UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 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 June 30, 1998 13,610,680
CENTRAL ILLINOIS LIGHT COMPANY
Common stock, no par value,
shares outstanding and
privately held by CILCORP
Inc. at June 30, 1998 13,563,871
CILCORP INC.
AND
CENTRAL ILLINOIS LIGHT COMPANY
FORM 10-Q FOR THE QUARTER ENDED JUNE 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 18-30
Condition and Results of Operations
CILCORP Inc. and Central Illinois Light Company
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 30
Item 5: Other Information 31-32
Item 6: Exhibits and Reports on Form 8-K 32
Signatures 33-34
<PAGE>
<TABLE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
(Unaudited)
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 6,139 $ 10,576
Receivables, less reserves of $3,092 and
$2,454 100,390 141,234
Accrued unbilled revenue 33,674 38,775
Fuel, at average cost 7,558 7,816
Materials and supplies, at average cost 14,207 13,685
Gas in underground storage, at average
cost 13,901 22,666
Prepayments and other 10,612 10,971
---------- ---------
Total current assets 186,481 245,723
---------- ---------
Investments and other property:
Investments in leveraged leases 144,490 146,458
Cash surrender value of company-owned life
insurance, net of related policy loans of
$46,488 and $42,898 2,161 2,399
Other investments 17,827 18,675
---------- ---------
Total investments and other property 164,478 167,532
---------- ---------
Property, plant and equipment:
Utility plant, at original cost
Electric 1,227,912 1,213,585
Gas 405,542 401,870
---------- ---------
1,633,454 1,615,455
Less - accum. provision for depreciation 797,503 769,792
---------- ---------
835,951 845,663
Construction work in progress 31,330 21,550
Other, net of depreciation 25,184 22,188
---------- ---------
Total property, plant and equipment 892,465 889,401
---------- ---------
Other assets 31,652 32,163
---------- ---------
Total assets $1,275,076 $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>
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
(Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 11,513 $ 22,185
Notes payable 64,500 62,150
Accounts payable 106,127 132,286
Accrued taxes 3,133 2,810
Accrued interest 9,648 9,473
Purchased gas adjustment over-recoveries 224 1,666
Other 7,941 19,798
---------- ---------
Total current liabilities 203,086 250,368
---------- ---------
Long-term debt 298,555 298,528
---------- ---------
Deferred credits and other liabilities:
Accumulated deferred income taxes 237,081 241,013
Regulatory liab. of regulated subsidiary 56,612 56,807
Deferred investment tax credits 20,284 21,117
Other 50,480 48,273
---------- ---------
Total def. credits & other liabilities 364,457 367,210
---------- ---------
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 149,615 159,350
Accumulated other comprehensive income 676 676
---------- ---------
Total stockholders' equity 342,858 352,593
---------- ---------
Total liab. and stockholders' equity $1,275,076 $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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenue:
Electric utility $ 88,305 $ 81,011 $167,482 $154,303
Gas utility 28,310 30,509 98,212 123,012
Non-regulated energy and
energy services 124,956 41,126 329,208 47,071
Environmental and engineering
services 18,595 18,245 36,062 35,838
Other business 4,820 2,090 10,015 4,890
-------- -------- -------- --------
Total 264,986 172,981 640,979 365,114
-------- -------- -------- --------
Operating expenses:
Fuel for generation and
purchased power 78,898 28,230 132,280 54,652
Gas purchased for resale 99,629 51,989 322,339 118,738
Other operations & maintenance 54,957 51,392 105,952 99,978
Depreciation and amortization 16,833 16,651 33,633 33,358
Taxes, other than income taxes 9,419 8,289 20,925 19,388
-------- -------- -------- --------
Total 259,736 156,551 615,129 326,114
-------- -------- -------- --------
Fixed charges and other:
Interest expense 7,569 6,942 15,092 14,006
Preferred stock dividends of
subsidiary 797 811 1,599 1,597
Allowance for funds used
during construction (29) (110) (6) (118)
Other 311 242 533 572
-------- -------- -------- --------
Total 8,648 7,885 17,218 16,057
-------- -------- -------- --------
Income (loss) from continuing
oper. before income taxes (3,398) 8,545 8,632 22,943
Income taxes (2,881) 2,715 1,189 7,105
-------- -------- -------- --------
Net income (loss) from
continuing operations (517) 5,830 7,443 15,838
Loss from operations of
discontinued business, net
of tax of ($112), $2,
($287), and ($193) (171) (13) (437) (302)
-------- -------- -------- --------
Net income (loss) (688) 5,817 7,006 15,536
Other comprehensive income -- -- -- --
-------- -------- -------- --------
Comprehensive income (loss) $ (688) $ 5,817 $ 7,006 $ 15,536
======== ======== ======== ========
Average common share
outstanding - basic 13,611 13,611 13,611 13,611
======== ======== ======== ========
Earnings per common share -
basic
