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 March 31, 1999
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 March 31, 1999 13,610,680
CENTRAL ILLINOIS LIGHT COMPANY
Common stock, no par value,
shares outstanding and privately
held by CILCORP Inc. at March 31, 1999 13,563,871
1
CILCORP INC.
AND
CENTRAL ILLINOIS LIGHT COMPANY
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
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
Statements of Segments of Business 14-15
Notes to Consolidated Financial Statements
CILCORP Inc. and Central Illinois Light Company 16-19
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
CILCORP Inc. and Central Illinois Light Company 20-31
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 31
Item 5: Other Information 31-32
Item 6: Exhibits and Reports on Form 8-K 32
Signatures
2
<PAGE>
<TABLE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<CAPTION>
March 31, December 31,
1999 1998
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 2,804 $ 1,669
Receivables, less reserves of
$3,877 and $3,411 121,125 134,548
Accrued unbilled revenue 34,802 39,339
Fuel, at average cost 10,944 13,431
Materials and supplies, at
average cost 14,912 15,435
Gas in underground storage, at
average cost 6,657 20,494
Prepayments and other 5,986 7,646
---------- ----------
Total current assets 197,230 232,562
---------- ----------
Investments and other property:
Investment in leveraged leases 147,481 146,977
Cash surrender value of company-owned
life insurance, net of related
policy loans of $48,132 3,352 2,655
Other investments 21,653 16,882
---------- ----------
Total investments and other
property 172,486 166,514
---------- ----------
Property, plant and equipment:
Utility plant, at original cost
Electric 1,239,766 1,237,885
Gas 418,981 417,585
---------- ----------
1,658,747 1,655,470
Less - accumulated provision for
depreciation 830,761 812,630
---------- ----------
827,986 842,840
Construction work in progress 36,802 30,075
Other, net of depreciation 7,156 7,755
---------- ----------
Total property, plant and
equipment 871,944 880,670
---------- ----------
Other assets 24,219 33,194
---------- ----------
Total assets $1,265,879 $1,312,940
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these Balance Sheets.
</TABLE>
3
<PAGE>
<TABLE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<CAPTION>
March 31, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 43,021 $ 13,027
Notes payable 80,700 96,200
Accounts payable 95,793 128,845
Accrued taxes 14,276 8,262
Accrued interest 6,974 9,994
FAC/PGA over-recoveries 2,007 304
Other 11,028 14,316
---------- ----------
Total current liabilities 253,799 270,948
---------- ----------
Long-term debt 257,550 288,135
---------- ----------
Deferred credits and other
liabilities:
Accumulated deferred income taxes 238,047 239,305
Regulatory liability of regulated
subsidiary 43,824 46,346
Deferred investment tax credits 19,069 19,450
Other 47,321 47,098
---------- ----------
Total deferred credits and
other liabilities 348,261 352,199
---------- ----------
Preferred stock of subsidiary 66,120 66,120
---------- ----------
Stockholders' equity:
Common stock, no par value;
authorized 50,000,000 shares -
outstanding 13,610,680 shares 192,853 192,853
Retained earnings 148,141 143,530
Accumulated other comprehensive
income (845) (845)
---------- ----------
Total stockholders' equity 340,149 335,538
---------- ----------
Total liabilities and
stockholders' equity $1,265,879 $1,312,940
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these Balance Sheets.
</TABLE>
4
<PAGE>
<TABLE>
CILCORP INC AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands)*
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Revenue:
Electric utility $ 80,962 $ 79,177
Gas utility 76,797 69,902
Other businesses 10,479 5,235
-------- --------
Total 168,238 154,314
-------- --------
Operating expenses:
Fuel for generation and
purchased power 30,070 29,016
Gas purchased for resale 50,771 43,990
Other operations and maintenance 30,608 28,691
Depreciation and amortization 18,321 15,984
Taxes, other than income taxes 11,567 10,788
-------- --------
Total 141,337 128,469
-------- --------
Fixed charges and other:
Interest expense 7,212 7,249
Preferred stock dividends of
subsidiary 797 802
Allowance for funds used
during construction (11) 23
Other 247 205
-------- --------
Total 8,245 8,279
-------- --------
Income from continuing operations
before income taxes 18,656 17,566
Income taxes 6,049 6,250
-------- --------
Net income from
continuing operations 12,607 11,316
Income (loss) from operations of
discontinued business, net of
tax of $45 and $(2,355) 28 (3,622)
-------- --------
Net income $ 12,635 $ 7,694
Other comprehensive income -- --
-------- --------
Comprehensive income $ 12,635 $ 7,694
======== ========
5
Average common shares outstanding -
basic 13,611 13,611
======== ========
Earnings per common share - basic
Continuing operations $ .93 $ .83
Discontinued operations -- (.26)
-------- --------
Net income per common
share - basic $ .93 $ .57
======== ========
Average common shares outstanding -
diluted 13,748 13,690
======== ========
Earnings per common share - diluted
Continuing operations $ .92 $ .83
Discontinued operations -- (.27)
-------- --------
Net income per common
share - diluted $ .92 $ .56
======== ========
Dividends per common share $ .615 $ .615
======== ========
<FN>
*Except per share amounts
The accompanying notes to the Consolidated Financial Statements are
an integral part of these statements.
</TABLE>
6
<PAGE>
<TABLE>
CILCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 13,405 $ 12,117
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Non-cash lease income and investment income (1,633) (1,637)
Cash receipts in excess of debt service
on leases 1,466 796
Depreciation and amortization 18,321 15,984
Deferred income taxes, investment tax credit
and regulatory liability of subsidiary, net (3,639) (2,323)
Changes in operating assets and liabilities:
Decrease in accounts receivable and
accrued unbilled revenue 2,924 10,126
Decrease in inventories 16,832 12,793
(Decrease) in accounts payable (22,789) (11,152)
Increase in accrued taxes 9,239 6,756
Decrease in other assets 4,602 4,395
Decrease in other liabilities (3,232) (5,933)
-------- --------
Total adjustments 22,091 29,805
-------- --------
Net cash provided by operating activities
from continuing operations 35,496 41,922
-------- --------
Net cash provided (used) by operating
activities of discontinued operations 391 (4,978)
-------- --------
Cash flow from operations 35,887 36,944
-------- --------
Cash flows from investing activities:
Additions to plant (10,497) (12,119)
Other 1,400 (6,094)
-------- --------
Net cash used by investing activities
from continuing operations (9,097) (18,213)
-------- --------
Net cash used by investing activities
from discontinued operations (395) 4,978
-------- --------
Cash flow from investing activities (9,492) (13,235)
-------- --------
7
Cash flow from financing activities:
Net decrease in short-term debt (15,500) (13,700)
Decrease in long-term debt (585) (1,131)
Common dividends paid (8,371) (8,371)
Preferred dividends paid (797) (802)
-------- --------
Net cash used by financing activities
from continuing operations (25,253) (24,004)
-------- --------
Net cash used by financing activities
from discontinued operations (7) (12)
-------- --------
Cash flow from financing activities (25,260) (24,016)
-------- --------
Net (decrease) increase in cash and
temporary cash investments: 1,135 (307)
Cash and temporary cash investments
at beginning of year: 1,669 10,576
-------- --------
Cash and temporary cash investments at
March 31 $ 2,804 $ 10,269
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 9,030 $ 8,861
Income taxes $ 3,967 $ 4,755
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these statements.
