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 September 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 September 30, 1997 13,610,680
CENTRAL ILLINOIS LIGHT COMPANY
Common stock, no par value,
shares outstanding and privately
held by CILCORP Inc. at September 30, 1997 13,563,871
CILCORP INC.
AND
CENTRAL ILLINOIS LIGHT COMPANY
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1: Financial Statements
CILCORP INC.
Consolidated Balance Sheets 3-4
Consolidated Statements of Income 5-6
Consolidated Statements of Cash Flows 7-8
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets 9-10
Consolidated Statements of Income 11
Consolidated Statements of Cash Flows 12-13
Notes to Consolidated Financial Statements 14-17
CILCORP Inc. and Central Illinois Light Company
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-32
CILCORP Inc. and Central Illinois Light Company
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 33
Item 5: Other Information 33-35
Item 6: Exhibits and Reports on Form 8-K 35
Signatures 36-37
<PAGE>
<TABLE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<CAPTION>
September 30, December 31,
1997 1996
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 10,754 $ 4,941
Receivables, less reserves of $3,097 and $2,600 80,497 78,309
Accrued unbilled revenue 26,895 39,851
Fuel, at average cost 5,617 7,643
Materials and supplies, at average cost 13,766 15,126
Gas in underground storage, at average cost 26,172 24,723
Prepayments and other 19,488 11,614
---------- ----------
Total current assets 183,189 182,207
---------- ----------
Investments and other property:
Investment in leveraged leases 144,636 133,030
Cash surrender value of company-owned life
insurance, net of related policy loans of
$42,762 and $37,948 1,869 2,128
Other investments 18,196 19,679
---------- ----------
Total investments and other property 164,701 154,837
---------- ----------
Property, plant and equipment:
Utility plant, at original cost
Electric 1,204,083 1,186,110
Gas 396,988 393,246
---------- ----------
1,601,071 1,579,356
Less - accumulated provision for depreciation 758,051 724,398
---------- ----------
843,020 854,958
Construction work in progress 20,202 15,092
Other, net of depreciation 21,863 21,554
---------- ----------
Total property, plant and equipment 885,085 891,604
---------- ----------
Other assets:
Cost in excess of net assets of acquired
businesses, net of accumulated amortization of
$5,524 and $4,997 22,613 23,141
Other 26,288 33,904
---------- ----------
Total other assets 48,901 57,045
---------- ----------
Total assets $1,281,876 $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>
September 30, December 31,
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 22,181 $ 23,057
Notes payable 57,931 27,900
Accounts payable 65,867 63,434
Accrued taxes 4,746 8,801
Accrued interest 4,975 10,711
Purchased gas adjustment over-recoveries 1,388 601
Other 19,591 22,867
---------- ----------
Total current liabilities 176,679 157,371
---------- ----------
Long-term debt 298,531 320,666
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes 233,007 235,239
Regulatory liability of regulated subsidiary 67,276 68,565
Deferred investment tax credit 21,538 22,801
Other 47,038 46,726
---------- ----------
Total deferred credits 368,859 373,331
---------- ----------
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 180,927 177,445
---------- ----------
Total stockholders' equity 371,687 368,205
---------- ----------
Total liabilities and stockholders' equity $1,281,876 $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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue:
Electric utility $104,336 $ 96,247 $258,639 $246,876
Gas utility 19,019 18,594 142,031 128,903
Non-regulated energy and energy
services 84,061 856 131,308 1,080
Environmental and engineering
services 19,392 20,852 55,229 62,673
Other businesses 1,695 1,975 6,585 6,651
-------- -------- -------- --------
Total 228,503 138,524 593,792 446,183
-------- -------- -------- --------
Operating expenses:
Fuel for generation and
purchased power 40,806 25,958 95,458 76,872
Gas purchased for resale 84,137 6,517 202,875 68,360
Other operations and maintenance 49,694 52,960 150,461 156,437
Depreciation and amortization 16,638 16,505 50,076 49,683
Taxes, other than income taxes 8,797 8,538 28,197 28,830
-------- -------- -------- --------
Total 200,072 110,478 527,067 380,182
-------- -------- -------- --------
Fixed charges and other:
Interest expense 6,896 6,948 20,953 21,849
Preferred stock dividends
of subsidiary 818 795 2,415 2,396
Allowance for funds used during
construction (10) (15) (128) (85)
Other 252 159 824 568
-------- -------- -------- --------
Total 7,956 7,887 24,064 24,728
-------- -------- -------- --------
Income from continuing operations
before income taxes 20,475 20,159 42,661 41,273
Income taxes 7,556 7,610 14,360 15,584
-------- -------- -------- --------
Net income from continuing
operations 12,919 12,549 28,301 25,689
Income (loss) from operations of
discontinued business 155 (77) 309 (297)
-------- -------- -------- --------
Net Income $ 13,074 $ 12,472 $ 28,610 $ 25,392
======== ======== ======== ========
Average common shares outstanding 13,611 13,536 13,611 13,444
Earnings per common share
Continuing operations $ .95 $ .93 $ 2.08 $ 1.91
