Ameren Illinois Co - Annual Report: 2007 (Form 10-K)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2007
		OR
( )		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from        to       .

 

Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Each of the following classes or series of securities is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 and is listed on the New York Stock Exchange:

 

 

Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934:

 

 

Ameren Energy Generating Company, CILCORP Inc., and Illinois Power Company do not have securities registered under either Section 12(b) or 12(g) of the Securities Exchange Act of 1934.

 

Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.

 

 

Indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.

 

 

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 registrant was 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 each registrant’s 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.

 

 

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

 

 

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

 

 

As of June 29, 2007, Ameren Corporation had 207,510,090 shares of its $0.01 par value common stock outstanding. The aggregate market value of these shares of common stock (based upon the closing price of these shares on the New York Stock Exchange on that date) held by nonaffiliates was $10,170,069,511. The shares of common stock of the other registrants were held by affiliates as of June 29, 2007.

 

The number of shares outstanding of each registrant’s classes of common stock as of January 31, 2008, was as follows:

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive proxy statement of Ameren Corporation and portions of the definitive information statements of Union Electric Company, Central Illinois Public Service Company, and Central Illinois Light Company for the 2008 annual meetings of shareholders are incorporated by reference into Part III of this Form 10-K.

 

OMISSION OF CERTAIN INFORMATION

 

Ameren Energy Generating Company and CILCORP Inc. meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore filing this form with the reduced disclosure format allowed under that General Instruction.

 

This combined Form 10-K is separately filed by Ameren Corporation, Union Electric Company, Central Illinois Public Service Company, Ameren Energy Generating Company, CILCORP Inc., Central Illinois Light Company, and Illinois Power Company. Each registrant hereto is filing on its own behalf all of the information contained in this annual report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.

 

TABLE OF CONTENTS

 

 

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 on page 3 of this Form 10-K 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.

 

We use the words “our,” “we” or “us” with respect to certain information that relates to all Ameren Companies, as defined below. When appropriate, subsidiaries of Ameren are named specifically as we discuss their various business activities.

 

AERG – AmerenEnergy Resources Generating Company, a CILCO subsidiary that operates a non-rate-regulated electric generation business in Illinois.

AFS – Ameren Energy Fuels and Services Company, a Resources Company subsidiary that procures fuel and natural gas and manages the related risks for the Ameren Companies.

Ameren – Ameren Corporation and its subsidiaries on a consolidated basis. In references to financing activities, acquisition activities, or liquidity arrangements, Ameren is defined as Ameren Corporation, the parent.

Ameren Companies – The individual registrants within the Ameren consolidated group.

Ameren Illinois Utilities – CIPS, IP and the rate-regulated electric and gas utility operations of CILCO.

Ameren Services – Ameren Services Company, an Ameren Corporation subsidiary that provides support services to Ameren and its subsidiaries.

AMIL – The balancing authority area operated by Ameren, which includes the load of the Ameren Illinois Utilities and the generating assets of AERG and Genco.

AMMO – The balancing authority area operated by Ameren, which includes the load and generating assets of UE.

AMT – Alternative minimum tax.

APB – Accounting Principles Board.

ARB – Accounting Research Bulletin.

ARO – Asset retirement obligations.

Baseload  – The minimum amount of electric power delivered or required over a given period of time at a steady rate.

Btu – British thermal unit, a standard unit for measuring the quantity of heat energy required to raise the temperature of one pound of water by one degree Fahrenheit.

Capacity factor – A percentage measure that indicates how much of an electric power generating unit’s capacity was used during a specific period.

CILCO – Central Illinois Light Company, a CILCORP subsidiary that operates a rate-regulated electric transmission and distribution business, a non-rate-regulated electric generation business through AERG, and a rate-regulated natural gas transmission and distribution business, all in Illinois, as AmerenCILCO. CILCO owns all of the common stock of AERG.

CILCORP – CILCORP Inc., an Ameren Corporation subsidiary that operates as a holding company for CILCO and various non-rate-regulated subsidiaries.

