10-Q 1 cilco10qtr1qtr.txt CILCO10Q1QTR03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended March 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ........ to ........ Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 2-95569 CILCORP Inc. 37-1169387 (An Illinois Corporation) 300 Liberty Street Peoria, Illinois 61602 (309) 677-5230 1-2732 CENTRAL ILLINOIS LIGHT COMPANY 37-0211050 (An Illinois Corporation) 300 Liberty Street Peoria, Illinois 61602 (309) 677-5230 Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X]. No [ ]. Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ]. No [X]. Indicate the number of shares outstanding of each of the issuer's respective classes of common stock, as of the latest practicable date: CILCORP Inc. Common stock, no par value, shares outstanding and privately held by Ameren Corporation at May 15, 2003 1,000 CENTRAL ILLINOIS LIGHT COMPANY Common stock, no par value, shares outstanding and privately held by CILCORP Inc. at May 15, 2003 13,563,871
CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003 TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) CILCORP INC. Consolidated Balance Sheets 3-4 Consolidated Statements of Income and Comprehensive Income 5-6 Consolidated Statements of Cash Flows 7-8 CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets 9-10 Consolidated Statements of Income and Comprehensive Income 11 Consolidated Statements of Cash Flows 12-13 Notes to Consolidated Financial Statements CILCORP Inc. and Central Illinois Light Company 14-27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CILCORP Inc. and Central Illinois Light Company 28-47 Item 3. Quantitative and Qualitative Disclosures about Market Risk 47-49 Item 4. Controls and Procedures 49 Forward-Looking Statements 49-50 PART II. OTHER INFORMATION Item 1. Legal Proceedings 51 Item 6. Exhibits and Reports on Form 8-K 51 Signatures and Certifications 52-59
This Form 10-Q contains "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements should be read with the cautionary statements and important factors included in this Form 10-Q at Part I under the heading Forward-Looking Statements. Forward-looking statements are all statements other than statements of historical fact, including those statements that are identified by the use of the words "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," and similar expressions. 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) (Unaudited) Successor Predecessor March 31, December 31, 2003 2002 ASSETS Current Assets: Cash and cash equivalents $ 34,148 | $ 31,821 Receivables, less allowance for | uncollectible accounts of $3,672 and $1,989 82,227 | 52,982 Receivables, miscellaneous 9,037 | 7,932 Accrued unbilled revenue 33,667 | 37,256 Fuel, at average cost 62,502 | 16,459 Materials and supplies, at average cost 18,497 | 17,691 Gas in underground storage, at average cost 12,545 | 27,209 Prepayments and other 7,579 | 23,748 ---------- | ---------- Total Current Assets 260,202 | 215,098 ---------- | ---------- Investments and Other Property: | Investment in leveraged leases 131,820 | 132,874 Other investments 18,396 | 17,850 ---------- | ---------- Total Investments and Other Property 150,216 | 150,724 ---------- | ---------- Property, Plant and Equipment: | Utility plant, at original cost | Electric 860,655 | 739,779 Gas 184,706 | 245,944 ---------- | ---------- 1,045,361 | 985,723 Less - accumulated provision for depreciation 13,718 | 175,972 ---------- | ---------- 1,031,643 | 809,751 Construction work in progress 129,111 | 104,571 Other, net of depreciation -- | 22 ---------- | ---------- Total Property, Plant and Equipment 1,160,754 | 914,344 ---------- | ---------- Other Assets: | Goodwill, net of accumulated amortization | of $0 and $33,753 594,765 | 580,748 Regulatory assets 11,175 | 7,732 Other assets 36,257 | 32,398 ---------- | ---------- Total Other Assets 642,197 | 620,878 ---------- | ---------- Total Assets $2,213,369 | $1,901,044 ========== | ========== See Notes to Consolidated Financial Statements.
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CILCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) (Unaudited) Successor Predecessor March 31, December 31, 2003 2002 LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Current portion of long-term debt $ 1,400 | $ 26,750 Notes payable -- | 10,000 Accounts payable 111,165 | 76,332 Accrued taxes 23,098 | 8,105 Accrued interest 27,256 | 18,712 Other 23,933 | 21,427 ---------- | ---------- Total Current Liabilities 186,852 | 161,326 ---------- | ---------- Long-term debt 856,256 | 791,028 ---------- | ---------- Deferred Credits and Other Liabilities: | Deferred income taxes 306,817 | 189,977 Regulatory liability of regulated subsidiary 18,614 | 19,230 Deferred investment tax credit 12,561 | 12,958 Pension liabilities 129,839 | 106,797 Postretirement health care liabilities 121,539 | 61,513 Other 43,801 | 22,536 ---------- | ---------- Total Deferred Credits and Other Liabilities 633,171 | 413,011 ---------- | ---------- Preferred stock of subsidiary without | mandatory redemption 19,120 | 19,120 Preferred stock of subsidiary with | mandatory redemption 22,000 | 22,000 ---------- | ---------- Total Preferred Stock of Subsidiary 41,120 | 41,120 ---------- | ---------- Stockholder's Equity: | Common stock, no par value; authorized 10,000 | outstanding 1,000 -- | -- Additional paid-in capital 494,205 | 519,433 Retained earnings 3,077 | 34,688 Accumulated other comprehensive income (loss) (1,312) | (59,562) ---------- | ---------- Total Stockholder's Equity 495,970 | 494,559 ---------- | ---------- Total Liabilities and Stockholder's Equity $2,213,369 | $1,901,044 ========== | ========== See Notes to Consolidated Financial Statements.
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CILCORP INC. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income (In thousands) (Unaudited) Successor Predecessor Two Months Three Months Ended January Ended March 31, 2003 2003 March 31,2002 Operating Revenues: CILCO Electric $ 59,266 | $ 35,305 $ 84,113 CILCO Gas 69,143 | 44,270 80,018 CILCO Other 21,104 | 11,975 21,750 CILCORP Other 30,631 | 12,373 18,001 -------- | -------- -------- Total operating revenues 180,144 | 103,923 203,882 -------- | -------- -------- Operating expenses: | Fuel and purchased power 43,854 | 24,702 53,460 Gas 79,766 | 42,410 65,891 Other operations and maintenance 19,418 | 12,965 32,799 Depreciation and amortization 13,998 | 5,941 18,011 Taxes, other than income taxes 8,315 | 4,299 11,760 -------- | -------- -------- Total operating expenses 165,351 | 90,317 181,921 -------- | -------- -------- Operating income 14,793 | 13,606 21,961 -------- | -------- -------- Other income and (deductions): | Allowance for equity funds used | during construction 12 | 5 -- Miscellaneous income 93 | 46 300 Miscellaneous expense (290) | (154) (717) Income taxes 399 | 206 687 -------- | -------- -------- Total other income and (deductions) 214 | 103 270 -------- | -------- -------- Interest charges and preferred | dividends: | Interest expense 9,804 | 5,203 16,266 Allowance for borrowed funds used | during construction (458) | (187) (238) Preferred stock dividends of | subsidiary 360 | 180 540 -------- | -------- -------- Total 9,706 | 5,196 16,568 -------- | -------- -------- Income from continuing | operations before income taxes 5,301 | 8,513 5,663 Income taxes 2,224 | 3,128 1,648 -------- | -------- -------- 5 Net income from continuing operations before cumulative effect of change in accounting principle 3,077 | 5,385 4,015 Loss from operations of discontinued | businesses, net of tax of $(5) -- | -- (9) Cumulative effect of change in | accounting principle, net of | income taxes -- | 3,818 -- -------- | -------- -------- Net income $ 3,077 | $ 9,203 $ 4,006 | Other comprehensive income (loss) (1,312) | 350 5,464 -------- | -------- -------- Comprehensive income $ 1,765 | $ 9,553 $ 9,470 ======== | ======== ======== See Notes to Consolidated Financial Statements.
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CILCORP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) (Unaudited) Successor Predecessor Two Months Three Months Ended January Ended March 31, 2003 2003 March 31, 2002 Cash flows from operating: Net income $ 3,077 | $ 9,203 $ 4,006 Adjustments to reconcile net income to net | cash provided by operating activities: | Cumulative effect of change in | accounting principle -- | (3,818) -- Depreciation and amortization 13,998 | 5,941 18,011 Allowance for funds used during | construction (470) | (192) (238) Non-cash leveraged lease and | affordable housing income (580) | (297) (1,048) Cash receipts in excess of debt service | on leases 784 | 1,410 1,715 Deferred income taxes, net (2,691) | (6,824) 8,361 Deferred investment tax credits, net (265) | (132) (399) Other (1,470) | -- -- Changes in assets and liabilities: | Accounts receivable and | unbilled revenue (1,860) | (24,901) (1,748) Inventories 3,270 | 10,740 18,563 Accounts payable 5,658 | 15,168 (20,816) Accrued taxes 3,921 | 11,073 (2,324) Assets, other 1,641 | 11,709 (571) Liabilities, other 14,605 | 2,722 7,184 -------- | -------- -------- Net cash provided by operating | activities from continuing | operations 39,618 | 31,802 30,696 -------- | -------- -------- Net cash provided by (used in) | operating activities of | discontinued operations -- | -- 6 -------- | -------- -------- Net cash provided by operating | activities 39,618 | 31,802 30,702 -------- | -------- -------- Cash flows from investing: | Construction expenditures (17,155) | (15,906) (32,605) Allowance for funds used during | construction 470 | 192 238 Other (1,039) | (305) (2,096) -------- | -------- -------- Net cash used in investing activities (17,724) | (16,019) (34,463) -------- | -------- -------- | 7 Cash flows from financing: | Redemptions: | Short-term debt -- | (10,000) (5,000) Long-term debt (25,350) | -- -------- | -------- -------- Net cash provided by (used in) | financing activities (25,350) | (10,000) (5,000) | Net change in cash and | cash equivalents (3,456) | 5,783 (8,761) Cash and cash equivalents | at beginning of period 37,604 | 31,821 18,182 -------- | -------- -------- Cash and cash equivalents at | end of period $ 34,148 | $ 37,604 $ 9,421 ======== | ======== ======== | Cash paid during the period for: | | Interest $ 3,784 | $ 5,413 $ 8,719 | Income taxes $ -- | $ -- $ 88 See Notes to Consolidated Financial Statements.
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CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets (In thousands) (Unaudited) March 31, December 31, ASSETS 2003 2002 Utility Plant, At Original Cost: Electric $1,364,898 $1,349,153 Gas 468,066 469,831 ---------- ---------- 1,832,964 1,818,984 Less - accumulated provision for depreciation 1,011,021 1,033,095 ---------- ---------- 821,943 785,889 Construction work in progress 129,111 104,571 ---------- ---------- Total Utility Plant 951,054 890,460 ---------- ---------- Other Property and Investments: Cash surrender value of corporate-owned life insurance (net of related policy loans of $69,634) 5,259 4,268 Other 892 892 ---------- ---------- Total Other Property and Investments 6,151 5,160 ---------- ---------- Current Assets: Cash and temporary cash investments 28,105 22,256 Receivables, less allowance for uncollectible accounts of $3,669 and $1,989 71,523 47,179 Receivables, miscellaneous 8,829 7,136 Accrued unbilled revenue 26,887 32,162 Fuel, at average cost 16,307 16,459 Materials and supplies, at average cost 16,200 16,411 Gas in underground storage, at average cost 12,545 27,209 Prepaid taxes 636 886 Other 7,525 23,679 ---------- ---------- Total Current Assets 188,557 193,377 ---------- ---------- Deferred Debits: Regulatory assets 11,175 7,732 Unamortized debt expense 1,491 1,581 Prepaid pension cost 7,250 7,250 Other 3,401 3,441 ---------- ---------- Total Deferred Debits 23,317 20,004 ---------- ---------- Total Assets $1,169,079 $1,109,001 ========== ========== See Notes to Consolidated Financial Statements.
