**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

**FORM 10-Q**

** **

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

 

**For the Quarterly period ended March 31, 2002**

 

**OR**

 

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

 

**For the Transition periodfrom                  to                  **

 

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

 

Indicate by check mark whetherthe Registrants (1) have filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the Registrants were required to file suchreports), and (2) have been subject to such filing requirements for the past 90days.

 

Yes    ý               No    o

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date:

 

| CILCORP Inc.                    |   | Common  stock, no par value,            |   |       |
|---------------------------------|--------|-----------------------------------------|--------|------------|
|                            |   | shares  outstanding and privately       |   |       |
|                            |   | held by The  AES Corporation            |   |       |
|                            |   | at March 31,  2002                      |   | 1,000      |
|                            |   |                                    |   |       |
| CENTRAL  ILLINOIS LIGHT COMPANY |   |                                    |
|                            |   | Common  stock, no par value,            |   |       |
|                            |   | shares  outstanding and privately       |   |       |
|                            |   | held by  CILCORP Inc. at March 31, 2002 |   | 13,563,871 |
|                                 |        |                                         |        |            |  |  |

 

----

 

CILCORP INC.

AND

CENTRAL ILLINOIS LIGHT COMPANY

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002

INDEX

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

 

2

----

 

### PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

 

CILCORP INC.AND SUBSIDIARIES

Consolidated Statements of Income

and Comprehensive Income

(In thousands)

(Unaudited)

 
|                                                                 |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                 |   | **2002**                           |   | **2001** |   |
| Revenue:                                                             |   |                               |   |   |   |
| CILCO Electric                                                       |   | $                                  | 84,113 |   | $ | 89,000 |   |
| CILCO Gas                                                            |   | 80,018                             |   | 158,949 |   |
| CILCO Other                                                          |   | 21,760                             |   | 12,954 |   |
| Other Businesses                                                     |   | 18,291                             |   | 15,960 |   |
| Total                                                                |   | 204,182                            |   | 276,863 |   |
| Operating expenses:                                                  |   |                               |   |   |   |
| Fuel for generation and purchased power                              |   | 53,460                             |   | 46,916 |   |
| Gas purchased for resale                                             |   | 65,891                             |   | 140,688 |   |
| Other operations and maintenance                                     |   | 33,174                             |   | 30,382 |   |
| Depreciation and amortization                                        |   | 18,011                             |   | 21,090 |   |
| Taxes, other than income taxes                                       |   | 11,760                             |   | 12,894 |   |
| Total                                                                |   | 182,296                            |   | 251,970 |   |
| Fixed charges and other:                                             |   |                               |   |   |   |
| Interest expense                                                     |   | 16,266                             |   | 17,909 |   |
| Preferred stock dividends of subsidiary                              |   | 540                                |   | 540 |   |
| Allowance for funds used during  construction                        |   | (238                               | )      | (106 | ) |
| Other                                                                |   | 342                                |   | 302 |   |
| Total                                                                |   | 16,910                             |   | 18,645 |   |
| Income from continuing operations before  income taxes               |   | 4,976                              |   | 6,248 |   |
| Income taxes                                                         |   | 961                                |   | 3,023 |   |
| Net income from continuing operations                                |   | 4,015                              |   | 3,225 |   |
| Loss from operations of discontinued  businesses, net of tax of $(5) |   | (9                                 | )      | — |   |
| Net income                                                           |   | $                                  | 4,006  |   | $ | 3,225 |   |
|                                                                 |   |                               |   |   |   |   |   |
| Other comprehensive income (loss)                                    |   | 5,464                              |   | (249 | ) |
| Comprehensive income                                                 |   | $                                  | 9,470  |   | $ | 2,976 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

3

----

 

CILCORP INC. AND SUBSIDIARIES

ConsolidatedBalance Sheets

(In thousands)

 
|                                                                         |   | **March 31,  2002** |      | **December  31,  2001** |   |
|------------------------------------------------------------------------------|--------|---------------------|-----------|-------------------------|--------|
|                                                                         |   | **(Unaudited)**     |      |                    |   |
| ASSETS                                                                       |   |                |      |                    |   |
|                                                                         |   |                |      |                    |   |
| Current Assets:                                                              |   |                |      |                    |   |
| Cash and Temporary Cash Investments                                          |   | $                   | 9,551     |                    | $      | 18,312 |   |
| Receivables, Less Allowance for  Uncollectible Accounts of $3,262 and $1,800 |   | 57,145              |      | 47,610                  |   |
| Accrued Unbilled Revenue                                                     |   | 32,487              |      | 40,265                  |   |
| Fuel, at Average Cost                                                        |   | 18,261              |      | 18,068                  |   |
| Materials and Supplies, at Average Cost                                      |   | 16,966              |      | 17,273                  |   |
| Gas in Underground Storage, at Average Cost                                  |   | 8,618               |      | 27,067                  |   |
| FAC Underrecoveries                                                          |   | 1,255               |      | 1,255                   |   |
| PGA Underrecoveries                                                          |   | 8,300               |      | 3,236                   |   |
| Prepayments and Other                                                        |   | 10,064              |      | 7,627                   |   |
| Total Current Assets                                                         |   | 162,647             |      | 180,713                 |   |
| Investments and Other Property:                                              |   |                |      |                    |   |
| Investment in Leveraged Leases                                               |   | 135,116             |      | 135,504                 |   |
| Other Investments                                                            |   | 19,820              |      | 19,285                  |   |
| Total Investments and Other Property                                         |   | 154,936             |      | 154,789                 |   |
| Property, Plant and Equipment:                                               |   |                |      |                    |   |
| Utility Plant, at Original Cost                                              |   |                |      |                    |   |
| Electric                                                                     |   | 724,704             |      | 716,857                 |   |
| Gas                                                                          |   | 235,245             |      | 233,278                 |   |
|                                                                         |   | 959,949             |      | 950,135                 |   |
| Less-Accumulated Provision for Depreciation                                  |   | 144,240             |      | 126,502                 |   |
|                                                                         |   | 815,709             |      | 823,633                 |   |
| Construction Work in Progress                                                |   | 56,981              |      | 34,340                  |   |
| Other, Net of Depreciation                                                   |   | 23                  |      | 14                      |   |
| Total Property, Plant and Equipment                                          |   | 872,713             |      | 857,987                 |   |
| Other Assets:                                                                |   |                |      |                    |   |
| Goodwill, Net of Accumulated Amortization  of $33,753                        |   | 579,211             |      | 579,211                 |   |
| Other                                                                        |   | 33,464              |      | 38,998                  |   |
| Total Other Assets                                                           |   | 612,675             |      | 618,209                 |   |
|                                                                         |   |                |      |                    |   |
| Total Assets                                                                 |   | $                   | 1,802,971 |                    | $      | 1,811,698 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

4

----

 
|                                                             |   | **March 31,  2002** |      | **December  31,  2001** |   |
|------------------------------------------------------------------|--------|---------------------|-----------|-------------------------|--------|
|                                                             |   | **(Unaudited)**     |      |                    |   |
| LIABILITIES AND STOCKHOLDER’S EQUITY                        |   |                |      |                    |   |
|                                                             |   |                |      |                    |   |
| Current Liabilities:                                             |   |                |      |                    |   |
| Current Portion of Long-Term Debt                                |   | $                   | 26,750    |                    | $      | 1,400 |   |
| Notes Payable                                                    |   | 58,000              |      | 63,000                  |   |
| Accounts Payable                                                 |   | 54,833              |      | 75,644                  |   |
| Accrued Taxes                                                    |   | 12,555              |      | 14,879                  |   |
| Accrued Interest                                                 |   | 27,409              |      | 18,392                  |   |
| Other                                                            |   | 14,728              |      | 18,281                  |   |
| Total Current Liabilities                                        |   | 194,275             |      | 191,596                 |   |
| Long-Term Debt                                                   |   | 692,392             |      | 717,730                 |   |
| Deferred Credits and Other Liabilities:                          |   |                |      |                    |   |
| Deferred Income Taxes                                            |   | 212,839             |      | 202,822                 |   |
| Regulatory Liability of Regulated  Subsidiary                    |   | 37,655              |      | 45,377                  |   |
| Deferred Investment Tax Credit                                   |   | 14,155              |      | 14,553                  |   |
| Other                                                            |   | 85,953              |      | 83,388                  |   |
| Total Deferred Credits and Other  Liabilities                    |   | 350,602             |      | 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                                                |   | 14,311              |      | 10,305                  |   |
| Accumulated Other Comprehensive Income  (Loss)                   |   | (8,562              | )         | (14,026                 | )      |
| Total Stockholder’s Equity                                  |   | 524,582             |      | 515,112                 |   |
| Total Liabilities and Stockholder’s Equity                  |   | $                   | 1,802,971 |                    | $      | 1,811,698 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

