-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LEXQluzJaDQ7m3pf8j3N515aAYhjxw/lvSAcfbd2ZddI5bC6GrCtgOFprIVAGYwR WwQikAjWfA+p29hnJ2lSFQ== 0000762129-98-000017.txt : 19980813 0000762129-98-000017.hdr.sgml : 19980813 ACCESSION NUMBER: 0000762129-98-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CILCORP INC CENTRAL INDEX KEY: 0000762129 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 371169387 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08946 FILM NUMBER: 98684106 BUSINESS ADDRESS: STREET 1: 300 HAMILTON BLVD STE 300 CITY: PEORIA STATE: IL ZIP: 61602 BUSINESS PHONE: 3096758810 MAIL ADDRESS: STREET 1: 300 LIBERTY STREET STREET 2: STE 300 CITY: PEORIA STATE: IL ZIP: 61602 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL ILLINOIS LIGHT CO CENTRAL INDEX KEY: 0000018651 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 370211050 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02732 FILM NUMBER: 98684107 BUSINESS ADDRESS: STREET 1: 300 LIBERTY ST CITY: PEORIA STATE: IL ZIP: 61602 BUSINESS PHONE: 3096725271 MAIL ADDRESS: STREET 1: 300 LIBERTY STREET CITY: PEORIA STATE: IL ZIP: 61602 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ........ to ........ Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-8946 CILCORP Inc. 37-1169387 (An Illinois Corporation) 300 Hamilton Blvd, Suite 300 Peoria, Illinois 61602 (309) 675-8810 1-2732 CENTRAL ILLINOIS LIGHT COMPANY 37-0211050 (An Illinois Corporation) 300 Liberty Street Peoria, Illinois 61602 (309) 675-8810 Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: CILCORP Inc. Common stock, no par value, shares outstanding at June 30, 1998 13,610,680 CENTRAL ILLINOIS LIGHT COMPANY Common stock, no par value, shares outstanding and privately held by CILCORP Inc. at June 30, 1998 13,563,871 CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 INDEX PART I. FINANCIAL INFORMATION Page No. Item 1: Financial Statements CILCORP INC. Consolidated Balance Sheets 3-4 Consolidated Statements of Income 5-6 Consolidated Statements of Cash Flows 7-8 CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets 9-10 Consolidated Statements of Income 11 Consolidated Statements of Cash Flows 12-13 Notes to Consolidated Financial Statements 14-17 CILCORP Inc. and Central Illinois Light Company Item 2: Management's Discussion and Analysis of Financial 18-30 Condition and Results of Operations CILCORP Inc. and Central Illinois Light Company PART II. OTHER INFORMATION Item 1: Legal Proceedings 30 Item 5: Other Information 31-32 Item 6: Exhibits and Reports on Form 8-K 32 Signatures 33-34 CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
June 30, December 31, ASSETS 1998 1997 (Unaudited) Current assets: Cash and temporary cash investments $ 6,139 $ 10,576 Receivables, less reserves of $3,092 and $2,454 100,390 141,234 Accrued unbilled revenue 33,674 38,775 Fuel, at average cost 7,558 7,816 Materials and supplies, at average cost 14,207 13,685 Gas in underground storage, at average cost 13,901 22,666 Prepayments and other 10,612 10,971 ---------- --------- Total current assets 186,481 245,723 ---------- --------- Investments and other property: Investments in leveraged leases 144,490 146,458 Cash surrender value of company-owned life insurance, net of related policy loans of $46,488 and $42,898 2,161 2,399 Other investments 17,827 18,675 ---------- --------- Total investments and other property 164,478 167,532 ---------- --------- Property, plant and equipment: Utility plant, at original cost Electric 1,227,912 1,213,585 Gas 405,542 401,870 ---------- --------- 1,633,454 1,615,455 Less - accum. provision for depreciation 797,503 769,792 ---------- --------- 835,951 845,663 Construction work in progress 31,330 21,550 Other, net of depreciation 25,184 22,188 ---------- --------- Total property, plant and equipment 892,465 889,401 ---------- --------- Other assets 31,652 32,163 ---------- --------- Total assets $1,275,076 $1,334,819 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
June 30, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 (Unaudited) Current liabilities: Current portion of long-term debt $ 11,513 $ 22,185 Notes payable 64,500 62,150 Accounts payable 106,127 132,286 Accrued taxes 3,133 2,810 Accrued interest 9,648 9,473 Purchased gas adjustment over-recoveries 224 1,666 Other 7,941 19,798 ---------- --------- Total current liabilities 203,086 250,368 ---------- --------- Long-term debt 298,555 298,528 ---------- --------- Deferred credits and other liabilities: Accumulated deferred income taxes 237,081 241,013 Regulatory liab. of regulated subsidiary 56,612 56,807 Deferred investment tax credits 20,284 21,117 Other 50,480 48,273 ---------- --------- Total def. credits & other liabilities 364,457 367,210 ---------- --------- Preferred stock of subsidiary 66,120 66,120 ---------- --------- Stockholders' equity: Common stock, no par value; authorized 50,000,000 shares - outstanding 13,610,680 shares 192,567 192,567 Retained earnings 149,615 159,350 Accumulated other comprehensive income 676 676 ---------- --------- Total stockholders' equity 342,858 352,593 ---------- --------- Total liab. and stockholders' equity $1,275,076 $1,334,819 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
CILCORP INC. AND SUBSIDIARIES Consolidated Statements of Income (In thousands)* (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Revenue: Electric utility $ 88,305 $ 81,011 $167,482 $154,303 Gas utility 28,310 30,509 98,212 123,012 Non-regulated energy and energy services 124,956 41,126 329,208 47,071 Environmental and engineering services 18,595 18,245 36,062 35,838 Other business 4,820 2,090 10,015 4,890 -------- -------- -------- -------- Total 264,986 172,981 640,979 365,114 -------- -------- -------- -------- Operating expenses: Fuel for generation and purchased power 78,898 28,230 132,280 54,652 Gas purchased for resale 99,629 51,989 322,339 118,738 Other operations & maintenance 54,957 51,392 105,952 99,978 Depreciation and amortization 16,833 16,651 33,633 33,358 Taxes, other than income taxes 9,419 8,289 20,925 19,388 -------- -------- -------- -------- Total 259,736 156,551 615,129 326,114 -------- -------- -------- -------- Fixed charges and other: Interest expense 7,569 6,942 15,092 14,006 Preferred stock dividends of subsidiary 797 811 1,599 1,597 Allowance for funds used during construction (29) (110) (6) (118) Other 311 242 533 572 -------- -------- -------- -------- Total 8,648 7,885 17,218 16,057 -------- -------- -------- -------- Income (loss) from continuing oper. before income taxes (3,398) 8,545 8,632 22,943 Income taxes (2,881) 2,715 1,189 7,105 -------- -------- -------- -------- Net income (loss) from continuing operations (517) 5,830 7,443 15,838 Loss from operations of discontinued business, net of tax of ($112), $2, ($287), and ($193) (171) (13) (437) (302) -------- -------- -------- -------- Net income (loss) (688) 5,817 7,006 15,536 Other comprehensive income -- -- -- -- -------- -------- -------- -------- Comprehensive income (loss) $ (688) $ 5,817 $ 7,006 $ 15,536 ======== ======== ======== ======== Average common share outstanding - basic 13,611 13,611 13,611 13,611 ======== ======== ======== ======== Earnings per common share - basic Continuing operations $ (.04) $ .43 $ .55 $ 1.16 Discontinued operations (.02) -- (.04) (.02) -------- -------- -------- -------- Net income (loss) per common share - basic $ (.06) $ .43 $ .51 $ 1.14 ======== ======== ======== ======== Average common shares outstanding - diluted 13,611 13,611 13,690 13,611 ======== ======== ======== ======== Earnings per common share - diluted Continuing operations $ (.04) $ .43 $ .54 $ 1.16 Discontinued operations (.02) -- (.03) (.02) -------- -------- -------- -------- Net income (loss) per common share - diluted $ (.06) $ .43 $ .51 $ 1.14 ======== ======== ======== ======== Dividends per common share $ .615 $ .615 $ 1.23 $ 1.23 ======== ======== ======== ======== *Except per share amounts The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