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CENTRAL ILLINOIS LIGHT COMPANY Consolidated Balance Sheets (In thousands) (Unaudited) March 31, December 31, CAPITALIZATION AND LIABILITIES 2003 2002 Capitalization: Common Stockholder's Equity: Common stock, no par value; authorized 20,000,000 shares; outstanding 13,563,871 shares $ 185,661 $ 185,661 Additional paid-in capital 52,000 52,000 Retained earnings 149,395 113,775 Accumulated other comprehensive income (loss) (29,684) (28,722) ---------- ---------- Total Common Stockholder's Equity 357,372 322,714 Preferred stock without mandatory redemption 19,120 19,120 Preferred stock with mandatory redemption 22,000 22,000 Long-term debt 316,041 316,028 ---------- ---------- Total Capitalization 714,533 679,862 ---------- ---------- Current Liabilities: Current maturities of long-term debt 1,400 26,750 Notes payable -- 10,000 Accounts payable 87,724 67,950 Accrued taxes 30,628 17,607 Accrued interest 7,542 9,437 Other 23,933 21,427 ---------- ---------- Total Current Liabilities 151,227 153,171 ---------- ---------- Deferred Liabilities and Credits: Accumulated deferred income taxes 106,233 95,389 Regulatory liability 18,614 19,230 Investment tax credits 12,561 12,958 Pension liabilities 89,153 85,056 Postretirement health care liability 45,684 41,333 Other 31,074 22,002 ---------- ---------- Total Deferred Liabilities and Credits 303,319 275,968 ---------- ---------- Total Capitalization and Liabilities $1,169,079 $1,109,001 ========== ========== See Notes to Consolidated Financial Statements.
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CENTRAL ILLINOIS LIGHT COMPANY Consolidated Statements of Income and Comprehensive Income (In thousands) (Unaudited) Three Months Ended March 31, 2003 2002 Operating revenues: Electric $ 94,571 $ 84,113 Gas 113,413 80,018 -------- -------- Total operating revenues 207,984 164,131 -------- -------- Operating expenses: Fuel 25,656 22,030 Gas 80,212 49,608 Purchased power 12,343 11,530 Other operations and maintenance 34,836 31,446 Depreciation and amortization 18,126 17,664 Income taxes 7,759 5,512 Other taxes 12,590 11,740 -------- -------- Total operating expenses 191,522 149,530 -------- -------- Operating income 16,462 14,601 -------- -------- Other income and deductions: Cost of equity funds capitalized 17 -- Corporate-owned life insurance, net (371) (342) Other, net 642 804 -------- -------- Total other income and deductions 288 462 -------- -------- Interest expenses: Interest on long-term debt 4,799 4,367 Cost of borrowed funds capitalized (645) (238) Other 516 1,050 -------- -------- Total interest expense 4,670 5,179 -------- -------- Net income before preferred dividends 12,080 9,884 -------- -------- Dividends on preferred stock 540 540 -------- -------- Income available for common stock before cumulative effect of change in accounting principle 11,540 9,344 Cumulative effect of change in accounting principle, net of income taxes 24,080 -- -------- -------- Income available for common stock $ 35,620 $ 9,344 Other comprehensive income (loss) (962) 5,464 -------- -------- Comprehensive income $ 34,658 $ 14,808 ======== ======== See Notes to Consolidated Financial Statements.
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CENTRAL ILLINOIS LIGHT COMPANY Consolidated Statements of Cash Flows (In thousands) (Unaudited) Three Months Ended March 31, 2003 2002 Cash flows from operating: Net income $ 35,620 $ 9,344 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle (24,080) -- Depreciation and amortization 18,126 17,664 Allowance for funds used during construction (662) (238) Deferred income taxes, net 10,143 9,912 Deferred investment tax credits, net (397) (399) Changes in assets and liabilities: Receivables, net (26,037) (12,760) Inventories 15,027 16,421 Unbilled revenue 5,275 6,502 Accounts payable 19,774 (34,329) Accrued taxes and interest (4,708) (2,355) Assets, other 13,621 4,841 Liabilities, other 13,296 1,831 -------- -------- Net cash provided by operating activities 74,998 16,434 -------- -------- Cash flows from investing: Construction expenditures (33,061) (32,605) Allowance for funds used during construction 662 238 Other (1,400) (1,808) -------- -------- Net cash used in investing activities (33,799) (34,175) -------- -------- Cash flows from financing: Dividends on common stock -- (8,000) Redemptions: Short-term debt (10,000) -- Long-term debt (25,350) -- Issuances: Short-term debt -- 15,000 -------- -------- Net cash provided by (used in) financing activities (35,350) 7,000 -------- -------- 12 Net change in cash and cash equivalents 5,849 (10,741) Cash and cash equivalents at beginning of period 22,256 12,454 -------- -------- Cash and cash equivalents at end of period $ 28,105 $ 1,713 ======== ======== Cash paid during the periods: Interest $ 9,197 $ 8,648 Income taxes, net $ -- $ -- See Notes to Consolidated Financial Statements.
13 CILCORP INC. AND CENTRAL ILLINOIS LIGHT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Summary of Significant Accounting Policies General The consolidated financial statements include the accounts of CILCORP Inc. (the Holding Company), Central Illinois Light Company (CILCO or AmerenCILCO), QST Enterprises Inc. (QST) and its subsidiaries QST Energy Inc. (QST Energy) and CILCORP Infraservices Inc. (CILCORP Infraservices), and CILCORP Inc.'s other subsidiaries (collectively, CILCORP or the Company) after elimination of significant intercompany transactions. In the fourth quarter of 1998, the operations of QST and its subsidiaries (excluding ESE Land Corporation and CILCORP Infraservices) were discontinued and, therefore, are being reported as discontinued operations in the financial statements. Prior year amounts have been reclassified on a basis consistent with the 2003 presentation. CILCO, the Holding Company's principal business subsidiary, is engaged in the generation, transmission, distribution and sale of electric energy in an area of approximately 3,700 square miles in central and east-central Illinois, and the purchase, distribution, transportation and sale of natural gas in an area of approximately 4,500 square miles in central and east-central Illinois. Other Holding Company first-tier subsidiaries are CILCORP Investment Management Inc. (CIM), which manages the Company's investment portfolio and CILCORP Ventures Inc. (CVI), which pursues investment opportunities in energy-related products and services. The Holding Company is a wholly-owned subsidiary of Ameren Corporation (Ameren). Ameren is a public utility holding company registered with the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935 (PUHCA) and is headquartered in St. Louis, Missouri. Ameren's principal business is the generation, transmission and distribution of electricity, and the distribution of natural gas to residential, commercial, industrial and wholesale users in the central United States. Ameren's primary subsidiaries, including Central Illinois Light Company, are as follows: o Union Electric Company, which operates a rate-regulated electric generation, transmission and distribution business, and a rate-regulated natural gas distribution business in Missouri and Illinois as AmerenUE. o Central Illinois Public Service Company, which operates a rate-regulated electric and natural gas transmission and distribution business in Illinois as AmerenCIPS. o Central Illinois Light Company, a subsidiary of CILCORP Inc., which operates a rate-regulated transmission and distribution business, an electric generation business, and a rate-regulated natural gas distribution business in Illinois as AmerenCILCO. 14 o AmerenEnergy Resources Company (Resources Company), which consists of non rate-regulated electric operations. Subsidiaries include AmerenEnergy Generating Company (Generating Company) which operates Ameren's non rate-regulated electric generation in Missouri and Illinois, AmerenEnergy Marketing Company (Marketing Company), which markets power for periods over one year, AmerenEnergy Fuels and Services Company, which procures fuel and manages the related risks for Ameren's affiliated companies, and AmerenEnergy Medina Valley Cogen (No. 4), LLC, which indirectly owns a 40 megawatt, gas-fired electric generation plant. On February 4, 2003, Ameren completed the acquisition of AES Medina Valley Cogen (No. 4), LLC and renamed it AmerenEnergy Medina Valley Cogen (No. 4), LLC. o AmerenEnergy, Inc. (AmerenEnergy) which serves as a power marketing and risk management agent for Ameren affiliated companies for transactions of primarily less than one year. o Electric Energy, Inc. (EEI), which operates electric generation and transmission facilities in Illinois. Ameren has a 60% ownership interest in EEI, 40% owned by AmerenUE and 20% owned by Resources Company. o Ameren Services Company (Ameren Services), which provides shared support services to Ameren and its subsidiaries, including CILCORP. Charges are based upon the actual costs incurred by Ameren Services as required by the PUHCA. Throughout this document, CILCORP or the Company refers to CILCORP Inc. and its subsidiaries on a consolidated basis. CILCO refers to Central Illinois Light Company. Acquisition On January 31, 2003, Ameren completed its acquisition of all of the outstanding common stock of CILCORP Inc. from The AES Corporation (AES). CILCORP Inc. is the parent company of Central Illinois Light Company which operated as CILCO. With the acquisition, CILCO became an Ameren subsidiary, but remains a separate utility company, operating as AmerenCILCO. The results of operations for CILCORP (including its subsidiaries) were included in Ameren's financial statements effective with the January acquisition date. Ameren acquired CILCORP to complement its existing Illinois gas and electric operations. The purchase included CILCO's rate-regulated electric and natural gas business in Illinois serving approximately 200,000 and 205,000 customers, respectively, of which approximately 150,000 are combination electric and gas customers. CILCO's service territory is contiguous to Ameren's service territory. CILCO also has a non rate-regulated electric and gas marketing business principally focused in the Chicago, Illinois region. Finally, the purchase included CILCO's approximately 1,200 megawatts of largely coal-fired generating capacity, most of which is expected to become non rate-regulated in 2003. The total purchase price was approximately $1.34 billion including the assumption of CILCORP debt and preferred stock. The purchase price is subject to certain adjustments for working capital and other changes pending the finalization of CILCORP's closing balance sheet. Financial Statement Presentation The acquisition was accounted for using the purchase method of accounting. Under this method, the purchase price was allocated to the fair market value of the assets acquired and the liabilities assumed. The excess purchase price over the fair value of the assets acquired and the liabilities assumed was allocated to goodwill at CILCORP Inc. As a result, CILCORP Inc. has 15 recorded purchase accounting fair value adjustments to electric plant in service, pension and other postretirement liabilities, long-term debt, emission allowances, coal contracts, and other balance sheet items. Ameren is in the process of completing a third party valuation of acquired property and plant and intangible assets. Therefore, the allocation of the purchase price to the acquired net assets is subject to refinement. The excess of the purchase price over tangible net assets acquired has been allocated preliminarily to goodwill in the amount of $595 million at CILCORP. The purchase accounting entries are reflected on CILCORP's financial statements as of the purchase date. As permitted by rules of the SEC, the Company did not "push down" the effects of purchase accounting to the financial statements of any of Holding Company's subsidiaries, including CILCO. Accordingly, CILCORP's post-acquisition financial statements reflect a new basis of accounting, and separate financial statements are presented for pre-acquisition (predecessor) and post-acquisition (successor) periods, separated by a heavy black line. CILCO's financial statements are presented on their historical basis of accounting for all periods presented. Goodwill The excess purchase price over the fair value of the assets acquired and the liabilities assumed by Ameren in its January 31, 2003, acquisition of CILCORP was allocated to goodwill at the Holding Company. The Company does not amortize goodwill under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 requires the evaluation of goodwill for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired. Accounting Changes and Other Matters Statement of Financial Accounting Standards (SFAS) No. 143 - "Accounting for Asset Retirement Obligations" (SFAS 143) The Company adopted the provisions of SFAS 143 on January 1, 2003. SFAS 143 provides the accounting requirements for asset retirement obligations associated with tangible, long-lived assets. SFAS 143 requires CILCORP to record the estimated fair value of legal obligations associated with the retirement of tangible long-lived assets in the period in which the liabilities are incurred and to capitalize a corresponding amount as part of the book value of the related long-lived asset. In subsequent periods, the Company is required to adjust asset retirement obligations based on changes in estimated fair value, and the corresponding increases in asset book values are depreciated over the useful life of the related asset. Uncertainties as to the probability, timing or cash flows associated with an asset retirement obligation affect the Company's estimate of fair value. Upon adoption of this standard, CILCO recognized asset retirement obligations of approximately $5.6 million related primarily to retirement costs for ash ponds at the Duck Creek power plant, and a net increase in net property and plant of approximately $45.6 million due to elimination of non-legal obligation costs of removal for non rate-regulated assets from accumulated depreciation. As a result, CILCO recognized a net