 Compared to Normal 1,182 1,182 1,182 1,182 1,182 1,182 Year '89 '90 '91 '92 '93 '94
Item 8.


Item 8. Financial Statements and Supplementary Data.
CIPSCO INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, __________________________________
1994 1993 1992 __________ __________ __________ (in thousands) Operating Revenues: Electric $ 697,427 $ 688,820 $ 593,973 Provision for revenue refunds - - 1,646 _________ _________ _________ 697,427 688,820 595,619 Gas 138,418 145,702 133,756 Investment 8,770 10,238 10,502 _________ _________ _________
Total operating revenues 844,615 844,760 739,877 _________ _________ _________ Operating Expenses: Fuel for electric generation 196,324 186,938 172,544 Purchased power 55,543 60,181 21,094 Gas costs 85,043 90,097 82,553 Other operation 140,068 142,716 131,305 Maintenance 65,176 61,218 64,092 Depreciation and amortization 81,099 78,062 74,170 Taxes other than income taxes 56,017 54,813 51,133 _________ _________ _________
Total operating expenses 679,270 674,025 596,891 _________ _________ _________
Operating Income 165,345 170,735 142,986 _________ _________ _________
Interest and Other Charges: Interest on long-term debt of subsidiary 32,842 34,421 36,397 Interest on provision for revenue refunds - - (803) Other interest charges 378 603 398 Allowance for funds used during construction (919) (2,259) (3,226) Preferred stock dividends of subsidiary 3,510 3,718 4,549 Miscellaneous, net (3,502) (3,107) (7,579) _________ _________ _________
Total interest and other charges 32,309 33,376 29,736 _________ _________ _________
Income Before Income Taxes 133,036 137,359 113,250 Income taxes 49,082 51,861 40,751 _________ _________ _________
Net Income $ 83,954 $ 85,498 $ 72,499 ========== ========== ==========
Average Shares of Common Stock Outstanding 34,107 34,108 34,108
Earnings Per Average Share of Common Stock $2.46 $2.51 $2.13
The accompanying notes to consolidated financial statements are an integral part of these statements.
CIPSCO INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ___________________________ 1994 1993 _____________ ____________ (in thousands)
ASSETS Utility Plant, at original cost: Electric $2,264,930 $2,172,259 Gas 220,347 208,208 __________ __________ 2,485,277 2,380,467 Less--Accumulated depreciation 1,077,533 1,020,097 __________ __________ 1,407,744 1,360,370 Construction work in progress 31,816 61,104 __________ __________ 1,439,560 1,421,474 __________ __________
Current Assets: Cash 1,963 4,630 Temporary investments, at cost which approximates market 5,875 5,527 Accounts receivable, net 67,579 61,445 Accrued unbilled revenues 30,484 38,774 Materials and supplies, at average cost 39,817 40,824 Fuel for electric generation, at average cost 30,305 26,046 Gas stored underground, at average cost 13,167 14,335 Prepayments 10,925 10,142 __________ __________ 200,115 201,723 __________ __________ Investments and Other Assets: Investment in marketable securities 43,929 42,703 Investment in leveraged leases 49,933 42,216 Other 43,820 49,634 __________ __________ 137,682 134,553 __________ __________
$1,777,357 $1,757,750 ========== ==========
CAPITALIZATION AND LIABILITIES Capitalization: Common shareholders' equity: Common stock, no par value, authorized shares, 100,000,000; outstanding 34,069,542 and 34,107,706 shares, respectively $ 356,812 $ 357,212 Retained earnings 292,418 277,040 Unrealized investment losses, net (1,617) - __________ __________ 647,613 634,252 Preferred stock of subsidiary 80,000 80,000 Long-term debt of subsidiary 459,619 474,323 __________ __________ 1,187,232 1,188,575 __________ __________
Current Liabilities: Long-term debt of subsidiary due within one year 15,000 20,000 Short-term borrowings 14,985 - Accounts payable 54,021 56,039 Accrued wages 9,833 12,775 Accrued taxes 12,629 12,973 Accrued interest 9,408 9,204 Other 31,488 34,902 __________ __________ 147,364 145,893 __________ __________
Deferred Credits: Accumulated deferred income taxes 313,072 294,732 Investment tax credits 55,595 58,962 Regulatory liabilities, net 74,094 69,588 __________ __________ 442,761 423,282 __________ __________ $1,777,357 $1,757,750 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
CIPSCO INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31, __________________________________ 1994 1993 1992 __________ __________ __________ (in thousands)
OPERATING ACTIVITIES: Net income $ 83,954 $ 85,498 $ 72,499 Adjustments to reconcile net income to net cash provided: Depreciation and amortization 81,099 78,062 74,170 Allowance for equity funds used during construction (AFUDC) (630) (1,459) (2,162) Deferred income taxes, net 19,891 7,900 20,149 Investment tax credit amortization (3,367) (3,366) (3,336) Cash flows impacted by changes in assets and liabilities: Accounts receivable, net and accrued unbilled revenues 2,156 (15,603) 4,900 Fuel for electric generation (4,259) 8,336 2,872 Other inventories 2,175 (4,450) (667) Prepayments (783) 5,502 21,159 Other assets 5,814 19,231 (19,761) Accounts payable and other (5,433) 6,009 19,225 Accrued wages, taxes and interest (3,082) 5,867 (4,580) Accumulated provision for revenue refunds - - (75,449) Other 626 4,400 (5,580) __________ __________ _________ Net cash provided by operating activities 178,161 195,927 103,439 __________ __________ _________ INVESTING ACTIVITIES: Utility construction expenditures, excluding AFUDC (95,682) (85,453) (117,198) Allowance for borrowed funds used during construction (289) (800) (1,064) Changes in temporary investments (348) (2,949) 95,575 Long-term investment in marketable securities (2,843) (2,790) (3,510) Long-term investment in leveraged leases (7,717) (10,832) (13,388) __________ __________ _________ Net cash used in investing activities (106,879) (102,824) (39,585) __________ __________ _________
FINANCING ACTIVITIES: Common stock dividends paid (67,874) (66,510) (65,146) Proceeds from issuance of long-term debt of subsidiary - 195,000 199,000 Repayment of long-term debt of subsidiary (20,000) (205,000) (190,500) Retirement of common stock (1,020) - - Redemption of preferred stock of subsidiary - (27,500) (18,245) Proceeds from issuance of preferred stock of subsidiary - 42,500 - Proceeds from issuance of (repayment of) short-term borrowings 14,985 (21,393) 21,393 Issuance expense, discount and premium (40) (7,104) (11,718) _________ _________ _________ Net cash used in financing activities (73,949) (90,007) (65,216) _________ _________ _________
Net increase (decrease) in cash (2,667) 3,096 (1,362) Cash at beginning of year 4,630 1,534 2,896 _________ _________ _________ Cash at end of year $ 1,963 $ 4,630 $ 1,534 ========= ========= ========= Supplemental disclosures of cash flow information: Cash payments during the year: Interest, net of amounts capitalized $ 30,714 $ 31,058 $ 38,382 Income taxes $ 34,264 $ 36,718 $ 10,326
The accompanying notes to consolidated financial statements are an integral part of these statements.