CIPS – Central Illinois Public Service Company, an Ameren Corporation subsidiary that operates a rate-regulated electric and natural gas transmission and distribution business in Illinois as AmerenCIPS.

CIPSCO – CIPSCO Inc., the former parent of CIPS.

CO₂ – Carbon dioxide.

Cooling degree-days – The summation of positive differences between the mean daily temperature and a 65-degree Fahrenheit base. This statistic is useful for estimating electricity demand by residential and commercial customers for summer cooling.

CT – Combustion turbine electric generation equipment used primarily for peaking capacity.

CUB – Citizens Utility Board.

Development Company – Ameren Energy Development Company was an Ameren Energy Resources Company subsidiary and parent of Genco, Marketing Company, AFS, and Medina Valley. It was eliminated in an internal reorganization in February 2008.

DOE – Department of Energy, a U.S. government agency.

DRPlus – Ameren Corporation’s dividend reinvestment and direct stock purchase plan.

Dth (dekatherm) – one million BTUs of natural gas.

Dynegy – Dynegy Inc.

EEI – Electric Energy, Inc., an 80%-owned Ameren Corporation subsidiary (40% owned by UE and 40% owned by Development Company) that operates non-rate-regulated electric generation facilities and FERC-regulated transmission facilities in Illinois. In February 2008, UE’s 40% ownership interest and Development Company’s 40% ownership interest were transferred to Resources Company. The remaining 20% is owned by Kentucky Utilities Company.

EITF – Emerging Issues Task Force, an organization designed to assist the FASB in improving financial reporting through the identification, discussion and resolution of financial issues in keeping with existing authoritative literature.

ELPC – Environmental Law and Policy Center.

EPA – Environmental Protection Agency, a U.S. government agency.

Equivalent availability factor – A measure that indicates the percentage of time an electric power generating unit was available for service during a period.

ERISA – Employee Retirement Income Security Act of 1974, as amended.

Exchange Act – Securities Exchange Act of 1934, as amended.

FASB – Financial Accounting Standards Board, a rulemaking organization that establishes financial accounting and reporting standards in the United States.

FERC – The Federal Energy Regulatory Commission, a U.S. government agency.

FIN – FASB Interpretation.  An explanation intended to clarify accounting pronouncements previously issued by the FASB.

Fitch – Fitch Ratings, a credit rating agency.

FSP – FASB Staff Position.  A publication that provides application guidance on FASB literature.

FTRs – Financial transmission rights, financial instruments that entitle the holder to pay or receive compensation for certain congestion-related transmission charges between two designated points.

Fuelco – Fuelco LLC, a limited-liability company that provides nuclear fuel management and services to its members. The members are UE, Texas Generation Company LP, and Pacific Energy Fuels Company.

GAAP – Generally accepted accounting principles in the United States.

Genco – Ameren Energy Generating Company, a Resources Company subsidiary that operates a non-rate-regulated electric generation business in Illinois and Missouri.

Gigawatthour – One thousand megawatthours.

Heating degree-days – The summation of negative differences between the mean daily temperature and a 65- degree Fahrenheit base. This statistic is useful as an indicator of demand for electricity and natural gas for winter space heating for residential and commercial customers.

IBEW – International Brotherhood of Electrical Workers, a labor union.

ICC – Illinois Commerce Commission, a state agency that regulates the Illinois utility businesses and operations of CIPS, CILCO and IP.

Illinois Customer Choice Law – Illinois Electric Service Customer Choice and Rate Relief Law of 1997, which provided for electric utility restructuring and introduced competition into the retail supply of electric energy in Illinois.

Illinois electric settlement agreement – A comprehensive settlement of issues in Illinois arising out of the end of ten years of frozen electric rates, effective January 2, 2007. The Illinois electric settlement agreement, which became effective on August 28, 2007, was designed to avoid new rate rollback and freeze legislation and legislation that would impose a tax on electric generation in Illinois. The settlement addresses the issue of future power procurement, and it includes a comprehensive rate relief and customer assistance program.

