10-K 1 c76157e10vk.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 2002 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 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class so registered on which registered CILCO Preferred Stock, Cumulative $100 par, 4 1/2% series New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]. 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]. 1 As of June 28, 2002, The AES Corporation held all 1,000 outstanding shares of common stock, without par value, of CILCORP Inc. At June 28, 2002, there was no voting stock of CILCORP Inc. held by non-affiliates. At March 31, 2003, Ameren Corporation held all 1,000 outstanding shares of common stock, without par value, of CILCORP Inc., as a result of Ameren Corporation's acquisition of the shares from The AES Corporation on January 31, 2003. As of June 28, 2002, and March 31, 2003, CILCORP Inc. held all 13,563,871 shares of common stock, without par value, of Central Illinois Light Company. The aggregate market value of the voting preferred stock held by non-affiliates of Central Illinois Light Company at June 28, 2002, was $36.0 million. OMISSION OF CERTAIN INFORMATION CILCORP Inc. meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K as a wholly owned subsidiary of Ameren Corporation and is therefore filing this form with the reduced disclosure format allowed under that General Instruction. DOCUMENT INCORPORATED BY REFERENCE Portions of Central Illinois Light Company's Proxy Statement, to be filed not later than April 25, 2003, in connection with its Annual Meeting of Shareholders to be held on May 20, 2003, is incorporated by reference into Part III hereof. 2 CILCORP INC. and Central Illinois Light Company 2002 Form 10-K Annual Report This combined Form 10-K is filed separately by CILCORP Inc. and its subsidiaries (CILCORP or the Company) and Central Illinois Light Company and its subsidiaries (CILCO). Information herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, CILCO makes no representation as to information relating to any other subsidiary of CILCORP Inc. Table of Contents
Page Glossary of Terms 4-6 Part I Item 1 Business 7-14 Item 2 Properties 15 Item 3 Legal Proceedings 16 Item 4 Submission of Matters to a Vote of Security Holders 16 Executive Officers of the Registrants (Item 401(b) of Regulation S-K) 17-18 Part II Item 5 Market for the Registrants' Common Equity and Related Stockholder Matters 19 Item 6 Selected Financial Data 20 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 21-53 Item 7A Quantitative and Qualitative Disclosures About Market Risk 54 Item 8 Financial Statements and Supplementary Data 55-142 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 143 Part III Item 10 Directors and Executive Officers of the Registrants 144-147 Item 11 Executive Compensation 147 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 148 Item 13 Certain Relationships and Related Transactions 148 Item 14 Controls and Procedures 148 Part IV Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 149-154 Schedules, Signatures and Certifications, Exhibits 155-163
This Form 10-K 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-K at page 52 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. 3 GLOSSARY OF TERMS When used herein, the following terms have the meanings indicated. AEG -- Ameren Energy Generating Company AER -- Ameren Energy Resources Company AES -- The AES Corporation, parent of CILCORP Inc. prior to acquisition of CILCORP Inc. by Ameren Corporation on January 31, 2003. AFUDC -- Allowance for Funds Used During Construction Ameren -- Ameren Corporation, parent of CILCORP Inc. upon completion of acquisition on January 31, 2003. AmerenCILCO or CILCO -- Central Illinois Light Company AmerenCIPS -- Central Illinois Public Service Company AmerenEnergy -- AmerenEnergy, Inc. AmerenUE or Union Electric -- Union Electric Company Ameren Services -- Ameren Services Company APB - Accounting Principles Board BTU -- British Thermal Unit. The quantity of heat required to raise the temperature of one pound of water one degree Fahrenheit. Bcf -- Billion cubic feet Caterpillar -- Caterpillar Inc., CILCO's largest customer CECO -- CILCO Energy Corporation CEDCO -- CILCO Exploration and Development Company CESI -- CILCORP Energy Services Inc. CIGI -- Central Illinois Generation, Inc. (renamed AmerenEnergy Resources Generating Company in April 2003) CII -- CILCORP Infraservices Inc. CILCORP -- CILCORP Inc. and subsidiaries CILCORP Inc. -- the Holding Company CIM -- CILCORP Investment Management Inc. CIPS -- Central Illinois Public Service CLM -- CILCORP Lease Management Inc. Company -- CILCORP Inc. and subsidiaries 4 Cooling Degree Day -- The measure of the extent to which the average of high and low temperatures for a day rises above 65 degrees Fahrenheit (annual degree days above historic average indicate warmer than average temperatures); the historic average provided by The National Weather Service for 30-year period. CVI -- CILCORP Ventures Inc. DSM -- Demand Side Management. The process of helping customers control how they use energy resources. EEI -- Electric Energy, Inc. EITF -- Emerging Issues Task Force EPA -- U.S. Environmental Protection Agency FAC -- Fuel Adjustment Clause FASB -- Financial Accounting Standards Board FERC -- Federal Energy Regulatory Commission Generating Company -- AmerenEnergy Generating Company Heating Degree Day -- The measure of the extent to which the average of high and low temperatures for a day falls below 65 degrees Fahrenheit (annual degree days above historic average indicates cooler than average temperatures); the historic average provided by The National Weather Service for 30-year period. Holding Company -- CILCORP Inc. ICC -- Illinois Commerce Commission IEPA -- Illinois Environmental Protection Agency KW -- Kilowatt, a thousand watts kWh -- Kilowatt-hour, one thousand watts used for one hour (unit of work) Marketing Company -- AmerenEnergy Marketing Company MCF -- One thousand cubic feet MW -- Megawatt, a million watts NOx - Nitrogen oxide PGA -- Purchased Gas Adjustment PUHCA -- Public Utility Holding Company Act of 1935 QST -- QST Enterprises Inc. QST Energy -- QST Energy Inc. QST Trading -- QST Energy Trading Inc. 5 Resources Company -- AmerenEnergy Resources Company SEC -- Securities and Exchange Commission SFAS -- Statement of Financial Accounting Standards SO2 -- Sulfur dioxide Therm -- Unit of measurement for natural gas; a therm is equal to one hundred cubic feet (volume); a therm is also equal to 100,000 BTUs (energy). 6 PART I Item 1. Business CILCORP INC. AND SUBSIDIARIES CILCORP Inc. (the Holding Company) was incorporated as a holding company in the state of Illinois in 1985. The financial condition and results from continuing operations of CILCORP Inc. and its subsidiaries (CILCORP or the Company) primarily reflect the operations of Central Illinois Light Company (CILCO), CILCORP Inc.'s principal business subsidiary. In the fourth quarter of 1998, the operations of CILCORP Inc.'s first-tier subsidiary QST Enterprises Inc. (QST) and its subsidiaries (excluding ESE Land Corporation and CILCORP Infraservices Inc.) were discontinued (see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations) and, therefore, are being reported as discontinued operations in the financial statements. The Holding Company also has two other first-tier subsidiaries, CILCORP Investment Management Inc. (CIM) and CILCORP Ventures Inc. (CVI), whose operations, combined with those of ESE Land Corporation, CILCORP Infraservices Inc., and the Holding Company itself, are collectively referred to herein as CILCORP Other. CILCORP Inc. owns 100% of the common stock of all of its subsidiaries. At December 31, 2002, CILCORP Inc. was a wholly-owned subsidiary of The AES Corporation (AES). On April 29, 2002, AES announced an agreement with Ameren Corporation (Ameren) to sell 100% of its ownership interest in CILCORP Inc. and its subsidiaries. Ameren completed the acquisition of the Company on January 31, 2003. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for discussion regarding this transaction. CILCO 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. CILCO has three wholly-owned subsidiaries, CILCO Exploration and Development Company (CEDCO), CILCO Energy Corporation (CECO) and Central Illinois Generation, Inc. (CIGI). CEDCO was formed to engage in the exploration and development of gas, oil, coal and other mineral resources. CECO was formed to research and develop new sources of energy, including the conversion of coal and other minerals into gas. The operations of CEDCO and CECO are not significant. CIGI is an inactive subsidiary incorporated on November 15, 2001. CIGI was formed in anticipation of CILCO's filing with the Illinois Commerce Commission (ICC) seeking approval to transfer substantially all of its electric generation assets to a non rate-regulated subsidiary. CILCO filed a Notice of Transfer of Assets with the ICC on February 13, 2002. The ICC approved this filing on April 10, 2002. The Transfer of Assets was contingent upon FERC approval of a long-term power supply agreement (PSA). Final FERC approval was granted on December 27, 2002. Due to the acquisition of CILCORP by Ameren, this transaction is expected to be completed by the third quarter of 2003. QST, formed in December 1995, provided energy and energy-related services to a broad spectrum of retail and wholesale customers through its subsidiary, QST Energy Inc. (QST Energy). QST Energy has one wholly-owned subsidiary - QST Energy Trading Inc. (QST Trading), which purchased and sold energy in the wholesale market. In the fourth quarter of 1998, QST decided to discontinue its energy operations and report their results as discontinued. Refer to the 7 caption "QST Enterprises Discontinued Operations" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. CIM manages the Company's investment portfolio. CIM holds seven leveraged lease investments through three wholly-owned subsidiaries: CILCORP Lease Management Inc., which was formed in 1985, and CIM Leasing Inc. and CIM Air Leasing Inc., which were both formed in 1993. CIM's other wholly-owned subsidiary is CIM Energy Investments Inc., which was formed in 1989 to invest in non rate-regulated, independent power production facilities. CIM also directly owns limited partnership interests in affordable housing portfolios. CVI primarily invests in ventures in energy-related products and services. CVI has an 80% interest in the Agricultural Research and Development Corporation and has one wholly-owned subsidiary, CILCORP Energy Services Inc. (CESI). CESI was formed to pursue energy-related opportunities in the non rate-regulated market. CESI's primary business is gas management services, which includes commodity procurement and re-delivery to retail customers. The following table summarizes the relative contribution of each business group to consolidated assets at December 31, 2002, and to revenue and net income for the year ended December 31, 2002. The financial information as of and for the years ended December 31, 2001 and 2000 has been restated. See Note 19 -- Restatement to CILCORP's consolidated financial statements and Note 17 -- Restatement to CILCO's consolidated financial statements for additional information.
Assets Revenue Net Income (Loss) (In thousands) CILCO $1,109,001 $718,938 $ 47,969 CILCORP Other 792,572 60,859 (23,311) -------- Total Continuing Operations 24,658 QST Discontinued Operations (73) -------- Net Income $ 24,585 ========
8 BUSINESS OF CILCO CILCO was incorporated under the laws of Illinois in 1913. CILCO's principal business is 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. CILCO is continuing to experience, in varying degrees, the impact of developments common to the electric and gas industries. These include increased competition in wholesale and retail markets, changes in regulation and legislation affecting utilities, uncertainties as to the future demand for electricity and natural gas, structural and competitive changes in the markets for these commodities, the high cost of compliance with environmental and safety laws and regulations and uncertainties in regulatory and political processes. At the same time, CILCO has sought to provide reliable service at reasonable rates for its customers and a fair return for its investors. Refer to the caption "Regulatory Matters" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. ELECTRIC SERVICE CILCO furnishes electric service to retail customers in 136 Illinois communities (including Peoria, East Peoria, Pekin, Lincoln and Morton). At December 31, 2002, CILCO had approximately 200,000 retail electric customers. CILCO owns and operates two coal-fired base load generating plants, a natural gas-fired cogeneration plant, two natural gas combustion turbine generators and 16 diesel-fueled power modules. The natural gas combustion turbine generators and the power modules are typically used for peaking service. The 2002 system peak demand was 1,270 MW on August 1, 2002. The all-time system peak demand of 1,287 MW was set on July 31, 2001. The system peak demand for 2003 is estimated to be 1,242 MW with a planned reserve margin in excess of 16%. The planned reserve margin takes into account 100 MW of net firm purchased power, approximately 64 MW of interruptible industrial load and 137 MW of unit or system power purchases and other related Demand Side Management (DSM) programs. Studies conducted by CILCO indicate that it has sufficient base load generating capacity to provide an adequate and reliable supply of electricity to satisfy base load demand; however, CILCO must purchase capacity and energy to meet its summer peak demands and reserve requirements. CILCO has a power purchase agreement with Aquila for 75 MW of capacity and firm energy through December 2003, and with AmerenCIPS for 100 MW of capacity and firm energy for the months of June through September in 2003. CILCO is interconnected with AmerenCIPS, Commonwealth Edison Company, Illinois Power Company and the Springfield City Water, Light and Power Department to provide for the interchange of electric energy on an emergency and mutual help basis. GAS SERVICE CILCO provides gas service to customers in 128 Illinois communities (including Peoria, East Peoria, Pekin, Lincoln and Springfield). At December 31, 2002, CILCO had approximately 205,000 gas customers, including 170 industrial, commercial and residential gas transportation customers that purchase gas 9 directly from suppliers for transportation through CILCO's system. For further discussion of gas transportation, refer to the caption "CILCO Gas Operations" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. CILCO's all-time maximum daily send-out of 443,167 MCF occurred on January 15, 1972. The 2002 peak day send-out of 344,945 MCF occurred on March 3, 2002. CILCO has been able to meet all of its existing customer requirements during the 2002-2003 heating season. CILCO believes that its present and planned supplies of gas will continue to be sufficient to serve all of its existing customer requirements during the 2003-2004 heating season. REGULATION CILCO is a public utility under the laws of the State of Illinois and is subject to the jurisdiction of the Illinois Commerce Commission (ICC). The ICC has general power of supervision and regulation with respect to services and facilities, rates and charges, classification of accounts, valuations of property, determination of depreciation rates, construction, contracts with any affiliated interest, the issuance of stock and evidences of indebtedness and various other matters. In Illinois, the Electric Service Customer Choice and Rate Relief Law of 1997 (the Illinois Law) began a transition process to a fully competitive market for electricity. The ICC's supervision and regulatory oversight of certain transactions by electric utilities is reduced or suspended during the mandatory transition period (which terminates on January 1, 2007) and, for certain non-utility transactions, is permanently eliminated under the Illinois Law. Refer to the caption "Regulatory Matters" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. With respect to certain electric matters, CILCO is subject to regulation by the Federal Energy Regulatory Commission (FERC). CILCO is exempt from the provisions of the Natural Gas Act, but is affected by orders, rules and regulations issued by the FERC with respect to certain gas matters. ELECTRIC FUEL AND PURCHASED GAS ADJUSTMENT CLAUSES CILCO's former tariffs provided for adjustments to its electric rates through the Fuel Adjustment Clause (FAC) to recover the cost of energy purchased from other suppliers and to reflect increases or decreases in the cost of fuel used in its generating stations. The transportation costs of coal were not included in the FAC, but were collected through base rates. CILCO filed a proposal to eliminate the FAC on September 10, 2001. Tariffs eliminating CILCO's FAC became effective on October 29, 2001. Elimination of the FAC is a prerequisite to utility restructuring, as provided for in the Illinois Law. Elimination of the FAC exposes CILCO to market risk with respect to the cost of fuel and purchased power required to serve native load customers. CILCO's current tariffs also provide for adjustments to its gas rates through the Purchased Gas Adjustment clause (PGA) to reflect increases or decreases in the cost of natural gas purchased for sale to customers. 10 FUEL SUPPLY - COAL Substantially all of CILCO's electric generation capacity is coal-fired. Approximately 2.7 million tons of coal were burned during 2002. Existing coal contracts with three suppliers in Illinois and an additional Colorado supplier are expected to supply all of the 2003 requirements. During the years 2002, 2001, and 2000, the average cost per ton of coal burned, including transportation, was $35.42, $40.94, and $34.80, respectively. The cost of coal burned per million BTU's was $1.61, $1.84, and $1.57, respectively. On November 21, 2001, Freeman United Coal Mining Company (Freeman) and CILCO entered into a Termination Agreement and Mutual Release which terminated the coal supply contract the parties entered into in 1986. The 1986 contract had obligated CILCO to purchase between 500,000 and 1,000,000 tons annually through 2010 from Freeman's Crown II mine. As part of the agreement, CILCO agreed to make termination payments to Freeman and both parties agreed to dismiss any pending lawsuits or arbitration between the parties. Also on November 21, 2001, CILCO and Prairie Energy Sales Corporation, a subsidiary of Freeman, entered into a new Coal Supply and Transportation Agreement. The new contract obligates CILCO to purchase 1,000,000 tons of coal per year for 2002 through 2004 and 800,000 tons in 2005. NATURAL GAS SUPPLY During 2002, CILCO continued to maintain a natural gas supply portfolio that is structured around firm and interruptible gas transportation service provided by five interstate pipeline suppliers and firm and interruptible gas purchase arrangements of varying terms made directly with approximately 20 gas suppliers. Reliability is enhanced through natural gas injections and withdrawals at CILCO's two natural gas storage fields and contracted storage facilities. The supply and pipeline capacity portfolio continues to provide reliable supplies at prevailing market prices. CILCO believes that its present and planned supply of gas will continue to be sufficient to serve all of its present and projected firm customer requirements. During 2002, CILCO purchased approximately 35,581,700 MCF of natural gas at a cost of approximately $137.5 million, or an average cost of $3.86 per MCF. The average cost per MCF of natural gas purchased was $5.28 in 2001 and $5.17 in 2000. The decrease in the average price of natural gas during the winter of 2001-2002 was due primarily to a greater supply of natural gas as a result of abnormally warm weather during the winter months. FINANCING AND CAPITAL EXPENDITURES PROGRAMS Refer to the section "Liquidity and Capital Resources" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. ENVIRONMENTAL MATTERS Refer to the caption "Environmental Matters" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11 SIGNIFICANT CUSTOMER Caterpillar Inc. (Caterpillar) is CILCO's largest industrial customer. Gas revenues, electric revenues, and sales of other services to Caterpillar were 7.7%, 7.3%, and 6.5% of CILCO's total revenue for 2002, 2001, and 2000, respectively. Sales to Caterpillar from all continuing CILCORP subsidiaries represented 8.8%, 9.5%, and 7.5% of CILCORP consolidated operating revenue from continuing operations for 2002, 2001, and 2000, respectively. The 2001 and 2000 percentages are based on restated 2001 and 2000 results. See CILCORP Note 19 - Restatement and CILCO Note 17 - Restatement of Item 8. Financial Statements and Supplementary Data. See also Note 10 - Statements of Segments of Business of Item 8. Financial Statements and Supplementary Data. FRANCHISES CILCO negotiates franchise agreements which authorize it to provide utility services to the communities in its service area. The franchises are for various terms, usually 10 to 25 years. Based on past experience, CILCO anticipates that, as franchises expire, new franchises will be granted in the normal course of business. REGULATORY MATTERS Refer to the caption "Regulatory Matters" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. PEOPLE As of December 31, 2002, the number of full-time people at CILCO was 895, and the number of part-time people was 16. Of these, 335 gas and electric field people were represented by Local 51 of the International Brotherhood of Electrical Workers (IBEW), and 176 power plant people were represented by Local 8 of the National Conference of Firemen and Oilers (NCF&O). UNION CONTRACTS On February 21, 2002, CILCO and the IBEW agreed to extend the existing contract through June 30, 2004. The NCF&O ratified its current contract with CILCO on February 23, 2001. The NCF&O contract expires on July 1, 2006. 12 BUSINESS OF CILCORP OTHER CIM The investment portfolio of CIM at December 31, 2002, and 2001, is shown in the following table:
Type of Investment At December 31 2002 2001 (In thousands) Investment in leveraged leases $132,874 $135,504 Cash and temporary cash investments 1,875 171 Investment in Energy Investors Fund 563 658 Investment in affordable housing funds 8,285 9,740 Other 119 119 -------- -------- Total $143,716 $146,192 ======== ========
At December 31, 2002, CIM held equity investments in seven leveraged leases through its wholly-owned subsidiaries, CILCORP Lease Management Inc. (CLM), CIM Air Leasing Inc. and CIM Leasing Inc. (In January 2001, a mining equipment lease expired, and that equipment was sold.) According to the terms of some of the lease agreements, under certain circumstances, subsidiaries of CIM may be obligated to incur additional non-recourse debt to finance the cost of certain alterations, additions, or improvements required by the lessees. CIM, through its wholly-owned subsidiary, CIM Energy Investments Inc., had a 2.5% interest in the Energy Investors Fund, L.P. (Fund), at December 31, 2002. The Fund invests in non-regulated, non-utility facilities for the production of electricity or thermal energy. The equity method of accounting is used for this investment. CIM is a limited partner in eight affordable housing portfolios. The ownership interests in these partnerships ranged from 3% to 10% at December 31, 2002. The equity method of accounting is used for these investments. CVI CVI's net investment in CESI, its wholly-owned subsidiary, is approximately $1.5 million. CESI's primary business is gas management services, which includes commodity procurement and re-delivery to retail customers. BUSINESS OF QST QST Enterprises Inc. (QST) was formed in December 1995. Through its wholly-owned subsidiary, QST Energy Inc. (QST Energy), QST provided a portfolio of non rate-regulated, energy-related products and services including wholesale and retail sales of electricity and natural gas in markets that are open to competition. QST and QST Energy ceased operations during the fourth quarter of 1998, except for fulfillment of contractual obligations for 1999, and recorded loss provisions for the discontinued energy operations. The results of QST and its past and present subsidiaries (excluding ESE Land Corporation and CILCORP Infraservices Inc.) are shown as discontinued operations in the statements of income for the year 2002 and prior periods. See also CILCORP Note 17 - QST Enterprises Discontinued Operations and CILCORP Note 19 - Restatement, of Item 8. Financial Statements and Supplementary Data. 13 AVAILABLE INFORMATION CILCORP and CILCO make available free of charge through Ameren's Internet website (http://www.ameren.com) the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after CILCORP and CILCO electronically file such reports with, or furnish it to, the SEC. This information for Ameren and its affiliates, AmerenCIPS, AmerenUE, and Generating Company is also available through Ameren's Internet website. CILCORP and CILCO also make available free of charge through Ameren's Internet website the code of business conduct for its directors, officers and employees, referred to as Ameren's Corporate Compliance Policy. This document is also available in print upon written request to Secretary, P.O. Box 66149, St. Louis, Missouri 63166-6149. 14 Item 2. Properties CILCO CILCO owns and operates two coal-fired generating plants, a cogeneration plant, two combustion turbine-generators and 16 diesel-fueled power modules. These facilities had an available summer capability of 1,172 MW in 2002. The two combustion turbine generators with a summer rating of 30 MW (15 MW each) and the 16 diesel-fueled power modules with a total rating of 26 MW are typically used during peak periods. The cogeneration plant, which became operational during 1995, produces steam for Midwest Grain Products, Inc. (MWG) and also generates electricity for distribution to CILCO's customers. This turbine-generator has an available summer capability of 10 MW. The major generating facilities of CILCO (representing 94.4% of CILCO's available summer generating capability projected for 2003), all of which are fueled with coal, are as follows:
Available Summer Net Heat Station & Unit Installed Capability (KW) Rate (a) Duck Creek Unit 1 1976 366,000 10,018 E. D. Edwards Unit 1 1960 117,000 Unit 2 1968 262,000 Unit 3 1972 361,000 9,863(b)
(a) "Net Heat Rate" represents the amount of energy to produce a given unit of output and is expressed as BTU per kilowatt-hour. (b) Represents the Net Heat Rate for E. D. Edwards Units 1-3. CILCO's transmission system includes approximately 285 circuit miles operating at 138,000 volts, 48 circuit miles operating at 345,000 volts and 18 principal substations with an installed capacity of approximately 3,724 megavolt-amperes. The electric distribution system includes approximately 6,486 circuit miles of overhead pole and tower lines and 2,046 miles of underground distribution cables. The distribution system also includes approximately 108 substations with an installed capacity of 1,764 megavolt-amperes. The gas system includes approximately 3,674 miles of transmission and distribution mains. CILCO has an underground gas storage facility located about ten miles southwest of Peoria near Glasford, Illinois. The facility has a present recoverable capacity of approximately 4.5 Bcf. An additional storage facility near Lincoln, Illinois, has a present recoverable capacity of approximately 5.2 Bcf. 15 Item 3. Legal Proceedings Reference is made to the captions "Environmental Matters" of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and to "Note 7 - Commitments and Contingencies" of Item 8. Financial Statements and Supplementary Data for certain pending legal proceedings and/or proceedings known to be contemplated by governmental authorities. The Company and its subsidiaries are subject to certain claims and lawsuits in connection with work performed in the ordinary course of their businesses. Except as otherwise disclosed or referred to in this section, in the opinion of management, all such claims currently pending are not expected to result in a material adverse effect on the financial position and results of operations of the Company. Risk of loss is mitigated, in some cases, by insurance or contractual or statutory indemnification. The Company believes it has established appropriate reserves for potential losses. Item 4. Submission of Matters to a Vote of Security Holders CILCORP There were no matters submitted to a vote of security holders during the fourth quarter of 2002. CILCO There were no matters submitted to a vote of security holders during the fourth quarter of 2002. 16 INFORMATION REGARDING EXECUTIVE OFFICERS REQUIRED BY ITEM 401(b) OF REGULATION S-K. Executive Officers of CILCORP Simultaneously with the acquisition of CILCORP by Ameren on January 31, 2003, all of the executive officers and directors of CILCORP resigned and the following new executive officers were elected or appointed by CILCORP's new directors:
Age as of Initial Name 12/31/02 Present Position Effective Date Charles W. Mueller 64 Chairman and Director January 31, 2003 Gary L. Rainwater 56 President and Director January 31, 2003 Paul A. Agathen 55 Senior Vice President and Director January 31, 2003 Warner L. Baxter 41 Senior Vice President and Director January 31, 2003 Daniel F. Cole 49 Senior Vice President January 31, 2003 Garry L. Randolph 54 Senior Vice President January 31, 2003 Thomas R. Voss 55 Senior Vice President and Director January 31, 2003 David A. Whiteley 46 Senior Vice President and Director January 31, 2003 Jerre E. Birdsong 48 Vice President and Treasurer January 31, 2003 Steven R. Sullivan 42 Vice President Regulatory Policy, General Counsel and Secretary January 31, 2003 Martin J. Lyons 36 Vice President and March 14, 2003 Controller January 31, 2003
All officers are elected or appointed annually by the Board of Directors following the election of such Board at the annual meeting of stockholders. Except for Mr. Sullivan and Mr. Lyons, each of the above-named executive officers has been employed by CILCORP or a CILCORP affiliate, or Ameren or an Ameren affiliate, for more than five years in executive or management positions. Mr. Sullivan was previously employed as an attorney by Anheuser Busch Companies, Inc. Mr. Lyons was previously employed as an accountant by PricewaterhouseCoopers LLP. 17 Executive Officers of CILCO Simultaneously with the acquisition of CILCO by Ameren on January 31, 2003, all of the executive officers and directors of CILCO resigned, except Mr. Scott A. Cisel, and the following new executive officers were elected or appointed by CILCO's new directors:
Age as of Initial Name 12/31/02 Present Position Effective Date Charles W. Mueller 64 Chairman and Director January 31, 2003 Gary L. Rainwater 56 President and Director January 31, 2003 Paul A. Agathen 55 Senior Vice President and Director January 31, 2003 Warner L. Baxter 41 Senior Vice President and Director January 31, 2003 Daniel F. Cole 49 Senior Vice President January 31, 2003 R. Alan Kelley 50 Senior Vice President January 31, 2003 Garry L. Randolph 54 Senior Vice President January 31, 2003 Thomas R. Voss 55 Senior Vice President and Director January 31, 2003 David A. Whiteley 46 Senior Vice President January 31, 2003 Scott A. Cisel 49 Vice President, Chief Operating Officer and Director January 31, 2003 Jerre E. Birdsong 48 Vice President and Treasurer January 31, 2003 Robert G. Ferlmann 41 Vice President January 31, 2003 Steven R. Sullivan 42 Vice President Regulatory Policy, General Counsel and Secretary January 31, 2003 Martin J. Lyons 36 Vice President & March 14, 2003 Controller January 31, 2003
All officers are elected or appointed annually by the Board of Directors following the election of such Board at the annual meeting of stockholders. Except for Mr. Sullivan and Mr. Lyons, each of the above-named executive officers has been employed by CILCORP or a CILCORP affiliate, or Ameren or an Ameren affiliate, for more than five years in executive or management positions. Mr. Sullivan was previously employed as an attorney by Anheuser Busch Companies, Inc. Mr. Lyons was previously employed as an accountant by PricewaterhouseCoopers LLP. 18 PART II Item 5. Market for the Registrants' Common Equity and Related Stockholder Matters CILCORP CILCORP Inc's. common stock is not traded on any market. At December 31, 2002, there were 10,000 authorized, no par value, shares of CILCORP Inc.'s common stock. One thousand of those shares were issued, and outstanding and privately held, beneficially and of record, by The AES Corporation at December 31, 2002. On January 31, 2003, Ameren acquired all 1,000 outstanding shares of CILCORP Inc.'s common stock. Requirements which must be met before CILCORP Inc. can pay dividends or make other distributions are described in Note 12 of CILCORP's Notes to the Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data. CILCO CILCO's common stock is not traded on any market. At December 31, 2002, there were 13,563,871 shares of CILCO's Common Stock, no par value, issued, and outstanding and privately held, beneficially and of record, by CILCORP Inc. CILCO may not pay common stock dividends until certain retained earnings requirements are met, as described in Note 12 of CILCO's Notes to the Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data. 19 Item 6. Selected Financial Data The financial information as of and for the years ended December 31, 2001 and 2000 has been restated. See Note 19 -- Restatement to CILCORP's Consolidated Financial Statements and Note 17 -- Restatement to CILCO's Consolidated Financial Statements for additional information. CILCORP Inc. and Subsidiaries Selected Financial Data For the Periods Ended
As Restated(1) ------------------------- Oct. 19 Jan. 1 to to Dec. 31, Dec. 31, Dec. 31, Dec. 31, Oct. 18, Dec. 31, 2002 2001 2000 1999(2)(3) 1999(2)(3) 1998(3) (In thousands except ratios) Revenue $ 779,797 $ 789,994 $ 723,514 $ 120,589 $460,261 $ 559,168 Net income available for common stockholders 24,585 23,763 11,385 (745) 280 16,310 Total assets 1,901,044 1,814,481 1,948,506 1,830,953 1,312,940 Long-term debt 791,028 717,730 720,482 730,434 285,552 Ratio of earnings to fixed charges 1.4 1.6 1.2 0.9 1.0 2.4
Central Illinois Light Company Selected Financial Data For the Years Ended December 31,
(As Restated(4)) ---------------------------- 2002 2001 2000 1999(5) 1998(5) (In thousands except ratios) Electric and Gas Revenue $ 602,428 $ 642,869 $ 636,490 $ 553,474 $ 532,336 Net income available for common stockholders 47,969 12,479 44,800 16,041 41,041 Total assets 1,109,001 1,043,486 1,107,440 1,056,280 1,024,428 Long-term debt 316,028 242,730 245,482 237,934 267,884 Ratio of earnings to fixed charges 3.6 1.8 3.5 1.9 3.4
(1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. (2) The AES Corporation purchased CILCORP Inc. and subsidiaries on October 18, 1999. (3) Selected financial data for 1999 and 1998 does not reflect the impact of the restatement described in Note 19 to the Consolidated Financial Statements. (4) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. (5) Selected financial data for 1999 and 1998 does not reflect the impact of the restatement described in Note 17 to the Consolidated Financial Statements. 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement of the financial statements for the years ended December 31, 2001 and 2000, as described in Notes 19 and 17 to the consolidated financial statements of CILCORP Inc. and its subsidiaries and Central Illinois Light Company, respectively. CILCORP Inc. (the Holding Company), headquartered in Peoria, Illinois, is a holding company and a wholly-owned subsidiary of Ameren Corporation (Ameren). The Holding Company's principal operating subsidiary is Central Illinois Light Company (CILCO), which operates as AmerenCILCO. CILCO's principal business is the rate-regulated transmission and distribution of electricity, the generation of electricity and the rate-regulated distribution of natural gas in Illinois. Ameren completed its acquisition of CILCORP Inc. and its subsidiaries (CILCORP or the Company) on January 31, 2003, from The AES Corporation (AES). See Recent Developments for further information. Ameren is a public utility holding company registered 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. In addition to CILCORP Inc., Ameren's principal subsidiaries and affiliates 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 AmerenEnergy Resources Company (Resources Company), which consists of non rate-regulated operations. Subsidiaries include AmerenEnergy Generating Company (Generating Company) that operates 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 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 its acquisition of AES Medina Valley Cogen (No. 4), LLC (Medina Valley) from AES and renamed it AmerenEnergy Medina Valley Cogen (No. 4), LLC. See Recent Developments for further information. 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. Charges are based upon the actual costs incurred by Ameren Services, as required by the PUHCA. The results of operations and financial position of the Company is 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 nearly all of the Company's revenues directly 21 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, 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 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 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 results of QST Enterprises Inc. (QST) and its subsidiaries (excluding ESE Land Corporation and CILCORP Infraservices Inc.) are reported as discontinued operations. See Management's Discussion and Analysis of Financial Condition and Results of Operations - QST Enterprises Discontinued Operations. OVERVIEW Contributions to the Company's earnings (in thousands of dollars) for the last three calendar years are shown below.