5

----

 

CILCORP INC. AND SUBSIDIARIES

ConsolidatedStatements of Cash Flows

(In thousands)

(Unaudited)

 
|                                                                                      |   | **Three Months Ended  March 31,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                      |   | **2002**                          |   | **2001** |   |
| Cash flows from operating activities:                                                     |   |                              |   |   |   |
| Net income from  continuing operations before preferred dividends                         |   | $                                 | 4,546  |   | $ | 3,765 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:        |   |                              |   |   |   |
| Non-cash leveraged lease and affordable  housing income                                   |   | (1,048                            | )      | (1,075 | ) |
| Cash receipts in excess of debt service on  leases                                        |   | 1,715                             |   | 4,537 |   |
| Depreciation and amortization                                                             |   | 18,011                            |   | 21,090 |   |
| Deferred income taxes, investment tax  credit and regulatory liability of subsidiary, net |   | 7,962                             |   | (5,977 | ) |
| Changes in operating assets and  liabilities:                                             |   |                              |   |   |   |
| (Increase) Decrease in accounts receivable  and accrued unbilled revenue                  |   | (1,748                            | )      | 12,423 |   |
| Decrease in inventories                                                                   |   | 18,563                            |   | 19,425 |   |
| Decrease in accounts payable                                                              |   | (20,816                           | )      | (50,943 | ) |
| (Decrease) Increase in accrued taxes                                                      |   | (2,324                            | )      | 8,094 |   |
| (Increase) Decrease in other assets                                                       |   | (1,317                            | )      | 18,926 |   |
| Increase in other liabilities                                                             |   | 7,184                             |   | 10,079 |   |
| Total adjustments                                                                         |   | 26,182                            |   | 36,579 |   |
| Net cash provided by operating activities  from continuing operations                     |   | 30,728                            |   | 40,344 |   |
| Net cash provided by (used in) operating  activities of discontinued operations           |   | 6                                 |   | (341 | ) |
| Cash flow provided by operations                                                          |   | 30,734                            |   | 40,003 |   |
| Cash flows from investing activities:                                                     |   |                              |   |   |   |
| Additions to plant                                                                        |   | (32,605                           | )      | (10,106 | ) |
| Other                                                                                     |   | (1,350                            | )      | (527 | ) |
| Cash flow used in investing activities                                                    |   | (33,955                           | )      | (10,633 | ) |
| Cash flow from financing activities:                                                      |   |                              |   |   |   |
| Net decrease in short-term debt                                                           |   | (5,000                            | )      | (7,100 | ) |
| Preferred dividends paid                                                                  |   | (540                              | )      | (540 | ) |
| Cash flow used in financing activities                                                    |   | (5,540                            | )      | (7,640 | ) |
| Net increase (decrease) in cash and  temporary cash investments:                          |   | (8,761                            | )      | 21,730 |   |
| Cash and temporary cash investments at  beginning of year:                                |   | 18,312                            |   | 11,743 |   |
| Cash and temporary cash investments at  March 31                                          |   | $                                 | 9,551  |   | $ | 33,473 |   |
| Supplemental disclosures of cash flow  information:                                       |   |                              |   |   |   |
| Cash paid during the period for:                                                          |   |                              |   |   |   |
| Interest                                                                                  |   | $                                 | 7,907  |   | $ | 10,028 |   |
| Income taxes                                                                              |   | $                                 | 88     |   | $ | 28 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

6

----

 

CENTRAL ILLINOISLIGHT COMPANY

Consolidated Statements of Income

and Comprehensive Income

(In thousands)

(Unaudited)

 
|                                  |   | **Three Months Ended  March 31,** |   |
|---------------------------------------|--------|-----------------------------------|--------|
|                                  |   | **2002**                          |   | **2001** |   |
| Operating revenue:                    |   |                              |   |   |   |
| Electric                              |   | $                                 | 84,113 |   | $ | 89,000 |   |
| Gas                                   |   | 80,018                            |   | 158,949 |   |
| Total operating revenues              |   | 164,131                           |   | 247,949 |   |
| Operating expenses:                   |   |                              |   |   |   |
| Cost of fuel                          |   | 22,030                            |   | 29,260 |   |
| Cost of gas                           |   | 49,608                            |   | 126,680 |   |
| Purchased power                       |   | 11,530                            |   | 10,112 |   |
| Other operations and maintenance      |   | 31,446                            |   | 29,035 |   |
| Depreciation and amortization         |   | 17,664                            |   | 17,225 |   |
| Income taxes                          |   | 5,512                             |   | 6,656 |   |
| Other taxes                           |   | 11,740                            |   | 12,868 |   |
| Total operating expenses              |   | 149,530                           |   | 231,836 |   |
| Operating income                      |   | 14,601                            |   | 16,113 |   |
| Other income and deductions:          |   |                              |   |   |   |
| Company-owned life insurance, net     |   | (342                              | )      | (302 | ) |
| Other, net                            |   | 804                               |   | 2,452 |   |
| Total other income and deductions     |   | 462                               |   | 2,150 |   |
| Interest expenses:                    |   |                              |   |   |   |
| Interest on long-term debt            |   | 4,367                             |   | 4,328 |   |
| Cost of borrowed funds capitalized    |   | (238                              | )      | (106 | ) |
| Other                                 |   | 1,050                             |   | 1,710 |   |
| Total interest expense                |   | 5,179                             |   | 5,932 |   |
| Net income before preferred dividends |   | 9,884                             |   | 12,331 |   |
| Dividends on preferred stock          |   | 540                               |   | 540 |   |
| Income available for common stock     |   | $                                 | 9,344  |   | $ | 11,791 |   |
| Other comprehensive income (loss)     |   | 5,464                             |   | (249 | ) |
| Comprehensive income                  |   | $                                 | 14,808 |   | $ | 11,542 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

7

----

 

CENTRAL ILLINOIS LIGHT COMPANY

ConsolidatedBalance Sheets

(In thousands)

 
|                                                                                           |   | **March 31,  2002** |      | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------------|--------|---------------------|-----------|-------------------------|--------|
|                                                                                           |   | **(Unaudited)**     |      |                    |   |
| ASSETS                                                                                         |   |                |      |                    |   |
|                                                                                           |   |                |      |                    |   |
| Utility Plant, At Original Cost:                                                               |   |                |      |                    |   |
| Electric                                                                                       |   | $                   | 1,334,078 |                    | $      | 1,326,231 |   |
| Gas                                                                                            |   | 459,132             |      | 457,165                 |   |
|                                                                                           |   | 1,793,210           |      | 1,783,396               |   |
| Less-Accumulated Provision for Depreciation                                                    |   | 1,002,428           |      | 985,045                 |   |
|                                                                                           |   | 790,782             |      | 798,351                 |   |
| Construction Work in Progress                                                                  |   | 56,981              |      | 34,340                  |   |
| Total Utility Plant                                                                            |   | 847,763             |      | 832,691                 |   |
| Other Property and Investments:                                                                |   |                |      |                    |   |
| Cash Surrender Value of Company-owned Life  Insurance (Net of Related Policy Loans of $65,314) |   | 4,866               |      | 3,920                   |   |
| Other                                                                                          |   | 1,112               |      | 1,133                   |   |
| Total Other Property and Investments                                                           |   | 5,978               |      | 5,053                   |   |
| Current Assets:                                                                                |   |                |      |                    |   |
| Cash and Temporary Cash Investments                                                            |   | 1,843               |      | 12,584                  |   |
| Receivables, Less Allowance for  Uncollectible Accounts of $3,262 and $1,800                   |   | 57,083              |      | 49,375                  |   |
| Accrued Unbilled Revenue                                                                       |   | 27,565              |      | 34,067                  |   |
| Fuel, at Average Cost                                                                          |   | 18,261              |      | 18,068                  |   |
| Materials and Supplies, at Average Cost                                                        |   | 16,280              |      | 15,849                  |   |
| Gas in Underground Storage, at Average Cost                                                    |   | 8,618               |      | 27,067                  |   |
| Prepaid Taxes                                                                                  |   | 9,219               |      | 9,007                   |   |
| FAC Underrecoveries                                                                            |   | 1,255               |      | 1,255                   |   |
| PGA Underrecoveries                                                                            |   | 8,300               |      | 3,236                   |   |
| Other                                                                                          |   | 10,020              |      | 7,569                   |   |
| Total Current Assets                                                                           |   | 158,444             |      | 178,077                 |   |
| Deferred Debits:                                                                               |   |                |      |                    |   |
| Unamortized Loss on Reacquired Debt                                                            |   | 2,388               |      | 2,448                   |   |
| Unamortized Debt Expense                                                                       |   | 1,274               |      | 1,305                   |   |
| Prepaid Pension Cost                                                                           |   | 168                 |      | 168                     |   |
| Other                                                                                          |   | 16,602              |      | 21,971                  |   |
| Total Deferred Debits                                                                          |   | 20,432              |      | 25,892                  |   |
| Total Assets                                                                                   |   | $                   | 1,032,617 |                    | $      | 1,041,713 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

