UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2001
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 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 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 and privately
held by The AES Corporation
at March 31, 2001 1,000
CENTRAL ILLINOIS LIGHT COMPANY
Common stock, no par value,
shares outstanding and privately
held by CILCORP Inc. at March 31, 2001 13,563,871
1
CILCORP INC.
AND
CENTRAL ILLINOIS LIGHT COMPANY
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1: Financial Statements
CILCORP INC.
Consolidated Balance Sheets 3-4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6-7
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets 8-9
Consolidated Statements of Income 10
Consolidated Statements of Cash Flows 11-12
Statements of Segments of Business 13-14
Notes to Consolidated Financial Statements
CILCORP Inc. and Central Illinois Light Company 15-17
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
CILCORP Inc. and Central Illinois Light Company 18-30
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 31
Item 5: Other Information 31
Item 6: Exhibits and Reports on Form 8-K 31
Signatures 32
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2001 2000
(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments $ 33,473 $ 11,743
Receivables, less reserves of
$1,432 and $1,343 116,160 91,050
Accrued unbilled revenue 32,768 70,444
Fuel, at average cost 13,137 13,995
Materials and supplies,
at average cost 16,247 16,295
Gas in underground storage,
at average cost 9,894 28,413
FAC/PGA underrecoveries 3,209 20,838
Prepayments and other 4,771 5,563
---------- ----------
Total current assets 229,659 258,341
---------- ----------
Investments and other property:
Investment in leveraged leases 136,606 140,936
Other investments 21,611 21,056
---------- ----------
Total investments and other
property 158,217 161,992
---------- ----------
Property, plant and equipment:
Utility plant, at original cost
Electric 700,528 695,220
Gas 220,279 218,710
---------- ----------
920,807 913,930
Less - accumulated provision for
depreciation 82,943 66,128
---------- ----------
837,864 847,802
Construction work in progress 32,222 29,213
Other, net of depreciation 112 144
---------- ----------
Total property, plant and
equipment 870,198 877,159
---------- ----------
Other assets:
Goodwill, net of accumulated
amortization of $22,255 and $18,422 590,711 594,544
Other 54,829 56,240
---------- ----------
Total other assets 645,540 650,784
---------- ----------
Total assets $1,903,614 $1,948,276
========== ==========
See Notes to Consolidated Financial Statements.
3
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2001 2000
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 18,900 $ 17,500
Notes payable 108,200 115,300
Accounts payable 62,215 113,571
Accrued taxes 28,197 20,170
Accrued interest 27,023 18,495
FAC/PGA overrecoveries 2,504 7
Other 5,877 6,287
---------- ----------
Total current liabilities 252,916 291,330
---------- ----------
Long-term debt 719,093 720,482
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes 194,203 198,577
Regulatory liability of regulated
subsidiary 42,949 42,752
Deferred investment tax credits 15,757 16,159
Freeman contract liability 87,049 90,574
Other 77,828 77,559
---------- ----------
Total deferred credits and
other liabilities 417,786 425,621
---------- ----------
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 4,565 1,340
Accumulated other comprehensive income (699) (450)
---------- ----------
Total stockholder's equity 472,699 469,723
---------- ----------
Total liabilities and
Stockholder's equity $1,903,614 $1,948,276
========== ==========
See Notes to Consolidated Financial Statements.
4
CILCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
Revenue:
CILCO Electric $ 89,000 $ 86,326
CILCO Gas 158,949 70,144
CILCO Other 12,954 8,384
Other Businesses 15,960 6,269
-------- --------
Total 276,863 171,123
-------- --------
Operating expenses:
Fuel for generation and
purchased power 47,243 39,253
Gas purchased for resale 140,688 43,063
Other operations and maintenance 30,055 27,300
Depreciation and amortization 21,090 21,021
Taxes, other than income taxes 12,894 11,980
-------- --------
Total 251,970 142,617
-------- --------
Fixed charges and other:
Interest expense 17,909 17,343
Preferred stock dividends of
subsidiary 540 840
Allowance for funds used
during construction (106) (103)
Other 302 275
-------- --------
Total 18,645 18,355
-------- --------
Income before income taxes 6,248 10,151
Income taxes 3,023 4,442
-------- --------
Net income $ 3,225 $ 5,709
Other comprehensive income (loss) (249) --
-------- --------
Comprehensive income $ 2,976 $ 5,709
======== ========
See Notes to Consolidated Financial Statements.
