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 March 31, 2003
[ ] 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 ( ).
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ( ). No (X).
Shares outstanding of the registrant's common stock as of May 14, 2003:
Common Stock, no par value, held by Ameren Corporation (parent company of the
registrant) - 25,452,373.
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
TABLE OF CONTENTS
Page
PART I. Financial Information
ITEM 1. Financial Statements (Unaudited)
Balance Sheet at March 31, 2003 and December 31, 2002........... 2
Statement of Income for the three months ended March 31, 2003
and 2002........................................................ 3
Statement of Cash Flows for the three months ended March 31,
2003 and 2002................................................... 4
Statement of Common Stockholder's Equity for the three months
ended March 31, 2003 and 2002................................... 5
Notes to Financial Statements................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...... 20
ITEM 4. Controls and Procedures......................................... 21
PART II. Other Information
ITEM 1. Legal Proceedings............................................... 23
ITEM 6. Exhibits and Reports on Form 8-K................................ 23
SIGNATURE.................................................................... 24
CERTIFICATIONS............................................................... 24
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 Part I, Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations," under the heading
"Forward-Looking Statements." 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.
1
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
BALANCE SHEET
(Unaudited, in millions)
March 31, December 31,
2003 2002
----------- ------------
ASSETS:
Property and plant, net $ 822 $ 825
Investments and other assets:
Intercompany notes receivable - Generating Company 373 373
Intercompany tax receivable - Generating Company 159 162
Other assets 18 17
------- -------
Total investments and other assets 550 552
------- -------
Current assets:
Cash and cash equivalents 16 17
Accounts receivable - trade (less allowance for doubtful
accounts of $2 and $1, respectively) 64 53
Unbilled revenue 57 74
Intercompany notes receivable 23 16
Miscellaneous accounts and notes receivable 27 22
Current portion of intercompany notes receivable - Generating Company 46 46
Current portion of intercompany tax receivable - Generating Company 13 13
Materials and supplies, at average cost 19 41
Other current assets 6 7
------- -------
Total current assets 271 289
------- -------
Regulatory assets 30 31
------- -------
Total Assets $ 1,673 $ 1,697
======= =======
CAPITAL AND LIABILITIES:
Capitalization:
Common stock, no par value, 45.0 shares authorized -
25.5 shares outstanding $ 120 $ 120
Retained earnings 387 405
Accumulated other comprehensive income (13) (13)
------- -------
Total common stockholder's equity 494 512
------- -------
Preferred stock not subject to mandatory redemption 80 80
Long-term debt, net 534 534
------- -------
Total capitalization 1,108 1,126
------- -------
Current liabilities:
Current maturities of long-term debt 40 45
Accounts and wages payable 77 87
Taxes accrued 38 32
Other current liabilities 31 26
------- -------
Total current liabilities 186 190
------- -------
Accumulated deferred income taxes 277 282
Accumulated deferred investment tax credits 12 13
Regulatory liabilities 15 15
Other deferred credits and liabilities 75 71
------- -------
Total Capital and Liabilities $ 1,673 $ 1,697
======= =======
See Notes to Financial Statements.
2
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
STATEMENT OF INCOME
(Unaudited, in millions)
Three Months Ended
March 31,
-------------------
2003 2002
-------- --------
OPERATING REVENUES:
Electric $ 132 $ 150
Gas 77 65
----- -----
Total operating revenues 209 215
----- -----
OPERATING EXPENSES:
Purchased power 86 105
Gas 53 44
Other operations and maintenance 42 41
Depreciation and amortization 13 12
Income taxes (1) 1
Other taxes 9 9
----- -----
Total operating expenses 202 212
----- -----
OPERATING INCOME 7 3
OTHER INCOME AND (DEDUCTIONS):
Miscellaneous, net -
Miscellaneous income 7 10
Miscellaneous expense (1) (1)
Income taxes (2) -
----- -----
Total other income and (deductions) 4 9
----- -----
INTEREST CHARGES 9 10
----- -----
NET INCOME 2 2
PREFERRED STOCK DIVIDENDS 1 1
----- -----
NET INCOME AFTER PREFERRED STOCK DIVIDENDS $ 1 $ 1
===== =====
See Notes to Financial Statements.
3
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
STATEMENT OF CASH FLOWS
(Unaudited, in millions)
Three Months Ended
March 31,
------------------
2003 2002
------ ------
Cash Flows From Operating:
Net income $ 2 $ 2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13 12
Deferred income taxes, net (5) (5)
Deferred investment tax credits, net (1) -
Changes in assets and liabilities:
Receivables, net 1 5
Materials and supplies 22 18
Accounts and wages payable (10) (42)
Taxes accrued 6 6
Assets, other 4 9
Liabilities, other 9 6
---- ----
Net cash provided by operating activities 41 11
---- ----
Cash Flows From Investing:
Construction expenditures (10) (12)
Intercompany notes receivable (7) 18
---- ----
Net cash (used in)/provided by investing activities (17) 6
---- ----
Cash Flows From Financing:
Dividends on common stock (19) (15)
Dividends on preferred stock (1) (1)
Redemptions:
Long-term debt (5) (5)
---- ----
Net cash used in financing activities (25) (21)
---- ----
Net change in cash and cash equivalents (1) (4)
Cash and cash equivalents at beginning of year 17 26
---- ----
Cash and cash equivalents at end of period $ 16 $ 22
==== ====
Cash paid during the periods:
Interest $ 5 $ 6
Income taxes, net - -
See Notes to Financial Statements.
