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 June 30, 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 August 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
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PART I. Financial Information
ITEM 1. Financial Statements (Unaudited)
Balance Sheet at June 30, 2003 and December 31, 2002.............................................. 2
Statement of Income for the three and six months ended June 30, 2003 and 2002..................... 3
Statement of Cash Flows for the six months ended June 30, 2003 and 2002........................... 4
Statement of Common Stockholder's Equity for the three and six months ended June 30, 2003 and 2002 5
Notes to Financial Statements..................................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 20
ITEM 4. Controls and Procedures........................................................................... 21
Forward-Looking Statements........................................................................ 21
PART II. Other Information
ITEM 1. Legal Proceedings................................................................................. 23
ITEM 4. Submission of Matters to a Vote of Security Holders............................................... 24
ITEM 5. Other Information................................................................................. 24
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 24
SIGNATURE...................................................................................................... 26
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 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)
June 30, December 31,
2003 2002
-------- ------------
ASSETS:
Property and plant, net $ 822 $ 825
Investments and other assets:
Intercompany notes receivable - Generating Company 324 373
Intercompany tax receivable - Generating Company 156 162
Other assets 18 17
-------- --------
Total investments and other assets 498 552
-------- --------
Current assets:
Cash and cash equivalents 18 17
Accounts receivable - trade (less allowance for doubtful
accounts of $1 and $1, respectively) 45 53
Unbilled revenue 65 74
Intercompany notes receivable - 16
Miscellaneous accounts and notes receivable 18 22
Current portion of intercompany notes receivable - Generating Company 49 46
Current portion of intercompany tax receivable - Generating Company 13 13
Materials and supplies, at average cost 33 41
Other current assets 6 7
-------- --------
Total current assets 247 289
-------- --------
Regulatory assets 29 31
-------- --------
Total Assets $ 1,596 $ 1,697
======== ========
CAPITAL AND LIABILITIES:
Capitalization:
Common stock, no par value, 45.0 shares authorized -
25.5 shares outstanding $ 120 $ 120
Retained earnings 370 405
Accumulated other comprehensive income (loss) (15) (13)
-------- --------
Total common stockholder's equity 475 512
-------- --------
Preferred stock not subject to mandatory redemption 80 80
Long-term debt, net 485 534
-------- --------
Total capitalization 1,040 1,126
-------- --------
Current liabilities:
Current maturities of long-term debt - 45
Accounts and wages payable 86 87
Intercompany notes payable 39 -
Taxes accrued 32 32
Other current liabilities 25 26
-------- --------
Total current liabilities 182 190
-------- --------
Accumulated deferred income taxes 271 282
Accumulated deferred investment tax credits 12 13
Regulatory liabilities 15 15
Other deferred credits and liabilities 76 71
-------- --------
Total Capital and Liabilities $ 1,596 $ 1,697
======== ========
See Notes to Financial Statements.
2
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
STATEMENT OF INCOME
(Unaudited, in millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
----- ----- ----- ------
OPERATING REVENUES:
Electric $ 137 $ 161 $ 269 $ 311
Gas 30 26 107 91
------ ------ ------ ------
Total operating revenues 167 187 376 402
------ ------ ------ ------
OPERATING EXPENSES:
Purchased power 82 101 168 206
Gas 18 12 71 56
Other operations and maintenance 38 40 80 81
Depreciation and amortization 13 13 26 25
Income taxes - 4 (1) 5
Other taxes 7 6 16 15
------ ------ ------ ------
Total operating expenses 158 176 360 388
------ ------ ------ ------
OPERATING INCOME 9 11 16 14
OTHER INCOME AND (DEDUCTIONS):
Miscellaneous, net -
Miscellaneous income 7 7 14 17
Miscellaneous expense (1) - (2) (1)
Income taxes (3) - (5) -
------ ------ ------ ------
Total other income and (deductions) 3 7 7 16
------ ------ ------ ------
INTEREST CHARGES 9 10 18 20
------ ------ ------ ------
NET INCOME 3 8 5 10
PREFERRED STOCK DIVIDENDS - 1 1 2
------ ------ ------ ------
NET INCOME AFTER PREFERRED STOCK DIVIDENDS $ 3 $ 7 $ 4 $ 8
====== ====== ====== ======
See Notes to Financial Statements.
3
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
STATEMENT OF CASH FLOWS
(Unaudited, in millions)
Six Months Ended
June 30,
----------------
2003 2002
------ ------
Cash Flows From Operating:
Net income $ 5 $ 10
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 26 25
Amortization of debt issuance costs and premium/discounts - 1
Deferred income taxes, net (11) (9)
Deferred investment tax credits, net (1) (1)
Other (2) -
Changes in assets and liabilities:
Receivables, net 21 (14)
Materials and supplies 8 9
Accounts and wages payable (1) (29)
Taxes accrued - 6
Assets, other 7 15
Liabilities, other 5 2
----- -----
Net cash provided by operating activities 57 15
----- -----
Cash Flows From Investing:
Construction expenditures (22) (26)
Intercompany notes receivable 62 43
----- -----
Net cash provided by investing activities 40 17
----- -----
Cash Flows From Financing:
Dividends on common stock (39) (31)
Dividends on preferred stock (1) (2)
Redemptions:
Long-term debt (95) (5)
Issuances:
Intercompany notes payable 39 -
----- -----
Net cash used in financing activities (96) (38)
----- -----
Net change in cash and cash equivalents 1 (6)
Cash and cash equivalents at beginning of year 17 26
----- -----
Cash and cash equivalents at end of period $ 18 $ 20
===== =====
Cash paid during the periods:
Interest $ 20 $ 20
Income taxes, net 14 9
See Notes to Financial Statements.
