**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

** **

**FORM 10-Q**

 

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

**For theQuarterly period ended September 30, 2002**

 

**OR**

 

**o****    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For theTransition 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 the Registrants (1) have filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrants were required to file such reports), and (2) have been subject tosuch filing requirements for the past 90 days.

Yes   ý                        No   o

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:

 
| CILCORP Inc.                    |   | Common stock, no  par value,                |   |       |
|---------------------------------|--------|---------------------------------------------|--------|------------|
|                            |   | shares  outstanding and privately           |   |       |
|                            |   | held by The AES  Corporation                |   |       |
|                            |   | at September 30,  2002                      |   | 1,000      |
|                            |   |                                        |   |       |
| CENTRAL ILLINOIS  LIGHT COMPANY |   |                                        |
|                            |   | Common stock, no  par value,                |   |       |
|                            |   | shares  outstanding and privately           |   |       |
|                            |   | held by CILCORP  Inc. at September 30, 2002 |   | 13,563,871 |

 

 

----

 

CILCORP INC.

AND

 CENTRALILLINOIS LIGHT COMPANY

FORM 10-Q FOR THE QUARTERENDED SEPTEMBER 30, 2002

INDEX

 
| PART I.        | FINANCIAL INFORMATION                                                                                                                        |   |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                                         |   |
| Item 1:        | Financial Statements                                                                                                                         |   |
|           |                                                                                                                                         |   |
|           | CILCORP INC.                                                                                                                                 |   |
|           |                                                                                                                                         |   |
|           | Consolidated  Statements of Operations and Comprehensive Income                                                                              |   |
|           |                                                                                                                                         |   |
|           | Consolidated  Balance Sheets                                                                                                                 |   |
|           |                                                                                                                                         |   |
|           | Consolidated  Statements of Cash Flows                                                                                                       |   |
|           |                                                                                                                                         |   |
|           | CENTRAL  ILLINOIS LIGHT COMPANY                                                                                                              |   |
|           |                                                                                                                                         |   |
|           | Consolidated  Statements of Income and Comprehensive Income                                                                                  |   |
|           |                                                                                                                                         |   |
|           | Consolidated  Balance Sheets                                                                                                                 |   |
|           |                                                                                                                                         |   |
|           | 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 |
|           |                                                                                                                                         |   |
| Item  3:       | Quantitative  and Qualitative Disclosures about Market Risk                                                                                  |   |
|           |                                                                                                                                         |   |
| Item 4:        | Controls and Procedures                                                                                                                      |   |
|           |                                                                                                                                         |   |
|           |                                                                                                                                         |   |
| PART II.       | OTHER INFORMATION                                                                                                                            |   |
|           |                                                                                                                                         |   |
| Item  1:       | Legal  Proceedings                                                                                                                           |   |
|           |                                                                                                                                         |   |
| Item  5:       | Other  Information                                                                                                                           |   |
|           |                                                                                                                                         |   |
| Item 6:        | Exhibits and  Reports on Form 8-K                                                                                                            |   |
|           |                                                                                                                                         |   |
| Signatures     |                                                                                                                                         |
|           |                                                                                                                                         |   |
| Certifications |                                                                                                                                         |

 

2

----

 

### PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

CILCORP INC. AND SUBSIDIARIES

ConsolidatedStatements of Operations

and Comprehensive Income

(In thousands)

(Unaudited)

 
|                                                                                               |   | **Three Months Ended  September 30,** |    | **Nine Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|--------------------------------------|--------|
|                                                                                               |   | **2002**                              |    | **2001**                             |   | **2002** |   | **2001** |   |
|                                                                                               |   |                                  |    |                                 |   |   |   |   |   |
| Revenue:                                                                                           |   |                                  |    |                                 |   |   |   |   |   |
| CILCO Electric                                                                                     |   | $                                     | 126,099 |                                 | $      | 123,712 |   | $ | 304,868 |   | $ | 305,011 |   |
| CILCO Gas                                                                                          |   | 24,762                                |    | 21,801                               |   | 142,961 |   | 222,496 |   |
| CILCO Other                                                                                        |   | 40,902                                |    | 36,731                               |   | 91,135 |   | 76,015 |   |
| Other businesses                                                                                   |   | 9,971                                 |    | 14,359                               |   | 39,998 |   | 39,844 |   |
| Total                                                                                              |   | 201,734                               |    | 196,603                              |   | 578,962 |   | 643,366 |   |
| Operating expenses:                                                                                |   |                                  |    |                                 |   |   |   |   |   |
| Cost of fuel and purchased power                                                                   |   | 70,467                                |    | 80,276                               |   | 181,701 |   | 182,073 |   |
| Cost of gas                                                                                        |   | 20,581                                |    | 17,859                               |   | 118,731 |   | 191,958 |   |
| Other operations and maintenance                                                                   |   | 30,351                                |    | 28,527                               |   | 100,061 |   | 93,309 |   |
| Depreciation and amortization                                                                      |   | 18,204                                |    | 21,392                               |   | 54,251 |   | 64,302 |   |
| Taxes, other than income taxes                                                                     |   | 9,924                                 |    | 9,442                                |   | 30,925 |   | 31,147 |   |
| Total                                                                                              |   | 149,527                               |    | 157,496                              |   | 485,669 |   | 562,789 |   |
| Fixed charges and other:                                                                           |   |                                  |    |                                 |   |   |   |   |   |
| Interest expense                                                                                   |   | 16,616                                |    | 17,229                               |   | 49,470 |   | 52,895 |   |
| Preferred stock dividends of subsidiary                                                            |   | 540                                   |    | 540                                  |   | 1,619 |   | 1,619 |   |
| Allowance for funds used during construction                                                       |   | (384                                  | )       | (14                                  | )      | (1,031 | ) | (58 | ) |
| Other                                                                                              |   | (53                                   | )       | 332                                  |   | 614 |   | 950 |   |
| Total                                                                                              |   | 16,719                                |    | 18,087                               |   | 50,672 |   | 55,406 |   |
| Income from continuing operations before income  taxes                                             |   | 35,488                                |    | 21,020                               |   | 42,621 |   | 25,171 |   |
| Income taxes                                                                                       |   | 12,812                                |    | 9,409                                |   | 13,810 |   | 12,645 |   |
| Income from continuing operations                                                                  |   | 22,676                                |    | 11,611                               |   | 28,811 |   | 12,526 |   |
| Loss from operations of discontinued businesses, net  of tax of $(3), $(2,813), $(11) and $(2,813) |   | (4                                    | )       | (4,278                               | )      | (16 | ) | (4,278 | ) |
| Net income                                                                                         |   | $                                     | 22,672  |                                 | $      | 7,333 |   | $ | 28,795 |   | $ | 8,248 |   |
|                                                                                               |   |                                  |    |                                 |   |   |   |   |   |
| Other comprehensive income (loss)                                                                  |   | 606                                   |    | (5,828                               | )      | 5,630 |   | (12,697 | ) |
| Comprehensive income (loss)                                                                        |   | $                                     | 23,278  |                                 | $      | 1,505 |   | $ | 34,425 |   | $ | (4,449 | ) |

 

See Notes toConsolidated Financial Statements.

 

3

----

 

CILCORP INC. AND SUBSIDIARIES

ConsolidatedBalance Sheets

(In thousands)

 
|                                                                         |   | **September 30,  2002** |      | **December 31,  2001** |   |
|------------------------------------------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                                                                         |   | **(Unaudited)**         |      |                   |   |
| ASSETS                                                                       |   |                    |      |                   |   |
|                                                                         |   |                    |      |                   |   |
| Current Assets:                                                              |   |                    |      |                   |   |
| Cash and Temporary Cash Investments                                          |   | $                       | 56,760    |                   | $      | 18,312 |   |
| Receivables, Less Allowance for Uncollectible Accounts of $2,067 and  $1,800 |   | 58,591                  |      | 47,610                 |   |
| Accrued Unbilled Revenue                                                     |   | 24,587                  |      | 40,265                 |   |
| Fuel, at Average Cost                                                        |   | 13,896                  |      | 18,068                 |   |
| Materials and Supplies, at Average Cost                                      |   | 18,130                  |      | 17,273                 |   |
| Gas in Underground Storage, at Average Cost                                  |   | 27,128                  |      | 27,067                 |   |
| FAC Underrecoveries                                                          |   | 1,255                   |      | 1,255                  |   |
| PGA Underrecoveries                                                          |   | 2,379                   |      | 3,236                  |   |
| Prepayments and Other                                                        |   | 15,646                  |      | 20,533                 |   |
| Total Current Assets                                                         |   | 218,372                 |      | 193,619                |   |
| Investments and Other Property:                                              |   |                    |      |                   |   |
| Investment in Leveraged Leases                                               |   | 134,257                 |      | 135,504                |   |
| Other Investments                                                            |   | 17,424                  |      | 19,285                 |   |
| Total Investments and Other Property                                         |   | 151,681                 |      | 154,789                |   |
| Property, Plant and Equipment:                                               |   |                    |      |                   |   |
| Utility Plant, at Original Cost                                              |   |                    |      |                   |   |
| Electric                                                                     |   | 728,738                 |      | 716,857                |   |
| Gas                                                                          |   | 240,250                 |      | 233,278                |   |
|                                                                         |   | 968,988                 |      | 950,135                |   |
| Less-Accumulated Provision for Depreciation                                  |   | 170,534                 |      | 126,502                |   |
|                                                                         |   | 798,454                 |      | 823,633                |   |
| Construction Work in Progress                                                |   | 102,288                 |      | 34,340                 |   |
| Other, Net of Depreciation                                                   |   | 22                      |      | 14                     |   |
| Total Property, Plant and Equipment                                          |   | 900,764                 |      | 857,987                |   |
| Other Assets:                                                                |   |                    |      |                   |   |
| Goodwill, Net of Accumulated Amortization of $33,753                         |   | 579,211                 |      | 579,211                |   |
| Other                                                                        |   | 27,578                  |      | 26,092                 |   |
| Total Other Assets                                                           |   | 606,789                 |      | 605,303                |   |
|                                                                         |   |                    |      |                   |   |
| Total Assets                                                                 |   | $                       | 1,877,606 |                   | $      | 1,811,698 |   |

 

See Notes toConsolidated Financial Statements.

 

4

----

 
|                                                            |   | **September 30,  2002** |      | **December 31,  2001** |   |
|-----------------------------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                                                            |   | **(Unaudited)**         |      |                   |   |
| LIABILITIES AND STOCKHOLDER’S EQUITY                       |   |                    |      |                   |   |
|                                                            |   |                    |      |                   |   |
| Current Liabilities:                                            |   |                    |      |                   |   |
| Current Portion of Long-Term Debt                               |   | $                       | 26,750    |                   | $      | 1,400 |   |
| Notes Payable                                                   |   | —                  |      | 63,000                 |   |
| Accounts Payable                                                |   | 60,697                  |      | 75,644                 |   |
| Accrued Taxes                                                   |   | 23,022                  |      | 14,879                 |   |
| Accrued Interest                                                |   | 25,206                  |      | 18,392                 |   |
| Other                                                           |   | 5,191                   |      | 18,281                 |   |
| Total Current Liabilities                                       |   | 140,866                 |      | 191,596                |   |
| Long-Term Debt                                                  |   | 791,016                 |      | 717,730                |   |
| Deferred Credits and Other Liabilities:                         |   |                    |      |                   |   |
| Deferred Income Taxes                                           |   | 213,660                 |      | 202,822                |   |
| Regulatory Liability of Regulated Subsidiary                    |   | 34,418                  |      | 45,377                 |   |
| Deferred Investment Tax Credit                                  |   | 13,357                  |      | 14,553                 |   |
| Other                                                           |   | 93,632                  |      | 83,388                 |   |
| Total Deferred Credits and Other Liabilities                    |   | 355,067                 |      | 346,140                |   |
| 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 Outstanding 1,000 |   | —                  |      | —                 |   |
| Additional Paid-in Capital                                      |   | 518,833                 |      | 518,833                |   |
| Retained Earnings                                               |   | 39,100                  |      | 10,305                 |   |
| Accumulated Other Comprehensive Loss                            |   | (8,396                  | )         | (14,026                | )      |
| Total Stockholder’s Equity                                 |   | 549,537                 |      | 515,112                |   |
| Total Liabilities and Stockholder’s Equity                 |   | $                       | 1,877,606 |                   | $      | 1,811,698 |   |

 

See Notes toConsolidated Financial Statements.