CIPSCO INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years Ended December 31, __________________________________ 1994 1993 1992 __________ __________ __________ (in thousands)
Balance, beginning of year $ 277,040 $ 259,338 $ 251,893 Add (deduct): Net income 83,954 85,498 72,499 Common stock dividends ($1.99, $1.95 and $1.91 per share, respectively) (67,874) (66,510) (65,146) Other (702) (1,286) 92 _________ _________ _________ Balance, end of year $ 292,418 $ 277,040 $ 259,338 ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CIPSCO Incorporated and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CIPSCO Incorporated (an Illinois corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CIPSCO Incorporated and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois, January 27, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the accounts of CIPSCO Incorporated, a holding company, Central Illinois Public Service Company (CIPS), a combination electric and gas utility, and CIPSCO Investment Company (CIC). The four subsidiaries of CIC are CIPSCO Securities Company, which invests in marketable securities; CIPSCO Leasing Company, which invests in leveraged leases directly or through subsidiaries; CIPSCO Energy Company, which invests in energy projects or leases through subsidiary companies; and CIPSCO Venture Company, which invests in opportunities within the CIPS utility service territory to assist economic development efforts in the region. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. Certain items previously reported for years prior to 1994 have been reclassified to conform with the current-year presentation. The operating revenues of all investment activities are included under the caption Operating Revenues, "Investment." Operating expenses are included under the appropriate captions as shown on the Consolidated Statements of Income.
Concentration of Credit Risk. CIPS provides electric service to about 317,000 customers in 557 communities and natural gas service to approximately 166,000 customers in 267 communities throughout a 20,000-square-mile area in central and southern Illinois. Credit risk is spread over a diversified base of residential, commercial and industrial customers. See Note 3 to Consolidated Financial Statements for a discussion of receivables related to the leveraged lease investments.
Regulation. CIPS is a public utility subject to regulation by the Illinois Commerce Commission (Illinois commission) and the Federal Energy Regulatory Commission (FERC). The utility maintains its accounts in accordance with the Uniform System of Accounts as defined by these agencies. Its accounting policies conform to generally accepted accounting principles applicable to rate-regulated enterprises and reflect the effects of the ratemaking process.
Operating Revenues. CIPS accrues an estimate of electric and gas revenues for service rendered but unbilled at the end of each accounting period. Investment revenues are comprised of interest on temporary investments and income from marketable securities and leveraged leases.
Utility Plant. Utility plant in service is stated at original cost. Substantially all of the utility plant of CIPS is subject to the lien of its first mortgage bond indenture. Additions to utility plant include the cost of contracted services, material, labor, overheads and an allowance for funds used during construction. Maintenance and repair of property and replacement
of minor items of property are charged to operating expenses. Property retired is removed from utility plant accounts and charged to accumulated depreciation.
Allowance for Funds Used During Construction (AFUDC). AFUDC is included in Construction Work in Progress (CWIP) and represents the cost of financing that construction. AFUDC does not represent a current source of cash funds. The inclusion of AFUDC in CWIP affords the opportunity to earn a return on the cost of construction capital after the related asset is placed in service and included in the rate base. The AFUDC rate, based on a formula prescribed by the FERC, on a before- tax basis, was 9% in 1994 and 1993, and 10% in 1992.
Depreciation. Depreciation expense is based on remaining life straight-line rates (composite, approximately 3.4% in 1994 and 1993, and 3.3% in 1992) applied to the various classes of depreciable property.
Fuel and Gas Costs. CIPS adjusts fuel expense to recognize over- or under- recoveries from customers of allowable fuel costs through the uniform fuel adjustment clause (FAC). The FAC provides for the current recovery of changes in the cost of fuel for electric generation in billings to customers. Monthly, the difference between revenues recorded through application of the FAC and recoverable fuel costs is recorded as a current asset or liability, pending reflection in future billings to customers, with a corresponding decrease or increase in cost of fuel for electric generation. The uniform purchased gas adjustment clause (PGA) provides a matching of gas costs with revenues. Monthly, the difference between revenues recorded through application of the PGA and recoverable gas costs is recorded as a current asset or liability with a corresponding decrease or increase in the gas cost. The cumulative difference for the calendar year is collected from, or refunded to, customers over a one-year period beginning in the following April. The Illinois commission conducts annual reconciliation proceedings with respect to each year's FAC and PGA revenues and has completed its review for all years prior to 1993. Reconciliation proceedings for 1993 commenced in July 1994. No reconciliation proceeding has yet commenced for the year 1994.
Income Taxes and Investment Tax Credits. Deferred income taxes are recorded which result from the use of accelerated depreciation methods, rapid amortization, repair allowance and certain other temporary differences in recognition of income and expense for tax and financial statement purposes. CIPSCO 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. Investment tax credits are being amortized over the estimated average useful lives of the related properties. The Company adopted, effective January 1, 1993, the liability method of accounting for deferred income taxes required by Statement of Financial Accounting Standards (SFAS) No. 109. This statement required the establishment of deferred tax liabilities and assets for all temporary
differences between the tax basis of assets and liabilities and the amounts reported in the financial statements. (See Note 10 to Consolidated Financial Statements.)
