UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From to
Commission file number 1-3672
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Illinois 37-0211380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
607 East Adams Street, Springfield, Illinois 62739
(Address of principal executive offices and Zip Code)
Registrant's telephone number,
including area code: (217) 523-3600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
------------- ------------
Shares outstanding of Central Illinois Public Service Company's common
stock as of November 12, 2002: Common Stock, no par value, held by Ameren
Corporation (parent company of registrant) - 25,452,373
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
INDEX
Page
----
PART I. Financial Information
ITEM 1. Financial Statements (Unaudited)
Balance Sheet at September 30, 2002 and December 31, 2001 . . 2
Statement of Income for the three and nine months
ended September 30, 2002 and 2001 . . . . . . . . . . . . . . 3
Statement of Cash Flows for the nine months ended
September 30, 2002 and 2001 . . . . . . . . . . . . . . . . . 4
Statement of Common Stockholder's Equity for the three
and nine months ended September 30, 2002 and 2001 . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk . 20
ITEM 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . 21
PART II. Other Information
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 22
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
should be read with the cautionary statements and important factors included in
this Form 10-Q at Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," under the heading "Safe Harbor Statement."
Forward-looking statements are all statements other than statements of
historical fact, including those statements that are identified by the use of
the words "anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
BALANCE SHEET
(Unaudited, in millions)
September 30, December 31,
2002 2001
------------ ------------
ASSETS:
Property and plant, at original cost:
Electric $1,242 $1,224
Gas 287 280
------ ------
1,529 1,504
Less accumulated depreciation and amortization 722 693
------ ------
807 811
Construction work in progress 13 11
------ ------
Total property and plant, net 820 822
------ ------
Investments and other assets:
Intercompany notes receivable 373 419
Intercompany tax receivable 166 177
Other assets 13 17
------ ------
Total investments and other assets 552 613
------ ------
Current assets:
Cash and cash equivalents 16 26
Accounts receivable - trade (less allowance for
doubtful accounts of $1 and $1, respectively) 57 38
Unbilled revenue 61 81
Other accounts and notes receivable 66 61
Intercompany notes receivable 46 43
Intercompany tax receivable 13 18
Materials and supplies, at average cost -
Fossil fuel 33 33
Other 10 9
Other 8 7
------ ------
Total current assets 310 316
------ ------
Regulatory assets 30 32
------ ------
Total Assets $1,712 $1,783
====== ======
CAPITAL AND LIABILITIES:
Capitalization:
Common stock, no par value, 45.0 shares
authorized - 25.5 shares outstanding $ 120 $ 120
Retained earnings 428 444
------ ------
Total common stockholder's equity 548 564
------ ------
Preferred stock not subject to mandatory redemption 80 80
Long-term debt 534 579
------ ------
Total capitalization 1,162 1,223
------ ------
Current liabilities:
Current maturities of long-term debt 45 33
Accounts and wages payable 78 114
Accumulated deferred income taxes - 20
Taxes accrued 51 23
Other 33 31
------ ------
Total current liabilities 207 221
------ ------
Accumulated deferred income taxes 271 255
Accumulated deferred investment tax credits 11 12
Regulatory liabilities 23 36
Other deferred credits and liabilities 38 36
------ ------
Total Capital and Liabilities $1,712 $1,783
====== ======
See Notes to Financial Statements.
2
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
STATEMENT OF INCOME
(Unaudited, in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
2002 2001 2002 2001
----- ----- ----- -----
OPERATING REVENUES:
Electric $ 209 $ 210 $ 520 $ 529
Gas 15 19 106 131
----- ----- ----- -----
Total operating revenues 224 229 626 660
----- ----- ----- -----
OPERATING EXPENSES:
Operations
Purchased power 117 123 323 336
Gas 6 9 62 88
Other 31 33 94 91
----- ----- ----- -----
154 165 479 515
Maintenance 8 8 26 21
Depreciation and amortization 13 12 38 36
Income taxes 16 14 21 26
Other taxes 6 6 21 18
----- ----- ----- -----
Total operating expenses 197 205 585 616
----- ----- ----- -----
OPERATING INCOME 27 24 41 44
OTHER INCOME AND (DEDUCTIONS):
Miscellaneous, net
Miscellaneous income 8 13 25 33
Miscellaneous expense - (1) (1) (1)
Income taxes - (1) - (1)
----- ----- ----- -----
Total other income and (deductions) 8 11 24 31
----- ----- ----- -----
INTEREST CHARGES 11 10 31 29
----- ----- ----- -----
NET INCOME 24 25 34 46
PREFERRED STOCK DIVIDENDS 1 1 3 3
----- ----- ----- -----
NET INCOME AFTER PREFERRED STOCK DIVIDENDS $ 23 $ 24 $ 31 $ 43
===== ===== ===== =====
See Notes to Financial Statements.
3
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
STATEMENT OF CASH FLOWS
(Unaudited, in millions)
Nine Months Ended
September 30,
-----------------
2002 2001
----- -----
Cash Flows From Operating:
Net income $ 34 $ 46
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 38 36
Amortization of debt issuance costs and
premium/discounts 1 1
Deferred income taxes, net (12) (14)
Deferred investment tax credits, net (1) (1)
Changes in assets and liabilities:
Receivables, net (4) 11
Materials and supplies (1) (14)
Accounts and wages payable (36) (17)
Taxes accrued 28 22
Assets, other 25 8
Liabilities, other (1) 3
----- -----
Net cash provided by operating activities 71 81
----- -----
Cash Flows From Investing:
Construction expenditures (41) (34)
Intercompany notes receivable 43 40
----- -----
Net cash provided by investing activities 2 6
----- -----
Cash Flows From Financing:
Dividends on common stock (47) (15)
Dividends on preferred stock (3) (3)
Redemptions:
Long-term debt (33) (30)
Intercompany notes payable - (194)
Issuances:
Long-term debt - 150
----- -----
Net cash used in financing activities (83) (92)
----- -----
Net change in cash and cash equivalents (10) (5)
Cash and cash equivalents at beginning of year 26 30
----- -----
Cash and cash equivalents at end of period $ 16 $ 25
===== =====
Cash paid during the periods:
Interest $ 26 $ 25
Income taxes, net 6 17
See Notes to Financial Statements.
4
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
STATEMENT OF COMMON STOCKHOLDER'S EQUITY
(Unaudited, in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
----- ----- ----- -----
Common stock $ 120 $ 120 $ 120 $ 120
Retained earnings
Beginning balance 421 454 444 435
Net income 24 25 34 46
Common stock dividends (16) (34) (47) (34)
Preferred stock dividends (1) (1) (3) (3)
----- ----- ----- -----
428 444 428 444
----- ----- ----- -----
Total common stockholder's equity $ 548 $ 564 $ 548 $ 564
===== ===== ===== =====
See Notes to Financial Statements.
5
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2002
NOTE 1 - Summary of Significant Accounting Policies
Basis of Presentation
Our financial statements reflect all adjustments (which include normal,
recurring adjustments) necessary, in our opinion, for a fair presentation of the
interim results. These statements should be read in conjunction with the
financial statements and the notes thereto included in our 2001 Annual Report on
Form 10-K.
When we refer to AmerenCIPS, our, we or us, we are referring to Central
Illinois Public Service Company. All tabular dollar amounts are in millions,
unless otherwise indicated.
Accounting Changes and Other Matters
In January 2001, we adopted Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
The impact of that adoption was immaterial to us.
On January 1, 2002, we adopted SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires business
combinations to be accounted for under the purchase method of accounting, which
requires one party in the transaction to be identified as the acquiring
enterprise and for that party to allocate the purchase price to the assets and
liabilities of the acquired enterprise based on fair market value. SFAS 142
requires goodwill and indefinite-lived intangible assets recorded in the
financial statements to be tested for impairment at least annually, rather than
amortized over a fixed period, with impairment losses recorded in the income
statement. SFAS 141 and SFAS 142 did not have any effect on our financial
position, results of operations or liquidity upon adoption. See Note 6 -
"CILCORP Acquisition."