4
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
STATEMENT OF COMMON STOCKHOLDER'S EQUITY
(Unaudited, in millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2003 2002 2003 2002
------ ------ ----- -----
Common stock $ 120 $ 120 $ 120 $ 120
Retained earnings
Beginning balance 387 430 405 444
Net income 3 8 5 10
Common stock dividends (20) (16) (39) (31)
Preferred stock dividends - (1) (1) (2)
----- ------ ------ ------
370 421 370 421
----- ------ ------ ------
Accumulated other comprehensive income (loss)
Beginning balance - derivative financial instruments - - - -
Change in derivative financial instruments in current period (2) - (2) -
------ ------ ------ ------
(2) - (2) -
------ ------ ------ ------
Beginning balance - minimum pension liability (13) - (13) -
Change in minimum pension liability in current period - - - -
------ ------ ------ ------
(13) - (13) -
------ ------ ------ ------
(15) - (15) -
------ ------ ------ ------
Total common stockholder's equity $ 475 $ 541 $ 475 $ 541
====== ====== ====== ======
Comprehensive income, net of taxes
Net income $ 3 $ 8 $ 5 $ 10
Unrealized net gain/(loss) on derivative hedging instruments,
net of income taxes of $(1), $-, $(1) and $-, respectively (2) - (2) -
------ ------ ------ ------
Total comprehensive income, net of taxes $ 1 $ 8 $ 3 $ 10
====== ====== ====== ======
See Notes to Financial Statements.
5
CENTRAL ILLINOIS PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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'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 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 electric 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 primarily 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.
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 effective 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. Corresponding
increases in asset book values are depreciated over the remaining useful life of
the related asset. Uncertainties as to the probability, timing or amount of cash
flows associated with an asset retirement obligation affect our estimates of
fair value.
We have determined that certain other asset retirement obligations exist.
However, we are unable to estimate the fair value of those obligations because
the probability, timing or amount of 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, our depreciation methodology has 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 $127 million at June 30, 2003.
SFAS No. 150 - "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity"
In May 2003, the FASB issued SFAS 150 that established standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 requires financial
instruments that were issued in the form of shares with an unconditional
obligation, where the issuer must redeem the instrument by transferring its
assets on a specified date, be classified as liabilities. Accordingly, SFAS 150
requires issuers to classify mandatorily redeemable financial instruments as
liabilities. SFAS 150 also requires such financial instruments to be measured at
fair value and a cumulative effect adjustment to be recognized in the statement
of income for any difference between the carrying amount and fair value. SFAS
150 will be effective in the third quarter of 2003. SFAS 150 will not have any
impact on our financial position, results of operations or liquidity upon
adoption in the third quarter of 2003.
7
FASB Interpretation No. (FIN) 46 - "Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated
Financial Statements"
The FASB issued FIN 46 in January 2003. FIN 46 provides guidance on the
identification of, and financial reporting for, entities over which control is
achieved through means other than voting rights; such entities are known as
variable-interest entities (VIEs). FIN 46 will determine the following:
o Whether consolidation is required under the "controlling financial
interest" model of ARB 51, or other existing authoritative guidance;
o Or, alternatively, whether the variable-interest model under FIN 46
should be used to account for existing and new entities.
The initial application of FIN 46 depends on the date that the VIE was
created. For public entities, FIN 46 is effective no later than the beginning of
the first interim period that starts after June 15, 2003. At this time, we are
assessing the impact of FIN 46 on our financial position, results of operations
or liquidity upon adoption in the third quarter of 2003.
Interchange Revenues
Interchange revenues included in Operating Revenues - Electric were $10
million for the three months ended June 30, 2003 (2002 - $8 million) and $18
million for the six months ended June 30, 2003 (2002 - $18 million).
Purchased Power
Purchased power included in Operating Expenses - Purchased Power was $82
million for the three months ended June 30, 2003 (2002 - $101 million) and $168
million for the six months ended June 30, 2003 (2002 - $206 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 June 30, 2003 were
$3 million (2002 - $2 million) and $8 million for the six months ended June 30,
2003 (2002 - $7 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.
Pension
At December 31, 2002, Ameren recorded a minimum pension liability of $102
million, after taxes, which resulted in a charge to Accumulated Other
Comprehensive Income (Loss)(OCI) and a reduction in stockholders' equity. Our
portion of the minimum pension liability was $13 million, after taxes. Based on
changes in interest rates, Ameren may need to change its actuarial assumptions
for its pension plan at December 31, 2003, which could result in a requirement
to record an additional minimum pension liability.
