================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): September 30, 1999
THE AES CORPORATION
(exact name of registrant as specified in its charter)
DELAWARE 0-19281 54-1163725
(State of Incorporation) (Commission File No.) (IRS Employer Identification No.)
1001 North 19th Street
Arlington, Virginia 22209
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:
(703) 522-1315
NOT APPLICABLE
(Former Name or Former Address, if changed since last report)
================================================================================
<PAGE>
ITEM 5. OTHER EVENTS
In November 1998, The AES Corporation entered into a definitive agreement for
the acquisition of CILCORP. All shareholder and regulatory approvals required to
complete the acquisition have been obtained, and we expect the acquisition to
close in the fourth quarter of 1999. This Current Report on Form 8-K includes
audited historical financial statements of CILCORP as of and for the three years
ended December 31, 1998, interim financial statements of CILCORP as of and for
the six months ended June 30, 1999, and pro forma financial statements of The
AES Corporation as of and for the six months ended June 30, 1999 and for the
year ended December 31, 1998 which reflect the acquisition of CILCORP.
<PAGE>
CILCORP INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NO.
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants ........................................... F-2
Consolidated Statements of Income for the Three Years Ended December 31, 1998 ...... F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 ....................... F-4
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1998 ................................................................. F-5
Consolidated Statements of Segments of Business for the Three Years Ended
December 31, 1998 ................................................................. F-6
Consolidated Statements of Retained Earnings for the Three Years Ended
December 31, 1998 ................................................................. F-9
Notes to Consolidated Financial Statements ......................................... F-10
INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Income For the Six Months Ended June 30, 1999
and 1998 .......................................................................... F-26
Consolidated Balance Sheets as of June 30, 1999 and 1998 ........................... F-27
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1999
and 1998 .......................................................................... F-29
Consolidated Statements of Segments of Business for the Six Months Ended June 30,
1999 and 1998 ..................................................................... F-30
Notes to Consolidated Financial Statements ......................................... F-31
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To the Stockholders of CILCORP Inc.:
We have audited the accompanying consolidated balance sheets of CILCORP
Inc. (an Illinois corporation) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, cash flows,
stockholders' equity and segments of business for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CILCORP Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 27, 1999
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
CILCORP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue:
Electric .............................................. $ 360,009 $ 338,096 $322,785
Gas ................................................... 172,327 208,758 195,770
Other Businesses ...................................... 26,688 11,106 8,505
--------- --------- --------
Total ............................................... 559,024 557,960 527,060
--------- --------- --------
Operating Expenses:
Fuel for Generation and Purchased Power ............... 124,058 115,081 101,622
Gas Purchased for Resale .............................. 93,586 123,532 108,286
Other Operations and Maintenance ...................... 145,673 124,852 131,675
Depreciation and Amortization ......................... 66,179 62,416 60,574
State and Local Revenue Taxes ......................... 26,502 22,467 22,004
Other Taxes ........................................... 11,463 11,833 11,516
--------- --------- --------
Total ............................................... 467,461 460,181 435,677
--------- --------- --------
Fixed Charges and Other:
Interest Expense ...................................... 29,473 27,462 28,964
Preferred Stock Dividends of Subsidiary ............... 3,194 3,216 3,188
Allowance for Funds Used During Construction. (34) (134) (90)
Other ................................................. 1,013 1,177 679
--------- --------- --------
Total ............................................... 33,646 31,721 32,741
--------- --------- --------
Income from Continuing Operations Before
Income Taxes .......................................... 57,917 66,058 58,642
Income Taxes ........................................... 19,699 22,349 20,702
--------- --------- --------
Net Income from Continuing Operations Before
Extraordinary Item .................................... 38,218 43,709 37,940
Loss from Operations of Discontinued Businesses,
Net of Tax of $(16,278), $(7,298) and $(6,197)......... (25,025) (34,126) (9,997)
Gain on Sale/Disposal of Assets of Discontinued
Businesses, Net of Tax of $2,014 and $1,889............ 3,117 2,712 --
Extraordinary Item (see Note 1) ........................ -- 4,100 --
--------- --------- --------
Net Income ............................................. $ 16,310 $ 16,395 $ 27,943
Other Comprehensive Income ............................. (169) (317) (5)
--------- --------- --------
Comprehensive Income ................................... $ 16,141 $ 16,078 $ 27,938
========= ========= ========
Average Common Shares Outstanding -- Basic ............. 13,611 13,611 13,480
Earnings Per Common Share -- Basic
Continuing Operations ................................. $ 2.81 $ 3.21 $ 2.81
Discontinued Operations ............................... ( 1.61) ( 2.31) ( .74)
Extraordinary Item .................................... -- .30 --
--------- --------- --------
Net Income Per Common Share -- Basic ................... $ 1.20 $ 1.20 $ 2.07
========= ========= ========
Average Common Shares Outstanding -- Diluted. 13,707 13,627 13,480
Earnings Per Common Share -- Diluted
Continuing Operations ................................. $ 2.79 $ 3.21 $ 2.81
Discontinued Operations ............................... ( 1.60) ( 2.31) ( .74)
Extraordinary Item .................................... -- .30 --
--------- --------- --------
Net Income Per Common Share -- Diluted ................ $ 1.19 $ 1.20 $ 2.07
========= ========= ========
Dividends per Common Share ............................ $ 2.46 $ 2.46 $ 2.46
</TABLE>
The accompanying Notes to Financial Statements are an
integral part of these statements.
F-3
<PAGE>
CONSOLIDATED BALANCE SHEETS
CILCORP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1998 1997
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Temporary Cash Investments ...................... $ 1,669 $ 10,576
Receivables, Less Reserves of $3,411 and $2,518........... 134,666 141,234
Accrued Unbilled Revenue ................................. 39,220 38,775
Fuel, at Average Cost .................................... 13,431 7,816
Materials and Supplies, at Average Cost .................. 15,062 13,685
Gas in Underground Storage, at Average Cost .............. 20,767 22,666
Prepayments and Other .................................... 7,706 10,971
---------- ----------
Total Current Assets ................................... 232,521 245,723
---------- ----------
Investments and Other Property:
Investment in Leveraged Leases ............................ 146,990 146,458
Other Investments ......................................... 19,500 21,074
---------- ----------
Total Investments and Other Property ................... 166,490 167,532
---------- ----------
Property, Plant and Equipment:
Utility Plant, at Original Cost
Electric ................................................. 1,237,885 1,213,585
Gas ...................................................... 417,585 401,870
---------- ----------
1,655,470 1,615,455
Less -- Accumulated Provision for Depreciation ............ 812,630 769,792
---------- ----------
842,840 845,663
Construction Work in Progress ............................. 30,075 21,550
Other, Net of Depreciation ................................ 7,796 22,188
---------- ----------
Total Property, Plant and Equipment .................... 880,711 889,401
---------- ----------
Other Assets: 33,218 32,163
---------- ----------
Total Assets ........................................... $1,312,940 $1,334,819
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt ........................ $ 13,027 $ 22,185
Notes Payable ............................................ 96,200 62,150
Accounts Payable ......................................... 136,840 132,286
Accrued Taxes ............................................ 8,185 2,810
Accrued Interest ......................................... 10,102 9,473
FCA/PGA Over-Recoveries .................................. 304 1,666
Other .................................................... 8,881 19,798
---------- ----------
Total Current Liabilities .............................. 273,539 250,368
---------- ----------
Long-Term Debt ............................................ 285,552 298,528
---------- ----------
Deferred Credits and Other Liabilities:
Deferred Income Taxes ..................................... 239,306 241,013
Regulatory Liability of Regulated Subsidiary .............. 46,346 56,807
Deferred Investment Tax Credit ............................ 19,450 21,117
Other ..................................................... 47,089 48,273
---------- ----------
Total Deferred Credits ................................. 352,191 367,210
---------- ----------
Preferred Stock of Subsidiary ............................. 66,120 66,120
---------- ----------
Stockholders' Equity:
Common Stock, no par value; Authorized 50,000,000 shares --
Outstanding 13,610,680 and 13,610,680 shares ............. 192,853 192,567
Retained Earnings ......................................... 143,530 160,702
Accumulated Other Comprehensive Income .................... (845) (676)
---------- ----------
Total Stockholders' Equity ............................. 335,538 352,593
---------- ----------
Total Liabilities and Stockholders' Equity ............. $1,312,940 $1,334,819
========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an
integral part of these balance sheets.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CILCORP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income from Continuing Operations Before Preferred Dividends. $ 41,412 $ 46,925 $ 41,128
--------- --------- ---------
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Non-Cash Income ....................................................... (6,150) (4,102) (4,297)
Cash Receipts in Excess of Debt Service on Leases ..................... 7,618 -- --
Depreciation and Amortization ......................................... 66,179 62,416 60,574
Deferred Income Taxes, Investment Tax Credit and Regulatory
Liability of Subsidiary, Net ........................................ (5,865) (3,342) (1,707)
Changes in Operating Assets and Liabilities:
Decrease (Increase) in Accounts Receivable and Accrued Unbilled
Revenue ............................................................. 5,430 (74) (3,474)
(Increase) Decrease in Inventories .................................... (5,093) 3,294 (5,310)
Increase (Decrease) in Accounts Payable ............................... 14,188 (1,961) 6,809
Increase (Decrease) in Accrued Taxes .................................. 10 3,893 (5,843)
(Increase) Decrease in Other Assets ................................... 209 (17,027) 2,197
Increase (Decrease) in Other Liabilities .............................. (6,426) (9,039) 11,036
--------- --------- ---------
Total Adjustments ...................................................... 70,100 34,058 59,985
--------- --------- ---------
Net Cash Provided by Operating Activities .............................. 111,512 80,983 101,113
Net Cash Provided by (Used in) Operating Activities of Discontinued
Operations ............................................................ (43,202) 10,031 1,263
--------- --------- ---------
Cash Flow from Operations .............................................. 68,310 91,014 102,376
--------- --------- ---------
Cash Flows from Investing Activities:
Additions to Plant ..................................................... (67,112) (55,055) (43,680)
Purchase of Long-Term Investments ...................................... -- (6,933) (4,713)
Other .................................................................. (4,514) (1,242) 482
--------- --------- ---------
Net Cash Used in Investing Activities .................................. (71,626) (63,230) (47,911)
Net Cash Provided by (Used in) Investing Activities of Discontinued
Operations ............................................................ 19,169 3,310 (3,082)
--------- --------- ---------
Cash Flow from Investing Activities .................................... (52,457) (59,920) (50,993)
--------- --------- ---------
Cash Flows from Financing Activities:
Net Increase (Decrease) in Short-Term Debt ............................. 34,050 34,250 (19,200)
Repayment of Long-Term Debt ............................................ (22,102) (22,954) (19,393)
Common Dividends Paid .................................................. (33,482) (33,482) (33,142)
Preferred Dividends Paid ............................................... (3,194) (3,216) (3,188)
Common Stock Issued .................................................... -- -- 11,430
--------- --------- ---------
Net Cash Provided by (Used in) Financing Activities of Continuing
Operations ............................................................ (24,728) (25,402) (63,493)
Net Cash Provided by (Used in) Financing Activities of Discontinued
Operations ............................................................ (32) (57) (49)
--------- --------- ---------
Net Cash Used in Financing Activities .................................. (24,760) (25,459) (63,542)
--------- --------- ---------
Net Increase (Decrease) in Cash and Temporary Cash Investments ......... (8,907) 5,635 (12,159)
Cash and Temporary Cash Investments at Beginning of Year ............... 10,576 4,941 17,100
--------- --------- ---------
Cash and Temporary Cash Investments at End of Year ..................... $ 1,669 $ 10,576 $ 4,941
========= ========= =========
</TABLE>
The accompanying Notes to Financial Statements
are an integral part of these statements.