Discontinued operations .01 (.01) .02 (.02)
-------- -------- -------- --------
Earnings per average common
share $ .96 $ .92 $ 2.10 $ 1.89
======== ======== ======== ========
Dividends per common share $ .615 $ .615 $ 1.845 $ 1.845
======== ======== ======== ========
<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>
Nine Months Ended
September 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 30,716 $ 28,085
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash lease income and investment income (11,844) (4,421)
Depreciation and amortization 50,074 49,681
Deferred income taxes, investment tax credit
and regulatory liability of subsidiary, net (4,784) 9,147
Changes in operating assets and liabilities:
Decrease in accounts receivable and accrued
unbilled revenue 10,758 32,047
Decrease (increase) in inventories 1,937 (1,677)
Increase in accounts payable 2,221 594
(Decrease) increase in accrued taxes (3,791) 907
Decrease (increase) in other assets 4,131 (2,570)
(Decrease) in other liabilities (10,128) (6,921)
-------- -------
Total adjustments 38,574 76,787
Net cash provided by operating activities from
continuing operations 69,290 104,872
Net cash used by operating activities of
discontinued operations (1,905) (4,880)
-------- --------
Cash flow from operations 67,385 99,992
-------- --------
Cash flows from investing activities:
Additions to plant (36,418) (34,765)
Investing activities of discontinued operations 676 5,501
Other (5,323) (6,578)
-------- -------
Net cash provided (used) by investing
activities (41,065) (35,842)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in short-term debt 30,031 (39,300)
Decrease in long-term debt (23,011) (19,070)
Common dividends paid (25,112) (24,778)
Preferred dividends paid (2,415) (2,396)
Proceeds from issuance of stock -- 10,276
-------- -------
Net cash used by financing activities (20,507) (75,268)
-------- -------
Net increase (decrease) in cash and temporary
cash investments: 5,813 (11,118)
Cash and temporary cash investments at beginning
of year: 4,941 17,100
-------- -------
Cash and temporary cash investments
at September 30 $ 10,754 $ 5,982
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 26,219 $ 26,818
Income taxes 23,573 13,570
<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>
September 30, December 31,
ASSETS 1997 1996
(Unaudited)
<S> <C> <C>
Utility plant, at original cost:
Electric $1,204,083 $1,186,110
Gas 396,988 393,246
---------- ----------
1,601,071 1,579,356
Less - accumulated provision for depreciation 758,051 724,398
---------- ----------
843,020 854,958
Construction work in progress 20,202 15,092
Plant acquisition adjustments, net of
amortization 1,396 1,930
---------- ----------
Total utility plant 864,618 871,980
---------- ----------
Other property and investments:
Cash surrender value of company-owned life
insurance (net of related policy loans of
$42,762 and $37,948) 1,869 2,128
Other 1,543 1,553
---------- ----------
Total other property and investments 3,412 3,681
---------- ----------
Current assets:
Cash and temporary cash investments 1,997 1,662
Receivables, less reserves of $1,342 and $1,000 34,285 43,604
Accrued unbilled revenue 18,854 30,879
Fuel, at average cost 5,617 7,643
Materials and supplies, at average cost 13,766 15,126
Gas in underground storage, at average cost 25,683 24,222
Prepaid taxes 3,957 1,183
Other 6,138 9,668
---------- ----------
Total current assets 110,297 133,987
---------- ----------
Deferred debits:
Unamortized loss on reacquired debt 5,229 5,572
Unamortized debt expense 2,063 2,198
Prepaid pension cost 496 496
Other 16,006 18,255
---------- ----------
Total deferred debits 23,794 26,521
---------- ----------
Total assets $1,002,121 $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>
September 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 141,058 136,629
---------- ----------
Total common shareholder's equity 326,719 322,290
Preferred stock without mandatory redemption 44,120 44,120
Preferred stock with mandatory redemption 22,000 22,000
Long-term debt 267,824 278,439
---------- ----------
Total capitalization 660,663 666,849
---------- ----------
Current liabilities:
Current maturities of long-term debt 10,650 20,000
Notes payable 12,200 9,900
Accounts payable 41,693 46,126
Accrued taxes 3,622 7,013
Accrued interest 5,277 9,761
Purchased gas adjustment over-recoveries 1,388 601
Level payment plan 597 2,737
Other 3,608 5,831
---------- ----------
Total current liabilities 79,035 101,969
---------- ----------
Deferred liabilities and credits:
Accumulated deferred income taxes 132,500 135,251
Regulatory liability 67,276 68,565
Investment tax credits 21,538 22,801
Capital lease obligation 2,295 2,621
Other 38,814 38,113
---------- ----------
Total deferred liabilities and credits 262,423 267,351
---------- ----------
Total capitalization and liabilities $1,002,121 $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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Operating revenue:
Electric $104,336 $ 96,270 $258,639 $249,048
Gas 19,019 18,594 142,031 128,981
-------- -------- -------- --------
Total operating revenues 123,355 114,864 400,670 378,029
-------- -------- -------- --------
Operating expenses:
Cost of fuel 24,497 21,788 68,240 68,144
