-----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, ASvfeQ3r6OQNOADMcZJPVZXruIBVYwsPRu6faQonaXxIPf35wzR7WWqveW4vl0vS sb2qDi1HoaPLlnKiRzdzlg== 0000762129-97-000014.txt : 19971111 0000762129-97-000014.hdr.sgml : 19971111 ACCESSION NUMBER: 0000762129-97-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971110 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CILCORP INC CENTRAL INDEX KEY: 0000762129 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 371169387 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08946 FILM NUMBER: 97711922 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: SEC FILE NUMBER: 001-02732 FILM NUMBER: 97711923 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, 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 September 30, 1997 13,610,680 CENTRAL ILLINOIS LIGHT COMPANY Common stock, no par value, shares outstanding and privately held by CILCORP Inc. at September 30, 1997 13,563,871 CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 INDEX PART I. FINANCIAL INFORMATION Page No. Item 1: Financial Statements CILCORP INC. Consolidated Balance Sheets 3-4 Consolidated Statements of Income 5-6 Consolidated Statements of Cash Flows 7-8 CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets 9-10 Consolidated Statements of Income 11 Consolidated Statements of Cash Flows 12-13 Notes to Consolidated Financial Statements 14-17 CILCORP Inc. and Central Illinois Light Company Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 18-32 CILCORP Inc. and Central Illinois Light Company PART II. OTHER INFORMATION Item 1: Legal Proceedings 33 Item 5: Other Information 33-35 Item 6: Exhibits and Reports on Form 8-K 35 Signatures 36-37 CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
September 30, December 31, 1997 1996 ASSETS (Unaudited) Current assets: Cash and temporary cash investments $ 10,754 $ 4,941 Receivables, less reserves of $3,097 and $2,600 80,497 78,309 Accrued unbilled revenue 26,895 39,851 Fuel, at average cost 5,617 7,643 Materials and supplies, at average cost 13,766 15,126 Gas in underground storage, at average cost 26,172 24,723 Prepayments and other 19,488 11,614 ---------- ---------- Total current assets 183,189 182,207 ---------- ---------- Investments and other property: Investment in leveraged leases 144,636 133,030 Cash surrender value of company-owned life insurance, net of related policy loans of $42,762 and $37,948 1,869 2,128 Other investments 18,196 19,679 ---------- ---------- Total investments and other property 164,701 154,837 ---------- ---------- Property, plant and equipment: Utility plant, at original cost Electric 1,204,083 1,186,110 Gas 396,988 393,246 ---------- ---------- 1,601,071 1,579,356 Less - accumulated provision for depreciation 758,051 724,398 ---------- ---------- 843,020 854,958 Construction work in progress 20,202 15,092 Other, net of depreciation 21,863 21,554 ---------- ---------- Total property, plant and equipment 885,085 891,604 ---------- ---------- Other assets: Cost in excess of net assets of acquired businesses, net of accumulated amortization of $5,524 and $4,997 22,613 23,141 Other 26,288 33,904 ---------- ---------- Total other assets 48,901 57,045 ---------- ---------- Total assets $1,281,876 $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)
September 30, December 31, 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) Current liabilities: Current portion of long-term debt $ 22,181 $ 23,057 Notes payable 57,931 27,900 Accounts payable 65,867 63,434 Accrued taxes 4,746 8,801 Accrued interest 4,975 10,711 Purchased gas adjustment over-recoveries 1,388 601 Other 19,591 22,867 ---------- ---------- Total current liabilities 176,679 157,371 ---------- ---------- Long-term debt 298,531 320,666 ---------- ---------- Deferred credits and other liabilities: Deferred income taxes 233,007 235,239 Regulatory liability of regulated subsidiary 67,276 68,565 Deferred investment tax credit 21,538 22,801 Other 47,038 46,726 ---------- ---------- Total deferred credits 368,859 373,331 ---------- ---------- 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 180,927 177,445 ---------- ---------- Total stockholders' equity 371,687 368,205 ---------- ---------- Total liabilities and stockholders' equity $1,281,876 $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 Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Revenue: Electric utility $104,336 $ 96,247 $258,639 $246,876 Gas utility 19,019 18,594 142,031 128,903 Non-regulated energy and energy services 84,061 856 131,308 1,080 Environmental and engineering services 19,392 20,852 55,229 62,673 Other businesses 1,695 1,975 6,585 6,651 -------- -------- -------- -------- Total 228,503 138,524 593,792 446,183 -------- -------- -------- -------- Operating expenses: Fuel for generation and purchased power 40,806 25,958 95,458 76,872 Gas purchased for resale 84,137 6,517 202,875 68,360 Other operations and maintenance 49,694 52,960 150,461 156,437 Depreciation and amortization 16,638 16,505 50,076 49,683 Taxes, other than income taxes 8,797 8,538 28,197 28,830 -------- -------- -------- -------- Total 200,072 110,478 527,067 380,182 -------- -------- -------- -------- Fixed charges and other: Interest expense 6,896 6,948 20,953 21,849 Preferred stock dividends of subsidiary 818 795 2,415 2,396 Allowance for funds used during construction (10) (15) (128) (85) Other 252 159 824 568 -------- -------- -------- -------- Total 7,956 7,887 24,064 24,728 -------- -------- -------- -------- Income from continuing operations before income taxes 20,475 20,159 42,661 41,273 Income taxes 7,556 7,610 14,360 15,584 -------- -------- -------- -------- Net income from continuing operations 12,919 12,549 28,301 25,689 Income (loss) from operations of discontinued business 155 (77) 309 (297) -------- -------- -------- -------- Net Income $ 13,074 $ 12,472 $ 28,610 $ 25,392 ======== ======== ======== ======== Average common shares outstanding 13,611 13,536 13,611 13,444 Earnings per common share Continuing operations $ .95 $ .93 $ 2.08 $ 1.91 Discontinued operations .01 (.01) .02 (.02) -------- -------- -------- -------- Earnings per average common share $ .96 $ .92 $ 2.10 $ 1.89 ======== ======== ======== ======== 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, 1997 1996 Cash flows from operating activities: Net income before preferred dividends $ 30,716 $ 28,085 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash lease income and investment income (11,844) (4,421) Depreciation and amortization 50,074 49,681 Deferred income taxes, investment tax credit and regulatory liability of subsidiary, net (4,784) 9,147 Changes in operating assets and liabilities: Decrease in accounts receivable and accrued unbilled revenue 10,758 32,047 Decrease (increase) in inventories 1,937 (1,677) Increase in accounts payable 2,221 594 (Decrease) increase in accrued taxes (3,791) 907 Decrease (increase) in other assets 4,131 (2,570) (Decrease) in other liabilities (10,128) (6,921) -------- ------- Total adjustments 38,574 76,787 Net cash provided by operating activities from continuing operations 69,290 104,872 Net cash used by operating activities of discontinued operations (1,905) (4,880) -------- -------- Cash