UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ........ to ........
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-8946 CILCORP Inc. 37-1169387
(An Illinois Corporation)
300 Hamilton Blvd, Suite 300
Peoria, Illinois 61602
(309) 675-8810
1-2732 CENTRAL ILLINOIS LIGHT COMPANY 37-0211050
(An Illinois Corporation)
300 Liberty Street
Peoria, Illinois 61602
(309) 675-8810
Indicate by check mark whether the Registrants (1) have filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrants were required
to file such reports), and (2) have been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
CILCORP Inc. Common stock, no par value,
shares outstanding at July 31, 1997 13,610,680
CENTRAL ILLINOIS LIGHT COMPANY
Common stock, no par value,
shares outstanding and privately
held by CILCORP Inc. at July 31, 1997 13,563,871
CILCORP INC.
AND
CENTRAL ILLINOIS LIGHT COMPANY
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1: Financial Statements
CILCORP INC.
Consolidated Balance Sheets 3-4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6-7
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets 8-9
Consolidated Statements of Income 10
Consolidated Statements of Cash Flows 11-12
Notes to Consolidated Financial Statements 13-15
CILCORP Inc. and Central Illinois Light Company
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-29
CILCORP Inc. and Central Illinois Light Company
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 30
Item 5: Other Information 30-32
Item 6: Exhibits and Reports on Form 8-K 33
Signatures 34-35
<PAGE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 7,883 $ 4,941
Receivables, less reserves of $3,266 and 78,839 78,309
$2,600
Accrued unbilled revenue 23,469 39,851
Fuel, at average cost 8,804 7,643
Materials and supplies, at average cost 13,310 15,126
Gas in underground storage, at average cost 13,180 24,723
Prepayments and other 25,307 11,614
----------- ----------
Total current assets 170,792 182,207
----------- ----------
Investments and other property:
Investment in leveraged leases 136,000 133,030
Cash surrender value of company-owned life
insurance, net of related policy loans of 1,851 2,128
$41,349 and $37,948
Other investments 19,068 19,679
---------- ----------
Total investments and other property 156,919 154,837
---------- ----------
Property, plant and equipment:
Utility plant, at original cost
Electric 1,197,155 1,186,110
Gas 393,871 393,246
---------- ----------
1,591,026 1,579,356
Less - accumulated provision for depreciation 744,705 724,398
---------- ----------
846,321 854,958
Construction work in progress 19,034 15,092
Other, net of depreciation 21,665 21,554
---------- ----------
Total property, plant and equipment 887,020 891,604
---------- ----------
Other assets:
Cost in excess of net assets of acquired
businesses, net of accumulated amortization of
$5,348 and $4,997 22,790 23,141
Other 22,532 33,904
---------- ----------
Total other assets 45,322 57,045
---------- ----------
Total assets $1,260,053 $1,285,693
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these Balance Sheets.
</TABLE>
<PAGE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 13,686 $ 23,057
Notes payable 35,700 27,900
Accounts payable 60,490 63,434
Accrued taxes 1,469 8,801
Accrued interest 9,281 10,711
Purchased gas adjustment over-recoveries 4,489 601
Other 19,937 22,867
---------- ----------
Total current liabilities 145,052 157,371
---------- ----------
Long-term debt 310,180 320,666
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes 233,550 235,239
Regulatory liability of regulated subsidiary 67,706 68,565
Deferred investment tax credit 21,959 22,801
Other 48,502 46,726
---------- ----------
Total deferred credits 371,717 373,331
---------- ----------
Preferred stock of subsidiary 66,120 66,120
---------- ----------
Stockholders' equity:
Common stock, no par value; authorized
50,000,000 shares - outstanding 13,610,680
shares 190,760 190,760
Retained earnings 176,224 177,445
---------- ----------
Total stockholders' equity 366,984 368,205
---------- ----------
Total liabilities and stockholders' equity $1,260,053 $1,285,693
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these Balance Sheets.
</TABLE>
<PAGE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands)*
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<C> <C> <C> <C>
Revenue:
Electric $ 81,011 $ 76,087 $154,303 $152,778
Gas 30,509 32,347 123,012 110,387
Non-regulated energy and energy
services 41,229 224 47,247 224
Environmental and
engineering services 19,551 21,380 37,174 41,855
Other businesses 2,090 1,897 4,890 4,676
-------- -------- -------- --------
Total 174,390 131,935 366,626 309,920
-------- -------- -------- --------
Operating expenses:
Fuel for generation and
purchased power 28,230 22,534 54,652 50,728
Gas purchased for resale 51,989 16,254 118,738 61,843
Other operations and maint. 52,738 55,818 101,842 106,289
Depreciation and amort. 16,691 16,563 33,438 33,178
Taxes, other than income taxes 8,291 8,655 19,400 20,292
-------- -------- -------- --------
Total 157,939 119,824 328,070 272,330
-------- -------- -------- --------
Fixed charges and other:
Interest expense 6,974 8,128 14,057 14,901
Preferred stock dividends of
subsidiary 811 786 1,597 1,601
Allowance for funds used during
construction (110) (35) (118) (70)
Other 242 (535) 572 409
-------- -------- -------- --------
Total 7,917 8,344 16,108 16,841
-------- -------- -------- --------
Income before income taxes 8,534 3,767 22,448 20,749
Income taxes 2,717 1,240 6,912 7,829
-------- -------- -------- --------
Net income available for common
stockholders $ 5,817 $ 2,527 $ 15,536 $ 12,920
======== ======== ======== ========
Average common shares
outstanding 13,611 13,455 13,611 13,404
Net income per common share $ .43 $ .19 $ 1.14 $ .96
Dividends per common share $ .615 $ .615 $ 1.23 $ 1.23
<FN>
*Except per share amounts
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<CAPTION> Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 17,133 $ 14,521
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash lease & investment income (2,543) (2,987)
Depreciation and amortization 33,438 33,178
Deferred income taxes, investment tax credit and
regulatory liability of subsidiary (3,390) 383
Changes in operating assets and liabilities:
Decrease in accounts receivable and
accrued unbilled revenue 15,852 25,450
Decrease in inventories 12,198 10,751
Decrease in accounts payable (2,944) (5,223)
Decrease in accrued taxes (7,332) (3,340)
(Increase) decrease in other assets (2,321) 6,888
Increase (decrease) in other liabilities 1,304 (3,109)
-------- --------
Total adjustments 44,262 61,991
-------- --------
Net cash provided by operating activities 61,395 76,512
-------- --------
Cash flows from investing activities:
Additions to plant (26,180) (21,940)
Other (1,878) (953)
-------- --------
Net cash used in investing activities (28,058) (22,893)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in short-term debt 7,800 (40,230)
Net decrease in long-term debt (19,857) (15,963)
Common dividends paid (16,741) (16,466)
Preferred dividends paid (1,597) (1,601)
Proceeds from issuance of stock -- 6,865
-------- --------
Net cash used in financing activities (30,395) (67,395)
-------- --------
Net increase (decrease) in cash and
temporary cash investments 2,942 (13,776)
Cash and temporary cash investments at
beginning of year 4,941 17,100
-------- --------
Cash and temporary cash investments at end
of quarter $ 7,883 $ 3,324
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 16,494 $ 15,071
Income Taxes $ 17,622 $ 7,832
<FN>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
(Unaudited)
<S> <C> <C>
Utility plant, at original cost:
Electric $1,197,155 $1,186,110
Gas 393,871 393,246
---------- ----------
1,591,026 1,579,356
Less - accumulated provision for depreciation 744,705 724,398
---------- ----------
846,321 854,958
Construction work in progress 19,034 15,092
Plant acquisition adjustments, net of
amortization 1,574 1,930
---------- ----------
Total utility plant 866,929 871,980
---------- ---------- --
Other property and investments:
Cash surrender value of company-owned life
insurance (net of related policy loans
$41,349 and $37,948) 1,851 2,128
Other 1,547 1,553
---------- ----------
Total other property and investments 3,398 3,681
---------- ----------
Current assets:
Cash and temporary cash investments 690 1,662
Receivables, less reserves of $1,579 and $1,000 33,400 43,604
Accrued unbilled revenue 23,469 30,879
Fuel, at average cost 8,804 7,643
Materials and supplies, at average cost 13,310 15,126
Gas in underground storage, at average cost 12,686 24,222
Prepaid taxes 6,072 1,183
Other 4,582 9,668
---------- ----------
Total current assets 103,013 133,987
---------- ----------
Deferred debits:
Unamortized loss on reacquired debt 5,344 5,572
Unamortized debt expense 2,108 2,198
Prepaid pension cost 496 496
Other 12,267 18,255
---------- ----------
Total deferred debits 20,215 26,521
---------- ----------
Total assets $ 993,555 $1,036,169
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these Balance Sheets.
