UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended June 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From to Commission file number 1-2967. UNION ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Missouri 43-0559760 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1901 Chouteau Avenue, St. Louis, Missouri 63103 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (314) 621-3222 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No . Shares outstanding of each of registrant's classes of common stock as of July 31, 1999: Common Stock, $5 par value, held by Ameren Corporation (parent company of Registrant) - 102,123,834 Union Electric Company Index Page No. Part I Financial Information (Unaudited) Management's Discussion and Analysis 2 Quantitative and Qualitative Disclosures About Market Risk 6 Balance Sheet - June 30, 1999 and December 31, 1998 9 Statement of Income - Three months, six months and 12 months ended June 30, 1999 and 1998 10 Statement of Cash Flows - Six months ended June 30, 1999 and 1998 11 Notes to Financial Statements 12 Part II Other Information 15 PART I. FINANCIAL INFORMATION (UNAUDITED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Union Electric Company (AmerenUE or the Registrant) is a subsidiary of Ameren Corporation (Ameren), a holding company which is registered under the Public Utility Holding Company Act of 1935 (PUHCA). In December 1997, 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). The following discussion and analysis should be read in conjunction with the Notes to Financial Statements beginning on page 12, and the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), the Audited Financial Statements and the Notes to Financial Statements appearing in the Registrant's 1998 Form 10-K. RESULTS OF OPERATIONS Earnings Second quarter 1999 earnings of $68 million increased $4 million compared to 1998 second quarter earnings. Earnings for the six months ended June 30, 1999, increased $18 from the year-ago period to $110 million. Earnings for the twelve months ended June 30, 1999, were $329 million, a $41 million increase from the preceding 12-month period. Excluding the extraordinary charge recorded in the fourth quarter of 1997 to write off the generation-related regulatory assets and liabilities of the Registrant's Illinois retail electric business, earnings for the 12-month period ended June 30, 1998, were $315 million. Earnings fluctuated due to many conditions, primarily: weather variations, credits to electric customers, sales growth, fluctuating operating costs (including Callaway Nuclear Plant refueling outages), merger-related expenses, changes in interest expense, changes in income and property taxes, a charge for a targeted employee separation plan and an extraordinary charge, as noted above. The significant items affecting revenues, costs and earnings during the three-month, six-month and 12-month periods ended June 30, 1999 and 1998 are detailed below. Electric Operations Electric Operating Revenues Variations for periods ended June 30, 1999 from comparable prior-year periods - -------------------------------------------------------------------------------- (Millions of Dollars) Three Months Six Months Twelve Months - -------------------------------------------------------------------------------- Credit to customers $ 33 $ 23 $ 23 Rate variations (6) (11) (19) Effect of abnormal weather (24) (20) 6 Growth and other (19) (2) (2) Interchange sales 49 68 119 - -------------------------------------------------------------------------------- $ 33 $ 58 $ 127 - -------------------------------------------------------------------------------- The $33 million increase in second quarter electric revenues, compared to the year-ago quarter, was primarily driven by a 147 percent increase in interchange sales due to strong marketing efforts, as well as a lower credit to Missouri electric customers (see Note 5 under Notes to Financial Statements for further information). These benefits were partially offset by a 5 percent decrease in native sales as a result of milder weather. Electric revenues were also affected by rate decreases in both Missouri and Illinois (see Note 5 under Notes to Financial Statements for further information). Electric revenues for the first six months of 1999 increased $58 million compared to the same 1998 period. The increase in revenues was primarily due to a 71 percent increase in interchange sales due to strong marketing efforts and decreased credits to Missouri electric customers (see Note 5 under Notes to Financial Statements for further -2- information). These benefits were partially offset by a 2 percent decline in native sales, primarily due to milder weather, and rate decreases in both Missouri and Illinois (see Note 5 under Notes to Financial Statements for further information). Electric revenues for the 12 months ended June 30, 1999, increased $127 million compared to the prior 12-month period. The increase in revenues was primarily driven by an 80 percent increase in interchange sales due to strong marketing efforts and decreased credits to Missouri electric customers (see Note 5 under Notes to Financial Statements for further information). These benefits were partially offset by rate decreases in both Missouri and Illinois (see Note 5 under Notes to Financial Statements for further information). Fuel and Purchased Power Variations for periods ended June 30, 1999 from comparable prior-year periods - -------------------------------------------------------------------------------- (Millions of Dollars) Three Months Six Months Twelve Months - -------------------------------------------------------------------------------- Fuel: Variation in generation $ 7 $ 12 $ 42 Price (6) (11) (27) Generation efficiencies and other - 2 5 Purchased power variation 32 39 35 - -------------------------------------------------------------------------------- $ 33 $ 42 $ 55 - -------------------------------------------------------------------------------- Fuel and purchased power costs for the three month, six month and twelve month periods