10-Q 1 cips10q1qtr03.txt CIPS10Q01Q03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From to Commission file number 1-3672 CENTRAL ILLINOIS PUBLIC SERVICE COMPANY (Exact name of registrant as specified in its charter) Illinois 37-0211380 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 607 East Adams Street, Springfield, Illinois 62739 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (217) 523-3600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X). No ( ). Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ( ). No (X). Shares outstanding of the registrant's common stock as of May 14, 2003: Common Stock, no par value, held by Ameren Corporation (parent company of the registrant) - 25,452,373. CENTRAL ILLINOIS PUBLIC SERVICE COMPANY TABLE OF CONTENTS Page PART I. Financial Information ITEM 1. Financial Statements (Unaudited) Balance Sheet at March 31, 2003 and December 31, 2002........... 2 Statement of Income for the three months ended March 31, 2003 and 2002........................................................ 3 Statement of Cash Flows for the three months ended March 31, 2003 and 2002................................................... 4 Statement of Common Stockholder's Equity for the three months ended March 31, 2003 and 2002................................... 5 Notes to Financial Statements................................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...... 20 ITEM 4. Controls and Procedures......................................... 21 PART II. Other Information ITEM 1. Legal Proceedings............................................... 23 ITEM 6. Exhibits and Reports on Form 8-K................................ 23 SIGNATURE.................................................................... 24 CERTIFICATIONS............................................................... 24 This Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements should be read with the cautionary statements and important factors included in this Form 10-Q at Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations," 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. 1
PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements. CENTRAL ILLINOIS PUBLIC SERVICE COMPANY BALANCE SHEET (Unaudited, in millions) March 31, December 31, 2003 2002 ----------- ------------ ASSETS: Property and plant, net $ 822 $ 825 Investments and other assets: Intercompany notes receivable - Generating Company 373 373 Intercompany tax receivable - Generating Company 159 162 Other assets 18 17 ------- ------- Total investments and other assets 550 552 ------- ------- Current assets: Cash and cash equivalents 16 17 Accounts receivable - trade (less allowance for doubtful accounts of $2 and $1, respectively) 64 53 Unbilled revenue 57 74 Intercompany notes receivable 23 16 Miscellaneous accounts and notes receivable 27 22 Current portion of intercompany notes receivable - Generating Company 46 46 Current portion of intercompany tax receivable - Generating Company 13 13 Materials and supplies, at average cost 19 41 Other current assets 6 7 ------- ------- Total current assets 271 289 ------- ------- Regulatory assets 30 31 ------- ------- Total Assets $ 1,673 $ 1,697 ======= ======= CAPITAL AND LIABILITIES: Capitalization: Common stock, no par value, 45.0 shares authorized - 25.5 shares outstanding $ 120 $ 120 Retained earnings 387 405 Accumulated other comprehensive income (13) (13) ------- ------- Total common stockholder's equity 494 512 ------- ------- Preferred stock not subject to mandatory redemption 80 80 Long-term debt, net 534 534 ------- ------- Total capitalization 1,108 1,126 ------- ------- Current liabilities: Current maturities of long-term debt 40 45 Accounts and wages payable 77 87 Taxes accrued 38 32 Other current liabilities 31 26 ------- ------- Total current liabilities 186 190 ------- ------- Accumulated deferred income taxes 277 282 Accumulated deferred investment tax credits 12 13 Regulatory liabilities 15 15 Other deferred credits and liabilities 75 71 ------- ------- Total Capital and Liabilities $ 1,673 $ 1,697 ======= ======= See Notes to Financial Statements.
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CENTRAL ILLINOIS PUBLIC SERVICE COMPANY STATEMENT OF INCOME (Unaudited, in millions) Three Months Ended March 31, ------------------- 2003 2002 -------- -------- OPERATING REVENUES: Electric $ 132 $ 150 Gas 77 65 ----- ----- Total operating revenues 209 215 ----- ----- OPERATING EXPENSES: Purchased power 86 105 Gas 53 44 Other operations and maintenance 42 41 Depreciation and amortization 13 12 Income taxes (1) 1 Other taxes 9 9 ----- ----- Total operating expenses 202 212 ----- ----- OPERATING INCOME 7 3 OTHER INCOME AND (DEDUCTIONS): Miscellaneous, net - Miscellaneous income 7 10 Miscellaneous expense (1) (1) Income taxes (2) - ----- ----- Total other income and (deductions) 4 9 ----- ----- INTEREST CHARGES 9 10 ----- ----- NET INCOME 2 2 PREFERRED STOCK DIVIDENDS 1 1 ----- ----- NET INCOME AFTER PREFERRED STOCK DIVIDENDS $ 1 $ 1 ===== ===== See Notes to Financial Statements.
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CENTRAL ILLINOIS PUBLIC SERVICE COMPANY STATEMENT OF CASH FLOWS (Unaudited, in millions) Three Months Ended March 31, ------------------ 2003 2002 ------ ------ Cash Flows From Operating: Net income $ 2 $ 2 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13 12 Deferred income taxes, net (5) (5) Deferred investment tax credits, net (1) - Changes in assets and liabilities: Receivables, net 1 5 Materials and supplies 22 18 Accounts and wages payable (10) (42) Taxes accrued 6 6 Assets, other 4 9 Liabilities, other 9 6 ---- ---- Net cash provided by operating activities 41 11 ---- ---- Cash Flows From Investing: Construction expenditures (10) (12) Intercompany notes receivable (7) 18 ---- ---- Net cash (used in)/provided by investing activities (17) 6 ---- ---- Cash Flows From Financing: Dividends on common stock (19) (15) Dividends on preferred stock (1) (1) Redemptions: Long-term debt (5) (5) ---- ---- Net cash used in financing activities (25) (21) ---- ---- Net change in cash and cash equivalents (1) (4) Cash and cash equivalents at beginning of year 17 26 ---- ---- Cash and cash equivalents at end of period $ 16 $ 22 ==== ==== Cash paid during the periods: Interest $ 5 $ 6 Income taxes, net - - See Notes to Financial Statements.