 

5

----

 

CILCORP INC. AND SUBSIDIARIES

ConsolidatedStatements of Cash Flows

(In thousands)

(Unaudited)

 
|                                                                                      |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                      |   | **2002**                             |   | **2001** |   |
| Cash flows from operating activities:                                                     |   |                                 |   |   |   |
| Income from continuing operations before preferred  dividends of subsidiary               |   | $                                    | 30,430 |   | $ | 14,145 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:        |   |                                 |   |   |   |
| Non-cash lease income and investment income                                               |   | (2,740                               | )      | (3,055 | ) |
| Out-of-market coal contract liability adjustment                                          |   | —                               |   | (28,574 | ) |
| QST litigation settlement                                                                 |   | —                               |   | (4,500 | ) |
| Non-cash FAC refund                                                                       |   | —                               |   | (4,045 | ) |
| Intangible items                                                                          |   | —                               |   | 3,966 |   |
| Other non-cash items                                                                      |   | —                               |   | (89 | ) |
| Cash receipts in excess of debt service on leases                                         |   | 5,128                                |   | 7,923 |   |
| Depreciation and amortization                                                             |   | 54,251                               |   | 64,302 |   |
| Deferred income taxes, investment tax credit and  regulatory liability of subsidiary, net |   | 5,533                                |   | (2,598 | ) |
| Changes in operating assets and liabilities:                                              |   |                                 |   |   |   |
| Decrease in accounts receivable and accrued unbilled  revenue                             |   | 4,682                                |   | 55,121 |   |
| Decrease (increase) in inventories                                                        |   | 3,254                                |   | (6,266 | ) |
| Decrease in accounts payable                                                              |   | (14,947                              | )      | (29,153 | ) |
| Increase (decrease) in accrued taxes                                                      |   | 8,152                                |   | (4,151 | ) |
| Decrease (increase) in other assets                                                       |   | 6,214                                |   | (9,710 | ) |
| Increase in other liabilities                                                             |   | 2,017                                |   | 30,520 |   |
| Total adjustments                                                                         |   | 71,544                               |   | 69,691 |   |
| Net cash provided by operating activities from  continuing operations                     |   | 101,974                              |   | 83,836 |   |
| Net cash (used in) provided by operating activities  of discontinued operations           |   | (11                                  | )      | 6,033 |   |
| Cash flows from operations                                                                |   | 101,963                              |   | 89,869 |   |
| Cash flows from investing activities:                                                     |   |                                 |   |   |   |
| Additions to plant                                                                        |   | (95,803                              | )      | (38,513 | ) |
| Cost of equity funds capitalized                                                          |   | (14                                  | )      | — |   |
| Other                                                                                     |   | (1,679                               | )      | (457 | ) |
| Net cash used in investing activities of continuing  operations                           |   | (97,496                              | )      | (38,970 | ) |
| Net cash used by investing activities from  discontinued operations                       |   | —                               |   | — |   |
| Cash flows from investing activities                                                      |   | (97,496                              | )      | (38,970 | ) |
|                                                                                      |   |                                 |   |   |   |
| Cash flows from financing activities:                                                     |   |                                 |   |   |   |
|                                                                                      |   |                                 |   |   |   |
| Net decrease in short-term debt                                                           |   | (63,000                              | )      | (20,300 | ) |
| Long-term debt issued                                                                     |   | 100,000                              |   | — |   |
| Long-term debt retired                                                                    |   | (1,400                               | )      | (8,500 | ) |
| Common dividends paid                                                                     |   | —                               |   | (15,000 | ) |
| Subsidiary preferred dividends paid                                                       |   | (1,619                               | )      | (1,619 | ) |
| Net cash provided by (used in) financing activities  of continuing operations             |   | 33,981                               |   | (45,419 | ) |
|                                                                                      |   |                                 |   |   |   |
| Net cash used in financing activities of  discontinued operations                         |   | —                               |   | (6,000 | ) |
| Cash flows from financing activities                                                      |   | 33,981                               |   | (51,419 | ) |
| Net increase (decrease) in cash and temporary cash  investments                           |   | 38,448                               |   | (520 | ) |
| Cash and temporary cash investments at beginning of  year                                 |   | 18,312                               |   | 11,743 |   |
| Cash and temporary cash investments at September 30                                       |   | $                                    | 56,760 |   | $ | 11,223 |   |
|                                                                                      |   |                                 |   |   |   |
| Supplemental disclosures of cash flow information:                                        |   |                                 |   |   |   |
|                                                                                      |   |                                 |   |   |   |
| Cash paid during the period for:                                                          |   |                                 |   |   |   |
|                                                                                      |   |                                 |   |   |   |
| Interest                                                                                  |   | $                                    | 44,483 |   | $ | 48,729 |   |
|                                                                                      |   |                                 |   |   |   |
| Income taxes                                                                              |   | $                                    | 5,393  |   | $ | 9,810 |   |

 

See Notes toConsolidated Financial Statements.

 

6

----

 

CENTRALILLINOIS LIGHT COMPANY

ConsolidatedStatements of Income

And Comprehensive Income

(In thousands)

(Unaudited)

 
|                                  |   | **Three Months Ended  September 30,** |    | **Nine Months Ended  September 30,** |   |
|---------------------------------------|--------|---------------------------------------|---------|--------------------------------------|--------|
|                                  |   | **2002**                              |    | **2001**                             |   | **2002** |   | **2001** |   |
| Operating revenue:                    |   |                                  |    |                                 |   |   |   |   |   |
| Electric                              |   | $                                     | 126,099 |                                 | $      | 123,712 |   | $ | 304,868 |   | $ | 305,011 |   |
| Gas                                   |   | 24,762                                |    | 21,801                               |   | 142,961 |   | 222,496 |   |
| Total operating revenues              |   | 150,861                               |    | 145,513                              |   | 447,829 |   | 527,507 |   |
| Operating expenses:                   |   |                                  |    |                                 |   |   |   |   |   |
| Cost of fuel                          |   | 28,323                                |    | 54,683                               |   | 74,648 |   | 108,647 |   |
| Cost of gas                           |   | 12,050                                |    | 9,803                                |   | 84,022 |   | 162,299 |   |
| Purchased power                       |   | 16,658                                |    | 15,670                               |   | 40,705 |   | 35,329 |   |
| Other operations and maintenance      |   | 28,163                                |    | 26,974                               |   | 95,026 |   | 89,448 |   |
| Depreciation and amortization         |   | 17,849                                |    | 17,173                               |   | 53,194 |   | 51,642 |   |
| Income taxes                          |   | 12,467                                |    | 2,368                                |   | 20,122 |   | 12,312 |   |
| Other taxes                           |   | 9,903                                 |    | 9,415                                |   | 30,811 |   | 31,074 |   |
| Total operating expenses              |   | 125,413                               |    | 136,086                              |   | 398,528 |   | 490,751 |   |
| Operating income                      |   | 25,448                                |    | 9,427                                |   | 49,301 |   | 36,756 |   |
| Other income and deductions:          |   |                                  |    |                                 |   |   |   |   |   |
| Cost of equity funds capitalized      |   | 14                                    |    | —                               |   | 14 |   | — |   |
| Company-owned life insurance, net     |   | 53                                    |    | (332                                 | )      | (614 | ) | (950 | ) |
| Other, net                            |   | 8,466                                 |    | 1,792                                |   | 13,854 |   | 7,077 |   |
| Total other income and (deductions)   |   | 8,533                                 |    | 1,460                                |   | 13,254 |   | 6,127 |   |
| Interest expense:                     |   |                                  |    |                                 |   |   |   |   |   |
| Interest on long-term debt            |   | 5,135                                 |    | 4,642                                |   | 13,889 |   | 13,299 |   |
| Cost of borrowed funds capitalized    |   | (370                                  | )       | (14                                  | )      | (1,017 | ) | (58 | ) |
| Other                                 |   | 680                                   |    | 1,121                                |   | 2,709 |   | 4,599 |   |
| Total interest expense                |   | 5,445                                 |    | 5,749                                |   | 15,581 |   | 17,840 |   |
| Net income before preferred dividends |   | 28,536                                |    | 5,138                                |   | 46,974 |   | 25,043 |   |
| Dividends on preferred stock          |   | 540                                   |    | 540                                  |   | 1,619 |   | 1,619 |   |
| Net income available for common stock |   | 27,996                                |    | 4,598                                |   | 45,355 |   | 23,424 |   |
|                                  |   |                                  |    |                                 |   |   |   |   |   |
| Other comprehensive income (loss)     |   | 606                                   |    | (5,828                               | )      | 5,630 |   | (12,697 | ) |
| Comprehensive income (loss)           |   | $                                     | 28,602  |                                 | $      | (1,230 | ) | $ | 50,985 |   | $ | 10,727 |   |

 

See Notes toConsolidated Financial Statements.

 

7

----

 

CENTRAL ILLINOIS LIGHT COMPANY

ConsolidatedBalance Sheets

(In thousands)

 
|                                                                                                       |   | **September  30,  2002** |      | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|-------------------------|--------|
|                                                                                                       |   | **(Unaudited)**          |      |                    |   |
| ASSETS                                                                                                     |   |                     |      |                    |   |
|                                                                                                       |   |                     |      |                    |   |
| Utility Plant, At Original Cost:                                                                           |   |                     |      |                    |   |
| Electric                                                                                                   |   | $                        | 1,338,112 |                    | $      | 1,326,231 |   |
| Gas                                                                                                        |   | 464,137                  |      | 457,165                 |   |
|                                                                                                       |   | 1,802,249                |      | 1,783,396               |   |
| Less-Accumulated Provision for Depreciation                                                                |   | 1,028,012                |      | 985,045                 |   |
|                                                                                                       |   | 774,237                  |      | 798,351                 |   |
| Construction Work in Progress                                                                              |   | 102,288                  |      | 34,340                  |   |
| Total Utility Plant                                                                                        |   | 876,525                  |      | 832,691                 |   |
| Other Property and Investments:                                                                            |   |                     |      |                    |   |
| Cash Surrender Value of Company-owned Life Insurance (Net of Related  Policy Loans of $69,523 and $65,314) |   | 3,442                    |      | 3,920                   |   |
| Other                                                                                                      |   | 1,050                    |      | 1,133                   |   |
| Total Other Property and Investments                                                                       |   | 4,492                    |      | 5,053                   |   |
| Current Assets:                                                                                            |   |                     |      |                    |   |
| Cash and Temporary Cash Investments                                                                        |   | 40,348                   |      | 12,584                  |   |
| Receivables, Less Allowance for Uncollectible Accounts of $2,067 and  $1,800                               |   | 57,477                   |      | 49,375                  |   |
| Accrued Unbilled Revenue                                                                                   |   | 22,291                   |      | 34,067                  |   |
| Fuel, at Average Cost                                                                                      |   | 13,896                   |      | 18,068                  |   |
| Materials and Supplies, at Average Cost                                                                    |   | 16,752                   |      | 15,849                  |   |
| Gas in Underground Storage, at Average Cost                                                                |   | 27,128                   |      | 27,067                  |   |
| Prepaid Taxes                                                                                              |   | 9,583                    |      | 9,007                   |   |
| FAC Underrecoveries                                                                                        |   | 1,255                    |      | 1,255                   |   |
| PGA Underrecoveries                                                                                        |   | 2,379                    |      | 3,236                   |   |
| Other                                                                                                      |   | 15,605                   |      | 20,475                  |   |
| Total Current Assets                                                                                       |   | 206,714                  |      | 190,983                 |   |
| Deferred Debits:                                                                                           |   |                     |      |                    |   |
| Unamortized Loss on Reacquired Debt                                                                        |   | 2,266                    |      | 2,448                   |   |
| Unamortized Debt Expense                                                                                   |   | 1,668                    |      | 1,305                   |   |
| Intangible Pension Asset                                                                                   |   | 168                      |      | 168                     |   |
| Other                                                                                                      |   | 10,934                   |      | 9,065                   |   |
| Total Deferred Debits                                                                                      |   | 15,036                   |      | 12,986                  |   |
| Total Assets                                                                                               |   | $                        | 1,102,767 |                    | $      | 1,041,713 |   |

 

See Notes toConsolidated Financial Statements.