</TABLE>
8
<PAGE>
<TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
(Unaudited)
<S> <C> <C>
Utility plant, at original cost:
Electric $1,239,766 $1,237,885
Gas 418,981 417,585
---------- ----------
1,658,747 1,655,470
Less - accumulated provision
for depreciation 830,761 812,630
---------- ----------
827,986 842,840
Construction work in progress 36,802 30,075
Plant acquisition adjustments,
net of amortization 288 505
---------- ----------
Total utility plant 865,076 873,420
---------- ----------
Other property and investments:
Cash surrender value of company-owned
life insurance (net of related
policy loans of $48,132) 3,352 2,655
Other 1,191 1,176
---------- ----------
Total other property and
investments 4,543 3,831
---------- ----------
Current assets:
Cash and temporary cash investments 1,564 1,362
Receivables, less reserves of
$1,667 and $1,106 43,993 35,767
Accrued unbilled revenue 25,446 31,315
Fuel, at average cost 10,944 13,431
Materials and supplies,
at average cost 14,553 15,062
Gas in underground storage,
at average cost 6,736 20,494
Prepaid taxes 1,143 2,265
Other 5,094 6,626
---------- ----------
Total current assets 109,473 126,322
---------- ----------
Deferred debits:
Unamortized loss on reacquired debt 3,181 3,261
Unamortized debt expense 1,812 1,852
Prepaid pension cost 417 417
Other 12,298 15,325
---------- ----------
Total deferred debits 17,708 20,855
---------- ----------
Total assets $ 996,800 $1,024,428
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these Balance Sheets.
</TABLE>
9
<PAGE>
<TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
<CAPTION>
March 31, December 31,
CAPITALIZATION AND LIABILITIES 1999 1998
(Unaudited)
<S> <C> <C>
Capitalization:
Common stockholder's equity:
Common stock, no par value;
authorized 20,000,000 shares;
outstanding 13,563,871 shares $ 185,661 $ 185,661
Retained earnings 130,285 135,315
Accumulated other comprehensive income (845) (845)
---------- ----------
Total common stockholder's equity 315,101 320,131
Preferred stock without mandatory
redemption 44,120 44,120
Preferred stock with mandatory redemption 22,000 22,000
Long-term debt 237,896 267,884
---------- ----------
Total capitalization 619,117 654,135
---------- ----------
Current liabilities:
Current maturities of long-term debt 30,000 --
Notes payable 28,800 40,600
Accounts payable 40,074 53,260
Accrued taxes 14,906 7,303
Accrued interest 7,020 9,394
FAC/PGA over-recoveries 2,007 304
Level payment plan -- 1,519
Other 4,632 5,261
---------- ----------
Total current liabilities 127,439 117,641
---------- ----------
Deferred credits and other
liabilities:
Accumulated deferred income taxes 142,120 141,746
Regulatory liability 43,824 46,346
Deferred investment tax credit 19,069 19,450
Capital lease obligation 1,577 1,703
Other 43,654 43,407
---------- ----------
Total deferred credits and
other liabilities 250,244 252,652
---------- ----------
Total capitalization and
liabilities $ 996,800 $1,024,428
========== ==========
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these Balance Sheets.
</TABLE>
10
<PAGE>
<TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Income
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Operating revenue:
Electric $ 80,962 $ 79,178
Gas 76,797 69,902
-------- --------
Total operating revenues 157,759 149,080
-------- --------
Operating expenses:
Cost of fuel 24,231 24,342
Cost of gas 44,687 40,622
Purchased power 5,839 4,674
Other operations and maintenance 27,702 26,817
Depreciation and amortization 18,060 15,755
Income taxes 6,895 7,777
Other taxes 11,561 10,769
-------- --------
Total operating expenses 138,975 130,756
-------- --------
Operating income 18,784 18,324
-------- --------
Other income and deductions:
Cost of equity funds capitalized -- --
Company-owned life insurance, net (247) (205)
Other, net (228) (82)
-------- --------
Total other income and
(deductions) (475) (287)
-------- --------
Income before interest expense 18,309 18,037
-------- --------
Interest expenses:
Interest on long-term debt 4,808 4,960
Cost of borrowed funds
capitalized (11) 23
Other 1,005 738
-------- --------
Total interest expense 5,802 5,721
-------- --------
Net income 12,507 12,316
-------- --------
Dividends on preferred stock 797 802
-------- --------
Net income available for
common stock 11,710 11,514
-------- --------
Other comprehensive income -- --
-------- --------
Comprehensive income $ 11,710 $ 11,514
======== ========
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these statements.
</TABLE>
11
<PAGE>
<TABLE>
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
(In thousands)
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 12,508 $ 12,316
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 18,276 15,933
Deferred income taxes, investment tax
credit and regulatory liability, net (2,529) (1,678)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (8,226) 48
Decrease in fuel, materials and supplies,
and gas in underground storage 16,753 12,789
Decrease in unbilled revenue 5,869 9,555
Decrease in accounts payable (13,185) (10,909)
Increase in accrued taxes and
interest 5,229 5,828
Capital lease payments 161 161
(Increase) decrease in other current assets 2,654 1,259
Decrease in other current
liabilities (446) (3,704)
Decrease in other non-current assets 3,655 4,517
Increase in other non-current liabilities 399 608
-------- --------
Net cash provided by operating activities 41,118 46,723
-------- --------
Cash flows from investing activities:
Capital expenditures (10,087) (10,463)
Cost of equity funds capitalized -- --
Other (1,330) (1,163)
-------- --------
Net cash used in investing activities (11,417) (11,626)
-------- --------
Cash flow from financing activities:
Common dividends paid (16,741) (13,371)
Preferred dividends paid (797) (802)
Payments on capital lease obligation (161) (161)
Decrease in short-term borrowing (11,800) (20,100)
-------- --------
Net cash used in financing activities (29,499) (34,434)
-------- --------
Net increase in cash and temporary
cash investments 202 663
Cash and temporary cash investments at
beginning of year 1,362 699
-------- --------
Cash and temporary cash investments at
March 31 $ 1,564 $ 1,362
======== ========
12
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest (net of cost of borrowed
funds capitalized) $ 8,334 $ 8,209
Income taxes $ 96 $ --
<FN>
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these statements.
