-----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, CchxYNyZRLkWOgJMs4gcAfvPf5HkqFohWm+DjhTH93KGcRQp2frloolccAalCvpL FjSpuMDLkOvg/DwozT6L7g== 0000762129-99-000017.txt : 19990512 0000762129-99-000017.hdr.sgml : 19990512 ACCESSION NUMBER: 0000762129-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990511 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: 99617306 BUSINESS ADDRESS: STREET 1: 300 HAMILTON BLVD STE 300 CITY: PEORIA STATE: IL ZIP: 61602 BUSINESS PHONE: 3096758810 MAIL ADDRESS: STREET 1: 300 LIBERTY STREET STREET 2: STE 300 CITY: PEORIA STATE: IL ZIP: 61602 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL ILLINOIS LIGHT CO CENTRAL INDEX KEY: 0000018651 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 370211050 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02732 FILM NUMBER: 99617307 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, 1999 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 March 31, 1999 13,610,680 CENTRAL ILLINOIS LIGHT COMPANY Common stock, no par value, shares outstanding and privately held by CILCORP Inc. at March 31, 1999 13,563,871 1 CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 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 Statements of Segments of Business 14-15 Notes to Consolidated Financial Statements CILCORP Inc. and Central Illinois Light Company 16-19 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations CILCORP Inc. and Central Illinois Light Company 20-31 PART II. OTHER INFORMATION Item 1: Legal Proceedings 31 Item 5: Other Information 31-32 Item 6: Exhibits and Reports on Form 8-K 32 Signatures 2 CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
March 31, December 31, 1999 1998 ASSETS (Unaudited) Current assets: Cash and temporary cash investments $ 2,804 $ 1,669 Receivables, less reserves of $3,877 and $3,411 121,125 134,548 Accrued unbilled revenue 34,802 39,339 Fuel, at average cost 10,944 13,431 Materials and supplies, at average cost 14,912 15,435 Gas in underground storage, at average cost 6,657 20,494 Prepayments and other 5,986 7,646 ---------- ---------- Total current assets 197,230 232,562 ---------- ---------- Investments and other property: Investment in leveraged leases 147,481 146,977 Cash surrender value of company-owned life insurance, net of related policy loans of $48,132 3,352 2,655 Other investments 21,653 16,882 ---------- ---------- Total investments and other property 172,486 166,514 ---------- ---------- Property, plant and equipment: Utility plant, at original cost Electric 1,239,766 1,237,885 Gas 418,981 417,585 ---------- ---------- 1,658,747 1,655,470 Less - accumulated provision for depreciation 830,761 812,630 ---------- ---------- 827,986 842,840 Construction work in progress 36,802 30,075 Other, net of depreciation 7,156 7,755 ---------- ---------- Total property, plant and equipment 871,944 880,670 ---------- ---------- Other assets 24,219 33,194 ---------- ---------- Total assets $1,265,879 $1,312,940 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
3 CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
March 31, December 31, 1999 1998 LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) Current liabilities: Current portion of long-term debt $ 43,021 $ 13,027 Notes payable 80,700 96,200 Accounts payable 95,793 128,845 Accrued taxes 14,276 8,262 Accrued interest 6,974 9,994 FAC/PGA over-recoveries 2,007 304 Other 11,028 14,316 ---------- ---------- Total current liabilities 253,799 270,948 ---------- ---------- Long-term debt 257,550 288,135 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes 238,047 239,305 Regulatory liability of regulated subsidiary 43,824 46,346 Deferred investment tax credits 19,069 19,450 Other 47,321 47,098 ---------- ---------- Total deferred credits and other liabilities 348,261 352,199 ---------- ---------- Preferred stock of subsidiary 66,120 66,120 ---------- ---------- Stockholders' equity: Common stock, no par value; authorized 50,000,000 shares - outstanding 13,610,680 shares 192,853 192,853 Retained earnings 148,141 143,530 Accumulated other comprehensive income (845) (845) ---------- ---------- Total stockholders' equity 340,149 335,538 ---------- ---------- Total liabilities and stockholders' equity $1,265,879 $1,312,940 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
4 CILCORP INC AND SUBSIDIARIES Consolidated Statements of Income (In thousands)* (Unaudited)
Three Months Ended March 31, 1999 1998 Revenue: Electric utility $ 80,962 $ 79,177 Gas utility 76,797 69,902 Other businesses 10,479 5,235 -------- -------- Total 168,238 154,314 -------- -------- Operating expenses: Fuel for generation and purchased power 30,070 29,016 Gas purchased for resale 50,771 43,990 Other operations and maintenance 30,608 28,691 Depreciation and amortization 18,321 15,984 Taxes, other than income taxes 11,567 10,788 -------- -------- Total 141,337 128,469 -------- -------- Fixed charges and other: Interest expense 7,212 7,249 Preferred stock dividends of subsidiary 797 802 Allowance for funds used during construction (11) 23 Other 247 205 -------- -------- Total 8,245 8,279 -------- -------- Income from continuing operations before income taxes 18,656 17,566 Income taxes 6,049 6,250 -------- -------- Net income from continuing operations 12,607 11,316 Income (loss) from operations of discontinued business, net of tax of $45 and $(2,355) 28 (3,622) -------- -------- Net income $ 12,635 $ 7,694 Other comprehensive income -- -- -------- -------- Comprehensive income $ 12,635 $ 7,694 ======== ======== 5 Average common shares outstanding - basic 13,611 13,611 ======== ======== Earnings per common share - basic Continuing operations $ .93 $ .83 Discontinued operations -- (.26) -------- -------- Net income per common share - basic $ .93 $ .57 ======== ======== Average common shares outstanding - diluted 13,748 13,690 ======== ======== Earnings per common share - diluted Continuing operations $ .92 $ .83 Discontinued operations -- (.27) -------- -------- Net income per common share - diluted $ .92 $ .56 ======== ======== 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.