Cash and Temporary Investments. Temporary investments consist of deposits and U.S. Treasury obligations. For purposes of Consolidated Statements of Cash Flows, temporary investments are not considered cash equivalents.
Marketable Securities. CIC holds a portfolio consisting primarily of common and preferred stocks that are substantially hedged with futures and options. (See Note 11 to Consolidated Financial Statements.) All securities are publicly traded. The investments and related hedging instruments are managed by professional investment managers in an overall managed portfolio strategy. Common stocks consist of investments that are representative of the Standard & Poor's 100 Index. Preferred stocks consist of perpetual and sinking fund issues primarily of public utilities, utility holding companies, commercial banks and bank holding companies. The portfolio also includes an investment in a limited partnership which pools money from multiple investors to invest in a variety of investment vehicles. The investments in common and preferred stocks and the options and futures used to hedge these investments are measured at market value on the Consolidated Balance Sheets with the change in value reflected in the valuation caption of the capitalization section in conformity with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Gains and losses on marketable securities are recognized when realized for Income Statement purposes. Gains and losses on purchased hedges are deferred until the gains and losses on the underlying securities are realized and recognized. For hedged investments, the investment and related hedging instrument have been combined on the Consolidated Balance Sheets.
2. COMMITMENTS AND CONTINGENCIES
Environmental Remediation Costs. The utility and certain of its predecessors and other affiliates operated facilities in the past for manufacturing gas from coal. In connection with manufacturing gas, various by-products were produced, some of which remain on sites where the facilities were located. The utility has identified 13 of these former manufactured gas plant sites (environmental remediation sites) which contain potentially harmful materials. Under directives from the Illinois Environmental Protection Agency (IEPA), CIPS has incurred costs and associated legal expenses related to the investigation and remediation of the sites. One site was added to the United States Environmental Protection Agency (USEPA) Superfund list on August 30, 1990. On September 30, 1992 the IEPA, in consultation with the USEPA, decided that the long-term remedial plan for this site should consist of a ground-water pump-and-treat program. The IEPA and CIPS entered into an agreement, which received required court approval on March 14, 1994, for CIPS to carry out the remedial action with the IEPA providing oversight. It is not known at this time what specific remedial action will be required at the other 12 sites. In 1987, CIPS filed a lawsuit against a number of insurance carriers seeking full indemnification for all costs in connection with certain environmental sites. As of December 31, 1994, all but two insurance carriers have settled. In 1991, a circuit court entered a verdict in favor of CIPS involving the coverage under one environmental liability policy. On August 26, 1994, the Illinois Appellate Court reversed the circuit court ruling on the basis that no claim was made during the policy coverage period. CIPS filed an appeal to the Illinois Supreme Court on December 27, 1994. The Illinois Supreme Court has discretion to accept or deny the appeal. The estimated incurred costs relating to studies and remediation at these 13 sites and associated legal expenses are being accrued and deferred rather than expensed currently, pending recovery through rates, from insurance carriers or other parties. At December 31, 1994, the $38.7 million has been deferred representing costs incurred and estimates for costs of completing studies at various sites and an estimate of remediation costs at the Superfund site. The total of the costs deferred, net of recoveries from insurers and through rate riders described below, was $1.3 million at December 31, 1994. In 1992, the Illinois commission issued an Order (the Generic Order) in its consolidated generic proceeding regarding appropriate ratemaking treatment of cleanup costs incurred by Illinois utilities with respect to environmental remediation sites. The Generic Order indicates that allowed cleanup costs may include prudently incurred cost of investigation, assessment and cleanup of environmental remediation sites, as well as litigation costs, including those involved in insurance recovery claims. The Generic Order authorizes utilities, including CIPS, to propose a mechanism to recover cleanup costs which is consistent with the provisions of the order. Such a mechanism must, among other things, provide for (1) recovery of cleanup costs over a five-year period, excluding carrying costs associated with the unrecovered balance of cleanup costs from the time that the recovery mechanism becomes effective; (2) a return to ratepayers over a five-year amortization period of any reimbursement of cleanup costs received from insurance carriers or other
parties; and (3) a prudence review of each utility's expenditures. The Generic Order was upheld on appeal by the Third District Illinois Appellate Court. That decision held that a rate rider mechanism is an appropriate means for utilities to recover cleanup costs. On April 6, 1994, the Illinois Supreme Court granted an intervenor's Petition for Leave to Appeal. The intervenor maintains that recovery of clean-up costs should not be allowed and that use of a rider mechanism for cost recovery is unlawful. CIPS and other utilities opposed the arguments of the intervenor and argued that the Illinois commission's decision to deny recovery of carrying costs associated with unrecovered balance of clean-up costs should be reversed. Management cannot predict what action the Illinois Supreme Court may take in this matter. On March 26, 1993, the Illinois commission approved CIPS' proposed environmental cost-recovery rate riders, effective with April 1993 billings to customers. Known as the electric environmental adjustment clause and the gas environmental adjustment clause, the riders are designed to enable CIPS to recover from its customers costs associated with cleanup of the environmental remediation sites, along with associated legal expenses, over a five-year period on terms consistent with the Generic Order. The environmental adjustment clause riders provide for an annual review of amounts recovered through the riders. Amounts found to have been incorrectly included would be subject to refund. Through December 31, 1994, CIPS collected $2.9 million from its customers pursuant to the riders. The total costs to be incurred for the cleanup of these sites or the possible recovery from insurance carriers and other parties cannot be estimated. Management believes that any costs incurred in connection with the sites that are not recovered from insurance carriers or other parties will be recovered through utility rates. Accordingly, management believes that costs incurred in connection with these sites will not have a material adverse effect on financial position or results of operations.
FERC Order 636. During 1992, FERC issued Order No. 636. This and successor orders have resulted in substantial restructuring of the service obligations of interstate pipeline suppliers. Order No. 636 provided mechanisms for pipelines to recover transition costs associated with the restructuring. CIPS has paid substantially all direct transition costs associated with the pipeline restructuring and is currently recovering all transition costs in its rates. Any future transition costs identified and billed from pipeline suppliers are expected to be recoverable from customers of CIPS.