</TABLE>
<PAGE>
<TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
<CAPTION>
June 30, December 31,
CAPITALIZATION AND LIABILITIES 1997 1996
(Unaudited)
<S> <C> <C>
Capitalization:
Common shareholder's equity:
Common stock, no par value; authorized
20,000,000 shares; outstanding
13,563,871 shares $ 185,661 $ 185,661
Retained earnings 133,908 136,629
---------- ----------
Total common shareholder's equity 319,569 322,290
Preferred stock without mandatory redemption 44,120 44,120
Preferred stock with mandatory redemption 22,000 22,000
Long-term debt 267,812 278,439
---------- ----------
Total capitalization 653,501 666,849
---------- ----------
Current liabilities:
Current maturities of long-term debt 10,650 20,000
Notes payable 13,000 9,900
Accounts payable 31,171 46,126
Accrued taxes 3,398 7,013
Accrued interest 8,433 9,761
Purchased gas adjustment over-recoveries 4,489 601
Level payment plan 22 2,737
Other 4,705 5,831
---------- ----------
Total current liabilities 75,868 101,969
---------- ----------
Deferred liabilities and credits:
Accumulated deferred income taxes 133,417 135,251
Regulatory liability 67,706 68,565
Investment tax credits 21,959 22,801
Capital lease obligation 2,406 2,621
Other 38,698 38,113
---------- ----------
Total deferred liabilities and credits 264,186 267,351
---------- ----------
Total capitalization and liabilities $ 993,555 $1,036,169
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these Balance Sheets.
</TABLE>
<PAGE>
<TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Income
(In thousands)
(Unaudited)
<CAPTION> Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Operating revenue:
Electric $ 81,011 $ 76,087 $154,303 $152,778
Gas 30,509 32,347 123,012 110,387
-------- -------- -------- --------
Total operating revenues 111,520 108,434 277,315 263,165
-------- -------- -------- --------
Operating expenses:
Cost of fuel 22,016 20,424 43,743 46,356
Cost of gas 13,136 16,254 74,803 61,843
Purchased power 4,042 2,110 8,146 4,372
Other operation expenses 20,777 23,599 40,385 44,174
Maintenance 9,108 7,658 15,764 13,785
Depreciation and amortization 15,394 15,011 30,787 30,065
Income taxes 5,068 3,528 12,316 12,142
Other taxes 7,597 7,662 17,792 18,048
-------- -------- -------- --------
Total operating expenses 97,138 96,246 243,736 230,785
-------- -------- -------- --------
Operating income 14,382 12,188 33,579 32,380
-------- -------- -------- --------
Other income and deductions:
Cost of equity funds capitalized 57 19 31 38
CILCO owned life insurance (242) (203) (572) (409)
Other, net (66) 72 (104) 12
-------- -------- -------- --------
Total other income and
(deductions) (251) (112) (645) (359)
-------- -------- -------- --------
Income before interest expenses 14,131 12,076 32,934 32,021
-------- -------- -------- --------
Interest expenses:
Interest on long-term debt 4,960 5,223 10,104 10,527
Cost of borrowed funds
capitalized (54) (16) (88) (32)
Other 658 559 1,300 1,298
-------- -------- -------- --------
Total interest expense 5,564 5,766 11,316 11,793
-------- -------- -------- --------
Net income 8,567 6,310 21,618 20,228
-------- -------- -------- --------
Dividends on preferred stock 811 786 1,597 1,601
-------- -------- -------- --------
Net income available for
common stock $ 7,756 $ 5,524 $ 20,021 $ 18,627
======== ======== ======== ========
<FN>
The accompanying notes to the Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 21,618 $ 20,228
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 31,143 30,420
Deferred taxes, investment tax credits and
regulatory liability (3,535) (2,303)
Decrease in accounts receivable 10,204 5,305
Decrease in fuel, materials and supplies,
and gas in underground storage 12,191 10,330
Decrease in unbilled revenue 7,410 9,882
Decrease in accounts payable (14,955) (8,195)
Decrease in accrued taxes and interest (4,943) (2,365)
Capital lease payments 323 322
Decrease in other current assets 197 14,067
Increase (decrease) in other current
liabilities 47 (2,539)
Decrease in other non-current assets 7,243 3,729
Increase (decrease) in other non-current
liabilities 635 (23)
-------- --------
Net cash provided by operating activities 67,578 78,858
-------- --------
Cash flows from investing activities:
Capital expenditures (22,865) (20,798)
Cost of equity funds capitalized (31) (38)
Other (4,093) (1,322)
-------- --------
Net cash used in investing activities (26,989) (22,158)
-------- --------
Cash flows from financing activities:
Common dividends paid (22,741) (29,464)
Preferred dividends paid (1,597) (1,601)
Retirement of long-term debt (20,000) (16,000)
Payments on capital lease obligation (323) (322)
Decrease in short-term borrowing 3,100 (24,600)
-------- --------
Net cash used in financing activities (41,561) (71,987)
-------- --------
Net decrease in cash and temporary cash
investments (972) (15,287)
Cash and temporary cash investments at beginning
of year 1,662 16,556
-------- --------
Cash and temporary cash investments at june 30 $ 690 $ 1,269
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest (net of cost of borrowed funds
capitalized) $ 13,129 $ 12,177
Income taxes 22,829 7,261
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these statements.
</TABLE>
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 Company), Central Illinois Light
Company (CILCO), QST Enterprises Inc. (QST), QST Environmental
Inc., formerly known as Environmental Science & Engineering,
Inc. (ESE), and CILCORP's other subsidiaries after elimination
of significant intercompany transactions. Effective October 29,
1996, ESE became a subsidiary of QST. Effective June 1, 1997,
ESE began operating under the name QST Environmental Inc.
CILCORP owns directly or indirectly 100% of the common stock of
its subsidiaries. The consolidated financial statements of CILCO
include the accounts of CILCO and its subsidiaries, CILCO
Exploration and Development Company and CILCO Energy
Corporation.
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 1996 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
CILCO continues to investigate and/or monitor four former gas
manufacturing plant sites located within CILCO's present gas
service territory. The purpose of these studies is to determine
if waste materials, principally coal tar, are present, whether
such waste materials constitute an environmental or health risk
and if CILCO is responsible for the remediation of any remaining
waste materials at those sites. Remediation work at one of the
four sites has been completed. A risk assessment/remedial
alternatives study at a second site was prepared in 1996, taking
into consideration new clean-up options under current Illinois
law. A revised remedial action plan for the second site has
been finalized and will be submitted to the Illinois
Environmental Protection Agency in August, 1997. Remediation of
the site is expected to begin in late 1997. CILCO has not
determined the ultimate extent of its liability for, or the
ultimate cost of, any remediation of the remaining two sites,
pending further studies.
