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, 1998
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, 1998 13,610,680
CENTRAL ILLINOIS LIGHT COMPANY
Common stock, no par value,
shares outstanding and privately
held by CILCORP Inc. at September 30, 1998 13,563,871
CILCORP INC.
AND
CENTRAL ILLINOIS LIGHT COMPANY
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
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 18-31
CILCORP Inc. and Central Illinois Light Company
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 31
Item 5: Other Information 31-32
Item 6: Exhibits and Reports on Form 8-K 33
Signatures 34-35
<PAGE>
<TABLE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<CAPTION>
September 30, December 31,
1998 1997
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 7,757 $ 10,576
Receivables, less reserves of
$2,853 and $2,454 98,498 141,234
Accrued unbilled revenue 26,977 38,775
Fuel, at average cost 4,988 7,816
Materials and supplies, at
average cost 15,066 13,685
Gas in underground storage, at
average cost 23,947 22,666
Prepayments and other 10,500 10,971
---------- ----------
Total current assets 187,733 245,723
---------- ----------
Investments and other property:
Investment in leveraged leases 144,972 146,458
Cash surrender value of company-owned
life insurance, net of related
policy loans of $47,976 and $42,898 2,161 2,399
Other investments 17,321 18,675
---------- ----------
Total investments and other
property 164,454 167,532
---------- ----------
Property, plant and equipment:
Utility plant, at original cost
Electric 1,234,565 1,213,585
Gas 407,189 401,870
---------- ----------
1,641,754 1,615,455
Less - accumulated provision for
depreciation 811,334 769,792
---------- ----------
830,420 845,663
Construction work in progress 36,577 21,550
Other, net of depreciation 15,461 22,188
---------- ----------
Total property, plant and
equipment 882,458 889,401
---------- ----------
Other assets 41,984 32,163
---------- ----------
Total assets $1,276,629 $1,334,819
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these Balance Sheets.
</TABLE>
<PAGE>
<TABLE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<CAPTION>
September 30, December 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ -- $ 22,185
Notes payable 83,107 62,150
Accounts payable 87,177 132,286
Accrued taxes 6,397 2,810
Accrued interest 5,069 9,473
Purchased gas adjustment
over-recoveries 288 1,666
Other 7,179 19,798
---------- ----------
Total current liabilities 189,217 250,368
---------- ----------
Long-term debt 298,567 298,528
---------- ----------
Deferred credits and other
liabilities:
Accumulated deferred income taxes 236,787 241,013
Regulatory liability of regulated
subsidiary 56,514 56,807
Deferred investment tax credits 19,868 21,117
Other 52,400 48,273
---------- ----------
Total deferred credits and
other liabilities 365,569 367,210
---------- ----------
Preferred stock of subsidiary 66,120 66,120
---------- ----------
Stockholders' equity:
Common stock, no par value;
authorized 50,000,000 shares -
outstanding 13,610,680 shares 192,567 192,567
Retained earnings 163,913 159,350
Accumulated other comprehensive
income 676 676
---------- ----------
Total stockholders' equity 357,156 352,593
---------- ----------
Total liabilities and
stockholders' equity $1,276,629 $1,334,819
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these Balance Sheets.
</TABLE>
<PAGE>
<TABLE>
CILCORP INC AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands)*
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenue:
Electric utility $115,236 $104,336 $282,718 $258,639
Gas utility 21,270 19,019 119,482 142,031
Non-regulated energy and
energy services 123,575 83,861 452,783 130,932
Environmental and
engineering services 14,760 19,392 50,822 55,230
Other business 4,637 1,695 14,652 6,585
-------- -------- -------- --------
Total 279,478 228,303 920,457 593,417
-------- -------- -------- --------
Operating expenses:
Fuel for generation and
purchased power 85,235 40,806 217,515 95,458
Gas purchased for resale 86,264 84,137 408,603 202,875
Other operations and maint. 48,148 49,461 154,100 149,439
Depreciation and amortization 17,399 16,530 51,032 49,888
Taxes, other than income taxes 10,342 8,789 31,267 28,177
-------- -------- -------- --------
Total 247,388 199,723 862,517 525,837
-------- -------- -------- --------
Fixed charges and other:
Interest expense 7,606 6,876 22,698 20,882
Preferred stock dividends of
subsidiary 797 818 2,396 2,415
Allowance for funds used
construction (14) (10) (20) (128)
Other 212 252 745 824
-------- -------- -------- --------
Total 8,601 7,936 25,819 23,993
-------- -------- -------- --------
Income from continuing oper.
before income taxes 23,489 20,644 32,121 43,587
Income taxes 8,805 7,622 9,994 14,727
-------- -------- -------- --------
Net income from
continuing operations 14,684 13,022 22,127 28,860
Income (loss) from operations
of discontinued business,
net of tax of ($176), $41,
($463), and ($152) (267) 52 (704) (250)
Gain on sale of assets of
discontinued business,
net of tax of $5,425 8,252 -- 8,252 --
-------- -------- -------- --------
Net income 22,669 13,074 29,675 28,610
Other comprehensive income -- -- -- --
-------- -------- -------- --------
Comprehensive income $ 22,669 $ 13,074 $ 29,675 $ 28,610
======== ======== ======== ========
Average common shares
outstanding - basic 13,611 13,611 13,611 13,611
======== ======== ======== ========
Earnings per common
share - basic
Continuing operations $ 1.08 $ .96 $ 1.63 $ 2.12
Discontinued operations .59 -- .55 (.02)
-------- -------- -------- --------
Net income per common
share - basic $ 1.67 $ .96 $ 2.18 $ 2.10
======== ======== ======== ========
Average common shares
outstanding - diluted 13,694 13,611 13,694 13,611
======== ======== ======== ========
Earnings per common
share - diluted
Continuing operations $ 1.07 $ .96 $ 1.62 $ 2.12
Discontinued operations .59 -- .55 (.02)
-------- -------- -------- --------
Net income per common
share - diluted $ 1.66 $ .96 $ 2.17 $ 2.10
======== ======== ======== ========
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,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 24,523 $ 31,275
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Non-cash lease income and investment income (5,155) (11,844)
Cash receipts in excess of debt service
on leases 6,838 39
Depreciation and amortization 50,607 49,887
Deferred income taxes, investment tax credit
and regulatory liability of subsidiary, net (5,850) (4,784)
Changes in operating assets and liabilities:
Decrease in accounts receivable and
accrued unbilled revenue 54,805 10,949
Decrease in inventories 166 1,937
(Decrease) increase in accounts payable (46,088) 2,179
Increase (decrease) in accrued taxes 3,762 (3,979)
(Increase) decrease in other assets (9,799) 4,465
Decrease in other liabilities (14,344) (10,154)
-------- --------
Total adjustments 34,942 38,695
-------- --------
Net cash provided by operating activities
from continuing operations 59,465 69,970
-------- --------
Net cash provided (used) by operating
activities of discontinued operations 226 (2,546)
-------- --------
Cash flow from operations 59,691 67,424
-------- --------
Cash flows from investing activities:
Additions to plant (47,418) (33,005)
Proceeds from sale of discontinued operations 20,000 --
Other (689) (5,362)
-------- --------
Net cash used by investing activities