5
CILCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
Cash flows from operating activities:
Net income before preferred dividends
of subsidiary $ 3,765 $ 6,549
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Non-cash lease income and investment income (1,075) (3,088)
Cash receipts in excess of debt service
on leases 4,537 6,959
Depreciation and amortization 21,090 21,021
Deferred income taxes, investment tax credit
and regulatory liability of subsidiary, net (5,977) (5,828)
Changes in operating assets and liabilities:
Decrease in accounts receivable and
accrued unbilled revenue 12,423 5,098
Decrease in inventories 19,425 18,044
Decrease in accounts payable (50,943) (6,723)
Increase in accrued taxes 8,094 8,050
Decrease in other assets 18,926 1,105
Increase in other liabilities 10,079 7,724
-------- --------
Total adjustments 36,579 52,362
-------- --------
Net cash provided by operating activities
from continuing operations 40,344 58,911
-------- --------
Net cash used by operating
activities of discontinued operations (341) --
-------- --------
Cash flow from operations 40,003 58,911
-------- --------
Cash flows from investing activities:
Additions to plant (10,106) (9,557)
Other (527) (487)
-------- --------
Cash flow from investing activities (10,633) (10,044)
-------- --------
6
Cash flow from financing activities:
Net decrease in short-term debt (7,100) (22,000)
Decrease in long-term debt -- (30,000)
Common dividends paid -- (3,100)
Preferred dividends paid (540) (840)
-------- --------
Cash flow from financing activities (7,640) (55,940)
-------- --------
Net increase (decrease) in cash and
temporary cash investments: 21,730 (7,073)
Cash and temporary cash investments
at beginning of year: 11,743 11,220
-------- --------
Cash and temporary cash investments at
March 31 $ 33,473 $ 4,147
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 10,260 $ 11,059
Income taxes $ 28 $ 2,663
See Notes to Consolidated Financial Statements.
7
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2001 2000
(Unaudited)
ASSETS
Utility plant, at original cost:
Electric $1,310,423 $1,305,115
Gas 443,645 442,076
---------- ----------
1,754,068 1,747,191
Less - accumulated provision
for depreciation 942,906 926,091
---------- ----------
811,162 821,100
Construction work in progress 32,223 29,213
---------- ----------
Total utility plant 843,385 850,313
---------- ----------
Other property and investments:
Cash surrender value of company-owned
life insurance (net of related
policy loans of $59,292) 4,372 3,497
Other 1,162 1,161
---------- ----------
Total other property and
investments 5,534 4,658
---------- ----------
Current assets:
Cash and temporary cash investments 29,819 8,777
Receivables, less reserves of
$1,432 and $1,343 101,416 60,148
Accrued unbilled revenue 29,037 64,339
Fuel, at average cost 13,137 13,995
Materials and supplies,
at average cost 15,212 15,807
Gas in underground storage,
at average cost 9,894 28,413
Prepaid taxes 5,393 5,588
FAC/PGA underrecoveries 3,209 20,838
Other 4,709 5,556
---------- ----------
Total current assets 211,826 223,461
---------- ----------
Deferred debits:
Unamortized loss on reacquired debt 2,631 2,691
Unamortized debt expense 1,396 1,427
Prepaid pension cost 229 229
Other 24,734 24,661
---------- ----------
Total deferred debits 28,990 29,008
---------- ----------
Total assets $1,089,735 $1,107,440
========== ==========
See Notes to Consolidated Financial Statements.
