-----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, TLhmEdYZV/kED15xRUjztfGs0yS/JP2WOF0YoTI8EySA8frppkhSdYFNYgUNgwyS tn+j3Vqxg3ghDsdLF507ww== 0000762129-98-000023.txt : 19981111 0000762129-98-000023.hdr.sgml : 19981111 ACCESSION NUMBER: 0000762129-98-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981110 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: 98741726 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: 98741727 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ........ to ........ Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-8946 CILCORP Inc. 37-1169387 (An Illinois Corporation) 300 Hamilton Blvd, Suite 300 Peoria, Illinois 61602 (309) 675-8810 1-2732 CENTRAL ILLINOIS LIGHT COMPANY 37-0211050 (An Illinois Corporation) 300 Liberty Street Peoria, Illinois 61602 (309) 675-8810 Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: CILCORP Inc. Common stock, no par value, shares outstanding at September 30, 1998 13,610,680 CENTRAL ILLINOIS LIGHT COMPANY Common stock, no par value, shares outstanding and privately held by CILCORP Inc. at September 30, 1998 13,563,871 CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 INDEX PART I. FINANCIAL INFORMATION Page No. Item 1: Financial Statements CILCORP INC. Consolidated Balance Sheets 3-4 Consolidated Statements of Income 5-6 Consolidated Statements of Cash Flows 7-8 CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets 9-10 Consolidated Statements of Income 11 Consolidated Statements of Cash Flows 12-13 Notes to Consolidated Financial Statements 14-17 CILCORP Inc. and Central Illinois Light Company Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 18-31 CILCORP Inc. and Central Illinois Light Company PART II. OTHER INFORMATION Item 1: Legal Proceedings 31 Item 5: Other Information 31-32 Item 6: Exhibits and Reports on Form 8-K 33 Signatures 34-35 CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
September 30, December 31, 1998 1997 ASSETS (Unaudited) Current assets: Cash and temporary cash investments $ 7,757 $ 10,576 Receivables, less reserves of $2,853 and $2,454 98,498 141,234 Accrued unbilled revenue 26,977 38,775 Fuel, at average cost 4,988 7,816 Materials and supplies, at average cost 15,066 13,685 Gas in underground storage, at average cost 23,947 22,666 Prepayments and other 10,500 10,971 ---------- ---------- Total current assets 187,733 245,723 ---------- ---------- Investments and other property: Investment in leveraged leases 144,972 146,458 Cash surrender value of company-owned life insurance, net of related policy loans of $47,976 and $42,898 2,161 2,399 Other investments 17,321 18,675 ---------- ---------- Total investments and other property 164,454 167,532 ---------- ---------- Property, plant and equipment: Utility plant, at original cost Electric 1,234,565 1,213,585 Gas 407,189 401,870 ---------- ---------- 1,641,754 1,615,455 Less - accumulated provision for depreciation 811,334 769,792 ---------- ---------- 830,420 845,663 Construction work in progress 36,577 21,550 Other, net of depreciation 15,461 22,188 ---------- ---------- Total property, plant and equipment 882,458 889,401 ---------- ---------- Other assets 41,984 32,163 ---------- ---------- Total assets $1,276,629 $1,334,819 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
September 30, December 31, 1998 1997 LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) Current liabilities: Current portion of long-term debt $ -- $ 22,185 Notes payable 83,107 62,150 Accounts payable 87,177 132,286 Accrued taxes 6,397 2,810 Accrued interest 5,069 9,473 Purchased gas adjustment over-recoveries 288 1,666 Other 7,179 19,798 ---------- ---------- Total current liabilities 189,217 250,368 ---------- ---------- Long-term debt 298,567 298,528 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes 236,787 241,013 Regulatory liability of regulated subsidiary 56,514 56,807 Deferred investment tax credits 19,868 21,117 Other 52,400 48,273 ---------- ---------- Total deferred credits and other liabilities 365,569 367,210 ---------- ---------- Preferred stock of subsidiary 66,120 66,120 ---------- ---------- Stockholders' equity: Common stock, no par value; authorized 50,000,000 shares - outstanding 13,610,680 shares 192,567 192,567 Retained earnings 163,913 159,350 Accumulated other comprehensive income 676 676 ---------- ---------- Total stockholders' equity 357,156 352,593 ---------- ---------- Total liabilities and stockholders' equity $1,276,629 $1,334,819 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
CILCORP INC AND SUBSIDIARIES Consolidated Statements of Income (In thousands)* (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Revenue: Electric utility $115,236 $104,336 $282,718 $258,639 Gas utility 21,270 19,019 119,482 142,031 Non-regulated energy and energy services 123,575 83,861 452,783 130,932 Environmental and engineering services 14,760 19,392 50,822 55,230 Other business 4,637 1,695 14,652 6,585 -------- -------- -------- -------- Total 279,478 228,303 920,457 593,417 -------- -------- -------- -------- Operating expenses: Fuel for generation and purchased power 85,235 40,806 217,515 95,458 Gas purchased for resale 86,264 84,137 408,603 202,875 Other operations and maint. 48,148 49,461 154,100 149,439 Depreciation and amortization 17,399 16,530 51,032 49,888 Taxes, other than income taxes 10,342 8,789 31,267 28,177 -------- -------- -------- -------- Total 247,388 199,723 862,517 525,837 -------- -------- -------- -------- Fixed charges and other: Interest expense 7,606 6,876 22,698 20,882 Preferred stock dividends of subsidiary 797 818 2,396 2,415 Allowance for funds used construction (14) (10) (20) (128) Other 212 252 745 824 -------- -------- -------- -------- Total 8,601 7,936 25,819 23,993 -------- -------- -------- -------- Income from continuing oper. before income taxes 23,489 20,644 32,121 43,587 Income taxes 8,805 7,622 9,994 14,727 -------- -------- -------- -------- Net income from continuing operations 14,684 13,022 22,127 28,860 Income (loss) from operations of discontinued business, net of tax of ($176), $41, ($463), and ($152) (267) 52 (704) (250) Gain on sale of assets of discontinued business, net