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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ........ to ........
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
2-95569 CILCORP Inc. 37-1169387
(An Illinois Corporation)
300 Liberty Street
Peoria, Illinois 61602
(309) 677-5230
1-2732 CENTRAL ILLINOIS LIGHT COMPANY 37-0211050
(An Illinois Corporation)
300 Liberty Street
Peoria, Illinois 61602
(309) 677-5230
Indicate by check mark whether the Registrants (1) have 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
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X]. No [ ].
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ]. No [X].
Indicate the number of shares outstanding of each of the issuer's respective
classes of common stock, as of the latest practicable date:
CILCORP Inc. Common stock, no par value,
shares outstanding and privately
held by Ameren Corporation
at August 14, 2003 1,000
CENTRAL ILLINOIS LIGHT COMPANY
Common stock, no par value,
shares outstanding and privately
held by CILCORP Inc. at August 14, 2003 13,563,871
OMISSION OF CERTAIN INFORMATION
CILCORP Inc. meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q as a wholly-owned subsidiary of Ameren Corporation and is
therefore filing this Form 10-Q with the reduced disclosure format allowed under
that General Instruction.
CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CILCORP INC.
Consolidated Balance Sheets 3-4
Consolidated Statements of Operations and
Comprehensive Income 5-6
Consolidated Statements of Cash Flows 7-8
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets 9-10
Consolidated Statements of Income and
Comprehensive Income 11
Consolidated Statements of Cash Flows 12-13
Notes to Consolidated Financial Statements
CILCORP Inc. and Central Illinois Light Company 14-29
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
CILCORP Inc. and Central Illinois Light Company 30-45
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 45-47
Item 4. Controls and Procedures 48
Forward-Looking Statements 48-49
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 50
Item 4. Submission of Matters To a Vote of Security Holders 51
Item 5. Other Information 51
Item 6. Exhibits and Reports on Form 8-K 51-52
Signatures 53
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. 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.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)
Successor Predecessor
June 30, December 31,
2003 2002
ASSETS
Current Assets:
Cash and cash equivalents $ 30,566 | $ 31,821
Receivables, less allowance for |
uncollectible accounts of $2,808 and $1,989 53,514 | 52,982
Receivables, miscellaneous 5,175 | 7,932
Accrued unbilled revenue 26,781 | 37,256
Fuel, at average cost 71,315 | 16,459
Materials and supplies, at average cost 19,830 | 17,691
Gas in underground storage, at average cost 21,078 | 27,209
Prepayments and other 14,430 | 23,748
---------- | ----------
Total Current Assets 242,689 | 215,098
---------- | ----------
Investments and Other Property: |
Investment in leveraged leases 131,186 | 132,874
Other investments 13,471 | 17,850
---------- | ----------
Total Investments and Other Property 144,657 | 150,724
---------- | ----------
Property, Plant and Equipment: |
Utility plant, at original cost |
Electric 991,502 | 739,779
Gas 186,319 | 245,944
---------- | ----------
1,177,821 | 985,723
Less - accumulated provision for depreciation 30,174 | 175,972
---------- | ----------
1,147,647 | 809,751
Construction work in progress 38,795 | 104,571
Other, net of depreciation -- | 22
---------- | ----------
Total Property, Plant and Equipment, net 1,186,442 | 914,344
---------- | ----------
Other Assets: |
Goodwill, and other intangibles |
net of accumulated amortization |
of $208 and $33,753 618,289 | 580,748
Regulatory assets 14,574 | 7,732
Other assets 5,674 | 32,398
---------- | ----------
Total Other Assets 638,537 | 620,878
---------- | ----------
Total Assets $2,212,325 | $1,901,044
========== | ==========
See Notes to Consolidated Financial Statements.
3
CILCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)
Successor Predecessor
June 30, December 31,
2003 2002
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt $ 101,400 | $ 26,750
Short-term debt -- | 10,000
Intercompany notes payable 110,600 | --
Accounts payable 83,363 | 76,332
Accrued taxes 3,774 | 8,105
Accrued interest 13,721 | 18,712
Other 21,977 | 21,427
---------- | ----------
Total Current Liabilities 334,835 | 161,326
---------- | ----------
Long-term debt 716,253 | 791,028
---------- | ----------
Deferred Credits and Other Liabilities: |
Deferred income taxes 300,511 | 189,977
Regulatory liability of regulated subsidiary 17,999 | 19,230
Deferred investment tax credit 12,164 | 12,958
Pension liabilities 131,570 | 106,797
Postretirement health care liabilities 124,533 | 61,513
Other 42,481 | 22,536
---------- | ----------
Total Deferred Credits and Other Liabilities 629,258 | 413,011
---------- | ----------
Preferred stock of subsidiary not subject to |
mandatory redemption 19,120 | 19,120
Preferred stock of subsidiary subject to |
mandatory redemption 22,000 | 22,000
---------- | ----------
Total Preferred Stock of Subsidiary 41,120 | 41,120
---------- | ----------
Stockholder's Equity: |
Common stock, no par value; authorized 10,000 |
outstanding 1,000 -- | --
Additional paid-in capital 489,500 | 519,433
Retained earnings 2,721 | 34,688
Accumulated other comprehensive income (loss) (1,362) | (59,562)
---------- | ----------
Total Stockholder's Equity 490,859 | 494,559
---------- | ----------
Total Liabilities and Stockholder's Equity $2,212,325 | $1,901,044
========== | ==========
See Notes to Consolidated Financial Statements.
4
CILCORP INC. AND SUBSIDIARIES
Consolidated Statements of Operations
and Comprehensive Income
(In thousands)
(Unaudited)
Successor Predecessor
--------------------- -------------------------------------
Three Five Three Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, January June 30, June 30,
2003 2003 2003 2002 2002
Operating Revenues:
CILCO Electric $ 89,405 $148,671 | $ 35,305 $ 94,656 $178,769
CILCO Gas 42,297 111,440 | 44,270 38,181 118,199
CILCO Other 34,667 55,771 | 11,975 28,437 50,187
CILCORP Other 21,077 51,708 | 12,373 11,720 29,721
-------- -------- | -------- -------- --------
Total operating revenues 187,446 367,590 | 103,923 172,994 376,876
-------- -------- | -------- -------- --------
Operating expenses: |
Fuel and purchased power 65,216 109,070 | 24,702 57,774 111,234
Gas 46,658 126,424 | 42,410 32,259 98,150
Other operations and |
maintenance 35,374 54,792 | 12,965 36,203 69,002
Depreciation and |
amortization 20,771 34,769 | 5,941 18,036 36,047
Taxes, other than income |
taxes 9,017 17,332 | 4,299 9,241 21,001
-------- -------- | -------- -------- --------
Total operating expenses 177,036 342,387 | 90,317 153,513 335,434
-------- -------- | -------- -------- --------
Operating income 10,410 25,203 | 13,606 19,481 41,442
-------- -------- | -------- -------- --------
Other income and |
(deductions): |
Allowance for equity funds |
used during construction 18 30 | 5 -- --
Miscellaneous income 101 194 | 46 52 352
Miscellaneous expense (618) (908) | (154) (658) (1,375)
Income taxes 647 1,046 | 206 662 1,349
-------- -------- | -------- -------- --------
Total other income and |
(deductions) 148 362 | 103 56 326
-------- -------- | -------- -------- --------
Interest charges and |
preferred dividends: |
Interest expense 12,535 22,339 | 5,203 16,588 32,854
Allowance for borrowed funds |
used during construction (776) (1,234) | (187) (409) (647)
Preferred stock dividends |
of subsidiary 539 899 | 180 539 1,079
-------- -------- | -------- -------- --------
Total 12,298 22,004 | 5,196 16,718 33,286
-------- -------- | -------- -------- --------
5
Income (loss) from
continuing operations
before income taxes (1,740) 3,561 | 8,513 2,819 8,482
Income taxes (1,384) 840 | 3,128 699 2,347
-------- -------- | -------- -------- --------
Net income (loss) from |
continuing operations |
before cumulative |
effect of change in |
accounting principle (356) 2,721 | 5,385 2,120 6,135
Loss from operations of |
discontinued businesses, |
net of tax of $(3) and |
$(8) -- -- | -- (3) (12)
Cumulative effect of change |
in accounting principle, |
net of income taxes -- -- | 3,818 -- --
-------- -------- | -------- -------- --------
Net income (loss) $ (356) $ 2,721 | $ 9,203 $ 2,117 $ 6,123
|
Other comprehensive income |
(loss) (50) (1,362) | 350 (440) 5,024
-------- -------- | -------- -------- --------
Comprehensive income (loss) $ (406) $ 1,359 | $ 9,553 $ 1,677 $ 11,147
======== ======== | ======== ======== ========
See Notes to Consolidated Financial Statements.
6
CILCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Successor Predecessor
------------- ------------------------------
Five Months Six Months
Ended January Ended
June 30, 2003 2003 June 30, 2002
Cash flows from operating:
Net income $ 2,721 | $ 9,203 $ 6,135
Adjustments to reconcile net income to net |
cash provided by operating activities: |
Cumulative effect of change in |
accounting principle -- | (3,818) --
Depreciation and amortization 34,769 | 5,941 36,047
Allowance for funds used during |
construction (1,265) | (192) (647)
Non-cash leveraged lease and |
affordable housing income (2,143) | (297) (2,060)
Cash receipts in excess of debt service |
on leases 2,518 | 1,410 3,402
Deferred income taxes, net (3,781) | (6,824) 6,820
Deferred investment tax credits, net (662) | (132) (798)
Changes in assets and liabilities: |
Accounts receivable and |
unbilled revenue 37,355 | (24,901) 8,722
Inventories (5,805) | 10,740 12,960
Accounts payable (36,970) | 15,168 (10,749)
Accrued taxes (3,511) | 11,073 (1,494)
Assets, other (8,653) | 11,709 (2,171)
Liabilities, other 4,116 | 2,722 (5,124)
--------- | -------- --------
Net cash provided by operating |
activities from continuing |
operations 18,689 | 31,802 51,043
--------- | -------- --------
Net cash used in |
operating activities of |
discontinued operations -- | -- (7)
--------- | -------- --------
Net cash provided by operating |
activities 18,689 | 31,802 51,036
--------- | -------- --------
Cash flows from investing: |
Construction expenditures (38,354) | (15,906) (63,051)
Allowance for funds used during |
construction 1,265 | 192 647
Other 4,458 | (305) (786)
--------- | -------- --------
Net cash used in investing activities (32,631) | (16,019) (63,190)
--------- | -------- --------
|
7
Cash flows from financing: |
Redemptions: |
Short-term debt -- | (10,000) (27,000)
Long-term debt (103,696) | -- 100,000
|
Issuances: |
Intercompany notes payable 110,600 | -- --
--------- | -------- --------
Net cash provided by (used in) |
financing activities 6,904 | (10,000) 73,000
|
Net change in cash and |
cash equivalents (7,038) | 5,783 60,846
Cash and cash equivalents |
at beginning of period 37,604 | 31,821 18,182
--------- | -------- --------
Cash and cash equivalents at |
end of period $ 30,566 | $ 37,604 $ 79,028
========= | ======== ========
|
Cash paid during the period for: |
|
Interest $ 8,539 | $ 5,413 $ 36,490
|
Income taxes $ 9,428 | $ -- $ 88
See Notes to Consolidated Financial Statements.
