**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

**FORM 10-Q**

 

**ý QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

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

 

**OR**

 

**o TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Transition period from         to        **

 

| Commission File  Number |   | Registrant;  State of Incorporation;  Address; and Telephone Number |   | IRS Employer  Identification No. |
|-------------------------|--------|---------------------------------------------------------------------|--------|----------------------------------|
| **1-8946**              |   | **CILCORP Inc.**                                                    |   | **37-1169387**                   |
|                    |   | (An Illinois  Corporation)                                          |   |                             |
|                    |   | **300 Liberty Street**                                              |   |                             |
|                    |   | **Peoria,  Illinois  61602**                                   |   |                             |
|                    |   | **(309)  677-5230**                                                 |   |                             |
|                    |   |                                                                |   |                             |
| **1-2732**              |   | **CENTRAL  ILLINOIS LIGHT COMPANY**                                 |   | **37-0211050**                   |
|                    |   | (An Illinois Corporation)                                           |   |                             |
|                    |   | **300  Liberty Street**                                             |   |                             |
|                    |   | **Peoria,  Illinois  61602**                                   |   |                             |
|                    |   | **(309)  677-5230**                                                 |   |                             |

 

Indicate by check markwhether the Registrants (1) have filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrants were required tofile such reports), and (2) have been subject to such filing requirements forthe past 90 days.

Yes    ý              No  o

 

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

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

 

 

----

 

CILCORP INC.

AND

CENTRAL ILLINOIS LIGHT COMPANY

FORM 10-Q FOR THE QUARTERENDED June 30, 2002

INDEX

 
| PART I.    | FINANCIAL INFORMATION                                                                                                                        |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                         |   |
| Item 1:    | Financial Statements                                                                                                                         |
|       |                                                                                                                                         |
|       | CILCORP INC.                                                                                                                                 |
|       |                                                                                                                                         |   |
|       |                                                                                                                                         | Consolidated  Statements of Operations |
|       |                                                                                                                                         |   |
|       |                                                                                                                                         | Consolidated Balance Sheets |
|       |                                                                                                                                         |   |
|       |                                                                                                                                         | Consolidated  Statements of Cash Flows |
|       |                                                                                                                                         |   |
|       | CENTRAL ILLINOIS LIGHT  COMPANY                                                                                                              |
|       |                                                                                                                                         |   |
|       |                                                                                                                                         | Consolidated  Statements of 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 |
|       |                                                                                                                                         |
| PART II.   | OTHER INFORMATION                                                                                                                            |
|       |                                                                                                                                         |
| Item 1:    | Legal Proceedings                                                                                                                            |
|       |                                                                                                                                         |
| Item 5:    | Other Information                                                                                                                            |
|       |                                                                                                                                         |
| Item 6:    | Exhibits and  Reports on Form 8-K                                                                                                            |
|       |
| Signatures |
|            |                                                                                                                                              |  |  |  |

 

2

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CILCORP INC. AND SUBSIDIARIES

Consolidated Statementsof Operations

(In thousands)

(Unaudited)

 
|                                                                        |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                        |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                                                        |   |                              |   |                            |   |   |   |   |   |
| Revenue:                                                                    |   |                              |   |                            |   |   |   |   |   |
| CILCO  Electric                                                             |   | $                                 | 94,656 |                            | $      | 92,299 |   | $ | 178,769 |   | $ | 181,299 |   |
| CILCO  Gas                                                                  |   | 38,181                            |   | 41,746                          |   | 118,199 |   | 200,695 |   |
| CILCO  Other                                                                |   | 28,473                            |   | 26,330                          |   | 50,233 |   | 39,284 |   |
| Other  businesses                                                           |   | 11,736                            |   | 9,525                           |   | 30,027 |   | 25,485 |   |
| Total                                                                       |   | 173,046                           |   | 169,900                         |   | 377,228 |   | 446,763 |   |
| Operating  expenses:                                                        |   |                              |   |                            |   |   |   |   |   |
| Fuel  for generation and purchased power                                    |   | 57,774                            |   | 54,881                          |   | 111,234 |   | 101,797 |   |
| Gas  purchased for resale                                                   |   | 32,259                            |   | 33,411                          |   | 98,150 |   | 174,099 |   |
| Other  operations and maintenance                                           |   | 36,536                            |   | 34,400                          |   | 69,710 |   | 64,782 |   |
| Depreciation  and amortization                                              |   | 18,036                            |   | 21,820                          |   | 36,047 |   | 42,910 |   |
| Taxes,  other than income taxes                                             |   | 9,241                             |   | 8,811                           |   | 21,001 |   | 21,705 |   |
| Total                                                                       |   | 153,846                           |   | 153,323                         |   | 336,142 |   | 405,293 |   |
| Fixed  charges and other:                                                   |   |                              |   |                            |   |   |   |   |   |
| Interest  expense                                                           |   | 16,588                            |   | 17,845                          |   | 32,854 |   | 35,666 |   |
| Preferred  stock dividends of subsidiary                                    |   | 539                               |   | 539                             |   | 1,079 |   | 1,079 |   |
| Allowance  for funds used during construction                               |   | (409                              | )      | (26                             | )      | (647 | ) | (44 | ) |
| Other                                                                       |   | 325                               |   | 316                             |   | 667 |   | 618 |   |
| Total                                                                       |   | 17,043                            |   | 18,674                          |   | 33,953 |   | 37,319 |   |
| Income  (loss) from continuing operations before income taxes               |   | 2,157                             |   | (2,097                          | )      | 7,133 |   | 4,151 |   |
| Income  taxes                                                               |   | 37                                |   | 213                             |   | 998 |   | 3,236 |   |
| Net  income (loss) from continuing operations                               |   | 2,120                             |   | (2,310                          | )      | 6,135 |   | 915 |   |
| Loss  from operations of discontinued businesses, net of tax of (3) and (8) |   | (3                                | )      | —                          |   | (12 | ) | — |   |
| Net  income (loss)                                                          |   | $                                 | 2,117  |                            | $      | (2,310 | ) | $ | 6,123 |   | $ | 915 |   |
| Other  comprehensive income (loss)                                          |   | (440                              | )      | (6,620                          | )      | 5,024 |   | (6,869 | ) |
| Comprehensive  income (loss)                                                |   | $                                 | 1,677  |                            | $      | (8,930 | ) | $ | 11,147 |   | $ | (5,954 | ) |

 

See Notes to ConsolidatedFinancial Statements.

 

3

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CILCORP INC. AND SUBSIDIARIES

Consolidated BalanceSheets

(In thousands)

(Unaudited)

 
|                                                                         |   | **June 30,  2002** |      | **December  31,  2001** |   |
|------------------------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
| ASSETS                                                                       |   |               |      |                    |   |
|                                                                         |   |               |      |                    |   |
| Current  assets:                                                             |   |               |      |                    |   |
| Cash and  Temporary Cash Investments                                         |   | $                  | 79,158    |                    | $      | 18,312 |   |
| Receivables,  Less Allowance for Uncollectible Accounts of $2,609 and $1,800 |   | 53,094             |      | 47,610                  |   |
| Accrued Unbilled  Revenue                                                    |   | 25,314             |      | 40,265                  |   |
| Fuel, at Average  Cost                                                       |   | 18,169             |      | 18,068                  |   |
| Materials and  Supplies, at Average Cost                                     |   | 17,528             |      | 17,273                  |   |
| Gas in Underground  Storage, at Average Cost                                 |   | 13,751             |      | 27,067                  |   |
| FAC  Underrecoveries                                                         |   | 1,255              |      | 1,255                   |   |
| PGA  Underrecoveries                                                         |   | 5,288              |      | 3,236                   |   |
| Prepayments and  Other                                                       |   | 11,150             |      | 7,627                   |   |
| Total Current  Assets                                                        |   | 224,707            |      | 180,713                 |   |
| Investments and  Other Property:                                             |   |               |      |                    |   |
| Investment in  Leveraged Leases                                              |   | 134,718            |      | 135,504                 |   |
| Other  Investments                                                           |   | 18,220             |      | 19,285                  |   |
| Total  Investments and Other Property                                        |   | 152,938            |      | 154,789                 |   |
| Property, Plant  and Equipment:                                              |   |               |      |                    |   |
| Utility Plant,  at Original Cost                                             |   |               |      |                    |   |
| Electric                                                                     |   | 724,593            |      | 716,857                 |   |
| Gas                                                                          |   | 238,520            |      | 233,278                 |   |
|                                                                         |   | 963,113            |      | 950,135                 |   |
| Less-Accumulated  Provision for Depreciation                                 |   | 154,886            |      | 126,502                 |   |
|                                                                         |   | 808,227            |      | 823,633                 |   |
| Construction  Work in Progress                                               |   | 77,244             |      | 34,340                  |   |
| Other, Net of  Depreciation                                                  |   | 22                 |      | 14                      |   |
| Total Property,  Plant and Equipment                                         |   | 885,493            |      | 857,987                 |   |
| Other Assets:                                                                |   |               |      |                    |   |
| Goodwill, Net of  Accumulated Amortization of $33,753                        |   | 579,211            |      | 579,211                 |   |
| Other                                                                        |   | 36,899             |      | 38,998                  |   |
| Total Other  Assets                                                          |   | 616,110            |      | 618,209                 |   |
|                                                                         |   |               |      |                    |   |
| Total Assets                                                                 |   | $                  | 1,879,248 |                    | $      | 1,811,698 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

