AEE

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2006, for Ameren Corporation and its subsidiaries, including Union Electric Company (UE), Central Illinois Public Service Company (CIPS), Ameren Energy Generating Company (Genco), CILCORP Inc., Central Illinois Light Company (CILCO), and Illinois Power Company (IP). Ameren operates rate-regulated electric and natural gas transmission and distribution businesses in Missouri and Illinois, alongside non-rate-regulated electric generation businesses. The filing highlights significant regulatory uncertainty in Illinois regarding the expiration of a 10-year electric rate freeze and power supply contracts on December 31, 2006.

Key Financial Metrics (Nine Months Ended Sept 30, 2006)

Note: Net income decreased 17% year-over-year. Operating cash flow decreased 12% due to lower margins and higher tax payments.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by $181 million (3.6%) primarily driven by organic growth and increased interchange sales margins following the expiration of cost-based affiliate power supply contracts in late 2005.
• Profitability Decline: Net income dropped significantly due to higher fuel and transportation costs (coal prices up 7-11%), severe storm-related outages, an unscheduled outage at the Callaway nuclear plant, and milder weather conditions reducing demand.
• Segment Performance:
  • Missouri Regulated (UE): Electric margins decreased $56 million for the nine months due to weather, storm costs, and the unavailability of the Taum Sauk hydroelectric plant.
  • Illinois Regulated: Margins were impacted by the expiration of power supply contracts and increased purchased power costs.
  • Non-rate-regulated Generation: Margins increased $40 million, largely due to higher interchange sales margins at EEI.
• Investing Activities: Cash used in investing activities increased to $1.005 billion (from $736 million) primarily due to UE's acquisition of three combustion turbine (CT) facilities totaling $292 million.

Guidance, Outlook, Risks, and Contingencies

Illinois Rate Freeze and Insolvency Risk

The most critical risk identified is the potential legislative extension of the Illinois electric rate freeze through 2010. Ameren estimates that if enacted, its Illinois utilities (CIPS, CILCO, IP) would spend approximately $1 billion annually more for power than they could charge customers. Management states this would likely lead to financial insolvency by February 2007, a downgrade of credit ratings to "deep junk" status, and a loss of access to capital markets.

Credit Rating Actions

In reaction to the Illinois legislative uncertainty:

• S&P: Downgraded Ameren and subsidiaries to BBB/BBB- and placed them on credit watch negative in October 2006.
• Moody's: Downgraded several subsidiaries (UE, CIPS, CILCORP, CILCO) in July 2006 and placed all Ameren companies under review for possible downgrade in October 2006.
• Fitch: Placed Ameren and Illinois utilities on rating watch negative.

Regulatory Proceedings

• Missouri: UE filed for a $361 million electric rate increase and $11 million gas rate increase with the MoPSC in July 2006. A decision is expected by June 2007.
• Illinois: CIPS, CILCO, and IP filed for delivery service rate increases totaling $202 million. Administrative law judges recommended a $147 million increase in October 2006; a final ICC decision is due by November 25, 2006.

Operational Contingencies

• Taum Sauk Breach: Following the December 2005 reservoir breach, UE settled with FERC for a $10 million penalty and $5 million in project enhancements. The plant remains out of service pending state reviews and a decision on rebuilding.
• Joint Dispatch Agreement (JDA): The JDA between UE, CIPS, and Genco was terminated effective December 31, 2006, altering power dispatch and margin allocation.

Investor Verification Checklist

• Illinois Legislative Status: Monitor the Illinois General Assembly's progress on the rate freeze extension legislation, as its passage is deemed an existential threat to the Illinois utilities.
• Credit Rating Trajectory: Track further actions by S&P, Moody's, and Fitch, as downgrades to sub-investment grade could trigger collateral requirements and prepayment demands totaling hundreds of millions of dollars.
• MoPSC Rate Case Outcome: Verify the final decision on UE's $361 million rate increase request, which is critical for recovering infrastructure and fuel costs in Missouri.
• Taum Sauk Rebuild Decision: Confirm whether UE will rebuild the Taum Sauk facility and the associated capital requirements, as this remains a significant contingent liability.
• Power Procurement Auction Appeals: Monitor the status of court appeals challenging the September 2006 Illinois power procurement auction results, which set the price for 2007 power supply.