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 September 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 October
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 7
Balance Sheet
- September 30, 1999 and December 31, 1998 10
Statement of Income
- Three months, nine months and 12 months ended
September 30, 1999 and 1998 11
Statement of Cash Flows
- Nine months ended September 30, 1999 and 1998 12
Notes to Financial Statements 13
Part II Other Information 16
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 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 the Financial Statements beginning on page 13, and the Management's
Discussion and Analysis of Financial Condition and Results of Operations (MD&A),
the Audited Financial Statements, and the Notes to the Financial Statements
appearing in the Registrant's 1998 Form 10-K.
RESULTS OF OPERATIONS
Earnings
Third quarter 1999 earnings of $206 million increased $2 million compared to
1998 third quarter earnings. Earnings for the nine months ended September 30,
1999, increased $20 million from the year-ago period to $316 million. Earnings
for the 12 months ended September 30, 1999, were $331 million, a $20 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 September 30, 1998, were $338
million.
Earnings fluctuated due to many conditions, primarily: weather variations,
credits to electric customers, electric rate reductions, 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, nine-month and 12-month periods ended September 30, 1999 and 1998
are detailed below.
Electric Operations
Electric Operating Revenues Variations for periods ended September 30, 1999
from comparable prior-year periods
- --------------------------------------------------------------------------------
(Millions of Dollars) Three Months Nine Months Twelve Months
- --------------------------------------------------------------------------------
Credit to customers $ (2) $ 21 $ 21
Rate variations (5) (16) (6)
Effect of abnormal weather (15) (35) (51)
Growth and other 26 24 13
Interchange sales 54 123 138
- --------------------------------------------------------------------------------
$ 58 $ 117 $ 115
- --------------------------------------------------------------------------------
Electric revenues for the three, nine and 12 months ended September 30, 1999,
increased $58 million, $117 million and $115 million, respectively, compared to
the year-ago periods. The increase in revenues was primarily due to an increase
in interchange sales, 32 percent, 55 percent and 72 percent, respectively for
each period, due to strong marketing efforts and decreased credits to Missouri
electric customers partially offset by an estimated credit that the Registrant
expects to pay to its Illinois electric customers for the initial period of a
sharing mechanism provided by deregulation legislation (see Note 5 under Notes
to Financial Statements for further information). These benefits were partially
offset by a 2 percent decline in native sales in each of the respective periods,
primarily due to milder weather and rate decreases in both Missouri and Illinois
(see Note 5 under Notes to Financial Statements for further information).
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Fuel and Purchased Power Variations for periods ended September 30, 1999
from comparable prior-year periods
- --------------------------------------------------------------------------------
(Millions of Dollars) Three Months Nine Months Twelve Months
- --------------------------------------------------------------------------------
Fuel:
Variation in generation $ (4) $ 7 $ 24
Price 3 (8) (19)
Generation efficiencies and other - 1 4
Purchased power variation 50 90 72
- --------------------------------------------------------------------------------
$ 49 $ 90 $ 81
- --------------------------------------------------------------------------------
The $49 million increase in third quarter fuel and purchased power costs
compared to the year ago quarter was driven by increased purchased power,
resulting from higher sales volume, partially offset by decreased generation.
Fuel and purchased power costs for the nine month and 12 month periods ended
September 30, 1999, compared to the year ago comparable periods, increased $90
million and $81 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 nine months ended September 30, 1999, increased $3 million
compared to the prior-year period primarily due to an Illinois gas rate increase
effective February 1999 and Missouri gas rate increase effective February 1998.
This increase was partially offset by a 5 percent decrease in retail sales. Gas
revenues for the 12 months ended September 30, 1999, decreased $2 million
compared to the year-ago period primarily due to a 9 percent decline in retail
sales due to milder weather, partially offset by an Illinois gas rate increase
effective February 1999 and Missouri gas rate increase effective February 1998.
Gas costs for the nine months ended September 30, 1999, increased $3 million
compared to the year-ago period, primarily due to increased gas prices. Gas
costs for the 12 months ended September 30, 1999, decreased $2 million compared
to the year-ago period, primarily due to lower sales, partially offset by
increased 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 months ended September 30, 1999 were
flat primarily due to increased information system related costs, expenses
associated with the Year 2000 project and increased injuries and damages
expenses based on claims experience, primarily offset by the 1998 one-time
pretax charge of $18 million for the targeted employee separation plan and
reduced workforce.