4

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|                                                        |   | **June 30,  2002** |      | **December  31,  2001** |   |
|-------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
| LIABILITIES  AND STOCKHOLDER’S EQUITY                  |   |               |      |                    |   |
|                                                        |   |               |      |                    |   |
| Current  liabilities:                                       |   |               |      |                    |   |
| Current Portion  of Long-Term Debt                          |   | $                  | 26,750    |                    | $      | 1,400 |   |
| Notes Payable                                               |   | 36,000             |      | 63,000                  |   |
| Accounts Payable                                            |   | 64,155             |      | 75,644                  |   |
| Accrued Taxes                                               |   | 13,385             |      | 14,879                  |   |
| Accrued Interest                                            |   | 17,444             |      | 18,392                  |   |
| Other                                                       |   | 9,389              |      | 18,281                  |   |
| Total Current  Liabilities                                  |   | 167,123            |      | 191,596                 |   |
| Long-Term Debt                                              |   | 792,404            |      | 717,730                 |   |
| Deferred Credits  and Other Liabilities:                    |   |               |      |                    |   |
| Deferred Income  Taxes                                      |   | 212,955            |      | 202,822                 |   |
| Regulatory  Liability of Regulated Subsidiary               |   | 35,835             |      | 45,377                  |   |
| Deferred  Investment Tax Credit                             |   | 13,756             |      | 14,553                  |   |
| Other                                                       |   | 89,796             |      | 83,388                  |   |
| Total Deferred  Credits and Other Liabilities               |   | 352,342            |      | 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                                          |   | 16,428             |      | 10,305                  |   |
| Accumulated  Other Comprehensive Income (Loss)              |   | (9,002             | )         | (14,026                 | )      |
| Total  Stockholder’s Equity                            |   | 526,259            |      | 515,112                 |   |
| Total  Liabilities and Stockholder’s Equity            |   | $                  | 1,879,248 |                    | $      | 1,811,698 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

5

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CILCORP INC. ANDSUBSIDIARIES

Consolidated Statementsof Cash Flows

(In thousands)

(Unaudited)

 
|                                                                                       |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                       |   | **2002**                        |   | **2001** |   |
| Cash  flows from operating activities:                                                     |   |                            |   |   |   |
| Net  income from continuing operations before preferred dividends of subsidiary            |   | $                               | 7,214  |   | $ | 1,994 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:         |   |                            |   |   |   |
| Non-cash  lease income and investment income                                               |   | (2,060                          | )      | (2,262 | ) |
| Cash  receipts in excess of debt service on leases                                         |   | 3,402                           |   | 6,225 |   |
| Depreciation  and amortization                                                             |   | 36,047                          |   | 42,910 |   |
| Deferred  income taxes, investment tax credit and regulatory liability of subsidiary,  net |   | 6,022                           |   | (13,349 | ) |
| Changes  in operating assets and liabilities:                                              |   |                            |   |   |   |
| Decrease  in accounts receivable and accrued unbilled revenue                              |   | 8,722                           |   | 42,662 |   |
| Decrease  in inventories                                                                   |   | 12,960                          |   | 3,531 |   |
| Decrease  in accounts payable                                                              |   | (10,749                         | )      | (44,519 | ) |
| Decrease  in accrued taxes                                                                 |   | (1,494                          | )      | (761 | ) |
| (Increase)  decrease in other assets                                                       |   | (2,171                          | )      | 2,428 |   |
| (Decrease)  increase in other liabilities                                                  |   | (5,124                          | )      | 4,648 |   |
| Total  adjustments                                                                         |   | 45,555                          |   | 41,513 |   |
| Net  cash provided by operating activities from continuing operations                      |   | 52,769                          |   | 43,507 |   |
| Net  cash (used in) provided by operating activities of discontinued operations            |   | (7                              | )      | 81 |   |
| Cash  flow from operations                                                                 |   | 52,762                          |   | 43,588 |   |
| Cash  flows from investing activities:                                                     |   |                            |   |   |   |
| Additions  to plant                                                                        |   | (63,051                         | )      | (24,532 | ) |
| Other                                                                                      |   | (786                            | )      | 192 |   |
| Net  cash used in investing activities                                                     |   | (63,837                         | )      | (24,340 | ) |
| Cash  flow from financing activities:                                                      |   |                            |   |   |   |
| Net  decrease in short-term debt                                                           |   | (27,000                         | )      | (3,866 | ) |
| Issuance  of long-term debt                                                                |   | 100,000                         |   | — |   |
| Common  dividends paid                                                                     |   | —                          |   | (15,000 | ) |
| Subsidiary  preferred dividends paid                                                       |   | (1,079                          | )      | (1,079 | ) |
| Net  cash provided by (used in) financing activities                                       |   | 71,921                          |   | (19,945 | ) |
| Net  increase (decrease) in cash and temporary cash investments:                           |   | 60,846                          |   | (697 | ) |
| Cash  and temporary cash investments at beginning of year:                                 |   | 18,312                          |   | 11,743 |   |
| Cash  and temporary cash investments at June 30                                            |   | $                               | 79,158 |   | $ | 11,046 |   |
|                                                                                       |   |                            |   |   |   |
| Supplemental  disclosures of cash flow information:                                        |   |                            |   |   |   |
|                                                                                       |   |                            |   |   |   |
| Cash  paid during the period for:                                                          |   |                            |   |   |   |
|                                                                                       |   |                            |   |   |   |
| Interest                                                                                   |   | $                               | 35,135 |   | $ | 37,043 |   |
|                                                                                       |   |                            |   |   |   |
| Income  taxes                                                                              |   | $                               | 88     |   | $ | 9,411 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

6

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CENTRAL ILLINOIS LIGHTCOMPANY

Consolidated Statementsof Income

(In thousands)

(Unaudited)

 
|                                   |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                   |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
| Operating  revenue:                    |   |                              |   |                            |   |   |   |   |   |
| Electric                               |   | $                                 | 94,656 |                            | $      | 92,299 |   | $ | 178,769 |   | $ | 181,299 |   |
| Gas                                    |   | 38,181                            |   | 41,746                          |   | 118,199 |   | 200,695 |   |
| Total  operating revenues              |   | 132,837                           |   | 134,045                         |   | 296,968 |   | 381,994 |   |
| Operating  expenses:                   |   |                              |   |                            |   |   |   |   |   |
| Cost  of fuel                          |   | 24,295                            |   | 24,704                          |   | 46,325 |   | 53,964 |   |
| Cost  of gas                           |   | 22,364                            |   | 25,816                          |   | 71,972 |   | 152,496 |   |
| Purchased  power                       |   | 12,517                            |   | 9,547                           |   | 24,047 |   | 19,659 |   |
| Other  operations and maintenance      |   | 35,417                            |   | 33,439                          |   | 66,863 |   | 62,474 |   |
| Depreciation  and amortization         |   | 17,681                            |   | 17,244                          |   | 35,345 |   | 34,469 |   |
| Income  taxes                          |   | 2,143                             |   | 3,288                           |   | 7,655 |   | 9,944 |   |
| Other  taxes                           |   | 9,168                             |   | 8,791                           |   | 20,908 |   | 21,659 |   |
| Total  operating expenses              |   | 123,585                           |   | 122,829                         |   | 273,115 |   | 354,665 |   |
| Operating  income                      |   | 9,252                             |   | 11,216                          |   | 23,853 |   | 27,329 |   |
| Other  income and deductions:          |   |                              |   |                            |   |   |   |   |   |
| Company-owned  life insurance, net     |   | (325                              | )      | (316                            | )      | (667 | ) | (618 | ) |
| Other,  net                            |   | 4,584                             |   | 2,833                           |   | 5,388 |   | 5,285 |   |
| Total  other income and (deductions)   |   | 4,259                             |   | 2,517                           |   | 4,721 |   | 4,667 |   |
| Interest  expenses:                    |   |                              |   |                            |   |   |   |   |   |
| Interest  on long-term debt            |   | 4,387                             |   | 4,329                           |   | 8,754 |   | 8,657 |   |
| Cost  of borrowed funds capitalized    |   | (409                              | )      | (26                             | )      | (647 | ) | (44 | ) |
| Other                                  |   | 979                               |   | 1,856                           |   | 2,029 |   | 3,478 |   |
| Total  interest expense                |   | 4,957                             |   | 6,159                           |   | 10,136 |   | 12,091 |   |
| Net  income before preferred dividends |   | 8,554                             |   | 7,574                           |   | 18,438 |   | 19,905 |   |
| Dividends  on preferred stock          |   | 539                               |   | 539                             |   | 1,079 |   | 1,079 |   |
| Income  available for common stock     |   | 8,015                             |   | 7,035                           |   | 17,359 |   | 18,826 |   |
| Other  comprehensive income (loss)     |   | (440                              | )      | (6,620                          | )      | 5,024 |   | (6,869 | ) |
| Comprehensive  income                  |   | $                                 | 7,575  |                            | $      | 415 |   | $ | 22,383 |   | $ | 11,957 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

7

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CENTRAL ILLINOIS LIGHT COMPANY

Consolidated BalanceSheets

(In thousands)