During the six months ended June 30, 1997, CILCO paid
approximately $84,000 to outside parties for former gas
manufacturing plant site monitoring, legal fees and feasibility
studies, and expects to spend approximately $300,000 during the
remainder of 1997. A $3.3 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 ultimately incur. Coal tar remediation
costs incurred through June 1997 have been deferred on the
Balance Sheets, net of amounts recovered from customers.
Through June 30, 1997, CILCO has recovered approximately $5.1
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 costs in the year they are incurred. Under
these circumstances, management believes that the cost of coal
tar remediation will not have a material adverse effect on
CILCO's financial position or results of operations.
NOTE 3. Commitments
In August 1990, CILCO entered into a firm, wholesale power
purchase agreement with Central Illinois Public Service Company
(CIPS). This agreement provides for a minimum contract delivery
rate from CIPS of 90 MW until the contract expires 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 a proceeding pending before the Federal Energy Regulatory
Commission (FERC), CILCO has challenged the validity of the
power agreements with CIPS because of the failure of CIPS to
obtain FERC approval of the agreements. In the alternative,
CILCO has requested that FERC provide an "open season" during
which CILCO may cancel the power agreements in whole or in part.
In the initial decision in the proceeding, an Administrative Law
Judge denied the request for an open season, and did not rule on
the challenge to the validity of the power agreements. CILCO
cannot predict how FERC will ultimately rule on these issues.
NOTE 4. Electric Transmission Open Access
On April 24, 1996, the FERC issued Order No. 888, Order No. 889,
and a Notice of Proposed Rulemaking (NOPR). Order No. 888
requires all public utilities that own, operate or control
interstate electric transmission facilities to file tariffs that
will allow third parties, including power marketers and other
utilities, the same transmission services that such utilities
provide themselves and finalizes the conditions under which a
utility may seek recovery of stranded costs from wholesale
jurisdictional customers. The NOPR requests comments regarding
the potential replacement of the single tariff contained in
Order No. 888 with a capacity reservation tariff. CILCO filed
an open access tariff under rulemaking provisions prior to the
issuance of Order No. 888. This tariff was revised to comply
with the final rule in Order No. 888. On March 4, 1997, FERC
issued Order 888-A, which included a new pro-forma open access
transmission tariff and a requirement that all utilities
regulated by FERC file new open access transmission tariffs
consistent with the new pro-forma tariff. On July 3, 1997, CILCO
filed its tariff in compliance with Order 888-A.
CILCO's compliance filings under Order 888 and Order 888-A
revised the charges for the provision of ancillary services.
Those revised charges have not yet been approved, and remain
subject to refund. If refunds were required, the amounts
involved would not be significant, and in the opinion of
management, would not have a material effect on the results of
CILCO's operations.
Order No. 889 requires public utilities to implement Standards
of Conduct and an Open Access Transmission Same-time Information
System (OASIS). Effective May 13, 1997, FERC Order No. 889-A
incorporated minor revisions to the original order and revised
the policy on posting discounts. In accordance with FERC Orders
889 and 889-A, CILCO is using the OASIS to nominate, obtain and
sell available electric transmission. On May 13, 1997, CILCO and
QST Energy Trading Inc. revised their original Standards of
Conduct as required by Order 889-A.
NOTE 5. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement No. 128, "Earnings per Share" (SFAS
128). This statement establishes standards for computing and
presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. This
statement is effective for financial statements issued for
periods ending after December 15, 1997. In June 1997, the FASB
issued Statement No. 130, "Reporting Comprehensive Income" (SFAS
130) and Statement No. 131, "Disclosure About Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 130
establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose
financial statements. Comprehensive income is the total of net
income and all other nonowner changes in equity. SFAS 131
establishes standards for reporting information about operating
segments for interim and annual financial reports. Operating
segments are components of a company about which separate
financial information is available that is regularly evaluated
by the chief operating decision maker to determine how to
allocate resources and to assess performance. SFAS 130 and SFAS
131 are effective for financial statements issued for periods
beginning after December 15, 1997. None of the pronouncements
issued by FASB in 1997 will have a material effect on the
Company's financial position, results of operations or cash
flows.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CILCORP Inc. (CILCORP or the Company) is the parent of two core
operating businesses, Central Illinois Light Company (CILCO) and
QST Enterprises Inc. (QST). CILCORP also has two other first-
tier subsidiaries, CILCORP Investment Management Inc. (CIM), and
CILCORP Ventures Inc. (CVI), whose operations, combined with
those of the holding company (Holding Company) itself, are
collectively referred to herein as Other Businesses.
CILCO, the primary business subsidiary, is an electric and gas
utility serving customers in central and east central Illinois.
CILCO's financial condition and results of operations are
currently the principal factors affecting the Company's
financial condition and results of operations.
QST, formed in December 1995, provides energy and energy-related
services to a broad spectrum of retail and wholesale customers
through its subsidiary, QST Energy Inc. (QST Energy) which began
operations in 1996. QST also provides fiber optic services
through QST Communications Inc. (QST Com). QST's operations
include those of QST Environmental Inc., a former first-tier
CILCORP subsidiary which became a QST subsidiary, effective
October 29, 1996. QST Environmental Inc.'s results are currently
reported as a separate business segment from QST's energy and
telecommunications operations.
QST Environmental is an environmental consulting and engineering
firm serving governmental, industrial and commercial customers.
QST Environmental, through several subsidiaries, also acquires
environmentally impaired property for remediation and resale,
and manufactures geophysical instruments.
CIM invests in a diversified portfolio of long-term financial
investments which currently includes leveraged leases, energy-
related projects and affordable residential housing.
CVI invests in energy, biotechnology, and health care ventures,
and in economic development projects in Central Illinois. CVI,
through one of its subsidiaries, CILCORP Energy Services Inc.
(CESI), also provides services for CILCORP's strategic alliances
with Caterpillar Inc. and other industrial customers (see Part
II. Item 5: Other Information, Power Quest Electric Pilot
Programs). Additionally, CESI pursues energy-related
opportunities in the non-regulated market.
Forward-Looking Information
Forward-looking information is included in Part I. Item 2:
Management's Discussion and Analysis of Financial Condition and
Results of Operations and Part II. Item 5: Other Information.
Such information generally relates to future expected or
anticipated events or trends and identified contingencies and
uncertainties. Certain material contingencies are also
described in Note 2 to the Consolidated Financial Statements.
Some important factors could cause actual results or outcomes to
differ materially from those discussed in the forward-looking
statements. These factors include prevailing governmental
policies, statutory changes, and regulatory actions with respect
to rates, industry structure and recovery of various costs
incurred by CILCO in the course of its business; the extent and
effect of participation by CILCO's customers in its Power Quest
programs; and increasing wholesale and retail competition in the
electric and gas business. The business and profitability of
CILCORP and its subsidiaries are also influenced by economic and
geographic factors, including ongoing changes in environmental
laws, regulations and policies which affect demand for QST
Environmental's services; weather conditions; the extent and
pace of development of competition for retail and wholesale
customers; pricing and transportation of commodities; market
demand for energy and for environmental consulting and
analytical services; inflation; capital market conditions; and
environmental protection and compliance costs. All such factors
are difficult to predict, contain uncertainties that may
materially affect actual results, and to a significant degree
are beyond the control of CILCORP and its subsidiaries.