Continuing operations $ (.04) $ .43 $ .55 $ 1.16
Discontinued operations (.02) -- (.04) (.02)
-------- -------- -------- --------
Net income (loss) per
common share - basic $ (.06) $ .43 $ .51 $ 1.14
======== ======== ======== ========
Average common shares
outstanding - diluted 13,611 13,611 13,690 13,611
======== ======== ======== ========
Earnings per common share -
diluted
Continuing operations $ (.04) $ .43 $ .54 $ 1.16
Discontinued operations (.02) -- (.03) (.02)
-------- -------- -------- --------
Net income (loss) per
common share - diluted $ (.06) $ .43 $ .51 $ 1.14
======== ======== ======== ========
Dividends per common share $ .615 $ .615 $ 1.23 $ 1.23
======== ======== ======== ========
<FN>
*Except per share amounts
The accompanying notes to the Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 9,042 $ 17,436
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Non-cash lease income & investment inc. (2,686) (2,543)
Depreciation and amortization 33,376 33,356
Deferred income taxes, investment tax
credit and regulatory liability of
subsidiary, net (4,958) (3,390)
Changes in operating assets & liabilities:
Decrease in accounts receivable and
accrued unbilled revenue 46,152 15,986
Decrease in inventories 8,501 16,481
Decrease in accounts payable (25,334) (3,272)
Increase (decrease) in accrued taxes 253 (7,536)
Decrease (increase) in other assets 710 (2,180)
Decrease in other liabilities (10,870) (2,276)
-------- --------
Total adjustments 45,144 44,626
-------- --------
Net cash provided by operating activities
from continuing operations 54,186 62,062
-------- --------
Net cash used by operating activities
of discontinued operations (1,031) (667)
-------- --------
Cash flow from operations 53,155 61,395
-------- --------
Cash flows from investing activities:
Additions to plant (27,231) (23,418)
Other 1,968 (1,878)
-------- --------
Net cash used by investing activities
from continuing operations (25,263) (25,296)
-------- --------
Net cash used by investing activities
from discontinued operations (3,893) (2,762)
-------- --------
Cash flow used by investing activities (29,156) (28,058)
-------- --------
Cash flow from financing activities:
Net increase in short-term debt 550 7,800
Decrease in long-term debt (10,645) (19,857)
Common dividends paid (16,742) (16,741)
Preferred dividends paid (1,599) (1,597)
-------- --------
Net cash used by financing activities (28,436) (30,395)
-------- --------
Net (decrease) increase in cash and
temporary cash investments: (4,437) 2,942
Cash and temporary cash investments at
beginning of year: 10,576 4,941
-------- --------
Cash and temporary cash investments at
June 30 $ 6,139 $ 7,883
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 13,613 $ 16,494
Income taxes $ 7,068 $ 17,622
<FN>
The accompanying Notes to the Consolidated Financial
Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
(Unaudited)
<S> <C> <C>
Utility plant, at original cost:
Electric $1,227,912 $1,213,585
Gas 405,542 401,870
---------- ----------
1,633,454 1,615,455
Less - accumulated provision for
depreciation 797,503 769,792
---------- ----------
835,951 845,663
Construction work in progress 31,330 21,550
Plant acquisition adjustments, net of
amortization 861 1,217
---------- ----------
Total utility plant 868,142 868,430
---------- ----------
Other property and investments:
Cash surrender value of company-owned
life insurance (net of related policy
loans of $46,488 and $42,898) 2,161 2,399
Other 1,214 1,214
---------- ----------
Total other property and investments 3,375 3,613
---------- ----------
Current assets:
Cash and temporary cash investments 2,447 698
Receivables, less reserves of $745 & $703 28,939 44,550
Accrued unbilled revenue 25,255 31,248
Fuel, at average cost 7,558 7,816
Materials and supplies, at average cost 14,207 13,685
Gas in underground storage, at avg. cost 13,358 22,118
Prepaid taxes 407 1,189
Other 8,182 6,331
---------- ----------
Total current assets 100,353 127,635
---------- ----------
Deferred debits:
Unamortized loss on reacquired debt 3,421 3,581
Unamortized debt expense 1,931 2,019
Prepaid pension cost 455 455
Other 15,963 16,922
---------- ----------
Total deferred debits 21,770 22,977
---------- ---------
Total assets $ 993,640 $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>
June 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 144,308 146,405
Accumulated other comprehensive income 676 676
---------- ---------
Total common shareholder's equity 330,645 332,742
Preferred stock without mandatory redemption 44,120 44,120
Preferred stock with mandatory redemption 22,000 22,000
Long-term debt 267,860 267,836
---------- ---------
Total capitalization 664,625 666,698
---------- ---------
Current liabilities:
Current maturities of long-term debt -- 10,650
Notes payable 20,400 21,300
Accounts payable 34,421 44,844
Accrued taxes 4,509 2,593
Accrued interest 8,824 9,234
Purchased gas adjustment over-recoveries 224 1,666
Level payment plan 59 2,375
Other 5,192 4,670
---------- ---------