CILCORP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Six Months Ended June 30, 1998 1997 Cash flows from operating activities: Net income before preferred dividends $ 9,042 $ 17,436 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Non-cash lease income & investment inc. (2,686) (2,543) Depreciation and amortization 33,376 33,356 Deferred income taxes, investment tax credit and regulatory liability of subsidiary, net (4,958) (3,390) Changes in operating assets & liabilities: Decrease in accounts receivable and accrued unbilled revenue 46,152 15,986 Decrease in inventories 8,501 16,481 Decrease in accounts payable (25,334) (3,272) Increase (decrease) in accrued taxes 253 (7,536) Decrease (increase) in other assets 710 (2,180) Decrease in other liabilities (10,870) (2,276) -------- -------- Total adjustments 45,144 44,626 -------- -------- Net cash provided by operating activities from continuing operations 54,186 62,062 -------- -------- Net cash used by operating activities of discontinued operations (1,031) (667) -------- -------- Cash flow from operations 53,155 61,395 -------- -------- Cash flows from investing activities: Additions to plant (27,231) (23,418) Other 1,968 (1,878) -------- -------- Net cash used by investing activities from continuing operations (25,263) (25,296) -------- -------- Net cash used by investing activities from discontinued operations (3,893) (2,762) -------- -------- Cash flow used by investing activities (29,156) (28,058) -------- -------- Cash flow from financing activities: Net increase in short-term debt 550 7,800 Decrease in long-term debt (10,645) (19,857) Common dividends paid (16,742) (16,741) Preferred dividends paid (1,599) (1,597) -------- -------- Net cash used by financing activities (28,436) (30,395) -------- -------- Net (decrease) increase in cash and temporary cash investments: (4,437) 2,942 Cash and temporary cash investments at beginning of year: 10,576 4,941 -------- -------- Cash and temporary cash investments at June 30 $ 6,139 $ 7,883 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 13,613 $ 16,494 Income taxes $ 7,068 $ 17,622 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets (In thousands)
June 30, December 31, ASSETS 1998 1997 (Unaudited) Utility plant, at original cost: Electric $1,227,912 $1,213,585 Gas 405,542 401,870 ---------- ---------- 1,633,454 1,615,455 Less - accumulated provision for depreciation 797,503 769,792 ---------- ---------- 835,951 845,663 Construction work in progress 31,330 21,550 Plant acquisition adjustments, net of amortization 861 1,217 ---------- ---------- Total utility plant 868,142 868,430 ---------- ---------- Other property and investments: Cash surrender value of company-owned life insurance (net of related policy loans of $46,488 and $42,898) 2,161 2,399 Other 1,214 1,214 ---------- ---------- Total other property and investments 3,375 3,613 ---------- ---------- Current assets: Cash and temporary cash investments 2,447 698 Receivables, less reserves of $745 & $703 28,939 44,550 Accrued unbilled revenue 25,255 31,248 Fuel, at average cost 7,558 7,816 Materials and supplies, at average cost 14,207 13,685 Gas in underground storage, at avg. cost 13,358 22,118 Prepaid taxes 407 1,189 Other 8,182 6,331 ---------- ---------- Total current assets 100,353 127,635 ---------- ---------- Deferred debits: Unamortized loss on reacquired debt 3,421 3,581 Unamortized debt expense 1,931 2,019 Prepaid pension cost 455 455 Other 15,963 16,922 ---------- ---------- Total deferred debits 21,770 22,977 ---------- --------- Total assets $ 993,640 $1,022,655 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets (In thousands)
June 30, December 31, CAPITALIZATION AND LIABILITIES 1998 1997 (Unaudited) Capitalization: Common shareholder's equity: Common stock, no par value; authorized 20,000,000 shares; outstanding 13,563,871 shares $ 185,661 $ 185,661 Retained earnings 144,308 146,405 Accumulated other comprehensive income 676 676 ---------- --------- Total common shareholder's equity 330,645 332,742 Preferred stock without mandatory redemption 44,120 44,120 Preferred stock with mandatory redemption 22,000 22,000 Long-term debt 267,860 267,836 ---------- --------- Total capitalization 664,625 666,698 ---------- --------- Current liabilities: Current maturities of long-term debt -- 10,650 Notes payable 20,400 21,300 Accounts payable 34,421 44,844 Accrued taxes 4,509 2,593 Accrued interest 8,824 9,234 Purchased gas adjustment over-recoveries 224 1,666 Level payment plan 59 2,375 Other 5,192 4,670 ---------- --------- Total current liabilities 73,629 97,332 ---------- --------- Deferred credits and other liabilities: Accumulated deferred income taxes 136,097 139,274 Regulatory liability 56,612 56,807 Deferred investment tax credit 20,284 21,117 Capital lease obligation 1,948 2,182 Other 40,445 39,245 --------- --------- Total deferred credits and other liab. 255,386 258,625 --------- --------- Total capitalization and liabilities $ 993,640 $1,022,655 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
CENTRAL ILLINOIS LIGHT COMPANY Consolidated Statements of Income (In thousands) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Operating revenue: Electric $ 88,304 $ 81,011 $167,482 $154,303 Gas 28,310 30,509 98,212 123,012 -------- -------- -------- -------- Total operating revenues 116,614 111,520 265,694 277,315 -------- -------- -------- -------- Operating expenses: Cost of fuel 21,135 22,016 45,477 43,743 Cost of gas 13,534 13,136 54,156 74,803 Purchased power 8,178 4,042 12,852 8,146 Other operations & maintenance 30,876 29,885 57,693 56,149 Depreciation and amortization 15,754 15,394 31,509 30,787 Income taxes 4,049 5,068 11,826 12,316 Other taxes 8,495 7,597 19,264 17,792 -------- -------- -------- -------- Total operating expenses 102,021 97,138 232,777 243,736 -------- -------- -------- -------- Operating income 14,593 14,382 32,917 33,579 -------- -------- -------- -------- Other income and deductions: Cost of equity funds capitalized -- 57 -- 31 Company-owned life insurance, net (207) (242) (412) (572) Other, net 58 (66) (24) (104) -------- -------- -------- -------- Total other income and (deductions) (149) (251) (436) (645) -------- -------- -------- -------- Income before interest expense 14,444 14,131 32,481 32,934 -------- -------- -------- -------- Interest expenses: Interest on long-term debt 4,922 4,960 9,882 10,104 Cost of borrowed funds capitalized (29) (54) (6) (88) Other 622 658 1,360 1,300 -------- -------- -------- -------- Total interest expense 5,515 5,564 11,236 11,316 -------- -------- -------- -------- Net income 8,929 8,567 21,245 21,618 -------- -------- -------- -------- Dividends on preferred stock 797 811 1,599 1,597 -------- -------- -------- -------- Net income available for common stock 8,132 7,756 19,646 20,021 -------- -------- -------- -------- Other comprehensive income -- -- -- -- -------- -------- -------- -------- Comprehensive income $ 8,132 $ 7,756 $ 19,646 $ 20,021 ======== ======== ======== ======== The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
CENTRAL ILLINOIS LIGHT COMPANY Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Six Months Ended June 30, 1998 1997 Cash flows from operating activities: Net income before preferred dividends $ 21,244 $ 21,618 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 31,865 31,143 Deferred income taxes, investment tax credit and regulatory liability, net (4,205) (3,535) Changes in operating assets and liabilities: Decrease in accounts receivable 15,611 10,204 Decrease in fuel, materials & supplies, and gas in underground storage 8,495 12,191 Decrease in unbilled revenue 5,993 7,410 Decrease in accounts payable (10,423) (14,955) Increase (decrease) in accrued taxes and interest 1,506 (4,943) Capital lease payments 323 323 (Increase) decrease in other current assets (1,070) 197 (Decrease) increase in other current liabilities (3,235) 47 Decrease in other non-current assets 2,257 7,243 Increase in other non-current liab. 1,356 635 -------- -------- Net cash provided by operating activities 69,717 67,578 -------- -------- Cash flows from investing activities: Capital expenditures (29,865) (22,865) Cost of equity funds capitalized -- (31) Other (2,890) (4,093) -------- -------- Net cash used in investing activities (32,755) (26,989) -------- -------- Cash flow from financing activities: Common dividends paid (21,741) (22,741) Preferred dividends paid (1,599) (1,597) Long-term debt retired (10,650) (20,000) Payments on capital lease obligation (323) (323) Short-term borrowing (900) 3,100 -------- -------- Net cash used in financing activities (35,213) (41,561) -------- -------- Net increase in cash and temporary cash investments 1,749 (972) Cash and temporary cash investments at beginning of year 698 1,662 -------- -------- Cash and temporary cash investments at June 30 $ 2,447 $ 690 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of