of tax of $5,425 8,252 -- 8,252 -- -------- -------- -------- -------- Net income 22,669 13,074 29,675 28,610 Other comprehensive income -- -- -- -- -------- -------- -------- -------- Comprehensive income $ 22,669 $ 13,074 $ 29,675 $ 28,610 ======== ======== ======== ======== Average common shares outstanding - basic 13,611 13,611 13,611 13,611 ======== ======== ======== ======== Earnings per common share - basic Continuing operations $ 1.08 $ .96 $ 1.63 $ 2.12 Discontinued operations .59 -- .55 (.02) -------- -------- -------- -------- Net income per common share - basic $ 1.67 $ .96 $ 2.18 $ 2.10 ======== ======== ======== ======== Average common shares outstanding - diluted 13,694 13,611 13,694 13,611 ======== ======== ======== ======== Earnings per common share - diluted Continuing operations $ 1.07 $ .96 $ 1.62 $ 2.12 Discontinued operations .59 -- .55 (.02) -------- -------- -------- -------- Net income per common share - diluted $ 1.66 $ .96 $ 2.17 $ 2.10 ======== ======== ======== ======== 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, 1998 1997 Cash flows from operating activities: Net income before preferred dividends $ 24,523 $ 31,275 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Non-cash lease income and investment income (5,155) (11,844) Cash receipts in excess of debt service on leases 6,838 39 Depreciation and amortization 50,607 49,887 Deferred income taxes, investment tax credit and regulatory liability of subsidiary, net (5,850) (4,784) Changes in operating assets and liabilities: Decrease in accounts receivable and accrued unbilled revenue 54,805 10,949 Decrease in inventories 166 1,937 (Decrease) increase in accounts payable (46,088) 2,179 Increase (decrease) in accrued taxes 3,762 (3,979) (Increase) decrease in other assets (9,799) 4,465 Decrease in other liabilities (14,344) (10,154) -------- -------- Total adjustments 34,942 38,695 -------- -------- Net cash provided by operating activities from continuing operations 59,465 69,970 -------- -------- Net cash provided (used) by operating activities of discontinued operations 226 (2,546) -------- -------- Cash flow from operations 59,691 67,424 -------- -------- Cash flows from investing activities: Additions to plant (47,418) (33,005) Proceeds from sale of discontinued operations 20,000 -- Other (689) (5,362) -------- -------- Net cash used by investing activities from continuing operations (28,107) (38,367) -------- -------- Net cash used by investing activities from discontinued operations (5,706) (2,737) -------- -------- Cash flow from investing activities (33,813) (41,104) -------- -------- Cash flow from financing activities: Net increase in short-term debt 20,950 30,031 Decrease in long-term debt (22,139) (23,011) Common dividends paid (25,112) (25,112) Preferred dividends paid (2,396) (2,415) -------- -------- Cash flow from financing activities (28,697) (20,507) Net (decrease) increase in cash and temporary cash investments: (2,819) 5,813 Cash and temporary cash investments at beginning of year: 10,576 4,941 -------- -------- Cash and temporary cash investments at September 30 $ 7,757 $ 10,754 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $23,769 $ 26,219 Income taxes 19,611 23,573 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 1998 1997 (Unaudited) Utility plant, at original cost: Electric $1,234,565 $1,213,585 Gas 407,189 401,870 ---------- ---------- 1,641,754 1,615,455 Less - accumulated provision for depreciation 811,334 769,792 ---------- ---------- 830,420 845,663 Construction work in progress 36,577 21,550 Plant acquisition adjustments, net of amortization 683 1,217 ---------- ---------- Total utility plant 867,680 868,430 ---------- ---------- Other property and investments: Cash surrender value of company-owned life insurance (net of related policy loans of $47,976 and $42,898) 2,036 2,399 Other 1,214 1,214 ---------- ---------- Total other property and investments 3,250 3,613 ---------- ---------- Current assets: Cash and temporary cash investments 714 698 Receivables, less reserves of $906 and $703 35,707 44,550 Accrued unbilled revenue 20,188 31,248 Fuel, at average cost 4,988 7,816 Materials and supplies, at average cost 15,066 13,685 Gas in underground storage, at average cost 23,208 22,118 Prepaid taxes 3,450 1,189 Other 9,029 6,331 ---------- ---------- Total current assets 112,350 127,635 ---------- ---------- Deferred debits: Unamortized loss on reacquired debt 3,341 3,581 Unamortized debt expense 1,892 2,019 Prepaid pension cost 455 455 Other 21,005 16,922 ---------- ---------- Total deferred debits 26,693 22,977 ---------- ---------- Total assets $1,009,973 $1,022,655 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets (In thousands)
September 30, December 31, CAPITALIZATION AND LIABILITIES 1998 1997 (Unaudited) Capitalization: Common shareholder's equity: Common stock, no par value; authorized 20,000,000 shares; outstanding 13,563,871 shares $ 185,661 $ 185,661 Retained earnings 139,206 146,405 Accumulated other comprehensive income 676 676 ---------- ---------- Total common shareholder's equity 325,543 332,742 Preferred stock without mandatory redemption 44,120 44,120 Preferred stock with mandatory redemption 22,000 22,000 Long-term debt 267,872 267,836 ---------- ---------- Total capitalization 659,535 666,698 ---------- ---------- Current liabilities: Current maturities of long-term debt -- 10,650 Notes payable 37,900 21,300 Accounts payable 40,229 44,844 Accrued taxes 6,041 2,593 Accrued interest 5,262 9,234 Purchased gas adjustment over-recoveries 288 1,666 Level payment plan -- 2,375 Other 4,714 4,670 ---------- ---------- Total current liabilities 94,434 97,332 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes 134,934 139,274 Regulatory liability 56,514 56,807 Deferred investment tax credit 19,868 21,117 Capital lease obligation 1,827 2,182 Other 42,861 39,245 ---------- ---------- Total deferred credits and other liabilities 256,004 258,625 ---------- ---------- Total capitalization and liabilities $1,009,973 $1,022,655 ========== ========== The accompanying Notes to the Consolidated Financial Statements are an integral part of these Balance Sheets.
