================================================================================



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT

                       PURSUANT TO SECTION 13 OR 15 (d) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

        Date of Report (date of earliest event reported): September 30, 1999

                               THE AES CORPORATION
             (exact name of registrant as specified in its charter)


        DELAWARE                0-19281                    54-1163725
(State of Incorporation) (Commission File No.) (IRS Employer Identification No.)


                             1001 North 19th Street
                            Arlington, Virginia 22209
          (Address of principal executive offices, including zip code)

               Registrant's telephone number, including area code:
                                 (703) 522-1315

                                 NOT APPLICABLE
          (Former Name or Former Address, if changed since last report)






================================================================================

<PAGE>

ITEM 5. OTHER EVENTS

In November 1998, The AES  Corporation  entered into a definitive  agreement for
the acquisition of CILCORP. All shareholder and regulatory approvals required to
complete the  acquisition  have been obtained,  and we expect the acquisition to
close in the fourth  quarter of 1999.  This Current  Report on Form 8-K includes
audited historical financial statements of CILCORP as of and for the three years
ended December 31, 1998,  interim financial  statements of CILCORP as of and for
the six months ended June 30, 1999,  and pro forma  financial  statements of The
AES  Corporation  as of and for the six months  ended June 30,  1999 and for the
year ended December 31, 1998 which reflect the acquisition of CILCORP.


<PAGE>


                                 CILCORP INC.
                         INDEX TO FINANCIAL STATEMENTS





<TABLE>
<CAPTION>
                                                                                           PAGE
                                                                                           NO.
                                                                                          -----
<S>                                                                                       <C>
CONSOLIDATED FINANCIAL STATEMENTS:
   Report of Independent Public Accountants ...........................................     F-2
   Consolidated Statements of Income for the Three Years Ended December 31, 1998 ......     F-3
   Consolidated Balance Sheets as of December 31, 1998 and 1997 .......................     F-4
   Consolidated Statements of Cash Flows for the Three Years Ended
    December 31, 1998 .................................................................     F-5
   Consolidated Statements of Segments of Business for the Three Years Ended
    December 31, 1998 .................................................................     F-6
   Consolidated Statements of Retained Earnings for the Three Years Ended
    December 31, 1998 .................................................................     F-9
   Notes to Consolidated Financial Statements .........................................    F-10
INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
   Consolidated Statements of Income For the Six Months Ended June 30, 1999
    and 1998 ..........................................................................    F-26
   Consolidated Balance Sheets as of June 30, 1999 and 1998 ...........................    F-27
   Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1999
    and 1998 ..........................................................................    F-29
   Consolidated Statements of Segments of Business for the Six Months Ended June 30,
    1999 and 1998 .....................................................................    F-30
   Notes to Consolidated Financial Statements .........................................    F-31

</TABLE>


                                      F-1
<PAGE>

Report of Independent Public Accountants
To the Stockholders of CILCORP Inc.:



     We  have  audited  the  accompanying consolidated balance sheets of CILCORP
Inc.  (an  Illinois  corporation)  and  subsidiaries as of December 31, 1998 and
1997,   and   the   related  consolidated  statements  of  income,  cash  flows,
stockholders'  equity  and  segments  of business for each of the three years in
the  period  ended  December  31,  1998.  These  financial  statements  are  the
responsibility  of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

     We  conducted  our  audits  in  accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance  about  whether  the  financial  statements  are  free  of
material  misstatement.  An  audit includes examining, on a test basis, evidence
supporting  the  amounts  and  disclosures in the financial statements. An audit
also   includes   assessing  the  accounting  principles  used  and  significant
estimates  made  by  management,  as  well  as  evaluating the overall financial
statement  presentation.  We  believe that our audits provide a reasonable basis
for our opinion.

     In  our opinion, the financial statements referred to above present fairly,
in   all   material  respects,  the  financial  position  of  CILCORP  Inc.  and
subsidiaries  as  of  December  31,  1998  and  1997,  and  the results of their
operations  and their cash flows for each of the three years in the period ended
December  31, 1998, in conformity with generally accepted accounting principles.




Arthur Andersen LLP
Chicago, Illinois
January 27, 1999

                                      F-2
<PAGE>

                       CONSOLIDATED STATEMENTS OF INCOME
                         CILCORP INC. AND SUBSIDIARIES





<TABLE>
<CAPTION>
                                                                 FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------------------
                                                               1998           1997            1996
                                                           ------------   ------------   --------------
                                                             (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                        <C>            <C>            <C>
Revenue:
 Electric ..............................................    $ 360,009      $ 338,096        $322,785
 Gas ...................................................      172,327        208,758         195,770
 Other Businesses ......................................       26,688         11,106           8,505
                                                            ---------      ---------        --------
   Total ...............................................      559,024        557,960         527,060
                                                            ---------      ---------        --------
Operating Expenses:
 Fuel for Generation and Purchased Power ...............      124,058        115,081         101,622
 Gas Purchased for Resale ..............................       93,586        123,532         108,286
 Other Operations and Maintenance ......................      145,673        124,852         131,675
 Depreciation and Amortization .........................       66,179         62,416          60,574
 State and Local Revenue Taxes .........................       26,502         22,467          22,004
 Other Taxes ...........................................       11,463         11,833          11,516
                                                            ---------      ---------        --------
   Total ...............................................      467,461        460,181         435,677
                                                            ---------      ---------        --------
Fixed Charges and Other:
 Interest Expense ......................................       29,473         27,462          28,964
 Preferred Stock Dividends of Subsidiary ...............        3,194          3,216           3,188
 Allowance for Funds Used During Construction.                    (34)          (134)            (90)
 Other .................................................        1,013          1,177             679
                                                            ---------      ---------        --------
   Total ...............................................       33,646         31,721          32,741
                                                            ---------      ---------        --------
Income from Continuing Operations Before
 Income Taxes ..........................................       57,917         66,058          58,642
Income Taxes ...........................................       19,699         22,349          20,702
                                                            ---------      ---------        --------
Net Income from Continuing Operations Before
 Extraordinary Item ....................................       38,218         43,709          37,940
Loss from Operations of Discontinued Businesses,
 Net of Tax of $(16,278), $(7,298) and $(6,197).........      (25,025)       (34,126)         (9,997)
Gain on Sale/Disposal of Assets of Discontinued
 Businesses, Net of Tax of $2,014 and $1,889............        3,117          2,712              --
Extraordinary Item (see Note 1) ........................           --          4,100              --
                                                            ---------      ---------        --------
Net Income .............................................    $  16,310      $  16,395        $ 27,943
Other Comprehensive Income .............................         (169)          (317)             (5)
                                                            ---------      ---------        --------
Comprehensive Income ...................................    $  16,141      $  16,078        $ 27,938
                                                            =========      =========        ========
Average Common Shares Outstanding -- Basic .............       13,611         13,611          13,480
Earnings Per Common Share -- Basic
 Continuing Operations .................................    $    2.81      $    3.21        $   2.81
 Discontinued Operations ...............................       ( 1.61)        ( 2.31)         (  .74)
 Extraordinary Item ....................................           --            .30              --
                                                            ---------      ---------        --------
Net Income Per Common Share -- Basic ...................    $    1.20      $    1.20        $   2.07
                                                            =========      =========        ========
Average Common Shares Outstanding -- Diluted.                  13,707         13,627          13,480
Earnings Per Common Share -- Diluted
 Continuing Operations .................................    $    2.79      $    3.21        $   2.81
 Discontinued Operations ...............................       ( 1.60)        ( 2.31)         (  .74)
 Extraordinary Item ....................................           --            .30              --
                                                            ---------      ---------        --------
 Net Income Per Common Share -- Diluted ................    $    1.19      $    1.20        $   2.07
                                                            =========      =========        ========
 Dividends per Common Share ............................    $    2.46      $    2.46        $   2.46

</TABLE>

             The accompanying Notes to Financial Statements are an
                       integral part of these statements.

                                      F-3
<PAGE>
                          CONSOLIDATED BALANCE SHEETS
                         CILCORP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
                                                                    AS OF DECEMBER 31,
                                                              ------------------------------
                                                                   1998             1997
                                                              --------------   -------------
                                                                      (IN THOUSANDS)
<S>                                                           <C>              <C>
                            ASSETS
Current Assets:
 Cash and Temporary Cash Investments ......................     $    1,669      $   10,576
 Receivables, Less Reserves of $3,411 and $2,518...........        134,666         141,234
 Accrued Unbilled Revenue .................................         39,220          38,775
 Fuel, at Average Cost ....................................         13,431           7,816
 Materials and Supplies, at Average Cost ..................         15,062          13,685
 Gas in Underground Storage, at Average Cost ..............         20,767          22,666
 Prepayments and Other ....................................          7,706          10,971
                                                                ----------      ----------
   Total Current Assets ...................................        232,521         245,723
                                                                ----------      ----------
Investments and Other Property:
Investment in Leveraged Leases ............................        146,990         146,458
Other Investments .........................................         19,500          21,074
                                                                ----------      ----------
   Total Investments and Other Property ...................        166,490         167,532
                                                                ----------      ----------
Property, Plant and Equipment:
 Utility Plant, at Original Cost
 Electric .................................................      1,237,885       1,213,585
 Gas ......................................................        417,585         401,870
                                                                ----------      ----------
                                                                 1,655,470       1,615,455
Less -- Accumulated Provision for Depreciation ............        812,630         769,792
                                                                ----------      ----------
                                                                   842,840         845,663
Construction Work in Progress .............................         30,075          21,550
Other, Net of Depreciation ................................          7,796          22,188
                                                                ----------      ----------
   Total Property, Plant and Equipment ....................        880,711         889,401
                                                                ----------      ----------
Other Assets:                                                       33,218          32,163
                                                                ----------      ----------
   Total Assets ...........................................     $1,312,940      $1,334,819
                                                                ==========      ==========
               LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 Current Portion of Long-Term Debt ........................     $   13,027      $   22,185
 Notes Payable ............................................         96,200          62,150
 Accounts Payable .........................................        136,840         132,286
 Accrued Taxes ............................................          8,185           2,810
 Accrued Interest .........................................         10,102           9,473
 FCA/PGA Over-Recoveries ..................................            304           1,666
 Other ....................................................          8,881          19,798
                                                                ----------      ----------
   Total Current Liabilities ..............................        273,539         250,368
                                                                ----------      ----------
Long-Term Debt ............................................        285,552         298,528
                                                                ----------      ----------
Deferred Credits and Other Liabilities:
Deferred Income Taxes .....................................        239,306         241,013
Regulatory Liability of Regulated Subsidiary ..............         46,346          56,807
Deferred Investment Tax Credit ............................         19,450          21,117
Other .....................................................         47,089          48,273
                                                                ----------      ----------
   Total Deferred Credits .................................        352,191         367,210
                                                                ----------      ----------
Preferred Stock of Subsidiary .............................         66,120          66,120
                                                                ----------      ----------
Stockholders' Equity:
Common Stock, no par value; Authorized 50,000,000 shares --
 Outstanding 13,610,680 and 13,610,680 shares .............        192,853         192,567
Retained Earnings .........................................        143,530         160,702
Accumulated Other Comprehensive Income ....................           (845)           (676)
                                                                ----------      ----------
   Total Stockholders' Equity .............................        335,538         352,593
                                                                ----------      ----------
   Total Liabilities and Stockholders' Equity .............     $1,312,940      $1,334,819
                                                                ==========      ==========
</TABLE>
             The accompanying Notes to Financial Statements are an
                     integral part of these balance sheets.

                                      F-4
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                         CILCORP INC. AND SUBSIDIARIES





<TABLE>
<CAPTION>
                                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                                           ---------------------------------------
                                                                               1998          1997          1996
                                                                           -----------   -----------   -----------
                                                                                       (IN THOUSANDS)
<S>                                                                        <C>           <C>           <C>
Cash Flows from Operating Activities:
Net Income from Continuing Operations Before Preferred Dividends.           $  41,412     $  46,925     $  41,128
                                                                            ---------     ---------     ---------
Adjustments to Reconcile Net Income to Net Cash Provided by
 Operating Activities:
 Non-Cash Income .......................................................       (6,150)       (4,102)       (4,297)
 Cash Receipts in Excess of Debt Service on Leases .....................        7,618            --            --
 Depreciation and Amortization .........................................       66,179        62,416        60,574
 Deferred Income Taxes, Investment Tax Credit and Regulatory
   Liability of Subsidiary, Net ........................................       (5,865)       (3,342)       (1,707)
Changes in Operating Assets and Liabilities:
 Decrease (Increase) in Accounts Receivable and Accrued Unbilled
   Revenue .............................................................        5,430           (74)       (3,474)
 (Increase) Decrease in Inventories ....................................       (5,093)        3,294        (5,310)
 Increase (Decrease) in Accounts Payable ...............................       14,188        (1,961)        6,809
 Increase (Decrease) in Accrued Taxes ..................................           10         3,893        (5,843)
 (Increase) Decrease in Other Assets ...................................          209       (17,027)        2,197
 Increase (Decrease) in Other Liabilities ..............................       (6,426)       (9,039)       11,036
                                                                            ---------     ---------     ---------

Total Adjustments ......................................................       70,100        34,058        59,985
                                                                            ---------     ---------     ---------
Net Cash Provided by Operating Activities ..............................      111,512        80,983       101,113
Net Cash Provided by (Used in) Operating Activities of Discontinued
 Operations ............................................................      (43,202)       10,031         1,263
                                                                            ---------     ---------     ---------
Cash Flow from Operations ..............................................       68,310        91,014       102,376
                                                                            ---------     ---------     ---------
Cash Flows from Investing Activities:
Additions to Plant .....................................................      (67,112)      (55,055)      (43,680)
Purchase of Long-Term Investments ......................................           --        (6,933)       (4,713)
Other ..................................................................       (4,514)       (1,242)          482
                                                                            ---------     ---------     ---------
Net Cash Used in Investing Activities ..................................      (71,626)      (63,230)      (47,911)
Net Cash Provided by (Used in) Investing Activities of Discontinued
 Operations ............................................................       19,169         3,310        (3,082)
                                                                            ---------     ---------     ---------
Cash Flow from Investing Activities ....................................      (52,457)      (59,920)      (50,993)
                                                                            ---------     ---------     ---------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Short-Term Debt .............................       34,050        34,250       (19,200)
Repayment of Long-Term Debt ............................................      (22,102)      (22,954)      (19,393)
Common Dividends Paid ..................................................      (33,482)      (33,482)      (33,142)
Preferred Dividends Paid ...............................................       (3,194)       (3,216)       (3,188)
Common Stock Issued ....................................................           --            --        11,430
                                                                            ---------     ---------     ---------
Net Cash Provided by (Used in) Financing Activities of Continuing
 Operations ............................................................      (24,728)      (25,402)      (63,493)
Net Cash Provided by (Used in) Financing Activities of Discontinued
 Operations ............................................................          (32)          (57)          (49)
                                                                            ---------     ---------     ---------
Net Cash Used in Financing Activities ..................................      (24,760)      (25,459)      (63,542)
                                                                            ---------     ---------     ---------
Net Increase (Decrease) in Cash and Temporary Cash Investments .........       (8,907)        5,635       (12,159)
Cash and Temporary Cash Investments at Beginning of Year ...............       10,576         4,941        17,100
                                                                            ---------     ---------     ---------
Cash and Temporary Cash Investments at End of Year .....................    $   1,669     $  10,576     $   4,941
                                                                            =========     =========     =========
</TABLE>

                 The accompanying Notes to Financial Statements
                    are an integral part of these statements.

                                      F-5
<PAGE>

                      STATEMENTS OF SEGMENTS OF BUSINESS
                         CILCORP INC. AND SUBSIDIARIES




<TABLE>
<CAPTION>
                                                                              1998
                                       ----------------------------------------------------------------------------------
                                           CILCO       CILCO        CILCO        OTHER         DISCONT.
                                         ELECTRIC       GAS         OTHER      BUSINESSES     OPERATIONS       TOTALS
                                       ------------ ----------- ------------ ------------- --------------- --------------
                                                                         (IN THOUSANDS)
<S>                                    <C>          <C>         <C>          <C>           <C>             <C>
Revenues .............................   $360,009    $172,327     $  1,743    $   24,717      $     --       $  558,796
Interest income ......................                                 228                                          228
                                         --------                 --------    ----------      --------       ----------
   Total .............................    360,009     172,327        1,971        24,717                        559,024
                                         --------    --------     --------    ----------      --------       ----------
Operating expenses ...................    235,801     138,459        3,600        23,422                        401,282
Depreciation and amortization ........     46,017      19,256          713           193                         66,179
                                         --------    --------     --------    ----------      --------       ----------
   Total .............................    281,818     157,715        4,313        23,615                        467,461
                                         --------    --------     --------    ----------      --------       ----------
Interest expense .....................     16,261       6,514                      6,698                         29,473
Preferred stock dividends ............                               3,194                                        3,194
Fixed charges and other expenses              (34)                   1,013                                          979
                                         --------    --------     --------    ----------      --------       ----------
   Total .............................     16,227       6,514        4,207         6,698                         33,646
                                         --------    --------     --------    ----------      --------       ----------
Income from continuing oper.
 before income taxes .................     61,964       8,098       (6,549)       (5,596)                        57,917
Income taxes .........................     21,645       3,443       (2,616)       (2,773)                        19,699
                                         --------    --------     --------    ----------      --------       ----------
Net income from continuing
 operations ..........................     40,319       4,655       (3,933)       (2,823)                        38,218
Effect of discontinued operations.....                                                         (21,908)         (21,908)
                                         --------    --------     --------    ----------      --------       ----------
Segment net income ...................   $ 40,319    $  4,655     $ (3,933)   $   (2,823)     $(21,908)      $   16,310
                                         ========    ========     ========    ==========      ========       ==========
Capital expenditures .................   $ 44,213    $ 22,889     $     --    $       10      $  8,916       $   76,028
Revenue from major customer
 Caterpillar Inc. ....................   $ 39,354    $    948     $     --    $    7,669      $  1,130       $   49,101
Segment assets .......................   $730,354    $286,737     $  5,072    $  594,734      $121,647       $1,738,544
Consolidation adjustments ............     (1,304)       (507)          --      (423,789)           (4)        (425,604)
                                         --------    --------     --------    ----------      --------       ----------
   Total assets ......................   $729,050    $286,230     $  5,072    $  170,945      $121,643       $1,312,940
                                         ========    ========     ========    ==========      ========       ==========

</TABLE>


                                      F-6
<PAGE>

                      STATEMENTS OF SEGMENTS OF BUSINESS
                         CILCORP INC. AND SUBSIDIARIES




<TABLE>
<CAPTION>
                                                                               1997
                                           -----------------------------------------------------------------------------
                                               CILCO       CILCO       CILCO        OTHER      DISCONT.
                                             ELECTRIC       GAS        OTHER     BUSINESSES   OPERATIONS      TOTALS
                                           ------------ ----------- ----------- ------------ ------------ --------------
                                                                          (IN THOUSANDS)
<S>                                        <C>          <C>         <C>         <C>          <C>          <C>
Revenues .................................   $338,096    $208,758    $     --    $   10,867   $      --     $  557,721
Interest income ..........................                                239                                      239
                                             --------    --------    --------    ----------   ---------     ----------
   Total .................................    338,096     208,758         239        10,867                    557,960
                                             --------    --------    --------    ----------   ---------     ----------
Operating expenses .......................    217,700     165,020       2,831        12,214                    397,765
Depreciation and amortization ............     43,858      17,647         713           198                     62,416
                                             --------    --------    --------    ----------   ---------     ----------
   Total .................................    261,558     182,667       3,544        12,412                    460,181
                                             --------    --------    --------    ----------   ---------     ----------
Interest expense .........................     16,192       6,454                     4,816                     27,462
Preferred stock dividends ................                              3,216                                    3,216
Fixed charges and other expenses .........       (134)                  1,177                                    1,043
                                             --------    --------    --------    ----------   ---------     ----------
   Total .................................     16,058       6,454       4,393         4,816                     31,721
                                             --------    --------    --------    ----------   ---------     ----------
Income from continuing oper.
 before income taxes .....................     60,480      19,637      (7,698)       (6,361)                    66,058
Income taxes .............................     21,901       7,416      (3,049)       (3,919)                    22,349
                                             --------    --------    --------    ----------   ---------     ----------
Net income from cont. oper.
 before extraord. item ...................     38,579      12,221      (4,649)       (2,442)                    43,709
Effect of discontinued operations
 and extraordinary item ..................      4,100                                           (31,414)       (27,314)
                                             --------    --------    --------    ----------   ---------     ----------
Segment net income .......................   $ 42,679    $ 12,221    $ (4,649)   $   (2,442)  $ (31,414)    $   16,395
                                             ========    ========    ========    ==========   =========     ==========
Capital expenditures .....................   $ 35,196    $ 19,830    $     --    $       29   $   6,188     $   61,243
Revenue from major customer
 Caterpillar Inc. ........................   $ 40,106    $    934    $     --    $    1,208   $   1,870     $   44,118
Segment assets ...........................   $724,869    $290,958    $  5,639    $  606,786   $ 144,412     $1,772,664
Consolidation adjustments ................     (1,070)       (416)         --      (436,345)        (14)      (437,845)
                                             --------    --------    --------    ----------   ---------     ----------
   Total assets ..........................   $723,799    $290,542    $  5,639    $  170,441   $ 144,398     $1,334,819
                                             ========    ========    ========    ==========   =========     ==========

</TABLE>



                                      F-7
<PAGE>

                      STATEMENTS OF SEGMENTS OF BUSINESS
                         CILCORP INC. AND SUBSIDIARIES




<TABLE>
<CAPTION>
                                                                            1996
                                       ------------------------------------------------------------------------------
                                           CILCO       CILCO       CILCO        OTHER       DISCONT.
                                         ELECTRIC       GAS        OTHER      BUSINESSES   OPERATIONS      TOTALS
                                       ------------ ----------- ----------- ------------- ------------ --------------
                                                                       (IN THOUSANDS)
<S>                                    <C>          <C>         <C>         <C>           <C>          <C>
Revenues .............................   $322,785    $195,770    $     --    $    7,825     $     --     $  526,380
Interest income ......................                                680                                       680
                                         --------    --------    --------    ----------     --------     ----------
   Total .............................    322,785     195,770         680         7,825                     527,060
                                         --------    --------    --------    ----------     --------     ----------
Operating expenses ...................    208,566     154,099       2,234        10,204                     375,103
Depreciation and amortization ........     42,530      17,134         713           197                      60,574
                                         --------    --------    --------    ----------     --------     ----------
   Total .............................    251,096     171,233       2,947        10,401                     435,677
                                         --------    --------    --------    ----------     --------     ----------
Interest expense .....................     17,445       6,716                     4,803                      28,964
Preferred stock dividends ............                              3,188                                     3,188
Fixed charges and other expenses......        (90)                    679                                       589
                                         --------    --------    --------    ----------     --------     ----------
   Total .............................     17,355       6,716       3,867         4,803                      32,741
                                         --------    --------    --------    ----------     --------     ----------
Income from continuing oper.
 before income taxes .................     54,334      17,821      (6,134)       (7,379)                     58,642
Income taxes .........................     19,576       6,972      (2,466)       (3,380)                     20,702
                                         --------    --------    --------    ----------     --------     ----------
Net income from continuing
 operations ..........................     34,758      10,849      (3,668)       (3,999)                     37,940
Effect of discontinued operations.....                                                        (9,997)        (9,997)
                                         --------    --------    --------    ----------     --------     ----------
Segment net income ...................   $ 34,758    $ 10,849    $ (3,668)   $   (3,999)    $ (9,997)    $   27,943
                                         ========    ========    ========    ==========     ========     ==========
Capital expenditures .................   $ 28,032    $ 15,529    $     --    $      119     $  3,061     $   46,741
Revenue from major customer
 Caterpillar Inc. ....................   $ 37,724    $  1,053    $     --    $       68     $    119     $   38,964
Segment assets .......................   $732,219    $296,343    $  6,424    $  585,732     $ 94,492     $1,715,210
Consolidation adjustments ............       (352)       (137)         --      (428,815)        (213)      (429,517)
                                         --------    --------    --------    ----------     --------     ----------
   Total assets ......................   $731,867    $296,206    $  6,424    $  156,917     $ 94,279     $1,285,693
                                         ========    ========    ========    ==========     ========     ==========
</TABLE>

                                      F-8
<PAGE>

                 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
                         CILCORP INC. AND SUBSIDIARIES





<TABLE>
<CAPTION>
                                                    COMMON STOCK                              OTHER
                                             --------------------------     RETAINED      COMPREHENSIVE
                                                SHARES         AMOUNT       EARNINGS         INCOME            TOTAL
                                             ------------   -----------   ------------   --------------   --------------
                                                                          (IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S>                                          <C>            <C>           <C>            <C>              <C>
Balance at December 31, 1995 .............   13,335,606     $179,330      $183,002          $ (354)         $361,978
Common Stock Issued ......................      275,074       11,430                                          11,430
Cash Dividend Declared on Common
 Stock ($2.46 per share)..................                                 (33,141)                          (33,141)
Additional Minimum Liability of
 Non-Qualified Pension Plan at
 December 31, 1996, net of $(3) taxes.....                                                      (5)               (5)
Net Income ...............................                                  27,943                            27,943
                                             ----------     --------      --------                          --------
Balance at December 31, 1996 .............   13,610,680     $190,760      $177,804          $ (359)         $368,205
CILCORP Shareholder Return Incentive
 Compensation ............................                     1,807                                           1,807
Cash Dividend Declared on Common
 Stock ($2.46 per share)..................                                 (33,482)                          (33,482)
Additional Minimum Liability of
 Non-Qualified Pension Plan at
 December 31, 1997, net of $(208) taxes.                                                      (317)             (317)
Other ....................................                                     (15)                              (15)
Net Income ...............................                                  16,395                            16,395
                                             ----------     --------      --------          ------          --------
Balance at December 31, 1997 .............   13,610,680     $192,567      $160,702          $ (676)         $352,593
Cash Dividend Declared on Common
 Stock ($2.46 per share)..................                                 (33,482)                          (33,482)
Additional Minimum Liability of
 Non-Qualified Pension Plan at
 December 31, 1998, net of $(111) taxes.                                                      (169)             (169)
Other ....................................                       286                                             286
Net Income ...............................                                  16,310                            16,310
                                                                          --------                          --------
Balance at December 31, 1998 .............   13,610,680     $192,853      $143,530          $ (845)         $335,538
                                             ==========     ========      ========          ========        ========
</TABLE>

                 The accompanying Notes to Financial Statements
                    are an integral part of these statements.

                                      F-9
<PAGE>


                         NOTES TO FINANCIAL STATEMENTS


NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


PRINCIPLES OF CONSOLIDATION

     The  consolidated financial statements include the accounts of CILCORP Inc.
(CILCORP  or  the  Holding Company), Central Illinois Light Company (CILCO), QST
Enterprises  Inc.  (QST)  and its subsidiaries (QST Environmental Inc., formerly
known  as  Environmental  Science  & Engineering, Inc. (ESE) and QST Energy Inc.
(QST  Energy))  and  CILCORP's  other  subsidiaries  (collectively, the Company)
after  elimination  of  significant  intercompany  transactions.  In  1998,  the
operations  of  QST  and its subsidiaries were discontinued (see Note 10). Prior
year  amounts  have  been  reclassified  on  a  basis  consistent  with the 1998
presentation.

     CILCORP  is  an  investor-owned  public utility holding company. CILCO, the
Company's   principal   business  subsidiary,  is  engaged  in  the  generation,
transmission,   distribution   and  sale  of  electric  energy  in  an  area  of
approximately  3,700  square miles in central and east-central Illinois, and the
purchase,  distribution,  transportation  and  sale of natural gas in an area of
approximately  4,500  square  miles  in central and east-central Illinois. Other
CILCORP  first-tier  subsidiaries  are CILCORP Investment Management Inc. (CIM),
which  manages  the  Company's  investment  portfolio  and CILCORP Ventures Inc.
(CVI),  which  pursues  investment  opportunities in energy-related products and
services.

     The  preparation  of  financial  statements  in  conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect  the  reported  amounts  of assets and liabilities and
disclosure  of  contingent  assets  and liabilities at the date of the financial
statements  and  the  reported  amounts  of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates.

     See  Management's  Discussion  and  Analysis  of  Financial  Condition  and
Results  of  Operations--  New  Accounting  Pronouncements  for  a discussion of
accounting  pronouncements  issued  by  the Financial Accounting Standards Board
which are effective in 1998 or thereafter.