 

8

----

 
|                                                                                     |   | **September  30,  2002** |      | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------|--------|--------------------------|-----------|-------------------------|--------|
|                                                                                     |   | **(Unaudited)**          |      |                    |   |
| CAPITALIZATION AND LIABILITIES                                                           |   |                     |      |                    |   |
|                                                                                     |   |                     |      |                    |   |
| Capitalization:                                                                          |   |                     |      |                    |   |
| Common Stockholder’s Equity:                                                        |   |                     |      |                    |   |
| Common Stock, No Par Value; Authorized 20,000,000 Shares; Outstanding  13,563,871 Shares |   | $                        | 185,661   |                    | $      | 185,661 |   |
| Additional Paid-in Capital                                                               |   | 52,000                   |      | 52,000                  |   |
| Retained Earnings                                                                        |   | 125,400                  |      | 108,045                 |   |
| Accumulated Other Comprehensive Loss                                                     |   | (175                     | )         | (5,805                  | )      |
| Total Common Stockholder’s Equity                                                   |   | 362,886                  |      | 339,901                 |   |
|                                                                                     |   |                     |      |                    |   |
| Preferred Stock Without Mandatory Redemption                                             |   | 19,120                   |      | 19,120                  |   |
| Preferred Stock With Mandatory Redemption                                                |   | 22,000                   |      | 22,000                  |   |
| Long-term Debt                                                                           |   | 316,017                  |      | 242,730                 |   |
| Total Capitalization                                                                     |   | 720,023                  |      | 623,751                 |   |
| Current Liabilities:                                                                     |   |                     |      |                    |   |
| Current Maturities of Long-Term Debt                                                     |   | 26,750                   |      | 1,400                   |   |
| Notes Payable                                                                            |   | —                   |      | 43,000                  |   |
| Accounts Payable                                                                         |   | 55,828                   |      | 81,140                  |   |
| Accrued Taxes                                                                            |   | 42,805                   |      | 28,862                  |   |
| Accrued Interest                                                                         |   | 5,177                    |      | 9,143                   |   |
| Other                                                                                    |   | 5,191                    |      | 18,281                  |   |
| Total Current Liabilities                                                                |   | 135,751                  |      | 181,826                 |   |
| Deferred Liabilities and Credits:                                                        |   |                     |      |                    |   |
| Accumulated Deferred Income Taxes                                                        |   | 103,396                  |      | 92,428                  |   |
| Regulatory Liability                                                                     |   | 34,418                   |      | 45,377                  |   |
| Investment Tax Credits                                                                   |   | 13,357                   |      | 14,553                  |   |
| Other                                                                                    |   | 95,822                   |      | 83,778                  |   |
| Total Deferred Liabilities and Credits                                                   |   | 246,993                  |      | 236,136                 |   |
| Total Capitalization and Liabilities                                                     |   | $                        | 1,102,767 |                    | $      | 1,041,713 |   |

 

See Notes toConsolidated Financial Statements.

 

9

----

 

CENTRAL ILLINOIS LIGHT COMPANY

### ConsolidatedStatements of Cash Flows

(In thousands)

(Unaudited)

 
|                                                                                 |   | **Nine Months Ended  September 30,** |   |
|--------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                 |   | **2002**                             |   | **2001** |   |
| Cash flows from operating activities:                                                |   |                                 |   |   |   |
| Net income before preferred dividends                                                |   | $                                    | 46,974 |   | $ | 25,043 |   |
|                                                                                 |   |                                 |   |   |   |
| Adjustments to reconcile net income to cash provided  by operating activities:       |   |                                 |   |   |   |
| Depreciation and amortization                                                        |   | 53,194                               |   | 51,642 |   |
| Deferred income taxes, investment tax credit and  regulatory liability, net          |   | 5,663                                |   | (16,597 | ) |
| Changes in operating assets and liabilities:                                         |   |                                 |   |   |   |
| Increase in accounts receivable                                                      |   | (8,102                               | )      | (8,202 | ) |
| Decrease (increase) in fuel, materials and supplies,  and gas in underground storage |   | 3,208                                |   | (4,810 | ) |
| Decrease in accrued unbilled revenue                                                 |   | 11,776                               |   | 46,810 |   |
| Decrease in accounts payable                                                         |   | (25,312                              | )      | (27,619 | ) |
| Increase (decrease) in accrued taxes and interest                                    |   | 9,977                                |   | (3,981 | ) |
| Capital lease payments                                                               |   | 484                                  |   | 484 |   |
| Decrease (increase) in other current assets                                          |   | 7,540                                |   | (7,838 | ) |
| (Decrease) increase in other current liabilities                                     |   | (7,460                               | )      | 9,727 |   |
| Increase in other non-current assets                                                 |   | (2,483                               | )      | (819 | ) |
| Increase in other non-current liabilities                                            |   | 4,787                                |   | 17,178 |   |
| Net cash provided by operating activities                                            |   | 100,246                              |   | 81,018 |   |
| Cash flows from investing activities:                                                |   |                                 |   |   |   |
| Capital expenditures                                                                 |   | (95,803                              | )      | (38,513 | ) |
| Cost of equity funds capitalized                                                     |   | (14                                  | )      | — |   |
| Other                                                                                |   | (2,162                               | )      | (1,788 | ) |
| Net cash used in investing activities                                                |   | (97,979                              | )      | (40,301 | ) |
| Cash flows from financing activities:                                                |   |                                 |   |   |   |
| Common dividends paid                                                                |   | (28,000                              | )      | (30,000 | ) |
| Preferred dividends paid                                                             |   | (1,619                               | )      | (1,619 | ) |
| Payments on capital lease obligation                                                 |   | (484                                 | )      | (484 | ) |
| Decrease in short-term borrowing                                                     |   | (43,000                              | )      | (9,300 | ) |
| Long-term debt issued                                                                |   | 100,000                              |   | — |   |
| Long-term debt retired                                                               |   | (1,400                               | )      | — |   |
| Net cash provided by (used in) financing activities                                  |   | 25,497                               |   | (41,403 | ) |
| Net increase (decrease) in cash and temporary cash  investments                      |   | 27,764                               |   | (686 | ) |
|                                                                                 |   |                                 |   |   |   |
| Cash and temporary cash investments at beginning of  year                            |   | 12,584                               |   | 8,777 |   |
| Cash and temporary cash investments at  September 30                            |   | $                                    | 40,348 |   | $ | 8,091 |   |
|                                                                                 |   |                                 |   |   |   |
| Supplemental disclosures of cash flow information:                                   |   |                                 |   |   |   |
|                                                                                 |   |                                 |   |   |   |
| Cash paid during the period for:                                                     |   |                                 |   |   |   |
|                                                                                 |   |                                 |   |   |   |
| Interest (net of cost of borrowed funds capitalized)                                 |   | $                                    | 24,017 |   | $ | 23,963 |   |
|                                                                                 |   |                                 |   |   |   |
| Income taxes                                                                         |   | $                                    | 14,605 |   | $ | 22,547 |   |

 

See Notes toConsolidated Financial Statements.

 

10

----

 

CILCORP Inc. and Subsidiaries

Statements ofSegments of Business

Three Months Ended September 30, 2002

(In thousands)

(Unaudited)

 
|                                                     |   | **CILCO  Electric** |    | **CILCO  Gas** |   | **CILCO  Other** |   | **Other  Businesses** |   | **Discont.  Oper.** |   | **Total** |   |
|----------------------------------------------------------|--------|---------------------|---------|----------------|--------|------------------|--------|-----------------------|--------|---------------------|--------|-----------|--------|
|                                                     |   |                |    |           |   |             |   |                  |   |                |   |      |   |
| Revenues                                                 |   | $                   | 126,099 |           | $      | 24,762           |   | $                     | 40,730 |                | $      | 9,948     |   | $ | — |   | $ | 201,539 |   |
| Interest income                                          |   | —              |    | —         |   | 172              |   | 23                    |   | —              |   | 195       |   |
| Total                                                    |   | 126,099             |    | 24,762         |   | 40,902           |   | 9,971                 |   |                |   | 201,734   |   |
| Operating expenses                                       |   | 73,692              |    | 21,405         |   | 26,996           |   | 9,230                 |   | —              |   | 131,323   |   |
| Depreciation and amortization                            |   | 12,240              |    | 5,609          |   | —           |   | 355                   |   | —              |   | 18,204    |   |
| Total                                                    |   | 85,932              |    | 27,014         |   | 26,996           |   | 9,585                 |   |                |   | 149,527   |   |
| Interest expense                                         |   | 4,261               |    | 1,554          |   | —           |   | 10,801                |   | —              |   | 16,616    |   |
| Preferred stock dividends                                |   | —              |    | —         |   | 540              |   | —                |   | —              |   | 540       |   |
| Fixed charges and other expenses                         |   | (384                | )       | —         |   | (53              | )      | —                |   | —              |   | (437      | )      |
| Total                                                    |   | 3,877               |    | 1,554          |   | 487              |   | 10,801                |   | —              |   | 16,719    |   |
| Income (loss) from continuing oper. before income  taxes |   | 36,290              |    | (3,806         | )      | 13,419           |   | (10,415               | )      | —              |   | 35,488    |   |
| Income taxes                                             |   | 13,873              |    | (1,501         | )      | 5,535            |   | (5,095                | )      | —              |   | 12,812    |   |
| Income (loss) from continuing oper.                      |   | 22,417              |    | (2,305         | )      | 7,884            |   | (5,320                | )      | —              |   | 22,676    |   |
| Effect of discontinued oper.                             |   | —              |    | —         |   | —           |   | —                |   | (4                  | )      | (4        | )      |
| Segment net income (loss)                                |   | $                   | 22,417  |           | $      | (2,305           | )      | $                     | 7,884  |                | $      | (5,320    | )      | $ | (4 | ) | $ | 22,672 |   |

 

See Notes toConsolidated Financial Statements.

 

11

----

 

CILCORP Inc. andSubsidiaries

Statements ofSegments of Business

Three Months Ended September 30, 2001

(In thousands)

(Unaudited)

 
|                                                    |   | **CILCO  Electric** |    | **CILCO  Gas** |   | **CILCO  Other** |   | **Other  Businesses** |   | **Discont.  Oper.** |   | **Total** |   |
|---------------------------------------------------------|--------|---------------------|---------|----------------|--------|------------------|--------|-----------------------|--------|---------------------|--------|-----------|--------|
|                                                    |   |                |    |           |   |             |   |
|                                                    |   |                |    |           |   |             |   |                  |   |                |   |      |   |
| 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 (loss) 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     |   |
| Income (loss) from continuing oper.                     |   | 6,323               |    | (2,645         | )      | 920              |   | 7,013                 |   | —              |   | 11,611    |   |
| Effect of discont. operations                           |   | —              |    | —         |   | —           |   | —                |   | (4,278              | )      | (4,278)   |   |
| Segment net income (loss)                               |   | $                   | 6,323   |           | $      | (2,645           | )      | $                     | 920    |                | $      | 7,013     |   | $ | (4,278 | ) | $ | 7,333 |   |

 

See Notes toConsolidated Financial Statements.

