-----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, CoiNx7Cef9r/QPoVnQBmmkykji02jM3FGDYPXaNsrL+fjedvGExT3z65xZcpbQU1 Cr413asVL3jU4G7/lIPq0Q== 0000762129-96-000023.txt : 19961111 0000762129-96-000023.hdr.sgml : 19961111 ACCESSION NUMBER: 0000762129-96-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961108 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: 1934 Act SEC FILE NUMBER: 001-08946 FILM NUMBER: 96656705 BUSINESS ADDRESS: STREET 1: 300 HAMILTON BLVD STE 300 CITY: PEORIA STATE: IL ZIP: 61602 BUSINESS PHONE: 3096758810 MAIL ADDRESS: STREET 1: 300 HAMILTON BLVD 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: 1934 Act SEC FILE NUMBER: 001-02732 FILM NUMBER: 96656706 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 September 30, 1996 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 November 1, 1996 13,588,898 CENTRAL ILLINOIS LIGHT COMPANY Common stock, no par value, shares outstanding and privately held by CILCORP Inc. at November 1, 1996 13,563,871 CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 INDEX PART I. FINANCIAL INFORMATION Page No. Item 1: Financial Statements CILCORP Inc. Consolidated Balance Sheets 3-4 Consolidated Statements of Income 5 Consolidated Statements of Cash Flows 6-7 CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets 8-9 Consolidated Statements of Income 10 Consolidated Statements of Cash Flows 11-12 Notes to Consolidated Financial Statements CILCORP Inc. and Central Illinois Light Company 13-15 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations CILCORP Inc. and Central Illinois Light Company 16-27 PART II. OTHER INFORMATION Item 1: Legal Proceedings 28 Item 5: Other Information 28-31 Item 6: Exhibits and Reports on Form 8-K 31 Signatures 32-33 CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
September 30, December 31, 1996 1995 ASSETS (Unaudited) Current assets: Cash and temporary cash investments $ 5,982 $ 17,100 Receivables, less reserves of $2,321 and $2,223 53,244 68,479 Accrued unbilled revenue 26,030 42,842 Fuel, at average cost 6,216 11,596 Materials and supplies, at average cost 15,185 16,963 Gas in underground storage, at average cost 22,427 13,592 Prepayments and other 9,100 14,921 ---------- ---------- Total current assets 138,184 185,493 ---------- ---------- Investments and other property: Investment in leveraged leases 131,562 127,141 Cash surrender value of company-owned life insurance, net of related policy loans of $37,820 and $33,211 1,649 1,924 Other investments 5,565 5,392 ---------- ---------- Total investments and other property 138,776 134,457 ---------- ---------- Property, plant and equipment: Utility plant, at original cost Electric 1,181,829 1,142,945 Gas 383,963 379,985 ---------- ---------- 1,565,792 1,522,930 Less - accumulated provision for depreciation 718,029 682,574 ---------- ---------- 847,763 840,356 Construction work in progress 25,206 44,749 Plant acquisition adjustments, being amortized to 1999 2,108 2,642 Other, net of depreciation 21,705 22,774 ---------- ---------- Total property, plant and equipment 896,782 910,521 ---------- ---------- Other assets: Prepaid pension expense 3,683 536 Cost in excess of net assets of acquired businesses, net of accumulated amortization of $4,821 and $4,293 23,317 23,845 Other 31,919 21,219 ---------- ---------- Total other assets 58,919 45,600 ---------- ---------- Total assets $1,232,661 $1,276,071 ========== ========== 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)
September 30, December 31, 1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) Current liabilities: Current portion of long-term debt $ 23,039 $ 19,052 Notes payable 7,800 47,100 Accounts payable 45,617 44,550 Accrued taxes 5,746 5,035 Accrued interest 3,732 10,059 Purchased gas adjustment over-recoveries 726 1,987 Other 13,151 15,259 ---------- ---------- Total current liabilities 99,811 143,042 ---------- ---------- Long-term debt 321,056 344,113 ---------- ---------- Deferred credits and other liabilities: Deferred income taxes 242,868 241,603 Net regulatory liability of regulated subsidiary 68,627 59,482 Deferred investment tax credit 23,222 24,485 Other 38,089 35,248 ---------- ---------- Total deferred credits 372,806 360,818 ---------- ---------- Preferred stock of subsidiary 66,120 66,120 ---------- ---------- Stockholders' equity: Common stock, no par value; authorized 50,000,000 shares - outstanding 13,579,300 and 13,335,606 shares 189,606 179,330 Retained earnings 183,262 182,648 ---------- ---------- Total stockholders' equity 372,868 361,978 ---------- ---------- Total liabilities and stockholders' equity $1,232,661 $1,276,071 ========== ========== 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 Nine Months Ended September 30, September 30, 1996 1995 1996 1995 Revenue: Electric $ 96,247 $104,201 $246,876 $254,443 Gas 18,594 17,834 128,903 101,331 Environmental and engineering services 20,890 33,424 62,745 98,296 Other businesses 2,831 2,115 7,731 6,580 -------- -------- -------- -------- Total 138,562 157,574 446,255 460,650 -------- -------- -------- -------- Operating expenses: Fuel for generation and purchased power 25,958 27,773 76,872 80,192 Gas purchased for resale 6,517 5,342 68,360 44,089 Other operations and maintenance 53,126 58,791 157,002 174,908 Depreciation and amortization 16,505 16,123 49,683 47,753 Taxes, other than income taxes 8,538 9,305 28,830 29,083 -------- -------- -------- -------- Total 110,644 117,334 380,747 376,025 -------- -------- -------- -------- Fixed charges and other: Interest expense 6,948 7,310 21,849 22,218 Preferred stock dividends of subsidiary 795 833 2,396 2,500 Allowance for funds used during construction (15) (10) (85) (307) Other 159 76 568 461 -------- -------- -------- -------- Total 7,887 8,209 24,728 24,872 -------- -------- -------- -------- Income before income taxes 20,031 32,031 40,780 59,753 Income taxes 7,559 12,596 15,388 23,169 -------- -------- -------- -------- Net income available for common stockholders $ 12,472 $ 19,435 $ 25,392 $ 36,584 ======== ======== ======== ======== Average common shares outstanding 13,536 13,191 13,444 13,104 Net income per common share $ .92 $ 1.47 $ 1.89 $ 2.79 Dividends per common share $ .615 $ .615 $ 1.845 $ 1.845 *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)
