-----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, SuvBF48QfUyHdrsvmSio4nOgcCqaotc+9djMEuCJ6sg593FupvqjZmvRwUK6ZsLp l5T6+uXODtGknPm8/WmplQ== 0000762129-97-000007.txt : 19970513 0000762129-97-000007.hdr.sgml : 19970513 ACCESSION NUMBER: 0000762129-97-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970512 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: 97600720 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 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: 97600721 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 March 31, 1997 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 April 30, 1997 13,610,680 CENTRAL ILLINOIS LIGHT COMPANY Common stock, no par value, shares outstanding and privately held by CILCORP Inc. at April 30, 1997 13,563,871 CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997 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 13-15 CILCORP Inc. and Central Illinois Light Company Item 2: Management's Discussion and Analysis of Financial 16-29 Condition and Results of Operations CILCORP Inc. and Central Illinois Light Company PART II. OTHER INFORMATION Item 1: Legal Proceedings 30 Item 4: Submission of Matters to a Vote of Security Holders 30 Item 5: Other Information 30-33 Item 6: Exhibits and Reports on Form 8-K 33 Signatures 34-35 CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
March 31, December 31, 1997 1996 ASSETS (Unaudited) Current assets: Cash and temporary cash investments $ 13,461 $ 4,941 Receivables, less reserves of $3,041 and 74,563 78,309 $2,600 Accrued unbilled revenue 23,164 39,851 Fuel, at average cost 10,617 7,643 Materials and supplies, at average cost 14,300 15,126 Gas in underground storage, at average cost 8,352 24,723 Prepayments and other 12,153 11,614 ---------- ---------- Total current assets 156,610 182,207 ---------- ---------- Investments and other property: Investment in leveraged leases 134,507 133,030 Cash surrender value of company-owned life insurance, net of related policy loans of $37,948 2,678 2,128 Other investments 19,089 19,679 ---------- ---------- Total investments and other property 156,274 154,837 ---------- ---------- Property, plant and equipment: Utility plant, at original cost Electric 1,190,044 1,186,110 Gas 394,712 393,246 ---------- ---------- 1,584,756 1,579,356 Less - accumulated provision for depreciation 738,728 724,398 ---------- ---------- 846,028 854,958 Construction work in progress 17,145 15,092 Other, net of depreciation 22,383 21,554 ---------- ---------- Total property, plant and equipment 885,556 891,604 ---------- ---------- Other assets: Cost in excess of net assets of acquired businesses, net of accumulated amortization of $5,172 and $4,997 22,965 23,141 Other 20,580 33,904 ---------- ---------- Total other assets 43,545 57,045 ---------- ---------- Total assets $1,241,985 $1,285,693 ========== ========== 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)
March 31, December 31, 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) Current liabilities: Current portion of long-term debt $ 3,041 $ 23,057 Notes payable 24,500 27,900 Accounts payable 45,070 63,434 Accrued taxes 13,681 8,801 Accrued interest 6,466 10,711 Purchased gas adjustment over-recoveries 2,529 601 Other 17,733 22,867 ---------- -------- Total current liabilities 113,020 157,371 ---------- -------- Long-term debt 320,669 320,666 ---------- -------- Deferred credits and other liabilities: Deferred income taxes 233,561 235,239 Regulatory liability of regulated subsidiary 68,136 68,565 Deferred investment tax credit 22,380 22,801 Other 48,548 46,726 ---------- -------- Total deferred credits 372,625 373,331 ---------- -------- 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 190,760 190,760 Retained earnings 178,791 177,445 ---------- -------- Total stockholders' equity 369,551 368,205 ---------- -------- Total liabilities and stockholders' equity $1,241,985 $1,285,693 ========== ========== 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 March 31, 1997 1996 Revenue: Electric $ 73,292 $ 76,691 Gas 92,503 78,040 Non-regulated energy and energy services 6,018 -- Environmental and engineering services 17,623 20,475 Other businesses 2,800 2,780 -------- -------- Total 192,236 177,986 -------- -------- Operating expenses: Fuel for generation and purchased power 26,422 28,194 Gas purchased for resale 66,749 45,589 Other operations and maintenance 49,104 50,469 Depreciation and amortization 16,747 16,616 Taxes, other than income taxes 11,109 11,638 -------- -------- Total 170,131 152,506 -------- -------- Fixed charges and other: Interest expense 7,083 6,771 Preferred stock dividends of subsidiary 786 815 Allowance for funds used during construction (8) (35) Other 330 945 -------- -------- Total 8,191 8,496 -------- -------- Income before income taxes 13,914 16,984 Income taxes 4,195 6,590 -------- -------- Net income available for common stockholders $ 9,719 $ 10,394 ======== ======== Average common shares outstanding 13,611 13,366 Net income per common share $ .71 $ .78 Dividends per common share $ .615 $ .615 *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)