As Restated(1)(2) --------------------------- 2002 2001 2000 CILCO $ 47,969 $ 12,479 $ 44,800 CILCORP Other (23,311) 12,949 (33,415) QST Enterprises Discontinued Operations (73) (1,665) -- -------- -------- -------- Net Income $ 24,585 $ 23,763 $ 11,385 ======== ======== ========
(1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. (2) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. CILCO's earnings increased $35.5 million in 2002, compared to 2001, primarily due to events that occurred during 2001. Electric gross margin increased $59.5 million in 2002, compared to 2001, due primarily to charges related to the termination of an out-of-market long-term coal contract in 2001 ($25.2 million) and the adverse settlement in 2001 of the 1999 and 2000 FAC reconciliations ($20.4 million). Electric margin was also positively impacted by weather, as cooling degree days were 24% higher in 2002 compared to 2001. Gas gross margin increased 3% as heating degree days were 4% higher in 2002 than 2001. CILCO's operations and maintenance expenses were $19.5 million higher in 2002, compared to 2001, due primarily to higher employee benefit costs and maintenance costs at the generating facilities (including an accrual of $8.5 million for environmental remediation costs), partially offset by lower uncollectible accounts expense. 22 CILCO's non rate-regulated electric gross margin increased $12.3 million in 2002, compared to 2001, primarily due to increased margin per MWh sold and increased sales to non rate-regulated electric customers in Illinois outside of CILCO's service territory. The increased margin per MWh sold is the result of terminating an existing supply contract in 2001 and replacing the supply at a lower cost. The higher margin per unit is not expected to continue beyond 2002 operating results. CILCO's earnings decreased $32.3 million in 2001, compared to 2000. Electric margin decreased $54.1 million in 2001, compared to 2000, due primarily to the termination of the out-of-market long-term coal contract and to the FAC reconciliation settlement discussed previously. Partially offsetting these factors, weather positively impacted electric gross margin, as cooling degree days were 4% higher in 2001, compared to 2000. Gas gross margin decreased $4.1 million in 2001, compared to 2000, as heating degree days were 6% lower in 2001 than in 2000. CILCORP Other's results were a $23.3 million loss in 2002, compared to earnings of $12.9 million in 2001, and a loss of $33.4 million in 2000. The 2001 results were positively impacted by the termination of an out-of-market long-term coal contract (discussed above) as a result of removal of a preacquisition contingency accrual related to this contract. This resulted in an $80 million pre-tax positive impact in 2001 to fuel for generation and purchased power at the Holding Company. CILCORP Other's results in 2002 also benefited from the elimination of goodwill amortization ($15.3 million) due to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." QST Enterprises' financial results for 2002 and 2001 were losses in excess of a discontinued operations liability accrued in 1998, and are shown as losses for those periods. The $1.7 million loss in 2001 primarily reflects the settlement of a lawsuit during the year. The results of QST Enterprises for 2000 were reflected in the discontinued operations liability, resulting in no net income or loss. The Company expects no impact in 2003 or future results. See Note 17 - QST Enterprises Discontinued Operations. Recent Developments Acquisition by Ameren On January 31, 2003, after receipt of the necessary regulatory agency approvals and clearance from the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act, Ameren completed the acquisition of all of the outstanding common stock of CILCORP Inc. from AES. AES was required by the SEC under the PUHCA to sell CILCORP as a condition to the SEC's approval of AES' acquisition of IPALCO Enterprises, Inc. With Ameren's acquisition, CILCO became an Ameren subsidiary, but remains a separate utility company, operating as AmerenCILCO. On February 4, 2003, Ameren also completed the acquisition of AES subsidiary, AES Medina Valley Cogen (No. 4), LLC (Medina Valley), which indirectly owns a 40 megawatt, gas-fired electric generation plant. With the acquisition, Medina Valley became a wholly-owned subsidiary of Resources Company and was renamed AmerenEnergy Medina Valley Cogen (No. 4), LLC. The CILCORP and AmerenEnergy Medina Valley Cogen (No. 4), LLC financial statements as of, and for the year ended December 31, 2002, do not include any activity related to the acquisition. When Ameren accounts for the acquisition in 2003, it intends to push down acquisition-related purchase accounting entries to the Holding Company, but not to the financial statements of CILCO. This accounting treatment is the same as when AES acquired the Company. Ameren acquired CILCORP to complement its existing Illinois electric and gas operations. The purchase included CILCO's rate-regulated electric and natural 23 gas businesses in Illinois serving approximately 200,000 and 205,000 customers, respectively. CILCO's service territory is contiguous to Ameren's service territory. In addition, the purchase includes 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 $1.4 billion and included the assumption of CILCORP and Medina Valley debt and preferred stock at closing of approximately $900 million, with the balance of the purchase price of approximately $500 million paid with Ameren's cash on hand. The purchase price is subject to certain adjustments for working capital and other changes and will be resolved in accordance with the purchase agreement. The cash component of the purchase price came from Ameren's issuances in September 2002 of 8.05 million common shares and in early 2003 of 6.325 million common shares. 24 RESULTS OF OPERATIONS - CILCORP INC. AND SUBSIDIARIES CILCO ELECTRIC OPERATIONS The following table summarizes electric operating revenue and expenses by component. Components of Electric Income
As Restated(1) -------------------------------- 2002 2001 2000 (In thousands) Revenue: Electric retail $379,658 $353,227 $367,812 Sales for resale 10,891 18,208 31,024 -------- -------- -------- Total revenue 390,549 371,435 398,836 -------- -------- -------- Cost of sales: Cost of fuel 100,069 144,856 115,310 Purchased power expense 48,101 44,441 47,388 Revenue taxes 20,074 19,315 19,176 -------- -------- -------- Total cost of sales 168,244 208,612 181,874 -------- -------- -------- Gross margin 222,305 162,823 216,962 -------- -------- -------- Operating expenses: Operation and maintenance expenses 100,169 83,610 78,998 Depreciation and amortization 48,431 47,604 48,404 Other taxes 9,967 9,046 8,870 -------- -------- -------- Total operating expenses 158,567 140,260 136,272 -------- -------- -------- Fixed charges and other: Cost of equity funds capitalized (27) -- -- Interest on long-term debt 13,950 12,622 12,506 Cost of borrowed funds capitalized (1,482) (18) (533) Other interest 2,495 4,155 4,389 -------- -------- -------- Total fixed charges and other 14,936 16,759 16,362 -------- -------- -------- Income before taxes 48,802 5,804 64,328 Income taxes 17,659 2,523 23,448 -------- -------- -------- Electric income $ 31,143 $ 3,281 $ 40,880 ======== ======== ========
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. Electric gross margin increased 37% in 2002, compared to 2001, due to several factors. In 2001, CILCO terminated an out-of-market long-term coal contract resulting in a $25.2 million charge to cost of fuel. Also, CILCO and the Illinois Commerce Commission (ICC) agreed to a Fuel Adjustment Clause (FAC) settlement in 2001. In its order dated August 21, 2001, the ICC approved the agreement requiring CILCO to refund $17.8 million related to the 1999 FAC reconciliation and $2.6 million related to the 2000 FAC reconciliation. On December 20, 2000, as part of the 1999 FAC reconciliation hearings, the ICC 25 ordered changes in CILCO's calculation of allowable fuel costs applicable to sales subject to the FAC. These changes revised the allocation of generated and purchased power between rate-regulated and non rate-regulated sales. As a result of this order, the rate-regulated sales margin decreased and the non rate-regulated sales margin increased for January through March 2001. (Non rate-regulated sales are discussed in CILCO Other.) The order also affected how costs are allocated between FAC and non-FAC customers in the CILCO service territory, resulting in less cost being recovered through FAC customers. On March 9, 2001, the ICC issued an emergency rule in response to the margin shifts. The emergency rule restored the previous calculation method for off-system non rate-regulated sales. On July 25, 2001, the ICC entered a final order, amending the emergency rule by changing the method for allocating fuel costs to non rate-regulated sales within CILCO's service territory. Increased residential sales also contributed to the increase in electric gross margin for 2002. Retail kilowatt-hour (kWh) sales increased 2% in 2002 compared to 2001. Residential sales and commercial sales increased by 8% and 2%, respectively. Cooling degree days were 24% higher in 2002 than in 2001. Industrial sales volumes decreased 4% in 2002, compared to 2001, principally due to the soft economy. Electric gross margin decreased 25% in 2001, compared to 2000, due primarily to the coal contract termination, FAC settlement and fuel cost allocation methodology discussed previously. Retail kWh sales increased 1% in 2001 compared to 2000. Residential and commercial sales volumes both increased by 2%. Cooling degree days were 4% higher in 2001 than in 2000. Industrial sales volumes decreased 1% in 2001 compared to 2000. Sales for resale decreased 40% in 2002, compared to 2001, and decreased 41% in 2001 compared to 2000. 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. In 2002, 65% of CILCO's total rate-regulated operating revenue was derived from the sale of electricity. Approximately 38% of electric revenue resulted from residential sales, 33% from commercial sales, 25% from industrial sales, 3% from sales for resale and 1% from other sales. Electric sales, particularly residential and commercial sales during the summer months, fluctuate based on weather conditions. The electric operating revenues of CILCO were derived from the following sources:
As Restated(1) ----------------------------- 2002 2001 2000 (In thousands) Residential $148,480 $141,810 $143,582 Commercial 127,767 128,593 127,156 Industrial 96,759 97,541 91,649 Sales for resale 10,891 18,208 31,024 Street lighting 1,466 1,491 1,506 Other revenue 5,186 4,168 3,919 FAC refund -- (20,376) -- -------- -------- -------- Total electric revenue $390,549 $371,435 $398,836 ======== ======== ========
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. 26 Electric operations and maintenance expense increased 20% in 2002 compared to 2001. The increase was partially due to the accrual of environmental expenses ($8.5 million) for the remediation of elevated boron levels at the Duck Creek recycle pond. (Refer to the section "Environmental Matters" of this Item.) Also contributing to the unfavorable variance were increased costs for employee benefits ($6.0 million), and power plant operations ($1.2 million), partially offset by lower uncollectible accounts expense ($1.6 million). Electric operations and maintenance expense increased 6% in 2001 compared to 2000. The increase was mainly due to increased costs for employee benefits ($2.3 million), uncollectible accounts ($2.4 million), and tree trimming ($1.5 million). These increases were partially offset by decreased costs for power plant operations ($0.5 million). The increase in depreciation and amortization expense in 2002 reflects additions and replacements of utility plant at costs in excess of the original cost of the property retired. Depreciation and amortization expense decreased 2% in 2001, compared to 2000, due to a decrease in production depreciation expense. The estimated remaining useful lives of the power plants were extended resulting in reduced depreciation rates. Fixed charges and other expenses decreased 11% in 2002, compared to 2001, due primarily to decreased short-term borrowings and increased capitalized interest related to NOx reduction projects at the power plants. The increase in income tax expense in 2002, compared to 2001, was primarily due to higher pre-tax income. 27 CILCO GAS OPERATIONS The following table summarizes gas operating revenue and expenses by component. Components of Gas Income
As Restated(1) ------------------------------- 2002 2001 2000 (In thousands) Revenue: Sale of gas $205,472 $265,665 $232,251 Transportation services 6,407 5,769 5,403 -------- -------- -------- Total revenue 211,879 271,434 237,654 -------- -------- -------- Cost of sales: Cost of gas 128,471 190,348 152,906 Revenue taxes 8,885 8,866 8,413 -------- -------- -------- Total cost of sales 137,356 199,214 161,319 -------- -------- -------- Gross margin 74,523 72,220 76,335 -------- -------- -------- Operating expenses: Operation and maintenance expenses 34,398 31,466 30,576 Depreciation and amortization 22,477 21,529 21,001 Other taxes 2,490 2,160 2,823 -------- -------- -------- Total operating expenses 59,365 55,155 54,400 -------- -------- -------- Fixed charges and other: Interest on long-term debt 5,056 5,056 5,010 Other interest 905 1,665 1,758 -------- -------- -------- Total fixed charges and other 5,961 6,721 6,768 -------- -------- -------- Income before taxes 9,197 10,344 15,167 Income taxes 3,665 4,331 6,430 -------- -------- -------- Gas income $ 5,532 $ 6,013 $ 8,737 ======== ======== ========
--------------- (1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. Gas gross margin increased 3% in 2002 compared to 2001. Residential and commercial sales volumes increased 7% and 1%, respectively. Heating degree days were 4% higher in 2002 than in 2001. Industrial sales volumes decreased 14% in 2002, compared to 2001, due to soft economic conditions. Gas gross margin decreased 5% in 2001 compared to 2000. Residential and commercial sales volumes decreased 11% and 13%, respectively. Heating degree days were 6% lower in 2001 than in 2000. Industrial sales volumes increased 41% in 2001, compared to 2000, due to increased use of CILCO's system gas by certain transportation customers. 28 Revenue from gas transportation services increased 11% in 2002, compared to 2001, while the volume of gas transported increased 13%. Revenue from gas transportation services increased 7% in 2001, compared to 2000, while the volume of gas transported decreased 5%. Decreases in lower margin industrial gas transportation sales were offset by increases in higher margin commercial gas transportation sales. In 2002, 35% of CILCO's total rate-regulated operating revenue was derived from the sale or transportation of natural gas. Approximately 61% of gas revenue resulted from residential sales, 25% from commercial sales, 10% from industrial sales, 3% from transportation and 1% from other sales. Gas sales, particularly residential and commercial sales during the winter months, fluctuate based on weather conditions. The gas operating revenues of CILCO were derived from the following sources:
2002 2001 2000 (In thousands) Residential $129,815 $156,928 $142,937 Commercial 53,407 68,466 62,921 Industrial 20,876 37,996 21,192 Transportation of gas 6,407 5,769 5,403 Other revenue 1,374 2,275 5,201 -------- -------- -------- Total gas revenue $211,879 $271,434 $237,654 ======== ======== ========
The cost of gas decreased 33% in 2002 and increased 24% in 2001, primarily due to fluctuations in natural gas prices. These costs were passed through to customers via the Purchased Gas Adjustment (PGA). Gas operations and maintenance expenses increased 9% in 2002 and 3% in 2001. The 2002 increase was primarily due to increased employee benefit costs ($3.0 million), and increased information technology expenses ($0.9 million), partially offset by decreased uncollectible accounts expense ($1.8 million). The 2001 increase was mainly due to an increased uncollectible accounts expense ($1.8 million), and increased employee benefit costs ($1.3 million), partially offset by lower net gas operation costs at the cogeneration facility ($0.9 million), and decreased information technology expenses ($1.8 million). The increase in depreciation and amortization expenses in 2002 and 2001 reflects additions as well as replacements of utility plant at costs in excess of the original cost of the property retired. Fixed charges and other expenses decreased 12% in 2002, compared to 2001, primarily due to decreased short-term borrowings. The decrease in income tax expense in 2002, compared to 2001, was primarily due to lower pre-tax income. 29 CILCO OTHER The following table summarizes CILCO Other's income and deductions. Components of CILCO Other Income (Loss)
2002 2001 2000 (In thousands) Revenue $114,820 $ 96,062 $ 47,807 Expense (92,403) (85,923) (50,521) -------- -------- -------- Gross margin 22,417 10,139 (2,714) -------- -------- -------- Other income and deductions: Interest income 1,690 758 547 Operating expenses (4,412) (3,269) (2,099) Other taxes (51) 5 (4) Preferred stock dividends (2,159) (2,159) (2,977) Other (1,042) (1,354) (1,221) -------- -------- -------- Total other income and (deductions) (5,974) (6,019) (5,754) -------- -------- -------- Income (loss) before income taxes 16,443 4,120 (8,468) Income taxes 5,149 935 (3,651) -------- -------- -------- CILCO Other income (loss) $ 11,294 $ 3,185 $ (4,817) ======== ======== ========
Gross margin increased $12.3 million in 2002, compared to 2001, primarily due to increased margin per MWh sold and increased sales to non rate-regulated electric customers in Illinois outside of CILCO's service territory. These sales are typically backed with power purchases arranged in approximately the same time period. The increased margin per MWh sold is the result of terminating an existing power purchase contract (See Note 7 - Commitments and Contingencies for a discussion of the Enron Contract.) and replacing the supply at a lower cost. The termination of a supply contract is an unusual occurrence and therefore, the higher margin per MWh is not expected to continue beyond 2002 operating results. These sales of electricity were to customers eligible to choose their energy supplier under the Illinois Law. Gross margin increased in 2001, compared to 2000, primarily due to increased non rate-regulated electricity sales in Illinois outside of CILCO's service territory and ICC mandated changes in the manner in which generated and purchased power costs are allocated between rate-regulated and non rate-regulated sales (see CILCO Electric Operations herein). These sales of electricity were to customers eligible to choose their energy supplier under the Illinois Law. Interest income increased in 2002, compared to 2001, due primarily to interest income on receivables due from affiliated companies. Operating expenses increased in 2002, compared to 2001, due primarily to increased administrative and bad debt expenses for non rate-regulated sales. The increase in expenses was partially offset by a gain on the sale of a parcel of land. Operating expenses increased in 2001, compared to 2000, due 30 primarily to greater administration and general expenses for non rate-regulated sales. Preferred stock dividends decreased in 2001, compared to 2000, due to the redemption of $25 million of auction rate preferred stock in July 2000. Proceeds from company-owned life insurance in the third quarter of 2002 reduced other deductions by approximately $0.5 million in 2002 compared to 2001. 31 CILCORP OTHER The following table summarizes CILCORP Other's revenue and expenses. CILCORP Other's results include income earned and expenses incurred at the Holding Company, CIM, CVI, ESE Land Corporation, and CILCORP Infraservices Inc. Components of CILCORP Other Income (Loss)
As Restated(1) -------------------------- 2002 2001 2000 (In thousands) Revenue: Leveraged lease income $ 3,093 $ 5,368 $ 8,261 Interest income 358 485 143 Gas marketing revenue 56,801 42,129 22,057 Other revenue 607 2,323 8,209 ---------- ---------- ---------- Total revenue 60,859 50,305 38,670 ---------- ---------- ---------- Expenses: Gas purchased for resale 55,615 41,999 21,871 Fuel for generation and purchased power -- (83,947) (3,515) Operating expenses 3,030 1,515 3,922 Depreciation and amortization 1,413 16,880 17,405 Interest expense 43,667 46,286 48,089 Other taxes 77 230 160 ---------- ---------- ---------- Total expenses 103,802 22,963 87,932 ---------- ---------- ---------- Income (loss) before income taxes (42,943) 27,342 (49,262) Income taxes (19,632) 14,393 (15,847) ---------- ---------- ---------- CILCORP Other income (loss) $ (23,311) $ 12,949 $ (33,415) ========== ========== ==========
(1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. Leveraged lease income decreased 42% in 2002, compared to 2001, primarily as a result of a $2.0 million loss related to a reduction in the estimated residual value on one of the leveraged leases. The income tax expense related to leveraged lease income was $2.0 million, $2.1 million, and $3.2 million for 2002, 2001, and 2000, respectively. Leveraged lease income decreased 35% in 2001, compared to 2000, due to a $2.4 million pre-tax gain in 2000 resulting from CIM's refinancing of certain leveraged lease investments and the termination of a lease in the first quarter of 2001. Gas marketing revenue increased 35% and gas purchased for resale increased 32% in 2002, compared to 2001, due to significant increases in gas marketing sales at CVI subsidiary CILCORP Energy Services Inc. Gas marketing revenue increased 91% in 2001, compared to 2000, while gas purchased for resale increased 92% at CVI subsidiary CILCORP Energy Services Inc. due to increased gas marketing sales and higher natural gas prices. 32 Other revenue decreased 74% in 2002, compared to 2001, mainly due to the expiration of a services contract in 2002. Other revenue decreased 72% in 2001 compared to 2000. In 2000, there was a $5.8 million pre-tax gain on the sale of stock options of McLeod USA, Inc. The Holding Company received the options as part of the sale of QST Communications in August 1998. In 2001, the $83.9 million credit to fuel for generation and purchased power represents the effect of CILCO's settlement of the out-of-market long-term coal contract, resulting in the Holding Company's removal of an $80 million preacquisition contingency accrual related to this contract. The entire preacquisition contingency accrual related to this contract was extinguished on the Holding Company's balance sheet at December 31, 2001. The Holding Company also reversed a $4.0 million preacquisition contingency accrual related to the settlement of the 1999 and 2000 CILCO FAC reconciliations. See related discussion at Item 1. Business, Business of CILCO, Fuel Supply - Coal. Operating expenses increased 100% in 2002, compared to 2001, primarily due to the write-off of receivables. The decrease in operating expenses in 2001, compared to 2000, was primarily due to pension and postretirement benefit expenses. The market value of the assets and liabilities of these plans was adjusted on the Holding Company's balance sheet at the time of acquisition by AES. Following these adjustments, the net periodic benefit costs are separately calculated and recorded at CILCORP consolidated and CILCO. This resulted from reversal of a portion of pension and postretirement benefit expenses recorded at CILCO, which were previously accrued by the Holding Company at the time of its acquisition by AES. Depreciation and amortization decreased 92% in 2002, compared to 2001, following the Company's adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) in January 2002. SFAS 142 requires that goodwill and intangible assets that have indefinite useful lives be tested at least annually for impairment rather than be amortized. Accordingly, the Holding Company ceased goodwill amortization, which was approximately $15.3 million, in 2001. See related discussion in Note 1 to the Consolidated Financial Statements. Interest expense decreased 6% in 2002, compared to 2001, mainly due to the retirement of CILCORP Inc.'s medium-term notes in 2001 and lower short-term debt in 2002. This decrease was partially offset by interest on deferred compensation arrangements for two former officers. The income tax benefit increased significantly during 2002, compared to 2001, due to a greater loss before income taxes. Income taxes increased in 2001, compared to 2000, due to higher net income resulting primarily from the elimination of the preacquisition liability related to the out-of-market long-term coal contract. 33 QST ENTERPRISES DISCONTINUED OPERATIONS QST Enterprises Inc. (QST) and QST Energy Inc. (QST Energy) ceased operations during the fourth quarter of 1998, except for fulfillment of contractual commitments for 1999. Accordingly, the results of QST and its subsidiaries are reported as discontinued operations. An initial loss provision was recorded for the discontinued energy operations in 1998. Subsequent purchase accounting adjustments included additional discontinued operations loss accruals for QST. See also CILCORP Note 17 - QST Enterprises Discontinued Operations and CILCORP Note 19 - Restatement, of Item 8. Financial Statements and Supplementary Data. The following table summarizes the loss from operations of discontinued businesses, net of tax.
Restated(1) -------------------------- 2002 2001 2000 (In thousands) QST, net of tax of $(47) and $(1,095) $ (73) $ (1,665) $ -- ------- -------- -------- $ (73) $ (1,665) $ -- ======= ======== ========
--------------- (1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. QST's financial results for 2002 and 2001 were in excess of the discontinued operations liability and are shown as losses for those periods. The results for 2000 were reflected in the discontinued operations liability, resulting in no net income or loss. Beginning in 1999, QST Energy was involved in litigation against two of its California commercial customers. On July 19, 2001, QST Energy and the two customers signed a settlement agreement and mutual release which resolved all of the pending lawsuits. A cash settlement of $6 million was paid to QST Energy and applied against the accounts receivable balance at QST Energy, which was $13 million at the time of settlement. A preacquisition contingency of $4.5 million had been accrued related to this litigation. The remaining receivable of $7.0 million at QST Energy was written off during the third quarter of 2001, resulting in the loss recorded as QST Enterprises Discontinued Operations during 2001. This loss was partially offset by the reversal of the $4.5 million preacquisition contingency accrual. RESULTS OF OPERATIONS - CENTRAL ILLINOIS LIGHT COMPANY Refer to Results of Operations - CILCORP Inc. and Subsidiaries for a discussion of the Results of Operations for Central Illinois Light Company Segments: CILCO Electric Operations, CILCO Gas Operations and CILCO Other. 34 LIQUIDITY AND CAPITAL RESOURCES OPERATING CILCORP's net cash flows provided by operating activities totaled $100.8 million for 2002, compared to $88.9 million for 2001 (as restated), and $97.1 million for 2000 (as restated). Cash provided from operations increased in 2002, primarily due to higher cash earnings resulting from favorable weather and increased sales to non-regulated electric customers in Illinois outside CILCO's service territory. These increases were partially offset by changes in working capital requirements. Cash flow from operations remained relatively constant in 2001 compared to 2000. CILCO's net cash flows provided by operating activities totaled $118.6 million for 2002, compared to $106.0 million for 2001, and $117.4 million for 2000. Cash provided from operations increased in 2002, primarily due to higher cash earnings resulting from favorable weather and increased sales to non-regulated electric customers in Illinois outside CILCO's service territory. These increases were partially offset by changes in working capital requirements. Cash flow from operations decreased in 2001 compared to 2000. The tariff-based gross margin of the rate-regulated utility operating company continues to be the principal source of cash from operating activities. The Company'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. PENSION FUNDING CILCORP and CILCO made no cash contributions to the defined benefit retirement plans during 2002. However, at December 31, 2002, CILCORP and CILCO recorded respective minimum pension liabilities of $51.2 million and $28.9 million, net of taxes, which resulted in a charge to Accumulated Other Comprehensive Income (OCI) and a reduction to stockholders' equity. Based on the performance of plan assets through December 31, 2002, the Company expects to be required under the Employee Retirement Income Security Act of 1974 to fund less than $1 million in 2003 and approximately $5 million in 2004. These amounts are estimated and may change based on actual stock market performance, changes in interest rates and any pertinent changes in governmental regulations. Ameren intends to merge CILCO's plans with Ameren's plans. Based on performance of plan assets through December 31, 2002, Ameren expects to be required to fund approximately $150 million to $175 million annually, including CILCO, in 2005, 2006 and 2007. CILCO's portion is expected to be approximately $17 million of these annual amounts. See Benefit Plan Accounting under Accounting Matters - Critical Accounting Policies. INVESTING CILCORP's net cash used in investing activities was $131.2 million in 2002, compared to $51.4 million in 2001, and $60.0 million in 2000. CILCO's net cash used in investing activities was $131.1 million in 2002, compared to $53.8 million in 2001 and $60.4 million in 2000. In 2002, construction expenditures were $124.4 million (2001 - $51.3 million; 2000 - $55.5 million), consisting primarily of nitrogen oxide (NOx) reduction equipment expenditures at the Edwards and Duck Creek generating stations (see Environmental section below), replacements and improvements to the existing electric transmission and distribution and natural gas distribution systems. 35 For the five-year period 2003 through 2007, construction expenditures for CILCORP and CILCO are estimated to be approximately $350 million, of which approximately $100 million is expected in 2003. This estimate also includes capital expenditures for additions, replacements and improvements to existing electric and gas transmission and distribution facilities as well as for compliance with NOx control regulations as discussed in Environmental below. CILCO expects to finance its 2003 capital expenditures primarily with funds provided by operating activities supplemented, if necessary, by external capital sources. Future funds provided by operations may be affected by the deregulation of the electric and natural gas utility industries. CILCORP and CILCO's capital expenditure program is subject to periodic review and revision, and actual capital expenditures may vary from these estimates 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. ENVIRONMENTAL We are subject to various environmental regulations by federal, state, and local authorities. From the beginning phases of siting and development, to the ongoing operation of existing or new electric generating, transmission, and distribution facilities, our activities involve compliance with diverse laws and regulations that address emissions and impacts to air and water, special, protected, and cultural resources (such as wetlands, endangered species, and archeological/historical resources), chemical and waste handling, and noise impacts. Our activities require complex and often lengthy processes to obtain approvals, permits, or licenses for new, existing, or modified facilities. Additionally, the use and handling of various chemicals or hazardous materials (including wastes) requires preparation of release prevention plans and emergency response procedures. As new laws or regulations are promulgated, we assess their applicability and implement the necessary modifications to our facilities or their operations, as required. The U. S. Environmental Protection Agency (EPA) issued a rule in October 1998 requiring 22 Eastern states and the District of Columbia to reduce emissions of NOx in order to reduce ozone in the Eastern United States. Among other things, the EPA's rule establishes an ozone season, which runs from May through September, and a NOx emission budget for each state, including Illinois. The EPA rule requires states to implement controls sufficient to meet their NOx budget by May 31, 2004. As a result of these state requirements, CILCORP and CILCO estimate spending an additional $42 million (including cost of removal) for NOx reduction equipment in 2003. A total of $69.7 million was spent in 2002. CILCO also estimates future capital expenditures for a landfill and return water line at the Duck Creek plant could range from $15 million to $30 million by 2007. See related discussion in Environmental Matters - Clean Air Act. FINANCING CILCORP's cash flows provided by financing activities totaled $44.0 million in 2002, compared to cash flows used in financing activities of $38.3 million in 2001, and $36.4 million in 2000. CILCO's cash flows provided by financing activities totaled $22.3 million in 2002, compared to cash flows used in financing activities of $48.5 million in 2001, and $56.7 million in 2000. Principal financing activities for the three year period included CILCO's 36 issuance of a two year secured term loan, offset by redemptions of short-term debt, long-term debt and preferred stock, as well as payments of dividends. SHORT-TERM DEBT AND LIQUIDITY Short-term debt consisted of commercial paper and bank loans at subsidiary, CILCO. At December 31, 2002, CILCO had committed credit facilities, expiring at various dates during 2003, totaling $60 million, all of which were unused. These credit facilities support CILCO's commercial paper program under which $10 million was outstanding at December 31, 2002. Based on these outstanding commercial paper borrowings, $50 million was available under CILCO's committed credit facilities at December 31, 2002. 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 $695 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. CILCO had a $30 million committed credit facility which matured in November 2002. This facility is not expected to be replaced. At December 31, 2002, Ameren and its subsidiaries had committed credit facilities, expiring at various dates between 2003 and 2005, totaling $695 million, excluding EEI of $45 million and AmerenUE's nuclear fuel lease facilities of $120 million. This amount does not include CILCO's $60 million of committed credit facilities. Ameren's utility money pool arrangement, under which AmerenUE, AmerenCIPS and Ameren Services may borrow, provides access to $695 million of liquidity. Ameren's non-utility money pool, under which CILCORP Inc. and its non rate-regulated subsidiaries, Generating Company and other of Ameren's non rate-regulated subsidiaries may borrow, provides access to $600 million of this liquidity. These committed credit facilities are used to support Ameren's and AmerenUE's commercial paper programs under which $250 million was outstanding at December 31, 2002. Based on commercial paper outstanding at December 31, 2002, $445 million was unused and available under these committed credit facilities and available for borrowing through either the utility money pool or non-utility money pool. In July 2002, Ameren entered into new committed credit agreements for $400 million in revolving credit facilities to be used for general corporate purposes, including support of commercial paper programs. These facilities are accessible through both of Ameren's money pool arrangements. The $400 million in new facilities includes a $270 million 364-day revolving credit facility and a $130 million 3-year revolving credit facility. The 3-year facility has a $50 million sub-limit for the issuance of letters of credit. These new credit facilities replaced AmerenUE's $300 million revolving credit facility. These amounts are included in the total committed credit facilities of $695 million mentioned above. Ameren had a $200 million committed credit facility which matured in December 2002. Ameren expects to replace this bank credit agreement with two new credit facilities and expects to extend or replace its other committed credit facilities upon their respective maturities. These credit facilities make borrowings available at various interest rates based on LIBOR, agreed rates and other options. 37 In addition to committed credit facilities, a further source of liquidity for Ameren is available cash and cash equivalents. At December 31, 2002, Ameren had $628 million of cash, all of which was available for borrowings under the utility money pool and/or non-utility money pool. In early 2003, Ameren paid a total of approximately $500 million, using cash on hand, 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 their businesses. Based on current credit ratings, CILCORP and CILCO believe that they will continue to have access to the capital markets. However, events beyond their 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. The following table summarizes available borrowing capacity under CILCO's committed lines of credit and credit agreements as of December 31, 2002.
Amount of commitment expiration per period (In millions) Total Less than 1 - 3 4 - 5 After 5 committed 1 year years years years Lines of credit and credit agreements $ 60 $ 60 $ -- $ -- $ -- Other commercial commitments -- -- -- -- -- --------- --------- ------- ------- ------- Total $ 60 $ 60 $ -- $ -- $ -- ========= ========= ======= ======= =======
The following tables summarize CILCORP and CILCO's contractual cash obligations as of December 31, 2002. CILCORP Inc. and Subsidiaries Contractual Cash Obligations
Payments Due By Period (In millions) Contractual Cash Obligations at Less than 1-3 4-5 After December 31, 2002 Total 1 year years years 5 years Long-Term Debt $ 818.3 $ 26.8 $ 119.3 $ 50.0 $ 622.2 Mandatory Redemption of Preferred Stock of Subsidiary 22.0 1.1 3.3 17.6 -- Operating Lease Obligations 12.0 3.1 5.5 2.1 1.3 Purchase Commitments(1) 420.8 193.5 141.7 8.8 76.8 --------- --------- --------- --------- --------- Total Contractual Cash Obligations $ 1,273.1 $ 224.5 $ 269.8 $ 78.5 $ 700.3 ========= ========= ========= ========= =========
38 CILCO Contractual Cash Obligations
Payments Due By Period (In millions) Contractual Cash Obligations at Less than 1-3 4-5 After December 31, 2002 Total 1 year years years 5 years Long-Term Debt $ 343.3 $ 26.8 $ 119.3 $ 50.0 $ 147.2 Mandatory Redemption of Preferred Stock 22.0 1.1 3.3 17.6 -- Operating Lease Obligations 12.0 3.1 5.5 2.1 1.3 Purchase Commitments(1) 419.5 192.6 141.3 8.8 76.8 --------- --------- --------- --------- --------- Total Contractual Cash Obligations $ 796.8 $ 223.6 $ 269.4 $ 78.5 $ 225.3 ========= ========= ========= ========= =========
(1) Includes electric energy and capacity commitments, gas supply and transportation commitments, and coal and transportation commitments. This table excludes contractual cash obligations for capital expenditures. These items are discussed under Investing within this section. 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 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 and its subsidiaries' financing arrangements do not contain credit rating triggers with the exception of certain triggers within CILCO's financing arrangements. An event of default will occur under a $25 million CILCO committed credit facility if CILCO fails to maintain a Moody's rating on its senior secured debt above Baa2, and a Fitch credit rating of BBB-. Under agreements governing $4.7 million of CILCO funded bank debt, CILCO must maintain a Moody's investment grade rating or an event of default will occur. Also, under a $100 million funded bank term loan, CILCO must maintain investment grade ratings for its first mortgage bonds from at least two of Standard & Poor's, Moody's and Fitch. As of February 2003, CILCO's senior secured debt ratings from these rating agencies were A-, A2 and BBB, respectively. CILCO's Fitch ratings are on positive credit watch. At its current ratings level, covenants in CILCORP Inc.'s indenture governing its $475 million senior notes and bonds require CILCORP to maintain a debt to capital ratio of no greater than 0.67 to 1.0 and an interest coverage ratio of at least 2.2 to 1.0 in order to make any payment of dividends or intercompany loans to affiliates other than its direct and indirect subsidiaries including CILCO. However, in the event CILCORP's senior long-term debt rating from Fitch is increased by one notch to BBB, CILCORP may make any such distribution or intercompany loan without being subject to these tests. At December 31, 2002, CILCORP's debt to capital ratio was 0.60 to 1.0 and its interest 39 coverage ratio was 2.72 to 1.0, calculated in accordance with related provisions in this indenture. The common stock of CILCO is pledged as security to the holders of CILCORP Inc.'s $475 million of senior notes and bonds. Covenants in CILCO's $100 million bank term loan require it to maintain a minimum level of common stockholder equity and limit CILCO's ability to pay dividends or otherwise make distributions with respect to its common stock. Any violation of these covenants will result in an event of default under this facility. Under the minimum common equity requirement CILCO must maintain a minimum level of common stockholder equity which increases from the date the facility was entered based on ongoing earnings. The maintenance of this test is determined upon each anniversary of the loan. If this test was performed as of December 31, 2002, the minimum common equity level requirement would equal approximately $301 million. At that date CILCO's common equity, calculated in accordance with this provision, was $329 million. Under the restricted payments provision CILCO may only pay dividends to the Holding Company up to $45 million annually subject to limited carryforward if not fully utilized. Covenants in Ameren's committed credit facilities require the maintenance of the percentage of total debt to total capital of 60% or less for Ameren, AmerenUE and AmerenCIPS. This covenant does not directly apply to CILCORP or CILCO. As of December 31, 2002, this ratio was approximately 50%, 43% and 50% for Ameren, AmerenUE and AmerenCIPS, respectively. Ameren's committed credit facilities also include indebtedness cross default provisions that could trigger a default under these facilities in the event any subsidiary of Ameren (subject to definition in the underlying credit agreements), other than certain project finance subsidiaries, defaults on indebtedness in excess of $50 million. Most of 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. Although an updated valuation report will not be available until the second half of 2003, Ameren believes that the unfunded liability status of our 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 December 31, 2002, Ameren and its subsidiaries were in compliance with their credit agreement provisions and covenants. 40 OFF-BALANCE SHEET ARRANGEMENTS At December 31, 2002, 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. Neither CILCORP Inc., nor any of its subsidiaries, expect to engage in any significant off-balance sheet financing arrangements in the near future. LONG-TERM DEBT AND EQUITY The following table summarizes CILCORP and CILCO's issuances and redemptions of long-term debt for the years ended 2002, 2001 and 2000. For additional information, see Note 5 - Long-Term Debt and Note 6 - Preferred Stock to the consolidated financial statements.