6 CILCORP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 Cash flows from operating activities: Net income before preferred dividends $ 13,405 $ 12,117 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Non-cash lease income and investment income (1,633) (1,637) Cash receipts in excess of debt service on leases 1,466 796 Depreciation and amortization 18,321 15,984 Deferred income taxes, investment tax credit and regulatory liability of subsidiary, net (3,639) (2,323) Changes in operating assets and liabilities: Decrease in accounts receivable and accrued unbilled revenue 2,924 10,126 Decrease in inventories 16,832 12,793 (Decrease) in accounts payable (22,789) (11,152) Increase in accrued taxes 9,239 6,756 Decrease in other assets 4,602 4,395 Decrease in other liabilities (3,232) (5,933) -------- -------- Total adjustments 22,091 29,805 -------- -------- Net cash provided by operating activities from continuing operations 35,496 41,922 -------- -------- Net cash provided (used) by operating activities of discontinued operations 391 (4,978) -------- -------- Cash flow from operations 35,887 36,944 -------- -------- Cash flows from investing activities: Additions to plant (10,497) (12,119) Other 1,400 (6,094) -------- -------- Net cash used by investing activities from continuing operations (9,097) (18,213) -------- -------- Net cash used by investing activities from discontinued operations (395) 4,978 -------- -------- Cash flow from investing activities (9,492) (13,235) -------- -------- 7 Cash flow from financing activities: Net decrease in short-term debt (15,500) (13,700) Decrease in long-term debt (585) (1,131) Common dividends paid (8,371) (8,371) Preferred dividends paid (797) (802) -------- -------- Net cash used by financing activities from continuing operations (25,253) (24,004) -------- -------- Net cash used by financing activities from discontinued operations (7) (12) -------- -------- Cash flow from financing activities (25,260) (24,016) -------- -------- Net (decrease) increase in cash and temporary cash investments: 1,135 (307) Cash and temporary cash investments at beginning of year: 1,669 10,576 -------- -------- Cash and temporary cash investments at March 31 $ 2,804 $ 10,269 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 9,030 $ 8,861 Income taxes $ 3,967 $ 4,755 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
8 CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets (In thousands)
March 31, December 31, ASSETS 1999 1998 (Unaudited) Utility plant, at original cost: Electric $1,239,766 $1,237,885 Gas 418,981 417,585 ---------- ---------- 1,658,747 1,655,470 Less - accumulated provision for depreciation 830,761 812,630 ---------- ---------- 827,986 842,840 Construction work in progress 36,802 30,075 Plant acquisition adjustments, net of amortization 288 505 ---------- ---------- Total utility plant 865,076 873,420 ---------- ---------- Other property and investments: Cash surrender value of company-owned life insurance (net of related policy loans of $48,132) 3,352 2,655 Other 1,191 1,176 ---------- ---------- Total other property and investments 4,543 3,831 ---------- ---------- Current assets: Cash and temporary cash investments 1,564 1,362 Receivables, less reserves of $1,667 and $1,106 43,993 35,767 Accrued unbilled revenue 25,446 31,315 Fuel, at average cost 10,944 13,431 Materials and supplies, at average cost 14,553 15,062 Gas in underground storage, at average cost 6,736 20,494 Prepaid taxes 1,143 2,265 Other 5,094 6,626 ---------- ---------- Total current assets 109,473 126,322 ---------- ---------- Deferred debits: Unamortized loss on reacquired debt 3,181 3,261 Unamortized debt expense 1,812 1,852 Prepaid pension cost 417 417 Other 12,298 15,325 ---------- ---------- Total deferred debits 17,708 20,855 ---------- ---------- Total assets $ 996,800 $1,024,428 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
9 CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets (In thousands)
March 31, December 31, CAPITALIZATION AND LIABILITIES 1999 1998 (Unaudited) Capitalization: Common stockholder's equity: Common stock, no par value; authorized 20,000,000 shares; outstanding 13,563,871 shares $ 185,661 $ 185,661 Retained earnings 130,285 135,315 Accumulated other comprehensive income (845) (845) ---------- ---------- Total common stockholder's equity 315,101 320,131 Preferred stock without mandatory redemption 44,120 44,120 Preferred stock with mandatory redemption 22,000 22,000 Long-term debt 237,896 267,884 ---------- ---------- Total capitalization 619,117 654,135 ---------- ---------- Current liabilities: Current maturities of long-term debt 30,000 -- Notes payable 28,800 40,600 Accounts payable 40,074 53,260 Accrued taxes 14,906 7,303 Accrued interest 7,020 9,394 FAC/PGA over-recoveries 2,007 304 Level payment plan -- 1,519 Other 4,632 5,261 ---------- ---------- Total current liabilities 127,439 117,641 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes 142,120 141,746 Regulatory liability 43,824 46,346 Deferred investment tax credit 19,069 19,450 Capital lease obligation 1,577 1,703 Other 43,654 43,407 ---------- ---------- Total deferred credits and other liabilities 250,244 252,652 ---------- ---------- Total capitalization and liabilities $ 996,800 $1,024,428 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
10 CENTRAL ILLINOIS LIGHT COMPANY Consolidated Statements of Income (In thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 Operating revenue: Electric $ 80,962 $ 79,178 Gas 76,797 69,902 -------- -------- Total operating revenues 157,759 149,080 -------- -------- Operating expenses: Cost of fuel 24,231 24,342 Cost of gas 44,687 40,622 Purchased power 5,839 4,674 Other operations and maintenance 27,702 26,817 Depreciation and amortization 18,060 15,755 Income taxes 6,895 7,777 Other taxes 11,561 10,769 -------- -------- Total operating expenses 138,975 130,756 -------- -------- Operating income 18,784 18,324 -------- -------- Other income and deductions: Cost of equity funds capitalized -- -- Company-owned life insurance, net (247) (205) Other, net (228) (82) -------- -------- Total other income and (deductions) (475) (287) -------- -------- Income before interest expense 18,309 18,037 -------- -------- Interest expenses: Interest on long-term debt 4,808 4,960 Cost of borrowed funds capitalized (11) 23 Other 1,005 738 -------- -------- Total interest expense 5,802 5,721 -------- -------- Net income 12,507 12,316 -------- -------- Dividends on preferred stock 797 802 -------- -------- Net income available for common stock 11,710 11,514 -------- -------- Other comprehensive income -- -- -------- -------- Comprehensive income $ 11,710 $ 11,514 ======== ======== The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
11 CENTRAL ILLINOIS LIGHT COMPANY Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 (In thousands) (Unaudited) Cash flows from operating activities: Net income before preferred dividends $ 12,508 $ 12,316 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 18,276 15,933 Deferred income taxes, investment tax credit and regulatory liability, net (2,529) (1,678) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (8,226) 48 Decrease in fuel, materials and supplies, and gas in underground storage 16,753 12,789 Decrease in unbilled revenue 5,869 9,555 Decrease in accounts payable (13,185) (10,909) Increase in accrued taxes and interest 5,229 5,828 Capital lease payments 161 161 (Increase) decrease in other current assets 2,654 1,259 Decrease in other current liabilities (446) (3,704) Decrease in other non-current assets 3,655 4,517 Increase in other non-current liabilities 399 608 -------- -------- Net cash provided by operating activities 41,118 46,723 -------- -------- Cash flows from investing activities: Capital expenditures (10,087) (10,463) Cost of equity funds capitalized -- -- Other (1,330) (1,163) -------- -------- Net cash used in investing activities (11,417) (11,626) -------- -------- Cash flow from financing activities: Common dividends paid (16,741) (13,371) Preferred dividends paid (797) (802) Payments on capital lease obligation (161) (161) Decrease in short-term borrowing (11,800) (20,100) -------- -------- Net cash used in financing activities (29,499) (34,434) -------- -------- Net increase in cash and temporary cash investments 202 663 Cash and temporary cash investments at beginning of year 1,362 699 -------- -------- Cash and temporary cash investments at March 31 $ 1,564 $ 1,362 ======== ======== 12 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of cost of borrowed funds capitalized) $ 8,334 $ 8,209 Income taxes $ 96 $ -- The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