ended June 30, 1999, compared to the year ago comparable periods, increased $33 million, $42 million and $55 million, respectively, primarily due to increased generation and purchased power resulting from higher sales volumes, partially offset by lower fuel prices. Gas Operations Gas revenues for the six months ended June 30, 1999, increased $2 million compared to the prior-year period primarily due to an annual $12 million Missouri gas rate increase effective February 1998. This increase was partially offset by a 6 percent decrease in retail sales. Gas revenues for the twelve months ended June 30, 1999, decreased $2 million compared to the year-ago period primarily due to a 10 percent decline in retail sales, partially offset by an annual $12 million Missouri gas rate increase effective February 1998. Gas costs for the six months ended June 30, 1999, increased $2 million compared to the year-ago period, primarily due to increased gas prices. Gas costs for the twelve month period ended June 30, 1999, decreased $4 million compared to the year-ago period, primarily due to lower sales and a decrease in gas prices. Other Operating Expenses Other operating expense variations reflected recurring factors such as growth, inflation, labor and benefit increases. Other operations expenses for the three and six months ended June 30, 1999, decreased $5 million and $7 million, respectively, compared to the same year-ago periods primarily due to decreased injuries and damages expenses based on claims experience, partially offset by increased expenses associated with the year 2000 project. Other operations expenses increased $24 million for the 12-month period ended June 30, 1999, compared to the same year-ago period primarily due to the charge for the targeted separation plan and increased expenses associated with the year 2000 project. Maintenance expenses for the six months ended June 30, 1999, increased $3 million compared to the year-ago period primarily due to increased power plant maintenance and tree trimming activity, partially offset by the absence of a Callaway Nuclear Plant refueling in 1999. There was a Callaway refueling outage during the six months ended June 30, 1998. The $4 million increase in maintenance expenses for the 12-month period ended June 30, 1999, compared to the prior 12-month period was primarily due to increased power plant maintenance and tree trimming activity, partially offset by the absence of a refueling at Callaway in 1999. Taxes Income taxes increased $4 million, $11 million and $35 million for the three, six and 12 months ended June 30, 1999, respectively, due to higher pretax income. -3- Other Income and Deductions Miscellaneous, net increased $2 million for the six months and twelve months ended June 30, 1999, compared to the comparable year-ago periods, primarily due to increased interest income and gains on the sale of property. Balance Sheet Changes in accounts and wages payable, other taxes accrued, and other current liabilities resulted from the timing of various payments to taxing authorities and suppliers. The $25 million increase in other deferred credits and liabilities was primarily due to the $20 million estimated credit to Missouri electric customers recorded in the first quarter of 1999 under the three-year experimental alternative regulation plan (see Note 5 under Notes to Financial Statements for further information). The $146 million increase in intercompany notes receivable is due to funds invested in a utility money pool (see Note 6 under Notes to Financial Statements). LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities totaled $266 million for the six months ended June 30, 1999, compared to $158 million during the same 1998 period. Cash flows used in investing activities totaled $277 million and $104 million for the six months ended June 30, 1999 and 1998, respectively. Construction expenditures for the six months ended June 30, 1999, for constructing new or improving existing facilities were $121 million. In addition, the Registrant expended $19 million for the acquisition of nuclear fuel. Capital requirements for the remainder of 1999 are expected to be principally for construction expenditures and the acquisition of nuclear fuel. The Registrant also issued intercompany notes receivable for $146 million through a utility money pool (see Note 6 under Notes to Financial Statements for further information). Cash flows used in financing activities were $23 million for the six months ended June 30, 1999, compared to $44 million during the same 1998 period. The Registrant's principal financing activity for the period was the payment of dividends, partially offset by the issuance of long-term debt. The Registrant plans to continue utilizing short-term debt to support normal operations and other temporary requirements. The Registrant is authorized by the Securities and Exchange Commission under PUHCA to have up to $1 billion 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 June 30, 1999, the Registrant had committed bank lines of credit aggregating $136 million (all of which were unused and available at such 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. At June 30, 1999, the Registrant had no outstanding short-term borrowings. The Registrant also has a bank credit agreement due 2000 which permits the borrowing of up to $300 million on a long-term basis, all of which was unused and $226 million of which was available at June 30, 1999. Also, Ameren has a bank credit agreement due 2002, which permits the borrowing of up to $200 million on a long-term basis. This credit agreement is available to Ameren and its subsidiaries, including the Registrant. As of June 30, 1999, $158 million was available for the Registrant's use. Additionally, the Registrant has a lease agreement that provides for the financing of nuclear fuel. At June 30, 1999, the maximum amount that could be financed under the agreement was $120 million. Cash used in financing activities for the first six months of 1999 included redemptions under the lease for nuclear fuel of $7 million, offset