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CENTRAL ILLINOIS PUBLIC SERVICE COMPANY STATEMENT OF COMMON STOCKHOLDER'S EQUITY (Unaudited, in millions) Three Months Ended March 31, ------------------ 2003 2002 ----- ----- Common stock $ 120 $ 120 Retained earnings Beginning balance 405 444 Net income 2 2 Common stock dividends (19) (15) Preferred stock dividends (1) (1) ----- ----- 387 430 ----- ----- Accumulated other comprehensive income Beginning balance - minimum pension liability (13) - Change in minimum pension liability in current period - - ----- ----- (13) - ----- ----- Total common stockholder's equity $ 494 $ 550 ===== ===== See Notes to Financial Statements.
5 CENTRAL ILLINOIS PUBLIC SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED) March 31, 2003 NOTE 1 - Summary of Significant Accounting Policies General Central Illinois Public Service Company, headquartered in Springfield, Illinois, operates as AmerenCIPS and is a wholly-owned subsidiary of Ameren Corporation (Ameren). Our principal business is the rate-regulated transmission and distribution of electricity and the distribution of natural gas to residential, commercial, industrial and wholesale users in Illinois. Ameren is a public utility holding company registered with the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935 (PUHCA) and is headquartered in St. Louis, Missouri. Ameren' 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 us, Ameren's primary subsidiaries and our 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 Light Company, a subsidiary of CILCORP Inc. (CILCORP), which operates a rate-regulated transmission and distribution business, an electric generation business and a rate-regulated natural gas distribution business in Illinois as AmerenCILCO. Ameren completed its acquisition of CILCORP on January 31, 2003. o AmerenEnergy Resources Company (Resources Company), which consists of non rate-regulated operations. Subsidiaries include AmerenEnergy Generating Company (Generating Company), which operates Ameren's non rate-regulated electric generation in Missouri and Illinois, AmerenEnergy Marketing Company (Marketing Company), which markets power for periods over one year, AmerenEnergy Fuels and Services Company, which procures fuel and manages the related risks for Ameren-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) and renamed it AmerenEnergy Medina Valley Cogen (No. 4), LLC. Generating Company supplies electric power to Marketing Company which, in turn, supplies us with power under a power supply agreement (Power Supply Agreement). o AmerenEnergy, Inc. (AmerenEnergy), which serves as a power marketing and risk management agent for Ameren-affiliated companies for transactions of primarily less than one year. o Electric Energy, Inc. (EEI), which operates electric generation and transmission facilities in Illinois. Ameren has a 60% ownership interest in EEI, 40% owned by AmerenUE and 20% owned by Resources Company. o Ameren Services Company (Ameren Services), which provides shared support services to Ameren and its subsidiaries, including us. Charges are based upon the actual costs incurred by Ameren Services, as required by the PUHCA. When we refer to AmerenCIPS, our, we or us, we are referring to Central Illinois Public Service Company. All tabular dollar amounts are in millions, unless otherwise indicated. Our accounting policies conform to generally accepted accounting principles in the United States (GAAP). Our financial statements reflect all adjustments (which include normal, recurring adjustments) necessary, in our opinion, for a fair presentation of our interim results. These statements should be read in conjunction with the financial statements and notes thereto included in our 2002 Annual Report on Form 10-K. 6 The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. Such estimates and assumptions affect 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 reported period. Actual results could differ from those estimates. Certain reclassifications have been made to prior years' financial statements to conform to 2003 reporting. Accounting Changes and Other Matters Statement of Financial Accounting Standards (SFAS) No. 143 - "Accounting for Asset Retirement Obligations" We adopted the provisions of SFAS 143 on January 1, 2003. SFAS 143 provides the accounting requirements for asset retirement obligations associated with tangible, long-lived assets. SFAS 143 requires us 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, we are 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 our estimate of fair value. We have determined that certain asset retirement obligations exist. However, we are unable to estimate the fair value of those obligations because the probability, timing or cash flows associated with the obligations are indeterminable. We do not believe that these obligations, when incurred, will have a material adverse impact on our financial position, results of operations or liquidity. Historically, we have included an estimated cost of dismantling and removing plant from service upon retirement. Because these estimated costs of removal have been included in the cost of service upon which our present utility rates are based, and with the expectation that this practice will continue in the jurisdictions in which we operate, adoption of SFAS 143 did not result in any change in the depreciation accounting practices of our rate-regulated operations. We have estimated future removal costs embedded in accumulated depreciation related to rate-regulated plant assets were approximately $126 million at March 31, 2003. FASB Interpretation No. (FIN) 45 - "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" FIN 45 was issued in November 2002 and requires that upon issuance of certain guarantees, a guarantor must recognize a liability for the fair value of the obligation assumed under the guarantee. These recognition provisions of FIN 45 are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements for periods ending after December 15, 2002. Because we do not have such obligations, the recognition provisions of FIN 45 did not have any effect on our financial position, results of operations or liquidity in the first quarter of 2003. Revenue We accrue an estimate of electric and gas revenues for service rendered, but unbilled, at the end of each accounting period. Interchange revenues included in Operating Revenues - Electric were $8 million for the three months ended March 31, 2003 (2002 - $10 million). 7 Purchased Power Purchased power included in Operating Expenses - Purchased Power was $86 million for the three months ended March 31, 2003 (2002 - $105 million). Excise Taxes Excise taxes on our Illinois gas customer bills are imposed on us and are recorded gross in Operating Revenues and Other Taxes. Excise taxes recorded in Operating Revenues and Other Taxes for the three months ended March 31, 2003 were $5 million (2002 - $5 million). Excise taxes applicable to Illinois electric customer bills are imposed on the consumer and are recorded as tax collections payable and included in Taxes Accrued on the Balance Sheet. NOTE 2 - Rate and Regulatory Matters Regional Transmission Organization Since April 2002, we and AmerenUE and subsidiaries of FirstEnergy Corporation and NiSource Inc. (collectively the GridAmerica Companies) have participated in a number of filings at the Federal Energy Regulatory Commission (FERC) in an effort to form GridAmerica LLC as an independent transmission company (ITC). On December 19, 2002, the FERC issued an order conditionally approving the formation and operation of GridAmerica as an ITC within the Midwest Independent System Operator (Midwest ISO), subject to further compliance filings. In response to the December 19, 2002 order, the GridAmerica Companies made three additional filings at the FERC. On January 31, 