13 Statements of Segments of Business CILCORP Inc. and Subsidiaries
Three Months Ended March 31, 1999 CILCO CILCO CILCO Other Discont. Electric Gas Other Businesses Operatns. Totals (In thousands) Revenues $80,962 $76,797 $ 848 $ 9,524 $ -- $168,131 Interest income -- -- 78 29 -- 107 ------- ------- ------- -------- ------- -------- Total 80,962 76,797 926 9,553 -- 168,238 ------- ------- ------- -------- ------- -------- Operating expenses 56,328 57,692 1,588 7,408 -- 123,016 Depreciation and amort. 12,432 5,628 216 45 -- 18,321 ------- ------- ------- -------- ------- -------- Total 68,760 63,320 1,804 7,453 -- 141,337 ------- ------- ------- -------- ------- -------- Interest exp. 4,151 1,662 -- 1,399 -- 7,212 Preferred stock div. -- -- 797 -- -- 797 Fixed charges & other exp. (11) -- 247 -- -- 236 ------- ------- ------- -------- ------- -------- Total 4,140 1,662 1,044 1,399 -- 8,245 ------- ------- ------- -------- ------- -------- Income from continuing oper. before income taxes 8,062 11,815 (1,922) 701 -- 18,656 Income taxes 2,148 4,747 (650) (196) -- 6,049 ------- ------- ------- -------- ------- -------- Net income from cont. operations 5,914 7,068 (1,272) 897 -- 12,607 ------- ------- ------- -------- ------- -------- Effect of discontinued operations -- -- -- -- 28 28 ------- ------- ------- -------- ------- -------- Segment net income $ 5,914 $ 7,068 $(1,272)$ 897 $ 28 $ 12,635 ======= ======= ======= ======== ======= ======== 14
Statements of Segments of Business CILCORP Inc. and Subsidiaries
Three Months Ended March 31, 1998 CILCO CILCO CILCO Other Discont. Electric Gas Other Businesses Operatns. Totals (In thousands) Revenues $79,178 $69,902 $ 35 $ 5,127 $ -- $154,242 Interest income -- -- 36 36 -- 72 ------- ------- ------- -------- ------- -------- Total 79,178 69,902 71 5,163 -- 154,314 ------- ------- ------- -------- ------- -------- Operating expenses 54,431 52,793 672 4,589 -- 112,485 Depreciation and amort. 11,218 4,537 178 51 -- 15,984 ------- ------- ------- -------- ------- -------- Total 65,649 57,330 850 4,640 -- 128,469 ------- ------- ------- -------- ------- -------- Interest exp. 4,074 1,624 -- 1,551 -- 7,249 Preferred stock div. -- -- 802 -- -- 802 Fixed charges & other exp. 23 -- 205 -- -- 228 ------- ------- ------- -------- ------- -------- Total 4,097 1,624 1,007 1,551 -- 8,279 ------- ------- ------- -------- ------- -------- Income from continuing oper. before income taxes 9,432 10,948 (1,786) (1,028) -- 17,566 Income taxes 3,422 4,355 (697) (830) -- 6,250 ------- ------- ------- -------- ------- -------- Net income from cont. operations 6,010 6,593 (1,089) (198) -- 11,316 ------- ------- ------- -------- ------- -------- Effect of discontinued operations -- -- -- -- (3,622) (3,622) ------- ------- ------- -------- ------- -------- Segment net income $ 6,010 $ 6,593 $(1,089)$ (198) $(3,622) $ 7,694 ======= ======= ======= ======== ======= ========
15 CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Introduction The consolidated financial statements include the accounts of CILCORP Inc. (CILCORP or the Holding Company), Central Illinois Light Company (CILCO), QST Enterprises Inc. (QST) and its subsidiaries (QST Environmental Inc., formerly known as Environmental Science & Engineering, Inc. (ESE), QST Energy Inc. (QST Energy) and CILCORP Infraservices Inc.) and CILCORP's other subsidiaries (collectively, the Company) after elimination of significant intercompany transactions. The consolidated financial statements of CILCO include the accounts of CILCO and its subsidiaries, CILCO Exploration and Development Company and CILCO Energy Corporation. CILCORP owns directly or indirectly 100% of the common stock of its first-tier subsidiaries. In the fourth quarter of 1998, the operations of QST and its subsidiaries (excluding new subsidiary CILCORP Infraservices Inc. - see Management's Discussion and Analysis) were discontinued (see Note 4.) and, therefore, are being reported as discontinued operations in the financial statements. Prior year amounts have been reclassified on a basis consistent with the 1999 presentation. The accompanying unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC). Although CILCORP believes the disclosures are adequate to make the information presented not misleading, these consolidated financial statements should be read along with the Company's 1998 Annual Report on Form 10-K. In the Company's opinion, the consolidated financial statements furnished reflect all normal and recurring adjustments necessary for a fair presentation of the results of operations for the periods presented. Operating results for interim periods are not necessarily indicative of operating results to be expected for the year or of the Company's future financial condition. NOTE 2. Contingencies Gas Manufacturing Plant Sites CILCO continues to investigate and/or monitor four former gas manufacturing plant sites located within CILCO's present gas service territory. The purpose of the investigations is to determine if waste materials, principally coal tar, are present, whether such waste materials constitute an environmental or health risk and if CILCO is responsible for the remediation of any remaining waste materials at those sites. During the three months ended March 31, 1999, CILCO paid approximately $132,000 to outside parties for former gas manufacturing plant site monitoring, remediation and legal fees, and expects to spend approximately $480,000 during the remainder of 1999. A $1.6 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 incur and recover in the future. Coal tar remediation costs incurred through March 1999 have been deferred on the Balance Sheets, net of amounts recovered from customers. Through March 31, 1999, CILCO has recovered approximately $6.5 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 remediation costs in the year that the expenditures occur. Under these circumstances, management believes that the cost of coal tar remediation will not have a material adverse effect on CILCO's financial position or results of operations. 16 CILCO's Union Contracts The International Brotherhood of Electrical Workers Local 51 (IBEW) ratified its current agreement on October 10, 1997. The current contract expires on July 1, 2000. The IBEW represents approximately 392 CILCO gas and electric department employees. The National Conference of Firemen and Oilers Local 8 (NCF&O), ratified its current agreement on October 23, 1998. The current contract expires on July 1, 2001. The NCF&O represents approximately 202 CILCO power plant employees. NOTE 3. Commitments In August 1990, CILCO entered into a firm, wholesale power purchase agreement with Central Illinois Public Service Company, now AmerenCIPS (CIPS). This agreement provided for a minimum contract delivery rate from CIPS of 90 MW until the contract expired in May 1998. In March 1995, CILCO and CIPS amended a limited-term power agreement reached in November 1992. This agreement, which now expires in May 2009, provides for CILCO to purchase 150 MW of CIPS' capacity from June 1998 through May 2002, and 50 MW from June 2002 through May 2009. In January 1997, CILCO intervened in a proceeding before the Federal Energy Regulatory Commission (FERC) to raise contract issues relating to CIPS' proposal to engage with a second utility in joint dispatch of their respective generating units. CILCO also challenged the validity of the power agreements with CIPS because of CIPS' failure to obtain FERC approval of the agreements. In the alternative, CILCO requested that FERC provide an "open season" during which CILCO may cancel the power agreements in whole or in part. In an October 1997 order, FERC rejected CILCO's challenges to joint dispatch and denied CILCO's request for an open season. However, CIPS was ordered to file the agreements with FERC and, on its own motion, FERC initiated a separate proceeding to investigate the terms of the agreements. Hearings in that proceeding have concluded, and the Administrative Law Judge entered an