Exhibit 99-3
SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Ameren Corporation (Ameren) is a newly created holding company which will
be registered under the Public Utility Holding Company Act of 1935 (PUHCA).
In December 1997, Union Electric Company (AmerenUE) and CIPSCO Incorporated
(CIPSCO) combined to form Ameren, with AmerenUE and CIPSCO's subsidiaries,
Central Illinois Public Service Company (AmerenCIPS) and CIPSCO Investment
Company (CIC) becoming wholly-owned subsidiaries of Ameren (the Merger).
In addition, Ameren, as a result of the Merger, has a 60 percent ownership
interest in Electric Energy, Inc. (EEI), which is consolidated for
financial reporting purposes. Upon consummation of the Merger, the common
stockholders of AmerenUE and CIPSCO received one and 1.03 shares,
respectively, of Ameren common stock, par value $.01 per share, and became
common stockholders of Ameren.
The Merger is accounted for as a pooling-of-interests, and the Supplemental
Consolidated Condensed Financial Statements included in this Form 8-K, in
lieu of pro forma financial statements as required by Article ll, "Pro
Forma Financial Information" of Regulation S-X, are presented as if the
Merger were consummated as of the beginning of the earliest period
presented. However, the Supplemental Consolidated Condensed Financial
Statements are not necessarily indicative of the results of operations,
financial position or cash flows that would have occurred had the Merger
been consummated for the periods for which it is given effect, nor is it
necessarily indicative of the future results of operations, financial
position or cash flows.
References to the Company are to Ameren on a consolidated basis; however,
in certain circumstances, the subsidiaries are separately referred to in
order to distinguish between their different business activities.
RESULTS OF OPERATIONS
Earnings
Common stock earnings for the nine months ended September 30, 1997 totaled
$340 million, or $2.48 per share, compared to earnings of $348 million or
$2.53 per share for the same period in 1996. Earnings and earnings per
share fluctuated due to many conditions, primarily: weather variations,
competitive market forces, credits to electric customers, sales growth,
fluctuating operating expenses, and merger-related expenses.
Electric Operations
The impacts of the more significant items affecting electric revenues and
operating expenses during the nine month period ended September 30, 1997
compared to 1996 are detailed below:
Electric Revenues
(millions of dollars) Variation for period ended
September 30, 1997 from
comparable
prior year period
Nine
Months
Rate variations $ (4)
Credits to customers 26
Effect of abnormal weather (3)
Growth and other (3)
Interchange sales (6)
EEI 5
____
$ 15
Electric revenues for the nine months ended September 30, 1997 increased
$15 million compared to the same period last year primarily due to a lower
customer credit (see Note 2 - Regulatory Matters under Notes to the
Supplemental Consolidated Condensed Financial Statements), partly offset by
decreases in interchange revenues and lower revenues attributable to one
less day in the period due to leap year in 1996. For the nine month period
ended September 30, 1997, residential sales decreased 2 percent while
commercial sales remained relatively flat compared to the same periods in
1996. Industrial sales increased 1 percent while interchange sales
decreased 1 percent compared to the year-ago periods.
Fuel and Purchased Power
(Millions of dollars) Variation for period ended
September 30, 1997 from
comparable
prior period
Nine
Months
Fuel:
Variation in generation $ 26
Price (20)
Generation efficiencies and other --
Purchased power variation (37)
EEI 9
___
$(22)
___
The decline in fuel and purchased power costs for the nine months ended
September 30, 1997, versus the comparable prior-year period was primarily
due to decreased purchased power costs, resulting from relatively flat
native load sales coupled with greater generation, as well as lower fuel
prices.
Gas Operations
The decrease in gas revenues of $2 million for the nine months ended
September 30, 1997 compared to the comparable year-ago period was primarily
due to milder weather. Dekatherm sales to residential and commercial
customers decreased 12 percent and 17 percent, respectively, in the nine
month period ended September 30, 1997 over the same period in 1996, offset
in part by increased dekatherm sales to industrial customers by 19 percent.
In addition to traditional sales to its end customers, AmerenCIPS makes off-
system sales of gas to others. Such off-system sales in 1997 continued to
offset above mentioned declines, whereas such sales were minimal in 1996.
The $4 million increase in gas costs for the nine months ended September
30, 1997 when compared to the same period in 1996 was primarily the result
of increased dekatherms purchased for resale to wholesale customers.
Other Operating Expenses
Other operating expense variations reflect recurring conditions such as
growth, inflation and wage increases.
For the nine months ended September 30, 1997, other operating expenses
increased $34 million versus the comparable prior year period primarily due
to increased consultant expenses, computer related expenses, and injuries
and damages expenses.
Depreciation and amortization expense for the nine months ended September
30, 1997 increased $7 million compared to the comparable 1996 period
primarily due to increases in depreciable property.
Income taxes charged to operating expenses for the nine months ended
September 30, 1997 decreased $11 million compared to the same period in
1996 primarily as the result of lower pretax income.
Other Income and Deductions
Miscellaneous, net for the nine months ended September 30, 1997 decreased
$3 million compared to the nine month period ended September 30, 1996 due
to an increase in merger-related expenses.
Interest
Interest charges for the nine months ended September 30, 1997 increased $5
million compared to the same period in 1996 primarily due to increased debt
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $625 million for the nine
months ended September 30, 1997, compared to $662 million during the same
1996 period.
Cash flows used in investing activities totaled $293 million and $333
million for the nine months ended September 30, 1997 and 1996,
respectively. Construction expenditures for the nine months ended
September 30, 1997 of $287 million were for constructing new or improving
existing facilities, purchasing railroad coal cars and complying with the
Clean Air Act. In addition, the Company expended $13 million for the
acquisition of nuclear fuel. Capital requirements for the remainder of
1997 are expected to be principally for construction expenditures and the
acquisition of nuclear fuel.