(Unaudited)

 
|                                                                                                        |   | **June 30,  2002** |      | **December  31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
| ASSETS                                                                                                      |   |               |      |                    |   |
| Utility Plant,  At Original Cost:                                                                           |   |               |      |                    |   |
| Electric                                                                                                    |   | $                  | 1,333,967 |                    | $      | 1,326,231 |   |
| Gas                                                                                                         |   | 462,407            |      | 457,165                 |   |
|                                                                                                        |   | 1,796,374          |      | 1,783,396               |   |
| Less-Accumulated  Provision for Depreciation                                                                |   | 1,012,719          |      | 985,045                 |   |
|                                                                                                        |   | 783,655            |      | 798,351                 |   |
| Construction  Work in Progress                                                                              |   | 77,244             |      | 34,340                  |   |
| Total Utility  Plant                                                                                        |   | 860,899            |      | 832,691                 |   |
| Other Property  and Investments:                                                                            |   |               |      |                    |   |
| Cash Surrender  Value of Company-owned Life Insurance (Net of Related Policy Loans of $69,592  and $65,314) |   | 3,541              |      | 3,920                   |   |
| Other                                                                                                       |   | 1,115              |      | 1,133                   |   |
| Total Other  Property and Investments                                                                       |   | 4,656              |      | 5,053                   |   |
| Current Assets:                                                                                             |   |               |      |                    |   |
| Cash and Temporary  Cash Investments                                                                        |   | 71,108             |      | 12,584                  |   |
| Receivables,  Less Allowance for Uncollectible Accounts of $2,609 and $1,800                                |   | 51,145             |      | 49,375                  |   |
| Accrued Unbilled  Revenue                                                                                   |   | 23,400             |      | 34,067                  |   |
| Fuel, at Average  Cost                                                                                      |   | 18,169             |      | 18,068                  |   |
| Materials and  Supplies, at Average Cost                                                                    |   | 16,475             |      | 15,849                  |   |
| Gas in  Underground Storage, at Average Cost                                                                |   | 13,751             |      | 27,067                  |   |
| Prepaid Taxes                                                                                               |   | 9,504              |      | 9,007                   |   |
| FAC  Underrecoveries                                                                                        |   | 1,255              |      | 1,255                   |   |
| PGA  Underrecoveries                                                                                        |   | 5,288              |      | 3,236                   |   |
| Other                                                                                                       |   | 11,120             |      | 7,569                   |   |
| Total Current  Assets                                                                                       |   | 221,215            |      | 178,077                 |   |
| Deferred Debits:                                                                                            |   |               |      |                    |   |
| Unamortized Loss  on Reacquired Debt                                                                        |   | 2,327              |      | 2,448                   |   |
| Unamortized Debt  Expense                                                                                   |   | 1,746              |      | 1,305                   |   |
| Prepaid Pension  Cost                                                                                       |   | 168                |      | 168                     |   |
| Other                                                                                                       |   | 19,699             |      | 21,971                  |   |
| Total Deferred  Debits                                                                                      |   | 23,940             |      | 25,892                  |   |
| Total Assets                                                                                                |   | $                  | 1,110,710 |                    | $      | 1,041,713 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

8

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|                                                                                     |   | **June 30,  2002** |      | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
| 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                                                                       |   | 97,404             |      | 108,045                 |   |
| Accumulated  Other Comprehensive Income (Loss)                                           |   | (781               | )         | (5,805                  | )      |
| Total Common  Stockholder’s Equity                                                  |   | 334,284            |      | 339,901                 |   |
|                                                                                     |   |               |      |                    |   |
| Preferred Stock  Without Mandatory Redemption                                            |   | 19,120             |      | 19,120                  |   |
| Preferred Stock  With Mandatory Redemption                                               |   | 22,000             |      | 22,000                  |   |
| Long-term Debt                                                                           |   | 317,405            |      | 242,730                 |   |
| Total  Capitalization                                                                    |   | 692,809            |      | 623,751                 |   |
| Current  Liabilities:                                                                    |   |               |      |                    |   |
| Current  Maturities of Long-Term Debt                                                    |   | 26,750             |      | 1,400                   |   |
| Notes Payable                                                                            |   | 36,000             |      | 43,000                  |   |
| Accounts Payable                                                                         |   | 57,847             |      | 81,140                  |   |
| Accrued Taxes                                                                            |   | 35,501             |      | 28,862                  |   |
| Accrued Interest                                                                         |   | 8,169              |      | 9,143                   |   |
| Other                                                                                    |   | 9,389              |      | 18,281                  |   |
| Total Current  Liabilities                                                               |   | 173,656            |      | 181,826                 |   |
| Deferred  Liabilities and Credits:                                                       |   |               |      |                    |   |
| Accumulated  Deferred Income Taxes                                                       |   | 103,352            |      | 92,428                  |   |
| Regulatory  Liability                                                                    |   | 35,835             |      | 45,377                  |   |
| Investment Tax  Credits                                                                  |   | 13,756             |      | 14,553                  |   |
| Other                                                                                    |   | 91,302             |      | 83,778                  |   |
| Total Deferred  Liabilities and Credits                                                  |   | 244,245            |      | 236,136                 |   |
| Total  Capitalization and Liabilities                                                    |   | $                  | 1,110,710 |                    | $      | 1,041,713 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

9

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CENTRAL ILLINOIS LIGHT COMPANY

### Consolidated Statementsof Cash Flows

(In thousands)

(Unaudited)

 
|                                                                           |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                           |   | **2002**                        |   | **2001** |   |
| Cash  flows from operating activities:                                         |   |                            |   |   |   |
| Net  income before preferred dividends                                         |   | $                               | 18,438 |   | $ | 19,905 |   |
|                                                                           |   |                            |   |   |   |
| Adjustments  to reconcile net income to cash provided by operating activities: |   |                            |   |   |   |
| Depreciation  and amortization                                                 |   | 35,345                          |   | 34,469 |   |
| Deferred  income taxes, investment tax credit and regulatory liability, net    |   | 6,813                           |   | (10,015 | ) |
| Changes  in operating assets and liabilities:                                  |   |                            |   |   |   |
| Increase  in accounts receivable                                               |   | (1,771                          | )      | (16,687 | ) |
| Decrease  in fuel, materials and supplies, and gas in underground storage      |   | 12,590                          |   | 5,787 |   |
| Decrease  in accrued unbilled revenue                                          |   | 10,667                          |   | 39,483 |   |
| Decrease  in accounts payable                                                  |   | (23,293                         | )      | (40,629 | ) |
| Increase  (decrease) in accrued taxes and interest                             |   | 5,666                           |   | (2,064 | ) |
| Capital  lease payments                                                        |   | 323                             |   | 323 |   |
| (Increase)  decrease in other current assets                                   |   | (6,101                          | )      | 15,954 |   |
| (Decrease)  increase in other current liabilities                              |   | (3,868                          | )      | 5,743 |   |
| Decrease  (increase) in other non-current assets                               |   | 3,256                           |   | (14,174 | ) |
| Increase  in other non-current liabilities                                     |   | 1,363                           |   | 2,725 |   |
| Net  cash provided by operating activities                                     |   | 59,428                          |   | 40,820 |   |
| Cash  flows from investing activities:                                         |   |                            |   |   |   |
| Capital  expenditures                                                          |   | (63,051                         | )      | (24,532 | ) |
| Other                                                                          |   | (1,451                          | )      | (1,181 | ) |
| Net  cash used in investing activities                                         |   | (64,502                         | )      | (25,713 | ) |
| Cash  flow from financing activities:                                          |   |                            |   |   |   |
| Common  dividends paid                                                         |   | (28,000                         | )      | (30,000 | ) |
| Preferred  dividends paid                                                      |   | (1,079                          | )      | (1,079 | ) |
| Payments  on capital lease obligation                                          |   | (323                            | )      | (323 | ) |
| (Decrease)  increase in short-term borrowing                                   |   | (7,000                          | )      | 13,134 |   |
| Long-term  debt issued                                                         |   | 100,000                         |   | — |   |
| Net  cash provided by (used in) financing activities                           |   | 63,598                          |   | (18,268 | ) |
| Net  increase (decrease) in cash and temporary cash investments                |   | 58,524                          |   | (3,161 | ) |
|                                                                           |   |                            |   |   |   |
| Cash  and temporary cash investments at beginning of year                      |   | 12,584                          |   | 8,777 |   |
| Cash  and temporary cash investments at June 30                           |   | $                               | 71,108 |   | $ | 5,616 |   |
|                                                                           |   |                            |   |   |   |
| Supplemental  disclosures of cash flow information:                            |   |                            |   |   |   |
|                                                                           |   |                            |   |   |   |
| Cash  paid during the period for:                                              |   |                            |   |   |   |
|                                                                           |   |                            |   |   |   |
| Interest  (net of cost of borrowed funds capitalized)                          |   | $                               | 14,360 |   | $ | 13,249 |   |
|                                                                           |   |                            |   |   |   |
| Income  taxes                                                                  |   | $                               | 1,167  |   | $ | 17,508 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

10

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Statements of Segments ofBusiness