order in December 1998 finding the agreements are, with minor exceptions, just and reasonable. CILCO is appealing that order to FERC and is requesting FERC to order refunds by CIPS for CIPS' failure to file the 1990 agreement before providing service to CILCO under that agreement. FERC's October 1997 order in the joint dispatch proceeding failed to address certain contract issues raised by CILCO. FERC denied rehearing of that order in February 1998, and CILCO appealed to the United States Court of Appeals for the District of Columbia Circuit for a review of FERC's orders concerning the CIPS agreements. The Court dismissed the appeal because the issues raised by CILCO before the Court of Appeals can still be considered by FERC in the separate proceeding. CILCO will have the right to appeal after FERC enters its final order in the separate proceeding. CILCO also filed a separate complaint at FERC in December 1998, challenging the manner in which CIPS is performing, or failing to perform, under the agreements and has notified CIPS that CILCO considers CIPS to be in default under the agreements. On the ground that CIPS is in default regarding performance under the 1992 agreement, CILCO suspended capacity reservation payments to CIPS under the agreement as of January 21, 1999. On April 30, 1999, FERC issued an order finding that CIPS violated the agreements by placing the other utility ahead of CILCO in the pricing queue by virtue of CIPS' joint dispatch arrangement. Subject to the outcome of the separate proceeding in which FERC is reviewing the agreements, CIPS was directed to recompute CILCO's energy bills to reflect the correct contractual pricing under the agreements, and to refund the difference with interest. FERC did not order termination of the agreements, and CILCO anticipates that purchases of power from CIPS under the agreements will be resumed. CILCO cannot predict whether CIPS will seek rehearing or an appeal of FERC's decision. If CILCO's position is not upheld in any rehearing or appeal, CILCO could be required to pay the suspended capacity reservation charges, which are currently $865,000 per month, plus interest, to CIPS. Pending resumption of purchases under the agreements, CILCO is purchasing power and energy from other sources. 17 NOTE 4. QST Enterprises Discontinued Operations Due to uncertainties related to energy deregulation across the country, the illiquidity of certain energy markets and its pending acquisition by AES, the Company intends to focus on the opportunities in the Illinois energy market resulting from the deregulation of electricity under the Electric Service Customer Choice and Rate Relief Law of 1997 (see Management's Discussion and Analysis - Illinois Electric Deregulation). As a result, the Company decided in the fourth quarter of 1998 to attempt to sell its 100% ownership interest in QST Environmental Inc., a first-tier subsidiary of QST Enterprises Inc. providing environmental consulting and engineering services. On May 7, 1999, QST Enterprises Inc. signed a definitive agreement for the sale of QST Environmental Inc. to MACTEC, Inc., a privately-held company which provides environmental management services, for approximately $18 million in cash. The effective date of the sale is scheduled for the first week of June 1999. In August 1998, QST Enterprises Inc. sold its wholly-owned fiber optic- based telecommunications subsidiary, QST Communications, for $20 million cash and stock options valued at $5.5 million. Since incurring material losses in the wholesale electricity market in June 1998 and subsequent losses in its energy operations outside of Illinois, QST Energy has transferred its Pennsylvania retail customers to other marketers, ceased its Houston-based energy trading operations, and is seeking to terminate its obligation to provide electricity to its non-Illinois customers. Accordingly, the operations of QST Enterprises Inc. and its subsidiaries are shown as discontinued operations in the statements of income. The Company's investment in QST Enterprises Inc. (excluding CILCORP Infraservices Inc.), as of March 31, 1999, on the accompanying consolidated balance sheet, consists primarily of $8.7 million in working capital, $6.5 million in fixed assets and $11.6 million of investments and other assets. Prior year financial statements have been reclassified to conform to the current year presentation. NOTE 5. Financial Instruments and Price Risk Management CILCORP utilizes commodity futures contracts, options and swaps in the normal course of its natural gas business activities. However, it does not currently utilize these instruments to hedge its electric purchase and sale transactions or to participate in energy trading activities. Gains and losses arising from derivative financial instrument transactions which hedge the impact of fluctuations in energy prices are recognized in income concurrent with the related purchases and sales of the commodity. If a derivative financial instrument contract is terminated because it is probable that a transaction or forecasted transaction will not occur, any gain or loss as of such date is immediately recognized. If a derivative financial instrument contract is terminated early for other economic reasons, any gain or loss as of the termination date is deferred and recorded concurrently with the related purchase and sale of natural gas. CILCORP is subject to commodity price risk for deregulated sales to the extent that energy is sold under firm price commitments. Due to market conditions, at times CILCORP may have unmatched commitments to purchase and sell energy on a price and quantity basis. Physical and derivative financial instruments give rise to market risk, which represents the potential loss that can be caused by a change in the market value of a particular commitment. Market risks are actively monitored to ensure compliance with the Company's risk management policies, including limits to the Company's total net exposure at any time. The net loss reflected in operating results from derivative financial instruments was approximately $36,000 for the first quarter 1999. As of March 31, 1999, CILCORP had fixed-price derivative financial instruments representing hedges of natural gas purchases of .6 Bcf and natural gas sales of 2.8 Bcf for commitments through September 2000. The net deferred gain and carrying amount on these fixed-price derivatives at March 31, 1999 was approximately $345,000. At March 31, 1999, CILCORP had open positions in derivative financial instruments used to hedge basis of 3.4 Bcf for commitments through October 1999. The net deferred gain on these basis derivatives at March 31, 1999, was approximately $76,000. 18 NOTE 6. New Accounting Pronouncements In December 1998, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached consensus on Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. EITF 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, starting January 1999, with changes in fair value recorded in earnings. QST's energy trading activities, as defined by EITF 98-10, were marked to market at December 31, 1998, and accounted for as discontinued operations. CILCORP has adopted EITF 98-10, but currently anticipates that its future activities will not be classified as energy trading operations under EITF 98-10. Management therefore does not expect EITF 98-10 to have a material effect on CILCORP's 1999 results of operations unless there is a material change in the market value of the open energy sale commitments included in discontinued operations in 1998. AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued in March 1998. This SOP provides guidance on both the accounting for the costs of software developed or obtained for internal use and the determination of whether computer software is for internal use. This SOP applies to all non-governmental entities and is effective for financial statements beginning after December 15, 1998. The Company has adopted this SOP and does not expect it to have a material effect on its financial position, results of operations or cash flows. NOTE 7. Earnings Per Share The following data show the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock. The shares calculated for dilutive potential result from Award Agreements entered into pursuant to the CILCORP Shareholder Return Incentive Compensation Plan.