In July 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations"
was issued. SFAS 143 requires an entity to record a liability and corresponding
asset representing the present value of legal obligations associated with the
retirement of tangible, long-lived assets. SFAS 143 is effective for us on
January 1, 2003. At this time, we are assessing the impact of SFAS 143 on our
financial position, results of operations and liquidity upon adoption.
On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS 144 addresses the financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS 144 retains the guidance related to
calculating and recording impairment losses, but adds guidance on the accounting
for discontinued operations, previously accounted for under Accounting
Principles Board Opinion No. 30. We evaluate long-lived assets for impairment
when events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. The determination of whether impairment has
occurred is based on an estimate of undiscounted cash flows attributable to the
assets, as compared with the carrying value of the assets. If impairment has
occurred, the amount of the impairment recognized is determined by estimating
the fair value of the assets and recording a provision for loss if the carrying
value is greater than the fair value. SFAS 144 did not have any effect on our
financial position, results of operations or liquidity upon adoption.
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS 146 requires an entity to recognize and measure at fair value a liability
for a cost associated with an exit or disposal activity in the period in which
the liability is incurred and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002.
6
Excise Taxes
Excise taxes on our Illinois gas customer bills are imposed on us and are
recorded gross in Operating Revenues and Other Taxes. Excise taxes recorded in
Operating Revenues and Other Taxes for the three and nine months ended September
30, 2002 and 2001 were $2 million and $9 million, respectively. Excise taxes
applicable to Illinois electric customer bills are imposed on the consumer and
are recorded as tax collections payable.
Employee Benefit Plans
Ameren Corporation, our parent company, made cash contributions totaling
$15 million to Ameren's defined benefit retirement plans during the third
quarter of 2002, and Ameren expects to make additional cash contributions to the
plans totaling approximately $15 million in the fourth quarter of 2002. Our
share of the cash contribution made in the third quarter of 2002 was
approximately $2 million, and we expect our share of the cash contribution that
may be made in the fourth quarter of 2002 will be approximately $2 million.
Future funding plans will be evaluated at the end of 2002. Based on the
performance of plan assets through September 30, 2002, Ameren expects to be
required under the Employee Retirement Income Security Act of 1974 to fund $25
million to $50 million in 2004 and $150 million to $200 million in 2005 in order
to maintain minimum funding levels. We expect our share of the funding to be
between $3 million to $5 million, and $16 million to $21 million for 2004 and
2005, respectively, plus our share related to employees of our affiliate, Ameren
Services Company. These amounts are estimates and may change based on actual
stock market performance, changes in interest rates, any plan funding in 2002 or
2003 and finalization of actuarial assumptions. In addition, we expect at
December 31, 2002, to be required to record a minimum pension liability that
would result in a charge to Accumulated Other Comprehensive Income (OCI) in
stockholder's equity. The amount of the charge is expected to result in a less
than one percent change in our debt to total capitalization ratios.
NOTE 2 - Rate and Regulatory Matters
Illinois Electric
In December 1997, the Electric Service Customer Choice and Rate Relief Law
of 1997 (the Illinois Law) was enacted providing for electric utility
restructuring in Illinois. This legislation introduced competition into the
retail supply of electric energy in Illinois. Illinois residential customers
were offered choice in suppliers beginning on May 1, 2002. Industrial and
commercial customers were previously offered this choice.
The original Illinois Law contained a provision freezing retail bundled
electric rates through January 1, 2005. In 2002, legislation was passed and
signed into law that extended the rate freeze period through January 1, 2007. As
a result of the extension through January 1, 2007 of the electric rate freeze
related to the Illinois Law, we expect to seek to renew or extend a power supply
agreement between us and our affiliate, AmerenEnergy Marketing Company
(Marketing Company), through the same period. A renewal or extension of the
power supply agreement will depend on compliance with regulatory requirements in
effect at the time, and we cannot predict whether we will be successful in
securing a renewal or extension of this agreement. The offering of choice to our
industrial and commercial customers has not had a material adverse effect on our
business, and we do not expect the offering of choice to our residential
customers, or the extension of the rate freeze, to have a material adverse
effect on our business.
In October 2002, we and our affiliate, Union Electric Company, operating as
AmerenUE, filed with the Illinois Commerce Commission (ICC) a proposal to
suspend collection of transition charges associated with the Illinois Law for
the period commencing June 2003 until at least June 2005. The Illinois Law
allows a utility to collect transition charges from customers that elect to move
from bundled retail rates to market-based rates. Utilities have the right to
collect transition charges throughout the transition period that ends January 1,
2007. The suspension of collection of transition charges is not expected to have
a material impact on us.
7
Federal - Electric Transmission
In December 1999, the Federal Energy Regulatory Commission (FERC) issued
Order 2000 requiring all utilities, subject to FERC jurisdiction, to state their
intentions for joining a regional transmission organization (RTO). RTOs are
independent organizations that will functionally control the transmission assets
of utilities in order to improve the wholesale power market. Since January 2001,
we and AmerenUE, along with several other utilities, were seeking approval from
the FERC to participate in an RTO known as the Alliance RTO. We had previously
been a member of the Midwest Independent System Operator (Midwest ISO) and
recorded a pretax charge to earnings in 2000 of $8 million ($5 million after
taxes) for an exit fee and other costs when we left that organization. We felt
the for-profit Alliance RTO business model was superior to the not-for-profit
Midwest ISO business model and provided us with a more equitable return on our
transmission assets.
In late 2001, the FERC issued an order that rejected the formation of the
Alliance RTO and ordered the Alliance RTO companies and the Midwest ISO to
discuss how the Alliance RTO business model could be accommodated within the
Midwest ISO. On April 25, 2002, after the Alliance RTO and Midwest ISO failed to
reach an agreement, and after a series of filings by the two parties with the
FERC, the FERC issued a declaratory order setting forth the division of
responsibilities between the Midwest ISO and National Grid (the managing member
of the transmission company formed by the Alliance companies) and approved the
rate design and the revenue distribution methodology proposed by the Alliance
companies. However, the FERC denied a request by the Alliance companies and
National Grid to purchase certain services from the Midwest ISO at incremental
cost rather than Midwest ISO's full tariff rates. The FERC also ordered the
Midwest ISO to return the exit fee paid by us and AmerenUE to leave the Midwest
ISO, provided we and AmerenUE return to the Midwest ISO and agree to pay their
proportional share of the startup and ongoing operational expenses of the
Midwest ISO. Moreover, the FERC required the Alliance companies to select the
RTO in which they will participate within thirty days of the order.
Since the April 2002 FERC order, we and AmerenUE have made filings with the
FERC indicating that we would return to the Midwest ISO through a new
independent transmission company, GridAmerica LLC, that was agreed to be formed
by us and AmerenUE, along with subsidiaries of FirstEnergy Corporation and
NiSource Inc. If the FERC approves the definitive agreements establishing
GridAmerica, a subsidiary of National Grid will serve as the managing member of
GridAmerica and will manage the transmission assets of the three companies and
participate in the Midwest ISO on behalf of GridAmerica. Other Alliance RTO
companies announced their intentions to join the PJM Interconnection LLC (PJM)
RTO. On July 25, 2002, the Ameren companies filed a motion with the FERC
requesting that it condition the approval of the choices of other Illinois
utilities to join the PJM RTO on Midwest ISO and PJM entering into an agreement
addressing important reliability and rate-barrier issues. On July 31, 2002, the
FERC issued an order accepting the formation of GridAmerica as an independent
transmission company under the Midwest ISO subject to further compliance filings
ordered by the FERC. The FERC also issued an order accepting the elections made
by the other Illinois utilities to join the PJM RTO on the condition PJM and
Midwest ISO immediately begin a process to address the reliability and
rate-barrier issues raised by us and other market participants in previous
filings.