Total current liabilities 73,629 97,332
---------- ---------
Deferred credits and other liabilities:
Accumulated deferred income taxes 136,097 139,274
Regulatory liability 56,612 56,807
Deferred investment tax credit 20,284 21,117
Capital lease obligation 1,948 2,182
Other 40,445 39,245
--------- ---------
Total deferred credits and other liab. 255,386 258,625
--------- ---------
Total capitalization and liabilities $ 993,640 $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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating revenue:
Electric $ 88,304 $ 81,011 $167,482 $154,303
Gas 28,310 30,509 98,212 123,012
-------- -------- -------- --------
Total operating revenues 116,614 111,520 265,694 277,315
-------- -------- -------- --------
Operating expenses:
Cost of fuel 21,135 22,016 45,477 43,743
Cost of gas 13,534 13,136 54,156 74,803
Purchased power 8,178 4,042 12,852 8,146
Other operations & maintenance 30,876 29,885 57,693 56,149
Depreciation and amortization 15,754 15,394 31,509 30,787
Income taxes 4,049 5,068 11,826 12,316
Other taxes 8,495 7,597 19,264 17,792
-------- -------- -------- --------
Total operating expenses 102,021 97,138 232,777 243,736
-------- -------- -------- --------
Operating income 14,593 14,382 32,917 33,579
-------- -------- -------- --------
Other income and deductions:
Cost of equity funds
capitalized -- 57 -- 31
Company-owned life insurance,
net (207) (242) (412) (572)
Other, net 58 (66) (24) (104)
-------- -------- -------- --------
Total other income and
(deductions) (149) (251) (436) (645)
-------- -------- -------- --------
Income before interest expense 14,444 14,131 32,481 32,934
-------- -------- -------- --------
Interest expenses:
Interest on long-term debt 4,922 4,960 9,882 10,104
Cost of borrowed funds
capitalized (29) (54) (6) (88)
Other 622 658 1,360 1,300
-------- -------- -------- --------
Total interest expense 5,515 5,564 11,236 11,316
-------- -------- -------- --------
Net income 8,929 8,567 21,245 21,618
-------- -------- -------- --------
Dividends on preferred stock 797 811 1,599 1,597
-------- -------- -------- --------
Net income available for
common stock 8,132 7,756 19,646 20,021
-------- -------- -------- --------
Other comprehensive income -- -- -- --
-------- -------- -------- --------
Comprehensive income $ 8,132 $ 7,756 $ 19,646 $ 20,021
======== ======== ======== ========
<FN>
The accompanying Notes to the Consolidated Financial
Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 21,244 $ 21,618
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 31,865 31,143
Deferred income taxes, investment tax
credit and regulatory liability, net (4,205) (3,535)
Changes in operating assets and liabilities:
Decrease in accounts receivable 15,611 10,204
Decrease in fuel, materials & supplies,
and gas in underground storage 8,495 12,191
Decrease in unbilled revenue 5,993 7,410
Decrease in accounts payable (10,423) (14,955)
Increase (decrease) in accrued taxes
and interest 1,506 (4,943)
Capital lease payments 323 323
(Increase) decrease in other current
assets (1,070) 197
(Decrease) increase in other current
liabilities (3,235) 47
Decrease in other non-current assets 2,257 7,243
Increase in other non-current liab. 1,356 635
-------- --------
Net cash provided by operating
activities 69,717 67,578
-------- --------
Cash flows from investing activities:
Capital expenditures (29,865) (22,865)
Cost of equity funds capitalized -- (31)
Other (2,890) (4,093)
-------- --------
Net cash used in investing activities (32,755) (26,989)
-------- --------
Cash flow from financing activities:
Common dividends paid (21,741) (22,741)
Preferred dividends paid (1,599) (1,597)
Long-term debt retired (10,650) (20,000)
Payments on capital lease obligation (323) (323)
Short-term borrowing (900) 3,100
-------- --------
Net cash used in financing activities (35,213) (41,561)
-------- --------
Net increase in cash and temporary cash
investments 1,749 (972)
Cash and temporary cash investments at
beginning of year 698 1,662
-------- --------
Cash and temporary cash investments at
June 30 $ 2,447 $ 690
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest (net of cost of borrowed funds
capitalized) $ 12,203 $ 13,129
Income taxes $ 13,588 $ 22,829
<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, 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 the result of an
unprecedented, sudden increase in electricity
prices during the week of June 22. QST Trading
closed its open wholesale electricity positions
for the remainder of the summer to avoid
exposure to further adverse price movements. As
a part of this strategic reevaluation, CILCORP
has announced a restructuring of operating and
marketing responsibilities within and between
its current business segments. The Company will
focus on energy operations within Illinois and
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
expects to complete 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 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.