Three Months Ended March 31, 1997 1996 Cash flows from operating activities: Net income before preferred dividends $ 10,505 $ 11,209 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Non-cash lease & investment income (1,039) (1,493) Depreciation and amortization 16,747 16,616 Deferred income taxes, investment tax credit and regulatory liability of subsidiary (2,528) 114 Changes in operating assets and liabilities: Decrease in accounts receivable and accrued unbilled revenue 20,433 7,394 Decrease in inventories 14,223 13,843 Decrease in accounts payable (18,364) (11,534) Increase in accrued taxes 4,880 7,027 Decrease in other assets 12,785 9,921 (Decrease) increase in other liabilities (5,629) (4,846) -------- -------- Total adjustments 41,508 37,042 -------- -------- Net cash provided by operating activities 52,013 48,251 -------- -------- Cash flows from investing activities: Additions to plant (10,038) (7,938) Other (883) (817) -------- -------- Net cash used in investing activities (10,921) (8,755) -------- -------- Cash flows from financing activities: Net decrease in short-term debt (3,400) (28,030) Repayment of long-term debt (20,013) (16,207) Common dividends paid (8,373) (8,207) Preferred dividends paid (786) (815) Proceeds from issuance of stock -- 3,637 -------- -------- Net cash used in financing activities (32,572) (49,622) -------- -------- Net increase (decrease) in cash and temporary cash investments 8,520 (10,126) Cash and temporary cash investments at beginning of year 4,941 17,100 -------- -------- Cash and temporary cash investments at end of quarter $ 13,461 $ 6,974 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 12,353 $ 11,702 Income Taxes $ 2,717 $ 500 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets (In thousands)
March 31, December 31, ASSETS 1997 1996 (Unaudited) Utility plant, at original cost: Electric $1,190,044 $1,186,110 Gas 394,712 393,246 ---------- ---------- 1,584,756 1,579,356 Less - accumulated provision for depreciation 738,728 724,398 ---------- ---------- 846,028 854,958 Construction work in progress 17,145 15,092 Plant acquisition adjustments, net of amortization 1,752 1,930 -------- -------- Total utility plant 864,925 871,980 -------- -------- Other property and investments: Cash surrender value of company-owned life insurance (net of related policy loans of $37,948) 2,678 2,128 Other 1,550 1,553 -------- -------- Total other property and investments 4,228 3,681 -------- -------- Current assets: Cash and temporary cash investments 10,584 1,662 Receivables, less reserves of $1,343 and $1,000 47,534 43,604 Accrued unbilled revenue 15,454 30,879 Fuel, at average cost 10,617 7,643 Materials and supplies, at average cost 14,300 15,126 Gas in underground storage, at average cost 7,868 24,222 Prepaid taxes 268 1,183 Other 2,934 9,668 -------- -------- Total current assets 109,559 133,987 -------- -------- Deferred debits: Unamortized loss on reacquired debt 5,458 5,572 Unamortized debt expense 2,152 2,198 Prepaid pension cost 496 496 Other 11,280 18,255 -------- -------- Total deferred debits 19,386 26,521 -------- -------- Total assets $ 998,098 $1,036,169 ======== ========= 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)
March 31, December 31, CAPITALIZATION AND LIABILITIES 1997 1996 (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 140,523 136,629 -------- --------- Total common shareholder's equity 326,184 322,290 Preferred stock without mandatory redemption 44,120 44,120 Preferred stock with mandatory redemption 22,000 22,000 Long-term debt 278,449 278,439 -------- --------- Total capitalization 670,753 666,849 -------- --------- Current liabilities: Current maturities of long-term debt - 20,000 Notes payable - 9,900 Accounts payable 35,576 46,126 Accrued taxes 11,095 7,013 Accrued interest 6,469 9,761 Purchased gas adjustment over-recoveries 2,529 601 Level payment plan - 2,737 Other 4,300 5,831 -------- --------- Total current liabilities 59,969 101,969 -------- --------- Deferred liabilities and credits: Accumulated deferred income taxes 134,334 135,251 Regulatory liability 68,136 68,565 Investment tax credits 22,380 22,801 Capital lease obligation 2,514 2,621 Other 40,012 38,113 -------- --------- Total deferred liabilities and credits 267,376 267,351 -------- --------- Total capitalization and liabilities $998,098 $1,036,169 ======== ========= 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 March 31, 1997 1996 Operating revenues: Electric $ 73,292 $ 76,691 Gas 92,503 78,040 -------- -------- Total operating revenues 165,795 154,731 -------- -------- Operating expenses: Cost of fuel 21,727 25,932 Cost of gas 61,667 45,589 Purchased power 4,104 2,262 Other operation and maintenance 26,264 26,702 Depreciation and amortization 15,393 15,054 Income taxes 7,248 8,614 Other taxes 10,195 10,386 -------- -------- Total operating expenses 146,598 134,539 -------- -------- Operating income 19,197 20,192 -------- -------- Other income and deductions: Cost of equity funds capitalized (26) 19 Company-owned life insurance, net (330) (206) Other, net (38) (60) -------- -------- Total other income and (deductions) (394) (247) -------- -------- Income before interest expenses 18,803 19,945 -------- -------- Interest expenses: Interest on long-term debt 5,144 5,304 Cost of borrowed funds capitalized (34) (16) Other 642 739 -------- -------- Total interest expenses 5,752 6,027 -------- -------- Net income 13,051 13,918 -------- -------- Dividends on preferred stock 786 815 -------- -------- Net income available for common stock $ 12,265 $ 13,103 ======== ======== 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)