Cost of gas 7,383 6,352 82,186 68,195
Purchased power 7,889 3,615 16,035 7,987
Other operations and maintenance 27,163 27,658 83,312 85,617
Depreciation and amortization 15,394 15,009 46,181 45,074
Income taxes 10,369 10,252 22,685 22,394
Other taxes 8,169 7,701 25,961 25,749
-------- -------- -------- --------
Total operating expenses 100,864 92,375 344,600 323,160
-------- -------- -------- --------
Operating income 22,491 22,489 56,070 54,869
-------- -------- -------- --------
Other income and deductions:
Cost of equity funds capitalized 2 8 33 46
Company-owned life insurance, net (252) (160) (824) (569)
Other, net (267) (288) (371) (276)
-------- -------- -------- --------
Total other income and
(deductions) (517) (440) (1,162) (799)
-------- -------- -------- --------
Income before interest expense 21,974 22,049 54,908 54,070
-------- -------- -------- --------
Interest expenses:
Interest on long-term debt 4,960 5,250 15,064 15,777
Cost of borrowed funds
capitalized (7) (7) (95) (39)
Other 684 572 1,984 1,870
-------- -------- -------- --------
Total interest expense 5,637 5,815 16,953 17,608
-------- -------- -------- --------
Net income 16,337 16,234 37,955 36,462
-------- -------- -------- --------
Dividends on preferred stock 818 795 2,415 2,396
-------- -------- -------- --------
Net income available for
common stock $ 15,519 $ 15,439 $ 35,540 $ 34,066
======== ======== ======== ========
<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>
Nine Months Ended
September 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 37,956 $ 36,462
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 46,714 45,608
Deferred income taxes, investment tax credit
and regulatory liability, net (5,302) (3,454)
Changes in operating assets and liabilities:
Decrease in accounts receivable 9,319 7,868
Decrease (increase) in fuel, materials and
supplies, and gas in underground storage 1,925 (1,509)
Decrease in unbilled revenue 12,025 12,430
(Decrease) in accounts payable (4,433) (290)
(Decrease) in accrued taxes and interest (7,875) (8,472)
Capital lease payments 484 484
Decrease in other current assets 756 14,616
(Decrease) in other current liabilities (3,577) (4,462)
Decrease (increase) in other non-current
assets 4,135 (1,090)
Increase in other non-current liabilities 603 1,095
-------- --------
Net cash provided by operating activities 92,730 99,286
-------- --------
Cash flows from investing activities:
Capital expenditures (35,772) (32,132)
Cost of equity funds capitalized (33) (46)
Other (4,880) (914)
-------- --------
Net cash used in investing activities (40,685) (33,092)
-------- --------
Cash flows from financing activities:
Common dividends paid (31,111) (37,767)
Preferred dividends paid (2,415) (2,396)
Long-term debt issued -- --
Long-term debt retired (20,000) (16,000)
Payments on capital lease obligation (484) (484)
Increase (decrease) in short-term borrowing 2,300 (24,100)
-------- --------
Net cash used in financing activities (51,710) (80,747)
-------- --------
Net Increase (decrease) in cash and temporary
cash investments 335 (14,553)
Cash and temporary cash investments at
beginning of year 1,662 16,556
-------- --------
Cash and temporary cash investments at
September 30 $ 1,997 $ 2,003
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest (net of cost of borrowed funds
capitalized) $ 22,267 $ 21,724
Income taxes 32,099 20,066
<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. QST Enterprises Inc.
expects to complete the sale of ESE Land Corporation, a subsidiary of QST
Environmental Inc., in the fourth quarter of 1997. Results of ESE Land
Corporation are being reported as discontinued operations effective with this
reporting period.
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 was 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 nine months ended September 30, 1997, CILCO paid approximately
$180,000 to outside parties for former gas manufacturing plant site
monitoring, legal fees and feasibility studies, and expects to spend
approximately $200,000 during the remainder of 1997. A $2.6 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 September 1997 have been deferred on the Balance Sheets, net of
amounts recovered from customers.
Through September 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.
On January 27, 1997, CILCO intervened in a proceeding pending before the
Federal Energy Regulatory Commission (FERC), to challenge 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 requested that FERC
provide an "open season" during which CILCO may cancel the power agreements in
whole or in part. In an order issued on October 15, 1997, FERC rejected the
challenge to the validity of the agreements and denied CILCO's request for an
open season. However, FERC ordered CIPS to file the agreements with FERC and
on its own motion initiated a separate proceeding to investigate the terms of
the agreements. CILCO has asked FERC to assess penalties under its rules
against CIPS for the failure to file the contracts as required, and FERC has
not yet addressed this issue. FERC's order also failed to address certain
contract issues raised by CILCO, and requests for rehearing of that order are
due to be filed by November 14, 1997. CILCO cannot predict how FERC will
ultimately rule on the issues in these two cases.