Illinois EPA – Illinois Environmental Protection Agency, a state government agency.

Illinois Regulated – A financial reporting segment consisting of the regulated electric and gas transmission and distribution businesses of CIPS, CILCO and IP.

IP – Illinois Power Company, an Ameren Corporation subsidiary. IP operates a rate-regulated electric and natural gas transmission and distribution business in Illinois as AmerenIP.

IP LLC – Illinois Power Securitization Limited Liability Company, which is a special-purpose Delaware limited-liability company.

IP SPT – Illinois Power Special Purpose Trust, which was created as a subsidiary of IP LLC to issue TFNs as allowed under the Illinois Customer Choice Law. Pursuant to FIN 46R, IP SPT is a variable-interest entity, as the equity investment is not sufficient to permit IP SPT to finance its activities without additional subordinated debt.

IPA – Illinois Power Agency, a state government agency that has broad authority to assist in the procurement of electric power for residential and nonresidential customers beginning in June 2009.

ISRS – Infrastructure system replacement surcharge.  A cost recovery mechanism in Missouri that allows UE to recover gas infrastructure replacement costs from utility customers without a traditional rate case.

IUOE – International Union of Operating Engineers, a labor union.

JDA – The joint dispatch agreement among UE, CIPS, and Genco under which UE and Genco jointly dispatched electric generation prior to its termination on December 31, 2006.

Kilowatthour – A measure of electricity consumption equivalent to the use of 1,000 watts of power over a period of one hour.

Marketing Company – Ameren Energy Marketing Company, a Resources Company subsidiary that markets power for Genco, AERG and EEI.

Medina Valley – Ameren Energy Medina Valley Cogen LLC, a Resources Company subsidiary, which owns a 40-megawatt gas-fired electric generation plant.

Megawatthour – One thousand kilowatthours.

MGP – Manufactured gas plant.

MISO – Midwest Independent Transmission System Operator, Inc.

MISO Day Two Energy Market – A market that began operating on April 1, 2005. It uses market-based pricing, which incorporates transmission congestion and line losses, to compensate market participants for power.

Missouri Environmental Authority – Environmental Improvement and Energy Resources Authority of the state of Missouri, a governmental body authorized to finance environmental projects by issuing tax-exempt bonds and notes.

Missouri Regulated – A financial reporting segment consisting of all the operations of UE’s business, except for non-rate-regulated activities.

Money pool – Borrowing agreements among Ameren and its subsidiaries to coordinate and provide for certain short-term cash and working capital requirements. Separate money pools maintained for rate-regulated and non-rate-regulated businesses are referred to as the utility money pool and the non-state-regulated subsidiary money pool, respectively.

Moody’s – Moody’s Investors Service Inc., a credit rating agency.

MoPSC – Missouri Public Service Commission, a state agency that regulates the Missouri utility business and operations of UE.

NCF&O – National Congress of Firemen and Oilers, a labor union.

NERC – North American Electric Reliability Corporation.

Non-rate-regulated Generation – A financial reporting segment consisting of the operations or activities of Genco, CILCORP holding company, AERG, EEI, and Marketing Company.

NOx – Nitrogen oxide.

Noranda – Noranda Aluminum, Inc.

NRC – Nuclear Regulatory Commission, a U.S. government agency.

NYMEX – New York Mercantile Exchange.

NYSE – New York Stock Exchange, Inc.

OATT – Open Access Transmission Tariff.

OCI – Other comprehensive income (loss) as defined by GAAP.

Off-system revenues – Revenues from nonnative load sales.

OTC – Over-the-counter.

PGA – Purchased Gas Adjustment tariffs, which allow the passing through of the actual cost of natural gas to utility customers.

PJM – PJM Interconnection LLC.