CILCORP Inc. andSubsidiaries

Three Months EndedJune 30, 2002

 
|                                                     |   | **CILCO  Electric** |   | **CILCO  Gas** |   | **CILCO  Other** |   | **Other  Businesses** |   | **Discont.  Oper.** |   | **Total** |   |
|----------------------------------------------------------|--------|---------------------|--------|----------------|--------|------------------|--------|-----------------------|--------|---------------------|--------|-----------|--------|
|                                                     |   | **(In  thousands)** |   |
|                                                     |   |                |   |           |   |             |   |                  |   |                |   |      |   |
| Revenues                                                 |   | $                   | 94,656 |           | $      | 38,181           |   | $                     | 28,437 |                | $      | 11,720    |   | $ | — |   | $ | 172,994 |   |
| Interest income                                          |   | —              |   | —         |   | 36               |   | 16                    |   | —              |   | 52        |   |
| Total                                                    |   | 94,656              |   | 38,181         |   | 28,473           |   | 11,736                |   |                |   | 173,046   |   |
| Operating  expenses                                      |   | 69,863              |   | 33,898         |   | 21,777           |   | 10,272                |   | —              |   | 135,810   |   |
| Depreciation and  amortization                           |   | 12,074              |   | 5,607          |   | —           |   | 355                   |   | —              |   | 18,036    |   |
| Total                                                    |   | 81,937              |   | 39,505         |   | 21,777           |   | 10,627                |   |                |   | 153,846   |   |
| Interest expense                                         |   | 3,907               |   | 1,459          |   | —           |   | 11,222                |   | —              |   | 16,588    |   |
| Preferred stock  dividends                               |   | —              |   | —         |   | 539              |   | —                |   | —              |   | 539       |   |
| Fixed  charges and                                       |   |                |   |           |   |             |   |                  |   |                |   |      |   |
| other expenses                                           |   | (409                | )      | —         |   | 325              |   | —                |   | —              |   | (84       | )      |
| Total                                                    |   | 3,498               |   | 1,459          |   | 864              |   | 11,222                |   | —              |   | 17,043    |   |
| Income  (loss) from continuing oper. before income taxes |   | 9,221               |   | (2,783         | )      | 5,832            |   | (10,113               | )      | —              |   | 2,157     |   |
| Income  taxes                                            |   | 3,204               |   | (1,061         | )      | 2,112            |   | (4,218                | )      | —              |   | 37        |   |
| Net  income (loss) from continuing oper.                 |   | 6,017               |   | (1,722         | )      | 3,720            |   | (5,895                | )      | —              |   | 2,120     |   |
|                                                     |   |                |   |           |   |             |   |                  |   |                |   |      |   |
| Effect  of discontinued oper.                            |   | —              |   | —         |   | —           |   | —                |   | (3                  | )      | (3        | )      |
| Segment  net income (loss)                               |   | $                   | 6,017  |           | $      | (1,722           | )      | $                     | 3,720  |                | $      | (5,895    | )      | $ | (3 | ) | $ | 2,117 |   |

 

See Notes toConsolidated Financial Statements.

 

11

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Statements of Segments ofBusiness

CILCORP Inc. andSubsidiaries

Three Months Ended June30, 2001

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

 

See Notes toConsolidated Financial Statements.

 

12

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Statements ofSegments of Business

CILCORP Inc. andSubsidiaries

Six Months EndedJune 30, 2002

 
|                                                     |   | **CILCO  Electric** |    | **CILCO  Gas** |   | **CILCO  Other** |   | **Other  Businesses** |   | **Discont.  Oper.** |   | **Total** |   |
|----------------------------------------------------------|--------|---------------------|---------|----------------|--------|------------------|--------|-----------------------|--------|---------------------|--------|-----------|--------|
|                                                     |   | **(In  thousands)** |    |
|                                                     |   |                |    |           |   |             |   |                  |   |                |   |      |   |
| Revenues                                                 |   | $                   | 178,769 |           | $      | 118,199          |   | $                     | 50,187 |                | $      | 29,721    |   | $ | — |   | $ | 376,876 |   |
| Interest income                                          |   | —              |    | —         |   | 46               |   | 306                   |   | —              |   | 352       |   |
| Total                                                    |   | 178,769             |    | 118,199        |   | 50,233           |   | 30,027                |   | —              |   | 377,228   |   |
| Operating  expenses                                      |   | 133,491             |    | 96,624         |   | 43,100           |   | 26,880                |   | —              |   | 300,095   |   |
| Depreciation and  amortization                           |   | 24,141              |    | 11,204         |   | —           |   | 702                   |   | —              |   | 36,047    |   |
| Total                                                    |   | 157,632             |    | 107,828        |   | 43,100           |   | 27,582                |   | —              |   | 336,142   |   |
| Interest expense                                         |   | 7,839               |    | 2,944          |   | —           |   | 22,071                |   | —              |   | 32,854    |   |
| Preferred stock  dividends                               |   | —              |    | —         |   | 1,079            |   | —                |   | —              |   | 1,079     |   |
| Fixed charges  and other expenses                        |   | (647                | )       | —         |   | 667              |   | —                |   | —              |   | 20        |   |
| Total                                                    |   | 7,192               |    | 2,944          |   | 1,746            |   | 22,071                |   | —              |   | 33,953    |   |
| Income  (loss) from continuing oper. before income taxes |   | 13,945              |    | 7,427          |   | 5,387            |   | (19,626               | )      | —              |   | 7,133     |   |
| Income  taxes                                            |   | 4,675               |    | 2,980          |   | 1,745            |   | (8,402                | )      | —              |   | 998       |   |
| Net  income (loss) from continuing oper.                 |   | 9,270               |    | 4,447          |   | 3,642            |   | (11,224               | )      | —              |   | 6,135     |   |
|                                                     |   |                |    |           |   |             |   |                  |   |                |   |      |   |
| Effect  of discontinued oper.                            |   | —              |    | —         |   | —           |   | —                |   | (12                 | )      | (12       | )      |
| Segment  net income (loss)                               |   | $                   | 9,270   |           | $      | 4,447            |   | $                     | 3,642  |                | $      | (11,224   | )      | $ | (12 | ) | $ | 6,123 |   |

 

See Notes toConsolidated Financial Statements.

 

13

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Statements ofSegments of Business

CILCORP Inc. andSubsidiaries

Six Months EndedJune 30, 2001

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

 

See Notes toConsolidated Financial Statements.

 

14

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CILCORP INC. ANDCENTRAL ILLINOIS LIGHT COMPANY

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.  Introduction

 

The consolidatedfinancial statements include the accounts of CILCORP Inc. (CILCORP or theHolding Company), Central Illinois Light Company (CILCO), QST Enterprises Inc.(QST) and its subsidiaries, QST Energy Inc. (QST Energy), and CILCORPInfraservices Inc. (CILCORP Infraservices), and CILCORP’s other subsidiaries(collectively, the Company), after elimination of significant intercompanytransactions.  The consolidatedfinancial statements of CILCO include the accounts of CILCO and itssubsidiaries, CILCO Exploration and Development Company, CILCO EnergyCorporation, and Central Illinois Generation, Inc.  CILCORP owns 100% of the common stock of its first-tiersubsidiaries.  In the fourth quarter of1998, 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, TheAES Corporation (AES) announced an agreement with Ameren Corporation to sell100 percent of its ownership interest in CILCORP and its subsidiaries.  The transaction is subject to regulatory approvalsby the Illinois Commerce Commission (ICC), the Federal Energy RegulatoryCommission (FERC), the Federal Communications Commission (FCC), the Securitiesand Exchange Commission (SEC), and expiration of the waiting period under theHart-Scott-Rodino Antitrust Improvements Act. AES expects the sale to close in the first quarter 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’s opinion,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 ultimateoutcome is 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’sfinancial position 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 Company utilizescommodity futures contracts, options and swaps in the normal course of itsnatural 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 inthe derivative’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, all gains and losses are recorded in OCI until the hedgedtransaction is recorded in earnings.  Ifa cash flow hedge is terminated because it is probable that the hedgedtransaction will not occur, the related balance in OCI as of such date isimmediately recognized in earnings.  Ifa cash flow hedge is terminated early for other reasons, the related balance inOCI as of the termination date is recognized in earnings concurrently with therelated 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 ended June30, 2002, was $0.3 million for natural gas (included in Gas Purchased forResale).  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-taxloss in OCI in the amount of $0.3 million for the quarter ended June 30, 2002.  The after-tax balance in OCI associated withthese open derivative positions

 

16

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at June 30, 2002, was$(0.3) million.  This portion of OCIreflects hedges of natural gas sales of 1,700,000 MMBtu for commitments throughFebruary 2004.  Approximately $0.3 millionof OCI related to derivative financial instruments as of June 30, 2002, isexpected to be recognized as an increase to operating  earnings over the next twelve months based on market prices as ofJune 30, 2002.  The actual amountrecognized in earnings will be based on the market conditions at the time thederivatives are settled.

 

In May 2001, the Companyimplemented a winter 2001-2002 hedging strategy related to regulated gasactivities.  This strategy utilizedcollars (a combination of a put option and a call option) and futures to helpprotect customers who are charged the Company’s Purchased Gas Adjustment (PGA)from large price fluctuations.  TheCompany has recognized the mark-to-market value in OCI, consistent with SFAS133.  In the month of delivery, anyrelated mark-to-market value is removed from OCI and charged/credited to thecustomer.  This program was completed inMarch 2002.  Beginning in March 2002,the Company is hedging its injections into storage fields utilizing collars andfutures to further hedge the cost for customers charged the PGA.  In May 2002, the Company began its winter2002-2003 hedge program which is similar to the winter 2001-2002 program.

 

Beginning with the secondquarter of 2002, gains and losses on PGA-related positions are being recordedas regulatory assets or liabilities in accordance with Statement of FinancialAccounting Standards No. 71, “Accounting for the Effects of Certain Types ofRegulation” (SFAS 71), as opposed to being recorded in OCI.  An after-tax gain of $0.2 million wasreclassified from OCI to regulatory liabilities and was grossed-up for taxes,resulting in a regulatory liability of $0.3 million at April 1, 2002.  For the quarter ended June 30, 2002, amark-to-market loss of $0.3 million was recorded in the regulatory liabilityfor all PGA-related derivatives, reducing the regulatory liability to $0,meaning these positions are at market. This reflects hedges of natural gas sales of 500,000 MMBtu forcommitments through March 2003.