4
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
STATEMENT OF COMMON STOCKHOLDER'S EQUITY
(Unaudited, in millions)
Three Months Ended
March 31,
------------------
2003 2002
----- -----
Common stock $ 120 $ 120
Retained earnings
Beginning balance 405 444
Net income 2 2
Common stock dividends (19) (15)
Preferred stock dividends (1) (1)
----- -----
387 430
----- -----
Accumulated other comprehensive income
Beginning balance - minimum pension liability (13) -
Change in minimum pension liability in current
period - -
----- -----
(13) -
----- -----
Total common stockholder's equity $ 494 $ 550
===== =====
See Notes to Financial Statements.
5
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003
NOTE 1 - Summary of Significant Accounting Policies
General
Central Illinois Public Service Company, headquartered in Springfield,
Illinois, operates as AmerenCIPS and is a wholly-owned subsidiary of Ameren
Corporation (Ameren). Our principal business is the rate-regulated transmission
and distribution of electricity and the distribution of natural gas to
residential, commercial, industrial and wholesale users in Illinois. Ameren is a
public utility holding company registered with the Securities and Exchange
Commission (SEC) under the Public Utility Holding Company Act of 1935 (PUHCA)
and is headquartered in St. Louis, Missouri. Ameren' 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 primary subsidiaries and our
affiliates are as follows:
o Union Electric Company, which operates a rate-regulated electric
generation, transmission and distribution business, and a rate-regulated
natural gas distribution business in Missouri and Illinois as AmerenUE.
o Central Illinois Light Company, a subsidiary of CILCORP Inc. (CILCORP),
which operates a rate-regulated transmission and distribution business, an
electric generation business and a rate-regulated natural gas distribution
business in Illinois as AmerenCILCO. Ameren completed its acquisition of
CILCORP on January 31, 2003.
o AmerenEnergy Resources Company (Resources Company), which consists of non
rate-regulated operations. Subsidiaries include AmerenEnergy Generating
Company (Generating Company), which 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,
AmerenEnergy Fuels and Services Company, which procures fuel and manages
the related risks for Ameren-affiliated companies and AmerenEnergy Medina
Valley Cogen (No. 4), LLC, which indirectly owns a 40 megawatt, gas-fired
electric generation plant. On February 4, 2003, Ameren completed its
acquisition of AES Medina Valley Cogen (No. 4), LLC (Medina Valley) and
renamed it AmerenEnergy Medina Valley Cogen (No. 4), LLC. 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 operates electric generation and
transmission facilities in Illinois. Ameren has a 60% ownership interest in
EEI, 40% owned by AmerenUE and 20% owned by 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 the
PUHCA.
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 accounting policies conform to generally accepted accounting principles
in the United States (GAAP). Our financial statements reflect all adjustments
(which include normal, recurring adjustments) necessary, in our opinion, for a
fair presentation of our interim results. These statements should be read in
conjunction with the financial statements and notes thereto included in our 2002
Annual Report on Form 10-K.
6
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions. Such estimates and
assumptions affect reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior years' financial statements to conform to 2003 reporting.
Accounting Changes and Other Matters
Statement of Financial Accounting Standards (SFAS) No. 143 - "Accounting for
Asset Retirement Obligations"
We adopted the provisions of SFAS 143 on January 1, 2003. SFAS 143 provides
the accounting requirements for asset retirement obligations associated with
tangible, long-lived assets. SFAS 143 requires us to record the estimated fair
value of legal obligations associated with the retirement of tangible long-lived
assets in the period in which the liabilities are incurred and to capitalize a
corresponding amount as part of the book value of the related long-lived asset.
In subsequent periods, we are required to adjust asset retirement obligations
based on changes in estimated fair value, and the corresponding increases in
asset book values are depreciated over the useful life of the related asset.
Uncertainties as to the probability, timing or cash flows associated with an
asset retirement obligation affect our estimate of fair value.
We have determined that certain asset retirement obligations exist.
However, we are unable to estimate the fair value of those obligations because
the probability, timing or cash flows associated with the obligations are
indeterminable. We do not believe that these obligations, when incurred, will
have a material adverse impact on our financial position, results of operations
or liquidity.
Historically, we have included an estimated cost of dismantling and
removing plant from service upon retirement. Because these estimated costs of
removal have been included in the cost of service upon which our present utility
rates are based, and with the expectation that this practice will continue in
the jurisdictions in which we operate, adoption of SFAS 143 did not result in
any change in the depreciation accounting practices of our rate-regulated
operations. We have estimated future removal costs embedded in accumulated
depreciation related to rate-regulated plant assets were approximately $126
million at March 31, 2003.
FASB Interpretation No. (FIN) 45 - "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others"
FIN 45 was issued in November 2002 and requires that upon issuance of
certain guarantees, a guarantor must recognize a liability for the fair value of
the obligation assumed under the guarantee. These recognition provisions of FIN
45 are to be applied on a prospective basis to guarantees issued or modified
after December 31, 2002, irrespective of the guarantor's fiscal year-end. FIN 45
also requires additional disclosures by a guarantor in its interim and annual
financial statements for periods ending after December 15, 2002. Because we do
not have such obligations, the recognition provisions of FIN 45 did not have any
effect on our financial position, results of operations or liquidity in the
first quarter of 2003.
Revenue
We accrue an estimate of electric and gas revenues for service rendered,
but unbilled, at the end of each accounting period.
Interchange revenues included in Operating Revenues - Electric were $8
million for the three months ended March 31, 2003 (2002 - $10 million).
7
Purchased Power
Purchased power included in Operating Expenses - Purchased Power was $86
million for the three months ended March 31, 2003 (2002 - $105 million).
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 months ended March 31, 2003
were $5 million (2002 - $5 million). Excise taxes applicable to Illinois
electric customer bills are imposed on the consumer and are recorded as tax
collections payable and included in Taxes Accrued on the Balance Sheet.