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. On July 31, 1997, FERC issued an
order accepting CILCO's charges for the provision of ancillary services that
were proposed in CILCO's Order 888 compliance filing. CILCO's Order 888-A
compliance filing revised two of the ancillary service charges (energy
imbalance service and real power loss service) to make them easier to document
and administer than they were in the Company's Order 888 compliance filing.
The revised charges for these two ancillary services have not yet been
approved, and remain subject to refund. Management believes that the cost of
any future refunds will not have a material adverse effect on CILCO's
financial position or results of 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. QST Environmental Discontinued Operations
QST Environmental has been pursuing a plan to sell substantially all the
assets of its wholly-owned subsidiary, ESE Land Corporation. Completion of
this transaction is anticipated during the fourth quarter of 1997.
Accordingly, the discontinued activities are shown as discontinued operations
in the statement of earnings. Prior year financial statements have been
reclassified to conform to the current year presentation.
Net assets of the discontinued operations are included in the accompanying
consolidated balance sheets as follows:
September December
1997 1996
(In thousands)
Cash $ - $ 912
Note receivable 3,000 3,000
Prepaid expenses 103 -
Real estate held for resale 11,223 7,308
Other assets 62 153
Liabilities (14,233) (11,526)
-------- --------
Net assets of discontinued operation $ 155 $ 153
======== ========
NOTE 6. Financial Instruments and Price Risk Management
Beginning in the third quarter of 1997, QST has entered into commodity futures
contracts, options, and swaps (derivative financial instruments) relating to
its natural gas business activities. Gains and losses arising from derivative
transactions which serve to hedge the impact of market risk associated with
fluctuations in energy prices are recognized in income concurrent with the
related purchases and sales of natural gas. Realized and unrealized gains and
losses on derivative transactions which do not qualify as hedges are
recognized in income as revenues on a current basis. 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
concurrent with the related purchases and sales of natural gas.
At September 30, 1997, the fair value of natural gas derivative financial
instruments was a loss of $1.1 million and the net open fixed price position
of these financial instruments was 0.8 billion cubic feet. The net loss
arising from financial instruments entered into for both hedging and non-
hedging purposes for the nine months ended September 30, 1997 was $.7 million.
QST establishes physical and derivative financial instrument positions in its
normal course of business. These transactions 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 risk management policies of QST. Policies are in place
which limit the amount of total net exposure QST may enter into at any point
in time. Procedures exist which allow for the monitoring of all commitments
and positions with timely reporting to senior management.
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 separately from QST's
energy and telecommunications operations.
QST Environmental is an environmental consulting and engineering firm serving
governmental, industrial and commercial customers. QST Environmental expects
to complete the sale of ESE Land Corporation, a wholly-owned subsidiary, which
acquires environmentally impaired property for remediation and resale, during
the fourth quarter of 1997.
CIM invests in a diversified portfolio of long-term financial investments
which currently includes leveraged leases, energy-related projects and
affordable residential housing.
CVI has invested 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 $60 million on a short-term basis. On September 30, 1997, CILCORP had
committed bank lines of credit of $50 million, of which $42.7 million was
used.
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. Through September 30, 1997,
CILCORP has received $600,808 from investors for the purchase of common
stock through this direct registration program. The dollars received to
date under this plan have been used to purchase shares on the open market
for plan participants. 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
September 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 $35.8 million for the nine months ended
September 30, 1997. Capital expenditures are anticipated to be approximately
$16.5 million for the remainder of 1997 and are estimated to be $50 million in
1998.
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 September 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 $12.2 million of
commercial paper outstanding at September 30, 1997 and expects to issue
commercial paper periodically throughout the remainder of 1997.
QST (Excluding QST Environmental)
Capital expenditures totaled approximately $4.1 million for the nine months
ended September 30, 1997, primarily for construction of fiber optic and other
communications facilities. Capital expenditures for the remainder of 1997 are
expected to be $1 million. 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.
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 estimated installed cost
of the cogeneration system is approximately $10 million. However, the Tower's
current utility provider, Commonwealth Edison (ComEd), has refused to allow
QST necessary access to its distribution system. On April 28, 1997, 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. A hearing on the complaint is
scheduled for December 2, 1997. QST expects to finance the cogeneration
project with a combination of long-term debt and funds provided by CILCORP.
At September 30, 1997, QST had outstanding debt of $12.4 million, all of which
was owed to CILCORP.
QST Environmental
For the quarter ended September 30, 1997, QST Environmental's expenditures for
capital additions and improvements were approximately $1,120,000, which
included $845,000 to acquire land for remediation and resale through its
subsidiary ESE Land. Capital expenditures for the remainder of 1997 are
expected to be $150,000.
QST Environmental has lines of credit with CILCORP under which QST
Environmental may borrow up to $20 million of term debt and up to $15 million
of revolving debt, depending upon the amount of QST Environmental's
receivables. At September 30, 1997, QST Environmental had borrowed
$21 million from CILCORP. Of this amount, $20 million is term debt due May
1998 and $1 million is revolving debt. Based on the amount of its receivables
at September 30, 1997, QST Environmental has $7 million available on its lines
of credit with CILCORP.