F-5
<PAGE>
STATEMENTS OF SEGMENTS OF BUSINESS
CILCORP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------------
CILCO CILCO CILCO OTHER DISCONT.
ELECTRIC GAS OTHER BUSINESSES OPERATIONS TOTALS
------------ ----------- ------------ ------------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................. $360,009 $172,327 $ 1,743 $ 24,717 $ -- $ 558,796
Interest income ...................... 228 228
-------- -------- ---------- -------- ----------
Total ............................. 360,009 172,327 1,971 24,717 559,024
-------- -------- -------- ---------- -------- ----------
Operating expenses ................... 235,801 138,459 3,600 23,422 401,282
Depreciation and amortization ........ 46,017 19,256 713 193 66,179
-------- -------- -------- ---------- -------- ----------
Total ............................. 281,818 157,715 4,313 23,615 467,461
-------- -------- -------- ---------- -------- ----------
Interest expense ..................... 16,261 6,514 6,698 29,473
Preferred stock dividends ............ 3,194 3,194
Fixed charges and other expenses (34) 1,013 979
-------- -------- -------- ---------- -------- ----------
Total ............................. 16,227 6,514 4,207 6,698 33,646
-------- -------- -------- ---------- -------- ----------
Income from continuing oper.
before income taxes ................. 61,964 8,098 (6,549) (5,596) 57,917
Income taxes ......................... 21,645 3,443 (2,616) (2,773) 19,699
-------- -------- -------- ---------- -------- ----------
Net income from continuing
operations .......................... 40,319 4,655 (3,933) (2,823) 38,218
Effect of discontinued operations..... (21,908) (21,908)
-------- -------- -------- ---------- -------- ----------
Segment net income ................... $ 40,319 $ 4,655 $ (3,933) $ (2,823) $(21,908) $ 16,310
======== ======== ======== ========== ======== ==========
Capital expenditures ................. $ 44,213 $ 22,889 $ -- $ 10 $ 8,916 $ 76,028
Revenue from major customer
Caterpillar Inc. .................... $ 39,354 $ 948 $ -- $ 7,669 $ 1,130 $ 49,101
Segment assets ....................... $730,354 $286,737 $ 5,072 $ 594,734 $121,647 $1,738,544
Consolidation adjustments ............ (1,304) (507) -- (423,789) (4) (425,604)
-------- -------- -------- ---------- -------- ----------
Total assets ...................... $729,050 $286,230 $ 5,072 $ 170,945 $121,643 $1,312,940
======== ======== ======== ========== ======== ==========
</TABLE>
F-6
<PAGE>
STATEMENTS OF SEGMENTS OF BUSINESS
CILCORP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------------
CILCO CILCO CILCO OTHER DISCONT.
ELECTRIC GAS OTHER BUSINESSES OPERATIONS TOTALS
------------ ----------- ----------- ------------ ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................. $338,096 $208,758 $ -- $ 10,867 $ -- $ 557,721
Interest income .......................... 239 239
-------- -------- -------- ---------- --------- ----------
Total ................................. 338,096 208,758 239 10,867 557,960
-------- -------- -------- ---------- --------- ----------
Operating expenses ....................... 217,700 165,020 2,831 12,214 397,765
Depreciation and amortization ............ 43,858 17,647 713 198 62,416
-------- -------- -------- ---------- --------- ----------
Total ................................. 261,558 182,667 3,544 12,412 460,181
-------- -------- -------- ---------- --------- ----------
Interest expense ......................... 16,192 6,454 4,816 27,462
Preferred stock dividends ................ 3,216 3,216
Fixed charges and other expenses ......... (134) 1,177 1,043
-------- -------- -------- ---------- --------- ----------
Total ................................. 16,058 6,454 4,393 4,816 31,721
-------- -------- -------- ---------- --------- ----------
Income from continuing oper.
before income taxes ..................... 60,480 19,637 (7,698) (6,361) 66,058
Income taxes ............................. 21,901 7,416 (3,049) (3,919) 22,349
-------- -------- -------- ---------- --------- ----------
Net income from cont. oper.
before extraord. item ................... 38,579 12,221 (4,649) (2,442) 43,709
Effect of discontinued operations
and extraordinary item .................. 4,100 (31,414) (27,314)
-------- -------- -------- ---------- --------- ----------
Segment net income ....................... $ 42,679 $ 12,221 $ (4,649) $ (2,442) $ (31,414) $ 16,395
======== ======== ======== ========== ========= ==========
Capital expenditures ..................... $ 35,196 $ 19,830 $ -- $ 29 $ 6,188 $ 61,243
Revenue from major customer
Caterpillar Inc. ........................ $ 40,106 $ 934 $ -- $ 1,208 $ 1,870 $ 44,118
Segment assets ........................... $724,869 $290,958 $ 5,639 $ 606,786 $ 144,412 $1,772,664
Consolidation adjustments ................ (1,070) (416) -- (436,345) (14) (437,845)
-------- -------- -------- ---------- --------- ----------
Total assets .......................... $723,799 $290,542 $ 5,639 $ 170,441 $ 144,398 $1,334,819
======== ======== ======== ========== ========= ==========
</TABLE>
F-7
<PAGE>
STATEMENTS OF SEGMENTS OF BUSINESS
CILCORP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------------
CILCO CILCO CILCO OTHER DISCONT.
ELECTRIC GAS OTHER BUSINESSES OPERATIONS TOTALS
------------ ----------- ----------- ------------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................. $322,785 $195,770 $ -- $ 7,825 $ -- $ 526,380
Interest income ...................... 680 680
-------- -------- -------- ---------- -------- ----------
Total ............................. 322,785 195,770 680 7,825 527,060
-------- -------- -------- ---------- -------- ----------
Operating expenses ................... 208,566 154,099 2,234 10,204 375,103
Depreciation and amortization ........ 42,530 17,134 713 197 60,574
-------- -------- -------- ---------- -------- ----------
Total ............................. 251,096 171,233 2,947 10,401 435,677
-------- -------- -------- ---------- -------- ----------
Interest expense ..................... 17,445 6,716 4,803 28,964
Preferred stock dividends ............ 3,188 3,188
Fixed charges and other expenses...... (90) 679 589
-------- -------- -------- ---------- -------- ----------
Total ............................. 17,355 6,716 3,867 4,803 32,741
-------- -------- -------- ---------- -------- ----------
Income from continuing oper.
before income taxes ................. 54,334 17,821 (6,134) (7,379) 58,642
Income taxes ......................... 19,576 6,972 (2,466) (3,380) 20,702
-------- -------- -------- ---------- -------- ----------
Net income from continuing
operations .......................... 34,758 10,849 (3,668) (3,999) 37,940
Effect of discontinued operations..... (9,997) (9,997)
-------- -------- -------- ---------- -------- ----------
Segment net income ................... $ 34,758 $ 10,849 $ (3,668) $ (3,999) $ (9,997) $ 27,943
======== ======== ======== ========== ======== ==========
Capital expenditures ................. $ 28,032 $ 15,529 $ -- $ 119 $ 3,061 $ 46,741
Revenue from major customer
Caterpillar Inc. .................... $ 37,724 $ 1,053 $ -- $ 68 $ 119 $ 38,964
Segment assets ....................... $732,219 $296,343 $ 6,424 $ 585,732 $ 94,492 $1,715,210
Consolidation adjustments ............ (352) (137) -- (428,815) (213) (429,517)
-------- -------- -------- ---------- -------- ----------
Total assets ...................... $731,867 $296,206 $ 6,424 $ 156,917 $ 94,279 $1,285,693
======== ======== ======== ========== ======== ==========
</TABLE>
F-8
<PAGE>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
CILCORP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMMON STOCK OTHER
-------------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
------------ ----------- ------------ -------------- --------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ............. 13,335,606 $179,330 $183,002 $ (354) $361,978
Common Stock Issued ...................... 275,074 11,430 11,430
Cash Dividend Declared on Common
Stock ($2.46 per share).................. (33,141) (33,141)
Additional Minimum Liability of
Non-Qualified Pension Plan at
December 31, 1996, net of $(3) taxes..... (5) (5)
Net Income ............................... 27,943 27,943
---------- -------- -------- --------
Balance at December 31, 1996 ............. 13,610,680 $190,760 $177,804 $ (359) $368,205
CILCORP Shareholder Return Incentive
Compensation ............................ 1,807 1,807
Cash Dividend Declared on Common
Stock ($2.46 per share).................. (33,482) (33,482)
Additional Minimum Liability of
Non-Qualified Pension Plan at
December 31, 1997, net of $(208) taxes. (317) (317)
Other .................................... (15) (15)
Net Income ............................... 16,395 16,395
---------- -------- -------- ------ --------
Balance at December 31, 1997 ............. 13,610,680 $192,567 $160,702 $ (676) $352,593
Cash Dividend Declared on Common
Stock ($2.46 per share).................. (33,482) (33,482)
Additional Minimum Liability of
Non-Qualified Pension Plan at
December 31, 1998, net of $(111) taxes. (169) (169)
Other .................................... 286 286
Net Income ............................... 16,310 16,310
-------- --------
Balance at December 31, 1998 ............. 13,610,680 $192,853 $143,530 $ (845) $335,538
========== ======== ======== ======== ========
</TABLE>
The accompanying Notes to Financial Statements
are an integral part of these statements.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
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) and QST Energy Inc.