Three Months Ended March 31, 1997 1996 Cash flows from operating activities: Net income before preferred dividends $ 13,051 $ 13,918 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,571 15,232 Deferred taxes, investment tax credits and regulatory liability (1,767) (1,152) Increase in accounts receivable (3,930) (10,470) Decrease in fuel, materials and supplies, and gas in underground storage 14,206 13,424 Decrease in unbilled revenue 15,425 9,414 Decrease in accounts payable (10,550) (9,577) Increase (decrease) in accrued taxes and interest 790 (837) Capital lease payments 161 161 Decrease in other current assets 7,651 14,025 Decrease in other current liabilities (2,339) (1,275) Decrease in other non-current assets 7,602 4,598 Increase in other non-current liabilities 2,206 580 -------- -------- Net cash provided by operating activities 58,077 48,041 -------- -------- Cash flows from investing activities: Capital expenditures (8,013) (7,852) Cost of equity funds capitalized 26 (19) Other (1,950) (1,509) -------- -------- Net cash used in investing activities (9,937) (9,380) -------- -------- Cash flows from financing activities: Common dividends paid (8,371) (8,208) Preferred dividends paid (786) (815) Retirement of long-term debt (20,000) (16,000) Payments on capital lease obligation (161) (161) Decrease in short-term borrowing (9,900) (24,600) -------- -------- Net cash used in financing activities (39,218) (49,784) -------- -------- Net increase (decrease) in cash and temporary cash investments 8,922 (11,123) Cash and temporary cash investments at beginning of year 1,662 16,556 -------- -------- Cash and temporary cash investments at March 31 $ 10,584 $ 5,433 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of cost of borrowed funds capitalized) $ 9,321 $ 9,400 Income taxes 4,095 -- 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), Environmental Science & Engineering, Inc. (ESE), and CILCORP's other subsidiaries after elimination of significant intercompany transactions. Effective October 29, 1996, ESE became a subsidiary of QST. Effective June 1, 1997, ESE will change its name to QST Environmental Inc. CILCORP owns directly or indirectly 100% of the common stock of its subsidiaries. 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 1996 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 transition 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 three months ended March 31, 1997, CILCO paid $.4 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 currently recoverable from customers, management does not expect gas pipeline supplier transition costs to materially impact CILCO's financial position or results of operations. CILCO has recorded a regulatory asset and a corresponding liability of $.4 million on its Balance Sheets as of March 31, 1997, for these transition costs, all of which will be due in 1997. 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 governing waste storage or disposal. 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. Remediation work at one of the four sites has been completed. A risk assessment/remedial alternatives study at a second site was completed in 1996, taking into consideration new clean-up options under current Illinois law. A remedial action plan for the second site is expected to be determined during 1997, with remediation of the site expected to begin in late 1997. CILCO has not determined the ultimate extent of its liability for, or the ultimate cost of, any remediation of the remaining two sites, pending further studies. During the three months ended March 31, 1997, CILCO paid approximately $22,000 to outside parties for former gas manufacturing plant site monitoring, legal fees and feasibility studies and expects to spend approximately $1.1 million during the remainder of 1997. A $3.5 million liability and a corresponding regulatory asset are recorded on the Balance Sheets representing the minimum amount of coal tar investigation and remediation costs CILCO expects to incur. Coal tar remediation costs incurred through March 1997 have been deferred on the Balance Sheets, net of amounts recovered from customers. Through March 31, 1997, CILCO has recovered approximately $5 million in coal tar remediation costs from its customers through a gas rate rider approved by the Illinois Commerce Commission (ICC). Currently, that rider allows recovery of prudently incurred coal tar costs in the year they are incurred. 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. 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 from CIPS 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 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. 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. Electric Transmission Open Access 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 allow third parties, including power marketers and other utilities, the same transmission services that such utilities 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 began on a test basis starting December 2, 1996, and full commercial operations and compliance with the Standards of Conduct began 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. CILCO is also working with the Midwest Independent System Operator Group. The goal of this group is to assure the secure, reliable, and independent operation of the transmission network. NOTE 6. Earnings Per Share Accounting Pronouncement In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, "Earnings per Share" (SFAS 128). This statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This statement is effective for financial statements issued for periods ending after December 15, 1997. This statement will not have a material effect on the Company's earnings per share as reported under current generally accepted accounting principles. 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. QST also provides fiber optic and advanced Internet-based communication services and products through QST Communications Inc. (QST Com). QST's operations include those of Environmental Science & Engineering, Inc. (ESE), a former first-tier CILCORP subsidiary which, effective October 29, 1996, became a QST subsidiary. ESE's results are reported as a separate business segment from QST's energy and telecommunications operations. Effective June 1, 1997, ESE will change its name to QST Environmental Inc. ESE is an environmental consulting and engineering firm serving governmental, industrial and commercial customers. ESE, through several subsidiaries, also acquires environmentally impaired property for remediation and resale. 