flow from operations 67,385 99,992 -------- -------- Cash flows from investing activities: Additions to plant (36,418) (34,765) Investing activities of discontinued operations 676 5,501 Other (5,323) (6,578) -------- ------- Net cash provided (used) by investing activities (41,065) (35,842) -------- -------- Cash flows from financing activities: Net increase (decrease) in short-term debt 30,031 (39,300) Decrease in long-term debt (23,011) (19,070) Common dividends paid (25,112) (24,778) Preferred dividends paid (2,415) (2,396) Proceeds from issuance of stock -- 10,276 -------- ------- Net cash used by financing activities (20,507) (75,268) -------- ------- Net increase (decrease) in cash and temporary cash investments: 5,813 (11,118) Cash and temporary cash investments at beginning of year: 4,941 17,100 -------- ------- Cash and temporary cash investments at September 30 $ 10,754 $ 5,982 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 26,219 $ 26,818 Income taxes 23,573 13,570 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, ASSETS 1997 1996 (Unaudited) Utility plant, at original cost: Electric $1,204,083 $1,186,110 Gas 396,988 393,246 ---------- ---------- 1,601,071 1,579,356 Less - accumulated provision for depreciation 758,051 724,398 ---------- ---------- 843,020 854,958 Construction work in progress 20,202 15,092 Plant acquisition adjustments, net of amortization 1,396 1,930 ---------- ---------- Total utility plant 864,618 871,980 ---------- ---------- Other property and investments: Cash surrender value of company-owned life insurance (net of related policy loans of $42,762 and $37,948) 1,869 2,128 Other 1,543 1,553 ---------- ---------- Total other property and investments 3,412 3,681 ---------- ---------- Current assets: Cash and temporary cash investments 1,997 1,662 Receivables, less reserves of $1,342 and $1,000 34,285 43,604 Accrued unbilled revenue 18,854 30,879 Fuel, at average cost 5,617 7,643 Materials and supplies, at average cost 13,766 15,126 Gas in underground storage, at average cost 25,683 24,222 Prepaid taxes 3,957 1,183 Other 6,138 9,668 ---------- ---------- Total current assets 110,297 133,987 ---------- ---------- Deferred debits: Unamortized loss on reacquired debt 5,229 5,572 Unamortized debt expense 2,063 2,198 Prepaid pension cost 496 496 Other 16,006 18,255 ---------- ---------- Total deferred debits 23,794 26,521 ---------- ---------- Total assets $1,002,121 $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)
September 30, 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 141,058 136,629 ---------- ---------- Total common shareholder's equity 326,719 322,290 Preferred stock without mandatory redemption 44,120 44,120 Preferred stock with mandatory redemption 22,000 22,000 Long-term debt 267,824 278,439 ---------- ---------- Total capitalization 660,663 666,849 ---------- ---------- Current liabilities: Current maturities of long-term debt 10,650 20,000 Notes payable 12,200 9,900 Accounts payable 41,693 46,126 Accrued taxes 3,622 7,013 Accrued interest 5,277 9,761 Purchased gas adjustment over-recoveries 1,388 601 Level payment plan 597 2,737 Other 3,608 5,831 ---------- ---------- Total current liabilities 79,035 101,969 ---------- ---------- Deferred liabilities and credits: Accumulated deferred income taxes 132,500 135,251 Regulatory liability 67,276 68,565 Investment tax credits 21,538 22,801 Capital lease obligation 2,295 2,621 Other 38,814 38,113 ---------- ---------- Total deferred liabilities and credits 262,423 267,351 ---------- ---------- Total capitalization and liabilities $1,002,121 $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 Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Operating revenue: Electric $104,336 $ 96,270 $258,639 $249,048 Gas 19,019 18,594 142,031 128,981 -------- -------- -------- -------- Total operating revenues 123,355 114,864 400,670 378,029 -------- -------- -------- -------- Operating expenses: Cost of fuel 24,497 21,788 68,240 68,144 Cost of gas 7,383 6,352 82,186 68,195 Purchased power 7,889 3,615 16,035 7,987 Other operations and maintenance 27,163 27,658 83,312 85,617 Depreciation and amortization 15,394 15,009 46,181 45,074 Income taxes 10,369 10,252 22,685 22,394 Other taxes 8,169 7,701 25,961 25,749 -------- -------- -------- -------- Total operating expenses 100,864 92,375 344,600 323,160 -------- -------- -------- -------- Operating income 22,491 22,489 56,070 54,869 -------- -------- -------- -------- Other income and deductions: Cost of equity funds capitalized 2 8 33 46 Company-owned life insurance, net (252) (160) (824) (569) Other, net (267) (288) (371) (276) -------- -------- -------- -------- Total other income and (deductions) (517) (440) (1,162) (799) -------- -------- -------- -------- Income before interest expense 21,974 22,049 54,908 54,070 -------- -------- -------- -------- Interest expenses: Interest on long-term debt 4,960 5,250 15,064 15,777 Cost of borrowed funds capitalized (7) (7) (95) (39) Other 684 572 1,984 1,870 -------- -------- -------- -------- Total interest expense 5,637 5,815 16,953 17,608 -------- -------- -------- -------- Net income 16,337 16,234 37,955 36,462 -------- -------- -------- -------- Dividends on preferred stock 818 795 2,415 2,396 -------- -------- -------- -------- Net income available for common stock $ 15,519 $ 15,439 $ 35,540 $ 34,066 ======== ======== ======== ======== 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, 1997 1996 Cash flows from operating activities: Net income before preferred dividends $ 37,956 $ 36,462 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 46,714 45,608 Deferred income taxes, investment tax credit and regulatory liability, net (5,302) (3,454) Changes in operating assets and liabilities: Decrease in accounts receivable 9,319 7,868 Decrease (increase) in fuel, materials and supplies, and gas in underground storage 1,925 (1,509) Decrease in unbilled revenue 12,025 12,430 (Decrease) in accounts payable (4,433) (290) (Decrease) in accrued taxes and interest (7,875) (8,472) Capital lease payments 484 484 Decrease in other current assets 756 14,616 (Decrease) in other current liabilities (3,577) (4,462) Decrease (increase) in other non-current assets 4,135 (1,090) Increase in other non-current liabilities 603 1,095 -------- -------- Net cash provided by operating activities 92,730 99,286 -------- -------- Cash flows from investing activities: Capital expenditures (35,772) (32,132) Cost of equity funds capitalized (33) (46) Other (4,880) (914) -------- -------- Net cash used in investing activities (40,685) (33,092) -------- -------- Cash flows from financing activities: Common dividends paid (31,111) (37,767) Preferred dividends paid (2,415) (2,396) Long-term debt issued -- -- Long-term debt retired (20,000) (16,000) Payments on capital lease obligation (484) (484) Increase (decrease) in short-term borrowing 2,300 (24,100) -------- -------- Net cash used in financing activities (51,710) (80,747) -------- -------- Net Increase (decrease) in cash and temporary cash investments 335 (14,553) Cash and temporary cash investments at beginning of year 1,662 16,556 -------- -------- Cash and temporary cash investments at September 30 $ 1,997 $ 2,003 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of cost of borrowed funds capitalized) $ 22,267 $ 21,724 Income taxes 32,099 20,066 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Introduction The consolidated financial statements include the accounts of CILCORP Inc. (CILCORP or Company), Central Illinois Light Company (CILCO), QST Enterprises Inc. (QST), QST Environmental Inc., formerly known as Environmental Science & Engineering, Inc. (ESE), and CILCORP's other subsidiaries after elimination of significant intercompany transactions. Effective October 29, 1996, ESE became a subsidiary of QST. Effective June 1, 1997, ESE began operating under the name 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. QST Enterprises Inc. expects to complete the sale of ESE Land Corporation, a subsidiary of QST Environmental Inc., in the fourth quarter of 1997. Results of ESE Land Corporation are being reported as discontinued operations effective with this reporting period. 