8
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
(Unaudited)
June 30, December 31,
ASSETS 2003 2002
Utility Plant, At Original Cost:
Electric $1,470,196 $1,349,153
Gas 469,678 469,831
---------- ----------
1,939,874 1,818,984
Less - accumulated provision for depreciation 1,025,292 1,033,095
---------- ----------
914,582 785,889
Construction work in progress 38,794 104,571
---------- ----------
Total Utility Plant 953,376 890,460
---------- ----------
Other Property and Investments:
Cash surrender value of corporate-owned life
insurance (net of related policy loans of
$73,987 and $69,634) 3,901 4,268
Other 892 892
---------- ----------
Total Other Property and Investments 4,793 5,160
---------- ----------
Current Assets:
Cash and temporary cash investments 7,728 22,256
Receivables, less allowance for
uncollectible accounts of $2,802 and $1,989 47,557 47,179
Receivables, miscellaneous 5,131 7,136
Accrued unbilled revenue 23,669 32,162
Fuel, at average cost 17,743 16,459
Materials and supplies, at average cost 17,338 16,411
Gas in underground storage, at average cost 21,078 27,209
Prepaid taxes 3,628 886
Other 8,001 23,679
---------- ----------
Total Current Assets 151,873 193,377
---------- ----------
Deferred Debits:
Regulatory assets 14,574 7,732
Unamortized debt expense 1,049 1,581
Prepaid pension cost 7,250 7,250
Other 3,209 3,441
---------- ----------
Total Deferred Debits 26,082 20,004
---------- ----------
Total Assets $1,136,124 $1,109,001
========== ==========
See Notes to Consolidated Financial Statements
9
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Balance Sheets
(In thousands)
(Unaudited)
June 30, December 31,
CAPITALIZATION AND LIABILITIES 2003 2002
Capitalization:
Common Stockholder's Equity:
Common stock, no par value; authorized
20,000,000 shares; outstanding
13,563,871 shares $ 185,661 $ 185,661
Additional paid-in capital 52,000 52,000
Retained earnings 131,069 113,775
Accumulated other comprehensive income (loss) (29,734) (28,722)
----------- -----------
Total Common Stockholder's Equity 338,996 322,714
Preferred stock not subject to mandatory
redemption 19,120 19,120
Preferred stock subject to mandatory
redemption 22,000 22,000
Long-term debt 141,231 316,028
----------- -----------
Total Capitalization 521,347 679,862
----------- -----------
Current Liabilities:
Current maturities of long-term debt 101,400 26,750
Short-term debt -- 10,000
Intercompany notes payable 98,900 --
Accounts payable 71,769 67,950
Accrued taxes 4,504 17,607
Accrued interest 4,760 9,437
Other 21,977 21,427
----------- -----------
Total Current Liabilities 303,310 153,171
----------- -----------
Deferred Liabilities and Credits:
Accumulated deferred income taxes 106,663 95,389
Regulatory liability 17,999 19,230
Investment tax credits 12,164 12,958
Pension liabilities 93,420 85,056
Postretirement health care liability 50,575 41,333
Other 30,646 22,002
----------- -----------
Total Deferred Liabilities and Credits 311,467 275,968
----------- -----------
Total Capitalization and Liabilities $ 1,136,124 $ 1,109,001
=========== ===========
See Notes to Consolidated Financial Statements.
10
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Income
and Comprehensive Income
(In thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Operating revenues:
Electric $ 89,405 $ 94,656 $183,976 $178,769
Gas 42,297 38,181 155,710 118,199
-------- -------- -------- --------
Total operating revenues 131,702 132,837 339,686 296,968
-------- -------- -------- --------
Operating expenses:
Fuel 19,742 24,295 45,398 46,325
Gas 26,809 22,364 107,021 71,972
Purchased power 13,633 12,517 25,976 24,047
Other operations and maintenance 37,851 35,417 72,687 66,863
Depreciation and amortization 18,584 17,681 36,710 35,345
Income taxes 1,202 2,143 8,961 7,655
Other taxes 8,926 9,168 21,516 20,908
-------- -------- -------- --------
Total operating expenses 126,747 123,585 318,269 273,115
-------- -------- -------- --------
Operating income 4,955 9,252 21,417 23,853
-------- -------- -------- --------
Other income and deductions:
Cost of equity funds capitalized 18 -- 35 --
Corporate-owned life insurance, net (384) (325) (755) (667)
Other, net 2,573 4,584 3,215 5,388
-------- -------- -------- --------
Total other income and
deductions 2,207 4,259 2,495 4,721
-------- -------- -------- --------
Interest expenses:
Interest on long-term debt 3,532 4,387 8,331 8,754
Cost of borrowed funds capitalized (776) (409) (1,421) (647)
Other 687 979 1,203 2,029
-------- -------- -------- --------
Total interest expense 3,443 4,957 8,113 10,136
-------- -------- -------- --------
Net income before preferred dividends 3,719 8,554 15,799 18,438
Dividends on preferred stock 539 539 1,079 1,079
-------- -------- -------- --------
Income available for common stock
before cumulative effect of
change in accounting principle 3,180 8,015 14,720 17,359
Cumulative effect of change in
accounting principle, net of
income taxes -- -- 24,080 --
-------- -------- -------- --------
Income available for common stock $ 3,180 $ 8,015 $ 38,800 $ 17,359
Other comprehensive income (loss) (50) (440) (1,012) 5,024
-------- -------- -------- --------
Comprehensive income $ 3,130 $ 7,575 $ 37,788 $ 22,383
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
11
CENTRAL ILLINOIS LIGHT COMPANY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
2003 2002
Cash flows from operating:
Net income $ 38,800 $ 17,359
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of change in accounting principle (24,080) --
Depreciation and amortization 36,710 35,345
Allowance for funds used during construction (1,457) (647)
Deferred income taxes, net 9,872 7,611
Deferred investment tax credits, net (794) (798)
Changes in assets and liabilities:
Receivables, net 1,627 (1,771)
Inventories 3,920 12,590
Unbilled revenue 8,493 10,667
Accounts payable 3,819 (23,293)
Accrued taxes and interest (33,614) 5,666
Assets, other 7,845 (2,845)
Liabilities, other 20,611 (2,505)
--------- --------
Net cash provided by operating activities 71,752 57,379
--------- --------
Cash flows from investing:
Construction expenditures (54,259) (63,051)
Allowance for funds used during construction 1,457 647
Other (522) (1,451)
--------- --------
Net cash used in investing activities (53,324) (63,855)
--------- --------
Cash flows from financing:
Dividends on common stock (21,506) (28,000)
Redemptions:
Short-term debt (10,000) (7,000)
Long-term debt (100,350) --
Issuances:
Intercompany notes payable 98,900 --
Long-term debt -- 100,000
--------- --------
Net cash (used in) provided by financing activities (32,956) 65,000
--------- --------
12
Net change in cash and
cash equivalents
(14,528) 58,524
Cash and cash equivalents at
beginning of period 22,256 12,454
--------- --------
Cash and cash equivalents at
end of period $ 7,728 $ 70,978
========= ========
Cash paid during the periods:
Interest $ 13,957 $ 14,909
Income taxes, net $ 10,696 $ 1,167
See Notes to Consolidated Financial Statements.
13
CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Summary of Significant Accounting Policies
General
The consolidated financial statements include the accounts of CILCORP Inc. (the
Holding Company); Central Illinois Light Company (CILCO or AmerenCILCO); QST
Enterprises Inc. (QST) and its subsidiaries, QST Energy Inc. (QST Energy) and
CILCORP Infraservices Inc. (CILCORP Infraservices), which operates as
AmerenCILCO Infraservices; and CILCORP Inc.'s other subsidiaries (collectively,
CILCORP or the Company) after elimination of significant intercompany
transactions. In the fourth quarter of 1998, the operations of QST and its
subsidiaries (excluding ESE Land Corporation and CILCORP Infraservices) were
discontinued and, therefore, are being reported as discontinued operations in
the financial statements through December 2002. Prior year amounts have been
reclassified on a basis consistent with the 2003 presentation.
CILCO, the Holding Company's principal business subsidiary, is engaged in the
generation, transmission, distribution and sale of electric energy in an area of
approximately 3,700 square miles in central and east-central Illinois, and the
purchase, distribution, transportation and sale of natural gas in an area of
approximately 4,500 square miles in central and east-central Illinois. Other
Holding Company first-tier subsidiaries are CILCORP Investment Management Inc.
(CIM), which manages the Company's investment portfolio and CILCORP Ventures
Inc. (CVI), which pursues investment opportunities in energy-related products
and services.
The Holding Company is a wholly-owned subsidiary of Ameren Corporation (Ameren).
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. Ameren's principal subsidiaries,
including Central Illinois Light Company, 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 Public Service Company, which operates a rate-regulated
electric and natural gas transmission and distribution business in Illinois
as AmerenCIPS.
o Central Illinois Light Company, a subsidiary of CILCORP Inc., 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 Acquisition for further information.
14
o AmerenEnergy Resources Company (Resources Company), which consists of non
rate-regulated electric 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's 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 the acquisition of AES Medina Valley
Cogen (No. 4), LLC and renamed it AmerenEnergy Medina Valley Cogen (No. 4),
LLC.
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 CILCORP. Charges are
based upon the actual costs incurred by Ameren Services as required by the
PUHCA.
Throughout this document, CILCORP or the Company refers to CILCORP Inc. and its
subsidiaries on a consolidated basis. CILCO refers to Central Illinois Light
Company.
The accounting policies of CILCORP conform to generally accepted accounting
principles in the United States (GAAP). CILCORP's financial statements reflect
all adjustments (which include normal, recurring adjustments) necessary, in the
Company's opinion, for a fair presentation of interim results. These statements
should be read in conjunction with the financial statements and the notes
thereto included in CILCORP and CILCO's 2002 Annual Report on Form 10-K.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the 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 reporting period. Actual results could differ from those
estimates.
Acquisition
On January 31, 2003, Ameren completed its acquisition of all of the outstanding
common stock of CILCORP Inc. from The AES Corporation (AES). CILCORP Inc. is the
parent company of 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. The results of operations
for CILCORP (including its subsidiaries) were included in Ameren's consolidated
financial statements effective with the acquisition date.
Ameren acquired CILCORP to complement its existing Illinois gas and electric
operations. The purchase included CILCO's rate-regulated electric and natural
gas business 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 Ameren's service
territory. CILCO also has a non rate-regulated electric and gas marketing
15
business principally focused in the Chicago, Illinois region. Finally, the
purchase included CILCO's 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, including the
assumption of CILCORP debt and preferred stock of approximately $859 million.
Financial Statement Presentation
The acquisition was accounted for using the purchase method of accounting. Under
this method, the purchase price was allocated to the fair market value of the
assets acquired and the liabilities assumed of CILCORP. The excess purchase
price over the fair value of the assets acquired and the liabilities assumed was
allocated to goodwill at CILCORP Inc. As a result, CILCORP Inc. has recorded
purchase accounting fair value adjustments to electric plant in service, pension
and other postretirement liabilities, long-term debt, emission allowances
(included in Fuel, at average cost on the consolidated balance sheet), coal
contracts, and other balance sheet items. Ameren is in the process of completing
a third party valuation of acquired property and plant and intangible assets.
Therefore, the allocation of the purchase price to the acquired net assets is
subject to refinement. The excess of the purchase price over tangible net assets
acquired has been allocated preliminarily to goodwill in the amount of $603
million at CILCORP.
The purchase accounting entries are reflected on CILCORP's financial statements
as of the acquisition date. As permitted by rules of the SEC, the Company did
not "push down" the effects of purchase accounting to the financial statements
of any of Holding Company's subsidiaries, including CILCO. Accordingly,
CILCORP's post-acquisition financial statements reflect a new basis of
accounting, and separate financial statements are presented for pre-acquisition
(predecessor) and post-acquisition (successor) periods, separated by a heavy
black line. CILCO's financial statements are presented on their historical basis
of accounting for all periods presented.
Accounting Changes and Other Matters
Statement of Financial Accounting Standards (SFAS) No. 143 - "Accounting for
Asset Retirement Obligations"
The Company 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 CILCORP 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, the Company is 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 the
Company's estimate of fair value.
Upon adoption of this standard, CILCO recognized asset retirement obligations of
approximately $5.6 million related primarily to retirement costs for ash ponds
at the Duck Creek power plant, and a net increase in net property and plant of
approximately $45.6 million due to elimination of non-legal
16
obligation costs of removal for non rate-regulated assets from accumulated
depreciation. As a result, CILCO recognized a net after-tax gain upon adoption
of $24.1 million.