NOTE 2 - Rate and Regulatory Matters
Intercompany Purchase of Illinois Service Territory
On May 30, 2003, in a proceeding before the Illinois Commerce Commission
(ICC) involving a request for approval of an intercompany transfer of certain
electric generating facilities from Generating Company to AmerenUE, AmerenUE
filed a Notice of Withdrawal with the ICC stating that AmerenUE had elected not
to pursue approval of the transfer and was withdrawing its request. In the
Notice, AmerenUE stated that the concerns expressed by the ICC Staff regarding
AmerenUE's means of satisfying its generating capacity needs, as well as the
Missouri Public Service Commission's (MoPSC) views of the
8
appropriate means of meeting generating capacity obligations, have demonstrated
to AmerenUE the difficulty of a single company operating as an electric utility
in both a regulated generation jurisdiction such as Missouri and an unregulated
generation jurisdiction such as Illinois. To remedy this difficulty, AmerenUE
announced in the Notice its plan to limit its public utility operations to the
State of Missouri and to discontinue operating as a public utility subject to
ICC regulation. AmerenUE intends to accomplish this plan by selling its
Illinois-based electric and natural gas businesses, including its Illinois-based
distribution assets and certain of its transmission assets, to us. In 2002,
AmerenUE's Illinois service territory generated revenues of $166 million and is
estimated to have a net book value of $138 million at December 31, 2003.
AmerenUE's electric generating facilities and certain of its electric
transmission facilities in Illinois would not be part of the sale. The sale of
AmerenUE's Illinois-based utility businesses to us will require the approval of
the ICC, the Federal Energy Regulatory Commission (FERC), the MoPSC and the SEC
under the provisions of the PUHCA. On June 13, 2003, the ICC Staff filed a
response to AmerenUE's Notice of Withdrawal indicating that the ICC Staff did
not object to it and on July 23, 2003, the ICC issued an order accepting the
withdrawal. In the third quarter of 2003, AmerenUE expects to file with the
MoPSC, the ICC, the FERC and the SEC for the authority to transfer its
Illinois-based utility businesses, at net book value, to us. AmerenUE proposes
to transfer approximately one-half of the assets directly to us in consideration
for a promissory note, and approximately one-half of the assets by means of a
dividend in kind to Ameren followed by a capital contribution of the assets from
Ameren to us.
We are unable to predict the ultimate outcome of these regulatory
proceedings or the timing of the final decisions of the various agencies. As a
result, we are not able at this time to estimate the impact of this transaction
on our financial position, results of operations or liquidity.
Regional Transmission Organization (RTO)
Since April 2002, we, AmerenUE and subsidiaries of FirstEnergy Corporation
and NiSource Inc. (collectively the GridAmerica Companies) have participated in
a number of filings at the 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
procedures to determine the justness and reasonableness of the proposed rate
amendments to the Midwest ISO OATT. At this time, the parties are pursuing
settlement of the disputed rate issues. Absent settlement, the rates filed in
the February 28, 2003 filing will go into effect on October 1, 2003, subject to
refund. On May 15, 2003, the FERC issued an order accepting the February 18,
2003 compliance filing.
Once GridAmerica becomes operational and Ameren has secured approval to
participate in GridAmerica from the MoPSC, the FERC has ordered the return of
the $18 million exit fee, with interest, paid by Ameren when it previously left
the Midwest ISO. Our portion of the exit fee to be returned is $5 million. 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. We expect GridAmerica to become
operational in late 2003, subject to regulatory approvals.
9
In July 2003, the FERC issued an Order (July Order) that could potentially
reduce Ameren's, as well as other utilities', "through and out" transmission
revenues effective November 1, 2003, reversing an Administrative Law Judge's
previous decision on this matter. The revenues subject to elimination by the
July Order are those revenues from transmission reservations that travel through
or out of our transmission system and are also used to provide electricity to
load within the Midwest ISO or PJM Interconnection LLC systems. The magnitude of
the potential net revenue reduction resulting from the July Order is still being
evaluated, but could be up to $20 to $25 million annually for Ameren. While it
is anticipated that Ameren's transmission revenues could be reduced by the July
Order, transmission expenses for our affiliates could also be reduced. Our
portion of the potential net revenue reduction could be up to $6 to $8 million
annually. Moreover, the FERC's Order explicitly permits companies participating
in an RTO to seek collection of the lost "through and out" revenues through
other rate mechanisms. At this time, we intend to seek rehearing of the July
Order. We also intend to seek recovery of any potential lost "through and out"
revenues through rate mechanisms acknowledged by the FERC in the July Order.
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 retail load, and
proposes a new energy market and congestion management system that uses
locational marginal pricing as its basis.
Although issuance of the final rule is uncertain and its implementation
schedule is unknown, the Midwest ISO is already in the process of implementing a
separate market design similar to the proposed market design in the NOPR. In
July 2003, the Midwest ISO filed with the FERC a revised OATT codifying the
terms and conditions under which it will implement the new market design. The
Midwest ISO has targeted March 2004 as the start date for implementation. We are
reviewing the Midwest ISO's market design and the potential impact of the market
design on the cost and reliability of service to retail customers. At this time,
we are unable to predict the ultimate impact the new market design will have on
our future financial position, results of operations or liquidity.
Illinois Gas
In November 2002, we filed a request with the ICC to increase annual rates
for natural gas service by approximately $16 million. The ICC Staff has
recommended an annual increase of approximately $8 million. In addition, other
parties have proposed a lower increase in this case. Hearings were completed in
June and July 2003. The ICC has until October 2003 to render a decision in this
gas case and any rate change is expected to be effective in November 2003.
Illinois Electric
Commencing 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 $23 million for the three months ended June 30, 2003 and
$42 million six months ended June 30, 2003. We continue to provide electric
delivery service to these customers and charge them ICC approved delivery
service tariff rates for that service.