</TABLE>
13
<PAGE>
<TABLE>
Statements of Segments of Business
CILCORP Inc. and Subsidiaries
<CAPTION>
Three Months Ended March 31, 1999
CILCO CILCO CILCO Other Discont.
Electric Gas Other Businesses Operatns. Totals
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues $80,962 $76,797 $ 848 $ 9,524 $ -- $168,131
Interest income -- -- 78 29 -- 107
------- ------- ------- -------- ------- --------
Total 80,962 76,797 926 9,553 -- 168,238
------- ------- ------- -------- ------- --------
Operating
expenses 56,328 57,692 1,588 7,408 -- 123,016
Depreciation
and amort. 12,432 5,628 216 45 -- 18,321
------- ------- ------- -------- ------- --------
Total 68,760 63,320 1,804 7,453 -- 141,337
------- ------- ------- -------- ------- --------
Interest exp. 4,151 1,662 -- 1,399 -- 7,212
Preferred
stock div. -- -- 797 -- -- 797
Fixed charges
& other exp. (11) -- 247 -- -- 236
------- ------- ------- -------- ------- --------
Total 4,140 1,662 1,044 1,399 -- 8,245
------- ------- ------- -------- ------- --------
Income from
continuing
oper. before
income taxes 8,062 11,815 (1,922) 701 -- 18,656
Income taxes 2,148 4,747 (650) (196) -- 6,049
------- ------- ------- -------- ------- --------
Net income
from cont.
operations 5,914 7,068 (1,272) 897 -- 12,607
------- ------- ------- -------- ------- --------
Effect of
discontinued
operations -- -- -- -- 28 28
------- ------- ------- -------- ------- --------
Segment net
income $ 5,914 $ 7,068 $(1,272)$ 897 $ 28 $ 12,635
======= ======= ======= ======== ======= ========
14
<PAGE>
</TABLE>
<TABLE>
Statements of Segments of Business
CILCORP Inc. and Subsidiaries
<CAPTION>
Three Months Ended March 31, 1998
CILCO CILCO CILCO Other Discont.
Electric Gas Other Businesses Operatns. Totals
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues $79,178 $69,902 $ 35 $ 5,127 $ -- $154,242
Interest income -- -- 36 36 -- 72
------- ------- ------- -------- ------- --------
Total 79,178 69,902 71 5,163 -- 154,314
------- ------- ------- -------- ------- --------
Operating
expenses 54,431 52,793 672 4,589 -- 112,485
Depreciation
and amort. 11,218 4,537 178 51 -- 15,984
------- ------- ------- -------- ------- --------
Total 65,649 57,330 850 4,640 -- 128,469
------- ------- ------- -------- ------- --------
Interest exp. 4,074 1,624 -- 1,551 -- 7,249
Preferred
stock div. -- -- 802 -- -- 802
Fixed charges
& other exp. 23 -- 205 -- -- 228
------- ------- ------- -------- ------- --------
Total 4,097 1,624 1,007 1,551 -- 8,279
------- ------- ------- -------- ------- --------
Income from
continuing
oper. before
income taxes 9,432 10,948 (1,786) (1,028) -- 17,566
Income taxes 3,422 4,355 (697) (830) -- 6,250
------- ------- ------- -------- ------- --------
Net income
from cont.
operations 6,010 6,593 (1,089) (198) -- 11,316
------- ------- ------- -------- ------- --------
Effect of
discontinued
operations -- -- -- -- (3,622) (3,622)
------- ------- ------- -------- ------- --------
Segment net
income $ 6,010 $ 6,593 $(1,089)$ (198) $(3,622) $ 7,694
======= ======= ======= ======== ======= ========
</TABLE>
15
CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Introduction
The consolidated financial statements include the accounts of CILCORP
Inc. (CILCORP or the Holding Company), Central Illinois Light Company
(CILCO), QST Enterprises Inc. (QST) and its subsidiaries (QST
Environmental Inc., formerly known as Environmental Science &
Engineering, Inc. (ESE), QST Energy Inc. (QST Energy) and CILCORP
Infraservices Inc.) and CILCORP's other subsidiaries (collectively,
the Company) after elimination of significant intercompany
transactions. The consolidated financial statements of CILCO include
the accounts of CILCO and its subsidiaries, CILCO Exploration and
Development Company and CILCO Energy Corporation. CILCORP owns
directly or indirectly 100% of the common stock of its first-tier
subsidiaries. In the fourth quarter of 1998, the operations of QST
and its subsidiaries (excluding new subsidiary CILCORP Infraservices
Inc. - see Management's Discussion and Analysis) were discontinued
(see Note 4.) and, therefore, are being reported as discontinued
operations in the financial statements. Prior year amounts have been
reclassified on a basis consistent with the 1999 presentation.
The accompanying unaudited consolidated financial statements have
been prepared according to the rules and regulations of the
Securities and Exchange Commission (SEC). Although CILCORP believes
the disclosures are adequate to make the information presented not
misleading, these consolidated financial statements should be read
along with the Company's 1998 Annual Report on Form 10-K.
In the Company's opinion, the consolidated financial statements
furnished reflect all normal and recurring adjustments necessary for
a fair presentation of the results of operations for the periods
presented. Operating results for interim periods are not necessarily
indicative of operating results to be expected for the year or of the
Company's future financial condition.
NOTE 2. Contingencies
Gas Manufacturing Plant Sites
CILCO continues to investigate and/or monitor four former gas
manufacturing plant sites located within CILCO's present gas service
territory. The purpose of the investigations is to determine if
waste materials, principally coal tar, are present, whether such
waste materials constitute an environmental or health risk and if
CILCO is responsible for the remediation of any remaining waste
materials at those sites.
During the three months ended March 31, 1999, CILCO paid
approximately $132,000 to outside parties for former gas
manufacturing plant site monitoring, remediation and legal fees, and
expects to spend approximately $480,000 during the remainder of 1999.