2003 the GridAmerica Companies filed a request for authorization to transfer functional control of certain transmission assets to GridAmerica. On February 18, 2003, the GridAmerica Companies filed revised agreements codifying the formation and operation of GridAmerica to reflect changes requested by the FERC in the December 19, 2002 order. On February 28, 2003, the GridAmerica Companies together with the Midwest ISO filed revisions to the Midwest ISO Open Access Transmission Tariff (OATT) to provide rates for service over the transmission facilities to be transferred to GridAmerica by the GridAmerica Companies. On April 30 2003, the FERC issued orders in response to the January 31, 2003 and February 28, 2003 filings. In its order regarding the GridAmerica Companies' request to transfer functional control of their transmission assets to GridAmerica, the FERC authorized the transfer. In response to the February 28, 2003 filing, the FERC accepted the amendments to the Midwest ISO OATT effective upon the commencement of service over the GridAmerica transmission facilities under the Midwest ISO OATT, suspended the proposed rates for a nominal period, subject to refund, and established hearing and settlement judge procedures to determine the justness and reasonableness of the proposed rate amendments to the Midwest ISO OATT. An order in response to the February 18, 2003 filing is still pending. Until the tariffs and other material terms of our and AmerenUE's participation in GridAmerica, and GridAmerica's participation in the Midwest ISO, are finalized and approved by the FERC, we are unable to predict the impact that on-going regional transmission organization developments will have on our financial position, results of operations or liquidity. AmerenUE's participation in GridAmerica is subject to Missouri Public Service Commission (MoPSC) approval. An order from the MoPSC is expected during 2003. Standard Market Design Notice of Proposed Rulemaking (NOPR) On July 31, 2002, the FERC issued a Standard Market Design NOPR. The NOPR proposes a number of changes to the way the current wholesale transmission service and energy markets are operated. Specifically, the NOPR calls for all jurisdictional transmission facilities to be placed under the control of an independent transmission provider (similar to an RTO), proposes a new transmission service tariff that provides a single form of transmission service for all users of the transmission system including bundled 8 retail load, and proposes a new energy market and congestion management system that uses locational marginal pricing as its basis. On November 15, 2002, we filed our initial comments on the NOPR with the FERC expressing concern with the potential impact of the proposed rules in their current form on the cost and reliability of service to retail customers. We also proposed that certain modifications be made to the proposed rules in order to protect transmission owners from the possibility of trapped transmission costs that might not be recoverable from ratepayers as a result of inconsistent regulatory policies. We filed additional comments on the remaining sections of the NOPR during the first quarter of 2003. On April 28, 2003 the FERC issued a "white paper" reflecting comments received in response to the NOPR. More specifically, the white paper indicated that the FERC will not assert jurisdiction over the transmission rate component of bundled retail service and will insure that existing bundled retail customers retain their existing transmission rights and retain rights for future load growth in its final rule. Moreover, the white paper acknowledged that the final rule will provide the states with input on resource adequacy requirements, allocation of firm transmission rights, and transmission planning. The FERC also requested input on the flexibility and timing of the final rule's implementation. Even though issuance of the final rule and its implementation schedule are still unknown, the Midwest ISO is already in the process of implementing a market design similar to the proposed market design in the NOPR. The Midwest ISO has targeted March 2004 as the start date for implementation. We are in the process of reviewing the FERC's white paper. Until the FERC issues a final rule, we and Ameren are unable to predict the ultimate impact on our future financial position, results of operations or liquidity. Illinois Gas In November 2002, we filed a request with the Illinois Commerce Commission (ICC) to increase annual rates for natural gas service by approximately $16 million. The ICC has until October 2003 to render a decision on this request; however, the ICC Staff has recommended an annual increase of approximately $8 million. Illinois Electric In 2002, all of our Illinois residential, commercial and industrial customers had choice in electric suppliers as provided by the Electric Service Customer Choice and Rate Relief Law of 1997. Several commercial and industrial customers switched to Marketing Company for their energy supply resulting in a decline in our revenues and a corresponding decrease in purchased power of approximately $19 million for the first quarter of 2003. We continue to incur delivery service costs and charge related tariffs associated with these customers. NOTE 3 - Related Party Transactions We have transactions in the normal course of business with Ameren and its other subsidiaries. These transactions are primarily comprised of power purchases and sales, as well as other services received or rendered. Intercompany power purchases under the Power Supply Agreement and from EEI, an affiliate, totaled $86 million for the three months ended March 31, 2003 (2002 - $105 million). We have the ability to borrow from Ameren and AmerenUE, through a utility money pool agreement. Ameren Services administers the utility money pool and tracks internal and external funds separately. Internal funds are surplus funds contributed to the money pool from participants. The primary source of external funds for the utility money pool at March 31, 2003 was AmerenUE's commercial paper program. Through the utility money pool, we can access committed credit facilities at Ameren and AmerenUE, which totaled $679 million at March 31, 2003. These facilities are in addition to our own $15 million in committed credit facilities. The total amount available to us at any given time from the utility money pool is reduced by the amount of borrowings by our affiliates, but increased to the extent Ameren, AmerenUE or Ameren Services have surplus funds and the availability of other external borrowing sources. Surplus funds providing additional liquidity available to us through the utility money pool totaled $260 million at March 31, 2003. The availability of funds is also determined by funding requirements and limits established by the PUHCA. We, along with AmerenUE and Ameren Services, rely on the utility money 9 pool to coordinate and provide for certain short-term cash and working capital requirements. Borrowers receiving a loan under the utility money pool agreement must repay the principal amount of such loan, together with accrued interest. Interest is calculated at varying rates of interest depending on the composition of internal and external funds in the utility money pool. The average interest rate for the utility money pool for the three months ended March 31, 2003 was 1.32% (2002 - 1.79%). At March 31, 2003, we had $23 million in intercompany receivables outstanding (December 31, 2002 - $16 million) through the utility money pool. On April 1, 2003, AmerenUE entered into an additional 364-day committed credit facility totaling $75 million to be used for general corporate purposes, including support of commercial paper programs. This facility makes borrowings available at various interest rates based on LIBOR, agreed rates and other options. We and Ameren can access this facility through the utility money pool. Support services provided by Ameren Services, including wages, employee benefits and professional services, are based on actual costs incurred. For the three months ended March 31, 2003, support services provided by Ameren Services included in Operating Expenses - Other Operations and Maintenance totaled $15 million (2002 - $16 million). As of March 31, 2003, intercompany receivables included in Miscellaneous Accounts and Notes Receivable were approximately $20 million (December 31, 2002 - $12 million). As of March 31, 2003, intercompany payables included in Accounts and Wages Payables totaled approximately $53 million (2002 - $63 million). Our intercompany interest income recorded in Miscellaneous Income was approximately $7 million for the three months ended March 31, 2003 (2002 - $8 million). NOTE 4 - Property and Plant, Net
