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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
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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.
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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
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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
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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.
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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.
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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
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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
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See Notes to Supplemental Consolidated Condensed Financial Statements
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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
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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
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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
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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
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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
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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
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REGULATORY LIABILITY:
Income taxes $286 $304
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Regulatory Liability $286 $304
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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 payment 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
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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
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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.
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