Cash flows used in financing activities were $285 million for the nine
months ended September 30, 1997, compared to $297 million of cash flows
used for financing activities during the same 1996 period. The Company's
principal financing activities for the nine months ended September 30,
1997, were the redemption of $106 million of long-term debt and $64 million
of preferred stock and the payment of dividends.
The Company plans to utilize short-term debt as support for normal
operations and other temporary requirements. AmerenUE and AmerenCIPS are
authorized by the Federal Energy Regulatory Commission (FERC) to have up to
$600 million and $150 million, respectively, of short-term unsecured debt
instruments outstanding at any one time. Short-term borrowings consist of
bank loans (maturities generally on an overnight basis) and commercial
paper (maturities generally within 10 to 45 days). At September 30, 1997,
the Company had committed bank lines of credit aggregating $259 million (of
which $252 million were unused at that date) which make available interim
financing at various rates of interest based on LIBOR, the bank certificate
of deposit rate or other options. The lines of credit are renewable
annually at various dates throughout the year. As of September 30, 1997,
the Company had $43 million of short-term borrowings.
As of September 30, 1997, AmerenCIPS has registration statements covering
$75 million of first mortgage bonds and medium-term notes filed with the
Securities and Exchange Commission (SEC). AmerenCIPS' mortgage indenture
limits the amount of first mortgage bonds which may be issued. At
September 30, 1997, AmerenCIPS could have issued about $677 million of
additional first mortgage bonds under the indenture, assuming an annual
interest rate of 7.5 percent. Additionally, AmerenCIPS' articles of
incorporation limit amounts of preferred stock which may be issued.
Assuming a preferred dividend rate of 7.38 percent, the utility could have
issued all $185 million of authorized but unissued preferred stock as of
September 30, 1997. AmerenUE has registration statements covering $160
million of long-term debt filed with the SEC. In addition, AmerenUE has
registration statements filed with the SEC covering $100 million of
preferred stock. AmerenUE also has bank credit agreements due 1999 which
permit the borrowing of up to $300 million and $200 million on a long-term
basis. At September 30, 1997, no such borrowings were outstanding.
Additionally, AmerenUE has a lease agreement which provides for the
financing of nuclear fuel. At September 30, 1997, the maximum amount which
could be financed under the agreement was $120 million. Cash provided from
financing for the nine months ended September 30, 1997, included issuances
under the lease for nuclear fuel of $28 million offset in part by $21
million of redemptions. At September 30, 1997, $114 million was financed
under the lease.
RATE MATTERS
See Note 2 - Regulatory Matters under Notes to Supplemental Consolidated
Condensed Financial Statements for further information.
CONTINGENCIES
Subsequent to the completion of a contract restructuring with a major coal
supplier by AmerenCIPS, a group of industrial customers filed with the
Illinois Third District Appellate Court (the Court) in February 1997 an
appeal of the December 1996 order of the ICC which approved, among other
things, recovery of the restructuring payment and associated carrying costs
(Restructuring Charges), incurred as a result of the restructuring, through
the retail fuel adjustment clause (FAC). Additionally, in May 1997 the
FERC approved recovery of the wholesale portion of the Restructuring
Charges through the wholesale FAC.
As a result of the ICC and FERC orders, AmerenCIPS classified the $72
million of the Restructuring Charges made to the coal supplier in February
1997 as a regulatory asset and, through October 1997, recovered
approximately $9.5 million of the Restructuring Charges through the retail
FAC and from wholesale customers.
On November 24, 1997, the Court reversed the ICC's order, finding that the
Restructuring Charges were not direct costs of fuel that may be recovered
through the retail FAC, but rather should be considered as a part of a
review of AmerenCIPS' aggregate revenue requirements in a full rate case.
Restructuring Charges allocated to wholesale customers (approximately 16
percent of the total) are not in question as a result of the opinion of the
Court. On December 8, 1997, AmerenCIPS requested a rehearing by the Court.
The Company is evaluating the impact of the Court decision on its financial
statements. The Company cannot predict the ultimate outcome of this
matter. If the Court's decision should ultimately prevail, AmerenCIPS will
be required to cease recovery of the Restructuring Charges through the
retail FAC, and could be required to refund any portion of those charges
that had been collected through the retail FAC. The Company is also
exploring other alternatives for recovery of the Restructuring Charges.
The Company is currently evaluating the unamortized retail portion of the
Restructuring Charges, which is currently classified as a regulatory asset,
to determine if it continues to meet the criteria for the existence of an
asset under Generally Accepted Accounting Principles (GAAP). If it is
determined that such criteria are not met, the unamortized balance of the
Restructuring Charges, approximately $36 million, net of tax, could be
charged to earnings. The Company is also evaluating the revenues
previously recovered in 1997 through the retail FAC to determine if a loss
contingency, as defined under GAAP, is required. Such loss contingency ($5
million, net of tax) could also be charged to earnings. See Note 3 -
Commitments and Contingencies under Notes to Supplemental Consolidated
Condensed Financial Statements for further information.
See Note 3 - Commitments and Contingencies under Notes to Supplemental
Consolidated Condensed Financial Statements for other material issues
existing at September 30, 1997.
DIVIDENDS
The Board of Directors does not set specific targets or payout parameters
for dividend payments, however, the Board considers various issues
including the Company's historic earnings and cash flow; projected
earnings, cash flow and potential cash flow requirements; dividend
increases at other utilities; return on investments with similar risk
characteristics; and overall business considerations. It is currently
anticipated that the Company will initially pay dividends on its common
stock at AmerenUE's historical payment level, which was $2.54 per share on
an annual basis prior to the consummation of the Merger.