During the six months ended June 30, 1998, CILCO
paid approximately $240,000 to outside parties
for former gas manufacturing plant site
monitoring, legal fees and feasibility studies,
and expects to spend approximately $1 million
(including remediation costs) during the
remainder of 1998. A $3.6 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 June 1998
have been deferred on the Balance Sheets, net of
amounts recovered from customers.
Through June 30, 1998, CILCO has recovered
approximately $5.3 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 the Company's
contract proposal on October 10, 1997.
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 397 CILCO gas
and electric department employees. The current
contract with the International Brotherhood of
Firemen and Oilers Local 8 (IBF&O), which
represents approximately 202 CILCO power plant
employees, expired on July 1, 1998. The IBF&O
is currently working without a contract while
negotiations continue with CILCO.
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 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, 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 proceeding is currently in
the briefing stage. CILCO has asked FERC to
assess penalties against CIPS under its rules
for the 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 in the statement of
income. Prior year financial statements have
been reclassified to conform to the current year
presentation.
QST Communications Inc.
QST has reached a definitive agreement to sell
the common stock of its wholly-owned subsidiary,
QST Communications Inc. (QST Communications), to
McLeodUSA Telecommunications Services, Inc., for
$20 million in cash and stock options valued at
$5.5 million. QST Communications provides fiber
optic-based communications services to customers
in central Illinois. The agreement to sell is
subject to approval of a Hart-Scott-Rodino
filing. An after-tax gain of approximately $7.8
million is expected to be recognized in the
third quarter when the transaction is expected
to be closed. (See Form 8-K filed July 28,
1998.) Accordingly, the activities of this
subsidiary are shown as discontinued operations
in the income statement. Prior year financial
statements have been reclassified to conform to
the current year presentation.
Net assets of the discontinued operations of QST
Communications are included in the accompanying
consolidated balance sheets as follows:
<TABLE>
<CAPTION>
June December
Discontinued Operations of QST 1998 1997
Communications
(In thousands)
<S> <C> <C>
Cash $ 246 $ 340
Accounts receivable 350 58
Other current assets 409 509
Property, plant and equipment 9,425 5,988
Other assets 178 134
Total liabilities (6,429) (4,563)
------- -------
Net Assets of Discontinued Operations $ 4,179 $ 2,466
======= =======
</TABLE>
NOTE 5. Financial Instruments and Price Risk Management
As of June 30, 1998, QST Energy Inc., a subsidiary
of QST, had open derivative financial instruments
representing hedges of natural gas sales of 1 Bcf and natural
gas purchases and inventories of 1 Bcf for
commitments through 1999. The net deferred gain
on these derivatives as of June 30, 1998, was
$.4 million. The net loss reflected in
operating results arising from financial
instruments entered into by QST Energy Inc. for
gas hedging and trading purposes was $1.8
million for the six months ended June 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 for 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>
Six Months Ended
June 30, 1998
(In thousands)
<S> <C>
Income available to common shareholders $ 7,006
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 79
</TABLE>
The Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share,
for the year ended December 31, 1997.
Restatement of six months ended June 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 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. In June, QST Energy's
subsidiary, QST Energy Trading Inc., incurred
significant losses 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. QST expects to complete the
sale of QST Communications Inc., a wholly-owned
subsidiary which provides telecommunications
services, during the third quarter of 1998.
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 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.
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 has
announced a restructuring of 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 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.
Management continues to evaluate the impact of
Year 2000 issues on the Company's computer
software systems and operations. An outside
consulting firm has been engaged by CILCO to
assist in this process at the utility and is
currently updating business impact analyses.
QST Enterprises has formed an internal project
team to address Year 2000 issues for all
entities within QST Enterprises (including QST
Environmental), and has completed a preliminary
assessment. The Company currently believes it
will be able to achieve Year 2000 compliance
through a combination of modifications of
certain existing programs and systems, and the
replacement of others with new software that is
Year 2000 compliant. A significant portion of
these system replacements was initiated for
business purposes rather than solely for Year
2000 compliance. Costs to modify existing
programs and systems to be Year 2000 compliant
are not deemed to be material to the Company.
However, if such modifications and conversions
are not made, 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.