Month Issued/Redeemed 2002 2001 2000 (In thousands) Issuances - Long-term Debt: CILCO Secured Term Loan Due 2004 June $100,000 $ -- $ -- Hallock Power Modules Loan Due 2000-2004 May -- -- 4,000 Kickapoo Power Modules Loan Due 2000-2004 May -- -- 4,000 -------- -------- -------- Total long-term debt issuances $100,000 $ -- $ 8,000 ======== ======== ======== Redemptions - Long-term Debt: CILCORP Medium term Notes, Due 2001. Interest rates From 8.52% to 9.1% Jul -- 5,000 -- Aug -- 3,500 -- Dec -- 9,000 -- CILCO Hallock Power Modules Loan Due 2000-2004 Sep $ 700 $ 700 $ 250 Kickapoo Power Modules Loan Due 2000-2004 Sep 700 700 250 6.4% Series due 2000 Feb -- -- 30,000 -------- ------- ------- Total long-term debt redemptions $ 1,400 $18,900 $30,500 ======== ======= ======= Equity: CILCO Flexible Auction Rate Preferred Stock, Class A, no par value Jul $ -- $ -- $25,000 -------- ------- ------- Total preferred stock redemptions $ -- $ -- $25,000 ======== ======= =======
41 CREDIT RATINGS As of February 2003, the 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 AmerenCIPS: Secured debt A1 A- Unsecured debt A2 BBB+ Generating Company: Unsecured debt A3/Baa2 A-
Standard & Poor's increased the ratings of CILCORP and CILCO subsequent to the acquisition of these entities by Ameren Corporation. As of February 2003, the unsecured debt ratings of CILCORP were BBB+ and Baa2 from Standard & Poor's and Moody's, respectively. The secured debt ratings of CILCO were A- and A2 from Standard & Poor's and Moody's, respectively. Standard & Poor's assigned stable outlooks to the ratings. Moody's also assigned a stable outlook to the ratings for CILCORP and CILCO. 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. 42 REGULATORY MATTERS In 2002, all of CILCO's Illinois residential, commercial and industrial customers had choice in electric suppliers. As a provision of the legislation related to the restructuring of the Illinois electric industry (the Illinois Law), a rate freeze is in effect through January 1, 2007. The Illinois Law allows a utility to collect transition charges from customers that elect to move from bundled retail rates to market-based rates. Utilities have the right to collect transition charges throughout the transition period that ends January 1, 2007. In March 2000, CILCO filed revised tariff sheets with the ICC eliminating the collection of the customer transition charge. At a March 2000 hearing, the ICC approved CILCO's revised tariffs, thereby eliminating the collection of any customer transition charge. CILCO cannot re-establish the collection of a transition charge until it files, and the ICC approves, revised tariff sheets that reinstate a transition charge. Under the Illinois Law, we were subject to a residential electric rate decrease of 2% in October 2000 and an additional 1% in October 2002. The Illinois Law also contains a provision requiring that one-half of excess earnings from the Illinois jurisdiction for the years 1998 through 2006 be refunded to CILCO's Illinois customers. Excess earnings are defined as the portion of the two-year average annual rate of return on common equity in excess of 1.5% of the two-year average of an Index, as defined in the Illinois Law. The Index is defined as the sum of the average for the twelve months ended September 30 of the average monthly yields of the long-term U.S. Treasury bonds, plus 9% for calendar years 2000 through 2004. CILCO's average rates of return on common equity for the two year average at December 31, 2002, were 9.0% as compared to the average index of 16.0%. No refunds are expected to be required for the period of April 1, 2002, through March 31, 2003. For the three years ended December 31, 2002, no refunds were required. With the enactment of the Illinois Law, electric generation in Illinois became deregulated and competitive. As a result, the accounting principles applicable to rate-regulated enterprises (Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71)) no longer apply to the electric generation portion of CILCO's business. There were no impairments to CILCO assets as a result of transitioning from SFAS 71. Its ability to keep total production costs competitive in a deregulated market will determine whether and to what extent the value of these assets may be impaired in the future. With electric choice beginning on October 1, 1999, for its industrial customers and some of its commercial customers, and with all other non-residential customers being able to choose their electric supplier on December 31, 2000, CILCO has entered into multi-year contracts with targeted customers representing approximately 40% of total 2002 electric kWh sales to non-residential customers. The contract sales represented approximately 26% ($59 million) of the 2002 commercial and industrial revenue. These contracts, most of which expire in 2004, were designed to capture a significant portion of the margin that the customers paid to CILCO in the most recent twelve months. The ultimate market price for electricity, the cost for a utility to produce or buy electricity, and the number of customers that may be gained or lost due to customer choice of supplier in Illinois cannot be predicted. As a result, management cannot predict the ultimate impact that the Illinois Law will have 43 on CILCORP's financial position or results of operations, but the effect could be significant. However, CILCO is currently a low-cost provider of electricity, and management will continue to position CILCO for competition by controlling costs, maintaining good customer relations, and developing flexibility to meet individual customer requirements. As of December 31, 2002, all electric customers eligible for choice continue to purchase their electricity supply from CILCO, other than those who self-generate. During the year ended December 31, 2002, CILCO supplied approximately 2.8 million megawatt hours to retail customers outside of its service territory for 2002. CILCO supplied these new customers primarily by purchasing electricity from other suppliers. CILCO made the necessary firm supply and transmission arrangements to meet customer requirements. OUTLOOK CILCORP Inc. and its subsidiaries believe 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 impacts native load demand, o The adverse effects of rising employee benefit costs, higher insurance costs and increased security 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 ICC by the end of 2003. The Company 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 the ordinary course of business, the Company evaluates strategies to enhance its 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. ENVIRONMENTAL MATTERS The Company is subject to various environmental regulations by federal, state, and local authorities. From the beginning phases of siting and development, to the ongoing operation of existing or new electric generating, transmission, and distribution facilities, the Company's activities involve compliance with diverse laws and regulations that address emissions and impacts to air and water, special, protected, and cultural resources (such as wetlands, endangered species, and archeological/historical resources), chemical and waste handling, and noise impacts. The Company's activities require complex and often lengthy processes to obtain approvals, permits, or licenses for new, existing, or modified facilities. Additionally, the use and handling of various chemicals or hazardous materials (including wastes) requires preparation of release prevention plans and emergency response procedures. As new laws or regulations are promulgated, the Company assesses the applicability and implements the necessary modifications to its facilities or operations, as required. The more significant matters are discussed below. 44 Clean Air Act The Clean Air Act affects both existing generating facilities and new projects. The Clean Air Act and many state laws require significant reductions in SO2 and NOx emissions that result from burning fossil fuels. The Clean Air Act also contains other provisions that could materially affect some of CILCO's projects. Various provisions require permits, inspections, or installation of additional pollution control technology or may require the purchase of emission allowances. Certain of these provisions are described in more detail below. The Clean Air Act creates a marketable commodity called an SO2 "allowance." All generating facilities over 25 megawatts that emit SO2 must obtain allowances in order to operate after 1999. Each allowance gives the owner the right to emit one ton of SO2. All existing generating facilities have been allocated allowances based on a facility's past production and the statutory emission reduction goals. If additional allowances are needed for new generating facilities, they can be purchased from facilities having excess allowances or from SO2 allowance banks. CILCO's generating facilities comply with the SO2 allowance caps through the use of an existing SO2 scrubber, fuel blending and SO2 allowance purchases. CILCO is also considering the possibility of utilizing low sulfur fuels in the future. The U.S. Environmental Protection Agency (EPA) issued a rule in October 1998 requiring 22 Eastern states and the District of Columbia to reduce emissions of NOx in order to reduce ozone in the Eastern United States. Among other things, the EPA's rule establishes an ozone season, which runs from May through September, and a NOx emission budget for each state, including Illinois. The EPA rule requires states to implement controls sufficient to meet their NOx budget by May 31, 2004. Total capital expenditures to meet the NOx emission requirements are estimated to be $125.5 million (including cost of removal), $77.5 million of which was expended through 2002. These costs include the installation of two Selective Catalytic Reduction (SCR) units and combustion control modifications. On December 31, 2002, the EPA published in the Federal Register revisions to the New Source Review (NSR) programs under the Clean Air Act, including changes to the routine maintenance, repair and replacement exclusions. Various Northeastern states have filed a petition with the United States District Court for the District of Columbia challenging the legality of the revisions to the NSR programs. It is likely that various industries and environmental groups will seek to intervene in that challenge. At this time, CILCO is unable to predict the impact of this challenge on its future financial position, results of operations or liquidity. National Ambient Air Quality Standards The EPA is currently working on rulemakings to implement the new National Ambient Air Quality Standards for ozone and particulate matter. These new ambient standards may require significant additional reductions in SO2 and NOx emissions from power plants by 2008. At this time, CILCO is unable to predict the ultimate impact of these revised air quality standards on its future financial position, results of operations or liquidity. 45 Mercury and Regional Haze Regulations In December 1999, the EPA issued a decision to regulate mercury emissions from coal-fired power plants by 2008. The EPA is scheduled to propose regulations by 2004. These regulations have the potential to add significant capital and/or operating costs to generating systems after 2006. The EPA also issued Best Available Retrofit Technology (BART) guidelines to address visibility impairment (so called "Regional Haze") across the United States from sources of air pollution, including coal-fired power plants. The guidelines were to be used by states to mandate pollution control measures for SO2 and NOx emissions. In May 2002, the District of Columbia Circuit Court remanded these rules back to the EPA. The EPA is currently working to address the issues raised by the court decision. These rules could also add significant pollution control costs to our generating system between 2008 and 2012. At this time, CILCO is unable to predict the ultimate impact of these revised air quality standards on our future financial condition, results of operations or liquidity. Multi-Pollutant Legislation The United States Congress has been working on legislation to consolidate the numerous air pollution regulations facing the utility industry. This "multi-pollutant" legislation will be deliberated in Congress in 2003. While the cost to comply with such legislation, if enacted, could be significant, it is anticipated that the costs would be less than the combined impact of the new National Ambient Air Quality Standards and the Mercury and Regional Haze Regulations, discussed above. Pollution control costs under such legislation are expected to be incurred in phases from 2007 through 2015. At this time, CILCO is unable to predict the ultimate impact of the above expected regulations and this legislation on its future financial position, results of operations or liquidity; however, the impact could be material. Future initiatives regarding greenhouse gas emissions and global warming continue to be the subject of much debate. The related Kyoto Protocol was signed by the United States but has since been rejected by the President, who instead has asked for an 18% decrease in carbon intensity on a voluntary basis. Future initiatives on this issue and the ultimate effects of the Kyoto Protocol and the President's initiatives on CILCO are unknown. Coal-fired power plants are significant sources of carbon dioxide emissions, a principal greenhouse gas. Therefore, CILCO's compliance costs with any mandated federal greenhouse gas reductions in the future could be material. Clean Water Act In April 2002, the EPA proposed rules under the Clean Water Act that require that cooling water intake structures reflect the best technology available for minimizing adverse environmental impacts. These rules pertain to existing generating facilities that currently employ a cooling water intake structure whose flow exceeds 50 million gallons per day. A final action on the proposed rules is expected by August 2003. The proposed rule may require CILCO to install additional intake screens or other protective measures, as well as extensive site specific study and monitoring requirements. CILCO's compliance costs associated with the final rules are unknown. In October 2002, CILCO submitted a corrective action plan to the Illinois EPA (IEPA) in accordance with permit conditions to address ground water issues associated with the recycle pond and ash ponds at the Duck Creek facility. In January 2003, the IEPA accepted portions of the plan but rejected other portions as being inadequate. 46 Future actions will entail, at a minimum, the closure of two ash ponds, replacement of a return water line, construction of a landfill and remedial actions to treat water in the recycle pond and an ash pond. CILCO recorded an $8.5 million liability on the balance sheet in 2002 for the remediation effort related to the water treatment for the recycle pond and an ash pond. In addition, CILCO estimates future capital expenditures for the landfill and return water line could range from $15 million to $30 million by 2007. See Note 1 - Summary of Significant Accounting Policies - for further discussion of the costs related to the closure of two ash ponds. Remediation CILCO owns or is otherwise responsible for four former manufactured gas plant (MGP) sites in Illinois. The ICC permits the recovery of remediation and litigation costs associated with certain former MGP sites located in Illinois from Illinois electric and natural gas utility customers through environmental adjustment rate riders. To be recoverable, such costs must be prudently and properly incurred and are subject to annual reconciliation review by the ICC. Remediation at two of the four sites was completed and "No Further Remediation" letters were received in 1999 and 2000. Groundwater sampling continues at the third site and a plan has been filed with the IEPA for additional investigation at the site. Remediation of the site is expected to be completed in 2004. CILCO has not determined the ultimate extent of its liability for, or the ultimate cost of any remediation of, the fourth site, which is pending further studies. In 2002, CILCO spent approximately $0.2 million for former gas manufacturing plant site monitoring, legal fees and feasibility studies and has received some recovery from insurance settlements. A $1.1 million liability is recorded on the balance sheet, representing its minimum obligation expected for these remediation activities. Total costs incurred through December 2002, less amounts recovered from customers, have been deferred as a regulatory liability on the Balance Sheet. Through December 31, 2002, CILCO has recovered approximately $8.2 million in remediation costs from its customers. Under these circumstances, management believes that the cost of coal tar remediation will not have a material adverse effect on CILCO's financial position or results of operations. Asbestos Related Litigation CILCO has been named, along with numerous other parties, in several lawsuits which have been filed by certain plaintiffs claiming varying degrees of injury from asbestos exposure. The cases have been filed in the Circuit Courts of Madison, Cook and Peoria Counties in Illinois and one case has been filed in Indiana. The number of total defendants named in each case is significant with as many as 87 parties named in a case to as few as 10. The claims filed against CILCO allege injury from asbestos exposure during the plaintiffs' activities at our electric generating plants. In each lawsuit, the plaintiff seeks unspecified damages in excess of $50,000, which typically would be shared among the named defendants. A total of thirteen such lawsuits have been filed against CILCO, of which eleven are pending, one has been settled and one has been dismissed. 47 IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS See Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements. CRITICAL ACCOUNTING POLICIES 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 regulatory decisions The Company defers costs as regulatory assets in and requirements accordance with SFAS 71 and makes investments that o Anticipated future regulatory decisions and their it is assumed will be collected in future rates. impact o Impact of deregulation and competition 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 o Responsible party determination The Company accrues for all known o Approved methods for cleanup and environmental contamination where requirements imposed by regulators 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 environmental remediation occurring is more likely than not, and legal obligation costs and a range of costs can be determined.
48 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. Unbilled Revenue At the end of each period, the o Projecting customer energy usage Company estimates, based on o Estimating impacts of weather and other expected usage, the amount of usage-affecting factors for the unbilled revenue to record for services period that have been provided to 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, o Future rate of return on pension and the Company accrues costs of other plan assets providing future employee benefits o Interest rates used in valuing benefit in accordance with SFAS 87, 106 obligations and 112. See Note 3 - o Healthcare cost trend rates Postemployment and Postretirement o Timing of employee retirements Benefits to the Consolidated Financial Statements. 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, healthcare trend rate and expected rate of return on pension assets is based on the review of available current, historical and projected rates, as applicable.
49 Derivative Financial Instruments o Market conditions in the energy industry, especially The Company records all derivatives at their fair the effects of price volatility on contractual commodity market value in accordance with SFAS 133. The commitments identification and classification of a derivative o Regulatory and political environments and requirements and the fair value of such derivative must be o Fair value estimations on longer term contracts determined. The Company designates certain o Complexity of financial instruments and accounting rules derivatives as hedges of future cash flows. See o Effectiveness of derivatives that have been designated Note 9 - Accounting for Price Risk Management as hedges Activities to the Consolidated Financial Statements. 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 nonamortization approach o Method for determining fair value for purchased goodwill and certain intangibles in o Market prices for equity securities or accordance with SFAS 142, "Goodwill and Other assets and liabilities Intangible Assets." The Company annually assesses o Projections of future cash flows whether its goodwill is impaired and performs an o Interest rates used in valuing goodwill assessment more frequently if events occur indicating possible impairment. As of December 31, 2002, CILCORP had net goodwill of $579 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.
50 Leveraged Leases The Company accounts for its Investments in o Market conditions of the industry of the Leveraged Leases in Accordance with SFAS 13, leased asset that might affect the residual "Accounting for Leases." As required by SFAS 13, value at the end of the lease terms. This the Company reviews its estimated residual value would include: the real estate markets where as well as all other important assumptions each of the assets are located; the rail affecting estimated total net income from the industry; the aerospace industry and energy leases. SFAS 13 requires the rate of return market where the asset is located. and total income of a lease to be recalculated o Management judgment as to whether if there is a permanent decline in the estimated impairments are other than temporary. 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. EFFECTS OF INFLATION AND CHANGING PRICES Inflation may have a significant impact on the Company's future operations and its ability to contain costs. To help protect CILCO from the effects of inflation, substantially all gas sales rates include a Purchased Gas Adjustment (PGA) to provide for changes in the cost of natural gas. See also Item 1. Business of CILCO - Electric Fuel and Purchased Gas Adjustment Clauses. Over the past five years, the annual rate of inflation, as measured by the Consumer Price Index, has ranged from 1.6% to 3.4%. 51 FORWARD-LOOKING INFORMATION Statements made in this annual 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, we are 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 us 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 our 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; 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 of 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 the CILCORP acquisition; o cost and availability of transmission capacity for the energy generated by our generating facilities or required to satisfy our energy sales; and o legal and administrative proceedings. 52 Given these uncertainties, undue reliance should not be placed on these forward-looking statements. Except to the extent required by the federal securities laws, CILCORP undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 53 Item 7A. Quantitative and Qualitative Disclosures About Market Risk CILCORP Inc. and its subsidiaries (the Company) are 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 2002 were to CILCO retail customers in Illinois under tariffs regulated by the Illinois Commerce Commission (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). Prior to October 29, 2001, prudently incurred costs of fuel used to generate electricity and purchased power costs were recovered from retail customers that purchase energy through regulated tariffs under the Fuel Adjustment Clause (FAC). Thus, through October 28, 2001, there had been very limited commodity price risk associated with CILCO's traditional rate-regulated sales. CILCO filed to eliminate the FAC on September 10, 2001. The ICC approved the elimination of the FAC on October 24, 2001, for bills issued on or after October 29, 2001. While the Company is exposed to increased commodity price risk due to the elimination of the FAC, 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 December 31, 2002, these non rate-regulated activities had net open market price risk positions of approximately 235,000 MWh of electricity and 70,000 Mcf of natural gas. A market price sensitivity of 10% applied to positions open in the next twelve months is not material to the Company. See Note 9 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 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. At December 31, 2002, the combined borrowings outstanding under these facilities totaled $114.7 million. As of December 31, 2002, the Company had approximately $133 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 monitor 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 senior management, master trading and netting agreements, and credit support management such as letters of credit and parental guarantees. 54 Item 8. Financial Statements and Supplementary Data Index to Financial Statements:
Page ---- CILCORP Independent Auditors' Report 56 Consolidated Statements of Income and Comprehensive Income 57 Consolidated Balance Sheets 58-59 Consolidated Statements of Cash Flows 60-61 Consolidated Statements of Stockholder's Equity 62 Notes to Consolidated Financial Statements 63-100 CILCO Independent Auditors' Report 101 Consolidated Statements of Income and Comprehensive Income 102 Consolidated Balance Sheets 103-104 Consolidated Statements of Cash Flows 105-106 Consolidated Statements of Stockholder's Equity 107 Notes to Consolidated Financial Statements 108-142
55 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of CILCORP Inc. Peoria, Illinois We have audited the accompanying consolidated balance sheets of CILCORP Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income and comprehensive income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CILCORP Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 19, the accompanying 2001 and 2000 consolidated financial statements have been restated. As discussed in Note 1, effective January 1, 2001, CILCORP Inc. and subsidiaries changed its method of accounting for derivative instruments and hedging activities to conform to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." As discussed in Note 1, effective January 1, 2002, CILCORP Inc. and subsidiaries changed its method of accounting for goodwill and intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets." DELOITTE & TOUCHE LLP Indianapolis, IN April 11, 2003 56 CILCORP Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income
As Restated(1) -------------- For the Years Ended December 31 2002 2001 2000 (In thousands) Revenue: CILCO Electric $ 390,549 $ 371,435 $ 398,836 CILCO Gas 211,879 271,434 237,654 CILCO Other 116,510 96,820 48,354 CILCORP Other 60,859 50,305 38,670 ---------- ---------- ---------- Total 779,797 789,994 723,514 ---------- ---------- ---------- Operating Expenses: Cost of Fuel and Purchased Power 237,857 190,576 208,271 Cost of Gas 184,086 232,347 174,777 Other Operations and Maintenance 144,725 120,557 117,028 Depreciation and Amortization 72,321 86,013 86,810 State and Local Revenue Taxes 28,959 28,181 27,589 Other Taxes 12,585 11,431 11,857 ---------- ---------- ---------- Total 680,533 669,105 626,332 ---------- ---------- ---------- Fixed Charges and Other: Interest Expense 66,073 69,784 71,752 Preferred Stock Dividends of Subsidiary 2,159 2,159 2,977 Allowance for Funds Used During Construction (1,509) (18) (533) Other 1,042 1,354 1,221 ---------- ---------- ---------- Total 67,765 73,279 75,417 ---------- ---------- ---------- Income from Continuing Operations Before Income Taxes 31,499 47,610 21,765 Income Taxes 6,841 22,182 10,380 ---------- ---------- ---------- Net Income from Continuing Operations 24,658 25,428 11,385 Loss from Operations of Discontinued Businesses, Net of Tax of $(47) and $(1,095) (73) (1,665) -- ---------- ---------- ---------- Net Income $ 24,585 $ 23,763 $ 11,385 Other Comprehensive Loss (47,703) (11,409) (450) ---------- ---------- ---------- Comprehensive Income (Loss) $ (23,118) $ 12,354 $ 10,935 ========== ========== ==========
(1) See Note 19 to the Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 57 CILCORP Inc. and Subsidiaries Consolidated Balance Sheets
Assets (As of December 31) 2002 2001 (As Restated(1)) (In thousands) Current Assets: Cash and Temporary Cash Investments $ 31,821 $ 18,182 Receivables, Less Allowance for Uncollectible Accounts of $1,989 and $1,800 45,075 34,065 Accrued Unbilled Revenue 48,444 51,399 Fuel, at Average Cost 14,724 18,068 Materials and Supplies, at Average Cost 17,691 15,849 Gas in Underground Storage, at Average Cost 27,209 27,067 FAC Underrecoveries 1,259 1,255 PGA Underrecoveries 2,635 2,974 Prepayments and Other 26,240 24,523 ---------- ---------- Total Current Assets 215,098 193,382 ---------- ---------- Investments and Other Property: Investment in Leveraged Leases 132,874 135,504 Other Investments 17,850 19,285 ---------- ---------- Total Investments and Other Property 150,724 154,789 ---------- ---------- Property, Plant and Equipment: Utility Plant, at Original Cost Electric 739,779 716,857 Gas 245,944 233,278 ---------- ---------- 985,723 950,135 Less-Accumulated Provision for Depreciation 175,972 126,502 ---------- ---------- 809,751 823,633 Construction Work in Progress 104,571 34,340 Other, Net of Depreciation 22 14 ---------- ---------- Total Property, Plant and Equipment 914,344 857,987 ---------- ---------- Other Assets: Goodwill, Net of Accumulated Amortization of $33,753 580,748 580,748 Other 40,130 27,575 ---------- ---------- Total Other Assets 620,878 608,323 ---------- ---------- Total Assets $1,901,044 $1,814,481 ========== ==========
(1) See Note 19 to the Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 58 CILCORP Inc. and Subsidiaries Consolidated Balance Sheets Liabilities and Stockholder's Equity (As of December 31)
2002 2001 (As Restated(1)) (In thousands, except share amounts) Current Liabilities: Current Portion of Long-Term Debt $ 26,750 $ 1,400 Notes Payable 10,000 63,000 Accounts Payable 81,010 76,442 Accrued Taxes 8,105 13,736 Accrued Interest 18,712 18,392 Other 16,749 24,734 ---------- ---------- Total Current Liabilities 161,326 197,704 ---------- ---------- Long-Term Debt 791,028 717,730 ---------- ---------- Deferred Credits and Other Liabilities: Deferred Income Taxes 189,977 204,247 Regulatory Liability of Regulated Subsidiary 19,230 38,662 Deferred Investment Tax Credit 12,958 14,553 Pension Liabilities 106,797 5,729 Postretirement Health Care Liabilities 61,513 55,832 Other 22,536 21,827 ---------- ---------- Total Deferred Credits and Other Liabilities 413,011 340,850 ---------- ---------- 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 519,433 518,833 Retained Earnings 34,688 10,103 Accumulated Other Comprehensive Loss (59,562) (11,859) ---------- ---------- Total Stockholder's Equity 494,559 517,077 ---------- ---------- Total Liabilities and Stockholder's Equity $1,901,044 $1,814,481 ========== ==========
(1) See Note 19 to the Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 59 CILCORP Inc. and Subsidiaries Consolidated Statements of Cash Flows
As Restated(1) -------------- For the Years Ended December 31 2002 2001 2000 (In thousands) Cash Flows from Operating Activities: Net Income from Continuing Operations Before Preferred Dividends $ 26,817 $ 27,587 $ 14,362 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Non-Cash Leveraged Lease Income and Investment Income (1,836) (4,071) (7,645) Coal Contract Settlement -- (90,574) -- Non-Cash FAC Refund -- (4,045) -- Intangible Items -- 6,438 -- Other Non-Cash Items -- 247 -- Cash Receipts in Excess of Debt Service on Leveraged Leases 6,815 9,611 10,397 Depreciation and Amortization 72,321 86,013 86,810 Deferred Income Taxes, Investment Tax Credit and Regulatory Liability of Subsidiary, Net (3,338) 12,308 (16,255) Changes in Operating Assets and Liabilities: (Increase) Decrease in Accounts Receivable and Accrued Unbilled Revenue (8,131) 58,199 (58,492) Decrease (Increase) in Inventories 1,360 (3,589) (6,950) (Decrease) Increase in Accounts Payable 4,518 (25,997) 69,256 (Decrease) Increase in Accrued Taxes (4,999) (1,667) 4,582 (Increase) Decrease in Other Assets (21,129) 5,635 265 Increase in Other Liabilities 28,400 12,776 750 ---------- ---------- ---------- Net Cash Provided by Operating Activities 100,798 88,871 97,080 ---------- ---------- ---------- Net Cash Provided by (Used in) Operating Activities of Discontinued Operations -- 7,377 (202) ---------- ---------- ---------- Net Cash Provided by Operating Activities 100,798 96,248 96,878 ---------- ---------- ----------
60 Cash Flows from Investing Activities: Additions to Plant (124,400) (51,255) (55,532) Other (6,800) (195) (4,446) ---------- ---------- ---------- Net Cash Used in Investing Activities (131,200) (51,450) (59,978) ---------- ---------- ---------- Cash Flows from Financing Activities: Net (Decrease) Increase in Short-Term Debt (53,000) (52,300) 23,400 Long-Term Debt Retired (1,400) (18,900) (30,500) Long-Term Debt Issued 100,000 -- 8,000 Preferred Stock Redeemed -- -- (25,000) Common Dividends Paid -- (15,000) (9,300) Preferred Dividends Paid (2,159) (2,159) (2,977) Additional Paid-in Capital 600 50,000 -- ---------- ---------- ---------- Net Cash Provided by (Used in) Financing Activities 44,041 (38,359) (36,377) ---------- ---------- ---------- Net Increase in Cash and Temporary Cash Investments 13,639 6,439 523 Cash and Temp. Cash Investments at Beginning of Period 18,182 11,743 11,220 ---------- ---------- ---------- Cash and Temporary Cash Investments at End of Period $ 31,821 $ 18,182 $ 11,743 ========== ========== ==========
(1) See Note 19 to the Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 61 CILCORP Inc. and Subsidiaries Consolidated Statements of Stockholder's Equity
Other Add'l Compre- Common Stock Paid in Retained hensive Shares Amount Capital Earnings Income Total (In thousands, except share amounts) Balance 1/1/00, as restated(1) 1,000 $ -- $468,833 $ (745) $ -- $468,088 Cash Dividend Declared on Common Stock (9,300) (9,300) Additional Minimum Liability of Non-Qualified Pension Plan, net of $(299) taxes (450) (450) Net Income 11,385 11,385 ------- --------- -------- --------- -------- -------- Balance 12/31/00, as restated(1) 1,000 $ -- $468,833 $ 1,340 $ (450) $469,723 AES Equity Contribution 50,000 50,000 Cash Dividend Declared on Common Stock (15,000) (15,000) Additional Minimum Liability of Pension Plans, net of $(6,047) taxes, as restated(1) (9,201) (9,201) SFAS 133, net of $(1,451) taxes, as restated(1) (2,208) (2,208) Net Income 23,763 23,763 ------- --------- -------- --------- -------- -------- Balance 12/31/01, as restated(1) 1,000 $ -- $518,833 $ 10,103 $(11,859) $ 517,077 AES Equity Contribution 600 600 Additional Minimum Liability of Pension Plans, net of $(33,678) taxes (51,215) (51,215) SFAS 133, net of $2,308 taxes 3,512 3,512 Net Income 24,585 24,585 ------- --------- -------- --------- -------- -------- Balance 12/31/02 1,000 $ -- $519,433 $ 34,688 $(59,562) $494,559 ======= ========= ======== ========= ======== ========
(1) See Note 19 to the Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 62 CILCORP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of CILCORP Inc. (the Holding Company), Central Illinois Light Company (CILCO), QST Enterprises Inc. (QST) and its subsidiaries QST Energy Inc. (QST Energy) and CILCORP Infraservices Inc. (CILCORP Infraservices), and CILCORP'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 2002 presentation. At December 31, 2002, CILCORP Inc., a public utility holding company, was a wholly-owned subsidiary of The AES Corporation (AES). On April 29, 2002, AES announced an agreement with Ameren Corporation to sell 100 percent of its ownership interest in CILCORP. See Note 18 - Subsequent Event. 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. RESTATEMENT The financial statements as of and for the years ended December 31, 2001 and 2000 have been restated. See Note 19 -- Restatement for additional information. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. ACCOUNTING CHANGES AND OTHER MATTERS In January 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The impact of that adoption resulted in no cumulative effect charge to the income statement, and a cumulative effect adjustment of $1.7 million, net of taxes, to Accumulated Other Comprehensive Income (OCI), which increased common stockholders' equity. See Note 9 - Accounting for Price Risk Management Activities for further information. In January 2002, the Company adopted SFAS No. 141, "Business Combinations" (SFAS 141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires business combinations to be accounted for under the purchase method of accounting, which requires one party in the transaction to be identified as the acquiring enterprise and for that party to allocate the purchase price to the assets and liabilities of the acquired enterprise based 63 on fair market value. SFAS 142 requires goodwill and indefinite-lived intangible assets recorded in the financial statements to be tested for impairment at least annually, rather than amortized over a fixed period, with impairment losses recorded in the income statement. Adoption of SFAS 142 resulted in annual goodwill amortization of $15.3 million ceasing in 2002. For the Year Ended December 31,