REGULATION

     CILCO  is  a  public utility subject to regulation by the Illinois Commerce
Commission  (ICC)  and  the  Federal  Energy  Regulatory  Commission (FERC) with
respect  to  accounting  matters,  and maintains its accounts in accordance with
the Uniform System of Accounts prescribed by these agencies.

     CILCO  is  subject  to  the provisions of Statement of Financial Accounting
Standards  No.  71,  "Accounting for the Effects of Certain Types of Regulation"
(SFAS  71)  for  its  regulated public utility operations. Under SFAS 71, assets
and  liabilities  are  recorded  to  represent  probable  future  increases  and
decreases,  respectively,  of  revenues  to  CILCO resulting from the ratemaking
action of regulatory agencies.

     The  Electric Service Customer Choice and Rate Relief Law of 1997 (Customer
Choice  Law)  became  effective  in  Illinois  in  December  1997.  Among  other
provisions,   this  law  begins  a  nine-year  transition  process  to  a  fully
competitive  market  for  electricity  in  Illinois.  Electric  transmission and
distribution  activities  are  expected  to  continue  to  be  regulated,  but a
customer   may  choose  to  purchase  electricity  from  another  supplier  (see
Management's Discussion--Competition).


                                      F-10
<PAGE>


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

     Due  to  the  transition cost recovery limitations and base rate reductions
of  the  Customer  Choice  Law,  CILCO's  electric generation activities will no
longer  be  subject to the provisions of SFAS 71. Accordingly, regulatory assets
of  $1.5  million  and  liabilities  of  $5.6  million  associated with electric
generating  plant  were written-off or credited, respectively, to income in 1997
as  a  net $4.1 million after-tax extraordinary item. Regulatory assets included
on  the  Consolidated  Balance  Sheets  at  December  31,  1998  and 1997 are as
follows:


<TABLE>
<CAPTION>
                                                                   1998         1997
                                                                ----------   ---------
                                                                    (IN THOUSANDS)
<S>                                                             <C>          <C>
Included in prepayments and other:
 Fuel and gas cost adjustments ..............................    $ 4,740      $ 2,954
 Coal tar remediation cost -- estimated current .............        609          844
 Gas transition costs .......................................         --          159
                                                                 -------      -------
    Current costs included in prepayments and other .........      5,349        3,957
                                                                 -------      -------
Included in other assets:
 Coal tar remediation cost, net of recoveries ...............      1,281        2,745
 Regulatory tax asset .......................................      5,723        7,578
 Deferred gas costs .........................................      4,039        4,145
 Unamortized loss on reacquired debt ........................      3,261        3,581
                                                                 -------      -------
 Future costs included in other assets ......................     14,304       18,049
                                                                 -------      -------
    Total regulatory assets .................................    $19,653      $22,006
                                                                 =======      =======

</TABLE>

     Regulatory  assets  at  December  31, 1998 are related to CILCO's regulated
electric  and  gas distribution activities. CILCO does not currently believe the
costs  recorded  for  its  generating  plants and related assets at December 31,
1998  to  be  impaired  as  a  result  of  the  Customer  Choice Law. Regulatory
liabilities,  consisting  of  deferred  tax  items  primarily related to CILCO's
electric  and  gas  transmission  and distribution operations, are approximately
$46.3 million and $56.8 million at December 31, 1998 and 1997, respectively.

     CILCO's  electric  generation-related  identifiable  assets included in the
balance sheet at December 31, 1998 and 1997 were:


<TABLE>
<CAPTION>
                                                              1998           1997
                                                          ------------   ------------
                                                                (IN THOUSANDS)
<S>                                                       <C>            <C>
Property, Plant and Equipment .........................    $  537,358     $  535,065
Less: Accumulated Depreciation ........................      (266,461)      (259,988)
                                                           ----------     ----------
                                                              270,897        275,077
Construction Work in Progress .........................         3,268          1,979
                                                           ----------     ----------
 Net Property, Plant and Equipment ....................       274,165        277,056
Fuel, at Average Cost .................................         8,704          8,520
Materials and Supplies, at Average Cost ...............         8,452          8,202
                                                           ----------     ----------
Total Identifiable Electric Generation Assets .........    $  291,321     $  293,778
                                                           ==========     ==========
</TABLE>

     Accumulated  deferred  income  taxes  associated  with  electric generation
property  at  December  31, 1998 and 1997 were approximately $72 million and $79
million, respectively.


                                      F-11
<PAGE>


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)


OPERATING REVENUES, FUEL COSTS AND COST OF GAS

     Electric,  gas,  and  non-regulated  energy  and  energy  services revenues
include  service  provided  but unbilled at year end. Substantially all electric
rates  and  gas system sales rates of CILCO include a fuel adjustment clause and
a  purchased  gas adjustment clause, respectively. These clauses provide for the
recovery  of  changes in electric fuel costs, excluding coal transportation, and
changes  in  the  cost of gas on a current basis in billings to customers. CILCO
adjusts  the  cost of fuel and cost of gas to recognize over or under recoveries
of  allowable  costs.  The cumulative effects are deferred on the Balance Sheets
as  a current asset or current liability (see Regulation, above) and adjusted by
refunds or collections through future billings to customers.


CONCENTRATION OF CREDIT RISK

     CILCO,  as  a  public utility, must provide service to customers within its
defined  service  territory  and  may  not  discontinue  service  to residential
customers  when  certain  weather  conditions  exist.  CILCO continually reviews
customers'  creditworthiness  and requests deposits or refunds deposits based on
that  review.  At December 31, 1998, CILCO had net receivables of $35.8 million,
of which approximately $4.7 million was due from its major customers.

     See  Note  6  for a discussion of receivables related to CILCORP Investment
Management Inc.'s leveraged lease portfolio.


FAIR VALUE OF FINANCIAL INSTRUMENTS

     The   carrying  amount  of  Cash  and  Temporary  Cash  Investments,  Other
Investments,  and  Notes  Payable  approximates  fair  value. The estimated fair
value  of  the  Company's  Preferred  Stock  with  Mandatory  Redemption was $23
million  at  December  31, 1998 and 1997, based on current market interest rates
for  other  companies  with  comparable  credit  ratings, capital structure, and
size.  The  estimated  fair  value  of  the  Company's Long-Term Debt, including
current  maturities,  was $339 million at December 31, 1998, and $352 million at
December  31,  1997.  The  fair  market  value of these instruments was based on
current  market  interest  rates  for  other  companies  with  comparable credit
ratings, capital structures, and size.


DEPRECIATION AND MAINTENANCE

     Provisions  for  depreciation  of  utility property for financial reporting
purposes  are  based on straight-line composite rates. The annual provisions for
utility  plant  depreciation,  expressed  as a percentage of average depreciable
utility  property,  were  3.8%  and 4.6% for electric and gas, respectively, for
each  of  the last three years. Utility maintenance and repair costs are charged
directly  to  expense.  Renewals of units of property are charged to the utility
plant  account,  and  the  original  cost  of  depreciable  property replaced or
retired,  together  with  the  removal  cost  less  salvage,  is  charged to the
accumulated provision for depreciation.

     Non-utility  property is depreciated over estimated lives ranging from 3 to
40 years.


GOODWILL

     As  a  result  of  significant  downsizing  of  QST Environmental Inc. (QST
Environmental)  during 1996 and 1997 and continuing overcapacity and competition
in  the  environmental  segment  in  the  fourth  quarter  of  1997, the Company
determined  that  an  impairment  to  goodwill associated with QST Environmental
existed.  As  a  result,  the  Company  wrote  off the $22.6 million unamortized
goodwill  balance.  In late 1998, the Company decided to sell its 100% ownership
interest  in  QST  Environmental  and has classified its results as discontinued
(see Note 10).


                                      F-12
<PAGE>


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)


INCOME TAXES

     The  Company  follows  a  policy  of  comprehensive  interperiod income tax
allocation.  Investment  tax  credits  related  to  utility  property  have been
deferred  and are being amortized over the estimated useful lives of the related
property.  CILCORP  and  its subsidiaries file a consolidated federal income tax
return.  Income  taxes  are allocated to the individual companies based on their
respective taxable income or loss.


CONSOLIDATED STATEMENTS OF CASH FLOWS

     The  Company  considers all highly liquid debt instruments purchased with a
remaining  maturity  of three months or less to be cash equivalents for purposes
of the Consolidated Statements of Cash Flows.

     Cash paid for interest and income taxes was as follows:





<TABLE>
<CAPTION>
                                     DECEMBER 31,
                         ------------------------------------
                            1998         1997         1996
                         ----------   ----------   ----------
                                    (IN THOUSANDS)
<S>                      <C>          <C>          <C>
Interest .............    $26,067      $28,710      $28,988
Income taxes .........    $19,611      $28,537      $13,572
                          -------      -------      -------
</TABLE>

COMPANY-OWNED LIFE INSURANCE POLICIES

     The  following  amounts  related to Company-owned life insurance contracts,
issued by one major insurance company, are included in Other Investments:


<TABLE>
<CAPTION>
                                                    DECEMBER 31,
                                              -------------------------
                                                  1998          1997
                                              -----------   -----------
                                                   (IN THOUSANDS)
<S>                                           <C>           <C>
Cash surrender value of contracts .........    $  50,786     $  45,297
Borrowings against contracts ..............      (48,132)      (42,898)
                                               ---------     ---------
   Net investment .........................    $   2,654     $   2,399
                                               =========     =========

</TABLE>

     Interest   expense   related   to  borrowings  against  Company-owned  life
insurance,  included  in  "Other"  on the Consolidated Statements of Income, was
$3.6   million,  $3.5  million  and  $2.7  million  for  1998,  1997  and  1996,
respectively.


                                      F-13
<PAGE>

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2.  INCOME TAXES

     The  Company  uses  the liability method to account for income taxes. Under
the  liability method, deferred income taxes are recognized at currently enacted
income  tax rates to reflect the tax effect of temporary differences between the
financial  reporting  basis  and  the  tax  basis  of  assets  and  liabilities.
Temporary  differences  occur  because  the  income  tax  law either requires or
permits  certain  items  to  be reported on the Company's income tax return in a
different  year  than  they  are reported in the financial statements. CILCO has
recorded  a regulatory asset and liability to account for the effect of expected
future  regulatory actions related to unamortized investment tax credits, income
tax  liabilities initially recorded at tax rates in excess of current rates, the
equity  component  of  Allowance  for  Funds  Used during Construction and other
items  for  which deferred taxes had not previously been provided. The temporary
differences  related to the consolidated deferred income tax asset and liability
at December 31, 1998, 1997, and 1996 were as follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                    ------------------------------------
                                                       1998         1997         1996
                                                    ----------   ----------   ----------
                                                               (IN THOUSANDS)
<S>                                                 <C>          <C>          <C>
Deferred tax assets:
 Deferred tax asset .............................    $ 20,742     $ 18,347     $ 16,452
 Adjustment to reflect regulatory asset .........      (5,723)      (7,578)      (4,777)
                                                     --------     --------     --------
 Net deferred tax asset .........................    $ 15,019     $ 10,769     $ 11,675
                                                     ========     ========     ========
</TABLE>
<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                          ---------------------------------------
                                                                              1998          1997          1996
                                                                          -----------   -----------   -----------
                                                                                      (IN THOUSANDS)
<S>                                                                       <C>           <C>           <C>
Deferred tax liabilities:
 Deferred tax liability-property ......................................    $ 196,301     $ 207,460     $ 214,356
 Adjustment to reflect regulatory liability ...........................      (46,346)      (56,807)      (68,565)
                                                                           ---------     ---------     ---------
 Net deferred tax liability-property ..................................      149,955       150,653       145,791
 Deferred tax liability-leases ........................................      103,566       101,005        97,964
 Deferred tax liability-other .........................................          804           124         3,159
                                                                           ---------     ---------     ---------
 Accumulated deferred income tax liability ............................    $ 254,325     $ 251,782     $ 246,914
                                                                           =========     =========     =========
 Accumulated deferred income tax liability, net of deferred tax assets     $ 239,306     $ 241,013     $ 235,239
                                                                           =========     =========     =========
</TABLE>

     The  following  table  reconciles  the  change  in the accumulated deferred
income  tax  liability to the deferred income tax expense included in the income
statement:

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                           ----------------------------
                                                                                1998           1997
                                                                           -------------   ------------
                                                                                  (IN THOUSANDS)
<S>                                                                        <C>             <C>
Net change in deferred income tax liability per above table ............     $  (1,707)     $   5,774
Change in tax effects of income tax related regulatory assets and
 liabilities ...........................................................        (8,606)       (14,559)
Deferred taxes related to extraordinary item ...........................            --          5,634
Other ..................................................................          (106)           125
                                                                             ---------      ---------
Deferred income tax benefit for the period .............................       (10,419)        (3,026)
Less: Deferred income tax benefit for the period from discontinued
 operations ............................................................        (6,115)        (1,245)
                                                                             ---------      ---------
Deferred income tax benefit for the period from continuing operations...     $  (4,304)     $  (1,781)
                                                                             =========      =========
</TABLE>

                                      F-14
<PAGE>


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2.  INCOME TAXES -- (CONTINUED)

     Income tax expenses were as follows:



<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                  -------------------------------------
                                                                      1998         1997         1996
                                                                  -----------   ----------   ----------
                                                                             (IN THOUSANDS)
<S>                                                               <C>           <C>          <C>
Current income taxes
Federal .......................................................    $  13,731     $ 17,814     $ 15,129
State .........................................................        3,791        3,836        2,169
                                                                   ---------     --------     --------
Total current taxes ...........................................       17,522       21,650       17,298
                                                                   ---------     --------     --------
Deferred income taxes, net ....................................
Property-related deferred income taxes ........................      (11,262)        (841)      (2,346)
Leveraged leases ..............................................        2,602        3,040        4,398
Unbilled revenue ..............................................         (287)        (885)         425
Gas take-or-pay settlements ...................................          522         (339)        (706)
Environmental remediation costs ...............................          (58)          46         (642)
Pension expenses ..............................................          869       (1,798)      (1,726)
Other post-employment benefits expenses .......................         (847)        (617)         187
Customer advances .............................................          478         (438)         (40)
Gas in underground storage ....................................       (1,681)        (191)         405
Amortization of debt discounts, premiums and expenses .........         (790)        (179)        (179)
CILCO Executive Deferred Compensation Plan ....................         (671)        (191)        (525)
CILCORP Shareholder Return Incentive Comp. Plan ...............         (717)          --           --
QST Gas Derivatives Mark to Market ............................          948           --           --
Other .........................................................          475         (633)        (360)
                                                                   ---------     --------     --------
Total deferred income taxes, net ..............................      (10,419)      (3,026)      (1,109)
                                                                   ---------     --------     --------
Investment tax credit amortization ............................       (1,668)      (1,684)      (1,684)
                                                                   ---------     --------     --------
Total income tax provisions before extraordinary item .........        5,435       16,940       14,505
Deferred taxes related to extraordinary item ..................           --       (5,634)          --
                                                                   ---------     --------     --------
Total income tax provisions ...................................    $   5,435     $ 11,306     $ 14,505
                                                                   =========     ========     ========
</TABLE>

     Total  income  tax  provisions are presented within the Income Statement as
follows:


<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                         -------------------------------------
                                                             1998         1997         1996
                                                         -----------   ----------   ----------
                                                                    (IN THOUSANDS)
<S>                                                      <C>           <C>          <C>
Income taxes from continuing operations ..............    $  19,699     $ 22,349     $ 20,702
Tax on income (loss) from operations of discontinued
 businesses ..........................................      (16,278)      (7,298)      (6,197)
Tax on gain (loss) on sale/disposal of discontinued
 businesses ..........................................        2,014        1,889           --
Deferred taxes related to extraordinary item .........           --       (5,634)          --
                                                          ---------     --------     --------
Total income tax provisions ..........................    $   5,435     $ 11,306     $ 14,505
                                                          ---------     --------     --------
</TABLE>

     The  1997 income tax provision has been reduced to reflect the crediting to
income  as  an  extraordinary  item the regulatory liability related to electric
generation  property  deferred  taxes which were recorded at tax rates in excess
of the current rate.

     Total  deferred  income taxes, net, includes deferred state income taxes of
$(1,635,000), $(229,000) and $(538,000) for 1998, 1997 and 1996, respectively.


                                      F-15
<PAGE>


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2.  INCOME TAXES -- (CONTINUED)

     The  following  table represents a reconciliation of the effective tax rate
with the statutory federal income tax rate.


<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                                 ------------------------------------
                                                                    1998         1997         1996
                                                                 ----------   ----------   ----------
<S>                                                              <C>          <C>          <C>
Statutory federal income tax .................................       35.0%        35.0%        35.0%
                                                                     ----        -----         ----
Amortization of property related deferred taxes provided at
 tax rates in excess of current rate .........................       (8.3)        (3.9)        (3.4)
Amortization of investment tax credit ........................       (7.6)        (6.1)        (4.0)
State income taxes ...........................................        5.5          9.0          4.8
Goodwill write-off and amortization ..........................         --         29.2           .6
Preferred dividends of subsidiary and other permanent
 differences .................................................        6.6          5.2          3.6
Tax provision adjustment .....................................         --         (1.6)         (.4)
Affordable housing tax credits ...............................       (6.1)        (3.4)         (.1)
Corporate-owned life insurance ...............................       (4.2)        (2.9)        (1.7)
AES transaction costs ........................................        3.3           --           --
Other differences ............................................        1.1           .7          (.2)
                                                                     ----        -----         ----
Total ........................................................       (9.7)        26.2          (.8)
                                                                     ----        -----         ----
Effective income tax rate before effect of extraordinary item.       25.3         61.2         34.2
Tax effect of extraordinary item .............................         --        (20.4)          --
                                                                     ----        -----         ----
Effective income tax rate ....................................       25.3%        40.8%        34.2%
                                                                     ====        =====         ====
</TABLE>

                                      F-16
<PAGE>


                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


NOTE 3 POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS

POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE

     CILCO   has   recorded   a  liability  of  approximately  $1.5  million  at
December 31,  1998  and  1997,  for  benefits other than pensions or health care
provided  to  former  or  inactive  employees.  The liability for these benefits
(primarily   long-term   and   short-term   disability   payments   under  plans
self-insured by CILCO) is actuarially determined.


PENSION BENEFITS

     Substantially  all of CILCO's full-time employees, including those assigned
to  the  Holding  Company,  are  covered  by  trusteed, non-contributory defined
benefit  pension  plans.  Benefits  under  these  qualified  plans  reflect  the
employee's  years  of  service, age at retirement and maximum total compensation
for  any  consecutive  sixty-month period prior to retirement. CILCO also has an
unfunded nonqualified plan for certain employees.

     Pension costs for the past three years were charged as follows:


<TABLE>
<CAPTION>
                                        1998        1997        1996
                                    -----------   --------   ----------
                                              (IN THOUSANDS)
<S>                                 <C>           <C>        <C>
Operating expenses ..............     $  (893)     $ 493      $ 9,700
Utility plant and other .........           6        125          922
                                      -------      -----      -------
Net pension costs ...............     $  (887)     $ 618      $10,622
                                      =======      =====      =======
</TABLE>

     Provisions  for  pension  expense  reflect  the  use  of the projected unit
credit  actuarial  cost  method. At December 31, 1998 and 1997, CILCO recognized
an  additional minimum liability on the Balance Sheets for the plan in which the
accumulated benefit obligation exceeds the fair value of plan assets.

POSTRETIREMENT HEALTH CARE BENEFITS

     Provisions  for  postretirement  benefits expenses are determined under the
accrual method of accounting.

     Substantially  all of CILCO's full-time employees, including those assigned
to  the  Holding  Company, are currently covered by a trusteed, non-contributory
defined   benefit   postretirement  health  care  plan.  The  plan  pays  stated
percentages  of  most  necessary  medical  expenses  incurred by retirees, after
subtracting  payments  by  Medicare  or  other  providers  and  after  a  stated
deductible  has  been met. Participants become eligible for the benefits if they
retire  from  CILCO  after  reaching  age  55  with 10 or more years of service.
Neither  QST  Enterprises  nor  its subsidiaries provide health care benefits to
retired employees.

     Postretirement health care benefit costs were charged as follows:


<TABLE>
<CAPTION>
                                                            1998        1997        1996
                                                         ---------   ---------   ---------
                                                                  (IN THOUSANDS)
<S>                                                      <C>         <C>         <C>
Operating expenses ...................................    $3,904      $3,989      $5,096
Utility plant and other ..............................     1,260       1,825       1,883
                                                          ------      ------      ------
Net postretirement health care benefit costs .........    $5,164      $5,814      $6,979
                                                          ======      ======      ======
</TABLE>


                                      F-17
<PAGE>


                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3 POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS-- (CONTINUED)
     The components of net periodic benefit costs follow:


<TABLE>
<CAPTION>
                                                                                        OTHER POSTRETIREMENT
                                                              PENSION BENEFITS                BENEFITS
                                                         ---------------------------   -----------------------
                                                             1998           1997          1998         1997
                                                         ------------   ------------   ----------   ----------
                                                                            (IN THOUSANDS)
<S>                                                      <C>            <C>            <C>          <C>
Service cost .........................................    $   5,410      $   4,384      $  1,417     $  1,298
Interest cost ........................................       19,024         17,561         5,371        5,047
Expected return on plan assets .......................      (25,304)       (21,005)       (4,388)      (3,249)
Amortization of transition liability (asset) .........         (888)          (888)        2,858        2,858
Amortization of past service cost ....................        1,068          1,068            --           --
Recognized actuarial loss ............................         (197)          (502)          (94)        (140)
                                                          ---------      ---------      --------     --------
Net benefit cost .....................................    $    (887)     $     618      $  5,164     $  5,814
                                                          =========      =========      ========     ========
Pension Plans with Accumulated Benefit
 Obligations in Excess of Assets
Total projected benefit obligation ...................    $  (4,191)     $  (3,692)
Total accumulated benefit obligation .................    $  (3,582)     $  (2,902)
Total fair value of assets ...........................    $      --      $      --
</TABLE>

     Information on the plans, funded status follows:


<TABLE>
<CAPTION>
                                                                                                OTHER POSTRETIREMENT
                                                                 PENSION BENEFITS                     BENEFITS
                                                          -------------------------------   -----------------------------
                                                               1998             1997             1998            1997
                                                          --------------   --------------   -------------   -------------
                                                                                  (IN THOUSANDS)
<S>                                                       <C>              <C>              <C>             <C>
Change in Benefit Obligations
Benefit obligation at January 1, ......................     $ (254,929)      $ (235,441)      $ (72,542)      $ (67,367)
Service cost ..........................................         (5,410)          (4,384)         (1,417)         (1,298)
Interest cost .........................................        (19,024)         (17,561)         (5,371)         (5,047)
Actuarial (gain) loss .................................        (22,521)         (13,928)         (7,500)         (2,891)
Benefits paid .........................................         16,238           16,385           4,514           4,061
                                                            ----------       ----------       ---------       ---------
Benefit obligation at December 31, ....................     $ (285,646)      $ (254,929)      $ (82,316)      $ (72,542)
                                                            ==========       ==========       =========       =========
Change in Plan Assets
Fair value of assets at January 1, ....................     $  289,091       $  254,824       $  52,263       $  39,601
Actual return on assets ...............................         36,467           50,489           5,781           9,907
Company contributions .................................            163              163             863           6,816
Participant contributions .............................             --               --              --              --
Benefits paid .........................................        (16,238)         (16,385)         (4,514)         (4,061)
                                                            ----------       ----------       ---------       ---------
Fair value of assets at December 31, ..................     $  309,483       $  289,091       $  54,393       $  52,263
                                                            ==========       ==========       =========       =========
Funded Status at December 31,
Benefit obligation less (greater) than plan
 assets ...............................................     $   23,837       $   34,162       $ (27,923)      $ (20,279)
Unrecognized net transition liability (asset) .........         (4,011)          (4,899)         30,297          33,155
Unrecognized actuarial (gain) loss ....................        (35,875)         (47,431)         (6,777)        (12,977)
Unrecognized prior service cost .......................          6,365            7,433              --              --
Intangible asset ......................................           (415)            (455)             --              --
Accumulated other comprehensive income ................         (1,401)          (1,120)             --              --
                                                            ----------       ----------       ---------       ---------
Prepaid (accrued) benefit cost ........................     $  (11,500)      $  (12,310)      $  (4,403)      $    (101)
                                                            ==========       ==========       =========       =========
Assumptions as of December 31,
Discount rate .........................................           6.75%            7.25%           6.75%           7.25%
Long-term return on assets ............................           9.00%            8.50%           8.50%           8.50%
Long-term compensation increase .......................           3.50%            4.50%            N/A             N/A
</TABLE>

                                      F-18
<PAGE>


                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3 POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS-- (CONTINUED)

     For  measurement purposes, a 7.2 percent annual rate of increase in the per
capita  cost  of covered health care benefits was assumed for 1998. The rate was
assumed  to  decrease  gradually  to  5.7  percent  for  2025  and  remain level
thereafter.

     Increasing  the  assumed  health  care  cost  trend rate by 1% in each year
would   increase   the   accumulated   postretirement   benefit   obligation  at
December 31,   1998,  by  $2.9  million  and  the  aggregate  of the service and
interest  cost  components  of  net  postretirement health care cost for 1998 by
$252,000.  Decreasing the assumed health care cost trend rate by 1% in each year
would   decrease   the   accumulated   postretirement   benefit   obligation  at
December 31,  1998,  by  $3.3  million  and  the  aggregate  of  the service and
interest  cost  components  of  net  postretirement health care cost for 1998 by
$295,000.


NOTE 4 CILCORP SHAREHOLDER RETURN INCENTIVE COMPENSATION PLAN

     Under  the  Company's  Shareholder  Return Incentive Compensation Plan (the
Plan),  eligible  key employees of the Company and its subsidiaries are entitled
to  receive  shares  of  the  Company's  common  stock  based  on  a performance
methodology  established  and periodically amended by the Compensation Committee
of   the  Company's  Board  of  Directors.  During  1997,  350,000  fully-vested
performance  shares  were  distributed.  Such shares are convertible into common
stock  with  the  number of shares received based upon the number of performance
shares  exercised  multiplied by the difference between the average market price
of  the  Company's  common stock for the fifteen days prior to exercise and $36,
divided by the market price of common stock at the exercise date.

     The   compensation  expense  recognized  under  this  Plan,  based  on  the
provisions  of  Statement  of Financial Accounting Standards No. 123, (SFAS 123)
was  $1.8 million  in  1997  when the performance shares were distributed. These
shares  were  convertible  into common stock at any time until December 31, 1998
(the  Performance  Period).  The  fair  value  of each performance share granted
under  the  Plan  was  $5.98 -- estimated using the Black-Scholes option-pricing
model  assuming  a  risk-free  interest  rate  of  5.7%, dividend yield of 5.9%,
expected life of one year and volatility of 16.1%.

     In  1998,  the  Performance  Period  for the originally granted performance
shares  was  extended  to  December 31, 1999. No additional expense was recorded
following  this extension, as a revaluation of the fair value of the performance
shares  per  the provisions of SFAS 123 yielded no material valuation difference
due to the one-year extension.

     To  the extent that the market price exceeds $56, the Plan participants are
entitled  to  receive  cash  in  lieu of common stock. Consequently, the Company
recognized  expense  of  $1.75  million  in the fourth quarter 1998 to reflect a
share price approximating $61.


NOTE 5 SHORT-TERM DEBT

     Short-term  debt  at  December 31,  1998,  consisted  of  $55.6  million of
Holding  Company  bank  borrowings  and $40.6 million of CILCO commercial paper.
Short-term  debt at December 31, 1997, included $40.9 million of Holding Company
bank borrowings and $21.3 million of CILCO commercial paper.

     The  Holding  Company  had  arrangements  for bank lines of credit totaling
$60 million  at  December 31, 1998, of which $55.6 million was used. These lines
were maintained by commitment fees of 1/8 of 1% per annum in lieu of balances.

     CILCO  had  arrangements  for  bank lines of credit totaling $45 million at
December 31,  1998,  all  of  which  were  unused.  These  lines  of credit were
maintained  by  commitment  fees  of  1/20  of 1% per annum in lieu of balances.
These bank lines of credit support CILCO's issuance of commercial paper.


                                      F-19
<PAGE>


                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)



NOTE 6. LEVERAGED LEASE INVESTMENTS

     The  Company,  through  subsidiaries  of CILCORP Investment Management Inc.
(CIM),  is  a  lessor  in  eight leveraged lease arrangements under which mining
equipment,   electric   production  facilities,  warehouses,  office  buildings,
passenger  railway  equipment  and  an aircraft are leased to third parties. The
economic  lives  and  lease  terms  vary  with  the leases. CIM's share of total
equipment  and  facilities  cost  was approximately $350 million at December 31,
1998, and 1997.