 

In December 2001, the FinancialAccounting Standards Board (FASB) revised its earlier conclusion, DerivativesImplementation Group (DIG) Issue C-15, related to contracts involving thepurchase 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 thathave a price based on an underlying that is not clearly and closely related tothe electricity being sold or purchased or that are denominated in a currencythat is foreign to the buyer or seller are not considered normal purchases andnormal sales and are required to be accounted for as derivatives under SFAS 133.  This revised conclusion was effectivebeginning April 1, 2002.  The Companyhas determined that its physical contracts qualify for the normal purchases andsales exemption as redefined in DIG Issue C-15 and are not to be accounted foras derivatives under SFAS 133.

 

17

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NOTE 4.  Other Comprehensive Income

 

Rollforward of Accumulated Other Comprehensive Income -CILCORP Inc.

 
|                                                                    |   | **Pension**        |   | **SFAS 133** |   | **Total** |   |
|-------------------------------------------------------------------------|--------|--------------------|--------|--------------|--------|-----------|--------|
|                                                                    |   | **(In thousands)** |   |
|                                                                    |   |               |   |         |   |      |   |
| Accumulated  other comprehensive income (loss) - March 31, 2002 balance |   | $                  | (9,333 | )            | $      | 771       |   | $ | (8,562 | ) |
|                                                                    |   |               |   |         |   |      |   |
| Other  comprehensive income -                                           |   |               |   |         |   |      |   |
| Pension                                                                 |   | —             |   | —       |   | —    |   |
| SFAS 133                                                                |   | —             |   | (440         | )      | (440      | )      |
| Accumulated  other comprehensive income (loss) - June 30, 2002 balance  |   | $                  | (9,333 | )            | $      | 331       |   | $ | (9,002 | ) |

 

Rollforward of Accumulated Other Comprehensive Income - CentralIllinois Light Company

 
|                                                                    |   | **Pension**        |   | **SFAS 133** |   | **Total** |   |
|-------------------------------------------------------------------------|--------|--------------------|--------|--------------|--------|-----------|--------|
|                                                                    |   | **(In thousands)** |   |
|                                                                    |   |               |   |         |   |      |   |
| Accumulated  other comprehensive income (loss) - March 31, 2002 balance |   | $                  | (1,112 | )            | $      | 771       |   | $ | (341 | ) |
|                                                                    |   |               |   |         |   |      |   |
| Other  comprehensive income -                                           |   |               |   |         |   |      |   |
| Pension                                                                 |   | —             |   | —       |   | —    |   |
| SFAS 133                                                                |   | —             |   | (440         | )      | (440      | )      |
| Accumulated  other comprehensive income (loss) - June 30, 2002 balance  |   | $                  | (1,112 | )            | $      | 331       |   | $ | (781 | ) |

 

18

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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.  The initialimpairment assessment has been performed, utilizing the requirements of SFAS142, and the Company has determined that its fair value exceeds its carryingvalue and therefore, goodwill for the Company is considered not impaired.  The Company has identified the followingfour 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)** |    |
|                                                                           |   |                |    |
| 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

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

 

CILCORP Inc. (CILCORP) is a wholly-owned subsidiary of The AESCorporation (AES).  The financialcondition and operating results of CILCORP and its subsidiaries (the Company)primarily reflect the operations of subsidiary Central Illinois Light Company(CILCO).

 

In July 2000, AES announced plans to acquire IPALCO Enterprises, Inc.(IPALCO), a utility holding company headquartered in Indianapolis,Indiana.  Following this announcement,AES indicated that as part of the Securities and Exchange Commission (SEC)approval process for the IPALCO transaction, AES expected to restructure itsownership interests in CILCORP within a specified period of time in order tocontinue as an exempt holding company under the Public Utility Holding CompanyAct of 1935 (PUHCA).  On March 23, 2001,AES received an order from the SEC which allowed AES’ continued exemption fromPUHCA.  The exemption order required AESto divest its ownership interests in CILCO’s regulated utility assets withintwo years of the 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 Businesses segment includes the operations of the HoldingCompany itself (Holding Company), its investment subsidiary, CILCORP InvestmentManagement Inc. (CIM), CILCORP Ventures Inc. (CVI), and CILCORP InfraservicesInc. which provides utility infrastructure operation and maintenanceservices.  The results of QST and itssubsidiaries (excluding ESE Land Corporation and CILCORP Infraservices Inc.)are reported as discontinued operations (see Results of Operations - QSTEnterprises Discontinued Operations).

 

Forward-LookingInformation

 

Forward-looking information is included in Management’s Discussion andAnalysis of Financial Condition and Results of Operations (MD&A).  Certain material contingencies are alsodescribed in Note 2 to the Consolidated Financial Statements.

 

Some important factors could cause actual results or outcomes to differmaterially from those expressed or implied in MD&A.  The business and profitability of CILCORPand its subsidiaries are influenced by economic and geographic factors,including ongoing changes in environmental laws and weather conditions; theextent and pace of development of competition for retail and wholesale energycustomers; changes in technology; changes in company-wide operation and plantavailability compared to historical performance and changes in historicaloperating cost structure, including changes in various costs and expenses;pricing and transportation of commodities; market supply and demand for energyand energy derivative financial instruments; inflation; capital marketconditions; and environmental protection and compliance costs.  Prevailing governmental policies, statutorychanges, and regulatory actions with respect to rates, tariffs, industrystructure and recovery of various costs incurred by CILCO in the course of itsbusiness and increasing wholesale and retail competition in the electric andgas business affect its earnings.  Inaddition, actual results or outcomes could differ materially from thoseexpressed or implied

 

20

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in MD&A due to the announced agreement by CILCORP’s soleshareholder, The AES Corporation, to sell its ownership interest in CILCORP andits subsidiaries to Ameren Corporation. All such factors are difficult to predict, contain uncertainties thatmay materially affect actual results and, to a significant degree, are beyondthe control of CILCORP and its subsidiaries. CILCORP and its subsidiaries undertake no obligation to publicly updateor revise any forward-looking statements, whether as a result of changes inactual results, assumptions or other factors.

 

Capital Resources & Liquidity

 

The Company believes that internal and external sources of capitalwhich are or are expected to be available will be adequate to fund its capitalexpenditures, pay its financial obligations, meet working capital needs andretire or refinance debt as it matures.

 

CILCORP

 

CILCORP (the Holding Company) is currently authorized by its Board ofDirectors to borrow up to $60 million on a short-term basis.  At June 30, 2002, the Holding Company had noshort-term debt outstanding.

 

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

 

CILCO

 

Capital expenditures totaled $63.1 million for the six months endedJune 30, 2002.  Capital expenditures areanticipated to be approximately $71.9 million for the remainder of 2002 and arecurrently estimated to be approximately $80.2 million in 2003.  The increase in capital expenditures in 2002and 2003 relates primarily to the installation of nitrogen oxide (NOx)reduction equipment at the Edwards and Duck Creek generating stations.

 

CILCO had short-term debt of $36 million at June 30, 2002, consistingentirely of commercial paper, outstanding at an average rate of 2.55%.  CILCO expects to issue commercial paperthroughout 2002, and is currently authorized by its Board of Directors to issueup to $150 million of short–term debt.  At June 30, 2002, committed bank lines of credit totaled $90million, all of which were unused except in support of commercial paperissuance.  During 2002, CILCO expects tocontinue to support commercial paper issuance with its bank lines ofcredit.  CILCO plans to finance its 2002and 2003 capital expenditures with funds provided by operations, short-termdebt and long-term debt.  In June 2002,CILCO obtained a two-year $100 million senior secured term loan.  The proceeds of the borrowings will be usedto reduce short-term debt, refund medium-term notes maturing in 2003 and fundcapital expenditures.  The loan issecured by a first mortgage on substantially all of CILCO’s property and has avariable interest rate.  The averageinterest rate on this term loan is currently 3.01%.  Future funds provided by operations may be affected by thederegulation of the electric and natural gas utility industries (seeCompetition).

 

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CIM

 

At June 30, 2002, CIM had outstanding debt of $11.3 million, borrowedfrom CILCORP.

 

CVI

 

At June 30, 2002, CVI had outstanding debt of $4.8 million, borrowedfrom CILCORP.

 

Competition

 

CILCO, as a regulated public utility, has an obligation to provideservice to retail customers within its defined service territory; thus, CILCOhas not generally been in competition with other public utilities for retailelectric or gas customers in these areas. However, the passage of the Electric Service Customer Choice and RateRelief Law of 1997 (Customer Choice Law) began a transition process to a fullycompetitive market for electricity in Illinois.   During the mandatory transition period, electric utilities areprohibited from increasing base rates, unless the electric utility demonstratesthat its 2-year average earned rate of return is below the 2-year average ofthe monthly average yield of the U.S. Treasury long-term bond index.  The mandatory transition period ends onJanuary 1, 2005.  Recently enacted legislationextends this rate freeze and transition period to January 1, 2007, providedthat Ameren Corporation’s acquisition of CILCORP and its subsidiaries closes asanticipated.  Electricity and naturalgas also compete with other forms of energy available to customers.  For example, within the City of Springfield,CILCO’s natural gas business competes with the City’s municipal electric systemto provide customer energy needs.

 

Primarily as a result of the Customer Choice Law, the electric industryin Illinois will change significantly during the coming years at both thewholesale and retail levels.  As ofDecember 31, 2000, all non-residential customers had the ability to choosetheir electric supplier.  Residentialelectric customers are able to choose their electric supplier as of May 1,2002.