ELECTRIC INDUSTRY RESTRUCTURING
Certain states are considering proposals that would promote competition in
the retail electric market. In December 1997, the Governor of Illinois
signed the Electric Service Customer Choice and Rate Relief Law of 1997
(the Act) providing for utility restructuring in Illinois. This
legislation introduces price-based competition into the supply of electric
energy in Illinois and will provide a less regulated structure for Illinois
electric utilities. The Act includes a 5 percent residential electric rate
decrease for the Company's Illinois electric customers, effective August 1,
1998. The Company may be subject to additional 5 percent residential
electric rate decreases in each of 2000 and 2002 to the extent its rates
exceed the Midwest utility average at that time. The Company's rates are
currently below the Midwest utility average. The Company estimates that
the initial 5 percent rate decrease will result in a decrease in annual
electric revenues of about $13 million, based on estimated levels of sales
and assuming normal weather conditions. Retail direct access, which allows
customers to choose their electric generation supplier, will be phased in
over several years. Access for commercial and industrial customers will
occur over a period from October 1999 to December 2000, and access for
residential customers will occur after May 1, 2002. The Act also relieves
the Company of the requirement in the ICC's Order issued in September 1997
(which approved the Merger), requiring AmerenUE and AmerenCIPS to file
electric rate cases or alternative regulatory plans in Illinois following
consummation of the Merger to reflect the effects of net merger savings.
Other provisions of the Act include (1) potential recovery of a portion of
a utility's stranded costs through a transition charge collected from
customers who choose another electric supplier, (2) the option for certain
utilities, including the Company, to eliminate the retail FAC applicable to
their rates and to roll into base rates a historical level of fuel expense
and (3) a mechanism to securitize certain future revenues related to
stranded costs.
At this time, the Company is assessing the impact that the Act will have on
its operations. The potential negative consequences resulting from the Act
could be significant and include the impairment and writedown of certain
assets, including generation-related plant and regulatory assets, related
to the Company's Illinois jurisdictional assets. The provisions of the Act
could also result in lower revenues, reduced profit margins and increased
costs of capital. At this time, the Company is unable to determine the
impact of the Act on the Company's future financial condition, results of
operations or liquidity. (See Note 2 - Regulatory Matters under Notes to
Supplemental Consolidated Condensed Financial Statements.)
In Missouri, where 72 percent of the Company's retail electric revenues are
derived, a task force appointed by the Missouri Public Service Commission
(MoPSC) is investigating industry restructuring and competition and is
scheduled to issue a report to the MoPSC in 1998. A joint legislative
committee is also conducting hearings on these issues. Currently, retail
wheeling has not been allowed in Missouri; however, the joint agreement
approved by the MoPSC in February 1997 as part of its merger authorization
includes a provision that required AmerenUE to file a proposal for a 100-
megawatt experimental retail wheeling pilot program in Missouri. AmerenUE
filed its proposal with the MoPSC in September 1997. This proposal is
still subject to review and approval by the MoPSC.
The Company is unable to predict the timing or ultimate outcome of the
electric industry restructuring initiatives being considered in the state
of Missouri. In the state of Missouri, the potential negative consequences
of industry restructuring could be significant and include the impairment
and writedown of certain assets, including generation-related plant and
regulatory assets, lower revenues, reduced profit margins and increased
costs of capital. At this time, the Company is unable to predict the
impact of potential electric industry restructuring matters in the state of
Missouri on the Company's future financial condition, results of operations
or liquidity. (See Note 2 - Regulatory Matters under Notes to Supplemental
Consolidated Condensed Financial Statements.)
AIR QUALITY STANDARDS
In July 1997, the United States Environmental Protection Agency (EPA)
issued final regulations revising the National Ambient Air Quality
Standards for ozone and particulate matter. Although specific emission
control requirements are still being developed, it is believed that the
revised standards will require significant additional reductions in
nitrogen oxide and sulfur dioxide emissions from coal-fired boilers. In
October 1997, the EPA announced that Missouri and Illinois are included in
the area targeted for nitrogen oxide emissions reductions as part of their
regional control program. Reduction requirements in nitrogen oxide
emissions from the Company's coal-fired boilers could exceed 80 percent
from 1990 levels by the year 2002. Reduction requirements in sulfur
dioxide emissions may be up to 50 percent beyond that already required by
Phase II acid rain control provisions of the 1990 Clean Air Act Amendments
and are anticipated to be required by 2007. Because of the magnitude of
these additional reductions, the Company could be required to incur
significantly higher capital costs to meet future compliance obligations
for its coal-fired boilers or purchase power from other sources, either of
which could have significantly higher operating and maintenance
expenditures associated with compliance. At this time the Company is
unable to determine the impact of the revised air quality standards on the
Company's future financial condition, results of operations or liquidity.
The United States and other countries are discussing possibilities for an
international treaty to address the issue of "global warming." The Company
is unable to predict what agreements, if any, will be adopted. However,
most of the proposals under discussion could result in significantly higher
capital costs and operations and maintenance expenditures by the Company.
At this time, the Company is unable to determine the impact of these
proposals on the Company's future financial condition, results of
operations or liquidity.
INFORMATION SYSTEMS
The Year 2000 issue relates to computer systems and applications which
currently use two-digit date fields to designate a year. As the century
date change occurs, date-sensitive systems will recognize the year 2000 as
1900, or not at all. This inability to recognize or properly treat the
year 2000 may cause systems to process critical financial and operational
information incorrectly.
The Company continues to assess the impact of the Year 2000 issue on its
operations, including the development of final cost estimates for, and the
extent of programming changes required to address this issue. At this
time, the Company believes that the Year 2000 issue will not have a
material adverse effect on its financial condition, results of operations
or liquidity.
OUTLOOK
The Company's management and Board of Directors recognize that competition
will continue to increase in the future, especially in the energy supply
portion of our business. The introduction of competition into the markets,
coupled with the impact of the revised air quality standards on the
Company's operations, will result in numerous challenges and uncertainties
for Ameren and the utility industry. At this time, the Company cannot
predict the timing or impact of these matters on its future financial
condition, results of operations or liquidity.
SAFE HARBOR STATEMENT
Statements made in this report which are not based on historical facts are
forward-looking and, accordingly, involve risks and uncertainties that
could cause actual results to differ materially from those discussed.