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, CILCORP Energy Services Inc. (CESI), also provides services for CILCORP's strategic alliances with Caterpillar Inc. and other industrial customers (see Part II. Item 5: Other Information, Power Quest Electric Pilot Programs). CESI was formed to pursue energy-related opportunities in the non- regulated market. 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 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 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; pricing and transportation of commodities; market demand for energy 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 March 31, 1997, CILCORP had committed bank lines of credit of $45 million, of which $24.5 million was outstanding. The Company issued 275,074 shares of common stock at an average price of $41.55 during 1996 through the CILCO Employees' Savings Plan (ESP) and the CILCORP Inc. Investors Choice Automatic Reinvestment and Stock Purchase Plan (DRIP). Effective December 19, 1996, issuance of new shares of common stock through the ESP and DRIP was suspended. Depending on market conditions and corporate needs, the Company may issue additional shares of common stock through the ESP or the DRIP at any time. On December 23, 1996, the Company began 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. 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 other than CILCO, and for other corporate purposes. The Company has $42 million of medium-term notes outstanding at March 31, 1997. The Company may issue an additional $27 million under its existing $75 million medium-term note program. The Company 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 $8 million for the three months ended March 31, 1997. Capital expenditures are anticipated to be approximately $45.2 million for the remainder of 1997. Capital expenditures for the years 1998 and 1999 are estimated to be $57.3 million and $53 million, respectively. CILCO retired $20 million of first mortgage bonds in March 1997. Currently, CILCO does not plan to issue long-term debt during the remainder of 1997. CILCO intends to finance its 1997 and 1998 capital expenditures with funds provided by operations. At March 31, 1997, CILCO had committed bank lines of credit aggregating $20 million, all of which were unused. CILCO uses these lines of credit to support issuance of short-term commercial paper. CILCO had no commercial paper outstanding at March 31, 1997 and expects to issue commercial paper periodically throughout the remainder of 1997. QST (Excluding ESE) Capital expenditures totaled approximately $1.9 million for the three months ended March 31, 1997, and are anticipated to be approximately $12.2 million for the remainder of 1997, primarily for construction of co-generation assets and fiber optic and other communications facilities. The property management company which operates the Sears Tower (Tower) in Chicago has hired QST to install a cogeneration system that would supply electricity to the Tower and its tenants. The Sears Tower is the tallest building in North America which has 110 floors and 10,000 employees working in the building. Installing the cogeneration system would save the Tower and its tenants approximately $2 million annually in energy costs. The Tower's current utility provider, Commonwealth Edison (ComEd), however, is refusing to allow installation of the system. As a result, QST and the property management company have filed a joint complaint with the Illinois Commerce Commission. QST expects to finance the co-generation assets with a combination of long- term debt and funds provided by CILCORP. QST expects to finance the fiber optic and other communication facilities and working capital needs during the remainder of 1997 with funds provided by CILCORP. At March 31, 1997, QST had outstanding debt of $4.8 million, all of which was owed to the Holding Company. ESE For the quarter ended March 31, 1997, ESE's expenditures for capital additions and improvements were approximately $99,000. Capital expenditures for the remainder of 1997 are expected to be $1.2 million. In addition, through its subsidiary, ESE Land Corporation, ESE spent $1.2 million during the first quarter of 1997 to acquire land for remediation and resale. ESE is currently soliciting offers to purchase ESE Land Corporation. At March 31, 1997, ESE had borrowings from CILCORP of $21 million. Of this amount, $20 million is term debt due May 1998 and $1 million is revolving debt. ESE has $7 million available on its revolving line of credit from CILCORP. ESE also has a $10 million bank line of credit, of which $4.3 million was outstanding at March 31, 1997, to collateralize performance bonds issued in connection with ESE projects. CIM At March 31, 1997, CIM had outstanding debt of $28.6 million, consisting of $25.6 million borrowed from CILCORP and $3 million borrowed from external sources. During the fourth quarter of 1996, CIM committed $15.8 million to fund four affordable housing tax credit investments. Approximately $5 million of this commitment was funded in cash in 1996. During the first quarter of 1997, CIM funded an additional $.7 million of its commitment. During the remainder of 1997, CIM expects to contribute approximately $6.3 million in cash for these investments, with substantially all of the remainder of the cash contributions to be made in 1998. These investments will be funded through borrowings from CILCORP. CIM expects to finance new investments and working capital needs during 1997 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 1997 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, ESE and Other Businesses for the three months ended March 31, 1997 and 1996.