Clean Air Act. CIPS' current compliance strategy to meet Phase I and II of the sulfur dioxide emission reduction requirements of the Clean Air Act Amendments of 1990 (Amendments) is to switch to a lower sulfur coal at some of its units along with increased scrubbing with its existing scrubber at Newton Unit 1. The current estimated capital costs of compliance based on the current strategy is included in the five-year construction budget. However, the five-year construction costs may increase if studies being undertaken by CIPS indicate that renovations to the Newton Unit 1 scrubber are required to allow existing or additional levels of scrubbing or if such studies indicate that CIPS should change its compliance strategy to place more reliance on fuel switching. In 1991, in accordance with the plan to switch some units to lower sulfur coal, the utility signed a long-term coal contract with an existing supplier for lower sulfur Illinois coal. Due to the magnitude of the supplier's capital investment, the contract includes a graduated termination charge. In 1995 CIPS can terminate the contract under certain conditions, and CIPS would be required to pay approximately $41 million (plus an inflation adjustment) in termination charges. During 1995, and each subsequent year, the termination charge is reduced according to a formula using tons of coal purchased. The termination charge would not be effective if CIPS terminated the contract due to failure of the coal to meet quality specifications provided for in the contract.
Labor Disputes. The International Union of Operating Engineers Local 148 and the International Brotherhood of Electrical Workers Local 702 have both filed unfair labor practice charges with the National Labor Relations Board (NLRB) relating to the legality of the lockout by CIPS of both unions during 1993. The Peoria Regional Office of the NLRB has issued complaints against CIPS concerning its lockout of both unions. Both unions seek, among other things, back pay and other benefits for the period of the lockout. CIPS estimates the amount of back pay and other benefits for both unions to be less than $12 million dollars. A hearing, before an administrative law judge of the NLRB, began in 1994 and is scheduled to be completed during 1995. Management believes the lockout was both lawful and reasonable and that the final resolution of the disputes will not have a material adverse effect on financial position or results of operations of the Company or CIPS.
Other Issues. CIPSCO's utility subsidiary is involved in other legal and administrative proceedings before various courts and agencies with respect to rates, taxes, gas and electric fuel cost reconciliations, service area disputes, environmental torts and other matters. Although unable to predict the outcome of these matters, management believes that appropriate liabilities have been established and that final disposition of these actions will not have a material adverse effect on financial position or results of operations.
3. LEVERAGED LEASES
CIC and its subsidiaries are the lessors in several leveraged lease arrangements involving a commercial jet aircraft, an interest in a natural gas liquids plant, natural gas processing equipment, retail department store properties, and combustion turbine generating units. These leases expire in various years beginning in 1999 through 2013.
The aggregate residual values are estimated to be 42 percent of the aggregate cost. CIC's aggregate equity investment represents 22 percent of the aggregate purchase price of the properties. The remaining 78 percent was financed by nonrecourse debt provided by lenders who have been granted, as their sole remedy in the event of default by the lessees, an assignment of rentals due under the leases and a security interest in the leased properties. The following is a summary of the components of CIC's net investment in leveraged leases at December 31:
1994 1993 1992 _________ _________ ____________ (in thousands)
Rentals receivable (net of nonrecourse debt) $ 24,894 $ 25,776 $ 25,196 Estimated residual value of leased property 64,599 53,671 33,094 Less - Unearned and deferred income (39,560) (37,231) (26,906) _______ _______ _______
Investment in leveraged leases 49,933 42,216 31,384 Less - Deferred taxes, net of AMT (25,817) (19,777) (7,942) _______ _______ _______ Net investment $ 24,116 $ 22,439 $ 23,442 ======= ======= =======
The following is a summary of the components of income from leveraged leases for the years ended December 31:
1994 1993 1992 _________ _________ ____________ (in thousands)
Income before income taxes $ 4,664 $ 4,702 $ 3,071 Income tax expense (1,874) (2,037) (1,165) _______ _______ _______
Income from leveraged leases $ 2,790 $ 2,665 $ 1,906 ======= ======= =======
4. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
CIPS sponsors a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and employees' final average pay. Pension costs are accrued on a current basis in accordance with actuarial determinations. The pension plan is funded in compliance with income tax regulations and federal funding requirements. CIPS uses a September 30 measurement date for its valuation of pension plan assets and liabilities. The utility also provides certain employees with pension benefits which exceed the qualified plan limits imposed by federal tax law.
Funded Status of Pension Plan (in thousands)
1994 1993 1992 _________ _________ _________
Fair value of plan assets* $188,449 $177,824 $150,729 _______ _______ _______
Accumulated benefit obligations:** Vested benefits 120,032 125,641 98,770 Nonvested benefits 3,644 559 284 Effect of projected future compensation levels (based on 4.8% annual increases in 1994, 4.3% in 1993 and 4.5% in 1992) 38,974 41,214 37,025 _______ _______ _______
Total projected benefit obligation 162,650 167,414 136,079 _______ _______ _______ Plan assets in excess of projected benefit obligation $ 25,799 $ 10,410 $ 14,650 ======= ======= =======
________________________ * Plan assets are invested in common and preferred stocks, bonds, money market instruments, guaranteed income contracts and real estate. ** The assumed weighted average discount rate was 7.75% for 1994, 6.50% for 1993 and 7.25% for 1992.