Three Months Ended March 31, 1999 1998 (In thousands) Income available to common shareholders $12,635 $ 7,694 Weighted average number of common shares used in Basic Earnings Per Share 13,611 13,611 Weighted number of dilutive potential common shares used in Diluted Earnings Per Share 137 79
The Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share, for the year ended December 31, 1997. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In 1998 and prior years, the financial condition and operating results of CILCORP Inc. and its subsidiaries (the Company) primarily reflected the operations of Central Illinois Light Company (CILCO), QST Enterprises Inc. (QST), and their subsidiaries. On November 23, 1998, the Company announced that The AES Corporation (AES) has offered to buy 100% of the Company's outstanding common stock for $65 per share, subject to CILCORP shareholder approval and various regulatory approvals. On March 10, 1999, the Illinois Commerce Commission issued its approval of CILCORP's merger with AES. Other required approvals are in process. The Company anticipates that this transaction will close in the third quarter of 1999. As a result of the pending acquisition and after reviewing its business plans, the Company decided in late 1998 to attempt to sell its 100% ownership interest in QST Environmental Inc. (QST Environmental), a first-tier subsidiary of QST that provides environmental consulting and engineering services. On May 7, 1999, QST agreed to sell all the outstanding common stock of QST Environmental to MACTEC, Inc. for approximately $18 million in cash. The sale is expected to be effective in the first week of June 1999. QST had sold another of its subsidiaries, QST Communications Inc., in August 1998. In June 1998, QST Energy Inc. (QST Energy), another first-tier subsidiary of QST, incurred a material loss related to wholesale electricity contracts, triggered by an unprecedented increase in short-term wholesale electricity prices. QST Energy closed its electric and gas non-retail positions and, in the fourth quarter of 1998, closed its Houston energy trading office and transferred its Pennsylvania retail electric and gas customers to other marketers. In late 1998, QST Energy began negotiating with its remaining non- Illinois commercial customers to end its obligations to provide electric service over the remaining terms of its contracts with them. Due to uncertainties related to electric deregulation across the country, the illiquidity of certain energy markets, and its pending acquisition by AES, the Company intends to focus on the opportunities in the Illinois energy market resulting from the deregulation of electricity under the Electric Service Customer Choice and Rate Relief Law of 1997 (see Item 5: Other Information - Illinois Electric Deregulation). This law will enable CILCO, the Company's regulated public utility that generates and distributes electricity and purchases, transports and distributes natural gas, to serve Illinois electric customers outside its traditional Central Illinois service territory. As a result of these events, the Company is reporting the results of QST Enterprises and its subsidiaries (excluding CILCORP Infraservices Inc., which began operations in 1999) as discontinued operations (see Note 4). The Other Businesses segment includes the operations of the holding company itself (Holding Company), its investment subsidiary, CILCORP Investment Management Inc. (CIM), CILCORP Ventures Inc. (CVI) and CILCORP Infraservices Inc. which provides utility infrastructure operation and maintenance services. 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 expressed or implied in MD&A. The business and profitability of CILCORP and its subsidiaries are influenced by economic and geographic factors, including ongoing changes in environmental laws and weather conditions; the extent 20 and pace of development of competition for retail and wholesale energy customers; changes in technology; third party compliance with Year 2000 requirements; the inability to identify and remediate or replace embedded computer chips in affected equipment; pricing and transportation of commodities; market supply and demand for energy and energy derivative financial instruments; inflation; capital market conditions; environmental protection and compliance costs and regulatory actions regarding the proposed merger with AES. Prevailing governmental policies, statutory changes, and regulatory actions with respect to rates, industry structure and recovery of various costs incurred by CILCO in the course of its business and increasing wholesale and retail competition in the electric and gas business affect its earnings. 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. CILCORP and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of changes in actual results, assumptions or other factors. Capital Resources & Liquidity 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 fund its capital expenditures, pay its financial obligations, meet working capital needs and retire or refinance debt as it matures. The Agreement and Plan of Merger (The Agreement) between the Company and The AES Corporation provides for the ongoing payment of common dividends, not to exceed the average for the four quarterly dividend payments prior to the effective date of The Agreement, pending the merger. 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 March 31, 1999, CILCORP had committed bank lines of credit of $60 million, of which $51.9 million was used. The Company had $30.5 million of medium-term notes outstanding at March 31, 1999. 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 $10.1 million for the three months ended March 31, 1999. Capital expenditures are anticipated to be approximately $46.5 million for the remainder of 1999 and are estimated to be $51 million in 2000. Included in 1999 and 2000 capital expenditures are $11.8 million and $5.8 million, respectively, for information technology projects. CILCO retired $10.65 million of medium-term notes in June 1998. CILCO does not plan to issue long-term debt during the remainder of 1999. CILCO intends to finance its 1999 and 2000 capital expenditures with funds provided by operations. As of March 31, 1999, CILCO had committed bank lines of credit aggregating $45 million, all of which were unused. CILCO uses these lines of credit to support issuance of short-term commercial paper. CILCO had $28.8 million of commercial paper outstanding at March 31, 1999 and expects to issue commercial paper periodically throughout the remainder of 1999. QST Working capital balances at QST (excluding QST Environmental) decreased by $12.5 million during the first quarter of 1999, primarily due to an increase in borrowings from the Holding Company. QST borrowed funds from the Holding Company as a result of two California commercial customers not paying QST for energy 21 delivered (see Results of Operations - QST Enterprises Discontinued Operations). QST expects to finance working capital needs with funds provided by the Holding Company as QST's operations are discontinued. At March 31, 1999, QST (excluding QST Environmental) had outstanding debt to the Holding Company of $14.3 million. QST Environmental spent $.4 million for capital additions and improvements during the first quarter of 1999. QST Environmental has a line of credit with CILCORP under which it may borrow up to $15 million, depending upon the amount of QST Environmental's receivables and fixed assets. This line of credit expires in May 2000. At March 31, 1999, QST Environmental had borrowed $6.6 million from CILCORP. Based upon its current receivables and fixed assets, QST Environmental has an additional $8.4 million available under this revolving line of credit. QST Environmental anticipates that cash and short-term investments, funds generated by operations and amounts available under the Holding Company line of credit will be sufficient to meet its anticipated working capital requirements prior to its sale. CIM At March 31, 1999, CIM had $38 million of outstanding debt owing to CILCORP. During 1997 and prior years, CIM committed to invest $16.6 million in affordable housing tax credit funds. Through March 31, 1999, approximately $14.7 million of these commitments had been funded. CIM expects to contribute approximately $1 million in cash for these investments during the remainder of 1999, and lesser amounts each year thereafter through 2006. These investments will be funded through borrowings from CILCORP. CIM expects to finance any other new investments and working capital needs during the remainder of 1999 with a combination of funds generated internally and funds provided by CILCORP. CVI At March 31, 1999, CVI had outstanding debt of $.4 million, borrowed from CILCORP. CVI expects to finance its activities and working capital needs during the remainder of 1999 with a combination of funds generated internally and with funds provided by CILCORP. 