10
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. An electric
power supply agreement was entered into between Generating Company and its
non-regulated affiliate, Marketing Company (Generating-Marketing Agreement),
both wholly-owned subsidiaries of Resources Company. Subsequently, Marketing
Company entered into the Power Supply Agreement with our company to supply us
sufficient energy and capacity to meet our obligations to offer service to our
retail customers and to fulfill our other obligations under applicable federal
and state tariffs or contracts through December 31, 2004. The Power Supply
Agreement and the Generating-Marketing Agreement may be terminated upon at least
one year's notice given by either party, but in no event can either agreement be
terminated prior to December 31, 2004. We expect Marketing Company to seek to
extend the Power Supply Agreement through December 31, 2006. An extension of the
Power Supply Agreement will depend on compliance with regulatory requirements in
effect as to Marketing Company at the time; and we cannot predict whether
Marketing Company will be successful in securing an extension of this agreement.
The ICC authorized the extension of this agreement in its order approving
Ameren's acquisition of CILCORP. 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. We are
obligated to pay a capacity charge per megawatt hour, per year to Marketing
Company or the greater of our forecasted peak demand or actual demand plus sales
at market based rates. We are also subject to energy charges per megawatt hour
for all energy sales other than sales at market-based rates. Charges are paid
monthly. Due to the Generating-Marketing Agreement, Generating Company bears the
all generation related operating risks, including plant performance, operations,
maintenance, efficiency, employee retention and other matters. There are no
guarantees, bargain purchase options or other terms that may convey to us the
right to use the property, plant and equipment of Generating Company.
Intercompany power purchases under the Power Supply Agreement and from EEI, an
affiliate, totaled $82 million for the three months ended June 30, 2003 (2002 -
$101 million) and $168 million for the six months ended June 30, 2003 (2002 -
$206 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 June 30, 2003 was AmerenUE's commercial
paper program. Through the utility money pool, we can access committed credit
facilities at Ameren and AmerenUE, which totaled $757 million at June 30, 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 has 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
PUHCA. We, along with AmerenUE and Ameren Services, rely on the utility money
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 June 30, 2003 was
1.19% (2002 - 1.75%) and 1.25% for the six months ended June 30, 2003 (2002 -
1.77%). At June 30, 2003, we did not have any intercompany receivables
outstanding (December 31, 2002 - $16 million) through the utility money pool. We
had $39 million in intercompany money pool borrowings outstanding at June 30,
2003 (December 31, 2002 - none). Subject to the receipt of regulatory approval,
which is being pursued, AmerenCILCO will also participate in the utility money
pool arrangement.
Costs of support services provided by Ameren Services, including wages,
employee benefits and professional services, are based on actual costs incurred.
Support services provided by Ameren Services included in Operating Expenses -
Other Operations and Maintenance for the three months ended June 30, 2003
totaled $14 million (2002 - $15 million) and $29 million for the six months
ended June 30, 2003 (2002 - $31 million).
11
As of June 30, 2003, intercompany receivables included in Miscellaneous
Accounts and Notes Receivable were approximately $12 million (December 31, 2002
- - $12 million). As of June 30, 2003, intercompany payables included in Accounts
and Wages Payables totaled approximately $56 million (2002 - $63 million).
Our intercompany note receivable from Generating Company was approximately
$373 million (December 31, 2002 - $419 million) including the current portion of
$49 million (December 31, 2002 - $46 million) as of June 30, 2003. Our
intercompany interest income recorded in Miscellaneous Income was approximately
$7 million for the three months ended June 30, 2003 (2002 - $7 million) and $14
million for the six months ended June 30, 2003 (2002 - $16 million).
NOTE 4 - Property and Plant, Net
Property and plant, net at June 30, 2003 and December 31, 2002, consisted of the
following:
- ---------------------------------------------------------------------------------------
June 30, 2003 December 31, 2002
- ---------------------------------------------------------------------------------------
Property and plant, at original cost:
Electric $1,267 $1,248
Gas 292 290
Other 5 5
- ---------------------------------------------------------------------------------------
$1,564 $1,543
Less accumulated depreciation and amortization 752 732
- ---------------------------------------------------------------------------------------
812 811
Construction work in progress:
Other 10 14
- ---------------------------------------------------------------------------------------
Property and plant, net $ 822 $ 825
- ---------------------------------------------------------------------------------------
NOTE 5 - Debt Financings
On April 1, 2003, we repaid $40 million first mortgage bonds 6.375% Series
Z which matured on that date. We also redeemed in April 2003, prior to maturity
and at par, our $50 million first mortgage bonds 7.5% Series X due July 1, 2007.
In July 2003, Ameren entered into two new credit agreements for $470
million in revolving credit facilities to be used for general corporate
purposes, including the support of commercial paper programs. The $470 million
in new facilities includes a $235 million 364-day revolving credit facility and
a $235 million three-year revolving credit facility. These new credit facilities
replaced Ameren's existing $270 million 364-day revolving credit facility, which
matured in July 2003, and a $200 million facility, which would have matured in
December 2003. The new credit facilities contain provisions which require Ameren
to meet minimum Employee Retirement Income Security Act (ERISA) funding
requirements for Ameren's pension plan. The prior credit facilities included
more restrictive provisions related to the funded status of Ameren's pension
plan, which are not present in the new facilities. In addition, in July 2003,
Ameren Corporation entered into an amendment of an existing $130 million
multi-year credit facility that similarly modified the ERISA-related provisions
in this facility. As a result, all of Ameren's facilities require it to meet
minimum ERISA funding requirements, but do not otherwise limit the underfunded
status of its pension plan. At July 31, 2003, all of such borrowing capacity
under these facilities was available.