Pension Plan Assets in Excess of Projected Benefit Obligation (in thousands)
1994 1993 1992 _________ _________ _________
Plan assets in excess of projected benefit obligation $ 25,799 $ 10,410 $ 14,650 Unrecognized transition asset (being amortized over 18.2 years) (4,399) (4,862) (5,325) Unrecognized net (gain) loss (23,146) (5,188) (13,617) Unrecognized prior service cost 5,679 760 1,590 _______ _______ _______
Prepaid (Accrued) pension costs at September 30 3,933 1,120 (2,702) Expense, net of funding October to December (80) 1,944 91 _______ _______ _______ Prepaid (Accrued) pension costs at December 31 $ 3,853 $ 3,064 $ (2,611) ======= ======= =======
Components of Net Pension Expense (in thousands)
1994 1993 1992 _________ _________ _________
Service cost (present value of benefits earned during the year) $ 8,053 $ 6,398 $ 5,721 Interest cost on projected benefit obligation 10,846 10,193 9,302 Actual return on plan assets (expected long-term rate of return was 8%) (6,795) (21,101) (13,755) Deferred investment gains (losses) (6,242) 10,071 4,834 Amortization of the unrecognized prior service cost 61 118 118 Amortization of the transition amount (463) (463) (463) _______ _______ _______ Net pension expense $ 5,460 $ 5,216 $ 5,757 ======= ======= =======
Effective January 1, 1993, CIPS adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The standard requires companies to recognize the cost of providing postretirement medical and life insurance benefits over the employees' service period. CIPS is funding the
medical benefits under two Voluntary Employee Beneficiary Association trusts (VEBA), and a 401(h) account established within the CIPS retirement income trust. CIPS sponsors postretirement plans providing medical and life benefits for certain of its retirees and their eligible dependents. The medical plan pays percentages of eligible medical expenses incurred by covered retirees after a deductible has been met, and after taking into account payment by Medicare or other providers. Currently, participants become eligible for coverage if they retire from CIPS after meeting age and years of service eligiblity requirements. The life insurance plan continues for all retirees who have been in the plan as employees for ten years or more. CIPS uses a September 30 measurement date for its valuation of postretirement assets and liabilities.
Funded Status of Postretirement Benefit Plans (in thousands)
1994 1993 _________ ________
Fair value of plan assets* $ 26,874 $ 13,302 _______ _______
Accumulated benefit obligations: Retirees 47,494 47,269 Fully eligible active employees 15,407 15,006 Other active employees 64,188 67,007 _______ _______
Total accumulated benefit obligations 127,089 129,282 _______ _______
Accumulated benefit obligations in excess of plan assets (100,215) (115,980) Unrecognized transition obligation (being amortized over 20 years) 104,695 110,511 Unrecognized net (gain) loss (including changes in assumptions) (21,307) (11,185) _______ _______ Accrued postretirement benefit cost at September 30 (16,827) (16,654) Expense, net of funding, October to December 14,906 14,912 _______ _______
Accrued postretirement benefit cost at December 31 $ (1,921) $ (1,742) ======= =======
* Plan assets are invested in common and preferred stocks, bonds, money market instruments, guaranteed income contracts and real estate.
Components of Postretirement Benefit Cost (in thousands)
1994 1993 _________ _________
Service costs on benefits earned $ 4,108 $ 4,215
Interest costs on accumulated benefit obligations 8,918 9,948 Actual return on plan assets (212) (1,038) Deferred investment gains (losses) (1,601) 397 Amortization of transition amounts 5,816 5,816 _______ _______ Postretirement benefit cost $ 17,029 $ 19,338 ======= =======
For purposes of calculating the postretirement benefit obligation it is assumed that health-care costs will increase by 11.4% in 1995, and that the rate of increase thereafter (the health-care cost trend rate) will decline to 4% in 2007 and subsequent years. The health-care cost trend rate has a significant effect on the amounts reported for costs each year as well as on the accumulated postretirement benefit obligation. To illustrate, increasing the assumed health-care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of September 30, 1994 by $18.8 million and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost $2.5 million annually. The weighted-average discount rate used to determine the accumulated postretirement benefit obligation was 8.25 percent in 1994 and 7 percent in 1993. The expected long-term rate of return on plan assets was 8 percent in both years. In March 1992, CIPS was granted rates by the Illinois commission which included CIPS' estimated postretirement costs determined on an accrual basis of accounting. CIPS' financial reporting for postretirement costs is consistent with the rate treatment. Therefore, adoption of SFAS No. 106 did not have a material effect on financial position or results of operations. The Company adopted SFAS No. 112, "Employers' Accounting for Postretirement Benefits," in 1993. The statement required the accrual of certain postemployment benefits for former or inactive employees. The adoption of SFAS No. 112 did not have a material effect on financial position or results of operations.
5. PREFERRED STOCK OF SUBSIDIARY
6. COMMON SHAREHOLDERS' EQUITY
Common Stock. In December 1994, CIPSCO purchased 38,164 shares from shareholders who held less than 100 shares. The repurchase reduced common stock and retained earnings.
Retained Earnings. CIPSCO is subject to restrictions on the use of retained earnings for cash dividends on common stock applicable to all corporations under the Illinois Business Corporation Act. CIPS is subject to the same restrictions, as well as those contained in its mortgage indenture and articles of incorporation. At December 31, 1994, 1993 and 1992, no amount of retained earnings was restricted.
7. LINES OF CREDIT AND SHORT-TERM BORROWINGS
External financing needs may be met from the sale of commercial paper or short- term borrowings from banks. CIPSCO and CIC have joint bank lines of credit of $30 million. The banks are compensated for these lines of credit. CIPS has arrangements for bank lines of credit which totaled $72.8 million at December 31, 1994. CIPS compensates banks for lines of credit totaling $60 million. The bank lines of credit are for corporate purposes including the support of any commercial paper borrowings. At December 31, 1994 there were no short-term borrowings from the lines of credit at CIPSCO, CIC, or CIPS, however, CIPS did have $15.0 million in commercial paper outstanding.
8. LONG-TERM DEBT OF SUBSIDIARY
Maturities and sinking fund requirements of CIPS' long-term debt through 1999 are as follows: Sinking Fund Maturities Requirements Total __________ ____________ _______ (in thousands)
1995 $15,000 $150 $15,150 1996 - 150 150 1997 58,000 - 58,000 1998 - - - 1999 50,000 - 50,000
In 1994 and 1993 the sinking fund requirements were satisfied by the application of net expenditures for bondable property in an amount equal to 166-2/3 percent of the annual requirement. The utility expects to meet the 1995 requirement in the same manner.