cost of borrowed funds capitalized) $ 12,203 $ 13,129 Income taxes $ 13,588 $ 22,829 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Introduction The consolidated financial statements include the accounts of CILCORP Inc. (CILCORP or Company), Central Illinois Light Company (CILCO), QST Enterprises Inc. (QST), QST Environmental Inc., formerly known as Environmental Science & Engineering, Inc. (ESE), and CILCORP's other subsidiaries after elimination of significant intercompany transactions. Formerly a CILCORP first-tier subsidiary, ESE became a subsidiary of QST effective October 29, 1996. Effective June 1, 1997, ESE began operating under the name QST Environmental Inc. (QST Environmental). CILCORP owns directly or indirectly 100% of the common stock of its first-tier subsidiaries. The consolidated financial statements of CILCO include the accounts of CILCO and its subsidiaries, CILCO Exploration and Development Company and CILCO Energy Corporation. CILCORP is currently reevaluating its sales and marketing strategy for QST Energy Inc. (QST Energy), a subsidiary of QST, due to the uncertainties related to energy deregulation and the immaturity and illiquidity of competitive energy markets. In June, QST Energy Trading Inc. (QST Trading), a QST Energy subsidiary, incurred after-tax losses relating to wholesale electricity contracts of approximately $6.6 million. These losses were the result of an unprecedented, sudden increase in electricity prices during the week of June 22. QST Trading closed its open wholesale electricity positions for the remainder of the summer to avoid exposure to further adverse price movements. As a part of this strategic reevaluation, CILCORP has announced a restructuring of operating and marketing responsibilities within and between its current business segments. The Company will focus on energy operations within Illinois and reduce the scope of its energy trading operations. QST completed the sale of substantially all of the assets of ESE Land Corporation, a subsidiary of QST Environmental, in the fourth quarter of 1997. In addition, QST expects to complete the sale of its subsidiary, QST Communications Inc., in the third quarter of 1998. Therefore, results of both ESE Land Corporation and QST Communications Inc. are being reported as discontinued operations. Prior year amounts have been reclassified on a basis consistent with the 1998 presentation. The accompanying unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC). Although CILCORP believes the disclosures are adequate to make the information presented not misleading, these consolidated financial statements should be read along with the Company's 1997 Annual Report on Form 10-K. In the Company's opinion, the consolidated financial statements furnished reflect all normal and recurring adjustments necessary for a fair presentation of the results of operations for the periods presented. Operating results for interim periods are not necessarily indicative of operating results to be expected for the year or of the Company's future financial condition. NOTE 2. Contingencies Gas Manufacturing Plant Sites CILCO continues to investigate and/or monitor four former gas manufacturing plant sites located within CILCO's present gas service territory. The purpose of these studies is to determine if waste materials, principally coal tar, are present, whether such waste materials constitute an environmental or health risk and if CILCO is responsible for the remediation of any remaining waste materials at those sites. During the six months ended June 30, 1998, CILCO paid approximately $240,000 to outside parties for former gas manufacturing plant site monitoring, legal fees and feasibility studies, and expects to spend approximately $1 million (including remediation costs) during the remainder of 1998. A $3.6 million liability and a corresponding regulatory asset are recorded on the Balance Sheets representing the minimum amount of coal tar investigation and remediation costs CILCO expects to ultimately incur. Coal tar remediation costs incurred through June 1998 have been deferred on the Balance Sheets, net of amounts recovered from customers. Through June 30, 1998, CILCO has recovered approximately $5.3 million in coal tar remediation costs from its customers through a gas rate rider approved by the Illinois Commerce Commission (ICC). Currently, that rider allows recovery of prudently incurred coal tar remediation costs in the year that the expenditures occur. Under these circumstances, management believes that the cost of coal tar remediation will not have a material adverse effect on CILCO's financial position or results of operations. CILCO's Union Contracts The International Brotherhood of Electrical Workers Local 51 (IBEW) ratified the Company's contract proposal on October 10, 1997. The new contract expires on July 1, 2000, and, among other items, provides for 3% wage increases each year of the contract. The IBEW represents approximately 397 CILCO gas and electric department employees. The current contract with the International Brotherhood of Firemen and Oilers Local 8 (IBF&O), which represents approximately 202 CILCO power plant employees, expired on July 1, 1998. The IBF&O is currently working without a contract while negotiations continue with CILCO. NOTE 3. Commitments In August 1990, CILCO entered into a firm, wholesale power purchase agreement with Central Illinois Public Service Company, now AmerenCIPS (CIPS). This agreement provided for a minimum contract delivery rate from CIPS of 90 MW until the contract expired in May 1998. In March 1995, CILCO and CIPS amended a limited- term power agreement reached in November 1992. This agreement, which now expires in May 2009, provides for CILCO to purchase up to 150 MW of CIPS' capacity from June 1998 through May 2002, and 50 MW from June 2002 through May 2009. On January 27, 1997, CILCO intervened in a proceeding pending before the Federal Energy Regulatory Commission (FERC), to challenge the validity of the power agreements with CIPS because of the failure of CIPS to obtain FERC approval of the agreements. In the alternative, CILCO requested that FERC provide an "open season" during which CILCO may cancel the power agreements in whole or in part. In an order issued on October 15, 1997, FERC rejected the challenge to the validity of the agreements and denied CILCO's request for an open season. However, CIPS was ordered to file the agreements with FERC, and FERC on its own motion initiated a separate proceeding to investigate the terms of the agreements. Hearings in that proceeding have concluded, and the proceeding is currently in the briefing stage. CILCO has asked FERC to assess penalties against CIPS under its rules for the failure to file the contracts as required; FERC has not yet made a final ruling on this issue. FERC's order also failed to address certain contract issues raised by CILCO. FERC denied rehearing of that order on February 3, 1998, and CILCO has appealed to the United States Court of Appeals for the District of Columbia Circuit for a review of FERC's orders concerning the CIPS contract. CILCO cannot predict how FERC or the Court will ultimately rule on the issues in these two cases. NOTE 4. Discontinued Operations ESE Land Corporation In November 1997, QST Environmental Inc. sold substantially all of the assets of its wholly- owned subsidiary, ESE Land Corporation, for $9.5 million in cash and residual interests in three newly-formed limited liability corporations valued at $5.962 million, resulting in an after- tax gain of approximately $2.7 million. Accordingly, the activities are shown as discontinued operations in the statement of income. Prior year financial statements have been reclassified to conform to the current year presentation. QST Communications Inc. QST has reached a definitive agreement to sell the common stock of its wholly-owned subsidiary, QST Communications Inc. (QST Communications), to McLeodUSA Telecommunications Services, Inc., for $20 million in cash and stock options valued at $5.5 million. QST Communications provides fiber optic-based communications services to customers in central Illinois. The agreement to sell is subject to approval of a Hart-Scott-Rodino filing. An after-tax gain of approximately $7.8 million is expected to be recognized in the third quarter when the transaction is expected to be closed. (See Form 8-K filed July 28, 1998.) Accordingly, the activities of this subsidiary are shown as discontinued operations in the income statement. Prior year financial statements have been reclassified to conform to the current year presentation. Net assets of the discontinued operations of QST Communications are included in the accompanying consolidated balance sheets as follows:
June December Discontinued Operations of QST 1998 1997 Communications (In thousands) Cash $ 246 $ 340 Accounts receivable 350 58 Other current assets 409 509 Property, plant and equipment 9,425 5,988 Other assets 178 134 Total liabilities (6,429) (4,563) ------- ------- Net Assets of Discontinued Operations $ 4,179 $ 2,466 ======= =======
NOTE 5. Financial Instruments and Price Risk Management As of June 30, 1998, QST Energy Inc., a subsidiary of QST, had open derivative financial instruments representing hedges of natural gas sales of 1 Bcf and natural gas purchases and inventories of 1 Bcf for commitments through 1999. The net deferred gain on these derivatives as of June 30, 1998, was $.4 million. The net loss reflected in operating results arising from financial instruments entered into by QST Energy Inc. for gas hedging and trading purposes was $1.8 million for the six months ended June 30, 1998. NOTE 6. New Accounting Pronouncements AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued in March 1998. This SOP provides guidance on both the accounting for the costs of software developed or obtained for internal use and for the determination of whether computer software is for internal use. This SOP applies to all non-governmental entities and is effective for financial statements beginning after December 15, 1998. The Company does not expect this SOP to have a material effect on its financial position, results of operations or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not yet adopted this pronouncement and has not yet determined its effect on the Company's financial position, results of operations or cash flows. NOTE 7. Earnings Per Share The following data show the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock. The shares calculated for potential dilution result from Award Agreements entered into pursuant to the CILCORP Shareholder Return Incentive Compensation Plan.
Six Months Ended June 30, 1998 (In thousands) Income available to common shareholders $ 7,006 Weighted average number of common shares used in Basic Earnings Per Share 13,611 Weighted number of dilutive potential common shares used in Diluted Earnings Per Share 79
The Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share, for the year ended December 31, 1997. Restatement of six months ended June 30, 1997 is not applicable as no potential common stock dilution occurred until the fourth quarter of 1997. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CILCORP Inc. (CILCORP or the Company) is the parent of two core operating businesses, Central Illinois Light Company (CILCO) and QST Enterprises Inc. (QST). CILCORP also has two other first-tier subsidiaries, CILCORP Investment Management Inc. (CIM), and CILCORP Ventures Inc. (CVI), whose operations, combined with those of the holding company (Holding Company) itself, are collectively referred to herein as Other Businesses. CILCO, the primary business subsidiary, is an electric and gas utility serving customers in central and east central Illinois. CILCO's financial condition and results of operations are currently the principal factors affecting the Company's financial condition and results of operations. QST, formed in December 1995, provides energy and energy-related services to a broad spectrum of retail and wholesale customers through its subsidiary, QST Energy Inc. (QST Energy) which began operations in 1996. In June, QST Energy's subsidiary, QST Energy Trading Inc., incurred significant losses relating to wholesale electricity contracts following an unprecedented, sudden increase in electricity prices. Subsequently, on June 29, 1998, CILCORP announced it was reevaluating its strategy for QST Energy, and indicated that the Company would focus on opportunities for profitable growth in Illinois, de-emphasizing energy trading activities at QST. QST expects to complete the sale of QST Communications Inc., a wholly-owned subsidiary which provides telecommunications services, during the third quarter of 1998. QST's operations include those of QST Environmental Inc. (QST Environmental), a former first-tier CILCORP subsidiary which became a QST subsidiary effective October 29, 1996. QST Environmental's results are currently reported separately from QST's energy and telecommunications operations. QST Environmental is an environmental consulting and engineering firm serving governmental, industrial and commercial customers. CIM invests in a diversified portfolio of long-term financial investments which currently includes leveraged leases, energy-related projects and affordable residential housing. CVI primarily invests in ventures in energy- related products and services. CVI has an 80% interest in the Agricultural Research and Development Corporation and has one wholly-owned subsidiary, CILCORP Energy Services Inc., (CESI). CESI's primary business is the sale of non-regulated energy services, including non- regulated sales of natural gas. The Company is continually investigating and exploring strategic restructuring opportunities, including potential combinations and alliances involving other investor-owned utility companies, as well as other companies engaged in the sale at retail or wholesale of electricity, natural gas and related products and services. Such restructuring activity has become more prevalent in the utility industry over the last few years. An obvious corollary to such activity is that the Company may acquire other companies or may itself be acquired. The Company's policy prohibits management from commenting on any possible merger, acquisition, or other major restructuring prior to the time that the law requires public disclosure. Consequently, the Company may engage in preliminary discussions or negotiations at any time, without disclosing their existence, that could subsequently lead to a public announcement. As part of the reevaluation of its sales and marketing strategy for QST Energy, CILCORP has announced a restructuring of operating and marketing responsibilities within and between its current business segments. Forward-Looking Information Forward-looking information is included in Part I. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations and Part II. Item 5: Other Information. Such information generally relates to future expected or anticipated events or trends and identified contingencies and uncertainties. Certain material contingencies are also described in Note 2 to the Consolidated Financial Statements. Some important factors could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. These factors include prevailing governmental policies, statutory changes, and regulatory actions with respect to rates, industry structure and recovery of various costs incurred by CILCO in the course of its business; and increasing wholesale and retail competition in the electric and gas business. The business and profitability of CILCORP and its subsidiaries are also influenced by economic and geographic factors, including ongoing changes in environmental laws, regulations and policies which affect demand for QST Environmental's services; weather conditions; the extent and pace of development of competition for retail and wholesale customers; changes in technology; third-party noncompliance with Year 2000 requirements; pricing and transportation of commodities; market supply and demand for energy and energy derivative financial instruments; market supply and demand for environmental consulting, engineering and analytical services; inflation; capital market conditions; and environmental protection and compliance costs. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and to a significant degree are beyond the control of CILCORP and its subsidiaries. Capital Resources & Liquidity Declaration of dividends by CILCORP is at the discretion of the Board of Directors. CILCORP's ability to declare and pay dividends is currently contingent upon its receipt of dividends from CILCO and is also affected by business and economic conditions, capital requirements, earnings and the overall financial condition of the Company. The Company believes that internal and external sources of capital which are, or are expected to be, available to the Holding Company and its subsidiaries will be adequate to meet the Company's capital expenditures program, finance acquisitions, pay its financial obligations, meet working capital needs and retire or refinance debt as it matures. Management continues to evaluate the impact of Year 2000 issues on the Company's computer software systems and operations. An outside consulting firm has been engaged by CILCO to assist in this process at the utility and is currently updating business impact analyses. QST Enterprises has formed an internal project team to address Year 2000 issues for all entities within QST Enterprises (including QST Environmental), and has completed a preliminary assessment. The Company currently believes it will be able to achieve Year 2000 compliance through a combination of modifications of certain existing programs and systems, and the replacement of others with new software that is Year 2000 compliant. A significant portion of these system replacements was initiated for business purposes rather than solely for Year 2000 compliance. Costs to modify existing programs and systems to be Year 2000 compliant are not deemed to be material to the Company. However, if such modifications and conversions are not made, or are not made in a timely manner, the Year 2000 issue could have a material impact on the Company's operations. In addition, management cannot predict the nature or impact on operations of third-party noncompliance with Year 2000 requirements. CILCORP Short-term borrowing capability is available to the Company for additional cash requirements. CILCORP's Board of Directors has authorized it to borrow up to $60 million on a short-term basis. On June 30, 1998, CILCORP had committed bank lines of credit of $60 million, of which $44.1 million was used. Depending on market conditions and corporate needs, the Company may issue additional shares of common stock through the CILCO Employees' Savings Plan (ESP) or the CILCORP Inc. Investors Choice Automatic Reinvestment and Stock Purchase Plan (DRIP) at any time. The proceeds from any newly-issued stock from the ESP or the DRIP have been, and will continue to be, used to retire CILCORP short-term debt, to meet working capital and capital expenditure requirements at subsidiaries, and for other corporate purposes. As of the date of this filing, neither the ESP nor the DRIP is utilizing original-issue stock to meet plan requirements. The Company had $42 million of medium-term notes outstanding at June 30, 1998, of which $11.5 million was retired in July 1998. The Company may issue an additional $27 million under its existing $75 million medium-term note program in order to retire maturing debt and to provide funds for other corporate purposes. CILCO Capital expenditures totaled $29.9 million for the six months ended June 30, 1998. Capital expenditures are anticipated to be approximately $32.4 million for the remainder of 1998 and are estimated to be $58.5 million in 1999. Included in 1998 and 1999 capital expenditures are $17 million and $9.4 million, respectively, for information technology projects, which include replacement of existing computer software containing two-digit date fields which will not be able to distinguish the year 2000 from the year 1900. Modifications of existing programs will be expensed as incurred, while expenditures for programs replaced in their entirety will be capitalized. CILCO retired $10,650,000 of medium-term notes in June 1997. Currently, CILCO does not plan to issue long-term debt during the remainder of 1998. CILCO intends to finance its 1998 and 1999 capital expenditures with funds provided by operations. As of July 1, 1998, CILCO had committed bank lines of credit aggregating $40 million, all of which were unused. CILCO uses these lines of credit to support issuance of short-term commercial paper. CILCO had $20.4 million of commercial paper outstanding at June 30, 1998 and expects to issue commercial paper periodically throughout the remainder of 1998. QST (Excluding QST Environmental) Capital expenditures totaled approximately $5.3 million for the six months ended June 30, 1998, primarily for construction of fiber optic and other communications facilities by QST Communications Inc. (QST Communications). Prior to closing the QST Communications stock sale, QST expects to fund approximately $1.3 million of capital expenditures at QST Communications during the third quarter of 1998 for expansion of its fiber optic system. (See Note 4. Discontinued Operations.) On May 22, the Illinois Commerce Commission (ICC) ruled it did not have the authority to require Commonwealth Edison to allow QST access to the Sears Tower distribution system. As a result, QST is currently evaluating its options, including potential appeals, related to this proposed cogeneration system for the Sears Tower. Approximately $1 million has been capitalized to date for the project. QST does not plan to incur capital expenditures for this project during the remainder of 1998, and will write-off the amount capitalized to date should the project not proceed. Working capital balances decreased by $8.6 million during the second quarter of 1998. QST expects to finance working capital needs during the remainder of 1998 with funds provided by the Holding Company. At June 30, 1998, QST had outstanding debt of $6 million, all of which was owed to the Holding Company. QST Environmental For the six months ended June 30, 1998, QST Environmental's expenditures for capital additions and improvements were approximately $175,000. Capital expenditures for the remainder of 1998 are expected to be $.9 million, which includes the replacement of the existing accounting/project management system. As a result, system modifications for Year 2000 compliance will be avoided. QST Environmental has a line of credit with CILCORP under which it may borrow up to $15 million, depending upon the amount of QST Environmental's receivables and fixed assets. This line of credit expires in May 2000. At June 30, 1998, QST Environmental had borrowed $10 million from CILCORP. Based upon its current receivables and fixed assets, QST Environmental has an additional $5 million available under this revolving line of credit. CIM At June 30, 1998, CIM had $37 million of outstanding debt owing to CILCORP. During 1997 and prior years, CIM committed to invest $16.6 million in affordable housing tax credit funds. Through June 30, 1998, approximately $11.8 million of these commitments had been funded. CIM expects to contribute approximately $2.6 million in cash for these investments during the remainder of 1998, $1.2 million in 1999, and lesser amounts each year thereafter through 2006. These investments will be funded through borrowings from CILCORP. CIM expects to finance any other new investments and working capital needs during the remainder of 1998 with a combination of funds generated internally and with funds provided by CILCORP. CVI At June 30, 1998, CVI had outstanding debt of $1.5 million, borrowed from CILCORP. CVI expects to finance its activities and working capital needs during the remainder of 1998 with a combination of funds generated internally and with funds provided by CILCORP. Results of Operations The following table summarizes net income of CILCO, QST, QST Environmental and Other Businesses for the three months and six months ended June 30, 1998 and 1997.
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (In thousands) (Unaudited) Core Businesses: CILCO Electric and gas utility operating income $ 14,593 $ 14,382 $ 32,917 $ 33,579 Utility other income and deductions (5,664) (5,815) (11,672) (11,961) Preferred stock dividends of CILCO (797) (811) (1,599) (1,597) -------- -------- -------- -------- Total utility net income 8,132 7,756 19,646 20,021 QST net income (includes QST Communications) (8,622) (1,373) (11,843) (2,264) QST Environmental net income (loss)(includes ESE Land) 199 (140) (202) (1,069) -------- -------- -------- -------- Total core business income (loss) (291) 6,243 7,601 16,688 Other businesses net loss (397) (426) (595) (1,152) -------- -------- -------- -------- Consolidated net income (loss) available to common shareholders $ (688) $ 5,817 $ 7,006 $ 15,536 ======== ======== ======== ========
CILCO Electric and Gas Operations The following table summarizes the components of CILCO electric and gas operating income for the three months and six months ended June 30, 1998 and 1997.