8

----

 
|                                                                                     |   | **March 31,  2002** |      | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------|--------|---------------------|-----------|-------------------------|--------|
|                                                                                     |   | **(Unaudited)**     |      |                    |   |
| CAPITALIZATION AND LIABILITIES                                                           |   |                |      |                    |   |
| Capitalization:                                                                          |   |                |      |                    |   |
| Common Stockholder’s Equity:                                                        |   |                |      |                    |   |
| Common Stock, No Par Value; Authorized  20,000,000 Shares; Outstanding 13,563,871 Shares |   | $                   | 185,661   |                    | $      | 185,661 |   |
| Additional Paid-in Capital                                                               |   | 52,000              |      | 52,000                  |   |
| Retained Earnings                                                                        |   | 89,389              |      | 108,045                 |   |
| Accumulated Other Comprehensive Income  (Loss)                                           |   | (341                | )         | (5,805                  | )      |
| Total Common Stockholder’s Equity                                                   |   | 326,709             |      | 339,901                 |   |
|                                                                                     |   |                |      |                    |   |
| Preferred Stock Without Mandatory  Redemption                                            |   | 19,120              |      | 19,120                  |   |
| Preferred Stock With Mandatory Redemption                                                |   | 22,000              |      | 22,000                  |   |
| Long-term Debt                                                                           |   | 217,393             |      | 242,730                 |   |
| Total Capitalization                                                                     |   | 585,222             |      | 623,751                 |   |
| Current Liabilities:                                                                     |   |                |      |                    |   |
| Current Maturities of Long-Term Debt                                                     |   | 26,750              |      | 1,400                   |   |
| Notes Payable                                                                            |   | 58,000              |      | 43,000                  |   |
| Accounts Payable                                                                         |   | 49,509              |      | 81,140                  |   |
| Accrued Taxes                                                                            |   | 28,225              |      | 28,862                  |   |
| Accrued Interest                                                                         |   | 7,425               |      | 9,143                   |   |
| Dividends Payable to CILCORP                                                             |   | 20,000              |      | —                  |   |
| Other                                                                                    |   | 14,728              |      | 18,281                  |   |
| Total Current Liabilities                                                                |   | 204,637             |      | 181,826                 |   |
| Deferred Liabilities and Credits:                                                        |   |                |      |                    |   |
| Accumulated Deferred Income Taxes                                                        |   | 103,996             |      | 92,428                  |   |
| Regulatory Liability                                                                     |   | 37,655              |      | 45,377                  |   |
| Investment Tax Credits                                                                   |   | 14,155              |      | 14,553                  |   |
| Other                                                                                    |   | 86,952              |      | 83,778                  |   |
| Total Deferred Liabilities and Credits                                                   |   | 242,758             |      | 236,136                 |   |
| Total Capitalization and Liabilities                                                     |   | $                   | 1,032,617 |                    | $      | 1,041,713 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

9

----

 

CENTRAL ILLINOIS LIGHT COMPANY

### Consolidated Statementsof Cash Flows

(In thousands)

(Unaudited)

 

 
|                                                                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                               |   | **2002**                           |   | **2001** |   |
| Cash flows from operating activities:                                              |   |                               |   |   |   |
| Net income before preferred dividends                                              |   | $                                  | 9,884  |   | $ | 12,331 |   |
|                                                                               |   |                               |   |   |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                               |   |   |   |
| Depreciation and amortization                                                      |   | 17,664                             |   | 17,225 |   |
| Deferred income taxes, investment tax  credits and regulatory liability, net       |   | 9,513                              |   | (2,913 | ) |
| Changes in operating assets and  liabilities:                                      |   |                               |   |   |   |
| Increase in accounts receivable                                                    |   | (7,708                             | )      | (41,268 | ) |
| Decrease in fuel, materials and supplies,  and gas in underground storage          |   | 17,825                             |   | 19,971 |   |
| Decrease in accrued unbilled revenue                                               |   | 6,502                              |   | 35,302 |   |
| Decrease in accounts payable                                                       |   | (31,631                            | )      | (46,511 | ) |
| (Decrease) Increase in accrued taxes and  interest                                 |   | (2,355                             | )      | 8,910 |   |
| Capital lease payments                                                             |   | 161                                |   | 161 |   |
| (Increase) decrease in other current assets                                        |   | (7,727                             | )      | 18,671 |   |
| Increase in other current liabilities                                              |   | 1,911                              |   | 1,838 |   |
| Decrease in other non-current assets                                               |   | 6,112                              |   | 431 |   |
| (Decrease) increase in other non-current  liabilities                              |   | (2,778                             | )      | 1,187 |   |
| Net cash provided by operating activities                                          |   | 17,373                             |   | 25,335 |   |
| Cash flows from investing activities:                                              |   |                               |   |   |   |
| Capital expenditures                                                               |   | (32,605                            | )      | (10,107 | ) |
| Other                                                                              |   | (1,808                             | )      | (1,885 | ) |
| Net cash used in investing activities                                              |   | (34,413                            | )      | (11,992 | ) |
| Cash flow from financing activities:                                               |   |                               |   |   |   |
| Common dividends paid                                                              |   | (8,000                             | )      | — |   |
| Preferred dividends paid                                                           |   | (540                               | )      | (540 | ) |
| Payments on capital lease obligation                                               |   | (161                               | )      | (161 | ) |
| Increase in short-term borrowing                                                   |   | 15,000                             |   | 8,400 |   |
| Net cash provided by financing activities                                          |   | 6,299                              |   | 7,699 |   |
| Net (Decrease) Increase in cash and  temporary cash investments                    |   | (10,741                            | )      | 21,042 |   |
|                                                                               |   |                               |   |   |   |
| Cash and temporary cash investments at  beginning of year                          |   | 12,584                             |   | 8,777 |   |
| Cash and temporary cash investments at  March 31                              |   | $                                  | 1,843  |   | $ | 29,819 |   |
|                                                                               |   |                               |   |   |   |
| Supplemental disclosures of cash flow  information:                                |   |                               |   |   |   |
|                                                                               |   |                               |   |   |   |
| Cash paid during the period for:                                                   |   |                               |   |   |   |
|                                                                               |   |                               |   |   |   |
| Interest                                                                           |   | $                                  | 8,285  |   | $ | 8,560 |   |
|                                                                               |   |                               |   |   |   |
| Income taxes                                                                       |   | $                                  | — |   | $ | — |   |

 

See Notes to ConsolidatedFinancial Statements.

 

10

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Statements ofSegments of Business

CILCORP Inc. and Subsidiaries

 
|                                              |   | **Three Months Ended March 31, 2002** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|
|                                              |   | **CILCO  Electric**                   |   | **CILCO  Gas** |   | **CILCO  Other** |   | **Other  Businesses ** |   | **Discont.  Oper.** |   | **Total** |   |
|                                              |   | **(In  thousands)**                   |   |
| Revenues                                          |   | $                                     | 84,113 |   | $ | 80,018 |   | $ | 21,750 |   | $ | 18,001 |   | $ | — |   | $ | 203,882 |   |
| Interest income                                   |   | —                                |   | — |   | 10 |   | 290 |   | — |   | 300 |   |
| Total                                             |   | 84,113                                |   | 80,018 |   | 21,760 |   | 18,291 |   | — |   | 204,182 |   |
|                                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                |   | 63,628                                |   | 62,726 |   | 21,323 |   | 16,608 |   | — |   | 164,285 |   |
| Depreciation and amortization                     |   | 12,067                                |   | 5,597 |   | — |   | 347 |   | — |   | 18,011 |   |
| Total                                             |   | 75,695                                |   | 68,323 |   | 21,323 |   | 16,955 |   | — |   | 182,296 |   |
| Interest expense                                  |   | 3,932                                 |   | 1,485 |   | — |   | 10,849 |   | — |   | 16,266 |   |
| Preferred stock dividends                         |   | —                                |   | — |   | 540 |   | — |   | — |   | 540 |   |
| Fixed charges and other expenses                  |   | (238                                  | )      | — |   | 342 |   | — |   | — |   | 104 |   |
| Total                                             |   | 3,694                                 |   | 1,485 |   | 882 |   | 10,849 |   | — |   | 16,910 |   |
| Income from continuing  oper. before income taxes |   | 4,724                                 |   | 10,210 |   | (445 | ) | (9,513 | ) | — |   | 4,976 |   |
| Income taxes                                      |   | 1,471                                 |   | 4,041 |   | (367 | ) | (4,184 | ) | — |   | 961 |   |
| Net income from continuing operations             |   | 3,253                                 |   | 6,169 |   | (78 | ) | (5,329 | ) | — |   | 4,015 |   |
|                                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Effect of discontinued operations                 |   | —                                |   | — |   | — |   | — |   | (9 | ) | (9 | ) |
| Segment net income  (loss)                        |   | $                                     | 3,253  |   | $ | 6,169 |   | $ | (78 | ) | $ | (5,329 | ) | $ | (9 | ) | $ | 4,006 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

