** **

**UNITED STATES SECURITIESAND 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 September 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  File Number |   | Registrant;  State of Incorporation; Address; and Telephone Number |   | IRS  Employer  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 theRegistrants (1) have filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrants were required to file suchreports), and (2) have been subject to such filing requirements for the past 90days.

Yes  ý   No  o

 

Indicate the number ofshares outstanding of each of the issuer's classes of common stock, as of thelatest practicable date:

 
| CILCORP Inc. |   | Common  stock, no par value, shares outstanding and privately held by The AES  Corporation at September 30, 2001 | 1,000 |
|--------------|--------|------------------------------------------------------------------------------------------------------------------|-------|
|         |

 

 
| CENTRAL ILLINOIS LIGHT  COMPANY |
|---------------------------------|
|                            |   | Common  stock, no par value, shares outstanding and privately held by CILCORP Inc. at  September 30, 2001 | 13,563,871 |

 

**CILCORP INC.ANDCENTRAL ILLINOIS LIGHT COMPANYFORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001INDEX**

 

 
| **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   |                                                                                                                                    |

### ** **

###  

### **PARTI.  FINANCIAL INFORMATION**

 

**Item 1.  FinancialStatements**

 

**CILCORPINC. AND SUBSIDIARIESConsolidated Balance Sheets**(Inthousands)(Unaudited)
|                                                              |   | **September 30,** |      | **December 31,** |   |
|-------------------------------------------------------------------|--------|-------------------|-----------|------------------|--------|
|                                                              |   | **2001**          |      | **2000**         |   |
| **ASSETS**                                                        |   |              |      |             |   |
|                                                              |   |              |      |             |   |
| Current assets:                                                   |   |              |      |             |   |
| Cash  and temporary cash investments                              |   | $                 | 11,223    |             | $      | 11,743 |   |
| Receivables, less reserves of $1,221 and  $1,343                  |   | 70,420            |      | 91,050           |   |
| Accrued unbilled  revenue                                         |   | 19,846            |      | 70,444           |   |
| Fuel, at average cost                                             |   | 14,933            |      | 13,995           |   |
| Materials and supplies, at average cost                           |   | 18,632            |      | 16,295           |   |
| Gas in underground  storage, at average cost                      |   | 31,405            |      | 28,413           |   |
| FAC/PGA  underrecoveries                                          |   | 2,284             |      | 20,838           |   |
| Prepayments and other                                             |   | 5,936             |      | 5,563            |   |
|                                                              |   |              |      |             |   |
| Total current assets                                              |   | 174,679           |      | 258,341          |   |
|                                                              |   |              |      |             |   |
| Investments and other  property:                                  |   |              |      |             |   |
| Investment in  leveraged leases                                   |   | 135,889           |      | 140,936          |   |
| Other  investments                                                |   | 19,649            |      | 21,056           |   |
|                                                              |   |              |      |             |   |
| Total investments and other property                              |   | 155,538           |      | 161,992          |   |
|                                                              |   |              |      |             |   |
| Property, plant and  equipment:                                   |   |              |      |             |   |
| Utility  plant, at original cost                                  |   |              |      |             |   |
| Electric                                                          |   | 712,100           |      | 695,220          |   |
| Gas                                                               |   | 225,299           |      | 218,710          |   |
|                                                              |   | 937,399           |      | 913,930          |   |
| Less – accumulated provision for depreciation                |   | 113,881           |      | 66,128           |   |
|                                                              |   |              |      |             |   |
|                                                              |   | 823,518           |      | 847,802          |   |
| Construction work in  progress                                    |   | 40,142            |      | 29,213           |   |
| Other, net of  depreciation                                       |   | 47                |      | 144              |   |
|                                                              |   |              |      |             |   |
| Total property, plant and equipment                               |   | 863,707           |      | 877,159          |   |
|                                                              |   |              |      |             |   |
| Other assets:                                                     |   |              |      |             |   |
| Goodwill, net of accumulated amortization of  $29,920 and $18,422 |   | 583,044           |      | 594,544          |   |
| Other                                                             |   | 80,930            |      | 56,240           |   |
|                                                              |   |              |      |             |   |
| Total other assets                                                |   | 663,974           |      | 650,784          |   |
|                                                              |   |              |      |             |   |
| Total assets                                                      |   | $                 | 1,857,898 |             | $      | 1,948,276 |   |

 

See Notes to Consolidated FinancialStatements.

 

**CILCORPINC. AND SUBSIDIARIESConsolidated Balance Sheets**(Inthousands)(Unaudited)
|                                                                             |   | **September  30,** |      | **December 31,** |   |
|----------------------------------------------------------------------------------|--------|--------------------|-----------|------------------|--------|
|                                                                             |   | **2001**           |      | **2000**         |   |
| **LIABILITIES  AND STOCKHOLDER'S EQUITY**                                        |   |               |      |             |   |
|                                                                             |   |               |      |             |   |
| Current liabilities:                                                             |   |               |      |             |   |
| Current portion of  long-term debt                                               |   | $                  | 11,800    |             | $      | 17,500 |   |
| Notes payable                                                                    |   | 89,000             |      | 115,300          |   |
| Accounts payable                                                                 |   | 72,256             |      | 113,571          |   |
| Accrued taxes                                                                    |   | 13,275             |      | 20,170           |   |
| Accrued interest                                                                 |   | 24,785             |      | 18,495           |   |
| FAC/PGA overrecoveries                                                           |   | 311                |      | 7                |   |
| Other                                                                            |   | 27,112             |      | 6,287            |   |
|                                                                             |   |               |      |             |   |
| Total current  liabilities                                                       |   | 238,539            |      | 291,330          |   |
|                                                                             |   |               |      |             |   |
| Long-term debt                                                                   |   | 717,718            |      | 720,482          |   |
|                                                                             |   |               |      |             |   |
| Deferred credits and other liabilities:                                          |   |               |      |             |   |
| Deferred income taxes                                                            |   | 195,369            |      | 198,577          |   |
| Regulatory liability of regulated subsidiary                                     |   | 57,985             |      | 42,752           |   |
| Deferred investment  tax credits                                                 |   | 14,955             |      | 16,159           |   |
| Provision for  out-of-market contract                                            |   | 62,000             |      | 90,574           |   |
| Other                                                                            |   | 79,938             |      | 77,559           |   |
|                                                                             |   |               |      |             |   |
| Total deferred credits and other liabilities                                     |   | 410,247            |      | 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)                                                     |   | (5,412             | )         | 1,340            |   |
| Accumulated other  comprehensive income (loss)                                   |   | (13,147            | )         | (450             | )      |
|                                                                             |   |               |      |             |   |
| Total stockholder's  equity                                                      |   | 450,274            |      | 469,723          |   |
|                                                                             |   |               |      |             |   |
| Total liabilities and stockholder's equity                                       |   | $                  | 1,857,898 |             | $      | 1,948,276 |   |

 

See Notes to Consolidated FinancialStatements.

 

**CILCORPINC. AND SUBSIDIARIESConsolidated Statements of Operations**(In thousands)(Unaudited)

 
|                                                                   |   | **Three Months Ended** |    | **Nine Months Ended** |   |
|------------------------------------------------------------------------|--------|------------------------|---------|-----------------------|--------|
|                                                                   |   | **September 30,**      |    | **September 30,**     |   |
|                                                                   |   | **2001**               |    | **2000**              |   | **2001** |   | **2000** |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Revenue:                                                               |   |                   |    |                  |   |   |   |   |   |
| CILCO Electric                                                         |   | $                      | 123,712 |                  | $      | 128,420 |   | $ | 305,011 |   | $ | 309,666 |   |
| CILCO Gas                                                              |   | 21,801                 |    | 26,201                |   | 222,496 |   | 129,155 |   |
| CILCO Other                                                            |   | 36,731                 |    | 17,725                |   | 76,015 |   | 36,578 |   |
| Other businesses                                                       |   | 14,359                 |    | 7,549                 |   | 39,844 |   | 19,252 |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Total                                                                  |   | 196,603                |    | 179,895               |   | 643,366 |   | 494,651 |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Operating expenses:                                                    |   |                   |    |                  |   |   |   |   |   |
| Fuel for generation and purchased power                                |   | 80,641                 |    | 74,309                |   | 183,091 |   | 162,981 |   |
| Gas purchased for  resale                                              |   | 17,859                 |    | 18,689                |   | 191,958 |   | 82,251 |   |
| Other operations and  maintenance                                      |   | 28,162                 |    | 28,152                |   | 92,291 |   | 84,757 |   |
| Depreciation and  amortization                                         |   | 21,392                 |    | 21,398                |   | 64,302 |   | 63,700 |   |
| Taxes, other than  income taxes                                        |   | 9,442                  |    | 9,895                 |   | 31,147 |   | 30,473 |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Total                                                                  |   | 157,496                |    | 152,443               |   | 562,789 |   | 424,162 |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Fixed charges and  other:                                              |   |                   |    |                  |   |   |   |   |   |
| Interest expense                                                       |   | 17,229                 |    | 18,092                |   | 52,895 |   | 52,678 |   |
| Preferred stock dividends of subsidiary                                |   | 540                    |    | 539                   |   | 1,619 |   | 2,437 |   |
| Allowance for funds used during construction                           |   | (14                    | )       | (136                  | )      | (58 | ) | (338 | ) |
| Other                                                                  |   | 332                    |    | 246                   |   | 950 |   | 767 |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Total                                                                  |   | 18,087                 |    | 18,741                |   | 55,406 |   | 55,544 |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Income from continuing operations before  income taxes                 |   | 21,020                 |    | 8,711                 |   | 25,171 |   | 14,945 |   |
| Income taxes                                                           |   | 9,409                  |    | 3,937                 |   | 12,645 |   | 7,391 |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Net income from continuing operations                                  |   | 11,611                 |    | 4,774                 |   | 12,526 |   | 7,554 |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Loss from operations of discontinued business,  net of tax of $(2,813) |   | (4,278                 | )       | -                     |   | (4,278 | ) | - |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Net income                                                             |   | 7,333                  |    | 4,774                 |   | 8,248 |   | 7,554 |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Other comprehensive  income (loss)                                     |   | (5,828                 | )       | -                     |   | (12,697 | ) | - |   |
|                                                                   |   |                   |    |                  |   |   |   |   |   |
| Comprehensive income  (loss)                                           |   | $                      | 1,505   |                  | $      | 4,774 |   | $ | (4,449 | ) | $ | 7,554 |   |

 

See Notes to Consolidated FinancialStatements.