PUHCA 1935 – The Public Utility Holding Company Act of 1935. It was repealed effective February 8, 2006, by the Energy Policy Act of 2005 that was enacted on August 8, 2005.

PUHCA 2005 – The Public Utility Holding Company Act of 2005, enacted as part of the Energy Policy Act of 2005, effective February 8, 2006.

Regulatory lag – Adjustments to retail electric and natural gas rates are based on historic cost levels and rate increase requests can take up to 11 months to be granted by the MOPSC and the ICC. As a result, revenue increases authorized by regulators will lag behind changing costs.

Resources Company – Ameren Energy Resources Company, LLC, an Ameren Corporation subsidiary that consists of non-rate-regulated operations, including Genco, Marketing Company, EEI, AFS, and Medina Valley. It is the successor to Ameren Energy Resources Company, which was eliminated in an internal reorganization in February 2008.

RTO – Regional Transmission Organization.

S&P – Standard & Poor’s Ratings Services, a credit rating agency that is a division of The McGraw-Hill Companies, Inc.

SEC – Securities and Exchange Commission, a U.S. government agency.

SERC – SERC Reliability Corporation, one of the regional electric reliability councils organized for coordinating the planning and operation of the nation’s bulk power supply.

SFAS – Statement of Financial Accounting Standards, the accounting and financial reporting rules issued by the FASB.

SO₂ – Sulfur dioxide.

TFN – Transitional Funding Trust Notes issued by IP SPT as allowed under the Illinois Customer Choice Law. IP must designate a portion of cash received from customer billings to pay the TFNs. The proceeds received by IP are remitted to IP SPT. The proceeds are restricted for the sole purpose of making payments of principal and interest on, and paying other fees and expenses related to, the TFNs. Under the application of FIN 46R, IP does not consolidate IP SPT. Therefore, the obligation to IP SPT appears on IP’s balance sheet.

TVA – Tennessee Valley Authority, a public power authority.

UE – Union Electric Company, an Ameren Corporation subsidiary that operates a rate-regulated electric generation, transmission and distribution business, and a rate-regulated natural gas transmission and distribution business in Missouri as AmerenUE.

 

 

 

Statements in this report not based on historical facts are considered “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 under Risk Factors and elsewhere in this report and in our other filings with the SEC, could cause actual results to differ materially from management expectations suggested in such forward-looking statements:

 

 

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 update or revise publicly any forward-looking statements to reflect new information or future events.

 

 

Ameren, headquartered in St. Louis, Missouri, is a public utility holding company under PUHCA 2005 administered by FERC. Ameren was formed in 1997 by the merger of UE and CIPSCO. Ameren acquired CILCORP in 2003 and IP in 2004. Ameren’s primary assets are the common stock of its subsidiaries, including UE, CIPS, Genco, CILCORP and IP. Ameren’s subsidiaries, which are separate, independent legal entities, operate rate-regulated electric generation, transmission and distribution businesses, rate-regulated natural gas transmission and distribution businesses, and non-rate-regulated electric generation businesses in Missouri and Illinois. Dividends on Ameren’s common stock depend upon distributions made to it by its subsidiaries.

 

To streamline its organizational structure, during late 2007, Ameren dissolved, merged or consolidated various of its subsidiaries that were inactive or had minimal or ancillary business operations. Among the subsidiaries eliminated was Ameren Energy, Inc., which previously served as a power marketing and risk management agent for UE. UE now performs such functions for itself. To further streamline its organizational structure, in February 2008, Development Company was eliminated through merger and Ameren Energy Resources Company was merged into the newly created Resources Company. As a part of this internal reorganization, on February 29, 2008, UE’s 40% ownership interest and Development Company’s 40% ownership interest in EEI were transferred to this newly created Resources Company.