 

12

----

 

CILCORP Inc. andSubsidiaries

Statements of Segmentsof Business

Nine Months Ended September 30, 2002

(In thousands)

(Unaudited)

 
|                                                     |   | **CILCO  Electric** |    | **CILCO  Gas** |   | **CILCO  Other** |   | **Other  Businesses** |   | **Discont.  Oper.** |   | **Total** |   |
|----------------------------------------------------------|--------|---------------------|---------|----------------|--------|------------------|--------|-----------------------|--------|---------------------|--------|-----------|--------|
|                                                     |   |                |    |           |   |             |   |
|                                                     |   |                |    |           |   |             |   |                  |   |                |   |      |   |
| Revenues                                                 |   | $                   | 304,868 |           | $      | 142,961          |   | $                     | 90,917 |                | $      | 39,669    |   | $ | — |   | $ | 578,415 |   |
| Interest income                                          |   | —              |    | —         |   | 218              |   | 329                   |   | —              |   | 547       |   |
| Total                                                    |   | 304,868             |    | 142,961        |   | 91,135           |   | 39,998                |   | —              |   | 578,962   |   |
| Operating expenses                                       |   | 207,183             |    | 118,029        |   | 70,096           |   | 36,110                |   | —              |   | 431,418   |   |
| Depreciation and amortization                            |   | 36,381              |    | 16,813         |   | —           |   | 1,057                 |   | —              |   | 54,251    |   |
| Total                                                    |   | 243,564             |    | 134,842        |   | 70,096           |   | 37,167                |   | —              |   | 485,669   |   |
| Interest expense                                         |   | 12,100              |    | 4,498          |   | —           |   | 32,872                |   | —              |   | 49,470    |   |
| Preferred stock dividends                                |   | —              |    | —         |   | 1,619            |   | —                |   | —              |   | 1,619     |   |
| Fixed charges and other expenses                         |   | (1,031              | )       | —         |   | 614              |   | —                |   | —              |   | (417      | )      |
| Total                                                    |   | 11,069              |    | 4,498          |   | 2,233            |   | 32,872                |   | —              |   | 50,672    |   |
| Income (loss) from continuing oper. before income  taxes |   | 50,235              |    | 3,621          |   | 18,806           |   | (30,041               | )      | —              |   | 42,621    |   |
| Income taxes                                             |   | 18,548              |    | 1,479          |   | 7,280            |   | (13,497               | )      | —              |   | 13,810    |   |
| Income (loss) from continuing oper.                      |   | 31,687              |    | 2,142          |   | 11,526           |   | (16,544               | )      | —              |   | 28,811    |   |
| Effect of discontinued oper.                             |   | —              |    | —         |   | —           |   | —                |   | (16                 | )      | (16       | )      |
| Segment net income (loss)                                |   | $                   | 31,687  |           | $      | 2,142            |   | $                     | 11,526 |                | $      | (16,544   | )      | $ | (16 | ) | $ | 28,795 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

13

----

 

CILCORP Inc. and Subsidiaries

Statements ofSegments of Business

Nine Months Ended September 30, 2001

(In thousands)

(Unaudited)

 
|                                               |   | **CILCO  Electric** |    | **CILCO  Gas** |   | **CILCO  Other** |   | **Other  Businesses** |   | **Discont.  Oper.** |   | **Total** |   |
|----------------------------------------------------|--------|---------------------|---------|----------------|--------|------------------|--------|-----------------------|--------|---------------------|--------|-----------|--------|
|                                               |   |                |    |           |   |             |   |
|                                               |   |                |    |           |   |             |   |                  |   |                |   |      |   |
| 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 (loss) 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    |   |
| Income (loss) from continuing oper.                |   | 15,323              |    | 3,593          |   | 4,508            |   | (10,898               | )      | —              |   | 12,526    |   |
| Effect of discont. operations                      |   | —              |    | —         |   | —           |   | —                |   | (4,278              | )      | (4,278    | )      |
| Segment net income (loss)                          |   | $                   | 15,323  |           | $      | 3,593            |   | $                     | 4,508  |                | $      | (10,898   | )      | $ | (4,278 | ) | $ | 8,248 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

14

----

 

CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.   Introduction

 

CILCORP Inc.(CILCORP or the Holding Company) is a wholly-owned subsidiary of The AESCorporation (AES).  The consolidatedfinancial statements include the accounts of CILCORP, Central Illinois Light Company(CILCO), QST Enterprises Inc. (QST) and its subsidiaries, QST Energy Inc. (QSTEnergy), and CILCORP Infraservices Inc. (CILCORP Infraservices), and CILCORP’sother subsidiaries (collectively, the Company), after elimination ofsignificant intercompany transactions. The consolidated financial statements of CILCO include the accounts ofCILCO and its subsidiaries, CILCO Exploration and Development Company, CILCOEnergy Corporation, and Central Illinois Generation, Inc.  CILCORP owns 100% of the common stock of itsfirst-tier subsidiaries.  In the fourthquarter of 1998, the operations of QST and its subsidiaries (excluding ESE LandCorporation and CILCORP Infraservices Inc. - see Management’s Discussion andAnalysis) were discontinued and, therefore, are being reported as discontinuedoperations in the financial statements. Prior year amounts have been reclassified on a basis consistent with the2002 presentation.

 

On April 29, 2002,The AES Corporation (AES) announced an agreement with Ameren Corporation tosell 100 percent of its ownership interest in CILCORP and itssubsidiaries.  The transaction issubject to regulatory approvals by the Illinois Commerce Commission (ICC), theFederal Energy Regulatory Commission (FERC), the Federal Communications Commission(FCC), the Securities and Exchange Commission (SEC), and expiration of thewaiting period under the Hart-Scott-Rodino Antitrust Improvements Act.  AES expects the sale to close in the firstquarter of 2003.

 

The accompanyingunaudited consolidated financial statements have been prepared according to therules and regulations of the SEC. Although the Company believes the disclosures are adequate to make theinformation presented not misleading, these consolidated financial statementsshould be read along with the Company’s 2001 Annual Report on Form 10-K.

 

In the Company’sopinion, the consolidated financial statements furnished reflect all normal andrecurring adjustments necessary for a fair presentation of the results ofoperations for the periods presented. Operating results for interim periods are not necessarily indicative ofoperating results to be expected for the year or of the Company’s futurefinancial condition.

 

 

NOTE 2.   Contingencies

 

On May 11, 2001, CILCO and Enron Power Marketing, Inc. (EPMI), asubsidiary of Enron Corp. (Enron), entered into a new Master Agreement forelectric purchases and sales, which covered energy transactions scheduled fordeliveries during the period of 2001-2003. On November 30, 2001, CILCO notified EPMI that events of default hadoccurred under the Master Agreement and declared the Master Agreementterminated effective December 20, 2001. Due to contractual provisions and EPMI’s and Enron’s actions, managementdoes not believe CILCO will be required to pay any amount to Enron or itsaffiliates and has therefore recorded no liability for undelivered electricpurchases.  Enron and EPMI filed Chapter11 bankruptcy petitions on December 2, 2001, in the U. S. Bankruptcy Courtfor the Southern District of New York. Thereafter, CILCO purchased replacement power to serve its retailcustomers which had previously been partially supported by the EPMItransactions.  While the ultimate outcomeis unpredictable, management does not believe that EPMI’s

 

15

----

 

defaults under the Master Agreement, its filing for bankruptcyprotection, CILCO’s termination of the Master Agreement, or CILCO’s purchase ofreplacement electricity will have a material adverse effect on CILCO’s financialposition or results of operations.

 

On May 4, 2001, CILCO and Enron subsidiary Enron North America Corp.(ENA) entered into a natural gas transaction for daily deliveries not to exceed10,000 MMBtu per day during calendar year 2002.  CILCO has received no natural gas deliveries pursuant to thistransaction.  On October 24, 2001, CILCOand ENA entered into a short-term natural gas transaction giving CILCO theright to call upon ENA for the delivery of 10,000 MMBtu per day during theperiod from November 1, 2001, through March 31, 2002.  Since late November 2001, ENA was unable to deliver natural gaswhen called upon by CILCO.  ENA’sfailure to deliver natural gas is an event of default under the Master FirmSales Agreement governing the October transaction.  On December 2, 2001, ENA filed a Chapter 11 bankruptcy petitionin the U. S. Bankruptcy Court for the Southern District of New York.  To the extent that it has been necessary,CILCO has purchased replacement natural gas. Because these transactions are part of a larger and more diversifiednatural gas supply portfolio and are subject to the Purchased Gas Adjustmentclause, management does not believe ENA’s failure to supply natural gas or itssubsequent bankruptcy filing will have a material adverse effect on CILCO’sfinancial position or results of operations.

 

 

NOTE 3.   Accounting for Price Risk ManagementActivities

 

The Companyutilizes commodity futures contracts, options and swaps in the normal course ofits natural gas and electric business activities to reduce market or pricerisk.  Since January 1, 2001, allderivative transactions have been accounted for under Statement of FinancialAccounting Standards No. 133, “Accounting for Derivative Transactions andHedging Activities” (SFAS 133), as interpreted and amended.  SFAS 133 requires that an entity recognizeall derivatives (including derivatives embedded in other contracts), asdefined, as either assets or liabilities on the balance sheet and measure thoseinstruments at fair value.  Changes in thederivative’s fair value are to be recognized currently in earnings, unlessspecific hedge accounting criteria are met. All of the Company’s derivatives qualify as cash flow hedges.  Under SFAS 133, the effective portion of thegain or loss on a derivative instrument designated and qualifying as a cashflow hedge is reported as a component of Other Comprehensive Income (OCI) untilthe hedged transaction affects earnings, at which time the amount accumulatedin OCI is reclassified into earnings. In addition, under SFAS 133, any ineffective portion of the gain or lossis recognized in earnings immediately. All of the Company’s cash flow hedges are highly effective, andtherefore, because any ineffectiveness is immaterial, all gains and losses havebeen recorded in OCI until the hedged transaction affects earnings.  If a cash flow hedge is terminated becauseit is probable that the hedged transaction will not occur, the related balancein OCI as of such date is immediately recognized in earnings.  If a cash flow hedge is terminated early forother reasons, the related balance in OCI as of the termination date isrecognized in earnings concurrently with the related hedged transaction.

 

Gains/losses onderivatives that hedge non-regulated activities are reflected in operatingresults when the hedged commitments are recognized.  The net gain reflected in operating results from derivativefinancial instruments for non-regulated activities for the quarter endedSeptember 30, 2002, was $0.3 million for natural gas (included in Gas Purchasedfor Resale).  The previously recordedgain/loss associated with these settled derivative financial instruments wasremoved from OCI.  The open derivativepositions are then marked-to-market through OCI.  The net effect of these adjustments was to record an after-taxgain in OCI in the amount of $0.6 million for the quarter

 

16

----

 

ended September30, 2002.  The after-tax balance in OCIassociated with these open derivative positions and unrealized gains on settledpositions at September 30, 2002, was a gain of $0.9 million.  The corresponding asset is reflected on thebalance sheet in prepayments and other. The portion of OCI for open positions reflects hedges of natural gassales of 2,280,000 MMBtu for commitments through February 2004.  Approximately $0.9 million of OCI related toderivative financial instruments as of September 30, 2002, is expected to berecognized as an increase to operating earnings over the next twelve months basedon market prices as of September 30, 2002. The actual amount recognized in earnings will be based on the marketconditions at the time the derivatives are settled.