Although such forward-looking statements have been made in good faith and
are based on reasonable assumptions, there is no assurance that the
expected results will be achieved. These statements include (without
limitation) statements as to future expectations, beliefs, plans,
strategies, objectives, legislation, events, conditions, financial
performance and dividends. In connection with the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995, the Company is
providing the following cautionary statement to identify important factors
that could cause actual results to differ materially from those
anticipated. Factors include, but are not limited to, the effects of:
regulatory actions; changes in laws and other governmental actions;
competition; business and economic conditions; weather conditions; fuel
prices and availability; generation plant performance; monetary and fiscal
policies; and legal and administrative proceedings.
AMEREN CORPORATION
SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(Thousands of Dollars, Except Shares)
ASSETS
Property and plant, at original
cost:
Electric $11,487,890
Gas 442,537
Other 35,960
__________
11,966,387
Less accumulated depreciation and amortization 5,228,270
__________
6,738,117
Construction work in progress:
Nuclear fuel in process 108,882
Other 128,861
__________
Total property and plant, net 6,975,860
__________
Investments and other assets:
Investments 116,008
Nuclear decommissioning trust fund 119,333
Other 61,307
__________
Total investments and other assets 296,648
__________
Current assets:
Cash and cash equivalents 58,092
Accounts receivable - trade (less allowance
for doubtful accounts of $5,202) 312,228
Unbilled revenue 84,142
Other accounts and notes receivable 62,098
Materials and supplies, at average cost -
Fossil fuel 92,374
Other 137,608
Other 35,240
__________
Total current assets 781,782
__________
Regulatory assets:
Deferred income taxes 695,782
Other 295,770
__________
Total regulatory assets 991,552
__________
Total Assets $ 9,045,842
__________
CAPITAL AND LIABILITIES
Capitalization:
Common stock, $.01 par value, authorized
400,000,000 shares - outstanding
137,215,462 shares $ 1,372
Other paid-in capital, principally
premium on common stock 1,582,938
Retained earnings 1,523,429
__________
Total common stockholders' equity 3,017,739
Preferred stock not subject to mandatory
redemption 235,197
Long-term debt 2,492,741
__________
Total capitalization 5,835,677
__________
Minority interest in consolidated subsidiary 3,534
Current liabilities:
Current maturity of long-term debt 43,193
Short-term debt 43,358
Accounts and wages payable 184,248
Accumulated deferred income taxes 35,160
Taxes accrued 249,822
Other 180,373
__________
Total current liabilities 736,154
__________
Accumulated deferred income taxes 1,635,289
Accumulated deferred investment tax credits 202,099
Regulatory liability 285,612
Other deferred credits and liabilities 347,477
__________
Total Capital and Liabilities $ 9,045,842
__________
See Notes to Supplemental Consolidated Condensed Financial Statements
AMEREN CORPORATION
SUPPLEMENTAL CONSOLIDATED CONDENSED
STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(Thousands of Dollars, Except Shares and Per Share Amounts)
1997 1996
OPERATING REVENUES:
Electric $2,421,692 $2,406,283
Gas 167,899 169,557
Other 9,771 8,776
_________ _________
Total operating revenues 2,599,362 2,584,616
OPERATING EXPENSES:
Operations
Fuel and purchased power 638,297 660,732
Gas costs 106,909 102,682
Other 434,067 400,522
--------- ---------
1,179,273 1,163,936
Maintenance 219,795 216,150
Depreciation and amortization 263,608 256,252
Income taxes 227,735 238,934
Other taxes 211,905 211,471
_________ _________
Total operating expenses 2,102,316 2,086,743
OPERATING INCOME 497,046 497,873
OTHER INCOME AND DEDUCTIONS:
Allowance for equity funds
used during construction 3,395 5,156
Miscellaneous, net (15,141) (12,523)
_________ _________
Total other income and deductions,
net (11,746) (7,367)
_________ _________
INCOME BEFORE INTEREST CHARGES
AND PREFERRED DIVIDENDS 485,300 490,506
INTEREST CHARGES AND PREFERRED
DIVIDENDS:
Interest 141,262 136,060
Allowance for borrowed funds used
during construction (5,443) (5,919)
Preferred dividends of subsidiaries 9,395 12,730
_________ _________
Net interest charges and preferred
dividends 145,214 142,871
_________ _________
NET INCOME $ 340,086 $ 347,635
_________ _________
EARNINGS PER SHARE OF COMMON
STOCK (BASED ON AVERAGE SHARES
OUTSTANDING) $2.48 $2.53
____ ____
AVERAGE COMMON SHARES OUTSTANDING 137,215,462 137,215,462
___________ ___________
See Notes to Supplemental Consolidated Condensed Financial Statements
AMEREN CORPORATION
SUPPLEMENTAL CONSOLIDATED CONDENSED
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(Thousands of Dollars)
1997 1996
Cash Flows From Operating:
Net income $340,086 $347,635
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 259,371 252,350
Amortization of nuclear fuel 28,737 32,198
Allowance for funds used during
construction (8,838) (11,075)
Deferred income taxes, net (4,479) 11,675
Deferred investment tax credits, net (7,128) (7,150)
Coal contract restructuring charge (71,795)
Changes in assets and liabilities:
Receivables, net (22,722) (18,210)
Materials and supplies 14,124 (22,862)
Accounts and wages payable (112,839) (110,215)
Taxes accrued 184,585 150,258
Other, net 25,865 37,763
_______ _______
Net cash provided by operating activities 624,967 662,367
Cash Flows From Investing:
Construction expenditures (286,952) (312,528)
Allowance for funds used during construction 8,838 11,075
Nuclear fuel expenditures (12,594) (26,001)
Long-term investments (2,698) (5,282)
_______ _______
Net cash used in investing activities (293,406) (332,736)
_______ _______
Cash Flows From Financing:
Dividends on common stock (248,376) (244,291)
Redemptions -
Nuclear fuel lease (21,011) (25,659)
Short-term debt (25,710) (29,600)
Long-term debt (106,000) (35,000)
Preferred stock (63,924) (26)
Issuances -
Nuclear fuel lease 27,653 31,581
Short-term debt -- 6,070
Long-term debt 152,000 --
_______ _______
Net cash used in financing activities (285,368) (296,925)
Net change in cash and cash equivalents 46,193 32,706
Cash and cash equivalents at beginning of
period 11,899 2,378
_______ _______
Cash and cash equivalents at end of period $ 58,092 $ 35,084