Until the reliability and rate-barrier issues are resolved as ordered by
the FERC, and the tariffs and other material terms of the Ameren companies'
participation in GridAmerica, and GridAmerica's participation in the Midwest
ISO, are finalized and approved by the FERC, we are unable to predict whether
the Ameren companies will in fact become a member of GridAmerica or Midwest ISO,
or the impact that on-going RTO developments will have on our financial
condition, results of operation or liquidity.
On July 31, 2002, the FERC issued its standard market design notice of
proposed rulemaking (NOPR). The NOPR proposes a number of changes to the way the
current wholesale transmission service and energy markets are operated.
Specifically, the NOPR calls for all jurisdictional transmission facilities to
be placed under the control of an independent transmission provider (similar to
an RTO), proposes a new transmission service tariff that provides a single form
of transmission service for all users of the transmission system including
bundled retail load, and proposes a new energy market and congestion management
system that uses locational marginal pricing as its basis. We are currently
evaluating the NOPR and its possible impact on operations and expect to file
comments on the NOPR with the FERC in November 2002. Until the FERC issues a
final rule, management is unable to predict the ultimate impact on our future
financial position, results of operations or liquidity.
8
NOTE 3 - Related Party Transactions
We have transactions in the normal course of business with Ameren
Corporation, our parent company, and Ameren's other subsidiaries. These
transactions are primarily comprised of power purchases and sales, including
power purchases derived under an electric power supply agreement between us and
Marketing Company, and other services received or rendered. An electric power
supply agreement was entered into between AmerenEnergy Generating Company
(Generating Company) and its non-regulated affiliate, Marketing Company, both
wholly-owned subsidiaries of AmerenEnergy Resources Company (Resources Company).
Subsequently, Marketing Company entered into a separate power supply agreement
with our company to supply us sufficient energy and capacity to meet our
obligations as a public utility through December 31, 2004 (Power Supply
Agreement). As a result of the extension through January 1, 2007 of the electric
rate freeze related to the Illinois Law, we expect to seek to renew or extend
the Power Supply Agreement through the same period. A renewal or extension of
the Power Supply Agreement will depend on compliance with regulatory
requirements in effect at the time, and we cannot predict whether we will be
successful in securing a renewal or extension of this agreement. A portion of
the capacity and energy supplied by Generating Company to Marketing Company will
be resold to us for resale to our native load customers at rates specified by
the ICC, which approximate the historical regulatory rates for generation, or to
retail customers allowed choice of an electric supplier under state law at
market-based prices. Through the Power Supply Agreement, we purchased $111
million of power for the three months ended September 30, 2002 (2001 - $117
million) and $304 million for the nine months ended September 30, 2002 (2001 -
$318 million).
Intercompany power purchases under the Power Supply Agreement and from
Electric Energy, Inc., an affiliate, totaled $117 million for the three months
ended September 30, 2002 (2001 - $123 million) and $323 million for the nine
months ended September 30, 2002 (2001 - $336 million). Intercompany power sales
to Marketing Company totaled $6 million for the three months ended September 30,
2002 (2001 - $6 million) and $19 million for the nine months ended September 30,
2002 (2001 - $18 million).
We have the ability to borrow from Ameren or AmerenUE, through a regulated
money pool agreement. Ameren Services, an affiliate, administers the regulated
money pool and tracks internal and external funds separately. Internal funds are
surplus funds contributed to the money pool from participants. The primary
source of external funds for the regulated money pool at September 30, 2002 was
AmerenUE's commercial paper program, which was backed by bank credit agreements
totaling $430 million and credit agreements totaling $400 million at Ameren. The
total amount available to us at any given time from the regulated money pool is
reduced by the amount of borrowings by our affiliates but increased to the
extent Ameren, AmerenUE or Ameren Services have surplus funds and the
availability of other external borrowing sources. The availability of funds is
also determined by funding requirements and limits established by the Public
Utility Holding Company Act of 1935. AmerenCIPS, AmerenUE and Ameren Services
rely on the regulated money pool to coordinate and provide for certain
short-term cash and working capital requirements. Borrowers receiving a loan
under the regulated money pool agreement must repay the principal amount of such
loan, together with accrued interest. Interest is calculated at varying rates of
interest depending on the composition of internal and external funds in the
regulated money pool. The average interest rate for the regulated money pool for
the three months ended September 30, 2002 was 1.73% (2001 - 3.67%) and 1.75%
(2001 - 4.51%) for the nine months ended September 30, 2002. At September 30,
2002, we had the ability to borrow up to $886 million, all of which was unused
and available, in addition to cash balances at Ameren Corporation, through the
regulated money pool. At September 30, 2002, we had $39 million in intercompany
receivables outstanding (December 31, 2001 - $24 million) through the regulated
money pool.
In July 2002, Ameren Corporation entered into new credit agreements for
$400 million in revolving credit facilities to be used for general corporate
purposes, including support of commercial paper programs. These new credit
facilities support our ability to borrow through the regulated money pool. The
$400 million in new facilities includes a $270 million 364-day revolving credit
facility and a $130 million 3-year revolving credit facility. The 3-year
facility has a $50 million sub-limit for the issuance of letters of credit.
These new credit facilities replaced AmerenUE's $300 million revolving credit
facility. At September 30, 2002, all of such borrowing capacity under these new
facilities was available.
Our financial agreements include customary default provisions that could
impact the continued availability of credit or result in the acceleration of
repayment. These events include bankruptcy, defaults
9
in payment of other indebtedness, certain judgments that are not paid or
insured, or failure to meet or maintain covenants. At September 30, 2002, we
were in compliance with these provisions.
Support services provided by Ameren Services, including wages, employee
benefits and professional services, are based on actual costs incurred. For the
three months ended September 30, 2002, Other Operating Expenses provided by
Ameren Services totaled $15 million (2001 - $13 million). For the nine months
ended September 30, 2002, Other Operating Expenses provided by Ameren Services
totaled $46 million (2001 - $41 million).
As of September 30, 2002, intercompany receivables included in Other
Accounts and Notes Receivable were approximately $52 million (December 31, 2001
- - $38 million). As of September 30, 2002, intercompany payables included in
Accounts and Wages Payables totaled approximately $58 million (December 31, 2001
- - $87 million).
We incurred a deferred intercompany tax gain, which resulted in an
additional deferred tax liability when we transferred our electric generating
assets and liabilities at historical net book value to Generating Company in May
2000. An intercompany tax receivable with Generating Company was established for
the deferred tax liability. This asset and liability will be amortized over
twenty years. At September 30, 2002, our deferred tax liability and intercompany
tax receivable was $179 million (December 31, 2001 - $195 million), including
the current portion of $13 million (December 31, 2001 - $18 million).
Our intercompany note receivable from Generating Company was approximately
$419 million (December 31, 2001 - $462 million) including the current portion of
$46 million (December 31, 2001 - $43 million) as of September 30, 2002. Our
intercompany interest income recorded in Miscellaneous Income was approximately
$8 million (2001 - $9 million) for the three months ended September 30, 2002 and
approximately $24 million (2001 - $28 million) for the nine months ended
September 30, 2002.