 

Beginning in March2002, the Company is hedging its anticipated summer injections into storagefields utilizing collars (a combination of a put option and a call option) andfutures to hedge the cost for customers charged the Purchased Gas Adjustment(PGA).  In May 2002, the Companyimplemented a winter 2002-2003 hedging strategy related to regulated gasactivities.  This strategy also utilizescollars and futures to help protect customers from large pricefluctuations.  Gains and losses onPGA-related positions are being recorded as regulatory assets or liabilities inaccordance with Statement of Financial Accounting Standards No. 71, “Accountingfor the Effects of Certain Types of Regulation” (SFAS 71).  For the quarter ended September 30, 2002, amark-to-market gain of $0.9 million was recorded in the regulatory liabilityfor all PGA-related derivatives, bringing the regulatory liability to $0.9million.  The corresponding asset isreflected on the balance sheet in prepayments and other.  This reflects hedges of natural gas sales of500,000 MMBtu for commitments through March 2003.

 

In December 2001,the Financial Accounting Standards Board (FASB) revised its earlier conclusion,Derivatives Implementation Group (DIG) Issue C-15, related to contractsinvolving the purchase or sale of electricity. Contracts for the purchase or sale of electricity, both forward andoption contracts, including capacity contracts, may qualify for the normalpurchases and sales exemption and are not required to be accounted for asderivatives under SFAS 133.  In orderfor contracts to qualify for this exemption, they must meet certain criteria,which include the requirement for physical delivery of the electricity to bepurchased or sold under the contract only in the normal course ofbusiness.  Additionally, contracts that havea price based on an underlying that is not clearly and closely related to theelectricity being sold or purchased or that are denominated in a currency thatis foreign to the buyer or seller are not considered normal purchases andnormal sales and are required to be accounted for as derivatives under SFAS133.  This revised conclusion waseffective beginning April 1, 2002.  TheCompany has determined that its physical contracts qualify for the normalpurchases and sales exemption as redefined in DIG Issue C-15 and are not to beaccounted for as derivatives under SFAS 133.

 

17

----

 

NOTE 4.   Other Comprehensive Income

 

Rollforward ofAccumulated Other Comprehensive Income -

CILCORP Inc.

 
|                                                                        |   | **Pension**         |   | **SFAS 133** |   | **Total** |   |
|-----------------------------------------------------------------------------|--------|---------------------|--------|--------------|--------|-----------|--------|
|                                                                        |   | **(In  thousands)** |   |
|                                                                        |   |                |   |         |   |      |   |
| Accumulated other comprehensive income (loss) - June 30, 2002 balance       |   | $                   | (9,333 | )            | $      | 331       |   | $ | (9,002 | ) |
|                                                                        |   |                |   |         |   |      |   |
| Other comprehensive income -                                                |   |                |   |         |   |      |   |
| Pension                                                                     |   | —              |   | —       |   | —    |   |
| SFAS 133                                                                    |   | —              |   | 606          |   | 606       |   |
| Accumulated other comprehensive income (loss) - September 30, 2002  balance |   | $                   | (9,333 | )            | $      | 937       |   | $ | (8,396 | ) |

 

Rollforward of Accumulated Other Comprehensive Income -

Central Illinois Light Company

 
|                                                                        |   | **Pension**        |   | **SFAS 133** |   | **Total** |   |
|-----------------------------------------------------------------------------|--------|--------------------|--------|--------------|--------|-----------|--------|
|                                                                        |   | **(In thousands)** |   |
|                                                                        |   |               |   |         |   |      |   |
| Accumulated other comprehensive income (loss) - June 30, 2002 balance       |   | $                  | (1,112 | )            | $      | 331       |   | $ | (781 | ) |
|                                                                        |   |               |   |         |   |      |   |
| Other comprehensive income -                                                |   |               |   |         |   |      |   |
| Pension                                                                     |   | —             |   | —       |   | —    |   |
| SFAS 133                                                                    |   | —             |   | 606          |   | 606       |   |
| Accumulated other comprehensive income (loss) - September 30, 2002  balance |   | $                  | (1,112 | )            | $      | 937       |   | $ | (175 | ) |

 

18

----

 

NOTE 5.   Impact of Accounting Standards

 

In June 2001, theFASB issued Statement of Financial Accounting Standards No. 142, “Goodwill andOther Intangible Assets” (SFAS 142), and Statement of Financial AccountingStandards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143).

 

SFAS 142 requiresthat goodwill and intangible assets that have indefinite useful lives be testedat least annually for impairment rather than be amortized.  The provisions of SFAS 142 were required tobe applied starting with fiscal years beginning after December 15, 2001.  The Company adopted SFAS 142 on January 1,2002, and, as a result, annual goodwill amortization of approximately $15.3million has ceased.  Net income wouldhave been $11.2 million and $19.8 million for the quarter and nine months endedSeptember 30, 2001, respectively, had CILCORP discontinued the amortization ofgoodwill effective January 1, 2001.  Theinitial impairment assessment has been performed, utilizing the requirements ofSFAS 142, and the Company has determined that its fair value exceeds itscarrying value and therefore, goodwill for the Company is considered notimpaired.  The Company has identified thefollowing four reporting units under the provisions of SFAS 142:  CILCO Electric, CILCO Gas, CILCO Other andOther Businesses.  The Company hascompleted the allocation of goodwill to the reporting units as follows:

 
|                                                                           |   | **CILCO  Electric** |    | **CILCO  Gas** |   | **CILCO  Other** |   | **Other  Businesses** |   | **Total** |   |
|--------------------------------------------------------------------------------|--------|---------------------|---------|----------------|--------|------------------|--------|-----------------------|--------|-----------|--------|
|                                                                           |   |                |    |           |   |             |
|                                                                           |   | **(In  thousands)** |    |
|                                                                           |   | **(Unaudited)**     |    |
|                                                                           |   |                |    |           |   |             |   |                  |   |      |   |
| Goodwill, net of accumulated amortization of $33,753, as of December  31, 2001 |   | $                   | 350,256 |           | $      | 132,514          |   | $                     | 2,118  |      | $      | 94,323 |   | $ | 579,211 |   |
|                                                                                |        |                     |         |                |        |                  |        |                       |        |           |        |  |  |  |  |  |

 

 

SFAS 143 addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  SFAS 143 is effective forfinancial statements issued for fiscal years beginning after June 15, 2002.  The Company has not yet quantified theeffect, if any, of this new standard on the consolidated financial statements.

 

Statement ofFinancial Accounting Standards No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (SFAS 144), was issued in August 2001, and iseffective for financial statements issued for fiscal years beginning afterDecember 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 adoption of SFAS 144 has not had asignificant impact on the Company’s financial position or results ofoperations.

 

Statement ofFinancial Accounting Standards No. 145, “Rescission of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”(SFAS 145), was issued in April 2002. The provisions of SFAS 145 related to the rescission of FASB StatementNo. 4 shall be applied in fiscal years beginning after May 15, 2002.  All other provisions of this Statement areeffective for financial statements issued on or after May 15, 2002.  Management has determined that adoption ofSFAS 145 has no material effect on the Company’s consolidated financialstatements.

 

19

----

 

In June 2002, theFASB issued Statement of Financial Accounting Standards No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities” (SFAS 146).  The provisions of SFAS 146 are effective forexit or disposal activities that are initiated after December 31, 2002.  The Company has not yet quantified theeffect, if any, of this new standard on the consolidated financial statements.

 

Emerging IssuesTask Force (EITF) Issue No. 02-03 - Issues Involved in Accounting for ContractsUnder EITF Issue No. 98-10, “Accounting for Contracts Involved in EnergyTrading and Risk Management Activities” (EITF 02-03).  In June 2002, the EITF reached a consensus on Issue 1 of EITF02-03 (consensus).  The key requirementsare that all gains and losses on energy trading contracts and related physicaltransactions must be shown net in the income statement.  The gross transaction volumes for thoseenergy trading contracts that are physically settled must be disclosed in thenotes to the financial statements.  Theconsensus is effective for financial statements issued for periods ending afterJuly 15, 2002.

 

The Companycurrently accounts for all its non-regulated power and gas marketing activitiesat gross in the Consolidated Statements of Income.  The Company has reviewed all its current power and gas marketingcontracts and all contracts closed in prior periods and identified no tradingcontracts subject to EITF 02-03 or EITF Issue No. 98-10, “Accounting forContracts Involved in Energy Trading and Risk Management Activities”.

 

NOTE 6.   Additional Minimum Pension Liability

 

At December 31 of eachyear, the Company reviews each pension plan to determine if the plans’accumulated benefit obligations exceed the fair value of the plan assets.  If the accumulated benefit obligationsexceed the fair value of the plan assets, an additional minimum pensionliability is recorded on the balance sheet, with a corresponding charge toother comprehensive income.  Downturnsin the stock market affect the value of the pension assets, and accordingly,the additional minimum pension liability at December 31, 2002, may be amaterial amount.

 

20

----

 

Item 2.  Management’s Discussion and Analysis of  FinancialCondition and Results of Operations

 

CILCORP Inc. (CILCORP) isa wholly-owned subsidiary of The AES Corporation (AES).  The financial condition and operatingresults of CILCORP and its subsidiaries (the Company) primarily reflect theoperations of subsidiary Central Illinois Light Company (CILCO).

 

In July 2000, AESannounced plans to acquire IPALCO Enterprises, Inc. (IPALCO), a utility holdingcompany headquartered in Indianapolis, Indiana.  Following this announcement, AES indicated that as part of theSecurities and Exchange Commission (SEC) approval process for the IPALCOtransaction, AES expected to restructure its ownership interests in CILCORPwithin a specified period of time in order to continue as an exempt holdingcompany under the Public Utility Holding Company Act of 1935 (PUHCA).  On March 23, 2001, AES received an orderfrom the SEC which allowed AES’ continued exemption from PUHCA.  The exemption order required AES to divestits ownership interests in CILCO’s regulated utility assets within two years ofthe closing (March 27, 2001) of AES’ acquisition of IPALCO.  On April 29, 2002, AES announced anagreement with Ameren Corporation to sell 100 percent of its ownership interestin CILCORP and its subsidiaries.  Thetransaction is subject to regulatory approvals by the Illinois CommerceCommission (ICC), the Federal Energy Regulatory Commission (FERC), the FederalCommunications Commission (FCC), the SEC, and expiration of the waiting periodunder the Hart-Scott-Rodino Antitrust Improvements Act.  AES expects the sale to close in the firstquarter of 2003.

 

The Other Businessessegment includes the operations of the Holding Company itself (HoldingCompany), its investment subsidiary, CILCORP Investment Management Inc. (CIM),CILCORP Ventures Inc. (CVI), and CILCORP Infraservices Inc., which providesutility infrastructure operation and maintenance services.  The results of QST and its subsidiaries(excluding ESE Land Corporation and CILCORP Infraservices Inc.) are reported asdiscontinued operations (see Results of Operations - QST EnterprisesDiscontinued Operations).

 

Forward-LookingInformation

 

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.

 

Some important factorscould cause actual results or outcomes to differ materially from thoseexpressed or implied in MD&A.  Thebusiness and profitability of CILCORP and its subsidiaries are influenced byeconomic and geographic factors, including ongoing changes in environmentallaws and weather conditions; the extent and pace of development of competitionfor retail and wholesale energy customers; changes in technology; changes incompany-wide operation and plant availability compared to historicalperformance and changes in historical operating cost structure, includingchanges 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 ofvarious costs incurred by CILCO in the course of its business and increasingwholesale and 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 announced transaction, concluded or not, by CILCORP’s sole

 

21

----

 

shareholder, The AESCorporation, to sell its ownership interest in CILCORP and its subsidiaries toAmeren Corporation.  All such factorsare difficult to predict, contain uncertainties that may materially affectactual results and, to a significant degree, are beyond the control of CILCORPand its subsidiaries.  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

 

The Company believes thatinternal and external sources of capital which are or are expected to beavailable will be adequate to fund its capital expenditures, pay its financialobligations, meet working capital needs and retire or refinance debt as itmatures.