(QST Energy)) and CILCORP's other subsidiaries (collectively, the Company)
after elimination of significant intercompany transactions. In 1998, the
operations of QST and its subsidiaries were discontinued (see Note 10). Prior
year amounts have been reclassified on a basis consistent with the 1998
presentation.
CILCORP is an investor-owned public utility holding company. CILCO, the
Company's principal business subsidiary, is engaged in the generation,
transmission, distribution and sale of electric energy in an area of
approximately 3,700 square miles in central and east-central Illinois, and the
purchase, distribution, transportation and sale of natural gas in an area of
approximately 4,500 square miles in central and east-central Illinois. Other
CILCORP first-tier subsidiaries are CILCORP Investment Management Inc. (CIM),
which manages the Company's investment portfolio and CILCORP Ventures Inc.
(CVI), which pursues investment opportunities in energy-related products and
services.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations-- New Accounting Pronouncements for a discussion of
accounting pronouncements issued by the Financial Accounting Standards Board
which are effective in 1998 or thereafter.
REGULATION
CILCO is a public utility subject to regulation by the Illinois Commerce
Commission (ICC) and the Federal Energy Regulatory Commission (FERC) with
respect to accounting matters, and maintains its accounts in accordance with
the Uniform System of Accounts prescribed by these agencies.
CILCO is subject to the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS 71) for its regulated public utility operations. Under SFAS 71, assets
and liabilities are recorded to represent probable future increases and
decreases, respectively, of revenues to CILCO resulting from the ratemaking
action of regulatory agencies.
The Electric Service Customer Choice and Rate Relief Law of 1997 (Customer
Choice Law) became effective in Illinois in December 1997. Among other
provisions, this law begins a nine-year transition process to a fully
competitive market for electricity in Illinois. Electric transmission and
distribution activities are expected to continue to be regulated, but a
customer may choose to purchase electricity from another supplier (see
Management's Discussion--Competition).
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Due to the transition cost recovery limitations and base rate reductions
of the Customer Choice Law, CILCO's electric generation activities will no
longer be subject to the provisions of SFAS 71. Accordingly, regulatory assets
of $1.5 million and liabilities of $5.6 million associated with electric
generating plant were written-off or credited, respectively, to income in 1997
as a net $4.1 million after-tax extraordinary item. Regulatory assets included
on the Consolidated Balance Sheets at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Included in prepayments and other:
Fuel and gas cost adjustments .............................. $ 4,740 $ 2,954
Coal tar remediation cost -- estimated current ............. 609 844
Gas transition costs ....................................... -- 159
------- -------
Current costs included in prepayments and other ......... 5,349 3,957
------- -------
Included in other assets:
Coal tar remediation cost, net of recoveries ............... 1,281 2,745
Regulatory tax asset ....................................... 5,723 7,578
Deferred gas costs ......................................... 4,039 4,145
Unamortized loss on reacquired debt ........................ 3,261 3,581
------- -------
Future costs included in other assets ...................... 14,304 18,049
------- -------
Total regulatory assets ................................. $19,653 $22,006
======= =======
</TABLE>
Regulatory assets at December 31, 1998 are related to CILCO's regulated
electric and gas distribution activities. CILCO does not currently believe the
costs recorded for its generating plants and related assets at December 31,
1998 to be impaired as a result of the Customer Choice Law. Regulatory
liabilities, consisting of deferred tax items primarily related to CILCO's
electric and gas transmission and distribution operations, are approximately
$46.3 million and $56.8 million at December 31, 1998 and 1997, respectively.
CILCO's electric generation-related identifiable assets included in the
balance sheet at December 31, 1998 and 1997 were:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Property, Plant and Equipment ......................... $ 537,358 $ 535,065
Less: Accumulated Depreciation ........................ (266,461) (259,988)
---------- ----------
270,897 275,077
Construction Work in Progress ......................... 3,268 1,979
---------- ----------
Net Property, Plant and Equipment .................... 274,165 277,056
Fuel, at Average Cost ................................. 8,704 8,520
Materials and Supplies, at Average Cost ............... 8,452 8,202
---------- ----------
Total Identifiable Electric Generation Assets ......... $ 291,321 $ 293,778
========== ==========
</TABLE>
Accumulated deferred income taxes associated with electric generation
property at December 31, 1998 and 1997 were approximately $72 million and $79
million, respectively.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
OPERATING REVENUES, FUEL COSTS AND COST OF GAS
Electric, gas, and non-regulated energy and energy services revenues
include service provided but unbilled at year end. Substantially all electric
rates and gas system sales rates of CILCO include a fuel adjustment clause and
a purchased gas adjustment clause, respectively. These clauses provide for the
recovery of changes in electric fuel costs, excluding coal transportation, and
changes in the cost of gas on a current basis in billings to customers. CILCO
adjusts the cost of fuel and cost of gas to recognize over or under recoveries
of allowable costs. The cumulative effects are deferred on the Balance Sheets
as a current asset or current liability (see Regulation, above) and adjusted by
refunds or collections through future billings to customers.
CONCENTRATION OF CREDIT RISK
CILCO, as a public utility, must provide service to customers within its
defined service territory and may not discontinue service to residential
customers when certain weather conditions exist. CILCO continually reviews
customers' creditworthiness and requests deposits or refunds deposits based on
that review. At December 31, 1998, CILCO had net receivables of $35.8 million,
of which approximately $4.7 million was due from its major customers.
See Note 6 for a discussion of receivables related to CILCORP Investment
Management Inc.'s leveraged lease portfolio.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of Cash and Temporary Cash Investments, Other
Investments, and Notes Payable approximates fair value. The estimated fair
value of the Company's Preferred Stock with Mandatory Redemption was $23
million at December 31, 1998 and 1997, based on current market interest rates
for other companies with comparable credit ratings, capital structure, and
size. The estimated fair value of the Company's Long-Term Debt, including
current maturities, was $339 million at December 31, 1998, and $352 million at
December 31, 1997. The fair market value of these instruments was based on
current market interest rates for other companies with comparable credit
ratings, capital structures, and size.
DEPRECIATION AND MAINTENANCE
Provisions for depreciation of utility property for financial reporting
purposes are based on straight-line composite rates. The annual provisions for
utility plant depreciation, expressed as a percentage of average depreciable
utility property, were 3.8% and 4.6% for electric and gas, respectively, for
each of the last three years. Utility maintenance and repair costs are charged
directly to expense. Renewals of units of property are charged to the utility
plant account, and the original cost of depreciable property replaced or
retired, together with the removal cost less salvage, is charged to the
accumulated provision for depreciation.
Non-utility property is depreciated over estimated lives ranging from 3 to
40 years.
GOODWILL
As a result of significant downsizing of QST Environmental Inc. (QST
Environmental) during 1996 and 1997 and continuing overcapacity and competition
in the environmental segment in the fourth quarter of 1997, the Company
determined that an impairment to goodwill associated with QST Environmental
existed. As a result, the Company wrote off the $22.6 million unamortized
goodwill balance. In late 1998, the Company decided to sell its 100% ownership
interest in QST Environmental and has classified its results as discontinued
(see Note 10).
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INCOME TAXES
The Company follows a policy of comprehensive interperiod income tax
allocation. Investment tax credits related to utility property have been
deferred and are being amortized over the estimated useful lives of the related
property. CILCORP and its subsidiaries file a consolidated federal income tax
return. Income taxes are allocated to the individual companies based on their
respective taxable income or loss.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company considers all highly liquid debt instruments purchased with a
remaining maturity of three months or less to be cash equivalents for purposes
of the Consolidated Statements of Cash Flows.
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest ............. $26,067 $28,710 $28,988
Income taxes ......... $19,611 $28,537 $13,572
------- ------- -------
</TABLE>
COMPANY-OWNED LIFE INSURANCE POLICIES
The following amounts related to Company-owned life insurance contracts,
issued by one major insurance company, are included in Other Investments:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash surrender value of contracts ......... $ 50,786 $ 45,297
Borrowings against contracts .............. (48,132) (42,898)
--------- ---------
Net investment ......................... $ 2,654 $ 2,399
========= =========
</TABLE>
Interest expense related to borrowings against Company-owned life
insurance, included in "Other" on the Consolidated Statements of Income, was
$3.6 million, $3.5 million and $2.7 million for 1998, 1997 and 1996,
respectively.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. INCOME TAXES
The Company uses the liability method to account for income taxes. Under
the liability method, deferred income taxes are recognized at currently enacted
income tax rates to reflect the tax effect of temporary differences between the
financial reporting basis and the tax basis of assets and liabilities.
Temporary differences occur because the income tax law either requires or
permits certain items to be reported on the Company's income tax return in a
different year than they are reported in the financial statements. CILCO has
recorded a regulatory asset and liability to account for the effect of expected
future regulatory actions related to unamortized investment tax credits, income
tax liabilities initially recorded at tax rates in excess of current rates, the
equity component of Allowance for Funds Used during Construction and other
items for which deferred taxes had not previously been provided. The temporary
differences related to the consolidated deferred income tax asset and liability
at December 31, 1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Deferred tax asset ............................. $ 20,742 $ 18,347 $ 16,452
Adjustment to reflect regulatory asset ......... (5,723) (7,578) (4,777)
-------- -------- --------
Net deferred tax asset ......................... $ 15,019 $ 10,769 $ 11,675
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Deferred tax liability-property ...................................... $ 196,301 $ 207,460 $ 214,356
Adjustment to reflect regulatory liability ........................... (46,346) (56,807) (68,565)
--------- --------- ---------
Net deferred tax liability-property .................................. 149,955 150,653 145,791
Deferred tax liability-leases ........................................ 103,566 101,005 97,964
Deferred tax liability-other ......................................... 804 124 3,159
--------- --------- ---------
Accumulated deferred income tax liability ............................ $ 254,325 $ 251,782 $ 246,914
========= ========= =========
Accumulated deferred income tax liability, net of deferred tax assets $ 239,306 $ 241,013 $ 235,239
========= ========= =========
</TABLE>
The following table reconciles the change in the accumulated deferred
income tax liability to the deferred income tax expense included in the income
statement:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Net change in deferred income tax liability per above table ............ $ (1,707) $ 5,774
Change in tax effects of income tax related regulatory assets and
liabilities ........................................................... (8,606) (14,559)
Deferred taxes related to extraordinary item ........................... -- 5,634
Other .................................................................. (106) 125
--------- ---------
Deferred income tax benefit for the period ............................. (10,419) (3,026)
Less: Deferred income tax benefit for the period from discontinued
operations ............................................................ (6,115) (1,245)
--------- ---------
Deferred income tax benefit for the period from continuing operations... $ (4,304) $ (1,781)
========= =========
</TABLE>
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. INCOME TAXES -- (CONTINUED)
Income tax expenses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income taxes
Federal ....................................................... $ 13,731 $ 17,814 $ 15,129
State ......................................................... 3,791 3,836 2,169
--------- -------- --------
Total current taxes ........................................... 17,522 21,650 17,298
--------- -------- --------
Deferred income taxes, net ....................................