22 Year 2000 The Company is continuing its progress toward making its computer systems and operations ready for the year 2000. CILCO began evaluating its information technology systems in 1996. Systems were reviewed and a schedule was developed for the analysis of all computer application code and for the replacement or modification of those systems that were identified as obsolete and/or having potential Year 2000 (Y2K) issues. Replacement of several major computer systems with Y2K issues began in 1997. A Y2K team was established in March 1998, consisting of personnel from each operating division of CILCO. In conjunction with the formation of the Y2K team, an outside firm specializing in Y2K projects was retained to assist CILCO with its overall Y2K project plans. CILCO has also worked with an independent audit team to evaluate the status of the Y2K project. The project was divided into three phases, as follows: Phase I tasks included an inventory of all present systems for embedded chips having potential Y2K issues, contacting all manufacturers of embedded chip devices for the Y2K status of these devices, identifying and surveying all critical suppliers, and conducting an inventory of all information technology hardware and software for analysis of Y2K problems. Phase I was completed in August 1998. Phase II is currently in progress. This phase includes Y2K compliance testing of all suspect embedded chip devices identified in Phase I in the power plants, service centers, and business offices. In addition, two separate groups of outside consultants evaluated all mainframe application code to identify specific instances of date problems in each application program for systems that are not being replaced. Phase II has been completed except for the testing of approximately 20% of embedded chip devices associated with electric and gas transmission and distribution and power plant operations. This testing will occur during the second quarter of 1999. Phase III is also in progress and includes the upgrade/replacement and re-testing of embedded chip devices found not to be Y2K compliant during Phase II. This phase includes completion of mainframe computer operating software upgrades to current Y2K compliant versions and defining Y2K contingency plans for each business unit. Computer application code that was determined to have Y2K date related problems during Phase II will be corrected. Testing of all applications which have undergone Y2K upgrades/modifications, testing of operating system software, and development and testing of contingency plans through simulation or actual tests, where practical, will complete Phase III, which is expected to be completed by October 1999. Systems identified as critical to the continued provision of utility services will be of particular focus during the testing portion of Phase III. These critical systems are generating station equipment, electric transmission and distribution control systems, gas delivery control systems, and telecommunications systems. An estimated $2 million (historical and future costs) will be spent for embedded chip analysis, vendor management, application code scanning, remediation, testing and contingency planning at CILCO. Approximately $30.7 million will have been spent prior to the year 2000 for system replacements or hardware upgrades initiated for business purposes other than solely for Y2K compliance. QST Environmental is scheduled to complete the upgrade of its billing and project accounting system to a Y2K compliant version by June 1999. Replacement of this system will cost approximately $1 million, $624,000 of which was spent in 1998. CILCO is working both internally and with utility industry groups, including the Mid-America Interconnected Network (MAIN) and the North American Electric Reliability Council (NERC), to identify and plan for all identified risks associated with the Y2K issue. While these groups are modeling potential worst case scenarios, the probability of extreme disruptions due to Y2K issues is considered extremely low. CILCO's Y2K team has identified the most likely worst case scenario to be an interruption in service by a critical supplier. 23 Consequently, alternate sources for supplies have been identified and the need for CILCO to stock additional inventories of critical items is being evaluated. CILCO is also following the contingency planning process recognized by MAIN and NERC. Accordingly, CILCO has established a Y2K contingency planning team that has received training in contingency planning techniques and goals. The team is collecting data and contingency planning began in March 1999. Within this structure, CILCO submitted its contingency plans to MAIN on March 31, 1999. MAIN is then required to submit plans to NERC by June 30, 1999. This contingency planning process is expected to continue through the fourth quarter 1999, and will include CILCO's participation in the NERC industry-wide drills during the spring and fall of 1999. The Company currently believes it will be able to adequately address Y2K issues, as discussed above, through a combination of modifications of certain existing programs and systems, the replacement of others with new software that is Y2K compliant, and the development of contingency plans. If such modifications and conversions are not made, however, or are not made in a timely manner, the Y2K issue could have a material impact on the Company's operations. In addition, management cannot predict the nature or impact on operations of third-party noncompliance with Y2K requirements beyond the assurances given during critical vendor assessments. Price Risk Management The majority of CILCORP's energy sales at the end of the first quarter 1999 were to CILCO retail customers in Illinois under tariffs regulated by the ICC. Although the Illinois retail electric market is becoming deregulated (see Illinois Electric Deregulation), prudently incurred costs of fuel used to generate electricity, purchased power costs and gas purchased for resale may be recovered from retail customers that purchase energy through regulated tariffs. Thus, there is very limited commodity price risk associated with CILCO's traditional regulated sales. However, as more customers in Illinois purchase energy on a competitive basis pursuant to the current Illinois deregulation timetable, CILCO's exposure to commodity price risk will increase. At March 31, 1999, QST's non- Illinois electric operations and gas trading activities have been accounted for as discontinued operations (see Note 4). The market risk inherent in the activities of CILCORP (exclusive of regulated Illinois tariff customers) is the potential loss arising from adverse changes in natural gas and electric commodity prices relative to the physical and financial positions that the Company maintains. The prices of natural gas and electricity are subject to fluctuations resulting from changes in supply and demand. At March 31, 1999, CILCORP engaged in deregulated electric retail and natural gas sales in Illinois, including wholesale power purchases and sales to utilize its electric generating capability. These deregulated activities had net open market price risk positions of approximately 14,000 MWh of electricity and 0.1 Bcf of natural gas. A market price sensitivity of 10% applied to these positions is not material to the Company. At March 31, 1999, QST's discontinued operations had a net open market price risk in electricity of approximately 0.3 million MWh. Assuming a 10% adverse change in market prices, the Company would record an additional loss of $0.8 million. Actual results may differ materially. See Note 5 for a discussion of CILCORP's use of financial derivatives for hedging purposes. Due to the high correlation between the changes in the value of the financial instruments owned by CILCORP to the change in price of the underlying commodity, the net effect on CILCORP's net income resulting from the change in value of these financial instruments is not expected to be material. 24 Results of Operations CILCO Electric Operations The following table summarizes the components of CILCO electric operating income for the three months ended March 31, 1999 and 1998.
Three Months Ended March 31, Components of Electric Operating Income 1999 1998 (In thousands) (Unaudited) Revenue: Electric retail $76,696 $73,357 Sales for resale 4,266 5,821 ------- ------- Total revenue 80,962 79,178 ------- ------- Cost of sales: Cost of fuel 24,231 24,342 Purchased power 5,839 4,674 Revenue taxes 4,643 4,317 ------- ------- Total cost of sales 34,713 33,333 ------- ------- Gross margin 46,249 45,845 ------- ------- Operating expenses Other operation and maintenance 19,250 18,899 Depreciation and amortization 12,432 11,218 Other taxes 2,365 2,199 ------- ------- Total operating expenses 34,047 32,316 ------- ------- Total 12,202 13,529 ------- ------- Fixed charges and other Cost of equity funds capitalized -- -- Interest on long-term debt 3,433 3,546 Cost of borrowed funds capitalized (11) 23 Other interest 718 528 ------- ------- Total 4,140 4,097 Income before income taxes 8,062 9,432 Income taxes 2,148 3,422 ------- ------- Electric income $ 5,914 $ 6,010 ======= =======
Electric gross margin increased 1% for the three months ended March 31, 1999, compared to the same period in 1998. While retail sales increased, these increases were offset by significant decreases in sales for resale. Retail kilowatt hour (KWh) sales increased 9% for the three months ended March 31, 1999, compared to the first quarter of 1998. Residential and commercial sales increased 9% and 6%, respectively, for the three months ended March 31, 1999, compared to the same period in 1998. Heating degree days were 13% higher for the three months ended March 31, 1999, compared to the same period in 1998. Industrial sales increased 10% for the three months ended March 31, 1999. Industrial sales were 25 favorably impacted by customers returning to retail supply due to the completion of CILCO's Power Quest industrial program in April 1998. Sales for resale decreased 27% for the first quarter of 1999, compared to the same period in 1998, due to lower available capacity for bulk sales. Sales for resale vary based on the energy requirements of native load customers, neighboring utilities and power marketers, CILCO's available capacity for bulk power sales and the price of power available for sale. In the future, CILCO expects increased activity in the sales for resale and purchased power markets. The overall level of business activity in CILCO's service territory and weather conditions are expected to continue to be the primary factors affecting electric sales in the near term. CILCO's electric sales will also be affected in the long term by deregulation and increased competition in the electric utility industry. The cost of fuel remained relatively constant in the first quarter of 1999 compared to the same period in 1998. Purchased power increased 25% for the quarter ended March 31, 1999, compared to the same periods in 1998. Purchased power expense varies based on CILCO's need for energy and the price of power available for purchase. CILCO makes use of purchased power when it is economical to do so and when required during maintenance outages at CILCO plants. The costs of purchased power for retail customers are passed through to those customers via the fuel adjustment clause (FAC). Electric operation and maintenance expense increased 2% for the three months ended March 31, 1999, compared to the same period in 1998. The increase for the quarter was mainly due to an increase in medical expenses and computer software costs, partially offset by lower outside services costs. Fixed charges and other expenses remained relatively constant in 1999 compared to 1998. 26 CILCO Gas Operations The following table summarizes the components of CILCO gas operating income for the three months ended March 31, 1999 and 1998.