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 June 30, 1998, CILCORP had committed
bank lines of credit of $60 million, of which
$44.1 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 $42 million of medium-term notes
outstanding at June 30, 1998, of which $11.5
million was retired 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 $29.9 million for
the six months ended June 30, 1998. Capital
expenditures are anticipated to be approximately
$32.4 million for the remainder of 1998 and are
estimated to be $58.5 million in 1999. Included
in 1998 and 1999 capital expenditures are
$17 million and $9.4 million, respectively, for
information technology projects, which include
replacement of existing computer software
containing two-digit date fields which will not
be able to distinguish the year 2000 from the
year 1900. Modifications of existing programs
will be expensed as incurred, while expenditures
for programs replaced in their entirety will be
capitalized.
CILCO retired $10,650,000 of medium-term notes
in June 1997. Currently, 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 July 1, 1998, CILCO had committed bank
lines of credit aggregating $40 million, all of
which were unused. CILCO uses these lines of
credit to support issuance of short-term
commercial paper. CILCO had $20.4 million of
commercial paper outstanding at June 30, 1998
and expects to issue commercial paper
periodically throughout the remainder of 1998.
QST (Excluding QST Environmental)
Capital expenditures totaled approximately $5.3
million for the six months ended June 30, 1998,
primarily for construction of fiber optic and
other communications facilities by QST
Communications Inc. (QST Communications). Prior
to closing the QST Communications stock sale,
QST expects to fund approximately $1.3 million
of capital expenditures at QST Communications
during the third quarter of 1998 for expansion
of its fiber optic system. (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. As a result, QST is
currently evaluating its options, including
potential appeals, related to this proposed
cogeneration system for the Sears Tower.
Approximately $1 million has been capitalized to
date for the project. QST does not plan to
incur capital expenditures for this project
during the remainder of 1998, and will write-off
the amount capitalized to date should the
project not proceed. Working capital balances
decreased by $8.6 million during the second
quarter of 1998. QST expects to finance working
capital needs during the remainder of 1998 with
funds provided by the Holding Company.
At June 30, 1998, QST had outstanding debt of $6
million, all of which was owed to the Holding
Company.
QST Environmental
For the six months ended June 30, 1998, QST
Environmental's expenditures for capital
additions and improvements were approximately
$175,000. Capital expenditures for the
remainder of 1998 are expected to be $.9
million, which includes the replacement of the
existing accounting/project management system.
As a result, system modifications for Year 2000
compliance will be avoided.
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
June 30, 1998, QST Environmental had borrowed
$10 million from CILCORP. Based upon its current
receivables and fixed assets, QST Environmental
has an additional $5 million available under
this revolving line of credit.
CIM
At June 30, 1998, CIM had $37 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 June 30, 1998, approximately
$11.8 million of these commitments had been
funded. CIM expects to contribute approximately
$2.6 million in cash for these investments
during the remainder of 1998, $1.2 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 June 30, 1998, CVI had outstanding debt of
$1.5 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 six months
ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Core Businesses:
CILCO
Electric and gas utility
operating income $ 14,593 $ 14,382 $ 32,917 $ 33,579
Utility other income and
deductions (5,664) (5,815) (11,672) (11,961)
Preferred stock dividends
of CILCO (797) (811) (1,599) (1,597)
-------- -------- -------- --------
Total utility net income 8,132 7,756 19,646 20,021
QST net income (includes QST
Communications) (8,622) (1,373) (11,843) (2,264)
QST Environmental net income
(loss)(includes ESE Land) 199 (140) (202) (1,069)
-------- -------- -------- --------
Total core business income
(loss) (291) 6,243 7,601 16,688
Other businesses net loss (397) (426) (595) (1,152)
-------- -------- -------- --------
Consolidated net income (loss)
available to common
shareholders $ (688) $ 5,817 $ 7,006 $ 15,536
======== ======== ======== ========
</TABLE>
CILCO Electric and Gas Operations
The following table summarizes the components of CILCO
electric and gas operating income for the three
months and six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Components of Electric and Three Months Ended Six Months Ended
Gas Operating Income June 30, June 30,
1998 1997 1998 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Electric revenue:
Electric retail $ 83,375 $ 77,649 $156,732 $146,988
Sales for resale 4,929 3,362 10,750 7,315
-------- -------- -------- --------
Total electric revenue 88,304 81,011 167,482 154,303
-------- -------- -------- --------