from continuing operations (28,107) (38,367)
-------- --------
Net cash used by investing activities
from discontinued operations (5,706) (2,737)
-------- --------
Cash flow from investing activities (33,813) (41,104)
-------- --------
Cash flow from financing activities:
Net increase in short-term debt 20,950 30,031
Decrease in long-term debt (22,139) (23,011)
Common dividends paid (25,112) (25,112)
Preferred dividends paid (2,396) (2,415)
-------- --------
Cash flow from financing activities (28,697) (20,507)
Net (decrease) increase in cash and
temporary cash investments: (2,819) 5,813
Cash and temporary cash investments
at beginning of year: 10,576 4,941
-------- --------
Cash and temporary cash investments at
September 30 $ 7,757 $ 10,754
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $23,769 $ 26,219
Income taxes 19,611 23,573
<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 1998 1997
(Unaudited)
<S> <C> <C>
Utility plant, at original cost:
Electric $1,234,565 $1,213,585
Gas 407,189 401,870
---------- ----------
1,641,754 1,615,455
Less - accumulated provision
for depreciation 811,334 769,792
---------- ----------
830,420 845,663
Construction work in progress 36,577 21,550
Plant acquisition adjustments,
net of amortization 683 1,217
---------- ----------
Total utility plant 867,680 868,430
---------- ----------
Other property and investments:
Cash surrender value of company-owned
life insurance (net of related
policy loans of $47,976 and $42,898) 2,036 2,399
Other 1,214 1,214
---------- ----------
Total other property and
investments 3,250 3,613
---------- ----------
Current assets:
Cash and temporary cash investments 714 698
Receivables, less reserves of
$906 and $703 35,707 44,550
Accrued unbilled revenue 20,188 31,248
Fuel, at average cost 4,988 7,816
Materials and supplies,
at average cost 15,066 13,685
Gas in underground storage,
at average cost 23,208 22,118
Prepaid taxes 3,450 1,189
Other 9,029 6,331
---------- ----------
Total current assets 112,350 127,635
---------- ----------
Deferred debits:
Unamortized loss on reacquired debt 3,341 3,581
Unamortized debt expense 1,892 2,019
Prepaid pension cost 455 455
Other 21,005 16,922
---------- ----------
Total deferred debits 26,693 22,977
---------- ----------
Total assets $1,009,973 $1,022,655
========== ==========
<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 1998 1997
(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 139,206 146,405
Accumulated other comprehensive income 676 676
---------- ----------
Total common shareholder's equity 325,543 332,742
Preferred stock without mandatory
redemption 44,120 44,120
Preferred stock with mandatory redemption 22,000 22,000
Long-term debt 267,872 267,836
---------- ----------
Total capitalization 659,535 666,698
---------- ----------
Current liabilities:
Current maturities of long-term debt -- 10,650
Notes payable 37,900 21,300
Accounts payable 40,229 44,844
Accrued taxes 6,041 2,593
Accrued interest 5,262 9,234
Purchased gas adjustment
over-recoveries 288 1,666
Level payment plan -- 2,375
Other 4,714 4,670
---------- ----------
Total current liabilities 94,434 97,332
---------- ----------
Deferred credits and other
liabilities:
Accumulated deferred income taxes 134,934 139,274
Regulatory liability 56,514 56,807
Deferred investment tax credit 19,868 21,117
Capital lease obligation 1,827 2,182
Other 42,861 39,245
---------- ----------
Total deferred credits and
other liabilities 256,004 258,625
---------- ----------
Total capitalization and
liabilities $1,009,973 $1,022,655
========== ==========
<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,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating revenue:
Electric $115,236 $104,336 $282,718 $258,639
Gas 21,270 19,019 119,482 142,031
-------- -------- -------- --------
Total operating revenues 136,506 123,355 402,200 400,670
-------- -------- -------- --------
Operating expenses:
Cost of fuel 25,625 24,497 71,102 68,240
Cost of gas 9,139 7,383 63,295 82,186
Purchased power 10,831 7,889 23,683 16,035
Other operations and maint. 27,949 27,163 85,642 83,312
Depreciation and amortization 16,344 15,394 47,853 46,181
Income taxes 12,046 10,369 23,872 22,685
Other taxes 9,757 8,169 29,021 25,961
-------- -------- -------- --------
Total operating expenses 111,691 100,864 344,468 344,600
-------- -------- -------- --------
Operating income 24,815 22,491 57,732 56,070
-------- -------- -------- --------
Other income and deductions:
Cost of equity funds capital. -- 2 -- 33
Company-owned life insur., net (333) (252) (745) (824)
Other, net 302 (267) 278 (371)
-------- -------- -------- --------
Total other income and
(deductions) (31) (517) (467) (1,162)
-------- -------- -------- --------
Income before interest expense 24,784 21,974 57,265 54,908
-------- -------- -------- --------
Interest expenses:
Interest on long-term debt 4,808 4,960 14,690 15,064
Cost of borrowed funds
capitalized (14) (7) (20) (95)
Other 926 684 2,286 1,984
-------- -------- -------- --------
Total interest expense 5,720 5,637 16,956 16,953
-------- -------- -------- --------
Net income 19,064 16,337 40,309 37,955
-------- -------- -------- --------
Dividends on preferred stock 797 818 2,396 2,415
-------- -------- -------- --------
Net income available for
common stock 18,267 15,519 37,913 35,540
-------- -------- -------- --------
Other comprehensive income -- -- -- --
-------- -------- -------- --------
Comprehensive income $ 18,267 $ 15,519 $ 37,913 $ 35,540
======== ======== ======== ========
<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,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 40,309 $ 37,956
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 48,386 46,714
Deferred income taxes, investment tax
credit and regulatory liability, net (5,883) (5,302)
Changes in operating assets and liabilities:
Decrease in accounts receivable 8,843 9,319
Decrease in fuel, materials and supplies,
and gas in underground storage 357 1,925
Decrease in unbilled revenue 11,060 12,025
Decrease in accounts payable (4,615) (4,433)
Decrease in accrued taxes and
interest (523) (7,875)
Capital lease payments 484 484
(Increase) decrease in other current assets (4,959) 756
Decrease in other current
liabilities (3,710) (3,577)
(Increase) decrease in other non-current assets (2,140) 4,135
Increase in other non-current liabilities 3,291 603
-------- --------
Net cash provided by operating activities 90,900 92,730
-------- --------
Cash flows from investing activities:
Capital expenditures (45,155) (35,772)
Cost of equity funds capitalized -- (33)
Other (3,687) (4,880)
-------- --------
Net cash used in investing activities (48,842) (40,685)
-------- --------
Cash flow from financing activities:
Common dividends paid (45,112) (31,111)
Preferred dividends paid (2,396) (2,415)
Long-term debt retired (10,650) (20,000)
Payments on capital lease obligation (484) (484)
Short-term borrowing 16,600 2,300
-------- --------
Net cash used in financing activities (42,042) (51,710)
-------- --------
Net increase in cash and temporary
cash investments 16 335
Cash and temporary cash investments at
beginning of year 698 1,662
-------- --------
Cash and temporary cash investments at
September 30 $ 714 $ 1,997
======== ========
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest (net of cost of borrowed
funds capitalized) $ 21,623 $ 22,267
Income taxes 28,655 32,099