Other operations expenses for the nine months ended September 30, 1999,
decreased $7 million, compared to the same year-ago period primarily due to the
1998 one-time pretax charge of $18 million for the targeted separation plan and
reduced workforce, partially offset by increased information system related
costs and expenses associated with the Year 2000 project. Other operations
expenses increased $3 million for the 12 months ended September 30, 1999,
compared to the same year-ago period primarily due to increased information
system related costs and expenses associated with the Year 2000 project,
partially offset by the 1998 one-time pretax charge of $18 million for the
targeted separation plan.
Maintenance expenses for the three, nine and 12 months ended September 30, 1999,
increased $7 million, $11 million and $14 million, respectively, compared to the
year-ago periods primarily due to increased power plant maintenance and tree
trimming activity, partially offset by the absence of a Callaway Nuclear Plant
refueling until fourth quarter 1999. There was a Callaway Nuclear Plant
refueling in the second quarter of 1998.
Taxes
Income taxes increased $4 million, $15 million and $25 million for the three,
nine and 12 months ended September 30, 1999, respectively, due to higher pretax
income.
Other Income and Deductions
The variation in miscellaneous, net for the 12 months ended September 30, 1999,
compared to the year-ago period, was primarily due to an increase in
miscellaneous expense resulting from the reversal of the Missouri portion of
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merger-related costs which were recorded as a regulatory asset upon Merger close
in December 1997, under conditions of the Missouri Public Service Commission
order approving the Merger. This increase was partially offset by increased
interest income and gains on the sale of property in the current 12-month
period.
Balance Sheet
The $230 million increase in cash and cash equivalents was primarily due to
higher revenues attributable to interchange sales in August and September 1999
compared to November and December 1998.
The $68 million increase in trade accounts receivable and unbilled revenue was
due primarily to higher revenues in August and September 1999 compared to
November and December 1998. The $79 million increase in intercompany notes
receivable is due to funds invested in a utility money pool (see Note 6 under
Notes to Financial Statements for further information). The remaining variance
is a result of the timing of various payments to suppliers.
The $65 million increase in other current liabilities was primarily due to the
timing of when credits will be paid to electric customers in the Registrant's
Missouri and Illinois jurisdictions, as well as an estimated rate reduction for
Missouri electric customers retroactive to September 1, 1998 (See Note 5 under
Notes to Consolidated Financial Statements for further information). The
remaining variance is a result of the timing of various payments to suppliers.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $639 million for the nine months
ended September 30, 1999, compared to $533 million during the same 1998 period.
Cash flows used in investing activities totaled $260 million and $155 million
for the nine months ended September 30, 1999 and 1998, respectively.
Construction expenditures for the nine months ended September 30, 1999, for
constructing new or improving existing facilities were $173 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 $79 million through
a utility money pool (see Note 6 under Notes to Financial Statements for further
information).
Cash flows used in financing activities totaled $149 million for the nine months
ended September 30, 1999, compared to $298 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 September
30, 1999, the Registrant had committed bank lines of credit aggregating $161
million (all of which was 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 September 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 available at September 30, 1999. Also, Ameren has a bank credit agreement
due 2002, which permits the borrowing of up to $200 million on a short-term
basis. This credit agreement is available to Ameren and its subsidiaries,
including the Registrant. As of September 30, 1999, $132 million was available
for the Registrant's use.
Additionally, the Registrant has a lease agreement that provides for the
financing of nuclear fuel. At September 30, 1999, the maximum amount that could
be financed under the agreement was $120 million. Cash used in financing
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activities for the nine months ended September 30, 1999, included redemptions
under the lease for nuclear fuel of $11 million, offset by $60 million of
issuances. At September 30, 1999, $116 million was financed under the lease.
The Registrant, in the ordinary course of business, explores opportunities to
reduce its cost in order to remain competitive in the marketplace. Areas where
the Company focuses its review include, but are not limited to, labor costs and
fuel supply costs. In the labor area, the Registrant is currently in
negotiations with many of the Registrant's major collective bargaining units in
an effort to manage its labor costs and practices effectively in the future. The
Registrant also explores alternatives to effectively manage the size of its
workforce. These alternatives include utilizing hiring freezes, outsourcing and
offering employee separation packages. In the fuel supply area, the Registrant
explores alternatives to effectively manage its overall fuel costs. These
alternatives include diversifying fuel sources for use at the Registrant's
fossil plants (e.g. utilizing low sulfur versus high sulfur coal), as well as
restructuring or terminating existing contracts with suppliers.