Restated(1) ----------------------- 2002 2001 2000 (In thousands) Reported net income $24,585 $23,763 $11,385 Add back: Goodwill amortization -- 15,331 15,541 ------- ------- ------- Adjusted net income $24,585 $39,094 $26,926 ======= ======= =======
(1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. CILCORP's assessment of goodwill at December 31, 2002, resulted in no impairment. SFAS 141 and SFAS 142 were utilized for Ameren's acquisition of CILCORP and AES Medina Valley Cogen (No. 4), LLC and will result in a change in goodwill at the Holding Company based on Ameren's acquisition price and the assignment of new fair values to assets and liabilities. See Note 18 - Subsequent Event for further information. The Company is adopting SFAS 143, "Accounting for Asset Retirement Obligations" (SFAS 143), in the first quarter of 2003. SFAS 143 provides the accounting requirements for asset retirement obligations associated with tangible, long-lived assets. SFAS 143 requires the Company 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 estimate of fair value. Historically, the Company has included an estimated cost of dismantling and removing plant from service upon retirement in the basis upon which depreciation rates were determined. SFAS 143 requires the Company to exclude costs of dismantling and removal upon retirement from the depreciation rates applied to non rate-regulated plant balances unless they are legal obligations under SFAS 143. Further, the Company is required to remove accumulated provisions for dismantling and removal costs from accumulated depreciation related to non rate-regulated plant assets and reflect such adjustment as a gain upon adoption of this standard, to the extent such dismantling and removal activities are not considered obligations as defined by SFAS 143. The Company is finalizing its evaluation of the impact of adopting SFAS 143. Upon adoption of this standard, the Company expects to recognize asset retirement obligations related primarily to retirement costs for ash ponds at the Duck Creek generating facility. In addition to these obligations, the Company has determined that certain other asset retirement obligations exist, but the Company is unable to estimate the fair value of those obligations because the probability, timing or cash flows associated with the obligations are indeterminable. The Company does not believe that these obligations, when incurred, will have a material adverse impact on its financial position, results of operations or liquidity. At this time, the Company has not determined the amount of net gain or loss, if any, to be recognized upon adoption of SFAS 143 for its non rate-regulated plant balances. 64 On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 retains the guidance related to calculating and recording impairment losses, but adds guidance on the accounting for discontinued operations, previously accounted for under Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 did not have any effect on the Company's financial position, results of operations or liquidity in 2002. SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145), was issued in April 2002. The provisions of SFAS 145 related to the rescission of FASB Statement No. 4 shall be applied in years beginning after May 15, 2002. All other provisions of SFAS 145 are effective for financial statements issued on or after May 15, 2002. Management has determined that adoption of SFAS 145 has no effect on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires an entity to recognize, and measure at fair value, a liability for a cost associated with an exit or disposal activity in the period in which the liability is incurred and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Management does not believe this statement will have a material effect on the consolidated financial statements. During 2002, the Company adopted the provisions of EITF Issue No. 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities" (EITF 02-3), that required revenues and costs associated with certain energy contracts to be shown on a net basis in the income statement. Prior to adopting EITF 02-3 and the rescission of EITF Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (EITF 98-10), the Company's accounting practice was to present all settled energy purchase or sale contracts within the Company's power risk management program on a gross basis in Electric Revenues and in Fuel and Purchased Power. This meant that revenues were recorded for the notional amount of the power sales contracts with a corresponding charge to income for the costs of the energy that was generated, or for the notional amount of a purchased power contract. In October 2002, the EITF reached a consensus to rescind EITF 98-10. The effective date for the full rescission of EITF 98-10 was for fiscal periods beginning after December 15, 2002, with early adoption permitted. In addition, the EITF reached a consensus in October 2002 that all SFAS 133 trading derivatives (subsequent to the rescission of EITF 98-10) should be shown net in the income statement, whether or not physically settled. This consensus applies to all energy and non-energy related trading derivatives that meet the definition of a derivative pursuant to SFAS 133. The Company 65 adopted and applied this guidance to 2002 and 2001, which had no impact on previously reported revenues, costs, earnings or stockholders' equity. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (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. The Company does not expect SFAS 148 to have any effect on its financial position, results of operations or liquidity in 2003. FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45), was issued in November 2002. FIN 45 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. The Company does not expect the recognition provisions of FIN 45 to have a material impact on its financial position or results of operations. 66 REGULATION CILCO is a public utility subject to regulation by the Illinois Commerce Commission (ICC) and the Federal Energy Regulatory Commission (FERC) with respect to accounting matters, and maintains its accounts in accordance with the Uniform System of Accounts prescribed by these agencies. CILCO is subject to the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), for certain of its rate-regulated public utility operations. Under SFAS 71, assets and liabilities are recorded to represent probable future increases and decreases, respectively, of revenues to CILCO resulting from the ratemaking action of regulatory agencies. The Electric Service Customer Choice and Rate Relief Law of 1997 (the Illinois Law) became effective in Illinois in December 1997. Among other provisions, this law began a nine-year transition process to a fully competitive market for electricity in Illinois. Electric transmission and distribution activities are expected to continue to be regulated, but a customer may choose to purchase electricity from another supplier. Due to the Illinois Law, CILCO's electric generation activities are no longer subject to the provisions of SFAS 71. Regulatory assets included on the Consolidated Balance Sheets at December 31, 2002, and 2001, were as follows:
2002 2001 (As restated)(1) (In thousands) Included in current assets: Fuel and gas cost adjustments $ 3,894 $ 4,229 SFAS 133 gas cost adjustment derivatives (included in prepayments and other) 571 4,119 Coal tar remediation cost - estimated current (included in prepayments and other) 757 825 ------- ------- Costs included in current assets 5,222 9,173 ------- ------- Included in other assets: Coal tar remediation cost, net of recoveries 296 23 Clean air permit fees 13 17 Regulatory tax asset 5,218 4,085 Deferred gas costs -- 14 Unamortized loss on reacquired debt 2,206 2,448 ------- ------- Future costs included in other assets 7,733 6,587 ------- ------- Total regulatory assets $12,955 $15,760 ======= =======
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. Regulatory assets at December 31, 2002, were related to CILCO's rate-regulated electric and gas distribution activities. CILCO's regulatory assets do not earn a current rate of return. Regulatory liabilities, consisting of deferred tax items of approximately $19.2 million and $45.4 million at December 31, 2002, and 2001, respectively, and deferred taxes for investment tax credits of approximately $4.3 million and $5.3 million at December 31, 2002 and 2001, respectively, were primarily related to CILCO's electric and gas transmission and distribution operations. 67 CILCO's electric generation-related identifiable assets, no longer subject to SFAS 71, included in the balance sheet at December 31, 2002, and 2001, were as follows:
2002 2001 (As restated)(1) (In thousands) Property, Plant and Equipment $ 303,834 $ 303,013 Less: Accumulated Depreciation 33,021 33,230 ---------- ---------- 270,813 269,783 Construction Work in Progress 82,493 13,811 ---------- ---------- Net Property, Plant and Equipment 353,306 283,594 Fuel, at Average Cost 14,724 18,068 Materials and Supplies, at Average Cost 10,373 9,033 SO2 Allowance Inventory 1,736 1,598 ---------- ---------- Total Identifiable Electric Generation Assets $ 380,139 $ 312,293 ========== ==========
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. Accumulated deferred income taxes and investment tax credits associated with electric generation property at December 31, 2002, and 2001, were approximately $62.0 million and $62.3 million, respectively, and investment tax credits were approximately $4.8 million and $5.5 million at December 31, 2002, and 2001, respectively. AFUDC equity is not applied to generation plant additions, as these expenditures are related to non rate-regulated activities. OPERATING REVENUES, FUEL COSTS AND COST OF GAS Electric, gas, and non rate-regulated energy and energy services revenues include service provided but unbilled at year end. Utility revenues are billed to customers monthly on a cycle basis. Revenues are recorded on the accrual basis and include estimates for electricity and gas delivered. Substantially all CILCO gas system sales rates include a Purchased Gas Adjustment clause. This clause provides for the recovery of changes in the cost of gas on a current basis in billings to customers. CILCO adjusts the cost of gas to recognize overrecoveries or underrecoveries of allowable costs. The cumulative effects are deferred on the balance sheets as a current asset or current liability (see Regulation) and adjusted by refunds or collections through future billings to customers. CILCO's former electric energy rates included a similar Fuel Adjustment Clause (FAC). CILCO filed a proposal to eliminate the FAC on September 10, 2001. Tariffs eliminating the FAC became effective October 29, 2001. SIGNIFICANT CUSTOMER Caterpillar Inc. (Caterpillar) is CILCO's largest industrial customer. Gas revenues, electric revenues, and sales of other services to Caterpillar were 7.7%, 7.3% (as restated), and 6.5% of CILCO's total revenue for 2002, 2001, and 2000, respectively. Sales to Caterpillar from all continuing CILCORP subsidiaries represented 8.8%, 9.5% (as restated), and 7.5% of CILCORP consolidated operating revenue from continuing operations for 2002, 2001, and 2000, respectively. See Note 10 - Statements of Segments of Business of Item 8. Financial Statements and Supplementary Data. 68 CONCENTRATION OF CREDIT RISK CILCO, as a public utility, must provide service to customers within its defined service territory and may not discontinue service to residential customers when certain weather conditions exist. CILCO continually reviews customers' creditworthiness and requests deposits or refunds deposits based on that review. At December 31, 2002, CILCO had net receivables of $38.5 million, of which approximately $3.1 million was due from Caterpillar. See Note 16 for a discussion of receivables related to CILCORP Investment Management Inc.'s leveraged lease portfolio. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of Cash and Temporary Cash Investments, Other Investments, and Notes Payable approximate fair value. The estimated fair value of CILCO's Preferred Stock with Mandatory Redemption was $22.1 million at both December 31, 2002, and December 31, 2001, based on current market interest rates for other companies with comparable credit ratings, capital structure, and size. The estimated fair value of Long-Term Debt, including current maturities, was $916.7 million at December 31, 2002, and $729.4 million at December 31, 2001. The fair market value of these instruments was based on current market interest rates for other companies with comparable credit ratings, capital structures, and size, but does not reflect effects of regulatory treatment accorded the instruments related to the rate-regulated portions of CILCO's business. See Note 9 for fair value of derivative financial instruments. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) The allowance, representing the cost of equity and borrowed funds used to finance construction, is capitalized as a component of the cost of utility plant. The amount of the allowance varies depending on the rate used and the size and length of the construction program. The Uniform System of Accounts defines AFUDC, a non-cash item, as the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate upon other funds when so used. On the income statement, the cost of equity and borrowed funds capitalized is reported in fixed charges. In accordance with the FERC formula, the composite AFUDC rates used in 2002, 2001, and 2000 were 6.2%, 4.8% and 6.9%, respectively. AFUDC equity is not applied to generation plant additions, as these expenditures are related to non rate-regulated activities. DEPRECIATION AND MAINTENANCE Provisions for depreciation of utility property for financial reporting purposes are based on straight-line composite rates. The annual provisions for utility plant depreciation, expressed as a percentage of average depreciable utility property, were 3.5%, 3.5%, and 3.7% for electric for 2002, 2001, and 2000, respectively, and 4.7%, 4.7%, and 4.6% for gas for 2002, 2001, and 2000, respectively. Utility maintenance and repair costs are charged directly to expense. Renewals of units of property are charged to the utility plant account, and the original cost of depreciable property replaced or retired, together with the removal cost less salvage, is charged to the accumulated provision for depreciation. 69 GOODWILL The excess purchase price over the fair value of the assets acquired and the liabilities assumed by AES in its 1999 acquisition of CILCORP was allocated to goodwill at the Holding Company. Through December 2001, goodwill was being amortized using the straight-line method over a 40-year period. On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets", which requires the use of a nonamortization approach for purchased goodwill and certain intangibles. See Note 18 - Subsequent Event. IMPAIRMENT OF LONG-LIVED ASSETS We evaluate long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets, as compared with the carrying value of the assets. If impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. See Accounting Changes and Other Matters relating to SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." INCOME TAXES The Company follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property. The Company will file a consolidated federal income tax return with AES for 2002. The Company makes income tax payments to AES based on its consolidated taxable income, calculated in the same manner as if CILCORP was not part of the AES consolidated group. Income taxes are allocated to the Company's subsidiaries based on their respective taxable income or loss. CONSOLIDATED STATEMENTS OF CASH FLOWS The Company considers all highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash equivalents for purposes of the Consolidated Statements of Cash Flows. Cash paid for interest and income taxes was as follows:
2002 2001 2000 (In thousands) Interest $ 71,285 $ 73,542 $ 75,171 Income taxes $ 21,073 $ 9,450 $ 27,496
RESTRICTED CASH CILCO has restricted cash of $7.9 million and $12.9 million at December 31, 2002, and 2001, respectively, within Prepayments and Other on the Consolidated Balance Sheets. 70 COMPANY-OWNED LIFE INSURANCE POLICIES The following amounts related to company-owned life insurance contracts, issued by a major insurance company, are included in Other Investments:
2002 2001 (In thousands) Cash surrender value of contracts $ 73,902 $ 69,234 Borrowings against contracts (69,634) (65,314) -------- -------- Net investment $ 4,268 $ 3,920 ======== ========
Interest expense related to borrowings against company-owned life insurance, included in "Other" on the Consolidated Statements of Income and Comprehensive Income, was $5.3 million, $4.9 million, and $4.3 million for 2002, 2001, and 2000, respectively. NOTE 2 - INCOME TAXES Total income tax expense for 2002 resulted in an effective tax rate of 21.6% on earnings before income taxes (47.0% in 2001 (as restated) and 47.8% in 2000 (as restated)). The principal reasons such rates differ from the statutory federal rate for the years ended December 31, 2002, 2001, and 2000 were as follows:
As Restated(1) ------------------- 2002 2001 2000 Statutory federal income tax rate: 35.0% 35.0% 35.0% ------ ------ ------ Increases (decreases)from: Depreciation differences (3.8) 3.4 (5.7) Amortization of investment tax credit (5.1) (3.6) (7.5) State income taxes 4.6 5.0 4.9 Goodwill amortization -- 12.0 25.0 Preferred dividends of subsidiary and other permanent differences 2.2 0.9 4.7 Tax provision adjustment (.5) 1.0 (2.6) Affordable housing tax credits (6.2) (4.6) (8.5) Company-owned life insurance (4.8) (2.8) (5.0) AES transaction costs amortization (2.3) (.7) 3.2 Taxable salvage 2.0 .8 3.0 Other differences .5 .6 1.3 ------ ------ ------ Total (13.4) 12.0 12.8 ------ ------ ------ Effective income tax rate 21.6% 47.0% 47.8% ====== ====== ======
(1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. 71 Components of income tax expense for the years ended December 31, 2002, 2001, and 2000 were as follows:
As Restated(1) ---------------------- 2002 2001 2000 (In thousands) Current income taxes Federal $ 10,609 $ 5,922 $ 19,691 State 2,882 1,579 4,062 -------- -------- -------- Total current income taxes 13,491 7,501 23,753 -------- -------- -------- Deferred income taxes, net Property-related deferred income Taxes (4,304) (11,850) (14,244) Leveraged leases 54 (586) 554 Pension expenses 1,900 4,233 (2,065) Environmental reserve (3,358) -- -- Other postemployment benefits expenses (6,042) (2,151) 4,056 Gas in underground storage 1,182 718 (788) Amortization of debt discounts, premiums and expenses (33) (99) 482 CILCO Executive Deferred Compensation Plan 361 170 609 Pension shortfall & VEBA 134 172 (648) Out-of-market contract 7,846 22,053 -- Sale of McLeod options (2,290) 2,290 -- Other (552) 241 304 -------- -------- -------- Total deferred income taxes, net (5,102) 15,191 (11,740) -------- -------- -------- Investment tax credit amortization (1,595) (1,605) (1,633) -------- -------- -------- Total income tax expense $ 6,794 $ 21,087 $ 10,380 ======== ======== ========
(1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. Total income tax expense presented within the Consolidated Statements of Income and Comprehensive Income was as follows:
As Restated(1) ---------------------- 2002 2001 2000 (In thousands) Income taxes from continuing operations $ 6,841 $ 22,182 $ 10,380 Tax on loss from operations of discontinued businesses (47) (1,095) -- -------- -------- -------- Total income tax expense $ 6,794 $ 21,087 $ 10,380 ======== ======== ========
(1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. Total deferred income taxes, net, includes deferred state income taxes of $(575.1), $3,321, and $(1,637), for the years 2002, 2001, and 2000, respectively. The Company uses the liability method to account for income taxes. Under the liability method, deferred income taxes are recognized at currently enacted income tax rates to reflect the tax effect of temporary differences between 72 the financial reporting basis and the tax basis of assets and liabilities. Temporary differences occur because the income tax law either requires or permits certain items to be reported on the Company's income tax return in a different year than they are reported in the financial statements. CILCO has recorded a regulatory asset and liability to account for the effect of expected future regulatory actions related to unamortized investment tax credits, income tax liabilities initially recorded at tax rates in excess of current rates, the equity component of Allowance for Funds Used During Construction and other items for which deferred taxes had not previously been provided. The temporary differences related to the consolidated deferred income tax asset and liability at December 31, 2002, and 2001, were as follows:
December 31, 2002 2001 (As restated)(1) (In thousands) Deferred tax asset - non-property $ 72,028 $ 42,094 Deferred tax liabilities: Deferred tax liability - property 155,401 140,816 Deferred tax liability - leases 106,604 105,525 -------- -------- Accumulated deferred income tax liability $262,005 $246,341 ======== ======== Accumulated deferred income tax liability, net of deferred tax assets $189,977 $204,247 ======== ========
--------------- (1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. The following table reconciles the change in the accumulated deferred income tax liability to the deferred income tax expense included in the Consolidated Statements of Income and Comprehensive Income:
As Restated(1) ---------------------- 2002 2001 2000 (In thousands) Net change in deferred income tax liability $(14,270) $ 5,670 $(38,979) Change in tax effects of income tax related regulatory assets and liabilities (20,565) 10,973 (430) Deferred tax recorded through purchase accounting -- (8,121) 29,725 Nonqualified pension shortfall 33,588 6,140 602 SFAS 133 (2,309) 1,451 -- Other (1,546) (922) (2,658) -------- -------- -------- Deferred income tax benefit for the period from continuing operations $ (5,102) $ 15,191 $(11,740) ======== ======== ========
--------------- (1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. 73 NOTE 3 - POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE CILCO has recorded a liability of approximately $.8 million and $1.4 million at December 31, 2002, and 2001, respectively, for benefits other than pensions or health care provided to former or inactive employees. The liability for these benefits (primarily long-term and short-term disability payments under plans self-insured by CILCO) is actuarially determined. PENSION BENEFITS The majority of CILCO's full-time employees are covered by trusteed, non-contributory defined benefit pension plans. Benefits under these qualified plans reflect the employee's years of service, age at retirement and maximum total compensation for any consecutive sixty-month period prior to retirement. CILCO also has an unfunded nonqualified plan for certain employees. Pension costs for the past three years were charged as follows:
2002 2001 2000 (In thousands) Operating expenses $ 2,193 $ (2,592) $ (2,186) Utility plant and other 234 -- -- -------- -------- -------- Net pension costs (income) $ 2,427 $ (2,592) $ (2,186) ======== ======== ========
The components of net periodic benefit costs were as follows:
2002 2001 2000 (In thousands) Service cost $ 3,866 $ 3,032 $ 3,320 Interest cost 21,568 21,856 21,504 Expected return on plan assets (24,608) (27,486) (30,212) Amortization of past service cost 18 -- -- Recognized actuarial loss (gain) 1,583 6 (508) Loss recognized due to curtailment and special termination benefits -- -- 3,710 -------- -------- -------- Net benefit cost (income) $ 2,427 $ (2,592) $ (2,186) ======== ======== ========
During 2000, CILCO recognized $3.7 million of net pension costs associated with additional benefits extended in connection with voluntary early retirement programs. 74 Information on the plans' funded status was as follows:
2002 2001 Change in Benefit Obligations Benefit obligation at beginning of period $ 320,137 $ 289,182 Service cost 3,866 3,032 Interest cost 21,569 21,856 Amendments 417 -- Actuarial loss 31,081 30,127 Benefits paid (23,964) (24,060) ---------- ---------- Benefit obligation at end of period $ 353,106 $ 320,137 ========== ========== Change in Plan Assets Fair value of assets at beginning of period $ 284,426 $ 316,684 Actual return on assets (19,148) (8,582) Company contributions 510 384 Benefits paid (23,964) (24,060) ---------- ---------- Fair value of assets at end of period $ 241,824 $ 284,426 ========== ========== Funded status at end of period $ (111,282) $ (35,711) Unrecognized actuarial loss 130,361 57,106 Unrecognized prior service cost 399 -- ---------- ---------- Net amount recognized $ 19,478 $ 21,395 ========== ========== Amounts recognized in the statement of financial position consisted of: Prepaid benefit cost $ 25,463 $ 26,098 Accrued benefit liability (107,290) (20,734) Intangible asset 415 34 Accumulated other comprehensive income 100,890 15,997 ---------- ---------- Net amount recognized $ 19,478 $ 21,395 ========== ========== Assumptions as of end of period Discount rate 6.25% 7.00% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 3.50% 3.50%
At December 31, 2002, and 2001, CILCORP recognized an additional minimum liability on the balance sheets of $51.5 million and $9.2 million, respectively, for plans in which the accumulated benefit obligation exceeds the fair value of plan assets. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $353.1 million, $323.7 million, and $241.8 million, respectively, as of December 31, 2002 (all five plans); $163.4 million, $154.9 million, and $134.1 million, respectively, as of December 31, 2001 (two plans). 75 POSTRETIREMENT HEALTH CARE BENEFITS CILCO has three non-pension postretirement benefit plans. These plans are health care plans covering three different groups of employees and retirees. Two of these plans are non-contributory except for participants retired under various early retirement windows, and one of the plans was amended effective in 2002 to provide for participant contributions. Postretirement health care benefit costs were charged as follows:
2002 2001 2000 (In thousands) Operating expenses $ 7,457 $ 4,047 $ 3,303 Utility plant and other 2,781 2,061 1,783 -------- -------- -------- Net postretirement health care benefit costs $ 10,238 $ 6,108 $ 5,086 ======== ======== ========
The components of net periodic benefit costs were as follows:
2002 2001 2000 (In thousands) Service cost $ 1,815 $ 1,579 $ 1,480 Interest cost 9,684 8,107 7,775 Expected return on plan assets (3,177) (3,780) (4,551) Recognized actuarial loss 1,916 202 -- Loss recognized due to curtailment and special termination benefits -- -- 382 -------- -------- -------- Net benefit cost $ 10,238 $ 6,108 $ 5,086 ======== ======== ========
During 2000, CILCO recognized $0.4 million of net postretirement health care benefit costs associated with additional benefits extended in connection with voluntary early retirement programs. 76 Information on the plans' funded status was as follows:
2002 2001 (In thousands) Change in Benefit Obligations Benefit obligation at beginning of period $ 117,396 $ 107,212 Service cost 1,815 1,579 Interest cost 9,684 8,107 Plan participants' contributions 273 233 Actuarial loss 35,895 8,668 Benefits paid (9,225) (8,403) ---------- ---------- Benefit obligation at end of period $ 155,838 $ 117,396 ========== ========== Change in Plan Assets Fair value of assets at beginning of period $ 41,099 $ 48,105 Actual return on assets (2,839) (974) Company contributions 4,582 2,138 Plan participants' contributions 273 233 Benefits paid (9,225) (8,403) ---------- ---------- Fair value of assets at end of period $ 33,890 $ 41,099 ========== ========== Funded status at end of period $ (121,948) $ (76,297) Unrecognized actuarial loss 60,535 20,540 ---------- ---------- Accrued benefit cost $ (61,413) $ (55,757) ========== ========== Assumptions as of end of period Discount rate 6.25% 7.00% Expected return on plan assets 9.00% 9.00%
For measurement purposes, an 11.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to decrease gradually to 5.0 percent for 2011 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):
1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components $ 765 $ (733) Effect on postretirement benefit obligation $ 9,197 $ (9,016)
SAVINGS PLAN CILCO sponsors a savings plan for eligible employees. The plan allows employees to contribute a portion of their base pay in accordance with specified guidelines. CILCO matches a percentage of the employee contribution up to certain limits. CILCO's matching contribution to the savings plan totaled $1.2 million in each of the years 2002, 2001 and 2000. 77 NOTE 4 - SHORT-TERM DEBT Short-term debt at December 31, 2002, consisted of $10.0 million (interest rate of 2.05%) of CILCO commercial paper. Short-term debt at December 31, 2001, included $20.0 million (average interest rate of 2.3%) of Holding Company bank borrowings and $43.0 million (average interest rate of 3.2%) of CILCO commercial paper. The Holding Company no longer has any committed credit facilities. CILCO had arrangements for committed credit facilities totaling $60 million, all of which were unused at December 31, 2002, and are used to support CILCO's commercial paper program. These facilities were maintained by commitment fees ranging from .09 of 1% per annum to .15 of 1% per annum in lieu of balances. Based on outstanding commercial paper borrowings, $50 million was available under CILCO's committed credit facilities at December 31, 2002. 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. An event of default will occur under a $25 million CILCO committed credit facility if CILCO fails to maintain a Moody's rating on its senior secured debt above Baa2, and a Fitch credit rating of BBB-. As of February 2003, CILCO's senior secured debt rating from the rating agencies were A2 and BBB, respectively. CILCO's Fitch ratings are on positive credit watch. 78 NOTE 5 - LONG-TERM DEBT
At December 31, 2002 2001 (In thousands) CILCO First Mortgage Bonds 7 1/2% series due 2007 $ 50,000 $ 50,000 8 1/5% series due 2022 65,000 65,000 Medium-term Notes 6.82% series due 2003 -- 25,350 6.13% series due 2005 16,000 16,000 7.8% series due 2023 10,000 10,000 7.73% series due 2025 20,000 20,000 Pollution Control Refunding Bonds 6.5% series F due 2010 5,000 5,000 6.2% series G due 2012 1,000 1,000 6.5% series E due 2018 14,200 14,200 5.9% series H due 2023 32,000 32,000 CILCO Bank Loans* Hallock Substation Power Modules due 2004 1,650 2,350 Kickapoo Substation Power Modules due 2004 1,650 2,350 Secured Term Loan due 2004 100,000 -- ---------- ---------- 316,500 243,250 Unamortized premium and discount on long-term debt, net (472) (520) ---------- ---------- Total CILCO $ 316,028 $ 242,730 ---------- ---------- CILCORP Inc. Senior Notes 8.7% due 2009 225,000 225,000 CILCORP Inc. Senior Bonds 9.375% due 2029 250,000 250,000 ---------- ---------- Total long-term debt $ 791,028 $ 717,730 ========== ==========
*Interest rates in the periods during which such rates apply vary depending on selection of certain defined rate modes. The average interest rates for the year 2002, were as follows: Hallock 3.03% Kickapoo 3.03% Secured Term Loan 2.87%
CILCO's long-term debt (excluding power module bank loans, which are secured by the property financed by such borrowings) is secured by a lien on substantially all of its property and franchises. Unamortized borrowing expense, premium and discount on outstanding rate-regulated utility long-term debt are being amortized over the lives of the respective issues. CILCORP Inc.'s long-term debt is secured by a pledge of all of the common stock of CILCO. Scheduled maturities of long-term debt are $103.3 million in 2004, $16.0 million in 2005, and $50.0 million in 2007. The remaining maturities of long-term debt of $622.2 million occur in 2008 and beyond. The 2003 and 2002 maturities of long-term borrowings have been classified as current liabilities as of December 31, 2002 and 2001, respectively. 79 CILCORP and CILCO's financial agreements include customary default provisions that could impact the continued availability of credit or results in the acceleration of repayment. Under the Hallock and Kickapoo Substation Power Module agreements, CILCO must maintain a Moody's investment grade rating or an event of default will occur. The $100 million secured term loan requires CILCO to maintain investment grade ratings for its first mortgage bonds from at least two of Standard & Poor's, Moody's and Fitch. As of February 2003, CILCO's senior secured debt ratings from these rating agencies were A-, A2 and BBB, respectively. CILCO's Fitch ratings are on positive credit watch. Covenants in CILCO's $100 million secured term loan require it to maintain a minimum level of common stockholder equity and limit CILCO's ability to pay dividends or otherwise make distributions with respect to its common stock. Any violation of these covenants will result in an event of default under this facility. Under the minimum common equity requirement CILCO must maintain a minimum level of common stockholder equity which increases from the date the facility was entered based on ongoing earnings. The maintenance of this test is determined upon each anniversary of the loan. If this test was performed as of December 31, 2002, the minimum common equity level requirement would equal approximately $301 million. At that date CILCO's common equity, calculated in accordance with this provision, was $329 million. Under the restricted payments provision CILCO may only pay dividends to the Holding Company up to $45 million annually subject to limited carryforward if not fully utilized. At its current ratings level, covenants in CILCORP Inc.'s indenture governing its $475 million senior notes and bonds require CILCORP to maintain a debt to capital ratio of no greater than 0.67 to 1.0 and an interest coverage ratio of at least 2.2 to 1.0 in order to make any payment of dividends or intercompany loans to affiliates other than its direct and indirect subsidiaries including CILCO. However, in the event CILCORP's senior long-term debt rating from Fitch is increased by one notch to BBB, CILCORP may make any such distribution or intercompany loan without being subject to these tests. At December 31, 2002, CILCORP's debt to capital ratio was 0.60 to 1.0 and its interest coverage ratio was 2.72 to 1.0, calculated in accordance with related provisions in this indenture. At December 31, 2002, CILCORP Inc. and its subsidiaries were in compliance with their indenture and credit agreement provisions and covenants. The common stock of CILCO is pledged as security of the holders of CILCORP Inc.'s $475 million of senior notes and bonds. 80 NOTE 6 - PREFERRED STOCK PREFERRED STOCK OF SUBSIDIARY
At December 31, 2002 2001 (In thousands) Preferred stock, cumulative $100 par value, authorized 1,500,000 shares Without mandatory redemption 4.50% series - 111,264 shares $ 11,126 $ 11,126 4.64% series - 79,940 shares 7,994 7,994 Class A, no par value, authorized 3,500,000 shares With mandatory redemption 5.85% series - 220,000 shares 22,000 22,000 -------- -------- Total preferred stock $ 41,120 $ 41,120 ======== ========
All classes of preferred stock are entitled to receive cumulative dividends and rank equally as to dividends and assets, according to their respective terms. All preferred shares of stock have voting rights. Those voting rights are one vote per share on all questions submitted to shareholders. One vote of the preferred shares is equal to one vote of the common shares. The liquidation preference related to Series A Preferred Stock is that in an involuntary or voluntary liquidation, the stockholder receives $100 per share plus accrued dividends. The total annual dividend requirement for preferred stock outstanding at December 31, 2002, is $2.2 million. PREFERRED STOCK WITHOUT MANDATORY REDEMPTION The call provisions of preferred stock redeemable at CILCO's option outstanding at December 31, 2002, were as follows:
Series Callable Price Per Share (plus accrued dividends) 4.50% $110 4.64% $102