     The  cost  of  the  equipment  and  facilities  owned  by  CIM is partially
financed  by  non-recourse  debt  provided by lenders, who have been granted, as
their  sole  remedy in the event of a lessee default, an assignment of rents due
under  the  leases  and  a  security  interest in the leased property. Such debt
amounted  to $232 million at December 31, 1998, and $237 million at December 31,
1997.

     Leveraged  lease  residual  value  assumptions,  which  are conservative in
relation  to independently appraised residual values of the lease portfolio, are
tested  on a periodic basis. In 1998, CIM decreased the estimated residual value
of  one  of  its  leases  by  approximately  $6.8  million  to  reflect  current
conditions in the secondary market for the asset.

     CIM's  net  investment in leveraged leases at December 31, 1998 and 1997 is
shown below:





<TABLE>
<CAPTION>
                                                                 1998          1997
                                                             -----------   -----------
                                                                  (IN THOUSANDS)
<S>                                                          <C>           <C>
   Minimum lease payments receivable .....................    $142,095      $136,916
   Estimated residual value ..............................      87,569        94,368
   Less: Unearned income .................................      82,674        84,826
                                                              --------      --------
   Investment in lease financing receivables .............     146,990       146,458
   Less: Deferred taxes arising from leveraged leases.....     103,566       101,005
                                                              --------      --------
   Net investment in leveraged leases ....................    $ 43,424      $ 45,453
                                                              ========      ========
</TABLE>

NOTE 7. PREFERRED STOCK

PREFERRED STOCK OF SUBSIDIARY

<TABLE>
<CAPTION>
                                                                AT DECEMBER 31,
                                                            -----------------------
                                                               1998         1997
                                                            ----------   ----------
                                                                (IN THOUSANDS)
<S>                                                         <C>          <C>
   Preferred stock, cumulative $100 par value,
    authorized 1,500,000 shares Without mandatory
    redemption 4.50% series -- 111,264 shares ...........    $11,126      $11,126
    4.64% series -- 79,940 shares .......................      7,994        7,994
   Class A, no par value, authorized 3,500,000 shares
    Flexible auction rate -- 250,000 shares (*) .........     25,000       25,000
    With mandatory redemption 5.85% series --
      220,000 shares ....................................     22,000       22,000
                                                             -------      -------
      Total preferred stock .............................    $66,120      $66,120
                                                             =======      =======
</TABLE>

----------
(*) Dividend  rates  at  December  31,  1998  and  1997,  were  4.04% and 4.18%,
    respectively.

     All   classes  of  preferred  stock  are  entitled  to  receive  cumulative
dividends  and  rank  equally  as  to  dividends  and assets, according to their
respective terms.

     The  total  annual  dividend requirement for preferred stock outstanding at
December  31,  1998,  is  $3.2  million,  assuming a continuation of the auction
dividend rate at December 31, 1998, for the flexible auction rate series.


                                      F-20
<PAGE>


                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7. PREFERRED STOCK -- (CONTINUED)

PREFERRED STOCK WITHOUT MANDATORY REDEMPTION

     The  call  provisions  of  preferred  stock  redeemable  at  CILCO's option
outstanding at December 31, 1998, are as follows:

          Series Callable Price Per Share (plus accrued dividends)

<TABLE>
<CAPTION>
                         <S>                         <C>
                         4.50%                      $110
                         4.64%                      $102
                         Flexible Auction Rate      $100

</TABLE>

PREFERRED STOCK WITH MANDATORY REDEMPTION

     CILCO's  5.85%  Class A preferred stock may be redeemed in 2003 at $100 per
share.  A  mandatory  redemption  fund  must be established on July 1, 2003. The
fund  will  provide for the redemption of 11,000 shares for $1.1 million on July
1  of  each  year  through  July 1, 2007. On July 1, 2008, the remaining 165,000
shares will be retired for $16.5 million.

PREFERENCE STOCK OF SUBSIDIARY, CUMULATIVE

     No Par Value, Authorized 2,000,000 shares, of which none have been issued.



PREFERRED STOCK OF HOLDING COMPANY

     No  Par  Value, Authorized 4,000,000 shares, of which none were outstanding
at December 31, 1998 and 1997.

COMMON STOCK RIGHTS

     On  October  29,  1996,  the  Board  of Directors of CILCORP authorized and
declared  a dividend distribution of one right for each share of common stock of
the  Company  to stockholders of record at November 12, 1996, and for each share
of  common  stock  issued thereafter. Each right gives the stockholder the right
to  purchase  one one-hundredth of a share of preferred stock of the Company for
$100,  subject to the conditions set forth in the agreement governing the rights
plan.


NOTE 8. LONG-TERM DEBT

<TABLE>
<CAPTION>
                                          AT DECEMBER 31,
                                      -----------------------
                                         1998         1997
                                      ----------   ----------
                                          (IN THOUSANDS)
<S>                                   <C>          <C>
CILCO first mortgage bonds
   7 1/2% series due 2007 .........    $ 50,000     $ 50,000
   8 1/5% series due 2022 .........      65,000       65,000
 Medium-term notes
   6.4% series due 2000 ...........      30,000       30,000
   6.82% series due 2003 ..........      25,350       25,350
   6.13% series due 2005 ..........      16,000       16,000
   7.8% series due 2023 ...........      10,000       10,000
   7.73% series due 2025 ..........      20,000       20,000
 Pollution control refunding bonds
   6.5% series F due 2010 .........       5,000        5,000
   6.2% series G due 2012 .........       1,000        1,000
   6.5% series E due 2018 .........      14,200       14,200
   5.9% series H due 2023 .........      32,000       32,000
                                       --------     --------
                                        268,550      268,550
                                       --------     --------
</TABLE>


                                      F-21
<PAGE>


                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8. LONG-TERM DEBT -- (CONTINUED)

<TABLE>
<CAPTION>
                                                       AT DECEMBER 31,
                                                 ---------------------------
                                                     1998           1997
                                                 ------------   ------------
                                                       (IN THOUSANDS)
<S>                                              <C>            <C>
CILCO first mortgage bonds
 Unamortized premium and discount on long-term
   debt, net .................................         (666)          (714)
                                                       ----           ----
    Total CILCO ..............................     $267,884       $267,836
                                                   --------       --------
   CILCORP Inc. Unsecured medium-term notes;
    various maturities in 2001; interest rates
    ranging from 8.52% to 9.10% ..............       17,500         30,500
   Other .....................................          168            192
                                                   --------       --------
    Total long-term debt .....................     $285,552       $298,528
                                                   ========       ========
</TABLE>

     CILCO's  first mortgage bonds are secured by a lien on substantially all of
its   property  and  franchises.  Unamortized  borrowing  expense,  premium  and
discount  on  outstanding  long-term  debt are being amortized over the lives of
the respective issues.

     Total  consolidated  maturities  of  long-term  debt  for  2000-2003 are as
follows:  $30 million in 2000, $18 million in 2001, no debt due in 2002, and $25
million  in  2003.  The  remaining maturities of long-term debt of $214 million,
occur in 2004 and beyond.

     The  1999  and 1998 maturities of long-term borrowings have been classified
as current liabilities.

NOTE 9. COMMITMENTS & CONTINGENCIES

     CILCO's  1999  capital  expenditures  are  estimated to be $56.6 million in
connection  with  which  CILCO  has normal and customary purchase commitments at
December 31, 1998.

     CILCO  acts  as  a  self-insurer for certain insurable risks resulting from
employee health and life insurance programs.

     The  International  Brotherhood  of  Electrical  Workers  Local  51  (IBEW)
ratified  its  current  agreement  on  October 10, 1997. The contract expires on
July  1,  2000.  The  IBEW  represents  approximately 389 CILCO gas and electric
department  employees.  The  National  Conference  of Firemen and Oilers Local 8
(NCF&O)  ratified  its  current  contract  with the Company on October 23, 1998.
CILCO's  previous contract with the NCF&O expired on July 1, 1998, and the NCF&O
membership  had  been  working  without  a  contract  since  that  time. The new
contract  expires  on July 1, 2001. The NCF&O represents approximately 200 CILCO
power plant employees.

     In  August  1990,  CILCO  entered  into  a  firm,  wholesale power purchase
agreement  with  Central Illinois Public Service Company, now AmerenCIPS (CIPS).
This  agreement provided for a minimum contract delivery rate from CIPS of 90 MW
until the contract expired in May 1998.

     In  March  1995,  CILCO  and  CIPS  amended  a limited-term power agreement
reached  in  November  1992.  This  agreement,  which  now  expires in May 2009,
provides  for  CILCO  to  purchase up to 150 MW of CIPS' capacity from June 1998
through May 2002, and 50 MW from June 2002 through May 2009.

     In  January  1997,  CILCO  intervened  in  a  proceeding before the Federal
Energy  Regulatory  Commission (FERC) to raise contract issues relating to CIPS'
proposal  to  engage with a second utility in joint dispatch of their respective
generating  units.  CILCO  also  challenged the validity of the power agreements
with  CIPS  because  of CIPS' failure to obtain FERC approval of the agreements.
In  the  alternative,  CILCO requested that FERC provide an "open season" during
which  CILCO  may cancel the power agreements in whole or in part. In an October
1997  order,  FERC  rejected  CILCO's  challenges  to  joint dispatch and denied
CILCO's  request  for  an  open  season.  However,  CIPS was ordered to file the
agreements with FERC and, on its own motion, FERC initiated a separate


                                      F-22
<PAGE>


                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9. COMMITMENTS & CONTINGENCIES -- (CONTINUED)

proceeding  to  investigate  the  terms  of  the  agreements.  Hearings  in that
proceeding  have  concluded,  and  the  Administrative  Law Judge has entered an
order  finding  the  agreements are, with minor exceptions, just and reasonable.
CILCO  is  appealing  that  order  to  FERC  and  is  requesting  FERC to assess
penalties  against  CIPS  for  CIPS'  failure  to file the 1990 agreement before
providing  service  to  CILCO  under  that  agreement. FERC's October 1997 order
failed  to  address  certain  contract  issues  raised  by  CILCO.  FERC  denied
rehearing  of  that order in February 1998, and CILCO has appealed to the United
States  Court  of  Appeals  for the District of Columbia Circuit for a review of
FERC's  orders  concerning  the  CIPS  agreements.  CILCO  also filed a separate
complaint  at  FERC  in  December  1998, challenging the manner in which CIPS is
performing,  or  failing  to perform, under the agreements and has notified CIPS
that  CILCO  considers CIPS to be in default under the agreements. On the ground
that  CIPS  is  in default regarding performance under the 1992 agreement, CILCO
suspended  capacity  reservation  payments  to  CIPS  under the agreements as of
January  21,  1999.  CILCO  cannot predict how FERC or the Court will ultimately
rule  on  the  issues  pending before them. If CILCO's position is not upheld on
certain   issues,  CILCO  could  be  required  to  pay  the  suspended  capacity
reservation  charges  which  are currently $865,000 per month, plus interest, to
CIPS.  While  the capacity payments are suspended, CILCO is purchasing power and
energy from other sources.

     Reference  is  made  to  Management's  Discussion and Analysis of Financial
Condition  and  Results of Operations -- Environmental Matters (regarding former
gas manufacturing sites) for a discussion of that item.


NOTE 10. QST ENTERPRISES DISCONTINUED OPERATIONS

     Due  to  uncertainties  related  to energy deregulation across the country,
the  illiquidity  of  certain energy markets and its pending acquisition by AES,
the  Company  will  focus  in  the  future  on the opportunities in the Illinois
energy  market resulting from the deregulation of electricity under the Electric
Service   Customer  Choice  and  Rate  Relief  Law  of  1997  (see  Management's
Discussion  and  Analysis  --  Competition). As a result, the Company decided in
the  fourth  quarter  of  1998  to  sell  its  100%  ownership  interest  in QST
Environmental  Inc.,  a  first-tier  subsidiary  of  QST providing environmental
consulting  and  engineering services. In August 1998, QST sold its wholly-owned
fiber  optic-based  telecommunications  subsidiary,  QST Communications, for $20
million  cash and stock options valued at $5.5 million. Since incurring material
losses  in  the  wholesale electricity market in June 1998 and subsequent losses
in  its  energy  operations  outside of Illinois, QST Energy has transferred its
Pennsylvania  retail  customers  to  other  marketers,  ceased its Houston-based
energy  trading  operations,  and has begun an effort to negotiate an end to its
obligation  to  provide  electricity to its non-Illinois customers. Accordingly,
the   operations   of   QST  Enterprises  and  its  subsidiaries  are  shown  as
discontinued  operations  in  the statements of income. The Company's investment
in  QST  Enterprises,  as of December 31, 1998, on the accompanying consolidated
balance  sheet,  consists  primarily  of  $17.4 million in working capital, $6.9
million  in fixed assets and $6.3 million of investments and other assets. Prior
year  financial  statements,  which  also include the discontinued operations of
ESE  Land  Corporation  (sold  by  QST  Environmental in November 1997, for $9.5
million  and  residual  interests in three limited liability corporations), have
been reclassified to conform to the current year presentation.


NOTE 11. LEASES

     The  Company  and  its  subsidiaries lease certain equipment, buildings and
other  facilities  under  capital and operating leases. Several of the operating
leases  provide  that  the  Company  pay  taxes, maintenance and other occupancy
costs applicable to these premises.

     Minimum  future rental payments under non-cancellable capital and operating
leases  having  remaining  terms  in excess of one year as of December 31, 1998,
are  $19.9  million  in total. Payments due during the years ending December 31,
1999,  through  December 31, 2003, are $8.1 million, $5.6 million, $3.4 million,
$1.9 million and $.5 million, respectively.


                                      F-23
<PAGE>


                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12. FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT

     CILCORP  utilizes  commodity  futures  contracts,  options and swaps in the
normal  course  of  its  natural  gas  business activities. However, it does not
currently  utilize  these  instruments  to  hedge its electric purchase and sale
transactions  or  to  participate in energy trading activities. Gains and losses
arising  from  derivative  financial  instrument  transactions  which  hedge the
impact  of  fluctuations  in  energy  prices are recognized in income concurrent
with  the  related  purchases  and  sales  of  the  commodity.  If  a derivative
financial  instrument  contract  is  terminated  because  it  is probable that a
transaction  or  forecasted  transaction  will not occur, any gain or loss as of
such  date  is  immediately  recognized.  If  a  derivative financial instrument
contract  is terminated early for other economic reasons, any gain or loss as of
the  termination  date  is  deferred  and recorded concurrently with the related
purchase  and  sale  of  natural gas. CILCORP is subject to commodity price risk
for  deregulated  sales  to  the  extent  that  energy  is sold under firm price
commitments.  Due  to  market  conditions,  at  times CILCORP may have unmatched
commitments  to purchase and sell energy on a price and quantity basis. Physical
and  derivative financial instruments give rise to market risk, which represents
the  potential  loss  that  can  be  caused by a change in the market value of a
particular  commitment. Market risks are actively monitored to ensure compliance
with  the  Company's risk management policies, including limits to the Company's
total net exposure at any time.

     The  net  loss  reflected  in  operating  results from derivative financial
instruments  was  $2.2  million  for  the  year  1998.  As of December 31, 1998,
CILCORP  had fixed-price derivative financial instruments representing hedges of
natural  gas  purchases  of  5.6  Bcf  and  natural  gas  sales  of  7.2 Bcf for
commitments  through  September  1999. The net deferred loss and carrying amount
on  these  fixed-price  derivatives  at  December  31,  1998 was $.9 million. At
December   31,   1998,  CILCORP  had  open  positions  in  derivative  financial
instruments  used  to  hedge  basis  of  1.0 Bcf for commitments through October
1999.  The  net  deferred  loss on these basis derivatives at December 31, 1998,
was $.1 million.

NOTE 13. EARNINGS PER SHARE

     The  following  data  show the amounts used in computing earnings per share
and  the  effect on income and the weighted average number of shares of dilutive
potential  common  stock.  The  shares  calculated for dilutive potential result
from the CILCORP Shareholder Return Incentive Compensation Plan.



<TABLE>
<CAPTION>
                                                                1998         1997
                                                             ----------   ----------
                                                                 (IN THOUSANDS)
<S>                                                          <C>          <C>
Income available to common shareholders ..................    $16,310      $16,395
Weighted average number of common shares used in Basic
 Earnings Per Share ......................................     13,611       13,611
Weighted number of dilutive potential common stock used in
 Diluted Earnings Per Share ..............................         96           16
</TABLE>

     The  Company  adopted  Statement of Financial Accounting Standards No. 128,
Earnings   Per   Share,  beginning  with  the  year  ended  December  31,  1997.
Restatement  of  1996  is  not  applicable as no potential common stock dilution
occurred until 1997.


                                      F-24
<PAGE>


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


NOTE 14 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The  following  quarterly  operating  results  are  unaudited,  but, in the
opinion  of  management, include all adjustments (consisting of normal recurring
accruals)  necessary  for a fair presentation of the Company's operating results
for  the  periods  indicated.  The  results of operations for each of the fiscal
quarters  are not necessarily comparable to, or indicative of, the results of an
entire  year  due  to  the  seasonal  nature of the Company's business and other
factors.

<TABLE>
<CAPTION>
                                                                             FOR THE THREE MONTHS ENDED
                                                            -------------------------------------------------------------
                                                              MARCH 31        JUNE 30      SEPTEMBER 30      DECEMBER 31
                                                            ------------   ------------   --------------   --------------
                                                                       (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                                         <C>            <C>            <C>              <C>
1998
 Revenue ................................................     $154,274       $121,435        $141,143        $  142,172
 Income from continuing operations before income
   taxes ................................................       17,566         10,254          29,020             1,077
 Income taxes ...........................................        6,250          2,519          10,983               (53)
 Net income from continuing operations ..................       11,316          7,735          18,037             1,130
 Loss from operations of discontinued business, net of
   tax of $(2,355), $(5,512), $(2,354), $(6,057).........       (3,622)        (8,423)         (3,620)           (9,360)
 Gain (loss) on sale/disposal of assets of discontinued
   business, net of tax of $5,425, $(3,411)..............           --             --           8,252            (5,135)
 Net income (loss) ......................................     $  7,694       $   (688)       $ 22,669        $  (13,365)
 Earnings per average common share--basic ...............
 Continuing operations ..................................     $   0.83       $   0.57        $   1.33        $     0.08
 Discontinued operations ................................       ( 0.27)        ( 0.62)           0.34            ( 1.06)
 Net income (loss) ......................................     $   0.56       $  (0.05)       $   1.67        $    (0.98)
 Earnings per average common share--diluted .............
 Continuing operations ..................................     $   0.83       $   0.56        $   1.32        $     0.08
 Discontinued operations ................................       ( 0.27)        ( 0.61)           0.34            ( 1.06)
 Net income (loss) ......................................     $   0.56       $  (0.05)       $   1.66        $    (0.98)
1997
 Revenue ................................................     $168,595       $113,610        $125,050        $  150,705
 Income from continuing operations before income
   taxes ................................................       16,793         10,889          23,966            14,410
 Income taxes ...........................................        5,254          3,559           8,858             4,678
 Net income from continuing operations before
   extraordinary item ...................................       11,539          7,330          15,108             9,732
 Loss from operations of discontinued business, net of
   tax of $(1,060), $(842), $(1,195), $(4,201)...........       (1,820)        (1,513)         (2,034)          (28,759)
 Gain on sale of assets of discontinued business, net
   of tax of $1,889......................................           --             --              --             2,712
 Extraordinary item .....................................           --             --              --             4,100
 Net income (loss) ......................................     $  9,719       $  5,817        $ 13,074        $  (12,215)
 Earnings per average common share--basic ...............
 Continuing operations ..................................     $   0.85       $   0.54        $   1.11        $     0.71
 Discontinued operations ................................       ( 0.14)        ( 0.11)         ( 0.15)           ( 1.91)
 Extraordinary item .....................................           --             --              --              0.30
 Net income (loss) ......................................     $   0.71       $   0.43        $   0.96        $    (0.90)
 Earnings per average common share--diluted .............
 Continuing operations ..................................     $   0.85       $   0.54        $   1.11        $     0.71
 Discontinued operations ................................       ( 0.14)        ( 0.11)         ( 0.15)           ( 1.91)
 Extraordinary item .....................................           --             --              --               .30
 Net income (loss) ......................................     $   0.71       $   0.43        $   0.96        $    (0.90)

</TABLE>


                                      F-25
<PAGE>

                         CILCORP INC AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                                (IN THOUSANDS)*
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                           SIX MONTHS ENDED
                                                                               JUNE 30,
                                                                     -----------------------------
                                                                         1999            1998
                                                                     ------------   --------------
<S>                                                                  <C>            <C>
Revenue:
Electric utility .................................................     $169,006       $167,482
Gas utility ......................................................      102,366         98,212
Other businesses .................................................       17,133         10,382
                                                                       --------       --------
 Total ...........................................................      288,505        276,076
                                                                       --------       --------
Operating expenses:
Fuel for generation and purchased power ..........................       57,183         58,329
Gas purchased for resale .........................................       65,005         60,025
Other operations and maintenance .................................       73,724         62,001
Depreciation and amortization ....................................       34,481         31,966
Taxes, other than income taxes ...................................       20,916         19,305
                                                                       --------       --------
 Total ...........................................................      251,309        231,626
                                                                       --------       --------
Fixed charges and other:
Interest expense .................................................       14,340         14,625
Preferred stock dividends of subsidiary ..........................        1,570          1,599
Allowance for funds used during construction .....................          (26)            (6)
Other ............................................................          506            412
                                                                       --------       --------
 Total ...........................................................       16,390         16,630
                                                                       --------       --------
Income from continuing operations before income taxes ............       20,806         27,820
Income taxes .....................................................        7,115          8,769
                                                                       --------       --------
Net income from continuing operations ............................       13,691         19,051
Loss from operations of discontinued business, net of tax of
 $(221) and $(7,867)..............................................         (407)       (12,045)
                                                                       --------       --------
Net income (loss) ................................................     $ 13,284       $  7,006
                                                                       ========       ========
Average common shares outstanding - basic ........................       13,611         13,611
Earnings per common share--basic Continuing operations ...........     $   1.01       $   1.40
Discontinued operations ..........................................       (  .03)          (.89)
                                                                       --------       --------
Net income per common share--basic ...............................     $    .98       $    .51
                                                                       ========       ========
Average common shares outstanding - diluted ......................       13,752         13,690
Earnings per common share--diluted Continuing operations .........     $   1.00       $   1.39
Discontinued operations ..........................................       (  .03)          (.88)
                                                                       --------       --------
Net income per common share--diluted .............................     $    .97       $    .51
                                                                       ========       ========
Dividends per common share .......................................     $   1.23       $   1.23
                                                                       ========       ========
</TABLE>

----------
*Except per share amounts

The  accompanying notes to the Consolidated Financial Statements are an integral
                           part of these statements.

                                      F-26
<PAGE>

                         CILCORP INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                 JUNE 30,      DECEMBER 31,
                                                               ------------   -------------
                                                                   1999            1998
                                                               ------------   -------------
                                                                       (UNAUDITED)
<S>                                                            <C>            <C>
ASSETS
Current assets:
 Cash and temporary cash investments .......................   $    3,541      $    1,669
Receivables, less reserves of $1,657 and $3,411.............       68,405         134,548
Accrued unbilled revenue ...................................       27,800          39,339
Fuel, at average cost ......................................        9,049          13,431
Materials and supplies, at average cost ....................       16,444          15,435
Gas in underground storage, at average cost ................       12,478          20,494
Prepayments and other ......................................        8,639           7,646
                                                               ----------      ----------
 Total current assets ......................................      146,356         232,562
                                                               ----------      ----------
Investments and other property:
Investment in leveraged leases .............................      143,297         146,977
Cash surrender value of company-owned life insurance, net of
 related policy loans of $51,871 and $48,132................        2,362           2,655
Other investments ..........................................       21,698          16,882
                                                               ----------      ----------
 Total investments and other property ......................      167,357         166,514
                                                               ----------      ----------
Property, plant and equipment:
Utility plant, at original cost
Electric ...................................................    1,245,551       1,237,885
Gas ........................................................      420,812         417,585
                                                               ----------      ----------
                                                                1,666,363       1,655,470
Less -- accumulated provision for depreciation .............      846,954         812,630
                                                               ----------      ----------
                                                                  819,409         842,840
Construction work in progress ..............................       45,576          30,075
Other, net of depreciation .................................          610           7,755
                                                               ----------      ----------
 Total property, plant and equipment .......................      865,595         880,670
                                                               ----------      ----------
Other assets ...............................................       23,327          33,194
                                                               ----------      ----------
 Total assets ..............................................   $1,202,635      $1,312,940
                                                               ==========      ==========

</TABLE>

The  accompanying Notes to the Consolidated Financial Statements are an integral
                         part of these Balance Sheets.


                                      F-27
<PAGE>

                         CILCORP INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                JUNE 30,       DECEMBER 31,
                                                             --------------   -------------
                                                                  1999             1998
                                                             --------------   -------------
                                                                      (UNAUDITED)
<S>                                                          <C>              <C>
              LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................     $   43,000      $   13,027
Notes payable ............................................         73,300          96,200
Accounts payable .........................................         52,276         128,845
Accrued taxes ............................................          5,031           8,262
Accrued interest .........................................          9,386           9,994
FAC/PGA over-recoveries ..................................            367             304
Other ....................................................          4,519          14,316
                                                               ----------      ----------
 Total current liabilities ...............................        187,879         270,948
                                                               ----------      ----------
Long-term debt ...........................................        257,168         288,135
                                                               ----------      ----------
Deferred credits and other liabilities:
Accumulated deferred income taxes ........................        240,446         239,305
Regulatory liability of regulated subsidiary .............         41,302          46,346
Deferred investment tax credits ..........................         18,654          19,450
Other ....................................................         58,370          47,098
                                                               ----------      ----------
 Total deferred credits and other liabilities ............        358,772         352,199
                                                               ----------      ----------
Preferred stock of subsidiary ............................         66,120          66,120
                                                               ----------      ----------
Stockholders' equity:
Common stock, no par value; authorized 50,000,000 shares--
 outstanding 13,610,680 shares ...........................        192,853         192,853
Retained earnings ........................................        140,688         143,530
Accumulated other comprehensive income ...................           (845)           (845)
                                                               ----------      ----------
 Total stockholders' equity ..............................        332,696         335,538
                                                               ----------      ----------
 Total liabilities and stockholders' equity ..............     $1,202,635      $1,312,940
                                                               ==========      ==========

</TABLE>

The  accompanying Notes to the Consolidated Financial Statements are an integral
                         part of these Balance Sheets.


                                      F-28
<PAGE>

                         CILCORP INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                            SIX MONTHS ENDED
                                                                                                JUNE 30,
                                                                                        -------------------------
                                                                                            1999          1998
                                                                                        -----------   -----------
<S>                                                                                     <C>           <C>
Cash flows from operating activities:
Net income before preferred dividends ...............................................    $  15,261     $  20,650
                                                                                         ---------     ---------
Adjustments to reconcile net income to net cash provided by operating activities:
 Non-cash lease income and investment income ........................................       (3,299)       (3,415)
 Cash receipts in excess of debt service on leases ..................................        7,326         5,650
 Depreciation and amortization ......................................................       34,481        31,966
 Deferred income taxes, investment tax credit and regulatory liability of
   subsidiary, net ..................................................................       (8,748)       (4,094)
Changes in operating assets and liabilities:
 Decrease in accounts receivable and accrued unbilled revenue .......................        7,719        21,343
 Decrease in inventories ............................................................       11,374         8,501
 Decrease in accounts payable .......................................................      (20,337)      (22,702)
 Increase in accrued taxes ..........................................................          934         2,630
 Decrease (increase) in other assets ................................................        1,700          (512)
 Increase (decrease) in other liabilities ...........................................        8,339        (1,469)
                                                                                         ---------     ---------
 Total adjustments ..................................................................       39,489        37,898
                                                                                         ---------     ---------
 Net cash provided by operating activities from continuing operations ...............       54,750        58,548
                                                                                         ---------     ---------
 Net cash provided (used) by operating activities of discontinued operations ........        8,112        (8,738)
                                                                                         ---------     ---------
 Cash flow from operations ..........................................................       62,862        49,810
                                                                                         ---------     ---------
Cash flows from investing activities:
 Additions to plant .................................................................      (27,311)      (29,871)
 Proceeds from sale of discontinued operations ......................................       17,376            --
 Other ..............................................................................       (4,012)         (909)
                                                                                         ---------     ---------
 Net cash used by investing activities from continuing operations ...................      (13,947)      (30,780)
                                                                                         ---------     ---------
 Net cash used by investing activities from discontinued operations .................       (4,838)       (5,359)
                                                                                         ---------     ---------
 Cash flow from investing activities ................................................      (18,785)      (36,139)
                                                                                         ---------     ---------
Cash flow from financing activities:
Net (decrease) increase in short-term debt ..........................................      (22,900)        2,350
Net decrease in long-term debt ......................................................         (994)       (2,117)
Common dividends paid ...............................................................      (16,741)      (16,742)
Preferred dividends paid ............................................................       (1,570)       (1,599)
                                                                                         ---------     ---------
 Cash flow from financing activities ................................................      (42,205)      (18,108)
                                                                                         ---------     ---------
Net increase (decrease) in cash and temporary cash investments ......................        1,872        (4,437)
Cash and temporary cash investments at beginning of year ............................        1,669        10,576
                                                                                         ---------     ---------
Cash and temporary cash investments at June 30 ......................................    $   3,541     $   6,139
                                                                                         =========     =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................................    $  13,832     $  13,613
Income taxes ........................................................................    $  10,872     $   7,068
</TABLE>

The  accompanying Notes to the Consolidated Financial Statements are an integral
                           part of these statements.