A $1.6 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 incur
and recover in the future. Coal tar remediation costs incurred
through March 1999 have been deferred on the Balance Sheets, net of
amounts recovered from customers.
Through March 31, 1999, CILCO has recovered approximately $6.5
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.
16
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
392 CILCO gas and electric department employees. The National
Conference of Firemen and Oilers Local 8 (NCF&O), ratified its
current agreement on October 23, 1998. The current contract expires
on July 1, 2001. The NCF&O represents approximately 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 150 MW of CIPS' capacity from
June 1998 through May 2002, and 50 MW from June 2002 through May
2009.
In January 1997, CILCO intervened in a proceeding before the Federal
Energy Regulatory Commission (FERC) to raise contract issues
relating to CIPS' proposal to engage with a second utility in joint
dispatch of their respective generating units. CILCO also
challenged the validity of the power agreements with CIPS because of
CIPS' failure to obtain FERC approval of the agreements. In the
alternative, CILCO requested that FERC provide an "open season"
during which CILCO may cancel the power agreements in whole or in
part. In an October 1997 order, FERC rejected CILCO's challenges to
joint dispatch and denied CILCO's request for an open season.
However, CIPS was ordered to file the agreements with FERC and, on
its own motion, FERC initiated a separate proceeding to investigate
the terms of the agreements. Hearings in that proceeding have
concluded, and the Administrative Law Judge entered an order in
December 1998 finding the agreements are, with minor exceptions,
just and reasonable. CILCO is appealing that order to FERC and is
requesting FERC to order refunds by CIPS for CIPS' failure to file
the 1990 agreement before providing service to CILCO under that
agreement. FERC's October 1997 order in the joint dispatch
proceeding failed to address certain contract issues raised by
CILCO. FERC denied rehearing of that order in February 1998, and
CILCO appealed to the United States Court of Appeals for the
District of Columbia Circuit for a review of FERC's orders
concerning the CIPS agreements. The Court dismissed the appeal
because the issues raised by CILCO before the Court of Appeals can
still be considered by FERC in the separate proceeding. CILCO will
have the right to appeal after FERC enters its final order in the
separate proceeding.
CILCO also filed a separate complaint at FERC in December 1998,
challenging the manner in which CIPS is performing, or failing to
perform, under the agreements and has notified CIPS that CILCO
considers CIPS to be in default under the agreements. On the ground
that CIPS is in default regarding performance under the 1992
agreement, CILCO suspended capacity reservation payments to CIPS
under the agreement as of January 21, 1999. On April 30, 1999, FERC
issued an order finding that CIPS violated the agreements by placing
the other utility ahead of CILCO in the pricing queue by virtue of
CIPS' joint dispatch arrangement. Subject to the outcome of the
separate proceeding in which FERC is reviewing the agreements, CIPS
was directed to recompute CILCO's energy bills to reflect the
correct contractual pricing under the agreements, and to refund the
difference with interest. FERC did not order termination of the
agreements, and CILCO anticipates that purchases of power from CIPS
under the agreements will be resumed. CILCO cannot predict whether
CIPS will seek rehearing or an appeal of FERC's decision. If
CILCO's position is not upheld in any rehearing or appeal, CILCO
could be required to pay the suspended capacity reservation charges,
which are currently $865,000 per month, plus interest, to CIPS.
Pending resumption of purchases under the agreements, CILCO is
purchasing power and energy from other sources.
17
NOTE 4. QST Enterprises Discontinued Operations
Due to uncertainties related to energy deregulation across the
country, the illiquidity of certain energy markets and its pending
acquisition by AES, the Company intends to focus on the opportunities
in the Illinois energy market resulting from the deregulation of
electricity under the Electric Service Customer Choice and Rate
Relief Law of 1997 (see Management's Discussion and Analysis -
Illinois Electric Deregulation). As a result, the Company decided in
the fourth quarter of 1998 to attempt to sell its 100% ownership
interest in QST Environmental Inc., a first-tier subsidiary of QST
Enterprises Inc. providing environmental consulting and engineering
services. On May 7, 1999, QST Enterprises Inc. signed a definitive
agreement for the sale of QST Environmental Inc. to MACTEC, Inc., a
privately-held company which provides environmental management
services, for approximately $18 million in cash. The effective
date of the sale is scheduled for the first week of June 1999. In
August 1998, QST Enterprises Inc. sold its wholly-owned fiber optic-
based telecommunications subsidiary, QST Communications, for $20
million cash and stock options valued at $5.5 million. Since
incurring material losses in the wholesale electricity market in June
1998 and subsequent losses in its energy operations outside of
Illinois, QST Energy has transferred its Pennsylvania retail
customers to other marketers, ceased its Houston-based energy trading
operations, and is seeking to terminate its obligation to provide
electricity to its non-Illinois customers. Accordingly, the
operations of QST Enterprises Inc. and its subsidiaries are shown as
discontinued operations in the statements of income. The Company's
investment in QST Enterprises Inc. (excluding CILCORP Infraservices
Inc.), as of March 31, 1999, on the accompanying consolidated balance
sheet, consists primarily of $8.7 million in working capital, $6.5
million in fixed assets and $11.6 million of investments and other
assets. Prior year financial statements have been reclassified to
conform to the current year presentation.
NOTE 5. Financial Instruments and Price Risk Management
CILCORP utilizes commodity futures contracts, options and swaps in
the normal course of its natural gas business activities. However,
it does not currently utilize these instruments to hedge its electric
purchase and sale transactions or to participate in energy trading
activities. Gains and losses arising from derivative financial
instrument transactions which hedge the impact of fluctuations in
energy prices are recognized in income concurrent with the related
purchases and sales of the commodity. If a derivative financial
instrument contract is terminated because it is probable that a
transaction or forecasted transaction will not occur, any gain or
loss as of such date is immediately recognized. If a derivative
financial instrument contract is terminated early for other economic
reasons, any gain or loss as of the termination date is deferred and
recorded concurrently with the related purchase and sale of natural
gas. CILCORP is subject to commodity price risk for deregulated
sales to the extent that energy is sold under firm price commitments.
Due to market conditions, at times CILCORP may have unmatched
commitments to purchase and sell energy on a price and quantity
basis. Physical and derivative financial instruments give rise to
market risk, which represents the potential loss that can be caused
by a change in the market value of a particular commitment. Market
risks are actively monitored to ensure compliance with the Company's
risk management policies, including limits to the Company's total net
exposure at any time.