<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. Formerly a CILCORP first-tier subsidiary, ESE became a
subsidiary of QST effective October 29, 1996. Effective June 1,
1997, ESE began operating under the name QST Environmental Inc. (QST
Environmental). CILCORP owns directly or indirectly 100% of the
common stock of its first-tier subsidiaries. The consolidated
financial statements of CILCO include the accounts of CILCO and its
subsidiaries, CILCO Exploration and Development Company and CILCO
Energy Corporation. CILCORP is currently reevaluating its sales and
marketing strategy for QST Energy Inc.(QST Energy), a subsidiary of
QST, due to the uncertainties related to energy deregulation and the
immaturity and illiquidity of competitive energy markets. In June
1998, QST Energy Trading Inc. (QST Trading), a QST Energy subsidiary,
incurred after-tax losses relating to wholesale electricity contracts
of approximately $6.6 million. These losses were primarily the
result of an unprecedented, sudden increase in electricity prices
during the week of June 22. As a part of this strategic
reevaluation, CILCORP is restructuring operating and marketing
responsibilities within and among its current business segments. The
Company will focus on energy operations within Illinois and
consequently, reduce the scope of its energy trading operations. QST
completed the sale of substantially all of the assets of ESE Land
Corporation, a subsidiary of QST Environmental, in the fourth quarter
of 1997. In addition, QST completed the sale of its subsidiary, QST
Communications Inc., in the third quarter of 1998. Therefore,
results of both ESE Land Corporation and QST Communications Inc. are
being reported as discontinued operations. Prior year amounts have
been reclassified on a basis consistent with the 1998 presentation.
The accompanying unaudited consolidated financial statements have
been prepared according to the rules and regulations of the
Securities and Exchange Commission (SEC). Although CILCORP believes
the disclosures are adequate to make the information presented not
misleading, these consolidated financial statements should be read
along with the Company's 1997 Annual Report on Form 10-K.
In the Company's opinion, the consolidated financial statements
furnished reflect all normal and recurring adjustments necessary for
a fair presentation of the results of operations for the periods
presented. Operating results for interim periods are not necessarily
indicative of operating results to be expected for the year or of the
Company's future financial condition.
NOTE 2. Contingencies
Gas Manufacturing Plant Sites
CILCO continues to investigate and/or monitor four former gas
manufacturing plant sites located within CILCO's present gas service
territory. The purpose of the investigations is to determine if
waste materials, principally coal tar, are present, whether such
waste materials constitute an environmental or health risk and if
CILCO is responsible for the remediation of any remaining waste
materials at those sites.
During the nine months ended September 30, 1998, CILCO paid
approximately $1 million to outside parties for former gas
manufacturing plant site monitoring, remediation and legal fees, and
expects to spend approximately $.8 million during the remainder of
1998. A $4 million liability and a corresponding regulatory asset
are recorded on the Balance Sheets representing the minimum amount of
coal tar investigation and remediation costs CILCO expects to incur
and recover in the future. Coal tar remediation costs incurred
through September 1998 have been deferred on the Balance Sheets, net
of amounts recovered from customers.
Through September 30, 1998, CILCO has recovered approximately $5.5
million in coal tar remediation costs from its customers through a
gas rate rider approved by the Illinois Commerce Commission (ICC).
Currently, that rider allows recovery of prudently incurred coal tar
remediation costs in the year that the expenditures occur. Under
these circumstances, management believes that the cost of coal tar
remediation will not have a material adverse effect on CILCO's
financial position or results of operations.
CILCO's Union Contracts
The International Brotherhood of Electrical Workers Local 51 (IBEW)
ratified its current agreement on October 10, 1997. The current
contract expires on July 1, 2000. The IBEW represents approximately
391 CILCO gas and electric department employees. The International
Brotherhood of Firemen and Oilers Local 8 (IBF&O), ratified the
Company's contract proposal on October 23, 1998. CILCO's contract
with the IBF&O expired on July 1, 1998, and the IBF&O membership had
been working without a contract since that time. The new contract
expires on July 1, 2001. The IBF&O represents approximately 202
CILCO power plant employees.
NOTE 3. Commitments
In August 1990, CILCO entered into a firm, wholesale power purchase
agreement with Central Illinois Public Service Company, now
AmerenCIPS (CIPS). This agreement provided for a minimum contract
delivery rate from CIPS of 90 MW until the contract expired in May
1998.
In March 1995, CILCO and CIPS amended a limited-term power agreement
reached in November 1992. This agreement, 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 CIPS' failure
to obtain FERC approval of the agreements. In the alternative, CILCO
requested that FERC provide an "open season" during which CILCO may
cancel the power agreements in whole or in part. In an 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, CIPS was ordered to file the agreements with FERC, and FERC
on its own motion initiated a separate proceeding to investigate the
terms of the agreements. Hearings in that proceeding have concluded,
and the parties are currently awaiting the order of the
administrative law judge. CILCO has asked FERC to assess penalties
against CIPS under FERC's rules for CIPS' failure to file the
contracts as required. FERC has not yet made a final ruling on this
issue. FERC's order also failed to address certain contract issues
raised by CILCO. FERC denied rehearing of that order on February 3,
1998, and CILCO has appealed to the United States Court of Appeals
for the District of Columbia Circuit for a review of FERC's orders
concerning the CIPS contract. CILCO cannot predict how FERC or the
Court will ultimately rule on the issues in these two cases.
NOTE 4. Discontinued Operations
ESE Land Corporation
In November 1997, QST Environmental Inc. sold substantially all of
the assets of its wholly-owned subsidiary, ESE Land Corporation, for
$9.5 million in cash and residual interests in three newly-formed
limited liability corporations valued at $5.962 million, resulting in
an after-tax gain of approximately $2.7 million. Accordingly, the
activities are shown as discontinued operations on the income
statement. Prior year financial statements have been reclassified to
conform to the current year presentation.
QST Communications Inc.
On August 21, 1998, QST sold the common equity of its wholly-owned
fiber optic-based telecommunications subsidiary, QST Communications
Inc., to McLeodUSA Telecommunications Services, Inc., for $20 million
in cash and stock options valued at $5.5 million, resulting in an
after-tax gain of approximately $8.3 million. Accordingly, the
activities of this subsidiary are shown as discontinued operations on
the income statement. Prior year financial statements have been
reclassified to conform to the current year presentation.