Certain of these reduction alternatives could result in additional investments
being made at the Registrant's power plants in order to utilize different types
of coal, or could require nonrecurring payments of employee separation benefits
or nonrecurring payments to restructure or terminate an existing fuel contract
with a supplier. Management is unable to predict which (if any), and to what
extent, these alternatives to reduce its overall cost structure will be
executed, as well as determine the impact of these actions on the Registrant's
future financial position, results of operations or cash flows.
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. On August 25, 1999, the ICC issued an order approving the delivery
services tariffs, with an allowed rate of return on equity of 10.45%. The
Registrant and AmerenCIPS filed a joint Petition for Rehearing of that Order
requesting the ICC to alter its conclusions on a number of issues. On October
13, 1999, the ICC granted a rehearing on certain issues. An Order on this
reopened proceeding is expected in early 2000.
In August 1999, Ameren filed a transmission system rate case with the Federal
Energy Regulatory Commission (FERC). This filing was primarily designed to
implement rates, terms and conditions for transmission service for those retail
customers in Illinois which choose other suppliers. On October 14, 1999, the
FERC issued an Order suspending the proposed rates until March 25, 2000. Ameren
filed in response an emergency Request for Rehearing which requested that the
portion of the filing which related to retail access in Illinois be placed into
effect as of October 1, 1999, to coincide with the start of retail competition
in Illinois. An Order from the FERC to this Request is expected shortly. An
initial decision as to Ameren's overall filing is expected in early 2001.
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 began 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.
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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 and 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 mission critical systems was completed
by September 30, 1999. The implementation/testing phase for all other
components/applications is approximately 98 percent complete as of September 30,
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 has also addressed the impact of electric power grid problems that may
occur outside of its own electric system. Ameren has conducted 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) and the North American Electric Reliability Council (NERC) to
plan Year 2000 operational preparedness and restoration scenarios. As of
September 30, 1999, Ameren had completed its assessment, planning and
implementation/testing phases for mission critical items as identified by NERC.
As a result, Ameren has been added to the "Ready" list being compiled by NERC as
it assesses readiness of the regional and national electric grid. 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 is being shared with EPRI participants
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 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
September 30, 1999, Ameren had expended approximately $8 million. Ameren's plans
to complete Year 2000 modifications are based on
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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 in
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.
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.
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 $5 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 September 30, 1999, continued to be outstanding throughout 2000, and
that the average interest rates for these instruments increased 1 percent over
1999. 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.
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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 September 30, 1999, the fair value of derivative financial instruments
exposed to commodity price risk was immaterial.
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 September 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.
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. The
following factors, in addition to those discussed elsewhere in this report and
in the Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
and in subsequent securities filings, could cause results to differ materially
from management expectations as suggested by such "forward-looking" statements:
the effects of regulatory actions; changes in laws and other governmental
actions; the impact on the Registrant of current regulations related to the
phasing-in of the opportunity for some customers to choose alternative energy
suppliers in Illinois; the effects of increased competition in the future due
to, among other things, deregulation of certain aspects of the Registrant's
business at both the state and Federal levels; future market prices for fuel and
purchased power, electricity, and natural gas, including the use of financial
instruments; average
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rates for electricity in the Midwest; business and economic conditions; interest
rates; weather conditions; fuel prices and availability; generation plant
performance; the impact of current environmental regulations on utilities and
the expectation that more stringent requirements will be introduced over time,
which could potentially have a negative financial effect; monetary and fiscal
policies; future wages and employee benefits costs; and legal and administrative
proceedings.