Capital Resources & Liquidity
Declaration of dividends by CILCORP is at the discretion of the
Board of Directors. CILCORP's ability to declare and pay
dividends is currently contingent upon its receipt of dividends
from CILCO and is also affected by business and economic
conditions, capital requirements, earnings and the overall
financial condition of the Company. The Company believes that
internal and external sources of capital which are, or are
expected to be, available to the Holding Company and its
subsidiaries will be adequate to meet the Company's capital
expenditures program, finance acquisitions, pay its financial
obligations, meet working capital needs and retire debt as it
matures.
CILCORP
Short-term borrowing capability is available to the Company for
additional cash requirements. CILCORP's Board of Directors has
authorized it to borrow up to $50 million on a short-term basis.
On June 30, 1997, CILCORP had committed bank lines of credit of
$50 million, of which $19.7 million was outstanding.
The Company issued 275,074 shares of common stock at an average
price of $41.55 during 1996 through the CILCO Employees'
Savings Plan (ESP) and the CILCORP Inc. Investors Choice
Automatic Reinvestment and Stock Purchase Plan (DRIP).
Effective December 19, 1996, issuance of new shares of common
stock through the ESP and DRIP was suspended. Depending on
market conditions and corporate needs, the Company may issue
additional shares of common stock through the ESP or the DRIP
at any time. On December 23, 1996, the Company began a direct
registration program to allow investors to make initial
purchases of CILCORP common stock directly from the Company
without utilizing the services of a broker. The proceeds from
any newly-issued stock from the ESP or the DRIP have been, and
will continue to be, used to retire CILCORP short-term debt, to
meet working capital and capital expenditure requirements at
subsidiaries, and for other corporate purposes.
The Company had $42 million of medium-term notes outstanding at
June 30, 1997. The Company may issue an additional $27 million
under its existing $75 million medium-term note program in
order to retire maturing debt and to provide funds for other
corporate purposes.
CILCO
Capital expenditures totaled $22.9 million for the six months
ended June 30, 1997. Capital expenditures are anticipated to be
approximately $30.3 million for the remainder of 1997. Capital
expenditures for the years 1998 and 1999 are estimated to be
$57.3 million and $53 million, respectively.
CILCO retired $20 million of first mortgage bonds in March 1997.
Currently, CILCO does not plan to issue long-term debt during
the remainder of 1997. CILCO intends to finance its 1997 and
1998 capital expenditures with funds provided by operations.
At June 30, 1997, CILCO had committed bank lines of credit
aggregating $30 million, all of which were unused. CILCO uses
these lines of credit to support issuance of short-term
commercial paper. CILCO had $13 million of commercial paper
outstanding at June 30, 1997 and expects to issue commercial
paper periodically throughout the remainder of 1997.
QST (Excluding QST Environmental)
Capital expenditures totaled approximately $3.1 million for the
six months ended June 30, 1997, and are anticipated to be
approximately $1.5 million for the remainder of 1997, primarily
for construction of fiber optic and other communications
facilities. The property management company which operates the
Sears Tower (Tower) in Chicago has contracted with QST to
install a cogeneration system that would supply electricity to
the Tower and its tenants. The Tower is the tallest building in
North America, with 110 floors and 10,000 employees working in
the building. QST estimates that installing the cogeneration
system would save the Tower and its tenants approximately $2
million annually in energy costs when compared to current costs.
However, the Tower's current utility provider, Commonwealth
Edison (ComEd), refused to allow QST necessary access to its
distribution system. On April 28, QST and Tower filed a joint
complaint with the Illinois Commerce Commission (ICC) alleging
that ComEd's refusal to permit an interconnection constituted a
violation of the Illinois Public Utilities Act. On May 22,
ComEd filed a motion to dismiss the complaint. On July 15, an
ICC Hearing Commissioner denied ComEd's motion, thus allowing a
hearing of the complaint. The hearing process will continue
over the remainder of the year. QST expects to finance
cogeneration assets with a combination of long-term debt and
funds provided by CILCORP. QST expects to finance fiber optic
and other communication facilities and its working capital needs
during the remainder of 1997 with funds provided by CILCORP.
At June 30, 1997, QST had outstanding debt of $3.2 million, all
of which was owed to CILCORP.
QST Environmental
For the quarter ended June 30, 1997, QST Environmental's
expenditures for capital additions and improvements were
approximately $126,000. Capital expenditures for the remainder
of 1997 are expected to be $975,000. In addition, through its
subsidiary, ESE Land Corporation, QST Environmental spent $3.1
million during the second quarter of 1997 to acquire land for
remediation and resale. QST Environmental is currently
soliciting offers to purchase ESE Land Corporation.
At June 30, 1997, QST Environmental had borrowed $20 million
from CILCORP under a term note. In addition, QST Environmental
has an $8 million revolving line of credit from CILCORP, all of
which was unused at June 30, 1997. As QST Environmental has
short-term excess cash, this cash is advanced to CILCORP. At
June 30, 1997, QST Environmental had advanced CILCORP $1.4
million.
CIM
At June 30, 1997, CIM had outstanding debt of $31.5 million,
consisting of $26.9 million borrowed from CILCORP and $4.6
million borrowed from external sources. During the fourth
quarter of 1996, CIM committed $15.8 million to fund four
affordable housing investments. Through June 30, 1997,
approximately $6.4 million of this commitment has been funded.
During the remainder of 1997, CIM expects to contribute
approximately $5.6 million in cash for these investments, with
substantially all of the remainder of the cash contributions to
be made in 1998. These investments will be funded through
borrowings from CILCORP. On July 21, 1997, CIM invested
$6.9 million in a new leveraged lease transaction. CIM has
funded $5.9 million of the investment to date and expects to
fund the remainder before the end of 1997. This investment was
financed through borrowings from CILCORP. CIM expects to
finance any other new investments and working capital needs
during the remainder of 1997 with a combination of funds
generated internally and with funds provided by CILCORP.
CVI
CVI expects to finance its activities and working capital needs
during the remainder of 1997 with a combination of funds
generated internally and with funds provided by CILCORP.
Results of Operations
The following table summarizes net income of CILCO, QST, QST
Environmental and Other Businesses for the three months and six
months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Core Businesses:
CILCO
Electric operating income $11,986 $10,731 $21,892 $20,816
Gas operating income 2,396 1,457 11,687 11,564
------- ------- ------- -------
Total utility operating income 14,382 12,188 33,579 32,380
Utility other income and
deductions (5,815) (5,878) (11,961) (12,152)
Preferred stock dividends of
CILCO (811) (786) (1,597) (1,601)
------- ------- ------- -------
Total utility net income 7,756 5,524 20,021 18,627
QST (excluding QST Environmental)
net loss (1,373) (915) (2,264) (1,361)
QST Environmental net loss (140) (1,191) (1,069) (3,163)
------- ------- ------- -------
Total core business income 6,243 3,418 16,688 14,103
Other businesses net loss (426) (891) (1,152) (1,183)
------- ------- ------- -------
Consolidated net income
available to common
shareholders $ 5,817 $ 2,527 $15,536 $12,920
======= ======= ======= =======
</TABLE>
CILCO Electric Operations
The following table summarizes the components of CILCO electric
operating income for the three months and six months ended June
30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Components of Electric June 30, June 30,
Operating Income 1997 1996 1997 1996
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Electric retail $77,649 $73,239 $146,988 $146,495
Sales for resale 3,362 2,848 7,315 6,283
------- ------- -------- --------
Total revenue 81,011 76,087 154,303 152,778
------- ------- -------- --------
Cost of sales:
Cost of fuel 22,016 20,424 43,743 46,356
Purchased power expense 4,042 2,110 8,146 4,372
Revenue taxes 3,312 3,247 6,912 6,892
------- ------- -------- --------
Total cost of sales 29,370 25,781 58,801 57,620
------- ------- -------- --------
Gross margin 51,641 50,306 95,502 95,158
------- ------- -------- --------
Operating expenses:
Other operation and maintenance 21,903 23,065 40,217 41,802
Depreciation and amortization 10,975 10,719 21,949 21,485
Income and other taxes 6,777 5,791 11,444 11,055
------- ------- -------- --------
Total operating expenses 39,655 39,575 73,610 74,342
------- ------- -------- --------
Electric operating income $11,986 $10,731 $ 21,892 $ 20,816
======= ======= ======== ========
</TABLE>
Electric gross margin increased 3% for the quarter ended June
30, 1997, compared to the same period in 1996. Retail kilowatt
hour (Kwh) sales for the quarter remained constant compared to
the same period in 1996. Higher margin residential and
commercial sales increased 2%, while lower margin industrial
sales decreased 2% for the quarter ended June 30, 1997, compared
to the same periods in 1996. Industrial sales decreases were
due primarily to customers switching to off-system suppliers
under CILCO's Power Quest program (see Part II. Item 5. Other
Information, Competition).