Electric cost of sales:
Cost of fuel 21,135 22,016 45,477 43,743
Purchased power 8,178 4,042 12,852 8,146
Revenue taxes 4,061 3,312 8,378 6,912
-------- -------- -------- --------
Total electric cost
of sales 33,374 29,370 66,707 58,801
-------- -------- -------- --------
Electric gross margin 54,930 51,641 100,775 95,502
-------- -------- -------- --------
Gas revenue:
Sale of gas 26,812 29,016 95,092 119,483
Transportation services 1,498 1,493 3,120 3,529
-------- -------- -------- --------
Total gas revenue 28,310 30,509 98,212 123,012
-------- -------- -------- --------
Gas cost of sales:
Cost of gas 13,534 13,136 54,156 74,803
Revenue taxes 1,600 1,243 5,092 4,809
-------- -------- -------- --------
Total gas cost of sales 15,134 14,379 59,248 79,612
-------- -------- -------- --------
Gas gross margin 13,176 16,130 38,964 43,400
-------- -------- -------- --------
Electric and gas operating
expenses
Other operation and
maintenance 30,876 29,885 57,693 56,149
Depreciation and
amortization 15,754 15,394 31,509 30,787
Income and other taxes 6,883 8,110 17,620 18,387
-------- -------- -------- --------
Total electric and gas
operating expenses 53,513 53,389 106,822 105,323
-------- -------- -------- --------
Electric and gas operating
income $ 14,593 $ 14,382 $ 32,917 $ 33,579
======== ======== ======== ========
</TABLE>
Electric gross margin increased 6% for the quarter and
six months ended June 30, 1998, compared to the same
periods in 1997. Retail kilowatt hour (Kwh)
sales increased 8% for the quarter and 4% for
the six months ended June 30, 1998. Residential
sales increased 2% for the quarter and decreased
2% for the six months ended June 30, 1998,
compared to the same periods in 1997.
Commercial sales increased 4% for the quarter
and six months ended June 30, 1998 due, in part,
to an increase in the number of commercial
customers. Industrial sales increased 16% and
9%, respectively, for the quarter and six months
ended June 30, 1998. CILCO industrial sales
through April 1998 were negatively impacted by
customers switching to off-system suppliers
under CILCO's Power Quest program (see Part II.
Item 5: Other Information, Power Quest Electric
Pilot Programs).
Sales for resale increased 47% during the
quarter and the six months ended June 30, 1998,
compared to the same periods in 1997, 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. In
the future, CILCO expects increased competition
and reduced margins 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 will also be
affected by deregulation and increased
competition in the electric utility industry
(see Part II. Item 5: Other Information,
Competition and Power Quest Retail Competition
Pilot Programs).
Substantially all of CILCO's electric generating
capacity is coal-fired. The cost of fuel
decreased 4% in the second quarter of 1998,
compared to the same period in 1997, due
primarily to a decrease in the cost of coal
burned, partially offset by a 5% increase in
generation. The cost of fuel increased 4% for
the six months ended June 30, 1998 due to a 6%
increase in generation, and a 2% increase in the
cost of coal burned. Purchased power increased
for the quarter and the six months ended June
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). CILCO
expects the wholesale power market to become
increasingly competitive.
Gas gross margin decreased 18% for the second
quarter and 10% for the six months ended June
30, 1998, compared to the same periods in 1997.
Residential sales volumes decreased 37% and 18%,
respectively, for the quarter and six months
ended June 30, 1998, primarily due to warmer
weather. Commercial sales volumes decreased 20%
and 10%, respectively, for the quarter and six
months ended June 30, 1998, compared to the same
periods in 1997. Heating degree days were 41%
lower for the quarter and 22% lower for the six
months ended June 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 stayed
constant and decreased 12% for the quarter and
six months ended June 30, 1998, respectively,
while gas transportation sales volumes increased
2% for the quarter and decreased 5% for the six
months ended June 30, 1998, compared to the same
periods in 1997.
The cost of gas increased 3% for the quarter
ended June 30, 1998, compared to the same period
in 1997, primarily due to higher natural gas
prices. The cost of gas decreased 28% for the
six months ended June 30, 1998, primarily due to
lower natural gas prices from CILCO's suppliers
in January and February.
Operation and maintenance expense increased 3%
for the quarter and six months ended June 30,
1998, compared to the same periods in 1997. The
increases were 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 increase were scheduled maintenance
outages at CILCO's E.D. Edwards generation
facility and increased customer service costs
related to the Customer Care Center which opened
on June 30, 1997. 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 2%
for the quarter and for the six months ended June 30,
1998, reflecting additions and replacements of
utility plant at costs in excess of the original
cost of the property retired.
Income and other taxes expense decreased for the
quarter and six months ended June 30, 1998,
primarily due to decreased deferred tax expense.