Nine Months Ended September 30, 1996 1995 Cash flows from operating activities: Net income before preferred dividends $ 27,788 $ 39,084 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash lease income and investment income (4,421) (4,984) Depreciation and amortization 49,683 47,753 Deferred income taxes, investment tax credit and regulatory liability of subsidiary, net 9,147 (2,273) Changes in operating assets and liabilities: Decrease in accounts receivable and accrued unbilled revenue 32,047 3,716 (Increase) decrease in inventories (1,677) 4,417 Increase (decrease) in accounts payable 1,067 (14,220) Increase in accrued taxes 711 1,929 (Increase) decrease in other assets (7,498) 2,152 Increase in other liabilities (6,855) (3,498) ------- ------- Total adjustments 72,204 34,992 ------- ------- Net cash provided by operating activities 99,992 74,076 ------- ------- Cash flows from investing activities: Additions to plant (34,775) (55,601) Proceeds from sale of long-term investments -- 872 Other (1,067) (3,678) ------- ------- Net cash used in investing activities (35,842) (58,407) ------- ------- Cash flows from financing activities: Net increase (decrease) in short-term debt (39,300) 5,535 Increase in long-term debt -- 19,766 Repayment of long-term debt (19,070) (17,927) Common dividends paid (24,778) (24,152) Preferred dividends paid (2,396) (2,500) Proceeds from issuance of stock 10,276 7,580 ------- ------- Net cash used in financing activities (75,268) (11,698) ------- ------- Net (decrease) increase in cash and temporary cash investments (11,118) 3,971 Cash and temporary cash investments at beginning of year 17,100 1,604 ------- ------- Cash and temporary cash investments at September 30 $ 5,982 $ 5,575 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $26,818 $26,153 Income taxes 13,570 20,434 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets (In thousands)
September 30, December 31, 1996 1995 ASSETS (Unaudited) Utility plant, at original cost: Electric $1,181,829 $1,142,945 Gas 383,963 379,985 ---------- ---------- 1,565,792 1,522,930 Less - accumulated provision for depreciation 718,029 682,574 ---------- ---------- 847,763 840,356 Construction work in progress 25,206 44,749 Plant acquisition adjustments, net of amortization 2,108 2,642 ---------- ---------- Total utility plant 875,077 887,747 ---------- ---------- Other property and investments: Cash surrender value of company-owned life insurance, net of related policy loans of $37,820 and $33,211 1,649 1,924 Other 1,613 1,623 ---------- ---------- Total other property and investments 3,262 3,547 ---------- ---------- Current Assets: Cash and temporary cash investments 2,003 16,556 Receivables, less reserves of $546 and $650 34,444 42,312 Accrued unbilled revenue 16,461 28,891 Fuel, at average cost 6,216 11,596 Materials and supplies, at average cost 15,185 16,541 Gas in underground storage, at average cost 21,838 13,592 Prepaid taxes -- 7,978 Other 3,663 10,300 ---------- ---------- Total current assets 99,810 147,766 ---------- ---------- Deferred debits: Unamortized loss on reacquired debt 5,686 6,029 Unamortized debt expense 2,245 2,374 Prepaid pension cost 3,683 536 Other 20,944 11,992 ---------- ---------- Total deferred debits 32,558 20,931 ---------- ---------- Total assets $1,010,707 $1,059,991 ========== ========== 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)
September 30, December 31, 1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY (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 137,116 140,814 ---------- ---------- Total common shareholder's equity 322,777 326,475 Preferred stock without mandatory redemption 44,120 44,120 Preferred stock with mandatory redemption 22,000 22,000 Long-term debt 278,428 298,397 ---------- ---------- Total capitalization 667,325 690,992 ---------- ---------- Current liabilities: Current maturities of long-term debt 20,000 16,000 Notes payable 500 24,600 Accounts payable 40,193 40,483 Accrued taxes 1,064 5,917 Accrued interest 4,890 8,508 Purchased gas adjustment over-recoveries 726 1,987 Other 5,087 8,288 ---------- ---------- Total current liabilities 72,460 105,783 ---------- ---------- Deferred liabilities and credits: Accumulated deferred income taxes 142,033 144,378 Regulatory liability, net 68,627 59,482 Investment tax credits 23,222 24,485 Capital lease obligation 2,725 3,025 Other 34,315 31,846 ---------- ---------- Total deferred liabilities and credits 270,922 263,216 ---------- ---------- Total capitalization and liabilities $1,010,707 $1,059,991 ========== ========== 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 Nine Months Ended September 30, September 30, 1996 1995 1996 1995 Operating revenue: Electric $ 96,247 $104,201 $246,876 $254,443 Gas 18,594 17,834 128,903 101,331 -------- -------- -------- -------- Total operating revenues 114,841 122,035 375,779 355,774 -------- -------- -------- -------- Operating expenses: Cost of fuel 21,788 23,667 68,144 70,783 Cost of gas 6,352 5,342 68,195 44,089 Purchased power 3,615 4,106 7,987 9,409 Other operations and maintenance 27,635 27,651 83,367 82,205 Depreciation and amortization 15,009 14,488 45,074 42,805 Income taxes 10,252 12,437 22,394 24,057 Other taxes 7,701 8,217 25,749 25,397 -------- -------- -------- -------- Total operating expenses 92,352 95,908 320,910 298,745 -------- -------- -------- -------- Operating income 22,489 26,127 54,869 57,029 -------- -------- -------- -------- Other income and deductions: Cost of equity funds capitalized 8 -- 46 -- Company-owned life insurance, net (160) (76) (569) (461) Other, net (288) (116) (276) (16) -------- -------- -------- -------- Total other income and (deductions) (440) (192) (799) (477) -------- -------- -------- -------- Income before interest expense 22,049 25,935 54,070 56,552 -------- -------- -------- -------- Interest expenses: Interest on long-term debt 5,250 5,242 15,777 14,992 Cost of borrowed funds capitalized (7) (10) (39) (307) Other 572 597 1,870 2,605 -------- -------- -------- -------- Total interest expense 5,815 5,829 17,608 17,290 -------- -------- -------- -------- Net income 16,234 20,106 36,462 39,262 -------- -------- -------- -------- Dividends on preferred stock 795 833 2,396 2,500 -------- -------- -------- -------- Net income available for common stock $ 15,439 $ 19,273 $ 34,066 $ 36,762 ======== ======== ======== ======== 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)
Nine Months Ended September 30, 1996 1995 Cash flows from operating activities: Net income before preferred dividends $ 36,462 $ 39,262 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 45,608 43,338 Deferred income taxes, investment tax credit and regulatory liability, net 5,538 (4,768) Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 7,868 (6,260) (Increase) decrease in fuel, materials and supplies, and gas in underground storage (1,509) 5,385 Decrease in unbilled revenue 12,430 6,306 (Decrease) in accounts payable (290) (14,059) (Decrease) in accrued taxes and interest (8,472) (5,835) Capital lease payments 484 428 Decrease in other current assets 14,616 3,279 (Decrease) in other current liabilities (4,462) (5,334) (Increase) in other non-current assets (10,082) (1,542) Increase in other non-current liabilities 1,095 1,845 -------- -------- Net cash provided by operating activities 99,286 62,045 -------- -------- Cash flows from investing activities: Capital expenditures (32,132) (51,689) Cost of equity funds capitalized (46) -- Other (914) (3,217) -------- -------- Net cash used in investing activities (33,092) (54,906) -------- -------- Cash flows from financing activities: Common dividends paid (37,767) (16,056) Preferred dividends paid (2,396) (2,500) Long-term debt issued -- 19,766 Long-term debt retired (16,000) -- Payments on capital lease obligation (484) (428) Decrease in short-term borrowing (24,100) (7,900) -------- -------- Net cash used in financing activities (80,747) (7,118) -------- -------- Net (decrease) increase in cash and temporary cash investments (14,553) 21 Cash and temporary cash investments at beginning of year 16,556 629 -------- -------- Cash and temporary cash investments at September 30 $ 2,003 $ 650 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of cost of borrowed funds capitalized) $ 21,724 $ 21,021 Income taxes 20,066 26,290 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), Environmental Science & Engineering, Inc. (ESE), QST Enterprises Inc. (QST) and CILCORP's other subsidiaries after elimination of significant intercompany transactions. Effective October 29, 1996, ESE became a subsidiary of QST. CILCORP owns 100% of the common stock of CILCO. All of the other first-tier subsidiaries are wholly-owned by CILCORP. The consolidated financial statements of CILCO include the accounts of CILCO and its subsidiaries, CILCO Exploration and Development Company and CILCO Energy Corporation. 