 

CILCORP

 

CILCORP (the HoldingCompany) is currently authorized by its Board of Directors to borrow up to $60million on a short-term basis.  AtSeptember 30, 2002, the Holding Company had no short-term debt outstanding.

 

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

 

At December 31 of eachyear, the Company reviews each pension plan to determine if the plans’accumulated benefit obligations exceed the fair value of the plan assets.  If the accumulated benefit obligationsexceed the fair value of the plan assets, an additional minimum pensionliability is recorded on the balance sheet, with a corresponding charge toother comprehensive income.  Downturnsin the stock market affect the value of the pension assets, and accordingly,the additional minimum pension liability at December 31, 2002, may be amaterial amount.

 

CILCO

 

Capital expenditurestotaled $96.1 million for the nine months ended September 30, 2002.  Capital expenditures are anticipated to beapproximately $38.9  million for the remainderof 2002 and are currently estimated to be approximately $80.2 million in2003.  The increase in capitalexpenditures in 2002 and 2003 over 2001 relates primarily to the installationof nitrogen oxide (NOx) reduction equipment at the Edwards and Duck Creekgenerating stations.

 

CILCO is currentlyauthorized by its Board of Directors to issue up to $150 million of short–termdebt, but had no short-term debt at September 30, 2002.  At September 30, 2002, committed banklines of credit totaled $90  million,all of which were unused.  A $30 millionbank line expires in the fourth quarter of 2002, with the remaining linesexpiring in 2003.  CILCO has notdetermined if it will renew or replace the $30 million bank line.  CILCO plans to finance its 2002 and 2003capital expenditures with funds provided by operations, short-term debt andlong-term debt.  In June 2002, CILCOobtained a two-year $100 million senior secured term loan.  The proceeds of the borrowings were used toreduce short-term debt, and will be used to refund medium-term notes maturingin 2003 and for general corporate purposes. The

 

22

----

 

loan is secured by afirst mortgage on substantially all of CILCO’s property and has a variableinterest rate.  The average interestrate on this term loan is currently 2.98%. Future funds provided by operations may be affected by the deregulationof the electric and natural gas utility industries (see Competition).

 

CIM

 

At September 30, 2002,CIM had outstanding debt of $12.6 million, borrowed from CILCORP.

 

CVI

 

At September 30, 2002,CVI had outstanding debt of $4.8 million, borrowed from CILCORP.

 

### Competition

 

CILCO, as a regulated public utility, has an obligation to provideelectricity and natural gas to retail customers within its defined serviceterritory; thus, CILCO has not generally been in competition with other energysuppliers 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 retail market for electricity inIllinois.  During the mandatorytransition period, electric utilities are prohibited from increasing base rates,unless the electric utility demonstrates that its 2-year average earned rate ofreturn is below the 2-year average of the monthly average yield of the U.S.Treasury long-term bond index.  Theinitial mandatory transition period ends on January 1, 2005.  Recently enacted legislation extends thisrate freeze and transition period to January 1, 2007.  For CILCO, this extension is applicable, provided that AmerenCorporation’s acquisition of CILCORP and its subsidiaries closes.  Electricity and natural gas also competewith other forms and sources 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.

 

Primarily as a result ofthe Customer Choice Law, the electric industry in Illinois will changesignificantly during the coming years at both the wholesale and retaillevels.  As of December 31, 2000,all non-residential customers had the ability to choose their electricsupplier.  Residential electriccustomers were able to choose their electric supplier as of May 1, 2002.

 

If a customer chooses toleave its present electricity supplier, that utility will collect a fee fordelivering power and may assess an additional transition charge on thecustomer.  This collection methodologymust be filed with and approved by the Illinois Commerce Commission (ICC) andis 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’sfinding that a utility’s financial condition is impaired and the utility meetsother requirements specified in the Customer Choice Law).

 

On March 9, 2000, CILCOfiled revised tariff sheets with the ICC eliminating the collection of thecustomer transition charge effective March 17, 2000.  At a March 15, 2000, hearing, the ICC approved CILCO’s revisedtariffs, thereby

 

23

----

 

eliminating thecollection of any customer transition charge. CILCO cannot re-establish the collection of a transition charge until itfiles, and the ICC approves, revised tariff sheets that reinstate a transition charge.

 

The Customer Choice Lawalso requires electric base rate reductions that vary by utility.  CILCO reduced its residential base rates by2% in August 1998, by 2% in October 2000, and by an additional 1% in October2002.  Also, CILCO’s return on commonequity will, in general, be capped (the Equity Cap) at an index (a 12-monthaverage yield for long-term U.S. Treasury bonds plus 8% for calendar years 1998and 1999 and a 12 month-average yield for long-term U.S. Treasury bonds plus 9%for calendar years 2000 through 2004) plus 1.5 percentage points.  The Equity Cap was 16.1% in 2001, 16.6% in2000, and 15.1% in 1999.  If CILCO’stwo-year average 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.

 

On June 30, 1999,Senate Bill 24 (a clarification and technical correction of the Customer ChoiceLaw) was signed into law.  This lawallows certain utilities, including CILCO, to increase the Equity Cap by anadditional 2% over the Equity Cap provided under the Customer Choice Law, forthe period 2000 through 2004.  Theincrease in the Equity Cap is allowed in exchange for these utilities offeringchoice of electricity suppliers to selected manufacturing customers onJune 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.

 

With the enactment of theCustomer Choice Law, electric generation in Illinois became deregulated andcompetitive.  As a result, theaccounting principles applicable to rate-regulated enterprises (Statement ofFinancial Accounting Standards No. 71, “Accounting for the Effects of CertainTypes of Regulation” (SFAS 71)) no longer apply to the electric generationportion of CILCO’s business.  There wereno impairments to CILCO assets as a result of transitioning from SFAS 71.  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 2001 electric kWh sales to non-residentialcustomers.  These contracts, most ofwhich expire in 2004, were designed to capture a significant portion of themargin that the customers paid to CILCO in the most recent twelve months.  In 2002, CILCO has been negotiating newcontracts with targeted at-risk customers who are currently being served underbundled tariff rates.  For thosecontracts expiring in 2002, CILCO has been negotiating contract extensions withselected customers.

 

The ultimate market pricefor electricity, the cost for a utility to produce or buy electricity, and thenumber of customers that may be gained or lost due to customer choice ofsupplier in Illinois cannot be predicted. As a result, management cannot predict the ultimate impact that theCustomer Choice Law will have on CILCORP’s financial position or results ofoperation, but the effect could be significant.  However, CILCO is currently a low-cost provider of electricity,and management will continue to position CILCO for competition by controllingcosts, maintaining good customer relations, and developing

 

24

----

 

flexibility to meetindividual customer requirements.  As ofSeptember 30, 2002, all electric customers eligible for choice continue topurchase their electricity supply from CILCO, other than those whoself-generate.  As of September 30,2002, CILCO has contracts totaling approximately 2.6 million megawatt hours ofretail load outside of its service territory for 2002.  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.

 

25

----

 

Results ofOperations

 

CILCO ElectricOperations

 

The followingtable summarizes the components of CILCO electric income for the three monthsand nine months ended September 30, 2002 and 2001.

 
|                               |   | **Three Months Ended  September 30,** |    | **Nine Months Ended  September 30,** |   |
|------------------------------------|--------|---------------------------------------|---------|--------------------------------------|--------|
| **Components  of Electric Income** |   | **2002**                              |    | **2001**                             |   | **2002** |   | **2001** |   |
|                               |   | **(In  thousands)**                   |    |
|                               |   | **(Unaudited)**                       |    |
| Revenue:                           |   |                                  |    |                                 |   |   |   |   |   |
| Electric retail                    |   | $                                     | 122,683 |                                 | $      | 118,634 |   | $ | 296,989 |   | $ | 291,530 |   |
| Sales for resale                   |   | 3,416                                 |    | 5,078                                |   | 7,879 |   | 13,481 |   |
| Total revenue                      |   | 126,099                               |    | 123,712                              |   | 304,868 |   | 305,011 |   |
| Cost of sales:                     |   |                                  |    |                                 |   |   |   |   |   |
| Cost of fuel                       |   | 28,323                                |    | 54,683                               |   | 74,648 |   | 108,647 |   |
| Purchased power                    |   | 16,658                                |    | 15,670                               |   | 40,705 |   | 35,329 |   |
| Revenue taxes                      |   | 6,020                                 |    | 5,506                                |   | 15,443 |   | 15,053 |   |
| Total cost of sales                |   | 51,001                                |    | 75,859                               |   | 130,796 |   | 159,029 |   |
| Gross margin                       |   | 75,098                                |    | 47,853                               |   | 174,072 |   | 145,982 |   |
| Operating expenses:                |   |                                  |    |                                 |   |   |   |   |   |
| Other operations and maintenance   |   | 20,397                                |    | 19,258                               |   | 69,176 |   | 65,586 |   |
| Depreciation and amortization      |   | 12,240                                |    | 11,721                               |   | 36,381 |   | 35,245 |   |
| Other taxes                        |   | 2,294                                 |    | 2,350                                |   | 7,211 |   | 7,188 |   |
| Total operating expenses           |   | 34,931                                |    | 33,329                               |   | 112,768 |   | 108,019 |   |
| Total                              |   | 40,167                                |    | 14,524                               |   | 61,304 |   | 37,963 |   |
| Fixed charges and other:           |   |                                  |    |                                 |   |   |   |   |   |
| Cost of equity funds capitalized   |   | (14                                   | )       | —                               |   | (14 | ) | — |   |
| Interest on long-term debt         |   | 3,761                                 |    | 3,314                                |   | 10,125 |   | 9,495 |   |
| Cost of borrowed funds capitalized |   | (370                                  | )       | (14                                  | )      | (1,017 | ) | (58 | ) |
| Other interest                     |   | 500                                   |    | 801                                  |   | 1,975 |   | 3,284 |   |
| Total                              |   | 3,877                                 |    | 4,101                                |   | 11,069 |   | 12,721 |   |
| Income before income taxes         |   | 36,290                                |    | 10,423                               |   | 50,235 |   | 25,242 |   |
| Income taxes                       |   | 13,873                                |    | 4,100                                |   | 18,548 |   | 9,919 |   |
| Electric income                    |   | $                                     | 22,417  |                                 | $      | 6,323 |   | $ | 31,687 |   | $ | 15,323 |   |

 

Electric grossmargin increased 57% for the quarter and 19% for the nine months endedSeptember 30, 2002, compared to the same periods in 2001, primarily as a resultof a Fuel Adjustment Clause (FAC) settlement agreement in the third quarter of2001 between the Company and the Illinois Commerce Commission (ICC).  In its order dated August 21, 2001, the ICCapproved the agreement requiring the Company to refund $17.8 million related tothe 1999 FAC reconciliation and $2.6 million related to the 2000 FACreconciliation.  Increased residentialsales also contributed to the increase in electric gross margin for the quarterand nine months ended September 30, 2002. In the first quarter of 2002, CILCO also received a payment discount inconjunction with

 

26

----

 

the termination ofan out-of-market long-term coal contract. The discount reduced cost of fuel by $0.8 million for the first quarterof 2002.  On December 20, 2000, as partof the 1999 FAC reconciliation hearings, the ICC ordered changes in CILCO’scalculation of allowable fuel costs applicable to sales subject to the FAC.  These changes revised the allocation ofgenerated and purchased power between regulated and non-regulated sales.  As a result of this order, the regulatedsales margin decreased and the non-regulated sales margin increased for Januarythrough March 2001.  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.  On July 25, 2001, the ICC entered a finalorder, amending the emergency rule by changing the method for allocating fuel coststo non-regulated sales within CILCO’s service territory.