8
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2001 2000
(Unaudited)
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 152,155 140,364
Accumulated other comprehensive income (1,224) (975)
---------- ----------
Total common stockholder's equity 363,592 352,050
Preferred stock without mandatory
redemption 19,120 19,120
Preferred stock with mandatory redemption 22,000 22,000
Long-term debt 244,095 245,482
---------- ----------
Total capitalization 648,807 638,652
---------- ----------
Current liabilities:
Current maturities of long-term debt 1,400 --
Notes payable 75,700 67,300
Accounts payable 49,804 96,315
Accrued taxes 36,166 25,512
Accrued interest 7,144 8,889
FAC/PGA overrecoveries 2,504 7
Other 5,805 6,214
---------- ----------
Total current liabilities 178,523 204,237
---------- ----------
Deferred credits and other liabilities:
Accumulated deferred income taxes 120,902 123,611
Regulatory liability 42,949 42,752
Deferred investment tax credit 15,757 16,159
Capital lease obligation 467 616
Other 82,330 81,413
---------- ----------
Total deferred credits and
other liabilities 262,405 264,551
---------- ----------
Total capitalization and
liabilities $1,089,735 $1,107,440
========== ==========
See Notes to Consolidated Financial Statements.
9
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Income
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
Operating revenue:
Electric $ 89,000 $ 86,326
Gas 158,949 70,144
-------- --------
Total operating revenues 247,949 156,470
-------- --------
Operating expenses:
Cost of fuel 29,260 28,999
Cost of gas 126,680 40,932
Purchased power 10,112 2,899
Other operations and maintenance 29,035 25,863
Depreciation and amortization 17,225 17,409
Income taxes 6,656 8,582
Other taxes 12,868 11,867
-------- --------
Total operating expenses 231,836 136,551
-------- --------
Operating income 16,113 19,919
-------- --------
Other income and deductions:
Company-owned life insurance, net (302) (275)
Other, net 2,452 608
-------- --------
Total other income and
(deductions) 2,150 333
-------- --------
Income before interest expense 18,263 20,252
-------- --------
Interest expenses:
Interest on long-term debt 4,328 4,531
Cost of borrowed funds
capitalized (106) (103)
Other 1,710 981
-------- --------
Total interest expense 5,932 5,409
-------- --------
Net income 12,331 14,843
-------- --------
Dividends on preferred stock 540 840
-------- --------
Income available for
common stock 11,791 14,003
Other comprehensive income (loss) (249) --
-------- --------
Comprehensive income $ 11,542 $ 14,003
======== ========
See Notes to Consolidated Financial Statements.
10
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
Cash flows from operating activities:
Net income $ 12,331 $ 14,843
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 17,225 17,409
Deferred income taxes, investment tax
credit and regulatory liability, net (2,913) (3,005)
Changes in operating assets and liabilities:
Increase in accounts receivable (41,268) (6,035)
Decrease in fuel, materials and supplies,
and gas in underground storage 19,971 17,878
Decrease in accrued unbilled revenue 35,302 10,416
Decrease in accounts payable (46,511) (6,608)
Increase in accrued taxes and interest 8,910 1,577
Capital lease payments 161 161
Decrease in other current assets 18,671 867
Increase in other current liabilities 2,088 694
Decrease in other non-current assets 431 3,299
Increase in other non-current liabilities 1,187 203
-------- --------
Net cash provided by operating activities 25,585 51,699
-------- --------
Cash flows from investing activities:
Capital expenditures (10,107) (9,557)
Other (2,135) (1,036)
-------- --------
Net cash used in investing activities (12,242) (10,593)
-------- --------
Cash flow from financing activities:
Preferred dividends paid (540) (840)
Payments on capital lease obligation (161) (161)
Increase (decrease) in short-term borrowing 8,400 (17,000)
Decrease in long-term debt -- (30,000)
-------- --------
Net cash provided from (used in)
financing activities 7,699 (48,001)
-------- --------
11
Net increase (decrease) in cash and
temporary cash investments 21,042 (6,895)
Cash and temporary cash investments at
beginning of year 8,777 8,548
-------- --------
Cash and temporary cash investments at
March 31 $ 29,819 $ 1,653
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,560 $ 9,262
Income taxes $ -- $ 7,260
See Notes to Consolidated Financial Statements.