after-tax gain upon adoption of $24.1 million. Upon adoption of this standard on January 1, 2003, CILCORP recognized asset retirement obligations of approximately $5.6 million related to retirement costs for ash ponds at the Duck Creek power plant, and a net increase in net property and plant of approximately $11.9 million due to elimination of non- 16 legal obligation costs of removal for non rate-regulated assets from accumulated depreciation. As a result, predecessor CILCORP recognized a net after-tax gain upon adoption of $3.8 million. Similar to the treatment applied by Ameren in the acquisition of CILCORP, AES recorded purchase accounting at the CILCORP level following its 1999 acquisition of CILCORP, but did not "push down" the purchase accounting to any of the Holding Company's subsidiaries, including CILCO. Accordingly, accumulated depreciation, including the embedded cost of removal liabilities, was reset to zero in purchase accounting for CILCORP while CILCO continued to carry property, plant and equipment and the related accumulated depreciation on a historical basis. As a result, the gain upon adoption of SFAS 143 recognized by CILCO exceeded the gain recognized by CILCORP as the cost of removal liabilities reversed by CILCORP upon adoption of SFAS 143 included only those liabilities recorded since the 1999 AES acquisition. In addition to those obligations that were identified and valued, the Company determined that certain other asset retirement obligations exist. However, management is unable to estimate the fair value of those obligations because the probability, timing or cash flows associated with the obligations are indeterminable. Management does not believe that these obligations, when incurred, will have a material adverse impact on CILCORP's financial position, results of operations or liquidity. SFAS 143 required a change in the depreciation methodology the Company historically utilized for non-regulated operations. Historically, the Company included an estimated cost of dismantling and removing plant from service upon retirement in the basis upon which depreciation rates were determined. SFAS 143 required the Company to exclude costs of dismantling and removal upon retirement from the depreciation rates applied to non rate-regulated plant balances. Further, the Company was required to remove accumulated provisions for dismantling and removal costs from accumulated depreciation, where they were embedded, and reflect such adjustment as a gain upon adoption of this standard, to the extent such dismantling and removal activities are not considered legal asset retirement obligations as defined by SFAS 143. At CILCO, the elimination of cost of removal in excess of anticipated salvage proceeds from accumulated depreciation resulted in a gain, as noted above, of $24.1 million, net of taxes, for a change in accounting principle. As noted above, the gain at CILCORP consolidated was only $3.8 million, net of taxes, due to the reset of accumulated depreciation at the time of AES' acquisition of CILCORP in 1999. Beginning in January 2003, depreciation rates for non rate-regulated assets were reduced to reflect the discontinuation of the accrual of dismantling and removal costs. In addition, non rate-regulated asset removal costs will prospectively be expensed as incurred. As a result, the impact of this change in accounting will result in a decrease in depreciation expense and an increase in operations and maintenance expense, the net impact of which is indeterminable, but not expected to be material. Like the non rate-regulated operations, the depreciation methodology historically utilized by the rate-regulated operations has included an estimated cost of dismantling and removing plant from service upon retirement. Because these estimated costs of removal have been included in the cost of service upon which CILCO's present utility rates are based, and with the expectation that this practice will continue in the jurisdictions in which CILCO operates, adoption of SFAS 143 did not result in any change in the depreciation accounting practices of CILCO's rate regulated operations. CILCO's estimated future removal costs embedded in accumulated depreciation related to rate-regulated plant assets were approximately $143 million at March 31, 2003. As a result of the reset of accumulated depreciation at Ameren's acquisition of CILCORP, estimated future removal costs embedded in accumulated depreciation at CILCORP consolidated are only $1.7 million at March 31, 2003. 17 SFAS No. 148 - "Accounting for Stock-Based Compensation - Transition and Disclosures" (SFAS 148) In December 2002, the FASB issued SFAS 148. SFAS 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions to require disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Employees of the Company previously participated in the AES Stock Option Plan that provided for grants of stock options to eligible participants. As permitted under SFAS 123, the Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for this plan. As the exercise price of all stock options are equal to their fair market value at the time the options are granted, the Company did not recognize any compensation expense related to the plan using the intrinsic value based method. Had compensation expense been recognized using the fair value based method under SFAS 123, the Company's consolidated earnings would have decreased by $2.7 million, $1.4 million, and $.3 million in 2002, 2001, and 2000, respectively. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123 by using the prospective method of adoption under SFAS 148. Because no stock options have been granted since January 1, 2003, SFAS 148 did not have any effect on the Company's financial position, results of operations or liquidity in the first quarter of 2003. FASB Interpretation No. 45 - "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45) FIN 45 was issued in November 2002, and requires that upon issuance of certain guarantees, a guarantor must recognize a liability for the fair value of the obligation assumed under the guarantee. These recognition provisions of FIN 45 are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements for periods ending after December 15, 2002. Because the Company does not have such obligations, the recognition provisions of FIN 45 did not have any effect on our financial position, results of operations or liquidity in the first quarter of 2003. SFAS No. 149 - "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149) In April 2003, SFAS 149 was issued. SFAS 149 clarifies under what circumstances a contract with initial net investment meets the characteristic of a derivative as discussed in SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is effective for hedging relationships designated and contracts entered into or modified after June 30, 2003. At this time, the Company is assessing the impact of SFAS 149 on its financial position, results of operations and liquidity upon adoption. The accounting policies of CILCORP conform to generally accepted accounting principles in the United States (GAAP). CILCORP's financial statements reflect all adjustments (which include normal, recurring adjustments) necessary, in the Company's opinion, for a fair presentation of interim results. These statements should be read in conjunction with the financial 18 statements and the notes thereto included in CILCORP and CILCO's 2002 Annual Report on Form 10-K. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2. Contingencies On May 11, 2001, CILCO and Enron Power Marketing, Inc. (EPMI), a subsidiary of Enron Corp. (Enron), entered into a new Master Agreement for electric purchases and sales, which covered energy transactions scheduled for deliveries during the period of 2001-2003. On November 28, 200l, EPMI demanded that CILCO post $28 million in collateral based on mark-to-market exposure of open transactions. On November 30, 2001, CILCO notified EPMI that events of default had occurred under the Master Agreement and pursuant to the termination provisions of the Master Agreement declared the Master Agreement terminated effective December 20, 2001. Due to contractual provisions and EPMI's and Enron's actions, management does not believe that it is probable that CILCO will be required to pay any amount to Enron or its affiliates and has therefore recorded no liability for undelivered electric purchases. Enron and EPMI filed Chapter 11 bankruptcy petitions on December 2, 2001, in the U. S. Bankruptcy Court for the Southern District of New York. Thereafter, CILCO purchased replacement power to serve its retail customers, which had previously been partially supported by the EPMI transactions. While the ultimate outcome is unpredictable, management does not believe that EPMI's defaults under the Master Agreement, its filing for bankruptcy protection, CILCO's termination of the Master Agreement, or CILCO's purchase of replacement electricity will have a material adverse effect on CILCORP's financial position, cash flows or results of operations. On May 4, 2001, CILCO and Enron subsidiary Enron North America Corp. (ENA) entered into a natural gas transaction for daily deliveries not to exceed 10,000 MMBtu per day during calendar year 2002. CILCO received no natural gas deliveries pursuant to this transaction in 2002. On October 24, 2001, CILCO and ENA entered into a short-term natural gas transaction giving CILCO the right to call upon ENA for the delivery of 10,000 MMBtu per day during the period from November 1, 2001, through March 31, 2002. Since late November 2001, ENA has been unable to deliver natural gas when called upon by CILCO. ENA's failure to deliver natural gas is an event of default under the Master Firm Sales Agreement governing the October transaction. On December 2, 2001, ENA filed a Chapter 11 bankruptcy petition in the U. S. Bankruptcy Court for the Southern District of New York. To the extent that it has been necessary, CILCO has purchased replacement natural gas. Because these transactions are part of a larger and more diversified natural gas supply portfolio and are subject to the Purchased Gas Adjustment clause, management does not believe ENA's failure to supply natural gas or its subsequent bankruptcy filing will have a material adverse effect on CILCORP's financial position, cash flows or results of operations. On December 10, 2002, EPMI filed a complaint against AES, Constellation New Energy, Inc., f/k/a AES New Energy Inc. and CILCO in the United States Bankruptcy Court for the Southern District of New York. With respect to CILCO, EPMI alleges that it is owed $31.2 million under the Master Agreement. CILCO disputes that any amount is owed EPMI based on the clear language of the Master Agreement, Section 553 of the Bankruptcy Code and EPMI's 19 misconduct prior to entering the Master Agreement and continuing through the date of its bankruptcy filing. AES has agreed to undertake CILCO's defense in this proceeding and intends to vigorously contest these claims. Due to CILCO's contractual and other defenses to EPMI's claims, as well as certain provisions related to the sale of CILCO to Ameren, management does not believe the results of this litigation will have a material adverse effect on CILCORP's financial position, cash flows or results of operation. NOTE 3. Rate and Regulatory Matters Gas Rate Case In November 2002, CILCO filed a request with the Illinois Commerce Commission (ICC) to increase annual rates for natural gas service by approximately $14 million. The ICC has until October 2003 to render a decision in this gas case; however, the ICC Staff has recommended the annual increase to be $9 million. Standard Market Design Notice of Proposed Rulemaking (NOPR) On July 31, 2002, the Federal Energy Regulatory Commission (FERC) issued a Standard Market Design NOPR. The NOPR proposes a number of changes to the way the current wholesale transmission service and energy markets are operated. Specifically, the NOPR calls for all jurisdictional transmission facilities to be placed under the control of an independent transmission provider (similar to a Regional Transmission Organization (RTO)), proposes a new transmission service tariff that provides a single form of transmission service for all users of the transmission system including bundled retail load, and proposes a new energy market and congestion management system that uses locational marginal pricing as its basis. On November 15, 2002, Ameren filed its initial comments on the NOPR with the FERC expressing concern with the potential impact of the proposed rules in their current form on the cost and reliability of service to retail customers. Ameren also proposed that certain modifications be made to the proposed rules in order to protect transmission owners from the possibility of trapped transmission costs that might not be recoverable from ratepayers as a result of inconsistent regulatory policies. Ameren filed additional comments on the remaining sections of the NOPR during the first quarter of 2003. On April 28, 2003 the FERC issued a "white paper" reflecting comments received in response to the NOPR. More specifically, the white paper indicated that the FERC will not assert jurisdiction over the transmission rate component of bundled retail service and will insure that existing bundled retail customers retain their existing transmission rights and retain rights for future load growth in its final rule. Moreover, the white paper acknowledged that the final rule will provide the states with input on resource adequacy requirements, allocation of firm transmission rights, and transmission planning. The FERC also requested input on the flexibility and timing of the final rule's implementation. Even though issuance of the final rule and its implementation schedule are still unknown, the Midwest Independent System Operator (Midwest ISO) is already in the process of implementing a market design similar to the proposed market design in the NOPR. The Midwest ISO has targeted March 2004 as the start date for implementation. The Company is in the process of reviewing the FERC's white paper. Until the FERC issues a final rule, the Company is unable to predict the ultimate impact on its future financial position, results of operations or liquidity. 