At June 30, 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.
Amortization of debt issuance costs and any premium or discounts were less
than $1 million for the three months ended June 30, 2003 (2002 - $1 million) and
less than $1 million for the six months ended June 30, 2003 (2002 - $1 million)
and were included in interest expense in the income statement.
12
At June 30, 2003, Ameren and its subsidiaries, including us, were in
compliance with their financial agreement provisions and covenants.
NOTE 6 - Miscellaneous, Net
Miscellaneous, net for the three and six months ended June 30, 2003 and
2002 consisted of the following:
- ---------------------------------------------------------------------------------------
Three Months Six Months
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------
Miscellaneous income:
Interest and dividend income $7 $7 $14 $16
Other - - - 1
- ---------------------------------------------------------------------------------------
Total miscellaneous income $7 $7 $14 $17
- ---------------------------------------------------------------------------------------
Miscellaneous expense:
Other $(1) $- $(2) $(1)
- ---------------------------------------------------------------------------------------
Total miscellaneous expense $(1) $- $(2) $(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 and six months ended June 30, 2003 and
2002 was as follows:
- --------------------------------------------------------------------------------
Electric Gas Total
- --------------------------------------------------------------------------------
Three months ended June 30, 2003
- --------------------------------------------------------------------------------
Revenues $ 137 $ 30 $ 167
Operating income 9 - 9
- --------------------------------------------------------------------------------
Three months ended June 30, 2002
- --------------------------------------------------------------------------------
Revenues $ 161 $ 26 $ 187
Operating income 11 - 11
- --------------------------------------------------------------------------------
Six months ended June 30, 2003
- --------------------------------------------------------------------------------
Revenues $ 269 $ 107 $ 376
Operating income 12 4 16
- --------------------------------------------------------------------------------
Six months ended June 30, 2002
- --------------------------------------------------------------------------------
Revenues $ 311 $ 91 $ 402
Operating income 10 4 14
- --------------------------------------------------------------------------------
13
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 principal 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 electric 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 Acquisitions 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 primarily 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. See Acquisitions
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.
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 The financial statements and related notes included in our Quarterly Report
on Form 10-Q for the period ended March 31, 2003.
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, as amended by Form 10-K/A.
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, as
amended by Form 10-K/A.
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. 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 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
14
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. Fluctuations in interest rates impact our cost of borrowings, and pension
and post-retirement benefits. 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.
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 indirect 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 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 three and six
months ended June 30, 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 acquisition cost was approximately $1.4 billion and included the
assumption of CILCORP and Medina Valley debt and preferred stock at closing of
$895 million and consideration of $489 million in cash, net of cash acquired.
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.
RESULTS OF OPERATIONS
Earnings Summary
Our net income decreased to $3 million in the second quarter of 2003 from
$8 million in the second quarter of 2002. The principal reason for the decrease
in net income was milder weather in our service territory ($5 million, net of
taxes) which reduced electric and gas margins. The negative impact of weather on
electric and gas margins was partially offset by increased interchange revenues
($1 million, net of taxes) and decreased interest expense related to lower long
term debt levels ($1 million, net of taxes).
Our net income decreased to $5 million in the first six months of 2003 from
$10 million in the first six months of 2002. In addition to the items discussed
above, net income for the first six months of 2003 benefited from favorable gas
margins, primarily due to increased demand, resulting from colder winter weather
in early 2003. The favorable gas margins in the first six months of 2003 were
partially offset by a decline in the amount of intercompany interest we received
on the Generating Company subordinated promissory note resulting from a lower
principal balance outstanding ($1 million, net of taxes).
15
Electric Operations
The following table represents the favorable (unfavorable) variation on
electric margins for the three and six months ended June 30, 2003 from the
comparable periods in 2002:
- --------------------------------------------------------------------------------
Three Months Six Months
- --------------------------------------------------------------------------------
Electric Revenues:
Effect of weather (estimate) $ (8) $ (3)
Interchange revenues 2 -
Growth and other (estimate) (18) (39)
- --------------------------------------------------------------------------------
Total variation in electric operating revenues $ (24) $ (42)
Purchased power variation: $ 19 $ 38
- --------------------------------------------------------------------------------
Change in electric margin $ (5) $ (4)
- --------------------------------------------------------------------------------
Electric margins decreased $5 million for the three months ended June 30,
2003 and $4 million for the six months ended June 30, 2003 compared to the same
periods in 2002 principally due to cooler-than-normal weather in the second
quarter versus warmer-than normal conditions in the same period in 2002. We had
53% less cooling degree days in the second quarter which resulted in decreases
in residential (18%) and commercial (25%) sales for the three months ending June
30, 2003. However, colder winter weather benefited electric margins in the first
quarter of 2003, reducing the net impact of weather on the first six months of
2003 as compared to the same period in 2002.
Commencing 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. Since then,
several commercial and industrial customers have switched to Marketing Company
for their energy supply resulting in a decline in our revenues and a
corresponding decrease in purchased power of approximately $23 million for the
three months ended June 30, 2003 and $42 million for the six months ended June
30, 2003. We continue to provide electric delivery service to these customers
and charge them Illinois Commerce Commission (ICC) approved delivery service
tariff rates for that service.