Property-related deferred income taxes ........................ (11,262) (841) (2,346)
Leveraged leases .............................................. 2,602 3,040 4,398
Unbilled revenue .............................................. (287) (885) 425
Gas take-or-pay settlements ................................... 522 (339) (706)
Environmental remediation costs ............................... (58) 46 (642)
Pension expenses .............................................. 869 (1,798) (1,726)
Other post-employment benefits expenses ....................... (847) (617) 187
Customer advances ............................................. 478 (438) (40)
Gas in underground storage .................................... (1,681) (191) 405
Amortization of debt discounts, premiums and expenses ......... (790) (179) (179)
CILCO Executive Deferred Compensation Plan .................... (671) (191) (525)
CILCORP Shareholder Return Incentive Comp. Plan ............... (717) -- --
QST Gas Derivatives Mark to Market ............................ 948 -- --
Other ......................................................... 475 (633) (360)
--------- -------- --------
Total deferred income taxes, net .............................. (10,419) (3,026) (1,109)
--------- -------- --------
Investment tax credit amortization ............................ (1,668) (1,684) (1,684)
--------- -------- --------
Total income tax provisions before extraordinary item ......... 5,435 16,940 14,505
Deferred taxes related to extraordinary item .................. -- (5,634) --
--------- -------- --------
Total income tax provisions ................................... $ 5,435 $ 11,306 $ 14,505
========= ======== ========
</TABLE>
Total income tax provisions are presented within the Income Statement as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes from continuing operations .............. $ 19,699 $ 22,349 $ 20,702
Tax on income (loss) from operations of discontinued
businesses .......................................... (16,278) (7,298) (6,197)
Tax on gain (loss) on sale/disposal of discontinued
businesses .......................................... 2,014 1,889 --
Deferred taxes related to extraordinary item ......... -- (5,634) --
--------- -------- --------
Total income tax provisions .......................... $ 5,435 $ 11,306 $ 14,505
--------- -------- --------
</TABLE>
The 1997 income tax provision has been reduced to reflect the crediting to
income as an extraordinary item the regulatory liability related to electric
generation property deferred taxes which were recorded at tax rates in excess
of the current rate.
Total deferred income taxes, net, includes deferred state income taxes of
$(1,635,000), $(229,000) and $(538,000) for 1998, 1997 and 1996, respectively.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. INCOME TAXES -- (CONTINUED)
The following table represents a reconciliation of the effective tax rate
with the statutory federal income tax rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax ................................. 35.0% 35.0% 35.0%
---- ----- ----
Amortization of property related deferred taxes provided at
tax rates in excess of current rate ......................... (8.3) (3.9) (3.4)
Amortization of investment tax credit ........................ (7.6) (6.1) (4.0)
State income taxes ........................................... 5.5 9.0 4.8
Goodwill write-off and amortization .......................... -- 29.2 .6
Preferred dividends of subsidiary and other permanent
differences ................................................. 6.6 5.2 3.6
Tax provision adjustment ..................................... -- (1.6) (.4)
Affordable housing tax credits ............................... (6.1) (3.4) (.1)
Corporate-owned life insurance ............................... (4.2) (2.9) (1.7)
AES transaction costs ........................................ 3.3 -- --
Other differences ............................................ 1.1 .7 (.2)
---- ----- ----
Total ........................................................ (9.7) 26.2 (.8)
---- ----- ----
Effective income tax rate before effect of extraordinary item. 25.3 61.2 34.2
Tax effect of extraordinary item ............................. -- (20.4) --
---- ----- ----
Effective income tax rate .................................... 25.3% 40.8% 34.2%
==== ===== ====
</TABLE>
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE
CILCO has recorded a liability of approximately $1.5 million at
December 31, 1998 and 1997, for benefits other than pensions or health care
provided to former or inactive employees. The liability for these benefits
(primarily long-term and short-term disability payments under plans
self-insured by CILCO) is actuarially determined.
PENSION BENEFITS
Substantially all of CILCO's full-time employees, including those assigned
to the Holding Company, are covered by trusteed, non-contributory defined
benefit pension plans. Benefits under these qualified plans reflect the
employee's years of service, age at retirement and maximum total compensation
for any consecutive sixty-month period prior to retirement. CILCO also has an
unfunded nonqualified plan for certain employees.
Pension costs for the past three years were charged as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating expenses .............. $ (893) $ 493 $ 9,700
Utility plant and other ......... 6 125 922
------- ----- -------
Net pension costs ............... $ (887) $ 618 $10,622
======= ===== =======
</TABLE>
Provisions for pension expense reflect the use of the projected unit
credit actuarial cost method. At December 31, 1998 and 1997, CILCO recognized
an additional minimum liability on the Balance Sheets for the plan in which the
accumulated benefit obligation exceeds the fair value of plan assets.
POSTRETIREMENT HEALTH CARE BENEFITS
Provisions for postretirement benefits expenses are determined under the
accrual method of accounting.
Substantially all of CILCO's full-time employees, including those assigned
to the Holding Company, are currently covered by a trusteed, non-contributory
defined benefit postretirement health care plan. The plan pays stated
percentages of most necessary medical expenses incurred by retirees, after
subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants become eligible for the benefits if they
retire from CILCO after reaching age 55 with 10 or more years of service.
Neither QST Enterprises nor its subsidiaries provide health care benefits to
retired employees.
Postretirement health care benefit costs were charged as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating expenses ................................... $3,904 $3,989 $5,096
Utility plant and other .............................. 1,260 1,825 1,883
------ ------ ------
Net postretirement health care benefit costs ......... $5,164 $5,814 $6,979
====== ====== ======
</TABLE>
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS-- (CONTINUED)
The components of net periodic benefit costs follow:
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------------- -----------------------
1998 1997 1998 1997
------------ ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost ......................................... $ 5,410 $ 4,384 $ 1,417 $ 1,298
Interest cost ........................................ 19,024 17,561 5,371 5,047
Expected return on plan assets ....................... (25,304) (21,005) (4,388) (3,249)
Amortization of transition liability (asset) ......... (888) (888) 2,858 2,858
Amortization of past service cost .................... 1,068 1,068 -- --
Recognized actuarial loss ............................ (197) (502) (94) (140)
--------- --------- -------- --------
Net benefit cost ..................................... $ (887) $ 618 $ 5,164 $ 5,814
========= ========= ======== ========
Pension Plans with Accumulated Benefit
Obligations in Excess of Assets
Total projected benefit obligation ................... $ (4,191) $ (3,692)
Total accumulated benefit obligation ................. $ (3,582) $ (2,902)
Total fair value of assets ........................... $ -- $ --
</TABLE>
Information on the plans, funded status follows:
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------------- -----------------------------
1998 1997 1998 1997
-------------- -------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in Benefit Obligations
Benefit obligation at January 1, ...................... $ (254,929) $ (235,441) $ (72,542) $ (67,367)
Service cost .......................................... (5,410) (4,384) (1,417) (1,298)
Interest cost ......................................... (19,024) (17,561) (5,371) (5,047)
Actuarial (gain) loss ................................. (22,521) (13,928) (7,500) (2,891)
Benefits paid ......................................... 16,238 16,385 4,514 4,061
---------- ---------- --------- ---------
Benefit obligation at December 31, .................... $ (285,646) $ (254,929) $ (82,316) $ (72,542)
========== ========== ========= =========
Change in Plan Assets
Fair value of assets at January 1, .................... $ 289,091 $ 254,824 $ 52,263 $ 39,601
Actual return on assets ............................... 36,467 50,489 5,781 9,907
Company contributions ................................. 163 163 863 6,816
Participant contributions ............................. -- -- -- --
Benefits paid ......................................... (16,238) (16,385) (4,514) (4,061)
---------- ---------- --------- ---------
Fair value of assets at December 31, .................. $ 309,483 $ 289,091 $ 54,393 $ 52,263
========== ========== ========= =========
Funded Status at December 31,
Benefit obligation less (greater) than plan
assets ............................................... $ 23,837 $ 34,162 $ (27,923) $ (20,279)
Unrecognized net transition liability (asset) ......... (4,011) (4,899) 30,297 33,155
Unrecognized actuarial (gain) loss .................... (35,875) (47,431) (6,777) (12,977)
Unrecognized prior service cost ....................... 6,365 7,433 -- --
Intangible asset ...................................... (415) (455) -- --
Accumulated other comprehensive income ................ (1,401) (1,120) -- --
---------- ---------- --------- ---------
Prepaid (accrued) benefit cost ........................ $ (11,500) $ (12,310) $ (4,403) $ (101)
========== ========== ========= =========
Assumptions as of December 31,
Discount rate ......................................... 6.75% 7.25% 6.75% 7.25%
Long-term return on assets ............................ 9.00% 8.50% 8.50% 8.50%
Long-term compensation increase ....................... 3.50% 4.50% N/A N/A
</TABLE>
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS-- (CONTINUED)
For measurement purposes, a 7.2 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1998. The rate was
assumed to decrease gradually to 5.7 percent for 2025 and remain level
thereafter.
Increasing the assumed health care cost trend rate by 1% in each year
would increase the accumulated postretirement benefit obligation at
December 31, 1998, by $2.9 million and the aggregate of the service and
interest cost components of net postretirement health care cost for 1998 by
$252,000. Decreasing the assumed health care cost trend rate by 1% in each year
would decrease the accumulated postretirement benefit obligation at
December 31, 1998, by $3.3 million and the aggregate of the service and
interest cost components of net postretirement health care cost for 1998 by
$295,000.
NOTE 4 CILCORP SHAREHOLDER RETURN INCENTIVE COMPENSATION PLAN
Under the Company's Shareholder Return Incentive Compensation Plan (the
Plan), eligible key employees of the Company and its subsidiaries are entitled
to receive shares of the Company's common stock based on a performance
methodology established and periodically amended by the Compensation Committee
of the Company's Board of Directors. During 1997, 350,000 fully-vested
performance shares were distributed. Such shares are convertible into common
stock with the number of shares received based upon the number of performance
shares exercised multiplied by the difference between the average market price
of the Company's common stock for the fifteen days prior to exercise and $36,
divided by the market price of common stock at the exercise date.