Electric gross margin remained constant for the six months ended
June 30, 1997, compared to the same period in 1996. Retail
kilowatt hour (Kwh) sales decreased 2% for the six months ended
June 30, 1997. Residential and commercial sales decreased 2%
and 1%, respectively, for the six months ended June 30, 1997,
compared to the same periods in 1996. Industrial sales
decreased 3% for the six months ended June 30, 1997 due
primarily to customers switching to off-system suppliers. These
sales decreases were partially offset by increased sales for
resale revenue and lower coal freight costs.
The overall level of business activity in CILCO's service
territory and weather conditions are expected to continue to be
the primary factors affecting electric sales in the near term.
CILCO's electric sales may also be affected for the near term by
the Power Quest pilot programs, and in the long term by
deregulation and increased competition in the electric utility
industry (see Part II. Item 5: Other Information, Competition).
Sales for resale increased during the second quarter and for the
six months ended June 30, 1997, compared to the same periods in
1996 due to favorable market conditions. Sales for resale vary
based on the energy requirements of neighboring utilities,
CILCO's available capacity for bulk power sales and the price of
power available for sale. CILCO expects increased competition
in the market for sales for resale and purchased power.
Substantially all of CILCO's electric generating capacity is
coal-fired. The cost of fuel increased 8% for the second
quarter of 1997, compared to the same period in 1996. This
increase was due to increases in the cost of coal, partially
offset by decreased generation. The cost of fuel decreased 6%
for the six months ended June 30, 1997, compared to the same
period in 1996, due primarily to a decrease in electric
generation resulting from a scheduled maintenance outage
beginning March 1 at CILCO's Duck Creek generation facility.
Purchased power increased for the quarter and the six months
ended June 30, 1997, compared to the same periods in 1996,
primarily due to the scheduled outage at the Duck Creek
facility. Purchased power expense varies based on CILCO's need
for energy and the price of power available for purchase. CILCO
makes use of purchased power when it is economical to do so and
when required during maintenance outages at CILCO plants. Costs
and savings realized from the purchase of power are passed
through to CILCO's customers via the fuel adjustment clause
(FAC). The FAC allows CILCO to pass increases or decreases in
the cost of fuel through to customers.
Other operation and maintenance expenses decreased 5% and 4%,
respectively, for the quarter and the six months ended June 30,
1997, compared to the same periods in 1996. The decreases were
primarily due to decreased employee salaries and employee
pension and benefit expenses as a result of the 1996 early
retirement program. In addition, the 1996 expenses include a
$2.2 million one-time write-down for disposal of obsolete
materials and supplies inventory. Increases in power plant
maintenance expenses associated with the scheduled outage at the
Duck Creek generation facility partially offset the decreases
for both periods.
Depreciation and amortization expense increased 2%, reflecting
additions and replacements of utility plant at costs in excess
of the original cost of the property retired.
Income and other taxes expense increased primarily due to higher
pre-tax operating income.
CILCO Gas Operations
The following table summarizes the components of CILCO gas
operating income for the three months and six months ended June
30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Components of Gas June 30, June 30,
Operating Income 1997 1996 1997 1996
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Sale of gas $29,016 $30,656 $119,483 $105,946
Transportation services 1,493 1,691 3,529 4,441
------- ------- -------- --------
Total revenue 30,509 32,347 123,012 110,387
------- ------- -------- --------
Cost of sales:
Cost of gas 13,136 16,254 74,803 61,843
Revenue taxes 1,243 1,375 4,809 5,053
------- ------- -------- --------
Total cost of sales 14,379 17,629 79,612 66,896
------- ------- -------- --------
Gross margin 16,130 14,718 43,400 43,491
------- ------- -------- --------
Operating expenses:
Other operation and maintenance 7,982 8,192 15,932 16,157
Depreciation and amortization 4,419 4,292 8,838 8,580
Income and other taxes 1,333 777 6,943 7,190
------- ------- -------- --------
Total operating expenses 13,734 13,261 31,713 31,927
------- ------- -------- --------
Gas operating income $ 2,396 $ 1,457 $ 11,687 $ 11,564
======= ======= ======== ========
</TABLE>
Gas gross margin increased 10% for the quarter and remained
constant for the six months ended June 30, 1997, compared to the
same periods in 1996. This was primarily due to increased sales
to commercial customers, which were partially offset in the six
months ended June 30, 1997 by reduced sales to residential
customers. Residential sales remained constant for the quarter
and decreased 10% for the six months ended June 30, 1997.
Heating degree days were 12% higher for the quarter and 5% lower
for the six months ended June 30, 1997, compared to the same
periods in 1996. Commercial sales increased 26% for the second
quarter of 1997, and 14% for the six months ended June 30, 1997,
due to customers switching from gas transportation to CILCO
system supply as a result of the competitiveness of CILCO's gas
prices and a 1996 Illinois law which exempts certain customers
from a portion of the state gross receipts tax on sales of
natural gas. The overall level of business activity in CILCO's
service territory and weather conditions are expected to
continue to be the primary factors affecting gas sales in the
near term. CILCO's gas sales may also be affected by further
deregulation in the natural gas industry.
Revenue from gas transportation services decreased 12% and 21%,
respectively, while sales volumes increased 19% and 11% for the
quarter and six months ended June 30, 1997, compared to the same
periods in 1996. The revenue decreases were not proportional to
the increases in volume due to increased transportation of gas by
customers using Rate 800 contract service, which has a lower per
unit charge than other classes of transportation service. Rate
800 customers have the ability to connect directly to interstate
pipelines and bypass CILCO's gas system. Rates are negotiated
individually with Rate 800 customers. In addition,
transportation revenues decreased due to commercial customers
switching back to CILCO system supply.
The cost of gas decreased 19% for the quarter and increased 21%
for the six months ended June 30, 1997, compared to the same
periods in 1996. The year-to-date increase was due to higher
natural gas prices in the first quarter of 1997 relative to
1996. The decrease for the second quarter was primarily due to
lower natural gas prices from CILCO's suppliers. The lower
natural gas prices, which accounted for the majority of the 5%
decrease in gas retail revenue, were passed through to CILCO's
gas customers via the purchased gas adjustment clause (PGA).
The PGA is the mechanism used to pass increases or decreases in
the cost of natural gas through to customers.