by $38 million of issuances. At June 30, 1999, $98 million was financed under the lease. RATE MATTERS In March 1999, the Registrant filed delivery service tariffs with the Illinois Commerce Commission (ICC) to comply with the requirements of the Electric Service Customer Choice and Rate Relief Law of 1997. These tariffs would be used by electric customers who choose to purchase their power from an alternative supplier. Hearings were conducted in June 1999, and a hearing examiner's proposed order was issued in July. The ICC is required to render a decision on the delivery services tariffs by September 1, 1999. -4- See Note 5 under Notes to Financial Statements for further discussion of Rate Matters. ELECTRIC INDUSTRY RESTRUCTURING In December 1997, the Governor of Illinois signed the Electric Service Customer Choice and Rate Relief Law of 1997 (the Law) providing for electric utility restructuring in Illinois. This legislation introduces competition into the supply of electric energy in Illinois. One of the major provisions of the Law includes the phasing-in through 2002 of retail direct access, which allows customers to choose their electric supplier. The phase-in of retail direct access begins on October 1, 1999, with large commercial and industrial customers principally comprising the initial group. The customers in this group represent approximately 7 percent of the Registrant's total sales. Retail direct access will be offered to the remaining commercial and industrial customers on December 31, 2000, and to residential customers on May 1, 2002. YEAR 2000 ISSUE The Year 2000 Issue relates to how dates are stored and used in computer systems, applications, and embedded systems. As the century date change occurs, certain date-sensitive systems need to be able to recognize the year as 2000 and not as 1900. This inability to recognize or properly treat the year as 2000 may cause these systems to process critical financial and operational information incorrectly. The Registrant's primary concern is the potential for any interruption in providing electric and gas service to customers, as well as the potential inability to process critical financial and operational information on a timely basis, including billing its customers, if appropriate steps are not taken to address this issue. Management has developed a Year 2000 plan (Plan) covering Ameren, including AmerenUE, and Ameren's Board of Directors has been briefed about the Year 2000 Issue and how it may affect the Registrant. Ameren's Plan to resolve the Year 2000 Issue involves three phases: assessment, planning, and implementation/ testing. Implementation of the Plan is directly supervised by each area's responsible Vice President. A Year 2000 Project Director coordinates the implementation of the Plan among functional teams who are addressing issues specific to a particular area, such as nuclear and non-nuclear generation facilities, energy management systems, gas distribution, etc. Ameren has also engaged certain outside consultants, technicians and other external resources to aid in formulating and implementing the Plan. Ameren has completed its assessment phase, which included analyzing date-sensitive electronic hardware, software applications and embedded systems and has developed a compliance plan to address issues that were identified. Many of the major corporate computer systems at Ameren are relatively new and therefore are either Year 2000 compliant or only require minor modifications. Also, several of the operating hardware and embedded systems (i.e., microprocessor chips) use analog rather than digital technology and thus are unaffected by the two-digit date issue. In addition, Ameren has contacted hundreds of vendors and suppliers to verify compliance. Ameren has also completed its planning phase. Items that have been identified for remediation have been prioritized into groups based on their significance to Ameren's operations. The implementation/testing phase for all components/applications is approximately 87 percent complete as of June 30, 1999. Ameren expects to complete remediation of its significant components/applications by the end of the third quarter 1999. With respect to third parties, for areas that interface directly with significant vendors, Ameren has inventoried vendors and major suppliers and is currently assessing their Year 2000 readiness through surveys, websites and personal contact. Ameren plans to follow up with major suppliers and vendors and verify Year 2000 compliance, where appropriate. Ameren has also queried its health insurance providers. To date, Ameren is not aware of any problems that would materially impact its financial condition, results of operations or liquidity; however, neither Ameren nor the Registrant has the means of ensuring that these parties will be Year 2000 compliant. The inability of those parties to complete their Year 2000 resolution process could materially impact Ameren and the Registrant. Ameren is also addressing the impact of electric power grid problems that may occur outside of its own electric system. Ameren has started Year 2000 electric power grid impact planning through the system's various electric interconnection affiliations and is working with the Mid-American Interchange Network (MAIN) to begin planning -5- Year 2000 operational preparedness and restoration scenarios. As of July 1, 1999 (the latest information available), MAIN had completed its assessment and planning phases and was 99 percent complete with its implementation/ testing phase. In addition, Ameren provides monthly status reports to the North American Electric Reliability Council (NERC) to assist them in assessing Year 2000 readiness of the regional electric grid. As of July 1, 1999 (the latest information available), NERC had completed its assessment and planning phases and was 98 percent complete with its implementation/testing phase. Ameren participated in a Year 2000 drill conducted by NERC in April 1999. The drill focused on the testing of the backup systems of voice and data communications needed to operate the electric