The net loss reflected in operating results from derivative financial
instruments was approximately $36,000 for the first quarter 1999. As
of March 31, 1999, CILCORP had fixed-price derivative financial
instruments representing hedges of natural gas purchases of .6 Bcf
and natural gas sales of 2.8 Bcf for commitments through September
2000. The net deferred gain and carrying amount on these fixed-price
derivatives at March 31, 1999 was approximately $345,000. At
March 31, 1999, CILCORP had open positions in derivative financial
instruments used to hedge basis of 3.4 Bcf for commitments through
October 1999. The net deferred gain on these basis derivatives at
March 31, 1999, was approximately $76,000.
18
NOTE 6. New Accounting Pronouncements
In December 1998, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached consensus on Issue No.
98-10, Accounting for Contracts Involved in Energy Trading and Risk
Management Activities. EITF 98-10 requires energy trading contracts
to be recorded at fair value on the balance sheet, starting January
1999, with changes in fair value recorded in earnings. QST's energy
trading activities, as defined by EITF 98-10, were marked to market
at December 31, 1998, and accounted for as discontinued operations.
CILCORP has adopted EITF 98-10, but currently anticipates that its
future activities will not be classified as energy trading operations
under EITF 98-10. Management therefore does not expect EITF 98-10 to
have a material effect on CILCORP's 1999 results of operations unless
there is a material change in the market value of the open energy
sale commitments included in discontinued operations in 1998.
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
has adopted this SOP and does not expect it to have a material effect
on its financial position, results of operations or cash flows.
NOTE 7. Earnings Per Share
The following data show the amounts used in computing earnings per
share and the effect on income and the weighted average number of
shares of dilutive potential common stock. The shares calculated
for dilutive potential result from Award Agreements entered into
pursuant to the CILCORP Shareholder Return Incentive Compensation
Plan.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
(In thousands)
<S> <C> <C>
Income available to common shareholders $12,635 $ 7,694
Weighted average number of common shares
used in Basic Earnings Per Share 13,611 13,611
Weighted number of dilutive potential common
shares used in Diluted Earnings Per Share 137 79
</TABLE>
The Company adopted Statement of Financial Accounting Standards No.
128, Earnings Per Share, for the year ended December 31, 1997.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 1998 and prior years, the financial condition and operating
results of CILCORP Inc. and its subsidiaries (the Company) primarily
reflected the operations of Central Illinois Light Company (CILCO),
QST Enterprises Inc. (QST), and their subsidiaries. On November 23,
1998, the Company announced that The AES Corporation (AES) has
offered to buy 100% of the Company's outstanding common stock for $65
per share, subject to CILCORP shareholder approval and various
regulatory approvals. On March 10, 1999, the Illinois Commerce
Commission issued its approval of CILCORP's merger with AES. Other
required approvals are in process. The Company anticipates that this
transaction will close in the third quarter of 1999.
As a result of the pending acquisition and after reviewing its
business plans, the Company decided in late 1998 to attempt to sell
its 100% ownership interest in QST Environmental Inc. (QST
Environmental), a first-tier subsidiary of QST that provides
environmental consulting and engineering services. On May 7, 1999,
QST agreed to sell all the outstanding common stock of QST
Environmental to MACTEC, Inc. for approximately $18 million in cash.
The sale is expected to be effective in the first week of June 1999.
QST had sold another of its subsidiaries, QST Communications Inc., in
August 1998.
In June 1998, QST Energy Inc. (QST Energy), another first-tier
subsidiary of QST, incurred a material loss related to wholesale
electricity contracts, triggered by an unprecedented increase in
short-term wholesale electricity prices. QST Energy closed its
electric and gas non-retail positions and, in the fourth quarter of
1998, closed its Houston energy trading office and transferred its
Pennsylvania retail electric and gas customers to other marketers.
In late 1998, QST Energy began negotiating with its remaining non-
Illinois commercial customers to end its obligations to provide
electric service over the remaining terms of its contracts with them.
Due to uncertainties related to electric deregulation across the
country, the illiquidity of certain energy markets, and its pending
acquisition by AES, the Company intends to focus on the opportunities
in the Illinois energy market resulting from the deregulation of
electricity under the Electric Service Customer Choice and Rate
Relief Law of 1997 (see Item 5: Other Information - Illinois
Electric Deregulation). This law will enable CILCO, the Company's
regulated public utility that generates and distributes electricity
and purchases, transports and distributes natural gas, to serve
Illinois electric customers outside its traditional Central Illinois
service territory. As a result of these events, the Company is
reporting the results of QST Enterprises and its subsidiaries
(excluding CILCORP Infraservices Inc., which began operations in
1999) as discontinued operations (see Note 4).
The Other Businesses segment includes the operations of the holding
company itself (Holding Company), its investment subsidiary, CILCORP
Investment Management Inc. (CIM), CILCORP Ventures Inc. (CVI) and
CILCORP Infraservices Inc. which provides utility infrastructure
operation and maintenance services.
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 expressed or implied in MD&A. The
business and profitability of CILCORP and its subsidiaries are
influenced by economic and geographic factors, including ongoing
changes in environmental laws and weather conditions; the extent
20
and pace of development of competition for retail and wholesale
energy customers; changes in technology; third party compliance with
Year 2000 requirements; the inability to identify and remediate or
replace embedded computer chips in affected equipment; pricing and
transportation of commodities; market supply and demand for energy
and energy derivative financial instruments; inflation; capital
market conditions; environmental protection and compliance costs and
regulatory actions regarding the proposed merger with AES.
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 affect its earnings. 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. CILCORP and its subsidiaries undertake
no obligation to publicly update or revise any forward-looking
statements, whether as a result of changes in actual results,
assumptions or other factors.
Capital Resources & Liquidity
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 fund its capital
expenditures, pay its financial obligations, meet working capital
needs and retire or refinance debt as it matures. The Agreement and
Plan of Merger (The Agreement) between the Company and The AES
Corporation provides for the ongoing payment of common dividends, not
to exceed the average for the four quarterly dividend payments prior
to the effective date of The Agreement, pending the merger.
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
March 31, 1999, CILCORP had committed bank lines of credit of
$60 million, of which $51.9 million was used.
The Company had $30.5 million of medium-term notes outstanding at
March 31, 1999. 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 $10.1 million for the three months ended
March 31, 1999. Capital expenditures are anticipated to be
approximately $46.5 million for the remainder of 1999 and are
estimated to be $51 million in 2000. Included in 1999 and 2000
capital expenditures are $11.8 million and $5.8 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
1999. CILCO intends to finance its 1999 and 2000 capital
expenditures with funds provided by operations.
As of March 31, 1999, 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 $28.8 million of commercial paper outstanding at March 31,
1999 and expects to issue commercial paper periodically throughout
the remainder of 1999.