CIM
At September 30, 1997, CIM had outstanding debt of $38.5 million, borrowed
from CILCORP. During the fourth quarter of 1996, CIM committed $15.8 million
to fund four affordable housing investments. Through September 30, 1997,
approximately $8.2 million of this commitment has been funded. CIM expects
to contribute approximately $1.9 million in cash for these investments during
the remainder of 1997, $3.3 million in 1998, and substantially all of the
remainder of the cash contributions in 1999. These investments will be
funded through borrowings from CILCORP. On July 21, 1997, CIM invested
$6.9 million in a leveraged lease of a waste-to-energy facility. 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 nine months ended September 30, 1997
and 1996.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Core Businesses:
CILCO
Electric operating income $23,161 $22,687 $45,053 $43,503
Gas operating income (loss) (671) (198) 11,016 11,366
------- ------- ------- -------
Total utility operating income 22,490 22,489 56,069 54,869
Utility other income and
deductions (6,154) (6,255) (18,115) (18,407)
Preferred stock dividends of
CILCO (818) (795) (2,415) (2,396)
------- ------- ------- -------
Total utility net income 15,518 15,439 35,539 34,066
QST (excluding QST Environmental)
net loss (2,285) (787) (4,549) (2,148)
QST Environmental net income
(loss) (includes ESE Land) 251 (715) (818) (3,878)
------- ------- ------- -------
Total core business income 13,484 13,937 30,172 28,040
Other businesses net loss (410) (1,465) (1,562) (2,648)
------- ------- ------- -------
Consolidated net income
available to common
shareholders $13,074 $12,472 $28,610 $25,392
======= ======= ======= =======
</TABLE>
CILCO Electric Operations
The following table summarizes the components of CILCO electric operating
income for the three months and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Components of Electric September 30, September 30,
Operating Income 1997 1996 1997 1996
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Electric retail $96,878 $92,564 $243,866 $239,059
Sales for resale 7,458 3,706 14,773 9,989
------- ------- -------- --------
Total revenue 104,336 96,270 258,639 249,048
------- ------- -------- --------
Cost of sales:
Cost of fuel 24,497 21,788 68,240 68,144
Purchased power expense 7,889 3,615 16,035 7,987
Revenue taxes 4,863 4,796 11,775 11,688
------- ------- -------- --------
Total cost of sales 37,249 30,199 96,050 87,819
------- ------- -------- --------
Gross margin 67,087 66,071 162,589 161,229
------- ------- -------- --------
Operating expenses:
Other operation and maintenance 19,027 19,562 59,244 61,364
Depreciation and amortization 10,949 10,718 32,898 32,203
Income and other taxes 13,950 13,104 25,394 24,159
------- ------- -------- --------
Total operating expenses 43,926 43,384 117,536 117,726
------- ------- -------- --------
Electric operating income $23,161 $22,687 $ 45,053 $ 43,503
======= ======= ======== ========
</TABLE>
Electric gross margin increased 2% for the quarter and 1% for the nine months
ended September 30, 1997, compared to the same periods in 1996. Retail
kilowatt hour (Kwh) sales increased 3% for the quarter and remained constant
for the nine months ended September 30, 1997. Residential and commercial
sales each increased 2% for the quarter and remained constant for the nine
months ended September 30, 1997, compared to the same periods in 1996.
Cooling degree days were 14% higher for the quarter and 2% lower for the nine
months ended September 30, 1997, compared to the same periods in 1996.
Industrial sales increased 6% for the quarter and remained constant for the
nine months ended September 30, 1997, compared to the same periods in 1996.
Industrial sales continue to be impacted by customers switching to off-system
suppliers under CILCO's Power Quest program (see Part II. Item 5. Other
Information, Competition).
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 third quarter and for the nine months
ended September 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 and power marketers, 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 12% for the third quarter of 1997, compared to the same
period in 1996. This increase was due to a 3% increase in generation, and a
16% increase in the cost of coal burned. The cost of fuel remained constant
for the nine months ended September 30, 1997, compared to the same period in
1996. Purchased power increased for the quarter and the nine months ended
September 30, 1997, compared to the same periods in 1996. 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 3% for the quarter and the
nine months ended September 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.
Consulting fees and injury and damage claims also decreased for both periods.
In addition, the 1996 expenses include a $2.2 million pre-tax 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 nine months
ended September 30, 1997.