 

 

**CILCORPINC. AND SUBSIDIARIESConsolidated Statements of Cash Flows**(Inthousands)(Unaudited)

 
|                                                                                      |   | **Nine Months Ended** |       |
|-------------------------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                                      |   | **September 30,**     |       |
|                                                                                      |   | **2001**              | ** ** | **2000** | ** ** |
| Cash  flows from operating activities:                                                    |   |                  |       |   |   |
| Net income from continuing operations before  preferred dividends                         |   | $                     | 14,145     |   | $ | 9,991 |   |
|                                                                                      |   |                  |       |   |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:        |   |                  |       |   |   |
| Non-cash lease income  and investment income                                              |   | (3,055                | )          | (6,490 | ) |
| Coal contract and other purchase accounting  adjustments, net of tax                      |   | (12,988               | )          | - |   |
| Cash receipts in excess of debt service on  leases                                        |   | 7,923                 |       | 9,719 |   |
| Depreciation and  amortization                                                            |   | 64,302                |       | 63,700 |   |
| Deferred income taxes, investment tax credit  and regulatory liability of subsidiary, net |   | (326                  | )          | (10,734 | ) |
| Changes in operating  assets and liabilities:                                             |   |                  |       |   |   |
| Decrease in accounts receivable and accrued  unbilled revenue                             |   | 55,121                |       | 7,842 |   |
| Increase in  inventories                                                                  |   | (6,266                | )          | (11,893 | ) |
| Increase (decrease) in  accounts payable                                                  |   | (38,260               | )          | 31,997 |   |
| Decrease in accrued  taxes                                                                |   | (4,151                | )          | (297 | ) |
| Increase in other assets                                                                  |   | (9,710                | )          | (15,821 | ) |
| Increase in other  liabilities                                                            |   | 17,101                |       | 808 |   |
|                                                                                      |   |                  |       |   |   |
| Total adjustments                                                                         |   | 69,691                |       | 68,831 |   |
|                                                                                      |   |                  |       |   |   |
| Net cash provided by operating activities from  continuing operations                     |   | 83,836                |       | 78,822 |   |
|                                                                                      |   |                  |       |   |   |
| Net cash provided (used) by operating  activities of discontinued operations              |   | 6,033                 |       | (188 | ) |
|                                                                                      |   |                  |       |   |   |
| Cash flow from  operations                                                                |   | 89,869                |       | 78,634 |   |
|                                                                                      |   |                  |       |   |   |
| Cash flows from  investing activities:                                                    |   |                  |       |   |   |
| Additions to plant                                                                        |   | (38,513               | )          | (43,211 | ) |
| Other                                                                                     |   | (457                  | )          | (1,258 | ) |
|                                                                                      |   |                  |       |   |   |
| Net cash used by investing activities from  continuing operations                         |   | (38,970               | )          | (44,469 | ) |
|                                                                                      |   |                  |       |   |   |
| Net cash used by investing activities from  discontinued operations                       |   | -                     |       | - |   |
|                                                                                      |   |                  |       |   |   |
| Cash flow from  investing activities                                                      |   | (38,970               | )          | (44,469 | ) |
|                                                                                      |   |                  |       |   |   |
| Cash flow from financing  activities:                                                     |   |                  |       |   |   |
| Net increase  (decrease) in short-term debt                                               |   | (20,300               | )          | 37,800 |   |
| Net decrease in  long-term debt                                                           |   | (8,500                | )          | (30,500 | ) |
| Net decrease in  preferred stock                                                          |   | -                     |       | (25,000 | ) |
| Common dividends paid                                                                     |   | (15,000               | )          | (9,300 | ) |
| Preferred dividends paid                                                                  |   | (1,619                | )          | (2,437 | ) |
|                                                                                      |   |                  |       |   |   |
| Net cash used by financing activities from  continuing operations                         |   | (45,419               | )          | (29,437 | ) |
|                                                                                      |   |                  |       |   |   |
| Net cash used by financing activities from  discontinued operations                       |   | (6,000                | )          | - |   |
|                                                                                      |   |                  |       |   |   |
| Cash flow from  financing activities                                                      |   | (51,419               | )          | (29,437 | ) |
|                                                                                      |   |                  |       |   |   |
| Net increase (decrease) in cash and temporary  cash investments:                          |   | (520                  | )          | 4,728 |   |
| Cash and temporary cash investments at  beginning of year:                                |   | 11,743                |       | 11,220 |   |
|                                                                                      |   |                  |       |   |   |
| Cash and temporary cash investments at  September 30                                      |   | $                     | 11,223     |   | $ | 15,948 |   |
|                                                                                      |   |                  |       |   |   |
| Supplemental disclosures of cash flow  information:                                       |   |                  |       |   |   |
|                                                                                      |   |                  |       |   |   |
| Cash paid during the  period for:                                                         |   |                  |       |   |   |
|                                                                                      |   |                  |       |   |   |
| Interest                                                                                  |   | $                     | 48,729     |   | $ | 48,830 |   |
|                                                                                      |   |                  |       |   |   |
| Income taxes                                                                              |   | $                     | 9,810      |   | $ | 21,058 |   |

 

 

See Notes to Consolidated FinancialStatements.

 

**CENTRALILLINOIS LIGHT COMPANYConsolidated Balance Sheets**(In thousands)(Unaudited)
|                                                                                                       |   | **September 30,** |                  | **December 31,** |                  |
|------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------------------|------------------|-----------------------|
|                                                                                                       |   | **2001**          |                  | **2000**         |                  |
|                                                                                                       |   |              |                  |             |                  |
| **ASSETS**                                                                                                 |   |              |                  |             |                  |
|                                                                                                       |   |              |                  |             |                  |
| Utility plant, at  original cost:                                                                          |   |              |                  |             |                  |
| Electric                                                                                                   |   | $                 | 1,321,995             |             | $                     | 1,305,115 |   |
| Gas                                                                                                        |   | 448,666           |                  | 442,076          |                  |
|                                                                                                       |   |              |                  |             |                  |
|                                                                                                       |   | 1,770,661         |                  | 1,747,191        |                  |
| Less - accumulated provision for depreciation                                                              |   | 972,780           |             | 926,091          |             |
|                                                                                                       |   |              |                  |             |                  |
|                                                                                                       |   | 797,881           |                  | 821,100          |                  |
| Construction work in  progress                                                                             |   | 40,142            |                  | 29,213           |                  |
|                                                                                                       |   |              |                  |             |                  |
| Total utility plant                                                                                        |   | 838,023           |                  | 850,313          |                  |
|                                                                                                       |   |              |                  |             |                  |
| Other property and  investments:                                                                           |   |              |                  |             |                  |
| Cash surrender value of company-owned life  insurance (net of related policy loans of $65,207 and $59,292) |   | 3,128             |        | 3,497            |        |
| Other                                                                                                      |   | 1,133             |                  | 1,161            |                  |
|                                                                                                       |   |              |                  |             |                  |
| Total other property and investments                                                                       |   | 4,261             |             | 4,658            |             |
|                                                                                                       |   |              |                  |             |                  |
| Current assets:                                                                                            |   |              |                  |             |                  |
| Cash and temporary  cash investments                                                                       |   | 8,091             |                  | 8,777            |                  |
| Receivables, less reserves of $1,221 and  $1,343                                                           |   | 68,350            |             | 60,148           |             |
| Accrued unbilled  revenue                                                                                  |   | 17,529            |                  | 64,339           |                  |
| Fuel, at average cost                                                                                      |   | 14,933            |                  | 13,995           |                  |
| Materials and supplies, at average cost                                                                    |   | 16,687            |             | 15,807           |             |
| Gas in underground storage, at average cost                                                                |   | 31,405            |             | 28,413           |             |
| Prepaid taxes                                                                                              |   | 4,851             |                  | 5,588            |                  |
| FAC/PGA  underrecoveries                                                                                   |   | 2,284             |                  | 20,838           |                  |
| Other                                                                                                      |   | 5,916             |                  | 5,556            |                  |
|                                                                                                       |   |              |                  |             |                  |
| Total current assets                                                                                       |   | 170,046           |                  | 223,461          |                  |
|                                                                                                       |   |              |                  |             |                  |
| Deferred debits:                                                                                           |   |              |                  |             |                  |
| Unamortized loss on  reacquired debt                                                                       |   | 2,509             |                  | 2,691            |                  |
| Unamortized debt  expense                                                                                  |   | 1,336             |                  | 1,427            |                  |
| Prepaid pension cost                                                                                       |   | 229               |                  | 229              |                  |
| Other                                                                                                      |   | 53,762            |                  | 24,661           |                  |
|                                                                                                       |   |              |                  |             |                  |
| Total deferred debits                                                                                      |   | 57,836            |                  | 29,008           |                  |
|                                                                                                       |   |              |                  |             |                  |
| Total assets                                                                                               |   | $                 | 1,070,166             |             | $                     | 1,107,440 |   |

 

See Notes to Consolidated FinancialStatements.

 

**CENTRALILLINOIS LIGHT COMPANYConsolidated Balance Sheets**(In thousands)(Unaudited)
|                                                                                          |   | **September  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                                                                             |   | 133,788            |           | 140,364               |           |
| Accumulated other  comprehensive income (loss)                                                |   | (13,672            | )              | (975                  | )              |
|                                                                                          |   |               |           |                  |           |
| Total common  stockholder's equity                                                            |   | 332,777            |           | 352,050               |           |
| Preferred stock without mandatory redemption                                                  |   | 19,120             |      | 19,120                |      |
| Preferred stock with  mandatory redemption                                                    |   | 22,000             |           | 22,000                |           |
| Long-term debt                                                                                |   | 242,718            |           | 245,482               |           |
|                                                                                          |   |               |           |                  |           |
| Total  capitalization                                                                         |   | 616,615            |           | 638,652               |           |
|                                                                                          |   |               |           |                  |           |
| Current liabilities:                                                                          |   |               |           |                  |           |
| Current maturities of  long-term debt                                                         |   | 2,800              |           | -                     |           |
| Notes payable                                                                                 |   | 58,000             |           | 67,300                |           |
| Accounts payable                                                                              |   | 68,696             |           | 96,315                |           |
| Accrued taxes                                                                                 |   | 25,500             |           | 25,512                |           |
| Accrued interest                                                                              |   | 4,920              |           | 8,889                 |           |
| FAC/PGA overrecoveries                                                                        |   | 311                |           | 7                     |           |
| Other                                                                                         |   | 27,112             |           | 6,214                 |           |
|                                                                                          |   |               |           |                  |           |
| Total current  liabilities                                                                    |   | 187,339            |           | 204,237               |           |
|                                                                                          |   |               |           |                  |           |
| Deferred credits and other liabilities:                                                       |   |               |      |                  |      |
| Deferred income taxes                                                                         |   | 107,626            |           | 123,611               |           |
| Regulatory liability                                                                          |   | 57,985             |           | 42,752                |           |
| Deferred investment  tax credit                                                               |   | 14,954             |           | 16,159                |           |
| Capital lease  obligation                                                                     |   | 159                |           | 616                   |           |
| Other                                                                                         |   | 85,488             |           | 81,413                |           |
|                                                                                          |   |               |           |                  |           |
| Total deferred credits and other liabilities                                                  |   | 266,212            |      | 264,551               |      |
|                                                                                          |   |               |           |                  |           |
| Total capitalization and liabilities                                                          |   | $                  | 1,070,166      |             | $              | 1,107,440 |      |

 

See Notes to Consolidated FinancialStatements.