NOTE 4 - Miscellaneous, net
Miscellaneous, net for the three and nine months ended September 30, 2002
and 2001 consisted of the following:
- --------------------------------------------------------------------------------
Three Months Nine Months
- --------------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Miscellaneous income:
Interest and dividend income $ 8 $ 9 $ 24 $ 28
Equity in earnings of subsidiary - 1 - 2
Other - 3 1 3
- --------------------------------------------------------------------------------
Total miscellaneous income $ 8 $ 13 $ 25 $ 33
- --------------------------------------------------------------------------------
Miscellaneous expense:
Other $ - $ (1) $ (1) $ (1)
- --------------------------------------------------------------------------------
Total miscellaneous expense $ - $ (1) $ (1) $ (1)
- --------------------------------------------------------------------------------
10
NOTE 5 - Segment Information
Segment information for the three and nine months ended September 30, 2002
and 2001 was as follows:
- ---------------------------------------------------------------------
Electric Gas Total
- ---------------------------------------------------------------------
Three months ended September 30, 2002:
- ---------------------------------------------------------------------
Revenues $ 209 $ 15 $ 224
Operating income 28 (1) 27
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Three months ended September 30, 2001:
- ---------------------------------------------------------------------
Revenues $ 210 $ 19 $ 229
Operating income 25 (1) 24
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Nine months ended September 30, 2002:
- ---------------------------------------------------------------------
Revenues $ 520 $ 106 $ 626
Operating income 38 3 41
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Nine months ended September 30, 2001:
- ---------------------------------------------------------------------
Revenues $ 529 $ 131 $ 660
Operating income 39 5 44
- ---------------------------------------------------------------------
Ameren Services, which provides shared support services to us, Ameren and
other Ameren subsidiaries, allocates administrative support services to each
segment based on various factors, such as headcount, number of customers, and
total assets.
NOTE 6 - CILCORP Acquisition
On April 28, 2002, Ameren entered into an agreement with The AES
Corporation (AES) to purchase all of the outstanding common stock of CILCORP
Inc. CILCORP is the parent company of Peoria, Illinois-based Central Illinois
Light Company, which operates as CILCO. Ameren also agreed to acquire AES Medina
Valley (No. 4), L.L.C. which indirectly owns a 40 megawatt, gas-fired electric
generation plant. The total purchase price is approximately $1.4 billion,
subject to adjustment for changes in CILCORP's working capital, and includes the
assumption of CILCORP and AES Medina Valley debt at closing, estimated at
approximately $900 million, with the balance of the purchase price payable in
cash. Ameren expects to finance a significant portion of the cash component of
the purchase price through prior and future issuances of new common equity.
The purchase will include CILCORP's regulated natural gas and electric
businesses in Illinois serving approximately 205,000 and 200,000 customers,
respectively, of which approximately 150,000 are combination electric and gas
customers. CILCO's service territory is contiguous to our service territory. In
addition, the purchase includes approximately 1,200 megawatts of largely
coal-fired generating capacity, most of which is expected to be non-regulated in
2003.
Upon completion of the acquisition, expected by March 2003, CILCO will
become an Ameren subsidiary, but will remain a separate utility company,
operating as AmerenCILCO. The transaction is subject to the approval of the ICC,
the FERC, the Securities and Exchange Commission (SEC) under the Public Utility
Holding Company Act of 1935 (PUHCA), and the Federal Communications Commission,
as well as the expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act and other customary closing conditions. Applications
to all applicable regulatory agencies were made and are proceeding through the
approval process. On August 30, 2002, Ameren and AES received from the U.S.
Department of Justice (DOJ) a Request for Additional Information (Second
Request) under the Hart-Scott-Rodino Act pertaining to the CILCORP acquisition.
Ameren intends to respond to the Second Request by the end of November. Under
the stock purchase agreement with AES, Ameren is obligated to resolve any issues
raised by the DOJ in connection with the Hart-Scott-Rodino filing. Although
issuance of a Second Request is not unusual for transactions of this size, it
does extend the review and waiting period under the
11
Act. Ameren does not expect that this extension will impact the anticipated
transaction closing date. In October 2002, Ameren resolved all outstanding
issues related to the CILCORP acquisition with the ICC Staff and all intervenors
that filed testimony in the case. The principal issue, among other things,
related to the potential exercise of market power within the CILCO service
territory. To address this issue Ameren has agreed to invest approximately $23
million by December 31, 2008 to increase the power import capability into
CILCO's service territory. The parties expect to agree upon a draft proposed
Order for presentation to the ICC in November, which is expected to issue a
final Order by the end of the year.
For the nine-month period ended September 30, 2002, CILCORP had revenues of
$579 million, operating income of $79 million, and net income from continuing
operations of $29 million, and as of September 30, 2002 had total assets of $1.9
billion. For the year ended December 31, 2001, CILCORP had revenues of $815
million, operating income of $126 million, and net income from continuing
operations of $28 million, and as of December 31, 2001 had total assets of $1.8
billion.
NOTE 7 - Subsequent Event
On November 4, 2002, Ameren Corporation announced a voluntary retirement
program that is being offered to approximately 1,000 of its 7,400 employees,
including employees providing support functions to us through Ameren Services
and approximately 110 AmerenCIPS employees. In addition, Ameren announced limits
on its contribtions and increased retiree contributions for certain retiree
medical benefit plans and a freeze on wage increases beginning in 2003 for all
management employees, including AmerenCIPS management employees. While we and
Ameren expect to realize significant long-term savings as a result of this
program, we expect to incur a one-time, after-tax charge in the fourth quarter
of 2002 related to the voluntary retirement program. That charge for Ameren
could range between $30 million and $50 million, based on voluntary retirements
ranging between 300 and 500, respectively. We expect to be allocated a portion
of this charge, depending on the amount of retirements within AmerenCIPS and
Ameren Services. In addition to the voluntary retirement program, we and Ameren
may consider implementing an involuntary severance program if it is determined
that additional positions must be eliminated to achieve optimum organizational
efficiency and effectiveness. Further, we and Ameren will continue to seek other
ways to reduce staffing over the next year to reduce costs and gain efficiencies
in operations.
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Central Illinois Public Service Company operates as AmerenCIPS and is a
wholly-owned subsidiary of Ameren Corporation (Ameren). Our principal business
is the regulated transmission and distribution of electricity and the
distribution of natural gas to residential, commercial, industrial, and
wholesale users in Illinois. Ameren is a holding company registered under the
Public Utility Holding Company Act of 1935 (PUHCA). Ameren's principal business
is the generation, transmission and distribution of electricity, and the
distribution of natural gas to residential, commercial, industrial and wholesale
users in the central United States. In addition to us, Ameren's principal
subsidiaries and our affiliates are as follows:
o Union Electric Company, which operates a regulated electric generation,
transmission and distribution business, and a regulated natural gas
distribution business in Missouri and Illinois as AmerenUE.
o AmerenEnergy Resources Company (Resources Company), which consists of non
rate-regulated operations. Subsidiaries include AmerenEnergy Generating
Company (Generating Company) that operates Ameren's non rate-regulated
electric generation in Missouri and Illinois, AmerenEnergy Marketing
Company (Marketing Company), which markets power for periods over one year,
and AmerenEnergy Fuels and Services Company, which procures fuel and
manages the related risks for Ameren-affiliated companies. Generating
Company supplies electric power to Marketing Company which, in turn,
supplies us with power under a power supply agreement (Power Supply
Agreement).
o AmerenEnergy, Inc. (AmerenEnergy) which serves as a power marketing and
risk management agent for Ameren- affiliated companies for transactions of
primarily less than one year.
o Electric Energy, Inc. (EEI), which owns and/or operates electric generation
and transmission facilities in Illinois. On April 30, 2002, we transferred
our 20% common stock interest in EEI to Ameren in the form of a dividend of
common stock in EEI. The book value of our investment in EEI was $1.8
million. Subsequently, Ameren contributed such stock to Resources Company.
o Ameren Services Company (Ameren Services), which provides shared support
services to Ameren and its subsidiaries, including us. Charges are based
upon the actual costs incurred by Ameren Services, as required by PUHCA.