Other operation and maintenance expenses decreased 3% and 1%,
respectively, for the quarter and six months ended June 30,
1997, compared to the same periods in 1996. The decreases were
due primarily to decreases in employee salaries and employee
pensions and benefits as a result of the 1996 early retirement
program.
Depreciation and amortization expense increased 3% for the
quarter and for the six months ended June 30, 1997, compared to
the same periods in 1996, reflecting additions and replacements
of utility plant at costs in excess of the original cost of the
property retired.
Income and other taxes expense changed for the quarter and six
months ended June 30, 1997, due to changes in pre-tax operating
income compared to 1996.
CILCO Other Income and Deductions and Interest Expense
The following table summarizes other income and deductions and
interest expense for the three months and six months ended June
30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Components of Other Income and June 30, June 30,
Deductions and Interest Expense 1997 1996 1997 1996
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Net interest expense $(5,504) $(5,498) $(11,198) $(11,412)
Income taxes 625 584 1,295 1,296
Other (936) (964) (2,058) (2,036)
------- ------- -------- --------
Other income $(5,815) $(5,878) $(11,961) $(12,152)
======= ======= ======== ========
</TABLE>
Interest expense decreased primarily as a result of a lower long-
term debt balance for the six months ended June 30, 1997
compared to the same period in 1996.
QST (Excluding QST Environmental)
The following table summarizes the revenue and expenses for QST
for the three months and six months ended June 30, 1997 and
1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Components of QST Net Loss (In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Electric revenue $ 1,824 $ 189 $ 2,453 $ 189
Gas revenue 39,137 -- 44,453 --
Telecommunications revenue 103 29 176 29
------- ------- ------- -------
Total revenue 41,064 218 47,082 218
Cost of sales:
Cost of electricity 2,173 186 2,763 186
Cost of gas 38,853 -- 43,935 --
Cost of sales -
Telecommunications 3 -- 13 --
------- ------- ------- -------
Total cost of sales 41,029 186 46,711 186
------- ------- ------- -------
Gross margin 35 32 371 32
------- ------- ------- -------
Other expenses:
General and administrative 2,206 1,472 3,849 2,258
Depreciation and
amortization 64 21 125 26
Interest 40 4 149 4
------- ------- ------- -------
Total other expenses 2,310 1,497 4,123 2,288
------- ------- ------- -------
Net loss before
taxes (2,275) (1,465) (3,752) (2,256)
Income taxes (902) (550) (1,488) (895)
------- ------- ------- -------
QST net loss $(1,373) $ (915) $(2,264) $(1,361)
======= ======= ======= =======
</TABLE>
QST Enterprises Inc. was formed in December 1995 to facilitate
CILCORP's expansion into non-regulated energy and related
services businesses. QST's initial focus was to compete against
energy suppliers who participated in CILCO's Power Quest
programs. QST also competes against marketers to provide energy
and services to customers of utilities and other energy
providers which will offer, or be required to offer, similar
retail competition programs and to sell energy to customers who
already have the ability to choose their energy supplier. QST
provides a portfolio of non-regulated, energy-related products
and services.
QST Energy's wholly-owned subsidiary, QST Energy Trading Inc.
(QST Trading), is a wholesale natural gas and electric power
marketer which purchases, sells and brokers energy and capacity
at market-based rates to other marketers, including QST Energy,
utilities and other customers. QST Energy and QST Trading
currently have offices in Peoria, Chicago and Houston.
Additional offices may be opened as the company continues to
grow. QST Energy continues to obtain additional large
commercial and industrial gas customers in the Chicago area and
in the pilot program of a non-affiliated Illinois utility.
During the remainder of 1997, QST plans to expand its energy
presence by participating in deregulation pilot programs in
states other than Illinois.
On May 23, 1997, QST Trading acquired Trebor Energy Resources,
a Houston-based natural gas marketing and trading company. The
acquisition increased QST's natural gas supply and logistics
capabilities and complements QST's growing wholesale and retail
energy business. Once the Trebor acquisition is fully
integrated, average daily gas volumes are anticipated to exceed
500,000 MMBTUs and annual electric volumes should exceed one
billion kilowatt hours. The acquisition enhances QST's ability
to purchase, transport and sell natural gas to utilities and
industrial and commercial customers in the Gulf Coast, Midwest
and Northeast markets. The acquisition price is based on a
deferred payment arrangement using predetermined performance
measures and therefore cannot currently be determined.
QST Energy, a subsidiary of QST Enterprises, entered into an
agreement on July 1, 1997, with R. Hadler and Company, Inc.
(Hadler), a Washington, D.C. based company, whereby Hadler will
work with QST to market natural gas and electricity to
commercial and industrial companies in Michigan, Pennsylvania,
and various other states. The primary focus will be the
development of the Midwest and Mid-Atlantic industrial and
commercial customer base. Under the terms of the agreement,
Hadler will expand QST's delivery system through its network,
arranging for the sale of energy to new customers. QST will
provide supply, logistics, trading and retail sales support
through existing functions.
QST's net losses for the quarter and six months ended June 30,
1997 were due primarily to administrative and general expenses,
including salaries and outside services not covered by revenues
at this early stage of QST's development. Gas revenues for the
second quarter and year-to-date 1997 resulted primarily from
wholesale sales of gas by QST Trading, while electric revenues
were derived from participation by QST Energy in Power Quest and
a pilot program of another Illinois utility. QST Energy also
participates in the Power Quest gas pilot program, but revenues
from this program are not material. QST net losses are expected
to continue in 1997 as QST continues to develop its businesses.
Revenues are anticipated to increase as the company grows through
participation in: additional pilot programs; retail sales of
energy to commercial and industrial customers; and wholesale
natural gas and power marketing transactions.
QST Environmental Operations
The following table summarizes the components of the
environmental and engineering services losses for the three
months and six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Components of QST Environmental Three Months Ended Six Months Ended
Net Loss June 30, June 30,
1997 1996 1997 1996
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Environmental and engineering
services revenue $19,551 $21,380 $37,174 $41,855
Direct non-labor project costs 6,473 6,200 12,473 11,866
------- ------- ------- -------
Net revenue 13,078 15,180 24,701 29,989
------- ------- ------- -------
Expenses:
Direct salaries and other costs 6,520 7,886 13,085 16,293
General and administrative 5,511 7,540 10,763 15,289
Depreciation and amortization 1,009 1,295 2,075 2,627
------- ------- ------- -------
Operating expenses 13,040 16,721 25,923 34,209
------- ------- ------- -------
Interest expense 118 240 260 636
------- ------- ------- -------
Loss before income taxes (80) (1,781) (1,482) (4,856)
Income taxes 60 (590) (413) (1,693)
------- ------- ------- -------
QST Environmental net loss $ (140) $(1,191) $(1,069) $(3,163)
======= ======= ======= =======
</TABLE>
QST Environmental's quarterly results in recent periods have
been affected by such factors as project delays, which may be
caused by delays in regulatory agency approvals or client
considerations; the level of subcontractor services; weather,
which may limit the amount of time QST Environmental's
professionals have in the field; corporate repositioning costs;
and increased competition in all aspects of the business.
Accordingly, results from one quarter are not necessarily
indicative of results for any other quarter or for the year.
QST Environmental's net revenues decreased by $2.1 million, or
14%, for the second quarter and by $5.3 million, or 18%, for the
six months ended June 30, 1997, compared to the same periods in
1996. The net revenue decreases for these periods resulted from
ongoing changes in environmental regulatory requirements of many
states, funding delays at the federal level and increased
competition in the consulting and laboratory businesses,
including industry overcapacity. The decrease in net revenue
from environmental services was partially offset by $700,000 of
revenue earned by ESE Land in the second quarter.