Three Months Ended March 31, Components of Gas Operating Income 1999 1998 (In thousands) (Unaudited) Revenue: Sale of gas $75,431 $68,280 Transportation services 1,366 1,622 ------- ------- Total revenue 76,797 69,902 ------- ------- Cost of sales: Cost of gas 44,687 40,622 Revenue taxes 3,751 3,492 ------- ------- Total cost of sales 48,438 44,114 ------- ------- Gross margin 28,359 25,788 ------- ------- Operating expenses Other operation and maintenance 8,452 7,918 Depreciation and amortization 5,628 4,537 Other taxes 802 761 ------- ------- Total operating expenses 14,882 13,216 ------- ------- Total 13,477 12,572 ------- ------- Fixed charges and other Cost of equity funds capitalized -- -- Interest on long-term debt 1,375 1,414 Cost of borrowed funds capitalized -- -- Other interest expense 287 210 ------- ------- Total 1,662 1,624 Income before income taxes 11,815 10,948 Income taxes 4,747 4,355 ------- ------- Gas income $ 7,068 $ 6,593 ======= =======
Gas gross margin increased 10% for the first quarter ended March 31, 1999, compared to the same period in 1998. Residential and commercial sales volumes increased 19% and 12%, respectively, for the quarter ended March 31, 1999, primarily due to colder weather. Heating degree days were 13% higher for the quarter ended March 31, 1999, compared to the same period in 1998. The overall level of business activity in CILCO's service territory and weather conditions are expected to continue to be the primary factors affecting gas sales in the near term. CILCO's gas sales may also be affected by further deregulation at the retail level in the natural gas industry. Revenue from gas transportation services decreased 16% while gas transportation sales volumes remained relatively constant for the first quarter ended March 31, 1999, compared to the same period in 1998. 27 The cost of gas increased 10% for the quarter ended March 31, 1999, compared to the same period in 1998, due to increased gas sales offset partially by lower natural gas prices. These changes were passed through to customers via the PGA. Gas operation and maintenance expense increased 7% for the three months ended March 31, 1999, compared to the same period in 1998. The increase for the three months ended March 31, 1999, was primarily due to increased medical expenses and computer software costs, partially offset by a decrease in outside services costs. Income and other taxes expense increased for the three months ended March 31, 1999, due to higher pre-tax operating income. Fixed charges and other expenses remained relatively constant in 1999 compared to 1998. CILCO Other The following table summarizes other income and deductions for the three months ended March 31, 1999 and 1998.
Components of Other Income Three Months Ended and Deductions March 31, 1999 1998 (In thousands) (Unaudited) Revenue $ 848 $ 35 Interest income 78 36 Amortization (216) (178) Operating expenses (1,588) (672) Preferred stock dividends (797) (802) Other (247) (205) ------- ------- Other income (deductions) (1,922) (1,786) Income taxes (benefit) (650) (697) ------- ------- Other income (deductions), net $(1,272) $(1,089) ======= =======
Other revenues and the related operating expenses increased for the three months ended March 31, 1999, due to increased nonregulated electricity sales in Illinois outside of CILCO's service territory. These sales of electricity are to eligible customers of other utilities' pilot programs formerly served by CILCO affiliate QST. 28 Other Businesses Operations The following table summarizes the components of Other Businesses income (loss) for the three months ended March 31, 1999 and 1998.
Components of Other Businesses Three Months Ended Net Income (Loss) March 31, 1999 1998 (In thousands) (Unaudited) Revenue: Leveraged lease revenue $1,957 $1,833 Other revenue 7,596 3,330 ------ ------ Total revenue 9,553 5,163 Expenses: Operating expenses 7,403 4,572 Depreciation and amortization 45 51 Interest expense 1,399 1,551 Other taxes 5 17 ------ ------ Total expenses 8,852 6,191 Income (loss) before income taxes 701 (1,028) Income tax benefit (196) (830) ------ ------ Other businesses net income (loss) $ 897 $ (198) ====== ======
Other revenues increased 85% for the three months ended March 31, 1999, primarily due to increased CVI gas marketing revenue and revenue from a new subsidiary, CILCORP Infraservices Inc. Operating expenses increased for the three months ended March 31, 1999, compared to the corresponding period in 1998, primarily due to increased expenses at CVI related to the gas retail marketing program and at CILCORP Infraservices Inc., while interest expense decreased due to lower average debt balances. Income and other taxes increased in the three months ended March 31, 1999, compared to the corresponding period in 1998, primarily due to an increase in pre-tax income. 29 QST Enterprises Discontinued Operations The results of QST Enterprises Inc. (QST) and its past and present subsidiaries - QST Communications, QST Environmental and QST Energy - are reported in 1999 and prior periods as discontinued operations (see Note 4). The table below shows the components of the discontinued operations. Income (loss) from operations of discontinued businesses, net of tax:
Three Months Ended March 31, 1999 1998 (In thousands) (Unaudited) QST Communications, net of tax of $(175) $ -- $ (266) QST Enterprises (excluding QST Environmental and QST Communications), net of tax of $(1,942) -- (2,955) QST Environmental, net of tax of $(45) and $(238) 28 (401) ------- ------- $ 28 $(3,622) ======= =======
In August 1998, QST sold its wholly-owned fiber optic-based telecommunications subsidiary, QST Communications, to McLeod USA for $20 million cash and McLeod stock options valued at $5.5 million, resulting in an after-tax gain of approximately $8.3 million. Operating losses incurred by QST Communications during the first quarter of 1998 are shown in the table above. During the fourth quarter of 1998, QST Enterprises Inc. and QST Energy ceased operations, except for fulfillment of contractual commitments for 1999 and beyond, and recorded loss provisions for the discontinued energy operations. Financial results for the first quarter of 1999 were reflected in the discontinued operations liability which was accrued at the end of 1998, resulting in no net income or loss for the quarter. In February 1999, QST Energy notified two of its California commercial customers that they were in default of their contracts with QST Energy as a result of not paying QST Energy for energy delivered. QST Energy filed two suits in the U.S. District Court, Central District of Illinois, seeking payment. In March, the customers filed a suit in California Superior Court, Alameda County, California, alleging that QST Energy was in breach of the contract. This suit was subsequently removed to U.S. District Court, Northern District of California. QST Energy has moved to dismiss this suit filed in California as duplicative of the suits pending in Illinois. QST Energy cannot predict the ultimate outcome of this matter, but intends to vigorously pursue its claim. The accounts receivable reflected in CILCORP's consolidated balance sheet at March 31, 1999, for these two customers, totaled $14.2 million. Under the terms of the contract, QST Energy is in the process of terminating delivery of electricity to the two customers. QST's losses for the first quarter of 1998 were primarily due to wholesale gas trading losses and general and administrative expenses incurred to support the retail and wholesale operations during the first quarter of 1998. On May 7, 1999, QST signed a definitive agreement to sell all the outstanding common stock of QST Environmental to MACTEC, Inc. for approximately $18 million in cash. The sale is expected to be effective in the first week of June 1999. 