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. Contingencies 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 prepared in 1996, taking into consideration new clean-up options under current Illinois law. A revised remedial action plan for the second site has been finalized and was submitted to the Illinois Environmental Protection Agency in August 1997. Remediation of the site is 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 nine months ended September 30, 1997, CILCO paid approximately $180,000 to outside parties for former gas manufacturing plant site monitoring, legal fees and feasibility studies, and expects to spend approximately $200,000 during the remainder of 1997. A $2.6 million liability and a corresponding regulatory asset are recorded on the Balance Sheets representing the minimum amount of coal tar investigation and remediation costs CILCO expects to ultimately incur. Coal tar remediation costs incurred through September 1997 have been deferred on the Balance Sheets, net of amounts recovered from customers. Through September 30, 1997, CILCO has recovered approximately $5.1 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 3. 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 90 MW until the contract expires in May 1998. In March 1995, CILCO and CIPS amended a limited-term power agreement reached in November 1992. This agreement, which now expires in May 2009, provides for CILCO to purchase up to 150 MW of CIPS' capacity from June 1998 through May 2002, and 50 MW from June 2002 through May 2009. On January 27, 1997, CILCO intervened in a proceeding pending before the Federal Energy Regulatory Commission (FERC), to challenge the validity of the power agreements with CIPS because of the failure of CIPS to obtain FERC approval of the agreements. In the alternative, CILCO requested that FERC provide an "open season" during which CILCO may cancel the power agreements in whole or in part. In an order issued on October 15, 1997, FERC rejected the challenge to the validity of the agreements and denied CILCO's request for an open season. However, FERC ordered CIPS to file the agreements with FERC and on its own motion initiated a separate proceeding to investigate the terms of the agreements. CILCO has asked FERC to assess penalties under its rules against CIPS for the failure to file the contracts as required, and FERC has not yet addressed this issue. FERC's order also failed to address certain contract issues raised by CILCO, and requests for rehearing of that order are due to be filed by November 14, 1997. CILCO cannot predict how FERC will ultimately rule on the issues in these two cases. NOTE 4. 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. 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. On March 4, 1997, FERC issued Order 888-A, which included a new pro- forma open access transmission tariff and a requirement that all utilities regulated by FERC file new open access transmission tariffs consistent with the new pro-forma tariff. On July 3, 1997, CILCO filed its tariff in compliance with Order 888-A. CILCO's compliance filings under Order 888 and Order 888-A revised the charges for the provision of ancillary services. On July 31, 1997, FERC issued an order accepting CILCO's charges for the provision of ancillary services that were proposed in CILCO's Order 888 compliance filing. CILCO's Order 888-A compliance filing revised two of the ancillary service charges (energy imbalance service and real power loss service) to make them easier to document and administer than they were in the Company's Order 888 compliance filing. The revised charges for these two ancillary services have not yet been approved, and remain subject to refund. Management believes that the cost of any future refunds will not have a material adverse effect on CILCO's financial position or results of operations. Order No. 889 requires public utilities to implement Standards of Conduct and an Open Access Transmission Same-time Information System (OASIS). Effective May 13, 1997, FERC Order No. 889-A incorporated minor revisions to the original order and revised the policy on posting discounts. In accordance with FERC Orders 889 and 889-A, CILCO is using the OASIS to nominate, obtain and sell available electric transmission. On May 13, 1997, CILCO and QST Energy Trading Inc. revised their original Standards of Conduct as required by Order 889-A. NOTE 5. QST Environmental Discontinued Operations QST Environmental has been pursuing a plan to sell substantially all the assets of its wholly-owned subsidiary, ESE Land Corporation. Completion of this transaction is anticipated during the fourth quarter of 1997. Accordingly, the discontinued activities are shown as discontinued operations in the statement of earnings. Prior year financial statements have been reclassified to conform to the current year presentation. Net assets of the discontinued operations are included in the accompanying consolidated balance sheets as follows: September December 1997 1996 (In thousands) Cash $ - $ 912 Note receivable 3,000 3,000 Prepaid expenses 103 - Real estate held for resale 11,223 7,308 Other assets 62 153 Liabilities (14,233) (11,526) -------- -------- Net assets of discontinued operation $ 155 $ 153 ======== ======== NOTE 6. Financial Instruments and Price Risk Management Beginning in the third quarter of 1997, QST has entered into commodity futures contracts, options, and swaps (derivative financial instruments) relating to its natural gas business activities. Gains and losses arising from derivative transactions which serve to hedge the impact of market risk associated with fluctuations in energy prices are recognized in income concurrent with the related purchases and sales of natural gas. Realized and unrealized gains and losses on derivative transactions which do not qualify as hedges are recognized in income as revenues on a current basis. If a derivative financial instrument contract is terminated early for other economic reasons, any gain or loss as of the termination date is deferred and recorded concurrent with the related purchases and sales of natural gas. At September 30, 1997, the fair value of natural gas derivative financial instruments was a loss of $1.1 million and the net open fixed price position of these financial instruments was 0.8 billion cubic feet. The net loss arising from financial instruments entered into for both hedging and non- hedging purposes for the nine months ended September 30, 1997 was $.7 million. QST establishes physical and derivative financial instrument positions in its normal course of business. These transactions give rise to market risk, which represents the potential loss that can be caused by a change in the market value of a particular commitment. Market risks are actively monitored to ensure compliance with risk management policies of QST. Policies are in place which limit the amount of total net exposure QST may enter into at any point in time. Procedures exist which allow for the monitoring of all commitments and positions with timely reporting to senior management. 