power grids in the event of a partial communication loss. The results of the drill at Ameren were successful. Additional drills are planned. Through the Electric Power Research Institute (EPRI), an industry-wide effort has been established to deal with Year 2000 problems affecting digital systems and equipment used by the nation's electric power companies. Under this effort, participating utilities are working together to assess specific vendors' system problems and test plans. The assessment will be shared by the industry as a whole to facilitate Year 2000 problem solving. In addressing the Year 2000 Issue, Ameren will incur internal labor costs as well as external consulting and other expenses related to infrastructure enhancements necessary to prepare for the new century. Ameren estimates that its external costs (consulting fees and related costs) for addressing the Year 2000 Issue will range from $10 million to $15 million. As of June 30, 1999, Ameren had expended approximately $7 million. Ameren's plans to complete Year 2000 modifications are based on management's best estimates, which are derived utilizing numerous assumptions of future events including the continued availability of certain resources, and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Ameren believes that, with appropriate modifications to existing computer systems/components, updates by vendors and trading partners, and conversion to new software and hardware in the ordinary course of business, the Year 2000 Issue will not pose significant operational problems for the Registrant. However, if such conversions are not completed in a proper and timely manner by all affected parties, the Year 2000 Issue could result in material adverse operational and financial consequences to the Registrant, and there can be no assurance that Ameren's efforts, or those of vendors and trading partners, interconnection affiliates, NERC or EPRI to address the Year 2000 Issue will be successful. Ameren is in the process of developing contingency plans to address potential risks, including risks of vendor/trading partners noncompliance, as well as noncompliance of any of the Registrant's material operating systems. The first operational contingency plan addressing power grid issues was completed during the first quarter of 1999. Contingency plans related to the business areas were completed in July 1999. At this time, the Registrant is unable to predict the ultimate impact, if any, of the Year 2000 Issue on the Registrant's financial condition, results of operations or liquidity; however, the impact could be material. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates and equity prices. The following discussion of Ameren's, including AmerenUE's, risk management activities includes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the "forward-looking" statements. Ameren handles market risks in accordance with established policies, which may include entering into various derivative transactions. In the normal course of business, Ameren also faces risks that are either non-financial or non-quantifiable. Such risks principally include credit risk and legal risk and are not represented in the following analysis. Interest Rate Risk The Registrant is exposed to market risk through changes in interest rates through its issuance of both long-term and short-term variable-rate debt, fixed-rate debt and commercial paper. The Registrant manages its interest rate exposure by controlling the amount of these instruments it holds within its total capitalization portfolio and by monitoring the effects of market changes in interest rates. If interest rates increase 1 percent in 2000 as compared to 1999, the Registrant's interest expense would increase by approximately $6 million and net income would decrease by approximately $3 million. This amount has been determined using the assumptions that the Registrant's outstanding variable rate debt as of June 30, 1999, continued to be outstanding throughout 2000, and that the average interest rates for these instruments increased 1 percent over 1999. -6- The model does not consider the effects of the reduced level of overall economic activity that would exist in such an environment. In the event of a significant change in interest rates, management would likely take actions to further mitigate its exposure to this market risk. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in the Registrant's financial structure. Commodity Price Risk The Registrant is exposed to changes in market prices for natural gas and fuel and purchased power. With regard to its natural gas utility business, the Registrant's exposure to changing market prices is in large part mitigated by the fact that AmerenUE has a Purchased Gas Adjustment Clause (PGA) in place in both its Missouri and Illinois jurisdictions. The PGA allows the Registrant to pass on to its customers its prudently incurred costs of natural gas. With approval of the Missouri Public Service Commission, the Registrant participated in an experimental program to control the volatility of gas prices paid by its Missouri customers in the 1998-1999 winter months through the purchase of financial instruments. This program concluded in April 1999. Since the Registrant does not have a provision similar to the PGA for its electric operations, the Registrant has entered into several long-term contracts with various suppliers to purchase coal and nuclear fuel to manage its exposure to fuel prices. With regard to the Registrant's exposure to commodity risk for purchased power, Ameren has established a subsidiary, AmerenEnergy, Inc., whose primary responsibility includes managing market risks associated with the changing market prices for purchased power for the Registrant. AmerenEnergy utilizes several techniques to mitigate its market risk for purchased power, including utilizing derivative financial instruments. A derivative is a contract whose value is dependent on or derived from the value of some underlying asset. The derivative financial instruments that AmerenEnergy is allowed to utilize (which include forward contracts and futures contracts) are dictated by a risk management policy, which has been reviewed with the Auditing Committee of Ameren's Board of Directors. Compliance with the risk management policy is the responsibility of a risk management steering committee, consisting of Ameren officers and an independent risk management officer at AmerenEnergy. As of June 30, 1999, the fair value of derivative financial instruments exposed to commodity price risk was immaterial. The Registrant expects an increase in the derivative financial instruments used to manage risk in 1999 due to expected growth at AmerenEnergy. Equity Price Risk The Registrant maintains trust funds, as required by the Nuclear Regulatory Commission and Missouri and Illinois state laws, to fund certain costs of nuclear decommissioning. As of June 30, 1999, these funds were invested primarily in domestic equity securities, fixed-rate, fixed-income securities, and cash and cash equivalents. By maintaining a portfolio that includes long-term equity investments, the Registrant is seeking to maximize the returns to be utilized to fund nuclear decommissioning costs. However, the equity securities included in the Registrant's portfolio are exposed to price fluctuations in equity markets, and the fixed-rate, fixed-income securities are exposed to changes in interest rates. The Registrant actively monitors its portfolio by benchmarking the performance of its investments against certain indices and by maintaining, and periodically reviewing, established target allocation percentages of the assets of its trusts to various investment options. The Registrant's exposure to equity price market risk is in large part mitigated due to the fact that the Registrant is currently allowed to recover its decommissioning costs in its rates. ACCOUNTING MATTERS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and requires recognition of all derivatives on the balance sheet measured at fair value. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date of SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. Earlier application is still encouraged. At this time, the Registrant is unable to determine the impact of SFAS 133 on its financial position or results of operations upon adoption; however, SFAS 133 could increase the volatility of the Registrant's future earnings. -7- SAFE HARBOR STATEMENT Statements made in this Form 10-Q which are not based on historical facts, are forward-looking and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Although such forward-looking statements have been made in good faith and are based on reasonable assumptions, there is no assurance that the expected results will be achieved. These statements include (without limitation) statements as to future expectations, beliefs, plans, strategies, objectives, events, conditions, financial performance and the Year 2000 Issue. In connection with the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Registrant is providing this 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; future market prices for fuel and purchased power, electricity, and natural gas, including the use of financial instruments; average rates for electricity in the Midwest; business and economic conditions; interest rates; weather conditions; fuel prices and availability; generation plant performance; monetary and fiscal policies; future wages and employee benefits costs; and legal and administrative proceedings. -8- UNION ELECTRIC COMPANY BALANCE SHEET UNAUDITED (Thousands of Dollars, Except Shares) June 30, December 31, ASSETS 1999 1998 - ------ ----------- ---------- Property and plant, at original cost: Electric $9,086,644 $8,975,542 Gas 216,413 209,556 Other 35,845 35,994 ---------- ---------- 9,338,902 9,221,092 Less accumulated depreciation and amortization 4,235,038 4,110,250 ---------- ---------- 5,103,864 5,110,842 Construction work in progress: Nuclear fuel in process 127,678 108,294 Other 109,698 127,168 ---------- ---------- Total property and plant, net 5,341,240 5,346,304 ---------- ---------- Investments and other assets: Nuclear decommissioning trust fund 177,402 161,877 Other 40,588 45,688 ---------- ---------- Total investments and other assets 217,990 207,565 ---------- ---------- Current assets: Cash and cash equivalents 13,559 47,337 Accounts receivable - trade (less allowance for doubtful accounts of $6,906 and $6,678, respectively) 202,401 143,912 Unbilled revenue 90,282 97,361 Other accounts and notes receivable 43,821 55,502 Intercompany notes receivable 145,500 -- Materials and supplies, at average cost - Fossil fuel 69,197 53,036 Other 94,202 91,831 Other 9,726 13,529 ---------- ---------- Total current assets 668,688 502,508 ---------- ---------- Regulatory assets: Deferred income taxes 606,649 608,353 Other 156,310 165,134 ---------- ---------- Total regulatory assets 762,959 773,487 ---------- ---------- Total Assets $6,990,877 $6,829,864 ========== ========== CAPITAL AND LIABILITIES Capitalization: Common stock, $5 par value, authorized 150,000,000 shares - outstanding 102,123,834 shares $ 510,619 $ 510,619 Other paid-in capital, principally premium on common stock 701,896 701,896 Retained earnings 1,198,452 1,211,610 ---------- ---------- Total common stockholders' equity 2,410,967 2,424,125 Preferred stock not subject to mandatory redemption 155,197 155,197 Long-term debt 1,777,339 1,674,311 ---------- ---------- Total capitalization 4,343,503 4,253,633 ---------- ---------- Current liabilities: Current maturity of long-term debt 119,379 117,269 Accounts and wages payable 183,399 242,522 Accumulated deferred income taxes 46,615 45,061 Taxes accrued 172,573 100,714 Other 188,876 151,385 ---------- ---------- Total current liabilities 710,842 656,951 ---------- ---------- Accumulated deferred income taxes 1,255,765 1,254,372 Accumulated deferred investment tax credits 141,403 144,175 Regulatory liability 152,513 159,317 Other deferred credits and liabilities 386,851 361,416 ---------- ---------- Total Capital and Liabilities $6,990,877 $6,829,864 ========== ========== See