Property and plant, net at March 31, 2003 and December 31, 2002, consisted of the following: ---------------------------------------------------------------------------------------------- March 31, 2003 December 31, 2002 ---------------------------------------------------------------------------------------------- Property and plant, at original cost: Electric $1,255 $1,248 Gas 291 290 Other 5 5 ---------------------------------------------------------------------------------------------- $1,551 $1,543 Less accumulated depreciation and amortization 742 732 ---------------------------------------------------------------------------------------------- 809 811 Construction work in progress: Other 13 14 ---------------------------------------------------------------------------------------------- Property and plant, net $ 822 $ 825 ----------------------------------------------------------------------------------------------
NOTE 5 - Debt Financings On April 7, 2003, we redeemed, with cash, prior to maturity and at par our $50 million first mortgage bonds 7.5% Series X due July 1, 2007. At March 31, 2003, neither Ameren, nor any of its subsidiaries, including us, had any off-balance sheet financing arrangements, other than operating leases entered into in the ordinary course of business. At this time, we do not expect to engage in any significant off-balance sheet financing arrangements. Amortization of debt issuance costs and any premium or discounts were less than $1 million for the three months ended March 31, 2003 (2002 - less than $1 million) and were included in interest expense in the income statement. 10 At March 31, 2003, Ameren and its subsidiaries, including us, were in compliance with financial agreement provisions and covenants. NOTE 6 - Miscellaneous, Net Miscellaneous, net for the three months ended March 31, 2003 and 2002 consisted of the following: -------------------------------------------------------------------------------- Three Months 2003 2002 -------------------------------------------------------------------------------- Miscellaneous income: Interest and dividend income $7 $8 Equity in earnings of subsidiary - 1 Other - 1 -------------------------------------------------------------------------------- Total miscellaneous income $7 $10 -------------------------------------------------------------------------------- Miscellaneous expense: Other $(1) $(1) -------------------------------------------------------------------------------- Total miscellaneous expense $(1) $(1) -------------------------------------------------------------------------------- NOTE 7 - Segment Information Our business segments provide electric and gas service in portions of Illinois. The accounting policies of the segments are the same as those described in Note 1 - Summary of Significant Accounting Policies. Segment data includes a charge allocating costs of administrative support services to each of the segments. These costs are accumulated in a separate Ameren subsidiary, Ameren Services, which provides a variety of support services to us. We evaluate the performance of our segments and allocate resources to them, based on revenues and operating income. Segment information for the three months ended March 31, 2003 and 2002 was as follows: -------------------------------------------------------------------------------- Electric Gas Total -------------------------------------------------------------------------------- Three months ended March 31, 2003 -------------------------------------------------------------------------------- Revenues $ 132 $ 77 $ 209 Operating income 3 4 7 -------------------------------------------------------------------------------- Three months ended March 31, 2002 -------------------------------------------------------------------------------- Revenues $ 150 $ 65 $ 215 Operating income/(loss) (1) 4 3 -------------------------------------------------------------------------------- 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW Central Illinois Public Service Company, headquartered in Springfield, Illinois, operates as AmerenCIPS and is a wholly-owned subsidiary of Ameren Corporation (Ameren). Our principal business is the rate-regulated transmission and distribution of electricity and the distribution of natural gas to residential, commercial, industrial and wholesale users in Illinois. Ameren is a public utility holding company registered with the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935 (PUHCA) and is headquartered in St. Louis, Missouri. Ameren's principal business is the generation, transmission and distribution of electricity and the distribution of natural gas to residential, commercial, industrial and wholesale users in the central United States. In addition to us, Ameren's primary subsidiaries and our 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 Light Company, a subsidiary of CILCORP Inc. (CILCORP), which operates a rate-regulated transmission and distribution business, an electric generation business and a rate-regulated natural gas distribution business in Illinois as AmerenCILCO. Ameren completed its acquisition of CILCORP on January 31, 2003. See Recent Developments for further information. o AmerenEnergy Resources Company (Resources Company), which consists of non rate-regulated operations. Subsidiaries include AmerenEnergy Generating Company (Generating Company), which 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 co-generation plant. On February 4, 2003, Ameren completed its acquisition of AES Medina Valley Cogen (No. 4), LLC (Medina Valley) and renamed it AmerenEnergy Medina Valley Cogen (No. 4), LLC. See Recent Developments for further information. Generating Company supplies electric power to Marketing Company which, in turn, supplies us with power under a power supply agreement (Power Supply Agreement). o AmerenEnergy, Inc. (AmerenEnergy), which serves as a power marketing and risk management agent for Ameren-affiliated companies for transactions of primarily less than one year. o Electric Energy, Inc. (EEI), which operates electric generation and transmission facilities in Illinois. Ameren has a 60% ownership interest in EEI, 40% owned by AmerenUE and 20% owned by Resources Company. o Ameren Services Company (Ameren Services), which provides shared support services to Ameren and its subsidiaries, including us. Charges are based upon the actual costs incurred by Ameren Services, as required by the PUHCA. You should read the following discussion and analysis in conjunction with: o The financial statements and related notes included in this Quarterly Report on Form 10-Q. o Management's Discussion and Analysis of Financial Condition and Results of Operations that is included in our 2002 Annual Report on Form 10-K for the period ended December 31, 2002. o The audited financial statements and related notes that are included in our 2002 Annual Report on Form 10-K for the period ended