Central Illinois Light (CILTL) 10-Q 2001 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended June 30, 2001

OR

o 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 Liberty Street
	Peoria, Illinois  61602
	(309) 677-5230

1-2732	CENTRAL ILLINOIS LIGHT COMPANY	37-0211050
	(An Illinois Corporation)
	300 Liberty Street
	Peoria, Illinois  61602
	(309) 677-5230

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   ý   No  o

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 and privately held by The AES Corporation at June 30, 2001	1,000
CENTRAL ILLINOIS LIGHT COMPANY	Common stock, no par value, shares outstanding and privately held by CILCORP Inc. at June 30, 2001	13,563,871

CILCORP INC.
AND
 CENTRAL ILLINOIS LIGHT COMPANY
FORM 10-Q FOR THE QUARTER ENDED June 30, 2001
INDEX

PART I.	FINANCIAL INFORMATION
Item 1:	Financial Statements
	CILCORP INC.
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Cash Flows
	CENTRAL ILLINOIS LIGHT COMPANY
		Consolidated Balance Sheets
		Consolidated Statements of Income
		Consolidated Statements of Cash Flows
	Statements of Segments of Business
	Notes to Consolidated Financial Statements
	CILCORP Inc. and Central Illinois Light Company
Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations CILCORP Inc. and Central Illinois Light Company
PART II.	OTHER INFORMATION
Item 1:	Legal Proceedings
Item 5:	Other Information
Item 6:	Exhibits and Reports on Form 8-K
Signatures

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)

		June 30,		December 31,
		2001		2000
ASSETS
Current assets:
Cash and temporary cash investments		$	11,046	$	11,743
Receivables, less reserves of $1,151 and $1,343		88,753		91,050
Accrued unbilled revenue		27,017		70,444
Fuel, at average cost		16,166		13,995
Materials and supplies, at average cost		18,567		16,295
Gas in underground storage, at average cost		20,439		28,413
FAC/PGA underrecoveries		870		20,838
Prepayments and other		9,029		5,563
	Total current assets	191,887		258,341
Investments and other property:
Investment in leveraged leases		136,261		140,936
Other investments		20,150		21,056
	Total investments and other property	156,411		161,992
Property, plant and equipment:
Utility plant, at original cost
	Electric	703,065		695,220
	Gas	221,063		218,710
		924,128		913,930
Less - accumulated provision for depreciation		97,273		66,128
		826,855		847,802
Construction work in progress		40,137		29,213
Other, net of depreciation		79		144
	Total property, plant and equipment	867,071		877,159
Other assets:
Goodwill, net of accumulated amortization of $26,087 and $18,422		586,877		594,544
Other		68,495		56,240
Total other assets		655,372		650,784
	Total assets	$	1,870,741	$	1,948,276

See Notes to Consolidated Financial Statements.

CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)

		June 30,			December 31,
		2001			2000
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt		$	18,900		$	17,500
Notes payable		111,434			115,300
Accounts payable		66,001			113,571
Accrued taxes		19,476			20,170
Accrued interest		17,386			18,495
FAC/PGA overrecoveries		1,841			7
Other		17,064			6,287
	Total current liabilities	252,102			291,330
Long-term debt		719,106			720,482
Deferred credits and other liabilities:
Deferred income taxes		188,386			198,577
Regulatory liability of regulated subsidiary		43,147			42,752
Deferred investment tax credits		15,356			16,159
Freeman contract liability		83,524			90,574
Other		79,231			77,559
	Total deferred credits and other liabilities	409,644			425,621
Preferred stock of subsidiary without mandatory redemption		19,120			19,120
Preferred stock of subsidiary with mandatory redemption		22,000			22,000
	Total preferred stock of subsidiary	41,120			41,120
Stockholder's equity:
Common stock, no par value; authorized 10,000 shares – outstanding 1,000 shares		–			–
Additional paid-in capital		468,833			468,833
Retained earnings (deficit)		(12,745		)	1,340
Accumulated other comprehensive income (loss)		(7,319		)	(450		)
	Total stockholder's equity	448,769			469,723
	Total liabilities and stockholder's equity	$	1,870,741		$	1,948,276

See Notes to Consolidated Financial Statements.

CILCORP INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
(Unaudited)

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2001			2000			2001			2000
Revenue:
CILCO Electric		$	92,299		$	94,920		$	181,299		$	181,246
CILCO Gas		41,746			32,810			200,695			102,954
CILCO Other		26,330			10,469			39,284			18,853
Other businesses		9,525			5,434			25,485			11,703
	Total	169,900			143,633			446,763			314,756
Operating expenses:
Fuel for generation and purchased power		55,207			49,419			102,450			88,672
Gas purchased for resale		33,411			20,499			174,099			63,562
Other operations and maintenance		34,074			29,305			64,129			56,605
Depreciation and amortization		21,820			21,281			42,910			42,302
Taxes, other than income taxes		8,811			8,598			21,705			20,578
	Total	153,323			129,102			405,293			271,719
Fixed charges and other:
Interest expense		17,757			17,243			35,666			34,586
Preferred stock dividends of subsidiary		539			1,058			1,079			1,898
Allowance for funds used during construction		(26		)	(99		)	(44		)	(202		)
Other		404			246			618			521
	Total	18,674			18,448			37,319			36,803
Income (loss) before income taxes		(2,097		)	(3,917		)	4,151			6,234
Income taxes		213			(988		)	3,236			3,454
	Net income (loss)	(2,310		)	(2,929		)	915			2,780
Other comprehensive income (loss)		(6,620		)	—			(6,869		)	—
	Comprehensive income (loss)	$	(8,930	)	$	(2,929	)	$	(5,954	)	$	2,780

See Notes to Consolidated Financial Statements.

CILCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

		Six Months Ended
		June 30,
		2001			2000
Cash flows from operating activities:
Net income before preferred dividends of subsidiary		$	1,994		$	4,678
Adjustments to reconcile net income to net cash provided by operating activities:
	Non-cash lease income and investment income	(2,262		)	(4,598		)
	Cash receipts in excess of debt service on leases	6,225			8,315
	Depreciation and amortization	42,910			42,302
	Deferred income taxes, investment tax credit and regulatory liability of subsidiary, net	(13,349		)	(7,873		)
Changes in operating assets and liabilities:
	Decrease in accounts receivable and accrued unbilled revenue	42,662			6,606
	Decrease in inventories	3,531			6,493
	Increase (decrease) in accounts payable	(44,519		)	11,356
	Decrease in accrued taxes	(761		)	(10,913		)
	(Increase) decrease in other assets	2,428			(11,732		)
	Increase (decrease) in other liabilities	11,517			(4,314		)
	Total adjustments	48,382			35,642
	Net cash provided by operating activities from continuing operations	50,376			40,320
	Net cash provided (used) by operating activities of discontinued operations	81			(134		)
	Cash flow from operations	50,457			40,186
Cash flows from investing activities:
Additions to plant		(24,532		)	(23,831		)
Other		(6,677		)	(1,025		)
	Net cash used in investing activities	(31,209		)	(24,856		)
Cash flow from financing activities:
Net increase (decrease) in short-term debt		(3,866		)	7,800
Net decrease in long-term debt		—			(22,000		)
Common dividends paid		(15,000		)	(6,200		)
Subsidiary preferred dividends paid		(1,079		)	(1,898		)
	Net cash used in financing activities	(19,945		)	(22,298		)
Net decrease in cash and temporary cash investments		(697		)	(6,968		)
Cash and temporary cash investments at beginning of year:		11,743			11,220
Cash and temporary cash investments at June 30		$	11,046		$	4,252
Supplemental disclosures of cash flow information:
Cash paid during the period for:
	Interest	$	37,043		$	37,149
	Income taxes	$	9,411		$	15,950

See Notes to Consolidated Financial Statements.

CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
(Unaudited)

			June 30,		December 31,
			2001		2000
ASSETS
Utility plant, at original cost:
	Electric		$	1,312,960	$	1,305,115
	Gas		444,429		442,076
			1,757,389		1,747,191
	Less—accumulated provision for depreciation		956,526		926,091
			800,863		821,100
Construction work in progress			40,137		29,213
		Total utility plant	841,000		850,313
Other property and investments:
Cash surrender value of company-owned life insurance (net of related policy loans of $63,483 and $59,292)			3,098		3,497
Other			1,130		1,161
		Total other property and investments	4,228		4,658
Current assets:
Cash and temporary cash investments			5,616		8,777
Receivables, less reserves of $1,151 and $1,343			76,835		60,148
Accrued unbilled revenue			24,857		64,339
Fuel, at average cost			16,166		13,995
Materials and supplies, at average cost			15,822		15,807
Gas in underground storage, at average cost			20,439		28,413
Prepaid taxes			6,171		5,588
FAC/PGA underrecoveries			870		20,838
Other			8,987		5,556
		Total current assets	175,763		223,461
Deferred debits:
Unamortized loss on reacquired debt			2,570		2,691
Unamortized debt expense			1,366		1,427
Prepaid pension cost			229		229
Other			39,844		24,661
		Total deferred debits	44,009		29,008
Total assets			$	1,065,000	$	1,107,440

See Notes to Consolidated Financial Statements.

CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
(Unaudited)

			June 30,			December 31,
			2001			2000
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stockholder's equity:
	Common stock, no par value; authorized 20,000,000 shares; outstanding 13,563,871 shares		$	185,661		$	185,661
Additional paid-in capital			27,000			27,000
Retained earnings			129,190			140,364
Accumulated other comprehensive income (loss)			(7,844		)	(975		)
		Total common stockholder's equity	334,007			352,050
Preferred stock without mandatory redemption			19,120			19,120
Preferred stock with mandatory redemption			22,000			22,000
Long-term debt			244,107			245,482
		Total capitalization	619,234			638,652
Current liabilities:
Current maturities of long-term debt			1,400			—
Notes payable			80,434			67,300
Accounts payable			55,686			96,315
Accrued taxes			24,351			25,512
Accrued interest			7,985			8,889
FAC/PGA overrecoveries			1,841			7
Other			16,992			6,214
		Total current liabilities	188,689			204,237
Deferred credits and other liabilities
Deferred income taxes			114,004			123,611
Regulatory liability			43,146			42,752
Deferred investment tax credit			15,356			16,159
Capital lease obligation			315			616
Other			84,256			81,413
		Total deferred credits and other liabilities	257,077			264,551
Total capitalization and liabilities			$	1,065,000		$	1,107,440

See Notes to Consolidated Financial Statements.

CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Income
(In thousands)
(Unaudited)

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2001			2000			2001			2000
Operating revenue:
Electric		$	92,299		$	94,920		$	181,299		$	181,246
Gas		41,746			32,810			200,695			102,954
Total operating revenues		134,045			127,730			381,994			284,200
Operating expenses:
Cost of fuel		24,704			23,148			53,964			52,147
Cost of gas		25,816			17,474			152,496			58,406
Purchased power		9,547			15,000			19,659			17,899
Other operations and maintenance		33,439			27,393			62,474			53,256
Depreciation and amortization		17,244			17,668			34,469			35,077
Income taxes		3,288			4,658			9,944			13,240
Other taxes		8,791			8,589			21,659			20,456
	Total operating expenses	122,829			113,930			354,665			250,481
Operating income		11,216			13,800			27,329			33,719
Other income and deductions:
Company-owned life insurance, net		(316		)	(246		)	(618		)	(521		)
Other, net		2,833			(541		)	5,285			67
	Total other income and (deductions)	2,517			(787		)	4,667			(454		)
Income before interest expense		13,733			13,013			31,996			33,265
Interest expenses:
Interest on long-term debt		4,329			4,329			8,657			8,860
Cost of borrowed funds capitalized		(26		)	(99		)	(44		)	(202		)
Other		1,856			1,018			3,478			1,999
Total interest expense		6,159			5,248			12,091			10,657
Net income		7,574			7,765			19,905			22,608
Dividends on preferred stock		539			1,058			1,079			1,898
Income available for common stock		7,035			6,707			18,826			20,710
Other comprehensive income (loss)		(6,620		)	—			(6,869		)	—
Comprehensive income		$	415		$	6,707		$	11,957		$	20,710

See Notes to Consolidated Financial Statements.

CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

		Six Months Ended
		June 30,
		2001			2000
Cash flows from operating activities:
Net income before preferred dividends		$	19,905		$	22,608
Adjustments to reconcile net income to cash provided by operating activities:
	Depreciation and amortization	34,469			35,077
	Deferred income taxes, investment tax credit and regulatory liability, net	(10,015		)	(6,013		)
Changes in operating assets and liabilities:
	Increase in accounts receivable	(16,687		)	(3,173		)
	Decrease in fuel, materials and supplies, and gas in underground storage	5,787			6,672
	Decrease in unbilled revenue	39,483			10,001
	Increase (decrease) in accounts payable	(40,629		)	4,999
Decrease in accrued taxes and interest		(2,064		)	(13,755		)
Capital lease payments		323			323
Decrease in other current assets		15,954			2,130
Increase in other current liabilities		12,612			157
Increase in other non-current assets		(14,174		)	(6,083		)
Increase (decrease) in other non-current liabilities		2,725			(1,746		)
	Net cash provided by operating activities	47,689			51,197
Cash flows from investing activities:
Capital expenditures		(24,532		)	(23,831		)
Other		(8,050		)	(2,664		)
	Net cash used in investing activities	(32,582		)	(26,495		)
Cash flow from financing activities:
Common dividends paid		(30,000		)	(16,000		)
Preferred dividends paid		(1,079		)	(1,897		)
Payments on capital lease obligation		(323		)	(323		)
Increase in short-term borrowing		13,134			9,800
Long-term debt retired		—			(30,000		)
Long-term debt issued		—			8,000
	Net cash used in financing activities	(18,268		)	(30,420		)
Net decrease in cash and temporary cash investments		(3,161		)	(5,718		)
Cash and temporary cash investments at beginning of year		8,777			8,548
Cash and temporary cash investments at June 30		$	5,616		$	2,830
Supplemental disclosures of cash flow information:
Cash paid during the period for:
	Interest (net of cost of borrowed funds capitalized)	$	13,249		$	13,881
	Income taxes	$	17,508		$	30,391

See Notes to Consolidated Financial Statements.