Gas Operations
Our gas margins decreased $2 million for the three months ended June 30,
2003 compared to the same period in 2002 primarily due to unfavorable weather.
We had 10% less heating degree days for our service territory for the second
quarter of 2003. For the first six months of 2003 compared to 2002, gas margins
increased $1 million compared to the same period in 2002 primarily due to
increased customer demand resulting from colder winter weather in the first
quarter of 2003.
Other Operating Expenses
Other Operations and Maintenance
Other operations and maintenance expenses decreased $2 million for the
three months and decreased $1 million for the six months ended June 30, 2003,
compared to the same periods in 2002, primarily due to a decrease in
professional services expenses.
Costs of support services provided by Ameren Services, including wages,
employee benefits and professional services, are based on actual costs incurred
and were included in other operations and maintenance expenses. See Note 3 -
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 were comparable for the three months
ended June 30, 2003 compared to the same period in 2002. For the first six
months of 2003, depreciation and amortization increased $1 million compared to
the same period in 2002 primarily resulting from transmission and
distribution-related additions.
16
Income Taxes
Income taxes decreased $1 million for both the three and six months ended
June 30, 2003 compared to the prior year periods primarily due to lower pre-tax
income.
Other Taxes
Other taxes increased $1 million for the three and six months ended June
30, 2003 compared to the same periods in 2002 due to tax refunds received in
2002.
Other Income and Deductions
Other income and deductions (excluding income taxes) decreased $1 million
for the three months ended June 30, 2003 compared to the same period in 2002,
primarily due to a decrease in contributions in aid of construction ($1
million). For the six months ended June 30, 2003, other income and deductions
decreased $4 million compared to the same period in 2002, primarily due to a
decline in intercompany interest we received on the Generating Company
subordinated promissory note resulting from lower principal balance outstanding
($2 million) as well as a decrease in contributions in aid of construction ($2
million).
Interest
Interest expense decreased $1 million for the three months ended June 30,
2003 and $2 million for the six months ended June 30, 2003 compared to the same
periods in 2002, primarily due to less interest expense as a result of the
redemption of first mortgage bonds in the third quarter of 2002 and in the
second quarter of 2003. See Note 5 - Debt Financings to our Financial Statements
under Item 1 of Part I of this report for further information.
LIQUIDITY AND CAPITAL RESOURCES
Operating
Cash provided by operating activities was $57 million in the first six
months of 2003 compared to $15 million in the first six months of 2002. The
increase was primarily due to variations in working capital between the periods.
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.
Investing
Our net cash provided by investing activities was $40 million for the six
months ended June 30, 2003 compared to $17 million for the same period in 2002.
Cash provided by investing activities increased in the first six months of 2003
as a result of principal payments received on our intercompany note receivable
with Generating Company coupled with 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 $96 million for the six
months ended June 30, 2003 as compared to $38 million for the same period in
2002. Our principal financing activities for the six-month periods included the
payment of dividends and the redemption of long-term debt.
17
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.
Debt Issuances and Redemptions
On April 1, 2003, we repaid $40 million of first mortgage bonds 6.375%
Series Z which matured on that date. We also redeemed in April 2003, prior to
maturity and at par, our $50 million first mortgage bonds 7.5% Series X due July
1, 2007.
Short-Term Debt and Liquidity
Short-term debt typically consists of intercompany borrowings through
Ameren's utility money pool. At June 30, 2003, Ameren and its subsidiaries had
committed credit facilities, expiring at various dates through 2005, totaling
$772 million, excluding AmerenCILCO facilities of $59 million, EEI facilities of
$41 million and AmerenUE's nuclear fuel lease facilities of $120 million. This
amount includes $757 million of committed credit facilities at Ameren and
AmerenUE and $15 million of our committed bank lines of credit. We access these
combined facilities through Ameren's utility money pool arrangement. AmerenUE
and Ameren Services may also borrow under this arrangement. Subject to the
receipt of regulatory approval, which is being pursued, AmerenCILCO will also
participate in the utility money pool arrangement. These committed credit
facilities are also used to support Ameren's commercial paper program and
AmerenUE's commercial paper program, under which $177 million was outstanding at
June 30, 2003. At June 30, 2003, $595 million was unused and available under
these committed credit facilities.
In July 2003, Ameren entered into two new credit agreements for $470
million in revolving credit facilities to be used for general corporate
purposes, including the support of commercial paper programs. The $470 million
in new facilities includes a $235 million 364-day revolving credit facility and
a $235 million three-year revolving credit facility. These new credit facilities
replaced Ameren's existing $270 million 364-day revolving credit facility, which
matured in July 2003, and a $200 million facility, which would have matured in
December 2003. The new credit facilities contain provisions which require Ameren
to meet minimum Employee Retirement Income Security Act (ERISA) funding
requirements for its pension plan. The prior credit facilities included more
restrictive provisions related to the funded status of Ameren's pension plan,
which are not present in the new facilities. In addition, in July 2003, Ameren
entered into an amendment of an existing $130 million multi-year credit facility
that similarly modified the ERISA-related provisions in this facility. As a
result, all of Ameren's facilities require it to meet minimum ERISA funding
requirements, but do not otherwise limit the underfunded status of its pension
plan. At July 31, 2003, all of such borrowing capacity under these facilities
was available.