QST
Working capital balances at QST (excluding QST Environmental)
decreased by $12.5 million during the first quarter of 1999,
primarily due to an increase in borrowings from the Holding Company.
QST borrowed funds from the Holding Company as a result of two
California commercial customers not paying QST for energy
21
delivered (see Results of Operations - QST Enterprises Discontinued
Operations). QST expects to finance working capital needs with funds
provided by the Holding Company as QST's operations are discontinued.
At March 31, 1999, QST (excluding QST Environmental) had outstanding
debt to the Holding Company of $14.3 million.
QST Environmental spent $.4 million for capital additions and
improvements during the first quarter of 1999. 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 March
31, 1999, QST Environmental had borrowed $6.6 million from CILCORP.
Based upon its current receivables and fixed assets, QST
Environmental has an additional $8.4 million available under this
revolving line of credit. QST Environmental anticipates that cash
and short-term investments, funds generated by operations and amounts
available under the Holding Company line of credit will be sufficient
to meet its anticipated working capital requirements prior to its
sale.
CIM
At March 31, 1999, CIM had $38 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 March 31,
1999, approximately $14.7 million of these commitments had been
funded. CIM expects to contribute approximately $1 million in cash
for these investments during the remainder of 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 1999 with a combination of funds generated internally
and funds provided by CILCORP.
CVI
At March 31, 1999, CVI had outstanding debt of $.4 million, borrowed
from CILCORP. CVI expects to finance its activities and working
capital needs during the remainder of 1999 with a combination of
funds generated internally and with funds provided by CILCORP.
22
Year 2000
The Company is continuing its progress toward making its computer
systems and operations ready for the year 2000. CILCO began
evaluating its information technology systems in 1996. Systems were
reviewed and a schedule was developed for the analysis of all
computer application code and for the replacement or modification of
those systems that were identified as obsolete and/or having
potential Year 2000 (Y2K) issues. Replacement of several major
computer systems with Y2K issues began in 1997. A Y2K team was
established in March 1998, consisting of personnel from each
operating division of CILCO. In conjunction with the formation of
the Y2K team, an outside firm specializing in Y2K projects was
retained to assist CILCO with its overall Y2K project plans. CILCO
has also worked with an independent audit team to evaluate the status
of the Y2K project. The project was divided into three phases, as
follows:
Phase I tasks included an inventory of all present systems for
embedded chips having potential Y2K issues, contacting all
manufacturers of embedded chip devices for the Y2K status of these
devices, identifying and surveying all critical suppliers, and
conducting an inventory of 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, two separate groups of outside consultants evaluated all
mainframe application code to identify specific instances of date
problems in each application program for systems that are not being
replaced. Phase II has been completed except for the testing of
approximately 20% of embedded chip devices associated with electric
and gas transmission and distribution and power plant operations.
This testing will occur during the second quarter of 1999.
Phase III is also in progress and includes the upgrade/replacement
and re-testing of embedded chip devices found not to be Y2K compliant
during Phase II. This phase includes completion of mainframe
computer operating software upgrades to current Y2K compliant
versions and defining Y2K contingency plans for each business unit.
Computer application code that was 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, which is expected to be completed
by October 1999. Systems identified as critical to the continued
provision of utility services will be of particular focus during the
testing portion of Phase III. These critical systems are generating
station equipment, electric transmission and distribution control
systems, gas delivery control systems, and telecommunications
systems.
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 have been spent prior to the year
2000 for system replacements or hardware upgrades initiated for
business purposes other than solely for Y2K compliance.
QST Environmental is scheduled to complete the upgrade of its billing
and project accounting system to a Y2K compliant version by June
1999. Replacement of this system will cost approximately $1 million,
$624,000 of which was spent in 1998.
CILCO is working both internally and with utility industry groups,
including the Mid-America Interconnected Network (MAIN) and the North
American Electric Reliability Council (NERC), to identify and plan
for all identified risks associated with the Y2K issue. While these
groups are modeling potential worst case scenarios, the probability
of extreme disruptions due to Y2K issues is considered extremely low.
CILCO's Y2K team has identified the most likely worst case scenario
to be an interruption in service by a critical supplier.
23
Consequently, alternate sources for supplies have been identified and
the need for CILCO to stock additional inventories of critical items
is being evaluated.
CILCO is also following the contingency planning process recognized
by MAIN and NERC. Accordingly, CILCO has established a Y2K
contingency planning team that has received training in contingency
planning techniques and goals. The team is collecting data and
contingency planning began in March 1999. Within this structure,
CILCO submitted its contingency plans to MAIN on March 31, 1999.
MAIN is then required to submit plans to NERC by June 30, 1999. This
contingency planning process is expected to continue through the
fourth quarter 1999, and will include CILCO's participation in the
NERC industry-wide drills during the spring and fall of 1999.
The Company currently believes it will be able to adequately address
Y2K issues, 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 Y2K 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 Y2K
requirements beyond the assurances given during critical vendor
assessments.
Price Risk Management
The majority of CILCORP's energy sales at the end of the first
quarter 1999 were to CILCO retail customers in Illinois under tariffs
regulated by the ICC. Although the Illinois retail electric market
is becoming deregulated (see Illinois Electric Deregulation),
prudently incurred costs of fuel used to generate electricity,
purchased power costs and gas purchased for resale may be recovered
from retail customers that purchase energy through regulated tariffs.
Thus, there is very limited commodity price risk associated with
CILCO's traditional regulated sales. However, as more customers in
Illinois purchase energy on a competitive basis pursuant to the
current Illinois deregulation timetable, CILCO's exposure to
commodity price risk will increase. At March 31, 1999, QST's non-
Illinois electric operations and gas trading activities have been
accounted for as discontinued operations (see Note 4).
The market risk inherent in the activities of CILCORP (exclusive of
regulated Illinois tariff customers) is the potential loss arising
from adverse changes in natural gas and electric commodity prices
relative to the physical and financial positions that the Company
maintains. The prices of natural gas and electricity are subject to
fluctuations resulting from changes in supply and demand. At
March 31, 1999, CILCORP engaged in deregulated electric retail and
natural gas sales in Illinois, including wholesale power purchases
and sales to utilize its electric generating capability. These
deregulated activities had net open market price risk positions of
approximately 14,000 MWh of electricity and 0.1 Bcf of natural gas.