Statements of Segments of Business
CILCORP Inc. and Subsidiaries
Three Months Ended June 30, 2001

		CILCO Electric			CILCO Gas			CILCO Other		Other Businesses			Total
		(In thousands)
Revenues		$	92,299		$	41,746		$	26,210	$	9,460		$	169,715
Interest income		—			—			120		65			185
	Total	92,299			41,746			26,330		9,525			169,900
Operating expenses		65,837			36,460			22,511		6,695			131,503
Depreciation and amortization		11,768			5,476			—		4,576			21,820
	Total	77,605			41,936			22,511		11,271			153,323
Interest expense		4,441			1,744			—		11,660			17,845
Preferred stock dividends		—			—			539		—			539
Fixed charges and other expenses		(26		)	—			316		—			290
	Total	4,415			1,744			855		11,660			18,674
Income before income taxes		10,279			(1,934		)	2,964		(13,406		)	(2,097		)
Income taxes		4,058			(770		)	986		(4,061		)	213
Segment net income		$	6,221		$	(1,164	)	$	1,978	$	(9,345	)	$	(2,310	)

See Notes to Consolidated Financial Statements.

Statements of Segments of Business
CILCORP Inc. and Subsidiaries
Three Months Ended June 30, 2000

		CILCO Electric			CILCO Gas			CILCO Other			Other Businesses			Total
		(In thousands)
Revenues		$	94,920		$	32,810		$	10,443		$	5,395		$	143,568
Interest income		—			—			26			39			65
	Total	94,920			32,810			10,469			5,434			143,633
Operating expenses		64,832			26,772			12,021			4,196			107,821
Depreciation and amortization		12,372			5,296			—			3,613			21,281
	Total	77,204			32,068			12,021			7,809			129,102
Interest expense		3,818			1,529			—			11,896			17,243
Preferred stock dividends		—			—			1,058			—			1,058
Fixed charges and other expenses		(99		)	—			246			—			147
	Total	3,719			1,529			1,304			11,896			18,448
Income before income taxes		13,997			(787		)	(2,856		)	(14,271		)	(3,917		)
Income taxes		4,961			(303		)	(1,011		)	(4,635		)	(988		)
Segment net income		$	9,036		$	(484	)	$	(1,845	)	$	(9,636	)	$	(2,929	)

Statements of Segments of Business
CILCORP Inc. and Subsidiaries
Six Months Ended June 30, 2001

		CILCO Electric			CILCO Gas		CILCO Other			Other Businesses				Total
		(In thousands)
Revenues		$	181,299		$	200,695	$	39,004	$		25,330		$		446,328
Interest income		—			—		280		155				435
	Total	181,299			200,695		39,284		25,485				446,763
Operating expenses		134,336			175,916		32,289		19,842				362,383
Depreciation and amortization		23,524			10,945		—		8,441				42,910
	Total	157,860			186,861		32,289		28,283				405,293
Interest expense		8,664			3,471		—		23,531				35,666
Preferred stock dividends		—			—		1,079		—				1,079
Fixed charges and other expenses		(44		)	—		618		—				574
	Total	8,620			3,471		1,697		23,531				37,319
Income before income taxes		14,819			10,363		5,298		(26,329			)	4,151
Income taxes		5,819			4,125		1,710		(8,418			)	3,236
Segment net income		$	9,000		$	6,238	$	3,588	$		(17,911	)	$		915

See Notes to Consolidated Financial Statements.

Statements of Segments of Business
CILCORP Inc. and Subsidiaries
Six Months Ended June 30, 2000

		CILCO Electric			CILCO Gas		CILCO Other			Other Businesses			Total
		(In thousands)
Revenues		$	181,246		$	102,954	$	18,784		$	11,610		$	314,594
Interest income		—			—		69			93			162
	Total	181,246			102,954		18,853			11,703			314,756
Operating expenses		122,631			79,533		20,151			7,102			229,417
Depreciation and amortization		24,573			10,504		—			7,225			42,302
	Total	147,204			90,037		20,151			14,327			271,719
Interest expense		7,753			3,106		—			23,727			34,586
Preferred stock dividends		—			—		1,898			—			1,898
Fixed charges and other expenses		(202		)	—		521			—			319
	Total	7,551			3,106		2,419			23,727			36,803
Income before income taxes		26,491			9,811		(3,717		)	(26,351		)	6,234
Income taxes		9,321			3,919		(1,365		)	(8,421		)	3,454
Segment net income		$	17,170		$	5,892	$	(2,352	)	$	(17,930	)	$	2,780

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 Energy Inc. (QST Energy), and CILCORP Infraservices Inc. (CILCORP Infraservices), 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 100% of the common stock of its first-tier subsidiaries.  In the fourth quarter of 1998, the operations of QST and its subsidiaries (excluding ESE Land Corporation and CILCORP Infraservices Inc. - see Management's Discussion and Analysis) were discontinued and, therefore, are being reported as discontinued operations in the financial statements.  Prior year amounts have been reclassified on a basis consistent with the 2001 presentation.

AES completed the acquisition of 100% of CILCORP's outstanding stock on October 18, 1999.  The merger was accounted for using the purchase method of accounting.  Under this method, the purchase price was allocated to the fair market value of the assets acquired and the liabilities assumed.  The excess of the purchase price over the fair value of the net assets acquired of approximately $573 million was recorded as goodwill at CILCORP and is being amortized over 40 years.  This initial allocation of the purchase price at October 18, 1999, was based on preliminary estimates made by the Company.  During 2000, adjustments were made to the purchase price allocation as additional information became available to finalize the allocation previously based upon preliminary estimates.  The primary effect of these adjustments was to increase goodwill by approximately $40 million, to increase utility plant by $28.4 million (offset by deferred taxes of $11.3 million), and to record a liability of approximately $110 million for an out-of-market long-term coal contract (offset by deferred taxes of approximately $44 million and net customer contract intangibles of approximately $17 million).  Changes to the Company's estimates after October 2000, if any, will be recorded in results of operations.