You should read the following discussion and analysis in conjunction with:
o The financial statements and related notes included in this Quarterly
Report on Form 10-Q.
o The audited financial statements and related notes that are included in our
Annual Report on Form 10-K for the year ended December 31, 2001.
o Management's Discussion and Analysis of Financial Condition and Results of
Operations that is included in our Annual Report on Form 10-K for the year
ended December 31, 2001.
When we refer to AmerenCIPS, our, we or us, we are referring to Central
Illinois Public Service Company. All tabular dollar amounts are in millions,
unless otherwise indicated.
Our results of operations and financial position are impacted by many
factors, including both controllable and uncontrollable factors. Weather,
economic conditions, and the actions of key customers or competitors can
significantly impact the demand for our services. Our results are also impacted
by seasonal fluctuations caused by winter heating, and summer cooling, demand.
With nearly all of our revenues subject to regulation by various state and
federal agencies, decisions by regulators can have a material impact on the
price we charge for our services. We principally utilize electric power and
natural gas in our operations. The prices for these commodities can fluctuate
significantly due to the world economic and political environment, weather and
many other factors. We do not have a purchased power recovery mechanism in
Illinois for our electric utility business, but we do have a gas cost recovery
mechanism for our gas utility business. We employ various risk management
strategies in order to try to reduce our exposure to commodity risks and other
risks inherent in our business. The reliability of our transmission and
distribution systems, and the level of operating and administrative costs and
capital investment are key factors that we seek to control in order to optimize
our results of operations, cash flows and financial position.
13
RESULTS OF OPERATIONS
Summary
Our net income decreased to $24 million in the third quarter of 2002 from
$25 million in the third quarter of 2001. Our net income decreased to $34
million for the first nine months ended September 30, 2002 from $46 million in
the same period of 2001. The decrease in both periods was primarily due to less
intercompany interest received on the Generating Company subordinated promissory
note as a result of a lower amount outstanding, and no earnings from EEI in the
third quarter of 2002 because of the transfer of our common stock interest in
EEI, which resulted in lower other income and deductions (third quarter - $3
million, net of taxes; year-to-date - $5 million, net of taxes). Additionally,
the decrease in the nine-month period was attributable to higher employee
benefit and tree-trimming costs that resulted in increased operating and
maintenance expenses (year to date - $5 million, net of taxes). The decrease in
the three-month period was slightly offset by reduced injuries and damages
expenses based on 2002 claims experience that resulted in lower operating
expenses (third quarter - $1 million, net of taxes).
Recent Developments
2003 Outlook and Voluntary Retirement Plan
See "Liquidity and Capital Resources - Outlook" for a discussion of
expected challenges to net income in 2003 and beyond, along with a voluntary
retirement plan that was offered to approximately 1,000 Ameren employees in
early November 2002 and is expected to result in a fourth quarter 2002 after-tax
charge to Ameren of between $30 million and $50 million.
CILCORP Acquisition
On April 28, 2002, Ameren entered into an agreement with The AES
Corporation (AES) to purchase all of the outstanding common stock of CILCORP
Inc. CILCORP is the parent company of Peoria, Illinois-based Central Illinois
Light Company, which operates as CILCO. Ameren also agreed to acquire AES Medina
Valley (No. 4), L.L.C. which indirectly owns a 40 megawatt, gas-fired electric
generation plant. The total purchase price is approximately $1.4 billion,
subject to adjustment for changes in CILCORP's working capital, and includes the
assumption of CILCORP and AES Medina Valley debt at closing, estimated at
approximately $900 million, with the balance of the purchase price payable in
cash. Ameren expects to finance a significant portion of the cash component of
the purchase price through prior and future issuances of new common equity.
The purchase will include CILCORP's regulated natural gas and electric
businesses in Illinois serving approximately 205,000 and 200,000 customers,
respectively, of which approximately 150,000 are combination electric and gas
customers. CILCO's service territory is contiguous to our service territory. In
addition, the purchase includes approximately 1,200 megawatts of largely
coal-fired generating capacity, most of which is expected to be non-regulated in
2003.
Upon completion of the acquisition, expected by March 2003, CILCO will
become an Ameren subsidiary, but will remain a separate utility company,
operating as AmerenCILCO. The transaction is subject to the approval of the
Illinois Commerce Commission (ICC), the Federal Energy Regulatory Commission
(FERC), the Securities and Exchange Commission (SEC) under PUHCA, and the
Federal Communications Commission, as well as the expiration of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act and other
customary closing conditions. Applications to all applicable regulatory agencies
were made and are proceeding through the approval process. On August 30, 2002,
Ameren and AES received from the U.S. Department of Justice (DOJ) a Request for
Additional Information (Second Request) under the Hart-Scott-Rodino Act
pertaining to the CILCORP acquisition. Ameren intends to respond to the Second
Request by the end of November. Under the stock purchase agreement with AES,
Ameren is obligated to resolve any issues raised by the DOJ in connection with
the Hart-Scott-Rodino filing. Although issuance of a Second Request is not
unusual for transactions of this size, it does extend the review and waiting
period under the Act. Ameren does not expect that this extension will impact the
anticipated transaction closing date. In October 2002, Ameren resolved all
outstanding issues related to the CILCORP acquisition with the ICC Staff and all
intervenors that filed testimony in the case. The principal issue, among other
things, related to the potential exercise of market power within the CILCO
service
14
territory. To address this issue Ameren agreed to invest approximately $23
million by December 31, 2008 to increase the power import capability into
CILCO's service territory. The parties expect to agree upon a draft proposed
Order for presentation to the ICC in November, which is expected to issue a
final Order by the end of the year.
For the nine-month period ended September 30, 2002, CILCORP had revenues of
$579 million, operating income of $79 million, and net income from continuing
operations of $29 million, and as of September 30, 2002 had total assets of $1.9
billion. For the year ended December 31, 2001, CILCORP had revenues of $815
million, operating income of $126 million, and net income from continuing
operations of $28 million, and as of December 31, 2001 had total assets of $1.8
billion.
In April 2002, as a result of AmerenUE's then pending Missouri electric
earnings complaint case and the CILCORP transaction and related assumption of
debt, credit rating agencies placed Ameren Corporation's debt under review for
possible downgrade or negative credit watch. Standard & Poor's placed the
ratings of our debt and AmerenUE's debt on negative credit watch and placed the
ratings of Generating Company's debt on positive credit watch. However, Standard
& Poor's stated it expected the corporate credit ratings of Ameren and its
subsidiaries to be in the "A" rating category following completion of the
acquisition. Moody's Investor Service stated it envisioned a one notch downgrade
of Ameren's issuer, senior unsecured debt and commercial paper ratings. Ameren's
corporate credit rating is "A+" at Standard & Poor's and its issuer rating is
"A2" at Moody's, while AmerenCIPS' corporate credit rating is A+ at Standard &
Poor's and our issuer rating is A2 at Moody's. In July 2002, AmerenUE settled
its electric earnings complaint case. Neither Standard & Poor's nor Moody's has
changed the assignment of negative or positive watch, review for possible
downgrade or negative outlook to any of the ratings nor have the ratings
themselves changed. Subsequent to the settlement of the Missouri electric
earnings complaint case, Fitch Ratings reduced AmerenUE's ratings by one notch
(from "AA" to "AA-" in the case of its first mortgage bonds) and changed the
outlook assigned to AmerenUE's ratings from negative to stable. Any adverse
change in the Ameren companies' ratings may reduce their access to capital
and/or increase the costs of borrowings resulting in a negative impact on
earnings. A credit rating is not a recommendation to buy, sell or hold
securities and should be evaluated independently of any other rating. Ratings
are subject to revision or withdrawal at any time by the assigning rating
organization.
Electric Operations
The following table represents the favorable (unfavorable) variations for
the three and nine months ended September 30, 2002 from the comparable periods
in 2001.