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UNION ELECTRIC COMPANY
BALANCE SHEET
UNAUDITED
(Thousands of Dollars, Except Shares)
September 30, December 31,
ASSETS 1999 1998
- ------ ---------- ----------
Property and plant, at original cost:
Electric $9,146,149 $8,975,542
Gas 219,275 209,556
Other 35,784 35,994
---------- ----------
9,401,208 9,221,092
Less accumulated depreciation and amortization 4,286,088 4,110,250
---------- ----------
5,115,120 5,110,842
Construction work in progress:
Nuclear fuel in process 134,394 108,294
Other 73,289 127,168
---------- ----------
Total property and plant, net 5,322,803 5,346,304
---------- ----------
Investments and other assets:
Nuclear decommissioning trust fund 172,477 161,877
Other 35,565 45,688
---------- ----------
Total investments and other assets 208,042 207,565
---------- ----------
Current assets:
Cash and cash equivalents 276,728 47,337
Accounts receivable - trade (less allowance for doubtful
accounts of $7,945 and $6,678, respectively) 249,999 143,912
Unbilled revenue 58,804 97,361
Other accounts and notes receivable 87,956 55,502
Intercompany notes receivable 78,800 -
Materials and supplies, at average cost -
Fossil fuel 64,509 53,036
Other 95,348 91,831
Other 20,541 13,529
---------- ----------
Total current assets 932,685 502,508
---------- ----------
Regulatory assets:
Deferred income taxes 605,797 608,353
Other 151,595 165,134
---------- ----------
Total regulatory assets 757,392 773,487
---------- ----------
Total Assets $7,220,922 $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 1,336,756 1,211,610
---------- ----------
Total common stockholders' equity 2,549,271 2,424,125
Preferred stock not subject to mandatory redemption 155,197 155,197
Long-term debt 1,721,333 1,674,311
---------- ----------
Total capitalization 4,425,801 4,253,633
---------- ----------
Current liabilities:
Current maturity of long-term debt 119,312 117,269
Accounts and wages payable 200,777 242,522
Accumulated deferred income taxes 47,392 45,061
Taxes accrued 272,399 100,714
Other 216,405 151,385
---------- ----------
Total current liabilities 856,285 656,951
---------- ----------
Accumulated deferred income taxes 1,254,053 1,254,372
Accumulated deferred investment tax credits 140,017 144,175
Regulatory liability 149,111 159,317
Other deferred credits and liabilities 395,655 361,416
---------- ----------
Total Capital and Liabilities $7,220,922 $6,829,864
========== ==========
See Notes to Financial Statements.
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UNION ELECTRIC COMPANY
STATEMENT OF INCOME
UNAUDITED
(Thousands of Dollars)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
----------------------- --------------------- ---------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
OPERATING REVENUES:
Electric $895,308 $836,898 $1,964,871 $1,848,177 $2,407,220 $2,292,260
Gas 10,542 9,464 68,246 65,179 94,242 96,713
Other - 75 171 342 199 492
-------- -------- --------- ---------- --------- ---------
Total operating revenues 905,850 846,437 2,033,288 1,913,698 2,501,661 2,389,465
OPERATING EXPENSES:
Operations
Fuel and purchased power 223,194 174,610 512,611 422,234 620,826 539,957
Gas 7,779 6,476 38,136 34,911 52,721 54,396
Other 125,041 125,321 338,193 345,618 454,562 451,296
-------- -------- --------- ---------- --------- ---------
356,014 306,407 888,940 802,763 1,128,109 1,045,649
Maintenance 51,887 44,685 170,127 159,560 232,562 218,109
Depreciation and amortization 66,594 65,338 196,917 194,113 262,591 256,923
Income taxes 135,952 131,454 216,854 201,717 232,522 207,460
Other taxes 59,696 64,815 159,564 166,860 205,493 212,129
-------- -------- --------- ---------- --------- ---------
Total operating expenses 670,143 612,699 1,632,402 1,525,013 2,061,277 1,940,270
OPERATING INCOME 235,707 233,738 400,886 388,685 440,384 449,195
OTHER INCOME AND DEDUCTIONS:
Allowance for equity funds used
during construction 1,149 1,152 6,037 3,370 7,652 4,817
Miscellaneous, net 1,933 3,152 4,648 4,042 11,510 17,326
-------- -------- --------- ---------- --------- ---------
Total other income and deductions 3,082 4,304 10,685 7,412 19,162 22,143
INCOME BEFORE
INTEREST CHARGES 238,789 238,042 411,571 396,097 459,546 471,338
INTEREST CHARGES:
Interest 31,769 32,739 93,747 97,559 126,135 130,946
Allowance for borrowed funds
used during construction (1,707) (1,248) (5,315) (4,566) (6,694) (6,283)
-------- -------- --------- ---------- --------- ---------
Net interest charges 30,062 31,491 88,432 92,993 119,441 124,663
INCOME BEFORE
EXTRAORDINARY CHARGE 208,727 206,551 323,139 303,104 340,105 346,765
-------- -------- --------- ---------- --------- ---------
EXTRAORDINARY CHARGE
(NET OF INCOME TAXES) - - - - - (26,967)
-------- -------- --------- ---------- --------- ---------
NET INCOME 208,727 206,551 323,139 303,104 340,105 319,708
-------- -------- --------- ---------- --------- ---------
PREFERRED STOCK DIVIDENDS 2,204 2,204 6,613 6,613 8,817 8,817
-------- -------- --------- ---------- --------- ---------
NET INCOME AFTER PREFERRED
STOCK DIVIDENDS $206,523 $204,347 $316,526 $296,491 $331,288 $310,891
======== ======== ========= ========== ========= =========
See Notes to Financial Statements.