NOTE 2 - Rate and Regulatory Matters
Regional Transmission Organization
Since April 2002, we and AmerenUE and subsidiaries of FirstEnergy
Corporation and NiSource Inc. (collectively the GridAmerica Companies) have
participated in a number of filings at the Federal Energy Regulatory Commission
(FERC) in an effort to form GridAmerica LLC as an independent transmission
company (ITC). On December 19, 2002, the FERC issued an order conditionally
approving the formation and operation of GridAmerica as an ITC within the
Midwest Independent System Operator (Midwest ISO), subject to further compliance
filings.
In response to the December 19, 2002 order, the GridAmerica Companies made
three additional filings at the FERC. On January 31, 2003 the GridAmerica
Companies filed a request for authorization to transfer functional control of
certain transmission assets to GridAmerica. On February 18, 2003, the
GridAmerica Companies filed revised agreements codifying the formation and
operation of GridAmerica to reflect changes requested by the FERC in the
December 19, 2002 order. On February 28, 2003, the GridAmerica Companies
together with the Midwest ISO filed revisions to the Midwest ISO Open Access
Transmission Tariff (OATT) to provide rates for service over the transmission
facilities to be transferred to GridAmerica by the GridAmerica Companies.
On April 30 2003, the FERC issued orders in response to the January 31,
2003 and February 28, 2003 filings. In its order regarding the GridAmerica
Companies' request to transfer functional control of their transmission assets
to GridAmerica, the FERC authorized the transfer. In response to the February
28, 2003 filing, the FERC accepted the amendments to the Midwest ISO OATT
effective upon the commencement of service over the GridAmerica transmission
facilities under the Midwest ISO OATT, suspended the proposed rates for a
nominal period, subject to refund, and established hearing and settlement judge
procedures to determine the justness and reasonableness of the proposed rate
amendments to the Midwest ISO OATT. An order in response to the February 18,
2003 filing is still pending.
Until the tariffs and other material terms of our and AmerenUE's
participation in GridAmerica, and GridAmerica's participation in the Midwest
ISO, are finalized and approved by the FERC, we are unable to predict the impact
that on-going regional transmission organization developments will have on our
financial position, results of operations or liquidity. AmerenUE's participation
in GridAmerica is subject to Missouri Public Service Commission (MoPSC)
approval. An order from the MoPSC is expected during 2003.
Standard Market Design Notice of Proposed Rulemaking (NOPR)
On July 31, 2002, the FERC issued a Standard Market Design 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
8
retail load, and proposes a new energy market and congestion management system
that uses locational marginal pricing as its basis. On November 15, 2002, we
filed our initial comments on the NOPR with the FERC expressing concern with the
potential impact of the proposed rules in their current form on the cost and
reliability of service to retail customers. We also proposed that certain
modifications be made to the proposed rules in order to protect transmission
owners from the possibility of trapped transmission costs that might not be
recoverable from ratepayers as a result of inconsistent regulatory policies. We
filed additional comments on the remaining sections of the NOPR during the first
quarter of 2003.
On April 28, 2003 the FERC issued a "white paper" reflecting comments
received in response to the NOPR. More specifically, the white paper indicated
that the FERC will not assert jurisdiction over the transmission rate component
of bundled retail service and will insure that existing bundled retail customers
retain their existing transmission rights and retain rights for future load
growth in its final rule. Moreover, the white paper acknowledged that the final
rule will provide the states with input on resource adequacy requirements,
allocation of firm transmission rights, and transmission planning. The FERC also
requested input on the flexibility and timing of the final rule's
implementation.
Even though issuance of the final rule and its implementation schedule are
still unknown, the Midwest ISO is already in the process of implementing a
market design similar to the proposed market design in the NOPR. The Midwest ISO
has targeted March 2004 as the start date for implementation. We are in the
process of reviewing the FERC's white paper. Until the FERC issues a final rule,
we and Ameren are unable to predict the ultimate impact on our future financial
position, results of operations or liquidity.
Illinois Gas
In November 2002, we filed a request with the Illinois Commerce Commission
(ICC) to increase annual rates for natural gas service by approximately $16
million. The ICC has until October 2003 to render a decision on this request;
however, the ICC Staff has recommended an annual increase of approximately $8
million.
Illinois Electric
In 2002, all of our Illinois residential, commercial and industrial
customers had choice in electric suppliers as provided by the Electric Service
Customer Choice and Rate Relief Law of 1997. Several commercial and industrial
customers switched to Marketing Company for their energy supply resulting in a
decline in our revenues and a corresponding decrease in purchased power of
approximately $19 million for the first quarter of 2003. We continue to incur
delivery service costs and charge related tariffs associated with these
customers.
NOTE 3 - Related Party Transactions
We have transactions in the normal course of business with Ameren and its
other subsidiaries. These transactions are primarily comprised of power
purchases and sales, as well as other services received or rendered.
Intercompany power purchases under the Power Supply Agreement and from EEI, an
affiliate, totaled $86 million for the three months ended March 31, 2003 (2002 -
$105 million).
We have the ability to borrow from Ameren and AmerenUE, through a utility
money pool agreement. Ameren Services administers the utility 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 utility money pool at March 31, 2003 was AmerenUE's commercial
paper program. Through the utility money pool, we can access committed credit
facilities at Ameren and AmerenUE, which totaled $679 million at March 31, 2003.
These facilities are in addition to our own $15 million in committed credit
facilities. The total amount available to us at any given time from the utility
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. Surplus funds
providing additional liquidity available to us through the utility money pool
totaled $260 million at March 31, 2003. The availability of funds is also
determined by funding requirements and limits established by the PUHCA. We,
along with AmerenUE and Ameren Services, rely on the utility money
9
pool to coordinate and provide for certain short-term cash and working capital
requirements. Borrowers receiving a loan under the utility 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 utility money pool. The average interest
rate for the utility money pool for the three months ended March 31, 2003 was
1.32% (2002 - 1.79%). At March 31, 2003, we had $23 million in intercompany
receivables outstanding (December 31, 2002 - $16 million) through the utility
money pool.