The compensation expense recognized under this Plan, based on the
provisions of Statement of Financial Accounting Standards No. 123, (SFAS 123)
was $1.8 million in 1997 when the performance shares were distributed. These
shares were convertible into common stock at any time until December 31, 1998
(the Performance Period). The fair value of each performance share granted
under the Plan was $5.98 -- estimated using the Black-Scholes option-pricing
model assuming a risk-free interest rate of 5.7%, dividend yield of 5.9%,
expected life of one year and volatility of 16.1%.
In 1998, the Performance Period for the originally granted performance
shares was extended to December 31, 1999. No additional expense was recorded
following this extension, as a revaluation of the fair value of the performance
shares per the provisions of SFAS 123 yielded no material valuation difference
due to the one-year extension.
To the extent that the market price exceeds $56, the Plan participants are
entitled to receive cash in lieu of common stock. Consequently, the Company
recognized expense of $1.75 million in the fourth quarter 1998 to reflect a
share price approximating $61.
NOTE 5 SHORT-TERM DEBT
Short-term debt at December 31, 1998, consisted of $55.6 million of
Holding Company bank borrowings and $40.6 million of CILCO commercial paper.
Short-term debt at December 31, 1997, included $40.9 million of Holding Company
bank borrowings and $21.3 million of CILCO commercial paper.
The Holding Company had arrangements for bank lines of credit totaling
$60 million at December 31, 1998, of which $55.6 million was used. These lines
were maintained by commitment fees of 1/8 of 1% per annum in lieu of balances.
CILCO had arrangements for bank lines of credit totaling $45 million at
December 31, 1998, all of which were unused. These lines of credit were
maintained by commitment fees of 1/20 of 1% per annum in lieu of balances.
These bank lines of credit support CILCO's issuance of commercial paper.
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. LEVERAGED LEASE INVESTMENTS
The Company, through subsidiaries of CILCORP Investment Management Inc.
(CIM), is a lessor in eight leveraged lease arrangements under which mining
equipment, electric production facilities, warehouses, office buildings,
passenger railway equipment and an aircraft are leased to third parties. The
economic lives and lease terms vary with the leases. CIM's share of total
equipment and facilities cost was approximately $350 million at December 31,
1998, and 1997.
The cost of the equipment and facilities owned by CIM is partially
financed by non-recourse debt provided by lenders, who have been granted, as
their sole remedy in the event of a lessee default, an assignment of rents due
under the leases and a security interest in the leased property. Such debt
amounted to $232 million at December 31, 1998, and $237 million at December 31,
1997.
Leveraged lease residual value assumptions, which are conservative in
relation to independently appraised residual values of the lease portfolio, are
tested on a periodic basis. In 1998, CIM decreased the estimated residual value
of one of its leases by approximately $6.8 million to reflect current
conditions in the secondary market for the asset.
CIM's net investment in leveraged leases at December 31, 1998 and 1997 is
shown below:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Minimum lease payments receivable ..................... $142,095 $136,916
Estimated residual value .............................. 87,569 94,368
Less: Unearned income ................................. 82,674 84,826
-------- --------
Investment in lease financing receivables ............. 146,990 146,458
Less: Deferred taxes arising from leveraged leases..... 103,566 101,005
-------- --------
Net investment in leveraged leases .................... $ 43,424 $ 45,453
======== ========
</TABLE>
NOTE 7. PREFERRED STOCK
PREFERRED STOCK OF SUBSIDIARY
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Preferred stock, cumulative $100 par value,
authorized 1,500,000 shares Without mandatory
redemption 4.50% series -- 111,264 shares ........... $11,126 $11,126
4.64% series -- 79,940 shares ....................... 7,994 7,994
Class A, no par value, authorized 3,500,000 shares
Flexible auction rate -- 250,000 shares (*) ......... 25,000 25,000
With mandatory redemption 5.85% series --
220,000 shares .................................... 22,000 22,000
------- -------
Total preferred stock ............................. $66,120 $66,120
======= =======
</TABLE>
- ----------
(*) Dividend rates at December 31, 1998 and 1997, were 4.04% and 4.18%,
respectively.
All classes of preferred stock are entitled to receive cumulative
dividends and rank equally as to dividends and assets, according to their
respective terms.
The total annual dividend requirement for preferred stock outstanding at
December 31, 1998, is $3.2 million, assuming a continuation of the auction
dividend rate at December 31, 1998, for the flexible auction rate series.
F-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. PREFERRED STOCK -- (CONTINUED)
PREFERRED STOCK WITHOUT MANDATORY REDEMPTION
The call provisions of preferred stock redeemable at CILCO's option
outstanding at December 31, 1998, are as follows:
Series Callable Price Per Share (plus accrued dividends)
<TABLE>
<CAPTION>
<S> <C>
4.50% $110
4.64% $102
Flexible Auction Rate $100
</TABLE>
PREFERRED STOCK WITH MANDATORY REDEMPTION
CILCO's 5.85% Class A preferred stock may be redeemed in 2003 at $100 per
share. A mandatory redemption fund must be established on July 1, 2003. The
fund will provide for the redemption of 11,000 shares for $1.1 million on July
1 of each year through July 1, 2007. On July 1, 2008, the remaining 165,000
shares will be retired for $16.5 million.
PREFERENCE STOCK OF SUBSIDIARY, CUMULATIVE
No Par Value, Authorized 2,000,000 shares, of which none have been issued.
PREFERRED STOCK OF HOLDING COMPANY
No Par Value, Authorized 4,000,000 shares, of which none were outstanding
at December 31, 1998 and 1997.
COMMON STOCK RIGHTS
On October 29, 1996, the Board of Directors of CILCORP authorized and
declared a dividend distribution of one right for each share of common stock of
the Company to stockholders of record at November 12, 1996, and for each share
of common stock issued thereafter. Each right gives the stockholder the right
to purchase one one-hundredth of a share of preferred stock of the Company for
$100, subject to the conditions set forth in the agreement governing the rights
plan.
NOTE 8. LONG-TERM DEBT
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CILCO first mortgage bonds
7 1/2% series due 2007 ......... $ 50,000 $ 50,000
8 1/5% series due 2022 ......... 65,000 65,000
Medium-term notes
6.4% series due 2000 ........... 30,000 30,000
6.82% series due 2003 .......... 25,350 25,350
6.13% series due 2005 .......... 16,000 16,000
7.8% series due 2023 ........... 10,000 10,000
7.73% series due 2025 .......... 20,000 20,000
Pollution control refunding bonds
6.5% series F due 2010 ......... 5,000 5,000
6.2% series G due 2012 ......... 1,000 1,000
6.5% series E due 2018 ......... 14,200 14,200
5.9% series H due 2023 ......... 32,000 32,000
-------- --------
268,550 268,550
-------- --------
</TABLE>
F-21
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. LONG-TERM DEBT -- (CONTINUED)
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
CILCO first mortgage bonds
Unamortized premium and discount on long-term
debt, net ................................. (666) (714)
---- ----
Total CILCO .............................. $267,884 $267,836
-------- --------
CILCORP Inc. Unsecured medium-term notes;
various maturities in 2001; interest rates
ranging from 8.52% to 9.10% .............. 17,500 30,500
Other ..................................... 168 192
-------- --------
Total long-term debt ..................... $285,552 $298,528
======== ========
</TABLE>
CILCO's first mortgage bonds are secured by a lien on substantially all of
its property and franchises. Unamortized borrowing expense, premium and
discount on outstanding long-term debt are being amortized over the lives of
the respective issues.
Total consolidated maturities of long-term debt for 2000-2003 are as
follows: $30 million in 2000, $18 million in 2001, no debt due in 2002, and $25
million in 2003. The remaining maturities of long-term debt of $214 million,
occur in 2004 and beyond.
The 1999 and 1998 maturities of long-term borrowings have been classified
as current liabilities.
NOTE 9. COMMITMENTS & CONTINGENCIES
CILCO's 1999 capital expenditures are estimated to be $56.6 million in
connection with which CILCO has normal and customary purchase commitments at
December 31, 1998.
CILCO acts as a self-insurer for certain insurable risks resulting from
employee health and life insurance programs.
The International Brotherhood of Electrical Workers Local 51 (IBEW)
ratified its current agreement on October 10, 1997. The contract expires on
July 1, 2000. The IBEW represents approximately 389 CILCO gas and electric
department employees. The National Conference of Firemen and Oilers Local 8
(NCF&O) ratified its current contract with the Company on October 23, 1998.
CILCO's previous contract with the NCF&O expired on July 1, 1998, and the NCF&O
membership had been working without a contract since that time. The new
contract expires on July 1, 2001. The NCF&O represents approximately 200 CILCO
power plant employees.
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.
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
F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. COMMITMENTS & CONTINGENCIES -- (CONTINUED)
proceeding to investigate the terms of the agreements. Hearings in that
proceeding have concluded, and the Administrative Law Judge has entered an
order finding the agreements are, with minor exceptions, just and reasonable.
CILCO is appealing that order to FERC and is requesting FERC to assess
penalties against CIPS for CIPS' failure to file the 1990 agreement before
providing service to CILCO under that agreement. FERC's October 1997 order
failed to address certain contract issues raised by CILCO. FERC denied
rehearing of that order in February 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 agreements. 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 agreements as of
January 21, 1999. CILCO cannot predict how FERC or the Court will ultimately
rule on the issues pending before them. If CILCO's position is not upheld on
certain issues, CILCO could be required to pay the suspended capacity
reservation charges which are currently $865,000 per month, plus interest, to
CIPS. While the capacity payments are suspended, CILCO is purchasing power and
energy from other sources.
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental Matters (regarding former
gas manufacturing sites) for a discussion of that item.
NOTE 10. 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 will focus in the future 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 -- Competition). As a result, the Company decided in
the fourth quarter of 1998 to sell its 100% ownership interest in QST
Environmental Inc., a first-tier subsidiary of QST providing environmental
consulting and engineering services. In August 1998, QST 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 has begun an effort to negotiate an end to its
obligation to provide electricity to its non-Illinois customers. Accordingly,
the operations of QST Enterprises and its subsidiaries are shown as
discontinued operations in the statements of income. The Company's investment
in QST Enterprises, as of December 31, 1998, on the accompanying consolidated
balance sheet, consists primarily of $17.4 million in working capital, $6.9
million in fixed assets and $6.3 million of investments and other assets. Prior
year financial statements, which also include the discontinued operations of
ESE Land Corporation (sold by QST Environmental in November 1997, for $9.5
million and residual interests in three limited liability corporations), have
been reclassified to conform to the current year presentation.