December 31, 2002. When we refer to AmerenCIPS, our, we or us, we are referring to Central Illinois Public Service Company. All tabular dollar amounts are in millions, unless otherwise indicated. Our results of operations and financial position are impacted by many factors, including both controllable and uncontrollable factors. Weather, economic conditions, and the actions of key customers or competitors can significantly impact the demand for our services. Our results are also impacted by seasonal fluctuations caused by winter heating and summer cooling demand. With nearly all of our 12 revenues directly subject to regulation by various state and federal agencies, decisions by regulators can have a material impact on the price we charge for our services. We principally utilize electric power and natural gas in our operations. The prices for these commodities can fluctuate significantly due to the world economic and political environment, weather and many other factors. We do not have a purchased power recovery mechanism in Illinois for our electric utility business, but we do have a gas cost recovery mechanism for our gas utility business. In addition, our electric rates in Illinois are largely set through 2006. We employ various risk management strategies in order to try to reduce our exposure to commodity risks and other risks inherent in our business. The reliability of our transmission and distribution systems, and the level of operating and administrative costs and capital investment are key factors that we seek to control in order to optimize our results of operations, cash flows and financial position. RESULTS OF OPERATIONS Earnings Summary Our net income of $2 million for the three months ended March 31, 2003 was comparable to the same period of 2002. Gas margins improved by $3 million and electric margins improved by $1 million in the first quarter of 2003 principally due to increased demand, resulting from colder weather than the warmer-than-normal weather conditions in the first quarter of 2002. The benefit of the higher gas and electric margins was offset by lower interest income on our note receivable from Generating Company (less than $1 million, net of taxes), the loss of earnings from the transfer of our 20% interest in EEI to Resources Company on April 30, 2002 (less than $1 million, net of taxes) and increased depreciation (less than $1 million, net of taxes). Recent Developments Acquisitions On January 31, 2003, Ameren completed its acquisition of all of the outstanding common stock of CILCORP from The AES Corporation. CILCORP is the parent company of Peoria, Illinois-based Central Illinois Light Company, which operated as CILCO. With the acquisition, CILCO became an Ameren subsidiary, but remains a separate utility company, operating as AmerenCILCO. On February 4, 2003, Ameren also completed its acquisition of 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, which Ameren renamed as AmerenEnergy Medina Valley Cogen (No. 4), LLC, became a wholly-owned subsidiary of Resources Company. The results of operations for CILCORP and AmerenEnergy Medina Valley Cogen (No. 4), LLC were included in Ameren's consolidated financial statements effective with the January and February 2003 acquisition dates. Our results of operations for the quarter ended March 31, 2003 were not impacted by these acquisitions. Ameren acquired CILCORP to complement its existing Illinois gas and electric operations. The purchase included CILCO's rate-regulated electric and natural gas businesses in Illinois serving approximately 200,000 and 205,000 customers, respectively, of which approximately 150,000 are combination electric and gas customers. CILCO's service territory is contiguous to our service territory. CILCO also has a non rate-regulated electric and gas marketing business principally focused in the Chicago, Illinois region. Finally, the purchase included 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 $895 million and consideration of approximately $488 million in cash, including related acquisition costs, net of cash acquired. The purchase price is subject to certain adjustments for working capital and other changes pending the finalization of CILCORP's closing balance sheet. The cash component of the purchase price came from Ameren's issuances in September 2002 of 8.05 million common shares and its issuance in early 2003 of an additional 6.325 million common shares which together generated aggregate net proceeds of $575 million. 13 Credit Ratings In April 2002, as a result of AmerenUE's then pending Missouri electric earnings complaint case and the CILCORP transaction and related assumption of debt, credit rating agencies placed Ameren's and its subsidiaries' debt under review. Following the completion of the acquisition of CILCORP in January 2003, Standard & Poor's lowered the ratings of Ameren, AmerenUE and us and increased the ratings of Generating Company, CILCORP and AmerenCILCO. At the same time, Standard & Poor's changed the outlook assigned to all of Ameren's and its subsidiaries' ratings to stable. Moody's also lowered Ameren's and AmerenUE's ratings subsequent to the acquisition and changed the outlook on these ratings to stable. These actions were consistent with the actions the ratings agencies disclosed they were considering following Ameren's announcement of the CILCORP acquisition. As of April 30, 2003, selected ratings by Moody's and Standard & Poor's were as follows: -------------------------------------------------------------------------------- Moody's Standard & Poor's -------------------------------------------------------------------------------- Ameren Corporation: Issuer/Corporate credit rating A3 A- Unsecured debt A3 BBB+ Commercial paper P-2 A-2 AmerenUE: Secured debt A1 A- Unsecured debt A2 BBB+ Commercial paper P-1 A-2 CILCORP: Unsecured debt Baa2 BBB+ AmerenCILCO: Secured debt A2 A- AmerenCIPS: Secured debt A1 A- Unsecured debt A2 BBB+ Generating Company: Unsecured debt A3/Baa2 A- -------------------------------------------------------------------------------- Any adverse change in our, Ameren's or its other subsidiaries'credit ratings may reduce our 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. Electric Operations The following table represents the favorable (unfavorable) variation on electric margins for the three months ended March 31, 2003 from the comparable period in 2002: -------------------------------------------------------------------------------- Three Months -------------------------------------------------------------------------------- Electric Revenues: Effect of weather (estimate) $ 5 Wholesale sales 1 Interchange sales (2) Growth and other (estimate) (22) -------------------------------------------------------------------------------- Total variation in electric operating revenues $(18) Purchased power variation: $ 19 -------------------------------------------------------------------------------- Change in electric margins $ 1 -------------------------------------------------------------------------------- 14 Electric margins increased $1 million for the three months ended March 31, 2003 compared to the same period in 2002 principally due to increased demand resulting from colder winter weather as weather sensitive residential sales increased 16% for the first quarter of 2003 compared to 2002. During the first quarter of 2003 industrial and commercial revenues and corresponding purchased power declined approximately $19 million resulting from certain customers electing to switch to our affiliate, Marketing Company, for their energy supply and the impact of the soft economy. Gas Operations Our gas margins increased $3 million for the three months ended March 31, 2003 compared to the same period in 2002 gas revenues and costs increased primarily due to increased customer demand resulting from colder