_______ _______
Cash paid during the periods:
Interest (net of amount capitalized) $108,910 $115,340
Income taxes $120,829 $146,942
_______ _______
See Notes to Supplemental Consolidated Condensed Financial Statements
AMEREN CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1 - Summary of Significant Accounting Policies
Merger and Supplemental Financial Statements (Basis of Presentation)
Effective December 31, 1997, following the receipt of all required state and
federal regulatory approvals, Union Electric Company (AmerenUE) and CIPSCO
Incorporated (CIPSCO) combined to form Ameren Corporation (Ameren)(the
Merger). The accompanying supplemental consolidated condensed financial
statements (the financial statements) reflect the accounting for the Merger
as a pooling of interests and are presented as if the companies were
combined as of the earliest period presented. However, the financial
information is not necessarily indicative of the results of operations,
financial position or cash flows that would have occurred had the Merger
been consummated for the periods for which it is given effect, nor is it
necessarily indicative of future results of operations, financial position,
or cash flows. The financial statements reflect the conversion of each
outstanding share of AmerenUE common stock into one share of Ameren common
stock, and each outstanding share of CIPSCO common stock into 1.03 shares
of Ameren common stock in accordance with the terms of the merger
agreement. The outstanding preferred stock of AmerenUE and Central
Illinois Public Service Company (AmerenCIPS), a subsidiary of CIPSCO, were
not affected by the Merger.
The accompanying financial statements include the accounts of Ameren and
its consolidated subsidiaries (collectively the Company). All subsidiaries
for which the Company owns directly or indirectly more than 50% of the
voting stock are included as consolidated subsidiaries. Ameren's primary
operating companies, AmerenUE and AmerenCIPS are engaged principally in the
generation, transmission, distribution and sale of electric energy and the
purchase, distribution, transportation and sale of natural gas in the
states of Missouri and Illinois. The Company also has a non-regulated
investing subsidiary, CIPSCO Investment Company (CIC). The Company has a
60% interest in Electric Energy, Inc. (EEI). EEI owns and operates an
electric generating and transmission facility in Illinois that supplies
electric power primarily to a uranium enrichment plant located in Paducah,
Kentucky.
All significant intercompany balances and transactions have been eliminated
from the consolidated financial statements.
Financial statement note disclosures, normally included in financial
statements prepared in conformity with generally accepted accounting
principles, have been omitted in these financial statements. However, in
the opinion of the Company, the disclosures contained in the financial
statements are adequate to make the information presented not misleading.
See Notes to Supplemental Consolidated Financial Statements as of December
31, 1996, included in this Form 8-K for information relevant to the
accompanying financial statements, including information as to the
significant accounting policies of the Company.
In the opinion of the Company, the financial statements filed as a part of
this Form 8-K reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the periods
presented.
Due to the effect of weather on sales and other factors which are
characteristic of public utility operations, financial results for the
periods ended September 30, 1997 and 1996 are not necessarily indicative of
trends for any nine-month period.
Operating revenues and net income for the nine months ended September 30,
1997 and September 30, 1996, were as follows (in millions):
AmerenUE CIPSCO OTHER AMEREN
Nine months ended
September 30, 1997:
Operating revenues $1,812 $649 $138 $2,599
Net income 278 62 340
Nine months ended
September 30, 1996:
Operating revenues $1,785 $669 $131 $2,585
Net income 279 69 348
Regulation
Ameren will be a registered holding company and therefore subject to
regulation by the Securities and Exchange Commission (SEC) under the Public
Utility Holding Company Act of 1935 (PUHCA). AmerenUE and AmerenCIPS are
also regulated by the Missouri Public Service Commission (MoPSC), Illinois
Commerce Commission (ICC), and the Federal Energy Regulatory Commission
(FERC). The accounting policies of the Company are in accordance with the
ratemaking practices of the regulatory authorities having jurisdiction and,
as such, conform to Generally Accepted Accounting Principles (GAAP), as
applied to regulated public utilities.
NOTE 2 - Regulatory Matters
In July 1995, the MoPSC approved an agreement involving the Company's
Missouri electric rates. The agreement decreased rates 1.8% for all
classes of Missouri retail electric customers, effective August 1, 1995,
reducing annual revenues by about $30 million and reducing annual earnings
by approximately 13 cents per share. In addition, a one-time $30 million
credit to retail Missouri electric customers reduced 1995 earnings
approximately 13 cents per share. Also included is a three-year
experimental alternative regulation plan that provides that earnings in any
future years in excess of a 12.61% regulatory return on equity (ROE) will
be shared equally between customers and stockholders, and earnings above a
14% ROE will be credited to customers. The formula for computing the
credit uses twelve-month results ending June 30, rather than calendar year
earnings. The agreement also provides that no party shall file for a
general increase or decrease in the Company's Missouri retail electric
rates prior to July 1, 1998, except that the Company may file for an
increase if certain adverse events occur. During the nine months ended
September 30, 1997, the Company recorded an estimated $20 million credit
for the second year of the plan compared to the $47 million credit recorded
for the first year of the plan in 1996. This credit, which the Company
expects to pay to customers in 1998, was reflected as a reduction in
revenues.
Included in the joint agreement approved by the MoPSC in its February 1997
order authorizing the Merger, is a new three-year experimental alternative
regulation plan that will run from July 1, 1998, through June 30, 2001.