NOTE 5. Financial Instruments and Price Risk Management
As of September 30, 1998, QST had open derivative financial
instruments representing hedges of natural gas sales of 5.7 Bcf and
natural gas purchases and inventories of 5.6 Bcf for commitments
through 1998. The net deferred gain on these derivatives as of
September 30, 1998, was approximately $.2 million. The net loss
reflected in operating results arising from financial instruments
entered into by QST for hedging and trading purposes was $1.9 million
for the nine months ended September 30, 1998.
NOTE 6. New Accounting Pronouncements
AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," was issued
in March 1998. This SOP provides guidance on both the accounting for
the costs of software developed or obtained for internal use and the
determination of whether computer software is for internal use. This
SOP applies to all non-governmental entities and is effective for
financial statements beginning after December 15, 1998. The Company
does not expect this SOP to have a material effect on its financial
position, results of operations or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). The statement establishes accounting and
reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position
and measure those instruments at fair value. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company has not yet adopted this pronouncement and has not
yet determined its effect on the Company's financial position,
results of operations or cash flows.
NOTE 7. Earnings Per Share
The following data show the amounts used in computing earnings per
share and the effect on income and the weighted average number of
shares of dilutive potential common stock. The shares calculated
for potential dilution result from Award Agreements entered into
pursuant to the CILCORP Shareholder Return Incentive Compensation
Plan.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
(In thousands)
<S> <C>
Income available to common shareholders $29,675
Weighted average number of common shares
used in Basic Earnings Per Share 13,611
Weighted number of dilutive potential common
shares used in Diluted Earnings Per Share 83
</TABLE>
The Company adopted Statement of Financial Accounting Standards No.
128, Earnings Per Share, for the year ended December 31, 1997.
Restatement of nine months ended September 30, 1997 is not applicable
as no potential common stock dilution occurred until the fourth
quarter of 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CILCORP Inc. (CILCORP or the Company) is the parent of four first-
tier subsidiaries: Central Illinois Light Company (CILCO), QST
Enterprises Inc. (QST), CILCORP Investment Management Inc. (CIM), and
CILCORP Ventures Inc. (CVI). The operations of CIM and CVI, 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 retail and wholesale customers through its subsidiary,
QST Energy Inc. (QST Energy) which began operations in 1996. In
June, QST Energy's subsidiary, QST Energy Trading Inc., incurred
after-tax losses of approximately $6.6 million relating to wholesale
electricity contracts following an unprecedented sudden increase in
electricity prices. Subsequently, on June 29, 1998, CILCORP
announced it was reevaluating its strategy for QST Energy, and
indicated that the Company would focus on opportunities for
profitable growth in Illinois, de-emphasizing energy trading
activities at QST. In August, QST completed the sale of QST
Communications Inc., a wholly-owned subsidiary which provides
telecommunications services. QST's operations include those of QST
Environmental Inc. (QST Environmental), a former first-tier CILCORP
subsidiary which became a QST subsidiary effective October 29, 1996.
QST Environmental's results are reported separately from QST's energy
and discontinued telecommunications operations.
QST Environmental is an environmental consulting and engineering firm
serving governmental, industrial and commercial customers.
CIM invests in a diversified portfolio of long-term financial
investments which currently includes leveraged leases, energy-related
projects and affordable residential housing.
CVI primarily invests in ventures in energy-related products and
services. CVI has an 80% interest in the Agricultural Research and
Development Corporation and has one wholly-owned subsidiary, CILCORP
Energy Services Inc., (CESI). CESI's primary business is the sale of
non-regulated energy services, including non-regulated sales of
natural gas.
The Company is continually investigating and exploring strategic
restructuring opportunities, including potential combinations and
alliances involving other investor-owned utility companies, as well
as other companies engaged in the sale at retail or wholesale of
electricity, natural gas and related products and services. Such
restructuring activity has become more prevalent in the utility
industry over the last few years. An obvious corollary to such
activity is that the Company may acquire other companies or may
itself be acquired. The Company's policy prohibits management from
commenting on any possible merger, acquisition, or other major
restructuring prior to the time that the law requires public
disclosure. Consequently, the Company may engage in preliminary
discussions or negotiations at any time, without disclosing their
existence, that could subsequently lead to a public announcement.
As part of the reevaluation of its sales and marketing strategy for
QST Energy, CILCORP is restructuring operating and marketing
responsibilities within and between its current business segments.
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; 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 energy
customers; changes in technology; third-party noncompliance with Year
2000 requirements; pricing and transportation of commodities; market
supply and demand for energy and energy derivative financial
instruments; market supply and demand for environmental consulting,
engineering 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 or refinance debt
as it matures.
Year 2000
Management continues to evaluate the impact of Year 2000 issues on
the Company's computer software systems and operations. At CILCO, an
information technology software evaluation began in 1996. Systems
were reviewed, teams were formed, business cases were developed, and
a schedule was created for the analysis of all application code and
for the replacement or modification of those systems that were
identified as obsolete and/or having potential Year 2000 (Y2K)
issues. A Year 2000 team was established in March 1998, consisting
of personnel from each operating division of CILCO. In conjunction
with the formation of the Year 2000 team, an outside firm
specializing in Year 2000 projects was retained in March 1998 to
establish a Y2K project office and the overall Y2K project plans.
The project was divided into three phases as follows:
Phase I tasks included inventorying all present systems for embedded
chips having potential Y2K issues, contacting all manufacturers of
embedded chip devices for the Y2K status of said devices, identifying
and surveying all critical suppliers, and inventorying all
information technology hardware and software for analysis of Y2K
problems. Phase I was completed in August 1998.
Phase II is currently in progress. This phase includes Y2K
compliance testing of all suspect embedded chip devices identified in
Phase I in the power plants, service centers, and business offices.
In addition, outside consultants are evaluating all mainframe
application code to identify specific instances of date problems in
each application program. This effort is expected to be completed by
November 30, 1998.
Phase III will include the upgrade/replacement and re-testing of
embedded chip devices found not to be Y2K compliant during Phase II.
This phase will also include upgrading all mainframe computer
operating software to current Y2K compliant versions and defining Y2K
contingency plans for each business unit. Computer application code
that is determined to have Y2K date related problems during Phase II
will be corrected. Testing of all applications which have undergone
Y2K upgrades/modifications, testing of operating system software, and
development and testing of contingency plans through simulation or
actual tests, where practical, will complete Phase III. This effort
is expected to be completed by May 1, 1999.
An estimated $2 million (historical and future costs) will be spent
for embedded chip analysis, vendor management, application code
scanning, remediation, testing and contingency planning at CILCO.
Approximately $30.7 million will be spent prior to the year 2000 for
system replacements or hardware upgrades initiated for business
purposes other than solely Year 2000 compliance.
For non-utility subsidiaries, two major systems have been evaluated
for Y2K problems. At QST Environmental, the BST Billing and Project
Accounting System is being upgraded to a Y2K compliant version. This
project is on schedule and targeted for implementation by January
1999. Replacement of this system will cost approximately $1 million.
At the Holding Company, the Shareholder Records System has been
upgraded to a new Y2K compliant version of the same system previously
used. Installation has been completed, with Y2K testing scheduled
for completion during fourth quarter 1998. Costs for this
application upgrade were approximately $10,000.