-11-
UNION ELECTRIC COMPANY
STATEMENT OF CASH FLOWS
UNAUDITED
(Thousands of Dollars)
Nine Months Ended
September 30,
1999 1998
---- ----
Cash Flows From Operating:
Net income $ 323,139 $ 303,104
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 189,914 186,984
Amortization of nuclear fuel 30,823 26,837
Allowance for funds used during construction (11,352) (7,936)
Deferred income taxes, net (5,638) (6,804)
Deferred investment tax credits, net (4,158) (4,286)
Changes in assets and liabilities:
Receivables, net (99,984) (118,397)
Materials and supplies (14,990) (2,544)
Accounts and wages payable (41,745) (11,485)
Taxes accrued 171,685 151,073
Credit to customers 36,597 26,614
Other, net 64,650 (10,188)
--------- ---------
Net cash provided by operating activities 638,941 532,972
Cash Flows From Investing:
Construction expenditures (173,160) (155,526)
Allowance for funds used during construction 11,352 7,936
Nuclear fuel expenditures (19,662) (7,523)
Intercompany notes receivable (78,800) --
--------- ---------
Net cash used in investing activities (260,270) (155,113)
Cash Flows From Financing:
Dividends on common stock (191,380) (191,380)
Dividends on preferred stock (6,613) (6,613)
Environmental bond redemption fund -- (160,000)
Redemptions -
Nuclear fuel lease (11,332) (53,670)
Short-term debt -- (21,300)
Long-term debt -- (35,000)
Issuances -
Nuclear fuel lease 60,045 9,917
Long-term debt -- 160,000
--------- ---------
Net cash used in financing activities (149,280) (298,046)
--------- ---------
Net increase in cash and cash equivalents 229,391 79,813
Cash and cash equivalents at beginning of year 47,337 3,232
--------- ---------
Cash and cash equivalents at end of period $ 276,728 $ 83,045
========= =========
Cash paid during the periods:
Interest (net of amount capitalized) $ 77,288 $ 83,606
Income taxes, net $ 120,186 $ 122,738
See Notes to Financial Statements.
-12-
UNION ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 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 September 30, 1999 and 1998, are not necessarily indicative of trends for
any three-month, nine-month or 12-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 September 30, 1999,
the Registrant had recorded an estimated $20 million credit for the first year
of this plan. This credit was reflected as a reduction in electric revenues.
-13-
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 Illinois Commerce Commission on or before
March 31 of each year 2000 through 2005. As of September 30, 1999, the
Registrant recorded an estimated $2 million credit that it expects to return to
its customers 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 $50 million
and $6 million, respectively, as of September 30, 1999 and December 31, 1998.
Intercompany payables included in accounts and wages payable totaled
approximately $51 million and $17 million, respectively, as of September 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 at 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 $79 million, representing funds invested in the utility money
pool as of September 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
-14-
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.
-15-
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Reference is made to Item 5. Other Information in Part II of the
Registrant's Form 10-Q for the quarter ended June 30, 1999 for information
relating to a proposed amendment to the Registrant's By-Laws. On August 26,
1999, the Board of Directors of the Registrant amended 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, under another provision of its By-Laws, for
the Registrant's 2000 annual meeting of stockholders, any stockholder who
intends to submit a proposal or director nomination in person at the meeting
must provide written notice to the Registrant's Secretary by not later than
February 22, 2000 or earlier than January 23, 2000.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 3(ii)-By-Laws of Union Electric Company, as amended as of
August 26, 1999.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements, 12 Months Ended
September 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: November 15, 1999
-16-