Long-term debt outstanding at December 31, was: 1994 1993 Amount Amount ______ ______ (in thousands) First mortgage bonds (principal amount): Series J, 4 1/2% due 5/1/1994 $ - $20,000 Series K, 4 5/8% due 6/1/1995 15,000 15,000 Series L, 5 7/8% due 5/1/1997 15,000 15,000 Series 6 5/8% due 8/1/2009 (for Newton pollution control) 1,000 1,000 Series W, 7 1/8% due 5/15/1999 50,000 50,000 Series W, 8 1/2% due 5/15/2022 33,000 33,000 Series X, 6 1/8% due 7/1/1997 43,000 43,000 Series X, 7 1/2% due 7/1/2007 50,000 50,000 Series Y, 6 3/4% due 9/15/2002 23,000 23,000 Series Z, 6% due 4/1/2000 25,000 25,000 Series Z, 6 3/8% due 4/1/2003 40,000 40,000 _______ _______ 295,000 315,000 _______ _______
Pollution control loan obligations: 1990 Series A, 7.60% due 3/1/2014 20,000 20,000 1990 Series B, 7.60% due 9/1/2013 32,000 32,000 1993 Series A, 6 3/8% due 1/1/2028 35,000 35,000 1993 Series B-1, 4 3/8% due 6/1/2028 17,500 17,500 1993 Series B-2, 5.90% due 6/1/2028 17,500 17,500 1993 Series C-1, 4.20% due 8/15/2026 35,000 35,000 1993 Series C-2, 5.70% due 8/15/2026 25,000 25,000 _______ _______ 182,000 182,000 _______ _______
Unamortized net debt premium and discount (2,381) (2,677) _______ _______ 474,619 494,323
Maturities due within one year (15,000) (20,000) _______ _______ $459,619 $474,323 ======= =======
Interest rates on the 1993 Series B-1 and 1993 Series C-1 bonds will be adjusted to a then current market rate on June 1, 1998 and August 15, 1998, respectively. Interest rates on the 1993 Series B-2 and 1993 Series C-2 bonds are subject to redetermination at the option of the utility commencing June 1, 2003 and August 15, 2003, respectively.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value at December 31, 1994 and 1993 of each class of financial instruments for which it is practicable to make such estimates.
Cash and Temporary Investments - The carrying amounts approximate fair value because of the short-term maturity of these instruments.
Marketable Securities - The fair value is based on quoted market prices obtained from dealers or investment managers.
Financial Derivatives - The fair value was estimated using market values of options, calls and futures contracts on organized exchanges.
Short-Term Borrowings - The carrying amounts approximate fair value due to their short-term maturities.
Preferred Stock of Subsidiary - The fair value was estimated using market values provided by independent pricing services.
Long-Term Debt of Subsidiary - The fair value was estimated using market values provided by independent pricing services.
The estimated fair values of the Company's financial instruments as of December 31, are shown below:
1994 1993 _________________ _________________ Carrying Fair Carrying Fair Value Value Value Value ________ _____ ________ _____ (in thousands)
Marketable Securities $ 43,131 $ 43,131 $ 42,035 $ 43,045 Financial Derivatives 798 798 668 668 Preferred Stock 80,000 52,684 80,000 68,403 Long-term Debt 459,619 447,323 474,323 504,478
10. INCOME TAXES
The Company uses the liability method of accounting for deferred income taxes in compliance with SFAS No. 109 "Accounting for Income Taxes" effective January 1, 1993. Income tax expense includes provisions for deferred taxes to reflect the effect of temporary differences between the time certain costs are recorded for financial reporting and when they are deducted for income tax return purposes. As temporary differences reverse, the related accumulated deferred income taxes and a portion of the regulatory assets and liabilities are also reversed. Investment tax credits have been deferred and will continue to be credited to income over the lives of the related property. The components of federal and state income tax provisions and investment tax credits at December 31, were:
1994 1993 1992 ________ ________ ________ (in thousands)
Current - - Federal $ 29,048 $ 34,340 $ 7,070 - - State 4,534 6,980 (1,690) _______ _______ _______ 33,582 41,320 5,380 _______ _______ _______
Deferred - - Federal 14,738 12,315 29,679 - - State 4,129 1,592 9,028 _______ _______ _______ 18,867* 13,907* 38,707* _______ _______ _______
Amortization of investment tax credits (3,367) (3,366) (3,336) _______ _______ _______ Total income taxes $ 49,082 $ 51,861 $ 40,751 ======= ======= =======
1994 1993 1992 ________ ________ ________ (in thousands)
*Detail of Deferred Taxes: Excess of tax depreciation and amortization over book $ 6,534 $ 5,825 $ 5,588 Revenue refunds - - 29,526 Leveraged leases 6,040 7,511 8,489 Deferred fuel cost 484 2,782 (2,921) Deferred environmental site cleanup costs 5,190 (11,811) 62 Net operating loss carryback - 1,526 (1,526) Alternative minimum tax credit carry forward - 7,236 (6,927) Cost of removal 2,137 1,863 3,108 Unamortized loss on reacquired debt (460) 1,082 3,561 Miscellaneous (1,058) (2,107) (253) _______ _______ _______ Total $ 18,867 $ 13,907 $ 38,707 ======= ======= =======
Reconciliations with statutory federal income tax rates at December 31 were:
1994 1993 1992 ____ ____ ____
Effective income tax rate 35.9% 36.8% 34.6% Amortization of investment tax credits 2.5 2.4 2.8 Tax exempt interest and dividends 1.6 1.5 1.8 State income tax rate, net of federal income tax benefits (4.0) (3.9) (4.1) Other, net (1.0) (1.8) (1.1) ____ ____ ____ Statutory federal income tax rate 35.0% 35.0% 34.0% ==== ==== ====
The components of deferred income taxes at December 31, 1994 and 1993 are:
December 31, December 31, 1994 1993 ____________ ____________ (in thousands)
Accumulated deferred income tax liabilities related to: Depreciable property $315,364 $310,722 Investment tax credits (22,164) (23,500) Regulatory liabilities, net (27,742) (27,423) Leveraged leases 25,817 19,777 Other 21,797 15,156 _______ _______ Accumulated deferred income taxes per balance sheet $313,072 $294,732 ======= =======
Deferred tax assets (included in prepayments) $ 7,048 $ 5,999 ======= =======
11. DERIVATIVE FINANCIAL INSTRUMENTS
CIC has limited involvement with derivative financial instruments which includes futures contracts, purchased options and written options in combination with purchased options. These instruments are used to hedge the market risk associated with CIC's common and preferred stock investments. (See Note 1 to Consolidated Financial Statements.) CIC does not hold or issue these instruments for trading purposes. Financial futures contracts are for U.S. Treasury obligations and options contracts are for S & P Indexes and U.S. Treasury obligations. Futures and options contracts have terms that are one year or less and have little credit risk as these instruments are traded on organized exchanges. CIC bears the risk of unfavorable price changes associated with futures and options which are intended to hedge the opposite change in the market value of the common and preferred stocks. Gains and losses on purchased hedges of the equity securities are deferred as an adjustment to the carrying amount of the hedged equity securities until the gains or losses on the underlying securities are recognized. The amount of deferred hedge loss at December 31, 1994 and 1993 was $.2 million and $2.3 million, respectively.