Upon adoption of this standard effective January 1, 2003, CILCORP recognized
asset retirement obligations of approximately $5.6 million related to retirement
costs for ash ponds at the Duck Creek power plant, and a net increase in net
property and plant of approximately $11.9 million due to elimination of
non-legal obligation costs of removal for non rate-regulated assets from
accumulated depreciation. As a result, predecessor CILCORP recognized a net
after-tax gain upon adoption of $3.8 million. Similar to the treatment applied
by Ameren in the acquisition of CILCORP, AES recorded purchase accounting at the
CILCORP level following its 1999 acquisition of CILCORP, but did not "push down"
the purchase accounting to any of the Holding Company's subsidiaries, including
CILCO. Accordingly, accumulated depreciation, including the embedded cost of
removal liabilities, was reset to zero in purchase accounting for CILCORP while
CILCO continued to carry property, plant and equipment and the related
accumulated depreciation on a historical basis. As a result, the gain upon
adoption of SFAS 143 recognized by CILCO exceeded the gain recognized by CILCORP
as the cost of removal liabilities reversed by CILCORP upon adoption of SFAS 143
included only those liabilities recorded since the 1999 AES acquisition.
In addition to those obligations that were identified and valued, the Company
determined that certain other asset retirement obligations exist. However,
management is unable to estimate the fair value of those obligations because the
probability, timing or cash flows associated with the obligations are
indeterminable. Management does not believe that these obligations, when
incurred, will have a material adverse impact on CILCORP's financial position,
results of operations or liquidity.
SFAS 143 required a change in the depreciation methodology the Company
historically utilized for non-regulated operations. Historically, the Company
included an estimated cost of dismantling and removing plant from service upon
retirement in the basis upon which depreciation rates were determined. SFAS 143
required the Company to exclude costs of dismantling and removal upon retirement
from the depreciation rates applied to non rate-regulated plant balances.
Further, the Company was required to remove accumulated provisions for
dismantling and removal costs from accumulated depreciation, where they were
embedded, and reflect such adjustment as a gain upon adoption of this standard,
to the extent such dismantling and removal activities are not considered legal
asset retirement obligations as defined by SFAS 143. At CILCO, the elimination
of cost of removal in excess of anticipated salvage proceeds from accumulated
depreciation resulted in a gain, as noted above, of $24.1 million, net of taxes,
for a change in accounting principle. As noted above, the gain for CILCORP on a
consolidated basis was only $3.8 million, net of taxes, due to the reset of
accumulated depreciation at the time of AES' acquisition of CILCORP in 1999.
Beginning in January 2003, depreciation rates for non rate-regulated assets were
reduced to reflect the discontinuation of the accrual of dismantling and removal
costs. In addition, non rate-regulated asset removal costs will prospectively be
expensed as incurred. As a result, the impact of this change in accounting will
result in a decrease in depreciation expense and an increase in operations and
maintenance expense, the net impact of which is indeterminable, but not expected
to be material.
Like the methodology employed by the Company's non rate-regulated operations,
the depreciation methodology historically utilized by the rate-regulated
operations 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 CILCO's present utility rates are
based, and with the expectation that this practice will continue in the
17
jurisdictions in which CILCO operates, adoption of SFAS 143 did not result in
any change in the depreciation accounting practices of CILCO's rate regulated
operations. CILCO's estimated future removal costs embedded in accumulated
depreciation related to rate-regulated plant assets were approximately $145.1
million at June 30, 2003. As a result of the reset of accumulated depreciation
upon Ameren's acquisition of CILCORP, estimated future removal costs embedded in
accumulated depreciation at CILCORP consolidated are only $4.2 million at June
30, 2003.
Emerging Issues Task Force (EITF) Issue No. 02-3 and EITF Issue No. 98-10
In the quarters ended September 30, 2002 and December 31, 2002, we adopted the
provisions of EITF 02-3, "Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy Trading and Risk
Management Activities," that require revenues and costs associated with certain
energy contracts to be shown on a net basis in the income statement. The Company
had no contracts requiring restatement.
In October 2002, the EITF reached a consensus to rescind EITF 98-10. The
effective date for the full rescission of EITF 98-10 was for fiscal periods
beginning after December 15, 2002, with early adoption permitted. In addition,
the EITF reached a consensus in October 2002 that all SFAS No. 133 ("Accounting
for Derivative Instruments and Hedging Activities") trading derivatives
(subsequent to the rescission of EITF 98-10) should be shown net in the income
statement, whether or not physically settled. This consensus applies to all
energy and non-energy related trading derivatives that meet the definition of a
derivative pursuant to SFAS 133. The Company adopted and applied this guidance
to 2002 and 2001, which had no impact on previously reported revenues or costs.
SFAS No. 148 - "Accounting for Stock-Based Compensation - Transition and
Disclosures"
In December 2002, the FASB issued SFAS 148. SFAS 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It also amends
the disclosure provisions to require disclosure about the effects on reported
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation.
Employees of the Company previously participated in the AES Stock Option Plan
that provided for grants of stock options to eligible participants. As permitted
under SFAS 123, the Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees" in accounting for this plan. As the exercise price of all
stock options were equal to their fair market value at the time the options are
granted, the Company did not recognize any compensation expense related to the
plan using the intrinsic value based method. Had compensation expense been
recognized using the fair value based method under SFAS 123, the Company's
consolidated earnings under the predecessor basis would have decreased by $2.7
million, $1.4 million, and $.3 million in 2002, 2001, and 2000, respectively.
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS 123 by using the prospective method of adoption under SFAS
148. Because no stock options have been granted since January 1, 2003, SFAS 148
did not have any effect on the Company's financial position, results of
operations or liquidity in the first six months of 2003.
18
SFAS No. 149 - "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities"
In April 2003, the FASB issued SFAS 149. SFAS 149 clarifies under what
circumstances a contract with initial net investment meets the characteristic of
a derivative as discussed in SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 149 is effective for hedging relationships
designated and contracts entered into or modified after June 30, 2003. The
Company does not expect SFAS 149 to have any impact on its financial position,
results of operations or liquidity in the third quarter of 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. AmerenCILCO has $22
million of preferred stock subject to mandatory redemption that will be
classified as long-term debt in the third quarter of 2003. Effective July 1,
2003, this preferred stock is redeemable at par at any time and therefore, there
is no difference between book value and fair value.
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, the Company
is assessing the impact of FIN 46 on its financial position, results of
operations, or liquidity upon adoption in the third quarter of 2003.
19
NOTE 2. Contingencies
On May 11, 2001, CILCO and Enron Power Marketing, Inc. (EPMI), a subsidiary of
Enron Corp. (Enron), entered into a new Master Agreement for electric purchases
and sales, which covered energy transactions scheduled for deliveries during the
period of 2001-2003. On November 28, 200l, EPMI demanded that CILCO post $28
million in collateral based on mark-to-market exposure of open transactions. On
November 30, 2001, CILCO notified EPMI that events of default had occurred under
the Master Agreement and pursuant to the termination provisions of the Master
Agreement declared the Master Agreement terminated effective December 20, 2001.
Due to contractual provisions and EPMI's and Enron's actions, management does
not believe that it is probable that CILCO will be required to pay any amount to
Enron or its affiliates and has therefore recorded no liability for undelivered
electric purchases. Enron and EPMI filed Chapter 11 bankruptcy petitions on
December 2, 2001, in the U. S. Bankruptcy Court for the Southern District of New
York. Thereafter, CILCO purchased replacement power to serve its retail
customers, which had previously been partially supported by the EPMI
transactions. While the ultimate outcome is unpredictable, management does not
believe that EPMI's defaults under the Master Agreement, its filing for
bankruptcy protection, CILCO's termination of the Master Agreement, or CILCO's
purchase of replacement electricity will have a material adverse effect on
CILCORP's or CILCO's financial position, cash flows or results of operations.
On December 10, 2002, EPMI filed a complaint against AES, Constellation New
Energy, Inc., f/k/a AES New Energy Inc. and CILCO in the United States
Bankruptcy Court for the Southern District of New York. With respect to CILCO,
EPMI alleges that it is owed $31.2 million under the Master Agreement. CILCO
disputes that it owes any amount to EPMI based on the clear language of the
Master Agreement, Section 553 of the Bankruptcy Code and EPMI's misconduct prior
to entering the Master Agreement and continuing through the date of its
bankruptcy filing. AES has agreed to undertake CILCO's defense in this
proceeding and intends to vigorously contest these claims. Due to CILCO's
contractual and other defenses to EPMI's claims, as well as certain provisions
related to the sale of CILCO to Ameren, management does not believe the results
of this litigation will have a material adverse effect on CILCORP's financial
position, cash flows or results of operation. EPMI's claim against CILCO is
currently in court ordered mediation.
On May 4, 2001, CILCO and Enron subsidiary Enron North America Corp. (ENA)
entered into a natural gas transaction for daily deliveries not to exceed 10,000
MMBtu per day during calendar year 2002. CILCO received no natural gas
deliveries pursuant to this transaction in 2002. On October 24, 2001, CILCO and
ENA entered into a short-term natural gas transaction giving CILCO the right to
call upon ENA for the delivery of 10,000 MMBtu per day during the period from
November 1, 2001, through March 31, 2002. Since late November 2001, ENA has been
unable to deliver natural gas when called upon by CILCO. ENA's failure to
deliver natural gas is an event of default under the Master Firm Sales Agreement
governing the October transaction. On December 2, 2001, ENA filed a Chapter 11
bankruptcy petition in the U. S. Bankruptcy Court for the Southern District of
New York. To the extent that it has been necessary, CILCO has purchased
replacement natural gas. Because these transactions: (i) were part of a larger
and more diversified natural gas supply portfolio subject to inclusion in
CILCO's Purchased Gas Adjustment (PGA), (ii) concluded in accordance with their
terms and conditions, and (iii) do not form the basis of any claim made by ENA,
EPMI, or Enron in their bankruptcy proceedings or in any other forum, management
does not believe ENA's failure to supply natural gas or its subsequent
bankruptcy filing will have a material adverse effect on CILCORP's or CILCO's
financial position, cash flows or results of operations.
20
NOTE 3. Rate and Regulatory Matters
Gas Rate Case
In November 2002, CILCO filed a request with the Illinois Commerce Commission
(ICC) to increase annual rates for natural gas service by approximately $14
million. The ICC Staff has recommended the annual increase to be $9 million. In
addition, other parties have proposed a lower increase. Hearings were completed
in June 2003. In August, the Administrative Law Judge in the CILCO gas rate
proceeding recommended to the ICC the adoption of a Proposed Order to increase
annual rates for natural gas service by $10 million at CILCO. The ICC has until
October 2003 to render a decision in this gas case. Any rate change is expected
to be effective November 2003.
Standard Market Design Notice of Proposed Rulemaking (NOPR)
On July 31, 2002, the Federal Energy Regulatory Commission (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
a Regional Transmission Organization (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 the implementation schedule
is unknown, the Midwest Independent System Operator (Midwest ISO), of which
CILCO is a member, is already in the process of implementing a market design
similar to the proposed market design in the NOPR. In July 2003, the Midwest ISO
filed with the FERC a revised Open Access Transmission Tariff (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.
The Company is in the process of 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, the Company is unable to predict the ultimate
impact the new market design will have on its future financial position, results
of operations or liquidity.
NOTE 4. Accounting for Price Risk Management Activities
Gains/losses on derivatives that hedge non rate-regulated activities are
reflected in operating results when the hedged transaction affects earnings. The
net gain reflected in operating results from derivative financial instruments
for non rate-regulated activities for the quarter ended June 30, 2003, was $0.2
million for natural gas (included in Gas operating expenses). There were no
outstanding derivative financial instruments for electricity during the quarter
ended June 30, 2003. The previously recorded gain/loss associated with these
settled derivative financial instruments was removed from Other Comprehensive
Income (OCI) when hedged transactions affected earnings. All open derivative
positions hedging anticipated transactions are then marked-to-market with the
change in fair value being recorded in OCI. The net effect of these adjustments
was $0 for the quarter ended June 30, 2003. A purchase accounting entry was
recorded at CILCORP in the amount of $1.7 million during the first quarter of
2003 to eliminate the balance in OCI that existed at the acquisition date. The
after-tax balance in OCI associated with these open derivative positions and
unrealized gains/losses on settled
21
positions which related to hedged anticipated transactions at June 30, 2003, was
a loss of $1.4 million at CILCORP and a gain of $0.3 million at CILCO. The
corresponding asset is reflected on the balance sheet in Prepayments and Other.