Based upon the Company's current stage of completion of the Y2K
project, it is not practical to predict the most likely remaining
risks associated with the Y2K issue. However, the Company currently
believes it will continue to remain on schedule and will be able to
achieve Year 2000 compliance, as discussed above, through a
combination of modifications of certain existing programs and
systems, the replacement of others with new software that is Y2K
compliant, and the development of contingency plans. If such
modifications and conversions are not made, however, or are not made
in a timely manner, the Year 2000 issue could have a material impact
on the Company's operations. In addition, management cannot predict
the nature or impact on operations of third-party noncompliance with
Year 2000 requirements beyond the assurances given during critical
vendor assessments.
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, 1998, CILCORP had committed bank lines of credit of
$60 million, of which $45.2 million was used.
Depending on market conditions and corporate needs, the Company may
issue additional shares of common stock through the CILCO
Employees' Savings Plan (ESP) or the CILCORP Inc. Investors Choice
Automatic Reinvestment and Stock Purchase Plan (DRIP) at any time.
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. As
of the date of this filing, neither the ESP nor the DRIP is
utilizing original-issue stock to meet plan requirements.
The Company had $30.5 million of medium-term notes outstanding at
September 30, 1998, after retirement of $11.5 million in July 1998.
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 $45.2 million for the nine months ended
September 30, 1998. Capital expenditures are anticipated to be
approximately $16.7 million for the remainder of 1998 and are
estimated to be $60.5 million in 1999. Included in 1998 and 1999
capital expenditures are $16.6 million and $11.4 million,
respectively, for information technology projects.
CILCO retired $10.65 million of medium-term notes in June 1998.
CILCO does not plan to issue long-term debt during the remainder of
1998. CILCO intends to finance its 1998 and 1999 capital
expenditures with funds provided by operations.
As of September 30, 1998, CILCO had committed bank lines of credit
aggregating $45 million, all of which were unused. CILCO uses these
lines of credit to support issuance of short-term commercial paper.
CILCO had $37.9 million of commercial paper outstanding at September
30, 1998 and expects to issue commercial paper periodically
throughout the remainder of 1998.
QST (Excluding QST Environmental)
Capital expenditures totaled approximately $7.6 million for the nine
months ended September 30, 1998, including $5.7 million for
construction of fiber optic and other communications facilities by
QST Communications Inc. (See Note 4. Discontinued Operations) On
May 22, the Illinois Commerce Commission (ICC) ruled it did not have
the authority to require Commonwealth Edison to allow QST access to
the Sears Tower distribution system to build a cogeneration system.
On August 7, 1998, QST filed an appeal with the First District
Appellate Court related to this ruling. Approximately $1 million has
been capitalized to date for this project. Other than litigation
costs, QST does not plan to incur capital expenditures for this
project during the remainder of 1998, and will write-off all or a
portion of the costs capitalized to date should the appeal fail and
the project not proceed as planned. QST working capital balances
increased by $22.4 million during the third quarter of 1998 due to an
increase in accounts receivable and unbilled revenues due to QST
Energy's business growth in California, and to a reduction in short-
term debt due to the sale of QST Communications Inc. QST expects to
finance working capital needs during the remainder of 1998 with funds
provided by the Holding Company.
At September 30, 1998, QST Enterprises Inc. had no outstanding debt
other than at QST Environmental.
QST Environmental
For the nine months ended September 30, 1998, QST Environmental's
expenditures for capital additions and improvements were
approximately $.6 million. Capital expenditures for the remainder of
1998 are expected to be $.3 million, which includes the replacement
of the existing accounting/project management system.
QST Environmental has a line of credit with CILCORP under which it
may borrow up to $15 million, depending upon the amount of QST
Environmental's receivables and fixed assets. This line of credit
expires in May 2000. At September 30, 1998, QST Environmental had
borrowed $8 million from CILCORP. Based upon its current receivables
and fixed assets, QST Environmental has an additional $7 million
available under this revolving line of credit.
CIM
At September 30, 1998, CIM had $35 million of outstanding debt owing
to CILCORP. During 1997 and prior years, CIM committed to invest
$16.6 million in affordable housing tax credit funds. Through
September 30, 1998, approximately $12.8 million of these
commitments had been funded. CIM expects to contribute
approximately $1.4 million in cash for these investments during the
remainder of 1998, $1.4 million in 1999, and lesser amounts each
year thereafter through 2006. These investments will be funded
through borrowings from CILCORP. CIM expects to finance any other
new investments and working capital needs during the remainder of
1998 with a combination of funds generated internally and with funds
provided by CILCORP.
CVI
At September 30, 1998, CVI had outstanding debt of $1.3 million,
borrowed from CILCORP. CVI expects to finance its activities and
working capital needs during the remainder of 1998 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, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
CILCO
Electric and gas utility
operating income $24,815 $22,491 $57,732 $56,070
Utility other income and
deductions (5,751) (6,154) (17,423) (18,115)
Preferred stock dividends
of CILCO (797) (818) (2,396) (2,415)
------- ------- ------- -------
Total utility net income 18,267 15,519 37,913 35,540
QST net loss from continuing
operations (3,601) (2,183) (15,007) (3,990)
QST Environmental net inc. (loss)
from continuing operations 248 97 46 (1,127)
Other businesses net loss (230) (411) (825) (1,563)
------- ------- ------- -------
Consolidated net income from
continuing operations 14,684 13,022 22,127 28,860
Gain on sale of assets of
discontinued business and
income (loss) from operations
of discontinued business 7,985 52 7,548 (250)
------- ------- ------- -------
Consolidated net income available
to common shareholders $22,669 $13,074 $29,675 $28,610
======= ======= ======= =======
</TABLE>
CILCO Electric and Gas Operations
The following table summarizes the components of CILCO electric and
gas operating income for the three months and nine months ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Components of Electric and Three Months Ended Nine Months Ended
Gas Operating Income September 30, September 30,
1998 1997 1998 1997
<In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Electric revenue:
Electric retail $110,466 $ 96,878 $267,198 $243,866
Sales for resale 4,770 7,458 15,520 14,773
-------- -------- -------- --------
Total electric revenue 115,236 104,336 282,718 258,639
-------- -------- -------- --------
Electric cost of sales:
Cost of fuel 25,625 24,497 71,102 68,240
Purchased power 10,831 7,889 23,683 16,035
Revenue taxes 6,006 4,863 14,384 11,775
-------- -------- -------- --------
Total electric cost of
sales 42,462 37,249 109,169 96,050
-------- -------- -------- --------
Electric gross margin 72,774 67,087 173,549 162,589
-------- -------- -------- --------
Gas revenue:
Sale of gas 20,170 17,749 115,262 137,232
Transportation services 1,100 1,270 4,220 4,799
-------- -------- -------- --------
Total gas revenue 21,270 19,019 119,482 142,031
Gas cost of sales:
Cost of gas 9,139 7,383 63,295 82,186
Revenue taxes 954 508 6,046 5,317
-------- -------- -------- --------
Total gas cost of sales 10,093 7,891 69,341 87,503
-------- -------- -------- --------
Gas gross margin 11,177 11,128 50,141 54,528
-------- -------- -------- --------
Electric and gas operating
expenses
Other operation and
maintenance 27,949 27,163 85,642 83,312
Depreciation and
amortization 16,344 15,394 47,853 46,181
Income and other taxes 14,843 13,167 32,463 31,554
-------- -------- -------- --------
Total electric and gas
operating expenses 59,136 55,724 165,958 161,047
-------- -------- -------- --------
Electric and gas operating
income $ 24,815 $ 22,491 $ 57,732 $ 56,070
======== ======== ======== ========
</TABLE>
Electric gross margin increased 8% for the quarter and 7% for the
nine months ended September 30, 1998, compared to the same periods in
1997. Retail kilowatt hour (Kwh) sales increased 14% for the quarter
and 8% for the nine months ended September 30, 1998. Residential
sales increased 16% for the quarter and 5% for the nine months ended
September 30, 1998, compared to the same periods in 1997. Commercial
sales increased 13% for the quarter and 7% for the nine months ended
September 30, 1998. Cooling degree days were 26% and 37% higher,
respectively, for the quarter and nine months ended September 30,
1998, compared to the same periods in 1997. Industrial sales
increased 13% and 11% respectively, for the quarter and nine months
ended September 30, 1998. Industrial sales were favorably impacted
by customers returning to retail supply due to the completion of
CILCO's Power Quest industrial program (see Part II. Item 5: Other
Information, Power Quest Electric Pilot Programs).