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|                             |   | **Three Months Ended March 31, 2001** |   |
|----------------------------------|--------|---------------------------------------|--------|
|                             |   | **CILCO  Electric**                   |   | **CILCO  Gas** |   | **CILCO  Other** |   | **Other  Businesses** |   | **Total** |   |
|                             |   | **(In thousands)**                    |   |
| Revenues                         |   | $                                     | 89,000 |   | $ | 158,949 |   | $ | 12,794 |   | $ | 15,870 |   | $ | 276,613 |   |
| Interest income                  |   | —                                |   | — |   | 160 |   | 90 |   | 250 |   |
| Total                            |   | 89,000                                |   | 158,949 |   | 12,954 |   | 15,960 |   | 276,863 |   |
| Operating expenses               |   | 68,499                                |   | 139,456 |   | 9,778 |   | 13,147 |   | 230,880 |   |
| Depreciation and amortization    |   | 11,756                                |   | 5,469 |   | — |   | 3,865 |   | 21,090 |   |
| Total                            |   | 80,255                                |   | 144,925 |   | 9,778 |   | 17,012 |   | 251,970 |   |
| Interest expense                 |   | 4,311                                 |   | 1,727 |   | — |   | 11,871 |   | 17,909 |   |
| Preferred stock dividends        |   | —                                |   | — |   | 540 |   | — |   | 540 |   |
| Fixed charges and other expenses |   | (106                                  | )      | — |   | 302 |   | — |   | 196 |   |
| Total                            |   | 4,205                                 |   | 1,727 |   | 842 |   | 11,871 |   | 18,645 |   |
| Income before income  taxes      |   | 4,540                                 |   | 12,297 |   | 2,334 |   | (12,923 | ) | 6,248 |   |
| Income taxes                     |   | 1,761                                 |   | 4,895 |   | 724 |   | (4,357 | ) | 3,023 |   |
| Segment net income  (loss)       |   | $                                     | 2,779  |   | $ | 7,402 |   | $ | 1,610 |   | $ | (8,566 | ) | $ | 3,225 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

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CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.   Introduction

 

The consolidated financialstatements include the accounts of CILCORP Inc. (CILCORP or the HoldingCompany), Central Illinois Light Company (CILCO), QST Enterprises Inc. (QST)and its subsidiaries, QST Energy Inc. (QST Energy), and CILCORP InfraservicesInc. (CILCORP Infraservices), and CILCORP’s other subsidiaries (collectively,the Company), after elimination of significant intercompany transactions.  The consolidated financial statements ofCILCO include the accounts of CILCO and its subsidiaries, CILCO Exploration andDevelopment Company, CILCO Energy Corporation, and Central Illinois Generation,Inc.  CILCORP owns 100% of the commonstock of its first-tier subsidiaries. In the fourth quarter of 1998, the operations of QST and itssubsidiaries (excluding ESE Land Corporation and CILCORP Infraservices Inc. -see Management’s Discussion and Analysis) were discontinued and, therefore, arebeing reported as discontinued operations in the financial statements.  Prior year amounts have been reclassified ona basis consistent with the 2002 presentation.

 

The accompanying unauditedconsolidated financial statements have been prepared according to the rules andregulations of the Securities and Exchange Commission (SEC).  Although CILCORP believes the disclosuresare adequate to make the information presented not misleading, theseconsolidated financial statements should be read along with the Company’s 2001Annual Report on Form 10-K.

 

In the Company’s opinion, theconsolidated financial statements furnished reflect all normal and recurringadjustments necessary for a fair presentation of the results of operations forthe periods presented.  Operatingresults for interim periods are not necessarily indicative of operating resultsto be expected for the year or of the Company’s future financial condition.

 

 

NOTE 2.   Contingencies

 

On May 11, 2001, CILCO andEnron Power Marketing, Inc. (EPMI), a subsidiary of Enron Corp. (Enron),entered into a new Master Agreement for electric purchases and sales, whichcovered energy transactions scheduled for deliveries during the period of2001—2003.  On November 30, 2001, CILCOnotified EPMI that events of default had occurred under the Master Agreementand declared the Master Agreement terminated effective December 20, 2001.  Due to contractual provisions and EPMI’s andEnron’s actions, management does not believe CILCO will be required to pay anyamount to Enron or its affiliates and has therefore recorded no liability forundelivered electric purchases.  Enronand EPMI filed Chapter 11 bankruptcy petitions on December 2, 2001, in theU. S. Bankruptcy Court for the Southern District of New York.  Thereafter, CILCO purchased replacementpower to serve its retail customers which had previously been partiallysupported by the EPMI transactions. While the ultimate outcome is unpredictable, management does not believethat EPMI’s 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 Enronsubsidiary Enron North America Corp. (ENA) entered into a natural gastransaction for daily deliveries not to exceed 

 

13

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10,000 MMBtu’s per day duringcalendar year 2002.  CILCO has receivedno natural gas deliveries pursuant to this transaction.  On October 24, 2001, CILCO and ENA enteredinto a short-term natural gas transaction giving CILCO the right to call uponENA for the delivery of 10,000 MMBtu’s per day during the period from November1, 2001, through March 31, 2002.  Sincelate November 2001, ENA was unable to deliver natural gas when called upon byCILCO.  ENA’s failure to deliver naturalgas is an event of default under the Master Firm Sales Agreement governing theOctober transaction.  On December 2,2001, ENA filed a Chapter 11 bankruptcy petition in the U. S. Bankruptcy Courtfor the Southern District of New York. To the extent that it has been necessary, CILCO has purchasedreplacement natural gas.  Because thesetransactions are part of a larger and more diversified natural gas supplyportfolio and are subject to the Purchased Gas Adjustment clause, Managementdoes not believe ENA’s failure to supply natural gas or its subsequentbankruptcy filing will have a material adverse effect on CILCO’s financialposition or results of operations.

 

 

NOTE 3.   Accounting for Price Risk ManagementActivities

 

The Company utilizes commodityfutures contracts, options and swaps in the normal course of its natural gasand electric business activities to reduce market or price risk.  Since January 1, 2001, all derivativetransactions have been accounted for under Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Transactions and HedgingActivities” (SFAS 133), as interpreted and amended.  SFAS 133 requires that an entity recognize all derivatives(including derivatives embedded in other contracts), as defined, as eitherassets or liabilities on the balance sheet and measure those instruments atfair value.  Changes in the derivative’sfair value are to be recognized currently in earnings, unless specific hedgeaccounting criteria are met.  All of theCompany’s derivatives qualify as cash flow hedges.  Under SFAS 133, the effective portion of the gain or loss on aderivative instrument designated and qualifying as a cash flow hedge isreported as a component of Other Comprehensive Income (OCI) until the hedgedtransaction affects earnings, at which time the amount accumulated in OCI isreclassified into earnings.  Inaddition, under SFAS 133, any ineffective portion of the gain or loss isrecognized in earnings immediately.  Allof the Company’s cash flow hedges are highly effective, and therefore, allgains and losses are recorded in OCI until the hedged transaction is recordedin earnings.  If a cash flow hedge isterminated because it is probable that the hedged transaction will not occur,the related balance in OCI as of such date is immediately recognized.  If a cash flow hedge is terminated early forother reasons, the related balance in OCI as of the termination date isrecognized in earnings concurrently with the related hedged transaction.

 

Prior to the adoption of SFAS133, gains or losses were not recognized in the financial statements until theperiod in which the hedged transaction affected earnings (in the period ofdelivery).  The Company is subject tocommodity price risk for regulated and non-regulated sales to the extent thatenergy is sold under firm price commitments. Due to market conditions, at times the Company may have unmatchedcommitments to purchase and sell energy on a price and quantity basis.  Physical and derivative financialinstruments give rise to market risk, which represents the potential loss thatcan be caused by a change in the market value of a particular commitment.  Market risks are monitored to ensurecompliance with the Company’s risk management policies.

 

The Company recorded theeffects of implementation of SFAS 133 in OCI as a change in accountingprinciple.  The amount recorded as OCIreflects the mark-to-market value of fixed price derivative financialinstruments representing hedges of natural gas commitments through December2001.  These derivatives were related tonon-regulated activities and were accounted for as fully-

 

14

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effective cash-flow hedges asdetermined through correlation analyses performed throughout the year.  The balance in OCI, as of January 1, 2001,related to the implementation of SFAS 133, was an after-tax gain of $1.7million.