                                      F-29
<PAGE>

                      STATEMENTS OF SEGMENTS OF BUSINESS
                         CILCORP INC. AND SUBSIDIARIES


<TABLE>
<CAPTION>
                                                                     SIX MONTHS ENDED JUNE 30, 1999
                                          ------------------------------------------------------------------------------------
                                              CILCO         CILCO          CILCO          OTHER        DISCONT.
                                            ELECTRIC         GAS           OTHER       BUSINESSES     OPERATNS.       TOTALS
                                          ------------   -----------   ------------   ------------   -----------   -----------
                                                                             (IN THOUSANDS)
<S>                                       <C>            <C>           <C>            <C>            <C>           <C>
Revenues ..............................     $169,006      $102,366       $  1,729       $ 15,235       $    --      $288,336
Interest income .......................           --            --            113             56            --           169
                                            --------      --------       --------       --------       -------      --------
    Total .............................      169,006       102,366          1,842         15,291            --       288,505
                                            --------      --------       --------       --------       -------      --------
Operating expenses ....................      120,487        79,013          3,161         14,167            --       216,828
Depreciation and amortization .........       23,786        10,175            432             88            --        34,481
                                            --------      --------       --------       --------       -------      --------
    Total .............................      144,273        89,188          3,593         14,255            --       251,309
                                            --------      --------       --------       --------       -------      --------
Interest expense ......................        8,233         3,265             --          2,842            --        14,340
Preferred stock dividends .............           --            --          1,570             --            --         1,570
Fixed charges and other expenses.......          (26)           --            506             --            --           480
                                            --------      --------       --------       --------       -------      --------
    Total .............................        8,207         3,265          2,076          2,842            --        16,390
                                            --------      --------       --------       --------       -------      --------
Income from continuing oper.
 before income taxes ..................       16,526         9,913         (3,827)        (1,806)           --        20,806
Income taxes ..........................        5,315         4,044         (1,367)          (877)           --         7,115
                                            --------      --------       --------       --------       -------      --------
Net income from continuing
 operations ...........................       11,211         5,869         (2,460)          (929)           --        13,691
                                            --------      --------       --------       --------       -------      --------
Effect of discontinued operations .....           --            --             --             --          (407)         (407)
                                            --------      --------       --------       --------       -------      --------
Segment net income ....................     $ 11,211      $  5,869       $ (2,460)      $   (929)      $  (407)     $ 13,284
                                            ========      ========       ========       ========       =======      ========
</TABLE>

<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED JUNE 30, 1998
                                        -----------------------------------------------------------------------------
                                             CILCO        CILCO       CILCO        OTHER       DISCONT.
                                           ELECTRIC        GAS        OTHER     BUSINESSES    OPERATNS.      TOTALS
                                        -------------- ----------- ----------- ------------ ------------- -----------
                                                                       (IN THOUSANDS)
<S>                                     <C>            <C>         <C>         <C>          <C>           <C>
Revenues ..............................    $167,482     $ 98,212    $    355     $  9,780     $      --    $ 275,829
Interest income .......................          --           --         191           56            --          247
                                           --------     --------    --------     --------     ---------    ---------
    Total .............................     167,482       98,212         546        9,836            --      276,076
                                           --------     --------    --------     --------     ---------    ---------
Operating expenses ....................     112,626       76,816       1,553        8,665            --      199,660
Depreciation and amortization .........      22,436        9,073         356          101            --       31,966
                                           --------     --------    --------     --------     ---------    ---------
    Total .............................     135,062       85,889       1,909        8,766            --      231,626
                                           --------     --------    --------     --------     ---------    ---------
Interest expense ......................       8,038        3,204          --        3,383            --       14,625
Preferred stock dividends .............          --           --       1,599           --            --        1,599
Fixed charges and other expenses.......          (6)          --         412           --            --          406
                                           --------     --------    --------     --------     ---------    ---------
    Total .............................       8,032        3,204       2,011        3,383            --       16,630
                                           --------     --------    --------     --------     ---------    ---------
Income from continuing oper.
 before income taxes ..................      24,388        9,119      (3,374)      (2,313)           --       27,820
Income taxes ..........................       8,181        3,645      (1,339)      (1,718)           --        8,769
                                           --------     --------    --------     --------     ---------    ---------
Net income from continuing
 operations ...........................      16,207        5,474      (2,035)        (595)           --       19,051
                                           --------     --------    --------     --------     ---------    ---------
Effect of discontinued operations .....          --           --          --           --       (12,045)     (12,045)
                                           --------     --------    --------     --------     ---------    ---------
Segment net income ....................    $ 16,207     $  5,474    $ (2,035)    $   (595)    $ (12,045)   $   7,006
                                           ========     ========    ========     ========     =========    =========
</TABLE>

                                      F-30
<PAGE>

                CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE 1. INTRODUCTION

     The  consolidated financial statements include the accounts of CILCORP Inc.
(CILCORP  or  the  Holding Company), Central Illinois Light Company (CILCO), QST
Enterprises  Inc. (QST) and its subsidiaries (QST Environmental Inc., QST Energy
Inc.   (QST   Energy)  and  CILCORP  Infraservices  Inc.)  and  CILCORP's  other
subsidiaries  (collectively,  the  Company)  after  elimination  of  significant
intercompany  transactions.  The  consolidated  financial  statements  of  CILCO
include  the  accounts  of  CILCO  and  its  subsidiaries, CILCO Exploration and
Development  Company  and  CILCO  Energy  Corporation.  CILCORP owns directly or
indirectly  100%  of  the  common  stock  of its first-tier subsidiaries. In the
fourth  quarter  of  1998, the operations of QST and its subsidiaries (excluding
ESE   Land   Corporation  and  CILCORP  Infraservices  Inc.--  see  Management's
Discussion  and  Analysis)  were  discontinued (see Note 4.) and, therefore, are
being  reported  as  discontinued  operations  in  the financial statements. QST
completed  the  sale  of subsidiary QST Environmental Inc. in the second quarter
of  1999  (see Results of Operations-- QST Enterprises Discontinued Operations).
Prior  year  amounts  have been reclassified on a basis consistent with the 1999
presentation.

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared  according  to the rules and regulations of the Securities and Exchange
Commission  (SEC).  Although  CILCORP  believes  the disclosures are adequate to
make  the  information  presented  not  misleading, these consolidated financial
statements  should  be  read along with the Company's 1998 Annual Report on Form
10-K.

     In  the  Company's opinion, the consolidated financial statements furnished
reflect  all  normal and recurring adjustments necessary for a fair presentation
of  the  results  of operations for the periods presented. Operating results for
interim  periods  are  not  necessarily  indicative  of  operating results to be
expected for the year or of the Company's future financial condition.

NOTE 2. CONTINGENCIES

GAS MANUFACTURING PLANT SITES

     CILCO   continues   to   investigate   and/or   monitor   four  former  gas
manufacturing  plant sites located within CILCO's present gas service territory.
The   purpose  of  the  investigations  is  to  determine  if  waste  materials,
principally  coal  tar,  are present, whether such waste materials constitute an
environmental  or health risk and if CILCO is responsible for the remediation of
any remaining waste materials at those sites.

     During  the  six  months  ended  June  30,  1999,  CILCO paid approximately
$362,000  to outside parties for former gas manufacturing plant site monitoring,
remediation  and  legal fees, and expects to spend approximately $250,000 during
the  remainder  of 1999. A $1.5 million liability and a corresponding regulatory
asset  are  recorded  on  the  Balance Sheets representing the minimum amount of
coal  tar investigation and remediation costs CILCO expects to incur and recover
in  the  future. Coal tar remediation costs incurred through June 1999 have been
deferred on the Balance Sheets, net of amounts recovered from customers.

     Through  June  30,  1999, CILCO has recovered approximately $6.6 million in
coal  tar remediation costs from its customers through a gas rate rider approved
by  the  Illinois  Commerce  Commission  (ICC).  Currently,  that  rider  allows
recovery  of  prudently incurred coal tar remediation costs in the year that the
expenditures  occur.  Under  these  circumstances,  management believes that the
cost  of coal tar remediation will not have a material adverse effect on CILCO's
financial position or results of operations.

CILCO'S UNION CONTRACTS

     The  International  Brotherhood  of  Electrical  Workers  Local  51  (IBEW)
ratified  its  current  agreement  on  October 10,  1997.  The  current contract
expires  on  July 1,  2000.  The IBEW represents approximately 389 CILCO gas and
electric  department  employees.  The  National Conference of Firemen and Oilers
Local  8  (NCF&O),  ratified  its  current  agreement  on  October 23, 1998. The
current  contract  expires  on  July 1, 2001. The NCF&O represents approximately
159 CILCO power plant employees.


                                      F-31
<PAGE>

NOTE 3. COMMITMENTS

     In  August  1990,  CILCO  entered  into  a  firm,  wholesale power purchase
agreement  with  Central Illinois Public Service Company, now AmerenCIPS (CIPS).
This  agreement provided for a minimum contract delivery rate from CIPS of 90 MW
until the contract expired in May 1998.

     In  March  1995,  CILCO  and  CIPS  amended  a limited-term power agreement
reached  in  November 1992. This agreement provided for CILCO to purchase 150 MW
of  CIPS'  capacity  from  June  1998 through May 2002, and 50 MW from June 2002
through May 2009.

     In  May  1999,  a  settlement  was reached between CILCO and CIPS regarding
disputed  issues  pertaining  to  these  capacity  and  energy  agreements.  The
settlement  amends the previous agreements to provide for 100 MW of capacity and
firm  energy for the months of June through September for the years 2000 through
2003  and  additionally  provide  for  100  MW  of  firm energy for the month of
January  in  each  of those years. There are no commitments to purchase capacity
or  energy  beyond  those  dates.  The  agreements  provide  specific prices for
on-peak  and  off-peak  energy,  which eliminates the ambiguity that arose under
the  old  agreements  due  to  the  use of pricing queues. Under the settlement,
CILCO  will  have  no  capacity payment obligations to CIPS for February through
December  1999,  resulting in 1999 capacity reservation savings of approximately
$6  million.  The  settlement  also  obligates  both  parties  to  withdraw from
regulatory  action  pertaining  to  related  contract issues. CIPS and CILCO are
currently preparing the settlement document filing for approval by the FERC.

NOTE 4. QST ENTERPRISES DISCONTINUED OPERATIONS

     Due  to  uncertainties  related  to energy deregulation across the country,
the  illiquidity of certain energy markets and the Company's pending acquisition
by  AES,  the  Company  intends  to  focus  on the opportunities in the Illinois
energy  market resulting from the deregulation of electricity under the Electric
Service   Customer  Choice  and  Rate  Relief  Law  of  1997  (see  Management's
Discussion  and  Analysis--  Illinois  Electric  Deregulation). As a result, the
Company  decided  in  the  fourth  quarter  of  1998  to sell its 100% ownership
interest  in QST Environmental Inc. (QST Environmental), a first-tier subsidiary
of  QST  Enterprises  Inc.  providing  environmental  consulting and engineering
services.  On  May  7,  1999, QST Enterprises Inc. signed a definitive agreement
for  the  sale  of  QST  Environmental to MACTEC, Inc., a privately-held company
which  provides environmental management services, for approximately $18 million
in  cash,  which  was  received  by  QST  Enterprises Inc. on June 24, 1999, the
effective  date  of  the  sale.  In  August  1998, QST Enterprises Inc. sold its
wholly-owned    fiber    optic-based    telecommunications    subsidiary,    QST
Communications,  for  $20  million  cash  and  stock options then valued at $5.5
million.  After incurring material losses in the wholesale electricity market in
June  1998  and  subsequent losses in its energy operations outside of Illinois,
QST  Energy  transferred  its  Pennsylvania retail customers to other marketers,
ceased  its  Houston-based  energy  trading  operations,  and has terminated its
obligations  to  provide electricity to its non-Illinois customers. Accordingly,
the  operations  of  QST  Enterprises  Inc.  and  its  subsidiaries are shown as
discontinued  operations  in  the statements of income. The Company's investment
in  QST  Enterprises Inc. (excluding CILCORP Infraservices Inc.), as of June 30,
1999,  on  the  accompanying  consolidated  balance sheet, consists primarily of
$1.7  million  in working capital, $.2 million in fixed assets and $11.2 million
of   investments   and   other   assets.  Working  capital  consists  mainly  of
$1.7 million  in  receivables  (see  QST  Enterprises  Discontinued  Operations)
offset  by $16.6 million in outstanding debt to the Holding Company. Investments
and  other  assets  consists  primarily of a $5.5 million investment in ESE Land
Corporation  (ESE  Land)  and $5.5 million of stock options obtained in the sale
of  QST  Communications.  The  investment  in  ESE  Land  consists  of  residual
interests  in  three limited liability corporations obtained as part of the sale
of  ESE  Land  assets  in  fourth  quarter  1997.  QST  Environmental's residual
investment  in  ESE  Land  was  transferred to QST Enterprises Inc. prior to the
sale   of   QST   Environmental.  Prior  year  financial  statements  have  been
reclassified to conform to the current year presentation.

NOTE 5. FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT

     CILCORP  utilizes  commodity  futures  contracts,  options and swaps in the
normal  course  of  its  natural gas and electric business activities. Gains and
losses  arising  from  derivative  financial instrument transactions which hedge
the  impact of fluctuations in energy prices are recognized in income concurrent



                                      F-32
<PAGE>

NOTE 5. FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT-- (CONTINUED)

with  the  related  purchases  and  sales  of  the  commodity.  If  a derivative
financial  instrument  contract  is  terminated  because  it  is probable that a
transaction  or  forecasted  transaction  will not occur, any gain or loss as of
such  date  is  immediately  recognized.  If  a  derivative financial instrument
contract  is terminated early for other economic reasons, any gain or loss as of
the  termination  date  is  deferred  and recorded concurrently with the related
purchase  and  sale  of  natural gas. CILCORP is subject to commodity price risk
for  deregulated  sales  to  the  extent  that  energy  is sold under firm price
commitments.  Due  to  market  conditions,  at  times CILCORP may have unmatched
commitments  to purchase and sell energy on a price and quantity basis. Physical
and  derivative financial instruments give rise to market risk, which represents
the  potential  loss  that  can  be  caused by a change in the market value of a
particular  commitment. Market risks are actively monitored to ensure compliance
with  the  Company's risk management policies, including limits to the Company's
total net exposure at any time.

     The  net  gain  reflected  in  operating  results from derivative financial
instruments  was  approximately $415,000 for the second quarter 1999. As of June
30,  1999, CILCORP had fixed-price derivative financial instruments representing
hedges  of  natural gas purchases of .5 Bcf and natural gas sales of 1.6 Bcf for
commitments  through  September  2000. The net deferred gain and carrying amount
on  these  fixed-price derivatives at June 30, 1999, was approximately $571,600.
At   June 30,   1999,   CILCORP  had  open  positions  in  derivative  financial
instruments  used  to hedge basis of 1.4 Bcf for commitments through March 2000.
The  net  deferred  gain  on  these  basis  derivatives  at  June 30,  1999, was
approximately  $30,500.  As of June 30, 1999, CILCORP had fixed-price derivative
financial   instruments   representing   hedges   of  electricity  purchases  of
49,312 MWh  and  electricity  sales  of  3,680 MWh  for commitments through June
2000.   The   net  deferred  loss  and  carrying  amount  on  these  fixed-price
derivatives at June 30, 1999, was approximately $132,400.

NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS

     In  June  1998, the FASB issued Statement of Financial Accounting Standards
No. 133,  "Accounting  for  Derivative Instruments and Hedging Activities" (SFAS
133).   The   statement  establishes  accounting  and  reporting  standards  for
derivative  instruments  and  for hedging activities. It requires that an entity
recognize  all  derivatives  as either assets or liabilities in the statement of
financial  position and measure those instruments at fair value. As issued, SFAS
133  is  effective  for all fiscal quarters of fiscal years beginning after June
15, 1999.

     In  June  1999, the FASB issued Statement of Financial Accounting Standards
No. 137,   "Accounting  for  Derivative  Instruments  and  Hedging  Activities--
Deferral  of  the Effective Date of FASB Statement No. 133" (SFAS 137). SFAS 137
amends  SFAS  133  to require implementation of SFAS 133 for all fiscal quarters
of fiscal years beginning after June 15, 2000.

     The  Company  has  not  yet adopted SFAS 133 and has not yet determined its
effect  on  the  Company's  financial  position,  results  of operations or cash
flows.

NOTE 7. EARNINGS PER SHARE

     The  following  data  show the amounts used in computing earnings per share
and  the  effect on income and the weighted average number of shares of dilutive
potential  common  stock.  The  shares  calculated for dilutive potential result
from  Award  Agreements  entered into pursuant to the CILCORP Shareholder Return
Incentive Compensation Plan.



<TABLE>
<CAPTION>
                                                                 SIX MONTHS ENDED
                                                                     JUNE 30,
                                                              -----------------------
                                                                 1999         1998
                                                              ----------   ----------
                                                                  (IN THOUSANDS)
<S>                                                           <C>          <C>
Income available to common shareholders ...................    $13,284      $ 7,006
Weighted average number of common shares
 used in Basic Earnings Per Share .........................     13,611       13,611
Weighted number of dilutive potential common shares used in
 Diluted Earnings Per Share ...............................        141           79
</TABLE>

     The  Company  adopted  Statement of Financial Accounting Standards No. 128,
Earnings Per Share, for the year ended December 31, 1997.


                                      F-33
<PAGE>

                  INDEX TO UNAUDITED PRO FORMA FINANCIAL DATA





<TABLE>
<CAPTION>
                                                                                     PAGE
                                                                                     NO.
                                                                                    -----
<S>                                                                                 <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA:
   Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1999 .    P-3
   Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Six
    Months Ended June 30, 1999 ..................................................    P-4
   Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year
    Ended December 31, 1998 ..................................................       P-5
   Notes to Unaudited Pro Forma Condensed Consolidated Financial Data ...........    P-6

</TABLE>


                                      P-1

<PAGE>


The following  unaudited pro forma  condensed  consolidated  financial  data are
based on the historical consolidated financial statements of The AES Corporation
and its  subsidiaries  (the Company) and the historical  consolidated  financial
statements of CILCORP Inc. and its subsidiaries (CILCORP) after giving effect on
a pro forma  basis to the  acquisition  of  CILCORP  through a merger  between a
wholly-owned  subsidiary  of AES  and  CILCORP.  This  data  should  be  read in
conjunction with the historical  consolidated  financial statements and notes to
those financial statements of AES and CILCORP.

The unaudited pro forma condensed consolidated  statements of operations for the
year ended  December 31, 1998 and the six months ended June 30, 1999 present the
results of the Company and CILCORP as if the  acquisition had occurred as of the
beginning of the earliest period presented. The accompanying unaudited pro forma
condensed  consolidated balance sheet as of June 30, 1999 presents the financial
position of the Company and CILCORP as if the  acquisition  had occurred on that
date.

The pro  forma  adjustments  are  based on  preliminary  estimates,  information
currently  available  and  certain  assumptions  that  management  believes  are
reasonable under the circumstances. The actual consolidated financial statements
will  reflect the effects of the merger on and after the  effective  date of the
merger rather than the dates indicated  above. The unaudited pro forma condensed
consolidated  financial data neither purport to represent what the  consolidated
results of operations or financial  condition  actually  would have been had the
acquisition and related  transactions in fact occurred on the assumed dates, nor
to project the consolidated results of operations and financial position for any
future period.

The acquisition will be accounted for by the purchase method and, therefore, the
assets and  liabilities  of CILCORP will be recorded at their fair  values.  The
excess of the purchase  price over the fair value of net assets  acquired at the
effective  date of the  acquisition  will be recorded as  goodwill.  Allocations
included in the pro forma  financial  data are based on an analysis which is not
yet  completed.  Accordingly,  the  final  value of the  purchase  price and its
allocation may differ, perhaps significantly,  from the amounts included in this
pro forma financial data.

                                      P-2

<PAGE>

                UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                            June 30, 1999
                                                                                            (in millions)
                                                                        ------------------------------------------------------------
                                                                                                             Proforma
                                                                                                         Adjustments for
                                                                                                         the Acquisition
                                                                                                       (Notes 1, 2, 3, 4
                                                                             AES        CILCORP, Inc.        and 5)        Pro Forma
                                                                        -------------   -------------  ------------------  ---------
<S>                                                                     <C>              <C>            <C>                <C>
Assets
Current Assets:
  Cash, cash equivalents and short-term investments                     $      422       $      4       $       14         $   440
  Accounts receivables, less provision to reduce contract receivables          438             68               --             506
  Accrued unbilled revenue                                                      --             28               --              28
  Inventory                                                                    123             38               --             161
  Prepaid expenses and other current assets                                    288              8               --             296
                                                                        ----------       --------       ----------         -------
  Total current assets                                                       1,271            146               14           1,431
Property, Plant and Equipment:
  Property, plant and equipment, at cost                                     5,958          1,667             (847)          6,778
  Accumulated depreciation and amortization                                   (626)          (847)             847            (626)
  Construction work in progress and other                                      974             46               --           1,020
                                                                        ----------       --------       ----------         -------
  Property, plant & equipment, net                                           6,306            866               --           7,172
Other Assets:
  Investments in and advances to affiliates                                  1,721            165               --           1,886
  Electricity sales concessions and contracts                                  993             --               --             993
  Goodwill                                                                      67             --              571             638
  Other assets                                                                 879             26                6             911
                                                                        ----------       --------       ----------         -------
  Total other assets                                                         3,660            191              577           4,428
                                                                        ----------       --------       ----------         -------
Total                                                                   $   11,237       $  1,203       $      591         $13,031
                                                                        ==========       ========       ==========         =======
Liabilities and Stockholders' Equity
Current Liabilities:
  Accounts payable                                                      $      237       $     52       $       --         $   289
  Accrued interest and other liabilities                                       377             19               14             410
  Project financing debt - current portion                                     676            117              (27)            766
                                                                        ----------       --------       ----------         -------
  Total current liabilities                                                  1,290            188              (13)          1,465
Long-Term Liabilities:
  Project financing debt                                                     4,651            257              475           5,383
  Other notes payable                                                        2,009             --               --           2,009
  Deferred credits and other liabilities                                       450            359               --             809
                                                                        ----------       --------       ----------         -------
  Total long-term liabilities                                                7,110            616              475           8,201
                                                                        ----------       --------       ----------         -------
Minority Interest                                                              773             --               --             773
Company-obligated Mandatorily Redeemable Convertible
Preferred Securities of Subsidiary Trusts Holding Solely
Junior Subordinated Debentures of The AES Corporation                          550             --               --             550
Preferred Stock of Subsidiary                                                   --             66               --              66
Stockholders'  Equity:
  Common stock                                                                   2            193             (193)              2
  Additional paid-in capital                                                 1,757             --              462           2,219
  Retained earnings                                                            950            141             (141)            950
  Accumulated other comprehensive loss                                      (1,195)            (1)               1          (1,195)
                                                                        ----------       --------       ----------         -------
  Total stockholders' equity                                                 1,514            333              129           1,976
                                                                        ----------       --------       ----------         -------
Total                                                                   $   11,237       $  1,203       $      591         $13,031
                                                                        ==========       ========       ==========         =======
</TABLE>

 The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
                 Data are an integral part of these statements.

                                      P-3

<PAGE>


       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>


                                                                                    For the Six Months Ended June 30, 1999
                                                                                    (in millions, except per share amounts)
                                                                         -----------------------------------------------------------
                                                                                                            Proforma
                                                                                                         Adjustments for
                                                                                                         the Acquisition
                                                                                                       (Notes 1, 2, 3 and
                                                                             AES        CILCORP, Inc.         4)           Pro Forma
                                                                         -----------    -------------  ------------------  ---------
<S>                                                                      <C>              <C>              <C>              <C>

Revenues:
Sales and services                                                       $ 1,278          $   288          $    --          $ 1,566

Operating costs and expenses:
Cost of sales and services                                                   830              248               --            1,078
Selling, general and administrative expenses                                  31                3                7               41
                                                                         -------          -------          -------          -------
Total operating costs and expenses                                           861              251                7            1,119
                                                                         -------          -------          -------          -------
Operating Income (Loss)                                                      417               37               (7)             447

Other income and (expense):
Interest expense                                                            (276)             (16)             (20)            (312)
Interest and other income                                                     33                2               --               35
Preferred stock dividend of subsidiary                                        --               (2)              --               (2)
Foreign currency transaction loss                                             (2)              --               --               (2)
Equity in loss of affiliates before income taxes                             (54)              --               --              (54)
                                                                         -------          -------          -------          -------
Income (loss) before income taxes and minority
interest                                                                     118               21              (27)             112

Income tax provision (benefit)                                                28                7               (8)              27
Minority interest                                                             32               --               --               32
                                                                         -------          -------          -------          -------
Net income (loss) from continuing operations                             $    58          $    14          $   (19)         $    53
                                                                         =======          =======          =======          =======

Earnings per share from continuing operations --
Basic                                                                    $  0.31                                            $  0.28
Diluted                                                                     0.31                                               0.28

Weighted  average  common  shares  and potential common
shares used  in the calculation of
earnings per share --
Basic                                                                      184.1                                              191.6
Diluted                                                                    188.6                                              196.1

</TABLE>

            The accompanying Notes to Unaudited Pro Forma Condensed
     Consolidated Financial Data are an integral part of these statements.

                                      P-4

<PAGE>


       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>


                                                                                         For the Year Ended December 31, 1998
                                                                                       (in millions, except per share amounts)
                                                                         -----------------------------------------------------------
                                                                                                            Proforma
                                                                                                         Adjustments for
                                                                                                         the Acquisition
                                                                                                       (Notes 1, 2, 3 and
                                                                             AES        CILCORP, Inc.         4)           Pro Forma
                                                                         -----------    -------------  ------------------  ---------
<S>                                                                      <C>              <C>              <C>              <C>

Revenues:
Sales and services                                                       $ 2,398          $   559          $    --          $ 2,957

Operating costs and expenses:
Cost of sales and services                                                 1,587              458               --            2,045
Selling, general and administrative expenses                                  56                9               14               79
Provision for contract receivables                                            22               --               --               22
                                                                         -------          -------          -------          -------
Total operating costs and expenses                                         1,665              467               14            2,146
                                                                         -------          -------          -------          -------
Operating Income (Loss)                                                      733               92              (14)             811

Other income and (expense):
Interest expense                                                            (485)             (33)             (39)            (557)
Interest and other income                                                     67                2               --               69
Preferred stock dividend of subsidiary                                        --               (3)              --               (3)
Foreign currency transaction loss                                             (1)              --               --               (1)
Equity in earnings of affiliates before income taxes                         232               --               --              232
                                                                         -------          -------          -------          -------
Income (loss) before income taxes and minority
interest                                                                     546               58              (53)             551

Income tax provision (benefit)                                               145               20              (15)             150
Minority interest                                                             94               --               --               94
                                                                         -------          -------          -------          -------
Net income (loss) from continuing operations                             $   307          $    38          $   (38)         $   307
                                                                         =======          =======          =======          =======

Earnings per share from continuing operations --
Basic                                                                    $  1.73                                            $  1.66
Diluted                                                                     1.67                                               1.61

Weighted average common shares and potential common
shares used  in the
calculation of earnings per share --
Basic                                                                      177.5                                              185.0
Diluted                                                                    189.0                                              196.5


</TABLE>


            The accompanying Notes to Unaudited Pro Forma Condensed
     Consolidated Financial Data are an integral part of these statements.