 

**CENTRALILLINOIS LIGHT COMPANYConsolidated Statements of Income**(Inthousands)(Unaudited)

 
|                                |   | **Three Months Ended** |           | **Nine Months Ended** |           |
|-------------------------------------|--------|------------------------|----------------|-----------------------|----------------|
|                                |   | **September 30,**      |           | **September 30,**     |           |
|                                |   | **2001**               |           | **2000**              |           | **2001** |   | **2000** |   |
| Operating revenue:                  |   |                   |           |                  |           |   |   |   |   |
| Electric                            |   | $                      | 123,712        |                  | $              | 128,420 |   | $ | 305,011 |   | $ | 309,666 |   |
| Gas                                 |   | 21,801                 |           | 26,201                |           | 222,496 |   | 129,155 |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Total operating  revenues           |   | 145,513                |           | 154,621               |           | 527,507 |   | 438,821 |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Operating expenses:                 |   |                   |           |                  |           |   |   |   |   |
| Cost of fuel                        |   | 54,683                 |           | 32,039                |           | 108,647 |   | 84,186 |   |
| Cost of gas                         |   | 9,803                  |           | 13,887                |           | 162,299 |   | 72,293 |   |
| Purchased power                     |   | 15,670                 |           | 24,312                |           | 35,329 |   | 42,211 |   |
| Other operations and  maintenance   |   | 26,974                 |           | 26,099                |           | 89,448 |   | 79,355 |   |
| Depreciation and  amortization      |   | 17,173                 |           | 17,786                |           | 51,642 |   | 52,863 |   |
| Income taxes                        |   | 2,368                  |           | 9,159                 |           | 12,312 |   | 22,399 |   |
| Other taxes                         |   | 9,415                  |           | 9,884                 |           | 31,074 |   | 30,340 |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Total operating  expenses           |   | 136,086                |           | 133,166               |           | 490,751 |   | 383,647 |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Operating income                    |   | 9,427                  |           | 21,455                |           | 36,756 |   | 55,174 |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Other income and  deductions:       |   |                   |           |                  |           |   |   |   |   |
| Company-owned life  insurance, net  |   | (332                   | )              | (246                  | )              | (950 | ) | (767 | ) |
| Other, net                          |   | 1,792                  |           | (1,497                | )              | 7,077 |   | (1,430 | ) |
|                                |   |                   |           |                  |           |   |   |   |   |
| Total other income and (deductions) |   | 1,460                  |           | (1,743                | )              | 6,127 |   | (2,197 | ) |
|                                |   |                   |           |                  |           |   |   |   |   |
| Income before interest  expense     |   | 10,887                 |           | 19,712                |           | 42,883 |   | 52,977 |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Interest expenses:                  |   |                   |           |                  |           |   |   |   |   |
| Interest on long-term  debt         |   | 4,642                  |           | 4,328                 |           | 13,299 |   | 13,188 |   |
| Cost of borrowed funds capitalized  |   | (14                    | )              | (136                  | )              | (58 | ) | (338 | ) |
| Other                               |   | 1,121                  |           | 1,832                 |           | 4,599 |   | 3,831 |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Total interest expense              |   | 5,749                  |           | 6,024                 |           | 17,840 |   | 16,681 |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Net income                          |   | 5,138                  |           | 13,688                |           | 25,043 |   | 36,296 |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Dividends on preferred  stock       |   | 540                    |           | 539                   |           | 1,619 |   | 2,437 |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Income available for common stock   |   | 4,598                  |      | 13,149                |      | 23,424 |      | 33,859 |      |
|                                |   |                   |           |                  |           |   |   |   |   |
| Other comprehensive  income (loss)  |   | (5,828                 | )              | -                     |           | (12,697 | ) | - |   |
|                                |   |                   |           |                  |           |   |   |   |   |
| Comprehensive income                |   | $                      | (1,230         | )                     | $              | 13,149 |   | $ | 10,727 |   | $ | 33,859 |   |

 

See Notes to Consolidated FinancialStatements.

 

**CENTRALILLINOIS LIGHT COMPANYConsolidated Statements of CashFlows**(Inthousands)(Unaudited)

 

 
|                                                                           |   | **Nine Months Ended** |   |
|--------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                           |   | **September 30,**     |   |
|                                                                           |   | **2001**              |   | **2000** |   |
| Cash flows from  operating activities:                                         |   |                  |   |   |   |
| Net income before  preferred dividends                                         |   | $                     | 25,043 |   | $ | 36,296 |   |
|                                                                           |   |                  |   |   |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |   |                  |   |   |   |
| Depreciation and  amortization                                                 |   | 51,642                |   | 52,863 |   |
| Deferred income taxes, investment tax credit  and regulatory liability, net    |   | (3,178                | )      | (9,018 | ) |
| Changes in operating  assets and liabilities:                                  |   |                  |   |   |   |
| Increase in accounts  receivable                                               |   | (8,202                | )      | (9,051 | ) |
| Increase in fuel, materials and supplies, and  gas in underground storage      |   | (4,810                | )      | (11,167 | ) |
| Decrease in unbilled  revenue                                                  |   | 46,810                |   | 14,967 |   |
| Increase (decrease) in  accounts payable                                       |   | (27,619               | )      | 14,094 |   |
| Decrease in accrued  taxes and interest                                        |   | (3,981                | )      | (6,549 | ) |
| Capital lease payments                                                         |   | 484                   |   | 484 |   |
| Decrease in other  current assets                                              |   | 18,932                |   | 7,879 |   |
| Increase (decrease) in  other current liabilities                              |   | 9,727                 |   | (1,225 | ) |
| (Increase) decrease in  other non-current assets                               |   | (27,589               | )      | 3,167 |   |
| Increase (decrease) in  other non-current liabilities                          |   | 3,759                 |   | (3,236 | ) |
|                                                                           |   |                  |   |   |   |
| Net cash provided by  operating activities                                     |   | 81,018                |   | 89,504 |   |
|                                                                           |   |                  |   |   |   |
| Cash flows from  investing activities:                                         |   |                  |   |   |   |
| Additions to plant                                                             |   | (38,513               | )      | (43,211 | ) |
| Other                                                                          |   | (1,788                | )      | (3,220 | ) |
|                                                                           |   |                  |   |   |   |
| Net cash used in  investing activities                                         |   | (40,301               | )      | (46,431 | ) |
|                                                                           |   |                  |   |   |   |
| Cash flow from  financing activities:                                          |   |                  |   |   |   |
| Common dividends paid                                                          |   | (30,000               | )      | (16,000 | ) |
| Preferred dividends  paid                                                      |   | (1,619                | )      | (2,437 | ) |
| Payments on capital  lease obligation                                          |   | (484                  | )      | (484 | ) |
| Increase (decrease) in  short-term borrowing                                   |   | (9,300                | )      | 28,300 |   |
| Long-term debt retired                                                         |   | --                    |   | (30,000 | ) |
| Long-term debt issued                                                          |   | --                    |   | 8,000 |   |
| Preferred stock  retired                                                       |   | --                    |   | (25,000 | ) |
|                                                                           |   |                  |   |   |   |
| Net cash used in  financing activities                                         |   | (41,403               | )      | (37,621 | ) |
|                                                                           |   |                  |   |   |   |
| Net increase in cash and temporary cash  investments                           |   | (686                  | )      | 5,452 |   |
|                                                                           |   |                  |   |   |   |
| Cash and temporary cash investments at  beginning of year                      |   | 8,777                 |   | 8,548 |   |
|                                                                           |   |                  |   |   |   |
| Cash and temporary cash investments at  September 30                      |   | $                     | 8,091  |   | $ | 14,000 |   |
|                                                                           |   |                  |   |   |   |
| Supplemental disclosures of cash flow  information:                            |   |                  |   |   |   |
|                                                                           |   |                  |   |   |   |
| Cash paid during the  period for:                                              |   |                  |   |   |   |
|                                                                           |   |                  |   |   |   |
| Interest (net of cost of borrowed funds  capitalized)                          |   | $                     | 23,963 |   | $ | 24,337 |   |
|                                                                           |   |                  |   |   |   |
| Income taxes                                                                   |   | $                     | 22,547 |   | $ | 30,391 |   |

 

See Notes to Consolidated FinancialStatements.

 

 

**Statements of Segments of Business****CILCORP Inc. and SubsidiariesThree Months Ended September 30, 2001**

 
|                                              |   | **CILCO**      |    | **CILCO** |   | **CILCO** |   | **Other**      |   | **Discont.** |   |      |   |
|---------------------------------------------------|--------|----------------|---------|-----------|--------|-----------|--------|----------------|--------|--------------|--------|-----------|--------|
|                                              |   | **Electric**   |    | **Gas**   |   | **Other** |   | **Businesses** |   | **Oper.**    |   | **Total** |   |
|                                              |   | (In thousands) |    |
|                                              |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Revenues                                          |   | $              | 123,712 |      | $      | 21,801    |   | $              | 36,429 |         | $      | 14,291    |   | $ | -- |   | $ | 196,233 |   |
| Interest income                                   |   | --             |    | --        |   | 302       |   | 68             |   | --           |   | 370       |   |
|                                              |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Total                                             |   | 123,712        |    | 21,801    |   | 36,731    |   | 14,359         |   | --           |   | 196,603   |   |
|                                              |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Operating  expenses                               |   | 97,467         |    | 19,078    |   | 34,599    |   | (15,040        | )      | --           |   | 136,104   |   |
| Depreciation  and amortization                    |   | 11,721         |    | 5,452     |   | --        |   | 4,219          |   | --           |   | 21,392    |   |
|                                              |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Total                                             |   | 109,188        |    | 24,530    |   | 34,599    |   | (10,821        | )      | --           |   | 157,496   |   |
|                                              |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Interest expense                                  |   | 4,115          |    | 1,648     |   | --        |   | 11,466         |   | --           |   | 17,229    |   |
| Preferred  stock dividends                        |   | --             |    | --        |   | 540       |   | --             |   | --           |   | 540       |   |
| Fixed  charges and other expenses                 |   | (14            | )       | --        |   | 332       |   | --             |   | --           |   | 318       |   |
|                                              |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Total                                             |   | 4,101          |    | 1,648     |   | 872       |   | 11,466         |   | --           |   | 18,087    |   |
|                                              |   |           |    |      |   |      |   |           |   |         |   |      |   |
|                                              |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Income from continuing oper. before income  taxes |   | 10,423         |    | (4,377    | )      | 1,260     |   | 13,714         |   | --           |   | 21,020    |   |
| Income taxes                                      |   | 4,100          |    | (1,732    | )      | 340       |   | 6,701          |   | --           |   | 9,409     |   |
|                                              |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Net  income from continuing oper.                 |   | 6,323          |    | (2,645    | )      | 920       |   | 7,013          |   | --           |   | 11,611    |   |
| Effect  of discont. operations                    |   | --             |    | --        |   | --        |   | --             |   | (4,278       | )      | (4,278    | )      |
|                                              |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Segment  net income                               |   | $              | 6,323   |      | $      | (2,645    | )      | $              | 920    |         | $      | 7,013     |   | $ | (4,278 | ) | $ | 7,333 |   |

 

SeeNotes to Consolidated Financial Statements.