20 NOTE 4. Accounting for Price Risk Management Activities Gains/losses on derivatives that hedge non rate-regulated activities are reflected in operating results when the hedged transaction affects earnings. The net gain reflected in operating results from derivative financial instruments for non rate-regulated activities for the quarter ended March 31, 2003, was $4.4 million for natural gas (included in Gas operating expenses). There were no outstanding derivative financial instruments for electricity during the quarter ended March 31, 2003. The previously recorded gain/loss associated with these settled derivative financial instruments was removed from Other Comprehensive Income (OCI) when hedged transactions affected earnings. All open derivative positions hedging anticipated transactions are then marked-to-market with the change in fair value being recorded in OCI. The net effect of these adjustments was to record an after-tax loss in OCI in the amount of $1.0 million for the quarter ended March 31, 2003. The after-tax balance in OCI associated with these open derivative positions and unrealized gains/losses on settled positions related to hedged anticipated transactions at March 31, 2003, was a credit of $0.3 million. The corresponding asset is reflected on the balance sheet in Prepayments and Other. The portion of OCI for open positions reflects hedges of natural gas sales of 1,670,000 MMBtu for commitments through March 2004. Approximately $0.3 million of OCI related to derivative financial instruments as of March 31, 2003, is expected to be recognized as an increase to operating earnings over the next twelve months based on market prices as of March 31, 2003. The actual amount recognized in earnings will be based on the market conditions at the time the derivatives are settled. During the first quarter of 2003, the Company utilized derivatives in its rate-regulated gas business to manage the volatility of cash flows relative to customers charged the Purchased Gas Adjustment (PGA). The derivatives utilized included collars (a combination of a put option and a call option) and financial futures contracts. Marked-to-market gains and losses on PGA-related positions are recorded as regulatory assets or liabilities in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). All remaining PGA-related derivatives were settled during the quarter ended March 31, 2003, therefore there is no outstanding regulatory asset or liability balance at March 31, 2003. 21 NOTE 5. Other Comprehensive Income
Rollforward of Accumulated Other Comprehensive Income - CILCORP. Pension SFAS 133 Total (In thousands) Predecessor Accumulated other comprehensive income (loss) - December 31, 2002 balance $(60,866) $ 1,304 $(59,562) Other comprehensive income - January 2003 -- 350 350 -------- -------- -------- Accumulated other comprehensive income (loss) - January 31, 2003 balance $(60,866) $ 1,654 $(59,212) ======== ======== ======== --------------------------------------------------------------------------------------------------------------- Successor Accumulated other comprehensive income (loss) - January 31, 2003 balance $ -- $ -- $ -- Other comprehensive income - Two Months ended March 31, 2003 -- (1,312) (1,312) -------- -------- -------- Accumulated other comprehensive income (loss) - March 31, 2003 $ -- $ (1,312) $ (1,312) ======== ======== ======== Rollforward of Accumulated Other Comprehensive Income - CILCO Pension SFAS 133 Total (In thousands) Accumulated other comprehensive income (loss) - December 31, 2002 balance $(30,026) $ 1,304 $(28,722) Other comprehensive income - Three months ended March 31, 2003 -- (962) (962) -------- -------- -------- Accumulated other comprehensive income (loss) - March 31, 2003 balance $(30,026) $ 342 $(29,684) ======== ======== ========
22 NOTE 6. Statements of Segments of Business The Company has five reportable segments: CILCO Electric, CILCO Gas, CILCO Other, CILCORP Other and Discontinued Operations. The CILCO Electric segment contains the rate-regulated portions of the utility's electric business. The CILCO Gas segment contains the rate-regulated portions of the utility's gas business. The CILCO Other segment contains the non rate-regulated portions of the utility's business. The CILCORP Other segment includes the activities of the Holding Company, its leasing and investing subsidiaries, CILCORP Investment Management Inc. and CILCORP Ventures Inc., and QST Enterprises Inc. subsidiaries ESE Land Corporation and CILCORP Infraservices Inc. The CILCORP Other segment also includes the affects of purchase accounting fair value adjustments, the elimination of all intercompany transactions, and long-term debt outstanding at the Holding Company. Amortization of these purchase accounting fair value adjustments relates primarily to pension and postretirement liabilities, coal contract liabilities, long-term debt, electric plant in service and emission allowance assets. The Discontinued Operations segment includes activities related to certain discontinued subsidiaries of QST Enterprises Inc. The Company's reportable segments are strategic business units managed separately primarily due to the rate-regulated or non rate-regulated nature of the businesses, or due to the type of business activity involved. 23
CILCORP Inc. and Subsidiaries Statements of Segments of Business Two Months Ended March 31, 2003 (Successor) CILCO CILCO CILCO CILCORP Electric Gas Other Other Total (In thousands) Operating revenues $ 59,266 $ 69,143 $21,104 $ 30,631 $180,144 Operating expenses 55,007 62,874 20,992 26,478 165,351 -------- -------- ------- --------- -------- Operating income 4,259 6,269 112 4,153 14,793 Other income and (deductions) 12 -- 190 12 214 Interest charges and preferred dividends (2,159) (777) (360) (6,410) (9,706) -------- -------- ------- --------- -------- Income before income taxes 2,112 5,492 (58) (2,245) 5,301 Income taxes 935 2,160 45 (916) 2,224 -------- -------- ------- --------- -------- Net income (loss) before cumulative effect of change in accounting principle $ 1,177 $ 3,332 $ (103) $ (1,329) $ 3,077 ======== ======== ======= ========= ========
24
CILCORP Inc. and Subsidiaries Statements of Segments of Business January 2003 (Predecessor) CILCO CILCO CILCO CILCORP Electric Gas Other Other Total (In thousands) Operating revenues $ 35,305 $ 44,270 $11,975 $ 12,373 $103,923 Operating expenses 28,739 37,143 12,107 12,328 90,317 -------- -------- ------- --------- -------- Operating income 6,566 7,127 (132) 45 13,606 Other income and (deductions) 5 -- 93 5 103 Interest charges and preferred dividends (1,294) (440) (180) (3,282) (5,196) -------- -------- ------- --------- -------- Income before income taxes 5,277 6,687 (219) (3,232) 8,513 Income taxes 2,029 2,635 (53) (1,483) 3,128 -------- -------- ------- --------- -------- Net income (loss) before cumulative effect of change in accounting principle $ 3,248 $ 4,052 $ (166) $ (1,749) $ 5,385 ======== ======== ======= ========= ========
25
CILCORP Inc. and Subsidiaries Statements of Segments of Business Three Months Ended March 31, 2002 (Predecessor) CILCO CILCO CILCO CILCORP Discont. Electric Gas Other Other Oper. Total (In thousands) Operating revenues $ 84,113 $ 80,018 $21,750 $ 18,001 $ -- $203,882 Operating expenses 75,695 68,323 20,948 16,955 -- 181,921 -------- -------- ------- -------- ------ -------- Operating income 8,418 11,695 802 1,046 -- 21,961 Other income and (deductions) -- -- (20) 290 -- 270 Interest charges and preferred dividends (3,694) (1,485) (540) (10,849) -- (16,568) -------- -------- ------- -------- ------ -------- Income from continuing operations before income taxes 4,724 10,210 242 (9,513) -- 5,663 Income taxes 1,471 4,041 320 (4,184) -- 1,648 -------- -------- ------- -------- ------ -------- Net income from continuing operations 3,253 6,169 (78) (5,329) -- 4,015 Effect of discontinued operations -- -- -- -- (9) (9) -------- -------- ------- -------- ------ -------- Net income (loss) before cumulative effect of change in accounting principle $ 3,253 $ 6,169 $ (78) $ (5,329) $ (9) $ 4,006 ======== ======== ======= ======== ====== ========
26 NOTE 7. Miscellaneous The following table summarizes miscellaneous income and expense by component.
Successor Predecessor Two Months Three Months Ended January Ended March 31, 2003 2003 March 31, 2002 (In thousands) Miscellaneous income: Interest and dividend income $ 93 | $ 46 $ 300 ----- | ----- ----- Total miscellaneous income $ 93 | $ 46 $ 300 ===== | ===== ===== | Miscellaneous expense: | Corporate-owned life insurance $(243) | $(128) $(342) Donations (29) | (5) (226) Other (18) | (21) (149) ----- | ----- ----- Total miscellaneous expense $(290) | $(154) $(717) ===== | ===== =====
NOTE 8. Related Party Transactions CILCORP has transactions in the normal course of business with Ameren and its other subsidiaries. The transactions are primarily comprised of gas and electricity purchases and sales. Under a non-derivative, executory tolling agreement and gas sales and transport agreements, CILCORP sells and transports gas to, and purchases steam, chilled water and electricity from, AmerenEnergy Medina Valley Cogen (No. 4), LLC. During the first quarter of 2003, CILCORP purchased $9.0 million and sold $5.9 million under these agreements. As of March 31, 2003, CILCORP had recorded Accounts Payable of $2.4 million and Receivables of $2.0 million, related to these transactions. The current receivable was recorded in Accrued Unbilled Revenue on the CILCORP Balance Sheet. CILCO also has a power purchase agreement with AmerenCIPS for 100 MW of capacity and firm energy for the months of January and June through September 2003. CILCO purchased $1.3 million of power under this agreement in January 2003. CILCO also had power purchases ($.6 million) and sales ($.1 million) transactions with AmerenEnergy in the first quarter of 2003. At March 31, 2003, CILCO recorded a liability of $.3 million, included in Accounts Payable on the balance sheet. Additionally, CILCORP had Accounts Payable of $0.6 million related to a deposit received from AmerenEnergy Medina Valley Cogen (No. 4), LLC for future work to be performed by a Holding Company subsidiary. Subject to the receipt of regulatory approval, which is being pursued, CILCO will participate in Ameren's utility money pool arrangement. Under this arrangement, CILCO will have access to up to $694 million of additional committed liquidity, subject to reduction based on use by other utility money pool participants, but increased to the extent other pool participants have surplus cash balances, which may be used to fund pool needs. CILCORP participates in Ameren's non-utility money pool arrangement, which provides it access to up to $600 million of committed liquidity, subject to reduction based on use by other pool participants, which may also be supplemented by available cash balances among pool participants. 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The consolidated financial statements include the accounts of CILCORP Inc. (the Holding Company), Central Illinois Light Company (CILCO or AmerenCILCO), QST Enterprises Inc. (QST) and its subsidiaries QST Energy Inc. (QST Energy) and CILCORP Infraservices Inc. (CILCORP Infraservices), and CILCORP Inc.'s other subsidiaries (collectively, CILCORP or the Company) after elimination of significant intercompany transactions. In the fourth quarter of 1998, the operations of QST and its subsidiaries (excluding ESE Land Corporation and CILCORP Infraservices) were discontinued and, therefore, are being reported as discontinued operations in the financial statements. Prior year amounts have been reclassified on a basis consistent with the 2003 presentation. CILCO, the Holding Company's principal business subsidiary, is engaged in the generation, transmission, distribution and sale of electric energy in an area of approximately 3,700 square miles in central and east-central Illinois, and the purchase, distribution, transportation and sale of natural gas in an area of approximately 4,500 square miles in central and east-central Illinois. Other Holding Company first-tier subsidiaries are CILCORP Investment Management Inc. (CIM), which manages the Company's investment portfolio and CILCORP Ventures Inc. (CVI), which pursues investment opportunities in energy-related products and services. The Holding Company is a wholly-owned subsidiary of Ameren Corporation (Ameren). Ameren is a public utility holding company registered with the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935 (PUHCA) and is headquartered in St. Louis, Missouri. Ameren's principal business is the generation, transmission and distribution of electricity, and the distribution of natural gas to residential, commercial, industrial and wholesale users in the central United States. Ameren's primary subsidiaries, including Central Illinois Light Company, are as follows: o Union Electric Company, which operates a rate-regulated electric generation, transmission and distribution business, and a rate-regulated natural gas distribution business in Missouri and Illinois as AmerenUE. o Central Illinois Public Service Company, which operates a rate-regulated electric and natural gas transmission and distribution business in Illinois as AmerenCIPS. o Central Illinois Light Company, a subsidiary of CILCORP Inc., which operates a rate-regulated transmission and distribution business, an electric generation business, and a rate-regulated natural gas distribution business in Illinois as AmerenCILCO. o AmerenEnergy Resources Company (Resources Company), which consists of non rate-regulated electric operations. Subsidiaries include AmerenEnergy Generating Company (Generating Company) which operates Ameren's non rate-regulated electric generation in Missouri and Illinois, AmerenEnergy Marketing Company (Marketing Company), which markets power for periods over one year, AmerenEnergy Fuels and Services Company, which procures fuel and manages the related risks for Ameren's affiliated companies, and