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 1995 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. Gas Pipeline Supplier Transition Costs CILCO's natural gas suppliers are subject to various Federal Energy Regulatory Commission (FERC) orders and settlements related to the transition to a more competitive natural gas industry. FERC Order No. 636 unbundled the sale, transportation and storage functions of interstate gas pipelines, and also allows pipelines to recover prudently incurred transition costs from gas distribution companies. On July 16, 1996, the United States Court of Appeals affirmed Order No. 636 "in its broad contours and in most of its specifics," but remanded parts of Order No. 636 for further explanation including the FERC's failure to allocate any part of gas supply realignment costs to the pipelines. FERC Order No. 500 and Order No. 528 allow interstate gas pipelines to bill gas distribution companies for take-or-pay and other charges related to the transition to a more competitive gas industry. During the nine months ended September 30, 1996, CILCO paid $1.2 million to interstate gas pipelines for transition costs. These costs have been, or will be, recovered from CILCO's customers through its purchased gas adjustment clause (PGA). Since these costs are recoverable from customers, management does not expect gas pipeline supplier transition costs to materially impact CILCO's financial position or results of operations. For these transition costs, CILCO has recorded a regulatory asset and a corresponding liability of $2.2 million on its Balance Sheets as of September 30, 1996, of which $.7 million will be due in one year. The remaining $1.5 million represents the minimum amount of the estimated range of such future direct billings from pipelines which CILCO expects to receive related to take-or-pay and other transition costs. NOTE 3. Contingencies Neither CILCORP, CILCO, nor any of their subsidiaries has been identified as a potentially responsible party (PRP) under federal or state environmental laws. 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 nine months ended September 30, 1996, CILCO paid approximately $.4 million to outside parties to investigate and/or test two former gas manufacturing plant sites. In 1994, CILCO completed remediation work at one of those two sites. CILCO plans to begin remediation work at the other site in 1997. CILCO has not determined the ultimate extent of any CILCO liability or the cost of any remediation of the remaining two sites. However, as described in Part II. Item 1: Legal Proceedings, a suit against CILCO in connection with one of the sites was recently dismissed. CILCO expects to spend approximately $.1 million for site monitoring, legal fees and feasibility studies during the remainder of 1996. A $4.0 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. Coal tar remediation costs incurred through September 1996 have been deferred on the Balance Sheets, net of amounts recovered from customers. Through September 30, 1996, CILCO has recovered approximately $4.8 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 costs in the year they are incurred. Under these circumstances, management believes that the cost of any future coal tar remediation will not have a material adverse effect on CILCO's financial position or results of operations. NOTE 4. Commitments In August 1990, CILCO entered into a firm, wholesale power purchase agreement with Central Illinois Public Service Company (CIPS). This agreement provides for a minimum contract delivery rate of 80 megawatts (MW) of capacity through May 1997, then increasing to 90 MW until the contract expires in May 1998. In March 1995, CILCO and CIPS renegotiated a November 1992 limited-term power agreement. This renegotiated agreement, which expires in May 2009, provides for CILCO to purchase 150 MW of CIPS' capacity from June 1998 through May 2002, and 50 MW from June 2002 through May 2009. This renegotiated agreement was subject to the ICC's final approval of CILCO's 1995 electric least cost energy plan, which was granted on May 8, 1996. NOTE 5. Open Access Electric Transmission On April 24, 1996 the FERC issued Order No. 888, Order No. 889, and a Notice of Proposed Rulemaking (NOPR). Order No. 888 requires all public utilities that own, operate or control interstate electric transmission facilities to file tariffs that will offer others the same transmission services that they provide themselves and finalizes the conditions under which a utility may seek recovery of stranded costs from wholesale jurisdictional customers. Order No. 889 requires public utilities to implement standards of conduct and an Open Access Transmission Same-time Information System (OASIS). The NOPR requests comments regarding the potential replacement of the single tariff contained in Order No. 888 with a capacity reservation tariff. CILCO filed an open access tariff under rulemaking provisions prior to the issuance of Order No. 888. This tariff was revised to comply with the final rule in Order No. 888. The FERC granted a two- step extension of the implementation schedule for compliance with the Phase 1 OASIS requirements and Standards of Conduct. Under the extension, OASIS operations are to begin on a test basis starting December 2, 1996, and full commercial operations and compliance with the Standards of Conduct are to begin by January 3, 1997. CILCO is continuing to evaluate modifications to the Company's Standards of Conduct required by Order 889. The Company's wholesale electric merchant function has been transferred internally to the Energy Supply Group to comply with the requirements of Order 889. CILCO is currently working with the Mid-America Interconnected Network (MAIN) and intends to rely on MAIN to calculate Available Transfer Capability and provide an OASIS as required by Order No. 889. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CILCORP Inc. (CILCORP or the Company) is the parent of three core operating businesses, Central Illinois Light Company (CILCO), Environmental Science & Engineering, Inc. (ESE) 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. ESE is a national environmental consulting, engineering and analytical services firm serving governmental, industrial and commercial customers. ESE, through its subsidiaries, also acquires environmentally impaired property for remediation and resale. Effective October 29, 1996, ESE became a subsidiary of QST. QST, formed in December 1995, provides energy and energy-related services to a broad spectrum of retail customers. QST is also engaged in the business of fiber optic and advanced Internet-based communication services and products through one of its wholly-owned subsidiaries. CIM invests in a diversified portfolio of long-term financial investments which currently includes leveraged leases, energy-related projects and affordable residential housing. CVI invests in ventures in energy, biotechnology, and health care, and in economic development projects in Central Illinois. CVI, through one of its subsidiaries, also provides the funding for CILCORP's strategic alliances with Caterpillar, Inc. and other industrial customers (see Part II. Item 5: Other Information, CILCO Electric Pilot Programs). 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. Certain material contingencies are also described in Note 3 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 (including those of the FERC, ICC and SEC) with respect to rates, industry structure and recovery of various costs incurred by CILCO in the course of its business; the extent and effect of participation by CILCO's customers in its Power Quest programs; 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 ESE's services; weather conditions; the extent and pace of development of competition for retail and wholesale customers, which may particularly affect the future performance of QST Enterprises; pricing and transportation of commodities; market demand for energy from plants or facilities and for environmental consulting 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 debt as it matures. 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 $50 million on a short-term basis. On September 30, 1996, CILCORP had committed bank lines of credit of $50 million, of which $7.3 million was outstanding. During the first three quarters of 1996, CILCORP issued 243,694 shares of common stock at an average price of $42.17 per share through the CILCORP Inc. Automatic Reinvestment and Stock Purchase Plan (DRIP) and the CILCO Employees' Savings Plan (ESP). Depending on market conditions, CILCORP may issue additional shares of common stock through the DRIP, the ESP or other stock offerings. On July 26, 1996, the CILCORP Board of Directors authorized management to develop a direct registration program to allow investors to make initial purchases of CILCORP common stock directly from the company without utilizing the services of a broker. Implementation of such a program is not expected until late in the fourth quarter of 1996, at the earliest. The new direct registration program will likely incorporate the elements of the existing DRIP. The proceeds from any newly issued stock will be used to retire CILCORP debt, to meet working capital and capital expenditure requirements at subsidiaries other than CILCO and for other corporate purposes. At September 30, 1996, CILCORP had $42 million of medium-term notes outstanding under its currently authorized $75 million medium-term note program. Three million dollars of medium-term notes were retired in July 1996. CILCORP may issue additional notes in the future under this program to retire maturing debt and to provide funds for other corporate purposes. CILCO Capital expenditures totaled $32.2 million for the nine months ended September 30, 1996. Capital expenditures are anticipated to be approximately $17.9 million for the remainder of 1996. Capital expenditures for the years 1997 and 1998 are estimated to be $49.7 million and $49.5 million, respectively. Currently, CILCO does not plan to issue long-term debt during the remainder of 1996. CILCO intends to finance its 1996 and 1997 capital expenditures with funds provided by operations. At September 30, 1996, CILCO had committed bank lines of credit aggregating $30 million, all of which were unused. CILCO uses these lines of credit to support issuance of short-term commercial paper. CILCO had $.5 million of commercial paper outstanding at September 30, 1996 and expects to issue commercial paper periodically throughout the remainder of 1996. ESE For the quarter ended September 30, 1996, ESE's expenditures for capital additions and improvements were approximately $35,000. Capital expenditures for the remainder of 1996 are expected to be $100,000. In addition, through its subsidiary, ESE Land Corporation, ESE spent $965,000 to acquire land for remediation and resale. On October 1, 1996, ESE spent $3.7 million to acquire property through ESE Land Corporation. At September 30, 1996, ESE had borrowings of $20 million from CILCORP, and advances to CILCORP of $5.1 million. ESE also has a $15 million line of credit from CILCORP which was extended through May 1998. At September 30, 1996, this line of credit was not in use. ESE has a $10 million bank line of credit, of which $4.4 million was outstanding at September 30, 1996, to collateralize performance bonds issued in connection with ESE projects. QST Capital expenditures totaled approximately $2.3 million for the nine months ended September 30, 1996, and are anticipated to be approximately $1 million for the remainder of 1996, primarily for construction of fiber optic and other communications facilities. QST expects to finance new investments and working capital needs during the remainder of 1996 with funds provided by CILCORP. CIM At September 30, 1996, CIM had outstanding debt of $23.3 million, consisting of $20 million borrowed from CILCORP and $3.3 million borrowed from external sources. On October 15, 1996, CIM committed $7.5 million to fund an affordable housing tax credit investment. Of the $7.5 million total commitment, $2.5 million was invested on October 15. An additional $3.4 million will be funded later in 1996, with the remainder to be paid in the first half of 1997. CIM funded this investment through borrowings from CILCORP. CIM also expects to commit to invest in three additional affordable housing tax credit funds prior to December 31, 1996. CIM's anticipated investment in these funds is approximately $8.3 million. CIM expects to fund approximately $4 million of the $8.3 million commitment in 1996 and substantially all of the remainder in 1997. These investments will be funded through borrowings from CILCORP. CIM expects to finance new investments and working capital needs during 1996 with a combination of funds generated internally and with funds provided by CILCORP. CVI CVI expects to finance its activities and working capital needs during the remainder of 1996 with a combination of funds generated internally and with funds provided by CILCORP. Results of Operations The following table summarizes net income of CILCO, ESE, QST and Other Businesses for the three months and nine months ended September 30, 1996 and 1995.