Direct salaries and other expenses include the cost of
professional and technical staff and other costs billable to
customers. The direct salary costs include salaries and
related fringe benefits, including employer-paid medical and
dental insurance, payroll taxes, paid time off, and 401(k)
contributions. Direct and indirect salary expense decreased by
$1.4 million, or 17%, for the second quarter and by $3.2
million, or 20%, for the six months ended June 30, 1997,
compared to the same periods in 1996. This decrease is
primarily due to a planned reduction in the number of technical
staff to match decreased levels of business activity.
General and administrative expenses include non-billable
employee time devoted to marketing, proposals, supervision, and
professional development; supply expenses; and corporate
administrative expenses. General and administrative expenses
decreased by $2 million, or 27%, for the three months ended June
30, 1997, and decreased by $4.5 million, or 30%, for the six
months ended June 30, 1997. The decrease for these periods
resulted from efforts to control administrative costs, including
lower general and administrative salaries and related benefits
expense.
The QST Environmental net losses shown above include ESE Land
Corporation net income (loss) of $253,000 and ($110,000) for the
three months ended June 30, 1997 and 1996, respectively, and
$155,000 and ($220,000) for the six months ended June 30, 1997
and 1996, respectively. QST Environmental is currently
soliciting offers to purchase ESE Land. Management currently
believes that a material gain related to the sale of ESE Land
may be realized.
QST Environmental will continue to position itself to take
advantage of new market opportunities. QST Environmental is
collaborating with QST Energy to provide environmental
consulting and laboratory services for QST Energy customers.
The bundled services that QST Energy offers its customers
include the environmental consulting capabilities of QST
Environmental.
Due to the labor intensive nature of QST Environmental's
business, it has the ability to adjust staffing levels to
recognize changing business conditions. QST Environmental had
636 full-time equivalent employees at June 30, 1997, compared to
809 employees at June 30, 1996. To better utilize QST
Environmental's resources as part of CILCORP's commitment to
efficiently market non-regulated energy and related services,
QST Environmental became a subsidiary of QST effective October
29, 1996. During 1997, management is evaluating QST
Environmental's role in QST's and CILCORP's business strategy.
This evaluation, which will take into account QST
Environmental's ongoing performance and integration with QST's
operations, could result in further adjustments to staffing
levels and to the carrying value of QST Environmental's assets.
QST Environmental's future business activity and profitability
will continue to be impacted by the level of demand for its
services, which is affected by government funding levels, the
enforcement of various federal and state statutes and
regulations dealing with the environment and the use, control,
disposal, and clean-up of hazardous wastes. The market for QST
Environmental's services is highly competitive; however, no
single entity currently dominates the environmental and
engineering consulting services marketplace.
Other Businesses Operations
The following table summarizes the components of Other
Businesses losses for the three months and six months ended June
30, 1997 and 1996.
<TABLE> Three Months Ended Six Months Ended
<CAPTION> June 30, June 30,
Components of Other Businesses 1997 1996 1997 1996
Net Income (Loss) (In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Other revenue $ 2,089 $ 1,897 $ 4,889 $ 4,676
------- ------- ------- -------
Expenses:
Operating Expenses 2,090 1,774 5,711 3,260
Depreciation and amortization 48 58 96 105
Interest expense 1,257 1,504 2,425 2,844
Income and other taxes (880) (548) (2,191) (350)
------- ------- ------- -------
Total expenses 2,515 2,788 6,041 5,859
------- ------- ------- -------
Other businesses net loss $ (426) $ (891) $(1,152) $(1,183)
======= ======= ======= =======
</TABLE>
Other revenues remained relatively constant for the three and
six months ended June 30, 1997.
Operating expenses increased for the three and six months ended
June 30, 1997, compared to the same periods in 1996, primarily
due to higher expenses beginning in May 1996 related to the
Caterpillar Alliance at CVI (see Part II. Item 5:
Other Information, Power Quest Electric Pilot Programs).
Income and other taxes were lower in the quarter and six months
ended June 30, 1997, compared to the same periods in 1996,
primarily due to lower pre-tax income and tax credits received
in 1997 from investments made during the fourth quarter of 1996.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Reference is made to "Environmental Matters" under "Item 1.
Business" in the Company's 1996 Annual Report on Form 10-K (the
"1996 Form 10-K"), and Note 2. Contingencies," and
"Note 4. Open Access Electric Transmission," herein, for certain
pending legal proceedings and proceedings known to be
contemplated by governmental authorities.
The Company and its subsidiaries are subject to certain claims
and lawsuits in connection with work performed in the ordinary
course of their businesses. Except as otherwise referred to
above, in the opinion of management, all such claims currently
pending either will not result in a material adverse effect on
the financial position and results of operations of the Company
or are adequately covered by: (i) insurance; (ii) contractual or
statutory indemnification; and/or (iii) reserves for potential
losses.
Item 5: Other Information
Competition
In July 1995, Illinois enacted legislation that offers gas and
electric public utilities an opportunity to develop alternative
regulation and performance-based ratemaking programs. These
programs are subject to standards established by the ICC and are
restricted to the utility's service territory. These programs
must be approved by the ICC and must end by June 30, 2000. A
report on the results of the programs is to be delivered to the
Illinois legislature by December 31, 2000. CILCO has not filed
any alternative regulation or performance-based ratemaking
programs with the ICC.
CILCO anticipates significant changes in the electric utility
industry at both the wholesale and retail levels in the years to
come, including increased competition. CILCO also anticipates
further changes in the natural gas industry at the retail level.
Management cannot predict the ultimate effect and timing of
these changes, but believes that they will eventually result in
all customers having the opportunity to select the energy
supplier of their choice and that lower operating costs,
improved efficiency and new and better services and products
will be the key competitive factors for utilities and other
energy providers.
Legislation to institute changes in the electric utility
industry has been introduced in the Illinois General Assembly by
CILCO and other utilities (see Deregulation Legislation).
CILCORP and its subsidiaries support rapid implementation of
broadened consumer choice throughout Illinois and the nation and
the expanded business opportunities it will provide.
Power Quest Retail Competition Pilot Programs
In 1996, to lead the movement toward increased customer choice,
CILCO began Power Quest, which consists of two electric pilot
retail competition programs and a natural gas pilot retail
competition program. The programs offer greater choice to
customers and provide the opportunity for CILCO and certain of
its electric and natural gas customers to participate in a
competitive business environment. The electric programs were
approved by the ICC in March 1996 and approved by the FERC in
April 1996 (see Power Quest Electric Pilot Programs). The
natural gas program was approved by the ICC in June 1996 (see
Power Quest Gas Pilot Program).
Power Quest Electric Pilot Programs
One of CILCO's electric pilot programs permits eight of CILCO's
largest industrial customers that each have peak loads of 10
megawatts or more to secure part or all of their electric power
requirements from suppliers other than CILCO, subject to the
limitation that at no time shall total purchases from other
suppliers by participants in the program exceed 50 megawatts
(approximately 10% of CILCO's industrial load). CILCO may
extend the program's two year term with the approval of the ICC.
Industrial customers began receiving electricity under this
Power Quest program in May 1996. For the industrial pilot
program, CILCO could potentially experience a reduction in pre-
tax income of up to $5.4 million on an annual basis if the
entire 50 megawatts of eligible industrial capacity moved to off-
system suppliers. CILCORP has formed a strategic alliance (which
has a term concurrent with the Power Quest Electric Pilot
Program) with Caterpillar Inc. (Caterpillar), the largest of the
industrial customers eligible to participate in Power Quest.