AmerenEnergy Medina Valley Cogen (No. 4), LLC, which indirectly owns a 40 megawatt, gas-fired electric generation plant. On February 4, 2003, Ameren completed the acquisition of AES Medina Valley Cogen (No. 4), LLC from AES and renamed it AmerenEnergy Medina Valley Cogen (No. 4), LLC. o AmerenEnergy, Inc. (AmerenEnergy) which serves as a power marketing and risk management agent for Ameren affiliated companies for transactions of primarily less than one year. 28 o Electric Energy, Inc. (EEI), which operates electric generation and transmission facilities in Illinois. Ameren has a 60% ownership interest in EEI, 40% owned by AmerenUE and 20% owned by Resources Company. o Ameren Services Company (Ameren Services), which provides shared support services to Ameren and its subsidiaries, including CILCORP. Charges are based upon the actual costs incurred by Ameren Services as required by the PUHCA. The following discussion and analysis should be read in conjunction with: o The financial statements and related notes included in this Quarterly Report on Form 10-Q. o Management's Discussion and Analysis of Financial Conditions and Results of Operations in CILCORP's and CILCO's Annual Report on Form 10-K for the period ended December 31, 2002. o The audited financial statements and related notes in CILCORP's and CILCO's Annual Report on Form 10-K for the period ending December 31, 2002. Throughout this document, CILCORP or the Company refers to CILCORP Inc. and its subsidiaries on a consolidated basis. CILCO refers to Central Illinois Light Company. All tabular dollar amounts are in thousands, unless otherwise indicated. The acquisition was accounted for using the purchase method of accounting. Under this method, the purchase price was allocated to the fair market value of the assets acquired and the liabilities assumed. The excess purchase price over the fair value of the assets acquired and the liabilities assumed was allocated to goodwill at CILCORP Inc. As a result, CILCORP Inc. has recorded purchase accounting fair value adjustments to electric plant in service, pension and other postretirement liabilities, long-term debt, emission allowances, coal contracts, and other balance sheet items. Ameren is in the process of completing a third party valuation of acquired property and plant and intangible assets. Therefore, the allocation of the purchase price to the acquired net assets is subject to refinement. The excess of the purchase price over tangible net assets acquired has been allocated preliminarily to goodwill in the amount of $595 million at CILCORP. The purchase accounting entries are reflected on CILCORP's financial statements as of the purchase date. As permitted by rules of the SEC, the Company did not "push down" the effects of purchase accounting to the financial statements of any of Holding Company's subsidiaries, including CILCO. Accordingly, CILCORP's post-acquisition financial statements reflect a new basis of accounting, and separate financial statements are presented for pre-acquisition (predecessor) and post-acquisition (successor) periods, separated by a heavy black line. CILCO's financial statements are presented on their historical basis of accounting for all periods presented. For discussion throughout this document, the 2003 pre-acquisition and post-acquisition periods have been combined for comparison in total to other periods presented for categories and segments that were substantially unaffected by the acquisition and the related pre-acquisition and post-acquisition accounting events. The results of operations and financial position of the Company are impacted by many factors, including both controllable and uncontrollable factors. Weather, economic conditions and the actions of key customers or competitors can significantly impact the demand for the Company's services. The Company's results are also impacted by seasonal fluctuations caused by winter heating and summer cooling demand. With a substantial portion of the Company's revenues directly subject to regulation by various state and federal agencies, decisions by regulators can have a material impact on the price that the Company charges for its services. The Company principally utilizes coal, 29 natural gas and oil in its operations. The prices for these commodities can fluctuate significantly due to the world economic and political environment, weather, production levels and many other factors. The Company does not have a fuel cost recovery mechanism for its electric utility business, but does have a gas cost recovery mechanism for its gas distribution utility business. In addition, the Company's electric rates are largely set through 2006. The Company employs various risk management strategies in order to try to reduce its exposure to commodity risks and other risks inherent in its business. The reliability of the Company's power plants, and transmission and distribution systems, and the level of operating and administrative costs, and capital investment are key factors that the Company seeks to control in order to optimize its results of operations, cash flows and financial position. The financial condition and operating results of the Company primarily reflect the operations of its subsidiary CILCO. The CILCORP Other segment includes the activities of the Holding Company itself, its investment subsidiary, CILCORP Investment Management Inc. (CIM), CILCORP Ventures Inc. (CVI), ESE Land Corporation, and CILCORP Infraservices Inc., which provides utility infrastructure operation and maintenance services. The CILCORP Other segment also includes the affects of purchase accounting fair value adjustments and the elimination of all intercompany transactions. Amortization of these purchase accounting fair value adjustments relates primarily to pension and postretirement liabilities, coal contract liabilities, long-term debt, electric plant in service and emission allowance assets. The results of QST Enterprises Inc. (QST) and its subsidiaries (excluding ESE Land Corporation and CILCORP Infraservices Inc.) have been reported as discontinued operations through 2002. All operations had ceased at QST prior to the first quarter of 2003 and no further gains or losses associated with these discontinued operations will be presented in future periods. RESULTS OF OPERATIONS Earnings Summary The Company's net income increased to $12.3 million in the first quarter of 2003 from $4.0 million in the first quarter of 2002. Net income in the first quarter of 2003 included a net cumulative effect gain of $3.8 million associated with the adoption of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). The net gain resulted principally from the elimination of non-legal obligation costs of removal for non rate-regulated assets from accumulated depreciation. This net gain was recorded in January 2003, prior to the acquisition of the Company by Ameren. See Note 1. Summary of Significant Accounting Policies to the Consolidated Financial Statements under Item 1 of Part I of this report. Excluding the cumulative effect of change in accounting principle related to SFAS 143, the Company's net income increased $4.4 million in the first quarter of 2003 compared to the prior year period. In addition to the $2.2 million increase at CILCO discussed below, the Company's net income increased $2.2 million in the first quarter of 2003, compared to the prior year period, due to the amortization of purchase accounting fair value adjustments at the Holding Company. The amortization of the fair value adjustments that increase income related primarily to pension and postretirement liabilities, coal contract liabilities and long-term debt. Amortization of fair value adjustments for electric plant in service and emission allowances increased expenses in the first quarter of 2003 compared to the first quarter of 2002. Purchase accounting adjustments in 2002 relate to AES' 1999 acquisition of the Company. The following table summarizes the impact on net income of the amortization of these purchase accounting fair value adjustments during the first quarter of 2003 and 2002: 30 Income Statement Line Item 2003 2002 (In thousands) (Unaudited) Other operations and maintenance $ 4,123 $ 463 Interest expense 784 -- Fuel and purchased power 558 -- Depreciation and amortization (1,792) (355) Income taxes (1,457) (43) ------- ------ Impact on net income $ 2,216 $ 65 ======= ====== CILCO's income available for common stock increased to $35.6 million in the first quarter of 2003 from $9.3 million in the first quarter of 2002. Net income in the first quarter of 2003 included a net cumulative effect gain of $24.1 million associated with the adoption of SFAS 143. The net gain resulted principally from the elimination of non-legal obligation costs of removal for non rate-regulated assets from accumulated depreciation. Excluding the cumulative effect of change in accounting principle related to SFAS 143, CILCO's income available for common stock increased $2.2 million in the first quarter of 2003 compared to the prior year period. The increase was primarily due to favorable weather conditions, with regulated electric and gas gross margins increasing $3.5 million (net of tax) and $1.5 million (net of tax), respectively. Retail electric kilowatt-hour sales increased 8%, residential gas sales volume increased 16% and commercial sales volumes increased 17% in the first quarter of 2003 compared to the first quarter of 2002. Partially offsetting the benefit on net income of weather in the first quarter of 2003 was increased employee benefit costs ($2.7 million, net of tax) related to plan performance and increasing health care costs. Recent Developments Acquisition On January 31, 2003, Ameren completed its acquisition of all of the outstanding common stock of CILCORP Inc. from AES. CILCORP Inc. is the parent company of Central Illinois Light Company which operated as CILCO. With the acquisition, CILCO became an Ameren subsidiary, but remains a separate utility company, operating as AmerenCILCO. The results of operations for CILCORP Inc. and its subsidiaries (CILCORP) were included in Ameren's financial statements effective with the January acquisition date. Ameren acquired CILCORP to complement its existing Illinois gas and electric operations. The purchase included CILCO's rate-regulated electric and natural gas business in Illinois serving approximately 200,000 and 205,000 customers, respectively, of which approximately 150,000 are combination electric and gas customers. CILCO's service territory is contiguous to Ameren's service territory. CILCO also has a non rate-regulated electric and gas marketing business principally focused in the Chicago, Illinois region. Finally, the purchase included CILCO's approximately 1,200 megawatts of largely coal-fired generating capacity, most of which is expected to become non rate-regulated in 2003. The total purchase price was approximately $1.34 billion and included the assumption of CILCORP debt and preferred stock. The purchase price is subject 31 to certain adjustments for working capital and other changes pending the finalization of CILCORP's closing balance sheet. Ameren is in the process of completing a third party valuation of acquired property and plant and intangible assets. Therefore, the allocation of the purchase price to the acquired net assets is subject to refinement. The excess of the purchase price over tangible net assets acquired has been allocated preliminarily to goodwill in the amount of $595 million. In the first quarter of 2003, CILCORP has recorded purchase accounting fair value adjustments to electric plant in service, pension and other postretirement liabilities, long-term debt, emissions allowances, coal contract liabilities, and other balance sheet items. The amortization of purchase accounting fair value adjustments increased earnings by approximately $2.2 million, net of tax, in the first quarter of 2003. Amortization of adjustments that increased net income primarily related to pension and postretirement liabilities ($2.5 million, net of tax), coal contract liabilities ($.8 million, net of tax), and long-term debt ($.5 million, net of tax). Amortization of adjustments that decreased net income primarily related to electric plant in service ($1.1 million, net of tax) and emission allowance assets ($.5 million, net of tax). 32 Credit Ratings In April 2002, as a result of AmerenUE's then pending Missouri electric earnings complaint case and the CILCORP transaction and related assumption of debt, credit rating agencies placed Ameren's and its subsidiaries' debt under review. Following the completion of the acquisition of CILCORP in January 2003, Standard & Poor's lowered the ratings of Ameren, AmerenUE and AmerenCIPS and increased the ratings of Generating Company, CILCORP and CILCO. At the same time, Standard & Poor's changed the outlook assigned to all of Ameren's ratings to stable. Moody's also lowered Ameren and AmerenUE's ratings subsequent to the acquisition and changed the outlook on these ratings to stable. These actions were consistent with the actions the rating agencies disclosed they were considering following the announcement of the CILCORP acquisition. As of April 30, 2003, the selected ratings by Moody's and Standard & Poor's were as follows: Standard Moody's & Poor's Ameren Corporation: Issuer/Corporate credit rating A3 A- Unsecured debt A3 BBB+ Commercial paper P-2 A-2 AmerenUE: Secured debt A1 A- Unsecured debt A2 BBB+ Commercial paper P-1 A-2 CILCORP: Unsecured debt Baa2 BBB+ AmerenCILCO: Secured debt A2 A- AmerenCIPS: Secured debt A1 A- Unsecured debt A2 BBB+ Generating Company: Unsecured debt A3/Baa2 A- Any adverse change in the ratings may reduce access to capital and/or increase the costs of borrowings resulting in a negative impact on earnings. A credit rating is not a recommendation to buy, sell or hold securities and should be evaluated independently of any other rating. Ratings are subject to revision or withdrawal at any time by the assigning rating organization. 33 CILCO Electric Operations The following table summarizes electric operating revenue and expenses by component.