Three Months Ended March 31, 1997 1996 (In thousands) (Unaudited) Core Businesses: CILCO Electric operating income $ 9,906 $10,085 Gas operating income 9,291 10,107 ------- ------- Total utility operating income 19,197 20,192 Utility other income and deductions (6,146) (6,274) Preferred stock dividends of CILCO (786) (815) ------- ------- Total utility net income 12,265 13,103 QST (Excluding ESE) net loss (891) (446) ESE net loss (929) (1,972) ------- ------- Total core business income 10,445 10,685 Other businesses net loss (726) (291) ------- ------- Consolidated net income available to common shareholders $ 9,719 $10,394 ======= =======
CILCO Electric Operations The following table summarizes the components of CILCO electric operating income for the three months ended March 31, 1997 and 1996:
Three Months Ended Components of Electric March 31, Operating Income 1997 1996 (In thousands) (Unaudited) Revenue: Electric retail $69,339 $73,256 Sales for resale 3,953 3,435 ------- ------- Total revenue 73,292 76,691 ------- ------- Cost of sales: Cost of fuel 21,727 25,932 Purchased power expense 4,104 2,262 Revenue taxes 3,600 3,645 ------- ------- Total cost of sales 29,431 31,839 ------- ------- Gross margin 43,861 44,852 ------- ------- Operating expenses: Other operation and maintenance 18,314 18,737 Depreciation and amortization 10,974 10,766 Income and other taxes 4,667 5,264 ------- ------- Total operating expenses 33,955 34,767 ------- ------- Electric operating income $ 9,906 $10,085 ======= =======
Electric gross margin and retail sales volumes decreased 2% and 5%, respectively, for the three months ended March 31, 1997, compared to the same period in 1996. Residential and commercial sales decreased 5% and 4%, respectively, primarily due to an 8% decrease in heating degree days compared to the same period in 1996. Industrial sales decreased 5% 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, Power Quest Electric Pilot Programs). 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 by deregulation and increased competition in the electric utility industry (see Part II. Item 5: Other Information, Competition). Sales for resale increased during the first quarter of 1997 due to favorable market conditions. Sales for resale vary based on CILCO's available capacity for bulk power sales, the market price of power available for sale and the energy requirements of neighboring utilities. 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 16% in the first quarter of 1997, compared to the same period in 1996. The decrease was due to a 10% decrease in electric generation, resulting from a scheduled maintenance outage commencing March 1 at CILCO's Duck Creek generation facility, and a 13% reduction in the cost of coal burned. Purchased power increased for the three months ended March 31, 1997, compared to the same period in 1996 primarily due to the scheduled outage at the Duck Creek facility. Purchased power expense varies based on CILCO's need for energy and the market 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 2% for the three months ended March 31, 1997, compared to the corresponding period in 1996. The decrease was primarily due to decreased employee salaries and employee pension and benefit expenses as a result of the 1996 early retirement program. Tree trimming expenses also decreased. Increases in power plant maintenance expenses associated with the outage at the Duck Creek generation facility and increases in outside service costs partially offset the decrease for the first quarter of 1997. Depreciation and amortization expense increased 2%, 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 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 ended March 31, 1997 and 1996:
Three Months Ended Components of Gas March 31, Operating Income 1997 1996 (In thousands) (Unaudited) Revenue: Sale of gas $90,467 $75,290 Transportation services 2,036 2,750 ------- ------- Total revenue 92,503 78,040 ------- ------- Cost of sales: Cost of gas 61,667 45,589 Revenue taxes 3,566 3,678 ------- ------- Total cost of sales 65,233 49,267 ------- ------- Gross margin 27,270 28,773 ------- ------- Operating expenses: Other operation and maintenance 7,950 7,965 Depreciation and amortization 4,419 4,288 Income and other taxes 5,610 6,413 ------- ------- Total operating expenses 17,979 18,666 ------- ------- Gas operating income $ 9,291 $10,107 ======= =======
Gas gross margin decreased 5% for the quarter ended March 31, 1997, compared to the same period in 1996. Residential sales decreased 13% for the first quarter of 1997 primarily due to warmer winter weather. Heating degree days were 8% lower compared to the same period in 1996. Commercial sales increased 10% for the quarter due to customers switching from gas transportation to CILCO system supply as a result of the competitiveness of CILCO's gas price and a 1996 Illinois law which exempts certain customers from the state gross receipts tax on sales of natural gas. 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 in the natural gas industry. Revenue from gas transportation services decreased 26% while sales volumes increased 5% for the first quarter of 1997 compared to the same period in 1996. The revenue decrease was not proportional to the increase in volume due to increased transportation of gas by customers using Rate 10 contract service, which has a lower per unit charge than other classes of transportation service. Rate 10 customers have the ability to connect directly to interstate pipelines and bypass CILCO's gas system. Rates are negotiated individually with Rate 10 customers. In addition, transportation revenues decreased due to commercial customers switching back to CILCO system supply during the first quarter of 1997. The cost of gas increased 35% for the quarter ended March 31, 1997, compared to the same period in 1996. This increase was primarily due to higher natural gas prices from CILCO's suppliers. The higher natural gas prices, which accounted for the majority of the 20% increase in gas retail revenue, were passed through to CILCO's gas customers via the 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 three months ended March 31, 1997, compared to the same period in 1996. Decreases in employee salaries, pensions and benefits due to the 1996 early retirement program were partially offset by increases in outside service costs. Depreciation and amortization expense increased 3% for the quarter ended March 31, 1997, compared to the same period in 1996, 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 ended March 31, 1997, 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 ended March 31, 1997 and 1996:
Three Months Ended Components of Other Income and March 31, Deductions and Interest Expense 1997 1996 (In thousands) (Unaudited) Net interest expense $(5,694) $(5,914) Income taxes 670 712 Other (1,122) (1,072) ------- ------- Other income (deductions) $(6,146) $(6,274) ======= =======
Interest expense decreased primarily as a result of a lower long-term debt balance during the first quarter of 1997 compared to the same period in 1996. QST (Excluding ESE) The following table summarizes the revenue and expenses for QST for the three months ended March 31, 1997 and 1996.