PREFERRED STOCK WITH MANDATORY REDEMPTION CILCO's 5.85% Class A preferred stock may be redeemed in 2003 at $100 per share. A mandatory redemption fund must be established on July 1, 2003. The fund will provide for the redemption of 11,000 shares for $1.1 million on July 1 of each year through July 1, 2007. On July 1, 2008, the remaining 165,000 shares will be retired for $16.5 million. PREFERENCE STOCK OF SUBSIDIARY, CUMULATIVE CILCO has authorized 2,000,000 shares of no par value, preference stock, of which none have been issued. 81 NOTE 7 - COMMITMENTS & CONTINGENCIES CILCO's 2003 capital expenditures are estimated to be $100 million, which includes normal and customary purchase commitments at December 31, 2002. CILCO acts as a self-insurer for certain insurable risks resulting from employee health and life insurance programs. On February 21, 2002, CILCO and the International Brotherhood of Electrical Workers Local 51 (IBEW) agreed to extend the existing contract through June 30, 2004. The contract provides for 3% wage increases in each of the two years of the extension. The IBEW represents 335 CILCO gas and electric department people. The National Conference of Firemen and Oilers Local 8 (NCF&O) ratified its current contract with CILCO on February 23, 2001. This agreement expires on July 1, 2006, and provides for 4% wage increases in each of the first two years of the contract and for 3% wage increases in each of the final three years of the contract. The NCF&O represents 176 CILCO power plant people. The Company is subject to various environmental regulations by federal, state, and local authorities. From the beginning phases of siting and development, to the ongoing operation of existing or new electric generating, transmission, and distribution facilities, The Company's activities involve compliance with diverse laws and regulations that address emissions and impacts to air and water, special, protected, and cultural resources (such as wetlands, endangered species, and archeological/historical resources), chemical and waste handling, and noise impacts. The Company's activities require complex and often lengthy processes to obtain approvals, permits, or licenses for new, existing, or modified facilities. Additionally, the use and handling of various chemicals or hazardous materials (including wastes) requires preparation of release prevention plans and emergency response procedures. As new laws or regulations are promulgated, the Company assesses the applicability and implements the necessary modifications to its facilities or operations, as required. The more significant matters are discussed below. The Clean Air Act affects both existing generating facilities and new projects. The Clean Air Act and many state laws require significant reductions in SO2 and NOx emissions that result from burning fossil fuels. The Clean Air Act also contains other provisions that could materially affect some of CILCO's projects. Various provisions require permits, inspections, or installation of additional pollution control technology or may require the purchase of emission allowances. Certain of these provisions are described in more detail below. The Clean Air Act creates a marketable commodity called an SO2 "allowance." All generating facilities over 25 megawatts that emit SO2 must obtain allowances in order to operate after 1999. Each allowance gives the owner the right to emit one ton of SO2. All existing generating facilities have been allocated allowances based on a facility's past production and the statutory emission reduction goals. If additional allowances are needed for new generating facilities, they can be purchased from facilities having excess allowances or from SO2 allowance banks. CILCO's generating facilities comply with the SO2 allowance caps through the use of an existing SO2 scrubber, fuel blending and SO2 allowance purchases. CILCO is also considering the possibility of utilizing low sulfur fuels in the future. The U.S. Environmental Protection Agency (EPA) issued a rule in October 1998 requiring 22 Eastern states and the District of Columbia to reduce emissions of NOx in order to reduce ozone in the Eastern United States. Among other things, the EPA's rule establishes an ozone season, which runs from May 82 through September, and a NOx emission budget for each state, including Illinois. The EPA rule requires states to implement controls sufficient to meet their NOx budget by May 31, 2004. Total capital expenditures to meet the NOx emission requirements are estimated to be $125.5 million (including cost of removal), $77.5 million of which was expended through 2002. These costs include the installation of two Selective Catalytic Reduction (SCR) units and combustion control modifications. On December 31, 2002, the EPA published in the Federal Register revisions to the New Source Review (NSR) programs under the Clean Air Act, including changes to the routine maintenance, repair and replacement exclusions. Various Northeastern states have filed a petition with the United States District Court for the District of Columbia challenging the legality of the revisions to the NSR programs. It is likely that various industries and environmental groups will seek to intervene in that challenge. At this time, CILCO is unable to predict the impact of this challenge on its future financial position, results of operations or liquidity. The EPA is currently working on rulemakings to implement the new National Ambient Air Quality Standards for ozone and particulate matter. These new ambient standards may require significant additional reductions in SO2 and NOx emissions from power plants by 2008. At this time, CILCO is unable to predict the ultimate impact of these revised air quality standards on its future financial position, results of operations or liquidity. In December 1999, the EPA issued a decision to regulate mercury emissions from coal-fired power plants by 2008. The EPA is scheduled to propose regulations by 2004. These regulations have the potential to add significant capital and/or operating costs to generating systems after 2006. The EPA also issued Best Available Retrofit Technology (BART) guidelines to address visibility impairment (so called "Regional Haze") across the United States from sources of air pollution, including coal-fired power plants. The guidelines were to be used by states to mandate pollution control measures for SO2 and NOx emissions. In May 2002, the District of Columbia Circuit Court remanded these rules back to the EPA. The EPA is currently working to address the issues raised by the court decision. These rules could also add significant pollution control costs to our generating system between 2008 and 2012. At this time, CILCO is unable to predict the ultimate impact of these revised air quality standards on our future financial condition, results of operations or liquidity. The United States Congress has been working on legislation to consolidate the numerous air pollution regulations facing the utility industry. This "multi-pollutant" legislation will be deliberated in Congress in 2003. While the cost to comply with such legislation, if enacted, could be significant, it is anticipated that the costs would be less than the combined impact of the new National Ambient Air Quality Standards and the Mercury and Regional Haze Regulations, discussed above. Pollution control costs under such legislation are expected to be incurred in phases from 2007 through 2015. At this time, CILCO is unable to predict the ultimate impact of the above expected regulations and this legislation on its future financial position, results of operations or liquidity; however, the impact could be material. Future initiatives regarding greenhouse gas emissions and global warming continue to be the subject of much debate. The related Kyoto Protocol was signed by the United States but has since been rejected by the President, who instead has asked for an 18% decrease in carbon intensity on a voluntary basis. Future initiatives on this issue and the ultimate effects of the Kyoto Protocol and the President's initiatives on CILCO are unknown. Coal-fired power plants are significant sources of carbon dioxide emissions, a principal 83 greenhouse gas. Therefore, CILCO's compliance costs with any mandated federal greenhouse gas reductions in the future could be material. In April 2002, the EPA proposed rules under the Clean Water Act that require that cooling water intake structures reflect the best technology available for minimizing adverse environmental impacts. These rules pertain to existing generating facilities that currently employ a cooling water intake structure whose flow exceeds 50 million gallons per day. A final action on the proposed rules is expected by August 2003. The proposed rule may require CILCO to install additional intake screens or other protective measures, as well as extensive site specific study and monitoring requirements. CILCO's compliance costs associated with the final rules are unknown. In October 2002, CILCO submitted a corrective action plan to the Illinois EPA (IEPA) in accordance with permit conditions to address ground water issues associated with the recycle pond and ash ponds at the Duck Creek facility. In January 2003, the IEPA accepted portions of the plan but rejected other portions as being inadequate. Future actions will entail, at a minimum, the closure of two ash ponds, replacement of a return water line, construction of a landfill and remedial actions to treat water in the recycle pond and an ash pond. CILCO recorded an $8.5 million liability on the balance sheet in 2002 for the remediation effort related to the water treatment for the recycle pond and an ash pond. In addition, CILCO estimates future capital expenditures for the landfill and return water line could range from $15 million to $30 million by 2007. See Note 1 - Summary of Significant Accounting Policies - for further discussion of the costs related to the closure of two ash ponds. CILCO owns or is otherwise responsible for four former manufactured gas plant (MGP) sites in Illinois. The ICC permits the recovery of remediation and litigation costs associated with certain former MGP sites located in Illinois from Illinois electric and natural gas utility customers through environmental adjustment rate riders. To be recoverable, such costs must be prudently and properly incurred and are subject to annual reconciliation review by the ICC. Remediation at two of the four sites was completed and "No Further Remediation" letters were received in 1999 and 2000. Groundwater sampling continues at the third site and a plan has been filed with the IEPA for additional investigation at the site. Remediation of the site is expected to be completed in 2004. CILCO has not determined the ultimate extent of its liability for, or the ultimate cost of any remediation of, the fourth site, which is pending further studies. In 2002, CILCO spent approximately $0.2 million for former gas manufacturing plant site monitoring, legal fees and feasibility studies and has received some recovery from insurance settlements. A $1.1 million liability is recorded on the balance sheet, representing its minimum obligation expected for these remediation activities. Total costs incurred through December 2002, less amounts recovered from customers, have been deferred as a regulatory liability on the Balance Sheet. Through December 31, 2002, CILCO has recovered approximately $8.2 million in remediation costs from its customers. Under these circumstances, management believes that the cost of coal tar remediation will not have a material adverse effect on CILCO's financial position or results of operations. CILCO has been named, along with numerous other parties, in several lawsuits which have been filed by certain plaintiffs claiming varying degrees of injury from asbestos exposure. The cases have been filed in the Circuit Courts of Madison, Cook and Peoria Counties in Illinois and one case has been filed in Indiana. The number of total defendants named in each case is significant with as many as 87 parties named in a case to as few as 10. The 84 claims filed against CILCO allege injury from asbestos exposure during the plaintiffs' activities at our electric generating plants. In each lawsuit, the plaintiff seeks unspecified damages in excess of $50,000, which typically would be shared among the named defendants. A total of thirteen such lawsuits have been filed against CILCO, of which eleven are pending, one has been settled and one has been dismissed. 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 CILCO's financial position 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 CILCO's financial position 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 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 Corporation, management does not believe the results of this litigation will have a material adverse effect on CILCO's financial position or results of operations. 85 NOTE 8 - LEASES The Company leases certain equipment, buildings and other facilities under operating leases. As of December 31, 2002, rental expense totaled $4.9 million (2001 - $4.3 million; 2000 - $4.8 million). Minimum future rental payments under non-cancellable operating leases having remaining terms in excess of one year as of December 31, 2002, are $12.0 million in total. Payments due during the years ending December 31, 2003, through December 31, 2007, are $3.1 million, $2.4 million, $1.8 million, $1.3 million and $1.1 million, respectively. NOTE 9 - ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES The Company utilizes commodity futures contracts, options and swaps in the normal course of its natural gas and electric business activities to reduce market or price risk. Since January 1, 2001, all derivative transactions have been accounted for under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Transactions and Hedging Activities" (SFAS 133), as interpreted and amended. SFAS 133 requires that an entity recognize all derivatives (including derivatives embedded in other contracts), as defined, as either assets or liabilities on the balance sheet and measure those instruments at fair value unless they are determined to be normal purchases and normal sales as outlined in SFAS 133 and subsequent DIG (Derivative Implementation Group) conclusions. Several of the Company's contracts have been determined to be normal purchases and normal sales (power purchase contracts for example). For all derivatives not determined to be normal purchases and normal sales, changes in the derivative's fair value are to be recognized currently in earnings, unless specific hedge accounting criteria are met. Substantially all of the Company's derivatives qualify as cash flow hedges or have been determined to be normal purchases and normal sales. Under SFAS 133, the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is reported as a component of Other Comprehensive Income (OCI) until the hedged transaction affects earnings, at which time the amount accumulated in OCI is reclassified into earnings. In addition, under SFAS 133, any ineffective portion of the gain or loss is recognized in earnings immediately. All of the Company's cash flow hedges are highly effective, and therefore, because any ineffectiveness is immaterial, all gains and losses have been recorded in OCI until the hedged transaction affects earnings. If a cash flow hedge is terminated because it is probable that the hedged transaction will not occur, the related balance in OCI as of such date is immediately recognized in earnings. If a cash flow hedge is terminated early for other reasons, the related balance in OCI as of the termination date is recognized in earnings concurrently with the related hedged transaction. The Company recorded the effects of implementation of SFAS 133 in OCI as a change in accounting principle. The amount recorded as OCI reflects the mark-to-market value of fixed price derivative financial instruments representing hedges of natural gas commitments through December 2001. These derivatives were related to non rate-regulated activities and were accounted for as fully-effective cash-flow hedges as determined through correlation analyses performed throughout the year. The balance in OCI, as of January 1, 2001, related to the implementation of SFAS 133, was an after-tax credit of $1.7 million. Gains/losses on derivatives that hedge non rate-regulated activities are reflected in operating results when the hedged commitments are recognized. The net loss reflected in operating results from derivative financial instruments for non rate-regulated activities for the year ended December 31, 2002, was $5.4 million for natural gas (included in Gas Purchased for Resale). There were no outstanding derivative financial 86 instruments for electricity during the year ended December 31, 2002. The previously recorded gain/loss associated with these settled derivative financial instruments was removed from 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 credit in OCI in the amount of $3.5 million for the year ended December 31, 2002. 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 December 31, 2002, was a credit of $1.3 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 1,960,000 MMBtu for commitments through March 2004. Approximately $0.8 million of OCI related to derivative financial instruments as of December 31, 2002, is expected to be recognized as an increase to operating earnings over the next twelve months based on market prices as of December 31, 2002. The actual amount recognized in earnings will be based on the market conditions at the time the derivatives are settled. During 2002, 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. Mark-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). For the year ended December 31, 2001, losses of $4.1 million were recorded in regulatory assets. The corresponding liability is reflected on the balance sheet in Other Current Liabilities. For the year ended December 31, 2002, gains of $0.8 million were recorded in regulatory liabilities. The corresponding asset is reflected on the balance sheet in prepayments and other. This reflects hedges of natural gas sales of 400,000 MMBtu for commitments through March 2003. As these derivatives settle, the realized gain/loss is credited/charged to the PGA customers resulting in no income affect. In December 2001, the Financial Accounting Standards Board (FASB) revised its earlier conclusion, Derivatives Implementation Group (DIG) Issue C-15, related to contracts involving the purchase or sale of electricity. Contracts for the purchase or sale of electricity, including capacity contracts with call options, may qualify for the normal purchases and normal sales exemption and are not required to be accounted for as derivatives under SFAS 133. In order for contracts to qualify for this exemption, they must meet certain criteria, which include the requirement for physical delivery of the electricity to be purchased or sold under the contract only in the normal course of business. Additionally, contracts that have a price based on an underlying that is not clearly and closely related to the electricity being sold or purchased or that are denominated in a currency that is foreign to the buyer or seller are not considered normal purchases and normal sales and are required to be accounted for as derivatives under SFAS 133. This revised conclusion was effective beginning April 1, 2002. The Company has determined that its physical contracts qualify for the normal purchases and sales exemption as redefined in DIG Issue C-15 and are not to be accounted for as derivatives under SFAS 133. 87 NOTE 10 - 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 CILCORP Inc. (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 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. 88 CILCORP Inc. and Subsidiaries Statements of Segments of Business For the Year Ended December 31, 2002
CILCO CILCO CILCO CILCORP Discont. Electric Gas Other Other Operatns. Total (In thousands) Revenues $ 390,549 $ 211,879 $ 114,820 $ 60,501 $ -- $ 777,749 Interest income -- -- 1,690 358 -- 2,048 ------------ ------------ ------------ ------------ ------------ ------------ Total 390,549 211,879 116,510 60,859 -- 779,797 ------------ ------------ ------------ ------------ ------------ ------------ Operating expenses 278,380 174,244 96,866 58,722 -- 608,212 Depreciation and amortization 48,431 22,477 -- 1,413 -- 72,321 ------------ ------------ ------------ ------------ ------------ ------------ Total 326,811 196,721 96,866 60,135 -- 680,533 ------------ ------------ ------------ ------------ ------------ ------------ Interest expense 16,445 5,961 -- 43,667 -- 66,073 Preferred stock dividends -- -- 2,159 -- -- 2,159 Fixed charges and other expenses (1,509) -- 1,042 -- -- (467) ------------ ------------ ------------ ------------ ------------ ------------ Total 14,936 5,961 3,201 43,667 -- 67,765 ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) from continuing oper. before income taxes 48,802 9,197 16,443 (42,943) -- 31,499 Income taxes 17,659 3,665 5,149 (19,632) -- 6,841 ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) from continuing operations 31,143 5,532 11,294 (23,311) -- 24,658 Effect of discontinued operations -- -- -- -- (73) (73) ------------ ------------ ------------ ------------ ------------ ------------ Segment net income (loss) $ 31,143 $ 5,532 $ 11,294 $ (23,311) $ (73) $ 24,585 ============ ============ ============ ============ ============ ============ Capital expenditures $ 110,616 $ 13,784 $ -- $ -- $ -- $ 124,400 Revenue from major customer Caterpillar Inc $ 43,017 $ 1,078 $ 11,215 $ 12,977 $ -- $ 68,287 Segment assets as of Dec. 31 $ 821,692 $ 280,526 $ 5,897 $ 1,187,346 $ 1,361 $ 2,296,822 Consolidation adjustments 62 21 -- (394,774) (1,087) (395,778) ------------ ------------ ------------ ------------ ------------ ------------ Total assets $ 821,754 $ 280,547 $ 5,897 $ 792,572 $ 274 $ 1,901,044 ============ ============ ============ ============ ============ ============
89 CILCORP Inc. and Subsidiaries Statements of Segments of Business For the Year Ended December 31, 2001 (as restated)(1)
CILCO CILCO CILCO CILCORP Discont. Electric Gas Other Other Operatns. Total (In thousands) Revenues $ 371,435 $ 271,434 $ 96,062 $ 49,820 $ -- $ 788,751 Interest income -- -- 758 485 -- 1,243 ------------ ------------ ------------ ------------ ------------ ------------ Total 371,435 271,434 96,820 50,305 -- 789,994 ------------ ------------ ------------ ------------ ------------ ------------ Operating expenses 301,268 232,840 89,187 (40,203) -- 583,092 Depreciation and amortization 47,604 21,529 -- 16,880 86,013 ------------ ------------ ------------ ------------ ------------ ------------ Total 348,872 254,369 89,187 (23,323) -- 669,105 ------------ ------------ ------------ ------------ ------------ ------------ Interest expense 16,777 6,721 -- 46,286 -- 69,784 Preferred stock dividends -- -- 2,159 -- -- 2,159 Fixed charges and other expenses (18) -- 1,354 -- -- 1,336 ------------ ------------ ------------ ------------ ------------ ------------ Total 16,759 6,721 3,513 46,286 -- 73,279 ------------ ------------ ------------ ------------ ------------ ------------ Income from continuing oper. before income taxes 5,804 10,344 4,120 27,342 -- 47,610 Income taxes 2,523 4,331 935 14,393 -- 22,182 ------------ ------------ ------------ ------------ ------------ ------------ Net income from continuing operations 3,281 6,013 3,185 12,949 -- 25,428 Effect of discontinued operations -- -- -- -- (1,665) (1,665) ------------ ------------ ------------ ------------ ------------ ------------ Segment net income (loss) $ 3,281 $ 6,013 $ 3,185 $ 12,949 $ (1,665) $ 23,763 ============ ============ ============ ============ ============ ============ Capital expenditures $ 36,465 $ 14,790 $ -- $ -- $ -- $ 51,255 Revenue from major customer Caterpillar Inc $ 43,894 $ 1,724 $ 8,463 $ 21,096 $ -- $ 75,177 Segment assets as of Dec. 31 $ 733,476 $ 295,947 $ 5,056 $ 1,223,976 $ 1,435 $ 2,259,890 Consolidation adjustments (2,110) (781) -- (441,356) (1,162) (445,409) ------------ ------------ ------------ ------------ ------------ ------------ Total assets $ 731,366 $ 295,166 $ 5,056 $ 782,620 $ 273 $ 1,814,481 ============ ============ ============ ============ ============ ============
(1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. 90 CILCORP Inc. and Subsidiaries Statements of Segments of Business For the Year Ended December 31, 2000 (as restated)(1)
CILCO CILCO CILCO CILCORP Discont. Electric Gas Other Other Operatns. Total (In thousands) Revenues $ 398,836 $ 237,654 $ 47,807 $ 38,527 $ -- $ 722,824 Interest income -- -- 547 143 -- 690 ------------ ------------ ------------ ------------ ------------ ------------ Total 398,836 237,654 48,354 38,670 -- 723,514 ------------ ------------ ------------ ------------ ------------ ------------ Operating expenses 269,742 194,718 52,624 22,438 -- 539,522 Depreciation and amortization 48,404 21,001 -- 17,405 -- 86,810 ------------ ------------ ------------ ------------ ------------ ------------ Total 318,146 215,719 52,624 39,843 -- 626,332 ------------ ------------ ------------ ------------ ------------ ------------ Interest expense 16,895 6,768 -- 48,089 -- 71,752 Preferred stock dividends -- -- 2,977 -- -- 2,977 Fixed charges and other expenses (533) -- 1,221 -- -- 688 ------------ ------------ ------------ ------------ ------------ ------------ Total 16,362 6,768 4,198 48,089 -- 75,417 ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) from continuing oper. before income taxes 64,328 15,167 (8,468) (49,262) -- 21,765 Income taxes 23,448 6,430 (3,651) (15,847) -- 10,380 ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) from continuing operations 40,880 8,737 (4,817) (33,415) -- 11,385 Effect of discontinued operations -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Segment net income (loss) $ 40,880 $ 8,737 $ (4,817) $ (33,415) $ -- $ 11,385 ============ ============ ============ ============ ============ ============ Capital expenditures $ 41,366 $ 14,166 $ -- $ -- $ -- $ 55,532 Revenue from major customer Caterpillar Inc $ 42,961 $ 1,448 $ 292 $ 9,243 $ -- $ 53,944 Segment assets as of Dec. 31 $ 763,808 $ 331,290 $ 5,447 $ 1,274,214 $ 19,296 $ 2,394,055 Consolidation adjustments (726) (282) -- (438,586) (5,955) (445,549) ------------ ------------ ------------ ------------ ------------ ------------ Total assets $ 763,082 $ 331,008 $ 5,447 $ 835,628 $ 13,341 $ 1,948,506 ============ ============ ============ ============ ============ ============
--------------- (1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. 91 NOTE 11 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following quarterly operating results are unaudited, but, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Company's operating results for the periods indicated. The results of operations for each of the fiscal quarters are not necessarily comparable to, or indicative of, the results of an entire year due to the seasonal nature of the Company's business and other factors.
For the Three Months Ended March 31 June 30 Sept. 30 Dec. 31 2002 (In thousands) Revenue $ 204,182 $ 173,046 $ 201,734 $ 200,835 Income (loss) from continuing operations before income taxes 4,976 2,157 35,488 (11,122) Income taxes 961 37 12,812 (6,969) Net income (loss) from continuing operations 4,015 2,120 22,676 (4,153) Loss from operations of discontinued business, net of tax of $(5), $(3), $(3) and $(36) (9) (3) (4) (57) Net income (loss) 4,006 2,117 22,672 (4,210) 2001 (As previously reported) Revenue $ 276,863 $ 169,900 $ 196,603 $ 171,504 Income (loss) from continuing operations before income taxes 6,248 (2,097) 21,020 27,274 Income taxes 3,023 213 9,409 11,455 Net income (loss) from continuing operations 3,225 (2,310) 11,611 15,819 Loss from operations of discontinued business, net of tax of $(2,813) and $(67) -- -- (4,278) (102) Net income (loss) 3,225 (2,310) 7,333 15,717 2001 (As restated)(1) Revenue $ 171,727 $ 171,504 Income (loss) from continuing operations before income taxes 16,520 26,939 Income taxes 7,624 11,322 Net income (loss) from continuing operations 8,896 15,617 Loss from operations of discontinued business, net of tax of $(1,028) and $(67) (1,563) (102) Net income (loss) 7,333 15,515
--------------- (1) See Note 19 to the Consolidated Financial Statements for CILCORP Inc. and subsidiaries. NOTE 12 - RETAINED EARNINGS The Bond Indenture for the Holding Company's 8.7% (due 2009) and 9.375% (due 2029) senior notes provides that the Holding Company may pay dividends or make other distributions on its capital stock only if it has an assigned rating on its long-term senior secured debt of at least BB+ from Standard & Poor's, at least Baa2 from Moody's and at least BBB from Fitch Ratings. If the assigned ratings are lower, CILCORP must satisfy a leverage ratio test of .67 to 1 and an earnings before interest, taxes, depreciation and amortization interest coverage ratio test of 2.2 to 1. The Holding Company's long-term senior secured debt meets the above ratings requirements as of December 31, 2002. 92 NOTE 13 - OTHER COMPREHENSIVE INCOME Rollforward of Accumulated Other Comprehensive Income - CILCORP Inc. and subsidiaries
Pension SFAS 133 Total (In thousands) Accumulated other comprehensive loss - December 31, 2001 balance $ (9,651) $ (2,208) $(11,859) Other comprehensive income (loss) - Pension (51,215) -- (51,215) SFAS 133 -- 3,512 3,512 -------- -------- -------- Accumulated other comprehensive income (loss) - December 31, 2002 balance $(60,866) $ 1,304 $(59,562) ======== ======== ========
NOTE 14 - RELATED PARTY TRANSACTIONS 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, f/k/a AES Medina Valley. During 2002, CILCORP purchased $25.9 million and sold $14.0 million under these agreements. As of December 31, 2002, and 2001, respectively, CILCORP had recorded Accounts Payable of $2.5 million and $2.9 million and Receivables of $1.5 million and $1.9 million, related to these transactions. Of the current receivable, $1.4 million was recorded in Accrued Unbilled Revenue on the CILCORP 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. In addition, CILCORP has received and provided management, technical, advisory, operating, and administrative services from its former parent AES and its subsidiaries. Pursuant to SEC rules under PUHCA, these transactions were on an "at cost" basis. At December 31, 2002, and 2001, Accounts Payable to such entities were $0.0 million and $4.3 million, respectively. Amounts due from such entities at December 31, 2002, and 2001, totaled $0.5 million and $1.7 million, respectively. Of the current receivable, $0.4 million was included in Accounts Receivable and $0.1 million was included in Other Assets 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 June through September 2003. 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 $695 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. 93 NOTE 15 - STOCK OPTION PLAN Employees of the Company previously participated in the AES Stock Option Plan that provided for grants of stock options to eligible participants. Under the terms of the plan, the Company issued options to purchase shares of AES common stock at a price equal to 100% of the market price at the date the option is granted. The options become eligible for exercise under various schedules. The following table summarizes stock option activity during 2002, 2001 and 2000:
Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise 2002 Price 2001 Price 2000 Price -------- -------- -------- -------- -------- -------- Outstanding at beginning of year 566,445 $ 18.28 43,404 $ 33.61 9,190 $ 23.40 Granted -- -- 523,041 17.01 34,214 36.35 Exercised -- -- -- -- -- -- Cancelled or expired (18,003) 28.61 -- -- -- -- -------- -------- -------- -------- -------- -------- Outstanding at end of year 548,442 $ 17.94 566,445 $ 18.28 43,404 $ 33.61 ======== ======== ======== ======== ======== ======== Exercisable at end of year 528,062 9,190 -- ======== ======== ========
The following table summarizes additional information about stock options outstanding at December 31, 2002:
Weighted Outstanding Average Exercisable Exercise Price Shares Remaining Life Shares -------------- ----------- -------------- ----------- $13.19 474,940 8.8 474,940 $28.97 4,868 6.9 4,868 $36.31 27,574 7.1 27,574 $38.23 312 8.6 156 $42.51 140 8.5 70 $44.93 120 8.4 60 $49.94 200 8.0 200 $50.00 100 8.0 100 $55.61 40,188 8.1 20,094
The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and has adopted SFAS No. 123, "Accounting for Stock-based Compensation" (SFAS 123) for disclosure purposes. No compensation expense has been recognized in connection with the options, as all options have an exercise price equal to the market price of AES's common stock on the date of grant. For SFAS 123 disclosure purposes, the following assumptions were used in the Black-Scholes valuation method for shares issued in 2001 and 2000: 94
Risk-Free Expected Expected Year of Grant Interest Rate Option Term Volatility Dividend Yield ------------- ------------- ----------- ---------- -------------- 2001 4.8% 8.2 86% 0% 2000 5.1% 7.4 48% 0%
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. NOTE 16 - LEVERAGED LEASE INVESTMENTS The Company, through subsidiaries of CILCORP Investment Management Inc. (CIM), is a lessor in seven leveraged lease arrangements under which electric production facilities, warehouses, office buildings, passenger railway equipment and an aircraft are leased to third parties. The economic lives and lease terms vary with the leases. CIM's share of total equipment and facilities cost was approximately $310 million at both December 31, 2002, and December 31, 2001. The cost of the equipment and facilities owned by CIM is partially financed by non-recourse debt provided by lenders who have been granted, as their sole remedy in the event of a lessee default, an assignment of rents due under the leases and a security interest in the leased property. Such debt amounted to $207 million at December 31, 2002, and $212 million at December 31, 2001. CIM's net investment in leveraged leases at December 31, 2002, and 2001,was as follows:
2002 2001 (In thousands) Minimum lease payments receivable $102,635 $113,827 Estimated residual value 79,873 86,368 Less: Unearned income 49,634 64,691 -------- -------- Investment in lease financing receivables 132,874 135,504 Less: Deferred taxes arising from leveraged leases 106,604 105,525 -------- -------- Net investment in leveraged leases $ 26,270 $ 29,979 ======== ========
In the fourth quarter of 2002, CIM decreased the estimated residual value of one of its leveraged leases by approximately $6.5 million to reflect current conditions in the secondary market for the asset. NOTE 17 - QST ENTERPRISES DISCONTINUED OPERATIONS QST Enterprises Inc. (QST) and its subsidiaries (excluding ESE Land Corporation and CILCORP Infraservices Inc.) ceased operations during the fourth quarter of 1998, except for fulfillment of contractual commitments for 1999, and accordingly, recorded loss provisions for the discontinued energy operations in 1998. The results of QST and its subsidiaries are reported in 2002 and prior periods as discontinued operations. See also Note 18 - Subsequent Event. 95 Beginning in 1999, QST Energy was involved in litigation against two of its California commercial customers. On July 19, 2001, QST Energy and the two customers signed a settlement agreement and mutual release which resolved all of the pending lawsuits. A cash settlement of $6 million was paid to QST Energy and applied against the accounts receivable balance at QST Energy, which was $13 million at the time of settlement. The Holding Company had accrued $4.5 million as a preacquisition contingency related to this litigation. The remaining receivable of $7.0 million at QST Energy was written off during the third quarter of 2001, resulting in the loss recorded as QST Enterprises Discontinued Operations during 2001. This loss was partially offset by the reversal of the $4.5 million preacquisition contingency accrual recorded at the Holding Company. NOTE 18 - SUBSEQUENT EVENT On January 31, 2003, after receipt of the necessary regulatory agency approvals and clearance from the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act, Ameren Corporation (Ameren) completed its acquisition of all of the outstanding common stock of CILCORP Inc. (the Holding Company) from AES. With the acquisition, CILCO became an Ameren subsidiary, but remains a separate utility company, operating as AmerenCILCO. The Company's financial statements will be included in the Ameren consolidated financial statements effective with the January 2003 acquisition date. When Ameren accounts for the acquisition in 2003, it intends to push down acquisition related purchase accounting entries to the Holding Company, but not to the financial statements of CILCO. The total purchase price was approximately $1.34 billion and included 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. NOTE 19 - RESTATEMENT As previously reported in the current report on Form 8-K filed on January 31, 2003 by CILCORP Inc. and Central Illinois Light Company, Ameren Corporation issued a press release announcing the closing of the acquisition of all of the issued and outstanding common stock of CILCORP from The AES Corporation, pursuant to an agreement dated as of April 28, 2002. As of such acquisition, CILCORP became a wholly-owned subsidiary of Ameren. Subsequent to the issuance of the Company's 2001 consolidated financial statements and based on new management's review and determination, the consolidated financial statements have been restated from amounts previously reported for CILCORP Inc. and its subsidiaries for the years ended December 31, 2001 and 2000. DISCONTINUED OPERATION ADJUSTMENT QST Enterprises and QST Energy ceased operations during the fourth quarter of 1998, except for fulfillment of contractual commitments for 1999 and beyond. Accordingly, the results of QST Enterprises are reported as discontinued operations in the accompanying consolidated statements of income. An initial loss provision was recorded for the discontinued energy operations in 1998. Beginning in 1999, QST Energy was involved in litigation against two of its California commercial customers. On July 19, 2001, QST Energy and the two customers signed a settlement agreement and mutual release which resolved all of the pending lawsuits. A cash settlement of $6 million was paid to QST Energy and applied against the accounts receivable balance at QST Energy, which was $13 million at the time of settlement. CILCORP had reserved $4.5 million as a preacquisition contingency related to this litigation. The remaining receivable of $7.0 million at QST Energy was written off during the third quarter of 2001, resulting in the loss recorded as QST Discontinued Operations during 2001, and partially offset by the $4.5 million preacquisition contingency recorded at CILCORP. The reversal of this $4.5 million preacquisition contingency was originally recorded in results from continuing operations. This restatement records the $4.5 million in discontinued operations. This adjustment reduces CILCORP's Net Income from Continuing Operations and Loss from Discontinued Operations by $2.7 million, net of income taxes for the year ended December 31, 2001. OTHER RESTATEMENT ITEMS Other restatement items primarily relate to (i) reclassification of $20,376 of refunds to customers as a result of a settlement with the Illinois Commerce Commission regarding the fuel adjustment charge, (ii) accrual of certain employee benefit costs that had been incurred, but not reported as of the end of the year of $1,240, (iii) write off of certain costs that were determined not to qualify for capitalization of $1,307, (iv) adjustments in accruals and (v) reclassification of certain items on the Consolidated Balance Sheets. The impact of the restatements is summarized in the following tables: 96 CILCORP Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (In thousands) For the Year Ended December 31, 2001