Sales for resale decreased 36% during the quarter ended September 30,
1998, compared to the same period in 1997, due to lower available
capacity for bulk sales due to increased native load demand resulting
from warm weather. Sales for resale increased 5% for the nine months
ended September 30, 1998, compared to the same period in 1997, due to
favorable market conditions. Sales for resale vary based on the
energy requirements of native load customers, neighboring utilities
and power marketers, CILCO's available capacity for bulk power sales
and the price of power available for sale. In the future, CILCO
expects increased activity in the sales for resale and purchased
power markets.
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 remaining Power
Quest pilot program, and in the long term by deregulation and
increased competition in the electric utility industry (see Part II.
Item 5: Other Information, Power Quest Electric Pilot Programs).
Substantially all of CILCO's electric generating capacity is coal-
fired. The cost of fuel increased 5% in the third quarter of 1998,
compared to the same period in 1997, due to an increase in generation
offset by a decrease in the cost of coal burned. The cost of fuel
increased 4% for the nine months ended September 30, 1998 due to a 6%
increase in generation, offset by a 2% decrease in the cost of fuel
burned. Purchased power increased for the quarter and the nine
months ended September 30, 1998, compared to the same periods in
1997. 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. The costs of
purchased power for retail customers are passed through to those
customers via the fuel adjustment clause (FAC).
Gas gross margin remained relatively constant for the third quarter
and decreased 8% for the nine months ended September 30, 1998,
compared to the same periods in 1997. Residential sales volumes
remained relatively constant for the quarter and decreased 17% for
the nine months ended September 30, 1998. Sales decreases were
primarily due to warmer weather. Commercial sales volumes decreased
5% and 10%, respectively, for the quarter and nine months ended
September 30, 1998, compared to the same periods in 1997. Heating
degree days were 20% lower for the quarter and 22% lower for the nine
months ended September 30, 1998, compared to the same periods in
1997. 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 at the retail
level in the natural gas industry.
Revenue from gas transportation services decreased 13% and 12% for
the quarter and nine months ended September 30, 1998, respectively,
while gas transportation sales volumes decreased 8% for the quarter
and decreased 6% for the nine months ended September 30, 1998,
compared to the same periods in 1997.
The cost of gas increased 24% for the quarter ended September 30,
1998, compared to the same period in 1997, primarily due to higher
natural gas prices. The cost of gas decreased 23% for the nine
months ended September 30, 1998, primarily due to lower natural gas
prices from CILCO's suppliers in January and February 1998.
Operation and maintenance expense increased 3% for the quarter and
for the nine months ended September 30, 1998, compared to the same
periods in 1997. The increase for the quarter was mainly due to an
increase in steam generation expenses arising from outages at CILCO's
E. D. Edwards generation facility. The increase for the nine months
ended September 30, 1998 was primarily due to increased electric
distribution overhead line maintenance expense due to a severe storm
on June 29, which affected power delivery to approximately half of
CILCO's electric customers. Also contributing to the increases were
increased customer service costs related to the Customer Care Center
which opened on June 30, 1997, and increased expenditures related to
information technology activities. These increases were partially
offset by lower outside services costs and decreases in the
actuarially-determined costs for pensions and post-employment
benefits.
Depreciation and amortization expense increased 6% for the quarter
and 4% for the nine months ended September 30, 1998, reflecting
additions and replacements of utility plant at costs in excess of the
original cost of the property retired, and increased amortization
associated with the implementation of new computer systems.
Income and other taxes expense increased for the quarter and for the
nine months ended September 30, 1998, due to higher pre-tax operating
income.
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, 1998 and 1997.
<TABLE>
<CAPTION>
Components of Other Income Three Months Ended Nine Months Ended
and Deductions and Interest September 30, September 30,
Expense 1998 1997 1998 1997
<In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Net interest expense $(5,696) $(5,621) $(16,758) $(16,819)
Income taxes 520 834 1,859 2,129
Other (575) (1,367) (2,524) (3,425)
------- ------- -------- --------
Other income (deductions) $(5,751) $(6,154) $(17,423) $(18,115)
======= ======= ======== ========
</TABLE>
QST (Excluding QST Environmental)
The following table summarizes the revenue and expenses for QST for
the three months and nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Components of QST Net Loss 1998 1997 1998 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Electric:
Electric revenue $ 46,926 $ 8,140 $110,280 $ 10,593
Cost of electricity 48,940 8,421 123,218 11,184
-------- -------- -------- --------
Electric gross margin (2,014) (281) (12,938) (591)
-------- -------- -------- --------
Gas:
Gas revenue 76,649 75,658 342,503 120,111
Cost of gas 77,124 76,754 345,307 120,689
-------- -------- -------- --------
Gas gross margin (475) (1,096) (2,804) (578)
-------- -------- -------- --------
Other expenses:
General and administrative 3,295 2,229 8,765 5,290
Depreciation and amortization 205 28 509 72
Interest (21) (12) (143) 87
-------- -------- -------- --------
Total other expenses 3,479 2,245 9,131 5,449
-------- -------- -------- --------
Net loss before income
taxes (5,968) (3,622) (24,873) (6,618)
Income tax benefit (2,367) (1,439) (9,866) (2,628)
-------- -------- -------- --------
Net loss from continuing
operations (3,601) (2,183) (15,007) (3,990)
Loss from operations of
discontinued business,
net of tax (267) (102) (704) (559)
Gain on sale of assets of
discontinued business, net
of tax of $5,425 8,252 -- 8,252 --
-------- -------- -------- --------
QST net income (loss) $ 4,384 $ (2,285) $ (7,459) $ (4,549)
======== ======== ======== ========
</TABLE>
QST Enterprises Inc. (QST Enterprises) was formed in December 1995 to
facilitate CILCORP's expansion into non-regulated energy and related
services businesses. Its initial focus through QST Energy was to
compete against energy suppliers participating in CILCO's Power Quest
program. After successfully competing for Power Quest program
customers, QST Energy established and expanded the infrastructure
required to supply energy to customers outside of the CILCO service
territory, and has energy customers in Illinois, Pennsylvania, and
California. QST Energy 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. Due to the
uncertainties related to energy deregulation and the immaturity and
illiquidity of energy markets, the Company is de-emphasizing QST's
out-of-state energy sales and marketing activities and focusing on
the Illinois energy market by consolidating some of QST Energy's
assets and resources with those from CILCO.