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 (In thousands) (Unaudited) Core Businesses: CILCO Electric operating income $22,687 $26,079 $43,503 $47,004 Gas operating income (loss) (198) 48 11,366 10,025 ------- ------- ------- ------- Total utility operating income 22,489 26,127 54,869 57,029 Utility other income and deductions (6,255) (6,021) (18,407) (17,767) Preferred stock dividends of CILCO (795) (833) (2,396) (2,500) ------- ------- ------- ------- Total utility net income 15,439 19,273 34,066 36,762 ESE ESE net income (loss) (715) 413 (3,878) 333 QST QST net loss (787) -- (2,148) -- ------- ------- ------- ------- Total core business income 13,937 19,686 28,040 37,095 Other businesses: Other businesses net loss (1,465) (251) (2,648) (511) ------- ------- ------- ------- Consolidated net income available to common shareholders $12,472 $19,435 $25,392 $36,584 ======= ======= ======= =======
CILCO Electric Operations The following table summarizes the components of CILCO electric operating income for the three months and nine months ended September 30, 1996 and 1995:
Three Months Ended Nine Months Ended Components of Electric September 30, September 30, Operating Income 1996 1995 1996 1995 (In thousands) (Unaudited) Revenue: Electric retail $ 92,541 $103,214 $236,887 $251,108 Sales for resale 3,706 987 9,989 3,335 -------- -------- -------- -------- Total revenue 96,247 104,201 246,876 254,443 -------- -------- -------- -------- Cost of sales: Cost of fuel 21,788 23,667 68,144 70,783 Purchased power expense 3,615 4,106 7,987 9,409 Revenue taxes 4,796 4,686 11,688 11,164 -------- -------- -------- -------- Total cost of sales 30,199 32,459 87,819 91,356 -------- -------- -------- -------- Gross margin 66,048 71,742 159,057 163,087 -------- -------- -------- -------- Operating expenses: Other operation and maintenance 19,539 19,640 59,192 57,928 Depreciation and amortization 10,718 10,397 32,203 30,849 Income and other taxes 13,104 15,626 24,159 27,306 -------- -------- -------- -------- Total operating expenses 43,361 45,663 115,554 116,083 -------- -------- -------- -------- Electric operating income $ 22,687 $ 26,079 $ 43,503 $ 47,004 ======== ======== ======== ========
Electric gross margin decreased 8% for the quarter and 2% for the nine months ended September 30, 1996, compared to the same periods in 1995. Retail kilowatt hour (Kwh) sales for these same periods decreased 12% and 5%, respectively. The decreases in retail Kwh sales were due partially to industrial sales decreases of 10% for the quarter and nine months ended September 30, 1996, compared to the same periods in 1995. The decreases in retail Kwh sales were also due to decreases in residential sales. Residential sales for the same periods decreased 18% and 4%, respectively, while commercial sales decreased 7% for the quarter and increased 1% for the nine months ended September 30, 1996 compared to the same period in 1995. Industrial sales decreases were due primarily to decreased demand by several large customers and to customers switching to off- system suppliers under CILCO's Power Quest program (see Part II. Item 5: Other Information, CILCO Electric Pilot Programs). Residential and commercial sales decreases for the quarter and residential sales decreases for the nine months ended September 30 were primarily due to milder weather. Cooling degree days were 38% and 26% lower, respectively, for both the quarter and nine months ended September 30, 1996, compared to the same periods in 1995. A write-off of excess materials and supplies as part of an inventory reduction program contributed to the reduction in electric retail revenue (see Part II. Item 5: Other Information, Corporate Repositioning) during the nine months ended September 30, 1996, compared to the same periods in 1995. The overall level of business activity in CILCO's service territory and weather conditions are expected to continue to be the primary factors affecting electric sales in the near term. CILCO's electric sales may also be affected in the near term by the Power Quest electric pilot programs (see Part II. Item 5: Other Information, CILCO Electric Pilot Programs) and in the long term by changes in regulation and increased competition in the electric utility industry (see Part II. Item 5: Other Information, Competition). Sales for resale increased during the quarter and nine months ended September 30, 1996, due to lower production costs at CILCO, higher demand for electricity from neighboring utilities and expanding electric markets outside of CILCO's service territory. CILCO expects increased competition in the market for sales for resale and purchased power. Substantially all of CILCO's electric generating capacity is coal-fired. The cost of fuel decreased 8% for the quarter and 4% for the nine months ended September 30, 1996, compared to the same periods in 1995. The decreases were due to lower coal and transportation costs. Overall Kwh generated decreased 3% for the quarter and increased 5% for the nine months ended September 30, 1996, compared to the same periods in 1995. Purchased power decreased for the quarter and nine months ended September 30, 1996, compared to the same periods in 1995. 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. Costs and savings realized from the purchase of power are passed through to CILCO's customers via the fuel adjustment clause (FAC). The FAC allows CILCO to pass increases or decreases in the cost of fuel through to customers. Other operation and maintenance expenses decreased 1% for the quarter and increased 2%, for the nine months ended September 30, 1996, compared to the same periods in 1995. The decrease for the quarter was primarily due to decreased employee salaries that were partially offset by increases in consulting fees and uncollectible accounts expenses. The increase for the nine months ended September 30, 1996 was primarily due to increased consulting fees, tree trimming expenses and uncollectible accounts expenses that were partially offset by decreases in employee salary and wage expense (see Part II. Item 5: Other Information, Corporate Repositioning). Depreciation and amortization expense increased, reflecting additions and replacements of utility plant at costs in excess of the original cost of the property retired, and the increased amortization associated with the addition of CILCO's new customer information system in October 1995. Income and other taxes expense decreased primarily due to lower pre-tax operating income. CILCO Gas Operations The following table summarizes the components of CILCO gas operating income for the three months and nine months ended September 30, 1996 and 1995:
Three Months Ended Nine Months Ended Components of Gas September 30, September 30, Operating Income 1996 1995 1996 1995 (In thousands) (Unaudited) Revenue: Sale of gas $17,033 $15,999 $122,901 $ 94,950 Transportation services 1,561 1,835 6,002 6,381 ------- -------- -------- ------- Total revenue 18,594 17,834 128,903 101,331 ------- -------- -------- -------- Cost of sales: Cost of gas 6,352 5,342 68,195 44,089 Revenue taxes 507 521 5,560 4,841 ------- -------- -------- -------- Total cost of sales 6,859 5,863 73,755 48,930 ------- -------- -------- -------- Gross margin 11,735 11,971 55,148 52,401 ------- -------- -------- -------- Operating expenses: Other operation and maintenance 8,096 8,011 24,175 24,277 Depreciation and amortization 4,291 4,091 12,871 11,956 Income and other taxes (454) (179) 6,736 6,143 ------- -------- -------- -------- Total operating expenses 11,933 11,923 43,782 42,376 ------- -------- -------- -------- Gas operating income (loss) $ (198) $ 48 $ 11,366 $ 10,025 ======= ======== ======== ========
Gas gross margin decreased 2% for the quarter and increased 5% for the nine months ended September 30, 1996, compared to the same periods in 1995. Retail sales increased 6% and 14% for the quarter and nine months ended September 30, 1996, respectively, compared to 1995. A 15% decrease in revenue from transportation services offset the increased margin from increased retail sales for the third quarter. Residential sales remained constant for the quarter and increased 11% for the nine months ended September 30, 1996. Commercial sales increased 16% and 17% for the quarter and nine months ended September 30, 1996, respectively, compared to 1995, due to customers switching from gas transportation to CILCO system supply. Heating degree days were 19% lower for the quarter and 12% higher for the nine months ended September 30, 1996, compared to the same periods in 1995. The overall level of business activity in CILCO's service territory and weather conditions are expected to continue to be primary factors affecting gas sales in the near term. CILCO's gas sales may also be affected in the near term by the Power Quest gas pilot program (see Part II. Item 5: Other Information, CILCO Gas Pilot Program). In the long term, CILCO natural gas sales may be affected by further deregulation in the natural gas industry. Revenue from gas transportation services decreased 15% and 6%, while sales volumes decreased 16% and 8% for the quarter and nine months ended September 30, 1996, respectively, compared to the same periods in 1995. Transportation revenues and volumes declined primarily due to decreased purchases of gas by industrial transportation customers from suppliers other than CILCO and to commercial and industrial customers switching back to CILCO system supply. The cost of gas increased 19% for the quarter and 55% for the nine months ended September 30, 1996, compared to the same periods in 1995. This increase was primarily due to increased retail sales and higher natural gas prices from CILCO's suppliers. The higher natural gas prices, which contributed to the increase in gas retail revenue, were passed through to CILCO's gas customers via the Purchased Gas Adjustment Clause (PGA). The PGA is the mechanism used to pass increases or decreases in the cost of natural gas through to customers. Other operation and maintenance expenses remained relatively constant for the quarter and nine months ended September 30, 1996, compared to the same periods in 1995. Increased consulting fees and uncollectible accounts expenses were offset by decreases in salary and wage expense (see Part II. Item 5: Other Information, Corporate Repositioning). Depreciation and amortization expense increased, reflecting additions and replacements of utility plant at costs in excess of the original cost of the property retired, and the addition of CILCO's new customer information system in October 1995. Income and other taxes expense decreased for the quarter ended September 30, 1996, primarily due to lower pre-tax operating income. CILCO Other Income and Deductions and Interest Expense The following table summarizes other income and deductions and interest expense for the three months and nine months ended September 30, 1996 and 1995:
Three Months Ended Nine Months Ended Components of Other Income and September 30, September 30, Deductions and Interest Expense 1996 1995 1996 1995 (In thousands) (Unaudited) Net interest expense $(5,694) $ (5,825) $(17,106) $(17,500) Income taxes 859 603 2,155 1,708 Other (1,420) (799) (3,456) (1,975) ------- -------- -------- -------- Other income (deductions) $(6,255) $ (6,021) $(18,407 $(17,767) ======= ======== ======== ========
Net interest expense for the quarter ended September 30, 1996, compared to the same period in 1995, decreased primarily due to increased investment interest income. For the nine months ended September 30, 1996, compared to the same period in 1995, net interest expense decreased primarily due to increased investment interest income and the interest resulting from a settlement in 1995 with the Illinois Department of Revenue relating to an audit of the Illinois gross receipts tax. Higher long-term debt interest expense during 1996 partially offset the decrease. Other deductions for the quarter and nine months ended September 30, 1996, compared to the same periods in 1995, increased primarily due to increased advertising expense and corporate contributions and the gain on the sale of a parcel of land at the former R. S. Wallace generating plant site during 1995. ESE Operations The following table summarizes the components of the environmental and engineering services results for the three months and nine months ended September 30, 1996 and 1995:
Three Months Ended Nine Months Ended Components of ESE September 30, September 30, Net Income (Loss) 1996 1995 1996 1995 (In thousands) (Unaudited) Revenue: Environmental and engineering services revenue $ 20,890 $ 33,424 $ 62,745 $ 98,296 Direct non-labor project costs 6,641 13,576 18,507 38,193 -------- -------- -------- -------- Net revenue 14,249 19,848 44,238 60,103 -------- -------- -------- -------- Expenses: Direct salaries and other costs 7,324 9,311 23,617 29,626 General and administrative 6,448 7,802 21,737 23,600 Depreciation and amortization 1,244 1,409 3,871 4,268 -------- -------- -------- -------- Operating expenses 15,016 18,522 49,225 57,494 -------- -------- -------- -------- Interest expense 225 464 861 1,510 -------- -------- -------- -------- Income(loss) before income taxes (992) 862 (5,848) 1,099 Income taxes (277) 449 (1,970) 766 -------- -------- -------- -------- ESE net income (loss) $ (715) $ 413 $ (3,878) $ 333 ======== ======== ======== ========
ESE's quarterly results in recent periods have been affected by such things 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 ESE professionals have in the field; corporate repositioning costs; and increased competition in all aspects of the business. Accordingly, results from one quarter are not necessarily indicative of results for any other quarter or for the year. ESE's net revenues decreased by $5.6 million or 28% for the third quarter and by $15.9 million or 26% for the nine months ended September 30, 1996, compared to the same periods in 1995. The net revenue decreases for these periods resulted from ongoing changes in environmental regulatory requirements of many states, funding delays at the federal level and increased competition in the consulting and laboratory businesses. Additionally, the 1995 third quarter revenue included $1.7 million from the resale of property owned by an ESE subsidiary, Savannah Resources, Inc. Direct salaries and other expenses include the cost of professional and technical staff and other costs billable to customers. These costs include salaries and related fringe benefits, including employer paid medical and dental insurance, payroll taxes, paid time off, and 401(k) contributions. Direct and indirect salary expense decreased by $2 million or 21% for the third quarter and by $6 million or 20% for the nine months ended September 30, 1996, compared to the same periods in 1995. This decrease is primarily due to a reduction in the number of technical staff to match decreased levels of business activity. General and administrative expenses include non-billable employee time devoted to marketing, proposals, supervision, and professional development; supply expenses; and corporate administrative expenses. General and administrative expenses decreased by $1.4 million or 17% for the three months ended September 30, 1996, and decreased by $1.9 million or 8% for the nine months ended September 30, 1996. The decreases for these periods resulted from lower general and administrative salary and related benefit expense, and cost controls. Offsetting the decrease for the nine months ended September 30, 1996 are severance costs related to the reduction in the work force and other nonrecurring expenses totaling approximately $1.3 million. During the month of September, ESE sold its subsidiary, OES, Inc., at a pre-tax loss of approximately $14,000. This subsidiary was formed in 1995 to clean up unexploded artillery, ammunition, explosive waste and debris on military bases. OES completed a major contract in 1996, but was unsuccessful in winning sufficient contracts to maintain its profitability. As a result, operations were scaled back throughout the third quarter prior to its sale. ESE will continue to position itself to take advantage of new market opportunities. For example, ESE has formed an alliance with an engineering/construction company to focus on environmental consulting for clients on large remediation projects. ESE may also collaborate with QST to provide environmental consulting and laboratory services for QST customers. The bundled services that QST will offer its customers will include the environmental consulting capabilities of ESE. Due to the labor intensive nature of ESE's business, ESE has the ability to adjust staffing levels to recognize changing business conditions. ESE had 780 full-time equivalent employees at September 30, 1996, compared to 1,087 at September 30, 1995. In order to better utilize ESE's resources as part of CILCORP's commitment to non-regulated energy and services businesses, ESE became a subsidiary of QST effective October 29, 1996. QST Operations QST Enterprises Inc. was formed in December 1995 to facilitate CILCORP's expansion into non-regulated energy and related services businesses. QST provides energy and energy-related services to a broad spectrum of retail customers. QST is also engaged in the business of fiber optic and advanced Internet-based communication services and products through one of its wholly- owned subsidiaries. QST's initial focus is to compete against energy suppliers who may participate in CILCO's Power Quest programs (see Part II. Item 5: Other Information, CILCO Electric Pilot Programs and CILCO Gas Pilot Program). QST will also compete against marketers to provide energy and services to customers of utilities and other energy providers which will offer, or be required to offer, similar retail competition programs, and to sell energy to customers who may already have the ability to choose their energy supplier. QST provides a portfolio of non- regulated, energy-related products and services to customers and intends to supplement its competencies through selected acquisitions of other energy services and marketing companies aimed at broadening its customer base. Power Quest was approved by the ICC on March 13, 1996. QST began delivery of electricity in May 1996 to customers participating in Power Quest, and in June 1996 began delivery of energy to a customer participating in another Illinois utility's retail competition pilot program. At September 30, 1996, QST had two wholly-owned subsidiaries -- QST Energy Inc. and QST Communications Inc. Effective October 29, 1996, ESE became a wholly- owned subsidiary of QST (see ESE Operations). QST Communications Inc. is engaged in the business of fiber optic communication through a fiber optic loop it is constructing in Peoria, Illinois. In October 1996, QST Communications Inc. and CyberDesic Communications Corporation, a Peoria-based provider of Internet services, agreed to jointly develop and market advanced Internet-based communications and information products and services. QST Energy Inc. has one wholly-owned subsidiary -- QST Energy Trading Inc. On March 14, 1996, the FERC approved a request by QST Energy Trading Inc. to purchase, sell and broker energy and capacity at market-based rates as a wholesale power marketer. As part of this authorization, QST Energy Trading Inc. can purchase and sell power to QST Energy Inc. which, in turn, can sell power to retail customers. QST's revenues from the sale of electricity and gas to customers participating in CILCO's Power Quest programs and another Illinois utility's retail competition pilot program were approximately $780,000 and $1 million, respectively, for the third quarter and nine months ended September 30, 1996. QST had net losses for the three months and nine months ended September 30, 1996, of approximately $1.5 million and $2.6 million, respectively, caused primarily by outside services and administrative and general expenses which are not being covered by revenues at this early stage of QST's development. Other Businesses Operations The following table summarizes the components of Other Businesses losses for the three months and nine months ended September 30, 1996 and 1995.