Discontinued Operations As Previously and Other As Reported Adjustments Restated Revenue: CILCO Electric $ 391,811 $ (20,376) $ 371,435 CILCO Gas 271,434 -- 271,434 CILCO Other 96,820 -- 96,820 CILCORP Other 54,805 (4,500) 50,305 ------------ ------------ ------------ Total 814,870 (24,876) 789,994 ------------ ------------ ------------ Operating Expenses: Fuel for Generation and Purchased Power 210,952 (20,376) 190,576 Gas Purchased for Resale 232,347 -- 232,347 Other Operations and Maintenance 120,222 335 120,557 Depreciation and Amortization 86,013 -- 86,013 State and Local Revenue Taxes 28,181 -- 28,181 Other Taxes 11,431 -- 11,431 ------------ ------------ ------------ Total 689,146 (20,041) 669,105 ------------ ------------ ------------ Fixed Charges and Other: Interest Expense 69,784 -- 69,784 Preferred Stock Dividends of Subsidiary 2,159 -- 2,159 Allowance for Funds Used During Construction (18) -- (18) Other 1,354 -- 1,354 ------------ ------------ ------------ Total 73,279 -- 73,279 ------------ ------------ ------------ Income (Loss) from Continuing Operations Before Income Taxes 52,445 (4,835) 47,610 Income Taxes 24,100 (1,918) 22,182 ------------ ------------ ------------ Net Income (Loss) from Continuing Operations 28,345 (2,917) 25,428 Loss from Operations of Discontinued Businesses, Net of Tax of $(1,095) (4,380) 2,715 (1,665) ------------ ------------ ------------ Net Income (Loss) $ 23,965 $ (202) $ 23,763 Other Comprehensive Loss (13,576) 2,167 (11,409) ------------ ------------ ------------ Comprehensive Income (Loss) $ 10,389 $ 1,965 $ 12,354 ============ ============ ============
97 CILCORP Inc. and Subsidiaries Consolidated Balance Sheets (In thousands) Assets (as of December 31, 2001)
Discontinued Operations As Previously and Other As Reported Adjustments Restated Current Assets: Cash and Temporary Cash Investments $ 18,312 $ (130) $ 18,182 Receivables, Less Allowance for Uncollectible Accounts of $1,800 36,476 (2,411) 34,065 Accrued Unbilled Revenue 51,399 -- 51,399 Fuel, at Average Cost 18,068 -- 18,068 Materials and Supplies, at Average Cost 17,273 (1,424) 15,849 Gas in Underground Storage, at Average Cost 27,067 -- 27,067 FAC Underrecoveries 1,255 -- 1,255 PGA Underrecoveries 3,236 (262) 2,974 Prepayments and Other 20,533 3,990 24,523 ------------ ------------ ------------ Total Current Assets 193,619 (237) 193,382 ------------ ------------ ------------ Investments and Other Property: Investment in Leveraged Leases 135,504 -- 135,504 Other Investments 19,285 -- 19,285 ------------ ------------ ------------ Total Investments and Other Property 154,789 -- 154,789 ------------ ------------ ------------ Property, Plant and Equipment: Utility Plant, at Original Cost Electric 716,857 -- 716,857 Gas 233,278 -- 233,278 ------------ ------------ ------------ 950,135 -- 950,135 Less-Accumulated Provision for Depreciation 126,502 -- 126,502 ------------ ------------ ------------ 823,633 -- 823,633 Construction Work in Progress 34,340 -- 34,340 Other, Net of Depreciation 14 -- 14 ------------ ------------ ------------ Total Property, Plant and Equipment 857,987 -- 857,987 ------------ ------------ ------------ Other Assets: Goodwill, Net of Accumulated Amortization of $33,753 579,211 1,537 580,748 Other 26,092 1,483 27,575 ------------ ------------ ------------ Total Other Assets 605,303 3,020 608,323 ------------ ------------ ------------ Total Assets $ 1,811,698 $ 2,783 $ 1,814,481 ============ ============ ============
(1) Amounts as previously reported have been revised to reflect the reclassification of certain amounts to conform to the 2002 presentation. 98 CILCORP Inc. and Subsidiaries Consolidated Balance Sheets (In thousands) Liabilities and Stockholder's Equity (as of December 31, 2001)
Discontinued Operations As Previously and Other As Reported Adjustments Restated Current Liabilities: Current Portion of Long-Term Debt $ 1,400 $ -- $ 1,400 Notes Payable 63,000 -- 63,000 Accounts Payable 75,644 798 76,442 Accrued Taxes 14,879 (1,143) 13,736 Accrued Interest 18,392 -- 18,392 Other 18,281 6,453 24,734 ------------ ------------ ------------ Total Current Liabilities 191,596 6,108 197,704 ------------ ------------ ------------ Long-Term Debt 717,730 -- 717,730 ------------ ------------ ------------ Deferred Credits and Other Liabilities: Deferred Income Taxes 202,822 1,425 204,247 Regulatory Liability of Regulated Subsidiary 45,377 (6,715) 38,662 Deferred Investment Tax Credit 14,553 -- 14,553 Other 83,388 -- 83,388 ------------ ------------ ------------ Total Deferred Credits and Other Liabilities 346,140 (5,290) 340,850 ------------ ------------ ------------ 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 518,833 -- 518,833 Retained Earnings 10,305 (202) 10,103 Accumulated Other Comprehensive Income (14,026) 2,167 (11,859) ------------ ------------ ------------ Total Stockholder's Equity 515,112 1,965 517,077 ------------ ------------ ------------ Total Liabilities and Stockholder's Equity $ 1,811,698 $ 2,783 $ 1,814,481 ============ ============ ============
99 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Central Illinois Light Company Peoria, Illinois We have audited the accompanying consolidated balance sheets of Central Illinois Light Company and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income and comprehensive income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Central Illinois Light Company and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 17, the accompanying 2001 and 2000 consolidated financial statements have been restated. As discussed in Note 1, effective January 1, 2001, Central Illinois Light Company and subsidiaries changed its method of accounting for derivative instruments and hedging activities to conform to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." DELOITTE & TOUCHE LLP Indianapolis, IN April 11, 2003 100 Central Illinois Light Company Consolidated Statements of Income and Comprehensive Income
As Restated(1) -------------- For the Years Ended December 31, 2002 2001 2000 (In thousands) Operating Revenues: Electric $ 390,549 $ 371,435 $ 398,836 Gas 211,879 271,434 237,654 ---------- ---------- ---------- Total Operating Revenues 602,428 642,869 636,490 ---------- ---------- ---------- Operating Expenses: Cost of Fuel 100,069 144,856 115,310 Cost of Gas 128,471 190,348 152,906 Purchased Power 48,101 44,441 47,388 Other Operations and Maintenance 134,567 115,076 109,574 Depreciation and Amortization 70,908 69,133 69,405 Income Taxes 21,324 6,854 29,878 State and Local Taxes on Revenue 28,959 28,181 27,589 Other Taxes 12,457 11,206 11,693 ---------- ---------- ---------- Total Operating Expenses 544,856 610,095 563,743 ---------- ---------- ---------- Operating Income 57,572 32,774 72,747 ---------- ---------- ---------- Other Income and Deductions: Cost of Equity Funds Capitalized 27 -- -- Company-owned Life Insurance, Net (1,042) (1,354) (1,221) Other, Net 14,495 6,698 (619) ---------- ---------- ---------- Total Other Income and (Deductions) 13,480 5,344 (1,840) ---------- ---------- ---------- Interest Expense: Interest on Long-term Debt 19,006 17,678 17,516 Cost of Borrowed Funds Capitalized (1,482) (18) (533) Other 3,400 5,820 6,147 ---------- ---------- ---------- Total Interest Expense 20,924 23,480 23,130 ---------- ---------- ---------- Net Income Before Preferred Dividends 50,128 14,638 47,777 Dividends on Preferred Stock 2,159 2,159 2,977 ---------- ---------- ---------- Net Income Available for Common Stock $ 47,969 $ 12,479 $ 44,800 Other Comprehensive Loss (25,402) (2,345) (915) ---------- ---------- ---------- Comprehensive Income $ 22,567 $ 10,134 $ 43,885 ========== ========== ==========
(1) See Note 17 to the Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 101 Central Illinois Light Company Consolidated Balance Sheets Assets
As of December 31, 2002 2001 (As Restated(1)) (In thousands) Utility Plant, At Original Cost: Electric $1,349,153 $1,326,231 Gas 469,831 457,165 ---------- ---------- 1,818,984 1,783,396 Less-Accumulated Provision for Depreciation 1,033,095 985,045 ---------- ---------- 785,889 798,351 Construction Work in Progress 104,571 34,340 ---------- ---------- Total Utility Plant 890,460 832,691 ---------- ---------- Other Property and Investments: Cash Surrender Value of Company-owned Life Insurance (Net of Related Policy Loans of $69,634 in 2002 and $65,314 in 2001) 4,268 3,920 Other 892 1,133 ---------- ---------- Total Other Property and Investments 5,160 5,053 ---------- ---------- Current Assets: Cash and Temporary Cash Investments 22,256 12,454 Receivables, Less Allowance for Uncollectible Accounts of $1,989 and $1,800 38,476 35,830 Accrued Unbilled Revenue 43,350 45,201 Fuel, at Average Cost 14,724 18,068 Materials and Supplies, at Average Cost 16,411 14,425 Gas in Underground Storage, at Average Cost 27,209 27,067 Prepaid Taxes 886 9,007 FAC Underrecoveries 1,259 1,255 PGA Underrecoveries 2,635 2,974 Other 26,171 24,465 ---------- ---------- Total Current Assets 193,377 190,746 ---------- ---------- Deferred Debits: Unamortized Loss on Reacquired Debt 2,206 2,448 Unamortized Debt Expense 1,581 1,305 Prepaid Pension Cost 7,250 168 Other 8,967 11,075 ---------- ---------- Total Deferred Debits 20,004 14,996 ---------- ---------- Total Assets $1,109,001 $1,043,486 ========== ==========
(1) See Note 17 to the Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 102 Central Illinois Light Company Consolidated Balance Sheets Capitalization and Liabilities
As of December 31, 2002 2001 (As Restated(1)) (In thousands) 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 113,775 106,306 Accumulated Other Comprehensive Income (28,722) (3,320) ------------ ------------ Total Common Stockholder's Equity 322,714 340,647 Preferred Stock Without Mandatory Redemption 19,120 19,120 Preferred Stock With Mandatory Redemption 22,000 22,000 Long-term Debt 316,028 242,730 ------------ ------------ Total Capitalization 679,862 624,497 ------------ ------------ Current Liabilities: Current Maturities of Long-Term Debt 26,750 1,400 Notes Payable 10,000 43,000 Accounts Payable 72,628 81,938 Accrued Taxes 17,607 27,719 Accrued Interest 9,437 9,143 Other 16,749 24,734 ------------ ------------ Total Current Liabilities 153,171 187,934 ------------ ------------ Deferred Liabilities and Credits: Accumulated Deferred Income Taxes 95,389 94,062 Regulatory Liability 19,230 38,662 Investment Tax Credits 12,958 14,553 Pension Liabilities 85,056 29,941 Postretirement Health Care Liability 41,333 32,701 Other 22,002 21,136 ------------ ------------ Total Deferred Liabilities and Credits 275,968 231,055 ------------ ------------ Total Capitalization and Liabilities $ 1,109,001 $ 1,043,486 ============ ============
(1) See Note 17 to the Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 103 Central Illinois Light Company Consolidated Statements of Cash Flows
As Restated(1) -------------- For the Years Ended December 31, 2002 2001 2000 (In thousands) Cash Flows from Operating Activities: Net Income Before Preferred Dividends $ 50,128 $ 14,638 $ 47,777 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 70,908 69,133 69,405 Deferred Taxes, Investment Tax Credits and Regulatory Liability, Net (1,820) (20,180) (14,530) (Increase) Decrease in Accounts Receivable (2,646) 10,454 (14,012) Decrease (Increase) in Fuel, Materials and Supplies, and Gas in Underground Storage 1,216 (2,654) (6,659) Decrease (Increase) in Unbilled Revenue 1,851 33,003 (32,994) (Decrease) Increase in Accounts Payable (9,310) (15,617) 60,455 (Decrease) Increase in Accrued Taxes and Interest (9,818) 3,471 (604) Capital Lease Payments 645 645 645 Decrease (Increase) in Other Current Assets 8,876 7,189 (4,939) Increase in Other Current Liabilities 2,503 9,590 425 Decrease (Increase) in Other Non-Current Assets 2,475 (12,308) 9,016 Increase in Other Non-Current Liabilities 3,561 8,609 3,412 ---------- ---------- ---------- Net Cash Provided by Operating Activities 118,569 105,973 117,397 ---------- ---------- ---------- Cash Flows from Investing Activities: Capital Expenditures (124,373) (51,255) (55,532) Cost of Equity Funds Capitalized (27) -- -- Other (6,663) (2,537) (4,914) ---------- ---------- ---------- Net Cash Used in Investing Activities (131,063) (53,792) (60,446) ---------- ---------- ----------
104 Cash Flows from Financing Activities: Common Dividends Paid (40,500) (45,000) (26,000) Preferred Dividends Paid (2,159) (2,159) (2,977) Long-Term Debt Retired (1,400) (1,400) (30,500) Long-Term Debt Issued 100,000 -- 8,000 Preferred Stock Retired -- -- (25,000) Payments on Capital Lease Obligation (645) (645) (645) (Decrease) Increase in Short-Term Borrowing (33,000) (24,300) 20,400 Additional Paid-in Capital -- 25,000 -- ---------- ---------- ---------- Net Cash Provided by (Used in) Financing Activities 22,296 (48,504) (56,722) ---------- ---------- ---------- Net Increase in Cash and Temporary Cash Investments 9,802 3,677 229 Cash and Temporary Cash Investments at Beginning of Period 12,454 8,777 8,548 ---------- ---------- ---------- Cash and Temporary Cash Investments at End of Period $ 22,256 $ 12,454 $ 8,777 ========== ========== ========== Supplemental Disclosures of Cash Flow Information: Cash Paid During the Period for: Interest (Net of Cost of Borrowed Funds Capitalized) $ 27,766 $ 26,913 $ 28,874 Income Taxes $ 36,233 $ 27,072 $ 45,498
(1) See Note 17 to the Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 105 Central Illinois Light Company Consolidated Statements of Stockholder's Equity
As Restated(1) ------------------------- For the Years Ended December 31, 2002 2001 2000 (In thousands) Balance Beginning of Year $ 340,647 $ 350,513 $ 332,628 Add: Change in Additional Paid-in Capital -- 25,000 -- Net Income Before Preferred Dividends 50,128 14,638 47,777 ---------- ---------- ---------- Total 390,775 390,151 380,405 ---------- ---------- ---------- Deduct: Cash Dividends Declared Preferred Stock $100 Par Value 4 1/2% Series 501 501 501 4.64% Series 371 371 371 5.85% Series 1,287 1,287 1,287 Auction Rate Series -- -- 818 Common Stock, No Par Value 40,500 45,000 26,000 ---------- ---------- ---------- Total Dividends Declared 42,659 47,159 28,977 Additional Minimum Liability for Pension Plans at December 31, 2002, 2001 and 2000, net of taxes of $(19,013), $(90) and $(602), respectively 28,914 137 915 SFAS 133, net of taxes of $2,308 and $(1,451) (3,512) 2,208 -- ---------- ---------- ---------- 68,061 49,504 29,892 ---------- ---------- ---------- Balance End of Year $ 322,714 $ 340,647 $ 350,513 ========== ========== ==========
(1) See Note 17 to the Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 106 CENTRAL ILLINOIS LIGHT COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Central Illinois Light Company (CILCO) include the accounts of CILCO and its subsidiaries, CILCO Exploration and Development Company, CILCO Energy Corporation and Central Illinois Generation, Inc. Prior year amounts have been reclassified on a basis consistent with the 2002 presentation. BASIS OF ACCOUNTING CILCO is a wholly owned subsidiary of CILCORP Inc. The assets and liabilities are recorded at CILCO's original costs and do not reflect the application of purchase accounting for the acquisition of CILCORP Inc. by the AES Corporation in 1999. RESTATEMENT The financial statements as of and for the years ended December 31, 2001 and 2000 have been restated. See Note 17 -- Restatement for additional information. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. ACCOUNTING CHANGES AND OTHER MATTERS In January 2001, CILCO adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The impact of that adoption resulted in no cumulative effect charge to the income statement, and a cumulative effect adjustment of $1.7 million, net of taxes, to Accumulated Other Comprehensive Income (OCI), which increased common stockholders' equity. See Note 9 - Accounting for Price Risk Management Activities for further information. In January 2002, CILCO adopted SFAS No. 141, "Business Combinations" (SFAS 141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires business combinations to be accounted for under the purchase method of accounting, which requires one party in the transaction to be identified as the acquiring enterprise and for that party to allocate the purchase price to the assets and liabilities of the acquired enterprise based on fair market value. SFAS 142 requires goodwill and indefinite-lived intangible assets recorded in the financial statements to be tested for impairment at least annually, rather than amortized over a fixed period, with impairment losses recorded in the income statement. CILCO is adopting SFAS 143, "Accounting for Asset Retirement Obligations" (SFAS 143), in the first quarter of 2003. SFAS 143 provides the accounting requirements for asset retirement obligations associated with tangible, long-lived assets. SFAS 143 requires CILCO 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, CILCO 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 estimate of fair value. 107 Historically, CILCO has included an estimated cost of dismantling and removing plant from service upon retirement in the basis upon which depreciation rates were determined. SFAS 143 requires CILCO to exclude costs of dismantling and removal upon retirement from the depreciation rates applied to non rate-regulated plant balances unless they are legal obligations under SFAS 143. Further, CILCO is required to remove accumulated provisions for dismantling and removal costs from accumulated depreciation related to non rate-regulated plant assets and reflect such adjustment as a gain upon adoption of this standard, to the extent such dismantling and removal activities are not considered obligations as defined by SFAS 143. CILCO is finalizing its evaluation of the impact of adopting SFAS 143. Upon adoption of this standard, CILCO expects to recognize asset retirement obligations related primarily to retirement costs for ash ponds at the Duck Creek generating facility. In addition to these obligations, CILCO has determined that certain other asset retirement obligations exist, but CILCO is unable to estimate the fair value of those obligations because the probability, timing or cash flows associated with the obligations are indeterminable. CILCO does not believe that these obligations, when incurred, will have a material adverse impact on its financial position, results of operations or liquidity. At this time, CILCO has not determined the amount of net gain or loss, if any, to be recognized upon adoption of SFAS 143 for its non rate-regulated plan balances. On January 1, 2002, CILCO adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 retains the guidance related to calculating and recording impairment losses but adds guidance on the accounting for discontinued operations, previously accounted for under Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 did not have any effect on CILCO's financial position, results of operations or liquidity in 2002. SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145), was issued in April 2002. The provisions of SFAS 145 related to the rescission of FASB Statement No. 4 shall be applied in years beginning after May 15, 2002. All other provisions of SFAS 145 are effective for financial statements issued on or after May 15, 2002. Management has determined that adoption of SFAS 145 has no effect on CILCO's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires an entity to recognize, and measure at fair value, a liability for a cost associated with an exit or disposal activity in the period in which the liability is incurred and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Management does not believe this statement will have a material effect on the consolidated financial statements. During 2002, CILCO adopted the provisions of EITF Issue No. 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities" (EITF 02-3), 108 that required revenues and costs associated with certain energy contracts to be shown on a net basis in the income statement. Prior to adopting EITF 02-3 and the rescission of EITF Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (EITF 98-10), CILCO's accounting practice was to present all settled energy purchase or sale contracts within CILCO's power risk management program on a gross basis in Electric Revenues and in Fuel and Purchased Power. This meant that revenues were recorded for the notional amount of the power sales contracts with a corresponding charge to income for the costs of the energy that was generated, or for the notional amount of a purchased power contract. In October 2002, the EITF reached a consensus to rescind EITF 98-10. The effective date for the full rescission of EITF 98-10 was for fiscal periods beginning after December 15, 2002, with early adoption permitted. In addition, the EITF reached a consensus in October 2002 that all SFAS 133 trading derivatives (subsequent to the rescission of EITF 98-10) should be shown net in the income statement, whether or not physically settled. This consensus applies to all energy and non-energy related trading derivatives that meet the definition of a derivative pursuant to SFAS 133. CILCO adopted and applied this guidance to 2002 and 2001, which had no impact on previously reported revenues, costs, earnings or stockholder's equity. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (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 CILCO previously participated in the AES Stock Option Plan that provided for grants of stock options to eligible participants. As permitted under SFAS No. 123, CILCO 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, CILCO 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, CILCO's consolidated earnings would have decreased by $2.7 million, $1.4 million, and $.3 million in 2002, 2001, and 2000, respectively. CILCO does not expect SFAS 148 to have any effect on its financial position, results of operations or liquidity in 2003. FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45), was issued in November 2002. FIN 45 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. CILCO does not expect the recognition provisions of FIN 45 to have a material impact on its financial position or results of operations. REGULATION CILCO is a public utility subject to regulation by the Illinois Commerce Commission (ICC) and the Federal Energy Regulatory Commission (FERC) with 109 respect to accounting matters, and maintains its accounts in accordance with the Uniform System of Accounts prescribed by these agencies. CILCO is subject to the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), for certain of its rate-regulated public utility operations. Under SFAS 71, assets and liabilities are recorded to represent probable future increases and decreases, respectively, of revenues to CILCO resulting from the ratemaking action of regulatory agencies. The Electric Service Customer Choice and Rate Relief Law of 1997 (the Illinois Law) became effective in Illinois in December 1997. Among other provisions, this law began a nine-year transition process to a fully competitive market for electricity in Illinois. Electric transmission and distribution activities are expected to continue to be regulated, but a customer may choose to purchase electricity from another supplier. Due to the Illinois Law, CILCO's electric generation activities are no longer subject to the provisions of SFAS 71. Regulatory assets included on the Consolidated Balance Sheets at December 31, 2002, and 2001, were as follows:
2002 2001 (As restated)(1) (In thousands) Included in current assets: Fuel and gas cost adjustments $ 3,894 $ 4,229 SFAS 133 gas cost adjustment derivatives (included in other) 571 4,119 Coal tar remediation cost-estimated current (included in other) 757 825 -------- -------- Costs included in current assets 5,222 9,173 -------- -------- Included in other assets: Coal tar remediation cost, net of recoveries 296 23 Clean air permit fees 13 17 Regulatory tax asset 5,218 4,085 Deferred gas costs -- 14 Unamortized loss on reacquired debt 2,206 2,448 -------- -------- Future costs included in other assets 7,733 6,587 -------- -------- Total regulatory assets $ 12,955 $ 15,760 ======== ========
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. Regulatory assets at December 31, 2002, were related to CILCO's rate-regulated electric and gas distribution activities. CILCO's regulatory assets do not earn a current rate of return. Regulatory liabilities, consisting of deferred tax items of approximately $19.2 million and $45.4 million at December 31, 2002, and 2001, respectively, and deferred taxes for investment tax credits of approximately $4.3 million and $5.3 million at December 31, 2002, and 2001, respectively, were primarily related to CILCO's electric and gas transmission and distribution operations. 110 CILCO's electric generation-related identifiable assets, no longer subject to SFAS 71, included in the balance sheet at December 31, 2002, and 2001, were as follows:
2002 2001 (As restated)(1) (In thousands) Property, Plant and Equipment $552,442 $551,621 Less: Accumulated Depreciation 305,491 307,120 -------- -------- 246,951 244,501 Construction Work in Progress 82,493 13,811 -------- -------- Net Property, Plant and Equipment 329,444 258,312 Fuel, at Average Cost 14,724 18,068 Materials and Supplies, at Average Cost 10,373 9,033 SO2 Allowance Inventory 1,736 1,598 -------- -------- Total Identifiable Electric Generation Assets $356,277 $287,011 ======== ========
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. Accumulated deferred income taxes associated with electric generation property at December 31, 2002, and 2001, were approximately $62.0 million and $62.3 million, respectively, and investment tax credits were approximately $4.8 million and $5.5 million at December 31, 2002, and 2001, respectively. AFUDC equity is not applied to generation plant additions, as these expenditures are related to non rate-regulated activities. UTILITY OPERATING REVENUES, FUEL COSTS AND COST OF GAS Electric and gas revenues include service provided but unbilled at year-end. Utility revenues are billed to customers monthly on a cycle basis. Revenues are recorded on the accrual basis and include estimates for electricity and gas delivered. Substantially all CILCO gas system sales rates include a Purchased Gas Adjustment clause. This clause provides for the recovery of changes in the cost of gas on a current basis in billings to customers. CILCO adjusts the cost of gas to recognize overrecoveries or underrecoveries of allowable costs. The cumulative effects are deferred on the balance sheets as a current asset or current liability (see Regulation) and adjusted by refunds or collections through future billings to customers. CILCO's former electric energy rates included a similar Fuel Adjustment Clause (FAC). CILCO filed a proposal to eliminate the FAC on September 10, 2001. Tariffs eliminating the FAC became effective October 29, 2001. SIGNIFICANT CUSTOMER Caterpillar Inc. (Caterpillar) is CILCO's largest industrial customer. Gas revenues, electric revenues, and sales of other services to Caterpillar were 7.7%, 7.3%, and 6.5% of CILCO's total revenue for 2002, 2001, and 2000, respectively. See Note 10 - Statements of Segments of Business of Item 8. Financial Statements and Supplementary Data. 111 CONCENTRATION OF CREDIT RISK CILCO, as a public utility, must provide service to customers within its defined service territory and may not discontinue service to residential customers when certain weather conditions exist. CILCO continually reviews customers' creditworthiness and requests deposits or refunds deposits based on that review. At December 31, 2002, CILCO had net receivables of $38.5 million, of which approximately $3.1 million was due from Caterpillar. TRANSACTIONS WITH AFFILIATES CILCO, a subsidiary of CILCORP, incurs certain corporate expenses such as legal and accounting fees on behalf of CILCORP Inc. and its other subsidiaries. Also, beginning in 1997, CILCO sold natural gas to its affiliate CESI, in conjunction with CESI's gas marketing program. These expenses are billed monthly to CILCORP Inc. and its other subsidiaries based on specific identification of costs. A return on CILCO assets used by CILCORP Inc. and its other subsidiaries is also calculated and billed monthly. Total billings to CILCORP Inc. and its other subsidiaries amounted to $10.5 million, $11.4 million, and $12.0 million in 2002, 2001, and 2000, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of Cash and Temporary Cash Investments, Other Investments, and Notes Payable approximate fair value. The estimated fair value of CILCO's Preferred Stock with Mandatory Redemption was $22.1 million at both December 31, 2002, and at December 31, 2001, based on current market interest rates for other companies with comparable credit ratings, capital structure, and size. The estimated fair value of CILCO's Long-Term Debt, including current maturities, was $364.6 million at December 31, 2002, and $248.3 million at December 31, 2001. The fair market value of these instruments was based on current market interest rates for other companies with comparable credit ratings, capital structures, and size, but does not reflect effects of regulatory treatment accorded the instruments related to the rate-regulated portions of CILCO's business. See Note 9 for fair value of derivative financial instruments. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) The allowance, representing the cost of equity and borrowed funds used to finance construction, is capitalized as a component of the cost of utility plant. The amount of the allowance varies depending on the rate used and the size and length of the construction program. The Uniform System of Accounts defines AFUDC, a non-cash item, as the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate upon other funds when so used. On the income statement, the cost of borrowed funds capitalized is reported as a reduction of total interest expense and the cost of equity funds capitalized is reported as other income. In accordance with the FERC formula, the composite AFUDC rates used in 2002, 2001, and 2000 were 6.2%, 4.8%, and 6.9%, respectively. AFUDC equity is not applied to generation plant additions, as these expenditures are related to non rate-regulated activities. 112 DEPRECIATION AND MAINTENANCE Provisions for depreciation of utility property for financial reporting purposes are based on straight-line composite rates. The annual provisions for utility plant depreciation, expressed as a percentage of average depreciable utility property, were 3.5%, 3.5% and 3.7% for electric for 2002, 2001, and 2000, respectively, and 4.7%, 4.7%, and 4.6% for gas for 2002, 2001, and 2000, respectively. Utility maintenance and repair costs are charged directly to expense. Renewals of units of property are charged to the utility plant account, and the original cost of depreciable property replaced or retired, together with the removal cost less salvage, is charged to the accumulated provision for depreciation. IMPAIRMENT OF LONG-LIVED ASSETS We evaluate long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets, as compared with the carrying value of the assets. If impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. See Accounting Changes and Other Matters relating to SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." INCOME TAXES CILCO follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property. CILCO parent, CILCORP Inc. and its subsidiaries will file a consolidated federal income tax return with AES for 2002. Income taxes are allocated to the individual companies based on their respective taxable income or loss. CONSOLIDATED STATEMENTS OF CASH FLOWS CILCO considers all highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash equivalents for purposes of the Consolidated Statements of Cash Flows. RESTRICTED CASH CILCO has restricted cash of $7.9 million and $12.9 million at December 31, 2002, and 2001, respectively, within Current Assets - Other on the Consolidated Balance Sheets. 113 COMPANY-OWNED LIFE INSURANCE POLICIES The following amounts related to company-owned life insurance contracts, issued by a major insurance company, are recorded on the Consolidated Balance Sheets:
2002 2001 (In thousands) Cash surrender value of contracts $ 73,902 $ 69,234 Borrowings against contracts (69,634) (65,314) -------- -------- Net investment $ 4,268 $ 3,920 ======== ========
Interest expense related to borrowings against company-owned life insurance, included in Company-owned Life Insurance, Net on the Consolidated Statements of Income and Comprehensive Income, was $5.3 million, $4.9 million, and $4.3 million for 2002, 2001, and 2000, respectively. NOTE 2 - INCOME TAXES Total income tax expense for 2002 resulted in an effective tax rate of 35.6% on earnings before income taxes (38.4% in 2001 and 36.9% in 2000). The principal reasons such rates differ from the statutory federal rate for the years ended December 31, 2002, 2001, and 2000 were as follows:
Restated(1) ------------------- 2002 2001 2000 Statutory federal income tax rate: 35.0% 35.0% 35.0% ====== ====== ====== Increases (decreases) from: Depreciation differences (1.6) 7.5 (1.8) Amortization of investment tax credit (2.1) (7.9) (2.3) Company-owned life insurance (2.0) (6.2) (1.5) State income taxes 4.7 2.3 4.6 Preferred dividends and other permanent differences 2.0 6.1 2.8 Other differences (0.4) 1.6 0.1 ------ ------ ------ Total 0.6 3.4 1.9 ------ ------ ------ Effective income tax rate 35.6% 38.4% 36.9% ====== ====== ======
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. 114 Components of income tax expense for the years ended December 31, 2002, 2001, and 2000 were as follows:
Restated(1) ---------------------- Years Ended December 31, 2002 2001 2000 (In thousands) Current income taxes Federal $ 21,126 $ 20,574 $ 35,844 State 4,879 4,425 7,418 -------- -------- -------- Total operating current taxes 26,005 24,999 43,262 -------- -------- -------- Deferred operating income taxes, net Depreciation and amortization 3,063 1,752 1,743 Repair allowance 3,595 (2,846) (3,899) Capitalized overhead costs (783) (763) (783) Removal costs (9,920) (10,240) (11,356) Gas storage field 1,182 718 (788) Pension expense 1,900 4,233 (2,065) Environmental reserve (3,358) -- -- Out-of-market contract 7,846 (9,645) 1,295 Other postemployment benefits (6,042) (2,151) 4,056 Other (569) 2,402 46 -------- -------- -------- Total operating deferred income taxes, net (3,086) (16,540) (11,751) Investment tax credit amortization (1,595) (1,605) (1,633) -------- -------- -------- Total operating income taxes 21,324 6,854 29,878 Income tax reduction for disallowed plant costs 113 114 123 Other, net 5,035 821 (3,773) -------- -------- -------- Total income tax expense $ 26,472 $ 7,789 $ 26,228 ======== ======== ========
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. Total operating deferred income taxes, net, includes deferred state income taxes of $(300.9), $(2,432.7), and $(863.8) for 2002, 2001, and 2000, respectively. Other, net, includes deferred state income taxes of $100.0, $(118.0), and $(99.0) for 2002, 2001, and 2000, respectively. 115 CILCO uses the liability method to account for income taxes. Under the liability method, deferred income taxes are recognized at currently enacted income tax rates to reflect the tax effect of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. Temporary differences occur because the income tax law either requires or permits certain items to be reported on CILCO's income tax return in a different year than they are reported in the financial statements. CILCO has recorded a regulatory asset and liability to account for the effect of expected future regulatory actions related to unamortized investment tax credits, income tax liabilities initially recorded at tax rates in excess of current rates, the equity component of AFUDC and other items for which deferred taxes had not previously been provided. The temporary differences related to the consolidated deferred income tax asset and liability at December 31, 2002, and 2001, were as follows:
December 31, 2002 2001 (Restated)(1) (In thousands) Deferred tax asset - non-property $ 50,529 $ 36,728 Deferred tax liability - property 145,918 130,790 -------- -------- Accumulated deferred income tax liability, net of deferred tax assets $ 95,389 $ 94,062 ======== ========
The following table reconciles the change in the accumulated deferred income tax liability to the deferred income tax expense included in the Consolidated Statements of Income and Comprehensive Income for the period: (1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company.