Three Months Ended March 31, Components of Electric Income 2003 2002 (In thousands) (Unaudited) Revenue: Electric retail $89,564 $82,110 Sales for resale 5,007 2,003 ------- ------- Total revenue 94,571 84,113 ------- ------- Cost of sales: Fuel 25,656 22,030 Purchased power 12,343 11,530 Revenue taxes 5,131 4,902 ------- ------- Total cost of sales 43,130 38,462 ------- ------- Gross margin 51,441 45,651 ------- ------- Operating expenses: Operation and maintenance expenses 25,427 22,577 Depreciation and amortization 12,399 12,067 Other taxes 2,790 2,589 ------- ------- Total operating expenses 40,616 37,233 ------- ------- Other income and (deductions): Allowance for equity funds used during construction 17 -- ------- ------- Total 17 -- ------- ------- Interest charges: Interest on long-term debt 3,700 3,170 Cost of borrowed funds capitalized (645) (238) Other interest 398 762 ------- ------- Total 3,453 3,694 ------- ------- Income before taxes 7,389 4,724 Income taxes 2,964 1,471 ------- ------- Net income before cumulative effect of change in accounting principle $ 4,425 $ 3,253 ======= =======
Electric gross margin increased $5.8 million (13%) for the three months ended March 31, 2003, compared to the same period in 2002. Retail kilowatt-hour (kWh) sales increased 8% for the three months ended March 31, 2003, compared to the first quarter of 2002. Residential and commercial sales volumes increased 6% and 4%, respectively. Heating degree days were 20% higher for the three months ended March 31, 2003, compared to the same period in 2002. Industrial sales volumes increased 12% compared to the first quarter of 2002. 34 Sales for resale increased $3.0 million (150%) for the first quarter of 2003, compared to the same period in 2002. The increase was primarily due to greater sales in January 2003, as a result of higher wholesale prices. Sales for resale vary based on the energy requirements of native load customers, neighboring utilities and power marketers, CILCO's available capacity for bulk power sales, and the price of power available for sale. Electric operation and maintenance expense increased $2.9 million (13%) for the three months ended March 31, 2003, compared to the same period in 2002. The increase for the quarter was mainly due to increased employee benefit costs, including pension and postretirement health care benefits ($2.9 million). At the Holding Company (included in the CILCORP Other segment), approximately $2.6 million of pre-tax income was recorded in the first quarter of 2003 as amortization of a purchase accounting fair value adjustment related to the electric portion of the pension and postretirement health care benefit liabilities. Interest charges decreased $.2 million (7%) for the three months ended March 31, 2003, compared to the same period in 2002, primarily due to increased capitalized interest related to NOx reduction projects at the power plants ($.4 million). Income taxes increased for the three months ended March 31, 2003, due to a higher pre-tax income. 35 CILCO Gas Operations The following table summarizes gas operating revenue and expenses by component.
Three Months Ended March 31, Components of Gas Income 2003 2002 (In thousands) (Unaudited) Revenue: Sale of gas $111,669 $ 78,292 Transportation services 1,744 1,726 -------- -------- Total revenue 113,413 80,018 -------- -------- Cost of sales: Gas 80,212 49,608 Revenue taxes 3,973 3,620 -------- -------- Total cost of sales 84,185 53,228 -------- -------- Gross margin 29,228 26,790 -------- -------- Operating expenses: Operation and maintenance expenses 9,409 8,869 Depreciation and amortization 5,727 5,597 Other taxes 696 629 -------- -------- Total operating expenses 15,832 15,095 -------- -------- Interest charges: Interest on long-term debt 1,099 1,197 Other interest 118 288 -------- -------- Total 1,217 1,485 Income before taxes 12,179 10,210 Income taxes 4,795 4,041 -------- -------- Net income before cumulative effect of change in accounting principle $ 7,384 $ 6,169 ======== ========
Gas gross margin increased approximately $2.4 million (9%) for the three months ended March 31, 2003, compared to the same period in 2002. Residential and commercial sales volumes increased 16% and 17%, respectively, for the three months ended March 31, 2003, primarily due to colder weather. Heating degree days were 20% higher for the three months ended March 31, 2003, compared to the same period in 2002. The cost of gas increased $30.6 million (62%) for the three months ended March 31, 2003, compared to the same period in 2002, primarily due to higher natural gas prices and increased gas sales. These costs were passed through to customers via the Purchased Gas Adjustment (PGA). Gas operation and maintenance expense increased $.5 million (6%) for the three months ended March 31, 2003, compared to the same period in 2002. The increase for the three months ended March 31, 2003, was primarily due to 36 increased employee benefit costs, including pension and postretirement health care benefits ($1.6 million). At the Holding Company (included in the CILCORP Other segment), approximately $1.6 million of pre-tax income was recorded in the first quarter of 2003 as amortization of a purchase accounting fair value adjustment related to the gas portion of the pension and postretirement health care benefit liabilities. Interest charges decreased $.3 million (18%) for the three months ended March 31, 2003, compared to the same period in 2002, primarily due to decreased short-term borrowings. The increase in income tax expense for the three months ended March 31, 2003, was primarily due to higher pre-tax income. CILCO Other The following table summarizes CILCO Other's income and deductions.
Components of CILCO Other Three Months Ended Income (Loss) March 31, 2003 2002 (In thousands) (Unaudited) Revenue $ 33,079 $ 21,750 Expense 31,323 20,043 -------- -------- Gross margin 1,756 1,707 -------- -------- Operating expenses 1,776 905 -------- -------- Other income and (deductions): Miscellaneous income 122 10 Miscellaneous expense (444) (717) Income taxes 605 687 -------- -------- Total other income and (deductions) 283 (20) -------- -------- Preferred stock dividends 540 540 -------- -------- Income (loss) before taxes (277) 242 Income taxes (8) 320 -------- -------- Net loss before cumulative effect of change in accounting principle $ (269) $ (78) ======== ========
Operating expenses increased $.9 million for the three months ended March 31, 2003, primarily due to severance costs associated with the acquisition by Ameren. 37 CILCORP Other The following table summarizes CILCORP Other's revenue and expenses for the three months ended March 31, 2003 and 2002. CILCORP Other's results include income earned and expenses incurred at the Holding Company, CIM, CVI, ESE Land Corporation and CILCORP Infraservices Inc. The CILCORP Other segment also includes the affects of purchase accounting fair value adjustments and the elimination of all intercompany transactions. Amortization of these purchase accounting fair value adjustments relates primarily to pension and postretirement liabilities, coal contract liabilities, long-term debt, electric plant in service and emission allowance assets.
Components of CILCORP Other Three Months Ended Net Loss March 31, 2003 2002 (In thousands) (Unaudited) Revenue: Leveraged lease revenue $ 1,141 $ 1,326 Gas marketing revenue 42,112 16,314 Other revenue (249) 361 -------- -------- Total revenue 43,004 18,001 -------- -------- Operating Expenses: Gas 41,964 16,283 Fuel and purchased power (558) -- Other operations (4,437) 305 Depreciation and amortization 1,813 347 Taxes, other than income taxes 24 20 -------- -------- Total operating expenses 38,806 16,955 -------- -------- Other income and (deductions): Miscellaneous income 17 290 -------- -------- Total other income and (deductions) 17 290 -------- -------- Interest charges: Interest expense 9,692 10,849 -------- -------- Total interest charges 9,692 10,849 -------- -------- Loss before income taxes (5,477) (9,513) Income taxes (2,399) (4,184) -------- -------- Net loss before cumulative effect of change in accounting principle $ (3,078) $ (5,329) ======== ========
Leveraged lease revenue decreased $.2 million (14%) for the three months ended March 31, 2003, compared to the same period in 2002, due primarily to a reduction in the residual value of one of the leveraged leases in 2002. Gas marketing revenue and cost of gas increased $25.8 million and $25.7 million, respectively, in the first quarter of 2003, compared to the first quarter of 2002, due to increases in gas marketing sales at CVI subsidiary CILCORP Energy Services Inc. and higher natural gas prices. 38 Other revenue decreased $.6 million in the first quarter of 2003, compared to the first quarter of 2002, mainly due to the expiration of a services contract in 2002. In 2003, the $.6 million credit to fuel and purchased power represents amortization of the value of coal contract liabilities and emission credits at the power plants that were fair valued through purchase accounting. Other operations expenses for the first quarter of 2003 represent $4.4 million of income at the Holding Company due primarily to purchase accounting fair value adjustments to the pension and postretirement benefit liabilities ($4.2 million). CILCORP consolidated pension and postretirement benefit expenses are lower than CILCO's expenses due to the fair value adjustment to these liabilities. Depreciation and amortization increased $1.5 million for the three months ended March 31, 2003, compared to the same period in 2002, due primarily to purchase accounting adjustments increasing the fair market value of the Duck Creek and Edwards power plants ($1.8 million). The increase in value is being depreciated over the estimated remaining lives of the power plants. Interest expense decreased $1.2 million (11%) in the first quarter of 2003, compared to the first quarter of 2002, primarily as a result of a purchase accounting fair value adjustment to the CILCORP long-term debt. The fair value increase in long-term debt ($.8 million) is being amortized as a reduction in interest expense over the remaining life of the debt. The income tax benefit decreased significantly for the first quarter of 2003, compared to the first quarter of 2002, due to a lower loss before income taxes. 39 LIQUIDITY AND CAPITAL RESOURCES Operating CILCORP's net cash flows provided by operating activities totaled $71.4 million in the first quarter of 2003, compared to $30.7 million for the first quarter of 2002. Cash provided from operations increased in the first quarter of 2003, primarily due to higher cash earnings resulting from favorable weather and the timing of payments on accounts payable and accrued taxes, partially offset by the timing of receipts on accounts receivable. CILCO's net cash flows provided by operating activities totaled $75.0 million in the first quarter of 2003, compared to $16.4 million in the first quarter of 2002. Cash provided from operations increased in the first quarter of 2003, primarily due to higher cash earnings resulting from favorable weather and the timing of payments on accounts payable, partially offset by the timing of receipts on accounts receivable. The tariff-based gross margin of CILCO (the rate-regulated utility operating company) continues to be the principal source of cash from operating activities. CILCO's diversified retail customer mix of primarily rate-regulated residential, commercial and industrial classes and a commodity mix of gas and electric service provide a reasonably predictable source of cash flows. Investing CILCORP's net cash used in investing activities was $33.7 million in the first quarter of 2003, compared to $34.5 million in the first quarter of 2002. CILCO's net cash used in investing activities was $33.8 million in the first quarter of 2003, compared to $34.2 million in the first quarter of 2002. In the first quarter of 2003, construction expenditures were $33.1 million (2002 - $32.6 million), consisting primarily of nitrogen oxide (NOx) reduction equipment expenditures at the Edwards and Duck Creek power plants, replacements and improvements to the existing electric transmission and distribution and natural gas distribution systems. Capital expenditures relating to the Company's rate-regulated and non rate-regulated operations are expected to approximate $100 million in 2003. CILCORP and CILCO's capital expenditure program is subject to periodic review and revision, and actual capital expenditures may vary because of numerous factors. These factors include, but are not limited to, changes in business conditions, changes in environmental regulations, changes in load growth estimates, increasing costs of labor, equipment and materials, and cost of capital. Financing CILCORP's cash flows used in financing activities totaled $35.4 million in the first quarter of 2003, compared to $5.0 million in the first quarter of 2002. CILCO's cash flows used in financing activities totaled $35.4 million in the first quarter of 2003, compared to cash flows provided by financing activities of $7.0 million in the first quarter of 2002. In the first quarter of 2003, $25.4 million of long-term debt at CILCO matured and $10 million of short-term debt was repaid. No common dividends were paid by CILCO or CILCORP in the first quarter of 2003. 