The portion of OCI for open positions reflects hedges of natural gas sales of
4,020,000 MMBtu for commitments through November 2004. Approximately $1.4
million of OCI related to derivative financial instruments at CILCORP as of June
30, 2003, is expected to be recognized as a decrease to operating earnings over
the next twelve months based on market prices as of June 30, 2003. Approximately
$0.3 million of OCI at CILCO related to derivative financial instruments as of
June 30, 2003, is expected to be recognized as an increase to operating earnings
over the next twelve months based on market prices as of June 30, 2003. The
actual amount recognized in earnings will be based on the market conditions at
the time the derivatives are settled.
During the second quarter of 2003, there were no outstanding derivatives
relating to the Company's rate-regulated gas business.
22
NOTE 5. Other Comprehensive Income
2003 Rollforward of Accumulated Other Comprehensive Income - CILCORP
Pension SFAS 133 Total
(In thousands)
Predecessor
Accumulated other comprehensive income
(loss) - December 31, 2002 balance $(60,866) $ 1,304 $(59,562)
Other comprehensive income - January 2003 -- 350 350
-------- -------- --------
Accumulated other comprehensive income
(loss) - January 31, 2003 balance $(60,866) $ 1,654 $(59,212)
======== ======== ========
- --------------------------------------------------------------------------------
Successor
Accumulated other comprehensive income
(loss) - January 31, 2003 balance $ -- $ -- $ --
Other comprehensive income -
Two months ended March 31, 2003 -- (1,312) (1,312)
-------- -------- --------
Accumulated other comprehensive income
(loss) - March 31, 2003 $ -- $ (1,312) $ (1,312)
Other comprehensive income -
Three months ended June 30, 2003 -- (50) (50)
-------- -------- --------
Accumulated other comprehensive income
(loss) - June 30, 2003 $ -- $ (1,362) $ (1,362)
======== ======== ========
2002 Rollforward of Accumulated Other Comprehensive Income - CILCORP
Pension SFAS 133 Total
(In thousands)
Predecessor
Accumulated other comprehensive
loss - December 31, 2001 balance $ (9,333) $ (4,693) $(14,026)
Other comprehensive income -
Three months ended March 31, 2002 -- 5,464 5,464
-------- -------- --------
Accumulated other comprehensive income
(loss) - March 31, 2002 balance $ (9,333) $ 771 $ (8,562)
Other comprehensive income -
Three months ended June 30, 2002 -- (440) (440)
-------- -------- --------
Accumulated other comprehensive income
(loss) - June 30, 2002 balance $ (9,333) $ 331 $ (9,002)
======== ======== ========
23
2003 Rollforward of Accumulated Other Comprehensive Income - CILCO
Pension SFAS 133 Total
(In thousands)
Accumulated other comprehensive income
(loss) - December 31, 2002 balance $(30,026) $ 1,304 $(28,722)
Other comprehensive income -
Three months ended March 31, 2003 -- (962) (962)
-------- -------- --------
Accumulated other comprehensive income
(loss) - March 31, 2003 balance $(30,026) $ 342 $(29,684)
Other comprehensive income -
Three months ended June 30, 2003 -- (50) (50)
-------- -------- --------
Accumulated other comprehensive income
(loss) - June 30, 2003 balance $(30,026) $ 292 $(29,734)
======== ======== ========
2002 Rollforward of Accumulated Other Comprehensive Income - CILCO
Accumulated other comprehensive
loss - December 31, 2001 balance $ (1,112) $ (4,693) $ (5,805)
Other comprehensive income -
three months ended March 31, 2002 -- 5,464 5,464
-------- -------- --------
Accumulated other comprehensive income
(loss) - March 31, 2002 balance $ (1,112) $ 771 $ (341)
Other comprehensive income -
Three months ended June 30, 2002 -- (440) (440)
-------- -------- --------
Accumulated other comprehensive income
(loss) - June 30, 2002 balance $ (1,112) $ 331 $ (781)
======== ======== ========
24
NOTE 6. Debt Financings
On February 10, 2003, AmerenCILCO repaid $25.4 million first mortgage bonds
6.82% Series which matured on that date. In April 2003, three series of
AmerenCILCO's first mortgage bonds were redeemed, prior to maturity. These
included AmerenCILCO's $65 million principal amount 8.20% Series due January 15,
2022, at a redemption price of 103.29% and two 7.8% Series totaling $10 million
principal amount due February 9, 2023, at a redemption price of 103.90%.
NOTE 7. Miscellaneous
The following table summarizes CILCORP's miscellaneous income and expense by
component.
Successor Predecessor
-------------------- --------------------------------
Three Five Three Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, January June 30, June 30,
2003 2003 2003 2002 2002
(In thousands)
Miscellaneous income:
Interest and dividend income $ 101 $ 194 | $ 46 $ 52 $ 352
------ ----- | ----- ----- -------
Total miscellaneous income $ 101 $ 194 | $ 46 $ 52 $ 352
====== ===== | ===== ===== =======
|
Miscellaneous expense: |
Corporate-owned life |
insurance $ (384) $(627) | $(128) $(325) $ (667)
Donations (100) (130) | (5) (196) (421)
Other (134) (151) | (21) (137) (287)
------ ----- | ----- ----- -------
Total miscellaneous expense $ (618) $(908) | $(154) $(658) $(1,375)
====== ===== | ===== ===== =======
NOTE 8. Related Party Transactions
CILCORP has transactions in the normal course of business with Ameren and its
other subsidiaries. The transactions are primarily comprised of gas and
electricity purchases and sales, as well as other services received or rendered.
Under a non-derivative, executory tolling agreement and gas sales and transport
agreements, CILCORP sells and transports gas to, and purchases steam, chilled
water and electricity from AmerenEnergy Medina Valley Cogen (No. 4), LLC. During
the first six months of 2003, CILCORP purchased $15.5 million and sold $9.7
million under these agreements. As of June 30, 2003, CILCORP had recorded
Accounts Payable of $1.7 million and Receivables of $1.3 million, related to
these transactions. The current receivable was recorded in Accrued Unbilled
Revenue on the CILCORP Balance Sheet.
CILCO also has a power purchase agreement with AmerenCIPS for 100 MW of capacity
and firm energy for the months of January and June through September
2003. CILCO purchased $1.3 million and $1.6 million of power under this
agreement in January 2003 and June 2003, respectively. CILCO also had power
25
purchases ($1.2 million) and sales ($.1 million) transactions with AmerenEnergy
in the first five months of 2003. At June 30, 2003, CILCO recorded a liability
of $.6 million, included in Accounts Payable on the balance sheet relative to
these transactions.
Costs of support services provided by Ameren affiliates, including wages,
employee benefits and professional services, are based on actual costs incurred.
For the three months ended June 30, 2003, support services provided by Ameren
included in Other Operations and Maintenance totaled $1.1 million and $1.2
million for the six months ended June 30, 2003.
Ameren affiliates also provided insurance coverage that the Company recorded in
Prepayments and Other on the balance sheet. These services totaled $1.0 million
for the six month period ended June 30, 2003. Approximately $.6 million of this
amount has been amortized and included in Other Operations and Maintenance as of
June 30, 2003.
In addition, the Holding Company paid Ameren $14.3 million for transaction costs
associated with the acquisition. These costs are included in Goodwill.
As of June 30, 2003, intercompany receivables included in Receivables,
Miscellaneous were approximately $.2 million at CILCO and CILCORP. As of June
30, 2003, intercompany payables included in Accounts Payable totaled
approximately $.6 million at CILCO and $.7 million at CILCORP.
Additionally, CILCORP had Accounts Payable of $.6 million related to a deposit
received from AmerenEnergy Medina Valley Cogen (No. 4), LLC for future work to
be performed by a Holding Company subsidiary.
Subject to the receipt of regulatory approval, which is being pursued, CILCO
will participate in Ameren's utility money pool arrangement. Under this
arrangement, CILCO will have access to up to $772 million of additional
committed liquidity, subject to reduction based on use by other utility money
pool participants, but increased to the extent other pool participants have
surplus cash balances, which may be used to fund pool needs. CILCORP may access
up to $600 million of committed credit facilities at Ameren subject to reduction
based on use by its affiliates and subject to a $250 million intercompany
borrowing restriction pursuant to CILCORP's financing authority under the PUHCA.
26
NOTE 9. Statements of Segments of Business
The Company has five reportable segments: CILCO Electric, CILCO Gas, CILCO
Other, CILCORP Other and Discontinued Operations. The CILCO Electric segment
contains the rate-regulated portions of the utility's electric business. The
CILCO Gas segment contains the rate-regulated portions of the utility's gas
business. The CILCO Other segment contains the non rate-regulated portions of
the utility's business. The CILCORP Other segment includes the activities of the
Holding Company, its leasing and investing subsidiaries, CILCORP Investment
Management Inc. and CILCORP Ventures Inc., and QST Enterprises Inc.
subsidiaries, ESE Land Corporation and CILCORP Infraservices Inc. The CILCORP
Other segment also includes the effects of purchase accounting fair value
adjustments, the elimination of all intercompany transactions, and long-term
debt outstanding at the Holding Company. Amortization of these purchase
accounting fair value adjustments relates primarily to pension and
postretirement liabilities, coal contract liabilities, long-term debt, electric
plant in service and emission allowance assets. The Discontinued Operations
segment includes activities related to certain discontinued subsidiaries of QST
Enterprises Inc. through December 2002. All operations had ceased at QST prior
to the first quarter of 2003 and no further gains or losses associated with
these discontinued operations will be presented in future periods. The Company's
reportable segments are strategic business units managed separately primarily
due to the rate-regulated or non rate-regulated nature of the businesses, or due
to the type of business activity involved.
CILCORP Inc. and Subsidiaries
Statements of Segments of Business
Three Months Ended June 30, 2003 (Successor)
CILCO CILCO CILCO CILCORP
Electric Gas Other Other Total
(In thousands)
Operating revenues $ 89,405 $ 42,297 $34,667 $ 21,077 $187,446
Operating expenses 80,745 44,800 31,237 20,254 177,036
-------- -------- ------- --------- --------
Operating income
(loss) 8,660 (2,503) 3,430 823 10,410
Other income and
(deductions) 18 -- 120 10 148
Interest charges
and preferred
dividends (2,385) (1,058) (539) (8,316) (12,298)
-------- -------- ------- --------- --------
Income (loss) before
income taxes 6,293 (3,561) 3,011 (7,483) (1,740)
Income taxes 2,579 (1,377) 1,361 (3,947) (1,384)
-------- -------- ------- --------- --------
Net income (loss) $ 3,714 $ (2,184) $ 1,650 $ (3,536) $ (356)
======== ======== ======= ========= ========
27
CILCORP Inc. and Subsidiaries
Statements of Segments of Business
Three Months Ended June 30, 2002 (Predecessor)
CILCO CILCO CILCO CILCORP Discont.