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 nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Components of Gas September 30, September 30,
Operating Income (Loss) 1997 1996 1997 1996
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Sale of gas $17,748 $17,033 $137,231 $122,979
Transportation services 1,270 1,561 4,799 6,002
------- ------- -------- --------
Total revenue 19,018 18,594 142,030 128,981
------- ------- -------- --------
Cost of sales:
Cost of gas 7,383 6,352 82,186 68,195
Revenue taxes 508 507 5,317 5,560
------- ------- -------- --------
Total cost of sales 7,891 6,859 87,503 73,755
------- ------- -------- --------
Gross margin 11,127 11,735 54,527 55,226
------- ------- -------- --------
Operating expenses:
Other operation and maintenance 8,136 8,096 24,068 24,253
Depreciation and amortization 4,445 4,291 13,283 12,871
Income and other taxes (783) (454) 6,160 6,736
------- ------- -------- --------
Total operating expenses 11,798 11,933 43,511 43,860
------- ------- -------- --------
Gas operating income (loss) $ (671) $ (198) $ 11,016 $ 11,366
======= ======= ======== ========
</TABLE>
Gas gross margin decreased 5% for the quarter and 1% for the nine months ended
September 30, 1997, compared to the same periods in 1996. Retail sales
quantities increased 24% and 1% for the quarter and nine months ended
September 30, 1997, respectively, compared to 1996. A decrease in
transportation revenues of 20% partially offset the increase in retail
revenues. Residential sales decreased 10% for the quarter and decreased 10%
for the nine months ended September 30, 1997. Heating degree days were 36%
lower for the quarter and 5% lower for the nine months ended September 30,
1997, compared to the same periods in 1996. Commercial sales increased 43%
for the third quarter of 1997, and 17% for the nine months ended September 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.
Revenues from gas transportation services decreased 19% and 20%, respectively,
while sales volumes increased 20% and 13% for the quarter and nine months
ended September 30, 1997, compared to the same periods in 1996. Despite
increased transportation sales volumes, transportation revenues decreased due
to increased gas transportation 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 increased 16% for the quarter and increased 21% for the nine
months ended September 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 increase for the third quarter was
primarily due to higher natural gas sales partially offset by lower natural
gas prices. The lower natural gas prices 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 remained relatively constant for the
quarter and nine months ended September 30, 1997, compared to the same periods
in 1996.
Depreciation and amortization expense increased 4% for the quarter and 3% for
the nine months ended September 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 nine months ended
September 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 nine months ended September 30, 1997 and
1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Components of Other Income and September 30, September 30,
Deductions and Interest Expense 1997 1996 1997 1996
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Net interest expense $(5,621) $(5,694) $(16,819) $(17,106)
Income taxes 834 859 2,129 2,155
Other (1,367) (1,420) (3,425) (3,456)
------- ------- -------- --------
Other income (deductions) $(6,154) $(6,255) $(18,115) $(18,407)
======= ======= ======== ========
</TABLE>
Interest expense decreased primarily as a result of a lower long-term debt
balance for the nine months ended September 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 nine months ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Components of QST Net Loss (In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Electric revenue $ 8,140 $ 644 $ 10,593 $ 833
Gas revenue 75,658 166 120,111 166
Telecommunications revenue 200 26 376 55
------- ------- -------- -------
Total revenue 83,998 836 131,080 1,054
Cost of sales:
Cost of electricity 8,421 555 11,184 741
Cost of gas 76,754 166 120,689 166
Cost of sales -
Telecommunications 2 7 15 7
------- ------- ------- -------
Total cost of sales 85,177 728 131,888 914
------- ------- ------- -------
Gross margin (1,179) 108 (808) 140
------- ------- ------- -------
Other expenses:
General and administrative 2,470 1,391 6,319 3,649
Depreciation and
amortization 135 6 260 32
Interest 9 16 158 20
------- ------- ------- -------
Total other expenses 2,614 1,413 6,737 3,701
------- ------- ------- -------
Net loss before
taxes (3,793) (1,305) (7,545) (3,561)
Income taxes (1,508) (518) (2,996) (1,413)
------- ------- ------- -------
QST net loss $(2,285) $ (787) $(4,549) $(2,148)
======= ======= ======= =======
</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 participating in CILCO's
Power Quest programs. After successfully competing for Power Quest program
customers, QST has begun to establish and expand the infrastructure required
to supply energy to customers outside of the CILCO service territory. QST
competes against marketers, brokers and utility affiliates to provide energy
and services to customers of utilities and other energy providers which offer,
or will be required to offer, similar retail competition programs, as well as
marketing energy to customers who already have the ability to choose their
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, Pittsburgh and Houston.
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. 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
final acquisition price, based on a deferred payment arrangement using
predetermined performance measures, cannot currently be determined.
Negative electric gross margin at QST Energy and negative natural gas gross
margin at QST Trading contributed to QST's net losses for the quarter and nine
months ended September 30, 1997. Negative electric gross margin was the
result of retail operations in the pilot programs of Power Quest and another
Illinois utility. Electric wholesale trading generated a positive margin,
which partially offset the negative margin from the electric retail business.
Wholesale electric sales totaled 195,700 megawatt hours in the third quarter,
compared to 2,080 megawatt hours in the second quarter of 1997. The negative
electric retail margin was the result of purchased power cost increases during
the summer cooling season. Contributing to the higher costs was the refusal
by Union Electric/Central Illinois Public Service (UE/CIPS) to provide QST
Trading firm transmission service into CILCO's and another Illinois utility's
service territories for firm power purchases to supply QST customers under ICC
approved pilot programs.