Like the current plan, the new plan provides that earnings over a 12.61%
ROE up to a 14% ROE will be shared equally between customers and
shareholders. The new three-year plan will also return to customers 90% of
all earnings above a 14% ROE up to a 16% ROE. Earnings above a 16% ROE
would be credited entirely to customers. Other agreement provisions
include: recovery over a 10-year period of the Missouri portion of merger-
related expenses; a Missouri electric rate decrease, effective September 1,
1998, based on the weather-adjusted average annual credits to customers
under the current experimental alternative regulation plan; and an
experimental retail wheeling pilot program for 100 megawatts of electric
power. Also, as part of the agreement, the Company will not seek to
recover in Missouri the merger premium. The exclusion of the merger
premium from rates did not result in a charge to earnings.
In September 1997, the ICC approved the Merger subject to certain
conditions. The conditions included the requirement for AmerenUE and
AmerenCIPS to file electric and gas rate cases or alternative regulatory
plans within six months after the Merger is final to determine how net
merger savings would be shared between the ratepayers and stockholders.
In December 1997, the Governor of Illinois signed the Electric Service
Customer Choice and Rate Relief Law of 1997 (the Act) providing for utility
restructuring in Illinois. This legislation introduces price-based
competition into the supply of electric energy in Illinois and will provide
a less regulated structure for Illinois electric utilities. The Act
includes a 5 percent residential electric rate decrease for the Company's
Illinois electric customers, effective August 1, 1998. The Company may be
subject to additional 5 percent residential electric rate decreases in each
of 2000 and 2002 to the extent its rates exceed the Midwest utility average
at that time. The Company's rates are currently below the Midwest utility
average. The Company estimates that the initial 5 percent rate decrease
will result in a decrease in annual electric revenues of about $13 million,
based on estimated levels of sales and assuming normal weather conditions.
Retail direct access, which allows customers to choose their electric
generation supplier, will be phased in over several years. Access for
commercial and industrial customers will occur over a period from October
1999 to December 2000, and access for residential customers will occur
after May 1, 2002. The Act also relieves the Company of the requirement in
the ICC's Order issued in September 1997 (which approved the Merger),
requiring AmerenUE and AmerenCIPS to file electric rate cases or
alternative regulatory plans in Illinois following consummation of the
Merger to reflect the effects of net merger savings. Other provisions of
the Act include (1) potential recovery of a portion of a utility's stranded
costs through a transition charge collected from customers who choose
another electric supplier, (2) the option for certain utilities, including
the Company, to eliminate the retail FAC applicable to their rates and to
roll into base rates a historical level of fuel expense and (3) a mechanism
to securitize certain future revenues related to stranded costs.
The Company's accounting policies and financial statements conform to GAAP
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process in accordance with SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation". Such effects concern mainly the
time at which various items enter into the determination of net income in
order to follow the principle of matching costs and revenues. For example,
SFAS 71 allows the Company to record certain assets and liabilities
(regulatory assets and regulatory liabilities) which are expected to be
recovered or settled in future rates and would not be recorded under GAAP
for nonregulated entities. In addition, reporting under SFAS 71 allows
companies whose service obligations and prices are regulated to maintain
assets on their balance sheets representing costs they reasonably expect to
recover from customers, through inclusion of such costs in future rates.
SFAS 101, "Accounting for the Discontinuance of Application of FASB
Statement No. 71," specifies how an enterprise that ceases to meet the
criteria for application of SFAS 71 for all or part of its operations
should report that event in its financial statements. In general, SFAS 101
requires that the enterprise report the discontinuance of SFAS 71 by
eliminating from its balance sheet all regulatory assets and liabilities
related to the applicable portion of the business. At its July 24, 1997
meeting, the Emerging Issues Task Force of the Financial Accounting
Standards Board (EITF) concluded that application of SFAS 71 accounting
should be discontinued once sufficiently detailed deregulation legislation
is issued for a separable portion of a business for which a plan of
deregulation has been established. However, the EITF further concluded
that regulatory assets associated with the deregulated portion of the
business, which will be recovered through tariffs charged to customers of a
regulated portion of the business, should be associated with the regulated
portion of the business from which future cash recovery is expected (not
the portion of the business from which the costs originated), and can
therefore continue to be carried on the regulated entity's balance sheet to
the extent such assets are recovered. In addition, SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" establishes accounting standards for the impairment of long-
lived assets (i.e., determining whether the costs of such assets are
recoverable in future revenues.) SFAS 121 also requires that regulatory
assets, which are no longer probable of recovery through future revenue, be
charged to earnings.
Due to the enactment of the Act, prices for the supply of electric
generation are expected to transition from cost-based, regulated rates to
rates determined by competitive market forces in the state of Illinois. As
a result, the Company will discontinue application of SFAS 71 for the
Illinois portion of its generating business (i.e., the portion of the
Company's business related to the supply of electric energy in Illinois) in
the fourth quarter of 1997. At this time, the Company is assessing the
impact that the Act will have on its operations. The potential negative
consequences resulting from the Act could be significant and include the
impairment and writedown of certain assets, including generation-related
plant and regulatory assets, related to the Company's Illinois
jurisdictional assets. At September 30, 1997, the Company's net investment
in generation facilities related to its Illinois jurisdiction approximated
$826 million and was included in electric plant-in service on the Company's
balance sheet. In addition, at September 30, 1997, the Company's Illinois
generation-related net regulatory assets approximated $166 million. The
provisions of the Act could also result in lower revenues, reduced profit
margins and increased costs of capital. At this time, the Company is
unable to determine the impact of the Act on the Company's future financial
condition, results of operations or liquidity.
In the state of Missouri, where approximately 72 percent of the Company's
retail electric revenues are derived, a task force appointed by the MoPSC
is conducting studies of electric industry restructuring and competition
and will issue a report to the MoPSC in April 1998. A joint legislative
committee is also conducting studies and will report its findings and
recommendations to the Missouri General Assembly after reviewing the
results of the MoPSC task force.