 

**Statementsof Segments of BusinessCILCORP Inc. and SubsidiariesThree Months Ended September 30, 2000**

 
|                                              |   | **CILCO**      |    | **CILCO** |   | **CILCO** |   | **Other**      |   |      |   |
|---------------------------------------------------|--------|----------------|---------|-----------|--------|-----------|--------|----------------|--------|-----------|--------|
|                                              |   | **Electric**   |    | **Gas**   |   | **Other** |   | **Businesses** |   | **Total** |   |
|                                              |   | (In thousands) |    |
|                                              |   |           |    |      |   |      |   |           |   |      |   |
| Revenues                                          |   | $              | 128,420 |      | $      | 26,201    |   | $              | 17,615 |      | $      | 7,516 |   | $ | 179,752 |   |
| Interest income                                   |   | --             |    | --        |   | 110       |   | 33             |   | 143       |   |
|                                              |   |           |    |      |   |      |   |           |   |      |   |
| Total                                             |   | 128,420        |    | 26,201    |   | 17,725    |   | 7,549          |   | 179,895   |   |
|                                              |   |           |    |      |   |      |   |           |   |      |   |
| Operating  expenses                               |   | 83,607         |    | 22,614    |   | 20,933    |   | 3,891          |   | 131,045   |   |
| Depreciation  and amortization                    |   | 12,449         |    | 5,337     |   | --        |   | 3,612          |   | 21,398    |   |
|                                              |   |           |    |      |   |      |   |           |   |      |   |
| Total                                             |   | 96,056         |    | 27,951    |   | 20,933    |   | 7,503          |   | 152,443   |   |
|                                              |   |           |    |      |   |      |   |           |   |      |   |
| Interest expense                                  |   | 4,433          |    | 1,727     |   | --        |   | 11,932         |   | 18,092    |   |
| Preferred  stock dividends                        |   | --             |    | --        |   | 539       |   | --             |   | 539       |   |
| Fixed  charges and other expenses                 |   | (136           | )       | --        |   | 246       |   | --             |   | 110       |   |
|                                              |   |           |    |      |   |      |   |           |   |      |   |
| Total                                             |   | 4,297          |    | 1,727     |   | 785       |   | 11,932         |   | 18,741    |   |
|                                              |   |           |    |      |   |      |   |           |   |      |   |
| Income  from continuing oper. before income taxes |   | 28,067         |    | (3,477    | )      | (3,993    | )      | (11,886        | )      | 8,711     |   |
| Income taxes                                      |   | 10,535         |    | (1,376    | )      | (1,711    | )      | (3,511         | )      | 3,937     |   |
|                                              |   |           |    |      |   |      |   |           |   |      |   |
| Segment  net income                               |   | $              | 17,532  |      | $      | (2,101    | )      | $              | (2,282 | )         | $      | (8,375 | ) | $ | 4,774 |   |

 

SeeNotes to Consolidated Financial Statements.

 

**Statementsof Segments of BusinessCILCORP Inc. and SubsidiariesNine Months Ended September 30, 2001**

 
|                                        |   | **CILCO**      |    | **CILCO** |   | **CILCO** |   | **Other**      |   | **Discont.** |   |      |   |
|---------------------------------------------|--------|----------------|---------|-----------|--------|-----------|--------|----------------|--------|--------------|--------|-----------|--------|
|                                        |   | **Electric**   |    | **Gas**   |   | **Other** |   | **Businesses** |   | **Oper.**    |   | **Total** |   |
|                                        |   | (In thousands) |    |
|                                        |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Revenues                                    |   | $              | 305,011 |      | $      | 222,496   |   | $              | 75,433 |         | $      | 39,621    |   | $ | -- |   | $ | 642,561 |   |
| Interest income                             |   | --             |    | --        |   | 582       |   | 223            |   | --           |   | 805       |   |
|                                        |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Total                                       |   | 305,011        |    | 222,496   |   | 76,015    |   | 39,844         |   | --           |   | 643,366   |   |
|                                        |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Operating  expenses                         |   | 231,803        |    | 194,994   |   | 66,888    |   | 4,802          |   | --           |   | 498,487   |   |
| Depreciation  and amortization              |   | 35,245         |    | 16,397    |   | --        |   | 12,660         |   | --           |   | 64,302    |   |
|                                        |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Total                                       |   | 267,048        |    | 211,391   |   | 66,888    |   | 17,462         |   | --           |   | 562,789   |   |
|                                        |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Interest expense                            |   | 12,779         |    | 5,119     |   | --        |   | 34,997         |   | --           |   | 52,895    |   |
| Preferred  stock dividends                  |   | --             |    | --        |   | 1,619     |   | --             |   | --           |   | 1,619     |   |
| Fixed  charges and other expenses           |   | (58            | )       | --        |   | 950       |   | --             |   | --           |   | 892       |   |
|                                        |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Total                                       |   | 12,721         |    | 5,119     |   | 2,569     |   | 34,997         |   | --           |   | 55,406    |   |
|                                        |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Income from cont. oper. before income taxes |   | 25,242         |    | 5,986     |   | 6,558     |   | (12,615        | )      | --           |   | 25,171    |   |
| Income taxes                                |   | 9,919          |    | 2,393     |   | 2,050     |   | (1,717         | )      | --           |   | 12,645    |   |
|                                        |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Net income from continuing oper.            |   | 15,323         |    | 3,593     |   | 4,508     |   | (10,898        | )      | --           |   | 12,526    |   |
| Effect  of discont. operations              |   | --             |    | --        |   | --        |   | --             |   | (4,278       | )      | (4,278    | )      |
|                                        |   |           |    |      |   |      |   |           |   |         |   |      |   |
| Segment  net income                         |   | $              | 15,323  |      | $      | 3,593     |   | $              | 4,508  |         | $      | (10,898   | )      | $ | (4,278 | ) | $ | 8,248 |   |

 

SeeNotes to Consolidated Financial Statements.

 

**Statementsof Segments of BusinessCILCORP Inc. and SubsidiariesNine Months Ended September 30, 2000**

 
|                              |   | **CILCO**      |    | **CILCO** |   | **CILCO** |   | **Other**      |   |      |   |
|-----------------------------------|--------|----------------|---------|-----------|--------|-----------|--------|----------------|--------|-----------|--------|
|                              |   | **Electric**   |    | **Gas**   |   | **Other** |   | **Businesses** |   | **Total** |   |
|                              |   | (In thousands) |    |
|                              |   |           |    |      |   |      |   |           |   |      |   |
| Revenues                          |   | $              | 309,666 |      | $      | 129,155   |   | $              | 36,399 |      | $      | 19,126 |   | $ | 494,346 |   |
| Interest income                   |   | --             |    | --        |   | 179       |   | 126            |   | 305       |   |
|                              |   |           |    |      |   |      |   |           |   |      |   |
| Total                             |   | 309,666        |    | 129,155   |   | 36,578    |   | 19,252         |   | 494,651   |   |
|                              |   |           |    |      |   |      |   |           |   |      |   |
| Operating  expenses               |   | 206,238        |    | 102,147   |   | 41,084    |   | 10,993         |   | 360,462   |   |
| Depreciation  and amortization    |   | 37,022         |    | 15,841    |   | --        |   | 10,837         |   | 63,700    |   |
|                              |   |           |    |      |   |      |   |           |   |      |   |
| Total                             |   | 243,260        |    | 117,988   |   | 41,084    |   | 21,830         |   | 424,162   |   |
|                              |   |           |    |      |   |      |   |           |   |      |   |
| Interest expense                  |   | 12,186         |    | 4,833     |   | --        |   | 35,659         |   | 52,678    |   |
| Preferred  stock dividends        |   | --             |    | --        |   | 2,437     |   | --             |   | 2,437     |   |
| Fixed  charges and other expenses |   | (338           | )       | --        |   | 767       |   | --             |   | 429       |   |
|                              |   |           |    |      |   |      |   |           |   |      |   |
| Total                             |   | 11,848         |    | 4,833     |   | 3,204     |   | 35,659         |   | 55,544    |   |
|                              |   |           |    |      |   |      |   |           |   |      |   |
| Income  before income taxes       |   | 54,558         |    | 6,334     |   | (7,710    | )      | (38,237        | )      | 14,945    |   |
| Income taxes                      |   | 19,856         |    | 2,543     |   | (3,076    | )      | (11,932        | )      | 7,391     |   |
|                              |   |           |    |      |   |      |   |           |   |      |   |
| Segment  net income               |   | $              | 34,702  |      | $      | 3,791     |   | $              | (4,634 | )         | $      | (26,305 | ) | $ | 7,554 |   |

 

SeeNotes to Consolidated Financial Statements.

                                                                          

**CILCORPINC. AND CENTRAL ILLINOIS LIGHT COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS******(Unaudited)

 

 

**NOTE 1.  Introduction**

 

Theconsolidated financial statements include the accounts of CILCORP Inc. (CILCORPor the Holding Company), Central Illinois Light Company (CILCO), QSTEnterprises Inc. (QST) and its subsidiaries, QST Energy Inc. (QST Energy), andCILCORP Infraservices Inc. (CILCORP Infraservices), and CILCORP's othersubsidiaries (collectively, the Company), after elimination of significantintercompany transactions.  Theconsolidated financial statements of CILCO include the accounts of CILCO andits subsidiaries, CILCO Exploration and Development Company and CILCO EnergyCorporation.  CILCORP owns 100% of thecommon stock of its first-tier subsidiaries. In the fourth quarter of 1998, the operations of QST and itssubsidiaries (excluding ESE Land Corporation and CILCORP Infraservices Inc. -see Management's Discussion and Analysis) were discontinued and, therefore, arebeing reported as discontinued operations in the financial statements.  Prior year amounts have been reclassified ona basis consistent with the 2001 presentation.

 

TheAES Corporation (AES) completed the acquisition of 100% of CILCORP'soutstanding stock on October 18, 1999. The merger was accounted for using the purchase method ofaccounting.  Under this method, thepurchase price was allocated to the fair market value of the assets acquiredand the liabilities assumed.  The excessof the purchase price over the fair value of the net assets acquired ofapproximately $573 million was recorded as goodwill at CILCORP and is beingamortized over 40 years.  This initialallocation of the purchase price at October 18, 1999, was based on preliminaryestimates made by the Company.  During2000, adjustments were made to the purchase price allocation as additionalinformation became available to finalize the allocation previously based uponpreliminary estimates.  The primaryeffect of these adjustments was to increase goodwill by approximately $40million, to increase utility plant by $28.4 million (offset by deferred taxesof $11.3 million), and to record a liability of approximately $110 million foran out-of-market long-term coal contract (offset by deferred taxes ofapproximately $44 million and net customer contract intangibles ofapproximately $17 million).  Changes tothe Company's estimates after October 2000, are recorded in results ofoperations.

 

Theaccompanying unaudited consolidated financial statements have been preparedaccording to the rules and regulations of the Securities and ExchangeCommission (SEC).  Although CILCORPbelieves the disclosures are adequate to make the information presented notmisleading, these consolidated financial statements should be read along withthe Company's 2000 Annual Report on Form 10-K.

 

Inthe Company's opinion, the consolidated financial statements furnished reflectall normal and recurring adjustments necessary for a fair presentation of theresults of operations for the periods presented.  Operating results for interim periods are not necessarilyindicative of operating results to be expected for the year or of the Company'sfuture financial condition.

 

 

**NOTE 2.  Contingencies**

 

**FuelAdjustment Clause**

 

Asa result of abnormally warm weather during July 1999, CILCO incurred$33 million of generation and purchased power costs which are subject torecovery 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 tocustomers the cost of unrecovered fuel and purchased power costs in the nextcalculated month's FAC factor.  In thisinstance, on September 1, 1999, the ICC approved a request by CILCO tocharge certain customers over a 12-month period (without interest), beginningin September 1999.  In addition, CILCOrequested and received ICC permission to allow the larger industrial andcommercial customers the option to pay their respective shares of the Julyunderrecovery, 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 underrecoveredcosts of fuel and purchased power for a particular month are both treated asadjustments to cost of fuel expense. Recovery of the fuel and purchased power costs from all customer classeswas completed during 2000.