12
Statements of Segments of Business
CILCORP Inc. and Subsidiaries
Three Months Ended March 31, 2001
CILCO CILCO CILCO Other
Electric Gas Other Businesses Total
(In thousands)
Revenues $ 89,000 $158,949 $12,794 $ 15,870 $ 276,613
Interest income -- -- 160 90 250
-------- -------- ------- --------- ----------
Total 89,000 158,949 12,954 15,960 276,863
-------- -------- ------- --------- ----------
Operating
expenses 68,499 139,456 9,778 13,147 230,880
Depreciation and
amortization 11,756 5,469 -- 3,865 21,090
-------- -------- ------- --------- ----------
Total 80,255 144,925 9,778 17,012 251,970
-------- -------- ------- --------- ----------
Interest expense 4,311 1,727 -- 11,871 17,909
Preferred stock
dividends -- -- 540 -- 540
Fixed charges and
other expenses (106) -- 302 -- 196
-------- -------- ------- --------- ----------
Total 4,205 1,727 842 11,871 18,645
-------- -------- ------- --------- ----------
Income before
income taxes 4,540 12,297 2,334 (12,923) 6,248
Income taxes 1,761 4,895 724 (4,357) 3,023
-------- -------- ------- --------- ----------
Segment net
income $ 2,779 $ 7,402 $ 1,610 $ (8,566) $ 3,225
======== ======== ======= ========= ==========
See Notes to Consolidated Financial Statements.
13
Statements of Segments of Business
CILCORP Inc. and Subsidiaries
Three Months Ended March 31, 2000
CILCO CILCO CILCO Other
Electric Gas Other Businesses Total
(In thousands)
Revenues $ 86,326 $ 70,144 $ 8,341 $ 6,215 $ 171,026
Interest income -- -- 43 54 97
-------- -------- ------- --------- ----------
Total 86,326 70,144 8,384 6,269 171,123
-------- -------- ------- --------- ----------
Operating
expenses 57,799 52,761 8,130 2,906 121,596
Depreciation and
amortization 12,201 5,208 -- 3,612 21,021
-------- -------- ------- --------- ----------
Total 70,000 57,969 8,130 6,518 142,617
-------- -------- ------- --------- ----------
Interest expense 3,935 1,577 -- 11,831 17,343
Preferred stock
dividends -- -- 840 -- 840
Fixed charges and
other expenses (103) -- 275 -- 172
-------- -------- ------- --------- ----------
Total 3,832 1,577 1,115 11,831 18,355
-------- -------- ------- --------- ----------
Income before
income taxes 12,494 10,598 (861) (12,080) 10,151
Income taxes 4,360 4,222 (354) (3,786) 4,442
-------- -------- ------- --------- ----------
Segment net
income $ 8,134 $ 6,376 $ (507) $ (8,294) $ 5,709
======== ======== ======= ========= ==========
See Notes to Consolidated Financial Statements.
14
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 the Company's outstanding stock on
October 18, 1999. Approximately $886 million was required to complete the
merger, which involved the purchase of 13,625,680 shares of CILCORP's common
stock. Currently, there are 10,000 authorized shares of CILCORP common stock,
1,000 of which are issued. AES owns 100% of the 1,000 issued shares.
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.
15
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, have now been 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,
alleging fraud, negligent misrepresentations and deceit. QST Energy filed a
Motion to Dismiss these counterclaims. The court denied this motion and
vacated the trial set for May 7, 2001, to allow additional discovery. The new
trial date has not been set. QST Energy cannot predict the ultimate outcome
of this matter, but intends to vigorously pursue its claims to collect all
amounts due from the customers and to vigorously defend against the
counterclaims. The accounts receivable reflected in CILCORP's consolidated
balance sheet at March 31, 2001, for these two customers, totaled $13
million, excluding interest of approximately $3 million. Under the terms of
the contracts, QST Energy has terminated delivery of electricity to the two
customers.
NOTE 3. Accounting for Price Risk Management Activities
CILCORP utilizes commodity futures contracts, options and swaps in the normal
course of its natural gas and electric business activities to reduce market
or price risk. Gains and losses arising from derivative financial instrument
transactions which hedge the impact of fluctuations in energy prices are
recognized in income concurrent with the related purchases and sales of the
commodity. If a derivative financial instrument contract is terminated
because it is probable that a transaction or forecasted transaction will not
occur, any gain or loss as of such date is immediately recognized. 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 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 are reflected in operating results as commitments are fulfilled
and the related derivative financial instruments are settled. The net gain
reflected in operating results from derivative financial instruments for the
quarter ended March 31, 2001, was $1,713,239 for natural gas (included in Gas
Purchased for Resale). There were no outstanding derivative financial
instruments for electricity during the quarter ended March 31, 2001. The
16
previously recorded gain 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 $1,916,900. The after-tax
balance in OCI associated with these open derivative positions at March 31,
2001, was $249,100. This portion of OCI reflects hedges of natural gas sales
of 3,320,000 mmBtu or 3.3 Bcf for commitments through February 2002.