NOTE 11. LEASES
The Company and its subsidiaries lease certain equipment, buildings and
other facilities under capital and operating leases. Several of the operating
leases provide that the Company pay taxes, maintenance and other occupancy
costs applicable to these premises.
Minimum future rental payments under non-cancellable capital and operating
leases having remaining terms in excess of one year as of December 31, 1998,
are $19.9 million in total. Payments due during the years ending December 31,
1999, through December 31, 2003, are $8.1 million, $5.6 million, $3.4 million,
$1.9 million and $.5 million, respectively.
F-23
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. 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 $2.2 million for the year 1998. As of December 31, 1998,
CILCORP had fixed-price derivative financial instruments representing hedges of
natural gas purchases of 5.6 Bcf and natural gas sales of 7.2 Bcf for
commitments through September 1999. The net deferred loss and carrying amount
on these fixed-price derivatives at December 31, 1998 was $.9 million. At
December 31, 1998, CILCORP had open positions in derivative financial
instruments used to hedge basis of 1.0 Bcf for commitments through October
1999. The net deferred loss on these basis derivatives at December 31, 1998,
was $.1 million.
NOTE 13. 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 the CILCORP Shareholder Return Incentive Compensation Plan.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Income available to common shareholders .................. $16,310 $16,395
Weighted average number of common shares used in Basic
Earnings Per Share ...................................... 13,611 13,611
Weighted number of dilutive potential common stock used in
Diluted Earnings Per Share .............................. 96 16
</TABLE>
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share, beginning with the year ended December 31, 1997.
Restatement of 1996 is not applicable as no potential common stock dilution
occurred until 1997.
F-24
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly operating results are unaudited, but, in the
opinion of management, include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the Company's operating results
for the periods indicated. The results of operations for each of the fiscal
quarters are not necessarily comparable to, or indicative of, the results of an
entire year due to the seasonal nature of the Company's business and other
factors.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ -------------- --------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Revenue ................................................ $154,274 $121,435 $141,143 $ 142,172
Income from continuing operations before income
taxes ................................................ 17,566 10,254 29,020 1,077
Income taxes ........................................... 6,250 2,519 10,983 (53)
Net income from continuing operations .................. 11,316 7,735 18,037 1,130
Loss from operations of discontinued business, net of
tax of $(2,355), $(5,512), $(2,354), $(6,057)......... (3,622) (8,423) (3,620) (9,360)
Gain (loss) on sale/disposal of assets of discontinued
business, net of tax of $5,425, $(3,411).............. -- -- 8,252 (5,135)
Net income (loss) ...................................... $ 7,694 $ (688) $ 22,669 $ (13,365)
Earnings per average common share--basic ...............
Continuing operations .................................. $ 0.83 $ 0.57 $ 1.33 $ 0.08
Discontinued operations ................................ ( 0.27) ( 0.62) 0.34 ( 1.06)
Net income (loss) ...................................... $ 0.56 $ (0.05) $ 1.67 $ (0.98)
Earnings per average common share--diluted .............
Continuing operations .................................. $ 0.83 $ 0.56 $ 1.32 $ 0.08
Discontinued operations ................................ ( 0.27) ( 0.61) 0.34 ( 1.06)
Net income (loss) ...................................... $ 0.56 $ (0.05) $ 1.66 $ (0.98)
1997
Revenue ................................................ $168,595 $113,610 $125,050 $ 150,705
Income from continuing operations before income
taxes ................................................ 16,793 10,889 23,966 14,410
Income taxes ........................................... 5,254 3,559 8,858 4,678
Net income from continuing operations before
extraordinary item ................................... 11,539 7,330 15,108 9,732
Loss from operations of discontinued business, net of
tax of $(1,060), $(842), $(1,195), $(4,201)........... (1,820) (1,513) (2,034) (28,759)
Gain on sale of assets of discontinued business, net
of tax of $1,889...................................... -- -- -- 2,712
Extraordinary item ..................................... -- -- -- 4,100
Net income (loss) ...................................... $ 9,719 $ 5,817 $ 13,074 $ (12,215)
Earnings per average common share--basic ...............
Continuing operations .................................. $ 0.85 $ 0.54 $ 1.11 $ 0.71
Discontinued operations ................................ ( 0.14) ( 0.11) ( 0.15) ( 1.91)
Extraordinary item ..................................... -- -- -- 0.30
Net income (loss) ...................................... $ 0.71 $ 0.43 $ 0.96 $ (0.90)
Earnings per average common share--diluted .............
Continuing operations .................................. $ 0.85 $ 0.54 $ 1.11 $ 0.71
Discontinued operations ................................ ( 0.14) ( 0.11) ( 0.15) ( 1.91)
Extraordinary item ..................................... -- -- -- .30
Net income (loss) ...................................... $ 0.71 $ 0.43 $ 0.96 $ (0.90)
</TABLE>
F-25
<PAGE>
CILCORP INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)*
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1999 1998
------------ --------------
<S> <C> <C>
Revenue:
Electric utility ................................................. $169,006 $167,482
Gas utility ...................................................... 102,366 98,212
Other businesses ................................................. 17,133 10,382
-------- --------
Total ........................................................... 288,505 276,076
-------- --------
Operating expenses:
Fuel for generation and purchased power .......................... 57,183 58,329
Gas purchased for resale ......................................... 65,005 60,025
Other operations and maintenance ................................. 73,724 62,001
Depreciation and amortization .................................... 34,481 31,966
Taxes, other than income taxes ................................... 20,916 19,305
-------- --------
Total ........................................................... 251,309 231,626
-------- --------
Fixed charges and other:
Interest expense ................................................. 14,340 14,625
Preferred stock dividends of subsidiary .......................... 1,570 1,599
Allowance for funds used during construction ..................... (26) (6)
Other ............................................................ 506 412
-------- --------
Total ........................................................... 16,390 16,630
-------- --------
Income from continuing operations before income taxes ............ 20,806 27,820
Income taxes ..................................................... 7,115 8,769
-------- --------
Net income from continuing operations ............................ 13,691 19,051
Loss from operations of discontinued business, net of tax of
$(221) and $(7,867).............................................. (407) (12,045)
-------- --------
Net income (loss) ................................................ $ 13,284 $ 7,006
======== ========
Average common shares outstanding - basic ........................ 13,611 13,611
Earnings per common share--basic Continuing operations ........... $ 1.01 $ 1.40
Discontinued operations .......................................... ( .03) (.89)
-------- --------
Net income per common share--basic ............................... $ .98 $ .51
======== ========
Average common shares outstanding - diluted ...................... 13,752 13,690
Earnings per common share--diluted Continuing operations ......... $ 1.00 $ 1.39
Discontinued operations .......................................... ( .03) (.88)
-------- --------
Net income per common share--diluted ............................. $ .97 $ .51
======== ========
Dividends per common share ....................................... $ 1.23 $ 1.23
======== ========
</TABLE>
- ----------
*Except per share amounts
The accompanying notes to the Consolidated Financial Statements are an integral
part of these statements.
F-26
<PAGE>
CILCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------ -------------
1999 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments ....................... $ 3,541 $ 1,669
Receivables, less reserves of $1,657 and $3,411............. 68,405 134,548
Accrued unbilled revenue ................................... 27,800 39,339
Fuel, at average cost ...................................... 9,049 13,431
Materials and supplies, at average cost .................... 16,444 15,435
Gas in underground storage, at average cost ................ 12,478 20,494
Prepayments and other ...................................... 8,639 7,646
---------- ----------
Total current assets ...................................... 146,356 232,562
---------- ----------
Investments and other property:
Investment in leveraged leases ............................. 143,297 146,977
Cash surrender value of company-owned life insurance, net of
related policy loans of $51,871 and $48,132................ 2,362 2,655
Other investments .......................................... 21,698 16,882
---------- ----------
Total investments and other property ...................... 167,357 166,514
---------- ----------
Property, plant and equipment:
Utility plant, at original cost
Electric ................................................... 1,245,551 1,237,885
Gas ........................................................ 420,812 417,585
---------- ----------
1,666,363 1,655,470
Less -- accumulated provision for depreciation ............. 846,954 812,630
---------- ----------
819,409 842,840
Construction work in progress .............................. 45,576 30,075
Other, net of depreciation ................................. 610 7,755
---------- ----------
Total property, plant and equipment ....................... 865,595 880,670
---------- ----------
Other assets ............................................... 23,327 33,194
---------- ----------
Total assets .............................................. $1,202,635 $1,312,940
========== ==========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these Balance Sheets.
F-27
<PAGE>
CILCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------- -------------
1999 1998
-------------- -------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................ $ 43,000 $ 13,027
Notes payable ............................................ 73,300 96,200
Accounts payable ......................................... 52,276 128,845
Accrued taxes ............................................ 5,031 8,262
Accrued interest ......................................... 9,386 9,994
FAC/PGA over-recoveries .................................. 367 304
Other .................................................... 4,519 14,316
---------- ----------
Total current liabilities ............................... 187,879 270,948
---------- ----------
Long-term debt ........................................... 257,168 288,135
---------- ----------
Deferred credits and other liabilities:
Accumulated deferred income taxes ........................ 240,446 239,305
Regulatory liability of regulated subsidiary ............. 41,302 46,346
Deferred investment tax credits .......................... 18,654 19,450
Other .................................................... 58,370 47,098
---------- ----------
Total deferred credits and other liabilities ............ 358,772 352,199
---------- ----------
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 ........................................ 140,688 143,530
Accumulated other comprehensive income ................... (845) (845)
---------- ----------
Total stockholders' equity .............................. 332,696 335,538
---------- ----------
Total liabilities and stockholders' equity .............. $1,202,635 $1,312,940
========== ==========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these Balance Sheets.