CILCO Other Income and Deductions and Interest Expense
The following table summarizes other income and
deductions and interest expense for the three
months and six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Components of Other Income Three Months Ended Six Months Ended
And Deductions and June 30, June 30,
Interest Expense 1998 1997 1998 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Net interest expense $ (5,395) $ (5,504) $(11,062) $(11,198)
Income taxes 642 625 1,339 1,295
Other (911) (936) (1,949) (2,058)
-------- -------- -------- --------
Other income (deductions) $ (5,664) $ (5,815) $(11,672) $(11,961)
======== ======== ======== ========
</TABLE>
QST (Excluding QST Environmental)
The following table summarizes the revenue and expenses for
QST for the three months and six months ended June 30, 1998
and 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Components of QST Net Loss 1998 1997 1998 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Electric revenue $ 38,988 $ 1,844 $ 63,354 $ 2,453
Gas revenue 85,969 39,137 265,854 44,453
-------- -------- -------- --------
Total revenue 124,957 40,981 329,208 46,906
Cost of sales:
Cost of electricity 49,912 2,173 74,278 2,763
Cost of gas 86,096 38,853 268,183 43,935
-------- -------- -------- --------
Total cost of sales 136,008 41,026 342,461 46,698
-------- -------- -------- --------
Gross margin (11,051) (45) (13,253) 208
-------- -------- -------- --------
Other expenses:
General and administrative 2,848 1,758 5,469 3,060
Depreciation and amortization 180 24 304 45
Interest (72) 8 (121) 98
-------- -------- -------- --------
Total other expenses 2,956 1,790 5,652 3,203
-------- -------- -------- --------
Net loss before income taxes (14,007) (1,835) (18,905) (2,995)
Income taxes (5,556) (728) (7,499) (1,188)
-------- -------- -------- --------
Net loss from continuing
operations (8,451) (1,107) (11,406) (1,807)
Loss from operations of
discontinued business,
net of tax (171) (266) (437) (457)
-------- -------- -------- --------
QST net loss $ (8,622) $ (1,373) $(11,843) $ (2,264)
======== ======== ======== ========
</TABLE>
QST Enterprises Inc. 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 currently 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. The Company is currently reevaluating
QST's unregulated energy sales and marketing
strategy, due to the uncertainties related to
energy deregulation and the immaturity and
illiquidity of energy markets, and has signaled
its intention to focus on energy market growth
opportunities in Illinois, de-emphasizing its
out-of-state energy sales and marketing
activities.
QST Energy's wholly-owned subsidiary, QST Energy
Trading Inc. (QST Trading), is a wholesale
natural gas and electricity 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. In conjunction with the Company's
reevaluation of QST's strategy, CILCORP
announced its intention to cease QST's energy
trading activities. CILCORP will continue to
engage in energy trading activities primarily to
serve retail energy customers and to fully
utilize CILCO's generating capacity and other
energy assets.
QST's revenue increased for the quarter and six
months ended June 30, 1998, compared to the same
periods in 1997, due to increased wholesale
natural gas and electricity trading activity and
QST Energy's participation in the Pennsylvania
electric and gas pilots and the deregulated
California electric market. QST's electric
retail gross margin increased by $212,000 and
$261,000 for the quarter and the six months
ended June 30, 1998, respectively, as compared
to the same periods in 1997. This increase in
electric margin is primarily due to
participation in the Pennsylvania electric pilot
programs and the deregulated California market.
Positive electric retail margin was offset by
negative electric wholesale trading margin of
$10.8 million and $10.9 million for the quarter
and six months ended June 30, 1998,
respectively, as 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 wholesale electric gross margin of
closing the summer positions was recognized
during the second quarter.
Natural gas revenues increased approximately $47
million and $222 million during the quarter and
six months ended June 30, 1998, respectively, as
compared to the same periods in 1997, due
primarily to increased wholesale gas trading
activity. Negative natural gas gross margin
contributed approximately $.1 million and $1.4
million on an after-tax basis to QST's net loss
for the quarter and six months ended June 30,
1998, respectively. The negative gas gross
margin was primarily due to wholesale natural
gas sales and trading transactions by QST
Trading. During the first quarter of 1998,
wholesale gas trading losses on an after-tax
basis were approximately $1.3 million as
wholesale gas positions taken in 1997 settled.
For the quarter and six months ended June 30,
1997, natural gas gross margin was positive and
contributed approximately $.2 million and $.3
million, respectively, to QST's earnings on an
after-tax basis.
QST's general and administrative expenses have
increased for the quarter and six months ended
June 30, 1998, compared to the same periods in
1997, due to 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
reevaluates its unregulated energy sales and
marketing strategy.
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 six months ended June 30,
1998 and 1997.