Components of Electric and Three Months Ended Six Months Ended Gas Operating Income June 30, June 30, 1998 1997 1998 1997 (In thousands) (Unaudited) Electric revenue: Electric retail $ 83,375 $ 77,649 $156,732 $146,988 Sales for resale 4,929 3,362 10,750 7,315 -------- -------- -------- -------- Total electric revenue 88,304 81,011 167,482 154,303 -------- -------- -------- -------- Electric cost of sales: Cost of fuel 21,135 22,016 45,477 43,743 Purchased power 8,178 4,042 12,852 8,146 Revenue taxes 4,061 3,312 8,378 6,912 -------- -------- -------- -------- Total electric cost of sales 33,374 29,370 66,707 58,801 -------- -------- -------- -------- Electric gross margin 54,930 51,641 100,775 95,502 -------- -------- -------- -------- Gas revenue: Sale of gas 26,812 29,016 95,092 119,483 Transportation services 1,498 1,493 3,120 3,529 -------- -------- -------- -------- Total gas revenue 28,310 30,509 98,212 123,012 -------- -------- -------- -------- Gas cost of sales: Cost of gas 13,534 13,136 54,156 74,803 Revenue taxes 1,600 1,243 5,092 4,809 -------- -------- -------- -------- Total gas cost of sales 15,134 14,379 59,248 79,612 -------- -------- -------- -------- Gas gross margin 13,176 16,130 38,964 43,400 -------- -------- -------- -------- Electric and gas operating expenses Other operation and maintenance 30,876 29,885 57,693 56,149 Depreciation and amortization 15,754 15,394 31,509 30,787 Income and other taxes 6,883 8,110 17,620 18,387 -------- -------- -------- -------- Total electric and gas operating expenses 53,513 53,389 106,822 105,323 -------- -------- -------- -------- Electric and gas operating income $ 14,593 $ 14,382 $ 32,917 $ 33,579 ======== ======== ======== ========
Electric gross margin increased 6% for the quarter and six months ended June 30, 1998, compared to the same periods in 1997. Retail kilowatt hour (Kwh) sales increased 8% for the quarter and 4% for the six months ended June 30, 1998. Residential sales increased 2% for the quarter and decreased 2% for the six months ended June 30, 1998, compared to the same periods in 1997. Commercial sales increased 4% for the quarter and six months ended June 30, 1998 due, in part, to an increase in the number of commercial customers. Industrial sales increased 16% and 9%, respectively, for the quarter and six months ended June 30, 1998. CILCO industrial sales through April 1998 were negatively impacted by customers switching to off-system suppliers under CILCO's Power Quest program (see Part II. Item 5: Other Information, Power Quest Electric Pilot Programs). Sales for resale increased 47% during the quarter and the six months ended June 30, 1998, compared to the same periods in 1997, due to favorable market conditions. Sales for resale vary based on the energy requirements of neighboring utilities and power marketers, CILCO's available capacity for bulk power sales and the price of power available for sale. In the future, CILCO expects increased competition and reduced margins in the sales for resale and purchased power markets. The overall level of business activity in CILCO's service territory and weather conditions are expected to continue to be the primary factors affecting electric sales in the near term. CILCO's electric sales will also be affected by deregulation and increased competition in the electric utility industry (see Part II. Item 5: Other Information, Competition and Power Quest Retail Competition Pilot Programs). Substantially all of CILCO's electric generating capacity is coal-fired. The cost of fuel decreased 4% in the second quarter of 1998, compared to the same period in 1997, due primarily to a decrease in the cost of coal burned, partially offset by a 5% increase in generation. The cost of fuel increased 4% for the six months ended June 30, 1998 due to a 6% increase in generation, and a 2% increase in the cost of coal burned. Purchased power increased for the quarter and the six months ended June 30, 1998, compared to the same periods in 1997. Purchased power expense varies based on CILCO's need for energy and the price of power available for purchase. CILCO makes use of purchased power when it is economical to do so and when required during maintenance outages at CILCO plants. The costs of purchased power for retail customers are passed through to those customers via the fuel adjustment clause (FAC). CILCO expects the wholesale power market to become increasingly competitive. Gas gross margin decreased 18% for the second quarter and 10% for the six months ended June 30, 1998, compared to the same periods in 1997. Residential sales volumes decreased 37% and 18%, respectively, for the quarter and six months ended June 30, 1998, primarily due to warmer weather. Commercial sales volumes decreased 20% and 10%, respectively, for the quarter and six months ended June 30, 1998, compared to the same periods in 1997. Heating degree days were 41% lower for the quarter and 22% lower for the six months ended June 30, 1998, compared to the same periods in 1997. The overall level of business activity in CILCO's service territory and weather conditions are expected to continue to be the primary factors affecting gas sales in the near term. CILCO's gas sales may also be affected by further deregulation at the retail level in the natural gas industry. Revenue from gas transportation services stayed constant and decreased 12% for the quarter and six months ended June 30, 1998, respectively, while gas transportation sales volumes increased 2% for the quarter and decreased 5% for the six months ended June 30, 1998, compared to the same periods in 1997. The cost of gas increased 3% for the quarter ended June 30, 1998, compared to the same period in 1997, primarily due to higher natural gas prices. The cost of gas decreased 28% for the six months ended June 30, 1998, primarily due to lower natural gas prices from CILCO's suppliers in January and February. Operation and maintenance expense increased 3% for the quarter and six months ended June 30, 1998, compared to the same periods in 1997. The increases were primarily due to increased electric distribution overhead line maintenance expense due to a severe storm on June 29, which affected power delivery to approximately half of CILCO's electric customers. Also contributing to the increase were scheduled maintenance outages at CILCO's E.D. Edwards generation facility and increased customer service costs related to the Customer Care Center which opened on June 30, 1997. These increases were partially offset by lower outside services costs and decreases in the actuarially-determined costs for pensions and post-employment benefits. Depreciation and amortization expense increased 2% for the quarter and for the six months ended June 30, 1998, reflecting additions and replacements of utility plant at costs in excess of the original cost of the property retired. Income and other taxes expense decreased for the quarter and six months ended June 30, 1998, primarily due to decreased deferred tax expense. CILCO Other Income and Deductions and Interest Expense The following table summarizes other income and deductions and interest expense for the three months and six months ended June 30, 1998 and 1997.
Components of Other Income Three Months Ended Six Months Ended And Deductions and June 30, June 30, Interest Expense 1998 1997 1998 1997 (In thousands) (Unaudited) Net interest expense $ (5,395) $ (5,504) $(11,062) $(11,198) Income taxes 642 625 1,339 1,295 Other (911) (936) (1,949) (2,058) -------- -------- -------- -------- Other income (deductions) $ (5,664) $ (5,815) $(11,672) $(11,961) ======== ======== ======== ========
QST (Excluding QST Environmental) The following table summarizes the revenue and expenses for QST for the three months and six months ended June 30, 1998 and 1997.