Restated(1) ---------------------- December 31, 2002 2001 2000 (In thousands) Net change in deferred income tax liability per above table $ 1,327 $(29,549) $(12,466) Change in tax effects of income tax related regulatory assets and liabilities (20,565) 10,973 (430) SFAS 133 (2,309) 1,451 -- Nonqualified pension shortfall 19,013 90 601 Other -- (159) -- -------- -------- -------- Deferred income tax benefit for the period $ (2,534) $(17,194) $(12,295) ======== ======== ========
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. 116 NOTE 3 - POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE CILCO has recorded a liability of approximately $.8 million and $1.4 million at December 31, 2002, and 2001, respectively, for benefits other than pensions or health care provided to former or inactive employees. The liability for these benefits (primarily long-term and short-term disability payments under plans self-insured by CILCO) is actuarially determined. PENSION BENEFITS Substantially all of CILCO's full-time employees are covered by trusteed, non-contributory defined benefit pension plans. Benefits under these qualified plans reflect the employee's years of service, age at retirement and maximum total compensation for any consecutive sixty-month period prior to retirement. CILCO also has an unfunded nonqualified plan for certain employees. Pension costs for the past three years were charged as follows:
2002 2001 2000 (In thousands) Operating expenses $ 875 $ (4,159) $ (5,585) Utility plant and other 234 -- -- -------- -------- -------- Net pension costs (income) $ 1,109 $ (4,159) $ (5,585) ======== ======== ========
The components of net periodic benefit costs were as follows:
2002 2001 2000 (In thousands) Service cost $ 3,866 $ 3,032 $ 3,320 Interest cost 21,568 21,856 21,504 Expected return on plan assets (24,608) (27,486) (30,212) Amortization of transition asset (872) (889) (888) Amortization of past service cost 1,074 1,055 1,055 Recognized actuarial loss (gain) 81 (1,727) (4,074) Loss recognized due to curtailment and special termination benefits -- -- 3,710 -------- -------- -------- Net benefit cost (income) $ 1,109 $ (4,159) $ (5,585) ======== ======== ========
During 2000, CILCO recognized $3.7 million of net pension costs associated with additional benefits extended in connection with voluntary early retirement programs. 117 Information on the plans' funded status was as follows:
2002 2001 (In thousands) Change in Benefit Obligations Benefit obligation at January 1, $ 320,137 $ 289,182 Service cost 3,866 3,032 Interest cost 21,568 21,856 Amendments 417 -- Actuarial loss 31,081 30,127 Benefits paid (23,963) (24,060) ---------- ---------- Benefit obligation at December 31, $ 353,106 $ 320,137 ========== ========== Change in Plan Assets Fair value of assets at January 1, $ 284,426 $ 316,684 Actual return on assets (19,148) (8,582) Company contributions 509 384 Benefits paid (23,963) (24,060) ---------- ---------- Fair value of assets at December 31, $ 241,824 $ 284,426 ========== ========== Funded Status at December 31, $ (111,282) $ (35,711) Unrecognized net transition asset (474) (1,346) Unrecognized actuarial loss 79,699 4,943 Unrecognized prior service cost 3,528 4,184 ---------- ---------- Net amount recognized $ (28,529) $ (27,930) ========== ========== Amounts recognized in the statement of financial position consisted of: Prepaid benefit cost $ 3,722 $ 3,113 Accrued benefit liability (85,549) (33,054) Intangible asset 3,528 168 Accumulated other comprehensive income 49,770 1,843 ---------- ---------- Net amount recognized $ (28,529) $ (27,930) ========== ========== Assumptions as of December 31, Discount rate 6.25% 7.00% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 3.50% 3.50%
At December 31, 2002, and 2001, CILCO recognized an additional minimum liability on the balance sheets of $28.9 million and $0.1 million, respectively, for plans in which the accumulated benefit obligation exceeds the fair value of plan assets. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $353.1 million, $323.7 million, and $241.8 million, respectively, as of December 31, 2002 (all five plans), and $163.4 million, $154.9 million, and $134.1 million, respectively, as of December 31, 2001 (two plans). 118 POSTRETIREMENT HEALTH CARE BENEFITS CILCO has three non-pension postretirement benefit plans. These plans are health care plans covering three different groups of employees and retirees. Two of these plans are non-contributory except for participants retired under various early retirement windows, and one of the plans was amended effective in 2002 to provide for participant contributions. Postretirement health care benefit costs were charged as follows:
2002 2001 2000 (In thousands) Operating expenses $ 10,407 $ 7,095 $ 6,208 Utility plant and other 2,781 2,061 1,783 -------- -------- -------- Net postretirement health care benefit costs $ 13,188 $ 9,156 $ 7,991 ======== ======== ========
The components of net periodic benefit costs were as follows:
2002 2001 2000 (In thousands) Service cost $ 1,815 $ 1,579 $ 1,480 Interest cost 9,684 8,107 7,775 Expected return on plan assets (3,177) (3,780) (4,551) Amortization of transition liability 2,858 2,858 2,858 Recognized actuarial loss 2,008 392 47 Loss recognized due to curtailment and special termination benefits -- -- 382 -------- -------- -------- Net benefit cost $ 13,188 $ 9,156 $ 7,991 ======== ======== ========
During 2000, CILCO recognized $0.4 million of net postretirement health care benefit costs associated with additional benefits extended in connection with voluntary early retirement programs. 119 Information on the plans' funded status was as follows:
2002 2001 (In thousands) Change in Benefit Obligations Benefit obligation at January 1, $ 117,396 $ 107,212 Service cost 1,815 1,579 Interest cost 9,684 8,107 Plan participants' contributions 273 233 Actuarial loss 35,895 8,668 Benefits paid (9,225) (8,403) ---------- ---------- Benefit obligation at December 31, $ 155,838 $ 117,396 ========== ========== Change in Plan Assets Fair value of assets at January 1, $ 41,099 $ 48,105 Actual return on assets (2,839) (974) Company contributions 4,582 2,138 Plan participants' contributions 273 233 Benefits paid (9,225) (8,403) ---------- ---------- Fair value of assets at December 31, $ 33,890 $ 41,099 ========== ========== Funded Status at December 31, $ (121,948) $ (76,297) Unrecognized net transition liability 18,865 21,723 Unrecognized actuarial loss 61,851 21,948 ---------- ---------- Accrued benefit cost $ (41,232) $ (32,626) ========== ========== Assumptions as of December 31, Discount rate 6.25% 7.00% Expected return on plan assets 9.00% 9.00%
For measurement purposes, an 11.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to decrease gradually to 5.0 percent for 2011 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):
1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components $ 765 $ (733) Effect on postretirement benefit obligation $ 9,197 $ (9,016)
SAVINGS PLAN CILCO sponsors a savings plan for eligible employees. The plan allows employees to contribute a portion of their base pay in accordance with specified guidelines. CILCO matches a percentage of the employee 120 contribution up to certain limits. CILCO's matching contribution to the savings plan totaled $1.2 million in each of the years 2002, 2001 and 2000. NOTE 4 - SHORT-TERM DEBT CILCO had arrangements for committed credit facilities totaling $60 million, all of which were unused at December 31, 2002, and are used to support CILCO's commercial paper program. These facilities were maintained by commitment fees ranging from .09 of 1% per annum to .15 of 1% per annum in lieu of balances. Short-term borrowings consisted of commercial paper totaling $10.0 million (interest rate of 2.05%) and $43.0 million (average interest rate of 3.2%) at December 31, 2002, and 2001, respectively. Based on outstanding commercial paper borrowings, $50 million was available under CILCO's committed credit facilities at December 31, 2002. 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. An event of default will occur under a $25 million CILCO committed credit facility if CILCO fails to maintain a Moody's rating on its senior secured debt above Baa2, and a Fitch credit rating of BBB-. As of February 2003, CILCO's senior secured debt rating from the rating agencies were A2 and BBB, respectively. CILCO's Fitch ratings are on positive credit watch. NOTE 5 - LONG-TERM DEBT
At December 31, 2002 2001 (In thousands) First Mortgage Bonds 7 1/2% series due 2007 $ 50,000 $ 50,000 8 1/5% series due 2022 65,000 65,000 Medium-Term Notes 6.82% series due 2003 -- 25,350 6.13% series due 2005 16,000 16,000 7.8% series due 2023 10,000 10,000 7.73% series due 2025 20,000 20,000 Pollution Control Refunding Bonds 6.5% series F due 2010 5,000 5,000 6.2% series G due 2012 1,000 1,000 6.5% series E due 2018 14,200 14,200 5.9% series H due 2023 32,000 32,000 CILCO Bank Loans* Hallock Substation Power Modules due 2004 1,650 2,350 Kickapoo Substation Power Modules due 2004 1,650 2,350 Secured Term Loan due 2004 100,000 -- ---------- ---------- 316,500 243,250 Unamortized premium and discount on long-term debt, net (472) (520) ---------- ---------- Total CILCO long-term debt $ 316,028 $ 242,730 ========== ==========
121 *Interest rates in the periods during which such rates apply vary depending on selection of certain defined rate modes. The average interest rates for the year 2002, were as follows: Hallock 3.03% Kickapoo 3.03% Secured Term Loan 2.87%
CILCO's long-term debt (excluding power module bank loans, which are secured by the property financed by such borrowings) is secured by a lien on substantially all of its property and franchises. Unamortized borrowing expense, premium and discount on outstanding long-term debt are being amortized over the lives of the respective issues. Scheduled maturities of long-term debt are $103.3 million in 2004, $16.0 million in 2005, and $50.0 million in 2007. The remaining maturities of long-term debt of $147.2 million occur in 2008 and beyond. The 2003 and 2002 maturities of long-term borrowings have been classified as current liabilities. CILCORP and CILCO's financial agreements include customary default provisions that could impact the continued availability of credit or results in the acceleration of repayment. Under the Hallock and Kickapoo Substation Power Module agreements, CILCO must maintain a Moody's investment grade rating or an event of default will occur. The $100 million secured term loan requires CILCO to maintain investment grade ratings for its first mortgage bonds from at least two of Standard & Poor's, Moody's and Fitch. As of February 2003, CILCO's senior secured debt ratings from these rating agencies were A-, A2 and BBB, respectively. CILCO's Fitch ratings are on positive credit watch. Covenants in CILCO's $100 million secured term loan require it to maintain a minimum level of common stockholder equity and limit CILCO's ability to pay dividends or otherwise make distributions with respect to its common stock. Any violation of these covenants will result in an event of default under this facility. Under the minimum common equity requirement, CILCO must maintain a minimum level of common stockholder equity which increases from the date the facility was entered based on ongoing earnings. The maintenance of this test is determined upon each anniversary of the loan. If this test was performed as of December 31, 2002, the minimum common equity level requirement would equal approximately $301 million. At that date CILCO's common equity, calculated in accordance with this provision, was $329 million. Under the restricted payments provision CILCO may only pay dividends to the Holding Company up to $45 million annually subject to limited carryforward if not fully utilized. At December 31, 2002, CILCO was in compliance with its indenture and credit agreement provisions and covenants. 122 NOTE 6 - PREFERRED STOCK
At December 31, 2002 2001 (In thousands) Preferred stock, cumulative $100 par value, authorized 1,500,000 shares Without mandatory redemption 4.50% series - 111,264 shares $ 11,126 $ 11,126 4.64% series - 79,940 shares 7,994 7,994 Class A, no par value, authorized 3,500,000 shares With mandatory redemption 5.85% series - 220,000 shares 22,000 22,000 -------- -------- Total preferred stock $ 41,120 $ 41,120 ======== ========
All classes of preferred stock are entitled to receive cumulative dividends and rank equally as to dividends and assets, according to their respective terms. All preferred shares of stock have voting rights. Those voting rights are one vote per share on all questions submitted to shareholders. One vote of the preferred shares is equal to one vote of the common shares. The liquidation preference related to Series A Preferred Stock is that in an involuntary or voluntary liquidation, the stockholder receives $100 per share plus accrued dividends. The total annual dividend requirement for preferred stock outstanding at December 31, 2002, is $2.2 million. PREFERRED STOCK WITHOUT MANDATORY REDEMPTION The call provisions of preferred stock redeemable at CILCO's option outstanding at December 31, 2002, are as follows:
Series Callable Price Per Share (plus accrued dividends) 4.50% $110 4.64% $102
PREFERRED STOCK WITH MANDATORY REDEMPTION CILCO's 5.85% Class A preferred stock may be redeemed in 2003 at $100 per share. A mandatory redemption fund must be established on July 1, 2003. The fund will provide for the redemption of 11,000 shares for $1.1 million on July 1 of each year through July 1, 2007. On July 1, 2008, the remaining 165,000 shares will be retired for $16.5 million. PREFERENCE STOCK, CUMULATIVE CILCO has 2,000,000 authorized shares, of no par value preference stock, of which none have been issued. 123 NOTE 7 - COMMITMENTS & CONTINGENCIES CILCO's 2003 capital expenditures are estimated to be $100 million, which includes normal and customary purchase commitments at December 31, 2002. CILCO acts as a self-insurer for certain insurable risks resulting from employee health and life insurance programs. On February 21, 2002, CILCO and the International Brotherhood of Electrical Workers Local 51 (IBEW) agreed to extend the existing contract through June 30, 2004. The contract provides for 3% wage increases in each of the two years of the extension. The IBEW represents 335 CILCO gas and electric department people. The National Conference of Firemen and Oilers Local 8 (NCF&O) ratified its current contract with CILCO on February 23, 2001. This agreement expires on July 1, 2006, and provides for 4% wage increases in each of the first two years of the contract and for 3% wage increases in each of the final three years of the contract. The NCF&O represents 176 CILCO power plant people. CILCO is subject to various environmental regulations by federal, state, and local authorities. From the beginning phases of siting and development, to the ongoing operation of existing or new electric generating, transmission, and distribution facilities, CILCO's activities involve compliance with diverse laws and regulations that address emissions and impacts to air and water, special, protected, and cultural resources (such as wetlands, endangered species, and archeological/historical resources), chemical and waste handling, and noise impacts. CILCO's activities require complex and often lengthy processes to obtain approvals, permits, or licenses for new, existing, or modified facilities. Additionally, the use and handling of various chemicals or hazardous materials (including wastes) requires preparation of release prevention plans and emergency response procedures. As new laws or regulations are promulgated, CILCO assesses the applicability and implements the necessary modifications to its facilities or operations, as required. The more significant matters are discussed below. The Clean Air Act affects both existing generating facilities and new projects. The Clean Air Act and many state laws require significant reductions in SO2 and NOx emissions that result from burning fossil fuels. The Clean Air Act also contains other provisions that could materially affect some of CILCO's projects. Various provisions require permits, inspections, or installation of additional pollution control technology or may require the purchase of emission allowances. Certain of these provisions are described in more detail below. The Clean Air Act creates a marketable commodity called an SO2 "allowance." All generating facilities over 25 megawatts that emit SO2 must obtain allowances in order to operate after 1999. Each allowance gives the owner the right to emit one ton of SO2. All existing generating facilities have been allocated allowances based on a facility's past production and the statutory emission reduction goals. If additional allowances are needed for new generating facilities, they can be purchased from facilities having excess allowances or from SO2 allowance banks. CILCO's generating facilities comply with the SO2 allowance caps through the use of an existing SO2 scrubber, fuel blending and SO2 allowance purchases. CILCO is also considering the possibility of utilizing low sulfur fuels in the future. The U.S. Environmental Protection Agency (EPA) issued a rule in October 1998 requiring 22 Eastern states and the District of Columbia to reduce emissions of NOx in order to reduce ozone in the Eastern United States. Among other things, the EPA's rule establishes an ozone season, which runs from May 124 through September, and a NOx emission budget for each state, including Illinois. The EPA rule requires states to implement controls sufficient to meet their NOx budget by May 31, 2004. Total capital expenditures to meet the NOx emission requirements are estimated to be $125.5 million (including cost of removal), $77.5 million of which was expended through 2002. These costs include the installation of two Selective Catalytic Reduction (SCR) units and combustion control modifications. On December 31, 2002, the EPA published in the Federal Register revisions to the New Source Review (NSR) programs under the Clean Air Act, including changes to the routine maintenance, repair and replacement exclusions. Various Northeastern states have filed a petition with the United States District Court for the District of Columbia challenging the legality of the revisions to the NSR programs. It is likely that various industries and environmental groups will seek to intervene in that challenge. At this time, CILCO is unable to predict the impact of this challenge on its future financial position, results of operations or liquidity. The EPA is currently working on rulemakings to implement the new National Ambient Air Quality Standards for ozone and particulate matter. These new ambient standards may require significant additional reductions in SO2 and NOx emissions from power plants by 2008. At this time, CILCO is unable to predict the ultimate impact of these revised air quality standards on its future financial position, results of operations or liquidity. In December 1999, the EPA issued a decision to regulate mercury emissions from coal-fired power plants by 2008. The EPA is scheduled to propose regulations by 2004. These regulations have the potential to add significant capital and/or operating costs to generating systems after 2006. The EPA also issued Best Available Retrofit Technology (BART) guidelines to address visibility impairment (so called "Regional Haze") across the United States from sources of air pollution, including coal-fired power plants. The guidelines were to be used by states to mandate pollution control measures for SO2 and NOx emissions. In May 2002, the District of Columbia Circuit Court remanded these rules back to the EPA. The EPA is currently working to address the issues raised by the court decision. These rules could also add significant pollution control costs to our generating system between 2008 and 2012. At this time, CILCO is unable to predict the ultimate impact of these revised air quality standards on our future financial condition, results of operations or liquidity. The United States Congress has been working on legislation to consolidate the numerous air pollution regulations facing the utility industry. This "multi-pollutant" legislation will be deliberated in Congress in 2003. While the cost to comply with such legislation, if enacted, could be significant, it is anticipated that the costs would be less than the combined impact of the new National Ambient Air Quality Standards and the Mercury and Regional Haze Regulations, discussed above. Pollution control costs under such legislation are expected to be incurred in phases from 2007 through 2015. At this time, CILCO is unable to predict the ultimate impact of the above expected regulations and this legislation on its future financial position, results of operations or liquidity; however, the impact could be material. Future initiatives regarding greenhouse gas emissions and global warming continue to be the subject of much debate. The related Kyoto Protocol was signed by the United States but has since been rejected by the President, who instead has asked for an 18% decrease in carbon intensity on a voluntary basis. Future initiatives on this issue and the ultimate effects of the Kyoto Protocol and the President's initiatives on CILCO are unknown. Coal-fired power plants are significant sources of carbon dioxide emissions, a principal 125 greenhouse gas. Therefore, CILCO's compliance costs with any mandated federal greenhouse gas reductions in the future could be material. In April 2002, the EPA proposed rules under the Clean Water Act that require that cooling water intake structures reflect the best technology available for minimizing adverse environmental impacts. These rules pertain to existing generating facilities that currently employ a cooling water intake structure whose flow exceeds 50 million gallons per day. A final action on the proposed rules is expected by August 2003. The proposed rule may require CILCO to install additional intake screens or other protective measures, as well as extensive site specific study and monitoring requirements. CILCO's compliance costs associated with the final rules are unknown. In October 2002, CILCO submitted a corrective action plan to the Illinois EPA (IEPA) in accordance with permit conditions to address ground water issues associated with the recycle pond and ash ponds at the Duck Creek facility. In January 2003, the IEPA accepted portions of the plan but rejected other portions as being inadequate. Future actions will entail, at a minimum, the closure of two ash ponds, replacement of a return water line, construction of a landfill and remedial actions to treat water in the recycle pond and an ash pond. CILCO recorded an $8.5 million liability on the balance sheet in 2002 for the remediation effort related to the water treatment for the recycle pond and an ash pond. In addition, CILCO estimates future capital expenditures for the landfill and return water line could range from $15 million to $30 million by 2007. See Note 1 - Summary of Significant Accounting Policies - for further discussion of the costs related to the closure of two ash ponds. CILCO owns or is otherwise responsible for four former manufactured gas plant (MGP) sites in Illinois. The ICC permits the recovery of remediation and litigation costs associated with certain former MGP sites located in Illinois from Illinois electric and natural gas utility customers through environmental adjustment rate riders. To be recoverable, such costs must be prudently and properly incurred and are subject to annual reconciliation review by the ICC. Remediation at two of the four sites was completed and "No Further Remediation" letters were received in 1999 and 2000. Groundwater sampling continues at the third site and a plan has been filed with the IEPA for additional investigation at the site. Remediation of the site is expected to be completed in 2004. CILCO has not determined the ultimate extent of its liability for, or the ultimate cost of any remediation of, the fourth site, which is pending further studies. In 2002, CILCO spent approximately $0.2 million for former gas manufacturing plant site monitoring, legal fees and feasibility studies and has received some recovery from insurance settlements. A $1.1 million liability is recorded on the balance sheet, representing its minimum obligation expected for these remediation activities. Total costs incurred through December 2002, less amounts recovered from customers, have been deferred as a regulatory liability on the Balance Sheet. Through December 31, 2002, CILCO has recovered approximately $8.2 million in remediation costs from its customers. Under these circumstances, management believes that the cost of coal tar remediation will not have a material adverse effect on CILCO's financial position or results of operations. CILCO has been named, along with numerous other parties, in several lawsuits which have been filed by certain plaintiffs claiming varying degrees of injury from asbestos exposure. The cases have been filed in the Circuit Courts of Madison, Cook and Peoria Counties in Illinois and one case has been filed in Indiana. The number of total defendants named in each case is 126 significant with as many as 87 parties named in a case to as few as 10. The claims filed against CILCO allege injury from asbestos exposure during the plaintiffs' activities at our electric generating plants. In each lawsuit, the plaintiff seeks unspecified damages in excess of $50,000, which typically would be shared among the named defendants. A total of thirteen such lawsuits have been filed against CILCO, of which eleven are pending, one has been settled and one has been dismissed. 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, 2001, 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 CILCO's financial position 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 CILCO's financial position 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 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 Corporation, management does not 127 believe the results of this litigation will have a material adverse effect on CILCO's financial position or results of operations. NOTE 8 - LEASES CILCO leases certain equipment, buildings and other facilities under operating leases. As of December 31, 2002, rental expense totaled $4.9 million (2001 - $3.9 million; 2000 - $4.4 million). Minimum future rental payments under non-cancellable operating leases having remaining terms in excess of one year as of December 31, 2002, are $12.0 million in total. Payments due during the years ending December 31, 2003, through December 31, 2007, are $3.1 million, $2.4 million, $1.8 million, $1.3 million and $1.1 million, respectively. NOTE 9 - ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES CILCO utilizes commodity futures contracts, options and swaps in the normal course of its natural gas and electric business activities to reduce market or price risk. From January 1, 2001, all derivative transactions were accounted for under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Transactions and Hedging Activities" (SFAS 133), as interpreted and amended. SFAS 133 requires that an entity recognize all derivatives (including derivatives embedded in other contracts), as defined, as either assets or liabilities on the balance sheet and measure those instruments at fair value unless they are determined to be normal purchases and normal sales as outlined in SFAS 133 and subsequent DIG (Derivative Implementation Group) conclusions. Several of CILCO's contracts have been determined to be normal purchases and normal sales (power purchase contracts for example). For all derivatives not determined to be normal purchases and normal sales, changes in the derivative's fair value are to be recognized currently in earnings, unless specific hedge accounting criteria are met. Substantially all of CILCO's derivatives qualify as cash flow hedges or have been determined to be normal purchases and normal sales. Under SFAS 133, the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is reported as a component of Other Comprehensive Income (OCI) until the hedged transaction affects earnings, at which time the amount accumulated in OCI is reclassified into earnings. Any ineffective portion of the gain or loss is recognized in earnings immediately. All of CILCO's cash flow hedges are highly effective, and therefore, because any ineffectiveness is immaterial, all gains and losses have been recorded in OCI until the hedged transaction affects earnings. If a cash flow hedge is terminated because it is probable that the hedged transaction will not occur, the related balance in OCI as of such date is immediately recognized in earnings. If a cash flow hedge is terminated early for other reasons, the related balance in OCI as of the termination date is recognized in earnings concurrently with the related hedged transaction. CILCO recorded the effects of implementation of SFAS 133 in OCI as a change in accounting principle. The amount recorded as OCI reflects the mark-to-market value of fixed price derivative financial instruments representing hedges of natural gas commitments through December 2001. These derivatives were related to non rate-regulated activities and were accounted for as fully-effective cash-flow hedges as determined through correlation analyses performed throughout the year. The balance in OCI, as of January 1, 2001, related to the implementation of SFAS 133, was an after-tax credit of $1.7 million. CILCO enters into financial hedge transactions on behalf of a non rate-regulated affiliate as well as its own non rate-regulated customers. OCI on the books of CILCO represents the mark-to-market gain/loss on all positions. At the time these transactions are settled, the related gain/loss is removed 128 from OCI and the actual gain/loss on positions entered into on behalf of the non rate-regulated affiliate, plus related transaction costs, are credited to or recovered from the non rate-regulated affiliate and recognized in the non rate-regulated affiliate's operating results. Gains/losses on derivatives that hedge the non rate-regulated activities of CILCO are reflected in CILCO's operating results when the hedge commitments are recognized. The net loss reflected in operating results from derivative financial instruments for the non rate-regulated activities of CILCO for the year ended December 31, 2002, was $0.3 million for natural gas (included in Gas Purchased for Resale). There were no outstanding derivative financial instruments for electricity during the year ended December 31, 2002. The previously recorded gain/loss associated with these settled derivative financial instruments was removed from 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 credit in OCI in the amount of $3.5 million for the year ended December 31, 2002, for all open positions including those on the behalf of a non rate-regulated affiliate. 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 December 31, 2002, was a credit of $1.3 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 1,960,000 MMBtu or 2.0 Bcf for commitments through March 2004. Approximately $0.1 million of OCI related to derivative financial instruments as of December 31, 2002, for the benefit of CILCO, is expected to be recognized as an increase to earnings over the next twelve months based on market prices as of December 31, 2002. The actual amount recognized in earnings will be based on the market conditions at the time the derivatives are settled. During 2002, CILCO 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. Mark-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). For the year ended December 31, 2001, losses of $4.1 million were recorded in regulatory assets. The corresponding liability is reflected on the balance sheet in Other Current Liabilities. For the year ended December 31, 2002, gains of $0.8 million were recorded in regulatory liabilities. The corresponding asset is reflected on the balance sheet in prepayments and other. This reflects hedges of natural gas sales of 400,000 MMBtu for commitments through March 2003. As these derivatives settle, the realized gain/loss is credited/charged to the PGA customers resulting in no income affect. In December 2001, the Financial Accounting Standards Board (FASB) revised its earlier conclusion, Derivatives Implementation Group (DIG) Issue C-15, related to contracts involving the purchase or sale of electricity. Contracts for the purchase or sale of electricity, including capacity contracts with call options, may qualify for the normal purchases and normal sales exemption and are not required to be accounted for as derivatives under SFAS 133. In order for contracts to qualify for this exemption, they must meet certain criteria, which include the requirement for physical delivery of the electricity to be purchased or sold under the contract only in the normal course of business. Additionally, contracts that have a price based on an underlying that is not clearly and closely related to the electricity being sold or purchased or that are denominated in a currency that is foreign to the buyer or seller are not considered normal purchases and normal sales and are required to be accounted for as derivatives under SFAS 133. This revised conclusion is effective 129 beginning April 1, 2002. CILCO has determined that its physical contracts qualify for the normal purchases and sales exemption as redefined in DIG Issue C-15 and are not to be accounted for as derivatives under SFAS 133. NOTE 10 - STATEMENTS OF SEGMENTS OF BUSINESS CILCO has three reportable segments: CILCO Electric, CILCO Gas, and CILCO Other. 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. CILCO's reportable segments are strategic business units managed separately primarily due to the rate-regulated or non rate-regulated nature of the business. 130 Central Illinois Light Company Statements of Segments of Business For the year ended December 31, 2002
CILCO CILCO CILCO Total Electric Gas Other CILCO (In thousands) Revenues $ 390,549 $ 211,879 $ 114,820 $ 717,248 Interest Income -- -- 1,690 1,690 ------------ ------------ ------------ ------------ Total 390,549 211,879 116,510 718,938 ------------ ------------ ------------ ------------ Operating Expenses 278,380 174,244 96,866 549,490 Depreciation and Amortization 48,431 22,477 -- 70,908 ------------ ------------ ------------ ------------ Total 326,811 196,721 96,866 620,398 ------------ ------------ ------------ ------------ Interest Expense 16,445 5,961 -- 22,406 Preferred Stock Dividends -- -- 2,159 2,159 Fixed Charges and Other Expenses (1,509) -- 1,042 (467) ------------ ------------ ------------ ------------ Total 14,936 5,961 3,201 24,098 ------------ ------------ ------------ ------------ Income Before Income Taxes 48,802 9,197 16,443 74,442 Income Taxes 17,659 3,665 5,149 26,473 ------------ ------------ ------------ ------------ Segment Net Income $ 31,143 $ 5,532 $ 11,294 $ 47,969 ============ ============ ============ ============ Capital Expenditures $ 110,616 $ 13,784 $ -- $ 124,400 Revenue from major customer Caterpillar Inc. $ 43,017 $ 1,078 $ 11,215 $ 55,310 Segment Assets as of Dec. 31 $ 822,357 $ 280,747 $ 5,897 $ 1,109,001
131 Central Illinois Light Company Statements of Segments of Business For the year ended December 31, 2001 (as restated)(1)
CILCO CILCO CILCO Total Electric Gas Other CILCO (In thousands) Revenues $ 371,435 $ 271,434 $ 96,062 $ 738,931 Interest Income -- -- 758 758 ---------- ---------- ---------- ---------- Total 371,435 271,434 96,820 739,689 ---------- ---------- ---------- ---------- Operating Expenses 301,268 232,840 89,187 623,295 Depreciation and Amortization 47,604 21,529 -- 69,133 ---------- ---------- ---------- ---------- Total 348,872 254,369 89,187 692,428 ---------- ---------- ---------- ---------- Interest Expense 16,777 6,721 -- 23,498 Preferred Stock Dividends -- -- 2,159 2,159 Fixed Charges and Other Expenses (18) -- 1,354 1,336 ---------- ---------- ---------- ---------- Total 16,759 6,721 3,513 26,993 ---------- ---------- ---------- ---------- Income Before Income Taxes 5,804 10,344 4,120 20,268 Income Taxes 2,523 4,331 935 7,789 ---------- ---------- ---------- ---------- Segment Net Income $ 3,281 $ 6,013 $ 3,185 $ 12,479 ========== ========== ========== ========== Capital Expenditures $ 36,465 $ 14,790 $ -- $ 51,255 Revenue from major customer Caterpillar Inc. $ 43,894 $ 1,724 $ 8,463 $ 54,081 Segment Assets as of Dec. 31 $ 740,051 $ 298,379 $ 5,056 $1,043,486
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. 132 Central Illinois Light Company Statements of Segments of Business For the year ended December 31, 2000 (as restated)(1)
CILCO CILCO CILCO Total Electric Gas Other CILCO (In thousands) Revenues $ 398,836 $ 237,654 $ 47,807 $ 684,297 Interest Income -- -- 547 547 ---------- ---------- ---------- ---------- Total 398,836 237,654 48,354 684,844 ---------- ---------- ---------- ---------- Operating Expenses 269,742 194,718 52,624 517,084 Depreciation and Amortization 48,404 21,001 -- 69,405 ---------- ---------- ---------- ---------- Total 318,146 215,719 52,624 586,489 ---------- ---------- ---------- ---------- Interest Expense 16,895 6,768 -- 23,663 Preferred Stock Dividends -- -- 2,977 2,977 Fixed Charges and Other Expenses (533) -- 1,221 688 ---------- ---------- ---------- ---------- Total 16,362 6,768 4,198 27,328 ---------- ---------- ---------- ---------- Income Before Income Taxes 64,328 15,167 (8,468) 71,027 Income Taxes 23,448 6,430 (3,651) 26,227 ---------- ---------- ---------- ---------- Segment Net Income (Loss) $ 40,880 $ 8,737 $ (4,817) $ 44,800 ========== ========== ========== ========== Capital Expenditures $ 41,366 $ 14,166 $ -- $ 55,532 Revenue from major customer Caterpillar Inc. $ 42,961 $ 1,448 $ 292 $ 44,701 Segment Assets as of Dec. 31 $ 767,831 $ 332,855 $ 5,447 $1,106,133
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. 133 NOTE 11 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following quarterly operating results are unaudited, but, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of CILCO's operating results for the periods indicated. The results of operations for each of the fiscal quarters are not necessarily comparable to, or indicative of, the results of an entire year due to the seasonal nature of CILCO's business and other factors.
For the Three Months Ended March 31 June 30 Sept. 30 Dec. 31 (In thousands) 2002 Operating revenue $ 164,131 $ 132,837 $ 150,861 $ 154,599 Operating income 14,601 9,252 25,448 8,271 Net income before preferred dividends 9,884 8,554 28,536 3,154 2001 (as previously reported) Operating revenue $ 247,949 $ 134,045 $ 145,513 $ 135,738 Operating income (loss) 16,113 11,216 9,427 (3,780) Net income (loss) before preferred dividends 12,331 7,574 5,138 (10,203) 2001 (as restated)(1) Operating revenue $ 125,137 $ 135,738 Operating income (loss) 9,427 (3,982) Net income (loss) before preferred dividends 5,138 (10,405)
(1) See Note 17 to the Consolidated Financial Statements for Central Illinois Light Company. NOTE 12 - RETAINED EARNINGS CILCO's Articles of Incorporation provide that no dividends shall be paid on the common stock if, at the time of declaration, the balance of retained earnings does not equal at least two times the annual dividend requirement on all outstanding shares of preferred stock. The amount of retained earnings so required at December 31, 2002, was $4.3 million. NOTE 13 - OTHER COMPREHENSIVE INCOME Rollforward of Accumulated Other Comprehensive Income - Central Illinois Light Company
Pension SFAS 133 Total (In thousands) Accumulated other comprehensive loss - December 31, 2001 balance $ (1,112) $ (2,208) $ (3,320) Other comprehensive income (loss) - Pension (28,914) -- (28,914) SFAS 133 -- 3,512 3,512 -------- -------- -------- Accumulated other comprehensive income (loss) - December 31, 2002 balance $(30,026) $ 1,304 $(28,722) ======== ======== ========
134 NOTE 14 - RELATED PARTY TRANSACTIONS Under a non-derivative, executory tolling agreement and gas transportation agreement, CILCO purchases steam, chilled water and electricity from, and transports gas to, AmerenEnergy Medina Valley Cogen (No. 4), LLC, f/k/a AES Medina Valley. During 2002, CILCO purchased $25.9 million and sold $.6 million under these agreements. As of December 31, 2002, and 2001, respectively, CILCO had recorded Accounts Payable of $2.5 million and $2.9 million and Receivables of $0.06 million and $0.05 million related to these agreements. In addition, CILCO has received and provided management, technical, advisory, operating, and administrative services from its former parent AES and its subsidiaries. Pursuant to SEC rules under PUHCA, these transactions were on an "at cost" basis. At December 31, 2002, and 2001, Accounts Payable to such entities were $0.0 million and $3.6 million, respectively. Amounts due from such entities at December 31, 2002, and 2001, totaled $0.1 million and $1.7 million, respectively, and were included in Other Deferred Debits on the CILCO Balance Sheet. CILCO also has a power purchase agreement with AmerenCIPS for 100 MW of capacity and firm energy for the months of June through September 2003. 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 $695 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. NOTE 15 - STOCK OPTION PLAN Employees of CILCO previously participated in the AES Stock Option Plan that provided for grants of stock options to eligible participants. Under the terms of the plan, CILCO issued options to purchase shares of AES common stock at a price equal to 100% of the market price at the date the option is granted. The options become eligible for exercise under various schedules. The following table summarizes stock option activity during 2002, 2001 and 2000:
Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise 2002 Price 2001 Price 2000 Price -------- -------- -------- -------- -------- -------- Outstanding at beginning of year 566,445 $ 18.28 43,404 $ 33.61 9,190 $ 23.40 Granted -- -- 523,041 17.01 34,214 36.35 Exercised -- -- -- -- -- -- Cancelled or expired (18,003) 28.61 -- -- -- -- -------- -------- -------- -------- -------- -------- Outstanding at end of year 548,442 $ 17.94 566,445 $ 18.28 43,404 $ 33.61 ======== ======== ======== ======== ======== ======== Exercisable at end of year 528,062 9,190 -- ======== ======== ========
135 The following table summarizes additional information about stock options outstanding at December 31, 2002:
Weighted Outstanding Average Exercisable Exercise Price Shares Remaining Life Shares -------------- ----------- -------------- ----------- $13.19 474,940 8.8 474,940 $28.97 4,868 6.9 4,868 $36.31 27,574 7.1 27,574 $38.23 312 8.6 156 $42.51 140 8.5 70 $44.93 120 8.4 60 $49.94 200 8.0 200 $50.00 100 8.0 100 $55.61 40,188 8.1 20,094
CILCO accounts for its stock-based compensation plans under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and has adopted SFAS No. 123, "Accounting for Stock-based Compensation" (SFAS 123) for disclosure purposes. No compensation expense has been recognized in connection with the options, as all options have an exercise price equal to the market price of AES's common stock on the date of grant. For SFAS 123 disclosure purposes, the following assumptions were used in the Black-Scholes valuation method for shares issued in 2001 and 2000:
Risk-Free Expected Expected Year of Grant Interest Rate Option Term Volatility Dividend Yield ------------- ------------- ----------- ---------- -------------- 2001 4.8% 8.2 86% 0% 2000 5.1% 7.4 48% 0%