On April 1, 2003, AmerenUE entered into an additional 364-day committed
credit facility totaling $75 million to be used for general corporate purposes,
including support of commercial paper programs. This facility makes borrowings
available at various interest rates based on LIBOR, agreed rates and other
options. We and Ameren can access this facility through the utility money pool.
Support services provided by Ameren Services, including wages, employee
benefits and professional services, are based on actual costs incurred. For the
three months ended March 31, 2003, support services provided by Ameren Services
included in Operating Expenses - Other Operations and Maintenance totaled $15
million (2002 - $16 million).
As of March 31, 2003, intercompany receivables included in Miscellaneous
Accounts and Notes Receivable were approximately $20 million (December 31, 2002
- - $12 million). As of March 31, 2003, intercompany payables included in Accounts
and Wages Payables totaled approximately $53 million (2002 - $63 million).
Our intercompany interest income recorded in Miscellaneous Income was
approximately $7 million for the three months ended March 31, 2003 (2002 - $8
million).
NOTE 4 - Property and Plant, Net
Property and plant, net at March 31, 2003 and December 31, 2002, consisted of the following:
- ----------------------------------------------------------------------------------------------
March 31, 2003 December 31, 2002
- ----------------------------------------------------------------------------------------------
Property and plant, at original cost:
Electric $1,255 $1,248
Gas 291 290
Other 5 5
- ----------------------------------------------------------------------------------------------
$1,551 $1,543
Less accumulated depreciation and amortization 742 732
- ----------------------------------------------------------------------------------------------
809 811
Construction work in progress:
Other 13 14
- ----------------------------------------------------------------------------------------------
Property and plant, net $ 822 $ 825
- ----------------------------------------------------------------------------------------------
NOTE 5 - Debt Financings
On April 7, 2003, we redeemed, with cash, prior to maturity and at par our
$50 million first mortgage bonds 7.5% Series X due July 1, 2007.
At March 31, 2003, neither Ameren, nor any of its subsidiaries, including
us, had any off-balance sheet financing arrangements, other than operating
leases entered into in the ordinary course of business. At this time, we do not
expect to engage in any significant off-balance sheet financing arrangements.
Amortization of debt issuance costs and any premium or discounts were less
than $1 million for the three months ended March 31, 2003 (2002 - less than $1
million) and were included in interest expense in the income statement.
10
At March 31, 2003, Ameren and its subsidiaries, including us, were in
compliance with financial agreement provisions and covenants.
NOTE 6 - Miscellaneous, Net
Miscellaneous, net for the three months ended March 31, 2003 and 2002
consisted of the following:
- --------------------------------------------------------------------------------
Three Months
2003 2002
- --------------------------------------------------------------------------------
Miscellaneous income:
Interest and dividend income $7 $8
Equity in earnings of subsidiary - 1
Other - 1
- --------------------------------------------------------------------------------
Total miscellaneous income $7 $10
- --------------------------------------------------------------------------------
Miscellaneous expense:
Other $(1) $(1)
- --------------------------------------------------------------------------------
Total miscellaneous expense $(1) $(1)
- --------------------------------------------------------------------------------
NOTE 7 - Segment Information
Our business segments provide electric and gas service in portions of
Illinois. The accounting policies of the segments are the same as those
described in Note 1 - Summary of Significant Accounting Policies. Segment data
includes a charge allocating costs of administrative support services to each of
the segments. These costs are accumulated in a separate Ameren subsidiary,
Ameren Services, which provides a variety of support services to us. We evaluate
the performance of our segments and allocate resources to them, based on
revenues and operating income.
Segment information for the three months ended March 31, 2003 and 2002 was
as follows:
- --------------------------------------------------------------------------------
Electric Gas Total
- --------------------------------------------------------------------------------
Three months ended March 31, 2003
- --------------------------------------------------------------------------------
Revenues $ 132 $ 77 $ 209
Operating income 3 4 7
- --------------------------------------------------------------------------------
Three months ended March 31, 2002
- --------------------------------------------------------------------------------
Revenues $ 150 $ 65 $ 215
Operating income/(loss) (1) 4 3
- --------------------------------------------------------------------------------
11
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
Central Illinois Public Service Company, headquartered in Springfield,
Illinois, operates as AmerenCIPS and is a wholly-owned subsidiary of Ameren
Corporation (Ameren). Our principal business is the rate-regulated transmission
and distribution of electricity and the distribution of natural gas to
residential, commercial, industrial and wholesale users in Illinois. Ameren is a
public utility holding company registered with the Securities and Exchange
Commission (SEC) under the Public Utility Holding Company Act of 1935 (PUHCA)
and is headquartered in St. Louis, Missouri. 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 primary subsidiaries and our
affiliates are as follows:
o Union Electric Company, which operates a rate-regulated electric
generation, transmission and distribution business, and a rate-regulated
natural gas distribution business in Missouri and Illinois as AmerenUE.
o Central Illinois Light Company, a subsidiary of CILCORP Inc. (CILCORP),
which operates a rate-regulated transmission and distribution business, an
electric generation business and a rate-regulated natural gas distribution
business in Illinois as AmerenCILCO. Ameren completed its acquisition of
CILCORP on January 31, 2003. See Recent Developments for further
information.