 

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

 

On March 9, 2000, CILCO filed revised tariff sheets with the ICCeliminating the collection of the customer transition charge effective March17, 2000.  At a March 15, 2000, hearing,the ICC approved CILCO’s revised tariffs, thereby eliminating the collection ofany customer transition charge.  CILCOcannot re-establish the collection of a transition charge until it files, andthe ICC approves, revised tariff sheets that reinstate a transition charge.

 

The Customer Choice Law also requires electric base rate reductionsthat vary by utility.  CILCO reduced itsresidential base rates by 2% in August 1998 and by 2% in October 2000 and mustreduce residential base rates by an additional 1% in October 2002.  Also, CILCO’s return on common equity will,in general,

 

22

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be capped (the Equity Cap) at an index (a 12-month average yield for 30year U.S. Treasury bonds plus 8% for calendar years 1998 and 1999 and a 12month-average yield for U.S. Treasury bonds plus 9% for calendar years 2000 through2004) plus 1.5 percentage points.  TheEquity Cap was 16.1% in 2001, 16.6% in 2000, and 15.1% in 1999.  If CILCO’s two-year average return on commonequity exceeds the two–year average of the Equity Cap, fifty percent ofthe earnings in excess of the average Equity Cap must be refunded to customersin the following year.

 

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

 

With the enactment of the Customer Choice Law, electric generation inIllinois became deregulated and competitive. As a result, the accounting principles applicable to rate-regulatedenterprises (Statement of Financial Accounting Standards No. 71, “Accountingfor the Effects of Certain Types of Regulation” (SFAS 71)) no longer apply tothe electric generation portion of CILCO’s business.  There were no impairments to CILCO assets as a result oftransitioning from SFAS 71.  Its abilityto keep total production costs competitive in a deregulated market willdetermine whether and to what extent the value of these assets may be impairedin the future.

 

With electric choicebeginning on October 1, 1999, for its industrial customers and some of itscommercial customers, and with all other non-residential customers being ableto choose their electric supplier on December 31, 2000, CILCO has enteredinto 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 will be negotiating newcontracts with customers who are currently being served under bundled tariffrates.  For those contracts expiring in2002, CILCO will be negotiating contract extensions with selected customers.

 

The ultimate market price for electricity, the cost for a utility toproduce or buy electricity, and the number of customers that may be gained orlost due to customer choice of supplier in Illinois cannot be predicted.  As a result, management cannot predict theultimate impact that the Customer Choice Law will have on CILCORP’s financialposition or results of operation, but the effect could be significant.  However, CILCO is currently a low-costprovider of electricity, and management will continue to position CILCO forcompetition by controlling costs, maintaining good customer relations, anddeveloping flexibility to meet individual customer requirements.  As of June 30, 2002, all electric customerseligible for choice continue to purchase their electricity supply from CILCO,other than those who self-generate.  Asof June 30, 2002, CILCO has contracts totaling approximately 2.6 millionmegawatt hours of retail 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.

 

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MarketRisk Sensitive Instruments

 

# **CILCORPand its subsidiaries (the Company) are exposed to non-trading risks through itsdaily business activities.  Thesenon-trading activities may include the market or commodity price risk relatedto CILCO’s retail tariff activity and the Company’s non-regulated commoditymarketing activities.**

# ** **

# **Themajority of the Company’s electricity sales during the second quarter of 2002were to CILCO retail customers in Illinois under tariffs regulated by theIllinois Commerce Commission (ICC). (All prudently incurred gas costs are recovered through the Company’sPurchased Gas Adjustment (PGA) for sales to customers under tariffs regulatedby the ICC.)  Prior to October 29,2001, prudently incurred costs of fuel used to generate electricity andpurchased power costs were recovered from retail customers that purchase energythrough regulated tariffs under the Fuel Adjustment Clause (FAC).  Thus, through October 28, 2001, there hadbeen very limited commodity price risk associated with CILCO’s traditionalregulated sales.  CILCO filed toeliminate 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 risk due tothe elimination of the FAC, sufficient supply has been placed under contract tolimit the Company’s exposure to market risk at any given time.  When this supply is added to CILCOgeneration capacity, a reserve margin of over 15% is forecasted based on theforecasted peak load of 1,228 MW.  SinceCILCO supplies over 90% of its native load with its generation capacity,generation can be adjusted on a real-time basis to match actual load at anygiven time.  CILCO is subject to therisk that generation becomes unavailable due to forced outages.  The Company’s historical unplanned outagerate is 5.1%.  In the event that CILCOgeneration and purchased supply is insufficient to meet load requirements,CILCO would have to purchase electric supply from the market at prevailingmarket rates.**

# ** **

# **Themarket risk inherent in the non-regulated activities of CILCORP and itssubsidiaries is the potential loss arising from adverse changes in natural gasand electric commodity prices relative to the physical and financial positionsthat the Company maintains.  The pricesof natural gas and electricity are subject to fluctuations resulting fromchanges in supply and demand.  TheCompany is engaged in non-regulated electric retail and natural gas sales inIllinois, including wholesale power purchases and sales to utilize its electricgenerating capability.  At June 30, 2002,these non-regulated activities had net open market price risk positions ofapproximately 93,000 MWh of electricity and 225,000 Mcf of natural gas.  A market price sensitivity of 10% applied topositions open in the next twelve months is not material to the Company.  See Note 3 for a discussion of theCompany’s use of financial derivatives for hedging purposes.  Due to the high correlation between thechanges in the value of the financial instrument positions held by the Companyand the change in price of the underlying commodity, the net effect on theCompany’s net income resulting from the change in value of these financialinstruments is not expected to be material.**

# ** **

# **24**

# ****

#  

Results of Operations

 

CILCO Electric Operations

 

The following tablesummarizes the components of CILCO electric operating income for the threemonths and six months ended June 30, 2002 and 2001.

 
|                                         |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
| **Components of Electric Operating  Income** |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                         |   | **(In  thousands)**               |   |
|                                         |   | **(Unaudited)**                   |   |
| Revenue:                                     |   |                              |   |                            |   |   |   |   |   |
| Electric  retail                             |   | $                                 | 92,196 |                            | $      | 87,361 |   | $ | 174,306 |   | $ | 172,896 |   |
| Sales  for resale                            |   | 2,460                             |   | 4,938                           |   | 4,463 |   | 8,403 |   |
| Total  revenue                               |   | 94,656                            |   | 92,299                          |   | 178,769 |   | 181,299 |   |
| Cost  of sales:                              |   |                              |   |                            |   |   |   |   |   |
| Cost  of fuel                                |   | 24,295                            |   | 24,704                          |   | 46,325 |   | 53,964 |   |
| Purchased  power                             |   | 12,517                            |   | 9,547                           |   | 24,047 |   | 19,659 |   |
| Revenue  taxes                               |   | 4,521                             |   | 4,337                           |   | 9,423 |   | 9,547 |   |
| Total  cost of sales                         |   | 41,333                            |   | 38,588                          |   | 79,795 |   | 83,170 |   |
| Gross  margin                                |   | 53,323                            |   | 53,711                          |   | 98,974 |   | 98,129 |   |
| Operating  expenses                          |   |                              |   |                            |   |   |   |   |   |
| Other  operations and maintenance            |   | 26,202                            |   | 24,906                          |   | 48,779 |   | 46,328 |   |
| Depreciation  and amortization               |   | 12,074                            |   | 11,768                          |   | 24,141 |   | 23,524 |   |
| Other  taxes                                 |   | 2,328                             |   | 2,343                           |   | 4,917 |   | 4,838 |   |
| Total  operating expenses                    |   | 40,604                            |   | 39,017                          |   | 77,837 |   | 74,690 |   |
| Fixed  charges and other                     |   |                              |   |                            |   |   |   |   |   |
| Interest  on long-term debt                  |   | 3,194                             |   | 3,091                           |   | 6,364 |   | 6,181 |   |
| Cost  of borrowed funds capitalized          |   | (409                              | )      | (26                             | )      | (647 | ) | (44 | ) |
| Other  interest                              |   | 713                               |   | 1,350                           |   | 1,475 |   | 2,483 |   |
| Total                                        |   | 3,498                             |   | 4,415                           |   | 7,192 |   | 8,620 |   |
|                                         |   |                              |   |                            |   |   |   |   |   |
| Income  before income taxes                  |   | 9,221                             |   | 10,279                          |   | 13,945 |   | 14,819 |   |
| Income  taxes                                |   | 3,204                             |   | 4,058                           |   | 4,675 |   | 5,819 |   |
| Electric  income                             |   | $                                 | 6,017  |                            | $      | 6,221 |   | $ | 9,270 |   | $ | 9,000 |   |

 

Electric gross margindecreased 1% for the quarter and increased 1% for the six months ended June 30,2002, compared to the same periods in 2001. The decrease in gross margin for the quarter was primarily due todecreased wholesale power sales and increased purchased power, partially offsetby increased retail sales.  The increasein electric gross margin for the six months ended was due primarily to a firstquarter 2002 payment discount received by CILCO in conjunction with thetermination of an out-of-market long-term coal contract.  The discount reduced cost of fuel by $0.8million for the first quarter of 2002. On December 20, 2000, as part of the 1999 FAC reconciliation hearings,the Illinois Commerce Commission (ICC) ordered changes in CILCO’s calculationof allowable fuel costs applicable to sales

 

25

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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 fuelcosts to non-regulated sales within CILCO’s service territory.