Had compensation expense been recognized using the fair value based method under SFAS 123, CILCO's consolidated earnings would have decreased by $2.7 million, $1.4 million and $.3 million in 2002, 2001 and 2000, respectively. Note 16 - SUBSEQUENT EVENT On January 31, 2003, after receipt of the necessary regulatory agency approvals and clearance from the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act, Ameren Corporation (Ameren) completed its acquisition of all of the outstanding common stock of CILCO's parent, CILCORP Inc. (the Holding Company) from AES. With the acquisition, CILCO became an Ameren subsidiary, but remains a separate utility company, operating as AmerenCILCO. The Company's financial statements will be included in the Ameren consolidated financial statements effective with the January 2003 acquisition date. The total purchase price was approximately $1.34 billion and included 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. 136 NOTE 17 - RESTATEMENT As previously reported in the current report on Form 8-K filed on January 31, 2003 by CILCORP Inc. and Central Illinois Light Company, Ameren Corporation issued a press release announcing the closing of the acquisition of all of the issued and outstanding common stock of CILCORP from The AES Corporation, pursuant to an agreement dated as of April 28, 2002. As of such acquisition, CILCORP became a wholly-owned subsidiary of Ameren. Subsequent to the issuance of the Company's 2001 consolidated financial statements and based on new management's review and determination, the consolidated financial statements have been restated from amounts previously reported for CILCORP Inc. and its subsidiaries for the years ended December 31, 2001 and 2000. OTHER RESTATEMENT ITEMS Other restatement items primarily relate to (i) reclassification of $20,376 of refunds to customers as a result of a settlement with the Illinois Commerce Commission regarding the fuel adjustment charge, (ii) accrual of certain employee benefit costs that had been incurred, but not reported as of the end of the year of $1,240, (iii) write off of certain costs that were determined not to qualify for capitalization of $1,307, (iv) adjustments in accruals and (v) reclassification of certain items on the Consolidated Balance Sheets. Additionally, the consolidated Statements of Stockholder's Equity reflect a decrease in the Company's retained earnings of $1,537 as of January 1, 2000. The impact of the restatements is summarized in the following tables: 137 Central Illinois Light Company Consolidated Statements of Income and Comprehensive Income (In thousands) For the Year Ended December 31, 2001
As Previously As Reported Adjustments Restated Operating Revenues: Electric $ 391,811 $ (20,376) $ 371,435 Gas 271,434 -- 271,434 ------------ ------------ ------------ Total Operating Revenues 663,245 (20,376) 642,869 ------------ ------------ ------------ Operating Expenses: Cost of Fuel 165,232 (20,376) 144,856 Cost of Gas 190,348 -- 190,348 Purchased Power 44,441 -- 44,441 Other Operations and Maintenance 114,741 335 115,076 Depreciation and Amortization 69,133 -- 69,133 Income Taxes 6,987 (133) 6,854 State and Local Taxes on Revenue 28,181 -- 28,181 Other Taxes 11,206 -- 11,206 ------------ ------------ ------------ Total Operating Expenses 630,269 (20,174) 610,095 ------------ ------------ ------------ Operating Income 32,976 (202) 32,774 ------------ ------------ ------------ Other Income and Deductions: Company-owned Life Insurance, Net (1,354) -- (1,354) Other, Net 6,698 -- 6,698 ------------ ------------ ------------ Total Other Income and (Deductions) 5,344 -- 5,344 ------------ ------------ ------------ Interest Expenses: Interest on Long-term Debt 17,678 -- 17,678 Cost of Borrowed Funds Capitalized (18) -- (18) Other 5,820 -- 5,820 ------------ ------------ ------------ Total Interest Expenses 23,480 -- 23,480 ------------ ------------ ------------ Net Income Before Preferred Dividends 14,840 (202) 14,638 Dividends on Preferred Stock 2,159 -- 2,159 ------------ ------------ ------------ Net Income Available for Common Stock $ 12,681 $ (202) $ 12,479 Other Comprehensive Income (Loss) (4,830) 2,485 (2,345) ------------ ------------ ------------ Comprehensive Income $ 7,851 $ 2,283 $ 10,134 ============ ============ ============
138 Central Illinois Light Company Consolidated Balance Sheets (In thousands) Assets (as of December 31, 2001)
As Previously As Reported(1) Adjustments Restated Utility Plant, At Original Cost: Electric $ 1,326,231 $ -- $ 1,326,231 Gas 457,165 -- 457,165 ------------ ------------ ------------ 1,783,396 -- 1,783,396 Less-Accumulated Provision for Depreciation 985,045 -- 985,045 ------------ ------------ ------------ 798,351 -- 798,351 Construction Work in Progress 34,340 -- 34,340 ------------ ------------ ------------ Total Utility Plant 832,691 -- 832,691 ------------ ------------ ------------ Other Property and Investments: Cash Surrender Value of Company-owned Life Insurance (Net of Related Policy Loans of $65,314 in 2001) 3,920 -- 3,920 Other 1,133 -- 1,133 ------------ ------------ ------------ Total Other Property and Investments 5,053 -- 5,053 ------------ ------------ ------------ Current Assets: Cash and Temporary Cash Investments 12,584 (130) 12,454 Receivables, Less Allowance for Uncollectible Accounts of $1,800 38,241 (2,411) 35,830 Accrued Unbilled Revenue 45,201 -- 45,201 Fuel, at Average Cost 18,068 -- 18,068 Materials and Supplies, at Average Cost 15,849 (1,424) 14,425 Gas in Underground Storage, at Average Cost 27,067 -- 27,067 Prepaid Taxes 9,007 -- 9,007 FAC Underrecoveries 1,255 -- 1,255 PGA Underrecoveries 3,236 (262) 2,974 Other 20,475 3,990 24,465 ------------ ------------ ------------ Total Current Assets 190,983 (237) 190,746 ------------ ------------ ------------ Deferred Debits: Unamortized Loss on Reacquired Debt 2,448 -- 2,448 Unamortized Debt Expense 1,305 -- 1,305 Prepaid Pension Cost 168 -- 168 Other 9,065 2,010 11,075 ------------ ------------ ------------ Total Deferred Debits 12,986 2,010 14,996 ------------ ------------ ------------ Total Assets $ 1,041,713 $ 1,773 $ 1,043,486 ============ ============ ============
(1) Amounts as previously reported have been revised to reflect the reclassification of certain amounts to conform to the 2002 presentation. 139 Central Illinois Light Company Consolidated Balance Sheets (In thousands) Capitalization and Liabilities (as of December 31, 2001)
As Previously As Reported Adjustments Restated 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 108,045 (1,739) 106,306 Accumulated Other Comprehensive Income (5,805) 2,485 (3,320) ------------ ------------ ------------ Total Common Stockholder's Equity 339,901 746 340,647 Preferred Stock Without Mandatory Redemption 19,120 -- 19,120 Preferred Stock With Mandatory Redemption 22,000 -- 22,000 Long-term Debt 242,730 -- 242,730 ------------ ------------ ------------ Total Capitalization 623,751 746 624,497 ------------ ------------ ------------ Current Liabilities: Current Maturities of Long-Term Debt 1,400 -- 1,400 Notes Payable 43,000 -- 43,000 Accounts Payable 81,140 798 81,938 Accrued Taxes 28,862 (1,143) 27,719 Accrued Interest 9,143 -- 9,143 Other 18,281 6,453 24,734 ------------ ------------ ------------ Total Current Liabilities 181,826 6,108 187,934 ------------ ------------ ------------ Deferred Liabilities and Credits: Accumulated Deferred Income Taxes 92,428 1,634 94,062 Regulatory Liability 45,377 (6,715) 38,662 Investment Tax Credits 14,553 -- 14,553 Other 83,778 -- 83,778 ------------ ------------ ------------ Total Deferred Liabilities and Credits 236,136 (5,081) 231,055 ------------ ------------ ------------ Total Capitalization and Liabilities $ 1,041,713 $ 1,773 $ 1,043,486 ============ ============ ============
140 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure CILCORP and CILCO The following text was filed via Form 8-K on March 20, 2003, regarding a change in registrant's certifying accountant for CILCORP Inc. and for Central Illinois Light Company: On March 14, 2003, the Auditing Committees of CILCORP Inc. and Central Illinois Light Company (the "Registrants") dismissed Deloitte & Touche LLP ("Deloitte & Touche") as the Registrants' independent public accountants subject to completion of its services related to the audits of the fiscal year 2002 and engaged PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") to serve as the Registrants' independent public accountants for the fiscal year 2003. The Registrants' Auditing Committees made this replacement because PricewaterhouseCoopers is serving as the independent public accountants for the Registrants' parent company, Ameren Corporation, for the fiscal year 2003. Deloitte & Touche's reports on the Registrants' consolidated financial statements for the fiscal years ended December 31, 2001 and 2000 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the Registrants' two fiscal years ended December 31, 2001 and 2000 and the subsequent interim period through March 14, 2003, there were no disagreements with Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to Deloitte & Touche's satisfaction, would have caused it to make reference to the subject matter in connection with its reports on the Registrants' consolidated financial statements for such years, and there were no reportable events, as listed in Item 304(a) (1) (v) of Regulation S-K. The Registrants have provided Deloitte & Touche with a copy of the foregoing disclosures. Attached as Exhibit 16.1 is a copy of Deloitte & Touche's letter, dated March 20, 2003, stating its agreement with such statements. During the Registrants' two fiscal years ended December 31, 2002 and 2001 and the subsequent interim period through March 14, 2003, the Registrants did not consult PricewaterhouseCoopers regarding the application of accounting principles to a specified transaction, either contemplated or proposed, or the type of audit opinion that might be rendered on the Registrants' consolidated financial statements, or any other matter or reportable event that would be required to be reported in this Current Report on Form 8-K. 141 PART III Item 10. Directors and Executive Officers of the Registrants CILCORP CILCORP Directors Simultaneously with Ameren's acquisition of CILCORP on January 31, 2003, all the directors of CILCORP resigned and the following new directors were appointed to serve as directors until the 2003 annual meeting of shareholders. PAUL A. AGATHEN Mr. Agathen is a Senior Vice President of CILCORP, Union Electric, CIPS, AEG, Ameren Services and CILCO. He was employed by Union Electric in 1975 as an attorney. He was named General Attorney of Union Electric in 1982 and Vice President, Environmental and Safety in 1994. He was elected to his present position at Ameren Services in 1997, at Union Electric, CIPS and AEG in 2001 and at CILCORP and CILCO in 2003. Mr. Agathen became a Director of CILCORP in 2003. He is also a Director of: CIPS (since 1997); Union Electric (since 1998); AEG (since 2000); and CILCO (since 2003). Mr. Agathen is 55 years old. WARNER L. BAXTER Mr. Baxter is a Senior Vice President of CILCORP, Ameren, Union Electric, CIPS, AEG, Ameren Services, and CILCO. From 1983 to 1995, Mr. Baxter was employed by Price Waterhouse (now PricewaterhouseCoopers LLP). Mr. Baxter joined Union Electric in 1995 as Assistant Controller. He was promoted to Controller of Union Electric in 1996 and was elected Vice President and Controller of Union Electric, Ameren and Ameren Services in 1998. He was elected Vice President and Controller of the Company in 1999 and of AEG in 2000. Mr. Baxter was elected to his present position at Ameren, Union Electric, CIPS, Ameren Services and AEG in 2001 and at CILCORP and CILCO in 2003. He became a Director of CILCORP in 2003. He is also a Director of: Union Electric (since 1999); CIPS (since 1999); AEG (since 2001); and CILCO (since 2003). Mr. Baxter is 41 years old. RICHARD A. LIDDY Mr. Liddy is Retired Chairman of GenAmerica Financial Corporation, which provides life, health, pension, annuity and related insurance products and services. Mr. Liddy joined GenAmerica as President and Chief Operating Officer in 1988 and became Chairman of GenAmerica Financial Corporation in 1995. Mr. Liddy is a member of the Auditing Committee of CILCORP's Board of Directors and Human Resources Committees of Ameren Corporation's Board. He was elected Director of CILCORP in 2003. He is also a Director of: Ameren (since 1997); CILCO (since 2003); Brown Shoe Company, Inc.; Ralcorp Holdings Inc.; and Energizer Holdings, Inc. Mr. Liddy is 67 years old. RICHARD A. LUMPKIN Mr. Lumpkin is Chairman, Consolidated Communications, Inc. He assumed his present position as Chairman of Consolidated Communications, Inc. on January 1, 2003 upon the acquisition of the former Illinois Consolidated Telephone Company from McLeod USA, Inc. Previously, Mr. Lumpkin had served as President of Illinois Consolidated Telephone Company since 1977 and also Chairman and Chief Executive Officer since 1990. As a result of a September 1997 merger, he also had served as Vice Chairman of McLeodUSA Incorporated until April 2002. In 142 order to complete a recapitalization, McLeodUSA Incorporated filed, in January 2002, a prenegotiated plan of reorganization through a Chapter 11 bankruptcy petition filed in the United States Bankruptcy Court for the District of Delaware. In April 2002, McLeodUSA Incorporated's plan of reorganization became effective and it emerged from Chapter 11 protection. Mr. Lumpkin is a member of CILCORP's Auditing Committee. He became a Director of CILCORP in 2003. He is also a Director of: First Mid-Illinois Bancshares, Inc.; First Mid-Illinois Bank & Trust; and CILCO (since 2003). Mr. Lumpkin is 68 years old. PAUL L. MILLER, JR. Mr. Miller is President and Chief Executive Officer of P. L. Miller & Associates, a management consultant firm which specializes in strategic and financial planning for privately held companies and distressed businesses and in international business development. He is also a principal in a financial advisory firm for small to middle market companies. Mr. Miller has served as president of an international subsidiary of an investment banking firm, and for over 20 years was president of consumer product manufacturing and distribution firms. He is a member of CILCORP's Auditing Committee. He became a Director of CILCORP in 2003. He is also a Director of: Ameren (since 1997) and CILCO (since 2003). Mr. Miller is 60 years old. CHARLES W. MUELLER Mr. Mueller is Chairman and Chief Executive Officer of Ameren, Union Electric, and Ameren Services and Chairman of CILCORP and CILCO. Mr. Mueller began his career with Union Electric in 1961 as an engineer. He was named Treasurer in 1978, Vice President-Finance in 1983, Senior Vice President-Administrative Services in 1988, President in 1993 and Chief Executive Officer in 1994. Mr. Mueller was elected Chairman, President and Chief Executive Officer of Ameren in 1997. He relinquished his position as President of Ameren, Union Electric and Ameren Services in 2001. He was elected Chairman of CILCORP and CILCO in 2003. Mr. Mueller became a Director of CILCORP in 2003. Mr. Mueller is Chairman of the Federal Reserve Bank of St. Louis. He is also a Director of: Ameren (since 1997); Union Electric (since 1993); CIPS (since 1999); CILCO (since 2003); and Angelica Corporation. Mr. Mueller is 64 years old. GARY L. RAINWATER Mr. Rainwater is President and Chief Executive Officer of CIPS, President and Chief Operating Officer of Ameren, Union Electric, and Ameren Services and President of CILCORP and CILCO. Mr. Rainwater was elected Executive Vice President of CIPS in January 1997 and was named to his present position at CIPS in December 1997. Before joining CIPS he worked for Union Electric for 17 years, beginning his career in 1979 as an engineer. He was named General Manager-Corporate Planning in 1988 and Vice President in 1993. Mr. Rainwater was elected President of AER in 1999 and of AEG in 2000. He was elected President and Chief Operating Officer of Ameren, Union Electric and Ameren Services in 2001 at which time he relinquished his position as President of AER and AEG. He was elected President of CILCORP and CILCO in 2003. Mr. Rainwater became a Director of CILCORP in 2003. He is also a Director of: Union Electric (since 1998); CIPS (since 1997); and CILCO (since 2003). Mr. Rainwater is 56 years old. 143 HARVEY SALIGMAN Mr. Saligman is a Partner of Cynwyd Investments, a family real estate partnership. Mr. Saligman also served in various executive capacities in the consumer products industry for more than 35 years. He is a member of CILCORP's Auditing Committee. Mr. Saligman became a Director of CILCORP in 2003. He is also a Director of: Ameren (since 1997) and CILCO (since 2003). Mr. Saligman is 64 years old. THOMAS R. VOSS Mr. Voss is a Senior Vice President of CILCORP, Union Electric, CIPS, AEG, Ameren Services and CILCO. Mr. Voss began his career with Union Electric in 1969 as an engineer. After four years of military service, he returned to Union Electric and from 1975 to 1988, held various positions including district manager and distribution operating manager. Mr. Voss was elected Vice President of CIPS in 1998. Mr. Voss was elected to his present position at Union Electric, CIPS and Ameren Services in 1999, at AEG in 2001 and at CILCORP and CILCO in 2003. He became a Director of CILCORP in 2003. He is also a Director of: Union Electric (since 2001); CIPS (since 2001); and CILCO (since 2003). Mr. Voss is 55 years old. DAVID A. WHITELEY Mr. Whiteley is a Senior Vice President of CILCORP, Union Electric, AEG, Ameren Services and CILCO. Mr. Whiteley began his career with Union Electric in 1978 as an engineer and in 1993 was named manager of transmission planning and later manager of electrical engineering and transmission planning. In 2000, Mr. Whiteley was elected Vice President of Ameren Services responsible for engineering and construction and later energy delivery technical services. He was elected to his present position at CIPS, Union Electric, AEG and Ameren Services in 2001, and at CILCORP and CILCO in 2003. He became a director of CILCORP in 2003. Mr. Whiteley is 46 years old. JAMES W. WOGSLAND Mr. Wogsland was elected Executive Vice President and director of Caterpillar in 1987. He served as Vice Chairman and director from 1990 until his retirement in 1995. Mr. Wogsland is a member of CILCORP's Auditing Committee. He was elected director of CILCORP in 2003. He is also a director of: Ameren (since 1997) and CILCO (since 2003). Mr. Wogsland is 70 years old. CILCORP Officers The information required by Item 10 relating to CILCORP executive officers is set forth in Part I of this Form 10-K. CILCO The information required by Item 10 relating to directors is set forth in CILCO's definitive proxy statement for its 2003 Annual Meeting of Shareholders, to be filed soon with the SEC pursuant to Regulation 14A. Such information is incorporated herein by reference to the material appearing under the caption "Election of Directors" of such proxy statement. 144 Information required by Item 10 relating to executive officers of CILCO is set forth under a separate caption in Part I hereof. Item 11. Executive Compensation CILCORP This item is omitted in reliance on General Instruction (I)(2) of Form 10-K. CILCO CILCO will soon file with the SEC a definitive proxy statement pursuant to Regulation 14A. The information required by Item 11 is incorporated herein by reference to the material appearing under the caption "Executive Compensation" of such proxy statement. 145 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters CILCORP This item is omitted in reliance on General Instruction (I)(2) of Form 10-K. CILCO CILCO will soon file with the SEC a definitive proxy statement pursuant to Regulation 14A. The information required by Item 12 is incorporated herein by reference to the material appearing under the caption "Security Ownership" of such proxy statement. CILCO does not have any equity compensation plans under which its equity securities are authorized for issuance. Item 13. Certain Relationships and Related Transactions CILCORP This item is omitted in reliance on General Instruction (I)(2) of Form 10-K. CILCO CILCO will soon file with the SEC a definitive proxy statement pursuant to Regulation 14A. The information required by Item 13 is incorporated herein by reference to the material appearing under the caption "Item (1): Election of Directors" of such proxy statement. Item 14. 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. 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. 146 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K CILCORP
Page No. Form 10-K --------- (a) 1. Financial Statements The following statements are included herein: Report of Independent Public Accountants 56 Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 2002 57 Consolidated Balance Sheets as of December 31, 2002, and December 31, 2001 58-59 Consolidated Statements of Cash Flows for the three years ended December 31, 2002 60-61 Consolidated Statements of Stockholder's Equity for the three years ended December 31, 2002 62 Notes to the Consolidated Financial Statements 63-100 (a) 2. Financial Statement Schedules The following schedules are included herein: Schedule II - Valuation and Qualifying Accounts and Reserves for the three years ended December 31, 2002 155 Schedule XIII - Investment in Leveraged Leases at December 31, 2002 157 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
147 (a) 3. Exhibits *(3) Articles of Incorporation as amended effective November 15, 1999. [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit 3.] *(3)a By-laws as amended and restated effective October 18, 1999 [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (3)a]. *(4) Indenture, dated as of October 18, 1999, between Midwest Energy, Inc. and The Bank of New York, as Trustee; First Supplemental Indenture, dated as of October 18, 1999, between CILCORP Inc. and The Bank of New York. [Designated in registration statement Form S-4 filed by CILCORP on November 4, 1999, as exhibits 4.1 and 4.2.] **(4)a Instruments defining the rights of security holders. +*(10) CILCO Executive Deferral Plan. As amended effective August 15, 1999. [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit 10.] +*(10)a CILCO Executive Deferral Plan II. As amended effective April 1, 1999. [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)a.] +*(10)b CILCO Benefit Replacement Plan (as amended effective August 15, 1999). [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)b.] +*(10)c Retention Agreement between Central Illinois Light Company and Scott A. Cisel dated October 16, 2001. [Designated in Form 10-K for the year ended December 31, 2001, File No. 1-8946, as Exhibit (10)c.] +(10)d Incentive Compensation Agreements dated January 21, 2003, between CILCO and Robert J. Sprowls, Scott A. Cisel, James L. Luckey, III, and Thomas S. Romanowski. +*(10)e CILCO Involuntary Severance Pay Plan effective July 16, 2001. [Designated in Form 10-K for the year ended December 31, 2001, File No. 1-8946, as Exhibit (10)e.] +*(10)f CILCO Restructured Executive Deferral Plan (approved August 15, 1999). [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)e.] (12.1) Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (24.1) Power of Attorney (99.1) Certificate of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. (99.3) Certificate of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None. 148 * These exhibits have been previously filed with the Securities and Exchange Commission (SEC) as exhibits to registration statements or other filings of CILCORP or CILCO with the SEC and are incorporated herein as exhibits by reference. The file number and exhibit number of each such exhibit (where applicable) are stated in the description of such exhibit. ** Pursuant to Paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Company has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt as the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of CILCORP Inc. and its subsidiaries on a consolidated basis, but hereby agrees to furnish to the SEC on request any such instruments. + Management compensatory plan or arrangement. 149 CILCO
Page No. Form 10-K --------- (a) 1. Financial Statements The following are included herein: Report of Independent Public Accountants 101 Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 2002 102 Consolidated Balance Sheets as of December 31, 2002, and December 31, 2001 103-104 Consolidated Statements of Cash Flows for the three years ended December 31, 2002 105-106 Consolidated Statements of Stockholder's Equity for the three years ended December 31, 2002 107 Notes to the Consolidated Financial Statements 108-142 (a) 2. Financial Statement Schedules The following schedule is included herein: Schedule II - Valuation and Qualifying Accounts and Reserves for the three years ended December 31, 2002 156
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. (a) 3. Exhibits *(3) Articles of Incorporation. As amended April 28, 1998. [Designated in Form 10-K for the year ended December 31, 1998, File No. 1-8946, as Exhibit (3).] (3)a Bylaws. As amended effective March 14, 2003. *(4) Indenture of Mortgage and Deed of Trust between Illinois Power Company and Bankers Trust Company, as Trustee, dated as of April 1, 1933, Supplemental Indenture between the same parties dated as of June 30, 1933, Supplemental Indenture between the Company and Bankers Trust Company, as Trustee, dated as of July 1, 1933 and Supplemental Indenture between the same parties dated as of January 1, 1935, securing First Mortgage Bonds, and indentures supplemental to the foregoing through November 1, 1994. [Designated in Registration No. 2-1937 as Exhibit B-1, in Registration No. 2-2093 as Exhibit B-1(a), in Form 8-K for April 1940, File No. 1-2732-2, as Exhibit A, in Form 8-K for December 1949, File No. 1-2732-2, as Exhibit A, in Form 150 8-K for December 1951, File No. 1-2732, as Exhibit A, in Form 8-K for July 1957, File No. 1-2732, as Exhibit A, in Form 8-K for July 1958, File No. 1-2732, as Exhibit A, in Form 8-K for March 1960, File No. 1-2732, as Exhibit A, in Form 8-K for September 1961, File No. 1-2732, as Exhibit B, in Form 8-K for March 1963, File No. 1-2732, as Exhibit A, in Form 8-K for February 1966, File No. 1-2732, as Exhibit A, in Form 8-K for March 1967, File No. 1-2732, as Exhibit A, in Form 8-K for August 1970, File No. 1-2732, as Exhibit A, in Form 8-K for September 1971, File No. 1-2732, as Exhibit A, in Form 8-K for September 1972, File No. 1-2732, as Exhibit A, in Form 8-K for April 1974, File No. 1-2732, as Exhibit 2(b), in Form 8-K for June 1974, File No. 1-2732, as Exhibit A, in Form 8-K for March 1975, File No. 1-2732, as Exhibit A, in Form 8-K for May 1976, File No. 1-2732, as Exhibit A, in Form 10-Q for the quarter ended June 30, 1978, File No. 1-2732, as Exhibit 2, in Form 10-K for the year ended December 31, 1982, File No. 1-2732, as Exhibit (4)(b), in Form 8-K dated January 30, 1992, File No. 1-2732, as Exhibit (4) in Form 8-K dated January 29, 1993, File No. 1-2732, as Exhibit (4) and in Form 8-K dated December 2, 1994, File No. 1-2732, as Exhibit (4).] +*(10) CILCO Executive Deferral Plan. As amended effective August 15, 1999. [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit 10.] +*(10)a CILCO Executive Deferral Plan II. As amended effective April 1, 1999. [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)a.] +*(10)b Benefit Replacement Plan (as amended effective April 1, 1999). [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)b.] +*(10)c Retention Agreement between Central Illinois Light Company and Scott A. Cisel dated October 16, 2001. [Designated in Form 10-K for the year ended December 31, 2001, File No. 1-8946, Exhibit (10)c.] +(10)d Incentive Compensation Agreements dated January 21, 2003 between CILCO and Robert J. Sprowls, Scott A. Cisel, James L. Luckey, III, and Thomas S. Romanowski. +*(10)e CILCO Involuntary Severance Pay Plan effective July 16, 2001. [Designated in Form 10-K for the year ended December 31, 2001, File No. 1-8946, as Exhibit (10)e.] +*`(10)f CILCO Restructured Executive Deferral Plan (approved August 15, 1999). [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)e.] (12.2) Computation of Ratio of Earnings to Fixed Charges (24.2) Power of Attorney (99.2) Certificate of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. (99.4) Certificate of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. 151 (b) 3. Reports on Form 8-K None. * These exhibits have been previously filed with the Securities and Exchange Commission (SEC) as exhibits to registration statements or to other filings of CILCO with the SEC and are incorporated herein as exhibits by reference. The file number and exhibit number of each such exhibit (where applicable) are stated in the description of such exhibit. + Management compensatory plan or arrangement. 152 SCHEDULE II CILCORP INC. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Years ended December 31, 2002, 2001 and 2000 (In thousands)
Column A Column B Column C Column D Column E Additions Balance at Charged Charged Balance at Beginning to to Other End of Description of Period Income Accounts Deductions Period Year ended December 31, 2002 Accumulated Provisions Deducted from Assets- Doubtful Accounts $ 1,800 $ 2,551 $ -- $ 2,362 $ 1,989 Accumulated Provisions Not Deducted from Assets- Injuries and Damages 1,825 1,558 -- 1,161 2,222 Discontinued Operations Reserve -- -- -- -- -- Year ended December 31, 2001 Accumulated Provisions Deducted from Assets- Doubtful Accounts $ 1,343 $ 6,155 $ -- $ 5,698 $ 1,800 Accumulated Provisions Not Deducted from Assets- Injuries and Damages 1,670 986 -- 831 1,825 Discontinued Operations Reserve 524 -- -- 524 -- Year ended December 31, 2000 Accumulated Provisions Deducted from Assets- Doubtful Accounts $ 1,296 $ 2,000 $ -- $ 1,953 $ 1,343 Accumulated Provisions Not Deducted from Assets- Injuries and Damages 1,638 1,057 -- 1,025 1,670 Discontinued Operations Reserve 500 -- 663 639 524
153 SCHEDULE II CENTRAL ILLINOIS LIGHT COMPANY Valuation and Qualifying Accounts and Reserves Years Ended December 31, 2002, 2001, and 2000 (In thousands)
Column A Column B Column C Column D Column E Additions Balance at Charged Charged Balance at Beginning to to Other End of Description of Period Income Accounts Deductions Period Year ended December 31, 2002 Accumulated Provisions Deducted from Assets- Doubtful Accounts $ 1,800 $ 2,551 $ -- $ 2,362 $ 1,989 Accumulated Provisions Not Deducted from Assets- Injuries and Damages 1,825 1,558 -- 1,161 2,222 Year ended December 31, 2001 Accumulated Provisions Deducted from Assets- Doubtful Accounts $ 1,343 $ 6,155 $ -- $ 5,698 $ 1,800 Accumulated Provisions Not Deducted from Assets- Injuries and Damages 1,670 986 -- 831 1,825 Year ended December 31, 2000 Accumulated Provisions Deducted from Assets- Doubtful Accounts $ 1,296 $ 2,000 $ -- $ 1,953 $ 1,343 Accumulated Provisions Not Deducted from Assets- Injuries and Damages 1,638 1,057 -- 1,025 1,670
154 SCHEDULE XIII CILCORP INC. AND SUBSIDIARIES Investment in Leveraged Leases Year Ended December 31, 2002 (In thousands)
Amount Cost of each carried on lease (1) Balance Sheet (2) Office buildings $23,130 $ 57,081 Warehouses 11,746 19,817 Generating stations 21,890 33,766 Passenger railway equipment 3,805 7,167 Cargo aircraft 9,583 15,043 ------- -------- Totals $70,154 $132,874 ======= ========
(1) This value is the original cost of the leveraged lease net of original nonrecourse debt. (2) The amount carried on the balance sheet includes current rents receivable and estimated residual value, net of unearned and deferred income and nonrecourse debt. The investment in leveraged leases balance does not include deferred taxes of $(106,604). In the fourth quarter of 2002, CIM decreased the estimated residual value of one of its leveraged leases by approximately $6.5 million to reflect current conditions in the secondary market for the asset. 155 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. April 15, 2003 By /s/ Gary L. Rainwater --------------------- Gary L. Rainwater President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ Charles W. Mueller Chairman and Director April 15, 2003 ----------------------------- Charles W. Mueller /s/ Gary L. Rainwater President and Director April 15, 2003 ----------------------------- (Principal Executive Officer) Gary L. Rainwater /s/ Warner L. Baxter Senior Vice President and Director April 15, 2003 ----------------------------- (Principal Financial Officer) Warner L. Baxter /s/ Martin J. Lyons Vice President and Controller April 15, 2003 ----------------------------- (Principal Accounting Officer) Martin J. Lyons /s/ Paul A. Agathen Senior Vice President and Director April 15, 2003 ----------------------------- Paul A. Agathen * Director April 15, 2003 ----------------------------- Richard A. Liddy * Director April 15, 2003 ----------------------------- Richard A. Lumpkin * Director April 15, 2003 ----------------------------- Paul L. Miller, Jr. * Director April 15, 2003 ----------------------------- Harvey Saligman /s/ Thomas R. Voss Senior Vice President and Director April 15, 2003 ----------------------------- Thomas R. Voss /s/ David A. Whiteley Senior Vice President and Director April 15, 2003 ----------------------------- David A. Whiteley * Director April 15, 2003 ----------------------------- James W. Wogsland *By /s/ Steven R. Sullivan April 15, 2003 ------------------------- Steven R. Sullivan Attorney-in-Fact
156 CERTIFICATIONS I, Gary L. Rainwater, certify that: 1. I have reviewed this annual report on Form 10-K of CILCORP Inc.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 6. The registrant's other certifying officer and I have indicated in this annual 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: April 15, 2003 /s/ Gary L. Rainwater --------------------- Gary L. Rainwater Chief Executive Officer 157 CERTIFICATIONS (CONTINUED) I, Warner L. Baxter, certify that: 1. I have reviewed this annual report on Form 10-K of CILCORP Inc.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 6. The registrant's other certifying officer and I have indicated in this annual 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: April 15, 2003 /s/ Warner L. Baxter -------------------- Warner L. Baxter Chief Financial Officer 158 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 April 15, 2003 By /s/ Gary L. Rainwater --------------------- Gary L. Rainwater President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ Charles W. Mueller Chairman and Director April 15, 2003 ------------------------------------ Charles W. Mueller /s/ Gary L. Rainwater President and Director April 15, 2003 ------------------------------------ (Principal Executive Officer) Gary L. Rainwater /s/ Warner L. Baxter Senior Vice President and Director April 15, 2003 ------------------------------------ (Principal Financial Officer) Warner L. Baxter /s/ Martin J. Lyons Vice President and Controller April 15, 2003 ------------------------------------ (Principal Accounting Officer) Martin J. Lyons /s/ Paul A. Agathen Senior Vice President and Director April 15, 2003 ------------------------------------ Paul A. Agathen /s/ Scott A. Cisel Vice President, Chief Operating April 15, 2003 ------------------------------------ Officer and Director Scott A. Cisel * Director April 15, 2003 ------------------------------------ Richard A. Liddy * Director April 15, 2003 ------------------------------------ Richard A. Lumpkin * Director April 15, 2003 ------------------------------------ Paul L. Miller, Jr. * Director April 15, 2003 ------------------------------------ Harvey Saligman /s/ Thomas R. Voss Senior Vice President and Director April 15, 2003 ------------------------------------ Thomas R. Voss * Director April 15, 2003 ------------------------------------ James W. Wogsland *By /s/ Steven R. Sullivan April 15, 2003 ----------------------- Steven R. Sullivan Attorney-in-Fact
159 CERTIFICATIONS I, Gary L. Rainwater, certify that: 1. I have reviewed this annual report on Form 10-K of Central Illinois Light Company; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 6. The registrant's other certifying officer and I have indicated in this annual 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: April 15, 2003 /s/ Gary L. Rainwater --------------------- Gary L. Rainwater Chief Executive Officer 160 CERTIFICATIONS (CONTINUED) I, Warner L. Baxter, certify that: 1. I have reviewed this annual report on Form 10-K of Central Illinois Light Company; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 6. The registrant's other certifying officer and I have indicated in this annual 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: April 15, 2003 /s/ Warner L. Baxter -------------------- Warner L. Baxter Chief Financial Officer 161 EXHIBIT INDEX CILCORP
EXHIBIT NUMBER DESCRIPTION *(3) Articles of Incorporation as amended effective November 15, 1999. [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit 3.] *(3)a By-laws as amended and restated effective October 18, 1999 [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (3)a]. *(4) Indenture, dated as of October 18, 1999, between Midwest Energy, Inc. and The Bank of New York, as Trustee; First Supplemental Indenture, dated as of October 18, 1999, between CILCORP Inc. and The Bank of New York. [Designated in registration statement Form S-4 filed by CILCORP on November 4, 1999, as exhibits 4.1 and 4.2.] **(4)a Instruments defining the rights of security holders. +*(10) CILCO Executive Deferral Plan. As amended effective August 15, 1999. [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit 10.] +*(10)a CILCO Executive Deferral Plan II. As amended effective April 1, 1999. [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)a.] +*(10)b CILCO Benefit Replacement Plan (as amended effective August 15, 1999). [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)b.] +*(10)c Retention Agreement between Central Illinois Light Company and Scott A. Cisel dated October 16, 2001. [Designated in Form 10-K for the year ended December 31, 2001, File No. 1-8946, as Exhibit (10)c.] +(10)d Incentive Compensation Agreements dated January 21, 2003, between CILCO and Robert J. Sprowls, Scott A. Cisel, James L. Luckey, III, and Thomas S. Romanowski. +*(10)e CILCO Involuntary Severance Pay Plan effective July 16, 2001. [Designated in Form 10-K for the year ended December 31, 2001, File No. 1-8946, as Exhibit (10)e.] +*(10)f CILCO Restructured Executive Deferral Plan (approved August 15, 1999). [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)e.] (12.1) Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (24.1) Power of Attorney (99.1) Certificate of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. (99.3) Certificate of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
* These exhibits have been previously filed with the Securities and Exchange Commission (SEC) as exhibits to registration statements or other filings of CILCORP or CILCO with the SEC and are incorporated herein as exhibits by reference. The file number and exhibit number of each such exhibit (where applicable) are stated in the description of such exhibit. ** Pursuant to Paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Company has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt as the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of CILCORP Inc. and its subsidiaries on a consolidated basis, but hereby agrees to furnish to the SEC on request any such instruments. + Management compensatory plan or arrangement. CILCO
*(3) Articles of Incorporation. As amended April 28, 1998. [Designated in Form 10-K for the year ended December 31, 1998, File No. 1-8946, as Exhibit (3).] (3)a Bylaws. As amended effective March 14, 2003. *(4) Indenture of Mortgage and Deed of Trust between Illinois Power Company and Bankers Trust Company, as Trustee, dated as of April 1, 1933, Supplemental Indenture between the same parties dated as of June 30, 1933, Supplemental Indenture between the Company and Bankers Trust Company, as Trustee, dated as of July 1, 1933 and Supplemental Indenture between the same parties dated as of January 1, 1935, securing First Mortgage Bonds, and indentures supplemental to the foregoing through November 1, 1994. [Designated in Registration No. 2-1937 as Exhibit B-1, in Registration No. 2-2093 as Exhibit B-1(a), in Form 8-K for April 1940, File No. 1-2732-2, as Exhibit A, in Form 8-K for December 1949, File No. 1-2732-2, as Exhibit A, in Form 8-K for December 1951, File No. 1-2732, as Exhibit A, in Form 8-K for July 1957, File No. 1-2732, as Exhibit A, in Form 8-K for July 1958, File No. 1-2732, as Exhibit A, in Form 8-K for March 1960, File No. 1-2732, as Exhibit A, in Form 8-K for September 1961, File No. 1-2732, as Exhibit B, in Form 8-K for March 1963, File No. 1-2732, as Exhibit A, in Form 8-K for February 1966, File No. 1-2732, as Exhibit A, in Form 8-K for March 1967, File No. 1-2732, as Exhibit A, in Form 8-K for August 1970, File No. 1-2732, as Exhibit A, in Form 8-K for September 1971, File No. 1-2732, as Exhibit A, in Form 8-K for September 1972, File No. 1-2732, as Exhibit A, in Form 8-K for April 1974, File No. 1-2732, as Exhibit 2(b), in Form 8-K for June 1974, File No. 1-2732, as Exhibit A, in Form 8-K for March 1975, File No. 1-2732, as Exhibit A, in Form 8-K for May 1976, File No. 1-2732, as Exhibit A, in Form 10-Q for the quarter ended June 30, 1978, File No. 1-2732, as Exhibit 2, in Form 10-K for the year ended December 31, 1982, File No. 1-2732, as Exhibit (4)(b), in Form 8-K dated January 30, 1992, File No. 1-2732, as Exhibit (4) in Form 8-K dated January 29, 1993, File No. 1-2732, as Exhibit (4) and in Form 8-K dated December 2, 1994, File No. 1-2732, as Exhibit (4).] +*(10) CILCO Executive Deferral Plan. As amended effective August 15, 1999. [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit 10.] +*(10)a CILCO Executive Deferral Plan II. As amended effective April 1, 1999. [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)a.] +*(10)b Benefit Replacement Plan (as amended effective April 1, 1999). [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)b.] +*(10)c Retention Agreement between Central Illinois Light Company and Scott A. Cisel dated October 16, 2001. [Designated in Form 10-K for the year ended December 31, 2001, File No. 1-8946, Exhibit (10)c.] +(10)d Incentive Compensation Agreements dated January 21, 2003 between CILCO and Robert J. Sprowls, Scott A. Cisel, James L. Luckey, III, and Thomas S. Romanowski. +*(10)e CILCO Involuntary Severance Pay Plan effective July 16, 2001. [Designated in Form 10-K for the year ended December 31, 2001, File No. 1-8946, as Exhibit (10)e.] +*(10)f CILCO Restructured Executive Deferral Plan (approved August 15, 1999). [Designated in Form 10-K for the year ended December 31, 1999, File No. 1-8946, as Exhibit (10)e.] (12.2) Computation of Ratio of Earnings to Fixed Charges (24.2) Power of Attorney (99.2) Certificate of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. (99.4) Certificate of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
* These exhibits have been previously filed with the Securities and Exchange Commission (SEC) as exhibits to registration statements or to other filings of CILCO with the SEC and are incorporated herein as exhibits by reference. The file number and exhibit number of each such exhibit (where applicable) are stated in the description of such exhibit. + Management compensatory plan or arrangement.