CENTRAL ILLINOIS LIGHT COMPANY Consolidated Statements of Income (In thousands) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Operating revenue: Electric $115,236 $104,336 $282,718 $258,639 Gas 21,270 19,019 119,482 142,031 -------- -------- -------- -------- Total operating revenues 136,506 123,355 402,200 400,670 -------- -------- -------- -------- Operating expenses: Cost of fuel 25,625 24,497 71,102 68,240 Cost of gas 9,139 7,383 63,295 82,186 Purchased power 10,831 7,889 23,683 16,035 Other operations and maint. 27,949 27,163 85,642 83,312 Depreciation and amortization 16,344 15,394 47,853 46,181 Income taxes 12,046 10,369 23,872 22,685 Other taxes 9,757 8,169 29,021 25,961 -------- -------- -------- -------- Total operating expenses 111,691 100,864 344,468 344,600 -------- -------- -------- -------- Operating income 24,815 22,491 57,732 56,070 -------- -------- -------- -------- Other income and deductions: Cost of equity funds capital. -- 2 -- 33 Company-owned life insur., net (333) (252) (745) (824) Other, net 302 (267) 278 (371) -------- -------- -------- -------- Total other income and (deductions) (31) (517) (467) (1,162) -------- -------- -------- -------- Income before interest expense 24,784 21,974 57,265 54,908 -------- -------- -------- -------- Interest expenses: Interest on long-term debt 4,808 4,960 14,690 15,064 Cost of borrowed funds capitalized (14) (7) (20) (95) Other 926 684 2,286 1,984 -------- -------- -------- -------- Total interest expense 5,720 5,637 16,956 16,953 -------- -------- -------- -------- Net income 19,064 16,337 40,309 37,955 -------- -------- -------- -------- Dividends on preferred stock 797 818 2,396 2,415 -------- -------- -------- -------- Net income available for common stock 18,267 15,519 37,913 35,540 -------- -------- -------- -------- Other comprehensive income -- -- -- -- -------- -------- -------- -------- Comprehensive income $ 18,267 $ 15,519 $ 37,913 $ 35,540 ======== ======== ======== ======== 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, 1998 1997 Cash flows from operating activities: Net income before preferred dividends $ 40,309 $ 37,956 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 48,386 46,714 Deferred income taxes, investment tax credit and regulatory liability, net (5,883) (5,302) Changes in operating assets and liabilities: Decrease in accounts receivable 8,843 9,319 Decrease in fuel, materials and supplies, and gas in underground storage 357 1,925 Decrease in unbilled revenue 11,060 12,025 Decrease in accounts payable (4,615) (4,433) Decrease in accrued taxes and interest (523) (7,875) Capital lease payments 484 484 (Increase) decrease in other current assets (4,959) 756 Decrease in other current liabilities (3,710) (3,577) (Increase) decrease in other non-current assets (2,140) 4,135 Increase in other non-current liabilities 3,291 603 -------- -------- Net cash provided by operating activities 90,900 92,730 -------- -------- Cash flows from investing activities: Capital expenditures (45,155) (35,772) Cost of equity funds capitalized -- (33) Other (3,687) (4,880) -------- -------- Net cash used in investing activities (48,842) (40,685) -------- -------- Cash flow from financing activities: Common dividends paid (45,112) (31,111) Preferred dividends paid (2,396) (2,415) Long-term debt retired (10,650) (20,000) Payments on capital lease obligation (484) (484) Short-term borrowing 16,600 2,300 -------- -------- Net cash used in financing activities (42,042) (51,710) -------- -------- Net increase in cash and temporary cash investments 16 335 Cash and temporary cash investments at beginning of year 698 1,662 -------- -------- Cash and temporary cash investments at September 30 $ 714 $ 1,997 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of cost of borrowed funds capitalized) $ 21,623 $ 22,267 Income taxes 28,655 32,099 The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Introduction The consolidated financial statements include the accounts of CILCORP Inc. (CILCORP or Company), Central Illinois Light Company (CILCO), QST Enterprises Inc. (QST), QST Environmental Inc., formerly known as Environmental Science & Engineering, Inc. (ESE), and CILCORP's other subsidiaries after elimination of significant intercompany transactions. Formerly a CILCORP first-tier subsidiary, ESE became a subsidiary of QST effective October 29, 1996. Effective June 1, 1997, ESE began operating under the name QST Environmental Inc. (QST Environmental). CILCORP owns directly or indirectly 100% of the common stock of its first-tier subsidiaries. The consolidated financial statements of CILCO include the accounts of CILCO and its subsidiaries, CILCO Exploration and Development Company and CILCO Energy Corporation. CILCORP is currently reevaluating its sales and marketing strategy for QST Energy Inc.(QST Energy), a subsidiary of QST, due to the uncertainties related to energy deregulation and the immaturity and illiquidity of competitive energy markets. In June 1998, QST Energy Trading Inc. (QST Trading), a QST Energy subsidiary, incurred after-tax losses relating to wholesale electricity contracts of approximately $6.6 million. These losses were primarily the result of an unprecedented, sudden increase in electricity prices during the week of June 22. As a part of this strategic reevaluation, CILCORP is restructuring operating and marketing responsibilities within and among its current business segments. The Company will focus on energy operations within Illinois and consequently, reduce the scope of its energy trading operations. QST completed the sale of substantially all of the assets of ESE Land Corporation, a subsidiary of QST Environmental, in the fourth quarter of 1997. In addition, QST completed the sale of its subsidiary, QST Communications Inc., in the third quarter of 1998. Therefore, results of both ESE Land Corporation and QST Communications Inc. are being reported as discontinued operations. Prior year amounts have been reclassified on a basis consistent with the 1998 presentation. The accompanying unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC). Although CILCORP believes the disclosures are adequate to make the information presented not misleading, these consolidated financial statements should be read along with the Company's 1997 Annual Report on Form 10-K. In the Company's opinion, the consolidated financial statements furnished reflect all normal and recurring adjustments necessary for a fair presentation of the results of operations for the periods presented. Operating results for interim periods are not necessarily indicative of operating results to be expected for the year or of the Company's future financial condition. NOTE 2. Contingencies Gas Manufacturing Plant Sites CILCO continues to investigate and/or monitor four former gas manufacturing plant sites located within CILCO's present gas service territory. The purpose of 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 nine months ended September 30, 1998, CILCO paid approximately $1 million to outside parties for former gas manufacturing plant site monitoring, remediation and legal fees, and expects to spend approximately $.8 million during the remainder of 1998. A $4 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 September 1998 have been deferred on the Balance Sheets, net of amounts recovered from customers. Through September 30, 1998, CILCO has recovered approximately $5.5 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. 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 391 CILCO gas and electric department employees. The International Brotherhood of Firemen and Oilers Local 8 (IBF&O), ratified the Company's contract proposal on October 23, 1998. CILCO's contract with the IBF&O expired on July 1, 1998, and the IBF&O membership had been working without a contract since that time. The new contract expires on July 1, 2001. The IBF&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 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 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 order issued on October 15, 1997, FERC rejected the challenge to the validity of the agreements and denied CILCO's request for an open season. However, CIPS was ordered to file the agreements with FERC, and FERC on its own motion initiated a separate proceeding to investigate the terms of the agreements. Hearings in that proceeding have concluded, and the parties are currently awaiting the order of the administrative law judge. CILCO has asked FERC to assess penalties against CIPS under FERC's rules for CIPS' failure to file the contracts as required. FERC has not yet made a final ruling on this issue. FERC's order also failed to address certain contract issues raised by CILCO. FERC denied rehearing of that order on February 3, 1998, and CILCO has appealed to the United States Court of Appeals for the District of Columbia Circuit for a review of FERC's orders concerning the CIPS contract. CILCO cannot predict how FERC or the Court will ultimately rule on the issues in these two cases. NOTE 4. Discontinued Operations ESE Land Corporation In November 1997, QST Environmental Inc. sold substantially all of the assets of its wholly-owned subsidiary, ESE Land Corporation, for $9.5 million in cash and residual interests in three newly-formed limited liability corporations valued at $5.962 million, resulting in an after-tax gain of approximately $2.7 million. Accordingly, the activities are shown as discontinued operations on the income statement. Prior year financial statements have been reclassified to conform to the current year presentation. QST Communications Inc. On August 21, 1998, QST sold the common equity of its wholly-owned fiber optic-based telecommunications subsidiary, QST Communications Inc., to McLeodUSA Telecommunications Services, Inc., for $20 million in cash and stock options valued at $5.5 million, resulting in an after-tax gain of approximately $8.3 million. Accordingly, the activities of this subsidiary are shown as discontinued operations on the income statement. Prior year financial statements have been reclassified to conform to the current year presentation. NOTE 5. Financial Instruments and Price Risk Management As of September 30, 1998, QST had open derivative financial instruments representing hedges of natural gas sales of 5.7 Bcf and natural gas purchases and inventories of 5.6 Bcf for commitments through 1998. The net deferred gain on these derivatives as of September 30, 1998, was approximately $.2 million. The net loss reflected in operating results arising from financial instruments entered into by QST for hedging and trading purposes was $1.9 million for the nine months ended September 30, 1998. NOTE 6. New Accounting Pronouncements AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued in March 1998. This SOP provides guidance on both the accounting for the costs of software developed or obtained for internal use and the determination of whether computer software is for internal use. This SOP applies to all non-governmental entities and is effective for financial statements beginning after December 15, 1998. The Company does not expect this SOP to have a material effect on its financial position, results of operations or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not yet adopted this pronouncement and has not yet determined its effect on the Company's financial position, results of operations or cash flows. NOTE 7. Earnings Per Share The following data show the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock. The shares calculated for potential dilution result from Award Agreements entered into pursuant to the CILCORP Shareholder Return Incentive Compensation Plan.