 

Industrial sales remainedconstant for the quarter and decreased 3% for the six months ended June 30,2002, compared to the same periods in 2001. Residential sales increased 13% for the quarter and 3% for the sixmonths ended June 30, 2002, compared to the same periods in 2001.  Commercial sales increased 3% for thequarter and decreased 1% for the six months ended June 30, 2002, comparedto the same periods in 2001.  Retailkilowatt hour (kWh) sales increased 5% for the quarter and decreased 1% for thesix months ended June 30, 2002, compared to the same periods in 2001.  Cooling degree days were 22% higher for thequarter and six months ended June 30, 2002, compared to the same periods in2001.

 

Sales for resaledecreased 50% for the quarter and 47% for the six months ended June 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 level ofbusiness 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 2% for the quarter and 14% for the six months ended June 30, 2002,compared to the same periods in 2001. Purchased power increased 31% and 22% for the quarter and six monthsended June 30, 2002, respectively, compared to the same periods in 2001.

 

Electric operation andmaintenance expense increased 5% for the quarter and six months ended June 30,2002, compared to the same periods in 2001. The increase was mainly due to increased costs for pension, otherpost-employment benefits and tree trimming partially offset by loweruncollectible accounts expense.  Alsocontributing to the unfavorable variance for the six months ended June 30,2002, were expenses incurred as the result of an ice storm in  the first quarter of 2002.

 

Fixed charges and otherexpenses decreased 21% for the quarter and 17% for the six months ended June30, 2002, compared to the same periods in 2001, primarily due to decreasedshort-term borrowings and increased cost of borrowed funds capitalized.

 

Income tax expensedecreased 21% for the quarter and 20% for the six months ended June 30, 2002,compared to the same periods in 2001, due to decreases in pre-tax operatingincome.

 

26

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CILCO Gas Operations

 

The following tablesummarizes the components of CILCO gas operating income for the three monthsand six months ended June 30, 2002 and 2001.

 
|                                   |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
| **Components of Gas Operating Income** |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                   |   | **(In  thousands)**               |   |
|                                   |   | **(Unaudited)**                   |   |
| Revenue:                               |   |                              |   |                            |   |   |   |   |   |
| Sale  of gas                           |   | $                                 | 36,751 |                            | $      | 40,491 |   | $ | 115,043 |   | $ | 197,964 |   |
| Transportation  services               |   | 1,430                             |   | 1,255                           |   | 3,156 |   | 2,731 |   |
| Total  revenue                         |   | 38,181                            |   | 41,746                          |   | 118,199 |   | 200,695 |   |
| Cost  of sales:                        |   |                              |   |                            |   |   |   |   |   |
| Cost  of gas                           |   | 22,364                            |   | 25,816                          |   | 71,972 |   | 152,496 |   |
| Revenue  taxes                         |   | 1,812                             |   | 1,594                           |   | 5,432 |   | 6,139 |   |
| Total  cost of sales                   |   | 24,176                            |   | 27,410                          |   | 77,404 |   | 158,635 |   |
| Gross  margin                          |   | 14,005                            |   | 14,336                          |   | 40,795 |   | 42,060 |   |
| Operating  expenses                    |   |                              |   |                            |   |   |   |   |   |
| Other  operations and maintenance      |   | 9,215                             |   | 8,533                           |   | 18,084 |   | 16,146 |   |
| Depreciation  and amortization         |   | 5,607                             |   | 5,476                           |   | 11,204 |   | 10,945 |   |
| Other  taxes                           |   | 507                               |   | 517                             |   | 1,136 |   | 1,135 |   |
| Total  operating expenses              |   | 15,329                            |   | 14,526                          |   | 30,424 |   | 28,226 |   |
| Fixed  charges and other               |   |                              |   |                            |   |   |   |   |   |
| Interest  on long-term debt            |   | 1,193                             |   | 1,238                           |   | 2,390 |   | 2,476 |   |
| Other  interest expense                |   | 266                               |   | 506                             |   | 554 |   | 995 |   |
| Total                                  |   | 1,459                             |   | 1,744                           |   | 2,944 |   | 3,471 |   |
| Income  (loss) before income taxes     |   | (2,783                            | )      | (1,934                          | )      | 7,427 |   | 10,363 |   |
| Income  taxes                          |   | (1,061                            | )      | (770                            | )      | 2,980 |   | 4,125 |   |
| Gas  income (loss)                     |   | $                                 | (1,722 | )                               | $      | (1,164 | ) | $ | 4,447 |   | $ | 6,238 |   |

 

Gas gross margindecreased 2% for the quarter and 3% for the six months ended June 30, 2002,compared to the same periods in 2001. Residential sales volumes increased 17% for the quarter and decreased 1%for the six months ended June 30, 2002. Commercial sales volumes remained relatively constant for the quarterand decreased 9% for the six months ended June 30, 2002.  Heating degree days were 6% lower for thesix months ended June 30, 2002, compared to the same period in 2001.  Industrial sales volumes increased 9% forthe quarter and decreased 14% for the six months ended June 30, 2002.

 

The overall level ofbusiness activity in CILCO’s service territory and weather conditions areexpected to continue to be the primary factors affecting gas sales in the nearterm.  CILCO’s gas sales may also beaffected by further deregulation at the retail level in the natural gasindustry.

 

27

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Revenue from gastransportation services increased 14% and 16% for the quarter and six monthsended June 30, 2002, respectively, while gas transportation sales volumesincreased 34% for the quarter and 22% for the six months ended June 30, 2002,compared to the same periods in 2001.

 

The cost of gas decreased13% for the quarter and 53% for the six months ended June 30, 2002, compared tothe same periods in 2001, due to lower natural gas prices during the quarterand six months ended June 30, 2002. These costs were passed through to customers via the Purchased GasAdjustment (PGA).

 

Gas operation andmaintenance expense increased 8% and 12%, respectively, for the quarter and sixmonths ended June 30, 2002, compared to the same periods in 2001.  The increases were primarily due toincreases in expenses for pension and other post-employment benefits, partiallyoffset by decreased uncollectible accounts expense.  The increase for the six months ended was also due to increasesin public liability claims, partially offset by a decrease in gas distributioncosts.

 

Fixed charges and otherexpenses decreased 16% for the quarter and 15% for the six months ended June30, 2002, compared to the same periods in 2001, mainly due to decreasedshort-term borrowings.

 

Income tax expensedecreased 28% for the six months ended June 30, 2002, compared to the sameperiod in 2001, due to a decrease in pre-tax operating income.

 

28

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CILCO Other Operations

 

The following tablesummarizes CILCO’s other income and deductions for the three months and sixmonths ended June 30, 2002 and 2001.

 
| **Components of CILCO Other**        |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                 |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                 |   | **(In  thousands)**               |   |
|                                 |   | **(Unaudited)**                   |   |
| Revenue                              |   | $                                 | 28,437 |                            | $      | 26,210 |   | $ | 50,187 |   | $ | 39,004 |   |
| Expense                              |   | (20,969                           | )      | (22,066                         | )      | (41,012 | ) | (31,223 | ) |
| Gross  margin                        |   | 7,468                             |   | 4,144                           |   | 9,175 |   | 7,781 |   |
|                                 |   |                              |   |                            |   |   |   |   |   |
| Other  income and deductions:        |   |                              |   |                            |   |   |   |   |   |
| Interest  income                     |   | 36                                |   | 120                             |   | 46 |   | 280 |   |
| Operating  expenses                  |   | (757                              | )      | (445                            | )      | (2,037 | ) | (1,066 | ) |
| Other  taxes                         |   | (51                               | )      | —                          |   | (51 | ) | — |   |
| Preferred  stock dividends           |   | (539                              | )      | (539                            | )      | (1,079 | ) | (1,079 | ) |
| Other                                |   | (325                              | )      | (316                            | )      | (667 | ) | (618 | ) |
| Total  other income and (deductions) |   | (1,636                            | )      | (1,180                          | )      | (3,788 | ) | (2,483 | ) |
|                                 |   |                              |   |                            |   |   |   |   |   |
| Income  before income taxes          |   | 5,832                             |   | 2,964                           |   | 5,387 |   | 5,298 |   |
| Income  taxes                        |   | 2,112                             |   | 986                             |   | 1,745 |   | 1,710 |   |
| Other  income                        |   | $                                 | 3,720  |                            | $      | 1,978 |   | $ | 3,642 |   | $ | 3,588 |   |

 

Gross margin increased80% for the quarter and 18% for the six months ended June 30, 2002, compared tothe same periods in 2001, primarily due to increased margin per MWh sold and toincreased non-regulated electricity sales in Illinois outside of CILCO’sservice territory.  The higher marginper MWh sold is not expected to continue beyond the third quarter 2002operating results.  These sales ofelectricity were to customers eligible to choose their energy supplier underthe Customer Choice Law.

 

Operating expenses increasedfor the quarter and six months ended June 30, 2002, compared to the sameperiods in 2001, primarily due to increased administrative and bad debtexpenses for non-regulated sales and increased charitable donations.