F-28
<PAGE>
CILCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends ............................................... $ 15,261 $ 20,650
--------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash lease income and investment income ........................................ (3,299) (3,415)
Cash receipts in excess of debt service on leases .................................. 7,326 5,650
Depreciation and amortization ...................................................... 34,481 31,966
Deferred income taxes, investment tax credit and regulatory liability of
subsidiary, net .................................................................. (8,748) (4,094)
Changes in operating assets and liabilities:
Decrease in accounts receivable and accrued unbilled revenue ....................... 7,719 21,343
Decrease in inventories ............................................................ 11,374 8,501
Decrease in accounts payable ....................................................... (20,337) (22,702)
Increase in accrued taxes .......................................................... 934 2,630
Decrease (increase) in other assets ................................................ 1,700 (512)
Increase (decrease) in other liabilities ........................................... 8,339 (1,469)
--------- ---------
Total adjustments .................................................................. 39,489 37,898
--------- ---------
Net cash provided by operating activities from continuing operations ............... 54,750 58,548
--------- ---------
Net cash provided (used) by operating activities of discontinued operations ........ 8,112 (8,738)
--------- ---------
Cash flow from operations .......................................................... 62,862 49,810
--------- ---------
Cash flows from investing activities:
Additions to plant ................................................................. (27,311) (29,871)
Proceeds from sale of discontinued operations ...................................... 17,376 --
Other .............................................................................. (4,012) (909)
--------- ---------
Net cash used by investing activities from continuing operations ................... (13,947) (30,780)
--------- ---------
Net cash used by investing activities from discontinued operations ................. (4,838) (5,359)
--------- ---------
Cash flow from investing activities ................................................ (18,785) (36,139)
--------- ---------
Cash flow from financing activities:
Net (decrease) increase in short-term debt .......................................... (22,900) 2,350
Net decrease in long-term debt ...................................................... (994) (2,117)
Common dividends paid ............................................................... (16,741) (16,742)
Preferred dividends paid ............................................................ (1,570) (1,599)
--------- ---------
Cash flow from financing activities ................................................ (42,205) (18,108)
--------- ---------
Net increase (decrease) in cash and temporary cash investments ...................... 1,872 (4,437)
Cash and temporary cash investments at beginning of year ............................ 1,669 10,576
--------- ---------
Cash and temporary cash investments at June 30 ...................................... $ 3,541 $ 6,139
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................................ $ 13,832 $ 13,613
Income taxes ........................................................................ $ 10,872 $ 7,068
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
F-29
<PAGE>
STATEMENTS OF SEGMENTS OF BUSINESS
CILCORP INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
------------------------------------------------------------------------------------
CILCO CILCO CILCO OTHER DISCONT.
ELECTRIC GAS OTHER BUSINESSES OPERATNS. TOTALS
------------ ----------- ------------ ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues .............................. $169,006 $102,366 $ 1,729 $ 15,235 $ -- $288,336
Interest income ....................... -- -- 113 56 -- 169
-------- -------- -------- -------- ------- --------
Total ............................. 169,006 102,366 1,842 15,291 -- 288,505
-------- -------- -------- -------- ------- --------
Operating expenses .................... 120,487 79,013 3,161 14,167 -- 216,828
Depreciation and amortization ......... 23,786 10,175 432 88 -- 34,481
-------- -------- -------- -------- ------- --------
Total ............................. 144,273 89,188 3,593 14,255 -- 251,309
-------- -------- -------- -------- ------- --------
Interest expense ...................... 8,233 3,265 -- 2,842 -- 14,340
Preferred stock dividends ............. -- -- 1,570 -- -- 1,570
Fixed charges and other expenses....... (26) -- 506 -- -- 480
-------- -------- -------- -------- ------- --------
Total ............................. 8,207 3,265 2,076 2,842 -- 16,390
-------- -------- -------- -------- ------- --------
Income from continuing oper.
before income taxes .................. 16,526 9,913 (3,827) (1,806) -- 20,806
Income taxes .......................... 5,315 4,044 (1,367) (877) -- 7,115
-------- -------- -------- -------- ------- --------
Net income from continuing
operations ........................... 11,211 5,869 (2,460) (929) -- 13,691
-------- -------- -------- -------- ------- --------
Effect of discontinued operations ..... -- -- -- -- (407) (407)
-------- -------- -------- -------- ------- --------
Segment net income .................... $ 11,211 $ 5,869 $ (2,460) $ (929) $ (407) $ 13,284
======== ======== ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------------------------------
CILCO CILCO CILCO OTHER DISCONT.
ELECTRIC GAS OTHER BUSINESSES OPERATNS. TOTALS
-------------- ----------- ----------- ------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues .............................. $167,482 $ 98,212 $ 355 $ 9,780 $ -- $ 275,829
Interest income ....................... -- -- 191 56 -- 247
-------- -------- -------- -------- --------- ---------
Total ............................. 167,482 98,212 546 9,836 -- 276,076
-------- -------- -------- -------- --------- ---------
Operating expenses .................... 112,626 76,816 1,553 8,665 -- 199,660
Depreciation and amortization ......... 22,436 9,073 356 101 -- 31,966
-------- -------- -------- -------- --------- ---------
Total ............................. 135,062 85,889 1,909 8,766 -- 231,626
-------- -------- -------- -------- --------- ---------
Interest expense ...................... 8,038 3,204 -- 3,383 -- 14,625
Preferred stock dividends ............. -- -- 1,599 -- -- 1,599
Fixed charges and other expenses....... (6) -- 412 -- -- 406
-------- -------- -------- -------- --------- ---------
Total ............................. 8,032 3,204 2,011 3,383 -- 16,630
-------- -------- -------- -------- --------- ---------
Income from continuing oper.
before income taxes .................. 24,388 9,119 (3,374) (2,313) -- 27,820
Income taxes .......................... 8,181 3,645 (1,339) (1,718) -- 8,769
-------- -------- -------- -------- --------- ---------
Net income from continuing
operations ........................... 16,207 5,474 (2,035) (595) -- 19,051
-------- -------- -------- -------- --------- ---------
Effect of discontinued operations ..... -- -- -- -- (12,045) (12,045)
-------- -------- -------- -------- --------- ---------
Segment net income .................... $ 16,207 $ 5,474 $ (2,035) $ (595) $ (12,045) $ 7,006
======== ======== ======== ======== ========= =========
</TABLE>
F-30
<PAGE>
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., 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
ESE Land Corporation and 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. QST
completed the sale of subsidiary QST Environmental Inc. in the second quarter
of 1999 (see Results of Operations-- QST Enterprises Discontinued Operations).
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 six months ended June 30, 1999, CILCO paid approximately
$362,000 to outside parties for former gas manufacturing plant site monitoring,
remediation and legal fees, and expects to spend approximately $250,000 during
the remainder of 1999. A $1.5 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 June 1999 have been
deferred on the Balance Sheets, net of amounts recovered from customers.
Through June 30, 1999, CILCO has recovered approximately $6.6 million in
coal tar remediation costs from its customers through a gas rate rider approved
by the Illinois Commerce Commission (ICC). Currently, that rider allows
recovery of prudently incurred coal tar remediation costs in the year that the
expenditures occur. Under these circumstances, management believes that the
cost of coal tar remediation will not have a material adverse effect on CILCO's
financial position or results of operations.
CILCO'S UNION CONTRACTS
The International Brotherhood of Electrical Workers Local 51 (IBEW)
ratified its current agreement on October 10, 1997. The current contract
expires on July 1, 2000. The IBEW represents approximately 389 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
159 CILCO power plant employees.
F-31
<PAGE>
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 provided 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 May 1999, a settlement was reached between CILCO and CIPS regarding
disputed issues pertaining to these capacity and energy agreements. The
settlement amends the previous agreements to provide for 100 MW of capacity and
firm energy for the months of June through September for the years 2000 through
2003 and additionally provide for 100 MW of firm energy for the month of
January in each of those years. There are no commitments to purchase capacity
or energy beyond those dates. The agreements provide specific prices for
on-peak and off-peak energy, which eliminates the ambiguity that arose under
the old agreements due to the use of pricing queues. Under the settlement,
CILCO will have no capacity payment obligations to CIPS for February through
December 1999, resulting in 1999 capacity reservation savings of approximately
$6 million. The settlement also obligates both parties to withdraw from
regulatory action pertaining to related contract issues. CIPS and CILCO are
currently preparing the settlement document filing for approval by the FERC.
NOTE 4. QST ENTERPRISES DISCONTINUED OPERATIONS
Due to uncertainties related to energy deregulation across the country,
the illiquidity of certain energy markets and the Company's 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 sell its 100% ownership
interest in QST Environmental Inc. (QST Environmental), 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 to MACTEC, Inc., a privately-held company
which provides environmental management services, for approximately $18 million
in cash, which was received by QST Enterprises Inc. on June 24, 1999, the
effective date of the sale. In August 1998, QST Enterprises Inc. sold its
wholly-owned fiber optic-based telecommunications subsidiary, QST
Communications, for $20 million cash and stock options then valued at $5.5
million. After incurring material losses in the wholesale electricity market in
June 1998 and subsequent losses in its energy operations outside of Illinois,
QST Energy transferred its Pennsylvania retail customers to other marketers,
ceased its Houston-based energy trading operations, and has terminated its
obligations 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 June 30,
1999, on the accompanying consolidated balance sheet, consists primarily of
$1.7 million in working capital, $.2 million in fixed assets and $11.2 million
of investments and other assets. Working capital consists mainly of
$1.7 million in receivables (see QST Enterprises Discontinued Operations)
offset by $16.6 million in outstanding debt to the Holding Company. Investments
and other assets consists primarily of a $5.5 million investment in ESE Land
Corporation (ESE Land) and $5.5 million of stock options obtained in the sale
of QST Communications. The investment in ESE Land consists of residual
interests in three limited liability corporations obtained as part of the sale
of ESE Land assets in fourth quarter 1997. QST Environmental's residual
investment in ESE Land was transferred to QST Enterprises Inc. prior to the
sale of QST Environmental. 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 and electric business activities. Gains and
losses arising from derivative financial instrument transactions which hedge
the impact of fluctuations in energy prices are recognized in income concurrent
F-32
<PAGE>
NOTE 5. FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT-- (CONTINUED)
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 gain reflected in operating results from derivative financial
instruments was approximately $415,000 for the second quarter 1999. As of June
30, 1999, CILCORP had fixed-price derivative financial instruments representing
hedges of natural gas purchases of .5 Bcf and natural gas sales of 1.6 Bcf for
commitments through September 2000. The net deferred gain and carrying amount
on these fixed-price derivatives at June 30, 1999, was approximately $571,600.
At June 30, 1999, CILCORP had open positions in derivative financial
instruments used to hedge basis of 1.4 Bcf for commitments through March 2000.
The net deferred gain on these basis derivatives at June 30, 1999, was
approximately $30,500. As of June 30, 1999, CILCORP had fixed-price derivative
financial instruments representing hedges of electricity purchases of
49,312 MWh and electricity sales of 3,680 MWh for commitments through June
2000. The net deferred loss and carrying amount on these fixed-price
derivatives at June 30, 1999, was approximately $132,400.
NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS
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. As issued, SFAS
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999.
In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137). SFAS 137
amends SFAS 133 to require implementation of SFAS 133 for all fiscal quarters
of fiscal years beginning after June 15, 2000.