<TABLE>
<CAPTION>
Components of QST Three Months Ended Six Months Ended
Environmental Net Income June 30, June 30,
1998 1997 1998 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Environmental and engineering
services revenue $18,596 $18,245 $36,062 $35,838
Direct non-labor project costs 7,795 5,911 14,658 11,911
------- ------- ------- -------
Net revenue 10,801 12,334 21,404 23,927
------- ------- ------- -------
Expenses:
Direct salaries, indirect
salaries and related benefits 5,319 6,463 10,971 12,987
General and administrative 4,246 5,255 8,893 10,355
Depreciation and amortization 673 1,007 1,368 2,070
------- ------- ------- -------
Operating expenses 10,238 12,725 21,232 25,412
------- ------- ------- -------
Interest expense 207 118 455 260
------- ------- ------- -------
Income (loss) before income
taxes 356 (509) (283) (1,745)
Income taxes expense (benefit) 157 (116) (81) (521)
------- ------- ------- -------
Net income (loss) from
continuing operations 199 (393) (202) (1,224)
Income from operations of
discontinued business -- 253 -- 155
------- ------- ------- -------
QST Environmental net
income (loss) $ 199 $ (140) $ (202) $(1,069)
======= ======= ======= =======
</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
$1.5 million, or 12%, for the second quarter and
by $2.5 million, or 11%, for the six months
ended June 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 the remaining Gainesville Laboratory.
Consulting revenues for the quarter and six
months ended June 30, 1998 decreased by
approximately $1 million compared to the
corresponding periods in 1997.
Direct salaries, indirect salaries and related
benefits decreased by $1.1 million, or 18%, for
the second quarter and by $2 million, or 16%,
for the six months ended June 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.
General and administrative expenses decreased by
$1 million, or 19%, for the three months ended
June 30, 1998, and decreased by $1.4 million, or
14%, for the six months ended June 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 amortization is recorded in the
quarter ended June 1998. Depreciation expense
declined $.3 million due primarily to an
increase 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 524 full-time equivalent
employees at June 30, 1998, compared to 636
employees at June 30, 1997. 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. 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 six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Components of Other Businesses Three Months Ended Six Months Ended
Net Income (Loss) June 30, June 30,
1998 1997 1998 1997
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Other revenue $ 4,820 $ 2,089 $10,015 $ 4,889
------- ------- ------- -------
Expenses:
Operating expenses 4,084 2,109 8,647 5,741
Depreciation and amortization 49 48 97 96
Interest expense 1,953 1,238 3,547 2,395
Income and other taxes (869) (880) (1,681) (2,191)
------- ------- ------- -------
Total expenses 5,217 2,515 10,610 6,041
------- ------- ------- -------
Other businesses net loss $ (397) $ (426) $ (595) $(1,152)
======= ======= ======= =======
</TABLE>
Other revenues increased 131% for the three months ended
and 105% for the six months ended June 30, 1998,
primarily due to increased CVI gas marketing revenue.
Operating expenses increased for the quarter and
six months ended June 30, 1998, compared to the
corresponding periods in 1997, primarily due to
increased expenses related to the gas 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 six months ended June 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,
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 rate base reductions which vary by
utility. CILCO began its initial reduction in
its residential base rates with a 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
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 pilot program for CILCO's industrial
electric customers ended as scheduled on April
30, 1998. The program allowed CILCO's 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. Caterpillar purchased all of
its power from CILCO during the first year of
the program. During the second year,
Caterpillar purchased a portion of its Power
Quest allocation off-system and received a
correspondingly-reduced level of products and
services under the strategic alliance.
Based on Power Quest participation levels by
eligible industrial customers, CILCORP
experienced a reduction of $2.1 million in pre-
tax income for the first three 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 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.
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 on the current participation level
of eligible customers, CILCO anticipates a
reduction in pre-tax income of up to $1.3
million on an annual basis. Based upon
participation levels by eligible commercial and
residential customers, CILCORP experienced a
reduction of $.5 million in pre-tax income for
the first six months of 1998. Assuming the same
Power Quest participation level for all of 1998,
CILCORP would experience a reduction to pre-tax
income of $1.1 million in 1998.
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. This program did not have a material
adverse impact on CILCO's financial position or
results of operations for 1997 or the first six
months of 1998, nor does management believe this
program will 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 June 29, 1998 to disclose losses
relating to wholesale electricity contracts at CILCORP's
energy trading subsidiary.
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 August 12, 1998 R. O. Viets
R. O. Viets
President and
Chief Executive Officer
Date August 12, 1998 T. D. Hutchinson
T. D. Hutchinson
Controller
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934,
the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CENTRAL ILLINOIS LIGHT COMPANY
(Registrant)
Date August 12, 1998 T. S. Romanowski
T. S. Romanowski
Vice President and Chief
Financial Officer
Date August 12, 1998 T. D. Hutchinson
T. D. Hutchinson
Controller and Manager
of Accounting
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