Three Months Ended Six Months Ended June 30, June 30, Components of QST Net Loss 1998 1997 1998 1997 (In thousands) (Unaudited) Revenue: Electric revenue $ 38,988 $ 1,844 $ 63,354 $ 2,453 Gas revenue 85,969 39,137 265,854 44,453 -------- -------- -------- -------- Total revenue 124,957 40,981 329,208 46,906 Cost of sales: Cost of electricity 49,912 2,173 74,278 2,763 Cost of gas 86,096 38,853 268,183 43,935 -------- -------- -------- -------- Total cost of sales 136,008 41,026 342,461 46,698 -------- -------- -------- -------- Gross margin (11,051) (45) (13,253) 208 -------- -------- -------- -------- Other expenses: General and administrative 2,848 1,758 5,469 3,060 Depreciation and amortization 180 24 304 45 Interest (72) 8 (121) 98 -------- -------- -------- -------- Total other expenses 2,956 1,790 5,652 3,203 -------- -------- -------- -------- Net loss before income taxes (14,007) (1,835) (18,905) (2,995) Income taxes (5,556) (728) (7,499) (1,188) -------- -------- -------- -------- Net loss from continuing operations (8,451) (1,107) (11,406) (1,807) Loss from operations of discontinued business, net of tax (171) (266) (437) (457) -------- -------- -------- -------- QST net loss $ (8,622) $ (1,373) $(11,843) $ (2,264) ======== ======== ======== ========
QST Enterprises Inc. was formed in December 1995 to facilitate CILCORP's expansion into non- regulated energy and related services businesses. Its initial focus through QST Energy was to compete against energy suppliers participating in CILCO's Power Quest program. After successfully competing for Power Quest program customers, QST Energy established and expanded the infrastructure required to supply energy to customers outside of the CILCO service territory, and currently has energy customers in Illinois, Pennsylvania, and California. QST Energy competes against marketers, brokers and utility affiliates to provide energy and services to customers of utilities and other energy providers which offer, or will be required to offer, similar retail competition programs. The Company is currently reevaluating QST's unregulated energy sales and marketing strategy, due to the uncertainties related to energy deregulation and the immaturity and illiquidity of energy markets, and has signaled its intention to focus on energy market growth opportunities in Illinois, de-emphasizing its out-of-state energy sales and marketing activities. QST Energy's wholly-owned subsidiary, QST Energy Trading Inc. (QST Trading), is a wholesale natural gas and electricity power marketer which purchases, sells and brokers energy and capacity at market-based rates to other marketers, including QST Energy, utilities and other customers. QST Energy and QST Trading currently have offices in Peoria, Chicago, Pittsburgh and Houston. In conjunction with the Company's reevaluation of QST's strategy, CILCORP announced its intention to cease QST's energy trading activities. CILCORP will continue to engage in energy trading activities primarily to serve retail energy customers and to fully utilize CILCO's generating capacity and other energy assets. QST's revenue increased for the quarter and six months ended June 30, 1998, compared to the same periods in 1997, due to increased wholesale natural gas and electricity trading activity and QST Energy's participation in the Pennsylvania electric and gas pilots and the deregulated California electric market. QST's electric retail gross margin increased by $212,000 and $261,000 for the quarter and the six months ended June 30, 1998, respectively, as compared to the same periods in 1997. This increase in electric margin is primarily due to participation in the Pennsylvania electric pilot programs and the deregulated California market. Positive electric retail margin was offset by negative electric wholesale trading margin of $10.8 million and $10.9 million for the quarter and six months ended June 30, 1998, respectively, as the result of an unprecedented, sudden increase in wholesale electricity prices during the week of June 22, 1998. In view of the extreme and unprecedented volatility in electricity supply and pricing in the second quarter, QST decided to close its trading positions for the remainder of the summer to avoid further adverse price movements. The impact on wholesale electric gross margin of closing the summer positions was recognized during the second quarter. Natural gas revenues increased approximately $47 million and $222 million during the quarter and six months ended June 30, 1998, respectively, as compared to the same periods in 1997, due primarily to increased wholesale gas trading activity. Negative natural gas gross margin contributed approximately $.1 million and $1.4 million on an after-tax basis to QST's net loss for the quarter and six months ended June 30, 1998, respectively. The negative gas gross margin was primarily due to wholesale natural gas sales and trading transactions by QST Trading. During the first quarter of 1998, wholesale gas trading losses on an after-tax basis were approximately $1.3 million as wholesale gas positions taken in 1997 settled. For the quarter and six months ended June 30, 1997, natural gas gross margin was positive and contributed approximately $.2 million and $.3 million, respectively, to QST's earnings on an after-tax basis. QST's general and administrative expenses have increased for the quarter and six months ended June 30, 1998, compared to the same periods in 1997, due to the increase in the number of QST employees to support the growth in the retail and wholesale operations. Net operating losses are expected to continue in the near term as QST reevaluates its unregulated energy sales and marketing strategy. Results for QST Communications are being reported as discontinued operations in the statements of income. Prior year amounts have been reclassified on a basis consistent with the 1998 presentation (see Note 4. Discontinued Operations). QST Environmental Operations The following table summarizes environmental and engineering services revenue and expenses for the three months and six months ended June 30, 1998 and 1997.
Components of QST Three Months Ended Six Months Ended Environmental Net Income June 30, June 30, 1998 1997 1998 1997 (In thousands) (Unaudited) Revenue: Environmental and engineering services revenue $18,596 $18,245 $36,062 $35,838 Direct non-labor project costs 7,795 5,911 14,658 11,911 ------- ------- ------- ------- Net revenue 10,801 12,334 21,404 23,927 ------- ------- ------- ------- Expenses: Direct salaries, indirect salaries and related benefits 5,319 6,463 10,971 12,987 General and administrative 4,246 5,255 8,893 10,355 Depreciation and amortization 673 1,007 1,368 2,070 ------- ------- ------- ------- Operating expenses 10,238 12,725 21,232 25,412 ------- ------- ------- ------- Interest expense 207 118 455 260 ------- ------- ------- ------- Income (loss) before income taxes 356 (509) (283) (1,745) Income taxes expense (benefit) 157 (116) (81) (521) ------- ------- ------- ------- Net income (loss) from continuing operations 199 (393) (202) (1,224) Income from operations of discontinued business -- 253 -- 155 ------- ------- ------- ------- QST Environmental net income (loss) $ 199 $ (140) $ (202) $(1,069) ======= ======= ======= =======
QST Environmental's quarterly results have been affected by such factors as project delays, which may be caused by delays in regulatory agency approvals or client considerations; the level of subcontractor services; weather, which may limit the amount of time QST Environmental's professionals have in the field; and increased competition in all aspects of the business. QST Environmental's net revenues decreased by $1.5 million, or 12%, for the second quarter and by $2.5 million, or 11%, for the six months ended June 30, 1998, compared to the same periods in 1997. The net revenue decreases for these periods resulted primarily from reduced laboratory revenues as a result of the sale of the Peoria Laboratory and reduced business volume in the remaining Gainesville Laboratory. Consulting revenues for the quarter and six months ended June 30, 1998 decreased by approximately $1 million compared to the corresponding periods in 1997. Direct salaries, indirect salaries and related benefits decreased by $1.1 million, or 18%, for the second quarter and by $2 million, or 16%, for the six months ended June 30, 1998, compared to the same periods in 1997. Salary costs include salaries and related fringe benefits, including employer-paid medical and dental insurance, payroll taxes, paid time off, and 401(k) contributions. This decrease was primarily due to a planned reduction in the number of laboratory and other technical staff to match decreased levels of business activity. General and administrative expenses decreased by $1 million, or 19%, for the three months ended June 30, 1998, and decreased by $1.4 million, or 14%, for the six months ended June 30, 1998, compared to the same periods in 1997. General and administrative expenses include non- billable employee time devoted to marketing, proposals, supervision, and professional development; office supply expenses; and corporate administrative expenses. The decreases for these periods resulted from efforts to control administrative and marketing costs, including lower general and administrative salaries and related benefits expense. In the fourth quarter of 1997, QST Environmental wrote off $22.6 million of unamortized goodwill. Consequently, no amortization is recorded in the quarter ended June 1998. Depreciation expense declined $.3 million due primarily to an increase in fully-depreciated assets coupled with reduced capital expenditures. In November 1997, QST Environmental sold substantially all the assets of ESE Land for $9.5 million in cash and residual interests in three newly-formed limited liability corporations. These activities are shown as discontinued operations in the statements of income. Interest expense increased because, as a result of the ESE Land sale, a portion of interest costs is no longer capitalized. QST Environmental will continue to position itself to take advantage of new market opportunities. Due to the labor intensive nature of QST Environmental's business, it has the ability to adjust staffing levels to recognize changing business conditions. QST Environmental had 524 full-time equivalent employees at June 30, 1998, compared to 636 employees at June 30, 1997. To better utilize QST Environmental's resources as part of CILCORP's commitment to efficiently market non- regulated energy and related services, QST Environmental became a subsidiary of QST effective October 29, 1996. QST Environmental's future business activity and profitability will continue to be impacted by the level of demand for its services, which is affected by government funding levels, the enforcement of various federal and state statutes and regulations dealing with the environment and the use, control, disposal, and clean-up of hazardous wastes. The market for QST Environmental's services is highly competitive; no single entity currently dominates the environmental consulting and engineering services marketplace. Other Businesses Operations The following table summarizes the components of Other Businesses losses for the three months and six months ended June 30, 1998 and 1997.