 

Gains/losses on derivativesthat hedge non-regulated activities are reflected in operating results when thehedged commitments are recognized.  Thenet loss reflected in operating results from derivative financial instrumentsfor non-regulated activities for the quarter ended March 31, 2002, was$6.9 million for natural gas (included in Gas Purchased for Resale).  There were no outstanding derivativefinancial instruments for electricity during the quarter ended March 31,2002.  The previously recorded gain/lossassociated with these settled derivative financial instruments was removed fromOCI.  The open derivative positions arethen marked-to-market through OCI.  Thenet effect of these adjustments was to record an after-tax gain in OCI in theamount of $2.8 million for the quarter ended March 31, 2002.  The after-tax balance in OCI associated withthese open derivative positions at March 31, 2002, was $(0.6) million.  This portion of OCI reflects hedges ofnatural gas sales of 1,770,000 MMBtu or 1.8 Bcf for commitments throughFebruary 2004.  Approximately $0.6million of OCI related to derivative financial instruments as of March 31,2002, is expected to be recognized as an increase to earnings over the nexttwelve months based on market prices as of March 31, 2002.  The actual amount recognized in earningswill be based on the market conditions at the time the derivatives 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, any relatedmark-to-market value is removed from OCI and charged/credited to the customer.  This program was completed in March2002.  Beginning in March 2002, theCompany is hedging its injections into storage fields utilizing collars andfutures to further hedge the cost for customers charged the PGA.  For the quarter ended March 31, 2002, anafter-tax mark-to-market gain of $2.6 million was recorded in OCI for allPGA-related derivatives.  The after-taxbalance in OCI associated with PGA-related positions at March 31, 2002, was$(.2) million.  This portion of OCIreflects hedges of natural gas sales of 160,000 MMBtu or 0.2 Bcf forcommitments through July 2002.

 

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 as derivativesunder SFAS 133.  In order for contractsto qualify for this exemption, they must meet certain criteria, which includethe requirement for physical delivery of the electricity to be purchased orsold under the contract only in the normal course of business.  Additionally, contracts that have a pricebased on an underlying that is not clearly and closely related to theelectricity being sold or purchased or that are denominated in a currency thatis foreign to the buyer or seller are not considered normal purchases andnormal sales and are required to be accounted for as derivatives under SFAS133.  This revised conclusion iseffective beginning April 1, 2002.  TheCompany has determined that its 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.

 

15

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NOTE 4.   Other Comprehensive Income

 

Rollforward of AccumulatedOther Comprehensive Income —

CILCORP Inc.

 
|                                                                         |   | **Pension**         |   | **SFAS 133** |   | **Total** |   |
|------------------------------------------------------------------------------|--------|---------------------|--------|--------------|--------|-----------|--------|
|                                                                         |   | **(In  thousands)** |   |
| Accumulated other comprehensive loss –  December 31, 2001 balance       |   | $                   | (9,333 | )            | $      | (4,693    | )      | $ | (14,026 | ) |
|                                                                         |   |                |   |         |   |      |   |
| Other comprehensive income —                                            |   |                |   |         |   |      |   |
| Pension                                                                      |   | —              |   | —       |   | —    |   |
| SFAS 133                                                                     |   | —              |   | 5,464        |   | 5,464     |   |
|                                                                         |   |                |   |         |   |      |   |
| Accumulated other comprehensive income  (loss) — March 31, 2002 balance |   | $                   | (9,333 | )            | $      | 771       |   | $ | (8,562 | ) |

 

Rollforward of AccumulatedOther Comprehensive Income — 

Central Illinois Light Company

 
|                                                                         |   | **Pension**        |   | **SFAS 133** |   | **Total** |   |
|------------------------------------------------------------------------------|--------|--------------------|--------|--------------|--------|-----------|--------|
|                                                                         |   | **(In thousands)** |   |
|                                                                         |   |               |   |
| Accumulated other comprehensive loss —  December 31, 2001 balance       |   | $                  | (1,112 | )            | $      | (4,693    | )      | $ | (5,805 | ) |
|                                                                         |   |               |   |         |   |      |   |
| Other comprehensive income —                                            |   |               |   |         |   |      |   |
| Pension                                                                      |   | —             |   | —       |   | —    |   |
| SFAS 133                                                                     |   | —             |   | 5,464        |   | 5,464     |   |
|                                                                         |   |               |   |         |   |      |   |
| Accumulated other comprehensive income  (loss) — March 31, 2002 balance |   | $                  | (1,112 | )            | $      | 771       |   | $ | (341 | ) |

 

 

NOTE5 – Impact of Accounting Standards

 

In June 2001, the FASB issuedStatement of Financial Accounting Standards No. 141, “Business Combinations”(SFAS 141), 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 141 requires that allbusiness combinations initiated after June 30, 2001, be accounted forusing the purchase method and eliminates the pooling-of-interests method.  Certain transition provisions apply tobusiness combinations for which the acquisition date was before July 1, 2001,that were accounted for using the purchase method.  Management has reviewed the transition provisions and hasdetermined that adoption of these provisions has no material impact on itsconsolidated financial position or results of operations.

 

SFAS 142 requires that goodwilland intangible assets that have indefinite useful lives be tested at leastannually for impairment rather than be amortized.  The provisions of SFAS 142 were required to be applied startingwith fiscal years beginning after December 15, 2001.  The Company adopted 

 

16

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SFAS 142 on January 1, 2002,and, as a result, annual goodwill amortization of approximately $15.3 millionhas ceased.  The Company has identifiedthe following four reporting units under the provisions of SFAS 142:  CILCO Electric, CILCO Gas, CILCO Other andOther Businesses.  The Company willcomplete the allocation of goodwill to the reporting units and its initial impairmentassessment utilizing the requirements of SFAS 142 by June 30, 2002.

 

SFAS 143 addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  SFAS 143 is effective for financial statementsissued 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 of FinancialAccounting Standards No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (SFAS 144) was issued in August 2001, and is effective forfinancial statements issued for fiscal years beginning after December 15, 2001,and interim periods within those fiscal years. SFAS 144 addresses financial accounting and reporting for the impairmentor disposal of long-lived assets.  Theadoption of SFAS 144 has not had a significant impact on the Company’sfinancial position or results of operations.

 

 

NOTE6 – Subsequent Event

 

On April 29, 2002, The AESCorporation announced an agreement with Ameren Corporation to sell 100 percentof its ownership interest in CILCORP and its subsidiaries.  The transaction is subject to regulatoryapprovals by the Illinois Commerce Commission (ICC), the Federal Energy RegulatoryCommission (FERC), the Securities and Exchange Commission (SEC), and expirationof the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act.

 

17

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Item 2.    Management’s Discussion and Analysis of

                Financial Condition and Results of Operations

 

CILCORP Inc. (CILCORP) is awholly-owned subsidiary of The AES Corporation (AES).  The financial condition and operating results of CILCORP Inc. andits subsidiaries (the Company) primarily reflect the operations of subsidiaryCentral Illinois Light Company (CILCO).

 

In July 2000, AES announcedplans to acquire IPALCO Enterprises, Inc. (IPALCO), a utility holding companyheadquartered in Indianapolis, Indiana. Following this announcement, AES indicated that as part of the Securitiesand Exchange Commission (SEC) approval process for the IPALCO transaction, AESexpected to restructure its ownership interests in CILCORP within a specifiedperiod of time in order to continue as an exempt holding company under thePublic Utility Holding Company Act of 1935 (PUHCA).  On March 23, 2001, AES received an order from the SEC whichallowed AES’ continued exemption from PUHCA. The exemption order required AES to divest its ownership interests inCILCO’s regulated utility assets within two years of the closing (March 27,2001) of AES’ acquisition of IPALCO.  OnApril 29, 2002, AES announced an agreement with Ameren Corporation to sell 100percent of its ownership interest in CILCORP and its subsidiaries.  The transaction is subject to regulatoryapprovals by the Illinois Commerce Commission (ICC), the Federal EnergyRegulatory Commission (FERC), 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 segmentincludes the operations of the Holding Company itself (Holding Company), itsinvestment subsidiary, CILCORP Investment Management Inc. (CIM), CILCORPVentures Inc. (CVI), and CILCORP Infraservices Inc. which provides utility infrastructureoperation and maintenance services.  Theresults of QST and its subsidiaries (excluding CILCORP Infraservices Inc.) arereported as discontinued operations (see Results of Operations - QSTEnterprises Discontinued Operations).

 

 

Forward-Looking Information

 

Forward-looking information isincluded in Management’s Discussion and Analysis of Financial Condition andResults of Operations (MD&A). Certain material contingencies are also described in Note 2 to theConsolidated Financial Statements.