A market price sensitivity of 10% applied to these positions is not
material to the Company. At March 31, 1999, QST's discontinued
operations had a net open market price risk in electricity of
approximately 0.3 million MWh. Assuming a 10% adverse change in
market prices, the Company would record an additional loss of
$0.8 million. Actual results may differ materially. See Note 5 for
a discussion of CILCORP's use of financial derivatives for hedging
purposes. Due to the high correlation between the changes in the
value of the financial instruments owned by CILCORP to the change in
price of the underlying commodity, the net effect on CILCORP's net
income resulting from the change in value of these financial
instruments is not expected to be material.
24
Results of Operations
CILCO Electric Operations
The following table summarizes the components of CILCO electric
operating income for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Components of Electric Operating Income 1999 1998
(In thousands)
(Unaudited)
<S> <C> <C>
Revenue:
Electric retail $76,696 $73,357
Sales for resale 4,266 5,821
------- -------
Total revenue 80,962 79,178
------- -------
Cost of sales:
Cost of fuel 24,231 24,342
Purchased power 5,839 4,674
Revenue taxes 4,643 4,317
------- -------
Total cost of sales 34,713 33,333
------- -------
Gross margin 46,249 45,845
------- -------
Operating expenses
Other operation and maintenance 19,250 18,899
Depreciation and amortization 12,432 11,218
Other taxes 2,365 2,199
------- -------
Total operating expenses 34,047 32,316
------- -------
Total 12,202 13,529
------- -------
Fixed charges and other
Cost of equity funds capitalized -- --
Interest on long-term debt 3,433 3,546
Cost of borrowed funds capitalized (11) 23
Other interest 718 528
------- -------
Total 4,140 4,097
Income before income taxes 8,062 9,432
Income taxes 2,148 3,422
------- -------
Electric income $ 5,914 $ 6,010
======= =======
</TABLE>
Electric gross margin increased 1% for the three months ended
March 31, 1999, compared to the same period in 1998. While retail
sales increased, these increases were offset by significant decreases
in sales for resale. Retail kilowatt hour (KWh) sales increased 9%
for the three months ended March 31, 1999, compared to the first
quarter of 1998. Residential and commercial sales increased 9% and
6%, respectively, for the three months ended March 31, 1999, compared
to the same period in 1998. Heating degree days were 13% higher for
the three months ended March 31, 1999, compared to the same period in
1998. Industrial sales increased 10% for the three months ended
March 31, 1999. Industrial sales were
25
favorably impacted by customers returning to retail supply due to the
completion of CILCO's Power Quest industrial program in April 1998.
Sales for resale decreased 27% for the first quarter of 1999,
compared to the same period in 1998, due to lower available capacity
for bulk sales. 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 will also be affected in the long term by deregulation and
increased competition in the electric utility industry.
The cost of fuel remained relatively constant in the first quarter of
1999 compared to the same period in 1998. Purchased power increased
25% for the quarter ended March 31, 1999, compared to the same
periods in 1998. 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).
Electric operation and maintenance expense increased 2% for the three
months ended March 31, 1999, compared to the same period in 1998.
The increase for the quarter was mainly due to an increase in medical
expenses and computer software costs, partially offset by lower
outside services costs.
Fixed charges and other expenses remained relatively constant in 1999
compared to 1998.
26
CILCO Gas Operations
The following table summarizes the components of CILCO gas operating
income for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Components of Gas Operating Income 1999 1998
(In thousands)
(Unaudited)
<S> <C> <C>
Revenue:
Sale of gas $75,431 $68,280
Transportation services 1,366 1,622
------- -------
Total revenue 76,797 69,902
------- -------
Cost of sales:
Cost of gas 44,687 40,622
Revenue taxes 3,751 3,492
------- -------
Total cost of sales 48,438 44,114
------- -------
Gross margin 28,359 25,788
------- -------
Operating expenses
Other operation and maintenance 8,452 7,918
Depreciation and amortization 5,628 4,537
Other taxes 802 761
------- -------
Total operating expenses 14,882 13,216
------- -------
Total 13,477 12,572
------- -------
Fixed charges and other
Cost of equity funds capitalized -- --
Interest on long-term debt 1,375 1,414
Cost of borrowed funds capitalized -- --
Other interest expense 287 210
------- -------
Total 1,662 1,624
Income before income taxes 11,815 10,948
Income taxes 4,747 4,355
------- -------
Gas income $ 7,068 $ 6,593
======= =======
</TABLE>
Gas gross margin increased 10% for the first quarter ended March 31,
1999, compared to the same period in 1998. Residential and
commercial sales volumes increased 19% and 12%, respectively, for the
quarter ended March 31, 1999, primarily due to colder weather.
Heating degree days were 13% higher for the quarter ended March 31,
1999, compared to the same period in 1998. 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 16% while gas
transportation sales volumes remained relatively constant for the
first quarter ended March 31, 1999, compared to the same period in
1998.
27
The cost of gas increased 10% for the quarter ended March 31, 1999,
compared to the same period in 1998, due to increased gas sales
offset partially by lower natural gas prices. These changes were
passed through to customers via the PGA.
Gas operation and maintenance expense increased 7% for the three
months ended March 31, 1999, compared to the same period in 1998.
The increase for the three months ended March 31, 1999, was primarily
due to increased medical expenses and computer software costs,
partially offset by a decrease in outside services costs.
Income and other taxes expense increased for the three months ended
March 31, 1999, due to higher pre-tax operating income.
Fixed charges and other expenses remained relatively constant in 1999
compared to 1998.
CILCO Other
The following table summarizes other income and deductions for the
three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Components of Other Income Three Months Ended
and Deductions March 31,
1999 1998
(In thousands)
(Unaudited)
<S> <C> <C>
Revenue $ 848 $ 35
Interest income 78 36
Amortization (216) (178)
Operating expenses (1,588) (672)
Preferred stock dividends (797) (802)
Other (247) (205)
------- -------
Other income (deductions) (1,922) (1,786)
Income taxes (benefit) (650) (697)
------- -------
Other income (deductions), net $(1,272) $(1,089)
======= =======
</TABLE>
Other revenues and the related operating expenses increased for the
three months ended March 31, 1999, due to increased nonregulated
electricity sales in Illinois outside of CILCO's service territory.
These sales of electricity are to eligible customers of other
utilities' pilot programs formerly served by CILCO affiliate QST.