 

Inearly 2000, the ICC began its annual review of the previous year's FACcollections.  An ICC Hearing Examinerconducted hearings throughout 2000. Testimony was filed by CILCO, the ICC staff and parties who hadintervened in the proceeding and was followed by cross-examination ofwitnesses.  ICC staff and intervenorshad recommended during these hearings that up to $22.4 million be refunded toCILCO's customers.  On November 6, 2000,the ICC Hearing Examiner issued a Proposed Order recommending that $3.4 millionbe refunded to CILCO's customers.

 

Atits meeting on December 20, 2000, the ICC issued an order that modified theHearing Examiner's Proposed Order.  TheDecember 20 ICC pronouncement ordered CILCO to refund $20.9 million tocustomers in addition to the $3.4 million proposed by the HearingExaminer.  These refunds would have beenmade by adjusting the February 2001 FAC recovery factor and continuing theadjustment in subsequent months until the entire amount was refunded tocustomers.  CILCO strongly disagreedwith the ICC order and believed, among other things, that it conflicted withfederal law.  The Federal EnergyRegulatory Commission (FERC) previously reached a different conclusion withrespect to the issues giving rise to the $20.9 million refund.  The ICC's order failed to recognize thepreemptive jurisdiction of FERC.  TheICC's order to refund $20.9 million also resulted in a duplication of a portionof the Hearing Examiner's previously recommended $3.4 million refund.  CILCO petitioned the ICC for a rehearing anda stay of the refund order.  The ICCgranted CILCO's request for a rehearing and stayed the refund order.

 

The ICC issued an order on the rehearingon July 5, 2001.  This order requiredCILCO 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 andother issues relating to prior and future fuel costs.  On July 31, 2001, the ICC granted CILCO’s request to stay theJuly 5 order through August 24, 2001. On August 3, 2001, CILCO petitioned the ICC for a rehearing of the July5 order to preserve its legal alternatives. CILCO also filed a settlement agreement resolving issues related to the1999 and 2000 FAC filings.  As part ofthe settlement, CILCO agreed to refund $17.8 million related to the 1999 FACand $2.6 million related to the 2000 FAC. These refunds will be paid over a six month period plus accrued intereston the unpaid balance.  As a conditionof the settlement agreement, CILCO also agreed to file a petition to eliminatethe FAC within 21 days of an order approving the settlement.

 

On August 21, 2001, the ICC approvedCILCO's proposed settlement agreement to refund $20.4 million plus interest toits electric customers, beginning in September 2001.  This refund is material to the operations of the Company.  CILCO filed its proposal to eliminate theFAC on September 10, 2001.  The ICCapproved this proposal on October 24, 2001. On October 26, 2001, CILCO filed revised tariff sheets eliminating theFAC.  These tariffs became effective onOctober 29, 2001.  Elimination of theFAC is a prerequisite to utility restructuring, as provided for in the ElectricService Customer Choice and Rate Relief Law of 1997 (Customer Choice Law).  Elimination of the FAC will expose theCompany to market risk with respect to the cost of fuel and purchased powerrequired to serve native load customers.

 

**PreacquisitionContingency**

 

The AES Corporation's acquisition of CILCORPin November 1999 was accounted for using the purchase method ofaccounting.  The excess of the purchaseprice over the fair value of the net assets acquired was recorded as goodwillat CILCORP.  During 2000, adjustmentswere made to the purchase price allocation as additional information becameavailable to finalize the allocation previously based upon preliminaryestimates.  This final purchaseaccounting allocation included recording a liability for an out-of-marketlong-term coal contract.

 

In September 2001, CILCORP recorded an$18 million reduction in this liability for the out-of-market coalcontract.  The adjustment to thisliability was necessitated by a change in the Company's plan relative to thiscontract.  Accordingly, the Company madea new assessment of the potential liability and recorded an adjustment to theoriginal liability.

 

 

**NOTE 3.  Accounting for Price Risk ManagementActivities**

 

CILCORP utilizescommodity futures contracts, options and swaps in the normal course of itsnon-regulated natural gas and electric business activities to reduce market orprice risk.  Gains and losses arisingfrom derivative financial instrument transactions, related to non-regulatedactivities, which hedge the impact of fluctuations in energy prices are recognizedin income concurrent with the related purchases and sales of thecommodity.  If a derivative financialinstrument contract is terminated because it is probable that a transaction orforecasted transaction will not occur, any gain or loss as of such date isimmediately recognized.  CILCORP issubject to commodity price risk for deregulated sales to the extent that energyis sold under firm price commitments. At times, due to market conditions, CILCORP may have unmatchedcommitments to purchase and sell energy on a price and quantity basis.  Physical and derivative financialinstruments give rise to market risk, which represents the potential loss thatcan be caused by a change in the market value of a particular commitment.  Market risks are monitored to ensurecompliance with the Company's risk management policies, including limits to theCompany's total net exposure at any time.

 

The Companyadopted Statement of Financial Accounting Standards No. 133, "Accountingfor Derivative Instruments and Hedging Activities" (SFAS 133) on January1, 2001, and recorded the effects of implementation in Other ComprehensiveIncome (OCI) as a change in accounting principle.  The amount recorded as OCI reflects the mark-to-market value offixed price derivative financial instruments representing hedges of natural gascommitments through December 2001. These derivatives are related to non-regulated activities and are beingaccounted for as fully-effective cash-flow hedges.  The balance in OCI, as of January 1, 2001, related to theimplementation of SFAS 133, was an after-tax gain of $1,667,800.

 

Gains/losses onnon-regulated activities are reflected in operating results as commitments arefulfilled and the related derivative financial instruments are settled.  The net loss reflected in operating resultsfrom derivative financial instruments for non-regulated activities for thequarter ended September 30, 2001, was $1,039,700 for natural gas (includedin Gas Purchased for Resale).  Therewere no outstanding derivative financial instruments for electricity during thequarter ended September 30, 2001.  Thepreviously recorded gain/loss associated with these settled derivativefinancial instruments was removed from OCI. The open derivative positions are then marked-to-market throughOCI.  The net effect of theseadjustments was to record an after-tax loss in OCI in the amount of $1,264,700for the quarter ended September 30, 2001. The after-tax balance in OCI associated with these open derivativepositions at September 30, 2001, was $6,217,900.  This portion of OCI reflects hedges of natural gas sales of4,930,000 mmBtu or 4.9 Bcf for commitments through March 2003.

 

In May 2001, theCompany implemented a winter 2001-2002 hedging strategy related to regulatedgas activities.  This strategy utilizescollars (a combination of a put option and a call option) and futures to helpprotect customers who are charged the Company's Purchased Gas Adjustment (PGA)from large price fluctuations.  TheCompany enters into these collars based on pre-defined criteria and only whenentering into the collar produces a premium credit.  This premium credit is being deferred until the month ofdelivery.  This strategy does not resultin any income impacts since all gains/losses and premium credits will be passedalong to the customer in the month of delivery.  The Company is accounting for these hedges as cash-flow hedgesand is recognizing the mark-to-market value in OCI, consistent with SFAS 133.  In the month of delivery, any relatedmark-to-market value will be removed from OCI and charged/credited to thecustomer.  For the quarter endedSeptember 30, 2001, an after-tax mark-to-market loss of $4,564,200 was recordedin OCI.  The after-tax balance in OCIassociated with these open derivative positions at September 30, 2001, was$6,479,600.  This portion of OCIreflects hedges of natural gas sales of 7,920,000 mmBtu or 7.9 Bcf forcommitments through March 2002.

 

 

**NOTE 4.  Other Comprehensive Income**

 

Rollforwardof Accumulated Other Comprehensive Income -

CILCORPInc.

 
|                                                               |   | **Pension**    |   | **SFAS  133** |   | **Total** |   |
|--------------------------------------------------------------------|--------|----------------|--------|---------------|--------|-----------|--------|
|                                                               |   | (In thousands) |   |
|                                                               |   |           |   |          |   |      |   |
| Accumulated  other comprehensive loss - June 30, 2001 balance      |   | $              | (450   | )             | $      | (6,869    | )      | $ | (7,319 | ) |
|                                                               |   |           |   |          |   |      |   |
| Other  comprehensive loss - SFAS 133                               |   | --             |   | (5,828        | )      | (5,828    | )      |
|                                                               |   |           |   |          |   |      |   |
| Accumulated  other comprehensive loss - September 30, 2001 balance |   | $              | (450   | )             | $      | (12,697   | )      | $ | (13,147 | ) |

 

 

Rollforwardof Accumulated Other Comprehensive Income -

CentralIllinois Light Company

 
|                                                               |   | **Pension**    |   | **SFAS  133** |   | **Total** |   |
|--------------------------------------------------------------------|--------|----------------|--------|---------------|--------|-----------|--------|
|                                                               |   | (In thousands) |   |
|                                                               |   |           |   |          |   |      |   |
| Accumulated  other comprehensive loss - June 30, 2001 balance      |   | $              | (975   | )             | $      | (6,869    | )      | $ | (7,844 | ) |
|                                                               |   |           |   |          |   |      |   |
| Other  comprehensive loss - SFAS 133                               |   | --             |   | (5,828        | )      | (5,828    | )      |
|                                                               |   |           |   |          |   |      |   |
| Accumulated  other comprehensive loss - September 30, 2001 balance |   | $              | (975   | )             | $      | (12,697   | )      | $ | (13,672 | ) |

 

 

 

**NOTE 5.  Impact of AccountingStandards**

 

InJune 2001, the FASB issued Statement of Financial Accounting Standards No. 141,"Business Combinations" (SFAS 141), Statement of Financial AccountingStandards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),and Statement of Financial Accounting Standards No. 143, "Accounting forAsset Retirement Obligations" (SFAS 143).

 

SFAS141 requires that all business combinations be accounted for using the purchasemethod and applies to all business combinations initiated after June 30,2001.  Certain transition provisionsapply to business combinations for which the acquisition date was before July1, 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 orresults of operations.

 

SFAS142 requires that goodwill and intangible assets that have indefinite usefullives be tested at least annually for impairment rather than be amortized.  The provisions of SFAS 142 are required tobe applied starting with fiscal years beginning after December 15, 2001.  The Company is evaluating the impact of theadoption of this standard and has not yet determined the effect of adoption onits consolidated financial position or results of operations.

 

SFAS143 addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs.  SFAS 143 is effectivefor financial statements issued for fiscal years beginning after June 15,2002.  The Company has not yetquantified the effect, if any, of this new standard on the consolidatedfinancial statements.

 

Statementof Financial Accounting Standards No. 144 "Accounting for the Impairmentor Disposal of Long-Lived Assets" (SFAS 144) was issued in August 2001,and is effective for financial statements issued for fiscal years beginningafter December 15, 2001, and interim periods within those fiscal years.  SFAS 144 addresses financial accounting andreporting for the impairment or disposal of long-lived assets.  The Company has not yet quantified theeffect, if any, of this new standard on the consolidated financial statements.

 

**Item 2.                Management's Discussion andAnalysis of                            FinancialCondition and Results of Operations**

 

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

 

InJuly 2000, AES announced plans to acquire IPALCO Enterprises, Inc. (IPALCO), autility holding company headquartered in Indianapolis, Indiana.  Following this announcement, AES indicatedthat as part of the SEC approval process for the IPALCO transaction, AESexpected to restructure its ownership interests in CILCORP within a specifiedperiod of time in order to continue as an exempt holding company under thePublic Utility Holding Company Act of 1935 (PUHCA).  This planned restructuring may include the sale of all or variousparts of CILCORP and CILCO.  On March23, 2001, AES received an order from the SEC which allowed AES' continuedexemption from PUHCA.  The exemptionorder required AES to divest its ownership interests in CILCO's regulatedutility assets within two years of the closing (March 27, 2001) of AES'acquisition of IPALCO.