Nine Months Ended September 30, 1998 (In thousands) Income available to common shareholders $29,675 Weighted average number of common shares used in Basic Earnings Per Share 13,611 Weighted number of dilutive potential common shares used in Diluted Earnings Per Share 83
The Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share, for the year ended December 31, 1997. Restatement of nine months ended September 30, 1997 is not applicable as no potential common stock dilution occurred until the fourth quarter of 1997. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CILCORP Inc. (CILCORP or the Company) is the parent of four first- tier subsidiaries: Central Illinois Light Company (CILCO), QST Enterprises Inc. (QST), CILCORP Investment Management Inc. (CIM), and CILCORP Ventures Inc. (CVI). The operations of CIM and CVI, 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 retail and wholesale customers through its subsidiary, QST Energy Inc. (QST Energy) which began operations in 1996. In June, QST Energy's subsidiary, QST Energy Trading Inc., incurred after-tax losses of approximately $6.6 million relating to wholesale electricity contracts following an unprecedented sudden increase in electricity prices. Subsequently, on June 29, 1998, CILCORP announced it was reevaluating its strategy for QST Energy, and indicated that the Company would focus on opportunities for profitable growth in Illinois, de-emphasizing energy trading activities at QST. In August, QST completed the sale of QST Communications Inc., a wholly-owned subsidiary which provides telecommunications services. QST's operations include those of QST Environmental Inc. (QST Environmental), a former first-tier CILCORP subsidiary which became a QST subsidiary effective October 29, 1996. QST Environmental's results are reported separately from QST's energy and discontinued telecommunications operations. QST Environmental is an environmental consulting and engineering firm serving governmental, industrial and commercial customers. CIM invests in a diversified portfolio of long-term financial investments which currently includes leveraged leases, energy-related projects and affordable residential housing. CVI primarily invests in ventures in energy-related products and services. CVI has an 80% interest in the Agricultural Research and Development Corporation and has one wholly-owned subsidiary, CILCORP Energy Services Inc., (CESI). CESI's primary business is the sale of non-regulated energy services, including non-regulated sales of natural gas. The Company is continually investigating and exploring strategic restructuring opportunities, including potential combinations and alliances involving other investor-owned utility companies, as well as other companies engaged in the sale at retail or wholesale of electricity, natural gas and related products and services. Such restructuring activity has become more prevalent in the utility industry over the last few years. An obvious corollary to such activity is that the Company may acquire other companies or may itself be acquired. The Company's policy prohibits management from commenting on any possible merger, acquisition, or other major restructuring prior to the time that the law requires public disclosure. Consequently, the Company may engage in preliminary discussions or negotiations at any time, without disclosing their existence, that could subsequently lead to a public announcement. As part of the reevaluation of its sales and marketing strategy for QST Energy, CILCORP is restructuring operating and marketing responsibilities within and between its current business segments. Forward-Looking Information Forward-looking information is included in Part I. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations and Part II. Item 5: Other Information. Such information generally relates to future expected or anticipated events or trends and identified contingencies and uncertainties. Certain material contingencies are also described in Note 2 to the Consolidated Financial Statements. Some important factors could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. These factors include prevailing governmental policies, statutory changes, and regulatory actions with respect to rates, industry structure and recovery of various costs incurred by CILCO in the course of its business; and increasing wholesale and retail competition in the electric and gas business. The business and profitability of CILCORP and its subsidiaries are also influenced by economic and geographic factors, including ongoing changes in environmental laws, regulations and policies which affect demand for QST Environmental's services; weather conditions; the extent and pace of development of competition for retail and wholesale energy customers; changes in technology; third-party noncompliance with Year 2000 requirements; pricing and transportation of commodities; market supply and demand for energy and energy derivative financial instruments; market supply and demand for environmental consulting, engineering and analytical services; inflation; capital market conditions; and environmental protection and compliance costs. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and to a significant degree are beyond the control of CILCORP and its subsidiaries. Capital Resources & Liquidity Declaration of dividends by CILCORP is at the discretion of the Board of Directors. CILCORP's ability to declare and pay dividends is currently contingent upon its receipt of dividends from CILCO and is also affected by business and economic conditions, capital requirements, earnings and the overall financial condition of the Company. The Company believes that internal and external sources of capital which are, or are expected to be, available to the Holding Company and its subsidiaries will be adequate to meet the Company's capital expenditures program, finance acquisitions, pay its financial obligations, meet working capital needs and retire or refinance debt as it matures. Year 2000 Management continues to evaluate the impact of Year 2000 issues on the Company's computer software systems and operations. At CILCO, an information technology software evaluation began in 1996. Systems were reviewed, teams were formed, business cases were developed, and a schedule was created for the analysis of all application code and for the replacement or modification of those systems that were identified as obsolete and/or having potential Year 2000 (Y2K) issues. A Year 2000 team was established in March 1998, consisting of personnel from each operating division of CILCO. In conjunction with the formation of the Year 2000 team, an outside firm specializing in Year 2000 projects was retained in March 1998 to establish a Y2K project office and the overall Y2K project plans. The project was divided into three phases as follows: Phase I tasks included inventorying all present systems for embedded chips having potential Y2K issues, contacting all manufacturers of embedded chip devices for the Y2K status of said devices, identifying and surveying all critical suppliers, and inventorying 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, outside consultants are evaluating all mainframe application code to identify specific instances of date problems in each application program. This effort is expected to be completed by November 30, 1998. Phase III will include the upgrade/replacement and re-testing of embedded chip devices found not to be Y2K compliant during Phase II. This phase will also include upgrading all mainframe computer operating software to current Y2K compliant versions and defining Y2K contingency plans for each business unit. Computer application code that is 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. This effort is expected to be completed by May 1, 1999. 