                                      P-5

<PAGE>

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

The Unaudited Pro Forma Condensed  Consolidated  Financial Data are based on the
following assumptions:

(1)  The purchase price of approximately $904 million will be funded through the
     issuance  of $475  million  of  project  financing  debt  with an  expected
     interest  rate of 8.25% and through the  issuance of 7.0 million  shares of
     AES common stock. An additional 0.5 million shares of AES common stock will
     be issued to repay $27 million of CILCORP's current debt outstanding and to
     pay $6.0 million of costs related to the issuance of the project  financing
     debt.  The net  proceeds  from the  issuance  of the AES  common  stock are
     assumed  to be $462  million  (based  on a  closing  price  of  $63.625  on
     September 24, 1999).  The acquisition  will be accounted for as a purchase.
     The purchase  price  allocation  has been prepared on a  preliminary  basis
     pending  completion  of  engineering,  environmental,  legal and  valuation
     analyses, all of which are ongoing. The preliminary  adjustments which have
     been made to the assets and liabilities of CILCORP to reflect the effect of
     the acquisition are as follows (in millions):

          Goodwill...................................       $571
          Merger-related personnel costs ............         14

(2)  Goodwill will be amortized using the straight line method over 40 years.

(3)  The issuance  costs for the project  financing  debt will be amortized over
     the term of the debt which is approximately 20 years.

(4)  The income tax benefit for the effects of the pro forma  adjustments  which
     affect taxable income have been calculated at an effective rate of 39.5%.

(5)  In the Pro Forma  Condensed  Balance  Sheet  the  CILCORP  fixed  rate debt
     continues to be recorded at its historical  cost. Upon  consummation of the
     merger,  the fixed  rate debt will be  recorded  at its fair  value,  after
     considering  the rates the  combined  companies  would expect to receive in
     similar borrowing  arrangements.  As of December 31, 1998 the CILCORP fixed
     rate debt had a carrying  amount of  approximately  $299 million and a fair
     value amount of approximately $339 million.

                                      P-6
<PAGE>

                                   SIGNATURES

          Pursuant to the  requirements of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned hereunto duly authorized.





                                                    THE AES CORPORATION





     Date: September 30, 1999                          By /s/ William Luraschi
                                                         ---------------------
                                                          (signing officer)
[{"type": "8-K", "sequence": "1", "description": "FORM 8-K", "secsgml_size_bytes": 180681}]
{"company-data": {"conformed-name": "AES CORPORATION", "cik": "0000874761", "assigned-sic": "4991", "irs-number": "541163725", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "001-12291", "film-number": "99721243"}, "business-address": {"street1": "1001 N 19TH ST", "street2": "STE 2000", "city": "ARLINGTON", "state": "VA", "zip": "22209", "phone": "7035221315"}}
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT

                       PURSUANT TO SECTION 13 OR 15 (d) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

        Date of Report (date of earliest event reported): September 30, 1999

                               THE AES CORPORATION
             (exact name of registrant as specified in its charter)

        DELAWARE                0-19281                    54-1163725
(State of Incorporation) (Commission File No.) (IRS Employer Identification No.)

                             1001 North 19th Street
                            Arlington, Virginia 22209
          (Address of principal executive offices, including zip code)

               Registrant's telephone number, including area code:
                                 (703) 522-1315

                                 NOT APPLICABLE
          (Former Name or Former Address, if changed since last report)

================================================================================
ITEM 5. OTHER EVENTS

In November 1998, The AES  Corporation  entered into a definitive  agreement for
the acquisition of CILCORP. All shareholder and regulatory approvals required to
complete the  acquisition  have been obtained,  and we expect the acquisition to
close in the fourth  quarter of 1999.  This Current  Report on Form 8-K includes
audited historical financial statements of CILCORP as of and for the three years
ended December 31, 1998,  interim financial  statements of CILCORP as of and for
the six months ended June 30, 1999,  and pro forma  financial  statements of The
AES  Corporation  as of and for the six months  ended June 30,  1999 and for the
year ended December 31, 1998 which reflect the acquisition of CILCORP.
CILCORP INC.
                         INDEX TO FINANCIAL STATEMENTS
PAGE
                                                                                           NO.
                                                                                          -----
CONSOLIDATED FINANCIAL STATEMENTS:
   Report of Independent Public Accountants ...........................................     F-2
   Consolidated Statements of Income for the Three Years Ended December 31, 1998 ......     F-3
   Consolidated Balance Sheets as of December 31, 1998 and 1997 .......................     F-4
   Consolidated Statements of Cash Flows for the Three Years Ended
    December 31, 1998 .................................................................     F-5
   Consolidated Statements of Segments of Business for the Three Years Ended
    December 31, 1998 .................................................................     F-6
   Consolidated Statements of Retained Earnings for the Three Years Ended
    December 31, 1998 .................................................................     F-9
   Notes to Consolidated Financial Statements .........................................    F-10
INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
   Consolidated Statements of Income For the Six Months Ended June 30, 1999
    and 1998 ..........................................................................    F-26
   Consolidated Balance Sheets as of June 30, 1999 and 1998 ...........................    F-27
   Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1999
    and 1998 ..........................................................................    F-29
   Consolidated Statements of Segments of Business for the Six Months Ended June 30,
    1999 and 1998 .....................................................................    F-30
   Notes to Consolidated Financial Statements .........................................    F-31
F-1
Report of Independent Public Accountants
To the Stockholders of CILCORP Inc.:

     We  have  audited  the  accompanying consolidated balance sheets of CILCORP
Inc.  (an  Illinois  corporation)  and  subsidiaries as of December 31, 1998 and
1997,   and   the   related  consolidated  statements  of  income,  cash  flows,
stockholders'  equity  and  segments  of business for each of the three years in
the  period  ended  December  31,  1998.  These  financial  statements  are  the
responsibility  of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

     We  conducted  our  audits  in  accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance  about  whether  the  financial  statements  are  free  of
material  misstatement.  An  audit includes examining, on a test basis, evidence
supporting  the  amounts  and  disclosures in the financial statements. An audit
also   includes   assessing  the  accounting  principles  used  and  significant
estimates  made  by  management,  as  well  as  evaluating the overall financial
statement  presentation.  We  believe that our audits provide a reasonable basis
for our opinion.

     In  our opinion, the financial statements referred to above present fairly,
in   all   material  respects,  the  financial  position  of  CILCORP  Inc.  and
subsidiaries  as  of  December  31,  1998  and  1997,  and  the results of their
operations  and their cash flows for each of the three years in the period ended
December  31, 1998, in conformity with generally accepted accounting principles.

Arthur Andersen LLP
Chicago, Illinois
January 27, 1999

                                      F-2
CONSOLIDATED STATEMENTS OF INCOME
                         CILCORP INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------------------
                                                               1998           1997            1996
                                                           ------------   ------------   --------------
                                                             (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue:
 Electric ..............................................    $ 360,009      $ 338,096        $322,785
 Gas ...................................................      172,327        208,758         195,770
 Other Businesses ......................................       26,688         11,106           8,505
                                                            ---------      ---------        --------
   Total ...............................................      559,024        557,960         527,060
                                                            ---------      ---------        --------
Operating Expenses:
 Fuel for Generation and Purchased Power ...............      124,058        115,081         101,622
 Gas Purchased for Resale ..............................       93,586        123,532         108,286
 Other Operations and Maintenance ......................      145,673        124,852         131,675
 Depreciation and Amortization .........................       66,179         62,416          60,574
 State and Local Revenue Taxes .........................       26,502         22,467          22,004
 Other Taxes ...........................................       11,463         11,833          11,516
                                                            ---------      ---------        --------
   Total ...............................................      467,461        460,181         435,677
                                                            ---------      ---------        --------
Fixed Charges and Other:
 Interest Expense ......................................       29,473         27,462          28,964
 Preferred Stock Dividends of Subsidiary ...............        3,194          3,216           3,188
 Allowance for Funds Used During Construction.                    (34)          (134)            (90)
 Other .................................................        1,013          1,177             679
                                                            ---------      ---------        --------
   Total ...............................................       33,646         31,721          32,741
                                                            ---------      ---------        --------
Income from Continuing Operations Before
 Income Taxes ..........................................       57,917         66,058          58,642
Income Taxes ...........................................       19,699         22,349          20,702
                                                            ---------      ---------        --------
Net Income from Continuing Operations Before
 Extraordinary Item ....................................       38,218         43,709          37,940
Loss from Operations of Discontinued Businesses,
 Net of Tax of $(16,278), $(7,298) and $(6,197).........      (25,025)       (34,126)         (9,997)
Gain on Sale/Disposal of Assets of Discontinued
 Businesses, Net of Tax of $2,014 and $1,889............        3,117          2,712              --
Extraordinary Item (see Note 1) ........................           --          4,100              --
                                                            ---------      ---------        --------
Net Income .............................................    $  16,310      $  16,395        $ 27,943
Other Comprehensive Income .............................         (169)          (317)             (5)
                                                            ---------      ---------        --------
Comprehensive Income ...................................    $  16,141      $  16,078        $ 27,938
                                                            =========      =========        ========
Average Common Shares Outstanding -- Basic .............       13,611         13,611          13,480
Earnings Per Common Share -- Basic
 Continuing Operations .................................    $    2.81      $    3.21        $   2.81
 Discontinued Operations ...............................       ( 1.61)        ( 2.31)         (  .74)
 Extraordinary Item ....................................           --            .30              --
                                                            ---------      ---------        --------
Net Income Per Common Share -- Basic ...................    $    1.20      $    1.20        $   2.07
                                                            =========      =========        ========
Average Common Shares Outstanding -- Diluted.                  13,707         13,627          13,480
Earnings Per Common Share -- Diluted
 Continuing Operations .................................    $    2.79      $    3.21        $   2.81
 Discontinued Operations ...............................       ( 1.60)        ( 2.31)         (  .74)
 Extraordinary Item ....................................           --            .30              --
                                                            ---------      ---------        --------
 Net Income Per Common Share -- Diluted ................    $    1.19      $    1.20        $   2.07
                                                            =========      =========        ========
 Dividends per Common Share ............................    $    2.46      $    2.46        $   2.46
The accompanying Notes to Financial Statements are an
                       integral part of these statements.

                                      F-3
CONSOLIDATED BALANCE SHEETS
                         CILCORP INC. AND SUBSIDIARIES
AS OF DECEMBER 31,
                                                              ------------------------------
                                                                   1998             1997
                                                              --------------   -------------
                                                                      (IN THOUSANDS)
ASSETS
Current Assets:
 Cash and Temporary Cash Investments ......................     $    1,669      $   10,576
 Receivables, Less Reserves of $3,411 and $2,518...........        134,666         141,234
 Accrued Unbilled Revenue .................................         39,220          38,775
 Fuel, at Average Cost ....................................         13,431           7,816
 Materials and Supplies, at Average Cost ..................         15,062          13,685
 Gas in Underground Storage, at Average Cost ..............         20,767          22,666
 Prepayments and Other ....................................          7,706          10,971
                                                                ----------      ----------
   Total Current Assets ...................................        232,521         245,723
                                                                ----------      ----------
Investments and Other Property:
Investment in Leveraged Leases ............................        146,990         146,458
Other Investments .........................................         19,500          21,074
                                                                ----------      ----------
   Total Investments and Other Property ...................        166,490         167,532
                                                                ----------      ----------
Property, Plant and Equipment:
 Utility Plant, at Original Cost
 Electric .................................................      1,237,885       1,213,585
 Gas ......................................................        417,585         401,870
                                                                ----------      ----------
                                                                 1,655,470       1,615,455
Less -- Accumulated Provision for Depreciation ............        812,630         769,792
                                                                ----------      ----------
                                                                   842,840         845,663
Construction Work in Progress .............................         30,075          21,550
Other, Net of Depreciation ................................          7,796          22,188
                                                                ----------      ----------
   Total Property, Plant and Equipment ....................        880,711         889,401
                                                                ----------      ----------
Other Assets:                                                       33,218          32,163
                                                                ----------      ----------
   Total Assets ...........................................     $1,312,940      $1,334,819
                                                                ==========      ==========
               LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 Current Portion of Long-Term Debt ........................     $   13,027      $   22,185
 Notes Payable ............................................         96,200          62,150
 Accounts Payable .........................................        136,840         132,286
 Accrued Taxes ............................................          8,185           2,810
 Accrued Interest .........................................         10,102           9,473
 FCA/PGA Over-Recoveries ..................................            304           1,666
 Other ....................................................          8,881          19,798
                                                                ----------      ----------
   Total Current Liabilities ..............................        273,539         250,368
                                                                ----------      ----------
Long-Term Debt ............................................        285,552         298,528
                                                                ----------      ----------
Deferred Credits and Other Liabilities:
Deferred Income Taxes .....................................        239,306         241,013
Regulatory Liability of Regulated Subsidiary ..............         46,346          56,807
Deferred Investment Tax Credit ............................         19,450          21,117
Other .....................................................         47,089          48,273
                                                                ----------      ----------
   Total Deferred Credits .................................        352,191         367,210
                                                                ----------      ----------
Preferred Stock of Subsidiary .............................         66,120          66,120
                                                                ----------      ----------
Stockholders' Equity:
Common Stock, no par value; Authorized 50,000,000 shares --
 Outstanding 13,610,680 and 13,610,680 shares .............        192,853         192,567
Retained Earnings .........................................        143,530         160,702
Accumulated Other Comprehensive Income ....................           (845)           (676)
                                                                ----------      ----------
   Total Stockholders' Equity .............................        335,538         352,593
                                                                ----------      ----------
   Total Liabilities and Stockholders' Equity .............     $1,312,940      $1,334,819
                                                                ==========      ==========
The accompanying Notes to Financial Statements are an
                     integral part of these balance sheets.

                                      F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
                         CILCORP INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31,
                                                                           ---------------------------------------
                                                                               1998          1997          1996
                                                                           -----------   -----------   -----------
                                                                                       (IN THOUSANDS)
Cash Flows from Operating Activities:
Net Income from Continuing Operations Before Preferred Dividends.           $  41,412     $  46,925     $  41,128
                                                                            ---------     ---------     ---------
Adjustments to Reconcile Net Income to Net Cash Provided by
 Operating Activities:
 Non-Cash Income .......................................................       (6,150)       (4,102)       (4,297)
 Cash Receipts in Excess of Debt Service on Leases .....................        7,618            --            --
 Depreciation and Amortization .........................................       66,179        62,416        60,574
 Deferred Income Taxes, Investment Tax Credit and Regulatory
   Liability of Subsidiary, Net ........................................       (5,865)       (3,342)       (1,707)
Changes in Operating Assets and Liabilities:
 Decrease (Increase) in Accounts Receivable and Accrued Unbilled
   Revenue .............................................................        5,430           (74)       (3,474)
 (Increase) Decrease in Inventories ....................................       (5,093)        3,294        (5,310)
 Increase (Decrease) in Accounts Payable ...............................       14,188        (1,961)        6,809
 Increase (Decrease) in Accrued Taxes ..................................           10         3,893        (5,843)
 (Increase) Decrease in Other Assets ...................................          209       (17,027)        2,197
 Increase (Decrease) in Other Liabilities ..............................       (6,426)       (9,039)       11,036
                                                                            ---------     ---------     ---------

Total Adjustments ......................................................       70,100        34,058        59,985
                                                                            ---------     ---------     ---------
Net Cash Provided by Operating Activities ..............................      111,512        80,983       101,113
Net Cash Provided by (Used in) Operating Activities of Discontinued
 Operations ............................................................      (43,202)       10,031         1,263
                                                                            ---------     ---------     ---------
Cash Flow from Operations ..............................................       68,310        91,014       102,376
                                                                            ---------     ---------     ---------
Cash Flows from Investing Activities:
Additions to Plant .....................................................      (67,112)      (55,055)      (43,680)
Purchase of Long-Term Investments ......................................           --        (6,933)       (4,713)
Other ..................................................................       (4,514)       (1,242)          482
                                                                            ---------     ---------     ---------
Net Cash Used in Investing Activities ..................................      (71,626)      (63,230)      (47,911)
Net Cash Provided by (Used in) Investing Activities of Discontinued
 Operations ............................................................       19,169         3,310        (3,082)
                                                                            ---------     ---------     ---------
Cash Flow from Investing Activities ....................................      (52,457)      (59,920)      (50,993)
                                                                            ---------     ---------     ---------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Short-Term Debt .............................       34,050        34,250       (19,200)
Repayment of Long-Term Debt ............................................      (22,102)      (22,954)      (19,393)
Common Dividends Paid ..................................................      (33,482)      (33,482)      (33,142)
Preferred Dividends Paid ...............................................       (3,194)       (3,216)       (3,188)
Common Stock Issued ....................................................           --            --        11,430
                                                                            ---------     ---------     ---------
Net Cash Provided by (Used in) Financing Activities of Continuing
 Operations ............................................................      (24,728)      (25,402)      (63,493)
Net Cash Provided by (Used in) Financing Activities of Discontinued
 Operations ............................................................          (32)          (57)          (49)
                                                                            ---------     ---------     ---------
Net Cash Used in Financing Activities ..................................      (24,760)      (25,459)      (63,542)
                                                                            ---------     ---------     ---------
Net Increase (Decrease) in Cash and Temporary Cash Investments .........       (8,907)        5,635       (12,159)
Cash and Temporary Cash Investments at Beginning of Year ...............       10,576         4,941        17,100
                                                                            ---------     ---------     ---------
Cash and Temporary Cash Investments at End of Year .....................    $   1,669     $  10,576     $   4,941
                                                                            =========     =========     =========
The accompanying Notes to Financial Statements
                    are an integral part of these statements.

                                      F-5
STATEMENTS OF SEGMENTS OF BUSINESS
                         CILCORP INC. AND SUBSIDIARIES
1998
                                       ----------------------------------------------------------------------------------
                                           CILCO       CILCO        CILCO        OTHER         DISCONT.
                                         ELECTRIC       GAS         OTHER      BUSINESSES     OPERATIONS       TOTALS
                                       ------------ ----------- ------------ ------------- --------------- --------------
                                                                         (IN THOUSANDS)
Revenues .............................   $360,009    $172,327     $  1,743    $   24,717      $     --       $  558,796
Interest income ......................                                 228                                          228
                                         --------                 --------    ----------      --------       ----------
   Total .............................    360,009     172,327        1,971        24,717                        559,024
                                         --------    --------     --------    ----------      --------       ----------
Operating expenses ...................    235,801     138,459        3,600        23,422                        401,282
Depreciation and amortization ........     46,017      19,256          713           193                         66,179
                                         --------    --------     --------    ----------      --------       ----------
   Total .............................    281,818     157,715        4,313        23,615                        467,461
                                         --------    --------     --------    ----------      --------       ----------
Interest expense .....................     16,261       6,514                      6,698                         29,473
Preferred stock dividends ............                               3,194                                        3,194
Fixed charges and other expenses              (34)                   1,013                                          979
                                         --------    --------     --------    ----------      --------       ----------
   Total .............................     16,227       6,514        4,207         6,698                         33,646
                                         --------    --------     --------    ----------      --------       ----------
Income from continuing oper.
 before income taxes .................     61,964       8,098       (6,549)       (5,596)                        57,917
Income taxes .........................     21,645       3,443       (2,616)       (2,773)                        19,699
                                         --------    --------     --------    ----------      --------       ----------
Net income from continuing
 operations ..........................     40,319       4,655       (3,933)       (2,823)                        38,218
Effect of discontinued operations.....                                                         (21,908)         (21,908)
                                         --------    --------     --------    ----------      --------       ----------
Segment net income ...................   $ 40,319    $  4,655     $ (3,933)   $   (2,823)     $(21,908)      $   16,310
                                         ========    ========     ========    ==========      ========       ==========
Capital expenditures .................   $ 44,213    $ 22,889     $     --    $       10      $  8,916       $   76,028
Revenue from major customer
 Caterpillar Inc. ....................   $ 39,354    $    948     $     --    $    7,669      $  1,130       $   49,101
Segment assets .......................   $730,354    $286,737     $  5,072    $  594,734      $121,647       $1,738,544
Consolidation adjustments ............     (1,304)       (507)          --      (423,789)           (4)        (425,604)
                                         --------    --------     --------    ----------      --------       ----------
   Total assets ......................   $729,050    $286,230     $  5,072    $  170,945      $121,643       $1,312,940
                                         ========    ========     ========    ==========      ========       ==========
F-6
STATEMENTS OF SEGMENTS OF BUSINESS
                         CILCORP INC. AND SUBSIDIARIES
1997
                                           -----------------------------------------------------------------------------
                                               CILCO       CILCO       CILCO        OTHER      DISCONT.
                                             ELECTRIC       GAS        OTHER     BUSINESSES   OPERATIONS      TOTALS
                                           ------------ ----------- ----------- ------------ ------------ --------------
                                                                          (IN THOUSANDS)
Revenues .................................   $338,096    $208,758    $     --    $   10,867   $      --     $  557,721
Interest income ..........................                                239                                      239
                                             --------    --------    --------    ----------   ---------     ----------
   Total .................................    338,096     208,758         239        10,867                    557,960
                                             --------    --------    --------    ----------   ---------     ----------
Operating expenses .......................    217,700     165,020       2,831        12,214                    397,765
Depreciation and amortization ............     43,858      17,647         713           198                     62,416
                                             --------    --------    --------    ----------   ---------     ----------
   Total .................................    261,558     182,667       3,544        12,412                    460,181
                                             --------    --------    --------    ----------   ---------     ----------
Interest expense .........................     16,192       6,454                     4,816                     27,462
Preferred stock dividends ................                              3,216                                    3,216
Fixed charges and other expenses .........       (134)                  1,177                                    1,043
                                             --------    --------    --------    ----------   ---------     ----------
   Total .................................     16,058       6,454       4,393         4,816                     31,721
                                             --------    --------    --------    ----------   ---------     ----------
Income from continuing oper.
 before income taxes .....................     60,480      19,637      (7,698)       (6,361)                    66,058
Income taxes .............................     21,901       7,416      (3,049)       (3,919)                    22,349
                                             --------    --------    --------    ----------   ---------     ----------
Net income from cont. oper.
 before extraord. item ...................     38,579      12,221      (4,649)       (2,442)                    43,709
Effect of discontinued operations
 and extraordinary item ..................      4,100                                           (31,414)       (27,314)
                                             --------    --------    --------    ----------   ---------     ----------
Segment net income .......................   $ 42,679    $ 12,221    $ (4,649)   $   (2,442)  $ (31,414)    $   16,395
                                             ========    ========    ========    ==========   =========     ==========
Capital expenditures .....................   $ 35,196    $ 19,830    $     --    $       29   $   6,188     $   61,243
Revenue from major customer
 Caterpillar Inc. ........................   $ 40,106    $    934    $     --    $    1,208   $   1,870     $   44,118
Segment assets ...........................   $724,869    $290,958    $  5,639    $  606,786   $ 144,412     $1,772,664
Consolidation adjustments ................     (1,070)       (416)         --      (436,345)        (14)      (437,845)
                                             --------    --------    --------    ----------   ---------     ----------
   Total assets ..........................   $723,799    $290,542    $  5,639    $  170,441   $ 144,398     $1,334,819
                                             ========    ========    ========    ==========   =========     ==========
F-7
STATEMENTS OF SEGMENTS OF BUSINESS
                         CILCORP INC. AND SUBSIDIARIES
1996
                                       ------------------------------------------------------------------------------
                                           CILCO       CILCO       CILCO        OTHER       DISCONT.
                                         ELECTRIC       GAS        OTHER      BUSINESSES   OPERATIONS      TOTALS
                                       ------------ ----------- ----------- ------------- ------------ --------------
                                                                       (IN THOUSANDS)
Revenues .............................   $322,785    $195,770    $     --    $    7,825     $     --     $  526,380
Interest income ......................                                680                                       680
                                         --------    --------    --------    ----------     --------     ----------
   Total .............................    322,785     195,770         680         7,825                     527,060
                                         --------    --------    --------    ----------     --------     ----------
Operating expenses ...................    208,566     154,099       2,234        10,204                     375,103
Depreciation and amortization ........     42,530      17,134         713           197                      60,574
                                         --------    --------    --------    ----------     --------     ----------
   Total .............................    251,096     171,233       2,947        10,401                     435,677
                                         --------    --------    --------    ----------     --------     ----------
Interest expense .....................     17,445       6,716                     4,803                      28,964
Preferred stock dividends ............                              3,188                                     3,188
Fixed charges and other expenses......        (90)                    679                                       589
                                         --------    --------    --------    ----------     --------     ----------
   Total .............................     17,355       6,716       3,867         4,803                      32,741
                                         --------    --------    --------    ----------     --------     ----------
Income from continuing oper.
 before income taxes .................     54,334      17,821      (6,134)       (7,379)                     58,642
Income taxes .........................     19,576       6,972      (2,466)       (3,380)                     20,702
                                         --------    --------    --------    ----------     --------     ----------
Net income from continuing
 operations ..........................     34,758      10,849      (3,668)       (3,999)                     37,940
Effect of discontinued operations.....                                                        (9,997)        (9,997)
                                         --------    --------    --------    ----------     --------     ----------
Segment net income ...................   $ 34,758    $ 10,849    $ (3,668)   $   (3,999)    $ (9,997)    $   27,943
                                         ========    ========    ========    ==========     ========     ==========
Capital expenditures .................   $ 28,032    $ 15,529    $     --    $      119     $  3,061     $   46,741
Revenue from major customer
 Caterpillar Inc. ....................   $ 37,724    $  1,053    $     --    $       68     $    119     $   38,964
Segment assets .......................   $732,219    $296,343    $  6,424    $  585,732     $ 94,492     $1,715,210
Consolidation adjustments ............       (352)       (137)         --      (428,815)        (213)      (429,517)
                                         --------    --------    --------    ----------     --------     ----------
   Total assets ......................   $731,867    $296,206    $  6,424    $  156,917     $ 94,279     $1,285,693
                                         ========    ========    ========    ==========     ========     ==========
F-8
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
                         CILCORP INC. AND SUBSIDIARIES
COMMON STOCK                              OTHER
                                             --------------------------     RETAINED      COMPREHENSIVE
                                                SHARES         AMOUNT       EARNINGS         INCOME            TOTAL
                                             ------------   -----------   ------------   --------------   --------------
                                                                          (IN THOUSANDS EXCEPT SHARE AMOUNTS)
Balance at December 31, 1995 .............   13,335,606     $179,330      $183,002          $ (354)         $361,978
Common Stock Issued ......................      275,074       11,430                                          11,430
Cash Dividend Declared on Common
 Stock ($2.46 per share)..................                                 (33,141)                          (33,141)
Additional Minimum Liability of
 Non-Qualified Pension Plan at
 December 31, 1996, net of $(3) taxes.....                                                      (5)               (5)
Net Income ...............................                                  27,943                            27,943
                                             ----------     --------      --------                          --------
Balance at December 31, 1996 .............   13,610,680     $190,760      $177,804          $ (359)         $368,205
CILCORP Shareholder Return Incentive
 Compensation ............................                     1,807                                           1,807
Cash Dividend Declared on Common
 Stock ($2.46 per share)..................                                 (33,482)                          (33,482)
Additional Minimum Liability of
 Non-Qualified Pension Plan at
 December 31, 1997, net of $(208) taxes.                                                      (317)             (317)
Other ....................................                                     (15)                              (15)
Net Income ...............................                                  16,395                            16,395
                                             ----------     --------      --------          ------          --------
Balance at December 31, 1997 .............   13,610,680     $192,567      $160,702          $ (676)         $352,593
Cash Dividend Declared on Common
 Stock ($2.46 per share)..................                                 (33,482)                          (33,482)
Additional Minimum Liability of
 Non-Qualified Pension Plan at
 December 31, 1998, net of $(111) taxes.                                                      (169)             (169)
Other ....................................                       286                                             286
Net Income ...............................                                  16,310                            16,310
                                                                          --------                          --------
Balance at December 31, 1998 .............   13,610,680     $192,853      $143,530          $ (845)         $335,538
                                             ==========     ========      ========          ========        ========
The accompanying Notes to Financial Statements
                    are an integral part of these statements.

                                      F-9
NOTES TO FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The  consolidated financial statements include the accounts of CILCORP Inc.
(CILCORP  or  the  Holding Company), Central Illinois Light Company (CILCO), QST
Enterprises  Inc.  (QST)  and its subsidiaries (QST Environmental Inc., formerly
known  as  Environmental  Science  & Engineering, Inc. (ESE) and QST Energy Inc.
(QST  Energy))  and  CILCORP's  other  subsidiaries  (collectively, the Company)
after  elimination  of  significant  intercompany  transactions.  In  1998,  the
operations  of  QST  and its subsidiaries were discontinued (see Note 10). Prior
year  amounts  have  been  reclassified  on  a  basis  consistent  with the 1998
presentation.