NOTE 4. Other Comprehensive Income
Rollforward of Accumulated Other Comprehensive Income -
CILCORP Inc.
Pension SFAS 133 Total
(In thousands)
Accumulated other comprehensive
income-December 31, 2000 balance $(450) $ -- $ (450)
Change in accounting principle-
Other comprehensive income-
SFAS 133 -- 1,668 1,668
Other comprehensive income-
SFAS 133 -- (1,917) (1,917)
----- ------- -------
Accumulated other comprehensive
income-March 31, 2001 balance $(450) $ (249) $ (699)
===== ======= =======
Rollforward of Accumulated Other Comprehensive Income -
Central Illinois Light Company
Pension SFAS 133 Total
(In thousands)
Accumulated other comprehensive
income-December 31, 2000 balance $(975) $ -- $ (975)
Change in accounting principle-
Other comprehensive income-
SFAS 133 -- 1,668 1,668
Other comprehensive income-
SFAS 133 -- (1,917) (1,917)
----- ------- -------
Accumulated other comprehensive
income-March 31, 2001 balance $(975) $ (249) $(1,224)
===== ======= =======
17
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.
To complete the merger, approximately $886 million was raised through a
combination of additional paid-in capital contributed by AES and the offering
of senior notes and bonds assumed by CILCORP. The approximately $886 million
was used to purchase 13,625,680 shares of CILCORP's common stock. AES has
100% ownership of the 1,000 CILCORP common shares currently issued and
outstanding.
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 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 on
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 will enable 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.
18
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 March 31, 2001, CILCORP had committed bank
lines of credit of $60 million, of which $33 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 March 31, 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 $10.1 million for the three months ended March
31, 2001. Capital expenditures are anticipated to be approximately
19
$40 million for the remainder of 2001 and are currently estimated to be $96.5
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 mature in the
second quarter of 2001. 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 March 31, 2001, committed bank
lines of credit totaled $100 million, all of which were unused except in
support of commercial paper issuance. CILCO had $50.7 million of commercial
paper outstanding at March 31, 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).
CIM
At March 31, 2001, CIM had outstanding debt of $17.4 million, borrowed from
CILCORP.
CVI
At March 31, 2001, CVI had outstanding debt of $5.7 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
20
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
negotiating new contracts with those customers whose 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,
21
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
December 31, 2000, all eligible electric customers continue to purchase their
electricity supply from CILCO, other than those who self-generate. As of
March 31, 2001, CILCO has contracts totaling approximately $1.5 million
megawatt hours of new retail load outside of its service territory. CILCO
will supply these new customers by using its owned generation and electricity
purchases from other suppliers. CILCO has made the necessary 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 quarter 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, purchased power costs and gas purchased for resale
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 March 31, 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 69,829 MWh of electricity and 1,080,000
Mcf of natural gas. A market price sensitivity of 10% applied to these
positions is not material to the Company. See CILCORP 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.
22
Results of Operations
CILCO Electric Operations
The following table summarizes the components of CILCO electric operating income
for the three months ended March 31, 2001 and 2000.