Three Months Ended March 31, 1997 1996 Components of QST Net Loss (In thousands) (Unaudited) Revenue: Electric revenue $ 629 $ -- Gas revenue 5,316 -- Telecommunications revenue 73 -- ------ ------- Total revenue 6,018 -- Cost of sales: Cost of electricity 590 -- Cost of gas 5,082 -- Cost of sales - Telecommunications 34 -- ------ ------- Total cost of sales 5,706 -- ------ ------- Gross margin 312 -- ------ ------- Other expenses: General and administrative 1,619 786 Depreciation and amortization 61 5 Interest 109 -- ------ ------- Total other expenses 1,789 791 ------ ------- Net loss before taxes (1,477) (791) Income taxes (586) (345) ------ ------- QST net loss $ (891) $ (446) ======= ========
QST Enterprises Inc. was formed in December 1995 to facilitate CILCORP's expansion into non-regulated energy and related services businesses. QST's initial focus has been to compete against energy suppliers who participate in CILCO's Power Quest programs. QST also competes 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. QST Energy's wholly-owned subsidiary, QST Energy Trading Inc. (QST Trading), is a wholesale natural gas and 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 and Houston. Additional offices may be opened as the company continues to grow. QST is successfully obtaining additional large commercial and industrial customers in the Chicago area and in the pilot program of a non-affiliated Illinois utility. QST Enterprises, through QST Trading, entered into a marketing services agreement on March 24, 1997, with Trebor Energy Resources, a Houston-based natural gas marketing and trading company, whereby Trebor will purchase, transport and sell natural gas on behalf of QST to utilities, industrial and commercial customers principally in the Gulf Coast, Midwest and Northeast markets. Currently, QST is involved in negotiations to acquire Trebor's assets whereby the principals of Trebor will become QST employees. If the acquisition proceeds to completion, QST expects that the purchase price will be paid under a deferred payment arrangement based on predetermined performance measures and therefore cannot currently be determined. QST's net loss for the first three months of 1997 was caused primarily by outside services and administrative and general expenses, including salaries, which are not being covered by revenues at this early stage of QST's development. Gas revenue for the first quarter of 1997 resulted primarily from wholesale sales of gas by QST Trading, while electric revenues were from participation by QST Energy in Power Quest and a pilot program of another Illinois utility. QST Energy also participates in the Power Quest gas pilot program, but revenues from this program are not material. Losses are expected to continue in 1997, but at a reduced level, as QST continues to develop its businesses. Revenues are anticipated to increase as the company grows through participation in additional pilot programs; retail sales of energy to other energy marketers, commercial and industrial customers; and wholesale natural gas and power marketing transactions. ESE Operations The following table summarizes the components of the environmental and engineering services results for the three months ended March 31, 1997 and 1996:
Components of ESE Net Loss Three Months Ended March 31, 1997 1996 (In thousands) (Unaudited) Revenue: Environmental and engineering services revenue $17,623 $20,475 Direct non-labor project costs 6,000 5,666 ------- ------- Net revenue 11,623 14,809 ------- ------- Expenses: Direct salaries and other costs 6,565 9,407 General and administrative 5,252 6,749 Depreciation and amortization 1,066 1,332 ------- ------- Operating expenses 12,883 17,488 ------- ------- Interest expense 142 396 ------- ------- Loss before income taxes (1,402) (3,075) Income taxes (473) (1,103) ------- ------- ESE net loss $ (929) $(1,972) ======= =======
ESE's quarterly results in recent periods 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 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 $3 million, or 22%, for the three months ended March 31, 1997, compared to the same period in 1996. The net revenue decrease for this period 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, and industry overcapacity. 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 $2.8 million or 30% for the three months ended March 31, 1997, compared to the same period in 1996. 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 $1.5 million or 22% for the three months ended March 31, 1997. The decrease for this period resulted from lower general and administrative salary and related benefits expense, and cost controls. ESE will continue to position itself to take advantage of new market opportunities. 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 690 full-time equivalent employees at March 31, 1997, compared to 1,016 employees at March 31, 1996. To better utilize ESE's resources as part of CILCORP's commitment to efficiently market non-regulated energy and related services, ESE became a subsidiary of QST effective October 29, 1996. During 1997, management will continue to evaluate ESE's role in QST's and CILCORP's business strategy. This evaluation, which will take into account ESE's ongoing performance and integration with QST's operations, may result in adjustments to the carrying value of ESE's assets. ESE'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 ESE's services is highly competitive; however, no single entity currently dominates the environmental and engineering consulting services marketplace. Other Businesses Operations The following table summarizes the components of Other Businesses losses for the three months ended March 31, 1997 and 1996. Three Months Ended