 

Financialresults reflect application of the purchase method of accounting to themerger.  Under this method, the purchaseprice is allocated to the fair market value of the assets acquired and theliabilities assumed.  Any excess of thepurchase price over the fair value of the net assets acquired is allocated togoodwill.  As a result, CILCORP hasrecorded purchase accounting fair value adjustments to plant in service,pension and other post-retirement liabilities, an out-of-market long-term coalcontract, and other balance sheet items. After reflecting these adjustments, the Company also recordedgoodwill.  See Note 1 to theConsolidated Financial Statements for further discussion related to purchaseaccounting.  The adjustments arereflected in CILCORP's financial statements.

 

TheOther Businesses segment includes the operations of the Holding Company itself(Holding Company), its investment subsidiary, CILCORP Investment ManagementInc. (CIM), CILCORP Ventures Inc. (CVI), and CILCORP Infraservices Inc., whichprovides utility infrastructure operation and maintenance services.  The results of QST and its subsidiaries(excluding CILCORP Infraservices Inc. and residual interests in ESE LandCorporation) are reported as discontinued operations (see Results of Operations- QST Enterprises Discontinued Operations).

 

**Forward-Looking Information**

 

Forward-lookinginformation is included in Management's Discussion and Analysis of FinancialCondition and Results of Operations (MD&A).  Certain material contingencies are also described in Note 2 tothe Consolidated Financial Statements.

 

Someimportant factors could cause actual results or outcomes to differ materiallyfrom those expressed or implied in MD&A. The business and profitability of CILCORP and its subsidiaries areinfluenced by economic and geographic factors, including ongoing changes inenvironmental laws and weather conditions; the extent and pace of developmentof competition for retail and wholesale energy customers; changes intechnology; changes in company-wide operation and plant availability comparedto historical performance and changes in historical operating cost structure,including changes in various costs and expenses; pricing and transportation ofcommodities; market supply and demand for energy and energy derivativefinancial instruments; inflation; capital market conditions; and environmentalprotection and compliance costs. Prevailing governmental policies, statutory changes, and regulatoryactions with respect to rates, tariffs, industry structure and recovery of variouscosts incurred by CILCO in the course of its business and increasing wholesaleand retail competition in the electric and gas business affect itsearnings.  In addition, actual resultsor outcomes could differ materially from those expressed or implied in MD&Adue to the planned CILCORP & CILCO restructuring and the sale of all orvarious parts of CILCORP & CILCO by CILCORP's sole shareholder, The AESCorporation.  All such factors aredifficult to predict, contain uncertainties that may materially affect actualresults and, to a significant degree, are beyond the control of CILCORP and itssubsidiaries.  CILCORP and itssubsidiaries undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of changes in actual results,assumptions or other factors.

 

 

# **Capital Resources & Liquidity**

 

TheCompany believes that internal and external sources of capital which are or areexpected to be available to the Holding Company and its subsidiaries will beadequate to fund its capital expenditures, pay its financial obligations, meetworking capital needs and retire or refinance debt as it matures.

 

 

**CILCORP**

 

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

 

InOctober 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 thenotes were used by AES to acquire all outstanding shares of CILCORP commonstock for approximately $886 million, to pay transaction costs related to theacquisition, and to retire short-term debt.

 

AtSeptember 30, 2001, CILCORP had $9 million of medium-term notes outstanding,all of which is due to mature in December 2001.  With the issuance of the senior notes in October 1999, CILCORPcan no longer issue debt under this medium-term note program.

 

 

#### **CILCO**

 

Capitalexpenditures totaled $38.5 million for the nine months ended September 30,2001.  Capital expenditures areanticipated to be approximately $11.6 million for the remainder of 2001 and arecurrently estimated to be approximately $130 million in 2002.  The projected increase in 2002 is primarilydue to installation of NOx reduction equipment.

CILCOexpects to issue commercial paper periodically during 2001, and is currentlyauthorized by its Board of Directors to issue up to $150 million of short–termdebt.  At September 30, 2001, committedbank lines of credit totaled $100 million, all of which were unused exceptin support of commercial paper issuance. CILCO had $58 million of commercial paper outstanding atSeptember 30, 2001.  During 2001,CILCO expects to continue to support commercial paper issuance with its banklines of credit.  CILCO plans to financeits 2001 and 2002 capital expenditures primarily with funds provided byoperations.  CILCORP's parent, AES, mayalso provide equity capital to support CILCO's capital expenditures or otherfinancing requirements.  Future fundsprovided by operations may be affected by the deregulation of the electric andnatural gas utility industries (see Competition).  CILCO is also evaluating other financing alternatives tosupplement or replace current short-term financing as well as to provide forlong-term financing of 2002 capital expenditures.

####  

#### **CIM**

 

AtSeptember 30, 2001, CIM had outstanding debt of $14.1 million, borrowed fromCILCORP.

 

 

**CVI**

 

AtSeptember 30, 2001, CVI had outstanding debt of $3.1 million, borrowed fromCILCORP.

 

 

# **Competition**

 

CILCO, as a regulated public utility, hasan obligation to provide service to retail customers within its defined serviceterritory; thus, CILCO has not generally been in competition with other publicutilities for retail electric or gas customers in these areas.  However, the passage of the Electric ServiceCustomer Choice and Rate Relief Law of 1997 (Customer Choice Law) began atransition process to a fully competitive market for electricity inIllinois.  In addition, electricity andnatural 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 systemto provide customer energy needs.

 

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

 

Ifa customer chooses to leave its present electricity supplier, that utility willcollect a fee for delivering power and may assess an additional transitioncharge on the customer.  This collectionmethodology 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 pastinvestments made under a regulated system. The transition charge will usually reduce a customer's economicincentive to switch suppliers. Transition charges may be collected through 2006 (2008 upon the ICC's findingthat a utility's financial condition is impaired and the utility meets otherrequirements specified in the Customer Choice Law).

 

OnMarch 9, 2000, CILCO filed with the ICC revised tariff sheets eliminating thecollection of the customer transition charge effective March 17, 2000.  At a March 15, 2000, hearing, the ICCapproved CILCO's revised tariffs, thereby eliminating the collection of anycustomer transition charge.  CILCOcannot re-establish the collection of a transition charge until it files andthe ICC approves revised tariff sheets that reinstate a transition charge.

 

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

 

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

 

Withthe enactment of the Customer Choice Law, electric generation in Illinois willbecome deregulated and competitive.  Asa result, the accounting principles applicable to rate-regulated enterpriseswill no longer apply to the electric generation portion of CILCO'sbusiness.  Also, the cost of any assetsfor which recovery is impaired by the transition to a competitive marketplacemust be written off.  CILCO does notbelieve its electric generating asset values to be impaired.  Its ability to keep total production costscompetitive in a deregulated market will determine whether and to what extentthe value of these assets may be impaired in the future.

 

With electricchoice beginning on October 1, 1999, for its industrial customers and someof its commercial customers, and with all other non-residential customers beingable to choose their electric supplier on December 31, 2000, CILCO hasentered into multi–year contracts with targeted customers representingapproximately 45% of total 2000 electric kWh sales to non–residentialcustomers.  These contracts, most ofwhich expire from 2001 to 2002, were designed to capture a significant portionof the margin that the customers paid to CILCO in the most recent twelvemonths.  CILCO is either negotiating newcontracts with those customers or returning them to tariffs as the contractsexpire in 2001.

 

Theultimate market price for electricity, the cost for a utility to produce or buyelectricity, and the number of customers that may be gained or lost due tocustomer choice of supplier in Illinois cannot be predicted.  As a result, management cannot predict theultimate impact that the Customer Choice Law will have on CILCORP's financialposition or results of operation, but the effect could be significant.  However, CILCO is currently a low-costprovider of electricity, and management will continue to position CILCO forcompetition by controlling costs, maintaining good customer relations, anddeveloping flexibility to meet individual customer requirements.  As of September 30, 2001, all eligibleelectric customers continue to purchase their electricity supply from CILCO,other than those who self-generate.  Asof September 30, 2001, CILCO has contracts totaling approximately 2.5 millionmegawatt hours of new retail load outside of its service territory.  CILCO will supply these new customers byprimarily purchasing electricity from other suppliers.  CILCO has made the necessary firm supply andtransmission arrangements to meet customer requirements.

 

**Market Risk Sensitive Instruments**

 

# **CILCORP is exposed to non-trading risks through its dailybusiness activities.  These non-tradingactivities may include the market or commodity price risk related to CILCO'sretail tariff activity and CILCORP's non-regulated commodity marketing activities.**

# ** **

# **The majority of CILCORP's energy sales during the firstnine months of 2001 were to CILCO retail customers in Illinois under tariffsregulated by the ICC.  Although theIllinois retail electric market is becoming deregulated (see Item 2. Management'sDiscussion and Analysis of Financial Condition and Results of Operations -Competition), prudently incurred costs of fuel used to generate electricity andpurchased power costs may be recovered from retail customers that purchaseenergy through regulated tariffs under the Fuel Adjustment Clause (FAC).  Thus, to date, there has been very limitedcommodity price risk associated with CILCO's traditional regulated sales.  CILCO filed to eliminate the FAC on September10, 2001.  The Illinois CommerceCommission approved the elimination of the FAC on October 24, 2001, for billsissued on or after October 29, 2001. The elimination of the FAC will expose the Company to increasedcommodity price risk.  The Company is activelylooking at ways to minimize this risk.**

 

# **The market risk inherent in the activities of CILCORP isthe potential loss arising from adverse changes in natural gas and electriccommodity prices relative to the physical and financial positions that theCompany maintains.  The prices of naturalgas and electricity are subject to fluctuations resulting from changes insupply and demand.  At September 30,2001, CILCORP engaged in non-regulated electric retail and natural gas sales inIllinois, including wholesale power purchases and sales to utilize its electricgenerating capability.  Thesenon-regulated activities had net open market price risk positions ofapproximately 1,092,986 MWh of electricity and 173,000 Mcf of natural gas.  A market price sensitivity of 10% applied topositions open in the next twelve months is not material to the Company.  See Note 3 for a discussion ofCILCORP's use of financial derivatives for hedging purposes.  Due to the high correlation between thechanges in the value of the financial instrument positions held by CILCORP andthe change in price of the underlying commodity, the net effect on CILCORP'snet income resulting from the change in value of these financial instruments isnot expected to be material.**

# ** **

 

# **Results of Operations**

 

**CILCOElectric Operations**

 

Thefollowing table summarizes the components of CILCO electric operating incomefor the three months and nine months ended September 30, 2001 and 2000.