     CILCORP  is  an  investor-owned  public utility holding company. CILCO, the
Company's   principal   business  subsidiary,  is  engaged  in  the  generation,
transmission,   distribution   and  sale  of  electric  energy  in  an  area  of
approximately  3,700  square miles in central and east-central Illinois, and the
purchase,  distribution,  transportation  and  sale of natural gas in an area of
approximately  4,500  square  miles  in central and east-central Illinois. Other
CILCORP  first-tier  subsidiaries  are CILCORP Investment Management Inc. (CIM),
which  manages  the  Company's  investment  portfolio  and CILCORP Ventures Inc.
(CVI),  which  pursues  investment  opportunities in energy-related products and
services.

     The  preparation  of  financial  statements  in  conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect  the  reported  amounts  of assets and liabilities and
disclosure  of  contingent  assets  and liabilities at the date of the financial
statements  and  the  reported  amounts  of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates.

     See  Management's  Discussion  and  Analysis  of  Financial  Condition  and
Results  of  Operations--  New  Accounting  Pronouncements  for  a discussion of
accounting  pronouncements  issued  by  the Financial Accounting Standards Board
which are effective in 1998 or thereafter.

REGULATION

     CILCO  is  a  public utility subject to regulation by the Illinois Commerce
Commission  (ICC)  and  the  Federal  Energy  Regulatory  Commission (FERC) with
respect  to  accounting  matters,  and maintains its accounts in accordance with
the Uniform System of Accounts prescribed by these agencies.

     CILCO  is  subject  to  the provisions of Statement of Financial Accounting
Standards  No.  71,  "Accounting for the Effects of Certain Types of Regulation"
(SFAS  71)  for  its  regulated public utility operations. Under SFAS 71, assets
and  liabilities  are  recorded  to  represent  probable  future  increases  and
decreases,  respectively,  of  revenues  to  CILCO resulting from the ratemaking
action of regulatory agencies.

     The  Electric Service Customer Choice and Rate Relief Law of 1997 (Customer
Choice  Law)  became  effective  in  Illinois  in  December  1997.  Among  other
provisions,   this  law  begins  a  nine-year  transition  process  to  a  fully
competitive  market  for  electricity  in  Illinois.  Electric  transmission and
distribution  activities  are  expected  to  continue  to  be  regulated,  but a
customer   may  choose  to  purchase  electricity  from  another  supplier  (see
Management's Discussion--Competition).

                                      F-10
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

     Due  to  the  transition cost recovery limitations and base rate reductions
of  the  Customer  Choice  Law,  CILCO's  electric generation activities will no
longer  be  subject to the provisions of SFAS 71. Accordingly, regulatory assets
of  $1.5  million  and  liabilities  of  $5.6  million  associated with electric
generating  plant  were written-off or credited, respectively, to income in 1997
as  a  net $4.1 million after-tax extraordinary item. Regulatory assets included
on  the  Consolidated  Balance  Sheets  at  December  31,  1998  and 1997 are as
follows:
1998         1997
                                                                ----------   ---------
                                                                    (IN THOUSANDS)
Included in prepayments and other:
 Fuel and gas cost adjustments ..............................    $ 4,740      $ 2,954
 Coal tar remediation cost -- estimated current .............        609          844
 Gas transition costs .......................................         --          159
                                                                 -------      -------
    Current costs included in prepayments and other .........      5,349        3,957
                                                                 -------      -------
Included in other assets:
 Coal tar remediation cost, net of recoveries ...............      1,281        2,745
 Regulatory tax asset .......................................      5,723        7,578
 Deferred gas costs .........................................      4,039        4,145
 Unamortized loss on reacquired debt ........................      3,261        3,581
                                                                 -------      -------
 Future costs included in other assets ......................     14,304       18,049
                                                                 -------      -------
    Total regulatory assets .................................    $19,653      $22,006
                                                                 =======      =======
Regulatory  assets  at  December  31, 1998 are related to CILCO's regulated
electric  and  gas distribution activities. CILCO does not currently believe the
costs  recorded  for  its  generating  plants and related assets at December 31,
1998  to  be  impaired  as  a  result  of  the  Customer  Choice Law. Regulatory
liabilities,  consisting  of  deferred  tax  items  primarily related to CILCO's
electric  and  gas  transmission  and distribution operations, are approximately
$46.3 million and $56.8 million at December 31, 1998 and 1997, respectively.

     CILCO's  electric  generation-related  identifiable  assets included in the
balance sheet at December 31, 1998 and 1997 were:
1998           1997
                                                          ------------   ------------
                                                                (IN THOUSANDS)
Property, Plant and Equipment .........................    $  537,358     $  535,065
Less: Accumulated Depreciation ........................      (266,461)      (259,988)
                                                           ----------     ----------
                                                              270,897        275,077
Construction Work in Progress .........................         3,268          1,979
                                                           ----------     ----------
 Net Property, Plant and Equipment ....................       274,165        277,056
Fuel, at Average Cost .................................         8,704          8,520
Materials and Supplies, at Average Cost ...............         8,452          8,202
                                                           ----------     ----------
Total Identifiable Electric Generation Assets .........    $  291,321     $  293,778
                                                           ==========     ==========
Accumulated  deferred  income  taxes  associated  with  electric generation
property  at  December  31, 1998 and 1997 were approximately $72 million and $79
million, respectively.

                                      F-11
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

OPERATING REVENUES, FUEL COSTS AND COST OF GAS

     Electric,  gas,  and  non-regulated  energy  and  energy  services revenues
include  service  provided  but unbilled at year end. Substantially all electric
rates  and  gas system sales rates of CILCO include a fuel adjustment clause and
a  purchased  gas adjustment clause, respectively. These clauses provide for the
recovery  of  changes in electric fuel costs, excluding coal transportation, and
changes  in  the  cost of gas on a current basis in billings to customers. CILCO
adjusts  the  cost of fuel and cost of gas to recognize over or under recoveries
of  allowable  costs.  The cumulative effects are deferred on the Balance Sheets
as  a current asset or current liability (see Regulation, above) and adjusted by
refunds or collections through future billings to customers.

CONCENTRATION OF CREDIT RISK

     CILCO,  as  a  public utility, must provide service to customers within its
defined  service  territory  and  may  not  discontinue  service  to residential
customers  when  certain  weather  conditions  exist.  CILCO continually reviews
customers'  creditworthiness  and requests deposits or refunds deposits based on
that  review.  At December 31, 1998, CILCO had net receivables of $35.8 million,
of which approximately $4.7 million was due from its major customers.

     See  Note  6  for a discussion of receivables related to CILCORP Investment
Management Inc.'s leveraged lease portfolio.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The   carrying  amount  of  Cash  and  Temporary  Cash  Investments,  Other
Investments,  and  Notes  Payable  approximates  fair  value. The estimated fair
value  of  the  Company's  Preferred  Stock  with  Mandatory  Redemption was $23
million  at  December  31, 1998 and 1997, based on current market interest rates
for  other  companies  with  comparable  credit  ratings, capital structure, and
size.  The  estimated  fair  value  of  the  Company's Long-Term Debt, including
current  maturities,  was $339 million at December 31, 1998, and $352 million at
December  31,  1997.  The  fair  market  value of these instruments was based on
current  market  interest  rates  for  other  companies  with  comparable credit
ratings, capital structures, and size.

DEPRECIATION AND MAINTENANCE

     Provisions  for  depreciation  of  utility property for financial reporting
purposes  are  based on straight-line composite rates. The annual provisions for
utility  plant  depreciation,  expressed  as a percentage of average depreciable
utility  property,  were  3.8%  and 4.6% for electric and gas, respectively, for
each  of  the last three years. Utility maintenance and repair costs are charged
directly  to  expense.  Renewals of units of property are charged to the utility
plant  account,  and  the  original  cost  of  depreciable  property replaced or
retired,  together  with  the  removal  cost  less  salvage,  is  charged to the
accumulated provision for depreciation.

     Non-utility  property is depreciated over estimated lives ranging from 3 to
40 years.

GOODWILL

     As  a  result  of  significant  downsizing  of  QST Environmental Inc. (QST
Environmental)  during 1996 and 1997 and continuing overcapacity and competition
in  the  environmental  segment  in  the  fourth  quarter  of  1997, the Company
determined  that  an  impairment  to  goodwill associated with QST Environmental
existed.  As  a  result,  the  Company  wrote  off the $22.6 million unamortized
goodwill  balance.  In late 1998, the Company decided to sell its 100% ownership
interest  in  QST  Environmental  and has classified its results as discontinued
(see Note 10).

                                      F-12
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

INCOME TAXES

     The  Company  follows  a  policy  of  comprehensive  interperiod income tax
allocation.  Investment  tax  credits  related  to  utility  property  have been
deferred  and are being amortized over the estimated useful lives of the related
property.  CILCORP  and  its subsidiaries file a consolidated federal income tax
return.  Income  taxes  are allocated to the individual companies based on their
respective taxable income or loss.

CONSOLIDATED STATEMENTS OF CASH FLOWS

     The  Company  considers all highly liquid debt instruments purchased with a
remaining  maturity  of three months or less to be cash equivalents for purposes
of the Consolidated Statements of Cash Flows.

     Cash paid for interest and income taxes was as follows:
DECEMBER 31,
                         ------------------------------------
                            1998         1997         1996
                         ----------   ----------   ----------
                                    (IN THOUSANDS)
Interest .............    $26,067      $28,710      $28,988
Income taxes .........    $19,611      $28,537      $13,572
                          -------      -------      -------
COMPANY-OWNED LIFE INSURANCE POLICIES

     The  following  amounts  related to Company-owned life insurance contracts,
issued by one major insurance company, are included in Other Investments:
DECEMBER 31,
                                              -------------------------
                                                  1998          1997
                                              -----------   -----------
                                                   (IN THOUSANDS)
Cash surrender value of contracts .........    $  50,786     $  45,297
Borrowings against contracts ..............      (48,132)      (42,898)
                                               ---------     ---------
   Net investment .........................    $   2,654     $   2,399
                                               =========     =========
Interest   expense   related   to  borrowings  against  Company-owned  life
insurance,  included  in  "Other"  on the Consolidated Statements of Income, was
$3.6   million,  $3.5  million  and  $2.7  million  for  1998,  1997  and  1996,
respectively.

                                      F-13
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2.  INCOME TAXES

     The  Company  uses  the liability method to account for income taxes. Under
the  liability method, deferred income taxes are recognized at currently enacted
income  tax rates to reflect the tax effect of temporary differences between the
financial  reporting  basis  and  the  tax  basis  of  assets  and  liabilities.
Temporary  differences  occur  because  the  income  tax  law either requires or
permits  certain  items  to  be reported on the Company's income tax return in a
different  year  than  they  are reported in the financial statements. CILCO has
recorded  a regulatory asset and liability to account for the effect of expected
future  regulatory actions related to unamortized investment tax credits, income
tax  liabilities initially recorded at tax rates in excess of current rates, the
equity  component  of  Allowance  for  Funds  Used during Construction and other
items  for  which deferred taxes had not previously been provided. The temporary
differences  related to the consolidated deferred income tax asset and liability
at December 31, 1998, 1997, and 1996 were as follows:
DECEMBER 31,
                                                    ------------------------------------
                                                       1998         1997         1996
                                                    ----------   ----------   ----------
                                                               (IN THOUSANDS)
Deferred tax assets:
 Deferred tax asset .............................    $ 20,742     $ 18,347     $ 16,452
 Adjustment to reflect regulatory asset .........      (5,723)      (7,578)      (4,777)
                                                     --------     --------     --------
 Net deferred tax asset .........................    $ 15,019     $ 10,769     $ 11,675
                                                     ========     ========     ========
DECEMBER 31,
                                                                          ---------------------------------------
                                                                              1998          1997          1996
                                                                          -----------   -----------   -----------
                                                                                      (IN THOUSANDS)
Deferred tax liabilities:
 Deferred tax liability-property ......................................    $ 196,301     $ 207,460     $ 214,356
 Adjustment to reflect regulatory liability ...........................      (46,346)      (56,807)      (68,565)
                                                                           ---------     ---------     ---------
 Net deferred tax liability-property ..................................      149,955       150,653       145,791
 Deferred tax liability-leases ........................................      103,566       101,005        97,964
 Deferred tax liability-other .........................................          804           124         3,159
                                                                           ---------     ---------     ---------
 Accumulated deferred income tax liability ............................    $ 254,325     $ 251,782     $ 246,914
                                                                           =========     =========     =========
 Accumulated deferred income tax liability, net of deferred tax assets     $ 239,306     $ 241,013     $ 235,239
                                                                           =========     =========     =========
The  following  table  reconciles  the  change  in the accumulated deferred
income  tax  liability to the deferred income tax expense included in the income
statement:
DECEMBER 31,
                                                                           ----------------------------
                                                                                1998           1997
                                                                           -------------   ------------
                                                                                  (IN THOUSANDS)
Net change in deferred income tax liability per above table ............     $  (1,707)     $   5,774
Change in tax effects of income tax related regulatory assets and
 liabilities ...........................................................        (8,606)       (14,559)
Deferred taxes related to extraordinary item ...........................            --          5,634
Other ..................................................................          (106)           125
                                                                             ---------      ---------
Deferred income tax benefit for the period .............................       (10,419)        (3,026)
Less: Deferred income tax benefit for the period from discontinued
 operations ............................................................        (6,115)        (1,245)
                                                                             ---------      ---------
Deferred income tax benefit for the period from continuing operations...     $  (4,304)     $  (1,781)
                                                                             =========      =========
F-14
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2.  INCOME TAXES -- (CONTINUED)

     Income tax expenses were as follows:
DECEMBER 31,
                                                                  -------------------------------------
                                                                      1998         1997         1996
                                                                  -----------   ----------   ----------
                                                                             (IN THOUSANDS)
Current income taxes
Federal .......................................................    $  13,731     $ 17,814     $ 15,129
State .........................................................        3,791        3,836        2,169
                                                                   ---------     --------     --------
Total current taxes ...........................................       17,522       21,650       17,298
                                                                   ---------     --------     --------
Deferred income taxes, net ....................................
Property-related deferred income taxes ........................      (11,262)        (841)      (2,346)
Leveraged leases ..............................................        2,602        3,040        4,398
Unbilled revenue ..............................................         (287)        (885)         425
Gas take-or-pay settlements ...................................          522         (339)        (706)
Environmental remediation costs ...............................          (58)          46         (642)
Pension expenses ..............................................          869       (1,798)      (1,726)
Other post-employment benefits expenses .......................         (847)        (617)         187
Customer advances .............................................          478         (438)         (40)
Gas in underground storage ....................................       (1,681)        (191)         405
Amortization of debt discounts, premiums and expenses .........         (790)        (179)        (179)
CILCO Executive Deferred Compensation Plan ....................         (671)        (191)        (525)
CILCORP Shareholder Return Incentive Comp. Plan ...............         (717)          --           --
QST Gas Derivatives Mark to Market ............................          948           --           --
Other .........................................................          475         (633)        (360)
                                                                   ---------     --------     --------
Total deferred income taxes, net ..............................      (10,419)      (3,026)      (1,109)
                                                                   ---------     --------     --------
Investment tax credit amortization ............................       (1,668)      (1,684)      (1,684)
                                                                   ---------     --------     --------
Total income tax provisions before extraordinary item .........        5,435       16,940       14,505
Deferred taxes related to extraordinary item ..................           --       (5,634)          --
                                                                   ---------     --------     --------
Total income tax provisions ...................................    $   5,435     $ 11,306     $ 14,505
                                                                   =========     ========     ========
Total  income  tax  provisions are presented within the Income Statement as
follows:
DECEMBER 31,
                                                         -------------------------------------
                                                             1998         1997         1996
                                                         -----------   ----------   ----------
                                                                    (IN THOUSANDS)
Income taxes from continuing operations ..............    $  19,699     $ 22,349     $ 20,702
Tax on income (loss) from operations of discontinued
 businesses ..........................................      (16,278)      (7,298)      (6,197)
Tax on gain (loss) on sale/disposal of discontinued
 businesses ..........................................        2,014        1,889           --
Deferred taxes related to extraordinary item .........           --       (5,634)          --
                                                          ---------     --------     --------
Total income tax provisions ..........................    $   5,435     $ 11,306     $ 14,505
                                                          ---------     --------     --------
The  1997 income tax provision has been reduced to reflect the crediting to
income  as  an  extraordinary  item the regulatory liability related to electric
generation  property  deferred  taxes which were recorded at tax rates in excess
of the current rate.

     Total  deferred  income taxes, net, includes deferred state income taxes of
$(1,635,000), $(229,000) and $(538,000) for 1998, 1997 and 1996, respectively.

                                      F-15
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2.  INCOME TAXES -- (CONTINUED)

     The  following  table represents a reconciliation of the effective tax rate
with the statutory federal income tax rate.
YEARS ENDED DECEMBER 31,
                                                                 ------------------------------------
                                                                    1998         1997         1996
                                                                 ----------   ----------   ----------
Statutory federal income tax .................................       35.0%        35.0%        35.0%
                                                                     ----        -----         ----
Amortization of property related deferred taxes provided at
 tax rates in excess of current rate .........................       (8.3)        (3.9)        (3.4)
Amortization of investment tax credit ........................       (7.6)        (6.1)        (4.0)
State income taxes ...........................................        5.5          9.0          4.8
Goodwill write-off and amortization ..........................         --         29.2           .6
Preferred dividends of subsidiary and other permanent
 differences .................................................        6.6          5.2          3.6
Tax provision adjustment .....................................         --         (1.6)         (.4)
Affordable housing tax credits ...............................       (6.1)        (3.4)         (.1)
Corporate-owned life insurance ...............................       (4.2)        (2.9)        (1.7)
AES transaction costs ........................................        3.3           --           --
Other differences ............................................        1.1           .7          (.2)
                                                                     ----        -----         ----
Total ........................................................       (9.7)        26.2          (.8)
                                                                     ----        -----         ----
Effective income tax rate before effect of extraordinary item.       25.3         61.2         34.2
Tax effect of extraordinary item .............................         --        (20.4)          --
                                                                     ----        -----         ----
Effective income tax rate ....................................       25.3%        40.8%        34.2%
                                                                     ====        =====         ====
F-16
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3 POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS

POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE

     CILCO   has   recorded   a  liability  of  approximately  $1.5  million  at
December 31,  1998  and  1997,  for  benefits other than pensions or health care
provided  to  former  or  inactive  employees.  The liability for these benefits
(primarily   long-term   and   short-term   disability   payments   under  plans
self-insured by CILCO) is actuarially determined.

PENSION BENEFITS

     Substantially  all of CILCO's full-time employees, including those assigned
to  the  Holding  Company,  are  covered  by  trusteed, non-contributory defined
benefit  pension  plans.  Benefits  under  these  qualified  plans  reflect  the
employee's  years  of  service, age at retirement and maximum total compensation
for  any  consecutive  sixty-month period prior to retirement. CILCO also has an
unfunded nonqualified plan for certain employees.

     Pension costs for the past three years were charged as follows:
1998        1997        1996
                                    -----------   --------   ----------
                                              (IN THOUSANDS)
Operating expenses ..............     $  (893)     $ 493      $ 9,700
Utility plant and other .........           6        125          922
                                      -------      -----      -------
Net pension costs ...............     $  (887)     $ 618      $10,622
                                      =======      =====      =======
Provisions  for  pension  expense  reflect  the  use  of the projected unit
credit  actuarial  cost  method. At December 31, 1998 and 1997, CILCO recognized
an  additional minimum liability on the Balance Sheets for the plan in which the
accumulated benefit obligation exceeds the fair value of plan assets.

POSTRETIREMENT HEALTH CARE BENEFITS

     Provisions  for  postretirement  benefits expenses are determined under the
accrual method of accounting.

     Substantially  all of CILCO's full-time employees, including those assigned
to  the  Holding  Company, are currently covered by a trusteed, non-contributory
defined   benefit   postretirement  health  care  plan.  The  plan  pays  stated
percentages  of  most  necessary  medical  expenses  incurred by retirees, after
subtracting  payments  by  Medicare  or  other  providers  and  after  a  stated
deductible  has  been met. Participants become eligible for the benefits if they
retire  from  CILCO  after  reaching  age  55  with 10 or more years of service.
Neither  QST  Enterprises  nor  its subsidiaries provide health care benefits to
retired employees.

     Postretirement health care benefit costs were charged as follows:
1998        1997        1996
                                                         ---------   ---------   ---------
                                                                  (IN THOUSANDS)
Operating expenses ...................................    $3,904      $3,989      $5,096
Utility plant and other ..............................     1,260       1,825       1,883
                                                          ------      ------      ------
Net postretirement health care benefit costs .........    $5,164      $5,814      $6,979
                                                          ======      ======      ======
F-17
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3 POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS-- (CONTINUED)
     The components of net periodic benefit costs follow:
OTHER POSTRETIREMENT
                                                              PENSION BENEFITS                BENEFITS
                                                         ---------------------------   -----------------------
                                                             1998           1997          1998         1997
                                                         ------------   ------------   ----------   ----------
                                                                            (IN THOUSANDS)
Service cost .........................................    $   5,410      $   4,384      $  1,417     $  1,298
Interest cost ........................................       19,024         17,561         5,371        5,047
Expected return on plan assets .......................      (25,304)       (21,005)       (4,388)      (3,249)
Amortization of transition liability (asset) .........         (888)          (888)        2,858        2,858
Amortization of past service cost ....................        1,068          1,068            --           --
Recognized actuarial loss ............................         (197)          (502)          (94)        (140)
                                                          ---------      ---------      --------     --------
Net benefit cost .....................................    $    (887)     $     618      $  5,164     $  5,814
                                                          =========      =========      ========     ========
Pension Plans with Accumulated Benefit
 Obligations in Excess of Assets
Total projected benefit obligation ...................    $  (4,191)     $  (3,692)
Total accumulated benefit obligation .................    $  (3,582)     $  (2,902)
Total fair value of assets ...........................    $      --      $      --
Information on the plans, funded status follows:
OTHER POSTRETIREMENT
                                                                 PENSION BENEFITS                     BENEFITS
                                                          -------------------------------   -----------------------------
                                                               1998             1997             1998            1997
                                                          --------------   --------------   -------------   -------------
                                                                                  (IN THOUSANDS)
Change in Benefit Obligations
Benefit obligation at January 1, ......................     $ (254,929)      $ (235,441)      $ (72,542)      $ (67,367)
Service cost ..........................................         (5,410)          (4,384)         (1,417)         (1,298)
Interest cost .........................................        (19,024)         (17,561)         (5,371)         (5,047)
Actuarial (gain) loss .................................        (22,521)         (13,928)         (7,500)         (2,891)
Benefits paid .........................................         16,238           16,385           4,514           4,061
                                                            ----------       ----------       ---------       ---------
Benefit obligation at December 31, ....................     $ (285,646)      $ (254,929)      $ (82,316)      $ (72,542)
                                                            ==========       ==========       =========       =========
Change in Plan Assets
Fair value of assets at January 1, ....................     $  289,091       $  254,824       $  52,263       $  39,601
Actual return on assets ...............................         36,467           50,489           5,781           9,907
Company contributions .................................            163              163             863           6,816
Participant contributions .............................             --               --              --              --
Benefits paid .........................................        (16,238)         (16,385)         (4,514)         (4,061)
                                                            ----------       ----------       ---------       ---------
Fair value of assets at December 31, ..................     $  309,483       $  289,091       $  54,393       $  52,263
                                                            ==========       ==========       =========       =========
Funded Status at December 31,
Benefit obligation less (greater) than plan
 assets ...............................................     $   23,837       $   34,162       $ (27,923)      $ (20,279)
Unrecognized net transition liability (asset) .........         (4,011)          (4,899)         30,297          33,155
Unrecognized actuarial (gain) loss ....................        (35,875)         (47,431)         (6,777)        (12,977)
Unrecognized prior service cost .......................          6,365            7,433              --              --
Intangible asset ......................................           (415)            (455)             --              --
Accumulated other comprehensive income ................         (1,401)          (1,120)             --              --
                                                            ----------       ----------       ---------       ---------
Prepaid (accrued) benefit cost ........................     $  (11,500)      $  (12,310)      $  (4,403)      $    (101)
                                                            ==========       ==========       =========       =========
Assumptions as of December 31,
Discount rate .........................................           6.75%            7.25%           6.75%           7.25%
Long-term return on assets ............................           9.00%            8.50%           8.50%           8.50%
Long-term compensation increase .......................           3.50%            4.50%            N/A             N/A
F-18
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3 POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS-- (CONTINUED)

     For  measurement purposes, a 7.2 percent annual rate of increase in the per
capita  cost  of covered health care benefits was assumed for 1998. The rate was
assumed  to  decrease  gradually  to  5.7  percent  for  2025  and  remain level
thereafter.

     Increasing  the  assumed  health  care  cost  trend rate by 1% in each year
would   increase   the   accumulated   postretirement   benefit   obligation  at
December 31,   1998,  by  $2.9  million  and  the  aggregate  of the service and
interest  cost  components  of  net  postretirement health care cost for 1998 by
$252,000.  Decreasing the assumed health care cost trend rate by 1% in each year
would   decrease   the   accumulated   postretirement   benefit   obligation  at
December 31,  1998,  by  $3.3  million  and  the  aggregate  of  the service and
interest  cost  components  of  net  postretirement health care cost for 1998 by
$295,000.

NOTE 4 CILCORP SHAREHOLDER RETURN INCENTIVE COMPENSATION PLAN

     Under  the  Company's  Shareholder  Return Incentive Compensation Plan (the
Plan),  eligible  key employees of the Company and its subsidiaries are entitled
to  receive  shares  of  the  Company's  common  stock  based  on  a performance
methodology  established  and periodically amended by the Compensation Committee
of   the  Company's  Board  of  Directors.  During  1997,  350,000  fully-vested
performance  shares  were  distributed.  Such shares are convertible into common
stock  with  the  number of shares received based upon the number of performance
shares  exercised  multiplied by the difference between the average market price
of  the  Company's  common stock for the fifteen days prior to exercise and $36,
divided by the market price of common stock at the exercise date.

     The   compensation  expense  recognized  under  this  Plan,  based  on  the
provisions  of  Statement  of Financial Accounting Standards No. 123, (SFAS 123)
was  $1.8 million  in  1997  when the performance shares were distributed. These
shares  were  convertible  into common stock at any time until December 31, 1998
(the  Performance  Period).  The  fair  value  of each performance share granted
under  the  Plan  was  $5.98 -- estimated using the Black-Scholes option-pricing
model  assuming  a  risk-free  interest  rate  of  5.7%, dividend yield of 5.9%,
expected life of one year and volatility of 16.1%.

     In  1998,  the  Performance  Period  for the originally granted performance
shares  was  extended  to  December 31, 1999. No additional expense was recorded
following  this extension, as a revaluation of the fair value of the performance
shares  per  the provisions of SFAS 123 yielded no material valuation difference
due to the one-year extension.

     To  the extent that the market price exceeds $56, the Plan participants are
entitled  to  receive  cash  in  lieu of common stock. Consequently, the Company
recognized  expense  of  $1.75  million  in the fourth quarter 1998 to reflect a
share price approximating $61.

NOTE 5 SHORT-TERM DEBT

     Short-term  debt  at  December 31,  1998,  consisted  of  $55.6  million of
Holding  Company  bank  borrowings  and $40.6 million of CILCO commercial paper.
Short-term  debt at December 31, 1997, included $40.9 million of Holding Company
bank borrowings and $21.3 million of CILCO commercial paper.

     The  Holding  Company  had  arrangements  for bank lines of credit totaling
$60 million  at  December 31, 1998, of which $55.6 million was used. These lines
were maintained by commitment fees of 1/8 of 1% per annum in lieu of balances.

     CILCO  had  arrangements  for  bank lines of credit totaling $45 million at
December 31,  1998,  all  of  which  were  unused.  These  lines  of credit were
maintained  by  commitment  fees  of  1/20  of 1% per annum in lieu of balances.
These bank lines of credit support CILCO's issuance of commercial paper.

                                      F-19
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 6. LEVERAGED LEASE INVESTMENTS

     The  Company,  through  subsidiaries  of CILCORP Investment Management Inc.
(CIM),  is  a  lessor  in  eight leveraged lease arrangements under which mining
equipment,   electric   production  facilities,  warehouses,  office  buildings,
passenger  railway  equipment  and  an aircraft are leased to third parties. The
economic  lives  and  lease  terms  vary  with  the leases. CIM's share of total
equipment  and  facilities  cost  was approximately $350 million at December 31,
1998, and 1997.