Notes to Financial Statements. -9- UNION ELECTRIC COMPANY STATEMENT OF INCOME UNAUDITED (Thousands of Dollars) Three Months Ended Six Months Ended Twelve Months Ended June 30, June 30, June 30, 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- OPERATING REVENUES: Electric $ 608,429 $ 574,962 $ 1,069,563 $ 1,011,279 $ 2,348,810 $2,221,389 Gas 12,787 13,621 57,704 55,715 93,164 95,505 Other 151 93 171 267 274 488 ---------- ---------- ----------- ----------- ----------- ---------- 621,367 588,676 1,127,438 1,067,261 2,442,248 2,317,382 OPERATING EXPENSES: Operations Fuel and purchased power 168,842 135,847 289,417 247,624 572,242 517,099 Gas 8,557 8,456 30,357 28,435 51,418 54,926 Other 115,228 120,188 213,152 220,297 454,842 430,810 ---------- ---------- ----------- ----------- ----------- ---------- 292,627 264,491 532,926 496,356 1,078,502 1,002,835 Maintenance 67,617 66,830 118,240 114,875 225,360 221,381 Depreciation and amortization 64,918 64,254 130,323 128,775 261,335 254,072 Income taxes 49,647 45,831 80,902 70,263 228,024 193,401 Other taxes 50,266 54,443 99,868 102,045 210,612 211,590 ---------- ---------- ----------- ----------- ----------- ---------- Total operating expenses 525,075 495,849 962,259 912,314 2,003,833 1,883,279 OPERATING INCOME 96,292 92,827 165,179 154,947 438,415 434,103 OTHER INCOME AND DEDUCTIONS: Allowance for equity funds used during construction 2,219 1,201 4,888 2,218 7,655 4,849 Miscellaneous, net 1,387 1,409 2,715 890 12,729 11,065 ---------- ---------- ----------- ----------- ----------- ---------- Total other income and deductions 3,606 2,610 7,603 3,108 20,384 15,914 INCOME BEFORE INTEREST CHARGES 99,898 95,437 172,782 158,055 458,799 450,017 INTEREST CHARGES: Interest 31,055 30,660 61,978 64,820 127,105 132,863 Allowance for borrowed funds used during construction (1,826) (1,474) (3,608) (3,318) (6,235) (6,749) ---------- ---------- ----------- ----------- ----------- ---------- Net interest charges 29,229 29,186 58,370 61,502 120,870 126,114 INCOME BEFORE EXTRAORDINARY CHARGE 70,669 66,251 114,412 96,553 337,929 323,903 ---------- ---------- ----------- ----------- ----------- ---------- EXTRAORDINARY CHARGE (NET OF INCOME TAXES) -- -- -- -- -- (26,967) ---------- ---------- ----------- ----------- ----------- ---------- NET INCOME 70,669 66,251 114,412 96,553 337,929 296,936 ---------- ---------- ----------- ----------- ----------- ---------- PREFERRED STOCK DIVIDENDS 2,205 2,205 4,409 4,409 8,817 8,817 ---------- ---------- ----------- ----------- ----------- ---------- NET INCOME AFTER PREFERRED STOCK DIVIDENDS $ 68,464 $ 64,046 $ 110,003 $ 92,144 $ 329,112 $ 288,119 ========== ========== =========== =========== =========== =========== See Notes to Financial Statements. -10- UNION ELECTRIC COMPANY STATEMENT OF CASH FLOWS UNAUDITED (Thousands of Dollars) Six Months Ended June 30, 1999 1998 ---- ---- Cash Flows From Operating: Net income $ 114,412 $ 96,553 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 125,655 123,981 Amortization of nuclear fuel 21,025 16,182 Allowance for funds used during construction (8,496) (5,536) Deferred income taxes, net (2,153) (5,511) Deferred investment tax credits, net (2,772) (2,857) Changes in assets and liabilities: Receivables, net (39,729) (94,796) Materials and supplies (18,532) (2,435) Accounts and wages payable (59,123) (41,978) Taxes accrued 71,859 57,591 Other, net 63,718 16,742 --------- --------- Net cash provided by operating activities 265,864 157,936 Cash Flows From Investing: Construction expenditures (120,658) (100,525) Allowance for funds used during construction 8,496 5,536 Nuclear fuel expenditures (19,313) (9,352) Intercompany notes receivable (145,500) -- --------- --------- Net cash used in investing activities (276,975) (104,341) Cash Flows From Financing: Dividends on common stock (123,161) (123,161) Dividends on preferred stock (4,409) (4,409) Redemptions - Nuclear fuel lease (7,427) (51,152) Short-term debt -- (21,300) Issuances - Nuclear fuel lease 38,430 7,620 Long-term debt 73,900 148,500 --------- --------- Net cash used in financing activities (22,667) (43,902) Net increase (decrease) in cash and cash equivalents (33,778) 9,693 Cash and cash equivalents at beginning of year 47,337 3,232 --------- --------- Cash and cash equivalents at end of period $ 13,559 $ 12,925 ========= ========= Cash paid during the periods: Interest (net of amount capitalized) $ 58,025 $ 63,904 Income taxes, net $ 58,426 $ 62,138 See Notes to Financial Statements. -11- UNION ELECTRIC COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) June 30, 1999 Note 1 - Union Electric Company (AmerenUE or the Registrant) is a wholly-owned subsidiary of Ameren Corporation (Ameren), which is the parent company of two utility operating companies, the Registrant and Central Illinois Public Service Company (AmerenCIPS). Ameren is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA) formed in December 1997 upon the merger of AmerenUE and CIPSCO Incorporated (the Merger). Both Ameren and its subsidiaries are subject to the regulatory provisions of the PUHCA. The operating companies 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. Contracts among the companies--dealing with jointly-owned generating facilities, interconnecting transmission lines, and the exchange of electric power--are regulated by the Federal Energy Regulatory Commission (FERC) or the Securities and Exchange Commission (SEC). Administrative support services are provided to the Registrant by a separate Ameren subsidiary, Ameren Services Company. The Registrant serves 1.1 million electric and 124,000 gas customers in a 24,500 square-mile area of Missouri and Illinois, including Metropolitan St. Louis. The Registrant also has a 40 percent interest in Electric Energy, Inc. (EEI), which is accounted for under the equity method of accounting. 