12. REVENUES COLLECTED SUBJECT TO REFUND
In May 1992, the Illinois commission approved a March 18, 1992 settlement agreement that resolved a proceeding regarding the impact on the utility of the reduced federal corporate income tax rates established by the Tax Reform Act of 1986. Under terms of the agreement, $73 million, including accrued interest, was refunded to customers from July through December 1992 in complete settlement of all issues related to the proceeding. For the 61-month period, March 1987 through March 1992, a total of $78.4 million had been accrued for refunds. The total liability recorded by the utility exceeded the settlement agreement amount by $5.4 million resulting in a $3.3 million (net of taxes) or $.10 per share favorable impact on consolidated earnings during 1992.
13. SEGMENTS OF BUSINESS
CIPSCO's primary subsidiary, CIPS, is a public utility engaged in the sale of electricity which it generates, transmits and distributes. CIPS also sells natural gas, which it purchases from producers and suppliers and distributes through its system, and transports customer-owned natural gas. The investments of CIPSCO and subsidiaries include temporary investments and long-term investments including marketable securities and leveraged leases. The following is a summary of operations:
Years Ended December 31, _________________________________ 1994 1993 1992 ______ ______ ______ (in thousands) OPERATING INFORMATION
Electric operations: Operating revenues $ 697,427 $688,820 $ 595,619 Operating expenses, excluding provision for income taxes 550,386 534,071 472,414 _________ _________ _________ Pretax operating income 147,041 154,749 123,205 _________ _________ _________
Gas operations: Operating revenues 138,418 145,702 133,756 Operating expenses, excluding provision for income taxes 126,896 138,086 122,844 _________ _________ _________ Pretax operating income 11,522 7,616 10,912 _________ _________ _________
Investments: Operating revenues 8,770 10,238 10,502 Operating expenses, excluding provision for income taxes 1,988 1,868 1,633 _________ ________ _________ Pretax investment income 6,782 8,370 8,869 _________ ________ _________ Total 165,345 170,735 142,986 _________ ________ _________ Less interest expense and other charges 32,309 33,376 29,736 Less income taxes 49,082 51,861 40,751 _________ ________ _________
Net income per Consolidated Statements of Income $ 83,954 $ 85,498 $ 72,499 ========= ========= =========
Depreciation and amortization expense: Electric $ 74,496 $ 71,876 $ 68,902 Gas 6,100 5,771 5,252 Corporate 503 415 16 _________ ________ _________
Total $ 81,099 $ 78,062 $ 74,170 ========= ========= =========
INVESTMENT INFORMATION
Identifiable assets: Electric $1,469,601 $1,459,073 $1,435,755 Gas 176,788 177,857 188,019 Temporary investments 5,875 5,527 2,578 Marketable securities 43,929 42,703 39,913 Leveraged leases 49,933 42,216 31,384 Corporate 31,231 30,374 27,807 _________ ________ _________ Total $1,777,357 $1,757,750 $1,725,456 ========= ========= =========
Construction expenditues: Electric $ 82,673 $ 76,956 $ 103,023 Gas 13,928 10,756 17,401 _________ ________ _________ Total $ 96,601 $ 87,712 $ 120,424 ========= ========= =========
Item 8. Financial Statements and Supplementary Data.
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY STATEMENTS OF INCOME
Years Ended December 31, __________________________________
1994 1993 1992 __________ __________ __________ (in thousands)
Operating Revenues: Electric $ 697,458 $ 688,849 $ 593,996 Provision for revenue refunds - - 1,646 _________ _________ _________ 697,458 688,849 595,642 Gas 138,424 145,707 133,760 _________ _________ _________
Total operating revenues 835,882 834,556 729,402 _________ _________ _________
Operating Expenses: Fuel for electric generation 196,324 186,938 172,544 Purchased power 55,543 60,181 21,094 Gas costs 85,043 90,097 82,553 Other operation 138,622 141,310 129,715 Maintenance 65,172 61,216 64,092 Depreciation and amortization 80,596 77,647 74,154 Taxes other than income taxes 55,984 54,767 51,106 Income taxes 47,920 48,749 36,772 _________ _________ _________
Total operating expenses 725,204 720,905 632,030 _________ _________ _________
Operating Income 110,678 113,651 97,372 _________ _________ _________
Other Income and Deductions: Allowance for equity funds used during construction 630 1,459 2,162 Nonoperating income taxes (603) (631) (2,989) Miscellaneous, net 4,119 3,632 10,978 _________ _________ _________
Total other income and deductions 4,146 4,460 10,151 _________ _________ _________
Income Before Interest Charges 114,824 118,111 107,523 _________ _________ _________
Interest Charges: Interest on long-term debt 32,842 34,421 36,397 Interest on provision for revenue refunds - - (803) Other interest charges 358 479 392 Allowance for borrowed funds used during construction (289) (800) (1,064) _________ _________ _________
Total interest charges 32,911 34,100 34,922 _________ _________ _________
Net Income 81,913 84,011 72,601 Preferred stock dividends 3,510 3,718 4,549 _________ _________ _________
Earnings for Common Stock $ 78,403 $ 80,293 $ 68,052 ========== ========== ==========
The accompanying notes to financial statements are an integral part of these statements.