30 QST Environmental recorded a provision for estimated losses related to the sale or discontinuance of its business, including estimated losses related to assets and obligations, such as the laboratories, not integral to the environmental consulting business activities to be sold. QST Environmental's improved results from operations of discontinued business for the first quarter of 1999, as compared to the same period in 1998, resulted primarily from decreases in operating expenses, partially offset by decreases in laboratory revenues following the closing of the Gainesville Laboratory. PART II. OTHER INFORMATION Item 1: Legal Proceedings Reference is made to "Environmental Matters" under "Item 1. Business" in the Company's 1998 Annual Report on Form 10-K (the "1998 Form 10- K") and to "Note 2. Contingencies" and "QST Enterprises Discontinued Operations", herein, for certain pending legal proceedings and proceedings known to be contemplated by governmental authorities. The Company and its subsidiaries are subject to certain claims and lawsuits in connection with work performed in the ordinary course of their businesses. Except as otherwise referred to above, in the opinion of management, all such claims currently pending either will not result in a material adverse effect on the financial position and results of operations of the Company or are adequately covered by: (i) insurance; (ii) contractual or statutory indemnification; and/or (iii) reserves for potential losses. Item 5: Other Information Illinois Electric Deregulation In December 1997, the Electric Service Customer Choice and Rate Relief Law of 1997 (Customer Choice Law) became effective. The Customer Choice Law began a nine-year transition process to a fully competitive market for electricity in Illinois, with all customers being able to choose their electricity supplier by May 1, 2002. (Transition charges may be collected through 2006.) The Customer Choice Law also requires residential base rate reductions which vary by utility. CILCO began its reduction in residential base rates with an initial 2% decrease beginning August 1998. (Refer to the caption "Competition" in Management's Discussion and Analysis of Financial Condition and Results of Operations in CILCORP's 1998 Annual Report to Shareholders.) Power Quest Retail Competition Pilot Programs In 1996, to lead the movement toward increased customer choice, CILCO began Power Quest, which consisted of two electric pilot retail competition programs and a natural gas pilot retail competition program. The programs offered greater choice to customers and provided the opportunity for CILCO and certain of its electric and natural gas customers to participate in a competitive business environment. The pilot program for CILCO's industrial electric customers ended as scheduled on April 30, 1998. The program allowed CILCO's eight largest industrial customers (those with peak loads of 10 megawatts or more) to secure all or part of their electric power requirements from suppliers other than CILCO. However, program participants' total purchases from other suppliers were limited to 50 megawatts (10% of CILCO's industrial load) or less at all times. Participating customers began receiving electricity under this Power Quest pilot in May 1996. Seven of the eligible customers elected to participate in this pilot program. Caterpillar Inc., with three eligible accounts, elected to form a strategic alliance with CILCORP and receive value-added energy and environmental products and services rather than taking its entire Power Quest allocation from suppliers other than CILCO. Based on Power Quest participation levels by eligible industrial customers, CILCORP experienced a reduction of $1.6 million in pre-tax 31 income for the first three months of 1998 (including electric margin lost by CILCO, CVI costs associated with the Caterpillar alliance, and QST margin on sales to Power Quest industrial customers). Costs associated with the Caterpillar alliance are included in Other Businesses Operations for the three months ended March 31, 1998. Six of the Power Quest industrial program participants have signed contracts for electric service with CILCO which extend 18 months or more beyond October 1, 1999, when they would have become eligible to select alternative suppliers under the Customer Choice Law. CILCO is exploring electric service contract terms with the remaining initially eligible customers and with other key industrial and commercial customers. In the other Power Quest electric program, CILCO designated six areas within its service territory as Open Access Sites for up to five years. Based upon participation levels by eligible commercial and residential customers, CILCORP experienced a reduction of approximately $166,000 in pre-tax income for the first three months of 1999. In December 1998, CILCO received approval from the Illinois Commerce Commission (ICC) to eliminate this program, effective May 1, 1999. While CILCO has not filed with the ICC to terminate the gas residential pilot program, its affiliate, QST Energy, withdrew from participation in the program in August 1998. Most gas customers that had been served by QST have returned to CILCO or other affiliates. Participation in the gas pilot program by marketers other than QST has been minimal. This program did not have a material impact on CILCORP's financial position or results of operations for 1998 or the first three months of 1999. Management further believes this program will not have a material adverse impact on CILCORP's future financial position or results of operations. Voluntary Early Retirement Program As part of a continuing effort to better position itself for competition in the energy services industry, in April 1999, CILCO offered Voluntary Early Retirement Programs to employees in its electric power generation area, including employees represented by the NCF&O. A total of 118 employees are eligible to retire, effective as early as June 1, 1999. If 100% of the eligible employees chose to retire under the programs, CILCO estimates it would incur an after-tax charge to earnings of approximately $13.4 million. However, fewer than 100% of those eligible are expected to accept the offer under these programs. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits 27 - Financial data schedules (b) Reports on Form 8-K A Form 8-K was filed on March 22, 1999, regarding Year 2000 issues. 32 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 11, 1999 R. O. Viets R. O. Viets President and Chief Executive Officer Date May 11, 1999 T. D. Hutchinson T. D. Hutchinson Controller 33 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 11, 1999 R. J. Sprowls R. J. Sprowls Vice President and Chief Financial Officer Date May 11, 1999 T. D. Hutchinson T. D. Hutchinson Controller and Manager of Accounting 34 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-31-1999 JAN-01-1999 MAR-31-1999 PER-BOOK 865,076 179,354 197,230 24,219 0 1,265,879 192,853 0 147,296 340,149 22,000 44,120 257,550 51,900 0 28,800 43,021 0 1,577 488 476,274 1,265,879 182,632 6,094 155,506 161,600 21,032 (247) 20,785 7,353 13,432 797 12,635 8,371 5,459 35,887 .93 .92
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-31-1999 JAN-01-1999 MAR-31-1999 PER-BOOK 865,076 4,543 109,473 17,708 0 996,800 185,661 0 129,440 315,101 22,000 44,120 237,896 0 0 28,800 30,000 0 1,577 488 316,818 996,800 157,759 6,895 132,080 138,975 18,784 (475) 18,309 5,802 12,507 797 11,710 16,741 4,808 41,118 0 0
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