winter weather in the first quarter of 2003 as well as, gas costs increased due to higher natural gas prices and increased purchases. Other Operating Expenses Other Operations and Maintenance Other operations and maintenance expenses increased $1 million for the three months ended March 31, 2003 compared to the same period in 2002 primarily due to higher employee benefit costs related to increasing healthcare costs and investment performance of employee benefit plan assets ($2 million), partially offset by decreased professional services expenses related to information technology in 2002 ($1 million). Ameren Services provided services to us including wages, employee benefits and professional services that were included in other operations and maintenance expenses. See Note 4 - Related Party Transactions to our Financial Statements under Item 1 of Part I of this report for further information. Depreciation and Amortization Depreciation and amortization expenses increased $1 million in the first three months of 2003 compared to the same period in 2002 primarily resulting from transmission and distribution related additions. Income Taxes Income taxes were comparable for the three months ended 2003 and 2002. Other Income and Deductions Other income and deductions (excluding income taxes) decreased $3 million in the first three months of 2003 compared to the same period in 2002 primarily due to less intercompany interest received on the Generating Company subordinated promissory note as a result of a lower principal balance outstanding ($1 million), lower earnings from EEI due to the transfer of our 20% common stock interest in EEI to Resources Company on April 30, 2002 ($1 million) and a decrease in contributions in aid of construction ($1 million). Interest Interest expense decreased $1 million for the first three months of 2003 compared to the similar period in 2002, primarily due to less interest expense resulting from the redemption of first mortgage bonds in the third quarter of 2002. 15 LIQUIDITY AND CAPITAL RESOURCES Operating Cash provided by operating activities was $41 million in the first three months of 2003 compared to $11 million in the first three months of 2002. The increase was primarily due to less cash used in Accounts and Wages payable than in the first quarter of 2002. Lower sales and power purchases resulting from certain customers electing to switch to our affiliate, Marketing Company, for their energy supply and the timing impact on working capital resulted in the decrease. Our tariff-based gross margins continue to be our principal source of cash from operating activities. Our diversified retail customer mix of rate-regulated residential, commercial and industrial classes and a commodity mix of gas and electric service provide a reasonably predictable source of cash flows. In addition, we plan to utilize short-term debt to support normal operations and other temporary capital requirements. In 2002, all of our Illinois residential, commercial and industrial customers had choice in electric suppliers as provided by the Electric Service Customer Choice and Rate Relief Law of 1997. Several commercial and industrial customers switched to Marketing Company for their energy supply resulting in a decline in our revenues and a corresponding decrease in purchased power of approximately $19 million for the first quarter of 2003. We continue to incur delivery service costs and charge related tariffs associated with these customers. Investing Our net cash used in investing activities was $17 million for the three months ended March 31, 2003 while net cash provided by investing activities was $6 million for the same period in 2002. The difference was primarily due to increased intercompany money pool investments and a decrease in construction expenditures. Capital expenditures for transmission and distribution related activities are expected to approximate $55 million in 2003. Financing Our cash flows used in financing activities were $25 million for the three months ended March 31, 2003 as compared to $21 million for the same period in 2002. Our principal financing activities for the three month periods included the payment of dividends, as well as redemptions of long-term debt. The increase in cash used in financing activities was primarily due to an increase in the payment of dividends on our common stock. We are authorized by the SEC under the PUHCA to have up to $250 million of short-term unsecured debt instruments outstanding at any time. Short-Term Debt and Liquidity Short-term debt typically consists of borrowings under Ameren's utility money pool agreement but, from time to time, may also consist of commercial paper and bank loans (maturities generally within 1 to 45 days). At March 31, 2003, Ameren and its subsidiaries had committed credit facilities, expiring at various dates between 2003 and 2005, totaling $694 million, excluding AmerenCILCO facilities of $60 million, EEI of $45 million and AmerenUE's nuclear fuel lease facilities of $120 million. This amount includes $15 million of our committed bank lines of credit and $679 million of committed credit facilities at Ameren and AmerenUE. We access these combined facilities through Ameren's utility money pool arrangement. AmerenUE and Ameren Services may also borrow under this arrangement. These committed credit facilities are also used to support AmerenUE's commercial paper program, all of which was unused and available at March 31, 2003. Subject to the receipt of regulatory approval, which is being pursued, AmerenCILCO will participate in Ameren's utility money pool arrangement. Under this arrangement, AmerenCILCO will have access to up to $694 million of additional committed liquidity, subject to reduction based on the use by other utility 16 money pool participants, but increased to the extent other pool participants have surplus cash balances, which may be used to fund pool needs. At March 31, 2003, AmerenCILCO had committed credit facilities, expiring at various dates during 2003, totaling $60 million, one of which totaling $25 million was subsequently renewed to 2004. On April 1, 2003, AmerenUE entered into an additional 364-day committed credit facility totaling $75 million to be used for general corporate purposes, including support of commercial paper programs. This facility makes borrowings available at various interest rates based on LIBOR, agreed rates and other options. We and Ameren can access this facility through the utility money pool. Our affiliate, EEI also has two bank credit agreements totaling $45 million that expire in 2003. At March 31, 2003, $32 million was unused and available under these committed credit facilities. AmerenUE also has a lease agreement that provides for the financing of nuclear fuel. At March 31, 2003, the maximum amount that could be financed under the agreement was $120 million. At March 31, 2003, $111 million was financed under the lease. In addition to committed credit facilities, a further source of liquidity for Ameren is available cash and cash equivalents. At March 31, 2003, Ameren had $260 million of cash, all of which was available for borrowing by us under the utility money pool. In the first quarter of 2003, Ameren paid a total of approximately $488 million of cash on hand, including related acquisition costs, net of cash acquired to acquire CILCORP and Medina Valley. We rely on access to short-term and long-term capital markets as a significant source of funding for capital requirements not satisfied by our operating cash flows. The inability by us to raise capital on favorable terms, particularly during times of uncertainty in the capital markets, could negatively impact our ability to maintain and grow our businesses. Based on our current credit ratings, we believe that we will continue to have access to the capital markets. However, events