The Company has not yet adopted SFAS 133 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 dilutive potential result
from Award Agreements entered into pursuant to the CILCORP Shareholder Return
Incentive Compensation Plan.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Income available to common shareholders ................... $13,284 $ 7,006
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 ............................... 141 79
</TABLE>
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share, for the year ended December 31, 1997.
F-33
<PAGE>
INDEX TO UNAUDITED PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
PAGE
NO.
-----
<S> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1999 . P-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Six
Months Ended June 30, 1999 .................................................. P-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 1998 .................................................. P-5
Notes to Unaudited Pro Forma Condensed Consolidated Financial Data ........... P-6
</TABLE>
P-1
<PAGE>
The following unaudited pro forma condensed consolidated financial data are
based on the historical consolidated financial statements of The AES Corporation
and its subsidiaries (the Company) and the historical consolidated financial
statements of CILCORP Inc. and its subsidiaries (CILCORP) after giving effect on
a pro forma basis to the acquisition of CILCORP through a merger between a
wholly-owned subsidiary of AES and CILCORP. This data should be read in
conjunction with the historical consolidated financial statements and notes to
those financial statements of AES and CILCORP.
The unaudited pro forma condensed consolidated statements of operations for the
year ended December 31, 1998 and the six months ended June 30, 1999 present the
results of the Company and CILCORP as if the acquisition had occurred as of the
beginning of the earliest period presented. The accompanying unaudited pro forma
condensed consolidated balance sheet as of June 30, 1999 presents the financial
position of the Company and CILCORP as if the acquisition had occurred on that
date.
The pro forma adjustments are based on preliminary estimates, information
currently available and certain assumptions that management believes are
reasonable under the circumstances. The actual consolidated financial statements
will reflect the effects of the merger on and after the effective date of the
merger rather than the dates indicated above. The unaudited pro forma condensed
consolidated financial data neither purport to represent what the consolidated
results of operations or financial condition actually would have been had the
acquisition and related transactions in fact occurred on the assumed dates, nor
to project the consolidated results of operations and financial position for any
future period.
The acquisition will be accounted for by the purchase method and, therefore, the
assets and liabilities of CILCORP will be recorded at their fair values. The
excess of the purchase price over the fair value of net assets acquired at the
effective date of the acquisition will be recorded as goodwill. Allocations
included in the pro forma financial data are based on an analysis which is not
yet completed. Accordingly, the final value of the purchase price and its
allocation may differ, perhaps significantly, from the amounts included in this
pro forma financial data.
P-2
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999
(in millions)
------------------------------------------------------------
Proforma
Adjustments for
the Acquisition
(Notes 1, 2, 3, 4
AES CILCORP, Inc. and 5) Pro Forma
------------- ------------- ------------------ ---------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash, cash equivalents and short-term investments $ 422 $ 4 $ 14 $ 440
Accounts receivables, less provision to reduce contract receivables 438 68 -- 506
Accrued unbilled revenue -- 28 -- 28
Inventory 123 38 -- 161
Prepaid expenses and other current assets 288 8 -- 296
---------- -------- ---------- -------
Total current assets 1,271 146 14 1,431
Property, Plant and Equipment:
Property, plant and equipment, at cost 5,958 1,667 (847) 6,778
Accumulated depreciation and amortization (626) (847) 847 (626)
Construction work in progress and other 974 46 -- 1,020
---------- -------- ---------- -------
Property, plant & equipment, net 6,306 866 -- 7,172
Other Assets:
Investments in and advances to affiliates 1,721 165 -- 1,886
Electricity sales concessions and contracts 993 -- -- 993
Goodwill 67 -- 571 638
Other assets 879 26 6 911
---------- -------- ---------- -------
Total other assets 3,660 191 577 4,428
---------- -------- ---------- -------
Total $ 11,237 $ 1,203 $ 591 $13,031
========== ======== ========== =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 237 $ 52 $ -- $ 289
Accrued interest and other liabilities 377 19 14 410
Project financing debt - current portion 676 117 (27) 766
---------- -------- ---------- -------
Total current liabilities 1,290 188 (13) 1,465
Long-Term Liabilities:
Project financing debt 4,651 257 475 5,383
Other notes payable 2,009 -- -- 2,009
Deferred credits and other liabilities 450 359 -- 809
---------- -------- ---------- -------
Total long-term liabilities 7,110 616 475 8,201
---------- -------- ---------- -------
Minority Interest 773 -- -- 773
Company-obligated Mandatorily Redeemable Convertible
Preferred Securities of Subsidiary Trusts Holding Solely
Junior Subordinated Debentures of The AES Corporation 550 -- -- 550
Preferred Stock of Subsidiary -- 66 -- 66
Stockholders' Equity:
Common stock 2 193 (193) 2
Additional paid-in capital 1,757 -- 462 2,219
Retained earnings 950 141 (141) 950
Accumulated other comprehensive loss (1,195) (1) 1 (1,195)
---------- -------- ---------- -------
Total stockholders' equity 1,514 333 129 1,976
---------- -------- ---------- -------
Total $ 11,237 $ 1,203 $ 591 $13,031
========== ======== ========== =======
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Data are an integral part of these statements.
P-3
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
(in millions, except per share amounts)
-----------------------------------------------------------
Proforma
Adjustments for
the Acquisition
(Notes 1, 2, 3 and
AES CILCORP, Inc. 4) Pro Forma
----------- ------------- ------------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Sales and services $ 1,278 $ 288 $ -- $ 1,566
Operating costs and expenses:
Cost of sales and services 830 248 -- 1,078
Selling, general and administrative expenses 31 3 7 41
------- ------- ------- -------
Total operating costs and expenses 861 251 7 1,119
------- ------- ------- -------
Operating Income (Loss) 417 37 (7) 447
Other income and (expense):
Interest expense (276) (16) (20) (312)
Interest and other income 33 2 -- 35
Preferred stock dividend of subsidiary -- (2) -- (2)
Foreign currency transaction loss (2) -- -- (2)
Equity in loss of affiliates before income taxes (54) -- -- (54)
------- ------- ------- -------
Income (loss) before income taxes and minority
interest 118 21 (27) 112
Income tax provision (benefit) 28 7 (8) 27
Minority interest 32 -- -- 32
------- ------- ------- -------
Net income (loss) from continuing operations $ 58 $ 14 $ (19) $ 53
======= ======= ======= =======
Earnings per share from continuing operations --
Basic $ 0.31 $ 0.28
Diluted 0.31 0.28
Weighted average common shares and potential common
shares used in the calculation of
earnings per share --
Basic 184.1 191.6
Diluted 188.6 196.1
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Financial Data are an integral part of these statements.
P-4
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
(in millions, except per share amounts)
-----------------------------------------------------------
Proforma
Adjustments for
the Acquisition
(Notes 1, 2, 3 and
AES CILCORP, Inc. 4) Pro Forma
----------- ------------- ------------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Sales and services $ 2,398 $ 559 $ -- $ 2,957
Operating costs and expenses:
Cost of sales and services 1,587 458 -- 2,045
Selling, general and administrative expenses 56 9 14 79
Provision for contract receivables 22 -- -- 22
------- ------- ------- -------
Total operating costs and expenses 1,665 467 14 2,146
------- ------- ------- -------
Operating Income (Loss) 733 92 (14) 811
Other income and (expense):
Interest expense (485) (33) (39) (557)
Interest and other income 67 2 -- 69
Preferred stock dividend of subsidiary -- (3) -- (3)
Foreign currency transaction loss (1) -- -- (1)
Equity in earnings of affiliates before income taxes 232 -- -- 232
------- ------- ------- -------
Income (loss) before income taxes and minority
interest 546 58 (53) 551
Income tax provision (benefit) 145 20 (15) 150
Minority interest 94 -- -- 94
------- ------- ------- -------
Net income (loss) from continuing operations $ 307 $ 38 $ (38) $ 307
======= ======= ======= =======
Earnings per share from continuing operations --
Basic $ 1.73 $ 1.66
Diluted 1.67 1.61
Weighted average common shares and potential common
shares used in the
calculation of earnings per share --
Basic 177.5 185.0
Diluted 189.0 196.5
</TABLE>
The accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Financial Data are an integral part of these statements.
P-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The Unaudited Pro Forma Condensed Consolidated Financial Data are based on the
following assumptions:
(1) The purchase price of approximately $904 million will be funded through the
issuance of $475 million of project financing debt with an expected
interest rate of 8.25% and through the issuance of 7.0 million shares of
AES common stock. An additional 0.5 million shares of AES common stock will
be issued to repay $27 million of CILCORP's current debt outstanding and to
pay $6.0 million of costs related to the issuance of the project financing
debt. The net proceeds from the issuance of the AES common stock are
assumed to be $462 million (based on a closing price of $63.625 on
September 24, 1999). The acquisition will be accounted for as a purchase.
The purchase price allocation has been prepared on a preliminary basis
pending completion of engineering, environmental, legal and valuation
analyses, all of which are ongoing. The preliminary adjustments which have
been made to the assets and liabilities of CILCORP to reflect the effect of
the acquisition are as follows (in millions):
Goodwill................................... $571
Merger-related personnel costs ............ 14
(2) Goodwill will be amortized using the straight line method over 40 years.
(3) The issuance costs for the project financing debt will be amortized over
the term of the debt which is approximately 20 years.
(4) The income tax benefit for the effects of the pro forma adjustments which
affect taxable income have been calculated at an effective rate of 39.5%.
(5) In the Pro Forma Condensed Balance Sheet the CILCORP fixed rate debt
continues to be recorded at its historical cost. Upon consummation of the
merger, the fixed rate debt will be recorded at its fair value, after
considering the rates the combined companies would expect to receive in
similar borrowing arrangements. As of December 31, 1998 the CILCORP fixed
rate debt had a carrying amount of approximately $299 million and a fair
value amount of approximately $339 million.
P-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE AES CORPORATION
Date: September 30, 1999 By /s/ William Luraschi
---------------------
(signing officer)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference into The AES Corporation's Registration Statement No. 33-44498 on Form
S-8, Registration Statement No. 33-49262 on Form S-8, Registration Statement No.
333-26225 on Form S-8, Registration Statement No. 333-28883 on Form S-8,
Registration Statement No. 333-28885 on Form S-8, Registration Statement No.
333-38535 on Form S-8, Registration Statement No. 33-95046 on Form S-3,
Registration Statement No. 333-39857 on Form S-3, and Registration Statement No.
333-81953 on Form S-3, of our report dated January 27, 1999, covering CILCORP
Inc.'s consolidated financial statements for the year ended December 31, 1998,
included in this Current Report on Form 8-K of The AES Corporation dated
September 30, 1999.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
September 30, 1999.