 

Some important factors couldcause actual results or outcomes to differ materially from those expressed orimplied in MD&A.  The business andprofitability of CILCORP and its subsidiaries are influenced by economic andgeographic factors, including ongoing changes in environmental laws and weatherconditions; the extent and pace of development of competition for retail andwholesale energy customers; changes in technology; changes in company-wideoperation and plant availability compared to historical performance and changesin historical operating cost structure, including changes in various costs andexpenses; pricing and transportation of commodities; market supply and demandfor energy and 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 in MD&A due to the announced agreement by CILCORP’ssole shareholder, The AES Corporation, to sell its ownership interest inCILCORP and its subsidiaries 

 

18

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to Ameren Corporation.  All such factors are difficult to predict,contain uncertainties that may materially affect actual results and, to asignificant degree, are beyond the control of CILCORP and itssubsidiaries.  CILCORP and itssubsidiaries undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of changes in actual results,assumptions or other factors.

 

 

Capital Resources & Liquidity

 

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

 

 

CILCORP

 

CILCORP is currently authorizedby its Board of Directors to borrow up to $60 million on a short-termbasis.  At March 31, 2002, CILCORP hadno short-term debt outstanding.

 

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

 

 

CILCO

 

Capital expenditures totaled$32.6 million for the three months ended March 31, 2002.  Capital expenditures are anticipated to beapproximately $102.4 million for the remainder of 2002 and are currentlyestimated to be approximately $80.2 million in 2003.

 

CILCO had short-term debt of$58 million at March 31, 2002.  $28million of this short-term debt is commercial paper outstanding at a rate of2.76%.  The remaining $30 millionrepresents borrowings against a $50 million senior revolving creditfacility.  The interest on theseborrowings is 3.08%.  This creditfacility, obtained in January 2002, expires on June 30, 2002.  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 March 31, 2002, committed bank lines of credit totaled$100 million, 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 of credit.  CILCO plans to finance its 2002 and 2003capital expenditures with funds provided by operations, short-term debt andlong-term debt.  CILCO has receivedapproval from the Illinois Commerce Commission for the issuance of debt with amaximum maturity of two years.  Theproceeds of the borrowings will be used to replace short-term debt and torefund medium-term notes maturing in 2003. Future funds provided by operations may be affected by the deregulationof the electric and natural gas utility industries (see Competition).

 

 

CIM

 

At March 31, 2002, CIM hadoutstanding debt of $10.2 million, borrowed from CILCORP.

 

19

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CVI

 

At March 31, 2002, CVI hadoutstanding debt of $4.8 million, borrowed from CILCORP.

 

 

Competition

 

CILCO, as a regulated publicutility, has an obligation to provide service to retail customers within itsdefined service territory; thus, CILCO has not generally been in competitionwith other public utilities for retail electric or gas customers in theseareas.  However, the passage of theElectric Service Customer Choice and Rate Relief Law of 1997 (Customer ChoiceLaw) began a transition process to a fully competitive market for electricityin Illinois.  During the mandatorytransition period, which ends on January 1, 2005, 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 yields of 30 year U.S. Treasury bonds.  In addition, electricity and natural gascompete 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 theCustomer Choice Law, the electric industry in Illinois will changesignificantly during the coming years at both the wholesale and retaillevels.  As of December 31, 2000,all non-residential customers had the ability to choose their electricsupplier.  Residential electriccustomers are able to choose their electric supplier as of May 1, 2002.

 

If a customer chooses to leaveits present electricity supplier, that utility will collect a fee fordelivering power and may assess an additional transition charge on thecustomer.  This collection methodologymust be filed with and approved by the Illinois Commerce Commission (ICC) andis designed to help utilities recover a portion of the costs of pastinvestments made under a regulated system. The transition charge will usually reduce a customer’s economicincentive to switch suppliers. Transition charges may be collected through 2006 (2008 upon the ICC’sfinding that a utility’s financial condition is impaired and the utility meetsother requirements specified in the Customer Choice Law).

 

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

 

The Customer Choice Law alsorequires electric base rate reductions that vary by utility.  CILCO reduced its residential base rates by2% in August 1998 and by 2% in October 2000 and must reduce residential baserates by an additional 1% in October 2002. Also, CILCO’s return on common equity will, in general, be capped (theEquity Cap) at an index (a 12-month average yield for 30 year U.S. Treasurybonds plus 8% for calendar years 1998 and 1999 and a 12 month-average yield forU.S. Treasury bonds plus 9% for calendar years 2000 through 2004) plus 1.5percentage points.  The Equity Cap was16.1% in 2001, 16.6% in 2000, and 15.1% in 1999.  If CILCO’s two-year average return on common equity exceeds thetwo–year average of the Equity Cap, fifty percent of the earnings

 

20

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in excess of the average EquityCap must be refunded to customers in the following year.

 

On June 30, 1999, SenateBill 24 (a clarification and technical correction of the Customer Choice Law)was signed into law.  This law allowscertain utilities, including CILCO, to increase the Equity Cap by an additional2% over the Equity Cap provided under the Customer Choice Law, for the period2000 through 2004.  The increase in theEquity Cap is allowed in exchange for these utilities offering choice ofelectricity suppliers to selected manufacturing customers on June 1, 2000,and to the remaining manufacturing customers on October 1, 2000, earlierthan previously allowed under the Customer Choice Law.  Utilities selecting this option must alsowaive the right to seek a two-year extension on the collection of transitioncharges.  On April 13, 2000, CILCOfiled revised tariff sheets with the ICC to make these selected customerseligible for choice on June 1, 2000, in order to increase the equity cap by 2%,as outlined in Senate Bill 24.

 

With the enactment of theCustomer Choice Law, electric generation in Illinois became deregulated andcompetitive.  As a result, theaccounting principles applicable to rate-regulated enterprises (Statement ofFinancial Accounting Standards No. 71, “Accounting for the Effects of CertainTypes of Regulation” (SFAS 71)) no longer apply to the electric generationportion of CILCO’s business.  There wereno impairments to CILCO assets as a result of transitioning from SFAS 71.  Its ability to keep total production costscompetitive in a deregulated market will determine whether and to what extentthe value of these assets may be impaired in the future.

 

With electric choice beginningon 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 forelectricity, the cost for a utility to produce or buy electricity, and thenumber of customers that may be gained or lost due to customer choice ofsupplier in Illinois cannot be predicted. As a result, management cannot predict the ultimate impact that theCustomer Choice Law will have on CILCORP’s financial position or results ofoperation, but the effect could be significant.  However, CILCO is currently a low-cost provider of electricity,and management will continue to position CILCO for competition by controllingcosts, maintaining good customer relations, and developing flexibility to meetindividual customer requirements.  As ofMarch 31, 2002, all electric customers eligible for choice continue to purchasetheir electricity supply from CILCO, other than those who self-generate.  As of March 31, 2002, CILCO has contractstotaling approximately 2.6 million megawatt hours of retail load outside of itsservice territory for 2002.  CILCO willsupply these new customers by primarily purchasing electricity from othersuppliers.  CILCO has made the necessaryfirm supply and transmission arrangements to meet customer requirements.

 

21

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Market Risk 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 and gas sales during the first quarter of2002 were to CILCO retail customers in Illinois under tariffs regulated by theIllinois Commerce Commission (ICC). Prior to October 29, 2001, prudently incurred costs of fuel used togenerate electricity and purchased power costs were recovered from retailcustomers that purchase energy through regulated tariffs under the FuelAdjustment Clause (FAC).  Thus, throughOctober 28, 2001, there had been very limited commodity price risk associatedwith CILCO’s traditional regulated sales. CILCO filed to eliminate the FAC on September 10, 2001.  The ICC approved the elimination of the FACon October 24, 2001, for bills issued on or after October 29, 2001.  While the Company is exposed to increasedcommodity price risk due to the elimination of the FAC, sufficient supply hasbeen placed under contract to limit the Company’s exposure to market risk atany given time.  When this supply isadded to CILCO generation capacity, a reserve margin of over 15% is forecastedbased on the forecasted peak load of 1,228 Mw. Since CILCO supplies over 90% of its native load with its generationcapacity, generation can be adjusted on a real-time basis to match actual loadat any given time.  CILCO is subject tothe risk that generation becomes unavailable due to forced outages.  The Company’s historical unplanned outagerate is 5.1%.  In the unlikely eventthat CILCO generation and purchased supply is insufficient to meet loadrequirements, CILCO would have to purchase electric supply from the market atprevailing market 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.  AtMarch 31, 2002, the Company engaged in non-regulated electric retail andnatural gas sales in Illinois, including wholesale power purchases and sales toutilize its electric generating capability. These non-regulated activities had net open market price risk positionsof approximately 324,998 MWh of electricity and 250,000 Mcf of naturalgas.  A market price sensitivity of 10%applied to positions open in the next twelve months is not material to theCompany.  See Note 3 for adiscussion of the Company’s use of financial derivatives for hedgingpurposes.  Due to the high correlationbetween the changes in the value of the financial instrument positions held bythe Company and the change in price of the underlying commodity, the net effecton the Company’s net income resulting from the change in value of thesefinancial instruments is not expected to be material.