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 2000 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

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 1999, 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.  The two suits filed by QST Energy in the U.S. District Court, Central District of Illinois, were consolidated with the suit in the U.S. District Court, Northern District of California.  In December 2000, the two customers filed counterclaims against QST Energy.  On July 19, 2001, QST Energy and the two customers signed a settlement agreement and mutual release which resolved all of the pending lawsuits.  A cash settlement of $6 million was paid to QST Energy and applied against the accounts receivable balance at QST Energy, which was $13 million at June 30, 2001.  CILCORP had reserved $4.5 million as a preacquisition contingency related to this litigation.  Consequently, the net write-off during the third quarter will be approximately $2.5 million.

As a result of abnormally warm weather during July 1999, CILCO incurred $33 million of generation and purchased power costs which are subject to recovery from electric retail customers through the Fuel Adjustment Clause  (FAC).  Of this amount, $10 million was recovered in July 1999 and $23 million remained unrecovered at the end of July 1999.  CILCO's FAC allowed it to pass on to customers the cost of unrecovered fuel and purchased power costs in the next calculated month's FAC factor.  In this instance, on September 1, 1999, the ICC approved a request by CILCO to charge certain customers over a     12-month period (without interest), beginning in September 1999.  In addition, CILCO requested and received ICC permission to allow the larger industrial and commercial customers the option to pay their respective shares of the July underrecovery, which were billed in September, over a period of up to 12 months (without interest) after making appropriate arrangements with CILCO.  Also, under the FAC, the underrecovered costs of fuel and purchased power for a particular month are both treated as adjustments to cost of fuel expense.  Recovery of the fuel and purchased power costs from all customer classes was completed during 2000.

In early 2000, the ICC began its annual review of the previous year's FAC collections.  An ICC Hearing Examiner conducted hearings throughout 2000.  Testimony was filed by CILCO, the ICC staff and parties who had intervened in the proceeding and was followed by cross-examination of witnesses.  ICC staff and intervenors had recommended during these hearings that up to $22.4 million be refunded to CILCO's customers.  On November 6, 2000, the ICC Hearing Examiner issued a Proposed Order recommending that $3.4 million be refunded to CILCO's customers.

At its meeting on December 20, 2000, the ICC issued an order that modified the Hearing Examiner's Proposed Order.  The December 20 ICC pronouncement ordered CILCO to refund $20.9 million to customers in addition to the $3.4 million proposed by the Hearing Examiner.  These refunds would have been made by adjusting the February 2001 FAC recovery factor and continuing the adjustment in subsequent months until the entire amount was refunded to customers.  CILCO strongly disagrees with the ICC order and believes, among other things, that it conflicts with federal law.  The Federal Energy Regulatory Commission (FERC) previously reached a different conclusion with respect to the issues giving rise to the $20.9 million refund.  The ICC's order fails to recognize the preemptive jurisdiction of FERC.  The ICC's order to refund $20.9 million also results in a duplication of a portion of the Hearing Examiner's previously recommended $3.4 million refund.  CILCO petitioned the ICC for a rehearing and a stay of the refund order.  The ICC granted CILCO's request for a rehearing and stayed the refund order.

The ICC issued an order on the rehearing on July 5, 2001.  This order requires CILCO to refund a total of $21.9 million.  On July 24, 2001, CILCO filed a motion with the ICC to stay this order, to allow time for CILCO to complete and file a settlement resolving this and other issues relating to prior and future fuel costs.  On July 31, 2001, the ICC granted CILCO’s request to stay the July 5 order through August 24, 2001.  On August 3, 2001, CILCO petitioned the ICC for a rehearing of the July 5 order to preserve its legal alternatives.  CILCO also filed a settlement agreement resolving issues related to the 1999 and 2000 FAC filings.  As part of the settlement, CILCO agrees to refund $17.8 million related to the 1999 FAC and $2.6 million related to the 2000 FAC.  These refunds will be paid over a six month period plus accrued interest on the unpaid balance.  As a condition of the settlement agreement, CILCO also agrees to file a petition to eliminate the FAC within 21 days of an order approving the settlement.  Elimination of the FAC is a prerequisite to utility restructuring, as provided for in the Electric Service Customer Choice and Rate Relief Law of 1997 (Customer Choice Law).  Elimination of the FAC will expose the Company to market risk with respect to the cost of fuel and purchased power required to serve native load customers.

The refund required under either the July 5 order or the settlement, if approved, would have a material effect upon the Company.  While the Company cannot predict the ultimate outcome of these matters, management does not at this time consider it probable that the ICC will approve the settlement, and will thus not refund the $17.8 million related to the 1999 FAC.  The Company has reserved the right to, and will, take any legal action necessary to challenge the July 5 order if the settlement is not approved.  Accordingly, no reserve for the refunds has been recorded in the Company’s financial statements, other than a $4 million pre-acquisition contingency recorded in 2000.

NOTE 3.  Accounting for Price Risk Management Activities

CILCORP utilizes commodity futures contracts, options and swaps in the normal course of its non-regulated natural gas and electric business activities to reduce market or price risk.  Gains and losses arising from derivative financial instrument transactions, related to non-regulated activities, 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.  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 monitored to ensure compliance with the Company's risk management policies, including limits to the Company's total net exposure at any time.

The Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) on January 1, 2001, and recorded the effects of implementation in Other Comprehensive Income (OCI) as a change in accounting principle.  The amount recorded as OCI reflects the mark-to-market value of fixed price derivative financial instruments representing hedges of natural gas commitments through December 2001.  These derivatives are related to non-regulated activities and are being accounted for as fully-effective cash-flow hedges.  The balance in OCI, as of January 1, 2001, related to the implementation of SFAS 133, was an after-tax gain of $1,667,800.

Gains/losses on non-regulated activities are reflected in operating results as commitments are fulfilled and the related derivative financial instruments are settled.  The net loss reflected in operating results from derivative financial instruments for non-regulated activities for the quarter ended June 30, 2001, was $479,800 for natural gas (included in Gas Purchased for Resale).  There were no outstanding derivative financial instruments for electricity during the quarter ended June 30, 2001.  The previously recorded gain/loss associated with these settled derivative financial instruments was removed from OCI.  The open derivative positions are then marked-to-market through OCI.  The net effect of these adjustments was to record an after-tax loss in OCI in the amount of $4,704,100 for the quarter ended June 30, 2001.  The after-tax balance in OCI associated with these open derivative positions at June 30, 2001, was $4,953,200.  This portion of OCI reflects hedges of natural gas sales of 5,720,000 mmBtu or 5.7 Bcf for commitments through March 2003.