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 services through QST Communications Inc. (QST Com). QST's operations include those of QST Environmental Inc., a former first-tier CILCORP subsidiary which became a QST subsidiary effective October 29, 1996. QST Environmental Inc.'s results are currently reported separately from QST's energy and telecommunications operations. QST Environmental is an environmental consulting and engineering firm serving governmental, industrial and commercial customers. QST Environmental expects to complete the sale of ESE Land Corporation, a wholly-owned subsidiary, which acquires environmentally impaired property for remediation and resale, during the fourth quarter of 1997. CIM invests in a diversified portfolio of long-term financial investments which currently includes leveraged leases, energy-related projects and affordable residential housing. CVI has invested in energy, biotechnology, and health care ventures, 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). Additionally, CESI pursues 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 2 to the Consolidated Financial Statements. Some important factors could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. These factors include prevailing governmental policies, statutory changes, and regulatory actions with respect to rates, industry structure and recovery of various costs incurred by CILCO in the course of its business; 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 QST Environmental'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 $60 million on a short-term basis. On September 30, 1997, CILCORP had committed bank lines of credit of $50 million, of which $42.7 million was used. 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. Through September 30, 1997, CILCORP has received $600,808 from investors for the purchase of common stock through this direct registration program. The dollars received to date under this plan have been used to purchase shares on the open market for plan participants. The proceeds from any newly-issued stock from the ESP or the DRIP have been, and will continue to be, used to retire CILCORP short-term debt, to meet working capital and capital expenditure requirements at subsidiaries, and for other corporate purposes. The Company had $42 million of medium-term notes outstanding at September 30, 1997. The Company may issue an additional $27 million under its existing $75 million medium-term note program in order to retire maturing debt and to provide funds for other corporate purposes. CILCO Capital expenditures totaled $35.8 million for the nine months ended September 30, 1997. Capital expenditures are anticipated to be approximately $16.5 million for the remainder of 1997 and are estimated to be $50 million in 1998. 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 September 30, 1997, 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 $12.2 million of commercial paper outstanding at September 30, 1997 and expects to issue commercial paper periodically throughout the remainder of 1997. QST (Excluding QST Environmental) Capital expenditures totaled approximately $4.1 million for the nine months ended September 30, 1997, primarily for construction of fiber optic and other communications facilities. Capital expenditures for the remainder of 1997 are expected to be $1 million. QST expects to finance fiber optic and other communication facilities and its working capital needs during the remainder of 1997 with funds provided by CILCORP. The property management company which operates the Sears Tower (Tower) in Chicago has contracted with QST to install a cogeneration system that would supply electricity to the Tower and its tenants. The estimated installed cost of the cogeneration system is approximately $10 million. However, the Tower's current utility provider, Commonwealth Edison (ComEd), has refused to allow QST necessary access to its distribution system. On April 28, 1997, QST and Tower filed a joint complaint with the Illinois Commerce Commission (ICC) alleging that ComEd's refusal to permit an interconnection constituted a violation of the Illinois Public Utilities Act. A hearing on the complaint is scheduled for December 2, 1997. QST expects to finance the cogeneration project with a combination of long-term debt and funds provided by CILCORP. At September 30, 1997, QST had outstanding debt of $12.4 million, all of which was owed to CILCORP. QST Environmental For the quarter ended September 30, 1997, QST Environmental's expenditures for capital additions and improvements were approximately $1,120,000, which included $845,000 to acquire land for remediation and resale through its subsidiary ESE Land. Capital expenditures for the remainder of 1997 are expected to be $150,000. QST Environmental has lines of credit with CILCORP under which QST Environmental may borrow up to $20 million of term debt and up to $15 million of revolving debt, depending upon the amount of QST Environmental's receivables. At September 30, 1997, QST Environmental had borrowed $21 million from CILCORP. Of this amount, $20 million is term debt due May 1998 and $1 million is revolving debt. Based on the amount of its receivables at September 30, 1997, QST Environmental has $7 million available on its lines of credit with CILCORP. CIM At September 30, 1997, CIM had outstanding debt of $38.5 million, borrowed from CILCORP. During the fourth quarter of 1996, CIM committed $15.8 million to fund four affordable housing investments. Through September 30, 1997, approximately $8.2 million of this commitment has been funded. CIM expects to contribute approximately $1.9 million in cash for these investments during the remainder of 1997, $3.3 million in 1998, and substantially all of the remainder of the cash contributions in 1999. These investments will be funded through borrowings from CILCORP. On July 21, 1997, CIM invested $6.9 million in a leveraged lease of a waste-to-energy facility. This investment was financed through borrowings from CILCORP. CIM expects to finance any other new investments and working capital needs during the remainder of 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, QST Environmental and Other Businesses for the three months and nine months ended September 30, 1997 and 1996.