Electric Gas Other Other Oper. Total
(In thousands)
Operating revenues $ 94,656 $ 38,181 $28,437 $ 11,720 $ -- $172,994
Operating expenses 81,937 39,505 21,444 10,627 -- 153,513
-------- -------- ------- -------- ------ --------
Operating income
(loss) 12,719 (1,324) 6,993 1,093 -- 19,481
Other income and
(deductions) -- -- 40 16 -- 56
Interest charges
and preferred
dividends (3,498) (1,459) (539) (11,222) -- (16,718)
-------- -------- ------- -------- ------ --------
Income (loss) from
continuing
operations before
income taxes 9,221 (2,783) 6,494 (10,113) -- 2,819
Income taxes 3,204 (1,061) 2,774 (4,218) -- 699
-------- -------- ------- -------- ------ --------
Net income (loss)
from continuing
operations 6,017 (1,722) 3,720 (5,895) -- 2,120
Effect of
discontinued
operations -- -- -- -- (3) (3)
-------- -------- ------- -------- ------ --------
Net income (loss) $ 6,017 $ (1,722) $ 3,720 $ (5,895) $ (3) $ 2,117
======== ======== ======= ======== ====== ========
Five Months Ended June 30, 2003 (Successor)
CILCO CILCO CILCO CILCORP
Electric Gas Other Other Total
(In thousands)
Operating revenues $148,671 $111,440 $55,771 $ 51,708 $367,590
Operating expenses 135,752 107,674 52,229 46,732 342,387
-------- -------- ------- --------- --------
Operating income 12,919 3,766 3,542 4,976 25,203
Other income and
(deductions) 30 -- 310 22 362
Interest charges
and preferred
dividends (4,544) (1,835) (899) (14,726) (22,004)
-------- -------- ------- --------- --------
Income (loss) before
income taxes 8,405 1,931 2,953 (9,728) 3,561
Income taxes 3,514 783 1,406 (4,863) 840
-------- -------- ------- --------- --------
Net income (loss) $ 4,891 $ 1,148 $ 1,547 $ (4,865) $ 2,721
======== ======== ======= ========= ========
28
CILCORP Inc. and Subsidiaries
Statements of Segments of Business
January 2003 (Predecessor)
CILCO CILCO CILCO CILCORP
Electric Gas Other Other Total
(In thousands)
Operating revenues $ 35,305 $ 44,270 $11,975 $ 12,373 $103,923
Operating expenses 28,739 37,143 12,107 12,328 90,317
-------- -------- ------- --------- --------
Operating income
(loss) 6,566 7,127 (132) 45 13,606
Other income and
(deductions) 5 -- 93 5 103
Interest charges
and preferred
dividends (1,294) (440) (180) (3,282) (5,196)
-------- -------- ------- --------- --------
Income (loss) before
income taxes 5,277 6,687 (219) (3,232) 8,513
Income taxes 2,029 2,635 (53) (1,483) 3,128
-------- -------- ------- --------- --------
Net income (loss)
before cumulative
effect of change
in accounting
principle $ 3,248 $ 4,052 $ (166) $ (1,749) $ 5,385
======== ======== ======= ========= ========
Six Months Ended June 30, 2002 (Predecessor)
CILCO CILCO CILCO CILCORP Discont.
Electric Gas Other Other Oper. Total
(In thousands)
Operating revenues $178,769 $118,199 $50,187 $ 29,721 $ -- $376,876
Operating expenses 157,632 107,828 42,392 27,582 -- 335,434
-------- -------- ------- -------- ------ --------
Operating income 21,137 10,371 7,795 2,139 -- 41,442
Other income and
(deductions) -- -- 20 306 -- 326
Interest charges
and preferred
dividends (7,192) (2,944) (1,079) (22,071) -- (33,286)
-------- -------- ------- -------- ------ --------
Income (loss) from
continuing
operations before
income taxes 13,945 7,427 6,736 (19,626) -- 8,482
Income taxes 4,675 2,980 3,094 (8,402) -- 2,347
-------- -------- ------- -------- ------ --------
Net income (loss)
from continuing
operations 9,270 4,447 3,642 (11,224) -- 6,135
Effect of discont.
operations -- -- -- -- (12) (12)
-------- -------- ------- -------- ------ --------
Net income (loss) $ 9,270 $ 4,447 $ 3,642 $(11,224) $ (12) $ 6,123
======== ======== ======= ======== ====== ========
29
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
OVERVIEW
The consolidated financial statements include the accounts of CILCORP Inc. (the
Holding Company); Central Illinois Light Company (CILCO or AmerenCILCO); QST
Enterprises Inc. (QST) and its subsidiaries, QST Energy Inc. (QST Energy) and
CILCORP Infraservices Inc. (CILCORP Infraservices), operating as AmerenCILCO
Infraservices; and CILCORP Inc.'s other subsidiaries (collectively, CILCORP or
the Company) after elimination of significant intercompany transactions. In the
fourth quarter of 1998, the operations of QST and its subsidiaries (excluding
ESE Land Corporation and CILCORP Infraservices) were discontinued and,
therefore, are being reported as discontinued operations in the financial
statements through December 2002. Prior year amounts have been reclassified on a
basis consistent with the 2003 presentation.
CILCO, the Holding Company's principal business subsidiary, is engaged in the
generation, transmission, distribution and sale of electric energy in an area of
approximately 3,700 square miles in central and east-central Illinois, and the
purchase, distribution, transportation and sale of natural gas in an area of
approximately 4,500 square miles in central and east-central Illinois. Other
Holding Company first-tier subsidiaries are CILCORP Investment Management Inc.
(CIM), which manages the Company's investment portfolio and CILCORP Ventures
Inc. (CVI), which pursued investment opportunities in energy-related products
and services.
The Holding Company is a wholly-owned subsidiary of Ameren Corporation (Ameren).
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. Ameren's principal subsidiaries,
including Central Illinois Light Company, 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 Public Service Company, which operates a rate-regulated
electric and natural gas transmission and distribution business in Illinois
as AmerenCIPS.
o Central Illinois Light Company, a subsidiary of CILCORP Inc., 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 Acquisition for further information.
o AmerenEnergy Resources Company (Resources Company), which consists of non
rate-regulated electric 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's 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 the acquisition of AES Medina Valley
30
Cogen (No. 4), LLC and renamed it AmerenEnergy Medina Valley Cogen (No. 4),
LLC.
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 CILCORP. Charges are
based upon the actual costs incurred by Ameren Services as required by the
PUHCA.
The following discussion and analysis should be read 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 CILCORP's and
CILCO's Quarterly Report on Form 10-Q for the period ended March 31, 2003.
o Management's Discussion and Analysis of Financial Conditions and Results of
Operations in CILCORP's andCILCO's Annual Report on Form 10-K for the
period ended December 31, 2002.
o The audited financial statements and related notes in CILCORP's and CILCO's
Annual Report on Form 10-K for the period ended December 31, 2002.
Throughout this document, CILCORP or the Company refers to CILCORP Inc. and its
subsidiaries on a consolidated basis. CILCO refers to Central Illinois Light
Company. All tabular dollar amounts are in thousands, unless otherwise
indicated.
Acquisition
On January 31, 2003, Ameren completed its acquisition of all of the outstanding
common stock of CILCORP Inc. from AES. CILCORP Inc. is the parent company of
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. The results of operations for CILCORP Inc. and its
subsidiaries (CILCORP) were included in Ameren's consolidated financial
statements effective with the acquisition date.
Ameren acquired CILCORP to complement its existing Illinois gas and electric
operations. The purchase included CILCO's rate-regulated electric and natural
gas business 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 Ameren's 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 CILCO's 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 debt and preferred stock of approximately $859 million.
The acquisition was accounted for using the purchase method of accounting. Under
this method, the purchase price was allocated to the fair market value of the
assets acquired and the liabilities assumed. The excess purchase price over the
fair value of the assets acquired and the liabilities assumed was allocated to
goodwill at CILCORP Inc. As a result, CILCORP Inc. has recorded
31
purchase accounting fair value adjustments to electric plant in service, pension
and other postretirement liabilities, long-term debt, emission allowances, coal
contracts, and other balance sheet items. Ameren is in the process of completing
a third party valuation of acquired property and plant and intangible assets.
Therefore, the allocation of the purchase price to the acquired net assets is
subject to refinement. The excess of the purchase price over tangible net assets
acquired has been allocated preliminarily to goodwill in the amount of $603
million at CILCORP.
The amortization of these purchase accounting fair value adjustments increased
earnings by approximately $1.7 million, net of tax, in the second quarter of
2003 and $4.5 million, net of tax, in the first six months of 2003. Amortization
of adjustments that increased net income primarily related to pension and
postretirement liabilities ($2.6 million, net of tax - second quarter 2003, $5.2
million, net of tax - six months ended June 30, 2003), coal contract liabilities
($.9 million, net of tax - second quarter 2003, $1.7 million, net of tax - six
months ended June 30, 2003), long-term debt ($1.5 million, net of tax - second
quarter 2003, $2.0 million, net of tax - six months ended June 30, 2003) and
severance ($.7 million net of tax - second quarter 2003, $1.2 million, net of
tax - six months ended June 30, 2003). Amortization of adjustments that
decreased net income primarily related to electric plant in service ($1.3
million, net of tax - second quarter 2003, $2.4 million, net of tax - six months
ended June 30, 2003), emission allowance assets ($.9 million, net of tax -
second quarter 2003, $1.4 million, net of tax - six months ended June 30, 2003),
and purchased power ($1.8 million, net of tax - second quarter and six months
ended June 30, 2003).
The purchase accounting entries are reflected on CILCORP's financial statements
as of the purchase date. As permitted by rules of the SEC, the Company did not
"push down" the effects of purchase accounting to the financial statements of
any of Holding Company's subsidiaries, including CILCO. Accordingly, CILCORP's
post-acquisition financial statements reflect a new basis of accounting, and
separate financial statements are presented for pre-acquisition (predecessor)
and post-acquisition (successor) periods, separated by a heavy black line.
CILCO's financial statements are presented on their historical basis of
accounting for all periods presented. For discussion throughout this document,
the 2003 pre-acquisition and post-acquisition periods have been combined for
comparison in total to other periods presented for categories and segments that
were substantially unaffected by the acquisition and the related pre-acquisition
and post-acquisition accounting events.
The results of operations and financial position of the Company 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 the Company's services. The Company's
results are also impacted by seasonal fluctuations caused by winter heating and
summer cooling demand. With a substantial portion of the Company's revenues
directly subject to regulation by various state and federal agencies, decisions
by regulators can have a material impact on the price that the Company charges
for its services. The Company principally utilizes coal, natural gas and oil in
its operations. The prices for these commodities can fluctuate significantly due
to the world economic and political environment, weather, production levels and
many other factors. The Company does not have a fuel cost recovery mechanism for
its electric utility business, but does have a gas cost recovery mechanism for
its gas distribution utility business. In addition, the Company's electric rates
are largely set through 2006. Fluctuations in interest rates impact the
Company's cost of borrowings, and pension and post-retirement benefits. The
Company employs various risk management strategies in order to try to reduce its
exposure to commodity risks and other risks inherent in its business. The
reliability of the
32
Company's power plants, and transmission and distribution systems, and the level
of operating and administrative costs, and capital investment are key factors
that the Company seeks to control in order to optimize its results of
operations, cash flows and financial position.
The financial condition and operating results of the Company primarily reflect
the operations of its subsidiary CILCO. The CILCORP Other segment includes the
activities of the Holding Company itself, its investment subsidiary, CILCORP
Investment Management Inc. (CIM), CILCORP Ventures Inc. (CVI), ESE Land
Corporation, and CILCORP Infraservices Inc., which provides utility
infrastructure operation and maintenance services. The CILCORP Other segment
also includes the effects of purchase accounting fair value adjustments and the
elimination of all intercompany transactions. Amortization of these purchase
accounting fair value adjustments relates primarily to pension and
postretirement liabilities, coal contract liabilities, long-term debt, electric
plant in service and emission allowance assets. The results of QST Enterprises
Inc. (QST) and its subsidiaries (excluding ESE Land Corporation and CILCORP
Infraservices Inc.) have been reported as discontinued operations through 2002.
All operations had ceased at QST prior to the first quarter of 2003 and no
further gains or losses associated with these discontinued operations will be
presented in future periods.
RESULTS OF OPERATIONS
Earnings Summary
The Company's net loss was $.4 million in the second quarter of 2003 compared to
net income of $2.1 million in the second quarter of 2002. The Company's net
income increased $5.8 million to $11.9 million for the six months ended June 30,
2003, compared to earnings of $6.1 million in the same period last year. Net
income in the first six months of 2003 included a net cumulative effect gain of
$3.8 million associated with the adoption in January 2003 of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). The net gain resulted principally from the elimination
of non-legal obligation costs of removal for non rate-regulated assets from
accumulated depreciation. See Note 1. Summary of Significant Accounting Policies
to the Consolidated Financial Statements under Item 1 of Part I of this report.
Excluding the cumulative effect of change in accounting principle related to
SFAS 143, the Company's net income increased $2.0 million in the first six
months of 2003 compared to the prior year period.
CILCO's income available for common stock decreased $4.8 million to $3.2 million
in the second quarter of 2003 from $8.0 million in the second quarter of 2002.