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. Our inability 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
Our financial agreements and those of Ameren include customary default
provisions that could impact the continued availability of credit or result in
the acceleration of repayment. The majority of committed credit facilities of
Ameren and its subsidiaries 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 financing arrangements nor those of
Ameren and its subsidiaries contains credit rating triggers, except for three
funded bank term loans at AmerenCILCO totaling $105 million at June 30, 2003.
At June 30, 2003, Ameren and its subsidiaries, including us, were in
compliance with their financial agreement provisions and covenants.
18
Off-Balance Sheet Arrangements
At June 30, 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.
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 Fixed electric rates in our Illinois service territory;
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; and
o Reductions of 2003 expected capital expenditures.
We are pursuing an annual gas rate increase of approximately $16 million in
Illinois. See Note 2 - Rate and Regulatory Matters to our Financial Statements
under Item 1 of Part I of this report for additional information. Ameren is also
considering additional actions, including modifications to active employee
benefits, further staffing reductions and other initiatives.
International Brotherhood of Electrical Workers (IBEW) labor agreements for
one bargaining unit covering 70% of our workforce expired between April 1 and
July 1, 2003. The principal issues being negotiated with regard to continuation
of these labor agreements are wages, work rules and our proposal to change the
employee medical benefit program to require employees to pay for a greater
portion of their benefit coverage. Changes to the employee medical benefits
program have been agreed to with a joint bargaining committee representing all
unions; however, the changes cannot be implemented without ratification by a
majority of the collective membership of all bargaining units. We are unable to
predict whether the agreements will be ratified or the response of other
union-represented employees to any action by its employees. We are unable to
determine what, if any, impact these labor matters could have on our future
financial condition, results of operations or liquidity.
At December 31, 2002, Ameren recorded a minimum pension liability of $102
million, after taxes, which resulted in a charge to Accumulated Other
Comprehensive Income (Loss)(OCI) and a reduction in stockholders' equity. Our
portion of the minimum pension liability was $13 million, after taxes. Based on
changes in interest rates, Ameren may need to change its actuarial assumptions
for its pension plan at December 31, 2003, which could result in a requirement
to record an additional minimum pension liability.
In the ordinary course of business, we and Ameren evaluate 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.
19
REGULATORY MATTERS
See Note 2 - Rate and Regulatory Matters to our Financial Statements under
Item 1 of Part I of this report for information regarding the proposed transfer
by our affiliate AmerenUE of their Illinois service territory to us, as well as
other regulatory matters.
ACCOUNTING MATTERS
See Note 1 - Summary of Significant Accounting Policies to our Financial
Statements under Item 1 of Part I of this report for information.
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 risk management activities, including those of AmerenCIPS, 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 June 30, 2003, if interest rates
increased by 1%, our annual interest expense and dividends on preferred stock
would increase by less than $1 million and net income would decrease by less
than $1 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
AmerenCIPS, along with other subsidiaries of Ameren, is 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
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. The minimum pension
20
liability did not change at June 30, 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
As of June 30, 2003, the principal executive officer and principal
financial officer of AmerenCIPS have evaluated the effectiveness of the design
and operation of AmerenCIPS' disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Commission Act of
1934, as amended (Exchange Act)). Based upon that evaluation, the principal
executive officer and principal financial officer of AmerenCIPS have concluded
that such disclosure controls and procedures are effective in timely alerting
them to any material information relating to AmerenCIPS, which is required to be
included in AmerenCIPS' reports filed or submitted with the SEC under the
Exchange Act.
(b) Change in Internal Controls
There has been no significant change in AmerenCIPS' internal control over
financial reporting that occurred during AmerenCIPS' most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect,
AmerenCIPS' internal control over financial reporting.
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 delays in or difficulties in connection with the receipt of regulatory
approvals with respect to AmerenUE's plan to discontinue operating as a
public utility subject to ICC regulation and the transferring of AmerenUE's
Illinois-based electric and natural gas businesses to us or unexpected
adverse conditions or terms of those approvals;
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 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;
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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.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
On June 18, 2003, twenty retirees and surviving spouses of retirees of our
parent, Ameren Corporation, or its predecessors or subsidiaries (the plaintiffs)
filed a complaint in the U.S. District Court, Southern District of Illinois,
against Ameren, and its subsidiaries, Union Electric Company, operating as
AmerenUE, Ameren Energy Resources Company, Ameren Energy Generating Company,
Ameren Services Company and us, and against Ameren's Retiree Medical Plan (the
defendants). The retirees were members of various local labor unions of the
International Brotherhood of Electrical Workers (IBEW) and the International
Union of Operating Engineers (IUOE). The complaint alleges the following:
o the labor organizations which represented the plaintiffs have historically
negotiated retiree medical benefits with the defendants and that pursuant
to the negotiated collective bargaining agreements and other negotiated
documents, the plaintiffs are guaranteed medical benefits at no cost or at
a fixed maximum cost during their retirement;
o Ameren has unilaterally announced that, beginning in 2004, retirees must
pay a portion of their own health care premiums and either an increasing
portion of their dependents' premiums or newly imposed dependents'
premiums, and that surviving spouses will be paying increased amounts for
their medical benefits;
o the defendants' actions deprive the plaintiffs of vested benefits and thus
violate the Employee Retirement Income Security Act and the Labor
Management Relations Act of 1947, and constitute a breach of the
defendants' fiduciary duties; and
o the defendants are estopped from changing the plan benefits.