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (In thousands) (Unaudited) Core Businesses: CILCO Electric operating income $23,161 $22,687 $45,053 $43,503 Gas operating income (loss) (671) (198) 11,016 11,366 ------- ------- ------- ------- Total utility operating income 22,490 22,489 56,069 54,869 Utility other income and deductions (6,154) (6,255) (18,115) (18,407) Preferred stock dividends of CILCO (818) (795) (2,415) (2,396) ------- ------- ------- ------- Total utility net income 15,518 15,439 35,539 34,066 QST (excluding QST Environmental) net loss (2,285) (787) (4,549) (2,148) QST Environmental net income (loss) (includes ESE Land) 251 (715) (818) (3,878) ------- ------- ------- ------- Total core business income 13,484 13,937 30,172 28,040 Other businesses net loss (410) (1,465) (1,562) (2,648) ------- ------- ------- ------- Consolidated net income available to common shareholders $13,074 $12,472 $28,610 $25,392 ======= ======= ======= =======
CILCO Electric Operations The following table summarizes the components of CILCO electric operating income for the three months and nine months ended September 30, 1997 and 1996:
Three Months Ended Nine Months Ended Components of Electric September 30, September 30, Operating Income 1997 1996 1997 1996 (In thousands) (Unaudited) Revenue: Electric retail $96,878 $92,564 $243,866 $239,059 Sales for resale 7,458 3,706 14,773 9,989 ------- ------- -------- -------- Total revenue 104,336 96,270 258,639 249,048 ------- ------- -------- -------- Cost of sales: Cost of fuel 24,497 21,788 68,240 68,144 Purchased power expense 7,889 3,615 16,035 7,987 Revenue taxes 4,863 4,796 11,775 11,688 ------- ------- -------- -------- Total cost of sales 37,249 30,199 96,050 87,819 ------- ------- -------- -------- Gross margin 67,087 66,071 162,589 161,229 ------- ------- -------- -------- Operating expenses: Other operation and maintenance 19,027 19,562 59,244 61,364 Depreciation and amortization 10,949 10,718 32,898 32,203 Income and other taxes 13,950 13,104 25,394 24,159 ------- ------- -------- -------- Total operating expenses 43,926 43,384 117,536 117,726 ------- ------- -------- -------- Electric operating income $23,161 $22,687 $ 45,053 $ 43,503 ======= ======= ======== ========
Electric gross margin increased 2% for the quarter and 1% for the nine months ended September 30, 1997, compared to the same periods in 1996. Retail kilowatt hour (Kwh) sales increased 3% for the quarter and remained constant for the nine months ended September 30, 1997. Residential and commercial sales each increased 2% for the quarter and remained constant for the nine months ended September 30, 1997, compared to the same periods in 1996. Cooling degree days were 14% higher for the quarter and 2% lower for the nine months ended September 30, 1997, compared to the same periods in 1996. Industrial sales increased 6% for the quarter and remained constant for the nine months ended September 30, 1997, compared to the same periods in 1996. Industrial sales continue to be impacted by customers switching to off-system suppliers under CILCO's Power Quest program (see Part II. Item 5. Other Information, Competition). 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 for the near term by the Power Quest pilot programs, and in the long term by deregulation and increased competition in the electric utility industry (see Part II. Item 5: Other Information, Competition). Sales for resale increased during the third quarter and for the nine months ended September 30, 1997, compared to the same periods in 1996 due to favorable market conditions. Sales for resale vary based on the energy requirements of neighboring utilities and power marketers, CILCO's available capacity for bulk power sales and the price of power available for sale. 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 increased 12% for the third quarter of 1997, compared to the same period in 1996. This increase was due to a 3% increase in generation, and a 16% increase in the cost of coal burned. The cost of fuel remained constant for the nine months ended September 30, 1997, compared to the same period in 1996. Purchased power increased for the quarter and the nine months ended September 30, 1997, compared to the same periods in 1996. 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 3% for the quarter and the nine months ended September 30, 1997, compared to the same periods in 1996. The decreases were primarily due to decreased employee salaries and employee pension and benefit expenses as a result of the 1996 early retirement program. Consulting fees and injury and damage claims also decreased for both periods. In addition, the 1996 expenses include a $2.2 million pre-tax one-time write- down for disposal of obsolete materials and supplies inventory. Increases in power plant maintenance expenses associated with the scheduled outage at the Duck Creek generation facility partially offset the decreases for nine months ended September 30, 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 increased primarily due to higher 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, 1997 and 1996:
Three Months Ended Nine Months Ended Components of Gas September 30, September 30, Operating Income (Loss) 1997 1996 1997 1996 (In thousands) (Unaudited) Revenue: Sale of gas $17,748 $17,033 $137,231 $122,979 Transportation services 1,270 1,561 4,799 6,002 ------- ------- -------- -------- Total revenue 19,018 18,594 142,030 128,981 ------- ------- -------- -------- Cost of sales: Cost of gas 7,383 6,352 82,186 68,195 Revenue taxes 508 507 5,317 5,560 ------- ------- -------- -------- Total cost of sales 7,891 6,859 87,503 73,755 ------- ------- -------- -------- Gross margin 11,127 11,735 54,527 55,226 ------- ------- -------- -------- Operating expenses: Other operation and maintenance 8,136 8,096 24,068 24,253 Depreciation and amortization 4,445 4,291 13,283 12,871 Income and other taxes (783) (454) 6,160 6,736 ------- ------- -------- -------- Total operating expenses 11,798 11,933 43,511 43,860 ------- ------- -------- -------- Gas operating income (loss) $ (671) $ (198) $ 11,016 $ 11,366 ======= ======= ======== ========
Gas gross margin decreased 5% for the quarter and 1% for the nine months ended September 30, 1997, compared to the same periods in 1996. Retail sales quantities increased 24% and 1% for the quarter and nine months ended September 30, 1997, respectively, compared to 1996. A decrease in transportation revenues of 20% partially offset the increase in retail revenues. Residential sales decreased 10% for the quarter and decreased 10% for the nine months ended September 30, 1997. Heating degree days were 36% lower for the quarter and 5% lower for the nine months ended September 30, 1997, compared to the same periods in 1996. Commercial sales increased 43% for the third quarter of 1997, and 17% for the nine months ended September 30, 1997, due to customers switching from gas transportation to CILCO system supply as a result of the competitiveness of CILCO's gas prices and a 1996 Illinois law which exempts certain customers from a portion of 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. Revenues from gas transportation services decreased 19% and 20%, respectively, while sales volumes increased 20% and 13% for the quarter and nine months ended September 30, 1997, compared to the same periods in 1996. Despite increased transportation sales volumes, transportation revenues decreased due to increased gas transportation by customers using Rate 800 contract service, which has a lower per unit charge than other classes of transportation service. Rate 800 customers have the ability to connect directly to interstate pipelines and bypass CILCO's gas system. Rates are negotiated individually with Rate 800 customers. In addition, transportation revenues decreased due to commercial customers switching back to CILCO system supply. The cost of gas increased 16% for the quarter and increased 21% for the nine months ended September 30, 1997, compared to the same periods in 1996. The year-to-date increase was due to higher natural gas prices in the first quarter of 1997 relative to 1996. The increase for the third quarter was primarily due to higher natural gas sales partially offset by lower natural gas prices. The lower natural gas prices 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, 1997, compared to the same periods in 1996. Depreciation and amortization expense increased 4% for the quarter and 3% for the nine months ended September 30, 1997, compared to the same periods 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 changed for the quarter and nine months ended September 30, 1997, due to changes in pre-tax operating income compared to 1996. 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, 1997 and 1996:
Three Months Ended Nine Months Ended Components of Other Income and September 30, September 30, Deductions and Interest Expense 1997 1996 1997 1996 (In thousands) (Unaudited) Net interest expense $(5,621) $(5,694) $(16,819) $(17,106) Income taxes 834 859 2,129 2,155 Other (1,367) (1,420) (3,425) (3,456) ------- ------- -------- -------- Other income (deductions) $(6,154) $(6,255) $(18,115) $(18,407) ======= ======= ======== ========
Interest expense decreased primarily as a result of a lower long-term debt balance for the nine months ended September 30, 1997 compared to the same period in 1996. QST (Excluding QST Environmental) The following table summarizes the revenue and expenses for QST for the three months and nine months ended September 30, 1997 and 1996.
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Components of QST Net Loss (In thousands) (Unaudited) Revenue: Electric revenue $ 8,140 $ 644 $ 10,593 $ 833 Gas revenue 75,658 166 120,111 166 Telecommunications revenue 200 26 376 55 ------- ------- -------- ------- Total revenue 83,998 836 131,080 1,054 Cost of sales: Cost of electricity 8,421 555 11,184 741 Cost of gas 76,754 166 120,689 166 Cost of sales - Telecommunications 2 7 15 7 ------- ------- ------- ------- Total cost of sales 85,177 728 131,888 914 ------- ------- ------- ------- Gross margin (1,179) 108 (808) 140 ------- ------- ------- ------- Other expenses: General and administrative 2,470 1,391 6,319 3,649 Depreciation and amortization 135 6 260 32 Interest 9 16 158 20 ------- ------- ------- ------- Total other expenses 2,614 1,413 6,737 3,701 ------- ------- ------- ------- Net loss before taxes (3,793) (1,305) (7,545) (3,561) Income taxes (1,508) (518) (2,996) (1,413) ------- ------- ------- ------- QST net loss $(2,285) $ (787) $(4,549) $(2,148) ======= ======= ======= =======
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 was to compete against energy suppliers participating in CILCO's Power Quest programs. After successfully competing for Power Quest program customers, QST has begun to establish and expand the infrastructure required to supply energy to customers outside of the CILCO service territory. QST competes against marketers, brokers and utility affiliates to provide energy and services to customers of utilities and other energy providers which offer, or will be required to offer, similar retail competition programs, as well as marketing energy to customers who already have the ability to choose their 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 electric power marketer which purchases, sells and brokers energy and capacity at market-based rates to other marketers, including QST Energy, utilities and other customers. QST Energy and QST Trading currently have offices in Peoria, Chicago, Pittsburgh and Houston. On May 23, 1997, QST Trading acquired Trebor Energy Resources, a Houston-based natural gas marketing and trading company. The acquisition increased QST's natural gas supply and logistics capabilities and complements QST's growing wholesale and retail energy business. The acquisition enhances QST's ability to purchase, transport and sell natural gas to utilities and industrial and commercial customers in the Gulf Coast, Midwest and Northeast markets. The final acquisition price, based on a deferred payment arrangement using predetermined performance measures, cannot currently be determined. Negative electric gross margin at QST Energy and negative natural gas gross margin at QST Trading contributed to QST's net losses for the quarter and nine months ended September 30, 1997. Negative electric gross margin was the result of retail operations in the pilot programs of Power Quest and another Illinois utility. Electric wholesale trading generated a positive margin, which partially offset the negative margin from the electric retail business. Wholesale electric sales totaled 195,700 megawatt hours in the third quarter, compared to 2,080 megawatt hours in the second quarter of 1997. The negative electric retail margin was the result of purchased power cost increases during the summer cooling season. Contributing to the higher costs was the refusal by Union Electric/Central Illinois Public Service (UE/CIPS) to provide QST Trading firm transmission service into CILCO's and another Illinois utility's service territories for firm power purchases to supply QST customers under ICC approved pilot programs. On June 25, 1997, QST Trading filed a complaint at the FERC against UE and CIPS related to market power and other issues pertaining to transmission service. Additionally, on October 1, 1997, QST Trading filed a complaint with the Tenth Judicial Circuit Court of Illinois challenging the ICC's order authorizing the merger of the parent corporations of UE and CIPS and authorizing a joint generation dispatch agreement between UE and CIPS. QST Trading contends that the ICC does not have jurisdiction to approve central dispatch. QST Trading is seeking a declaratory judgment that the ICC's order approving central dispatch is void, and that the ICC's approval of the merger is also void because it is dependent upon the approval of central dispatch. Wholesale natural gas sales and trading transactions by QST Trading contributed to the negative gas gross margin for the third quarter and year-to- date 1997. QST also participates in the Power Quest gas pilot programs, but revenues from this program are not material. The negative gas gross margin for the third quarter and year-to-date was primarily due to wholesale trading losses incurred when natural gas prices increased approximately 36% during the months of August and September 1997. This price increase occurred as QST Trading was purchasing supply physically and financially to balance the portfolio position for these two months. Natural gas volumes have increased 81% from the second to the third quarter of 1997 to approximately 347,000 MMBTU per day due to the Trebor acquisition and market growth initiatives. QST's general and administrative expenses have increased for the quarter and the nine months ended September 30, 1997, compared to the same periods in 1996, due to the acquisition of Trebor Resources and an increase in the number of QST employees to support growing retail and wholesale operations. Net losses are expected to continue in 1997 as QST continues to develop its businesses, focused on the newly-emerging deregulated energy markets developing throughout the United States. Revenues are anticipated to increase as QST grows through: participation in additional pilot programs, retail sales of energy to commercial and industrial customers, and wholesale natural gas and electric transactions. QST Energy is participating in the Columbia Energy of Pennsylvania gas pilot program and the statewide Pennsylvania electricity pilot programs, all of which began November 1, 1997. QST Energy has acquired approximately 4,500 new natural gas customers through the Columbia Energy natural gas pilot. This customer growth in Pennsylvania will help position QST for the electricity pilots. As part of its expansion into the Pennsylvania markets, QST Energy has opened an office in Pittsburgh. QST Energy entered into an agreement on July 1, 1997, with R. Hadler and Company, Inc. (Hadler), a Washington, D.C.