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. Note 2 - Financial statement note disclosures, normally included in financial statements prepared in conformity with generally accepted accounting principles, have been omitted in this Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. However, in the opinion of the Registrant, the disclosures contained in this Form 10-Q are adequate to make the information presented not misleading. See Notes to Financial Statements included in the 1998 Form 10-K for information relevant to the financial statements contained in this Form 10-Q, including information as to the significant accounting policies of the Registrant. Note 3 - In the opinion of the Registrant the interim financial statements filed as part of this Form 10-Q reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. Registrant's financial statements were prepared to permit the information required in the Financial Data Schedule (FDS), Exhibit 27, to be directly extracted from the filed statements. The FDS amounts correspond to or are calculable from the amounts reported in the financial statements or notes thereto. Note 4 - Due to the effect of weather on sales and other factors which are characteristic of public utility operations, financial results for the periods ended June 30, 1999 and 1998, are not necessarily indicative of trends for any three-month, six-month, or twelve-month period. Note 5 - On July 21, 1995, the Missouri Public Service Commission (MoPSC) approved an agreement involving the Registrant's Missouri electric rates. The Agreement included a three-year experimental alternative regulation plan that provides that earnings in excess of a 12.61 percent regulatory return on equity (ROE) will be shared equally between customers and shareholders and earnings above 14 percent 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 Registrant recorded an estimated $43 million credit for the final year of the original experimental alternative regulation plan. The MoPSC staff has proposed adjustments to the Registrant's estimated $43 million credit, which if ultimately accepted, could increase the Registrant's estimated credit up to approximately $5 million. Hearings were held on this matter in June 1999, and a final order from the MoPSC is expected by the end of 1999. A new three-year experimental alternative regulation plan was included in the joint agreement approved by the MoPSC in its February 1997 order approving the Merger. Like the original plan, the new plan requires that earnings over a 12.61 percent ROE up to a 14 percent ROE will be shared equally between customers and stockholders. The new three-year plan will also return to customers 90 percent of all earnings above a 14 percent ROE up to a 16 percent ROE. Earnings above a 16 percent ROE will be credited entirely to customers. As of June 30, 1999, the Registrant had recorded an estimated $20 million credit for the first year of the new plan. This credit, which the Registrant expects to pay to Missouri customers later this year, was reflected as a reduction in electric revenues. -12- The joint agreement approved by the MoPSC in its February 1997 order approving the Merger also provided for a Missouri electric rate decrease, retroactive to September 1, 1998, based on the weather-adjusted average annual credits to customers under the original experimental alternative regulation plan. The MoPSC staff proposed adjustments to the Registrant's methodology of calculating the weather-adjusted credits. During the second quarter of 1999, the Registrant and the MoPSC staff reached a settlement on the methodology for calculating the weather-adjusted credits. This proposed settlement is subject to approval by the MoPSC. In addition, the results of the regulatory proceeding associated with the final year of the original experimental alternative regulation plan will impact the final Missouri electric rate decrease as well. The Registrant estimates that its Missouri electric rate decrease should approximate $15 million to $20 million on an annualized basis. A final order from the MoPSC is expected by the end of 1999. In conjunction with the Electric Service Customer Choice and Rate Relief Law of 1997 (the Law), a 5 percent residential electric rate decrease for the Registrant's Illinois electric customers was effective August 1, 1998. This rate decrease is expected to decrease electric revenues $3 million annually, based on estimated levels of sales and assuming normal weather conditions. The Registrant 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 Registrant's rates are currently below the Midwest utility average. The Law also contains a provision requiring one-half of excess earnings from the Illinois jurisdiction for the years 1998 through 2004 to be refunded to the Registrant's customers. Excess earnings are defined as the portion of the two-year average annual rate of return on common equity in excess of 1.5 percent of the two-year average of an Index, as defined in the Law. The Index is defined as the sum of the average for the twelve months ended September 30 of the average monthly yields of the 30-year U. S. Treasury bonds plus prescribed percentages ranging from 4 percent to 5 percent. In July 1999, Senate Bill 24 was passed which increased the prescribed percentages to 7 percent beginning in 2000. Filings must be made with the ICC on or before March 31 of each year 2000 through 2005. At this time, the Registrant is unable to determine the amount of the credit it will be required to return to customers, if any, under the Law for the two year period ended December 31, 1999. Note 6 - The Registrant has transactions in the normal course of business with other Ameren subsidiaries. These transactions are primarily comprised of power purchases and sales and services received or rendered. Intercompany receivables included in other accounts and notes receivable were approximately $5 million and $6 million, respectively, as of June 30, 1999 and December 31, 1998. Intercompany payables included in accounts and wages payable totaled approximately $31 million and $17 million, respectively, as of June 30, 1999 and December 31, 1998. In March 1999, the Registrant, along with Ameren Services Company and AmerenCIPS, entered into a utility money pool agreement to coordinate and provide for certain short-term cash and working capital requirements. Borrowings under the agreement are limited to $500 million and are due on demand or within one year. Interest is calculated on varying rates of interest depending on the composition of internal and external funds in the money pool. The money pool is administered by Ameren Services Company. The Registrant recorded an intercompany note receivable of $146 million, representing funds invested in the utility money pool as of June 30, 1999. Note 7 - Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" became effective on January 1, 1999. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. Under SOP 98-1, certain costs, may be capitalized and amortized over some future period. SOP 98-1 did not have a material impact on the Registrant's financial position or results of operations upon adoption. The Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) Issue 98-10, "Accounting for Energy Trading and Risk Management Activities" became effective on January 1, 1999. EITF 98-10 provides guidance on the accounting for energy contracts entered into for the purchase or sale of electricity, natural gas, capacity and transportation. The EITF reached a consensus in EITF 98-10 that sales and purchase activities being performed need to be classified as either trading or non-trading. Furthermore, transactions that are determined to be trading activities would be recognized on the balance sheet measured at fair value, with gains and losses included in earnings. EITF 98-10 includes factors or indicators to consider when determining if a transaction is a trading or non-trading activity. Currently, AmerenEnergy, Inc., an energy marketing subsidiary of Ameren, enters into contracts for the sale and purchase of energy on behalf of the Registrant. These transactions are considered non-trading -13- activities and are accounted for using the accrual or settlement method, which represents industry practice. Should any of AmerenEnergy's future activities be considered material trading activities based on the indicators provided in EITF 98-10, a change in accounting practice would be required. EITF 98-10 did not have a material impact on the Registrant's financial position or results of operations upon adoption. Note 8 - Certain reclassifications were made to prior-year financial statements to conform to current-period presentation. -14- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to "Electric Industry Restructuring" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2 - Regulatory Matters in the Notes to Financial Statements of the Registrant's Form 10-K for the year ended December 31, 1998 for information regarding the Registrant's membership in the Midwest Independent System Operator (Midwest ISO). In May 1999, the Missouri Public Service Commission approved a stipulation and agreement authorizing the Registrant's membership in the Midwest ISO for a six year transition period subject to certain conditions and reporting requirements. The six year period will commence on the first day that the Midwest ISO begins providing electric transmission service. Reference is made to "Liquidity and Capital Resources" in Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations and Note 11 - Commitments and Contingencies in the Notes to Financial Statements of the Registrant's Form 10-K for the year ended December 31, 1998 for information regarding the United States Environmental Protection Agency's (EPA) issuance in 1997 of National Ambient Air Quality Standards for ozone and particulate matter. In May 1997, the United States Court of Appeals for the District of Columbia Circuit remanded the ambient air quality standards regulations to EPA for reconsideration. At this time, the Registrant is unable to predict the ultimate impact of those revised air quality standards on its future financial condition, results of operations or liquidity. ITEM 5. OTHER INFORMATION Reference is made to Note 11 - Commitments and Contingencies in the Notes to Financial Statements of the Registrant's Form 10-K for the year ended December 31, 1998 for information concerning the expiration date of collective bargaining agreements. The Registrant is engaged in labor negotiations with the International Brotherhood of Electrical Workers and the International Union of Operating Engineers and the collective bargaining agreements have been extended so as to facilitate those negotiations. At this time, the Registrant is unable to predict the impact of these negotiations on its future financial condition, results of operations or cash flows. Any stockholder proposal intended for inclusion in the proxy material for the Registrant's 2000 annual meeting of stockholders must be received by the Registrant by December 1, 1999. In addition, under the Registrant's By-Laws, stockholders who intend to submit a proposal in person at an annual meeting, or who intend to nominate a director at a meeting, must provide advance written notice along with other prescribed information. In general, such notice must be received by the Secretary of the Registrant not later than 60 nor earlier than 90 days prior to the first anniversary of the preceding year's annual meeting. At its August 1999 Board of Directors Meeting, the Registrant intends to amend its By-Laws to change the date for holding its annual meeting of stockholders to the fourth Tuesday of April in each year to coincide with the annual meeting date of its parent, Ameren Corporation. Consequently, for the Registrant's 2000 annual meeting of stockholders, written notice of any in-person stockholder proposal or director nomination must be received not later than February 22, 2000 or earlier than January 23, 2000. -15- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements, 12 Months Ended June 30, 1999. Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNION ELECTRIC COMPANY (Registrant) By /s/ Donald E. Brandt ------------------------------- Donald E. Brandt Senior Vice President Finance and Corporate Services (Principal Financial Officer) Date: August 13, 1999