In May 2001, the Company implemented a winter 2001-2002 hedging strategy related to regulated gas activities.  This strategy utilizes collars (a combination of a put option and a call option) and futures to help protect customers who are charged the Company's Purchased Gas Adjustment (PGA) from large price fluctuations.  The Company enters into these collars based on pre-defined criteria and only when entering into the collar produces a premium credit.  This premium credit is being deferred until the month of delivery.  This strategy does not result in any income impacts since all gains/losses and premium credits will be passed along to the customer in the month of delivery.  The Company is accounting for these hedges as cash-flow hedges and is recognizing the mark-to-market value in OCI, consistent with SFAS 133.  In the month of delivery, any related mark-to-market value will be removed from OCI and charged/credited to the customer.  For the quarter ended June 30, 2001, an after-tax mark-to-market loss of $1,915,400 was recorded in OCI.  This portion of OCI reflects hedges of natural gas sales of 7,170,000 mmBtu or 7.2 Bcf for commitments through March 2002.

The FASB met in June 2001 and determined that certain electricity capacity contracts meet the "normal purchases and normal sales" exception as set forth in SFAS 138.  The Company was not previously accounting for such contracts as derivatives, therefore this clarification reinforces the Company's current accounting practices with regard to capacity contracts.

NOTE 4.  Other Comprehensive Income

Rollforward of Accumulated Other Comprehensive Income—CILCORP Inc.

	Pension			SFAS 133				Total
	(In thousands)
Accumulated other comprehensive loss—March 31, 2001 balance	$	(450	)		$	(249	)		$	(699	)
Other comprehensive loss—SFAS 133	—				(6,620		)		(6,620		)
Accumulated other comprehensive loss—June 30, 2001 balance	$	(450	)		$	(6,869	)		$	(7,319	)

Rollforward of Accumulated Other Comprehensive Income—Central Illinois Light Company

	Pension			SFAS 133					Total
	(In thousands)
Accumulated other comprehensive loss—March 31, 2001 balance	$	(975	)		$	(249		)		$	(1,224		)
Other comprehensive loss—SFAS 133	—				(6,620			)		(6,620			)
Accumulated other comprehensive loss—June 30, 2001 balance	$	(975	)		$		(6,869	)		$		(7,844	)

NOTE 5.  Impact of Accounting Standards

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).

SFAS 141 requires that all business combinations be accounted for using the purchase method and applies to all business combinations initiated after June 30, 2001.  Certain transition provisions apply to business combinations for which the acquisition date was before July 1, 2001, that were accounted for using the purchase method.  The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations.

SFAS 142 requires that goodwill and intangible assets that have indefinite useful lives be tested at least annually for impairment rather than be amortized.  The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001.  The Company is evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its consolidated financial position or results of operations.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

CILCORP Inc. (CILCORP) is a wholly-owned subsidiary of The AES Corporation (AES).  The financial condition and operating results of CILCORP Inc. and its subsidiaries (the Company) primarily reflect the operations of subsidiary Central Illinois Light Company (CILCO).  On November 23, 1998, the Company announced that AES had offered to buy 100% of the Company's outstanding common stock for $65 per share, subject to CILCORP shareholder approval and various regulatory approvals.  AES completed the acquisition of the Company on October 18, 1999.

In July 2000, AES announced plans to acquire IPALCO Enterprises, Inc. (IPALCO), a utility holding company headquartered in Indianapolis, Indiana.  Following this announcement, AES indicated that as part of the SEC approval process for the IPALCO transaction, AES expected to restructure its ownership interests in CILCORP within a specified period of time in order to continue as an exempt holding company under the Public Utility Holding Company Act of 1935 (PUHCA).  On March 23, 2001, AES received an order from the SEC which allowed AES' continued exemption from PUHCA.  The exemption order required AES to divest its ownership interests in CILCO's regulated utility assets within two years of the closing (March 27, 2001) of AES' acquisition of IPALCO.

Financial results reflect application of the purchase method of accounting to the merger.  Under this method, the purchase price is allocated to the fair market value of the assets acquired and the liabilities assumed.  Any excess of the purchase price over the fair value of the net assets acquired is allocated to goodwill.  As a result, CILCORP has recorded purchase accounting fair value adjustments to plant in service, pension and other post-retirement liabilities, an out-of-market long-term coal contract, and other balance sheet items.  After reflecting these adjustments, the Company also recorded goodwill.  See Note 1 to the Consolidated Financial Statements for further discussion related to purchase accounting.  The adjustments are reflected in CILCORP's financial statements.

Due to uncertainties related to electric deregulation across the country, the illiquidity of certain energy markets, and the Company's 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 Competition).  This law enables CILCO, the Company's regulated public utility that generates and distributes electricity and purchases, transports and distributes natural gas, to serve Illinois customers outside its traditional Central Illinois service territory.  As a result of these events, the Company reported the results of QST and its subsidiaries (excluding CILCORP Infraservices Inc. and residual interests in ESE Land Corporation) as discontinued operations (see Results of Operations – QST Enterprises Discontinued Operations).

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 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A).  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 and pace of development of competition for retail and wholesale energy customers; changes in technology; changes in company-wide operation and plant availability compared to historical performance and changes in historical operating cost structure, including changes in various costs and expenses; pricing and transportation of commodities; market supply and demand for energy and energy derivative financial instruments; inflation; capital market conditions; and environmental protection and compliance costs.  Prevailing governmental policies, statutory changes, and regulatory actions with respect to rates, tariffs, 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.

CILCORP

CILCORP is currently authorized by its Board of Directors to borrow up to $60 million on a short-term basis.  On June 30, 2001, CILCORP had committed bank lines of credit of $50 million, of which $31 million was used.

In October 1999, CILCORP issued $225 million of 8.7% senior notes (due 2009) and $250 million of 9.375% senior notes (due 2029).  Along with equity funds provided by AES, the proceeds of the notes were used by AES to acquire all outstanding shares of CILCORP common stock for approximately $886 million, to pay transaction costs related to the acquisition, and to retire short-term debt.

CILCORP had $17.5 million of medium-term notes outstanding at June 30, 2001.  With the issuance of the senior notes in October 1999, CILCORP can no longer issue debt under its medium-term note program.

CILCO

Capital expenditures totaled $24.5 million for the six months ended June 30, 2001.  Capital expenditures are anticipated to be approximately $25.6 million  for the remainder of 2001 and are currently estimated to be $112 million in 2002.  The projected increase in 2002 is primarily due to installation of NOx reduction equipment.

In the first quarter of 2001, CILCO obtained two short-term bank loans totaling $25 million to finance the purchase of natural gas.  The additional working capital was necessary as a result of the significant increase in natural gas prices relative to the timing of the recovery of the costs through the Purchased Gas Adjustment (PGA).  The bank loans matured in the second quarter of 2001.  In the third quarter of 2001, CILCO obtained an additional $15 million short-term bank loan.  CILCO expects to issue commercial paper periodically during 2001, and is currently authorized by its Board of Directors to issue up to $150 million of short–term debt.  At June 30, 2001, committed bank lines of credit totaled $100 million, all of which were unused except in support of commercial paper issuance.  CILCO had $80.4 million of commercial paper outstanding at June 30, 2001.  During 2001, CILCO expects to continue to support commercial paper issuance with its bank lines of credit.  CILCO plans to finance its 2001 and 2002 capital expenditures primarily with funds provided by operations.  CILCORP's parent, AES, may also provide equity capital to support CILCO's capital expenditures or other financing requirements.  Future funds provided by operations may be affected by the deregulation of the electric and natural gas utility industries (see Competition).  CILCORP is also evaluating other financing alternatives to supplement or replace current short-term financing as well as to provide for long-term financing of 2002 capital expenditures.