o AmerenEnergy Resources Company (Resources Company), which consists of non
rate-regulated operations. Subsidiaries include AmerenEnergy Generating
Company (Generating Company), which operates non rate-regulated electric
generation in Missouri and Illinois, AmerenEnergy Marketing Company
(Marketing Company), which markets power for periods over one year,
AmerenEnergy Fuels and Services Company, which procures fuel and manages
the related risks for Ameren-affiliated companies and AmerenEnergy Medina
Valley Cogen (No.4), LLC, which indirectly owns a 40 megawatt, gas-fired
electric co-generation plant. On February 4, 2003, Ameren completed its
acquisition of AES Medina Valley Cogen (No. 4), LLC (Medina Valley) and
renamed it AmerenEnergy Medina Valley Cogen (No. 4), LLC. See Recent
Developments for further information. 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 operates electric generation and
transmission facilities in Illinois. Ameren has a 60% ownership interest in
EEI, 40% owned by AmerenUE and 20% owned by 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 the
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 Management's Discussion and Analysis of Financial Condition and Results of
Operations that is included in our 2002 Annual Report on Form 10-K for the
period ended December 31, 2002.
o The audited financial statements and related notes that are included in our
2002 Annual Report on Form 10-K for the period ended December 31, 2002.
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
12
revenues directly 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. In addition, our electric rates in Illinois are largely set
through 2006. 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.
RESULTS OF OPERATIONS
Earnings Summary
Our net income of $2 million for the three months ended March 31, 2003 was
comparable to the same period of 2002. Gas margins improved by $3 million and
electric margins improved by $1 million in the first quarter of 2003 principally
due to increased demand, resulting from colder weather than the
warmer-than-normal weather conditions in the first quarter of 2002. The benefit
of the higher gas and electric margins was offset by lower interest income on
our note receivable from Generating Company (less than $1 million, net of
taxes), the loss of earnings from the transfer of our 20% interest in EEI to
Resources Company on April 30, 2002 (less than $1 million, net of taxes) and
increased depreciation (less than $1 million, net of taxes).
Recent Developments
Acquisitions
On January 31, 2003, Ameren completed its acquisition of all of the
outstanding common stock of CILCORP from The AES Corporation. CILCORP is the
parent company of Peoria, Illinois-based Central Illinois Light Company, which
operated as CILCO. With the acquisition, CILCO became an Ameren subsidiary, but
remains a separate utility company, operating as AmerenCILCO. On February 4,
2003, Ameren also completed its acquisition of AES Medina Valley Cogen (No. 4),
LLC (Medina Valley), which indirectly owns a 40 megawatt, gas-fired electric
generation plant. With the acquisition, Medina Valley, which Ameren renamed as
AmerenEnergy Medina Valley Cogen (No. 4), LLC, became a wholly-owned subsidiary
of Resources Company. The results of operations for CILCORP and AmerenEnergy
Medina Valley Cogen (No. 4), LLC were included in Ameren's consolidated
financial statements effective with the January and February 2003 acquisition
dates. Our results of operations for the quarter ended March 31, 2003 were not
impacted by these acquisitions.
Ameren acquired CILCORP to complement its existing Illinois gas and
electric operations. The purchase included CILCO's rate-regulated electric and
natural gas businesses in Illinois serving approximately 200,000 and 205,000
customers, respectively, of which approximately 150,000 are combination electric
and gas customers. CILCO's service territory is contiguous to our service
territory. CILCO also has a non rate-regulated electric and gas marketing
business principally focused in the Chicago, Illinois region. Finally, the
purchase included approximately 1,200 megawatts of largely coal-fired generating
capacity, most of which is expected to become non rate-regulated in 2003.
The total purchase price was approximately $1.4 billion and included the
assumption of CILCORP and Medina Valley debt and preferred stock at closing of
approximately $895 million and consideration of approximately $488 million in
cash, including related acquisition costs, net of cash acquired. The purchase
price is subject to certain adjustments for working capital and other changes
pending the finalization of CILCORP's closing balance sheet. The cash component
of the purchase price came from Ameren's issuances in September 2002 of 8.05
million common shares and its issuance in early 2003 of an additional 6.325
million common shares which together generated aggregate net proceeds of $575
million.
13
Credit Ratings
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's and its subsidiaries' debt under
review. Following the completion of the acquisition of CILCORP in January 2003,
Standard & Poor's lowered the ratings of Ameren, AmerenUE and us and increased
the ratings of Generating Company, CILCORP and AmerenCILCO. At the same time,
Standard & Poor's changed the outlook assigned to all of Ameren's and its
subsidiaries' ratings to stable. Moody's also lowered Ameren's and AmerenUE's
ratings subsequent to the acquisition and changed the outlook on these ratings
to stable. These actions were consistent with the actions the ratings agencies
disclosed they were considering following Ameren's announcement of the CILCORP
acquisition.
As of April 30, 2003, selected ratings by Moody's and Standard & Poor's
were as follows:
- --------------------------------------------------------------------------------
Moody's Standard & Poor's
- --------------------------------------------------------------------------------
Ameren Corporation:
Issuer/Corporate credit rating A3 A-
Unsecured debt A3 BBB+
Commercial paper P-2 A-2
AmerenUE:
Secured debt A1 A-
Unsecured debt A2 BBB+
Commercial paper P-1 A-2
CILCORP:
Unsecured debt Baa2 BBB+
AmerenCILCO:
Secured debt A2 A-
AmerenCIPS:
Secured debt A1 A-
Unsecured debt A2 BBB+
Generating Company:
Unsecured debt A3/Baa2 A-
- --------------------------------------------------------------------------------
Any adverse change in our, Ameren's or its other subsidiaries'credit
ratings may reduce our 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) variation on
electric margins for the three months ended March 31, 2003 from the comparable
period in 2002:
- --------------------------------------------------------------------------------
Three Months
- --------------------------------------------------------------------------------
Electric Revenues:
Effect of weather (estimate) $ 5
Wholesale sales 1
Interchange sales (2)
Growth and other (estimate) (22)
- --------------------------------------------------------------------------------
Total variation in electric operating revenues $(18)
Purchased power variation: $ 19
- --------------------------------------------------------------------------------
Change in electric margins $ 1
- --------------------------------------------------------------------------------
14
Electric margins increased $1 million for the three months ended March 31,
2003 compared to the same period in 2002 principally due to increased demand
resulting from colder winter weather as weather sensitive residential sales
increased 16% for the first quarter of 2003 compared to 2002. During the first
quarter of 2003 industrial and commercial revenues and corresponding purchased
power declined approximately $19 million resulting from certain customers
electing to switch to our affiliate, Marketing Company, for their energy supply
and the impact of the soft economy.