CILCO's income available for common stock increased $21.4 million to $38.8
million for the six months ended June 30, 2003, compared to earnings of $17.4
million for the same period last year. In the first six months of 2003, CILCO's
income included a net cumulative effect gain of $24.1 million associated with
the adoption of SFAS 143. The net gain resulted principally from the elimination
of non-legal obligation costs of removal for non rate-regulated assets from
accumulated depreciation. Excluding this cumulative effect of change in
accounting principle related to SFAS 143, CILCO's income available for common
stock in the first six months of 2003 was $14.7 million or a decrease of $2.6
million compared to the prior year period.
The decrease in CILCO's net income in the second quarter of 2003, versus the
second quarter of 2002, was due primarily to lower electric margin due to
unfavorable weather conditions in our service territory ($.9 million, net of
tax), increased employee benefit costs ($2.6 million, net of tax) related to
plan performance and increasing health care costs, severance costs associated
33
with the acquisition by Ameren ($.5 million, net of tax) and higher depreciation
expenses ($.5 million, net of tax). The decrease in net income for the first six
months of 2003 was principally due to increased employee benefit costs ($5.2
million, net of tax), severance costs associated with the acquisition by Ameren
($1.1 million, net of tax) and higher depreciation expense ($.8 million, net of
tax). Partially offsetting these items that decreased net income, were favorable
weather conditions in the first quarter, which resulted in greater electric
gross margin ($2.6 million, net of tax) and gas gross margin ($1.4 million, net
of tax).
The amortization of purchase accounting fair value adjustments at the Holding
Company increased the Company's net income by $1.7 million in the second quarter
and $4.4 million for the first six months of 2003, compared to the prior year
period. These adjustments partially offset the $4.8 million decrease for the
quarter and more than offset the $2.6 million decrease for the first six months
of 2003 in net income from CILCO, discussed above. The amortization of the fair
value adjustments that increased income related primarily to pension and
postretirement liabilities, coal contract liabilities, severance liabilities and
long-term debt. Amortization of fair value adjustments for electric plant in
service, purchased power and emission allowances increased expenses in 2003
compared to 2002. Purchase accounting adjustments in 2002 related to AES' 1999
acquisition of the Company. The following table summarizes the impact on net
income of the amortization of these purchase accounting fair value adjustments
during 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
Income Statement Line Item 2003 2002 2003 2002
(In thousands)
(Unaudited)
Other operations and maintenance $ 5,455 $ 463 $10,514 $ 925
Interest expense 2,562 -- 3,346 --
Fuel and purchased power (3,053) -- (2,495) --
CILCORP other revenue 68 -- 68 --
Depreciation and amortization (2,185) (355) (3,977) (710)
Income taxes (1,129) (43) (2,958) (85)
------- ------ ------- ------
Impact on net income $ 1,718 $ 65 $ 4,498 $ 130
======= ====== ======= ======
34
CILCO Electric Operations
The following table summarizes electric operating revenue and expenses by
component.
Three Months Ended Six Months Ended
June 30, June 30,
Components of Electric Income 2003 2002 2003 2002
(In thousands)
(Unaudited)
Revenue:
Electric retail $86,175 $92,196 $175,739 $174,306
Sales for resale 3,230 2,460 8,237 4,463
------- ------- -------- --------
Total revenue 89,405 94,656 183,976 178,769
------- ------- -------- --------
Cost of sales:
Fuel 19,742 24,295 45,398 46,325
Purchased power 13,633 12,517 25,976 24,047
Revenue taxes 4,219 4,521 9,350 9,423
------- ------- -------- --------
Total cost of sales 37,594 41,333 80,724 79,795
------- ------- -------- --------
Gross margin 51,811 53,323 103,252 98,974
------- ------- -------- --------
Operating expenses:
Operation and maintenance expenses 27,750 26,202 53,177 48,779
Depreciation and amortization 12,855 12,074 25,254 24,141
Other taxes 2,546 2,328 5,336 4,917
------- ------- -------- --------
Total operating expenses 43,151 40,604 83,767 77,837
------- ------- -------- --------
Other income and (deductions):
Allowance for equity funds used
during construction 18 -- 35 --
------- ------- -------- -------
Total 18 -- 35 --
------- ------- -------- -------
Interest charges:
Interest on long-term debt 2,643 3,194 6,343 6,364
Cost of borrowed funds capitalized (776) (409) (1,421) (647)
Other interest 518 713 916 1,475
------- ------- -------- -------
Total 2,385 3,498 5,838 7,192
------- ------- -------- -------
Income before taxes 6,293 9,221 13,682 13,945
Income taxes 2,579 3,204 5,543 4,675
------- ------- -------- -------
Net income before cumulative effect of
change in accounting principle $ 3,714 $ 6,017 $ 8,139 $ 9,270
======= ======= ======== =======
Electric gross margin decreased $1.5 million (3%) for the quarter and increased
$4.3 million (4%) for the six months ended June 30, 2003, compared to the same
periods in 2002. Retail kilowatt-hour (kWh) sales decreased 7% for the quarter
and remained constant for the six months ended June 30, 2003, compared to the
35
same periods in 2002. Residential sales volumes decreased 14% for the quarter
and 3% for the six months ended June 30, 2003, compared to the same periods in
2002. Commercial sales volumes decreased 1% for the quarter and increased 1% for
the six months ended June 30, 2003. Heating degree days were 20% higher in the
first quarter of 2003 and cooling degree days were 52% lower in the second
quarter of 2003 compared to the same periods in 2002. Industrial sales volumes
decreased 6% for the quarter, largely due to customers switching to an affiliate
for supply, and increased 2% for the six months ended June 30, 2003, compared to
the same periods in 2002.
Sales for resale increased $.8 million (31%) for the quarter and $3.8 million
(85%) for the six months ended June 30, 2003, compared to the same periods in
2002. The increase for the six months ended June 30, 2003, was primarily due to
greater sales in January 2003, as a result of higher wholesale prices. Sales for
resale vary based on the energy requirements of native load customers,
neighboring utilities and power marketers, CILCO's available capacity for bulk
power sales, and the price of power available for sale.
Electric operation and maintenance expense increased $1.5 million (6%) for the
quarter and $4.4 million (9%) for the six months ended June 30, 2003, compared
to the same periods in 2002. The increase was mainly due to increased employee
benefit costs, including pension and postretirement health care benefits ($2.8
million for the quarter and $5.7 million for the six months ended June 30,
2003). At the Holding Company (included in the CILCORP Other segment),
approximately $3.2 million and $5.4 million of pre-tax income was recorded in
the quarter and six months ended June 30, 2003, respectively, as amortization of
a purchase accounting fair value adjustment related to the electric portion of
the pension and postretirement health care benefit liabilities.
Interest charges decreased $1.1 million (32%) for the quarter and $1.4 million
(19%) for the six months ended June 30, 2003, compared to the same periods in
2002. The decrease was primarily due to increased capitalized interest related
to NOx reduction projects at the power plants and redemption of $75 million of
higher cost long-term debt that was replaced with lower cost borrowings from
Ameren.
Income taxes increased for the six months ended June 30, 2003, due to a higher
effective tax rate primarily due to an increase in depreciation differences.
36
CILCO Gas Operations
The following table summarizes gas operating revenue and expenses by component.
Three Months Ended Six Months Ended
June 30, June 30,
Components of Gas Income 2003 2002 2003 2002
(In thousands)
(Unaudited)
Revenue:
Sale of gas $40,939 $36,751 $152,608 $115,043
Transportation services 1,358 1,430 3,102 3,156
------- ------- -------- --------
Total revenue 42,297 38,181 155,710 118,199
------- ------- -------- --------
Cost of sales:
Gas 26,809 22,364 107,021 71,972
Revenue taxes 1,562 1,812 5,535 5,432
------- ------- -------- --------
Total cost of sales 28,371 24,176 112,556 77,404
------- ------- -------- --------
Gross margin 13,926 14,005 43,154 40,795
------- ------- -------- --------
Operating expenses:
Operation and maintenance expenses 10,101 9,215 19,510 18,084
Depreciation and amortization 5,729 5,607 11,456 11,204
Other taxes 599 507 1,295 1,136
------- ------- -------- --------
Total operating expenses 16,429 15,329 32,261 30,424
------- ------- -------- --------
Interest charges:
Interest on long-term debt 889 1,193 1,988 2,390
Other interest 169 266 287 554
------- ------- -------- --------
Total 1,058 1,459 2,275 2,944
Income (loss) before taxes (3,561) (2,783) 8,618 7,427
Income taxes (1,377) (1,061) 3,418 2,980
------- ------- -------- --------
Net income (loss) before cumulative
effect of change in accounting
principle $(2,184) $(1,722) $ 5,200 $ 4,447
======= ======= ======== ========
Gas gross margin decreased approximately $.1 million (1%) for the quarter and
increased approximately $2.4 million (6%) for the six months ended June 30,
2003, compared to the same periods in 2002. Residential and commercial sales
volumes decreased 10% and 6%, respectively, for the quarter, and increased 10%
and 11%, respectively, for the six months ended June 30, 2003. Heating degree
days were 15% lower for the quarter and 13% higher for the six months ended June
30, 2003, compared to the same periods in 2002.
The cost of gas increased $4.4 million (20%) for the quarter and $35 million
(49%) for the six months ended June 30, 2003, compared to the same periods in
2002, primarily due to higher natural gas prices. These costs were passed
through to customers via the Purchased Gas Adjustment (PGA).
37
Gas operation and maintenance expense increased $.9 million (10%) for the
quarter, and $1.4 million (8%) for the six months ended June 30, 2003, compared
to the same period in 2002. The increases for the quarter and six months ended
June 30, 2003, were primarily due to increased employee benefit costs, including
pension and postretirement health care benefits ($1.5 million and $3.0 million,
respectively). At the Holding Company (included in the CILCORP Other segment),
approximately $1.6 million and $3.2 million of pre-tax income was recorded,
respectively, in the second quarter and for the six months ended June 30, 2003,
as amortization of a purchase accounting fair value adjustment related to the
gas portion of the pension and postretirement health care benefit liabilities.
Interest charges decreased $.4 million (27%) for the quarter and $.7 million
(23%) for the six months ended June 30, 2003, compared to the same periods in
2002. The decrease was primarily due to the redemption of $75 million of higher
cost long-term debt that was replaced with lower cost borrowings from Ameren.
The decrease in income tax expense for the second quarter of 2003 was due to
lower pre-tax income.
The increase in income tax expense for the six months ended June 30, 2003, was
primarily due to higher pre-tax income.
38
CILCO Other
The following table summarizes CILCO Other's income and deductions.
Components of CILCO Other Three Months Ended Six Months Ended
Income June 30, June 30,
2003 2002 2003 2002
(In thousands)
(Unaudited)
Revenue $ 34,667 $ 28,437 $ 67,746 $ 50,187
Expense (29,162) (20,968) (60,352) (41,011)
-------- -------- -------- --------
Gross margin 5,505 7,469 7,394 9,176
-------- -------- -------- --------
Operating expenses 2,075 476 3,984 1,381
-------- -------- -------- --------
Other income and (deductions):
Miscellaneous income 91 36 213 46
Miscellaneous expense (618) (658) (1,062) (1,375)
Income taxes 647 662 1,252 1,349
-------- -------- -------- --------
Total other income and (deductions) 120 40 403 20
-------- -------- -------- --------
Preferred stock dividends 539 539 1,079 1,079
-------- -------- -------- --------
Income before taxes 3,011 6,494 2,734 6,736
Income taxes 1,361 2,774 1,353 3,094
-------- -------- -------- --------
Net income before cumulative effect
of change in accounting principle $ 1,650 $ 3,720 $ 1,381 $ 3,642
======== ======== ======== ========
CILCO Other's gross margin decreased $2.0 million (26%) for the quarter and $1.8
million (19%) for the six months ended June 30, 2003, compared to the same
periods in 2002. The decrease is due to a higher margin per MWh sold to non
rate-regulated electric customers in Illinois outside of CILCO's service
territory during 2002. These sales are typically backed with power purchases
arranged in approximately the same time period. The increased margin per MWh
sold was the result of terminating an existing power purchase contract in 2002
(See Note 2 - Contingencies for a discussion of the Enron Contract) and
replacing the supply at a lower cost. These sales of electricity were to
customers eligible to choose their energy supplier under the Electric Service
Customer Choice and Rate Relief Law of 1997 (the Illinois Law).