CIM

At June 30, 2001, CIM had outstanding debt of $15.8 million, borrowed from CILCORP.

CVI

At June 30, 2001, CVI had outstanding debt of $5.1 million, borrowed from CILCORP.

Competition

CILCO, as a regulated public utility, has an obligation to provide service to retail customers within its defined service territory; thus, CILCO has not generally been in competition with other public utilities for retail electric or gas customers in these areas.  However, the passage of the Electric Service Customer Choice and Rate Relief Law of 1997 (Customer Choice Law) began a transition process to a fully competitive market for electricity in Illinois.  In addition, electricity and natural gas compete with other forms of energy available to customers.  For example, within the City of Springfield, CILCO's natural gas business competes with the City's municipal electric system to provide customer energy needs.

Primarily as a result of the Customer Choice Law, the electric industry in Illinois will change significantly during the coming years at both the wholesale and retail levels.  As of December 31, 2000, all non-residential customers have the ability to choose their electric supplier.  Residential electric customers will be able to choose their electric supplier on May 1, 2002.

If a customer chooses to leave its present electricity supplier, that utility will collect a fee for delivering power and may assess an additional transition charge on the customer.  This collection methodology must be filed with and approved by the Illinois Commerce Commission (ICC) and is designed to help utilities recover a portion of the costs of past investments made under a regulated system.  The transition charge will usually reduce a customer's economic incentive to switch suppliers.  Transition charges may be collected through 2006 (2008 upon the ICC's finding that a utility's financial condition is impaired and the utility meets other requirements specified in the Customer Choice Law).

On March 9, 2000, CILCO filed with the ICC revised tariff sheets eliminating the collection of the customer transition charge effective March 17, 2000.  At a March 15, 2000, hearing, the ICC approved CILCO's revised tariffs, thereby eliminating the collection of any customer transition charge.  CILCO cannot re-establish the collection of a transition charge until it files and the ICC approves revised tariff sheets that reinstate a transition charge.

The Customer Choice Law also requires electric base rate reductions that vary by utility.  CILCO reduced its residential base rates by 2% in August 1998 and by 2% in October 2000 and must reduce base rates by an additional 1% in October 2002.  Also, CILCO's return on common equity will, in general, be capped (the Equity Cap) at an index (a 12-month average yield for 30 year U.S. Treasury bonds plus 8% for calendar years 1998 and 1999 and a 12 month-average yield for U.S. Treasury bonds plus 9% for calendar years 2000 through 2004) plus 1.5 percentage points.  If CILCO's two-year average return on common equity exceeds the two–year average of the Equity Cap, fifty percent of the earnings in excess of the average Equity Cap must be refunded to customers in the following year.

On June 30, 1999, Senate Bill 24 (a clarification and technical correction of the Customer Choice Law) was signed into law.  This law allows certain utilities, including CILCO, to increase the Equity Cap by an additional 2% over the Equity Cap provided under the Customer Choice Law, for the period 2000 through 2004.  The increase in the Equity Cap is allowed in exchange for these utilities offering choice of electricity suppliers to selected manufacturing customers on June 1, 2000, and to the remaining manufacturing customers on October 1, 2000, earlier than previously allowed under the Customer Choice Law.  Utilities selecting this option must also waive the right to seek a two-year extension on the collection of transition charges.  On April 13, 2000, CILCO filed revised tariff sheets with the ICC to make these selected customers eligible for choice on June 1, 2000, in order to increase the equity cap by 2%, as outlined in Senate Bill 24.

With the enactment of the Customer Choice Law, electric generation in Illinois will become deregulated and competitive.  As a result, the accounting principles applicable to rate-regulated enterprises will no longer apply to the electric generation portion of CILCO's business.  Also, the cost of any assets for which recovery is impaired by the transition to a competitive marketplace must be written off.  CILCO does not believe its electric generating asset values to be impaired.  Its ability to keep total production costs competitive in a deregulated market will determine whether and to what extent the value of these assets may be impaired in the future.

With electric choice beginning on October 1, 1999, for its industrial customers and some of its commercial customers, and with all other non-residential customers being able to choose their electric supplier on December 31, 2000, CILCO has entered into multi–year contracts with targeted customers representing approximately 45% of total 2000 electric kWh sales to non–residential customers.  These contracts, most of which expire from 2001 to 2002, were designed to capture a significant portion of the margin that the customers paid to CILCO in the most recent twelve months.  CILCO is either negotiating new contracts with those customers or returning them to tariffs as the contracts expire in 2001.

The ultimate market price for electricity, the cost for a utility to produce or buy electricity, and the number of customers that may be gained or lost due to customer choice of supplier in Illinois cannot be predicted.  As a result, management cannot predict the ultimate impact that the Customer Choice Law will have on CILCORP's financial position or results of operation, but the effect could be significant.  However, CILCO is currently a low-cost provider of electricity, and management will continue to position CILCO for competition by controlling costs, maintaining good customer relations, and developing flexibility to meet individual customer requirements.  As of June 30, 2001, all eligible electric customers continue to purchase their electricity supply from CILCO, other than those who self-generate.  As of June 30, 2001, CILCO has contracts totaling approximately 2.5 million megawatt hours of new retail load outside of its service territory.  CILCO will supply these new customers by primarily purchasing electricity from other suppliers.  CILCO has made the necessary firm supply and transmission arrangements to meet customer requirements.

Market Risk Sensitive Instruments

CILCORP is exposed to non-trading risks through its daily business activities.  These non-trading activities may include the market or commodity price risk related to CILCO's retail tariff activity and CILCORP's non-regulated commodity marketing activities.

The majority of CILCORP's energy sales during the first six months of 2001 were to CILCO retail customers in Illinois under tariffs regulated by the ICC.  Although the Illinois retail electric market is becoming deregulated (see Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Competition), prudently incurred costs of fuel used to generate electricity and purchased power costs may be recovered from retail customers that purchase energy through regulated tariffs under the Fuel Adjustment Clause (FAC).  Thus, there has been 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.  Also, CILCO's exposure to commodity price risk will increase if the FAC is eliminated.

The market risk inherent in the activities of CILCORP 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 June 30, 2001, CILCORP engaged in non-regulated electric retail and natural gas sales in Illinois, including wholesale power purchases and sales to utilize its electric generating capability.  These non-regulated activities had net open market price risk positions of approximately 1,397,000 MWh of electricity and 5,720,000 Mcf of natural gas.  A market price sensitivity of 10% applied to these positions is not material to the Company.  See Note 3 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 instrument positions held by CILCORP and 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.