     The  cost  of  the  equipment  and  facilities  owned  by  CIM is partially
financed  by  non-recourse  debt  provided by lenders, who have been granted, as
their  sole  remedy in the event of a lessee default, an assignment of rents due
under  the  leases  and  a  security  interest in the leased property. Such debt
amounted  to $232 million at December 31, 1998, and $237 million at December 31,
1997.

     Leveraged  lease  residual  value  assumptions,  which  are conservative in
relation  to independently appraised residual values of the lease portfolio, are
tested  on a periodic basis. In 1998, CIM decreased the estimated residual value
of  one  of  its  leases  by  approximately  $6.8  million  to  reflect  current
conditions in the secondary market for the asset.

     CIM's  net  investment in leveraged leases at December 31, 1998 and 1997 is
shown below:
1998          1997
                                                             -----------   -----------
                                                                  (IN THOUSANDS)
Minimum lease payments receivable .....................    $142,095      $136,916
   Estimated residual value ..............................      87,569        94,368
   Less: Unearned income .................................      82,674        84,826
                                                              --------      --------
   Investment in lease financing receivables .............     146,990       146,458
   Less: Deferred taxes arising from leveraged leases.....     103,566       101,005
                                                              --------      --------
   Net investment in leveraged leases ....................    $ 43,424      $ 45,453
                                                              ========      ========
NOTE 7. PREFERRED STOCK

PREFERRED STOCK OF SUBSIDIARY
AT DECEMBER 31,
                                                            -----------------------
                                                               1998         1997
                                                            ----------   ----------
                                                                (IN THOUSANDS)
Preferred stock, cumulative $100 par value,
    authorized 1,500,000 shares Without mandatory
    redemption 4.50% series -- 111,264 shares ...........    $11,126      $11,126
    4.64% series -- 79,940 shares .......................      7,994        7,994
   Class A, no par value, authorized 3,500,000 shares
    Flexible auction rate -- 250,000 shares (*) .........     25,000       25,000
    With mandatory redemption 5.85% series --
      220,000 shares ....................................     22,000       22,000
                                                             -------      -------
      Total preferred stock .............................    $66,120      $66,120
                                                             =======      =======
----------
(*) Dividend  rates  at  December  31,  1998  and  1997,  were  4.04% and 4.18%,
    respectively.

     All   classes  of  preferred  stock  are  entitled  to  receive  cumulative
dividends  and  rank  equally  as  to  dividends  and assets, according to their
respective terms.

     The  total  annual  dividend requirement for preferred stock outstanding at
December  31,  1998,  is  $3.2  million,  assuming a continuation of the auction
dividend rate at December 31, 1998, for the flexible auction rate series.

                                      F-20
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7. PREFERRED STOCK -- (CONTINUED)

PREFERRED STOCK WITHOUT MANDATORY REDEMPTION

     The  call  provisions  of  preferred  stock  redeemable  at  CILCO's option
outstanding at December 31, 1998, are as follows:

          Series Callable Price Per Share (plus accrued dividends)
4.50%                      $110
                         4.64%                      $102
                         Flexible Auction Rate      $100
PREFERRED STOCK WITH MANDATORY REDEMPTION

     CILCO's  5.85%  Class A preferred stock may be redeemed in 2003 at $100 per
share.  A  mandatory  redemption  fund  must be established on July 1, 2003. The
fund  will  provide for the redemption of 11,000 shares for $1.1 million on July
1  of  each  year  through  July 1, 2007. On July 1, 2008, the remaining 165,000
shares will be retired for $16.5 million.

PREFERENCE STOCK OF SUBSIDIARY, CUMULATIVE

     No Par Value, Authorized 2,000,000 shares, of which none have been issued.

PREFERRED STOCK OF HOLDING COMPANY

     No  Par  Value, Authorized 4,000,000 shares, of which none were outstanding
at December 31, 1998 and 1997.

COMMON STOCK RIGHTS

     On  October  29,  1996,  the  Board  of Directors of CILCORP authorized and
declared  a dividend distribution of one right for each share of common stock of
the  Company  to stockholders of record at November 12, 1996, and for each share
of  common  stock  issued thereafter. Each right gives the stockholder the right
to  purchase  one one-hundredth of a share of preferred stock of the Company for
$100,  subject to the conditions set forth in the agreement governing the rights
plan.

NOTE 8. LONG-TERM DEBT
AT DECEMBER 31,
                                      -----------------------
                                         1998         1997
                                      ----------   ----------
                                          (IN THOUSANDS)
CILCO first mortgage bonds
   7 1/2% series due 2007 .........    $ 50,000     $ 50,000
   8 1/5% series due 2022 .........      65,000       65,000
 Medium-term notes
   6.4% series due 2000 ...........      30,000       30,000
   6.82% series due 2003 ..........      25,350       25,350
   6.13% series due 2005 ..........      16,000       16,000
   7.8% series due 2023 ...........      10,000       10,000
   7.73% series due 2025 ..........      20,000       20,000
 Pollution control refunding bonds
   6.5% series F due 2010 .........       5,000        5,000
   6.2% series G due 2012 .........       1,000        1,000
   6.5% series E due 2018 .........      14,200       14,200
   5.9% series H due 2023 .........      32,000       32,000
                                       --------     --------
                                        268,550      268,550
                                       --------     --------
F-21
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8. LONG-TERM DEBT -- (CONTINUED)
AT DECEMBER 31,
                                                 ---------------------------
                                                     1998           1997
                                                 ------------   ------------
                                                       (IN THOUSANDS)
CILCO first mortgage bonds
 Unamortized premium and discount on long-term
   debt, net .................................         (666)          (714)
                                                       ----           ----
    Total CILCO ..............................     $267,884       $267,836
                                                   --------       --------
   CILCORP Inc. Unsecured medium-term notes;
    various maturities in 2001; interest rates
    ranging from 8.52% to 9.10% ..............       17,500         30,500
   Other .....................................          168            192
                                                   --------       --------
    Total long-term debt .....................     $285,552       $298,528
                                                   ========       ========
CILCO's  first mortgage bonds are secured by a lien on substantially all of
its   property  and  franchises.  Unamortized  borrowing  expense,  premium  and
discount  on  outstanding  long-term  debt are being amortized over the lives of
the respective issues.

     Total  consolidated  maturities  of  long-term  debt  for  2000-2003 are as
follows:  $30 million in 2000, $18 million in 2001, no debt due in 2002, and $25
million  in  2003.  The  remaining maturities of long-term debt of $214 million,
occur in 2004 and beyond.

     The  1999  and 1998 maturities of long-term borrowings have been classified
as current liabilities.

NOTE 9. COMMITMENTS & CONTINGENCIES

     CILCO's  1999  capital  expenditures  are  estimated to be $56.6 million in
connection  with  which  CILCO  has normal and customary purchase commitments at
December 31, 1998.

     CILCO  acts  as  a  self-insurer for certain insurable risks resulting from
employee health and life insurance programs.

     The  International  Brotherhood  of  Electrical  Workers  Local  51  (IBEW)
ratified  its  current  agreement  on  October 10, 1997. The contract expires on
July  1,  2000.  The  IBEW  represents  approximately 389 CILCO gas and electric
department  employees.  The  National  Conference  of Firemen and Oilers Local 8
(NCF&O)  ratified  its  current  contract  with the Company on October 23, 1998.
CILCO's  previous contract with the NCF&O expired on July 1, 1998, and the NCF&O
membership  had  been  working  without  a  contract  since  that  time. The new
contract  expires  on July 1, 2001. The NCF&O represents approximately 200 CILCO
power plant employees.

     In  August  1990,  CILCO  entered  into  a  firm,  wholesale power purchase
agreement  with  Central Illinois Public Service Company, now AmerenCIPS (CIPS).
This  agreement provided for a minimum contract delivery rate from CIPS of 90 MW
until the contract expired in May 1998.

     In  March  1995,  CILCO  and  CIPS  amended  a limited-term power agreement
reached  in  November  1992.  This  agreement,  which  now  expires in May 2009,
provides  for  CILCO  to  purchase up to 150 MW of CIPS' capacity from June 1998
through May 2002, and 50 MW from June 2002 through May 2009.

     In  January  1997,  CILCO  intervened  in  a  proceeding before the Federal
Energy  Regulatory  Commission (FERC) to raise contract issues relating to CIPS'
proposal  to  engage with a second utility in joint dispatch of their respective
generating  units.  CILCO  also  challenged the validity of the power agreements
with  CIPS  because  of CIPS' failure to obtain FERC approval of the agreements.
In  the  alternative,  CILCO requested that FERC provide an "open season" during
which  CILCO  may cancel the power agreements in whole or in part. In an October
1997  order,  FERC  rejected  CILCO's  challenges  to  joint dispatch and denied
CILCO's  request  for  an  open  season.  However,  CIPS was ordered to file the
agreements with FERC and, on its own motion, FERC initiated a separate

                                      F-22
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9. COMMITMENTS & CONTINGENCIES -- (CONTINUED)

proceeding  to  investigate  the  terms  of  the  agreements.  Hearings  in that
proceeding  have  concluded,  and  the  Administrative  Law Judge has entered an
order  finding  the  agreements are, with minor exceptions, just and reasonable.
CILCO  is  appealing  that  order  to  FERC  and  is  requesting  FERC to assess
penalties  against  CIPS  for  CIPS'  failure  to file the 1990 agreement before
providing  service  to  CILCO  under  that  agreement. FERC's October 1997 order
failed  to  address  certain  contract  issues  raised  by  CILCO.  FERC  denied
rehearing  of  that order in February 1998, and CILCO has appealed to the United
States  Court  of  Appeals  for the District of Columbia Circuit for a review of
FERC's  orders  concerning  the  CIPS  agreements.  CILCO  also filed a separate
complaint  at  FERC  in  December  1998, challenging the manner in which CIPS is
performing,  or  failing  to perform, under the agreements and has notified CIPS
that  CILCO  considers CIPS to be in default under the agreements. On the ground
that  CIPS  is  in default regarding performance under the 1992 agreement, CILCO
suspended  capacity  reservation  payments  to  CIPS  under the agreements as of
January  21,  1999.  CILCO  cannot predict how FERC or the Court will ultimately
rule  on  the  issues  pending before them. If CILCO's position is not upheld on
certain   issues,  CILCO  could  be  required  to  pay  the  suspended  capacity
reservation  charges  which  are currently $865,000 per month, plus interest, to
CIPS.  While  the capacity payments are suspended, CILCO is purchasing power and
energy from other sources.

     Reference  is  made  to  Management's  Discussion and Analysis of Financial
Condition  and  Results of Operations -- Environmental Matters (regarding former
gas manufacturing sites) for a discussion of that item.

NOTE 10. QST ENTERPRISES DISCONTINUED OPERATIONS

     Due  to  uncertainties  related  to energy deregulation across the country,
the  illiquidity  of  certain energy markets and its pending acquisition by AES,
the  Company  will  focus  in  the  future  on the opportunities in the Illinois
energy  market resulting from the deregulation of electricity under the Electric
Service   Customer  Choice  and  Rate  Relief  Law  of  1997  (see  Management's
Discussion  and  Analysis  --  Competition). As a result, the Company decided in
the  fourth  quarter  of  1998  to  sell  its  100%  ownership  interest  in QST
Environmental  Inc.,  a  first-tier  subsidiary  of  QST providing environmental
consulting  and  engineering services. In August 1998, QST sold its wholly-owned
fiber  optic-based  telecommunications  subsidiary,  QST Communications, for $20
million  cash and stock options valued at $5.5 million. Since incurring material
losses  in  the  wholesale electricity market in June 1998 and subsequent losses
in  its  energy  operations  outside of Illinois, QST Energy has transferred its
Pennsylvania  retail  customers  to  other  marketers,  ceased its Houston-based
energy  trading  operations,  and has begun an effort to negotiate an end to its
obligation  to  provide  electricity to its non-Illinois customers. Accordingly,
the   operations   of   QST  Enterprises  and  its  subsidiaries  are  shown  as
discontinued  operations  in  the statements of income. The Company's investment
in  QST  Enterprises,  as of December 31, 1998, on the accompanying consolidated
balance  sheet,  consists  primarily  of  $17.4 million in working capital, $6.9
million  in fixed assets and $6.3 million of investments and other assets. Prior
year  financial  statements,  which  also include the discontinued operations of
ESE  Land  Corporation  (sold  by  QST  Environmental in November 1997, for $9.5
million  and  residual  interests in three limited liability corporations), have
been reclassified to conform to the current year presentation.

NOTE 11. LEASES

     The  Company  and  its  subsidiaries lease certain equipment, buildings and
other  facilities  under  capital and operating leases. Several of the operating
leases  provide  that  the  Company  pay  taxes, maintenance and other occupancy
costs applicable to these premises.

     Minimum  future rental payments under non-cancellable capital and operating
leases  having  remaining  terms  in excess of one year as of December 31, 1998,
are  $19.9  million  in total. Payments due during the years ending December 31,
1999,  through  December 31, 2003, are $8.1 million, $5.6 million, $3.4 million,
$1.9 million and $.5 million, respectively.

                                      F-23
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12. FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT

     CILCORP  utilizes  commodity  futures  contracts,  options and swaps in the
normal  course  of  its  natural  gas  business activities. However, it does not
currently  utilize  these  instruments  to  hedge its electric purchase and sale
transactions  or  to  participate in energy trading activities. Gains and losses
arising  from  derivative  financial  instrument  transactions  which  hedge the
impact  of  fluctuations  in  energy  prices are recognized in income concurrent
with  the  related  purchases  and  sales  of  the  commodity.  If  a derivative
financial  instrument  contract  is  terminated  because  it  is probable that a
transaction  or  forecasted  transaction  will not occur, any gain or loss as of
such  date  is  immediately  recognized.  If  a  derivative financial instrument
contract  is terminated early for other economic reasons, any gain or loss as of
the  termination  date  is  deferred  and recorded concurrently with the related
purchase  and  sale  of  natural gas. CILCORP is subject to commodity price risk
for  deregulated  sales  to  the  extent  that  energy  is sold under firm price
commitments.  Due  to  market  conditions,  at  times CILCORP may have unmatched
commitments  to purchase and sell energy on a price and quantity basis. Physical
and  derivative financial instruments give rise to market risk, which represents
the  potential  loss  that  can  be  caused by a change in the market value of a
particular  commitment. Market risks are actively monitored to ensure compliance
with  the  Company's risk management policies, including limits to the Company's
total net exposure at any time.

     The  net  loss  reflected  in  operating  results from derivative financial
instruments  was  $2.2  million  for  the  year  1998.  As of December 31, 1998,
CILCORP  had fixed-price derivative financial instruments representing hedges of
natural  gas  purchases  of  5.6  Bcf  and  natural  gas  sales  of  7.2 Bcf for
commitments  through  September  1999. The net deferred loss and carrying amount
on  these  fixed-price  derivatives  at  December  31,  1998 was $.9 million. At
December   31,   1998,  CILCORP  had  open  positions  in  derivative  financial
instruments  used  to  hedge  basis  of  1.0 Bcf for commitments through October
1999.  The  net  deferred  loss on these basis derivatives at December 31, 1998,
was $.1 million.

NOTE 13. EARNINGS PER SHARE

     The  following  data  show the amounts used in computing earnings per share
and  the  effect on income and the weighted average number of shares of dilutive
potential  common  stock.  The  shares  calculated for dilutive potential result
from the CILCORP Shareholder Return Incentive Compensation Plan.
1998         1997
                                                             ----------   ----------
                                                                 (IN THOUSANDS)
Income available to common shareholders ..................    $16,310      $16,395
Weighted average number of common shares used in Basic
 Earnings Per Share ......................................     13,611       13,611
Weighted number of dilutive potential common stock used in
 Diluted Earnings Per Share ..............................         96           16
The  Company  adopted  Statement of Financial Accounting Standards No. 128,
Earnings   Per   Share,  beginning  with  the  year  ended  December  31,  1997.
Restatement  of  1996  is  not  applicable as no potential common stock dilution
occurred until 1997.

                                      F-24
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The  following  quarterly  operating  results  are  unaudited,  but, in the
opinion  of  management, include all adjustments (consisting of normal recurring
accruals)  necessary  for a fair presentation of the Company's operating results
for  the  periods  indicated.  The  results of operations for each of the fiscal
quarters  are not necessarily comparable to, or indicative of, the results of an
entire  year  due  to  the  seasonal  nature of the Company's business and other
factors.
FOR THE THREE MONTHS ENDED
                                                            -------------------------------------------------------------
                                                              MARCH 31        JUNE 30      SEPTEMBER 30      DECEMBER 31
                                                            ------------   ------------   --------------   --------------
                                                                       (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1998
 Revenue ................................................     $154,274       $121,435        $141,143        $  142,172
 Income from continuing operations before income
   taxes ................................................       17,566         10,254          29,020             1,077
 Income taxes ...........................................        6,250          2,519          10,983               (53)
 Net income from continuing operations ..................       11,316          7,735          18,037             1,130
 Loss from operations of discontinued business, net of
   tax of $(2,355), $(5,512), $(2,354), $(6,057).........       (3,622)        (8,423)         (3,620)           (9,360)
 Gain (loss) on sale/disposal of assets of discontinued
   business, net of tax of $5,425, $(3,411)..............           --             --           8,252            (5,135)
 Net income (loss) ......................................     $  7,694       $   (688)       $ 22,669        $  (13,365)
 Earnings per average common share--basic ...............
 Continuing operations ..................................     $   0.83       $   0.57        $   1.33        $     0.08
 Discontinued operations ................................       ( 0.27)        ( 0.62)           0.34            ( 1.06)
 Net income (loss) ......................................     $   0.56       $  (0.05)       $   1.67        $    (0.98)
 Earnings per average common share--diluted .............
 Continuing operations ..................................     $   0.83       $   0.56        $   1.32        $     0.08
 Discontinued operations ................................       ( 0.27)        ( 0.61)           0.34            ( 1.06)
 Net income (loss) ......................................     $   0.56       $  (0.05)       $   1.66        $    (0.98)
1997
 Revenue ................................................     $168,595       $113,610        $125,050        $  150,705
 Income from continuing operations before income
   taxes ................................................       16,793         10,889          23,966            14,410
 Income taxes ...........................................        5,254          3,559           8,858             4,678
 Net income from continuing operations before
   extraordinary item ...................................       11,539          7,330          15,108             9,732
 Loss from operations of discontinued business, net of
   tax of $(1,060), $(842), $(1,195), $(4,201)...........       (1,820)        (1,513)         (2,034)          (28,759)
 Gain on sale of assets of discontinued business, net
   of tax of $1,889......................................           --             --              --             2,712
 Extraordinary item .....................................           --             --              --             4,100
 Net income (loss) ......................................     $  9,719       $  5,817        $ 13,074        $  (12,215)
 Earnings per average common share--basic ...............
 Continuing operations ..................................     $   0.85       $   0.54        $   1.11        $     0.71
 Discontinued operations ................................       ( 0.14)        ( 0.11)         ( 0.15)           ( 1.91)
 Extraordinary item .....................................           --             --              --              0.30
 Net income (loss) ......................................     $   0.71       $   0.43        $   0.96        $    (0.90)
 Earnings per average common share--diluted .............
 Continuing operations ..................................     $   0.85       $   0.54        $   1.11        $     0.71
 Discontinued operations ................................       ( 0.14)        ( 0.11)         ( 0.15)           ( 1.91)
 Extraordinary item .....................................           --             --              --               .30
 Net income (loss) ......................................     $   0.71       $   0.43        $   0.96        $    (0.90)
F-25
CILCORP INC AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                                (IN THOUSANDS)*
                                  (UNAUDITED)
SIX MONTHS ENDED
                                                                               JUNE 30,
                                                                     -----------------------------
                                                                         1999            1998
                                                                     ------------   --------------
Revenue:
Electric utility .................................................     $169,006       $167,482
Gas utility ......................................................      102,366         98,212
Other businesses .................................................       17,133         10,382
                                                                       --------       --------
 Total ...........................................................      288,505        276,076
                                                                       --------       --------
Operating expenses:
Fuel for generation and purchased power ..........................       57,183         58,329
Gas purchased for resale .........................................       65,005         60,025
Other operations and maintenance .................................       73,724         62,001
Depreciation and amortization ....................................       34,481         31,966
Taxes, other than income taxes ...................................       20,916         19,305
                                                                       --------       --------
 Total ...........................................................      251,309        231,626
                                                                       --------       --------
Fixed charges and other:
Interest expense .................................................       14,340         14,625
Preferred stock dividends of subsidiary ..........................        1,570          1,599
Allowance for funds used during construction .....................          (26)            (6)
Other ............................................................          506            412
                                                                       --------       --------
 Total ...........................................................       16,390         16,630
                                                                       --------       --------
Income from continuing operations before income taxes ............       20,806         27,820
Income taxes .....................................................        7,115          8,769
                                                                       --------       --------
Net income from continuing operations ............................       13,691         19,051
Loss from operations of discontinued business, net of tax of
 $(221) and $(7,867)..............................................         (407)       (12,045)
                                                                       --------       --------
Net income (loss) ................................................     $ 13,284       $  7,006
                                                                       ========       ========
Average common shares outstanding - basic ........................       13,611         13,611
Earnings per common share--basic Continuing operations ...........     $   1.01       $   1.40
Discontinued operations ..........................................       (  .03)          (.89)
                                                                       --------       --------
Net income per common share--basic ...............................     $    .98       $    .51
                                                                       ========       ========
Average common shares outstanding - diluted ......................       13,752         13,690
Earnings per common share--diluted Continuing operations .........     $   1.00       $   1.39
Discontinued operations ..........................................       (  .03)          (.88)
                                                                       --------       --------
Net income per common share--diluted .............................     $    .97       $    .51
                                                                       ========       ========
Dividends per common share .......................................     $   1.23       $   1.23
                                                                       ========       ========
----------
*Except per share amounts

The  accompanying notes to the Consolidated Financial Statements are an integral
                           part of these statements.

                                      F-26
CILCORP INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)
JUNE 30,      DECEMBER 31,
                                                               ------------   -------------
                                                                   1999            1998
                                                               ------------   -------------
                                                                       (UNAUDITED)
ASSETS
Current assets:
 Cash and temporary cash investments .......................   $    3,541      $    1,669
Receivables, less reserves of $1,657 and $3,411.............       68,405         134,548
Accrued unbilled revenue ...................................       27,800          39,339
Fuel, at average cost ......................................        9,049          13,431
Materials and supplies, at average cost ....................       16,444          15,435
Gas in underground storage, at average cost ................       12,478          20,494
Prepayments and other ......................................        8,639           7,646
                                                               ----------      ----------
 Total current assets ......................................      146,356         232,562
                                                               ----------      ----------
Investments and other property:
Investment in leveraged leases .............................      143,297         146,977
Cash surrender value of company-owned life insurance, net of
 related policy loans of $51,871 and $48,132................        2,362           2,655
Other investments ..........................................       21,698          16,882
                                                               ----------      ----------
 Total investments and other property ......................      167,357         166,514
                                                               ----------      ----------
Property, plant and equipment:
Utility plant, at original cost
Electric ...................................................    1,245,551       1,237,885
Gas ........................................................      420,812         417,585
                                                               ----------      ----------
                                                                1,666,363       1,655,470
Less -- accumulated provision for depreciation .............      846,954         812,630
                                                               ----------      ----------
                                                                  819,409         842,840
Construction work in progress ..............................       45,576          30,075
Other, net of depreciation .................................          610           7,755
                                                               ----------      ----------
 Total property, plant and equipment .......................      865,595         880,670
                                                               ----------      ----------
Other assets ...............................................       23,327          33,194
                                                               ----------      ----------
 Total assets ..............................................   $1,202,635      $1,312,940
                                                               ==========      ==========
The  accompanying Notes to the Consolidated Financial Statements are an integral
                         part of these Balance Sheets.

                                      F-27
CILCORP INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)
JUNE 30,       DECEMBER 31,
                                                             --------------   -------------
                                                                  1999             1998
                                                             --------------   -------------
                                                                      (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................     $   43,000      $   13,027
Notes payable ............................................         73,300          96,200
Accounts payable .........................................         52,276         128,845
Accrued taxes ............................................          5,031           8,262
Accrued interest .........................................          9,386           9,994
FAC/PGA over-recoveries ..................................            367             304
Other ....................................................          4,519          14,316
                                                               ----------      ----------
 Total current liabilities ...............................        187,879         270,948
                                                               ----------      ----------
Long-term debt ...........................................        257,168         288,135
                                                               ----------      ----------
Deferred credits and other liabilities:
Accumulated deferred income taxes ........................        240,446         239,305
Regulatory liability of regulated subsidiary .............         41,302          46,346
Deferred investment tax credits ..........................         18,654          19,450
Other ....................................................         58,370          47,098
                                                               ----------      ----------
 Total deferred credits and other liabilities ............        358,772         352,199
                                                               ----------      ----------
Preferred stock of subsidiary ............................         66,120          66,120
                                                               ----------      ----------
Stockholders' equity:
Common stock, no par value; authorized 50,000,000 shares--
 outstanding 13,610,680 shares ...........................        192,853         192,853
Retained earnings ........................................        140,688         143,530
Accumulated other comprehensive income ...................           (845)           (845)
                                                               ----------      ----------
 Total stockholders' equity ..............................        332,696         335,538
                                                               ----------      ----------
 Total liabilities and stockholders' equity ..............     $1,202,635      $1,312,940
                                                               ==========      ==========
The  accompanying Notes to the Consolidated Financial Statements are an integral
                         part of these Balance Sheets.

                                      F-28
CILCORP INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
                                  (UNAUDITED)
SIX MONTHS ENDED
                                                                                                JUNE 30,
                                                                                        -------------------------
                                                                                            1999          1998
                                                                                        -----------   -----------
Cash flows from operating activities:
Net income before preferred dividends ...............................................    $  15,261     $  20,650
                                                                                         ---------     ---------
Adjustments to reconcile net income to net cash provided by operating activities:
 Non-cash lease income and investment income ........................................       (3,299)       (3,415)
 Cash receipts in excess of debt service on leases ..................................        7,326         5,650
 Depreciation and amortization ......................................................       34,481        31,966
 Deferred income taxes, investment tax credit and regulatory liability of
   subsidiary, net ..................................................................       (8,748)       (4,094)
Changes in operating assets and liabilities:
 Decrease in accounts receivable and accrued unbilled revenue .......................        7,719        21,343
 Decrease in inventories ............................................................       11,374         8,501
 Decrease in accounts payable .......................................................      (20,337)      (22,702)
 Increase in accrued taxes ..........................................................          934         2,630
 Decrease (increase) in other assets ................................................        1,700          (512)
 Increase (decrease) in other liabilities ...........................................        8,339        (1,469)
                                                                                         ---------     ---------
 Total adjustments ..................................................................       39,489        37,898
                                                                                         ---------     ---------
 Net cash provided by operating activities from continuing operations ...............       54,750        58,548
                                                                                         ---------     ---------
 Net cash provided (used) by operating activities of discontinued operations ........        8,112        (8,738)
                                                                                         ---------     ---------
 Cash flow from operations ..........................................................       62,862        49,810
                                                                                         ---------     ---------
Cash flows from investing activities:
 Additions to plant .................................................................      (27,311)      (29,871)
 Proceeds from sale of discontinued operations ......................................       17,376            --
 Other ..............................................................................       (4,012)         (909)
                                                                                         ---------     ---------
 Net cash used by investing activities from continuing operations ...................      (13,947)      (30,780)
                                                                                         ---------     ---------
 Net cash used by investing activities from discontinued operations .................       (4,838)       (5,359)
                                                                                         ---------     ---------
 Cash flow from investing activities ................................................      (18,785)      (36,139)
                                                                                         ---------     ---------
Cash flow from financing activities:
Net (decrease) increase in short-term debt ..........................................      (22,900)        2,350
Net decrease in long-term debt ......................................................         (994)       (2,117)
Common dividends paid ...............................................................      (16,741)      (16,742)
Preferred dividends paid ............................................................       (1,570)       (1,599)
                                                                                         ---------     ---------
 Cash flow from financing activities ................................................      (42,205)      (18,108)
                                                                                         ---------     ---------
Net increase (decrease) in cash and temporary cash investments ......................        1,872        (4,437)
Cash and temporary cash investments at beginning of year ............................        1,669        10,576
                                                                                         ---------     ---------
Cash and temporary cash investments at June 30 ......................................    $   3,541     $   6,139
                                                                                         =========     =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................................    $  13,832     $  13,613
Income taxes ........................................................................    $  10,872     $   7,068
The  accompanying Notes to the Consolidated Financial Statements are an integral
                           part of these statements.