 

22

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Results of Operations

 

CILCO Electric Operations

 

The following table summarizesthe components of CILCO electric operating income for the three months endedMarch 31, 2002 and 2001.

 
| Components of Electric Operating Income |   |                               |   |
|-----------------------------------------|--------|------------------------------------|--------|
|                                    |   | **Three  Months Ended  March 31,** |   |
|                                    |   | **2002**                           |   | **2001** |   |
|                                    |   | **(In thousands)**                 |   |
|                                    |   | **(Unaudited)**                    |   |
| Revenue:                                |   |                               |   |   |   |
| Electric retail                         |   | $                                  | 82,110 |   | $ | 85,535 |   |
| Sales for resale                        |   | 2,003                              |   | 3,465 |   |
| Total revenue                           |   | 84,113                             |   | 89,000 |   |
|                                    |   |                               |   |   |   |
| Cost of sales:                          |   |                               |   |   |   |
| Cost of fuel                            |   | 22,030                             |   | 29,260 |   |
| Purchased power expense                 |   | 11,530                             |   | 10,112 |   |
| Revenue taxes                           |   | 4,902                              |   | 5,210 |   |
| Total cost of sales                     |   | 38,462                             |   | 44,582 |   |
| Gross margin                            |   | 45,651                             |   | 44,418 |   |
|                                    |   |                               |   |   |   |
| Operating expenses:                     |   |                               |   |   |   |
| Operation and maintenance expenses      |   | 22,577                             |   | 21,422 |   |
| Depreciation and amortization           |   | 12,067                             |   | 11,756 |   |
| Other taxes                             |   | 2,589                              |   | 2,495 |   |
| Total operating expenses                |   | 37,233                             |   | 35,673 |   |
| Total                                   |   | 8,418                              |   | 8,745 |   |
|                                    |   |                               |   |   |   |
| Fixed charges and other:                |   |                               |   |   |   |
| Interest on long-term debt              |   | 3,170                              |   | 3,090 |   |
| Cost of borrowed funds capitalized      |   | (238                               | )      | (106 | ) |
| Other interest                          |   | 762                                |   | 1,221 |   |
| Total                                   |   | 3,694                              |   | 4,205 |   |
|                                    |   |                               |   |   |   |
| Income before income taxes              |   | 4,724                              |   | 4,540 |   |
| Income taxes                            |   | 1,471                              |   | 1,761 |   |
| Electric income                         |   | $                                  | 3,253  |   | $ | 2,779 |   |

 

Electric gross margin onregulated sales increased approximately 3% for the three months endedMarch 31, 2002, compared to the same period in 2001, due primarily toIllinois Commerce Commission (ICC) mandated changes in 2001.  On December 20, 2000, as part of the 1999Fuel Adjustment Clause (FAC) reconciliation hearings, the ICC ordered changesin CILCO’s calculation of allowable fuel costs applicable to sales subject tothe FAC.  These changes revised theallocation of generated and purchased power costs between regulated andnon-regulated sales.  As a result ofthis order, the regulated

 

23

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sales margin decreased and thenon-regulated sales margin increased for January through March 2001.  On March 9, 2001, the ICC issued anemergency rule in response to the margin shifts.  The emergency rule restored the previous calculation method foroff-system non-regulated sales in an attempt to fairly allocate costs betweenregulated and non-regulated sales.  OnJuly 25, 2001, the ICC entered a final order, amending the emergency rule,and further changing the method for allocating fuel costs to non-regulatedsales.

 

Also contributing to thefavorable variance was a first quarter 2002 payment discount received by theCompany in conjunction with the termination of an out-of-market long-term coalcontract.  The discount reduced cost offuel by $0.8 million for the first quarter of 2002.  Retail kilowatt hour (kWh) sales decreased 6% for the threemonths ended March 31, 2002, compared to the first quarter of 2001.  Residential and commercial sales volumesdecreased 4% and 5%, respectively. Heating degree days were 15% lower for the three months ended March 31,2002, compared to the same period in 2001. Industrial sales volumes decreased 7% compared to the first quarter of2001.

 

Sales for resale decreased 42%for the first quarter of 2002, compared to the same period in 2001.  Sales for resale vary based on the energyrequirements of native load customers, neighboring utilities and powermarketers, CILCO’s available capacity for bulk power sales, and the price ofpower available for sale.

 

The overall level of businessactivity in CILCO’s service territory and weather conditions are expected tocontinue to be the primary factors affecting electric sales in the nearterm.  CILCO’s electric sales will alsobe affected in the long term by deregulation and increased competition in theelectric utility industry.

 

Electric operation andmaintenance expense increased 5% for the three months ended March 31, 2002,compared to the same period in 2001. The increase for the quarter was mainly due to increased costs forpension, other post-employment benefits, uncollectible accounts and treetrimming.  Also contributing to theunfavorable variance were expenses incurred as a result of an ice storm in thefirst quarter of 2002.

 

Fixed charges and otherexpenses decreased 12% for the three months ended March 31, 2002, compared tothe same period in 2001, primarily due to decreased short-term borrowings.

 

Income taxes expense decreasedfor the three months ended March 31, 2002, due to a lower effective tax rate.

 

24

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CILCO Gas Operations

 

The following table summarizesthe components of CILCO gas operating income for the three months ended March31, 2002 and 2001.

 
| Components of Gas Operating Income |   |                               |   |
|------------------------------------|--------|------------------------------------|--------|
|                               |   | **Three  Months Ended  March 31,** |   |
|                               |   | **2002**                           |   | **2001** |   |
|                               |   | **(In thousands)**                 |   |
|                               |   | **(Unaudited)**                    |   |
| Revenue:                           |   |                               |   |   |   |
| Sale of gas                        |   | $                                  | 78,292 |   | $ | 157,473 |   |
| Transportation services            |   | 1,726                              |   | 1,476 |   |
| Total revenue                      |   | 80,018                             |   | 158,949 |   |
| Cost of sales:                     |   |                               |   |   |   |
| Cost of gas                        |   | 49,608                             |   | 126,680 |   |
| Revenue taxes                      |   | 3,620                              |   | 4,545 |   |
| Total cost of sales                |   | 53,228                             |   | 131,225 |   |
| Gross margin                       |   | 26,790                             |   | 27,724 |   |
|                               |   |                               |   |   |   |
| Operating expenses:                |   |                               |   |   |   |
| Operation and maintenance expenses |   | 8,869                              |   | 7,613 |   |
| Depreciation and amortization      |   | 5,597                              |   | 5,469 |   |
| Other taxes                        |   | 629                                |   | 618 |   |
| Total operating expenses           |   | 15,095                             |   | 13,700 |   |
| Total                              |   | 11,695                             |   | 14,024 |   |
| Fixed charges and other:           |   |                               |   |   |   |
| Interest on long-term debt         |   | 1,197                              |   | 1,238 |   |
| Other interest expense             |   | 288                                |   | 489 |   |
| Total                              |   | 1,485                              |   | 1,727 |   |
|                               |   |                               |   |   |   |
| Income before income taxes         |   | 10,210                             |   | 12,297 |   |
| Income taxes                       |   | 4,041                              |   | 4,895 |   |
| Gas income                         |   | $                                  | 6,169  |   | $ | 7,402 |   |

 

Gas gross margin decreasedapproximately 3% for the three months ended March 31, 2002, compared tothe same period in 2001.  Residentialand commercial sales volumes decreased 6% and 12%, respectively, for the threemonths ended March 31, 2002, primarily due to warmer weather.  Heating degree days were 15% lower for thethree months ended March 31, 2002, compared to the same period in 2001.

 

Revenue from gas transportationservices increased 17% and gas transportation sales volumes increased 13% forthe three months ended March 31, 2002, compared to the same period in2001.  Increases in higher margincommercial gas transportation sales were partially offset by decreases in lowermargin industrial gas transportation sales.

 

25

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The overall level of businessactivity in CILCO’s service territory and weather conditions are expected tocontinue to be the primary factors affecting gas sales in the near term.  CILCO’s gas sales may also be affected byfurther deregulation at the retail level in the natural gas industry.

 

The cost of gas decreased 61%for the three months ended March 31, 2002, compared to the same period in 2001,primarily due to lower natural gas prices and decreased gas sales.  These costs were passed through to customersvia the Purchased Gas Adjustment (PGA).

 

Gas operation and maintenanceexpense increased 16% for the three months ended March 31, 2002, compared tothe same period in 2001.  The increasefor the three months ended March 31, 2002, was primarily due to increases inexpenses for pension, other post-employment benefits, uncollectible accountsand public liability claims partially offset by a decrease in gas distributioncosts.