40 In April 2003, three series of CILCO's first mortgage bonds were redeemed with cash on hand prior to maturity. These included CILCO's $65 million principal amount of 8.20% series due January 15, 2022, at a redemption price of 103.29% and two 7.8% series totaling $10 million principal amount due February 9, 2023, at a redemption price of 103.90%. Ameren and AmerenUE are authorized by the SEC under PUHCA to have up to an aggregate of $1.5 billion and $1 billion, respectively, of short-term unsecured debt instruments outstanding at any time. In addition, AmerenCIPS, CILCO and CILCORP have PUHCA authority to have up to an aggregate of $250 million each of short-term unsecured debt instruments outstanding at any time. Generating Company is authorized by the Federal Energy Regulatory Commission (FERC) to have up to $300 million of short-term debt outstanding at any time. Short-Term Debt and Liquidity At March 31, 2003, CILCO had committed credit facilities, expiring at various dates during 2003, totaling $60 million, all of which were unused. Subsequent to this date, one of these facilities totaling $25 million was renewed to 2004. These credit facilities support CILCO's commercial paper program under which no amounts were outstanding at March 31, 2003. At March 31, 2003, Ameren and its subsidiaries had committed credit facilities, expiring at various dates between 2003 and 2005, totaling $694 million, excluding separate credit facilities of CILCO of $60 million, EEI of $45 million and AmerenUE's nuclear fuel lease facilities of $120 million. All of these amounts were available for use by two of Ameren's rate-regulated subsidiaries, (AmerenUE and AmerenCIPS), and Ameren Services Company, and $600 million of this amount was available for use by Ameren and most of its non rate-regulated subsidiaries including, but not limited to, Resources Company, Generating Company, Marketing Company, AmerenEnergy Fuels and Services Company and AmerenEnergy. CILCO may also access $600 million of these facilities through direct borrowings from Ameren. These committed credit facilities are used to support commercial paper programs under which no amounts were outstanding at March 31, 2003. At March 31, 2003, $694 million was unused and available under these committed credit facilities. Subject to the receipt of regulatory approval, which is being pursued, CILCO will participate in Ameren's utility money pool arrangement. Under this arrangement, CILCO will have access to up to $694 million of additional committed liquidity, subject to reduction based on use by other utility money pool participants, but increased to the extent other pool participants have surplus cash balances, which may be used to fund pool needs. CILCORP participates in Ameren's non-utility money pool arrangement, which provides it access to up to $600 million of committed liquidity, subject to reduction based on use by other pool participants, which may also be supplemented by available cash balances among pool participants. In addition to committed credit facilities, a further source of liquidity for Ameren is available cash and cash equivalents. At March 31, 2003, Ameren had $294 million of cash. In the first quarter of 2003, Ameren paid a total of approximately $488 million of cash on hand, including related acquisition costs, net of cash acquired to acquire CILCORP and Medina Valley. CILCORP and CILCO rely on access to short-term and long-term capital markets as a significant source of funding for capital requirements not satisfied by operating cash flows. The inability to raise capital on favorable terms, particularly during times of uncertainty in the capital markets, could negatively impact CILCORP and CILCO's ability to maintain and grow the businesses. Based on current credit ratings, CILCORP and CILCO believe that they will continue to have access to the capital markets. However, events 41 beyond the Company's control may create uncertainty in the capital markets such that the cost of capital would increase or the ability to access the capital markets would be adversely affected. Indenture and Credit Agreement Provisions and Covenants CILCORP's and CILCO's financial agreements include customary default or cross default provisions that could impact the continued availability of credit or result in the acceleration of repayment. Many of Ameren's and its subsidiaries' committed credit facilities require the borrower to represent, in connection with any borrowing under the facility, that no material adverse change has occurred since certain dates. Ameren's and its subsidiaries' financing arrangements do not contain credit rating triggers with the exception of certain triggers within CILCO's agreements covering $105 million of bank term loans. Ameren and its subsidiaries' committed credit facilities include provisions related to the funded status of Ameren's pension plan. These provisions either require Ameren to meet minimum ERISA funding requirements or limit the unfunded liability status of the plan. Under the most restrictive of these provisions impacting Ameren facilities totaling $400 million, an event of default will result if the unfunded liability status (as defined in the underlying credit agreements) of Ameren's pension plan exceeds $300 million in the aggregate. Based on the most recent valuation report available to Ameren at December 31, 2002, which was based on January 2002 asset and liability valuations, the unfunded liability status (as defined) was $31 million. While an updated valuation report will not be available until the second half of 2003, Ameren believes that the unfunded liability status of its pension plans (as defined) could exceed $300 million based on the investment performance of the pension plan assets and interest rate changes since January 1, 2002. As a result, Ameren may need to renegotiate the facility provisions, terminate or replace the affected facilities, or fund any unfunded liability shortfall. Should Ameren elect to terminate these facilities, Ameren believes it would otherwise have sufficient liquidity to manage short-term funding requirements. At March 31, 2003, Ameren and its subsidiaries, including CILCORP Inc. and CILCO, were in compliance with their indenture and credit agreement provisions and covenants. Off-Balance Sheet Arrangements At March 31, 2003, neither CILCORP Inc., nor any of its subsidiaries, had any off-balance sheet financing arrangements, other than operating leases entered into in the ordinary course of business. At this time, neither CILCORP Inc., nor any of its subsidiaries, expects to engage in any significant off-balance sheet financing arrangements. 42 OUTLOOK The Company believes there will be challenges to earnings in 2003 and beyond due to industry-wide trends and company-specific issues. The following are expected to put pressure on earnings in 2003 and beyond: o Weak economic conditions, which impact native load demand, o Power prices in the Midwest will impact the cost of power the Company purchases in the interchange markets. Although long-term power prices continue to be generally soft, short-term power prices have strengthened significantly from the prior year in the first quarter of 2003 due primarily to higher prices for natural gas, o Cost of fuel, which impacts electric gross margin. The Company has eliminated its fuel adjustment clause so increases in fuel costs may not be passed on to consumers, o The adverse effects of rising employee benefit costs and higher insurance costs, and o An assumed return to more normal weather patterns. CILCO is pursuing a gas rate increase of approximately $14 million in Illinois, which it expects to be ruled upon by the Illinois Commerce Commission (ICC) by the end of 2003. Ameren is also considering additional actions, including modifications to active employee benefits, staffing reductions, accelerating synergy opportunities related to CILCORP's acquisition by Ameren and other initiatives. In early May 2003, CILCO's service territory experienced several severe storms that damaged parts of the transmission and distribution system. As a result, CILCO expects to incur increased costs in the quarter ending June 30, 2003, for repairs required to the system. The Company is currently unable to estimate the impact on its future financial position, results of operations or cash flows. In the ordinary course of business, the Company and Ameren evaluate strategies to enhance their financial position, results of operations and liquidity. These strategies may include potential acquisitions, divestitures, and opportunities to reduce costs or increase revenues, and other strategic initiatives in order to increase shareholder value. The Company is unable to predict which, if any, of these initiatives will be executed, as well as the impact these initiatives may have on our future financial position, results of operations or liquidity. REGULATORY MATTERS See Note 3. Rate and Regulatory Matters to our Consolidated Financial Statements under Item 1 of Part I of this report for information. 43 ACCOUNTING MATTERS Critical Accounting Policies Preparation of the financial statements and related disclosures in compliance with generally accepted accounting principles requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The Company's application of these policies involves judgments regarding many factors, which, in and of themselves, could materially impact the financial statements and disclosures. A future change in the assumptions or judgments applied in determining the following matters, among others, could have a material impact on future financial results. In the table below, the Company has outlined those accounting policies that it believes are most difficult, subjective or complex:
Accounting Policy Uncertainties Affecting Application Regulatory Mechanisms and Cost Recovery o Regulatory environment, external The Company defers costs as regulatory decisions and requirements regulatory assets in accordance o Anticipated future regulatory decisions with SFAS 71 and makes investments and their impact that it is assumed will be o Impact of deregulation and competition collected in future rates. on ratemaking process and ability to recover costs Basis for Judgment The Company determines that costs are recoverable based on previous rulings by state regulatory authorities in jurisdictions where the Company operates or other factors that lead it to believe that cost recovery is probable. CILCO has no stranded costs as a result of deregulation of electric generation in Illinois. Environmental and Legal Obligations o Extent of contamination The Company accrues for all known o Responsible party determination environmental contamination where o Approved methods for cleanup remediation can be reasonably o Present and future legislation and estimated, but some of the governmental regulations and standards Company's operations have existed o Results of ongoing research and for over 85 years and previous development regarding environmental contamination may be unknown. The impacts Company accrues for legal o Probability of settlement or outcomes of obligations when it is believed litigation the probability of the obligation o Estimation of legal obligation costs occurring is more likely than not, and a range of costs can be determined. Basis for Judgment The Company determines the proper amounts to accrue for environmental contamination and legal obligations based on internal and third party estimates. Environmental obligations are based on clean-up costs in the context of current remediation standards and available technology. Legal obligations are based on the Company's prior experience and an analysis of similar obligations with other companies. 44 Accounting Policy (Continued) Uncertainties Affecting Application (Continued) Unbilled Revenue At the end of each period, the Company estimates, based on o Projecting customer energy usage expected usage, the amount of o Estimating impacts of weather and other revenue to record for services usage-affecting factors for the unbilled that have been provided to period customers, but not billed. This period can be up to one month. Basis for Judgment The Company determines the proper amount of unbilled revenue to accrue each period based on the volume of energy delivered as valued by a model of billing cycles and historical usage rates and growth by customer class for its service area, as adjusted for the modeled impact of seasonal and weather variations based on historical results. Benefit Plan Accounting Based on actuarial calculations, the Company accrues costs of o Future rate of return on pension and providing future employee benefits other plan assets in accordance with SFAS 87, 106 o Interest rates used in valuing benefit and 112. See Note 3 - obligations Postemployment and Postretirement o Health care cost trend rates Benefits to the Consolidated o Timing of employee retirements Financial Statements in the o Future plan designs CILCORP/CILCO 2002 Annual Report on Form 10-K. Basis for Judgment The Company utilizes a third party consultant to assist it in evaluating and recording the proper amount for future employee benefits. The ultimate selection of the discount rate, health care trend rate and expected rate of return on pension assets is based on the review of available current, historical and projected rates, as applicable. Derivative Financial Instruments The Company records all o Market conditions in the energy derivatives at their fair market industry, especially the effects of value in accordance with SFAS 133. price volatility on contractual The identification and commodity commitments classification of a derivative and o Regulatory and political environments the fair value of such derivative and requirements must be determined. The Company o Fair value estimations on longer term designates certain derivatives as contracts hedges of future cash flows. See o Complexity of financial instruments and Note 4 - Accounting for Price Risk accounting rules Management Activities to the o Effectiveness of derivatives that have Consolidated Financial Statements been designated as hedges under Item 1 of Part I of this report. 45 Accounting Policy (Continued) Uncertainties Affecting Application (Continued) Basis for Judgment The Company determines whether a transaction is a derivative versus a normal purchase or sale based on historical practice and the Company's intention at the time it enters a transaction. The Company utilizes actively quoted prices, prices provided by external sources, and prices based on internal models, and other valuation methods to determine the fair market value of derivative financial instruments. Goodwill The Company follows the o Method for determining fair value nonamortization approach for o Market prices for equity securities or purchased goodwill and certain assets and liabilities intangibles in accordance with o Projections of future cash flows SFAS 142, "Goodwill and Other o Interest rates used in valuing goodwill Intangible Assets." The Company annually assesses whether its goodwill is impaired and performs an assessment more frequently if events occur indicating possible impairment. As of March 31, 2003, CILCORP had goodwill of approximately $595 million. Basis for Judgment The Company determines whether goodwill is impaired based on internal and third party estimates of the value of its assets and liabilities. Leveraged Leases o Market conditions of the industry of the The Company accounts for its leased asset that might affect the investments in leveraged leases in residual value at the end of the lease accordance with SFAS 13, terms. This would include: the real "Accounting for Leases." As estate markets where each of the assets required by SFAS 13, the Company are located; the rail industry; the reviews its estimated residual aerospace industry and energy market value as well as all other where the asset is located. important assumptions affecting estimated total net income from the leases. SFAS 13 requires the rate of return and total income of a lease to be recalculated if there is a permanent decline in the estimated residual value below the value currently used to calculate income.