beyond our control may create uncertainty in the capital markets such that our cost of capital would increase or our ability to access the capital markets would be adversely affected. Financial Agreement Provisions and Covenants Ameren's and our financial agreements include customary default provisions that could impact the continued availability of credit or result in the acceleration of repayment. Ameren's and its subsidiaries' committed credit facilities require the borrower to represent, in connection with any borrowing under the facility that no material adverse change has occurred since certain dates. None of our, Ameren's nor its other subsidiaries' financing arrangements contain credit rating triggers, except for three funded bank term loans at AmerenCILCO totaling $105 million at March 31, 2003. Ameren's 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 Employee Retirement Income Security Act of 1974 (ERISA) funding requirements or limit the unfunded liability status of the plan. Under the most restrictive of these provisions impacting Ameren's facilities totaling $400 million, an event of default will result if the unfunded liability status (as defined in the underlying credit agreements) of Ameren's pension plan exceeds $300 million in the aggregate. Based on the most recent valuation report available to Ameren at December 31, 2002, which was based on January 2002 asset and liability valuations, the unfunded liability status (as defined) was $31 million. While an updated valuation report will not be available until the second half of 2003, Ameren believes that the unfunded liability status of its pension plans (as defined) could exceed $300 million based on the investment performance of the pension plan assets and interest rate changes since January 1, 2002. As a result, Ameren may need to renegotiate the facility provisions, terminate or replace the affected facilities, or fund any unfunded liability shortfall. Should Ameren elect to terminate these facilities, Ameren believes it would otherwise have sufficient liquidity to manage its short-term funding requirements. At March 31, 2003, Ameren and its subsidiaries, including us, were in compliance with their financial agreement provisions and covenants. 17 Off-Balance Sheet Arrangements At March 31, 2003, neither Ameren, nor any of its subsidiaries, including us, had any off-balance sheet financing arrangements, other than operating leases entered into in the ordinary course of business. At this time, we do not expect to engage in any significant off-balance sheet financing arrangements. OUTLOOK We 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 impact native load demand, o The adverse effects of rising employee benefit costs and higher insurance costs, and o An assumed return to more normal weather patterns relative to 2002. In late 2002, we and Ameren announced the following actions to mitigate the effect of these challenges: o A voluntary retirement program that was accepted by approximately 550 Ameren employees, including approximately 70 of our employees and additional employees providing support functions to us through Ameren Services, o Modifications to retiree employee benefit plans to increase co-payments and limit Ameren's overall cost, o A wage freeze in 2003 for all management employees, including our employees, and o Reductions of 2003 expected capital expenditures. We are pursuing an annual gas rate increase of approximately $16 million in Illinois. Ameren is also considering additional actions, including modifications to active employee benefits, further staffing reductions and other initiatives. In early May 2003, our service territory experienced several severe storms that damaged parts of our transmission and distribution system. As a result, we expect to incur increased costs in the quarter ending June 30, 2003 for repairs required to our system. We are currently unable to estimate the impact on our future financial position, results of operations or cash flows. In the ordinary course of business, we and Ameren evaluate several strategies to enhance our financial position, results of operations and liquidity. These strategies may include potential acquisitions, divestitures, opportunities to reduce costs or increase revenues and other strategic initiatives in order to increase Ameren's shareholder value. We are unable to predict which, if any, of these initiatives will be executed, as well as the impact these initiatives may have on our future financial position, results of operations or liquidity. REGULATORY MATTERS See Note 2 - Rate and Regulatory Matters to our Financial Statements under Item 1 of Part I of this report for more information. 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. Our 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, we have outlined those accounting policies that we believe are most difficult, subjective or complex: 18
Accounting Policy Uncertainties Affecting Application ----------------- ------------------------------------ Regulatory Mechanisms and Cost Recovery We defer costs as regulatory assets in o Regulatory environment, external regulatory accordance with SFAS 71 and make investments decisions and requirements that we assume we will be able to collect in o Anticipated future regulatory decisions and their future rates. impact o Impact of deregulation and competition on ratemaking process and ability to recover costs Basis for Judgment We determine that costs are recoverable based on previous rulings by state regulatory authorities in jurisdictions where we operate or other factors that lead us to believe that cost recovery is probable. Environmental Costs We accrue for all known environmental o Extent of contamination contamination where remediation can be o Responsible party determination reasonably estimated, but some of our o Approved methods for cleanup operations have existed for over 100 years o Present and future legislation and governmental and previous contamination may be unknown to regulations and standards us. o Results of ongoing research and development regarding environmental impacts o Indemnification obligations Basis for Judgment We determine the proper amounts to accrue for environmental contamination based on internal and third party estimates of clean-up costs in the context of current remediation standards and available technology. Unbilled Revenue At the end of each period, we estimate, based o Projecting customer energy usage on expected usage, the amount of revenue to o Estimating impacts of weather and other usage- record for services that have been provided affecting factors for the unbilled period to customers, but not billed. This period can be up to one month. Basis for Judgment We determine 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 our service area, as adjusted for the modeled impact of seasonal and weather variations based on historical results. 19 Accounting Policy (Continued) Uncertainties Affecting Application (Continued) ----------------------------- ----------------------------------------------- Benefit Plan Accounting Based on actuarial calculations, we accrue o Future rate of return on pension and other plan costs of providing future employee benefits assets in accordance with SFAS 87, 106, and 112. o Interest rates used in valuing benefit obligations See Note 11 - Retirement Benefits to our o Healthcare costs trend rates Financial Statements in our 2002 Annual o Timing of employee retirements Report on Form 10-K. o Future plan designs Basis for Judgment We utilize a third party consultant to assist us in evaluating and recording the proper amount for future employee benefits. Our ultimate selection of the discount rate, healthcare trend rate and expected rate of return on pension assets is based on our review of available current, historical and projected rates, as applicable.