Three Months Ended
March 31,
Components of Electric Operating Income 2001 2000
(In thousands)
(Unaudited)
Revenue:
Electric retail $85,535 $82,027
Sales for resale 3,465 4,299
------- -------
Total revenue 89,000 86,326
------- -------
Cost of sales:
Cost of fuel 29,260 28,999
Purchased power 10,112 2,899
Revenue taxes 5,210 4,785
------- -------
Total cost of sales 44,582 36,683
------- -------
Gross margin 44,418 49,643
------- -------
Operating expenses
Other operation and maintenance 21,422 18,495
Depreciation and amortization 11,756 12,201
Other taxes 2,495 2,621
------- -------
Total operating expenses 35,673 33,317
------- -------
Total 8,745 16,326
------- -------
Fixed charges and other
Interest on long-term debt 3,090 3,235
Cost of borrowed funds capitalized (106) (103)
Other interest 1,221 700
------- -------
Total 4,205 3,832
Income before income taxes 4,540 12,494
Income taxes 1,761 4,360
------- -------
Electric income $ 2,779 $ 8,134
======= =======
Electric gross margin decreased 11% for the three months ended March 31, 2001,
compared to the same period in 2000, due primarily to decreased wholesale power
sales and increased purchased power costs. On December 20, 2000, as part of the
1999 Fuel Adjustment Clause (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
23
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. Retail kilowatt hour (kWh)
sales increased 3% for the three months ended March 31, 2001, compared to the
first quarter of 2000. Residential and commercial sales volumes increased 13%
and 5%, respectively. Heating degree days were 21% higher for the three
months ended March 31, 2001, compared to the same period in 2000. Industrial
sales volumes decreased 6% compared to the first quarter of 2000.
Sales for resale decreased 19% for the first quarter of 2001, compared to the
same period 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.
Purchased power increased 249% for the quarter ended March 31, 2001, compared
to the same period in 2000, due to unscheduled power plant outages and FAC
calculation changes.
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 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
24
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 has granted CILCO's request
for a rehearing and stayed the refund order. The ICC must issue an order on
the rehearing by July 7, 2001. If the ICC's order disallowing the additional
$20.9 million of costs is ultimately upheld, the effect on the results of
operations of CILCORP and CILCO would be material.
Electric operation and maintenance expense increased 16% for the three months
ended March 31, 2001, compared to the same period in 2000. The increase for
the quarter was mainly due to a lower return on pension assets in 2000 and to
increased costs for power plant maintenance, tree trimming and outside legal
services.
Fixed charges and other expenses increased 10% for the three months ended
March 31, 2001, compared to the same period in 2000, primarily due to
increased short-term borrowings.
Income taxes expense decreased for the three months ended March 31, 2001, due
to lower pre-tax operating income.
25
CILCO Gas Operations
The following table summarizes the components of CILCO gas operating income for
the three months ended March 31, 2001 and 2000.
Three Months Ended
March 31,
Components of Gas Operating Income 2001 2000
(In thousands)
(Unaudited)
Revenue:
Sale of gas $157,473 $68,773
Transportation services 1,476 1,371
-------- -------
Total revenue 158,949 70,144
-------- -------
Cost of sales:
Cost of gas 126,680 40,932
Revenue taxes 4,545 3,631
-------- -------
Total cost of sales 131,225 44,563
-------- -------
Gross margin 27,724 25,581
-------- -------
Operating expenses
Other operation and maintenance 7,613 7,368
Depreciation and amortization 5,469 5,208
Other taxes 618 830
-------- -------
Total operating expenses 13,700 13,406
-------- -------
Total 14,024 12,175
-------- -------
Fixed charges and other
Interest on long-term debt 1,238 1,296
Other interest expense 489 281
-------- -------
Total 1,727 1,577
Income before income taxes 12,297 10,598
Income taxes 4,895 4,222
-------- -------
Gas income $ 7,402 $ 6,376
======== =======
Gas gross margin increased 8% for the first quarter ended March 31, 2001,
compared to the same period in 2000. Residential and commercial sales volumes
increased 10% and 3%, respectively, for the quarter ended March 31, 2001,
primarily due to colder weather. Heating degree days were 21% higher for the
quarter ended March 31, 2001, compared to the same period in 2000.
Revenue from gas transportation services increased 8% while gas
transportation sales volumes decreased 6% for the quarter ended March 31,
2001, compared to the same period in 2000. Decreases in lower margin
industrial gas transportation sales were more than offset by increases in
higher margin commercial gas transportation sales.
26
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.
The cost of gas increased 209% for the quarter ended March 31, 2001, compared
to the same period in 2000, primarily due to higher natural gas prices and
increased gas sales. These changes were passed through to customers via the
Purchased Gas Adjustment (PGA).