Components of Other Businesses Three Months Ended Six Months Ended Net Income (Loss) June 30, June 30, 1998 1997 1998 1997 (In thousands) (Unaudited) Revenue: Other revenue $ 4,820 $ 2,089 $10,015 $ 4,889 ------- ------- ------- ------- Expenses: Operating expenses 4,084 2,109 8,647 5,741 Depreciation and amortization 49 48 97 96 Interest expense 1,953 1,238 3,547 2,395 Income and other taxes (869) (880) (1,681) (2,191) ------- ------- ------- ------- Total expenses 5,217 2,515 10,610 6,041 ------- ------- ------- ------- Other businesses net loss $ (397) $ (426) $ (595) $(1,152) ======= ======= ======= =======
Other revenues increased 131% for the three months ended and 105% for the six months ended June 30, 1998, primarily due to increased CVI gas marketing revenue. Operating expenses increased for the quarter and six months ended June 30, 1998, compared to the corresponding periods in 1997, primarily due to increased expenses related to the gas marketing program at CVI, while interest expense increased due to higher average debt balances. The credit for income and other taxes decreased in the quarter and six months ended June 30, 1998, compared to the corresponding periods in 1997, primarily due to a smaller pre-tax loss. PART II. OTHER INFORMATION Item 1: Legal Proceedings Reference is made to "Environmental Matters" under "Item 1. Business" in the Company's 1997 Annual Report on Form 10-K (the "1997 Form 10- K"), and "Note 2. Contingencies," herein, for certain pending legal proceedings and proceedings known to be contemplated by governmental authorities. The Company and its subsidiaries are subject to certain claims and lawsuits in connection with work performed in the ordinary course of their businesses. Except as otherwise referred to above, in the opinion of management, all such claims currently pending either will not result in a material adverse effect on the financial position and results of operations of the Company or are adequately covered by: (i) insurance; (ii) contractual or statutory indemnification; and/or (iii) reserves for potential losses. Item 5: Other Information Illinois Electric Deregulation In December 1997, the Electric Service Customer Choice and Rate Relief Law of 1997 (Customer Choice Law) became effective. The Customer Choice Law began a nine-year transition process to a fully competitive market for electricity, with all customers being able to choose their electricity supplier by May 1, 2002. (Transition charges may be collected through 2006.) The Customer Choice Law also requires residential rate base reductions which vary by utility. CILCO began its initial reduction in its residential base rates with a 2% decrease beginning August 1998. (Refer to the caption "Competition" of the combined CILCORP/CILCO 1997 Form 10-K.) Power Quest Retail Competition Pilot Programs In 1996, to lead the movement toward increased customer choice, CILCO began Power Quest, which consists of two electric pilot retail competition programs and a natural gas pilot retail competition program. The programs offer greater choice to customers and provide the opportunity for CILCO and certain of its electric and natural gas customers to participate in a competitive business environment. The pilot program for CILCO's industrial electric customers ended as scheduled on April 30, 1998. The program allowed CILCO's largest industrial customers (those with peak loads of 10 megawatts or more) to secure all or part of their electric power requirements from suppliers other than CILCO. However, program participants' total purchases from other suppliers were limited to 50 megawatts (10% of CILCO's industrial load) or less at all times. Participating customers began receiving electricity under this Power Quest pilot in May 1996. Seven of the eligible customers elected to participate in this pilot program. Caterpillar Inc., with three eligible accounts, elected to form a strategic alliance with CILCORP and receive value-added energy and environmental products and services rather than taking its entire Power Quest allocation from suppliers other than CILCO. Caterpillar purchased all of its power from CILCO during the first year of the program. During the second year, Caterpillar purchased a portion of its Power Quest allocation off-system and received a correspondingly-reduced level of products and services under the strategic alliance. Based on Power Quest participation levels by eligible industrial customers, CILCORP experienced a reduction of $2.1 million in pre- tax income for the first three months of 1998 (including electric margin lost by CILCO, CVI costs associated with the Caterpillar alliance, and QST margin on sales to Power Quest industrial customers). Costs associated with the Caterpillar alliance are included in Other Businesses Operations. CILCO has offset some of the profit margin lost under Power Quest with increased wholesale electric margin outside its service territory. Six of the Power Quest industrial program participants have signed contracts for electric service with CILCO which extend 18 months or more beyond October 1, 1999, when they would have become eligible to select alternative suppliers. In the other Power Quest electric program, CILCO designated six areas within its service territory as Open Access Sites for up to five years. Based on the current participation level of eligible customers, CILCO anticipates a reduction in pre-tax income of up to $1.3 million on an annual basis. Based upon participation levels by eligible commercial and residential customers, CILCORP experienced a reduction of $.5 million in pre-tax income for the first six months of 1998. Assuming the same Power Quest participation level for all of 1998, CILCORP would experience a reduction to pre-tax income of $1.1 million in 1998. CILCO's gas residential pilot program is a five- year program that allows residential gas customers located in sites designated by CILCO to select their natural gas supplier, with CILCO continuing to provide distribution and metering services. This program did not have a material adverse impact on CILCO's financial position or results of operations for 1997 or the first six months of 1998, nor does management believe this program will have a material adverse impact on CILCO's future financial position or results of operations. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits 27 - Financial data schedules (b) Reports on Form 8-K A Form 8-K was filed on June 29, 1998 to disclose losses relating to wholesale electricity contracts at CILCORP's energy trading subsidiary. A Form 8-K was filed on July 28, 1998 to disclose the sale of the common stock of CILCORP's telecommunications subsidiary, QST Communications Inc. SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CILCORP Inc. (Registrant) Date August 12, 1998 R. O. Viets R. O. Viets President and Chief Executive Officer Date August 12, 1998 T. D. Hutchinson T. D. Hutchinson Controller SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTRAL ILLINOIS LIGHT COMPANY (Registrant) Date August 12, 1998 T. S. Romanowski T. S. Romanowski Vice President and Chief Financial Officer Date August 12, 1998 T. D. Hutchinson T. D. Hutchinson Controller and Manager of Accounting EX-27 2
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000762129 CILCORP INC. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 PER-BOOK 868,142 188,801 186,481 31,652 0 1,275,076 192,567 0 150,291 342,858 22,000 44,120 298,555 44,100 0 20,400 11,513 0 1,948 458 489,124 1,275,076 641,580 902 616,304 617,206 24,374 533 23,841 15,236 8,605 1,599 7,006 16,742 11,706 53,155 .51 .51
EX-27 3
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000018651 CENTRAL ILLINOIS LIGHT COMPANY 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 PER-BOOK 868,142 3,375 100,353 21,770 0 993,640 185,661 0 144,984 330,645 22,000 44,120 267,860 0 0 20,400 0 0 1,948 458 306,209 993,640 265,694 11,826 220,951 232,777 32,917 (436) 32,481 11,236 21,245 1,599 19,646 21,741 9,882 69,717 0 0
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