 

Retail salesvolumes increased 7% for the quarter and 2% for the nine months ended September30, 2002, compared to the same periods in 2001.  Residential sales increased 13% for the quarter and 7% for thenine months ended September 30, 2002, compared to the same periods in2001.  Commercial sales increased 6% forthe quarter and 2% for the nine months ended September 30, 2002, comparedto the same periods in 2001.  Industrialsales increased 2% for the quarter and decreased 2% for the nine months endedSeptember 30, 2002, compared to the same periods in 2001.  Cooling degree days were 22% higher for thequarter and nine months ended September 30, 2002, compared to the same periodsin 2001.

 

Sales for resaledecreased 33% for the quarter and 42% for the nine months ended September 30,2002, compared to the same periods in 2001. Sales for resale vary based on the energy requirements of native loadcustomers, neighboring utilities and power marketers, CILCO’s availablecapacity for bulk power sales and the price of power available for sale.

 

The overall levelof business activity in CILCO’s service territory and weather conditions areexpected to continue to be the primary factors affecting electric sales in thenear term.  CILCO’s electric sales willalso be affected in the long term by deregulation and increased competition inthe electric utility industry.

 

The cost of fueldecreased 48% for the quarter and 31% for the nine months ended September 30,2002, compared to the same periods in 2001, primarily due to the FAC settlementwith the ICC in 2001.  Additionally,CILCO renegotiated a long-term coal supply contract in late 2001 which resultedin lower coal costs in 2002.  Purchasedpower increased 6% and 15% for the quarter and nine months ended September 30,2002, respectively, compared to the same periods in 2001.

 

Electric operationand maintenance expense increased 6% for the quarter and 5% for the nine monthsended September 30, 2002, compared to the same periods in 2001.  The increase was mainly due to increasedcosts for pension, other post-employment benefits and tree trimming, partiallyoffset by lower uncollectible accounts expense.  Also contributing to the unfavorable variance for the nine monthsended September 30, 2002, were expenses incurred as the result of an ice stormin the first quarter of 2002.

 

Fixed charges andother expenses decreased 5% for the quarter and 13% for the nine months endedSeptember 30, 2002, compared to the same periods in 2001, primarily due todecreased short-term borrowings and increased capitalized interest related toNOx reduction projects at the power plants.

 

Income tax expenseincreased for the quarter and for the nine months ended September 30, 2002, comparedto the same periods in 2001, due to increases in income before income taxes.

 

27

----

 

CILCO Gas Operations

 

The followingtable summarizes the components of CILCO gas income for the three months andnine months ended September 30, 2002 and 2001.

 
|                              |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
| **Components  of Gas Income**     |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                              |   | **(In  thousands)**                   |   |
|                              |   | **(Unaudited)**                       |   |
| Revenue:                          |   |                                  |   |                                 |   |   |   |   |   |
| Sale of gas                       |   | $                                     | 23,386 |                                 | $      | 20,423 |   | $ | 138,429 |   | $ | 218,387 |   |
| Transportation services           |   | 1,376                                 |   | 1,378                                |   | 4,532 |   | 4,109 |   |
| Total revenue                     |   | 24,762                                |   | 21,801                               |   | 142,961 |   | 222,496 |   |
| Cost of sales:                    |   |                                  |   |                                 |   |   |   |   |   |
| Cost of gas                       |   | 12,050                                |   | 9,803                                |   | 84,022 |   | 162,299 |   |
| Revenue taxes                     |   | 989                                   |   | 987                                  |   | 6,421 |   | 7,126 |   |
| Total cost of sales               |   | 13,039                                |   | 10,790                               |   | 90,443 |   | 169,425 |   |
| Gross margin                      |   | 11,723                                |   | 11,011                               |   | 52,518 |   | 53,071 |   |
| Operating expenses:               |   |                                  |   |                                 |   |   |   |   |   |
| Other operations and maintenance  |   | 7,766                                 |   | 7,716                                |   | 25,850 |   | 23,862 |   |
| Depreciation and amortization     |   | 5,609                                 |   | 5,452                                |   | 16,813 |   | 16,397 |   |
| Other taxes                       |   | 600                                   |   | 572                                  |   | 1,736 |   | 1,707 |   |
| Total operating expenses          |   | 13,975                                |   | 13,740                               |   | 44,399 |   | 41,966 |   |
| Total                             |   | (2,252                                | )      | (2,729                               | )      | 8,119 |   | 11,105 |   |
| Fixed charges and other:          |   |                                  |   |                                 |   |   |   |   |   |
| Interest on long-term debt        |   | 1,374                                 |   | 1,328                                |   | 3,764 |   | 3,804 |   |
| Other interest expense            |   | 180                                   |   | 320                                  |   | 734 |   | 1,315 |   |
| Total                             |   | 1,554                                 |   | 1,648                                |   | 4,498 |   | 5,119 |   |
| Income (loss) before income taxes |   | (3,806                                | )      | (4,377                               | )      | 3,621 |   | 5,986 |   |
| Income taxes                      |   | (1,501                                | )      | (1,732                               | )      | 1,479 |   | 2,393 |   |
| Gas income (loss)                 |   | $                                     | (2,305 | )                                    | $      | (2,645 | ) | $ | 2,142 |   | $ | 3,593 |   |

 

Gas gross marginincreased 6% for the quarter and decreased 1% for the nine months endedSeptember 30, 2002, compared to the same periods in 2001.  Residential sales volumes increased 2% forthe quarter and decreased 1% for the nine months ended September 30, 2002,compared to the same periods in 2001. Commercial sales volumes increased 6% for the quarter and decreased 7%for the nine months ended September 30, 2002, compared to the same periods in2001.  Heating degree days were 8% lowerfor the nine months ended September 30, 2002, compared to the same periodin 2001.  Industrial sales volumesdecreased 14% for the quarter and for the nine months ended September 30,2002, compared to the same periods in 2001.

 

The overall levelof business activity in CILCO’s service territory and weather conditions areexpected to continue to be the primary factors

 

28

----

 

affecting gassales in the near term.  CILCO’s gassales may also be affected by further deregulation at the retail level in thenatural gas industry.

 

Revenue from gastransportation services remained relatively constant for the quarter andincreased 10% for the nine months ended September 30, 2002, while gastransportation sales volumes increased 5% for the quarter and 17% for the ninemonths ended September 30, 2002, compared to the same periods in 2001.

 

The cost of gasincreased 23% for the quarter and decreased 48% for the nine months endedSeptember 30, 2002, compared to the same periods in 2001, primarily due tofluctuations in natural gas prices. These costs were passed through to customers via the Purchased GasAdjustment (PGA).

 

Gas operation andmaintenance expense increased 1% for the quarter and 8% for the nine monthsended September 30, 2002, compared to the same periods in 2001.  The increases were primarily due toincreases in expenses for public liability claims, pension and otherpost-employment benefits, partially offset by decreased uncollectible accountsexpense.

 

Fixed charges andother expenses decreased 6% for the quarter and 12% for the nine months endedSeptember 30, 2002, compared to the same periods in 2001, mainly due todecreased short-term borrowings.

 

Income tax expense decreased for the nine months ended September 30,2002, compared to the same period in 2001, due to a decrease in income beforeincome taxes.

 

29

----

 

CILCO Other Operations

 

The followingtable summarizes CILCO’s Other income and deductions for the three months andnine months ended September 30, 2002 and 2001.

 
|                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
| **Components of CILCO Other**       |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                                |   | **(In  thousands)**                   |   |
|                                |   | **(Unaudited)**                       |   |
|                                |   |                                  |   |                                 |   |   |   |   |   |
| Revenue                             |   | $                                     | 40,730 |                                 | $      | 36,429 |   | $ | 90,917 |   | $ | 75,433 |   |
| Expense                             |   | (25,649                               | )      | (33,505                              | )      | (66,661 | ) | (64,728 | ) |
| Gross margin                        |   | 15,081                                |   | 2,924                                |   | 24,256 |   | 10,705 |   |
| Other income and deductions:        |   |                                  |   |                                 |   |   |   |   |   |
| Interest income                     |   | 172                                   |   | 302                                  |   | 218 |   | 582 |   |
| Operating expenses                  |   | (1,347                                | )      | (1,094                               | )      | (3,384 | ) | (2,160 | ) |
| Other taxes                         |   | —                                |   | —                               |   | (51 | ) | — |   |
| Preferred stock dividends           |   | (540                                  | )      | (540                                 | )      | (1,619 | ) | (1,619 | ) |
| Other                               |   | 53                                    |   | (332                                 | )      | (614 | ) | (950 | ) |
| Total other income and (deductions) |   | (1,662                                | )      | (1,664                               | )      | (5,450 | ) | (4,147 | ) |
| Income before income taxes          |   | 13,419                                |   | 1,260                                |   | 18,806 |   | 6,558 |   |
| Income taxes                        |   | 5,535                                 |   | 340                                  |   | 7,280 |   | 2,050 |   |
| Other income                        |   | $                                     | 7,884  |                                 | $      | 920 |   | $ | 11,526 |   | $ | 4,508 |   |

 

Gross marginincreased $12.2 million for the quarter and $13.6 million for the nine monthsended September 30, 2002, compared to the same periods in 2001, primarily dueto increased margin per MWh sold and to increased non-regulated electricitysales in Illinois outside of CILCO’s service territory.  The higher margin per MWh sold is notexpected to continue beyond third quarter 2002 operating results.  These sales of electricity were to customerseligible to choose their energy supplier under the Customer Choice Law.

 

Operating expensesincreased for the quarter and nine months ended September 30, 2002,compared to the same periods in 2001, primarily due to increased administrativeand bad debt expenses for non-regulated sales.

 

Proceeds fromcompany-owned life insurance in the third quarter of 2002 reduced otherdeductions by approximately $0.5 million for the quarter and nine months endedSeptember 30, 2002, compared to the same periods in 2001.

 

30

----

 

Other Businesses Operations

 

The following table summarizes Other Businesses revenue and expensesfor the three months and nine months ended September 30, 2002 and 2001.  Other Businesses results include incomeearned and expenses incurred at the Holding Company, CIM, CVI, and CILCORPInfraservices Inc.

 
| **Components  of Other Businesses**     |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
| **Operating Income (Loss)**             |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                                    |   | **(In  thousands)**                   |   |
|                                    |   | **(Unaudited)**                       |   |
| Revenue:                                |   |                                  |   |                                 |   |   |   |   |   |
| Leveraged lease revenue                 |   | $                                     | 1,265  |                                 | $      | 1,326 |   | $ | 3,881 |   | $ | 4,065 |   |
| Interest income                         |   | 23                                    |   | 68                                   |   | 329 |   | 223 |   |
| Gas marketing revenue                   |   | 8,802                                 |   | 7,788                                |   | 35,119 |   | 29,227 |   |
| Other revenue (expense)                 |   | (119                                  | )      | 5,177                                |   | 669 |   | 6,329 |   |
| Total revenue                           |   | 9,971                                 |   | 14,359                               |   | 39,998 |   | 39,844 |   |
| Expenses:                               |   |                                  |   |                                 |   |   |   |   |   |
| Gas purchased for resale                |   | 8,531                                 |   | 8,056                                |   | 34,709 |   | 29,659 |   |
| Fuel for generation and purchased power |   | —                                |   | (23,377                              | )      | — |   | (26,045 | ) |
| Operating expenses                      |   | 678                                   |   | 254                                  |   | 1,338 |   | 1,115 |   |
| Depreciation and amortization           |   | 355                                   |   | 4,219                                |   | 1,057 |   | 12,660 |   |
| Interest expense                        |   | 10,801                                |   | 11,466                               |   | 32,872 |   | 34,997 |   |
| Other taxes                             |   | 21                                    |   | 27                                   |   | 63 |   | 73 |   |
| Total expenses                          |   | 20,386                                |   | 645                                  |   | 70,039 |   | 52,459 |   |
| Income (loss) before income taxes       |   | (10,415                               | )      | 13,714                               |   | (30,041 | ) | (12,615 | ) |
| Income taxes                            |   | (5,095                                | )      | 6,701                                |   | (13,497 | ) | (1,717 | ) |
| Other Businesses income (loss)          |   | $                                     | (5,320 | )                                    | $      | 7,013 |   | $ | (16,544 | ) | $ | (10,898 | ) |

 

Gas marketingrevenue increased 13% for the quarter and 20% for the nine months endedSeptember 30, 2002, while gas purchased for resale increased 6% for the quarterand 17% for the nine months ended September 30, 2002, compared to the sameperiods in 2001.  These increases weredue to increased gas marketing sales at CVI subsidiary CILCORP Energy ServicesInc.