- --------------------------------------------------------------------------------
Three Months Nine Months
- --------------------------------------------------------------------------------
Operating Revenues:
Effect of abnormal weather (estimate) $ 7 $ 8
Growth and other (estimate) (9) (15)
Wholesale sales 1 -
Interchange sales - (2)
- --------------------------------------------------------------------------------
$ (1) $ (9)
Purchased Power: $ 6 $ 13
- --------------------------------------------------------------------------------
Change in electric margin $ 5 $ 4
- --------------------------------------------------------------------------------
Electric margins increased $5 million for the three months ended September
30, 2002 and $4 million for the nine months ended September 30, 2002 compared to
the same year-ago periods primarily due to more favorable weather conditions and
decreased purchased power costs attributable to lower energy prices and reduced
native load demand stemming from lower industrial sales. Weather-sensitive
residential sales increased 11% in the third quarter and 5% in the first nine
months of 2002 as compared to 2001. Partially offsetting the favorable weather
was lower industrial sales that declined 12% in the third quarter and 9% in the
first nine months of 2002 as compared to 2001, due to the impact of the soft
economy and certain industrial customers electing to switch their energy
supplier to our affiliate, Marketing Company.
The above interchange revenues and purchased power amounts include
transactions with our affiliates. See Note 3 - "Related Party Transactions" to
our financial statements.
15
Gas Operations
Our gas margins decreased $1 million in the third quarter of 2002 as
compared to the same year-ago quarter with a $4 million decrease in gas revenues
resulting from a decline in sales, partially offset by lower gas costs
attributable to lower natural gas prices and lower purchases. Our gas margins
increased $1 million in the first nine months of 2002 as compared to the same
prior year period due to a $25 million decrease in gas revenues offset by a $26
million decrease in gas costs. For the first nine months of 2002, warmer winter
weather and lower gas costs recovered through a purchased gas adjustment clause
reduced gas revenues. The decrease in gas costs for the first nine months of
2002 was attributable to lower natural gas prices and lower purchases due to the
mild winter weather.
Other Operating Expenses
Operating Expenses - Operations - Other decreased $2 million in the third
quarter and increased $3 million in the first nine months of 2002 as compared to
the same year-ago periods. The three-month and nine-month periods were impacted
by increases in employee benefits costs related to the investment performance of
pension plan assets and increasing healthcare costs in 2002, which were
partially offset by decreases in injuries and damages expenses based on claims
experience in 2002. However, for the nine-month period the increase in employee
benefit costs more than offset the lower injuries and damages expenses. See
"Liquidity and Capital Resources - Outlook" and Item 3. "Equity Price Risk"
below for a discussion of our expectations and plans regarding trends in
employee benefit costs.
Ameren Services provided services to us, including wages, employee benefits
and professional services, that were included in Other Operating Expenses. See
Note 3 - "Related Party Transactions" to our financial statements.
Maintenance expenses were flat in the third quarter and increased $5
million in the first nine months of 2002 compared to the same year-ago periods.
The increase in maintenance expense in the first nine months of 2002 was
primarily due to higher tree-trimming expenses, which were accelerated, in part,
to take advantage of the mild weather during the year, and increased expenses
due to storm repairs in the second quarter.
Income tax expense increased $1 million in the third quarter of 2002
compared to the same year-ago period primarily due to higher pretax income.
Income tax expense decreased $6 million in the first nine months of 2002
compared to the same year-ago period primarily due to lower pre-tax income.
Other tax expense remained flat in the third quarter and increased $3
million in the first nine months of 2002 compared to the same year-ago periods.
Other tax expense increased in the first nine months of 2002 primarily due to
adjustments related to revised property tax assessments in the prior year.
Other Income and Deductions
Other income and deductions (excluding income taxes) decreased $4 million
in the third quarter of 2002 and $8 million in the first nine months of 2002,
compared to the same year-ago periods, primarily due to less intercompany
interest received on the Generating Company subordinated promissory note as a
result of a lower amount outstanding. In addition, lower earnings from EEI due
to the transfer of our 20% common stock interest in EEI to Resources Company on
April 30, 2002 decreased other income and deductions. See Note 4 -
"Miscellaneous, net" to our financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Operating
Our cash flows provided by operating activities decreased $10 million to
$71 million for the nine months ended September 30, 2002 compared to the same
year-ago period. Cash flows from operating activities decreased primarily due to
a decrease in net income, an increase in intercompany money pool receivables,
and reduced payables resulting from lower amounts of power purchased from
Marketing Company.
16
Our tariff-based gross margins continue to be our principal source of cash
from operating activities. Our diversified retail customer mix of residential,
commercial and industrial classes and a commodity mix of gas and electric
service provide a reasonably predictable source of cash flows. We plan to
utilize short-term debt to support normal operations and other temporary capital
requirements. We are authorized by the SEC under PUHCA to have up to $250
million of short-term unsecured debt instruments outstanding at any one time.
Short-term borrowings consist of commercial paper with maturities generally
within 1 to 45 days.
At September 30, 2002, we had committed bank lines of credit aggregating
$15 million, all of which were unused and available at such date. These lines
make available interim financing at various rates of interest based on LIBOR,
the bank certificate of deposit rate or other options. The lines of credit are
renewable annually at various dates throughout the year. We expect to replace
these lines of credit prior to their maturity. At September 30, 2002, we had the
ability to borrow up to approximately $886 million from Ameren or AmerenUE, in
addition to cash balances at Ameren Corporation, through a regulated money pool
agreement. For the nine months ended September 30, 2002, we had no outstanding
short-term borrowings. See Note 3 - "Related Party Transactions" to our
financial statements.
In July 2002, Ameren Corporation entered into new credit agreements for
$400 million in revolving credit facilities to be used for general corporate
purposes, including support of commercial paper programs, all of which was
available as of September 30, 2002. These new credit facilities support our
ability to borrow through the regulated money pool. The $400 million in new
facilities includes a $270 million 364-day revolving credit facility and a $130
million 3-year revolving credit facility. The 3-year facility has a $50 million
sub-limit for the issuance of letters of credit. These new credit facilities
replaced AmerenUE's $300 million revolving credit facility that was in place as
of June 30, 2002.
Our financial agreements include customary default provisions that could
impact the continued availability of credit or result in the acceleration of
repayment. These events include bankruptcy, defaults in payment of other
indebtedness, certain judgments that are not paid or insured, or failure to meet
or maintain covenants. At September 30, 2002, we were in compliance with these
provisions.
At September 30, 2002, we did not have any off-balance sheet financing
arrangements.
Ameren Corporation made cash contributions totaling $15 million to Ameren's
defined benefit retirement plans during the third quarter of 2002, and Ameren
expects to make additional cash contributions to the plans totaling
approximately $15 million in the fourth quarter of 2002. Our share of the cash
contribution made in the third quarter of 2002 was approximately $2 million, and
we expect our share of the cash contribution that may be made in the fourth
quarter of 2002 will be approximately $2 million. Future funding plans will be
evaluated at the end of 2002. Based on the performance of plan assets through
September 30, 2002, Ameren expects to be required under the Employee Retirement
Income Security Act of 1974 to fund $25 million to $50 million in 2004 and $150
million to $200 million in 2005 in order to maintain minimum funding levels. We
expect our share of the funding to be $3 million to $5 million, and $16 million
and $21 million for 2004 and 2005, respectively, plus our share related to
employees of our affiliate, Ameren Services. These amounts are estimates and may
change based on actual stock market performance, changes in interest rates, any
plan funding in 2002 or 2003 and finalization of actuarial assumptions. In
addition, we expect at December 31, 2002, to be required to record a minimum
pension liability that would result in a charge to Accumulated Other
Comprehensive Income (OCI) in stockholder's equity. The amount of the charge is
expected to result in a less than one percent change in our debt to total
capitalization ratios.