Three Months Ended Nine Months Ended Components of Other Businesses September 30, September 30, Net Income (Loss) 1996 1995 1996 1995 (In thousands) (Unaudited) Revenue: Other revenue $ 2,133 $ 2,115 $ 6,808 $ 6,580 -------- -------- -------- -------- Expenses: Operating Expenses 3,686 493 6,943 2,179 Depreciation and amortization 58 49 163 146 Interest expense 881 1,457 3,726 4,540 Income and other taxes (1,027) 367 (1,376) 226 -------- -------- -------- -------- Total expenses 3,598 2,366 9,456 7,091 -------- -------- -------- -------- Other businesses net loss $ (1,465) $ (251) $ (2,648) $ (511) ======== ======== ======== ========
Other revenues remained relatively constant for the three months and nine months ended September 30, 1996. Operating expenses increased for the three months and nine months ended September 30, 1996, compared to the same periods in 1995, primarily due to higher professional service fees at the Holding Company (see Part II. Item 5: Other Information, Corporate Repositioning) and expenses related to the Caterpillar Alliance at CVI (see Part II. Item 5: Other Information, CILCO Electric Pilot Programs). Also contributing to the differences were higher operating expenses related to the leveraged lease investment portfolio in 1996 compared to 1995. Income and other taxes were lower in the quarter and nine months ended September 30, 1996, compared to the same periods in 1995, primarily due to lower pre-tax income. PART II. OTHER INFORMATION Item 1: Legal Proceedings Reference is made to "Environmental Matters" under "Item 1. Business" in the Company's 1995 Annual Report on Form 10-K (the "1995 Form 10-K"), and "Note 2. Gas Pipeline Supplier Transition Costs," "Note 3. Contingencies," and "Note 5. Open Access Electric Transmission," 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 disclosed or referred to in this section, 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. CILCO As discussed in the 1995 Form 10-K, on July 6, 1994 a lawsuit was filed against CILCO in a United States District Court by Vector-Springfield Properties, Ltd., seeking damages related to alleged coal tar contamination from the site of a former gas manufacturing plant which was owned but never operated by CILCO. The lawsuit seeks cost recovery of more than $3 million related to coal tar investigation expenses, operating losses and diminution of market value. CILCO is vigorously defending against these claims. In July 1996, a United States District Court judge entered an order summarily dismissing the lawsuit on the grounds that the applicable statute of limitations had expired. This decision has been appealed. Management cannot currently determine the outcome of this litigation, but does not believe it will have a material adverse impact on CILCO's financial position or results of operations. Item 5: Other Information Competition In July 1995, Illinois enacted legislation that offers gas and electric public utilities an opportunity to develop alternative regulation and performance-based ratemaking programs. These programs are subject to standards established by the ICC and are restricted to the utility's service territory. These programs must be approved by the ICC and must end by June 30, 2000. A report on the results of the programs is to be delivered to the Illinois legislature by December 31, 2000. CILCO has not filed any alternative regulation or performance-based ratemaking programs with the ICC. With the proposed changes in the regulatory environment and the potential for increased competition in the electric utility industry at both the wholesale and retail levels, CILCO anticipates significant changes in the industry in the years to come. The Illinois General Assembly has directed the Joint Committee on Electric Utility Reform to issue a final report by November 8, 1996, which will have findings, recommendations and/or principles on the future structure of the electric utility industry in Illinois. Management cannot predict the ultimate effect of these changes, but believes that they will eventually result in all customers having the opportunity to select the electric supplier of their choice and that low operating costs, improved efficiency and new and better services and products will be the key competitive factors for electric utilities. To lead the movement toward increased customer choice, CILCO established Power Quest, which consists of two electric pilot retail competition programs and a gas pilot retail competition program. The programs offer greater choice to customers and provide the opportunity for CILCO and its electric and natural gas customers to participate in a competitive business environment. The electric programs were approved by the ICC in March 1996 and approved by the FERC in April 1996 (see CILCO Electric Pilot Programs). The natural gas program was approved by the ICC in June 1996 (see CILCO Gas Pilot Program). CILCO also plans to sponsor legislation that will, if approved by the Illinois General Assembly and the Governor, institute changes to open up the electric markets in Illinois to competition by January 1, 1998 (see CILCO Consumer Choice Legislation). CILCO Electric Pilot Programs One of CILCO's two electric pilot programs permits CILCO's eight largest industrial customers that had peak loads of 10 megawatts or more during the twelve months ended July 31, 1995, to secure part or all of their electric power requirements from suppliers other than CILCO, subject to the limitation that at no time shall total purchases from other suppliers by participants in the program exceed 50 megawatts (approximately 10% of CILCO's industrial load). CILCO may extend the program's two year term with the approval of the ICC. Participating industrial customers began receiving electricity under Power Quest in May 1996. In the other electric program, CILCO designated five areas within its service territory as "Open Access Sites" for up to five years. The sites include the Central Illinois communities of Heyworth, Manito, and Williamsville; a shopping center in Peoria; and a developing commercial site in Lincoln. During that period, customers located within these "Open Access Sites" -- whether residential, commercial or industrial -- are eligible to purchase some or all of their electric power requirements from suppliers other than CILCO. On October 25, 1996, CILCO announced the expansion of this electric pilot program to include an additional 2,500 electric residential customers. The "Open Access Site" for these customers will be chosen by late November, 1996. CILCO may extend the program's five year term with ICC approval. Participating customers in the "Open Access Sites" began receiving electricity under Power Quest in May 1996. Under Power Quest, CILCO is experiencing a reduction in electric profit margin because some eligible customers are purchasing some or all of their power requirements from other suppliers. The amount of any such reduction depends largely upon the extent of customer participation in Power Quest. CILCO has offset some of the reduced profit margin by increased wholesale sales outside its service territory. For the industrial pilot program, CILCO anticipates a reduction in net income on an annual basis of up to $4 million if the entire 50 megawatts of