The Company is unable to predict the timing or ultimate outcome of the
electric industry restructuring initiatives being considered in the state
of Missouri. In the state of Missouri, the potential negative consequences
of industry restructuring could be significant and include the impairment
and writedown of certain assets, including generation-related plant and
regulatory assets, lower revenues, reduced profit margins and increased
costs of capital. At September 30, 1997, the Company's net investment in
generation facilities related to its Missouri jurisdiction approximated
$2.7 billion and was included in electric plant-in service on the Company's
balance sheet. In addition, at September 30, 1997, the Company's Missouri
generation-related regulatory assets approximated $435 million. At this
time, the Company is unable to predict the impact of potential electric
industry restructuring matters in the state of Missouri on the Company's
future financial condition, results of operations or liquidity.
In April 1996, the FERC issued Order 888 and Order 889 related to the
industry's wholesale electric business. The Company filed an open access
tariff under Order 888 as part of the merger case and in July 1997, the
case was settled. In March 1997, the FERC issued Order 888A which required
the Company to refile a tariff by July 14, 1997. The terms were not
significantly different from those filed in the original tariff under Order
888.
In accordance with SFAS 71, the Company has deferred certain costs pursuant
to actions of its regulators, and is currently recovering such costs in
electric rates charged to customers.
The Company had recorded the following regulatory assets and regulatory
liability as of September 30, 1997 and December 31, 1996:
(in millions) September 30, 1997 December 31, 1996
Regulatory Assets:
Income taxes $696 $734
Callaway costs 108 111
Coal contract restructuring charge 66 --
Undepreciated plant costs 37 41
Unamortized loss on reacquired debt 40 42
Contract termination costs 14 20
DOE decommissioning assessment 17 18
Other 14 12
___ ___
Regulatory Assets $992 $978
___ ___
Regulatory Liability:
Income taxes $286 $304
___ ___
Regulatory Liability $286 $304
___ ___
The Company continually assesses the recoverability of its regulatory
assets. Under current accounting standards, regulatory assets are written
off to earnings when it is no longer probable that such amounts will be
recovered through future revenues. However, as noted in the above
paragraphs, electric industry restructuring legislation may impact the
recoverability of regulatory assets in the future.
NOTE 3 - Commitments and Contingencies
During 1996, AmerenCIPS restructured its contract with one of its major
coal suppliers. In 1997, AmerenCIPS paid a $70 million restructuring
charge to the supplier, which allows them to purchase at market prices low-
sulfur, out-of-state coal through the supplier (in substitution for the
high-sulfur Illinois coal AmerenCIPS was obligated to purchase under the
original contract); and would receive options for future purchases of low-
sulfur, out-of-state coal from the supplier through 1999 at set negotiated
prices.
By switching to low-sulfur coal, AmerenCIPS was able to discontinue
operating the Newton Power Plant Unit 1 scrubber. The benefits of the
restructuring include lower cost coal, avoidance of significant capital
expenditures to renovate the scrubber, and elimination of scrubber
operating and maintenance costs (offset by scrubber retirement expenses).
The net benefits of restructuring are expected to exceed $100 million over
the next 10 years. In December 1996, the ICC entered an order approving
the switch to out-of-state coal, recovery of the restructuring payment plus
associated carrying costs (Restructuring Charges) through the retail FAC
over six years, and continued recovery in rates of the undepreciated
scrubber investment plus costs of removal. A group of industrial customers
filed with the Illinois Third District Appellate Court (the Court) in
February 1997 an appeal of the December 1996 order of the ICC which
approved, among other things, recovery of the Restructuring Charges through
the retail FAC. Additionally, in May 1997 the FERC approved recovery of
the wholesale portion of the Restructuring Charges through the wholesale
FAC.
As a result of the ICC and FERC orders, AmerenCIPS classified the $72
million of the Restructuring Charges made to the coal supplier in February
1997 as a regulatory asset and, through October 1997, recovered
approximately $9.5 million of the Restructuring Charges through the retail
FAC and from wholesale customers.
On November 24, 1997, the Court reversed the ICC's order, finding that the
Restructuring Charges were not direct costs of fuel that may be recovered
through the retail FAC, but rather should be considered as a part of a
review of AmerenCIPS' aggregate revenue requirements in a full rate case.
Restructuring Charges allocated to wholesale customers (approximately 16
percent of the total) are not in question as a result of the opinion of the
Court. On December 8, 1997, AmerenCIPS requested a rehearing by the Court.
The Company is evaluating the impact of the Court decision on its financial
statements. The Company cannot predict the ultimate outcome of this
matter. If the Court's decision should ultimately prevail, AmerenCIPS will
be required to cease recovery of the Restructuring Charges through the
retail FAC, and could be required to refund any portion of those charges
that had been collected through the retail FAC. The Company is also
exploring other alternatives for recovery of the Restructuring Charges.
The Company is currently evaluating the unamortized retail portion of the
Restructuring Charges, which is currently classified as a regulatory asset,
to determine if it continues to meet the criteria for the existence of an
asset under GAAP. If it is determined that such criteria are not met, the
unamortized balance of the Restructuring Charges, approximately $36
million, net of tax, could be charged to earnings. The Company is also
evaluating the revenues previously recovered in 1997 through the retail FAC
to determine if a loss contingency, as defined under GAAP, is required.
Such loss contingency ($5 million, net of tax) could also be charged to
earnings.
Under the Clean Air Act Amendments of 1990, the Company is required to
reduce total annual sulfur dioxide emissions significantly by the year
2000. Significant reductions in nitrogen oxide are also required. By
switching to low-sulfur coal and early banking of emission credits, the
Company anticipates that it can comply with the requirements of the law
without significant revenue increases because the related capital costs are
largely offset by lower fuel costs. As of year-end 1996, estimated
remaining capital costs expected to be incurred pertaining to Clean Air Act-
related projects totaled $76 million.