On June 25, 1997, QST Trading filed a complaint at the FERC against UE and
CIPS related to market power and other issues pertaining to transmission
service. Additionally, on October 1, 1997, QST Trading filed a complaint with
the Tenth Judicial Circuit Court of Illinois challenging the ICC's order
authorizing the merger of the parent corporations of UE and CIPS and
authorizing a joint generation dispatch agreement between UE and CIPS. QST
Trading contends that the ICC does not have jurisdiction to approve central
dispatch. QST Trading is seeking a declaratory judgment that the ICC's order
approving central dispatch is void, and that the ICC's approval of the merger
is also void because it is dependent upon the approval of central dispatch.
Wholesale natural gas sales and trading transactions by QST Trading
contributed to the negative gas gross margin for the third quarter and year-to-
date 1997. QST also participates in the Power Quest gas pilot programs, but
revenues from this program are not material. The negative gas gross margin
for the third quarter and year-to-date was primarily due to wholesale trading
losses incurred when natural gas prices increased approximately 36% during the
months of August and September 1997. This price increase occurred as QST
Trading was purchasing supply physically and financially to balance the
portfolio position for these two months. Natural gas volumes have increased
81% from the second to the third quarter of 1997 to approximately 347,000
MMBTU per day due to the Trebor acquisition and market growth initiatives.
QST's general and administrative expenses have increased for the quarter and
the nine months ended September 30, 1997, compared to the same periods in
1996, due to the acquisition of Trebor Resources and an increase in the number
of QST employees to support growing retail and wholesale operations. Net
losses are expected to continue in 1997 as QST continues to develop its
businesses, focused on the newly-emerging deregulated energy markets
developing throughout the United States. Revenues are anticipated to increase
as QST grows through: participation in additional pilot programs, retail
sales of energy to commercial and industrial customers, and wholesale natural
gas and electric transactions.
QST Energy is participating in the Columbia Energy of Pennsylvania gas pilot
program and the statewide Pennsylvania electricity pilot programs, all of
which began November 1, 1997. QST Energy has acquired approximately 4,500 new
natural gas customers through the Columbia Energy natural gas pilot. This
customer growth in Pennsylvania will help position QST for the electricity
pilots. As part of its expansion into the Pennsylvania markets, QST Energy
has opened an office in Pittsburgh.
QST Energy entered into an agreement on July 1, 1997, with R. Hadler and
Company, Inc. (Hadler), a Washington, D.C.-based company, under which 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. Hadler will expand QST's delivery
system through the Hadler network, arranging for the sale of energy to new
customers. QST Energy will provide supply, logistics, trading and retail
sales support through its existing capabilities.
QST Energy is negotiating an agreement with Susquehanna Pfaltzgraff Co., of
York, Pennsylvania, to market and offer electricity to consumers eligible to
participate in the Pennsylvania pilot programs. Privately-held Susquehanna
Pfaltzgraff is a diversified cable, radio and communications provider with
service to over one million customers nationally.
QST Environmental Operations
The following table summarizes environmental and engineering services revenue
and expenses for the three months and nine months ended September 30, 1997 and
1996:
<TABLE>
<CAPTION>
Components of QST Environmental Three Months Ended Nine Months Ended
Net Loss September 30, September 30,
1997 1996 1997 1996
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Environmental and engineering
services revenue $19,392 $20,852 $55,230 $62,672
Direct non-labor project costs 7,652 6,640 19,564 18,495
------- ------- ------- -------
Net revenue 11,740 14,212 35,666 44,177
------- ------- ------- -------
Expenses:
Direct salaries and other costs 5,868 7,324 18,853 23,617
General and administrative 4,674 6,283 15,029 21,189
Depreciation and amortization 877 1,244 2,947 3,866
------- ------- ------- -------
Operating expenses 11,419 14,851 36,829 48,672
------- ------- ------- -------
Interest expense 21 225 281 861
------- ------- ------- -------
Income (loss) before income taxes 300 (864) (1,444) (5,356)
Income taxes 204 (226) (317) (1,775)
------- ------- ------- -------
Net income (loss) from continuing
operations 96 (638) (1,127) (3,581)
Income (loss) from operations of
discontinued business 155 (77) 309 (297)
------- ------- ------- -------
QST Environmental net income
(loss) $ 251 $ (715) $ (818) $(3,878)
======= ======= ======= =======
</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 $2.5 million, or 17%, for the
third quarter and by $8.5 million, or 19%, for the nine months ended
September 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.
Direct salaries and other expenses, which include the cost of professional and
technical staff and other costs billable to customers, decreased during the
three months and nine months ended September 30, 1997. 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 $1.5 million, or 20%, for the
third quarter and by $4.8 million, or 20%, for the nine months ended
September 30, 1997, compared to the same periods in 1996. These decreases
were primarily due to a planned reduction in the number of technical staff to
match decreased levels of business activity.
General and administrative expenses decreased by $1.6 million, or 26%, for the
three months ended September 30, 1997, and decreased by $6.2 million, or 29%,
for the nine months ended September 30, 1997. General and administrative
expenses include non-billable employee time devoted to marketing, proposals,
supervision, and professional development; office supply expenses; and
corporate administrative expenses. The decreases for these periods resulted
from efforts to control administrative and marketing costs, including lower
general and administrative salaries and related benefits expense.