 

 

 
|                                |   | **Three Months Ended** |    | **Nine Months Ended** |   |
|-------------------------------------|--------|------------------------|---------|-----------------------|--------|
|                                |   | **September 30,**      |    | **September 30,**     |   |
| **Components of Electric Income**   |   | **2001**               |    | **2000**              |   | **2001** |   | **2000** |   |
|                                |   | (In thousands)         |    |
|                                |   | (Unaudited)            |    |
| Revenue:                            |   |                   |    |                  |   |   |   |   |   |
| Electric retail                     |   | $                      | 118,634 |                  | $      | 115,577 |   | $ | 291,530 |   | $ | 286,161 |   |
| Sales for resale                    |   | 5,078                  |    | 12,843                |   | 13,481 |   | 23,505 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Total revenue                       |   | 123,712                |    | 128,420               |   | 305,011 |   | 309,666 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Cost of sales:                      |   |                   |    |                  |   |   |   |   |   |
| Cost of fuel                        |   | 54,683                 |    | 32,039                |   | 108,647 |   | 84,186 |   |
| Purchased power                     |   | 15,670                 |    | 24,312                |   | 35,329 |   | 42,211 |   |
| Revenue taxes                       |   | 5,506                  |    | 5,730                 |   | 15,053 |   | 14,892 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Total cost of sales                 |   | 75,859                 |    | 62,081                |   | 159,029 |   | 141,289 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Gross margin                        |   | 47,853                 |    | 66,339                |   | 145,982 |   | 168,377 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Operating expenses:                 |   |                   |    |                  |   |   |   |   |   |
| Other operations and  maintenance   |   | 19,258                 |    | 19,117                |   | 65,586 |   | 57,961 |   |
| Depreciation and  amortization      |   | 11,721                 |    | 12,449                |   | 35,245 |   | 37,022 |   |
| Other taxes                         |   | 2,350                  |    | 2,409                 |   | 7,188 |   | 6,988 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Total operating  expenses           |   | 33,329                 |    | 33,975                |   | 108,019 |   | 101,971 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Total                               |   | 14,524                 |    | 32,364                |   | 37,963 |   | 66,406 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Fixed charges and  other:           |   |                   |    |                  |   |   |   |   |   |
| Interest on long-term  debt         |   | 3,314                  |    | 3,117                 |   | 9,495 |   | 9,443 |   |
| Cost of borrowed funds  capitalized |   | (14                    | )       | (136                  | )      | (58 | ) | (338 | ) |
| Other interest                      |   | 801                    |    | 1,316                 |   | 3,284 |   | 2,743 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Total                               |   | 4,101                  |    | 4,297                 |   | 12,721 |   | 11,848 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Income before income  taxes         |   | 10,423                 |    | 28,067                |   | 25,242 |   | 54,558 |   |
| Income taxes                        |   | 4,100                  |    | 10,535                |   | 9,919 |   | 19,856 |   |
|                                |   |                   |    |                  |   |   |   |   |   |
| Electric income                     |   | $                      | 6,323   |                  | $      | 17,532 |   | $ | 15,323 |   | $ | 34,702 |   |

 

Electricgross margin decreased 28% for the quarter and 13% for the nine months endedSeptember 30, 2001, compared to the same periods in 2000, primarily as a resultof an FAC settlement agreement between the Company and the Illinois CommerceCommission (ICC).  In its order datedAugust 21, 2001, the ICC approved the agreement requiring the Company to refund$17.8 million related to the 1999 FAC reconciliation and $2.6 million relatedto the 2000 FAC reconciliation.  Forfurther information, see Note 2 to the Consolidated Financial Statements.  Also contributing to the decrease inelectric gross margin for the nine months ended was decreased wholesale powersales and increased purchased power costs. On December 20, 2000, as part of the 1999 FAC reconciliation hearings,the ICC ordered changes in CILCO's calculation of allowable fuel costsapplicable to sales subject to the FAC. These changes revised the allocation of generated and purchased powerbetween regulated and non-regulated sales. As a result of this order, the regulated sales margin decreased and thenon-regulated sales margin increased for January through March 2001.  (Non-regulated sales are discussed in CILCOOther Income.  See Item 2. Management'sDiscussion and Analysis of Financial Condition and Results of Operations –CILCO Other Income.)  On March 9, 2001,the ICC issued an emergency rule in response to the margin shifts.  The emergency rule restored the previouscalculation method for off-system non-regulated sales in an attempt to fairlyallocate 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 coststo non-regulated sales.

 

Industrialsales increased 3% for the quarter and 1% for the nine months ended September30, 2001, compared to the same periods in 2000.  Residential sales increased 1% for the quarter and 4% for thenine months ended September 30, 2001, compared to the same periods in2000.  Commercial sales decreased 1% forthe quarter and increased 1% for the nine months ended September 30, 2001,compared to the same periods in 2000. Retail kilowatt hour (kWh) sales increased 1% for the quarter and 2% forthe nine months ended September 30, 2001, compared to the same periods in2000.  Cooling degree days were 1%higher for the quarter and 7% higher for the nine months ended September 30,2001, compared to the same periods in 2000.

 

Salesfor resale decreased 60% for the quarter and 43% for the nine months endedSeptember 30, 2001, compared to the same periods in 2000.  Sales for resale vary based on the energyrequirements of native load customers, neighboring utilities and powermarketers, CILCO's available capacity for bulk power sales and the price ofpower available for sale.  CILCO’sactivity in the sales for resale and purchased power markets is expected to increaseas a result of retail deregulation in the Illinois market.

 

Theoverall level of business activity in CILCO's service territory and weatherconditions are expected to continue to be the primary factors affectingelectric sales in the near term. CILCO's electric sales will also be affected in the long term byderegulation and increased competition in the electric utility industry.

 

Thecost of fuel increased 71% for the quarter and 29% for the nine months endedSeptember 30, 2001, compared to the same periods in 2000.  The increase was due primarily to thesettlement agreement with the ICC. Purchased power decreased 36% for the quarter and 16% for the ninemonths ended September 30, 2001, respectively, compared to the same periods in2000.

 

Electricoperations and maintenance expense increased 1% for the quarter and 13% for thenine months ended September 30, 2001, compared to the same periods in2000.  The increase was mainly due to alower return on pension assets in 2000 and to increased costs for uncollectibleaccounts, tree trimming, medical and postemployment benefits expenses.  The increase for the quarter was partiallyoffset by decreased costs for power plant operations.

 

Incometaxes expense decreased 61% for the quarter and 50% for the nine months endedSeptember 30, 2001, due to decreases in pre-tax operating income.

 

Fixedcharges and other expenses decreased 5% for the quarter and increased 7% forthe nine months ended September 30, 2001, compared to the same periods in 2000.

 

**CILCO Gas Operations**

 

Thefollowing table summarizes the components of CILCO gas operating income for thethree months and nine months ended September 30, 2001 and 2000.

 

 
|                               |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                               |   | **September 30,**      |   | **September 30,**     |   |
| **Components of Gas Income**       |   | **2001**               |   | **2000**              |   | **2001** |   | **2000** |   |
|                               |   | (In thousands)         |   |
|                               |   | (Unaudited)            |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Revenue:                           |   |                   |   |                  |   |   |   |   |   |
| Sale of gas                        |   | $                      | 20,423 |                  | $      | 24,811 |   | $ | 218,387 |   | $ | 125,251 |   |
| Transportation  services           |   | 1,378                  |   | 1,390                 |   | 4,109 |   | 3,904 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Total revenue                      |   | 21,801                 |   | 26,201                |   | 222,496 |   | 129,155 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Cost of sales:                     |   |                   |   |                  |   |   |   |   |   |
| Cost of gas                        |   | 9,803                  |   | 13,887                |   | 162,299 |   | 72,293 |   |
| Revenue taxes                      |   | 987                    |   | 1,022                 |   | 7,126 |   | 6,282 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Total cost of sales                |   | 10,790                 |   | 14,909                |   | 169,425 |   | 78,575 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Gross margin                       |   | 11,011                 |   | 11,292                |   | 53,071 |   | 50,580 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Operating expenses:                |   |                   |   |                  |   |   |   |   |   |
| Other operations and  maintenance  |   | 7,716                  |   | 6,982                 |   | 23,862 |   | 21,394 |   |
| Depreciation and  amortization     |   | 5,452                  |   | 5,337                 |   | 16,397 |   | 15,841 |   |
| Other taxes                        |   | 572                    |   | 723                   |   | 1,707 |   | 2,178 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Total operating expenses           |   | 13,740                 |   | 13,042                |   | 41,966 |   | 39,413 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Total                              |   | (2,729                 | )      | (1,750                | )      | 11,105 |   | 11,167 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Fixed charges and  other:          |   |                   |   |                  |   |   |   |   |   |
| Interest on long-term  debt        |   | 1,328                  |   | 1,211                 |   | 3,804 |   | 3,745 |   |
| Other interest expense             |   | 320                    |   | 516                   |   | 1,315 |   | 1,088 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Total                              |   | 1,648                  |   | 1,727                 |   | 5,119 |   | 4,833 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Income (loss) before  income taxes |   | (4,377                 | )      | (3,477                | )      | 5,986 |   | 6,334 |   |
| Income taxes                       |   | (1,732                 | )      | (1,376                | )      | 2,393 |   | 2,543 |   |
|                               |   |                   |   |                  |   |   |   |   |   |
| Gas income (loss)                  |   | $                      | (2,645 | )                     | $      | (2,101 | ) | $ | 3,593 |   | $ | 3,791 |   |

 

 

Gasgross margin decreased 2% for the quarter and increased 5% for the nine monthsended September 30, 2001, compared to the same periods in 2000.  Residential sales volumes decreased 5% forthe quarter and increased 7% for the nine months ended September 30, 2001.  Commercial sales volumes decreased 13% forthe quarter and 1% for the nine months ended September 30, 2001.   Heating degree days were slightly higherfor the quarter and 14% higher for the nine months ended September 30, 2001,compared to the same periods in 2000. Industrial sales volumes increased 55% for the quarter and 32% for thenine months ended September 30, 2001, due to increased system use sales totransportation customers.

 

Theoverall level of business activity in CILCO's service territory and weatherconditions are expected to continue to be the primary factors affecting gassales in the near term.  CILCO's gassales may also be affected by further deregulation at the retail level in thenatural gas industry.

 

Revenuefrom gas transportation services remained relatively constant for the quarterand increased 5% for the nine months ended September 30, 2001, while gastransportation sales volumes decreased 9% for the quarter and the nine monthsended September 30, 2001, compared to the same periods in 2000.  Decreases in lower margin industrial gastransportation sales were offset by increases in higher margin commercial gastransportation sales.

 

Thecost of gas decreased 29% for the quarter and increased 125% for the nine monthsended September 30, 2001, compared to the same periods in 2000.  The decrease for the quarter was mainly dueto decreased natural gas prices.  Theincrease for the nine months ended was mainly due to higher natural gas pricesduring the first six months and increased gas sales.  These changes were passed through to customers via the PGA.

 

Gasoperation and maintenance expense increased 11% and 12%, respectively, for thequarter and nine months ended September 30, 2001, compared to the same periodsin 2000.  The increases were primarilydue to increased uncollectible accounts expense, increased medical andpostemployment benefits expenses and lower return on pension assets.

 

Fixedcharges and other expenses decreased 5% for the quarter and increased 6% for thenine months ended September 30, 2001, compared to the same periods in 2000, dueto changes in interest expense.

**CILCO Other Operations**

** **

The following table summarizes CILCO'sother income and deductions for the three months and nine months ended September30, 2001 and 2000.