March 31, Components of Other Businesses 1997 1996 Net Income (Loss) (In thousands) (Unaudited) Revenue: Other revenue $ 2,800 $2,780 ------- ------ Expenses: Operating Expenses 3,621 1,486 Depreciation and amortization 48 47 Interest expense 1,168 1,340 Income and other taxes (1,311) 198 ------- ------ Total expenses 3,526 3,071 ------- ------ Other businesses net loss $ (726) $ (291) ======= ======
Other revenues remained relatively constant for the three months ended March 31, 1997. Operating expenses increased for the three months ended March 31, 1997, compared to the same periods in 1996, primarily due to higher expenses related to the Caterpillar Alliance at CVI (see Part II. Item 5: Other Information, Power Quest Electric Pilot Programs). Income and other taxes were lower in the three months ended March 31, 1997, compared to the same periods in 1996, primarily due to lower pre-tax income and tax credits received in 1997 from affordable housing tax credit investments committed to during the fourth quarter of 1996. PART II. OTHER INFORMATION Item 1: Legal Proceedings Reference is made to "Environmental Matters" under "Item 1. Business" in the Company's 1996 Annual Report on Form 10-K (the "1996 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 In July 1996, a United States District Court judge entered an order summarily dismissing a lawsuit filed against CILCO seeking damages related to alleged coal tar contamination from a gas manufacturing plant which was owned but never operated by CILCO. This decision, which was based on the grounds that the applicable statute of limitations has expired, was upheld on March 17, 1997, by the 7th Circuit Court of Appeals. Item 4: Submission of Matters to a Vote of Security Holders Shareholders cast the following votes at the Company's Annual Meeting of Shareholders held April 22, 1997: Votes Abstentions Against & Votes or Broker for Withheld Non-Votes Elected to the Board of Directors: M. Alexis 10,952,501 254,057 0 H. S. Peacock 10,954,535 252,023 0 R. N. Ullman 10,972,092 234,466 0 R. O. Viets 10,957,047 249,511 0 Amend Bylaws and/or Articles of Incorporation to establish a minimum level of stock ownership for directors 1,343,813 7,774,861 2,742,830 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. CILCO anticipates significant changes in the electric utility industry at both the wholesale and retail levels in the years to come, including increased competition. CILCO also anticipates changes in the natural gas industry at the retail level. 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 energy 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 utilities and other energy providers. CILCO has introduced legislation that will, if approved by the Illinois General Assembly and the Governor, institute changes to open the electric markets in Illinois to competition by January 1, 1998 (see CILCO Consumer Choice Legislation). Broadened consumer choice throughout Illinois and the nation will expand CILCORP's business opportunities. 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 electric programs were approved by the ICC in March 1996 and approved by the FERC in April 1996 (see Power Quest Electric Pilot Programs). The natural gas program was approved by the ICC in June 1996 (see Power Quest Gas Pilot Program). Power Quest Electric Pilot Programs One of CILCO's electric pilot programs permits eight of CILCO's largest industrial customers that have peak loads of 10 megawatts or more 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. Industrial customers began receiving electricity under this Power Quest program in May 1996. For the industrial pilot program, CILCO could experience a reduction in pre-tax income of up to $5.4 million on an annual basis if the entire 50 megawatts of eligible industrial capacity moved to off-system suppliers. CILCORP has formed a strategic alliance (which has a term concurrent with the Power Quest Electric Pilot Program) with Caterpillar Inc. (Caterpillar), the largest of the industrial customers eligible to participate in Power Quest. Caterpillar remained a full requirements customer of CILCO for the first year of the Power Quest program, and in exchange, CILCORP provided additional value-added services and innovative solutions to energy and environmental needs of Caterpillar. Costs associated with the Caterpillar alliance are reflected in Other Businesses Operations. During the second year of the alliance which began May 1, 1997, Caterpillar began purchasing a portion of its Power Quest allocation off-system (including from QST) and will continue to receive products and services under the strategic alliance. CILCO has offset some of the reduced profit margin by increased wholesale electric sales outside its service territory. Based on participation levels by eligible industrial customers through March 1997, CILCORP experienced a reduction of $1 million of pre-tax income for the first quarter of 1997 (including costs associated with the Caterpillar alliance offset by gross margins earned by QST). Assuming