As part of the strategy to de-emphasize out-of-state energy sales and
marketing activities, QST Energy has sold approximately 25,000
residential, commercial, and industrial electric accounts in
Pennsylvania to Exelon Energy, effective with customers' October
meter readings. Effective October 1, approximately 3,800 gas
customers in the Columbia Gas of Pennsylvania Choice Program have
been assigned from QST Energy to United Gas Management, Inc. The
proceeds from these sales were not material to QST Energy's results.
QST Energy will complete its exit from the Pennsylvania market when
it transfers 3,500 accounts within the city limits of Philadelphia to
a new joint venture between Philadelphia Gas Works and a new partner,
effective December 31, 1998. QST Energy is also evaluating
alternatives related to its electric customers in California.
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. Since the Company's change in strategy, QST
Trading's activities have been and will be primarily focused on
balancing its physical and financial portfolio. However, due to the
need to fulfill prior contracts and commitments, QST Trading may
continue to receive revenues and incur expenses related to trading
operations for the remainder of 1998 and a portion of 1999, and as a
result, may continue to realize negative gross margins.
QST's electric revenues increased approximately $39 million and $100
million during the quarter and nine months ended September 30, 1998,
respectively, compared to the same periods in 1997. Physical
delivery of electricity and electricity prices were greater in 1998
prior to the suspension of wholesale trading activities, compared to
1997. QST Energy revenues also increased due to its participation in
the Pennsylvania electric pilots and the deregulated California
electric market. QST's electric retail gross margin decreased by
$1.7 million for the quarter ended September 30, 1998, compared to
the same period in 1997, primarily due to transmission congestion
problems in the deregulated California market and higher costs to
procure electricity as the result of its suspension of wholesale
trading operations. These conditions may remain while QST continues
to serve its California electric retail customers. The $12.3 million
decrease in electric margin for the nine months ended September 30,
1998, compared to the same period in 1997, was primarily the result
of an unprecedented, sudden increase in wholesale electricity prices
during the week of June 22, 1998. In view of the extreme and
unprecedented volatility in electricity supply and pricing in the
second quarter, QST decided to close its trading positions for the
remainder of the summer to avoid further adverse price movements.
The impact on electric gross margin of closing the summer positions
was recognized primarily in the second quarter.
Natural gas revenues increased approximately $1 million and $222
million during the quarter and nine months ended September 30, 1998,
respectively, as compared to the same periods in 1997, due primarily
to increased wholesale gas trading activity in 1998 prior to the
suspension of trading activities. QST's negative natural gas gross
margin decreased by $.6 million and increased by $2.2 million for the
quarter and nine months ended September 30, 1998, respectively, as
compared to the same periods in 1997, primarily due to wholesale
natural gas trading transactions. For the quarter and nine months
ended September 30, 1998, negative wholesale natural gas margins were
slightly offset by positive retail gas margins of $.1 million and $.3
million, respectively. Wholesale gas trading revenues and expenses
will continue for the remainder of 1998 and a portion of 1999 as QST
fulfills prior contracts and commitments.
QST's general and administrative expenses have increased $1.1 million
and $3.5 million for the quarter and nine months ended September 30,
1998, respectively, compared to the same periods in 1997. The
increase in general and administrative expenses for the third quarter
of 1998, compared to the same period in 1997, was due to an increase
in the number of QST employees to support the growth in the retail
operations and to employee severance costs incurred at QST Trading.
The increase in general and administrative expenses for the nine
months ended September 30, 1998, compared to the same period in
1997, resulted from the increase in the number of QST employees to
support the growth in the retail and wholesale operations. Net
operating losses are expected to continue in the near term as QST de-
emphasizes out-of-state energy sales and marketing activities.
Results for QST Communications are being reported as discontinued
operations in the statements of income. Prior year amounts have been
reclassified on a basis consistent with the 1998 presentation (see
Note 4. Discontinued Operations).
QST Environmental Operations
The following table summarizes environmental and engineering services
revenue and expenses for the three months and nine months ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Components of QST Environmental Three Months Ended Nine Months Ended
Net Income September 30, September 30,
1998 1997 1998 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Environmental and engineering
services revenue $14,760 $19,392 $50,822 $55,230
Direct non-labor project costs 4,661 7,652 19,319 19,563
------- ------- ------- -------
Net revenue 10,099 11,740 31,503 35,667
------- ------- ------- -------
Expenses:
Direct salaries, indirect salaries
and related benefits 5,020 5,867 15,991 18,854
General and administrative 3,825 4,674 12,718 15,029
Depreciation and amortization 624 877 1,992 2,947
------- ------- ------- -------
Operating expenses 9,469 11,418 30,701 36,830
------- ------- ------- -------
Interest expense 193 21 648 281
------- ------- ------- -------
Income (loss) before income taxes 437 301 154 (1,444)
Income taxes expense (benefit) 189 204 108 (317)
------- ------- ------- -------
Net income (loss) from continuing
operations 248 97 46 (1,127)
Income from operations of
discontinued business -- 154 -- 309
------- ------- ------- -------
QST Environmental net income
(loss) $ 248 $ 251 $ 46 $ (818)
======= ======= ======= =======
</TABLE>
QST Environmental's quarterly results 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; and increased
competition in all aspects of the business.
QST Environmental's net revenues decreased by $1.6 million, or 14%,
for the third quarter and by $4.2 million, or 12%, for the nine
months ended September 30, 1998, compared to the same periods in
1997. The net revenue decreases for these periods resulted primarily
from reduced laboratory revenues as a result of the sale of the
Peoria Laboratory and reduced business volume in consulting and in
the remaining Gainesville Laboratory. Consulting revenues for the
quarter and nine months ended September 30, 1998 decreased by
approximately $1.2 million and $2.3 million, respectively, when
compared to the corresponding periods in 1997.