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 be spent prior to the year 2000 for system replacements or hardware upgrades initiated for business purposes other than solely Year 2000 compliance. For non-utility subsidiaries, two major systems have been evaluated for Y2K problems. At QST Environmental, the BST Billing and Project Accounting System is being upgraded to a Y2K compliant version. This project is on schedule and targeted for implementation by January 1999. Replacement of this system will cost approximately $1 million. At the Holding Company, the Shareholder Records System has been upgraded to a new Y2K compliant version of the same system previously used. Installation has been completed, with Y2K testing scheduled for completion during fourth quarter 1998. Costs for this application upgrade were approximately $10,000. Based upon the Company's current stage of completion of the Y2K project, it is not practical to predict the most likely remaining risks associated with the Y2K issue. However, the Company currently believes it will continue to remain on schedule and will be able to achieve Year 2000 compliance, 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 Year 2000 issue could have a material impact on the Company's operations. In addition, management cannot predict the nature or impact on operations of third-party noncompliance with Year 2000 requirements beyond the assurances given during critical vendor assessments. 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, 1998, CILCORP had committed bank lines of credit of $60 million, of which $45.2 million was used. Depending on market conditions and corporate needs, the Company may issue additional shares of common stock through the CILCO Employees' Savings Plan (ESP) or the CILCORP Inc. Investors Choice Automatic Reinvestment and Stock Purchase Plan (DRIP) at any time. The proceeds from any newly-issued stock from the ESP or the DRIP have been, and will continue to be, used to retire CILCORP short- term debt, to meet working capital and capital expenditure requirements at subsidiaries, and for other corporate purposes. As of the date of this filing, neither the ESP nor the DRIP is utilizing original-issue stock to meet plan requirements. The Company had $30.5 million of medium-term notes outstanding at September 30, 1998, after retirement of $11.5 million in July 1998. The Company may issue an additional $27 million under its existing $75 million medium-term note program in order to retire maturing debt and to provide funds for other corporate purposes. CILCO Capital expenditures totaled $45.2 million for the nine months ended September 30, 1998. Capital expenditures are anticipated to be approximately $16.7 million for the remainder of 1998 and are estimated to be $60.5 million in 1999. Included in 1998 and 1999 capital expenditures are $16.6 million and $11.4 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 1998. CILCO intends to finance its 1998 and 1999 capital expenditures with funds provided by operations. As of September 30, 1998, 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 $37.9 million of commercial paper outstanding at September 30, 1998 and expects to issue commercial paper periodically throughout the remainder of 1998. QST (Excluding QST Environmental) Capital expenditures totaled approximately $7.6 million for the nine months ended September 30, 1998, including $5.7 million for construction of fiber optic and other communications facilities by QST Communications Inc. (See Note 4. Discontinued Operations) On May 22, the Illinois Commerce Commission (ICC) ruled it did not have the authority to require Commonwealth Edison to allow QST access to the Sears Tower distribution system to build a cogeneration system. On August 7, 1998, QST filed an appeal with the First District Appellate Court related to this ruling. Approximately $1 million has been capitalized to date for this project. Other than litigation costs, QST does not plan to incur capital expenditures for this project during the remainder of 1998, and will write-off all or a portion of the costs capitalized to date should the appeal fail and the project not proceed as planned. QST working capital balances increased by $22.4 million during the third quarter of 1998 due to an increase in accounts receivable and unbilled revenues due to QST Energy's business growth in California, and to a reduction in short- term debt due to the sale of QST Communications Inc. QST expects to finance working capital needs during the remainder of 1998 with funds provided by the Holding Company. At September 30, 1998, QST Enterprises Inc. had no outstanding debt other than at QST Environmental. QST Environmental For the nine months ended September 30, 1998, QST Environmental's expenditures for capital additions and improvements were approximately $.6 million. Capital expenditures for the remainder of 1998 are expected to be $.3 million, which includes the replacement of the existing accounting/project management system. 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 September 30, 1998, QST Environmental had borrowed $8 million from CILCORP. Based upon its current receivables and fixed assets, QST Environmental has an additional $7 million available under this revolving line of credit. CIM At September 30, 1998, CIM had $35 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 September 30, 1998, approximately $12.8 million of these commitments had been funded. CIM expects to contribute approximately $1.4 million in cash for these investments during the remainder of 1998, $1.4 million in 1999, and lesser amounts each year thereafter through 2006. These investments will be funded through borrowings from CILCORP. CIM expects to finance any other new investments and working capital needs during the remainder of 1998 with a combination of funds generated internally and with funds provided by CILCORP. CVI At September 30, 1998, CVI had outstanding debt of $1.3 million, borrowed from CILCORP. CVI expects to finance its activities and working capital needs during the remainder of 1998 with a combination of funds generated internally and with funds provided by CILCORP. Results of Operations The following table summarizes net income of CILCO, QST, QST Environmental and Other Businesses for the three months and nine months ended September 30, 1998 and 1997.
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 (In thousands) (Unaudited) CILCO Electric and gas utility operating income $24,815 $22,491 $57,732 $56,070 Utility other income and deductions (5,751) (6,154) (17,423) (18,115) Preferred stock dividends of CILCO (797) (818) (2,396) (2,415) ------- ------- ------- ------- Total utility net income 18,267 15,519 37,913 35,540 QST net loss from continuing operations (3,601) (2,183) (15,007) (3,990) QST Environmental net inc. (loss) from continuing operations 248 97 46 (1,127) Other businesses net loss (230) (411) (825) (1,563) ------- ------- ------- ------- Consolidated net income from continuing operations 14,684 13,022 22,127 28,860 Gain on sale of assets of discontinued business and income (loss) from operations of discontinued business 7,985 52 7,548 (250) ------- ------- ------- ------- Consolidated net income available to common shareholders $22,669 $13,074 $29,675 $28,610 ======= ======= ======= =======
CILCO Electric and Gas Operations The following table summarizes the components of CILCO electric and gas operating income for the three months and nine months ended September 30, 1998 and 1997.