-based company, under which Hadler will work with QST to market natural gas and electricity to commercial and industrial companies in Michigan, Pennsylvania, and various other states. The primary focus will be the development of the Midwest and Mid-Atlantic industrial and commercial customer base. Hadler will expand QST's delivery system through the Hadler network, arranging for the sale of energy to new customers. QST Energy will provide supply, logistics, trading and retail sales support through its existing capabilities. QST Energy is negotiating an agreement with Susquehanna Pfaltzgraff Co., of York, Pennsylvania, to market and offer electricity to consumers eligible to participate in the Pennsylvania pilot programs. Privately-held Susquehanna Pfaltzgraff is a diversified cable, radio and communications provider with service to over one million customers nationally. QST Environmental Operations The following table summarizes environmental and engineering services revenue and expenses for the three months and nine months ended September 30, 1997 and 1996:
Components of QST Environmental Three Months Ended Nine Months Ended Net Loss September 30, September 30, 1997 1996 1997 1996 (In thousands) (Unaudited) Revenue: Environmental and engineering services revenue $19,392 $20,852 $55,230 $62,672 Direct non-labor project costs 7,652 6,640 19,564 18,495 ------- ------- ------- ------- Net revenue 11,740 14,212 35,666 44,177 ------- ------- ------- ------- Expenses: Direct salaries and other costs 5,868 7,324 18,853 23,617 General and administrative 4,674 6,283 15,029 21,189 Depreciation and amortization 877 1,244 2,947 3,866 ------- ------- ------- ------- Operating expenses 11,419 14,851 36,829 48,672 ------- ------- ------- ------- Interest expense 21 225 281 861 ------- ------- ------- ------- Income (loss) before income taxes 300 (864) (1,444) (5,356) Income taxes 204 (226) (317) (1,775) ------- ------- ------- ------- Net income (loss) from continuing operations 96 (638) (1,127) (3,581) Income (loss) from operations of discontinued business 155 (77) 309 (297) ------- ------- ------- ------- QST Environmental net income (loss) $ 251 $ (715) $ (818) $(3,878) ======= ======= ======= =======
QST Environmental'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 QST Environmental's 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. QST Environmental's net revenues decreased by $2.5 million, or 17%, for the third quarter and by $8.5 million, or 19%, for the nine months ended September 30, 1997, compared to the same periods in 1996. 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, including industry overcapacity. Direct salaries and other expenses, which include the cost of professional and technical staff and other costs billable to customers, decreased during the three months and nine months ended September 30, 1997. Direct salary 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 $1.5 million, or 20%, for the third quarter and by $4.8 million, or 20%, for the nine months ended September 30, 1997, compared to the same periods in 1996. These decreases were primarily due to a planned reduction in the number of technical staff to match decreased levels of business activity. General and administrative expenses decreased by $1.6 million, or 26%, for the three months ended September 30, 1997, and decreased by $6.2 million, or 29%, for the nine months ended September 30, 1997. General and administrative expenses include non-billable employee time devoted to marketing, proposals, supervision, and professional development; office supply expenses; and corporate administrative expenses. The decreases for these periods resulted from efforts to control administrative and marketing costs, including lower general and administrative salaries and related benefits expense. QST Environmental plans to sell substantially all the assets of ESE Land Corporation, a wholly-owned subsidiary which acquires environmentally impaired property for remediation and resale. Completion of this transaction is anticipated during the fourth quarter of 1997. Accordingly, the operations of ESE Land Corporation are shown as discontinued operations in the statements of earnings. Prior year financial statements have been reclassified to conform to the current year presentation. During the third quarter of 1997, ESE Land recorded a $455,000 pre-tax profit on the sale of real estate. QST Environmental will continue to position itself to take advantage of new market opportunities. QST Environmental is collaborating with QST Energy to provide environmental consulting and laboratory services for QST Energy customers. The bundled services that QST Energy offers its customers include the environmental consulting capabilities of QST Environmental. Due to the labor intensive nature of QST Environmental's business, it has the ability to adjust staffing levels to recognize changing business conditions. QST Environmental had 621 full-time equivalent employees at September 30, 1997, compared to 780 employees at September 30, 1996. To better utilize QST Environmental's resources as part of CILCORP's commitment to efficiently market non-regulated energy and related services, QST Environmental became a subsidiary of QST effective October 29, 1996. During 1997, management is evaluating QST Environmental's role in QST's and CILCORP's business strategy. This evaluation, which will take into account QST Environmental's ongoing performance and integration with QST's operations, could result in further adjustments to staffing levels and to the carrying value of QST Environmental's assets. QST Environmental's future business activity and profitability will continue to be impacted by the level of demand for its services, which is affected by government funding levels, the enforcement of various federal and state statutes and regulations dealing with the environment and the use, control, disposal, and clean-up of hazardous wastes. The market for QST Environmental's services is highly competitive; 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 and nine months ended September 30, 1997 and 1996. Three Months Ended Nine Months Ended
September 30, September 30, Components of Other Businesses 1997 1996 1997 1996 Net Income (Loss) (In thousands) (Unaudited) Revenue: Other revenue $1,923 $ 2,133 $ 6,812 $ 6,808 ------- ------- ------- ------- Expenses: Operating Expenses 1,715 3,686 7,426 6,943 Depreciation and amortization 48 58 144 163 Interest expense 1,241 881 3,666 3,726 Income and other taxes (671) (1,027) (2,862) (1,376) ------- ------- ------- ------- Total expenses 2,333 3,598 8,374 9,456 ------- ------- ------- ------- Other businesses net loss $ (410) $ (1,465) $(1,562) $(2,648) ======= ======= ======= =======