Direct salaries, indirect salaries and related benefits decreased by
$.8 million, or 14%, for the third quarter and by $2.9 million, or
15%, for the nine months ended September 30, 1998, compared to the
same periods in 1997. Salary costs include salaries and related
fringe benefits, including employer-paid medical and dental
insurance, payroll taxes, paid time off, and 401(k) contributions.
This decrease was primarily due to a planned reduction in the number
of laboratory and other technical staff to match decreased levels of
business activity. QST Environmental is evaluating alternatives
related to its Gainesville laboratory operations.
General and administrative expenses decreased by $.8 million, or 18%,
for the three months ended September 30, 1998, and decreased by $2.3
million, or 15%, for the nine months ended September 30, 1998,
compared to the same periods in 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.
In the fourth quarter of 1997, QST Environmental wrote off
$22.6 million of unamortized goodwill. Consequently, no goodwill
amortization is recorded in the quarter and nine months ended
September 30, 1998. Depreciation expense declined $.2 million for
the three months ended September 30, 1998, compared to the same
period in 1997, due primarily to increases in fully-depreciated
assets coupled with reduced capital expenditures.
In November 1997, QST Environmental sold substantially all the assets
of ESE Land for $9.5 million in cash and residual interests in three
newly-formed limited liability corporations. These activities are
shown as discontinued operations in the statements of income.
Interest expense increased because, as a result of the ESE Land sale,
a portion of interest costs is no longer capitalized.
QST Environmental will continue to position itself to take advantage
of new market opportunities. 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 485 full-time equivalent employees at September 30, 1998,
compared to 621 employees at September 30, 1997. 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; no single
entity currently dominates the environmental consulting and
engineering 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, 1998
and 1997.
<TABLE>
<CAPTION>
Components of Other Businesses Three Months Ended Nine Months Ended
Net Income (Loss) September 30, September 30,
1998 1997 1998 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Other revenue $ 3,724 $ 1,923 $13,739 $ 6,812
------- ------- ------- -------
Expenses:
Operating expenses 2,805 1,735 11,452 7,476
Depreciation and amortization 48 48 145 144
Interest expense 1,632 1,222 5,179 3,617
Income and other taxes (531) (671) (2,212) (2,862)
------- ------- ------- -------
Total expenses 3,954 2,334 14,564 8,375
------- ------- ------- -------
Other businesses net loss $ (230) $ (411) $ (825) $(1,563)
======= ======= ======= =======
</TABLE>
Other revenues increased 94% for the three months ended and 102% for
the nine months ended September 30, 1998, primarily due to increased
CVI gas marketing revenue.
Operating expenses increased for the quarter and nine months ended
September 30, 1998, compared to the corresponding periods in 1997,
primarily due to increased expenses related to the gas retail
marketing program at CVI, while interest expense increased due to
higher average debt balances.
The credit for income and other taxes decreased in the quarter and
nine months ended September 30, 1998, compared to the corresponding
periods in 1997, primarily due to a smaller pre-tax loss.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Reference is made to "Environmental Matters" under "Item 1. Business"
in the Company's 1997 Annual Report on Form 10-K (the "1997 Form 10-
K"), and "Note 2. Contingencies," 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
Illinois Electric Deregulation
In December 1997, the Electric Service Customer Choice and Rate
Relief Law of 1997 (Customer Choice Law) became effective. The
Customer Choice Law began a nine-year transition process to a fully
competitive market for electricity in Illinois, with all customers
being able to choose their electricity supplier by May 1, 2002.
(Transition charges may be collected through 2006.) The Customer
Choice Law also requires residential base rate reductions which vary
by utility. CILCO began its reduction in its residential base rates
with an initial 2% decrease beginning August 1998. (Refer to the
caption "Competition" of the combined CILCORP/CILCO 1997 Form 10-K.)
Power Quest Retail Competition Pilot Programs
In 1996, to lead the movement toward increased customer choice, CILCO
began Power Quest, which consisted of two electric pilot retail
competition programs and a natural gas pilot retail competition
program. The programs offered greater choice to customers and
provided the opportunity for CILCO and certain of its electric and
natural gas customers to participate in a competitive business
environment.
The pilot program for CILCO's industrial electric customers ended as
scheduled on April 30, 1998. The program allowed CILCO's eight
largest industrial customers (those with peak loads of 10 megawatts
or more) to secure all or part of their electric power requirements
from suppliers other than CILCO. However, program participants'
total purchases from other suppliers were limited to 50 megawatts
(10% of CILCO's industrial load) or less at all times. Participating
customers began receiving electricity under this Power Quest pilot in
May 1996.
Seven of the eligible customers elected to participate in this pilot
program. Caterpillar Inc., with three eligible accounts, elected to
form a strategic alliance with CILCORP and receive value-added energy
and environmental products and services rather than taking its entire
Power Quest allocation from suppliers other than CILCO. Based on
Power Quest participation levels by eligible industrial customers,
CILCORP experienced a reduction of $2.2 million in pre-tax income for
the first nine months of 1998 (including electric margin lost by
CILCO, CVI costs associated with the Caterpillar alliance, and QST
margin on sales to Power Quest industrial customers). Costs
associated with the Caterpillar alliance are included in Other
Businesses Operations. CILCO has offset some of the profit margin
lost under Power Quest with increased wholesale electric margin on
sales outside its service territory.
Six of the Power Quest industrial program participants have signed
contracts for electric service with CILCO which extend 18 months or
more beyond October 1, 1999, when they would have become eligible to
select alternative suppliers under the Customer Choice Law. CILCO
personnel are exploring electric service contract terms with the
remaining initially eligible customers and with other key industrial
and commercial customers.
In the other Power Quest electric program, CILCO designated six areas
within its service territory as Open Access Sites for up to five
years. Based upon participation levels by eligible commercial and
residential customers, CILCORP experienced a reduction of $.8 million
in pre-tax income for the first nine months of 1998. Assuming the
same Power Quest participation level for all of 1998, CILCORP would
experience a reduction to pre-tax income of $1 million in 1998. Due
to the passage of the Customer Choice Law, CILCO filed a request with
the Illinois Commerce Commission on October 28, 1998, for approval to
eliminate this program, effective May 1, 1999.
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. Due to the design of
CILCO's distribution tariffs, margin losses from customer
participation in the program have been minimal. Consequently, this
program did not have a material adverse impact on CILCO's financial
position or results of operations for 1997 or the first nine months
of 1998. Management further believes this program will not have a
material adverse impact on CILCO's future financial position or
results of operations.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial data schedules
(b) Reports on Form 8-K
A Form 8-K was filed on July 28, 1998 to disclose the sale of the
common stock of CILCORP's telecommunications subsidiary, QST
Communications Inc.
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, 1998
R. O. Viets
R. O. Viets
President and Chief
Executive Officer
Date November 10, 1998
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, 1998
R. J. Sprowls
R. J. Sprowls
Vice President and Chief
Financial Officer
Date November 10, 1998
T. D. Hutchinson
T. D. Hutchinson
Controller and Manager
of Accounting
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<NAME> CENTRAL ILLINOIS LIGHT COMPANY
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