eligible industrial capacity move to off-system suppliers. In an effort to retain industrial capacity, CILCORP has formed a strategic alliance with Caterpillar, Inc. (Caterpillar), CILCO's largest industrial electric customer. Under this alliance, Caterpillar will remain a full requirements customer of CILCO for the first year of the Power Quest program. Through this alliance, CILCORP and its subsidiaries will provide Caterpillar with higher service levels, lower prices, greater reliability, and innovative solutions to energy requirements. The expenses related to this alliance are being charged to CILCORP Ventures Inc. Similar alliances are being considered for other industrial customers. In the Power Quest "Open Access Sites," the Company anticipates a reduction in net income on an annual basis of up to $.4 million, based on customers' participation levels through September 1996. If all eligible customers in the Open Access Sites participate in Power Quest, the Company would experience a reduction in pre-tax net income on an annual basis of up to $1.2 million. CILCO Gas Pilot Program CILCO's gas residential pilot program is a five year pilot program that allows certain residential customers to select their natural gas supplier, with CILCO continuing to provide distribution and metering services. A limited number of CILCO's residential gas sales customers, located in "Open Access Sites" designated by CILCO, are allowed to participate in this program. CILCO has selected the Central Illinois communities of Heyworth, Manito, and Williamsville as the initial sites for the gas pilot program. The city of Springfield, Illinois, has also been chosen as a site for the gas pilot program, subject to the limitation that no more than 8,000 residential customers from Springfield may participate in the program. Participants in CILCO's gas retail pilot program began receiving natural gas under Power Quest in October 1996. Management does not believe this program will have a material adverse impact on CILCO's financial position or results of operations. CILCO Consumer Choice Legislation CILCO has drafted a Retail Consumer Choice Law (Choice Law) to be considered by the Illinois General Assembly next year. The proposed Choice Law: (1) provides that beginning January 1, 1998, customers of public utilities in Illinois may purchase electricity and customer-related services from any suppliers they choose; (2) continues monopoly services where appropriate; (3) allows for a smooth transition to a competitive market; (4) ensures that life-sustaining requirements for electricity are met for residential customers; (5) allows for financially distressed utilities to prove their need for assistance through the transition to a competitive market via a lost margin charge; (6) removes unnecessary regulation; and, (7) creates a level playing field where taxation is not a barrier to effective supplier competition. Corporate Repositioning In an effort to obtain a competitive advantage, various mergers and business combinations are occurring in the utility industry. Many utilities are preparing for a competitive marketplace by merging with or acquiring other utilities. Management will monitor this activity and continue to position itself for competition by keeping costs and prices low, maintaining good customer relations, and developing the flexibility to respond directly to individual customer requirements. As part of the effort to become more competitive, CILCO personnel are performing a detailed analysis of materials and supplies inventories at power plant and transmission and distribution storerooms. CILCO plans to reduce materials and supplies inventory levels by approximately $3 million through the sale, disposal, or use of identified inventory items. During the first nine months of 1996, CILCO disposed of approximately $1.75 million of inventory and wrote off another $.5 million of inventory that is expected to be disposed of during the remainder of the year. The remaining $.75 million of inventory reduction is expected to be achieved by not restocking inventory. This inventory reduction is expected to result in a total after-tax reduction to 1996 net income of approximately $1.35 million. In preparation for a competitive marketplace, CILCORP and its subsidiaries have undertaken other corporate repositioning activities, including developing new product offerings, upgrading customer data systems, and tapping needed expertise through alliances, consulting relationships, and the hiring of employees with experience in competitive markets. For the nine months ended September 30, 1996, CILCORP and its subsidiaries have incurred approximately $6.6 million of pre-tax expense for these repositioning activities. In addition to these repositioning costs, ESE, in its efforts to respond to continued competitive pressures, has incurred approximately $1.3 million in severance costs for the nine months ended September 30, 1996, related to reducing its workforce. Management expects these corporate restructuring charges to impact earnings during the remainder of 1996 and to a lesser degree in 1997. CILCORP/QST Officer Changes Effective November 4, 1996, William M. Shay, formerly President and Chief Operating Officer of QST Enterprises, was named Executive Vice President of CILCORP. In this new position, Shay assumes responsibility for CILCORP's corporate development activities, including mergers and acquisitions. He also will manage several functional areas. Replacing Shay at QST Enterprises is J. Mark Elliott. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits 27 - Financial data schedules (b) Reports on Form 8-K CILCORP Inc. filed a Form 8-K on October 29, 1996, to disclose a Shareholders' Rights plan. SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CILCORP Inc. (Registrant) Date November 8, 1996 R. O. Viets R. O. Viets President and Chief Executive Officer Date November 8, 1996 J. L. Barnett J. L. Barnett 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 November 8, 1996 T. S. Romanowski T. S. Romanowski Vice President and Chief Financial Officer Date November 8, 1996 R. L. Beetschen R. L. Beetschen Controller and Manager of Accounting SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CILCORP Inc. (Registrant) Date November , 1996 R. O. Viets President and Chief Executive Officer Date November , 1996 J. L. Barnett 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 November , 1996 T. S. Romanowski Vice President and Chief Financial Officer Date November , 1996 R. L. Beetschen 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 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 PER-BOOK 875,077 21,705 138,184 58,919 138,776 1,232,661 189,606 0 183,262 372,868 22,000 44,120 321,056 7,300 0 500 23,039 0 2,725 395 438,658 1,232,661 446,255 15,388 380,747 396,135 50,120 (568) 49,552 21,764 27,788 2,396 25,392 24,778 15,777 99,992 1.89 1.89
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 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 PER-BOOK 875,077 3,262 99,810 32,558 0 1,010,707 185,661 0 137,116 322,777 22,000 44,120 278,428 0 0 500 20,000 0 2,725 395 319,762 1,010,707 375,779 22,394 298,516 320,910 54,869 (799) 54,070 17,608 36,462 2,396 34,066 37,767 15,777 99,286 0 0
-----END PRIVACY-ENHANCED MESSAGE-----