Other revenues decreased 10% for the three months ended September 30, 1997, and remained relatively constant for the nine months ended September 30, 1997. Operating expenses decreased for the three months ended September 30, 1997, compared to the same period in 1996, primarily due to decreased expenses related to the Caterpillar Alliance at CVI and decreased utilization of outside services by CILCORP. Operating expenses increased for the nine months ended September 30, 1997, compared to the same period in 1996, primarily due to higher expenses related to the Caterpillar Alliance which began in May 1996 (see Part II. Item 5: Other Information, Power Quest Electric Pilot Programs). Income and other taxes were higher in the quarter due to higher pre-tax income, and lower in the nine months ended September 30, 1997, compared to the same periods in 1996, primarily due to lower pre-tax income and tax credits received in 1997 from investments made 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. Contingencies," and "Note 4. Electric Transmission Open Access," herein, for certain pending legal proceedings and proceedings known to be contemplated by governmental authorities. The Company and its subsidiaries are subject to certain claims and lawsuits in connection with work performed in the ordinary course of their businesses. Except as otherwise referred to above, in the opinion of management, all such claims currently pending either will not result in a material adverse effect on the financial position and results of operations of the Company or are adequately covered by: (i) insurance; (ii) contractual or statutory indemnification; and/or (iii) reserves for potential losses. Item 5: Other Information 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 further changes in the natural gas industry at the retail level. Management cannot predict the ultimate effect and timing 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 lower operating costs, improved efficiency and the marketing of new and better services and products will be the key competitive factors for utilities and other energy providers. Legislation to institute changes in the electric utility industry is pending in the Illinois General Assembly (see Deregulation Legislation). CILCORP and its subsidiaries support rapid implementation of broadened consumer choice throughout Illinois and the nation and the expanded business opportunities it will provide. 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 each 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. Participating industrial customers began receiving electricity under this Power Quest program in May 1996. For the industrial pilot program, CILCO could potentially experience a reduction in pre-tax income of up to $6.2 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 meet the 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 electric allocation off-system and will receive a correspondingly reduced level of products and services under the strategic alliance. Based on Power Quest participation levels by eligible industrial customers through September 1997, CILCORP experienced a reduction of $5.3 million of pre- tax income for the first nine months of 1997 (including electric margin lost by CILCO, CVI costs associated with the Caterpillar alliance, and QST margin on sales to Power Quest industrial customers). CILCO has offset some of the profit margin lost under Power Quest with increased wholesale electric sales outside its service territory. Assuming the same participation level for all of 1997, CILCORP would experience a reduction to pre-tax income, including costs associated with the Caterpillar alliance included in Other Businesses Operations, of $6.7 million related to industrial customers participating in Power Quest. In the other Power Quest electric program, CILCO has 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 designate additional Open Access Sites and, with ICC approval, may extend the program's five-year term. 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 the existing 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 September 1997, CILCORP experienced a reduction of $.8 million in pre-tax income for the first nine months of 1997. Assuming the same participation level for all of 1997, CILCORP would experience a reduction to pre-tax income of $1 million in 1997. 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 at any one time. 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 financial position or results of operations for 1996 or the first nine months of 1997, nor does management believe this program will have a material adverse impact on CILCO's future financial position or results of operations. Deregulation Legislation On October 30, the Illinois Senate voted 57-2 in favor of an amended version of legislation passed earlier this year by the Illinois House of Representatives which comprehensively restructures the electric utility industry in Illinois. The legislation, which is expected to return to the Illinois House for a final vote on the Senate's changes in mid-November, includes provisions for rate reductions, limits utilities' return on equity invested in the electric business, imposes customer exit fees to allow utilities to recover stranded costs, and, by virtue of the exit fees, prevents full consumer choice for residential customers until the end of 2006. CILCO is seeking legislative relief from a mandatory 5% rate reduction, effective August 1, 1998, that is included in the Senate-passed version and applies to the state's smaller, lower-cost utilities. The bill provides for 15% rate reductions on that same date for the state's two largest utilities, who have been supportive of the legislation. Management cannot predict the ultimate form of any legislation which may be enacted, but certain elements of the legislation being proposed could have a material adverse impact on CILCO's results of operations. CILCO's Union Contracts The International Brotherhood of Electric Workers Local 51 (IBEW) ratified the Company's contract proposal on October 10, 1997. CILCO's contract with the IBEW expired on June 30, 1997, and the IBEW membership had been working without a contract since that time. The new contract expires on July 1, 2000, and among other items, provides for 3% wage increases each year of the contract. The IBEW represents approximately 406 CILCO gas and electric department employees. The current contract with the International Brotherhood of Firemen and Oilers Local 8 (IBF&O), which represents approximately 201 CILCO power plant 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 November 10, 1997 R. O. Viets R. O. Viets President and Chief Executive Officer Date November 10, 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 November 10, 1997 T. S. Romanowski T. S. Romanowski Vice President and Chief Financial Officer Date November 10, 1997 T. D. Hutchinson T. D. Hutchinson Controller and Manager of Accounting EX-27 2
UT THIS SCHEDULE CONTAINS 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-31-1997 JAN-01-1997 SEP-30-1997 PER-BOOK 864,618 20,467 183,189 48,901 164,701 1,281,876 190,760 0 180,927 371,687 22,000 44,120 298,531 57,931 0 0 22,181 0 2,295 430 462,701 1,281,876 597,221 14,575 529,972 544,547 52,674 (824) 51,850 20,825 31,025 2,415 28,610 25,112 15,064 67,385 2.10 2.10
EX-27 3
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS, BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000018651 CENTRAL ILLINOIS LIGHT COMPANY 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 PER-BOOK 864,618 3,412 110,297 23,794 0 1,002,121 185,661 0 141,058 326,719 22,000 44,120 267,824 12,200 0 0 10,650 0 2,295 430 315,883 1,002,121 400,670 22,685 321,915 344,600 56,070 (1,162) 54,908 16,953 37,955 2,415 35,540 31,111 15,064 92,730 0 0
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