Results of Operations

CILCO Electric Operations

The following table summarizes the components of CILCO electric operating income for the three months and six months ended June 30, 2001 and 2000.

						Three Months Ended June 30,								Six Months Ended June 30,
						2001				2000				2001			2000
						(In thousands)
						(Unaudited)
Components of Electric Operating Income
Revenue:
	Electric retail						$	87,361			$	88,557		$	172,896		$	170,584
	Sales for resale						4,938				6,363			8,403			10,662
		Total revenue					92,299				94,920			181,299			181,246
Cost of sales:
	Cost of fuel						24,704				23,148			53,964			52,147
	Purchased power						9,547				15,000			19,659			17,899
	Revenue taxes						4,337				4,377			9,547			9,162
			Total cost of sales				38,588				42,525			83,170			79,208
Gross margin							53,711				52,395			98,129			102,038
Operating expenses
	Other operations and maintenance						24,906				20,349			46,328			38,844
	Depreciation and amortization						11,768				12,372			23,524			24,573
	Other taxes						2,343				1,958			4,838			4,579
				Total operating expenses			39,017				34,679			74,690			67,996
Total							14,694				17,716			23,439			34,042
Fixed charges and other
	Interest on long-term debt						3,091				3,091			6,181			6,326
	Cost of borrowed funds capitalized						(26		)		(99		)	(44		)	(202		)
	Other interest						1,350				727			2,483			1,427
					Total		4,415				3,719			8,620			7,551
Income before income taxes							10,279				13,997			14,819			26,491
	Income taxes						4,058				4,961			5,819			9,321
Electric income							$	6,221			$	9,036		$	9,000		$	17,170

Electric gross margin increased 3% for the quarter and decreased 4% for the six months ended June 30, 2001, compared to the same periods in 2000.  The increase in gross margin for the quarter was due to a reduction in non-energy purchased power costs which are not passed through the Fuel Adjustment Clause (FAC).  The decrease in electric gross margin for the six months ended was due primarily to decreased wholesale power sales and increased purchased power costs.  On December 20, 2000, as part of the 1999 FAC reconciliation hearings, the Illinois Commerce Commission (ICC) ordered changes in CILCO’s calculation of allowable fuel costs applicable to sales subject to the FAC.  These changes revised the allocation of generated and purchased power between regulated and non-regulated sales.  As a result of this order, the regulated sales margin decreased and the non-regulated sales margin increased for January through March 2001.  On March 9, 2001, the ICC issued an emergency rule in response to the margin shifts.  The emergency rule restored the previous calculation method for off-system non-regulated sales in an attempt to fairly allocate costs between regulated and non-regulated sales.  On July 25, 2001, the ICC entered a final order, amending the emergency rule, which changed the method for allocating fuel costs to non-regulated sales.

Industrial sales increased 5% for the quarter and remained constant for the six months ended June 30, 2001, compared to the same periods in 2000.  Residential sales decreased 4% for the quarter and increased 5% for the six months ended June 30, 2001, compared to the same periods in 2000.  Commercial sales increased 1% for the quarter and 3% for the six months ended June 30, 2001, compared to the same periods in 2000.  Retail kilowatt hour (kWh) sales increased 1% for the quarter and 2% for the six months ended June 30, 2001, compared to the same periods in 2000.  Cooling degree days were 11% higher for May and June 2001, compared to the same period in 2000.

Sales for resale decreased 22% for the quarter and 21% for the six months ended June 30, 2001, compared to the same periods in 2000.  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.  CILCO’s activity in the sales for resale and purchased power markets is expected to increase as a result of retail deregulation in the Illinois market.

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 increased 7% for the quarter and 3% for the six months ended June 30, 2001, compared to the same periods in 2000.  Purchased power decreased 36% and increased 10% for the quarter and six months ended June 30, 2001, respectively, compared to the same periods in 2000.

Electric operation and maintenance expense increased 22% for the quarter and 19% for the six months ended June 30, 2001, compared to the same periods in 2000.  The increase was mainly due to a lower return on pension assets in 2000, and to increased costs for power plant operations, uncollectible accounts and tree trimming.

Income taxes expense decreased for the quarter and six months ended June 30, 2001, due to decreases in pre-tax operating income.

Fixed charges and other expenses increased 19% for the quarter and 14% for the six months ended June 30, 2001, compared to the same periods in 2000, primarily due to higher interest expense.

CILCO Gas Operations

The following table summarizes the components of CILCO gas operating income for the three months and six months ended June 30, 2001 and 2000.

			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2001			2000			2001		2000
			(In thousands)
			(Unaudited)
Components of Gas Operating Income
Revenue:
	Sale of gas		$	40,491		$	31,667		$	197,964	$	100,440
	Transportation services		1,255			1,143			2,731		2,514
		Total revenue	41,746			32,810			200,695		102,954
Cost of sales:
	Cost of gas		25,816			17,474			152,496		58,406
	Revenue taxes		1,594			1,629			6,139		5,260
		Total cost of sales	27,410			19,103			158,635		63,666
Gross margin			14,336			13,707			42,060		39,288
Operating expenses
	Other operations and maintenance		8,533			7,044			16,146		14,412
	Depreciation and amortization		5,476			5,296			10,945		10,504
	Other taxes		517			625			1,135		1,455
		Total operating expenses	14,526			12,965			28,226		26,371
Total			(190		)	742			13,834		12,917
Fixed charges and other
	Interest on long-term debt		1,238			1,238			2,476		2,534
	Other interest expense		506			291			995		572
		Total	1,744			1,529			3,471		3,106
Income (loss) before income taxes			(1,934		)	(787		)	10,363		9,811
	Income taxes		(770		)	(303		)	4,125		3,919
Gas income (loss)			$	(1,164	)	$	(484	)	$	6,238	$	5,892

Gas gross margin increased 5% for the quarter and 7% for the six months ended June 30, 2001, compared to the same periods in 2000.  Residential sales volumes remained constant for the quarter and increased 8% for the six months ended June 30, 2001.  Commercial sales volumes decreased 6% for the quarter and increased 1% for the six months ended June 30, 2001.  Heating degree days were 22% lower for the quarter and 14% higher for the six months ended June 30, 2001, compared to the same periods in 2000.  Industrial sales volumes increased 3.0% for the quarter and 25% for the six months ended June 30, 2001, due to increased retail system use sales to transportation customers.

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 increased 10% and 9% for the quarter and six months ended June 30, 2001, respectively, while gas transportation sales volumes decreased 14% for the quarter and 10% for the six months ended June 30, 2001, compared to the same periods in 2000.  Decreases in lower margin industrial gas transportation sales were offset by increases in higher margin commercial gas transportation sales.