 

 

 
| **Components of CILCO Other Income** |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|--------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                 |   | **September 30,**      |   | **September 30,**     |   |
|                                 |   | **2001**               |   | **2000**              |   | **2001** |   | **2000** |   |
|                                 |   | (In thousands)         |   |
|                                 |   | (Unaudited)            |   |
|                                 |   |                   |   |                  |   |   |   |   |   |
| Revenue                              |   | $                      | 36,429 |                  | $      | 17,615 |   | $ | 75,433 |   | $ | 36,399 |   |
| Expense                              |   | (33,870                | )      | (20,412               | )      | (65,773 | ) | (39,901 | ) |
|                                 |   |                   |   |                  |   |   |   |   |   |
| Gross margin                         |   | 2,559                  |   | (2,797                | )      | 9,660 |   | (3,502 | ) |
|                                 |   |                   |   |                  |   |   |   |   |   |
|                                 |   |                   |   |                  |   |   |   |   |   |
| Other income and  deductions:        |   |                   |   |                  |   |   |   |   |   |
| Interest income                      |   | 302                    |   | 110                   |   | 582 |   | 179 |   |
| Operating expenses                   |   | (729                   | )      | (520                  | )      | (1,115 | ) | (1,180 | ) |
| Other taxes                          |   | --                     |   | (1                    | )      | -- |   | (3 | ) |
| Preferred stock  dividends           |   | (540                   | )      | (539                  | )      | (1,619 | ) | (2,437 | ) |
| Other                                |   | (332                   | )      | (246                  | )      | (950 | ) | (767 | ) |
|                                 |   |                   |   |                  |   |   |   |   |   |
| Total other income and  deductions   |   | (1,299                 | )      | (1,196                | )      | (3,102 | ) | (4,208 | ) |
|                                 |   |                   |   |                  |   |   |   |   |   |
| Income (loss) before  income taxes   |   | 1,260                  |   | (3,993                | )      | 6,558 |   | (7,710 | ) |
| Income taxes                         |   | 340                    |   | (1,711                | )      | 2,050 |   | (3,076 | ) |
|                                 |   |                   |   |                  |   |   |   |   |   |
| Other income (loss)                  |   | $                      | 920    |                  | $      | (2,282 | ) | $ | 4,508 |   | $ | (4,634 | ) |

 

 

Grossmargin increased for the quarter and nine months ended September 30, 2001,compared to the same periods in 2000, primarily due to increased non-regulatedelectricity sales in Illinois outside of CILCO's service territory and ICCmandated changes in the manner in which generated and purchased power costs areallocated between regulated and non-regulated sales (see Item 2.  Management's Discussion and Analysis ofFinancial Condition and Results of Operations - CILCO ElectricOperations).   These sales ofelectricity were to customers eligible to choose their energy supplier underthe Customer Choice Law.

 

Preferredstock dividends decreased for the nine months ended September 30, 2001,compared to the same period in 2000, due to the redemption of $25 million ofauction rate preferred stock in July 2000.

 

**OtherBusinesses Operations**

 

The following table summarizes thecomponents of Other Businesses net income (loss) for the three months and ninemonths ended September 30, 2001 and 2000.

 

 

 
| **Components of Other Businesses**      |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-----------------------------------------|--------|------------------------|--------|-----------------------|--------|
| **Net Income (Loss)**                   |   | **September 30,**      |   | **September 30,**     |   |
|                                    |   | **2001**               |   | **2000**              |   | **2001** |   | **2000** |   |
|                                    |   | (In thousands)         |   |
|                                    |   | (Unaudited)            |   |
| Revenue:                                |   |                   |   |                  |   |   |   |   |   |
| Leveraged lease  revenue                |   | $                      | 1,326  |                  | $      | 2,068 |   | $ | 4,065 |   | $ | 6,818 |   |
| Interest income                         |   | 68                     |   | 33                    |   | 223 |   | 126 |   |
| Gas marketing revenue                   |   | 7,788                  |   | 4,890                 |   | 29,227 |   | 10,283 |   |
| Other revenue                           |   | 5,177                  |   | 558                   |   | 6,329 |   | 2,025 |   |
|                                    |   |                   |   |                  |   |   |   |   |   |
| Total revenue                           |   | 14,359                 |   | 7,549                 |   | 39,844 |   | 19,252 |   |
|                                    |   |                   |   |                  |   |   |   |   |   |
| Expenses:                               |   |                   |   |                  |   |   |   |   |   |
| Gas purchased for  resale               |   | 8,056                  |   | 4,802                 |   | 29,659 |   | 9,958 |   |
| Fuel for generation and purchased power |   | (23,377                | )      | (1,847                | )      | (26,045 | ) | (1,847 | ) |
| Operating expenses                      |   | 254                    |   | 926                   |   | 1,115 |   | 2,752 |   |
| Depreciation and  amortization          |   | 4,219                  |   | 3,612                 |   | 12,660 |   | 10,837 |   |
| Interest expense                        |   | 11,466                 |   | 11,932                |   | 34,997 |   | 35,659 |   |
| Other taxes                             |   | 27                     |   | 10                    |   | 73 |   | 130 |   |
|                                    |   |                   |   |                  |   |   |   |   |   |
| Total expenses                          |   | 645                    |   | 19,435                |   | 52,459 |   | 57,489 |   |
|                                    |   |                   |   |                  |   |   |   |   |   |
| Income (loss) before  income taxes      |   | 13,714                 |   | (11,886               | )      | (12,615 | ) | (38,237 | ) |
| Income taxes                            |   | 6,701                  |   | (3,511                | )      | (1,717 | ) | (11,932 | ) |
|                                    |   |                   |   |                  |   |   |   |   |   |
| Other Businesses net  income (loss)     |   | $                      | 7,013  |                  | $      | (8,375 | ) | $ | (10,898 | ) | $ | (26,305 | ) |

 

Leveragedlease revenues decreased 40% for the nine months ended September 30, 2001,primarily due to the termination of the Company’s dragline lease in the firstquarter of 2001.

 

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

 

Fuel for generation andpurchased power changed significantly during the three months ended September30, 2001, compared to the same period in 2000. In September 2001, CILCORP recorded an $18 million reduction in apreacquisition contingency related to an out-of-market coal contract with acorresponding reduction in cost of fuel. The adjustment to this liability was necessitated by a change in theCompany's plan relative to this contract. Accordingly, the Company made a new assessment of the potentialliability and recorded an adjustment to the original liability.  Fuel for generation and purchased power wasalso impacted in 2001 by $4.0 million in amortization related to thepreacquisition liability for this out-of-market coal contract.

 

Other revenue increasedduring the three months ended September 30, 2001, due primarily to a $4.5million settlement of a preacquisition contingency related to litigation at QSTEnergy.  See related discussion at Item2. Management's Discussion and Analysis of Financial Conditions and Results ofOperations – QST Enterprises Discontinued Operations.

 

Depreciation andamortization increased due to the completion of purchase price allocations inthe fourth quarter of 2000.

 

The decrease inoperating expenses is due primarily to pension and postemploymentbenefits.  The market value of theassets and liabilities of these plans was adjusted on CILCORP's balance sheetat the time of acquisition by AES. Following these adjustments, the net periodic benefit costs areseparately calculated and recorded at CILCORP consolidated and CILCO.

 

Incometaxes increased for the three months and nine months ended September 30, 2001,compared to the corresponding periods in 2000, primarily due to higher netincome.

 

 

**QSTEnterprises Discontinued Operations**

 

QSTEnterprises 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 Enterprisesare reported as discontinued operations. An initial loss provision was recorded for the discontinued energyoperations in 1998.  Subsequent purchaseaccounting adjustments included additional discontinued operations lossaccruals for QST Enterprises.

 

Income(loss) from operations of discontinued businesses, net of tax:
|                                    |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-----------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                    |   | **September 30,**      |   | **September 30,**     |   |
|                                    |   | **2001**               |   | **2000**              |   | **2001** |   | **2000** |   |
|                                    |   |                   |   |                  |   |   |   |   |   |
| QST Enterprises, net of tax of $(2,813) |   | $                      | (4,278 | )                     | $      | -- |   | $ | (4,278 | ) | $ | -- |   |
|                                    |   |                   |   |                  |   |   |   |   |   |
|                                    |   | $                      | (4,278 | )                     | $      | -- |   | $ | (4,278 | ) | $ | -- |   |

 

QSTEnterprises' financial results for the period ended September 30, 2001, were inexcess of the discontinued operations liability and are shown as a loss forthat period.

 

Since 1999, QST Energy has been involvedin litigation against two of its California commercial customers.  On July 19, 2001, QST Energy and the twocustomers signed a settlement agreement and mutual release which resolved allof the pending lawsuits.  A cashsettlement of $6 million was paid to QST Energy and applied against theaccounts receivable balance at QST Energy, which was $13 million at the time ofsettlement.  CILCORP had reserved $4.5million as a preacquisition contingency related to this litigation.  The remaining receivable of $7.0 million atQST Energy was written off during the third quarter, and was partially offsetby the $4.5 million gain recorded at CILCORP.

 

### **PART II.  OTHERINFORMATION**

 

**Item 1.  LegalProceedings**

 

Referenceis made to "Fuel Supply - Coal" and "Electric Fuel and PurchasedGas Adjustment Clauses" of Item 1. Business,  "EnvironmentalMatters" of Item 7. Management's Discussion and Analysis of FinancialCondition and Results of Operations and to "Note 7 - Commitments andContingencies" of Item 8. Financial Statements and Supplementary Data in the Company's 2000 AnnualReport on Form 10-K and to "Note 2 - Contingencies" and"QST Enterprises Discontinued Operations", herein, for certainpending legal proceedings and/or proceedings known to be contemplated bygovernmental authorities.

 

TheCompany and its subsidiaries are subject to certain claims and lawsuits inconnection with work performed in the ordinary course of their businesses.  Except as otherwise referred to above, inthe opinion of management, all such claims currently pending either will notresult in a material adverse effect on the financial position and results ofoperations of the Company or are adequately covered by:  (i) insurance; (ii) contractual or statutoryindemnification; and/or (iii) reserves for potential losses.

 

 

**Item 5.  OtherInformation**

 

None

 

**Item 6.  Exhibits andReports on Form 8-K.**

 

(a) Exhibits

 

                None

 

(b) Reports on Form 8-K

 

                AForm 8-K was filed on August 30, 2001, regarding the Company's Fuel AdjustmentClause settlement agreement with the Illinois Commerce Commission.

 

### **SIGNATURES**

 

Pursuantto the requirements of the Securities Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

 
|                        | CILCORP Inc.                    |
|-----------------------------|---------------------------------|
|                        | (Registrant)                    |
|                        |                            |
|                        |                            |
|                        |                            |
| Date  November 9, 2001 |                            |
|                        | /s/ R. J. Sprowls               |
|                        | *Vice  President*               |
|                        |                            |
|                        |                            |
|                        |                            |
| Date  November 9, 2001 |                            |
|                        | /s/ T. S. Romanowski            |
|                        | *Chief  Financial Officer*      |
|                        | *And  Treasurer*                |
|                        |                            |
|                        |                            |
|                        |                            |
|                        |                            |
|                        |                            |
|                        |                            |
|                        |                            |
|                        | CENTRAL ILLINOIS LIGHT  COMPANY |
|                        | (Registrant)                    |
|                        |                            |
|                        |                            |
|                        |                            |
| Date  November 9, 2001 |                            |
|                        | /s/ R. J. Sprowls               |
|                        | *President*                     |
|                        |                            |
|                        |                            |
|                        |                            |
| Date  November 9, 2001 |                            |
|                        | /s/ T. S. Romanowski            |
|                        | *Chief  Financial Officer*      |
|                        | *And  Treasurer*                |