Operating expenses increased $1.6 million for the quarter and $2.6 million for
the six months ended June 30, 2003, primarily due to severance costs associated
with the acquisition by Ameren.
39
CILCORP Other
The following table summarizes CILCORP Other's revenue and expenses for the
three and six months ended June 30, 2003 and 2002. CILCORP Other's results
include income earned and expenses incurred at the Holding Company, CIM, CVI,
ESE Land Corporation and CILCORP Infraservices Inc. The CILCORP Other segment
also includes the effects of purchase accounting fair value adjustments and the
elimination of all intercompany transactions. Amortization of these purchase
accounting fair value adjustments relates primarily to pension and
postretirement liabilities, coal contract liabilities, long-term debt, electric
plant in service and emission allowance assets.
Components of CILCORP Other Three Months Ended Six Months Ended
Net Loss June 30, June 30,
2003 2002 2003 2002
(In thousands)
(Unaudited)
Revenue:
Leveraged lease revenue $ 1,099 $ 1,290 $ 2,240 $ 2,616
Gas marketing revenue 19,397 10,004 61,509 26,317
Other revenue 581 426 332 788
------- -------- -------- --------
Total revenue 21,077 11,720 64,081 29,721
------- -------- -------- --------
Operating Expenses:
Gas 19,849 9,895 61,813 26,178
Fuel and purchased power 3,053 -- 2,495 --
Other operations (4,858) 355 (9,295) 660
Depreciation and amortization 2,187 355 4,000 702
Taxes, other than income taxes 23 22 47 42
------- -------- -------- --------
Total operating expenses 20,254 10,627 59,060 27,582
------- -------- -------- --------
Other income and (deductions):
Miscellaneous income 10 16 27 306
------- -------- -------- --------
Total other income and (deductions) 10 16 27 306
------- -------- -------- --------
Interest charges:
Interest expense 8,316 11,222 18,008 22,071
------- -------- -------- --------
Total interest charges 8,316 11,222 18,008 22,071
------- -------- -------- --------
Loss before income taxes (7,483) (10,113) (12,960) (19,626)
Income taxes (3,947) (4,218) (6,346) (8,402)
------- -------- -------- --------
Net loss before cumulative effect of
change in accounting principle $(3,536) $ (5,895) $ (6,614) $(11,224)
======= ======== ======== ========
Leveraged lease revenue decreased $.2 million (15%) for the three months ended
and $.4 million (14%) for the six months ended June 30, 2003, compared to the
same periods in 2002, due primarily to a reduction in the residual value of one
of the leveraged leases in 2002.
Gas marketing revenue and cost of gas increased $9.4 million and $10 million,
respectively, in the second quarter of 2003 compared to the same quarter in
2002. Gas marketing revenue and cost of gas increased $35.2 million and $35.6
million, respectively, in the six months ended June 30, 2003, compared to the
40
same period in 2002. The increases were mainly due to higher natural gas prices.
Other revenue decreased $.5 million in the six months ended June 30, 2003,
compared to the same period in 2002, mainly due to the expiration of a services
contract in 2002.
Fuel and purchased power represents $3.1 million and $2.5 million of
amortization of purchase accounting fair value adjustments in the second quarter
and six months ended June 30, 2003, respectively. Coal and other contract
liabilities and emission credits at the power plants were fair valued through
purchase accounting.
Other operations expenses represent $4.9 million of income in the second quarter
and $9.3 million of income for the six months ended June 30, 2003, at the
Holding Company due primarily to purchase accounting fair value adjustments to
the pension and postretirement benefit liabilities of $4.4 million and $8.6
million, for the three and six month periods ended June 30, 2003, respectively.
CILCORP consolidated pension and postretirement benefit expenses are lower than
CILCO's expenses due to the fair value adjustment to these liabilities.
Depreciation and amortization increased $1.8 million and $3.3 million for the
three and six months ended June 30, 2003, respectively, compared to the same
periods in 2002, due primarily to purchase accounting adjustments increasing the
fair market value of the Duck Creek and Edwards power plants ($2.2 million and
$4.0 million). The increase in value is being depreciated over the estimated
remaining lives of the power plants.
Interest expense decreased $2.9 million (26%) in the second quarter and $4.1
million (18%) in the six months ended June 30, 2003, compared to the same
periods in 2002, primarily as a result of a purchase accounting fair value
adjustment to the CILCORP long-term debt. The fair value increase in long-term
debt is being amortized as a reduction in interest expense over the remaining
life of the debt ($2.6 million for the second quarter and $3.3 million for the
six months ended June 30, 2003).
The income tax benefit decreased for the second quarter and six months ended
June 30, 2003, compared to the same periods in 2002, due to a lower loss before
income taxes.
41
LIQUIDITY AND CAPITAL RESOURCES
Operating
CILCORP's net cash flows provided by operating activities totaled $47.1 million
for the first six months of 2003, compared to $51.0 million for the same period
in 2002. Cash provided from operations decreased in 2003, primarily due to
timing of payments on accounts payable and accrued taxes, partially offset by
the timing of receipts on accounts receivable.
CILCO's net cash flows provided by operating activities totaled $71.8 million
for the first six months of 2003, compared to $57.4 million for the same period
in 2002. Cash provided from operations increased in 2003, primarily due to
timing of payments on accounts payable and other liabilities.
The tariff-based gross margin of CILCO (the rate-regulated utility operating
company) continues to be the principal source of cash from operating activities.
CILCO's diversified retail customer mix of primarily rate-regulated residential,
commercial and industrial classes and a commodity mix of gas and electric
service provide a reasonably predictable source of cash flows.
Investing
CILCORP's net cash used in investing activities was $48.7 million for the first
six months of 2003, compared to $63.2 million for the same period in 2002.
CILCO's net cash used in investing activities was $53.3 million for the first
six months of 2003, compared to $63.9 million for the same period in 2002. In
the first six months of 2003, construction expenditures were $54.3 million (2002
- - $63.1 million), consisting primarily of nitrogen oxide (NOx) reduction
equipment expenditures at the Edwards and Duck Creek power plants, replacements
and improvements to the existing electric transmission and distribution and
natural gas distribution systems. Capital expenditures relating to the Company's
rate-regulated and non rate-regulated operations are expected to approximate
$100 million in 2003.
CILCORP and CILCO's capital expenditure program is subject to periodic review
and revision, and actual capital expenditures may vary because of numerous
factors. These factors include, but are not limited to, changes in business
conditions, changes in environmental regulations, changes in load growth
estimates, increasing costs of labor, equipment and materials, and cost of
capital.
Financing
CILCORP's cash flows provided by financing activities totaled $.3 million for
the first six months of 2003, compared to $73.0 million for the same period in
2002. CILCO's cash flows used in financing activities totaled $33.0 million for
the first six months of 2003, compared to cash flows provided by financing
activities of $65.0 million for the same period in 2002. The principal financing
activities for the first six months of 2003 included the redemptions of
long-term and short-term debt, offset by issuances of short-term debt. CILCO
also paid common dividends of $21.5 million to CILCORP, but no dividends were
paid by CILCORP. The first six months of 2002 included the issuances of $100
million of long-term debt at CILCO, redemption of short-term debt and
payment of $28.0 million of common dividends from CILCO to CILCORP. CILCORP paid
no dividends in the first six months of 2002.
42
CILCO and CILCORP have PUHCA authority to have up to an aggregate of $250
million each of short-term unsecured debt instruments outstanding at any time.
Short-Term Debt and Liquidity
At June 30, 2003, CILCO had committed credit facilities, expiring at various
dates during 2003 and 2004, totaling $59 million, all of which were unused and
available. At June 30, 2003, Ameren and its subsidiaries had committed credit
facilities, expiring at various dates between 2003 and 2005, totaling $772
million, excluding separate credit facilities of CILCO of $59 million, EEI of
$41 million and AmerenUE's nuclear fuel lease facilities of $120 million. The
$772 million of committed credit facilities were available for use by two of
Ameren's rate-regulated subsidiaries, AmerenUE and AmerenCIPS, and Ameren
Services Company through Ameren's utility money pool arrangement, and $600
million of this amount may be used by Ameren Corporation, and most of its non
rate-regulated subsidiaries including, but not limited to, Resources Company,
Generating Company, Marketing Company, AmerenEnergy Fuels and Services Company
and AmerenEnergy through Ameren's non-regulated subsidiary money pool
arrangement. CILCORP and CILCO may also access up to $600 million of these
facilities through direct borrowings from Ameren Corporation, subject to
reduction by use by other Ameren subsidiaries and applicable borrowing
limitations. These committed credit facilities are used to support commercial
paper programs 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 Ameren's and AmerenUE's 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.
Subject to the receipt of regulatory approval, which is being pursued, CILCO
will participate in Ameren's utility money pool arrangement. Under this
arrangement, CILCO will have access to up to $772 million of additional
committed liquidity, subject to reduction based on use by other utility money
pool participants, but increased to the extent other pool participants have
surplus cash balances, which may be used to fund pool needs. CILCORP may access
up to $600 million of committed credit facilities at Ameren subject to reduction
based on use by its affiliates and subject to a $250 million intercompany
borrowing restriction pursuant to CILCORP's financing authority under the PUHCA.
CILCORP and CILCO rely on access to short-term and long-term capital markets as
a significant source of funding for capital requirements not satisfied by
operating cash flows. The inability to raise capital on favorable terms,
43
particularly during times of uncertainty in the capital markets, could
negatively impact CILCORP and CILCO's ability to maintain and grow the
businesses. Based on current credit ratings, CILCORP and CILCO believe that they
will continue to have access to the capital markets. However, events beyond the
Company's control may create uncertainty in the capital markets such that the
cost of capital would increase or the ability to access the capital markets
would be adversely affected.
Financial Agreement Provisions and Covenants
CILCORP's and CILCO's financial agreements include customary default or cross
default provisions that could impact the continued availability of credit or
result in the acceleration of repayment. The majority of Ameren 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. The financing arrangements of Ameren and its
subsidiaries do not contain credit rating triggers, except for three funded bank
term loans at CILCO totaling $105 million at June 30, 2003.
At June 30, 2003, Ameren and its subsidiaries, including CILCORP and CILCO, were
in compliance with their financial agreement provisions and covenants.
Debt Issuances and Redemptions
On February 10, 2003, CILCO repaid $25.4 million first mortgage bonds 6.82%
Series which matured on that date. In April 2003, three series of CILCO's first
mortgage bonds were redeemed prior to maturity. These included CILCO's $65
million principal amount 8.20% series due January 15, 2022, at a redemption
price of 103.29% and two 7.8% series totaling $10 million principal amount due
February 9, 2023, at a redemption price of 103.90%.
Off-Balance Sheet Arrangements
At June 30, 2003, neither CILCORP, nor any of its subsidiaries, had any
off-balance sheet financing arrangements, other than operating leases entered
into in the ordinary course of business.
44
OUTLOOK
The Company believes 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 Power prices in the Midwest will impact the cost of power the Company
purchases in the interchange markets. Although long-term power prices
continue to be generally soft, short-term power prices have strengthened
significantly from the prior year in the first six months of 2003 due
primarily to higher prices for natural gas,
o Fixed electric rates in CILCO's 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.
CILCO is pursuing a gas rate increase of approximately $14 million in Illinois,
which it expects to be ruled upon by the Illinois Commerce Commission (ICC) by
the end of 2003. Ameren is also considering additional actions, including
modifications to active employee benefits, staffing reductions, accelerating
synergy opportunities related to CILCORP's acquisition by Ameren and other
initiatives.
In the ordinary course of business, the Company and Ameren evaluate strategies
to enhance their financial position, results of operations and liquidity. These
strategies may include potential acquisitions, divestitures, and opportunities
to reduce costs or increase revenues, and other strategic initiatives in order
to increase shareholder value. The Company is 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 3. Rate and Regulatory Matters to our Consolidated Financial Statements
under Item 1 of Part I of this report for information.
Impact of Future Accounting Pronouncements
See Note 1. Summary of Significant Accounting Policies to the Consolidated
Financial Statements under Item 1 of Part I of this report.