In July 1997, the United States Environmental Protection Agency (EPA)
issued final regulations revising the National Ambient Air Quality
Standards for ozone and particulate matter. Although specific emission
control requirements are still being developed, it is believed that the
revised standards will require significant additional reductions in
nitrogen oxide and sulfur dioxide emissions from coal-fired boilers. In
October 1997, the EPA announced that Missouri and Illinois are included in
the area targeted for nitrogen oxide emissions reductions as part of their
regional control program. Reduction requirements in nitrogen oxide
emissions from the Company's coal-fired boilers could exceed 80 percent
from 1990 levels by the year 2002. Reduction requirements in sulfur
dioxide emissions may be up to 50 percent beyond that already required by
Phase II acid rain control provisions of the 1990 Clean Air Act Amendments
and are anticipated to be required by 2007. Because of the magnitude of
these additional reductions, the Company could be required to incur
significantly higher capital costs to meet future compliance obligations
for its coal-fired boilers or purchase power from other sources, either of
which could have significantly higher operating and maintenance
expenditures associated with compliance. At this time the Company is
unable to determine the impact of the revised air quality standards on the
Company's future financial condition, results of operations or liquidity.
The United States and other countries are discussing possibilities for an
international treaty to address the issue of "global warming." The Company
is unable to predict what agreements, if any, will be adopted. However,
most of the proposals under discussion could result in significantly higher
capital costs and operations and maintenance expenditures by the Company.
At this time, the Company is unable to determine the impact of these
proposals on the Company's future financial condition, results of
operations or liquidity.
As of September 30, 1997, AmerenUE was designated a potentially responsible
party (PRP) by federal and state environmental protection agencies at four
hazardous waste sites. Other hazardous waste sites have been identified
for which AmerenUE may be responsible but has not been designated a PRP.
AmerenCIPS has identified 13 sites where it and certain of its predecessors
and other affiliates previously operated facilities that manufactured gas
from coal. This manufacturing produced various potentially harmful by-
products which may remain on some sites. One site was added to the EPA
Superfund list in 1990.
Costs relating to studies and remediation at the 13 AmerenCIPS' sites and
associated legal and litigation expenses are being accrued and deferred
rather than expensed currently, pending recovery through rates or from
insurers. Through December 31, 1996, the total of the costs deferred, net
of recoveries from insurers and through environmental adjustment clause
rate riders approved by the ICC, was $11 million.
The ICC has instituted a reconciliation proceeding to review AmerenCIPS'
environmental remediation activities in 1993, 1994 and 1995 and to
determine whether the revenues collected under the riders in 1993 were
consistent with the amount of remediation costs prudently and properly
incurred. Amounts found to have been incorrectly included under the riders
would be subject to refund. In mid-1997, AmerenCIPS and the ICC Staff
submitted a stipulation with regard to all matters at issue. Under the
stipulation, as of December 31, 1995, the aggregate amount of (i) revenues
received under the riders, insurance proceeds (and related interest)
exceeded (ii) rider-related costs (and related carrying costs) by
approximately $4 million. If this stipulation is approved by the ICC, this
amount would be applied to cover a portion of future remediation costs.
Also, if the stipulation is approved, insurance proceeds of approximately
$3 million would be applied to cover non-rider related costs incurred.
During 1997, the accumulated balance of recoverable environmental
remediation costs exceeded the balance of available insurance proceeds and
rider revenues; therefore, AmerenCIPS began to again collect revenue under
the riders beginning November 1, 1997.
The Company continually reviews remediation costs that may be required for
all of these sites. Any unrecovered environmental costs are not expected
to have a material adverse effect on the Company's financial position,
results of operations or liquidity.
The International Union of Operating Engineers Local 148 and the
International Brotherhood of Electrical Workers Local 702 filed unfair
labor practice charges with the National Labor Relations Board (NLRB)
relating to the legality of the lockout by AmerenCIPS of both unions during
1993. The NLRB has issued complaints against AmerenCIPS concerning its
lockout. Both unions seek, among other things, back pay and other benefits
for the period of the lockout. The Company estimates the amount of back
pay and other benefits for both unions to be less than $17 million. An
administrative law judge of the NLRB has ruled that the lockout was
unlawful. On July 23, 1996, the Company appealed to the NLRB. The Company
believes the lockout was both lawful and reasonable and that the final
resolution of the disputes will not have a material adverse effect on
financial position, results of operations or liquidity of the Company.
Regulatory changes enacted and being considered at the federal and state
levels continue to change the structure of the utility industry and utility
regulation, as well as encourage increased competition. At this time, the
Company is unable to predict the impact of these changes on the Company's
future financial condition, results of operations or liquidity. See Note 2
- - Regulatory Matters for further discussion.
The Company is involved in other legal and administrative proceedings
before various courts and agencies with respect to matters arising in the
ordinary course of business, some of which involve substantial amounts.
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.
Report of Independent Accountants
To the Stockholders and
Board of Directors of
Ameren Corporation
In our opinion, based upon our audits and the reports of other auditors, the
accompanying supplementary consolidated balance sheets and the related
supplementary consolidated statements of income, of cash flows and retained
earnings present fairly, in all material respects, the financial position
of Ameren Corporation and its subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. these financial statements are the
responsibility of the Company's management; our responsibility is to ezpress an
opinion on these financial statements based on our audits. We did not audit
the financial statements of Central Illinois Public Service Company and
CIPSCO Investment Company, wholly-owned subsidiaries, which combined
statements reflect total assets of $1,871,656,000 and $1,827,911,000 at
December 31, 1996 and 1995, respectively, and total revenues of $896,715,000,
$842,262,000 and $844,615,000 for the three years in the period ended
December 31, 1996, respectively. Those statements were audited by other auditors
whose reports thereon have been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for Central Illinois
Public Service Compnay and CIPSCO Investment Company, is based solely on the
reports of the other auditors. We conucted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports
of other auditors provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
________________________
PRICE WATERHOUSE LLP
St. Louis, Missouri
December 17, 1997