ITEM 3. Quantitative And Qualitative Disclosures About Market Risk. Market risk represents the risk of changes in value of a physical asset or a financial instrument, derivative or non-derivative, caused by fluctuations in market variables (e.g., interest rates, etc.). The following discussion of Ameren's, including our company's, risk management activities includes "forward-looking" statements that involve risks and uncertainties. Actual results could differ materially from those projected in the "forward-looking" statements. Ameren handles market risks in accordance with established policies, which may include entering into various derivative transactions. In the normal course of business, Ameren and our company also face risks that are either non-financial or non-quantifiable. Such risks principally include business, legal and operational risks and are not represented in the following discussion. Ameren's risk management objective is to optimize its physical generating assets within prudent risk parameters. Risk management policies are set by a Risk Management Steering Committee, which is comprised of senior-level Ameren officers. Interest Rate Risk We are exposed to market risk through changes in interest rates associated with both long-term and short-term variable-rate debt and fixed-rate debt, and auction-rate preferred stock. We manage our interest rate exposure by controlling the amount of these instruments we hold within our total capitalization portfolio and by monitoring the effects of market changes in interest rates. Utilizing our debt outstanding at March 31, 2003, if interest rates increased by 1%, our annual interest expense and dividend on preferred stock would increase by approximately $0.3 million and net income would decrease by approximately $0.3 million. The model does not consider the effects of the reduced level of potential overall economic activity that would exist in such an environment. In the event of a significant change in interest rates, management would likely take actions to further mitigate our exposure to this market risk. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure. 20 Equity Price Risk We, along with other subsidiaries of Ameren, are a participant in Ameren's defined benefit and post-retirement benefit plans and are responsible for our proportional share of the costs. Ameren's costs of providing non-contributory defined benefit retirement and post-retirement benefit plans are dependent upon a number of factors, such as the rates of return on plan assets, discount rate, the rate of increase in health care costs and contributions made to the plans. The market value of Ameren's plan assets has been affected by declines in the equity market since 2000 for the pension and post-retirement plans. As a result, at December 31, 2002 Ameren and its subsidiaries, including us, recognized an additional minimum pension liability as prescribed by SFAS No. 87, "Employers' Accounting for Pensions." The liability resulted in a reduction to equity as a result of a charge to Ameren's Accumulated Other Comprehensive Income (OCI) of $102 million, net of taxes. Our portion of this charge to OCI was $13 million, net of taxes. The amount of the liability was the result of asset returns experienced through 2002, interest rates and Ameren's contributions to the plans during 2002. Neither Ameren's nor our portion of the minimum pension liability changed at March 31, 2003. In future years, the liability recorded, the costs reflected in net income, or OCI, or cash contributions to the plans could increase materially without a recovery in equity markets in excess of Ameren's assumed return on plan assets. If the fair value of the plan assets were to grow and exceed the accumulated benefit obligations in the future, then the recorded liability would be reduced and a corresponding amount of equity would be restored in the Balance Sheet. ITEM 4. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our 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 our disclosure controls and procedures are effective in timely alerting them to material information relating to AmerenCIPS, which is required to be included in our periodic SEC filings. (b) Change in Internal Controls There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date we carried out our evaluation. FORWARD-LOOKING STATEMENTS Statements made in this report which are not based on historical facts are "forward-looking" and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Although such "forward-looking" statements have been made in good faith and are based on reasonable assumptions, there is no assurance that the expected results will be achieved. These statements include (without limitation) statements as to future expectations, beliefs, plans, strategies, objectives, events, conditions and financial performance. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, 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 and others, could cause results to differ materially from management expectations as suggested by such "forward-looking" statements: o the effects of regulatory actions, including changes in regulatory policy; 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; 21 o the effects of participation in a Federal Energy Regulatory Commission-approved Regional Transmission Organization, including activities associated with the Midwest Independent System Operator; o availability and future market prices for purchased power, electricity and natural gas for distribution, including the use of financial and derivative instruments and volatility of changes in market prices and our ability to recover increased costs; 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 Ameren's and our access to necessary capital more difficult or costly; o cost and availability of transmission capacity required to satisfy our energy sales; and o legal and administrative proceedings. Given these uncertainties, undue reliance should not be placed on these forward-looking statements. Except to the extent required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 22 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. Reference is made to Note 12 under Item 8 "Financial Statements and Supplementary Data" in Part II of our 2002 Annual Report on Form 10-K and Note 7 under Item 8 "Financial Statements and Supplementary Data" in Part II of the 2002 Annual Report on Form 10-K of our affiliates, CILCORP Inc. and Central Illinois Light Company, operating as AmerenCILCO, for a discussion of a number of lawsuits that name our affiliates, Union Electric Company, operating as AmerenUE, AmerenCILCO, our parent, Ameren Corporation, and us (which we refer to as the Ameren companies), along with numerous other parties, as defendants that have been filed by plaintiffs claiming varying degrees of injury from asbestos exposure. Since the filing of the 2002 Annual Reports on Form 10-K, 25 additional lawsuits have been filed against us and AmerenUE, but no additional lawsuits have been filed against AmerenCILCO. These lawsuits, like the previous cases, were mostly filed in the Circuit Court of Madison County, Illinois, involve a large number of total defendants and seek unspecified damages in excess of $50,000, which, if proved, typically would be shared among the named defendants. Also since the filing of the 2002 Annual Reports on Form 10-K, the Ameren companies have been voluntarily dismissed in 58 cases and have settled six cases. To date, a total of 152 asbestos-related lawsuits have been filed against the Ameren companies, of which 72 are pending, 16 have been settled and 64 have been dismissed. We believe that the final disposition of these proceedings will not have a material adverse effect on our financial position, results of operations or liquidity. Note 2 - Rate and Regulatory Matters to our Financial Statements under Item 1 of Part I of this report contains additional information on an administrative proceeding which is incorporated by reference under this item. ITEM 6. Exhibits and Reports on Form 8-K. (a)(i) Exhibits filed herewith. 99.1 - Certificate of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 - Certificate of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. (a)(ii) Exhibits incorporated by reference. 10.1 - *2003 Ameren Executive Incentive Plan (Ameren Corporation quarterly report on Form 10-Q for the quarter ended March 31, 2003, Exhibit 10.1) (b) Reports on Form 8-K. AmerenCIPS filed no reports on Form 8-K during the quarterly period ended March 31, 2003. Note: Reports of Ameren Corporation on Forms 8-K, 10-Q and 10-K are on file with the SEC under File Number 1-14756. Reports of Union Electric Company on Forms 8-K, 10-Q and 10-K are on file with the SEC under File Number 1-2967. Reports of Ameren Energy Generating Company on Forms 8-K, 10-Q and 10-K are on file with the SEC under the File Number 333-56594. --------------------- * Management compensatory plan or arrangement. 23 Reports of CILCORP Inc. on Forms 8-K, 10-Q and 10-K are on file with the SEC under File Number 2-95569. Reports of Central Illinois Light Company on Forms 8-K, 10-Q and 10-K are on file with the SEC under File Number 1-2732. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTRAL ILLINOIS PUBLIC SERVICE COMPANY (Registrant) By /s/ Martin J. Lyons ---------------------------- Martin J. Lyons Vice President and Controller (Principal Accounting Officer) Date: May 14, 2003 CERTIFICATIONS I, Gary L. Rainwater, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Central Illinois Public Service Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and 24 CERTIFICATIONS (CONTINUED) c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Gary L. Rainwater ------------------------------------- Gary L. Rainwater President and Chief Executive Officer (Principal Executive Officer) I, Warner L. Baxter, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Central Illinois Public Service Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and 25 CERTIFICATIONS (CONTINUED) c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Warner L. Baxter ------------------------------- Warner L. Baxter Senior Vice President, Finance (Principal Financial Officer) 26