The cost of gas increased 48% for the quarter and 161% for the six months ended June 30, 2001, compared to the same periods in 2000, due to increased gas sales and higher natural gas prices during the quarter and six months ended June 30, 2001.  These higher natural gas prices were passed through to customers via the PGA.

Gas operation and maintenance expense increased 21% and 12%, respectively, for the quarter and six months ended June 30, 2001, compared to the same periods in 2000.  The increases were primarily due to an increased uncollectible accounts expense, lower return on pension assets and increased gas distribution maintenance costs partially offset by decreased telecommunication expense and public liability claims.

Fixed charges and other expenses increased 14% and 12% for the quarter and six months ended June 30, 2001, compared to the same periods in 2000, mainly due to higher interest expense.

CILCO Other Operations

The following table summarizes CILCO’s other income and deductions for the three months and six months ended June 30, 2001 and 2000.

			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2001			2000			2001			2000
			(In thousands)
			(Unaudited)
Components of CILCO Other
Revenue			$	26,210		$	10,443		$	39,004		$	18,784
Expense			(22,419		)	(11,681		)	(31,903		)	(19,489		)
Gross margin (deficit)			3,791			(1,238		)	7,101			(705		)
Other income and deductions:
Interest income			120			26			280			69
Operating expenses			(92		)	(339		)	(386		)	(660		)
Other taxes			—			(1		)	—			(2		)
Preferred stock dividends			(539		)	(1,058		)	(1,079		)	(1,898		)
Other			(316		)	(246		)	(618		)	(521		)
Total other income and deductions			(827		)	(1,618		)	(1,803		)	(3,012		)
Income (loss) before income taxes			2,964			(2,856		)	5,298			(3,717		)
	Income taxes (benefit)		986			(1,011		)	1,710			(1,365		)
		Other income (loss)	$	1,978		$	(1,845	)	$	3,588		$	(2,352	)

Gross margin increased for the quarter and six months ended June 30, 2001, compared to the same periods in 2000, primarily due to increased non-regulated electricity sales in Illinois outside of CILCO’s service territory and ICC mandated changes in the manner in which generated and purchased power costs are allocated between regulated and non-regulated sales (see Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations – CILCO Electric Operations).   These sales of electricity were to customers eligible to choose their energy supplier under the Customer Choice Law.

Preferred stock dividends decreased for the quarter and six months ended June 30, 2001, compared to the same periods in 2000, due to the redemption of $25 million of auction rate preferred stock in July 2000.

Other Businesses Operations

The following table summarizes Other Businesses revenue and expenses for the three months and six months ended June 30, 2001 and 2000.  Other Businesses results include income earned and expenses incurred at the Holding Company, CIM, CVI, and CILCORP Infraservices Inc.

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2001			2000			2001			2000
		(In thousands)
		(Unaudited)
Components of Other Businesses
Net Loss
Revenue:
Leveraged lease revenue		$	1,343		$	1,435		$	2,739		$	4,750
Interest income		65			39			155			93
Gas marketing revenue		7,458			3,084			21,439			5,393
Other revenue		659			876			1,152			1,467
	Total revenue	9,525			5,434			25,485			11,703
Expenses:
	Gas purchased for resale	7,595			3,025			21,603			5,156
	Fuel for generation and purchased power	(1,334		)	—			(2,668		)	—
	Operating expenses	414			1,163			861			1,826
	Depreciation and amortization	4,576			3,613			8,441			7,225
	Interest expense	11,660			11,896			23,531			23,727
	Other taxes	20			8			46			120
	Total expenses	22,931			19,705			51,814			38,054
Loss before income taxes		(13,406		)	(14,271		)	(26,329		)	(26,351		)
	Income tax benefit	(4,061		)	(4,635		)	(8,418		)	(8,421		)
Other Businesses net loss		$	(9,345	)	$	(9,636	)	$	(17,911	)	$	(17,930	)

Leveraged lease revenues decreased 42% for the six months ended June 30, 2001, primarily due to the termination of the Company’s dragline lease in the first quarter of 2001.

Gas marketing revenues and gas purchased for resale at CVI subsidiary, CILCORP Energy Services Inc., increased significantly due to increased gas marketing sales and higher natural gas prices.

Interest expense remained relatively constant for the six months ended June 30, 2001.  Depreciation and amortization increased following the finalization of purchase price allocations in the fourth quarter of 2000.

Fuel for generation and purchased power was impacted in 2001 by $2.7 million in amortization related to the purchase accounting adjustment for the out-of-market Freeman coal contract.

The income tax benefit remained relatively constant in the six months ended June 30, 2001, compared to the corresponding period in 2000.

QST Enterprises Discontinued Operations

QST Enterprises and QST Energy ceased operations during the fourth quarter of 1998, except for fulfillment of contractual commitments for 1999 and beyond.  Accordingly, the results of QST Enterprises are reported as discontinued operations.  An initial loss provision was recorded for the discontinued energy operations in 1998.  Subsequent purchase accounting adjustments included additional discontinued operations loss accruals for QST Enterprises.

QST Enterprises’ financial results were applied against the discontinued operations provision, resulting in no net income or loss for the six months ended June 30, 2001, and 2000.

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 1999, 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.  The two suits filed by QST Energy in the U.S. District Court, Central District of Illinois, were consolidated with the suit in the U.S. District Court, Northern District of California.  In December 2000, the two customers filed counterclaims against QST Energy.  On July 19, 2001, QST Energy and the two customers signed a settlement agreement and mutual release which resolved all of the pending lawsuits.  A cash settlement of $6 million was paid to QST Energy and applied against the accounts receivable balance at QST Energy, which was $13 million at June 30, 2001.  CILCORP had reserved $4.5 million as a preacquisition contingency related to this litigation.  Consequently, the net write-off during the third quarter will be approximately $2.5 million.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

Reference is made to “Fuel Supply – Coal” and “Electric Fuel and Purchased Gas Adjustment Clauses” of Item 1.  Business,  “Environmental Matters” of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and to “Note 7 – Commitments and Contingencies” of Item 8.  Financial Statements and Supplementary Data in the Company’s 2000 Annual Report on Form 10-K and to “Note 2 – Contingencies” and “QST Enterprises Discontinued Operations”, herein, for certain pending legal proceedings and/or 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

             None

Item 6.  Exhibits and Reports on Form 8-K.

(a)           Exhibits

             None

(b)        Reports on Form 8-K

None

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CILCORP Inc.
	(Registrant)
Date  August 8, 2001
	/s/ R. J. Sprowls
	Vice President
Date  August 8, 2001
	/s/ T. S. Romanowski
	Chief Financial Officer
	And Treasurer
	CENTRAL ILLINOIS LIGHT COMPANY
	(Registrant)
Date  August 8, 2001
	/s/ R. J. Sprowls
	President
Date  August 8, 2001
	/s/ T. S. Romanowski
	Chief Financial Officer
	And Treasurer