                                      F-29
STATEMENTS OF SEGMENTS OF BUSINESS
                         CILCORP INC. AND SUBSIDIARIES
SIX MONTHS ENDED JUNE 30, 1999
                                          ------------------------------------------------------------------------------------
                                              CILCO         CILCO          CILCO          OTHER        DISCONT.
                                            ELECTRIC         GAS           OTHER       BUSINESSES     OPERATNS.       TOTALS
                                          ------------   -----------   ------------   ------------   -----------   -----------
                                                                             (IN THOUSANDS)
Revenues ..............................     $169,006      $102,366       $  1,729       $ 15,235       $    --      $288,336
Interest income .......................           --            --            113             56            --           169
                                            --------      --------       --------       --------       -------      --------
    Total .............................      169,006       102,366          1,842         15,291            --       288,505
                                            --------      --------       --------       --------       -------      --------
Operating expenses ....................      120,487        79,013          3,161         14,167            --       216,828
Depreciation and amortization .........       23,786        10,175            432             88            --        34,481
                                            --------      --------       --------       --------       -------      --------
    Total .............................      144,273        89,188          3,593         14,255            --       251,309
                                            --------      --------       --------       --------       -------      --------
Interest expense ......................        8,233         3,265             --          2,842            --        14,340
Preferred stock dividends .............           --            --          1,570             --            --         1,570
Fixed charges and other expenses.......          (26)           --            506             --            --           480
                                            --------      --------       --------       --------       -------      --------
    Total .............................        8,207         3,265          2,076          2,842            --        16,390
                                            --------      --------       --------       --------       -------      --------
Income from continuing oper.
 before income taxes ..................       16,526         9,913         (3,827)        (1,806)           --        20,806
Income taxes ..........................        5,315         4,044         (1,367)          (877)           --         7,115
                                            --------      --------       --------       --------       -------      --------
Net income from continuing
 operations ...........................       11,211         5,869         (2,460)          (929)           --        13,691
                                            --------      --------       --------       --------       -------      --------
Effect of discontinued operations .....           --            --             --             --          (407)         (407)
                                            --------      --------       --------       --------       -------      --------
Segment net income ....................     $ 11,211      $  5,869       $ (2,460)      $   (929)      $  (407)     $ 13,284
                                            ========      ========       ========       ========       =======      ========
SIX MONTHS ENDED JUNE 30, 1998
                                        -----------------------------------------------------------------------------
                                             CILCO        CILCO       CILCO        OTHER       DISCONT.
                                           ELECTRIC        GAS        OTHER     BUSINESSES    OPERATNS.      TOTALS
                                        -------------- ----------- ----------- ------------ ------------- -----------
                                                                       (IN THOUSANDS)
Revenues ..............................    $167,482     $ 98,212    $    355     $  9,780     $      --    $ 275,829
Interest income .......................          --           --         191           56            --          247
                                           --------     --------    --------     --------     ---------    ---------
    Total .............................     167,482       98,212         546        9,836            --      276,076
                                           --------     --------    --------     --------     ---------    ---------
Operating expenses ....................     112,626       76,816       1,553        8,665            --      199,660
Depreciation and amortization .........      22,436        9,073         356          101            --       31,966
                                           --------     --------    --------     --------     ---------    ---------
    Total .............................     135,062       85,889       1,909        8,766            --      231,626
                                           --------     --------    --------     --------     ---------    ---------
Interest expense ......................       8,038        3,204          --        3,383            --       14,625
Preferred stock dividends .............          --           --       1,599           --            --        1,599
Fixed charges and other expenses.......          (6)          --         412           --            --          406
                                           --------     --------    --------     --------     ---------    ---------
    Total .............................       8,032        3,204       2,011        3,383            --       16,630
                                           --------     --------    --------     --------     ---------    ---------
Income from continuing oper.
 before income taxes ..................      24,388        9,119      (3,374)      (2,313)           --       27,820
Income taxes ..........................       8,181        3,645      (1,339)      (1,718)           --        8,769
                                           --------     --------    --------     --------     ---------    ---------
Net income from continuing
 operations ...........................      16,207        5,474      (2,035)        (595)           --       19,051
                                           --------     --------    --------     --------     ---------    ---------
Effect of discontinued operations .....          --           --          --           --       (12,045)     (12,045)
                                           --------     --------    --------     --------     ---------    ---------
Segment net income ....................    $ 16,207     $  5,474    $ (2,035)    $   (595)    $ (12,045)   $   7,006
                                           ========     ========    ========     ========     =========    =========
F-30
CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE 1. INTRODUCTION

     The  consolidated financial statements include the accounts of CILCORP Inc.
(CILCORP  or  the  Holding Company), Central Illinois Light Company (CILCO), QST
Enterprises  Inc. (QST) and its subsidiaries (QST Environmental Inc., QST Energy
Inc.   (QST   Energy)  and  CILCORP  Infraservices  Inc.)  and  CILCORP's  other
subsidiaries  (collectively,  the  Company)  after  elimination  of  significant
intercompany  transactions.  The  consolidated  financial  statements  of  CILCO
include  the  accounts  of  CILCO  and  its  subsidiaries, CILCO Exploration and
Development  Company  and  CILCO  Energy  Corporation.  CILCORP owns directly or
indirectly  100%  of  the  common  stock  of its first-tier subsidiaries. In the
fourth  quarter  of  1998, the operations of QST and its subsidiaries (excluding
ESE   Land   Corporation  and  CILCORP  Infraservices  Inc.--  see  Management's
Discussion  and  Analysis)  were  discontinued (see Note 4.) and, therefore, are
being  reported  as  discontinued  operations  in  the financial statements. QST
completed  the  sale  of subsidiary QST Environmental Inc. in the second quarter
of  1999  (see Results of Operations-- QST Enterprises Discontinued Operations).
Prior  year  amounts  have been reclassified on a basis consistent with the 1999
presentation.

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared  according  to the rules and regulations of the Securities and Exchange
Commission  (SEC).  Although  CILCORP  believes  the disclosures are adequate to
make  the  information  presented  not  misleading, these consolidated financial
statements  should  be  read along with the Company's 1998 Annual Report on Form
10-K.

     In  the  Company's opinion, the consolidated financial statements furnished
reflect  all  normal and recurring adjustments necessary for a fair presentation
of  the  results  of operations for the periods presented. Operating results for
interim  periods  are  not  necessarily  indicative  of  operating results to be
expected for the year or of the Company's future financial condition.

NOTE 2. CONTINGENCIES

GAS MANUFACTURING PLANT SITES

     CILCO   continues   to   investigate   and/or   monitor   four  former  gas
manufacturing  plant sites located within CILCO's present gas service territory.
The   purpose  of  the  investigations  is  to  determine  if  waste  materials,
principally  coal  tar,  are present, whether such waste materials constitute an
environmental  or health risk and if CILCO is responsible for the remediation of
any remaining waste materials at those sites.

     During  the  six  months  ended  June  30,  1999,  CILCO paid approximately
$362,000  to outside parties for former gas manufacturing plant site monitoring,
remediation  and  legal fees, and expects to spend approximately $250,000 during
the  remainder  of 1999. A $1.5 million liability and a corresponding regulatory
asset  are  recorded  on  the  Balance Sheets representing the minimum amount of
coal  tar investigation and remediation costs CILCO expects to incur and recover
in  the  future. Coal tar remediation costs incurred through June 1999 have been
deferred on the Balance Sheets, net of amounts recovered from customers.

     Through  June  30,  1999, CILCO has recovered approximately $6.6 million in
coal  tar remediation costs from its customers through a gas rate rider approved
by  the  Illinois  Commerce  Commission  (ICC).  Currently,  that  rider  allows
recovery  of  prudently incurred coal tar remediation costs in the year that the
expenditures  occur.  Under  these  circumstances,  management believes that the
cost  of coal tar remediation will not have a material adverse effect on CILCO's
financial position or results of operations.

CILCO'S UNION CONTRACTS

     The  International  Brotherhood  of  Electrical  Workers  Local  51  (IBEW)
ratified  its  current  agreement  on  October 10,  1997.  The  current contract
expires  on  July 1,  2000.  The IBEW represents approximately 389 CILCO gas and
electric  department  employees.  The  National Conference of Firemen and Oilers
Local  8  (NCF&O),  ratified  its  current  agreement  on  October 23, 1998. The
current  contract  expires  on  July 1, 2001. The NCF&O represents approximately
159 CILCO power plant employees.

                                      F-31
NOTE 3. COMMITMENTS

     In  August  1990,  CILCO  entered  into  a  firm,  wholesale power purchase
agreement  with  Central Illinois Public Service Company, now AmerenCIPS (CIPS).
This  agreement provided for a minimum contract delivery rate from CIPS of 90 MW
until the contract expired in May 1998.

     In  March  1995,  CILCO  and  CIPS  amended  a limited-term power agreement
reached  in  November 1992. This agreement provided for CILCO to purchase 150 MW
of  CIPS'  capacity  from  June  1998 through May 2002, and 50 MW from June 2002
through May 2009.

     In  May  1999,  a  settlement  was reached between CILCO and CIPS regarding
disputed  issues  pertaining  to  these  capacity  and  energy  agreements.  The
settlement  amends the previous agreements to provide for 100 MW of capacity and
firm  energy for the months of June through September for the years 2000 through
2003  and  additionally  provide  for  100  MW  of  firm energy for the month of
January  in  each  of those years. There are no commitments to purchase capacity
or  energy  beyond  those  dates.  The  agreements  provide  specific prices for
on-peak  and  off-peak  energy,  which eliminates the ambiguity that arose under
the  old  agreements  due  to  the  use of pricing queues. Under the settlement,
CILCO  will  have  no  capacity payment obligations to CIPS for February through
December  1999,  resulting in 1999 capacity reservation savings of approximately
$6  million.  The  settlement  also  obligates  both  parties  to  withdraw from
regulatory  action  pertaining  to  related  contract issues. CIPS and CILCO are
currently preparing the settlement document filing for approval by the FERC.

NOTE 4. QST ENTERPRISES DISCONTINUED OPERATIONS

     Due  to  uncertainties  related  to energy deregulation across the country,
the  illiquidity of certain energy markets and the Company's pending acquisition
by  AES,  the  Company  intends  to  focus  on the opportunities in the Illinois
energy  market resulting from the deregulation of electricity under the Electric
Service   Customer  Choice  and  Rate  Relief  Law  of  1997  (see  Management's
Discussion  and  Analysis--  Illinois  Electric  Deregulation). As a result, the
Company  decided  in  the  fourth  quarter  of  1998  to sell its 100% ownership
interest  in QST Environmental Inc. (QST Environmental), a first-tier subsidiary
of  QST  Enterprises  Inc.  providing  environmental  consulting and engineering
services.  On  May  7,  1999, QST Enterprises Inc. signed a definitive agreement
for  the  sale  of  QST  Environmental to MACTEC, Inc., a privately-held company
which  provides environmental management services, for approximately $18 million
in  cash,  which  was  received  by  QST  Enterprises Inc. on June 24, 1999, the
effective  date  of  the  sale.  In  August  1998, QST Enterprises Inc. sold its
wholly-owned    fiber    optic-based    telecommunications    subsidiary,    QST
Communications,  for  $20  million  cash  and  stock options then valued at $5.5
million.  After incurring material losses in the wholesale electricity market in
June  1998  and  subsequent losses in its energy operations outside of Illinois,
QST  Energy  transferred  its  Pennsylvania retail customers to other marketers,
ceased  its  Houston-based  energy  trading  operations,  and has terminated its
obligations  to  provide electricity to its non-Illinois customers. Accordingly,
the  operations  of  QST  Enterprises  Inc.  and  its  subsidiaries are shown as
discontinued  operations  in  the statements of income. The Company's investment
in  QST  Enterprises Inc. (excluding CILCORP Infraservices Inc.), as of June 30,
1999,  on  the  accompanying  consolidated  balance sheet, consists primarily of
$1.7  million  in working capital, $.2 million in fixed assets and $11.2 million
of   investments   and   other   assets.  Working  capital  consists  mainly  of
$1.7 million  in  receivables  (see  QST  Enterprises  Discontinued  Operations)
offset  by $16.6 million in outstanding debt to the Holding Company. Investments
and  other  assets  consists  primarily of a $5.5 million investment in ESE Land
Corporation  (ESE  Land)  and $5.5 million of stock options obtained in the sale
of  QST  Communications.  The  investment  in  ESE  Land  consists  of  residual
interests  in  three limited liability corporations obtained as part of the sale
of  ESE  Land  assets  in  fourth  quarter  1997.  QST  Environmental's residual
investment  in  ESE  Land  was  transferred to QST Enterprises Inc. prior to the
sale   of   QST   Environmental.  Prior  year  financial  statements  have  been
reclassified to conform to the current year presentation.

NOTE 5. FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT

     CILCORP  utilizes  commodity  futures  contracts,  options and swaps in the
normal  course  of  its  natural gas and electric business activities. Gains and
losses  arising  from  derivative  financial instrument transactions which hedge
the  impact of fluctuations in energy prices are recognized in income concurrent

                                      F-32
NOTE 5. FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT-- (CONTINUED)

with  the  related  purchases  and  sales  of  the  commodity.  If  a derivative
financial  instrument  contract  is  terminated  because  it  is probable that a
transaction  or  forecasted  transaction  will not occur, any gain or loss as of
such  date  is  immediately  recognized.  If  a  derivative financial instrument
contract  is terminated early for other economic reasons, any gain or loss as of
the  termination  date  is  deferred  and recorded concurrently with the related
purchase  and  sale  of  natural gas. CILCORP is subject to commodity price risk
for  deregulated  sales  to  the  extent  that  energy  is sold under firm price
commitments.  Due  to  market  conditions,  at  times CILCORP may have unmatched
commitments  to purchase and sell energy on a price and quantity basis. Physical
and  derivative financial instruments give rise to market risk, which represents
the  potential  loss  that  can  be  caused by a change in the market value of a
particular  commitment. Market risks are actively monitored to ensure compliance
with  the  Company's risk management policies, including limits to the Company's
total net exposure at any time.

     The  net  gain  reflected  in  operating  results from derivative financial
instruments  was  approximately $415,000 for the second quarter 1999. As of June
30,  1999, CILCORP had fixed-price derivative financial instruments representing
hedges  of  natural gas purchases of .5 Bcf and natural gas sales of 1.6 Bcf for
commitments  through  September  2000. The net deferred gain and carrying amount
on  these  fixed-price derivatives at June 30, 1999, was approximately $571,600.
At   June 30,   1999,   CILCORP  had  open  positions  in  derivative  financial
instruments  used  to hedge basis of 1.4 Bcf for commitments through March 2000.
The  net  deferred  gain  on  these  basis  derivatives  at  June 30,  1999, was
approximately  $30,500.  As of June 30, 1999, CILCORP had fixed-price derivative
financial   instruments   representing   hedges   of  electricity  purchases  of
49,312 MWh  and  electricity  sales  of  3,680 MWh  for commitments through June
2000.   The   net  deferred  loss  and  carrying  amount  on  these  fixed-price
derivatives at June 30, 1999, was approximately $132,400.

NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS

     In  June  1998, the FASB issued Statement of Financial Accounting Standards
No. 133,  "Accounting  for  Derivative Instruments and Hedging Activities" (SFAS
133).   The   statement  establishes  accounting  and  reporting  standards  for
derivative  instruments  and  for hedging activities. It requires that an entity
recognize  all  derivatives  as either assets or liabilities in the statement of
financial  position and measure those instruments at fair value. As issued, SFAS
133  is  effective  for all fiscal quarters of fiscal years beginning after June
15, 1999.

     In  June  1999, the FASB issued Statement of Financial Accounting Standards
No. 137,   "Accounting  for  Derivative  Instruments  and  Hedging  Activities--
Deferral  of  the Effective Date of FASB Statement No. 133" (SFAS 137). SFAS 137
amends  SFAS  133  to require implementation of SFAS 133 for all fiscal quarters
of fiscal years beginning after June 15, 2000.

     The  Company  has  not  yet adopted SFAS 133 and has not yet determined its
effect  on  the  Company's  financial  position,  results  of operations or cash
flows.

NOTE 7. EARNINGS PER SHARE

     The  following  data  show the amounts used in computing earnings per share
and  the  effect on income and the weighted average number of shares of dilutive
potential  common  stock.  The  shares  calculated for dilutive potential result
from  Award  Agreements  entered into pursuant to the CILCORP Shareholder Return
Incentive Compensation Plan.
SIX MONTHS ENDED
                                                                     JUNE 30,
                                                              -----------------------
                                                                 1999         1998
                                                              ----------   ----------
                                                                  (IN THOUSANDS)
Income available to common shareholders ...................    $13,284      $ 7,006
Weighted average number of common shares
 used in Basic Earnings Per Share .........................     13,611       13,611
Weighted number of dilutive potential common shares used in
 Diluted Earnings Per Share ...............................        141           79
The  Company  adopted  Statement of Financial Accounting Standards No. 128,
Earnings Per Share, for the year ended December 31, 1997.

                                      F-33
INDEX TO UNAUDITED PRO FORMA FINANCIAL DATA
PAGE
                                                                                     NO.
                                                                                    -----
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA:
   Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1999 .    P-3
   Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Six
    Months Ended June 30, 1999 ..................................................    P-4
   Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year
    Ended December 31, 1998 ..................................................       P-5
   Notes to Unaudited Pro Forma Condensed Consolidated Financial Data ...........    P-6
P-1
The following  unaudited pro forma  condensed  consolidated  financial  data are
based on the historical consolidated financial statements of The AES Corporation
and its  subsidiaries  (the Company) and the historical  consolidated  financial
statements of CILCORP Inc. and its subsidiaries (CILCORP) after giving effect on
a pro forma  basis to the  acquisition  of  CILCORP  through a merger  between a
wholly-owned  subsidiary  of AES  and  CILCORP.  This  data  should  be  read in
conjunction with the historical  consolidated  financial statements and notes to
those financial statements of AES and CILCORP.

The unaudited pro forma condensed consolidated  statements of operations for the
year ended  December 31, 1998 and the six months ended June 30, 1999 present the
results of the Company and CILCORP as if the  acquisition had occurred as of the
beginning of the earliest period presented. The accompanying unaudited pro forma
condensed  consolidated balance sheet as of June 30, 1999 presents the financial
position of the Company and CILCORP as if the  acquisition  had occurred on that
date.

The pro  forma  adjustments  are  based on  preliminary  estimates,  information
currently  available  and  certain  assumptions  that  management  believes  are
reasonable under the circumstances. The actual consolidated financial statements
will  reflect the effects of the merger on and after the  effective  date of the
merger rather than the dates indicated  above. The unaudited pro forma condensed
consolidated  financial data neither purport to represent what the  consolidated
results of operations or financial  condition  actually  would have been had the
acquisition and related  transactions in fact occurred on the assumed dates, nor
to project the consolidated results of operations and financial position for any
future period.

The acquisition will be accounted for by the purchase method and, therefore, the
assets and  liabilities  of CILCORP will be recorded at their fair  values.  The
excess of the purchase  price over the fair value of net assets  acquired at the
effective  date of the  acquisition  will be recorded as  goodwill.  Allocations
included in the pro forma  financial  data are based on an analysis which is not
yet  completed.  Accordingly,  the  final  value of the  purchase  price and its
allocation may differ, perhaps significantly,  from the amounts included in this
pro forma financial data.

                                      P-2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1999
                                                                                            (in millions)
                                                                        ------------------------------------------------------------
                                                                                                             Proforma
                                                                                                         Adjustments for
                                                                                                         the Acquisition
                                                                                                       (Notes 1, 2, 3, 4
                                                                             AES        CILCORP, Inc.        and 5)        Pro Forma
                                                                        -------------   -------------  ------------------  ---------
Assets
Current Assets:
  Cash, cash equivalents and short-term investments                     $      422       $      4       $       14         $   440
  Accounts receivables, less provision to reduce contract receivables          438             68               --             506
  Accrued unbilled revenue                                                      --             28               --              28
  Inventory                                                                    123             38               --             161
  Prepaid expenses and other current assets                                    288              8               --             296
                                                                        ----------       --------       ----------         -------
  Total current assets                                                       1,271            146               14           1,431
Property, Plant and Equipment:
  Property, plant and equipment, at cost                                     5,958          1,667             (847)          6,778
  Accumulated depreciation and amortization                                   (626)          (847)             847            (626)
  Construction work in progress and other                                      974             46               --           1,020
                                                                        ----------       --------       ----------         -------
  Property, plant & equipment, net                                           6,306            866               --           7,172
Other Assets:
  Investments in and advances to affiliates                                  1,721            165               --           1,886
  Electricity sales concessions and contracts                                  993             --               --             993
  Goodwill                                                                      67             --              571             638
  Other assets                                                                 879             26                6             911
                                                                        ----------       --------       ----------         -------
  Total other assets                                                         3,660            191              577           4,428
                                                                        ----------       --------       ----------         -------
Total                                                                   $   11,237       $  1,203       $      591         $13,031
                                                                        ==========       ========       ==========         =======
Liabilities and Stockholders' Equity
Current Liabilities:
  Accounts payable                                                      $      237       $     52       $       --         $   289
  Accrued interest and other liabilities                                       377             19               14             410
  Project financing debt - current portion                                     676            117              (27)            766
                                                                        ----------       --------       ----------         -------
  Total current liabilities                                                  1,290            188              (13)          1,465
Long-Term Liabilities:
  Project financing debt                                                     4,651            257              475           5,383
  Other notes payable                                                        2,009             --               --           2,009
  Deferred credits and other liabilities                                       450            359               --             809
                                                                        ----------       --------       ----------         -------
  Total long-term liabilities                                                7,110            616              475           8,201
                                                                        ----------       --------       ----------         -------
Minority Interest                                                              773             --               --             773
Company-obligated Mandatorily Redeemable Convertible
Preferred Securities of Subsidiary Trusts Holding Solely
Junior Subordinated Debentures of The AES Corporation                          550             --               --             550
Preferred Stock of Subsidiary                                                   --             66               --              66
Stockholders'  Equity:
  Common stock                                                                   2            193             (193)              2
  Additional paid-in capital                                                 1,757             --              462           2,219
  Retained earnings                                                            950            141             (141)            950
  Accumulated other comprehensive loss                                      (1,195)            (1)               1          (1,195)
                                                                        ----------       --------       ----------         -------
  Total stockholders' equity                                                 1,514            333              129           1,976
                                                                        ----------       --------       ----------         -------
Total                                                                   $   11,237       $  1,203       $      591         $13,031
                                                                        ==========       ========       ==========         =======
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
                 Data are an integral part of these statements.

                                      P-3
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999
                                                                                    (in millions, except per share amounts)
                                                                         -----------------------------------------------------------
                                                                                                            Proforma
                                                                                                         Adjustments for
                                                                                                         the Acquisition
                                                                                                       (Notes 1, 2, 3 and
                                                                             AES        CILCORP, Inc.         4)           Pro Forma
                                                                         -----------    -------------  ------------------  ---------
Revenues:
Sales and services                                                       $ 1,278          $   288          $    --          $ 1,566

Operating costs and expenses:
Cost of sales and services                                                   830              248               --            1,078
Selling, general and administrative expenses                                  31                3                7               41
                                                                         -------          -------          -------          -------
Total operating costs and expenses                                           861              251                7            1,119
                                                                         -------          -------          -------          -------
Operating Income (Loss)                                                      417               37               (7)             447

Other income and (expense):
Interest expense                                                            (276)             (16)             (20)            (312)
Interest and other income                                                     33                2               --               35
Preferred stock dividend of subsidiary                                        --               (2)              --               (2)
Foreign currency transaction loss                                             (2)              --               --               (2)
Equity in loss of affiliates before income taxes                             (54)              --               --              (54)
                                                                         -------          -------          -------          -------
Income (loss) before income taxes and minority
interest                                                                     118               21              (27)             112

Income tax provision (benefit)                                                28                7               (8)              27
Minority interest                                                             32               --               --               32
                                                                         -------          -------          -------          -------
Net income (loss) from continuing operations                             $    58          $    14          $   (19)         $    53
                                                                         =======          =======          =======          =======

Earnings per share from continuing operations --
Basic                                                                    $  0.31                                            $  0.28
Diluted                                                                     0.31                                               0.28

Weighted  average  common  shares  and potential common
shares used  in the calculation of
earnings per share --
Basic                                                                      184.1                                              191.6
Diluted                                                                    188.6                                              196.1
The accompanying Notes to Unaudited Pro Forma Condensed
     Consolidated Financial Data are an integral part of these statements.

                                      P-4
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
                                                                                       (in millions, except per share amounts)
                                                                         -----------------------------------------------------------
                                                                                                            Proforma
                                                                                                         Adjustments for
                                                                                                         the Acquisition
                                                                                                       (Notes 1, 2, 3 and
                                                                             AES        CILCORP, Inc.         4)           Pro Forma
                                                                         -----------    -------------  ------------------  ---------
Revenues:
Sales and services                                                       $ 2,398          $   559          $    --          $ 2,957

Operating costs and expenses:
Cost of sales and services                                                 1,587              458               --            2,045
Selling, general and administrative expenses                                  56                9               14               79
Provision for contract receivables                                            22               --               --               22
                                                                         -------          -------          -------          -------
Total operating costs and expenses                                         1,665              467               14            2,146
                                                                         -------          -------          -------          -------
Operating Income (Loss)                                                      733               92              (14)             811

Other income and (expense):
Interest expense                                                            (485)             (33)             (39)            (557)
Interest and other income                                                     67                2               --               69
Preferred stock dividend of subsidiary                                        --               (3)              --               (3)
Foreign currency transaction loss                                             (1)              --               --               (1)
Equity in earnings of affiliates before income taxes                         232               --               --              232
                                                                         -------          -------          -------          -------
Income (loss) before income taxes and minority
interest                                                                     546               58              (53)             551

Income tax provision (benefit)                                               145               20              (15)             150
Minority interest                                                             94               --               --               94
                                                                         -------          -------          -------          -------
Net income (loss) from continuing operations                             $   307          $    38          $   (38)         $   307
                                                                         =======          =======          =======          =======

Earnings per share from continuing operations --
Basic                                                                    $  1.73                                            $  1.66
Diluted                                                                     1.67                                               1.61

Weighted average common shares and potential common
shares used  in the
calculation of earnings per share --
Basic                                                                      177.5                                              185.0
Diluted                                                                    189.0                                              196.5
The accompanying Notes to Unaudited Pro Forma Condensed
     Consolidated Financial Data are an integral part of these statements.

                                      P-5
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

The Unaudited Pro Forma Condensed  Consolidated  Financial Data are based on the
following assumptions:

(1)  The purchase price of approximately $904 million will be funded through the
     issuance  of $475  million  of  project  financing  debt  with an  expected
     interest  rate of 8.25% and through the  issuance of 7.0 million  shares of
     AES common stock. An additional 0.5 million shares of AES common stock will
     be issued to repay $27 million of CILCORP's current debt outstanding and to
     pay $6.0 million of costs related to the issuance of the project  financing
     debt.  The net  proceeds  from the  issuance  of the AES  common  stock are
     assumed  to be $462  million  (based  on a  closing  price  of  $63.625  on
     September 24, 1999).  The acquisition  will be accounted for as a purchase.
     The purchase  price  allocation  has been prepared on a  preliminary  basis
     pending  completion  of  engineering,  environmental,  legal and  valuation
     analyses, all of which are ongoing. The preliminary  adjustments which have
     been made to the assets and liabilities of CILCORP to reflect the effect of
     the acquisition are as follows (in millions):

          Goodwill...................................       $571
          Merger-related personnel costs ............         14

(2)  Goodwill will be amortized using the straight line method over 40 years.

(3)  The issuance  costs for the project  financing  debt will be amortized over
     the term of the debt which is approximately 20 years.

(4)  The income tax benefit for the effects of the pro forma  adjustments  which
     affect taxable income have been calculated at an effective rate of 39.5%.

(5)  In the Pro Forma  Condensed  Balance  Sheet  the  CILCORP  fixed  rate debt
     continues to be recorded at its historical  cost. Upon  consummation of the
     merger,  the fixed  rate debt will be  recorded  at its fair  value,  after
     considering  the rates the  combined  companies  would expect to receive in
     similar borrowing  arrangements.  As of December 31, 1998 the CILCORP fixed
     rate debt had a carrying  amount of  approximately  $299 million and a fair
     value amount of approximately $339 million.

                                      P-6
SIGNATURES

          Pursuant to the  requirements of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned hereunto duly authorized.

                                                    THE AES CORPORATION

     Date: September 30, 1999                          By /s/ William Luraschi
                                                         ---------------------
                                                          (signing officer)