AEE

Ameren Corporation 10-Q Summary: Period Ended September 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, for Ameren Corporation and its subsidiaries, including Union Electric Company (UE), Central Illinois Public Service Company (CIPS), Ameren Energy Generating Company (Genco), CILCORP Inc., and Central Illinois Light Company (CILCO). Ameren is a public utility holding company providing electricity and natural gas services in Missouri and Illinois. A significant event during the period was the integration of CILCORP, acquired on January 31, 2003, and the transfer of approximately 1,100 megawatts of CILCO generating capacity to its subsidiary AERG in October 2003.

Key Financial Metrics (Consolidated Ameren)

Note: Operating margins are not explicitly stated as a percentage in the text, but operating income represents approximately 37% of revenues for the nine-month period.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased 17.5% year-over-year for the nine months ended September 30, 2003, primarily driven by the acquisition of CILCORP and increased interchange revenues due to improved power prices.
• Net Income Increase: Net income rose 17.4% to $486 million for the nine-month period. This increase includes a one-time after-tax gain of $31 million from a coal contract settlement and an $18 million net gain from the adoption of SFAS 143 (Asset Retirement Obligations).
• Excluding One-Time Items: Excluding the coal settlement and SFAS 143 gains, adjusted net income for the nine months was $437 million, representing a 5.8% increase over the prior year.
• Expense Trends: Fuel and purchased power expenses increased due to higher sales volumes from the CILCORP acquisition. However, excluding CILCORP, fuel costs decreased due to greater availability of low-cost generation. Other operations and maintenance expenses increased due to CILCORP integration costs and higher employee benefit costs, partially offset by lower labor costs from a voluntary retirement program.
• Balance Sheet: Total assets increased by approximately $2 billion from December 31, 2002, reflecting the CILCORP acquisition and capital expenditures. Cash and cash equivalents decreased from $628 million to $100 million, largely due to the $489 million cash payment for acquisitions and significant capital expenditures ($457 million).

Guidance, Outlook, and Risks

• Outlook: Management expects CILCORP operations to be accretive to earnings in the first full year following acquisition as synergies are realized. Industrial sales showed a 1% increase in the first nine months of 2003, and weather-adjusted residential/commercial load growth is expected to continue at approximately 2% annually.
• Regulatory Matters: Electric rates in Illinois are legislatively fixed through January 1, 2007. In Missouri, UE faces a rate reduction of $30 million effective April 1, 2004. UE is pursuing a $27 million annual gas rate increase in Missouri, with settlement discussions ongoing. The company is reassessing its participation in the Midwest ISO Regional Transmission Organization (RTO) following changes by other Illinois utilities.
• Capital Expenditures: Forecasted capital expenditures for the full year 2003 are $675 million. A significant portion is allocated to UE ($485 million) and CILCORP/CILCO ($100 million each).
• Risks and Contingencies:
  • Environmental: Ongoing litigation regarding the Sauget Area 1 site (UE was dismissed from the lawsuit in September 2003, but the government reserves the right to refile). Potential costs associated with new EPA regulations on cooling water intake structures and New Source Review (NSR) programs are uncertain but could be material.
  • Asbestos Litigation: 91 asbestos-related lawsuits were pending as of October 31, 2003. Management does not believe these will have a material adverse effect.
  • Pension Funding: A minimum pension liability of $102 million (after-tax) was recorded. Future funding requirements are estimated at $150-$175 million annually for 2005-2007, dependent on market performance and interest rates.
  • Market Risk: Exposure to interest rate fluctuations and commodity price volatility (coal, gas, electricity) is managed through derivatives and risk management policies.

Key Facts for Investor Verification

• One-Time Gains: Verify the sustainability of earnings by excluding the $31 million coal contract settlement gain and the $18 million SFAS 143 accounting change gain from the reported net income.
• Acquisition Integration: Monitor the realization of synergies from the CILCORP acquisition, specifically regarding reduced overhead and fuel costs, as projected by management.
• Regulatory Rate Cases: Track the outcome of the Missouri gas rate case (decision expected April 2004) and the impact of the mandated $30 million electric rate reduction in Missouri effective April 2004.
• Capital Markets Access: Confirm continued access to capital markets, as the company relies on debt and equity issuances to fund capital expenditures and acquisitions, with $879 million remaining on a shelf registration statement.
• Pension Liability: Watch for potential increases in the minimum pension liability based on changes in interest rates and equity market performance at year-end 2003.