Components of Electric and Three Months Ended Nine Months Ended Gas Operating Income September 30, September 30, 1998 1997 1998 1997 Electric revenue: Electric retail $110,466 $ 96,878 $267,198 $243,866 Sales for resale 4,770 7,458 15,520 14,773 -------- -------- -------- -------- Total electric revenue 115,236 104,336 282,718 258,639 -------- -------- -------- -------- Electric cost of sales: Cost of fuel 25,625 24,497 71,102 68,240 Purchased power 10,831 7,889 23,683 16,035 Revenue taxes 6,006 4,863 14,384 11,775 -------- -------- -------- -------- Total electric cost of sales 42,462 37,249 109,169 96,050 -------- -------- -------- -------- Electric gross margin 72,774 67,087 173,549 162,589 -------- -------- -------- -------- Gas revenue: Sale of gas 20,170 17,749 115,262 137,232 Transportation services 1,100 1,270 4,220 4,799 -------- -------- -------- -------- Total gas revenue 21,270 19,019 119,482 142,031 Gas cost of sales: Cost of gas 9,139 7,383 63,295 82,186 Revenue taxes 954 508 6,046 5,317 -------- -------- -------- -------- Total gas cost of sales 10,093 7,891 69,341 87,503 -------- -------- -------- -------- Gas gross margin 11,177 11,128 50,141 54,528 -------- -------- -------- -------- Electric and gas operating expenses Other operation and maintenance 27,949 27,163 85,642 83,312 Depreciation and amortization 16,344 15,394 47,853 46,181 Income and other taxes 14,843 13,167 32,463 31,554 -------- -------- -------- -------- Total electric and gas operating expenses 59,136 55,724 165,958 161,047 -------- -------- -------- -------- Electric and gas operating income $ 24,815 $ 22,491 $ 57,732 $ 56,070 ======== ======== ======== ========
Electric gross margin increased 8% for the quarter and 7% for the nine months ended September 30, 1998, compared to the same periods in 1997. Retail kilowatt hour (Kwh) sales increased 14% for the quarter and 8% for the nine months ended September 30, 1998. Residential sales increased 16% for the quarter and 5% for the nine months ended September 30, 1998, compared to the same periods in 1997. Commercial sales increased 13% for the quarter and 7% for the nine months ended September 30, 1998. Cooling degree days were 26% and 37% higher, respectively, for the quarter and nine months ended September 30, 1998, compared to the same periods in 1997. Industrial sales increased 13% and 11% respectively, for the quarter and nine months ended September 30, 1998. Industrial sales were favorably impacted by customers returning to retail supply due to the completion of CILCO's Power Quest industrial program (see Part II. Item 5: Other Information, Power Quest Electric Pilot Programs). Sales for resale decreased 36% during the quarter ended September 30, 1998, compared to the same period in 1997, due to lower available capacity for bulk sales due to increased native load demand resulting from warm weather. Sales for resale increased 5% for the nine months ended September 30, 1998, compared to the same period in 1997, due to favorable market conditions. 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 may also be affected for the near term by the remaining Power Quest pilot program, and in the long term by deregulation and increased competition in the electric utility industry (see Part II. Item 5: Other Information, Power Quest Electric Pilot Programs). Substantially all of CILCO's electric generating capacity is coal- fired. The cost of fuel increased 5% in the third quarter of 1998, compared to the same period in 1997, due to an increase in generation offset by a decrease in the cost of coal burned. The cost of fuel increased 4% for the nine months ended September 30, 1998 due to a 6% increase in generation, offset by a 2% decrease in the cost of fuel burned. Purchased power increased for the quarter and the nine months ended September 30, 1998, compared to the same periods in 1997. Purchased power expense varies based on CILCO's need for energy and the price of power available for purchase. CILCO makes use of purchased power when it is economical to do so and when required during maintenance outages at CILCO plants. The costs of purchased power for retail customers are passed through to those customers via the fuel adjustment clause (FAC). Gas gross margin remained relatively constant for the third quarter and decreased 8% for the nine months ended September 30, 1998, compared to the same periods in 1997. Residential sales volumes remained relatively constant for the quarter and decreased 17% for the nine months ended September 30, 1998. Sales decreases were primarily due to warmer weather. Commercial sales volumes decreased 5% and 10%, respectively, for the quarter and nine months ended September 30, 1998, compared to the same periods in 1997. Heating degree days were 20% lower for the quarter and 22% lower for the nine months ended September 30, 1998, compared to the same periods in 1997. The overall level of business activity in CILCO's service territory and weather conditions are expected to continue to be the primary factors affecting gas sales in the near term. CILCO's gas sales may also be affected by further deregulation at the retail level in the natural gas industry. Revenue from gas transportation services decreased 13% and 12% for the quarter and nine months ended September 30, 1998, respectively, while gas transportation sales volumes decreased 8% for the quarter and decreased 6% for the nine months ended September 30, 1998, compared to the same periods in 1997. The cost of gas increased 24% for the quarter ended September 30, 1998, compared to the same period in 1997, primarily due to higher natural gas prices. The cost of gas decreased 23% for the nine months ended September 30, 1998, primarily due to lower natural gas prices from CILCO's suppliers in January and February 1998. Operation and maintenance expense increased 3% for the quarter and for the nine months ended September 30, 1998, compared to the same periods in 1997. The increase for the quarter was mainly due to an increase in steam generation expenses arising from outages at CILCO's E. D. Edwards generation facility. The increase for the nine months ended September 30, 1998 was primarily due to increased electric distribution overhead line maintenance expense due to a severe storm on June 29, which affected power delivery to approximately half of CILCO's electric customers. Also contributing to the increases were increased customer service costs related to the Customer Care Center which opened on June 30, 1997, and increased expenditures related to information technology activities. These increases were partially offset by lower outside services costs and decreases in the actuarially-determined costs for pensions and post-employment benefits. Depreciation and amortization expense increased 6% for the quarter and 4% for the nine months ended September 30, 1998, reflecting additions and replacements of utility plant at costs in excess of the original cost of the property retired, and increased amortization associated with the implementation of new computer systems. Income and other taxes expense increased for the quarter and for the nine months ended September 30, 1998, due to higher pre-tax operating income. CILCO Other Income and Deductions and Interest Expense The following table summarizes other income and deductions and interest expense for the three months and nine months ended September 30, 1998 and 1997.
Components of Other Income Three Months Ended Nine Months Ended and Deductions and Interest September 30, September 30, Expense 1998 1997 1998 1997 Net interest expense $(5,696) $(5,621) $(16,758) $(16,819) Income taxes 520 834 1,859 2,129 Other (575) (1,367) (2,524) (3,425) ------- ------- -------- -------- Other income (deductions) $(5,751) $(6,154) $(17,423) $(18,115) ======= ======= ======== ========
QST (Excluding QST Environmental) The following table summarizes the revenue and expenses for QST for the three months and nine months ended September 30, 1998 and 1997.