28
Other Businesses Operations
The following table summarizes the components of Other Businesses
income (loss) for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Components of Other Businesses Three Months Ended
Net Income (Loss) March 31,
1999 1998
(In thousands)
(Unaudited)
<S> <C> <C>
Revenue:
Leveraged lease revenue $1,957 $1,833
Other revenue 7,596 3,330
------ ------
Total revenue 9,553 5,163
Expenses:
Operating expenses 7,403 4,572
Depreciation and amortization 45 51
Interest expense 1,399 1,551
Other taxes 5 17
------ ------
Total expenses 8,852 6,191
Income (loss) before income taxes 701 (1,028)
Income tax benefit (196) (830)
------ ------
Other businesses net income (loss) $ 897 $ (198)
====== ======
</TABLE>
Other revenues increased 85% for the three months ended March 31,
1999, primarily due to increased CVI gas marketing revenue and
revenue from a new subsidiary, CILCORP Infraservices Inc.
Operating expenses increased for the three months ended March 31,
1999, compared to the corresponding period in 1998, primarily due to
increased expenses at CVI related to the gas retail marketing program
and at CILCORP Infraservices Inc., while interest expense decreased
due to lower average debt balances.
Income and other taxes increased in the three months ended March 31,
1999, compared to the corresponding period in 1998, primarily due to
an increase in pre-tax income.
29
QST Enterprises Discontinued Operations
The results of QST Enterprises Inc. (QST) and its past and present
subsidiaries - QST Communications, QST Environmental and QST Energy -
are reported in 1999 and prior periods as discontinued operations
(see Note 4). The table below shows the components of the
discontinued operations.
Income (loss) from operations of discontinued businesses, net of tax:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
(In thousands)
(Unaudited)
<S> <C> <C>
QST Communications, net of tax of
$(175) $ -- $ (266)
QST Enterprises (excluding QST
Environmental and QST Communications),
net of tax of $(1,942) -- (2,955)
QST Environmental, net of tax of $(45)
and $(238) 28 (401)
------- -------
$ 28 $(3,622)
======= =======
</TABLE>
In August 1998, QST sold its wholly-owned fiber optic-based
telecommunications subsidiary, QST Communications, to McLeod USA for
$20 million cash and McLeod stock options valued at $5.5 million,
resulting in an after-tax gain of approximately $8.3 million.
Operating losses incurred by QST Communications during the first
quarter of 1998 are shown in the table above.
During the fourth quarter of 1998, QST Enterprises Inc. and QST
Energy ceased operations, except for fulfillment of contractual
commitments for 1999 and beyond, and recorded loss provisions for the
discontinued energy operations. Financial results for the first
quarter of 1999 were reflected in the discontinued operations
liability which was accrued at the end of 1998, resulting in no net
income or loss for the quarter.
In February 1999, QST Energy notified two of its California
commercial customers that they were in default of their contracts
with QST Energy as a result of not paying QST Energy for energy
delivered. QST Energy filed two suits in the U.S. District Court,
Central District of Illinois, seeking payment. In March, the
customers filed a suit in California Superior Court, Alameda County,
California, alleging that QST Energy was in breach of the contract.
This suit was subsequently removed to U.S. District Court, Northern
District of California. QST Energy has moved to dismiss this suit
filed in California as duplicative of the suits pending in Illinois.
QST Energy cannot predict the ultimate outcome of this matter, but
intends to vigorously pursue its claim. The accounts receivable
reflected in CILCORP's consolidated balance sheet at March 31, 1999,
for these two customers, totaled $14.2 million. Under the terms of
the contract, QST Energy is in the process of terminating delivery
of electricity to the two customers.
QST's losses for the first quarter of 1998 were primarily due to
wholesale gas trading losses and general and administrative expenses
incurred to support the retail and wholesale operations during the
first quarter of 1998.
On May 7, 1999, QST signed a definitive agreement to sell all the
outstanding common stock of QST Environmental to MACTEC, Inc. for
approximately $18 million in cash. The sale is expected to be
effective in the first week of June 1999.
30
QST Environmental recorded a provision for estimated losses related
to the sale or discontinuance of its business, including estimated
losses related to assets and obligations, such as the laboratories,
not integral to the environmental consulting business activities to
be sold. QST Environmental's improved results from operations of
discontinued business for the first quarter of 1999, as compared to
the same period in 1998, resulted primarily from decreases in
operating expenses, partially offset by decreases in laboratory
revenues following the closing of the Gainesville Laboratory.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Reference is made to "Environmental Matters" under "Item 1. Business"
in the Company's 1998 Annual Report on Form 10-K (the "1998 Form 10-
K") and to "Note 2. Contingencies" and "QST Enterprises Discontinued
Operations", 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 residential base rates with
an initial 2% decrease beginning August 1998. (Refer to the caption
"Competition" in Management's Discussion and Analysis of Financial
Condition and Results of Operations in CILCORP's 1998 Annual Report
to Shareholders.)
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 $1.6 million in pre-tax
31
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 for the three months ended March 31, 1998.
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 is
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
approximately $166,000 in pre-tax income for the first three months
of 1999. In December 1998, CILCO received approval from the Illinois
Commerce Commission (ICC) to eliminate this program, effective May 1,
1999.
While CILCO has not filed with the ICC to terminate the gas
residential pilot program, its affiliate, QST Energy, withdrew from
participation in the program in August 1998. Most gas customers that
had been served by QST have returned to CILCO or other affiliates.
Participation in the gas pilot program by marketers other than QST
has been minimal. This program did not have a material impact on
CILCORP's financial position or results of operations for 1998 or the
first three months of 1999. Management further believes this program
will not have a material adverse impact on CILCORP's future financial
position or results of operations.
Voluntary Early Retirement Program
As part of a continuing effort to better position itself for
competition in the energy services industry, in April 1999, CILCO
offered Voluntary Early Retirement Programs to employees in its
electric power generation area, including employees represented by
the NCF&O. A total of 118 employees are eligible to retire,
effective as early as June 1, 1999. If 100% of the eligible
employees chose to retire under the programs, CILCO estimates it
would incur an after-tax charge to earnings of approximately
$13.4 million. However, fewer than 100% of those eligible are
expected to accept the offer under these programs.
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 March 22, 1999, regarding Year 2000
issues.
32
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 May 11, 1999
R. O. Viets
R. O. Viets
President and Chief
Executive Officer
Date May 11, 1999
T. D. Hutchinson
T. D. Hutchinson
Controller
33
<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 May 11, 1999
R. J. Sprowls
R. J. Sprowls
Vice President and Chief
Financial Officer
Date May 11, 1999
T. D. Hutchinson
T. D. Hutchinson
Controller and Manager
of Accounting
34
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<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<NAME> CILCORP INC.
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<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<CIK> 0000018651
<NAME> CENTRAL ILLINOIS LIGHT COMPANY
<MULTIPLIER> 1,000
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