Gas Operations
Our gas margins increased $3 million for the three months ended March 31,
2003 compared to the same period in 2002 gas revenues and costs increased
primarily due to increased customer demand resulting from colder winter weather
in the first quarter of 2003 as well as, gas costs increased due to higher
natural gas prices and increased purchases.
Other Operating Expenses
Other Operations and Maintenance
Other operations and maintenance expenses increased $1 million for the
three months ended March 31, 2003 compared to the same period in 2002 primarily
due to higher employee benefit costs related to increasing healthcare costs and
investment performance of employee benefit plan assets ($2 million), partially
offset by decreased professional services expenses related to information
technology in 2002 ($1 million).
Ameren Services provided services to us including wages, employee benefits
and professional services that were included in other operations and maintenance
expenses. See Note 4 - Related Party Transactions to our Financial Statements
under Item 1 of Part I of this report for further information.
Depreciation and Amortization
Depreciation and amortization expenses increased $1 million in the first
three months of 2003 compared to the same period in 2002 primarily resulting
from transmission and distribution related additions.
Income Taxes
Income taxes were comparable for the three months ended 2003 and 2002.
Other Income and Deductions
Other income and deductions (excluding income taxes) decreased $3 million
in the first three months of 2003 compared to the same period in 2002 primarily
due to less intercompany interest received on the Generating Company
subordinated promissory note as a result of a lower principal balance
outstanding ($1 million), lower earnings from EEI due to the transfer of our 20%
common stock interest in EEI to Resources Company on April 30, 2002 ($1 million)
and a decrease in contributions in aid of construction ($1 million).
Interest
Interest expense decreased $1 million for the first three months of 2003
compared to the similar period in 2002, primarily due to less interest expense
resulting from the redemption of first mortgage bonds in the third quarter of
2002.
15
LIQUIDITY AND CAPITAL RESOURCES
Operating
Cash provided by operating activities was $41 million in the first three
months of 2003 compared to $11 million in the first three months of 2002. The
increase was primarily due to less cash used in Accounts and Wages payable than
in the first quarter of 2002. Lower sales and power purchases resulting from
certain customers electing to switch to our affiliate, Marketing Company, for
their energy supply and the timing impact on working capital resulted in the
decrease.
Our tariff-based gross margins continue to be our principal source of cash
from operating activities. Our diversified retail customer mix of rate-regulated
residential, commercial and industrial classes and a commodity mix of gas and
electric service provide a reasonably predictable source of cash flows. In
addition, we plan to utilize short-term debt to support normal operations and
other temporary capital requirements. In 2002, all of our Illinois residential,
commercial and industrial customers had choice in electric suppliers as provided
by the Electric Service Customer Choice and Rate Relief Law of 1997. Several
commercial and industrial customers switched to Marketing Company for their
energy supply resulting in a decline in our revenues and a corresponding
decrease in purchased power of approximately $19 million for the first quarter
of 2003. We continue to incur delivery service costs and charge related tariffs
associated with these customers.
Investing
Our net cash used in investing activities was $17 million for the three
months ended March 31, 2003 while net cash provided by investing activities was
$6 million for the same period in 2002. The difference was primarily due to
increased intercompany money pool investments and a decrease in construction
expenditures. Capital expenditures for transmission and distribution related
activities are expected to approximate $55 million in 2003.
Financing
Our cash flows used in financing activities were $25 million for the three
months ended March 31, 2003 as compared to $21 million for the same period in
2002. Our principal financing activities for the three month periods included
the payment of dividends, as well as redemptions of long-term debt. The increase
in cash used in financing activities was primarily due to an increase in the
payment of dividends on our common stock.
We are authorized by the SEC under the PUHCA to have up to $250 million of
short-term unsecured debt instruments outstanding at any time.
Short-Term Debt and Liquidity
Short-term debt typically consists of borrowings under Ameren's utility
money pool agreement but, from time to time, may also consist of commercial
paper and bank loans (maturities generally within 1 to 45 days). At March 31,
2003, Ameren and its subsidiaries had committed credit facilities, expiring at
various dates between 2003 and 2005, totaling $694 million, excluding
AmerenCILCO facilities of $60 million, EEI of $45 million and AmerenUE's nuclear
fuel lease facilities of $120 million. This amount includes $15 million of our
committed bank lines of credit and $679 million of committed credit facilities
at Ameren and AmerenUE. We access these combined facilities through Ameren's
utility money pool arrangement. AmerenUE and Ameren Services may also borrow
under this arrangement. These committed credit facilities are also used to
support AmerenUE's commercial paper program, all of which was unused and
available at March 31, 2003.
Subject to the receipt of regulatory approval, which is being pursued,
AmerenCILCO will participate in Ameren's utility money pool arrangement. Under
this arrangement, AmerenCILCO will have access to up to $694 million of
additional committed liquidity, subject to reduction based on the use by other
utility
16
money pool participants, but increased to the extent other pool participants
have surplus cash balances, which may be used to fund pool needs. At March 31,
2003, AmerenCILCO had committed credit facilities, expiring at various dates
during 2003, totaling $60 million, one of which totaling $25 million was
subsequently renewed to 2004.