The plaintiffs have filed the complaint on behalf of themselves, other
similarly situated former non-management employees and their surviving spouses
who retired from January 1, 1992 through October 1, 2002, and on behalf of all
subsequent non-management retirees and their surviving spouses whose vested
medical benefits are reduced or are threatened with reduction. The plaintiffs
seek to have this lawsuit certified as a class action, injunctive relief and
declaratory relief, actual damages for any amounts they are made to pay as a
result of the defendants' actions, and payment of attorney fees and costs. On
August 11, 2003, the defendants filed motions to dismiss various counts of the
complaint. We are unable to predict the outcome of this lawsuit or the impact of
the outcome on our financial position, results of operations or liquidity.
Reference is made to Note 12 to the Notes to Financial Statements in Item
8. "Financial Statements and Supplementary Data" in Part II of our 2002 Annual
Report on Form 10-K, to 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, and to Item 1. "Legal Proceedings" in Part II of our Form 10-Q for
the quarterly period ended March 31, 2003, for a discussion of a number of
lawsuits that name our affiliates, AmerenUE and 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 our Form
10-Q for the quarterly period ended March 31, 2003, eleven 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 in Illinois,
involve a large number of total defendants and seek unspecified damages in
excess of $50,000 in each case, 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 March 31, 2003, the Ameren companies have settled one
case. To date, a total of 164 asbestos-related lawsuits have been filed against
the Ameren companies, of which 84 are pending, 17 have been settled and 63 have
been dismissed. Of these 164 lawsuits, we have been specifically named as a
defendant in 60, of which 31 are pending, 8 have been settled and 21 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.
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Note 2 - Rate and Regulatory Matters to our Financial Statements under Item
1 of Part I of this report contains additional information on legal and
administrative proceedings which is incorporated by reference under this item.
ITEM 4. Submission of Matters To a Vote of Security Holders.
At our annual meeting of stockholders held on April 22, 2003, the election
of directors was presented to the meeting for a vote and the results of such
voting are as follows:
Non-Voted
Name For Withheld Brokers
---- --- -------- -------
Paul A. Agathen 25,475,840 474 0
Warner L. Baxter 25,475,872 442 0
Richard A. Liddy 25,475,877 437 0
Richard A. Lumpkin 25,475,872 442 0
Paul L. Miller, Jr. 25,475,877 437 0
Charles W. Mueller 25,475,802 512 0
Douglas R. Oberhelman 25,475,801 513 0
Gary L. Rainwater 25,475,877 437 0
Harvey Saligman 25,475,872 442 0
Thomas R. Voss 25,475,877 437 0
David A. Whiteley 25,475,877 437 0
ITEM 5. Other Information.
Reference is made to Item 2. "Properties" in Part I of our 2002 Annual
Report on Form 10-K for a discussion of our membership in MAIN (Mid-America
Interconnected Network), which is one of the regional electric reliability
councils organized for coordinating the planning and operation of the nation's
bulk power supply. In response to the withdrawal notices filed by Commonwealth
Edison and Illinois Power, also members of MAIN, we, along with our affiliates,
AmerenUE and AmerenCILCO, provided formal written notice to the MAIN Board of
Directors on June 23, 2003 of our intent to withdraw from MAIN effective January
1, 2005. We intend to join another Regional Reliability Organization (RRO) prior
to our withdrawal from MAIN becoming effective. Until our withdrawal is
effective, we will continue to honor all of our obligations as a member of MAIN.
If we do not join another RRO, we may withdraw our notice of intent to withdraw
from MAIN.
Any stockholder proposal intended for inclusion in the proxy material for
our 2004 annual meeting of stockholders must be received by us by November 28,
2003. In addition, under our By-Laws, stockholders who intend to submit a
proposal in person at an annual meeting, or who intend to nominate a director at
a meeting, must provide advance written notice along with other prescribed
information. In general, such notice must be received by our Secretary not later
than 60 nor earlier than 90 days prior to the anniversary of the preceding
year's annual meeting. For our 2004 annual meeting of stockholders, written
notice of any in-person stockholder proposal or director nomination must be
received not later than February 22, 2004 or earlier than January 23, 2004. Our
2004 annual meeting of stockholders is scheduled to be held on April 27, 2004.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed herewith.
31.1 - Rule 13a-14(a)/15d-14(a) Certification of Principal Executive
Officer (required by Section 302 of the Sarbanes-Oxley Act
of 2002).
31.2 - Rule 13a-14(a)/15d-14(a) Certification of Principal Financial
Officer (required by Section 302 of the Sarbanes-Oxley Act
of 2002).
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32.1 - Section 1350 Certification of Principal Executive Officer
(required by Section 906 of the Sarbanes-Oxley Act of 2002).
32.2 - Section 1350 Certification of Principal Financial Officer
(required by Section 906 of the Sarbanes-Oxley Act of 2002).
(b) Reports on Form 8-K. Central Illinois Public Service Company filed the
following report on Form 8-K during the quarterly period ended June
30, 2003:
- --------------------------------------------------------------------------------
Items Financial
Date of Report Reported Statements Filed
- --------------------------------------------------------------------------------
May 30, 2003 5 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 AmerenEnergy Generating Company on Forms 8-K, 10-Q and
10-K are on file with the SEC under File Number 333-56594.
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.
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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: August 14, 2003
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