 

Other revenuedecreased 102% for the three months ended and 89% for the nine months endedSeptember 30, 2002, compared to the same periods in 2001, due primarily to a$4.5 million settlement in the third quarter of 2001 of a preacquisitioncontingency related to litigation at QST Energy.  See related discussion at Results of Operations - QST EnterprisesDiscontinued Operations.

 

Fuel forgeneration and purchased power was impacted by the settlement of apreacquisition contingency in 2001.  InSeptember 2001, CILCORP recorded an $18 million reduction in a preacquisitioncontingency related to an out-of-market coal contract with a correspondingreduction in cost of fuel.  Theadjustment to this liability was necessitated by a change in the Company’s planrelative to this contract.  Accordingly,the company made a new assessment of the potential liability and recorded anadjustment to the original liability. Fuel for generation and purchased power was also

 

31

----

 

impacted in 2001by $4.0 million in amortization related to the preacquisition liability forthis out-of-market coal contract.  Thiscontract was settled during the fourth quarter of 2001 and the preacquisitioncontingency related to this contract was removed.

 

Depreciation andamortization decreased during the quarter and nine months ended September 30,2002, following the Company’s adoption of Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142) in January2002.  SFAS 142 requires that goodwilland intangible assets that have indefinite useful lives be tested at leastannually for impairment rather than be amortized.  Accordingly, the Company has ceased goodwill amortization whichwas approximately $11.5 million during the nine months ended 2001.  See related discussion in Note 5 to theConsolidated Financial Statements.

 

Interest expensedecreased 6% for the quarter and nine months ended September 30, 2002,compared to the same periods in 2001, mainly due to the retirement of CILCORP’smedium-term notes in 2001 and to lower short-term debt in 2002.  This decrease was partially offset byinterest on deferred compensation arrangements for two former officers that wasrecorded during the second quarter of 2002.

 

The income taxbenefit increased significantly during the quarter and nine months endedSeptember 30, 2002, compared to the same periods in 2001, due to lower incomebefore income taxes.

 

32

----

 

QST EnterprisesDiscontinued Operations

 

QST Enterprises and QSTEnergy ceased operations during the fourth quarter of 1998, except forfulfillment 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.

 

Loss fromoperations of discontinued businesses, net of tax:

 
|                                                               |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|--------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                               |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                                                               |   | **(In  thousands)**                   |   |
|                                                               |   | **(Unaudited)**                       |   |
|                                                               |   |                                  |   |                                 |   |   |   |   |   |
| QST Enterprises, net of tax of $(3), $(2,813), $(11)  and $(2,813) |   | $                                     | (4     | )                                    | $      | (4,278 | ) | $ | (16 | ) | $ | (4,278 | ) |
|                                                               |   | $                                     | (4     | )                                    | $      | (4,278 | ) | $ | (16 | ) | $ | (4,278 | ) |

 

QST Enterprises’financial results for all periods shown were in excess of the discontinuedoperations provision and are shown as losses for those periods.  Beginning in 1999, QST Energy was 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 of 2001, and was partiallyoffset by the $4.5 million gain recorded at CILCORP.

 

33

----

 

Item 3.   Quantitative and Qualitative DisclosuresAbout Market Risk

 

Market RiskSensitive Instruments

 

CILCORP and its subsidiaries (the Company) are exposed to non-tradingrisks through its daily business activities. These non-trading activities may include the market or commodity pricerisk related to CILCO’s retail tariff activity and the Company’s non-regulatedcommodity marketing activities.

 

The majority of the Company’s electricity sales during the thirdquarter of 2002 were to CILCO retail customers in Illinois under tariffsregulated by the Illinois Commerce Commission (ICC).  Gas costs, prudently incurred in connection with sales tocustomers under tariffs regulated by the ICC, are recovered through theCompany’s Purchased Gas Adjustment (PGA). Prior to October 29, 2001, prudently incurred costs of fuel used togenerate electricity and purchased power costs were recovered from retail customersthat purchase energy through regulated tariffs under the Fuel Adjustment Clause(FAC).  Thus, through October 28, 2001,there had been very limited commodity price risk associated with CILCO’straditional regulated sales.  CILCOfiled to eliminate the FAC on September 10, 2001.  The ICC approved the elimination of the FAC on October 24,2001, for bills issued on or after October 29, 2001.  While the Company is exposed to increased commodity price riskdue to the elimination of the FAC, sufficient supply has been placed undercontract to limit the Company’s exposure to market risk at any given time.  When this supply is added to CILCOgeneration capacity, a reserve margin of over 10% is experienced, based on apeak load of 1,270 MW during the summer cooling season.  Since CILCO supplies over 90% of its nativeload with its generation capacity, generation can be adjusted on a real-timebasis to match actual load at any given time. CILCO is subject to the risk that generation becomes unavailable due toforced outages.  The Company’shistorical unplanned outage rate is 5.1%. In the event that CILCO generation and purchased supply is insufficientto meet load requirements, CILCO would have to purchase electric supply fromthe market at prevailing market rates.

 

The market risk inherent in the non-regulated activities of CILCORP andits subsidiaries is the potential loss arising from adverse changes in naturalgas and electric commodity prices relative to the physical and financialpositions that the Company maintains. The prices of natural gas and electricity are subject to fluctuationsresulting from changes in supply and demand. The Company is engaged in non-regulated electric retail and natural gassales in Illinois, including wholesale power purchases and sales to utilize itselectric generating capability.  AtSeptember 30, 2002, these non-regulated activities had net open market pricerisk positions of approximately 289,000 MWh of electricity and 220,000 Mcf ofnatural gas.  A market price sensitivityof 10% applied to positions open in the next twelve months is not material tothe Company.  See Note 3 for adiscussion of the Company’s use of financial derivatives for hedgingpurposes.  Due to the high correlationbetween the changes in the value of the financial instrument positions held bythe Company and the change in price of the underlying commodity, the net effecton the Company’s net income resulting from the change in value of thesefinancial instruments is not expected to be material.

# ** **

34

----

 

Item 4.   Controls and Procedures

# ** **

Evaluation of Disclosure controls and Procedures.  CILCORP’s vice president, CILCORP’s chieffinancial officer, CILCO’s president and CILCO’s chief financial officer, afterevaluating the effectiveness of the Company’s “disclosure controls andprocedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c))as of a date (the “Evaluation Date”) within 90 days before the filing date ofthis quarterly report, have concluded that as of the Evaluation Date, our disclosurecontrols and procedures were effective to ensure that material informationrelating to us and our consolidated subsidiaries is recorded, processed,summarized and reported in a timely manner.

 

Changes in Internal Controls. There were no significant changes in our internal controls or, to ourknowledge, in other factors that could significantly affect such controlssubsequent to the Evaluation Date.

 

35

----

 

### PARTII.  OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

Reference is madeto “Environmental Matters” of Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and to “Note 7 - Commitments andContingencies” of Item 8.  Financial Statementsand Supplementary Data in the Company’s 2001 Annual Report on Form 10-K and to“Note 2 - Contingencies”, herein, for certain pending legalproceedings and/or proceedings known to be contemplated by governmentalauthorities.

 

The Company andits subsidiaries are subject to certain claims and lawsuits in connection withwork 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.   Other Information

 

None

 

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

 

(a) Exhibits

 

99.1  Statement of PresidentUnder 18 U.S.C. §1350

99.2  Statement of ChiefFinancial Officer Under 18 U.S.C. §1350

99.3  Statement of ChiefExecutive Officer Under 18 U.S.C. §1350

99.4  Statement of Chief FinancialOfficer Under 18 U.S.C. §1350

 

(b) Reports onForm 8-K

 

None

 

36

----

 

### SIGNATURES

 

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

 

 
|                        |   | CILCORP Inc.                   |
|-----------------------------|--------|--------------------------------|
|                        |   | (Registrant)                   |
|                        |   |                           |
|                        |   |                           |
| Date  November 8, 2002 |   |                           |
|                        |   | /s/ L. M. Lee                  |
|                        |   | President                      |
|                        |   |                           |
|                        |   |                           |
| Date  November 8, 2002 |   |                           |
|                        |   | /s/ T. S. Romanowski           |
|                        |   | Chief Financial Officer        |
|                        |   | And Treasurer                  |
|                        |   |                           |
|                        |   |                           |
|                        |   | CENTRAL ILLINOIS LIGHT COMPANY |
|                        |   | (Registrant)                   |
|                        |   |                           |
|                        |   |                           |
| Date  November 8, 2002 |   |                           |
|                        |   | /s/ L. M. Lee                  |
|                        |   | Chief Executive Officer        |
|                        |   |                           |
|                        |   |                           |
| Date  November 8, 2002 |   |                           |
|                        |   | /s/ T. S. Romanowski           |
|                        |   | Chief Financial Officer        |
|                        |   | And Treasurer                  |

 

37

----

 

CERTIFICATIONS

 

CERTIFICATION OF VICEPRESIDENT

 

I, Robert J. Sprowls,certify that:

 

1.  I have reviewed this quarterly report onForm 10-Q of CILCORP Inc.;

 

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.  The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrantand we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  November 8, 2002 |                  |
|------------------------------|-----------------------|
|                         | /s/ Robert J. Sprowls |
|                         | Vice President        |

 

38

----

 

CERTIFICATION OF CHIEFFINANCIAL OFFICER

 

I, Thomas S. Romanowski,certify that:

 

1.  I have reviewed this quarterly report onForm 10-Q of CILCORP Inc.;

 

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.  The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  November 8, 2002 |                     |
|------------------------------|--------------------------|
|                         | /s/ Thomas S. Romanowski |
|                         | Chief Financial  Officer |

 

39

----

 

CERTIFICATION OFPRESIDENT

 

I, Robert J. Sprowls,certify that:

 

1.  I have reviewed this quarterly report onForm 10-Q of Central Illinois Light Company;

 

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.  The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  November 8, 2002 |                   |
|------------------------------|------------------------|
|                         | /s/ Robert J.  Sprowls |
|                         | President              |

 

40

----

 

CERTIFICATION OF CHIEFFINANCIAL OFFICER

 

I, Thomas S. Romanowski,certify that:

 

1.  I have reviewed this quarterly report onForm 10-Q of Central Illinois Light Company;

 

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.  The registrant’s other certifying officers andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our most recentevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  November 8, 2002 |                      |
|------------------------------|---------------------------|
|                         | /s/ Thomas S.  Romanowski |
|                         | Chief Financial  Officer  |

 

41

----