On April 1, 2003, AmerenUE entered into an additional 364-day committed
credit facility totaling $75 million to be used for general corporate purposes,
including support of commercial paper programs. This facility makes borrowings
available at various interest rates based on LIBOR, agreed rates and other
options. We and Ameren can access this facility through the utility money pool.
Our affiliate, EEI also has two bank credit agreements totaling $45 million
that expire in 2003. At March 31, 2003, $32 million was unused and available
under these committed credit facilities.
AmerenUE also has a lease agreement that provides for the financing of
nuclear fuel. At March 31, 2003, the maximum amount that could be financed under
the agreement was $120 million. At March 31, 2003, $111 million was financed
under the lease.
In addition to committed credit facilities, a further source of liquidity
for Ameren is available cash and cash equivalents. At March 31, 2003, Ameren had
$260 million of cash, all of which was available for borrowing by us under the
utility money pool. In the first quarter of 2003, Ameren paid a total of
approximately $488 million of cash on hand, including related acquisition costs,
net of cash acquired to acquire CILCORP and Medina Valley.
We rely on access to short-term and long-term capital markets as a
significant source of funding for capital requirements not satisfied by our
operating cash flows. The inability by us to raise capital on favorable terms,
particularly during times of uncertainty in the capital markets, could
negatively impact our ability to maintain and grow our businesses. Based on our
current credit ratings, we believe that we will continue to have access to the
capital markets. However, events beyond our control may create uncertainty in
the capital markets such that our cost of capital would increase or our ability
to access the capital markets would be adversely affected.
Financial Agreement Provisions and Covenants
Ameren's and our financial agreements include customary default provisions
that could impact the continued availability of credit or result in the
acceleration of repayment. Ameren's and its subsidiaries' committed credit
facilities require the borrower to represent, in connection with any borrowing
under the facility that no material adverse change has occurred since certain
dates. None of our, Ameren's nor its other subsidiaries' financing arrangements
contain credit rating triggers, except for three funded bank term loans at
AmerenCILCO totaling $105 million at March 31, 2003.
Ameren's and its subsidiaries' committed credit facilities include
provisions related to the funded status of Ameren's pension plan. These
provisions either require Ameren to meet minimum Employee Retirement Income
Security Act of 1974 (ERISA) funding requirements or limit the unfunded
liability status of the plan. Under the most restrictive of these provisions
impacting Ameren's facilities totaling $400 million, an event of default will
result if the unfunded liability status (as defined in the underlying credit
agreements) of Ameren's pension plan exceeds $300 million in the aggregate.
Based on the most recent valuation report available to Ameren at December 31,
2002, which was based on January 2002 asset and liability valuations, the
unfunded liability status (as defined) was $31 million. While an updated
valuation report will not be available until the second half of 2003, Ameren
believes that the unfunded liability status of its pension plans (as defined)
could exceed $300 million based on the investment performance of the pension
plan assets and interest rate changes since January 1, 2002. As a result, Ameren
may need to renegotiate the facility provisions, terminate or replace the
affected facilities, or fund any unfunded liability shortfall. Should Ameren
elect to terminate these facilities, Ameren believes it would otherwise have
sufficient liquidity to manage its short-term funding requirements.
At March 31, 2003, Ameren and its subsidiaries, including us, were in
compliance with their financial agreement provisions and covenants.
17
Off-Balance Sheet Arrangements
At March 31, 2003, neither Ameren, nor any of its subsidiaries, including
us, had any off-balance sheet financing arrangements, other than operating
leases entered into in the ordinary course of business. At this time, we do not
expect to engage in any significant off-balance sheet financing arrangements.
OUTLOOK
We believe there will be challenges to earnings in 2003 and beyond due to
industry-wide trends and company-specific issues. The following are expected to
put pressure on earnings in 2003 and beyond:
o Weak economic conditions, which impact native load demand,
o The adverse effects of rising employee benefit costs and higher insurance
costs, and
o An assumed return to more normal weather patterns relative to 2002.
In late 2002, we and Ameren announced the following actions to mitigate the
effect of these challenges:
o A voluntary retirement program that was accepted by approximately 550
Ameren employees, including approximately 70 of our employees and
additional employees providing support functions to us through Ameren
Services,
o Modifications to retiree employee benefit plans to increase co-payments and
limit Ameren's overall cost,
o A wage freeze in 2003 for all management employees, including our
employees, and
o Reductions of 2003 expected capital expenditures.
We are pursuing an annual gas rate increase of approximately $16 million in
Illinois. Ameren is also considering additional actions, including modifications
to active employee benefits, further staffing reductions and other initiatives.
In early May 2003, our service territory experienced several severe storms
that damaged parts of our transmission and distribution system. As a result, we
expect to incur increased costs in the quarter ending June 30, 2003 for repairs
required to our system. We are currently unable to estimate the impact on our
future financial position, results of operations or cash flows.
In the ordinary course of business, we and Ameren evaluate several
strategies to enhance our financial position, results of operations and
liquidity. These strategies may include potential acquisitions, divestitures,
opportunities to reduce costs or increase revenues and other strategic
initiatives in order to increase Ameren's 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.
REGULATORY MATTERS
See Note 2 - Rate and Regulatory Matters to our Financial Statements under
Item 1 of Part I of this report for more information.
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 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:
18
Accounting Policy Uncertainties Affecting Application
- ----------------- ------------------------------------
Regulatory Mechanisms and Cost Recovery
We defer costs as regulatory assets in o Regulatory environment, external regulatory
accordance with SFAS 71 and make investments decisions and requirements
that we assume we will be able to collect in o Anticipated future regulatory decisions and their
future rates. impact
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
We accrue for all known environmental o Extent of contamination
contamination where remediation can be o Responsible party determination
reasonably estimated, but some of our o Approved methods for cleanup
operations have existed for over 100 years o Present and future legislation and governmental
and previous contamination may be unknown to regulations and standards
us. o Results of ongoing research and development
regarding environmental impacts
o Indemnification obligations
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 standards and available technology.