Investing
Our net cash provided by investing activities was $2 million in the first
nine months of 2002 (2001 - $6 million) representing an increase in construction
expenditures for various distribution line upgrades, partially offset by
increased receipts on our intercompany note receivable from Generating Company.
Capital expenditures are expected to approximate $17 million in the fourth
quarter of 2002.
Financing
Our net cash flows used in financing activities totaled $83 million in the
first nine months of 2002 compared to $92 million in the same year-ago period.
Our principal financing activities for the first nine months of 2002 included
the payment of dividends and the redemption of long-term debt. Our principal
17
financing activities for the first nine months of 2001 included the repayment of
intercompany money pool borrowings and the issuance of long-term debt.
Outlook
We currently believe there will be challenges to earnings in 2003 and
beyond due to continued weak energy markets, a soft economy, higher employee
benefit costs and escalating insurance and security costs associated with world
events. These industry-wide trends, coupled with an assumed return to more
normal weather patterns, are expected to put pressure on earnings in 2003 and
beyond. As we complete our analysis of these challenges as part of our overall
budget process, we will be evaluating several initiatives to enhance revenues
and reduce costs for 2003 and beyond. These initiatives may include any or all
of the following:
o Actively managing employee headcount
o Modifying employee benefit plans
o Assessing the necessity of certain business support functions
o Reviewing capital expenditure plans
o Other initiatives
On November 4, 2002, Ameren Corporation announced a voluntary retirement
program that is being offered to approximately 1,000 of its 7,400 employees,
including employees providing support functions to us through Ameren Services
and approximately 110 AmerenCIPS employees. In addition, Ameren announced limits
on its contributions and increased retiree contributions for certain retiree
medical benefit plans and a freeze on wage increases beginning in 2003 for all
management employees, including AmerenCIPS management employees. While we and
Ameren expect to realize significant long-term savings as a result of this
program, we expect to incur a one-time, after-tax charge in the fourth quarter
of 2002 related to the program. That charge for Ameren could range between $30
million and $50 million, based on voluntary retirements ranging between 300 and
500, respectively. We expect to be allocated a portion of this charge, depending
on the amount of retirements within AmerenCIPS and Ameren Services. In addition
to the voluntary retirement program, we and Ameren may consider implementing an
involuntary severance program if it is determined that additional positions must
be eliminated to achieve optimum organizational efficiency and effectiveness.
Further, we and Ameren will continue to seek other ways to reduce staffing over
the next year to reduce costs and gain efficiencies in operations.
In the ordinary course of business, we evaluate several strategies to
enhance our financial position, earnings and liquidity. These strategies may
include potential acquisitions, divestitures, opportunities to reduce costs or
increase revenues, and other strategic initiatives in order to increase
shareholder value. We are unable to predict which, if any, of these initiatives
will be executed, as well as the impact these initiatives may have on our future
financial position, results of operations or liquidity.
Electric Industry Restructuring and Regulatory Matters
Illinois
See Note 2 - "Rate and Regulatory Matters" to our financial statements.
Federal - Electric Transmission
See Note 2 - "Rate and Regulatory Matters" to our financial statements.
ACCOUNTING MATTERS
Critical Accounting Policies
Preparation of the financial statements and related disclosures in
compliance with generally accepted accounting principles requires the
application of appropriate technical accounting rules and guidance, as well as
the use of estimates. Our application of these policies involves judgments
regarding many factors, which, in and of themselves, could materially impact the
financial statements and disclosures. A future change in the assumptions or
judgments applied in determining the following matters, among others, could
18
have a material impact on future financial results. In the table below, we have
outlined those accounting policies that we believe are most difficult,
subjective or complex:
Accounting Policy Uncertainties Affecting Application
- ----------------- -----------------------------------
Regulatory Mechanisms & Cost Recovery
o Regulatory environment, external regulatory
We defer costs as regulatory assets decisions and requirements
in accordance with SFAS 71 and make o Anticipated future regulatory decisions and their
investments that we assume we will be able impact
to collect in future rates. o Impact of deregulation and competition on
ratemaking process and ability to recover costs
Basis for Judgment
We determine that costs are recoverable based on previous rulings by state
regulatory authorities in jurisdictions where we operate or other factors
that lead us to believe that cost recovery is probable.
Environmental Costs
o Extent of contamination
We accrue for all known environmental o Responsible party determination
contamination, where remediation can be o Approved methods for cleanup
reasonably estimated, but some of our o Present and future legislation and governmental
operations have existed for over 100 years regulations and standards
and previous contamination may be o Results of ongoing research and development
unknown to us. regarding environmental impacts
Basis for Judgment
We determine the proper amounts to accrue for environmental contamination
based on internal and third party estimates of clean-up costs in the
context of current remediation regulation standards and available
technology.
Unbilled Revenue
At the end of each period, we estimate o Projecting customer energy usage
based on expected usage, the amount of o Estimating impacts of weather and other usage-
revenue to record for services that have been affecting factors for the unbilled period
provided to customers, but not billed. This
period can be up to one month.
Basis for Judgment
We determine the proper amount of unbilled revenue to accrue each period
based on the volume of energy delivered as valued by a model of billing
cycles and historical usage rates and growth by customer class for our
service area, as adjusted for the modeled impact of seasonal and weather
variations based on historical results.
Benefit Plan Accounting
Based on actuarial calculations, we accrue o Future rate of return on pension and other plan assets
costs of providing future employee benefits o Interest rates used in valuing benefit obligations
in accordance with SFAS 87, 106, and 112. o Healthcare costs trend rates
See Note 9 to our financial statements for
the year ended December 31, 2001.
Basis for Judgment
We utilize a third party consultant to assist us in evaluating and
recording the proper amount for future employee benefits. Our ultimate
selection of the discount rate, healthcare trend rate and expected rate of
return on pension assets is based on our review of available current,
historical and projected rates, as applicable.
19
Impact of Future Accounting Pronouncements
See Note 1 - "Summary of Significant Accounting Policies" to our financial
statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of changes in value of a physical asset or
a financial instrument, derivative or non-derivative, caused by fluctuations in
market variables (e.g., interest rates, etc.). The following discussion of
Ameren's, including our company's, risk management activities includes
"forward-looking" statements that involve risks and uncertainties. Actual
results could differ materially from those projected in the "forward-looking"
statements. Ameren manages market risks in accordance with established policies,
which may include entering into various derivative transactions. In the normal
course of business, Ameren and our company also face risks that are either
non-financial or non-quantifiable. Such risks principally include business,
legal and operational risk and are not represented in the following analysis.
Ameren's risk management objective is to optimize its physical generating
assets within prudent risk parameters. Risk management policies are set by a
Risk Management Steering Committee, which is comprised of senior-level Ameren
officers.
Interest Rate Risk
We are exposed to market risk through changes in interest rates associated
with the issuance of both long-term and short-term variable-rate debt and
fixed-rate debt, commercial paper and auction-rate long-term debt and preferred
stock. We manage our interest rate exposure by controlling the amount of these
instruments we hold within our total capitalization portfolio and by monitoring
the effects of market changes in interest rates.
Utilizing our debt outstanding at September 30, 2002, if interest rates
increased by 1%, our annual interest expense would increase by $0.3 million and
net income would decrease by $0.3 million. The model does not consider the
effects of the reduced level of potential overall economic activity that would
exist in such an environment. In the event of a significant change in interest
rates, management would likely take actions to further mitigate our exposure to
this market risk. However, due to the uncertainty of the specific actions that
would be taken and their possible effects, the sensitivity analysis assumes no
change in our financial structure.