Caterpillar remained a full requirements customer of CILCO for
the first year of the Power Quest program, and in exchange,
CILCORP provided additional value-added services and innovative
solutions to meet the energy and environmental needs of
Caterpillar. Costs associated with the Caterpillar alliance are
reflected in Other Businesses Operations. During the second
year of the alliance, which began May 1, 1997, Caterpillar began
purchasing a portion of its Power Quest electric allocation off-
system and will receive a correspondingly reduced level of
products and services under the strategic alliance.
CILCO has offset some of the profit margin lost under Power
Quest with increased wholesale electric sales outside its
service territory. Based on participation levels by eligible
industrial customers through June 1997, CILCORP experienced a
reduction of $3.1 million of pre-tax income for the first six
months of 1997 (including costs associated with the Caterpillar
alliance). Assuming the same participation level for all of
1997, CILCORP would experience a reduction to pre-tax income,
including costs associated with the Caterpillar alliance
included in Other Businesses Operations, of $6.8 million.
In the other Power Quest electric program, CILCO has, to date,
designated six areas within its service territory as Open Access
Sites for up to five years. The sites include the Central
Illinois communities of Heyworth, Manito, Peoria Heights and
Williamsville; a large regional shopping center in Peoria; and a
developing commercial business site in Lincoln. During this
period, approximately 5,500 customers located within these Open
Access Sites are eligible to purchase some or all of their
electric power requirements from suppliers other than CILCO.
CILCO may designate additional Open Access Sites and, with ICC
approval, may extend the program's five-year term. Customers in
all but the Peoria Heights Open Access Sites began receiving
electricity from suppliers other than CILCO in May 1996. Energy
deliveries in Peoria Heights began in February 1997. If all
eligible customers in the existing Open Access Sites participate
in Power Quest, CILCO would experience a reduction in pre-tax
income of up to $1.5 million on an annual basis. Based upon
participation levels by eligible commercial and residential
customers through June 1997, CILCORP experienced a reduction of
$.4 million of pre-tax income for the first six months of 1997.
Assuming the same participation level for all of 1997, CILCORP
would experience a reduction to pre-tax income of $.8 million.
Power Quest Gas Pilot Program
CILCO's gas residential pilot program is a five year program
that allows residential gas customers located in sites
designated by CILCO to select their natural gas supplier, with
CILCO continuing to provide distribution and metering services.
CILCO selected the Central Illinois towns of Heyworth, Manito,
and Williamsville as the initial sites for the gas pilot program
and later added the City of Springfield, Illinois, subject to
the limitation that no more than 8,000 residential customers
from Springfield may participate in the program at any one time.
Participants in the gas retail pilot program began receiving
natural gas from other suppliers in October 1996. This program
did not have a material adverse impact on CILCO's financial
position or results of operations for 1996 or the first six
months of 1997, nor does management believe this program will
have a material adverse impact on CILCO's future financial
position or results of operations.
Deregulation Legislation
On March 7, 1997, an electric restructuring bill was introduced
in the Illinois House of Representatives. Under this CILCO-
supported bill (HB1998), all electric customers served by
investor-owned utilities would have the opportunity to buy
electricity from their provider of choice beginning May 1, 1998
with potential consumer savings of 15 to 60 percent. Another
utility deregulation bill (SB55), supported by Commonwealth
Edison and Illinois Power, was introduced and passed in the
Illinois House in June 1997, but the Illinois Senate did not
consider the bill before it adjourned for the summer. CILCO
does not support this bill, which in its present form includes
certain provisions for rate reductions, limits utilities' return
on equity, imposes customer exit fees which allow utilities to
recover stranded costs, and prevents full consumer choice for
residential customers until 2008. Further negotiations are
expected this summer in an effort to draft a bill that provides
true choice of electric suppliers by balancing the interests of
consumers with those of the high-cost utilities. Revised
legislation could be considered by Illinois lawmakers during the
fall veto session that begins in October. Management cannot
predict the ultimate form of any legislation which may be
enacted, but certain elements of the legislation being proposed
could have a material adverse impact on CILCO's results of
operations.
Corporate Repositioning
In preparation for a competitive marketplace, the Company and
its subsidiaries have undertaken corporate repositioning
activities, including developing new product offerings,
upgrading customer data systems, and tapping needed expertise
through alliances, consulting relationships, and the hiring of
employees with experience in competitive markets. During the
first six months of 1997, the Company and its subsidiaries
incurred approximately $2.6 million of pre-tax expense for these
repositioning activities. In the second quarter CILCO announced
the formation of five new strategic business units (SBUs):
Power Generation, Local Distribution, Technical Services,
Customer Services, and Marketing and Sales. The SBUs will
better align CILCO with the requirements of a competitive
marketplace.
CILCO's Union Contracts
CILCO's contract with the International Brotherhood of Electric
Workers Local 51 (IBEW), expired on June 30, 1997. The IBEW is
currently working without a contract while negotiations continue
with CILCO. The IBEW represents approximately 460 CILCO gas and
electric department employees. The current contract with the
International Brotherhood of Firemen and Oilers Local 8 (IBF&O),
which represents approximately 208 CILCO employees, expires
June 30, 1998.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial data schedules
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CILCORP Inc.
(Registrant)
Date August 11, 1997 R. O. Viets
R. O. Viets
President and
Chief Executive Officer
Date August 11, 1997 T. D. Hutchinson
T. D. Hutchinson
Controller
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CENTRAL ILLINOIS LIGHT COMPANY
(Registrant)
Date August 11, 1997 T. S. Romanowski
T. S. Romanowski
Vice President and Chief
Financial Officer
Date August 11, 1997 T. D. Hutchinson
T. D. Hutchinson
Controller and Manager
of Accounting
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000762129
<NAME> CILCORP INC.
<MULTIPLIER> 1,000
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<OTHER-PROPERTY-AND-INVEST> 20,091
<TOTAL-CURRENT-ASSETS> 170,792
<TOTAL-DEFERRED-CHARGES> 45,322
<OTHER-ASSETS> 156,919
<TOTAL-ASSETS> 1,260,053
<COMMON> 190,760
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 176,224
<TOTAL-COMMON-STOCKHOLDERS-EQ> 366,984
22,000
44,120
<LONG-TERM-DEBT-NET> 310,180
<SHORT-TERM-NOTES> 35,700
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
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0
<CAPITAL-LEASE-OBLIGATIONS> 2,406
<LEASES-CURRENT> 421
<OTHER-ITEMS-CAPITAL-AND-LIAB> 464,556
<TOT-CAPITALIZATION-AND-LIAB> 1,260,053
<GROSS-OPERATING-REVENUE> 366,626
<INCOME-TAX-EXPENSE> 6,912
<OTHER-OPERATING-EXPENSES> 328,070
<TOTAL-OPERATING-EXPENSES> 334,982
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<OTHER-INCOME-NET> (572)
<INCOME-BEFORE-INTEREST-EXPEN> 31,072
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<NET-INCOME> 17,133
1,597
<EARNINGS-AVAILABLE-FOR-COMM> 15,536
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000018651
<NAME> CENTRAL ILLINOIS LIGHT COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
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<PERIOD-START> JAN-01-1997
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<TOTAL-CURRENT-ASSETS> 103,013
<TOTAL-DEFERRED-CHARGES> 20,215
<OTHER-ASSETS> 0
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<TOTAL-COMMON-STOCKHOLDERS-EQ> 319,569
22,000
44,120
<LONG-TERM-DEBT-NET> 267,812
<SHORT-TERM-NOTES> 13,000
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