QST Environmental plans to sell substantially all the assets of ESE Land
Corporation, a wholly-owned subsidiary which acquires environmentally impaired
property for remediation and resale. Completion of this transaction is
anticipated during the fourth quarter of 1997. Accordingly, the operations of
ESE Land Corporation are shown as discontinued operations in the statements of
earnings. Prior year financial statements have been reclassified to conform
to the current year presentation. During the third quarter of 1997, ESE Land
recorded a $455,000 pre-tax profit on the sale of real estate.
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 621 full-time equivalent employees at September 30,
1997, compared to 780 employees at September 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 nine months ended September 30, 1997 and 1996.
<TABLE> Three Months Ended Nine Months Ended
<CAPTION> September 30, September 30,
Components of Other Businesses 1997 1996 1997 1996
Net Income (Loss) (In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Other revenue $1,923 $ 2,133 $ 6,812 $ 6,808
------- ------- ------- -------
Expenses:
Operating Expenses 1,715 3,686 7,426 6,943
Depreciation and amortization 48 58 144 163
Interest expense 1,241 881 3,666 3,726
Income and other taxes (671) (1,027) (2,862) (1,376)
------- ------- ------- -------
Total expenses 2,333 3,598 8,374 9,456
------- ------- ------- -------
Other businesses net loss $ (410) $ (1,465) $(1,562) $(2,648)
======= ======= ======= =======
</TABLE>
Other revenues decreased 10% for the three months ended September 30, 1997,
and remained relatively constant for the nine months ended September 30, 1997.
Operating expenses decreased for the three months ended September 30, 1997,
compared to the same period in 1996, primarily due to decreased expenses
related to the Caterpillar Alliance at CVI and decreased utilization of
outside services by CILCORP. Operating expenses increased for the nine months
ended September 30, 1997, compared to the same period in 1996, primarily due
to higher expenses related to the Caterpillar Alliance which began in May 1996
(see Part II. Item 5: Other Information, Power Quest Electric Pilot Programs).
Income and other taxes were higher in the quarter due to higher pre-tax
income, and lower in the nine months ended September 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. Electric Transmission Open Access,"
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 the marketing
of 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 is pending
in the Illinois General Assembly (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. Participating
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 $6.2 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.
Based on Power Quest participation levels by eligible industrial customers
through September 1997, CILCORP experienced a reduction of $5.3 million of pre-
tax income for the first nine months of 1997 (including electric margin lost
by CILCO, CVI costs associated with the Caterpillar alliance, and QST margin
on sales to Power Quest industrial customers). CILCO has offset some of the
profit margin lost under Power Quest with increased wholesale electric sales
outside its service territory. 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 $6.7 million related to industrial customers participating in
Power Quest.
In the other Power Quest electric program, CILCO has 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 September
1997, CILCORP experienced a reduction of $.8 million in pre-tax income for the
first nine months of 1997. Assuming the same participation level for all of
1997, CILCORP would experience a reduction to pre-tax income of $1 million in
1997.
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 nine 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 October 30, the Illinois Senate voted 57-2 in favor of an amended version
of legislation passed earlier this year by the Illinois House of
Representatives which comprehensively restructures the electric utility
industry in Illinois. The legislation, which is expected to return to the
Illinois House for a final vote on the Senate's changes in mid-November,
includes provisions for rate reductions, limits utilities' return on equity
invested in the electric business, imposes customer exit fees to allow
utilities to recover stranded costs, and, by virtue of the exit fees, prevents
full consumer choice for residential customers until the end of 2006.
CILCO is seeking legislative relief from a mandatory 5% rate reduction,
effective August 1, 1998, that is included in the Senate-passed version and
applies to the state's smaller, lower-cost utilities. The bill provides for
15% rate reductions on that same date for the state's two largest utilities,
who have been supportive of the legislation. 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.
CILCO's Union Contracts
The International Brotherhood of Electric Workers Local 51 (IBEW) ratified the
Company's contract proposal on October 10, 1997. CILCO's contract with the
IBEW expired on June 30, 1997, and the IBEW membership had been working
without a contract since that time. The new contract expires on July 1, 2000,
and among other items, provides for 3% wage increases each year of the
contract. The IBEW represents approximately 406 CILCO gas and electric
department employees. The current contract with the International Brotherhood
of Firemen and Oilers Local 8 (IBF&O), which represents approximately 201
CILCO power plant 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 November 10, 1997 R. O. Viets
R. O. Viets
President and
Chief Executive Officer
Date November 10, 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 November 10, 1997 T. S. Romanowski
T. S. Romanowski
Vice President and Chief
Financial Officer
Date November 10, 1997 T. D. Hutchinson
T. D. Hutchinson
Controller and Manager
of Accounting
<TABLE> <S> <C>
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<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<NAME> CENTRAL ILLINOIS LIGHT COMPANY
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