Gas operation and maintenance expense increased 3% for the three months ended
March 31, 2001, compared to the same period in 2000. The increase for the
three months ended March 31, 2001, was primarily due to a lower return on
pension assets in 2000 and increased gas distribution costs, partially offset
by a decrease in public liability claims.
Fixed charges and other expenses increased 10% for the three months ended
March 31, 2001, compared to the same period in 2000, primarily due to
increased short-term borrowings.
Income taxes expense increased for the three months ended March 31, 2001, due
to higher pre-tax operating income.
27
CILCO Other Operations
The following table summarizes CILCO's other income and deductions for the three
months ended March 31, 2001 and 2000.
Components of Other Income Three Months Ended
and Deductions March 31,
2001 2000
(In thousands)
(Unaudited)
Revenue $12,794 $ 8,341
Expense (9,484) (7,808)
------- -------
Gross margin 3,310 533
------- -------
Other income and deductions:
Interest income 160 43
Operating expenses (294) (321)
Other taxes -- (1)
Preferred stock dividends (540) (840)
Other (302) (275)
------- -------
Total other income and deductions (976) (1,394)
Income (loss) before taxes 2,334 (861)
Income taxes 724 (354)
------- -------
Other income (loss) $ 1,610 $ (507)
======= =======
Gross margin increased for the three months ended March 31, 2001, 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 three months ended March 31,
2001, due to the redemption of $25 million of auction rate preferred stock in
July 2000.
28
Other Businesses Operations
The following table summarizes Other Businesses revenue and expenses for the
three months ended March 31, 2001 and 2000. Other Businesses results include
income earned and expenses incurred at the Holding Company, CIM, CVI, and
CILCORP Infraservices Inc.
Components of Other Businesses Three Months Ended
Net Loss March 31,
2001 2000
(In thousands)
(Unaudited)
Revenue:
Leveraged lease revenue $ 1,396 $ 3,315
Interest income 90 54
Gas marketing revenue 13,981 2,309
Other revenue 493 591
------- -------
Total revenue 15,960 6,269
Expenses:
Gas purchased for resale 14,008 2,131
Fuel for generation and purchased power (1,334) --
Operating expenses 447 663
Depreciation and amortization 3,865 3,612
Interest expense 11,871 11,831
Other taxes 26 112
------- -------
Total expenses 28,883 18,349
Loss before income taxes (12,923) (12,080)
Income taxes (4,357) (3,786)
------- -------
Other businesses loss $(8,566) $(8,294)
======= =======
Leveraged lease revenues decreased 58% for the three months ended March 31,
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 three months ended
March 31, 2001. Depreciation and amortization increased due to an increase in
amortization of goodwill resulting from AES' acquisition price in excess of
the fair value of CILCORP's assets and liabilities.
Fuel for generation and purchased power was impacted in 2001 by a $1.3
million purchase accounting adjustment related to the out-of-market Freeman
coal contract.
The income tax benefit increased in the three months ended March 31, 2001,
compared to the corresponding period in 2000, primarily due to lower net
income.
29
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 three months
ended March 31, 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, have now been 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,
alleging fraud, negligent misrepresentations and deceit. QST Energy filed a
Motion to Dismiss these counterclaims. The court denied this motion and
vacated the trial set for May 7, 2001, to allow additional discovery. The new
trial date has not been set. QST Energy cannot predict the ultimate outcome
of this matter, but intends to vigorously pursue its claims to collect all
amounts due from the customers. The accounts receivable reflected in
CILCORP's consolidated balance sheet at March 31, 2001, for these two
customers, totaled $13 million, excluding interest of approximately $3
million. Under the terms of the contracts, QST Energy has terminated delivery
of electricity to the two customers.
30
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
31
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CILCORP Inc.
(Registrant)
Date May 11, 2001 /s/ R. J. Sprowls
Vice President
Date May 11, 2001 /s/ T. S. Romanowski
Chief Financial Officer
And Treasurer
CENTRAL ILLINOIS LIGHT COMPANY
(Registrant)
Date May 11, 2001 /s/ R. J. Sprowls
President
Date May 11, 2001 /s/ T. S. Romanowski
Chief Financial Officer
And Treasurer
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