Three Months Ended Nine Months Ended September 30, September 30, Components of QST Net Loss 1998 1997 1998 1997 (In thousands) (Unaudited) Electric: Electric revenue $ 46,926 $ 8,140 $110,280 $ 10,593 Cost of electricity 48,940 8,421 123,218 11,184 -------- -------- -------- -------- Electric gross margin (2,014) (281) (12,938) (591) -------- -------- -------- -------- Gas: Gas revenue 76,649 75,658 342,503 120,111 Cost of gas 77,124 76,754 345,307 120,689 -------- -------- -------- -------- Gas gross margin (475) (1,096) (2,804) (578) -------- -------- -------- -------- Other expenses: General and administrative 3,295 2,229 8,765 5,290 Depreciation and amortization 205 28 509 72 Interest (21) (12) (143) 87 -------- -------- -------- -------- Total other expenses 3,479 2,245 9,131 5,449 -------- -------- -------- -------- Net loss before income taxes (5,968) (3,622) (24,873) (6,618) Income tax benefit (2,367) (1,439) (9,866) (2,628) -------- -------- -------- -------- Net loss from continuing operations (3,601) (2,183) (15,007) (3,990) Loss from operations of discontinued business, net of tax (267) (102) (704) (559) Gain on sale of assets of discontinued business, net of tax of $5,425 8,252 -- 8,252 -- -------- -------- -------- -------- QST net income (loss) $ 4,384 $ (2,285) $ (7,459) $ (4,549) ======== ======== ======== ========
QST Enterprises Inc. (QST Enterprises) was formed in December 1995 to facilitate CILCORP's expansion into non-regulated energy and related services businesses. Its initial focus through QST Energy was to compete against energy suppliers participating in CILCO's Power Quest program. After successfully competing for Power Quest program customers, QST Energy established and expanded the infrastructure required to supply energy to customers outside of the CILCO service territory, and has energy customers in Illinois, Pennsylvania, and California. QST Energy competes against marketers, brokers and utility affiliates to provide energy and services to customers of utilities and other energy providers which offer, or will be required to offer, similar retail competition programs. Due to the uncertainties related to energy deregulation and the immaturity and illiquidity of energy markets, the Company is de-emphasizing QST's out-of-state energy sales and marketing activities and focusing on the Illinois energy market by consolidating some of QST Energy's assets and resources with those from CILCO. As part of the strategy to de-emphasize out-of-state energy sales and marketing activities, QST Energy has sold approximately 25,000 residential, commercial, and industrial electric accounts in Pennsylvania to Exelon Energy, effective with customers' October meter readings. Effective October 1, approximately 3,800 gas customers in the Columbia Gas of Pennsylvania Choice Program have been assigned from QST Energy to United Gas Management, Inc. The proceeds from these sales were not material to QST Energy's results. QST Energy will complete its exit from the Pennsylvania market when it transfers 3,500 accounts within the city limits of Philadelphia to a new joint venture between Philadelphia Gas Works and a new partner, effective December 31, 1998. QST Energy is also evaluating alternatives related to its electric customers in California. 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. Since the Company's change in strategy, QST Trading's activities have been and will be primarily focused on balancing its physical and financial portfolio. However, due to the need to fulfill prior contracts and commitments, QST Trading may continue to receive revenues and incur expenses related to trading operations for the remainder of 1998 and a portion of 1999, and as a result, may continue to realize negative gross margins. QST's electric revenues increased approximately $39 million and $100 million during the quarter and nine months ended September 30, 1998, respectively, compared to the same periods in 1997. Physical delivery of electricity and electricity prices were greater in 1998 prior to the suspension of wholesale trading activities, compared to 1997. QST Energy revenues also increased due to its participation in the Pennsylvania electric pilots and the deregulated California electric market. QST's electric retail gross margin decreased by $1.7 million for the quarter ended September 30, 1998, compared to the same period in 1997, primarily due to transmission congestion problems in the deregulated California market and higher costs to procure electricity as the result of its suspension of wholesale trading operations. These conditions may remain while QST continues to serve its California electric retail customers. The $12.3 million decrease in electric margin for the nine months ended September 30, 1998, compared to the same period in 1997, was primarily the result of an unprecedented, sudden increase in wholesale electricity prices during the week of June 22, 1998. In view of the extreme and unprecedented volatility in electricity supply and pricing in the second quarter, QST decided to close its trading positions for the remainder of the summer to avoid further adverse price movements. The impact on electric gross margin of closing the summer positions was recognized primarily in the second quarter. Natural gas revenues increased approximately $1 million and $222 million during the quarter and nine months ended September 30, 1998, respectively, as compared to the same periods in 1997, due primarily to increased wholesale gas trading activity in 1998 prior to the suspension of trading activities. QST's negative natural gas gross margin decreased by $.6 million and increased by $2.2 million for the quarter and nine months ended September 30, 1998, respectively, as compared to the same periods in 1997, primarily due to wholesale natural gas trading transactions. For the quarter and nine months ended September 30, 1998, negative wholesale natural gas margins were slightly offset by positive retail gas margins of $.1 million and $.3 million, respectively. Wholesale gas trading revenues and expenses will continue for the remainder of 1998 and a portion of 1999 as QST fulfills prior contracts and commitments. QST's general and administrative expenses have increased $1.1 million and $3.5 million for the quarter and nine months ended September 30, 1998, respectively, compared to the same periods in 1997. The increase in general and administrative expenses for the third quarter of 1998, compared to the same period in 1997, was due to an increase in the number of QST employees to support the growth in the retail operations and to employee severance costs incurred at QST Trading. The increase in general and administrative expenses for the nine months ended September 30, 1998, compared to the same period in 1997, resulted from the increase in the number of QST employees to support the growth in the retail and wholesale operations. Net operating losses are expected to continue in the near term as QST de- emphasizes out-of-state energy sales and marketing activities. Results for QST Communications are being reported as discontinued operations in the statements of income. Prior year amounts have been reclassified on a basis consistent with the 1998 presentation (see Note 4. Discontinued Operations). QST Environmental Operations The following table summarizes environmental and engineering services revenue and expenses for the three months and nine months ended September 30, 1998 and 1997.
Components of QST Environmental Three Months Ended Nine Months Ended Net Income September 30, September 30, 1998 1997 1998 1997 (In thousands) (Unaudited) Revenue: Environmental and engineering services revenue $14,760 $19,392 $50,822 $55,230 Direct non-labor project costs 4,661 7,652 19,319 19,563 ------- ------- ------- ------- Net revenue 10,099 11,740 31,503 35,667 ------- ------- ------- ------- Expenses: Direct salaries, indirect salaries and related benefits 5,020 5,867 15,991 18,854 General and administrative 3,825 4,674 12,718 15,029 Depreciation and amortization 624 877 1,992 2,947 ------- ------- ------- ------- Operating expenses 9,469 11,418 30,701 36,830 ------- ------- ------- ------- Interest expense 193 21 648 281 ------- ------- ------- ------- Income (loss) before income taxes 437 301 154 (1,444) Income taxes expense (benefit) 189 204 108 (317) ------- ------- ------- ------- Net income (loss) from continuing operations 248 97 46 (1,127) Income from operations of discontinued business -- 154 -- 309 ------- ------- ------- ------- QST Environmental net income (loss) $ 248 $ 251 $ 46 $ (818) ======= ======= ======= =======
QST Environmental's quarterly results have been affected by such factors as project delays, which may be caused by delays in regulatory agency approvals or client considerations; the level of subcontractor services; weather, which may limit the amount of time QST Environmental's professionals have in the field; and increased competition in all aspects of the business. QST Environmental's net revenues decreased by $1.6 million, or 14%, for the third quarter and by $4.2 million, or 12%, for the nine months ended September 30, 1998, compared to the same periods in 1997. The net revenue decreases for these periods resulted primarily from reduced laboratory revenues as a result of the sale of the Peoria Laboratory and reduced business volume in consulting and in the remaining Gainesville Laboratory. Consulting revenues for the quarter and nine months ended September 30, 1998 decreased by approximately $1.2 million and $2.3 million, respectively, when compared to the corresponding periods in 1997. Direct salaries, indirect salaries and related benefits decreased by $.8 million, or 14%, for the third quarter and by $2.9 million, or 15%, for the nine months ended September 30, 1998, compared to the same periods in 1997. Salary costs include salaries and related fringe benefits, including employer-paid medical and dental insurance, payroll taxes, paid time off, and 401(k) contributions. This decrease was primarily due to a planned reduction in the number of laboratory and other technical staff to match decreased levels of business activity. QST Environmental is evaluating alternatives related to its Gainesville laboratory operations. General and administrative expenses decreased by $.8 million, or 18%, for the three months ended September 30, 1998, and decreased by $2.3 million, or 15%, for the nine months ended September 30, 1998, compared to the same periods in 1997. General and administrative expenses include non-billable employee time devoted to marketing, proposals, supervision, and professional development; office supply expenses; and corporate administrative expenses. The decreases for these periods resulted from efforts to control administrative and marketing costs, including lower general and administrative salaries and related benefits expense. In the fourth quarter of 1997, QST Environmental wrote off $22.6 million of unamortized goodwill. Consequently, no goodwill amortization is recorded in the quarter and nine months ended September 30, 1998. Depreciation expense declined $.2 million for the three months ended September 30, 1998, compared to the same period in 1997, due primarily to increases in fully-depreciated assets coupled with reduced capital expenditures. In November 1997, QST Environmental sold substantially all the assets of ESE Land for $9.5 million in cash and residual interests in three newly-formed limited liability corporations. These activities are shown as discontinued operations in the statements of income. Interest expense increased because, as a result of the ESE Land sale, a portion of interest costs is no longer capitalized. QST Environmental will continue to position itself to take advantage of new market opportunities. Due to the labor-intensive nature of QST Environmental's business, it has the ability to adjust staffing levels to recognize changing business conditions. QST Environmental had 485 full-time equivalent employees at September 30, 1998, compared to 621 employees at September 30, 1997. QST Environmental's future business activity and profitability will continue to be impacted by the level of demand for its services, which is affected by government funding levels, the enforcement of various federal and state statutes and regulations dealing with the environment and the use, control, disposal, and clean-up of hazardous wastes. The market for QST Environmental's services is highly competitive; no single entity currently dominates the environmental consulting and engineering services marketplace. Other Businesses Operations The following table summarizes the components of Other Businesses losses for the three months and nine months ended September 30, 1998 and 1997.