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
CILCORP'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. CILCORP handles market
risks in accordance with established policies, which may include entering into
various derivative transactions. In the normal course of business, CILCORP also
faces risks that are either non-financial or non-
45
quantifiable. Such risks principally include business, legal and operational
risks and are not represented in the following discussion.
CILCORP's risk management objective is to optimize its physical generating
assets within prudent risk parameters and to maintain a highly hedged portfolio
of gas and electric purchases and sales outside of its service territory.
Fair Value of Contracts
The Company is exposed to non-trading risks through its daily business
activities. These non-trading activities may include the market or commodity
price risk related to CILCO's retail tariff activity and the Company's non
rate-regulated commodity marketing activities.
The majority of the Company's electricity sales during 2003 were to CILCO retail
customers in Illinois under tariffs regulated by the ICC. Gas costs, prudently
incurred in connection with sales to customers under tariffs regulated by the
ICC, are recovered through the Company's Purchased Gas Adjustment (PGA). The
Company is exposed to electricity price risk since the Company mainly sells
electricity to customers at fixed prices. To limit this risk, sufficient
purchased power has been placed under contract to limit the Company's exposure
to market risk at any given time. When this supply is added to CILCO generation
capacity, a reserve margin in excess of 16% results, based on a peak load of
1,270 MW during the 2002 summer cooling season. Since CILCO supplies over 90% of
its native load with its generation capacity, generation can be adjusted on a
real-time basis to match actual load at any given time. CILCO is subject to the
risk that generation becomes unavailable due to forced outages. The Company's
historical unplanned outage rate is 5.4%. In the event that CILCO generation and
purchased supply is insufficient to meet load requirements, CILCO may have to
purchase power from the market at prevailing market rates.
The market risk inherent in the Company's non rate-regulated activities is the
potential loss arising from adverse changes in natural gas and electric
commodity prices relative to the physical and financial positions that the
Company maintains. The prices of natural gas and electricity are subject to
fluctuations resulting from changes in supply and demand. The Company is engaged
in non rate-regulated electric retail and natural gas sales throughout Illinois,
including wholesale power purchases and sales to utilize its electric generating
capability. At June 30, 2003, these non rate-regulated activities had net open
market price risk positions of approximately 700,000 MWh of electricity and
28,000 Mcf of natural gas. A market price sensitivity of 10% applied to
positions open in the next twelve months is not material to the Company. See
Note 4 for a discussion of the Company's use of financial derivatives for
hedging purposes. Due to the high correlation between the changes in the value
of the financial instrument positions held by the Company and the change in
price of the underlying commodity, the net effect on the Company's net income
resulting from the change in value of these financial instruments is not
expected to be material.
46
The following table summarizes the favorable (unfavorable) changes in the fair
value of all the Company's derivatives marked to market during the second
quarter of 2003:
(In thousands)
Fair value of contracts at beginning of period, net $ 621
Contracts which were realized or otherwise settled
during the period (253)
Changes in fair values attributable to changes in
valuation techniques and assumptions --
Fair value of new contracts entered during
the period --
Other changes in fair value 154
-----
Fair value of contracts outstanding at end of period, net $ 522
=====
Maturities of all derivative contracts as of June 30, 2003, were less than one
year and were all with investment-grade counterparties. Fair values are all
determined based on actively quoted prices.
Interest Rate Risk
The Company is exposed to interest rate risk as a result of changes in interest
rates on borrowings under secured bank loans which have interest rates that are
indexed to short-term market interest rates, and refinancing risk in the
commercial paper markets. CILCORP manages its interest rate exposure by
controlling the amount of these instruments held within its total capitalization
portfolio and by monitoring the effects of market changes in interest rates.
Utilizing the Company's debt outstanding at June 30, 2003, if interest rates
increased by 1%, the Company's annual interest expense would increase by
approximately $2.2 million and net income would decrease by approximately $1.3
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.
Credit Risk
As of June 30, 2003, the Company had approximately $131 million invested in
seven leveraged leases. The Company analyzes each counterparty's financial
condition prior to entering into sales, forwards, swaps, futures or option
contracts and monitors counterparty exposure associated with our leveraged
leases. The Company also establishes credit limits for these counterparties and
monitors the appropriateness of these limits on an ongoing basis through a
credit risk management program which involves daily exposure reporting to senior
management, master trading and netting agreements, and credit support management
such as letters of credit and parental guarantees.
47
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 CILCORP and CILCO have evaluated the effectiveness of the design and
operation of CILCORP's and CILCO's disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended (Exchange Act)). Based upon that evaluation, the principal executive
officer and principal financial officer of CILCORP and CILCO have concluded that
such disclosure controls and procedures are effective in timely alerting them to
any material information relating to CILCORP's and CILCO's consolidated
subsidiaries required to be included in CILCORP's and CILCO's reports filed or
submitted with the SEC under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting
There has been no significant change in CILCORP's and CILCO's internal control
over financial reporting that occurred during CILCORP's and CILCO's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect CILCORP's and CILCO's 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, CILCORP is 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, could cause results to differ materially from management
expectations as suggested by such "forward-looking" statements:
o changes in laws and other governmental actions, including monetary and
fiscal policies;
o the impact on CILCORP 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 CILCORP's business at both
the state and federal levels;
o the effects of participation in a FERC-approved Regional Transmission
Organization, including activities associated with the Midwest
Independent System Operator, Inc.;
o availability and future market prices for fuel for the production of
electricity, such as coal and natural gas, purchased power,
electricity and natural gas for distribution, including the use of
financial and derivative instruments, the volatility of changes in
market prices and the 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;
48
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
generating companies 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 CILCORP's
access to necessary capital more difficult or costly;
o competition from other generating facilities, including new facilities
that may be developed in the future;
o difficulties in integrating CILCO with Ameren's other businesses;
o changes in the coal markets, environmental laws or regulations or
other factors adversely impacting synergy assumptions in connection
with Ameren's acquisition of CILCORP;
o cost and availability of transmission capacity for the energy
generated by CILCO's generating facilities or required to satisfy its
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, neither CILCORP nor CILCO undertakes an obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
49
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 7 under Item 8. "Financial Statements and
Supplementary Data" in Part II of the Company's 2002 Annual Report on Form 10-K,
to Note 14 to the Notes to Consolidated Financial Statements in the 2002 Annual
Report to Shareholders of CILCORP's parent, Ameren Corporation, which is
incorporated by reference into Item 8. "Financial Statements and Supplementary
Data" in Part II of Ameren's 2002 Annual Report on Form 10-K, as amended by Form
10-K/A, and to Item 1. "Legal Proceedings" in Part II of Ameren's Form 10-Q for
the quarterly period ended March 31, 2003, for a discussion of a number of
lawsuits that name CILCORP affiliates, Union Electric Company, operating as
AmerenUE, and Central Illinois Public Service Company, operating as AmerenCIPS,
its parent, Ameren, and Central Illinois Light Company, operating as AmerenCILCO
(referred 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 Ameren's 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, which, if
proved, typically would be shared among the named defendants. Also since the
filing of Ameren's 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,
AmerenCILCO has been specifically named as a defendant in 13 (mostly in the
Circuit Courts of Madison, Cook and Peoria Counties in Illinois), of which 11
are pending, one has been settled and one has been dismissed. No additional
lawsuits have been filed against AmerenCILCO since the Company filed its 2002
Annual Report on Form 10-K. The Company believes that the final disposition of
these proceedings will not have a material adverse effect on its financial
position, results of operations or liquidity.
Note 2. Contingencies and Note 3. Rate and Regulatory Matters to the
Consolidated Financial Statements of CILCORP Inc. and Central Illinois Light
Company under Item 1 of Part I of this report contain additional information on
legal and administrative proceedings which are incorporated by reference under
this item.
50
Item 4. Submission of Matters To a Vote of Security Holders.
At AmerenCILCO's annual meeting of stockholders held on May 20, 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 13,780,513 1,458 0
Warner L. Baxter 13,780,513 1,458 0
Scott A. Cisel 13,780,513 1,458 0
Richard A. Liddy 13,780,363 1,608 0
Richard A. Lumpkin 13,780,413 1,558 0
Paul L. Miller, Jr. 13,780,413 1,558 0
Charles W. Mueller 13,780,513 1,458 0
Douglas R. Oberhelman 13,780,363 1,608 0
Gary L. Rainwater 13,780,513 1,458 0
Harvey Saligman 13,780,413 1,558 0
Thomas R. Voss 13,780,513 1,458 0
Item 5. Other Information.
AmerenCILCO is a member of Mid-America Interconnected Network (MAIN), 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
withdrawal notices filed by Commonwealth Edison and Illinois Power, also members
of MAIN, AmerenCILCO, along with its affiliates, AmerenUE and AmerenCIPS, which
are also members, provided formal written notice to the MAIN Board of Directors
on June 23, 2003, of their intent to withdraw from MAIN effective January 1,
2005. AmerenCILCO and its affiliates intend to join another Regional Reliability
Organization (RRO) prior to their withdrawal from MAIN becoming effective. Until
their withdrawal is effective, AmerenCILCO and its affiliates will continue to
honor all of their obligations as members of MAIN. If AmerenCILCO and its
affiliates do not join another RRO, they may withdraw their notice of intent to
withdraw from MAIN.
Any stockholder proposal intended for inclusion in the proxy material for
AmerenCILCO's 2004 annual meeting of stockholders must be received by it by
December 26, 2003. In addition, under AmerenCILCO's 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
AmerenCILCO's Secretary not later than 60 nor earlier than 90 days prior to the
anniversary of the preceding year's annual meeting. For AmerenCILCO's 2004
annual meeting of stockholders, written notice of any in-person stockholder
proposal or director nomination must be received not later than March 21, 2004,
or earlier than February 20, 2004. AmerenCILCO's 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.
3.1 By-Laws of CILCORP Inc. as amended effective May 20, 2003.
3.2 By-Laws of Central Illinois Light Company as amended effective May 20,
2003.
51
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
of CILCORP Inc. (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
of CILCORP Inc. (required by Section 302 of the Sarbanes-Oxley Act of
2002).
31.3 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
of Central Illinois Light Company (required by Section 302 of the
Sarbanes-Oxley Act of 2002).
31.4 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
of Central Illinois Light Company (required by Section 302 of the
Sarbanes-Oxley Act of 2002).
32.1 Section 1350 Certification of Principal Executive Officer of CILCORP
Inc. (required by Section 906 of the Sarbanes-Oxley Act of 2002).
32.2 Section 1350 Certification of Principal Financial Officer of CILCORP
Inc. (required by Section 906 of the Sarbanes-Oxley Act of 2002).
32.3 Section 1350 Certification of Principal Executive Officer of Central
Illinois Light Company (required by Section 906 of the Sarbanes-Oxley
Act of 2002).
32.4 Section 1350 Certification of Principal Financial Officer of Central
Illinois Light Company (required by Section 906 of the Sarbanes-Oxley
Act of 2002).
(b) Reports on Form 8-K. CILCORP Inc. and Central Illinois Light 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
-------------- --------- ----------------
April 22, 2003 amendment
to report on Form 8-K dated
March 14, 2003 4, 7 None
Note:Reports of Ameren Corporation on Forms 8-K, 10-Q and 10-K are on file with
the SEC under File Number 1-14756.
Reports of Union Electric Company on Forms 8-K, 10-Q and 10-K are on file
with the SEC under File Number 1-2967.
Reports of Ameren Energy Generating Company on Forms 8-K, 10-Q and 10-K are
on file with the SEC under File Number 333-56594.
Reports of Central Illinois Public Service Company on Forms 8-K, 10-Q and
10-K are on file with the SEC under File Number 1-3672.
52
SIGNATURES
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.
CILCORP INC.
(Registrant)
August 14, 2003 By /s/Martin J. Lyons
------------------------------
Martin J. Lyons
Vice President and Controller
(Principal Accounting Officer)
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 LIGHT COMPANY
(Registrant)
August 14, 2003 By /s/Martin J. Lyons
------------------------------
Martin J. Lyons
Vice President and Controller
(Principal Accounting Officer)
53