the same participation level for all of 1997, CILCORP would experience a reduction to pre-tax income, excluding costs associated with the Caterpillar alliance, of $1.4 million. In the other Power Quest electric program, CILCO designated six areas within its service territory as Open Access Sites for up to five years. The sites include the Central Illinois communities of Heyworth, Manito, Peoria Heights and Williamsville; a large regional shopping center in Peoria; and a developing commercial business site in Lincoln. During this period, approximately 5,500 customers located within these Open Access Sites are eligible to purchase some or all of their electric power requirements from suppliers other than CILCO. CILCO may extend the program's five year term with ICC approval. Customers in all but the Peoria Heights Open Access Sites began receiving electricity from suppliers other than CILCO in May 1996. Energy deliveries in Peoria Heights began in February 1997. If all eligible customers in Open Access Sites participate in Power Quest, CILCO would experience a reduction in pre-tax income of up to $1.5 million on an annual basis. Based upon participation levels by eligible commercial and residential customers through March 1997, CILCORP experienced a reduction of $.1 million of pre-tax income for the first quarter of 1997. Assuming the same participation level for all of 1997, CILCORP would experience a reduction to pre-tax income of $.5 million. QST Energy, despite competition from other suppliers, is currently serving more than 90% of the Power Quest customers who have chosen a supplier other than CILCO. Power Quest Gas Pilot Program 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. CILCO selected the Central Illinois towns of Heyworth, Manito, and Williamsville as the initial sites for the gas pilot program and later added the city of Springfield, Illinois, subject to the limitation that no more than 8,000 residential customers from Springfield may participate in the program. Participants in the gas retail pilot program began receiving natural gas from other suppliers in October 1996. This program did not have a material adverse impact on CILCO's 1996 or first quarter 1997 financial position or results of operations nor does management believe this program will have a material adverse impact on CILCO's future financial position or results of operations. CILCO Consumer Choice Legislation CILCO has assisted legislators in developing a Consumer Freedom to Choose Electricity Law (Choice Law) to be considered by the Illinois General Assembly in 1997. The Choice Law, if enacted: (1) provides that beginning January 1, 1998, consumers in Illinois may purchase electricity and customer-related services from any supplier they choose; (2) continues monopoly services where appropriate; (3) allows for a smooth transition to a competitive market; (4) ensures 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. On March 7, 1997, another electric restructuring bill was introduced in the Illinois House of Representatives. Under this CILCO-supported bill, all electric customers served by investor-owned utilities will have the opportunity to buy electricity from their provider of choice beginning May 1, 1998. Other legislative proposals regarding electric utility competition have been, or are expected to be, introduced in the General Assembly and in the United States Congress. Management cannot predict the ultimate form of any legislation which may be enacted. Corporate Repositioning In preparation for a competitive marketplace, the Company has undertaken 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. During the first quarter of 1997, the Company and its subsidiaries incurred approximately $1.5 million of pre-tax expense for these repositioning activities. CILCO's Union Contracts CILCO is presently in contract negotiations with one of its unions, the International Brotherhood of Electrical Workers (IBEW). The contract expires on June 30, 1997. The IBEW represents approximately 460 CILCO gas and electric department employees. The current contract with the International Brotherhood of Firemen and Oilers (IBF&O), which represents approximately 208 CILCO employees, expires June 30, 1998. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits 27 - Financial data schedules (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CILCORP Inc. (Registrant) Date May 12, 1997 R. O.Viets R. O. Viets President and Chief Executive Officer Date May 12, 1997 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 May 12, 1997 T. S. Romanowski T. S. Romanowski Vice President and Chief Financial Officer Date May 12, 1997 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 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 PER-BOOK 864,925 20,631 156,610 43,545 156,274 1,241,985 190,760 0 178,791 369,551 22,000 44,120 320,669 24,500 0 0 3,041 0 2,514 412 455,178 1,241,985 192,236 4,195 170,131 174,326 17,910 (330) 17,580 7,075 10,505 786 9,719 8,373 5,144 52,013 .71 .71
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 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 PER-BOOK 864,925 4,228 109,559 19,386 0 998,098 185,661 0 140,523 326,184 22,000 44,120 278,449 0 0 0 0 0 2,514 412 324,419 998,098 165,795 7,248 139,350 146,598 19,197 (394) 18,803 5,752 13,051 786 12,265 8,371 5,144 58,077 0 0
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