Components of Other Businesses Three Months Ended Nine Months Ended Net Income (Loss) September 30, September 30, 1998 1997 1998 1997 (In thousands) (Unaudited) Revenue: Other revenue $ 3,724 $ 1,923 $13,739 $ 6,812 ------- ------- ------- ------- Expenses: Operating expenses 2,805 1,735 11,452 7,476 Depreciation and amortization 48 48 145 144 Interest expense 1,632 1,222 5,179 3,617 Income and other taxes (531) (671) (2,212) (2,862) ------- ------- ------- ------- Total expenses 3,954 2,334 14,564 8,375 ------- ------- ------- ------- Other businesses net loss $ (230) $ (411) $ (825) $(1,563) ======= ======= ======= =======
Other revenues increased 94% for the three months ended and 102% for the nine months ended September 30, 1998, primarily due to increased CVI gas marketing revenue. Operating expenses increased for the quarter and nine months ended September 30, 1998, compared to the corresponding periods in 1997, primarily due to increased expenses related to the gas retail marketing program at CVI, while interest expense increased due to higher average debt balances. The credit for income and other taxes decreased in the quarter and nine months ended September 30, 1998, compared to the corresponding periods in 1997, primarily due to a smaller pre-tax loss. PART II. OTHER INFORMATION Item 1: Legal Proceedings Reference is made to "Environmental Matters" under "Item 1. Business" in the Company's 1997 Annual Report on Form 10-K (the "1997 Form 10- K"), and "Note 2. Contingencies," herein, for certain pending legal proceedings and proceedings known to be contemplated by governmental authorities. The Company and its subsidiaries are subject to certain claims and lawsuits in connection with work performed in the ordinary course of their businesses. Except as otherwise referred to above, in the opinion of management, all such claims currently pending either will not result in a material adverse effect on the financial position and results of operations of the Company or are adequately covered by: (i) insurance; (ii) contractual or statutory indemnification; and/or (iii) reserves for potential losses. Item 5: Other Information Illinois Electric Deregulation In December 1997, the Electric Service Customer Choice and Rate Relief Law of 1997 (Customer Choice Law) became effective. The Customer Choice Law began a nine-year transition process to a fully competitive market for electricity 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 its residential base rates with an initial 2% decrease beginning August 1998. (Refer to the caption "Competition" of the combined CILCORP/CILCO 1997 Form 10-K.) Power Quest Retail Competition Pilot Programs In 1996, to lead the movement toward increased customer choice, CILCO began Power Quest, which 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 $2.2 million in pre-tax income for the first nine months of 1998 (including electric margin lost by CILCO, CVI costs associated with the Caterpillar alliance, and QST margin on sales to Power Quest industrial customers). Costs associated with the Caterpillar alliance are included in Other Businesses Operations. CILCO has offset some of the profit margin lost under Power Quest with increased wholesale electric margin on sales outside its service territory. Six of the Power Quest industrial program participants have signed contracts for electric service with CILCO which extend 18 months or more beyond October 1, 1999, when they would have become eligible to select alternative suppliers under the Customer Choice Law. CILCO personnel are 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 $.8 million in pre-tax income for the first nine months of 1998. Assuming the same Power Quest participation level for all of 1998, CILCORP would experience a reduction to pre-tax income of $1 million in 1998. Due to the passage of the Customer Choice Law, CILCO filed a request with the Illinois Commerce Commission on October 28, 1998, for approval to eliminate this program, effective May 1, 1999. 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. Due to the design of CILCO's distribution tariffs, margin losses from customer participation in the program have been minimal. Consequently, this program did not have a material adverse impact on CILCO's financial position or results of operations for 1997 or the first nine months of 1998. Management further believes this program will not have a material adverse impact on CILCO's future financial position or results of operations. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits 27 - Financial data schedules (b) Reports on Form 8-K A Form 8-K was filed on July 28, 1998 to disclose the sale of the common stock of CILCORP's telecommunications subsidiary, QST Communications Inc. SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CILCORP Inc. (Registrant) Date November 10, 1998 R. O. Viets R. O. Viets President and Chief Executive Officer Date November 10, 1998 T. D. Hutchinson T. D. Hutchinson Controller SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTRAL ILLINOIS LIGHT COMPANY (Registrant) Date November 10, 1998 R. J. Sprowls R. J. Sprowls Vice President and Chief Financial Officer Date November 10, 1998 T. D. Hutchinson T. D. Hutchinson Controller and Manager of Accounting EX-27 2
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000762129 CILCORP INC. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 867,680 179,232 187,733 41,984 0 1,276,629 192,567 0 164,589 357,156 22,000 44,120 298,567 45,207 0 37,900 0 0 1,827 468 469,384 1,276,629 934,831 14,956 864,279 879,235 55,596 745 54,851 22,780 32,071 2,396 29,675 25,112 17,237 59,691 2.18 2.17
EX-27 3
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME, STATEMENT OF CASH FLOWS AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000018651 CENTRAL ILLINOIS LIGHT COMPANY 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 867,680 3,250 112,350 26,693 0 1,009,973 185,661 0 139,882 325,543 22,000 44,120 267,872 0 0 37,900 0 0 1,827 468 310,243 1,009,973 402,200 23,872 320,596 344,468 57,732 (467) 57,265 16,956 40,309 2,396 37,913 45,112 14,690 90,900 0 0
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