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY BALANCE SHEETS
December 31, ___________________________ 1994 1993 _____________ ____________ (in thousands)
ASSETS Utility Plant, at original cost: Electric $2,264,930 $2,172,259 Gas 220,347 208,208 __________ _________ 2,485,277 2,380,467 Less--Accumulated depreciation 1,077,533 1,020,097 __________ __________ 1,407,744 1,360,370 Construction work in progress 31,816 61,104 __________ __________ 1,439,560 1,421,474 __________ __________
Current Assets: Cash 1,320 4,038 Temporary investments, at cost which approximates market 2,593 2,734 Accounts receivable, net 67,686 61,591 Accrued unbilled revenues 30,484 38,774 Materials and supplies, at average cost 39,817 40,824 Fuel for electric generation, at average cost 30,305 26,046 Gas stored underground, at average cost 13,167 14,335 Prepayments 10,839 9,847 __________ __________ 196,211 198,189 __________ __________ Other Assets 42,879 48,799 __________ __________ $1,678,650 $1,668,462 ========== ==========
CAPITALIZATION AND LIABILITIES Capitalization: Common shareholder's equity: Common stock, no par value, authorized 45,000,000 shares; outstanding 25,452,373 shares $ 121,282 $ 121,282 Retained earnings 453,463 443,741 __________ __________ 574,745 565,023 Preferred stock 80,000 80,000 Long-term debt 459,619 474,323 __________ __________ 1,114,364 1,119,346 __________ __________
Current Liabilities: Long-term debt due within one year 15,000 20,000 Short-term borrowings 14,985 - Accounts payable 53,900 55,931 Accrued wages 9,833 12,720 Accrued taxes 12,963 13,391 Accrued interest 9,408 9,204 Other 31,488 34,895 __________ __________ 147,577 146,141 __________ __________
Deferred Credits: Accumulated deferred income taxes 287,020 274,425 Investment tax credits 55,595 58,962 Regulatory liabilities, net 74,094 69,588 __________ __________ 416,709 402,975 __________ __________ $1,678,650 $1,668,462 ========== ==========
The accompanying notes to financial statements are an integral part of these statements.
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY STATEMENTS OF CASH FLOW
Years Ended December 31, __________________________________ 1994 1993 1992 __________ __________ __________ (in thousands)
OPERATING ACTIVITIES: Net income $ 81,913 $ 84,011 $ 72,601 Adjustments to reconcile net income to net cash provided: Depreciation and amortization 80,596 77,647 74,154 Allowance for equity funds used during construction (AFUDC) (630) (1,459) (2,162) Deferred income taxes, net 14,146 7 16,407 Investment tax credit amortization (3,367) (3,366) (3,336) Cash flows impacted by changes in assets and liabilities: Accounts receivable, net and accrued unbilled revenues 2,195 (15,270) 4,542 Fuel for electric generation (4,259) 8,336 2,872 Other inventories 2,175 (4,450) (667) Prepayments (992) 3,305 23,585 Other assets 5,920 14,033 (20,210) Accounts payable and other liabilities (5,438) 6,106 17,641 Accrued wages, taxes and interest (3,111) 6,217 (5,197) Accumulated provision for revenue refunds - - (75,449) Other 1,129 4,815 (5,991) __________ __________ _________ Net cash provided by operating activities 170,277 179,932 98,790 __________ __________ _________ INVESTING ACTIVITIES: Construction expenditures, excluding AFUDC (95,682) (85,453) (117,198) Allowance for borrowed funds used during construction (289) (800) (1,064) Changes in temporary investments 141 (156) 92,175 __________ __________ _________ Net cash used in investing activities (95,830) (86,409) (26,087) __________ __________ _________
FINANCING ACTIVITIES: Proceeds from issuance of long-term debt - 195,000 199,000 Repayment of long-term debt (20,000) (205,000) (190,500) Proceeds from issuance of preferred stock - 42,500 - Redemption of preferred stock - (27,500) (18,245) Retirement of common stock - (33,250) (66,100) Proceeds from issuance of (repayment of) short-term borrowings 14,985 (17,393) 17,393 Dividends paid: Preferred stock (3,510) (3,718) (4,549) Common stock (68,600) (33,500) - Issuance expense, discount and premium (40) (7,104) (11,718) _________ _________ _________ Net cash used in financing activities (77,165) (89,965) (74,719) _________ _________ _________
Net increase (decrease) in cash (2,718) 3,558 (2,016) Cash at beginning of year 4,038 480 2,496 _________ _________ _________ Cash at end of year $ 1,320 $ 4,038 $ 480 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ 30,693 $ 30,909 $ 38,382 Income taxes $ 39,829 $ 48,367 $ 12,150
The accompanying notes to financial statements are an integral part of these statements.
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY STATEMENTS OF RETAINED EARNINGS
Years Ended December 31, __________________________________ 1994 1993 1992 __________ __________ __________ (in thousands)
Balance, beginning of year $ 443,741 $ 398,235 $ 330,518 Add (deduct); Net income 81,913 84,011 72,601 Dividends: Preferred stock (3,510) (3,718) (4,549) Common stock (68,600) (33,500) - Other (81) (1,287) (335) _________ _________ _________ Balance, end of year $ 453,463 $ 443,741 $ 398,235 ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Central Illinois Public Service Company:
We have audited the accompanying balance sheets of Central Illinois Public Service Company (an Illinois corporation and a wholly owned subsidiary of CIPSCO Incorporated) as of December 31, 1994 and 1993, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Central Illinois Public Service Company as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois, January 27, 1995
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The information contained in Note 1 of Notes to Consolidated Financial Statements on page 45 is incorporated herein by reference (except for the captions "Principles of Consolidation" and "Marketable Securities" which are not included herein).
2. COMMITMENTS AND CONTINGENCIES
The information contained in Note 2 of Notes to Consolidated Financial Statements on page 48 is incorporated herein by reference.
3. LEVERAGED LEASES
Not applicable.
4. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The information contained in Note 4 of Notes to Consolidated Financial Statements on page 52 is incorporated herein by reference.
5. PREFERRED STOCK
The information contained in Note 5 of Notes to Consolidated Financial Statements on page 56 is incorporated herein by reference.
6. COMMON SHAREHOLDERS EQUITY