 

Fixed charges and otherexpenses decreased 14% for the three months ended March 31, 2002, compared tothe same period in 2001, primarily due to decreased short-term borrowings.

 

Income taxes expense decreased17% for the three months ended March 31, 2002, due to lower pre-taxoperating income.

 

26

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CILCO Other Operations

 

The following table summarizesCILCO’s other income and deductions for the three months ended March 31, 2002and 2001.  Revenues within CILCO OtherOperations consist primarily of non-regulated electricity sales in Illinois,outside of CILCO’s service territory.

 
| Components of Other Income and  Deductions |   |                               |   |
|--------------------------------------------|--------|------------------------------------|--------|
|                                       |   | **Three  Months Ended  March 31,** |   |
|                                       |   | **2002**                           |   | **2001** |   |
|                                       |   | **(In thousands)**                 |   |
|                                       |   | **(Unaudited)**                    |   |
| Revenue                                    |   | $                                  | 21,750 |   | $ | 12,794 |   |
| Expense                                    |   | (20,043                            | )      | (9,157 | ) |
| Gross margin                               |   | 1,707                              |   | 3,637 |   |
| Other income and deductions:               |   |                               |   |   |   |
| Interest income                            |   | 10                                 |   | 160 |   |
| Operating expenses                         |   | (1,280                             | )      | (621 | ) |
| Preferred stock dividends                  |   | (540                               | )      | (540 | ) |
| Other                                      |   | (342                               | )      | (302 | ) |
| Total other income and deductions          |   | (2,152                             | )      | (1,303 | ) |
|                                       |   |                               |   |   |   |
| Income (loss) before taxes                 |   | (445                               | )      | 2,334 |   |
| Income taxes (benefit)                     |   | (367                               | )      | 724 |   |
| Other income (loss)                        |   | $                                  | (78    | ) | $ | 1,610 |   |

 

Gross margin decreased 53% forthe three months ended March 31, 2002, primarily due to ICC mandatedchanges in the manner in which generated and purchased power costs wereallocated between regulated and non-regulated sales in the first quarter of2001 for non-regulated electricity sales in Illinois outside of CILCO’s serviceterritory (see Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations - CILCO ElectricOperations).   These sales ofelectricity were to customers eligible to choose their energy supplier underthe Customer Choice Law.

 

Operating expenses increasedfor the three months ended March 31, 2002, primarily due to increased bad debtexpense for non-regulated sales and increased charitable donations.

 

27

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Other Businesses Operations

 

The following table summarizesOther Businesses revenue and expenses for the three months ended March 31, 2002and 2001.  Other Businesses resultsinclude income earned and expenses incurred at the Holding Company, CIM, CVI,and CILCORP Infraservices Inc.

 
| Components of Other Businesses  Net Loss |   |                               |   |
|------------------------------------------|--------|------------------------------------|--------|
|                                     |   | **Three  Months Ended  March 31,** |   |
|                                     |   | **2002**                           |   | **2001** |   |
|                                     |   | **(In thousands)**                 |   |
|                                     |   | **(Unaudited)**                    |   |
| Revenue:                                 |   |                               |   |   |   |
| Leveraged lease revenue                  |   | $                                  | 1,326  |   | $ | 1,396 |   |
| Interest income                          |   | 290                                |   | 90 |   |
| Gas marketing revenue                    |   | 16,313                             |   | 13,981 |   |
| Other revenue                            |   | 362                                |   | 493 |   |
| Total revenue                            |   | 18,291                             |   | 15,960 |   |
|                                     |   |                               |   |   |   |
| Expenses:                                |   |                               |   |   |   |
| Gas purchased for  resale                |   | 16,284                             |   | 14,008 |   |
| Fuel for generation  and purchased power |   | —                             |   | (1,334 | ) |
| Operating expenses                       |   | 304                                |   | 447 |   |
| Depreciation and amortization            |   | 347                                |   | 3,865 |   |
| Interest expense                         |   | 10,849                             |   | 11,871 |   |
| Other taxes                              |   | 20                                 |   | 26 |   |
| Total expenses                           |   | 27,804                             |   | 28,883 |   |
|                                     |   |                               |   |   |   |
| Loss before income taxes                 |   | (9,513                             | )      | (12,923 | ) |
| Income taxes (benefit)                   |   | (4,184                             | )      | (4,357 | ) |
| Other businesses loss                    |   | $                                  | (5,329 | ) | $ | (8,566 | ) |

 

Gas marketing revenues and gaspurchased for resale at CVI subsidiary, CILCORP Energy Services Inc., increaseddue to increased gas marketing sales.

 

Fuel for generation andpurchased power was impacted in the first quarter of  2001 by $1.3 million in amortization related to the purchaseaccounting for the out-of-market coal contract.  This contract was settled during the fourth quarter of 2001 andthe preacquisition contingency related to this contract was removed.

 

Depreciation and amortizationdecreased due to the Company’s January 1, 2002, adoption of the Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”(SFAS 142).  SFAS 142 requires thatgoodwill and intangible assets that have indefinite useful lives be tested atleast annually for impairment rather than be amortized.  Accordingly, the Company has ceased thegoodwill amortization which was approximately $3.8 million in the first quarterof 2001.

 

Interest expense decreased forthe three months ended March 31, 2002, due to the retirement of medium-termnotes in 2001 and lower short-term debt in 2002.

 

28

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The income tax benefitdecreased in the three months ended March 31, 2002, compared to thecorresponding period in 2001, primarily due to a lower net loss.

 

 

QST Enterprises DiscontinuedOperations

 

QST Enterprises and QST Energyceased operations during the fourth quarter of 1998, except for fulfillment ofcontractual commitments for 1999 and beyond. Accordingly, the results of QST Enterprises are reported as discontinuedoperations.  An initial loss provisionwas recorded for the discontinued energy operations in 1998.  Subsequent purchase accounting adjustmentsincluded additional discontinued operations loss accruals for QST Enterprises.

 

Lossfrom operations of discontinued businesses, net of tax:

 
|                                |   | **Three  Months EndedMarch 31,** |   |
|-------------------------------------|--------|----------------------------------|--------|
|                                |   | **2002**                         |   | **2001** |   |
| QST Enterprises, net of tax of $(5) |   | $                                | (9     | ) | $ | — |   |
|                                |   | $                                | (9     | ) | $ | — |   |

 

QST Enterprises’ financialresults for the period ended March 31, 2002, were in excess of the discontinuedoperations liability and are shown as a loss for that period.  The results for the period ended March 31,2001, were reflected in the discontinued operations liability, resulting in nonet income or loss.

 

29

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PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Reference is made to“Environmental Matters” of Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and to “Note 7 - Commitments andContingencies” of Item 8.  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 of management,all such claims currently pending either will not result in a material adverseeffect on the financial position and results of operations of the Company orare adequately covered by:  (i)insurance; (ii) contractual or statutory indemnification; and/or (iii) reservesfor potential losses.

 

 

Item 5.  Other Information

 

None

 

 

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

 
| (a) Exhibits             |   |                                                                                                           |
|--------------------------|--------|----------------------------------------------------------------------------------------------------------------|
|                     |   |                                                                                                           |
| (10)a                    |   | Retention  Agreement Between Central Illinois Light Company and James L. Luckey dated as  of March 1, 2002.    |
|                     |   |                                                                                                           |
| (10)b                    |   | Retention  Agreement Between Central Illinois Light Company and Gregory T. Russell dated  as of March 1, 2002. |
|                     |   |                                                                                                           |
|                     |   |                                                                                                           |
| (b) Reports  on Form 8-K |
|                     |   |                                                                                                           |
| None                     |   |                                                                                                           |

 

30

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SIGNATURES

 

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

 
|                    |   | CILCORP Inc.                           |
|-------------------------|--------|----------------------------------------|
|                    |   | (Registrant)                           |
|                    |   |                                   |
| Date  May 10, 2002 |   |                                   |
|                    |   | /s/ R. J. Sprowls                      |
|                    |   | Vice President                         |
|                    |   |                                   |
| Date  May 10, 2002 |   |                                   |
|                    |   | /s/ T. S. Romanowski                   |
|                    |   | Chief Financial Officer  And Treasurer |
|                    |   |                                   |
|                    |   |                                   |
|                    |   |                                   |
|                    |   | CENTRAL ILLINOIS LIGHT COMPANY         |
|                    |   | (Registrant)                           |
|                    |   |                                   |
| Date  May 10, 2002 |   |                                   |
|                    |   | /s/ R. J. Sprowls                      |
|                    |   | President                              |
|                    |   |                                   |
| Date  May 10, 2002 |   |                                   |
|                    |   | /s/ T. S. Romanowski                   |
|                    |   | Chief Financial Officer  And Treasurer |

 

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