Unbilled Revenue
At the end of each period, we estimate, based o Projecting customer energy usage
on expected usage, the amount of revenue to o Estimating impacts of weather and other usage-
record for services that have been provided affecting factors for the unbilled period
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.
19
Accounting Policy (Continued) Uncertainties Affecting Application (Continued)
- ----------------------------- -----------------------------------------------
Benefit Plan Accounting
Based on actuarial calculations, we accrue o Future rate of return on pension and other plan
costs of providing future employee benefits assets
in accordance with SFAS 87, 106, and 112. o Interest rates used in valuing benefit obligations
See Note 11 - Retirement Benefits to our o Healthcare costs trend rates
Financial Statements in our 2002 Annual o Timing of employee retirements
Report on Form 10-K. o Future plan designs
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.
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 handles 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 risks and are not represented in the following discussion.
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 both long-term and short-term variable-rate debt and fixed-rate debt, and
auction-rate 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 March 31, 2003, if interest rates
increased by 1%, our annual interest expense and dividend on preferred stock
would increase by approximately $0.3 million and net income would decrease by
approximately $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.
20
Equity Price Risk
We, along with other subsidiaries of Ameren, are a participant in Ameren's
defined benefit and post-retirement benefit plans and are responsible for our
proportional share of the costs. Ameren's costs of providing non-contributory
defined benefit retirement and post-retirement 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 2000 for the pension and post-retirement plans. As a result,
at December 31, 2002 Ameren and its subsidiaries, including us, recognized an
additional minimum pension liability as prescribed by SFAS No. 87, "Employers'
Accounting for Pensions." The liability resulted in a reduction to equity as a
result of a charge to Ameren's Accumulated Other Comprehensive Income (OCI) of
$102 million, net of taxes. Our portion of this charge to OCI was $13 million,
net of taxes. The amount of the liability was the result of asset returns
experienced through 2002, interest rates and Ameren's contributions to the plans
during 2002. Neither Ameren's nor our portion of the minimum pension liability
changed at March 31, 2003. In future years, the liability recorded, the costs
reflected in net income, or OCI, or cash contributions to the plans could
increase materially without a recovery in equity markets in excess of Ameren's
assumed return on plan assets. 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 equity would be
restored in the Balance Sheet.
ITEM 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Within 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.
(b) Change in Internal Controls
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.
FORWARD-LOOKING STATEMENTS
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 subsequent
securities filings and others, could cause results to differ materially from
management expectations as suggested by such "forward-looking" statements:
o the effects of 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;
21
o the effects of participation in a Federal Energy Regulatory
Commission-approved Regional Transmission Organization, including
activities associated with the Midwest Independent System Operator;
o availability and future market prices for purchased power, electricity and
natural gas for distribution, including the use of financial and derivative
instruments and volatility of changes in market prices and our ability to
recover increased costs;
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 effects of strategic initiatives, including acquisitions and
divestitures;
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 benefit 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.
22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Reference is made to Note 12 under Item 8 "Financial Statements and
Supplementary Data" in Part II of our 2002 Annual Report on Form 10-K and Note 7
under Item 8 "Financial Statements and Supplementary Data" in Part II of the
2002 Annual Report on Form 10-K of our affiliates, CILCORP Inc. and Central
Illinois Light Company, operating as AmerenCILCO, for a discussion of a number
of lawsuits that name our affiliates, Union Electric Company, operating as
AmerenUE, AmerenCILCO, 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 the 2002 Annual Reports on Form 10-K, 25
additional lawsuits have been filed against us and AmerenUE, but no additional
lawsuits have been filed against AmerenCILCO. 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 the 2002 Annual Reports on Form 10-K, the
Ameren companies have been voluntarily dismissed in 58 cases and have settled
six cases.
To date, a total of 152 asbestos-related lawsuits have been filed against
the Ameren companies, of which 72 are pending, 16 have been settled and 64 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.
Note 2 - Rate and Regulatory Matters to our Financial Statements under Item
1 of Part I of this report contains additional information on an administrative
proceeding which is incorporated by reference under this item.
ITEM 6. Exhibits and Reports on Form 8-K.
(a)(i) Exhibits filed herewith.
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.
(a)(ii) Exhibits incorporated by reference.
10.1 - *2003 Ameren Executive Incentive Plan (Ameren
Corporation quarterly report on Form 10-Q for the
quarter ended March 31, 2003, Exhibit 10.1)
(b) Reports on Form 8-K. AmerenCIPS filed no reports on Form 8-K
during the quarterly period ended March 31, 2003.
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.
- ---------------------
* Management compensatory plan or arrangement.
23
Reports of CILCORP Inc. on Forms 8-K, 10-Q and 10-K are on file
with the SEC under File Number 2-95569.
Reports of Central Illinois Light Company on Forms 8-K, 10-Q and
10-K are on file with the SEC under File Number 1-2732.
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
Vice President and Controller
(Principal Accounting Officer)
Date: May 14, 2003
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 officer 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
24
CERTIFICATIONS (CONTINUED)
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 officer 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 officer 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: May 14, 2003 /s/ Gary L. Rainwater
-------------------------------------
Gary L. Rainwater
President and Chief Executive Officer
(Principal 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 officer 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
25
CERTIFICATIONS (CONTINUED)
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 officer 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 officer 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: May 14, 2003 /s/ Warner L. Baxter
-------------------------------
Warner L. Baxter
Senior Vice President, Finance
(Principal Financial Officer)
26