######  

29

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###### OtherBusinesses Operations

 

The following tablesummarizes Other Businesses revenue and expenses for the three months and sixmonths ended June 30, 2002 and 2001. Other Businesses results include income earned and expenses incurred atthe Holding Company, CIM, CVI, and CILCORP Infraservices Inc.

 
| **Components of Other Businesses  Net Loss** |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                         |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                         |   | **(In  thousands)**               |   |
|                                         |   | **(Unaudited)**                   |   |
| Revenue:                                     |   |                              |   |                            |   |   |   |   |   |
| Leveraged  lease revenue                     |   | $                                 | 1,290  |                            | $      | 1,343 |   | $ | 2,616 |   | $ | 2,739 |   |
| Interest  income                             |   | 16                                |   | 65                              |   | 306 |   | 155 |   |
| Gas  marketing revenue                       |   | 10,004                            |   | 7,458                           |   | 26,317 |   | 21,439 |   |
| Other  revenue                               |   | 426                               |   | 659                             |   | 788 |   | 1,152 |   |
| Total  revenue                               |   | 11,736                            |   | 9,525                           |   | 30,027 |   | 25,485 |   |
| Expenses:                                    |   |                              |   |                            |   |   |   |   |   |
| Gas  purchased for resale                    |   | 9,895                             |   | 7,595                           |   | 26,178 |   | 21,603 |   |
| Fuel  for generation and purchased power     |   | —                            |   | (1,334                          | )      | — |   | (2,668 | ) |
| Operating  expenses                          |   | 355                               |   | 414                             |   | 660 |   | 861 |   |
| Depreciation  and amortization               |   | 355                               |   | 4,576                           |   | 702 |   | 8,441 |   |
| Interest  expense                            |   | 11,222                            |   | 11,660                          |   | 22,071 |   | 23,531 |   |
| Other  taxes                                 |   | 22                                |   | 20                              |   | 42 |   | 46 |   |
| Total  expenses                              |   | 21,849                            |   | 22,931                          |   | 49,653 |   | 51,814 |   |
| Loss  before income taxes                    |   | (10,113                           | )      | (13,406                         | )      | (19,626 | ) | (26,329 | ) |
| Income  tax benefit                          |   | (4,218                            | )      | (4,061                          | )      | (8,402 | ) | (8,418 | ) |
| Other  Businesses net loss                   |   | $                                 | (5,895 | )                               | $      | (9,345 | ) | $ | (11,224 | ) | $ | (17,911 | ) |

 

Gas marketingrevenues and gas purchased for resale at CVI subsidiary CILCORP Energy ServicesInc. increased significantly due to 

increased gasmarketing sales.

 

Fuel for generationand purchased power was impacted in 2001 by $2.7 million of amortizationrelated to the purchase accounting for an out-of-market coal contract.  This contract was settled during the fourthquarter of 2001 and the preacquistion contingency related to this contract wasremoved.

 

Depreciation andamortization decreased due to the Company’s January 1, 2002, adoption ofStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” (SFAS 142).  SFAS 142requires that goodwill and intangible assets that have indefinite useful livesbe tested at least annually for impairment rather than be amortized.  Accordingly, the Company has ceased goodwillamortization which was approximately $7.7 million in the first half of2001.  See related discussion in Note 5to the Consolidated Financial Statements.

 

30

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Interest expensedecreased for the six months ended June 30, 2002, due to the retirement ofCILCORP’s medium-term notes in 2001 and lower short-term debt in 2002.  This decrease was partially offset byinterest on deferred compensation arrangements for two former officers.

 

The income tax benefitdid not change significantly when comparing the 2002 results to the 2001results for each period, even though the pretax loss was less in the 2002periods.  This is due to the eliminationof goodwill amortization following the adoption of SFAS 142.  Goodwill amortization is not deductible fortax purposes.

 

 

QST EnterprisesDiscontinued Operations

 

QST Enterprises and QST Energy ceased operations during the fourthquarter of 1998, except for fulfillment of contractual commitments for 1999 andbeyond.  Accordingly, the results of QSTEnterprises are reported as discontinued operations.  An initial loss provision was recorded for the discontinuedenergy operations in 1998.  Subsequentpurchase accounting adjustments included additional discontinued operationsloss accruals for QST Enterprises.

 

Loss from operations ofdiscontinued businesses, net of tax:

 
|                                          |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                          |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                          |   | **(In  thousands)**               |   |
|                                          |   | **(Unaudited)**                   |   |
| QST  Enterprises, net of tax of $(3) and $(8) |   | $                                 | (3     | )                               | $      | — |   | $ | (12 | ) | $ | — |   |
|                                          |   | $                                 | (3     | )                               | $      | — |   | $ | (12 | ) | $ | — |   |

 

QST Enterprises’ financial results for the quarter and six months endedJune 30, 2002, were in excess of the discontinued operations provision andare shown as losses for those periods. The results for the periods ended June 30, 2001, were applied againstthe discontinued operations provision, resulting in no net income or loss.

 

31

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### PART II.  OTHER INFORMATION

 

Item 1.  LegalProceedings

 

Reference is made to“Environmental Matters” of Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations and to “Note 7 - Commitments andContingencies” of Item 8.  FinancialStatements and Supplementary Data in the Company’s 2001 Annual Report on Form10-K and to “Note 2 - Contingencies”, herein, for certain pendinglegal proceedings and/or proceedings known to be contemplated by governmentalauthorities.

 

The Company and itssubsidiaries are subject to certain claims and lawsuits in connection with workperformed in the ordinary course of their businesses.  Except as otherwise referred to above, in the opinion ofmanagement, all such claims currently pending either will not result in amaterial adverse effect on the financial position and results of operations ofthe Company or are adequately covered by: (i) insurance; (ii) contractual or statutory indemnification; and/or(iii) reserves for potential losses.

 

Item 5.  OtherInformation

 

None

 

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

 

(a) Exhibits

 

None

 

(b) Reports on Form 8-K

 

None

 

32

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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  August 9, 2002 |                            |                                   |   |
|                      |                            | /s/ L. M. Lee                          |   |
|                      |                            | President                              |   |
|                      |                            |                                   |   |
| Date  August 9, 2002 |                            |                                   |   |
|                      |                            | /s/ T. S.  Romanowski                  |   |
|                      |                            | Chief Financial  Officer And Treasurer |   |
|                      |                            |                                   |   |
|                      |                            |                                   |   |
|                      | CENTRAL ILLINOIS  LIGHT COMPANY |
|                      |                            | (Registrant)                           |   |
|                      |                            |                                   |   |
| Date  August 9, 2002 |                            |                                   |   |
|                      |                            | /s/ L. M. Lee                          |   |
|                      |                            | Chief Executive  Officer               |   |
|                      |                            |                                   |   |
| Date  August 9, 2002 |                            |                                   |   |
|                      |                            | /s/ T. S.  Romanowski                  |   |
|                      |                            | Chief Financial  Officer And Treasurer |   |

 

33

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STATEMENTOF PRESIDENT UNDER 18 U.S.C. § 1350

 

Inconnection with the filing of the Quarterly Report of CILCORP Inc. onForm 10-Q for the period ending June 30, 2002 (the Report), I, Leonard M.Lee, the president of CILCORP Inc., certify pursuant to section 1350 ofchapter 63 of title 18 of the United States Code that:

 

(i)            theReport fully complies with the requirements of section 13(a) or 15(d) of theSecurities Exchange Act of 1934, and

 

(ii)           theinformation contained in the Report fairly presents, in all material respects,the financial condition and results of operations of CILCORP Inc.

 

 
|   | /s/ Leonard M. Lee |   |
|--------|--------------------|--------|
|   | President          |   |

Date:  August 9, 2002

 

34

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STATEMENTOF CHIEF FINANCIAL OFFICER UNDER 18 U.S.C. § 1350

 

Inconnection with the filing of the Quarterly Report of CILCORP Inc. onForm 10-Q for the period ending June 30, 2002 (the Report), I, Thomas S.Romanowski, the chief financial officer of CILCORP Inc., certify pursuant tosection 1350 of chapter 63 of title 18 of the United States Code that:

 

(i)            theReport fully complies with the requirements of section 13(a) or 15(d) of theSecurities Exchange Act of 1934, and

 

(ii)           theinformation contained in the Report fairly presents, in all material respects,the financial condition and results of operations of CILCORP Inc.

 

 
|   | /s/ Thomas S. Romanowski |   |
|--------|--------------------------|--------|
|   | Chief Financial Officer  |   |

 

Date:  August 9, 2002

 

35

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STATEMENTOF CHIEF EXECUTIVE OFFICER UNDER 18 U.S.C. § 1350

 

Inconnection with the filing of the Quarterly Report of Central Illinois LightCompany on Form 10-Q for the period ending June 30, 2002 (the Report), I,Leonard M. Lee, the chief executive officer of Central Illinois Light Company,certify pursuant to section 1350 of chapter 63 of title 18 of the UnitedStates Code that:

 

(i)            theReport fully complies with the requirements of section 13(a) or 15(d) of theSecurities Exchange Act of 1934, and

 

(ii)           theinformation contained in the Report fairly presents, in all material respects,the financial condition and results of operations of Central Illinois LightCompany.

 

 
|   | /s/ Leonard M. Lee      |   |
|--------|-------------------------|--------|
|   | Chief Executive Officer |   |

 

Date:  August 9, 2002

 

36

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STATEMENTOF CHIEF FINANCIAL OFFICER UNDER 18 U.S.C. § 1350

 

Inconnection with the filing of the Quarterly Report of Central Illinois LightCompany on Form 10-Q for the period ending June 30, 2002 (the Report), I,Thomas S. Romanowski, the chief financial officer of Central Illinois LightCompany, certify pursuant to section 1350 of chapter 63 of title 18 of theUnited States Code that:

 

(i)            theReport fully complies with the requirements of section 13(a) or 15(d) of theSecurities Exchange Act of 1934, and

 

(ii)           theinformation contained in the Report fairly presents, in all material respects,the financial condition and results of operations of Central Illinois LightCompany.

 

 
|   | /s/ Thomas S. Romanowski |   |
|--------|--------------------------|--------|
|   | Chief Financial Officer  |   |

 

Date:  August 9, 2002

 

37

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