Equity Price Risk
We, along with other subsidiaries of Ameren, are a participant in Ameren's
defined benefit plans and postretirement benefit plans and are responsible for
our proportional share of the costs. Ameren's costs of providing
non-contributory defined benefit retirement and postretirement benefit plans are
dependent upon a number of factors, such as the rates of return on plan assets,
discount rate, the rate of increase in health care costs and contributions made
to the plans. The market value of Ameren's plan assets has been affected by
declines in the equity market since 2001 and 2000 for the pension and
postretirement plans. As a result, at December 31, 2002 Ameren and its
subsidiaries, including AmerenCIPS, could be required to recognize an additional
minimum pension liability as prescribed by SFAS No. 87, "Employers' Accounting
for Pensions" and SFAS No. 132, "Employers' Disclosures about Pensions and
Postretirement Benefits." The liability would be recorded as a reduction to OCI
and would not affect net income for 2002. The amount of the liability will
depend upon asset returns experienced in 2002, changes in interest rates and
Ameren's contributions to the plans during 2002. The liability recorded and cash
contributions to the plans could be material in future years without a
substantial recovery in equity markets. If the fair value of the plan assets
were to grow and exceed the accumulated benefit obligations in the future, then
the recorded liability would be reduced and a corresponding amount of OCI would
be restored in the Balance Sheet. See "Liquidity and Capital Resources -
Operating" and Note 1 - "Summary of Significant Accounting Policies" to our
financial statements.
20
ITEM 4. Controls and Procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to
AmerenCIPS, which is required to be included in our periodic SEC filings.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date we carried out our evaluation.
SAFE HARBOR STATEMENT
Statements made in this report which are not based on historical facts are
"forward-looking" and, accordingly, involve risks and uncertainties that could
cause actual results to differ materially from those discussed. Although such
"forward-looking" statements have been made in good faith and are based on
reasonable assumptions, there is no assurance that the expected results will be
achieved. These statements include (without limitation) statements as to future
expectations, beliefs, plans, strategies, objectives, events, conditions and
financial performance. In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we are providing this
cautionary statement to identify important factors that could cause actual
results to differ materially from those anticipated. The following factors, in
addition to those discussed elsewhere in this report and in the Annual Report on
Form 10-K for the year ended December 31, 2001, and in subsequent securities
filings, could cause results to differ materially from management expectations
as suggested by such "forward-looking" statements:
o the effects of the stipulation and agreement relating to the AmerenUE
Missouri electric excess earnings complaint case and other regulatory
actions, including changes in regulatory policy;
o changes in laws and other governmental actions, including monetary and
fiscal policies;
o the impact on us of current regulations related to the opportunity for
customers to choose alternative energy suppliers in Illinois;
o the effects of increased competition in the future due to, among other
things, deregulation of certain aspects of our business at both the state
and federal levels;
o the effects of participation in a FERC approved Regional Transmission
Organization (RTO), including activities associated with the Midwest
Independent System Operator;
o availability and future market prices for purchased power, electricity and
natural gas, including the use of financial and derivative instruments and
volatility of changes in market prices;
o average rates for electricity in the Midwest;
o business and economic conditions;
o the impact of the adoption of new accounting standards on the application
of appropriate technical accounting rules and guidance;
o interest rates and the availability of capital;
o actions of rating agencies and the effects of such actions;
o weather conditions;
o the impact of current environmental regulations on utilities and the
expectation that more stringent requirements will be introduced over time,
which could potentially have a negative financial effect;
o future wages and employee benefits costs, including changes in returns of
benefit plan assets;
o disruptions of the capital markets or other events making Ameren's and our
access to necessary capital more difficult or costly;
o cost and availability of transmission capacity required to satisfy our
energy sales; and
o legal and administrative proceedings.
Given these uncertainties, undue reliance should not be placed on these
forward-looking statements. Except to the extent required by the federal
securities laws, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
21
PART II. - OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to Item 3. "Legal Proceedings" in Part I of our Form 10-K
for the year ended December 31, 2001 and to Item 1. "Legal Proceedings" in Part
II of our Form 10-Qs for the quarterly periods ended March 31, 2002 and June 30,
2002 for a discussion of a number of lawsuits that name our affiliate, Union
Electric Company, operating as AmerenUE, our parent, Ameren Corporation, and us
(which we refer to as the Ameren companies), along with numerous other parties,
as defendants that have been filed by plaintiffs claiming varying degrees of
injury from asbestos exposure. Since the filing of our Form 10-Q for the
quarterly period ended June 30, 2002, 29 additional lawsuits have been filed
against the Ameren companies. These lawsuits, like the previous cases, were
mostly filed in the Circuit Court of Madison County, Illinois, involve a large
number of total defendants and seek unspecified damages in excess of $50,000,
which, if proved, typically would be shared among the named defendants. Also
since the filing of our Form 10-Q for the quarterly period ended June 30, 2002,
the Ameren companies have been voluntarily dismissed in two cases.
To date, a total of 107 asbestos-related lawsuits have been filed against
the Ameren companies, of which 91 are pending, 10 have been settled and six have
been dismissed. We believe that the final disposition of these proceedings will
not have a material adverse effect on our financial position, results of
operations or liquidity.
ITEM 5. Other Information
Reference is made to Item 5. "Other Information" in Part II of our Form
10-Q for the quarterly period ended June 30, 2002 for a listing of the audit and
non-audit services that the Auditing Committee of the Ameren Board of Directors
has pre-approved for performance by our independent accountants,
PricewaterhouseCoopers LLP. At its October 2002 meeting, the Auditing Committee
also pre-approved PricewaterhouseCoopers LLP to perform audits of two coal
supply contracts of our affiliate, Union Electric Company, operating as AmerenUE
with respect to the handling of prepaid reclamation funds.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 - Certificate of Chief Executive Officer required by Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 - Certificate of Chief Financial Officer required by Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. None.
Note: Reports of Ameren Corporation on Forms 8-K, 10-Q and 10-K are on
file with the SEC under File Number 1-14756.
Reports of Union Electric Company on Forms 8-K, 10-Q and 10-K are
on file with the SEC under File Number 1-2967.
Reports of Ameren Energy Generating Company on Forms 8-K, 10-Q
and 10-K are on file with the SEC under the File Number
333-56594.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL ILLINOIS PUBLIC
SERVICE COMPANY
(Registrant)
By /s/ Martin J. Lyons
---------------------------------
Martin J. Lyons
Controller
(Principal Accounting Officer)
Date: November 14, 2002
CERTIFICATIONS
I, Gary L. Rainwater, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Central Illinois
Public Service Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
23
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Gary L. Rainwater
-----------------------------
Gary L. Rainwater
Chief Executive Officer
I, Warner L. Baxter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Central Illinois
Public Service Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect
24
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ Warner L. Baxter
----------------------------
Warner L. Baxter
Chief Financial Officer
25
Exhibit 99.1
CERTIFICATE
furnished under
Section 906 of the Sarbanes-Oxley Act of 2002
I, Gary L. Rainwater, chief executive officer of Central Illinois Public
Service Company, hereby certify that to the best of my knowledge, the
accompanying Report of Central Illinois Public Service Company on Form 10-Q for
the quarter ended September 30, 2002 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that
information contained in such Report fairly presents, in all material respects,
the financial condition and results of operations of Central Illinois Public
Service Company.
/s/ Gary L. Rainwater
----------------------------
Gary L. Rainwater
Chief Executive Officer
Date: November 14, 2002
Exhibit 99.2
CERTIFICATE
furnished under
Section 906 of the Sarbanes-Oxley Act of 2002.
I, Warner L. Baxter, chief financial officer of Central Illinois Public
Service Company, hereby certify that to the best of my knowledge, the
accompanying Report of Central Illinois Public Service Company on Form 10-Q for
the quarter ended September 30, 2002 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that
information contained in such Report fairly presents, in all material respects,
the financial condition and results of operations of Central Illinois Public
Service Company.
/s/ Warner L. Baxter
----------------------------
Warner L. Baxter
Chief Financial Officer
Date: November 14, 2002