Basis for Judgment The Company determines whether the residual value has been "permanently impaired" based on an internal review as well as periodic third party review of the residual value. In addition to the above Critical Accounting Policies, CILCO has a policy to expense as incurred all costs associated with major maintenance projects. 46 Impact of Future Accounting Pronouncements See Note 1. Summary of Significant Accounting Policies to the Consolidated Financial Statements under Item 1 of Part I of this report. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of changes in value of a physical asset or a financial instrument, derivative or non-derivative, caused by fluctuations in market variables (e.g., interest rates, etc.). The following discussion of CILCORP's risk management activities includes "forward-looking" statements that involve risks and uncertainties. Actual results could differ materially from those projected in the "forward-looking" statements. CILCORP handles market risks in accordance with established policies, which may include entering into various derivative transactions. In the normal course of business, CILCORP also faces risks that are either non-financial or non-quantifiable. Such risks principally include business, legal and operational risks and are not represented in the following discussion. CILCORP's risk management objective is to optimize its physical generating assets within prudent risk parameters and to maintain a highly hedged portfolio of gas and electric purchases and sales outside of its service territory. Fair Value of Contracts The Company is exposed to non-trading risks through its daily business activities. These non-trading activities may include the market or commodity price risk related to CILCO's retail tariff activity and the Company's non rate-regulated commodity marketing activities. The majority of the Company's electricity sales during 2003 were to CILCO retail customers in Illinois under tariffs regulated by the ICC. Gas costs, prudently incurred in connection with sales to customers under tariffs regulated by the ICC, are recovered through the Company's Purchased Gas Adjustment (PGA). The Company is exposed to electricity price risk since the Company mainly sells electricity to customers at fixed prices. To limit this risk, sufficient purchased power has been placed under contract to limit the Company's exposure to market risk at any given time. When this supply is added to CILCO generation capacity, a reserve margin in excess of 16% results, based on a peak load of 1,270 MW during the 2002 summer cooling season. Since CILCO supplies over 90% of its native load with its generation capacity, generation can be adjusted on a real-time basis to match actual load at any given time. CILCO is subject to the risk that generation becomes unavailable due to forced outages. The Company's historical unplanned outage rate is 5.4%. In the event that CILCO generation and purchased supply is insufficient to meet load requirements, CILCO may have to purchase power from the market at prevailing market rates. The market risk inherent in the Company's non rate-regulated activities is the potential loss arising from adverse changes in natural gas and electric commodity prices relative to the physical and financial positions that the Company maintains. The prices of natural gas and electricity are subject to fluctuations resulting from changes in supply and demand. The Company is engaged in non rate-regulated electric retail and natural gas sales throughout Illinois, including wholesale power purchases and sales to utilize its electric generating capability. At March 31, 2003, these non rate-regulated activities had net open market price risk positions of approximately 250,000 MWh of electricity and 14,000 Mcf of natural gas. A market price sensitivity 47 of 10% applied to positions open in the next twelve months is not material to the Company. See Note 4 for a discussion of the Company's use of financial derivatives for hedging purposes. Due to the high correlation between the changes in the value of the financial instrument positions held by the Company and the change in price of the underlying commodity, the net effect on the Company's net income resulting from the change in value of these financial instruments is not expected to be material. The following table summarizes the favorable (unfavorable) changes in the fair value of all the Company's derivatives marked to market during the first quarter of 2003: (In thousands) Fair value of contracts at beginning of period, net $ 1,951 Contracts which were realized or otherwise settled during the period (6,767) Changes in fair values attributable to changes in valuation techniques and assumptions -- Fair value of new contracts entered during the period -- Other changes in fair value 5,437 -------- Fair value of contracts outstanding at end of period, net $ 621 ======== Maturities of all derivative contracts as of March 31, 2003, were less than one year and were all with investment-grade counterparties. Fair values are all determined based on actively quoted prices. Interest Rate Risk The Company is exposed to interest rate risk as a result of changes in interest rates on borrowings under secured bank loans which have interest rates that are indexed to short-term market interest rates, and refinancing risk in the commercial paper markets. CILCORP manages its interest rate exposure by controlling the amount of these instruments held within its total capitalization portfolio and by monitoring the effects of market changes in interest rates. Utilizing the Company's debt outstanding at March 31, 2003, if interest rates increased by 1%, the Company's annual interest expense would increase by approximately $1 million and net income would decrease by approximately $.6 million. The model does not consider the effects of the reduced level of potential overall economic activity that would exist in such an environment. In the event of a significant change in interest rates, management would likely take actions to further mitigate our exposure to this market risk. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure. Credit Risk As of March 31, 2003, the Company had approximately $132 million invested in seven leveraged leases. The Company analyzes each counterparty's financial condition prior to entering into sales, forwards, swaps, futures or option contracts and monitors counterparty exposure associated with our leveraged leases. The Company also establishes credit limits for these counterparties and monitors the appropriateness of these limits on an ongoing basis through a credit risk management program which involves daily exposure reporting to 48 senior management, master trading and netting agreements, and credit support management such as letters of credit and parental guarantees. Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures Within 90 days prior to the date of this report, CILCORP and CILCO carried out an evaluation, under the supervision and with participation of their management, including their chief executive officer and chief financial officer, of the effectiveness of the design and operation of CILCORP's and CILCO's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the chief executive officer and chief financial officer concluded that CILCORP's and CILCO's disclosure controls and procedures are effective in timely alerting them to material information relating to CILCORP and CILCO, which is required to be included in their periodic SEC filings. (b) Change in Internal Controls There have been no significant changes in CILCORP's and CILCO's internal controls or in other factors which could significantly affect internal controls subsequent to the date the evaluation was carried out. FORWARD-LOOKING STATEMENTS Statements made in this report which are not based on historical facts are "forward-looking" and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Although such "forward-looking" statements have been made in good faith and are based on reasonable assumptions, there is no assurance that the expected results will be achieved. These statements include (without limitation) statements as to future expectations, beliefs, plans, strategies, objectives, events, conditions and financial performance. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, CILCORP is providing this cautionary statement to identify important factors that could cause actual results to differ materially from those anticipated. The following factors, in addition to those discussed elsewhere in this report and in subsequent securities filings, could cause results to differ materially from management expectations as suggested by such "forward-looking" statements: o changes in laws and other governmental actions, including monetary and fiscal policies; o the impact on CILCORP of current regulations related to the opportunity for customers to choose alternative energy suppliers in Illinois; o the effects of increased competition in the future due to, among other things, deregulation of certain aspects of CILCORP's business at both the state and federal levels; o the effects of participation in a FERC-approved Regional Transmission Organization, including activities associated with the Midwest Independent Transmission System Operator, Inc.; o availability and future market prices for fuel and purchased power, electricity and natural gas, including the use of financial and derivative instruments and volatility of changes in market prices; o average rates for electricity in the Midwest; o business and economic conditions; o the impact of the adoption of new accounting standards on the application of appropriate technical accounting rules and guidance; 49 o interest rates and the availability of capital; o actions of rating agencies and the effects of such actions; o weather conditions; o the effects of strategic initiatives, including acquisitions and divestitures; o the impact of current environmental regulations on utilities and the expectation that more stringent requirements will be introduced over time, which could potentially have a negative financial effect; o future wages and employee benefit costs, including changes in returns on benefit plan assets; o disruptions of the capital markets or other events making CILCORP's access to necessary capital more difficult or costly; o competition from other generating facilities, including new facilities that may be developed in the future; o difficulties in integrating CILCO with Ameren's other businesses; o changes in the coal markets, environmental laws or regulations or other factors adversely impacting synergy assumptions in connection with Ameren's acquisition of CILCORP; o cost and availability of transmission capacity for the energy generated by CILCO's generating facilities or required to satisfy its energy sales; and o legal and administrative proceedings. Given these uncertainties, undue reliance should not be placed on these forward-looking statements. Except to the extent required by the federal securities laws, neither CILCORP nor CILCO undertakes an obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 50 PART II. OTHER INFORMATION Item 1. Legal Proceedings Note 2. Contingencies and Note 3. Rate and Regulatory Matters to the Consolidated Financial Statements of CILCORP Inc. and Central Illinois Light Company under Item 1 of Part I of this report contain information on legal and administrative proceedings which are incorporated by reference under this item. Item 6. Exhibits and Reports on Form 8-K. (a)(i) Exhibits filed herewith. 99.1 Certificate of Chief Executive Officer of CILCORP Inc. required by Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certificate of Chief Executive Officer of Central Illinois Light Company required by Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 Certificate of Chief Financial Officer of CILCORP Inc. required by Section 906 of the Sarbanes-Oxley Act of 2002. 99.4 Certificate of Chief Financial Officer of Central Illinois Light Company required by Section 906 of the Sarbanes-Oxley Act of 2002. (a)(ii) Exhibits incorporated by reference. 10.1 *2003 Ameren Executive Incentive Plan (Ameren Corporation quarterly report on Form 10-Q for the quarter ended March 31, 2003, Exhibit 10.1). *Management compensatory plan or arrangement (b) Reports on Form 8-K. CILCORP Inc. and Central Illinois Light Company filed the following reports during the three months ended March 31, 2003: Items Financial Date of Report Reported Statements Filed -------------- --------- ---------------- January 31, 2003 1, 5, 7 None March 14, 2003, as amended April 22, 2003 4, 7 None Note: Reports of Ameren Corporation on Forms 8-K, 10-Q and 10-K are on file with the SEC under File Number 1-14756. Reports of Union Electric Company on Forms 8-K, 10-Q and 10-K are on file with the SEC under File Number 1-2967. Reports of Ameren Energy Generating Company on Forms 8-K, 10-Q and 10-K are on file with the SEC under File Number 333-56594. Reports of Central Illinois Public Service Company on Forms 8-K, 10-Q and 10-K are on file with the SEC under File Number 1-3672. 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CILCORP INC. (Registrant) May 15, 2003 By /s/ Martin J. Lyons ----------------------------- Martin J. Lyons Vice President and Controller (Principal Accounting Officer) CERTIFICATIONS I, Gary L. Rainwater, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CILCORP Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): 52 CERTIFICATIONS (CONTINUED) a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Gary L. Rainwater ----------------------------- Gary L. Rainwater President (Principal Executive Officer) 53 CERTIFICATIONS (CONTINUED) I, Warner L. Baxter, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CILCORP Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 54 CERTIFICATIONS (CONTINUED) 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Warner L. Baxter ------------------------------ Warner L. Baxter Senior Vice President, Finance (Principal Financial Officer) 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTRAL ILLINOIS LIGHT COMPANY (Registrant) May 15, 2003 By /s/ Martin J. Lyons ----------------------------- Martin J. Lyons Vice President and Controller (Principal Accounting Officer) CERTIFICATIONS I, Gary L. Rainwater, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Central Illinois Light Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): 56 CERTIFICATIONS (CONTINUED) a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Gary L. Rainwater ----------------------------- Gary L. Rainwater President (Principal Executive Officer) 57 CERTIFICATIONS (CONTINUED) I, Warner L. Baxter, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Central Illinois Light Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 58 CERTIFICATIONS (CONTINUED) 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Warner L. Baxter ---------------------------- Warner L. Baxter Senior Vice President, Finance (Principal Financial Officer) 59