 

The following table presents our total employees at December 31, 2007:

 

 

 

The IBEW, the IUOE, the NCF&O and the Laborers and Gas Fitters labor unions collectively represent about 61% of Ameren’s total employees. They represent 72% of the employees at UE, 81% at CIPS, 72% at Genco, 70% at CILCORP, 70% at CILCO, and 90% at IP. All collective bargaining agreements that expired in 2007 have been renegotiated and ratified, with the exception of the benefits provisions contained in the agreements between IP and IBEW locals 51, 309, 702, and 1306. Bargaining over these benefits provisions continues at this time, with existing provisions remaining in effect. The majority of the renegotiated agreements have four- or five-year terms, and expire in 2011 and 2012. Four collective bargaining agreements between IP and the Laborers and Gas Fitters labor unions, covering approximately 127 employees, expire June 30, 2008.

 

For additional information about the development of our businesses, our business operations, and factors affecting our operations and financial position, see Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7, of this report and Note 1 – Summary of Significant Accounting Policies to our financial statements under Part II, Item 8, of this report.

 

Ameren has three reportable segments: Missouri Regulated, Illinois Regulated, and Non-rate-regulated Generation. CILCORP and CILCO have two reportable segments: Illinois Regulated and Non-rate-regulated Generation. See Note 16 – Segment Information to our financial statements under Part II, Item 8, of this report for additional information on reporting segments.

 

Rates

 

Rates that UE, CIPS, CILCO and IP are allowed to charge for their utility services are the single most important influence upon their and Ameren’s consolidated results of operations, financial position, and liquidity. The utility rates charged to UE, CIPS, CILCO and IP customers are determined by governmental entities. Decisions by these entities are influenced by many factors, including the cost of providing service, the quality of service, regulatory staff knowledge and experience, economic conditions, public policy, and social and political views. Decisions made by these governmental entities regarding rates could have a material impact on the results of operations, financial position, or liquidity of UE, CIPS, CILCORP, CILCO, IP and Ameren.

 

The ICC regulates rates and other matters for CIPS, CILCO and IP. The MoPSC regulates UE. FERC regulates UE, CIPS, Genco, CILCO, IP and EEI as to their ability to charge market-based rates for the sale and transmission of energy in interstate commerce and various other matters discussed below under General Regulatory Matters.

 

About 37% of Ameren’s electric and 13% of its gas operating revenues were subject to regulation by the MoPSC in the year ended December 31, 2007. About 41% of Ameren’s electric and 87% of its gas operating revenues were subject to regulation by the ICC in the year ended December 31, 2007. Wholesale revenues for UE, Genco and AERG are subject to FERC regulation, but not subject to direct MoPSC or ICC regulation.

 

Missouri Regulated

 

About 83% of UE’s electric and 100% of its gas operating revenues were subject to regulation by the MoPSC in the year ended December 31, 2007.

 

If certain criteria are met, UE’s gas rates may be adjusted without a traditional rate proceeding. PGA clauses permit prudently incurred natural gas costs to be passed directly to the consumer. The ISRS permits prudently incurred gas infrastructure replacement costs to be passed directly to the consumer.

 

A Missouri law enacted in July 2005 enables the MoPSC to put in place fuel and purchased power and environmental cost recovery mechanisms for Missouri’s electric utilities. The law also includes rate case filing requirements, a 2.5% annual rate increase cap for the environmental cost recovery mechanism, and prudency reviews, among other things. Rules for the fuel and purchased power cost recovery mechanism were approved by the MoPSC in September 2006 and became effective that year. Rules for the environmental cost recovery mechanism were approved by the MoPSC in February 2008 and will be effective once published in the Missouri Register. UE will not be able to utilize the cost recovery mechanisms until the MoPSC authorizes them as part of a rate case proceeding. UE was denied use of a fuel and purchased power cost recovery mechanism in its last electric rate order, in May 2007. UE plans to request use of a fuel and purchased power cost recovery mechanism and, potentially an environmental cost recovery mechanism, in its next electric rate case filing, expected in the second quarter of 2008.

 

With the expiration of multiyear electric and gas rate moratoriums, effective July 1, 2006, UE filed requests with the MoPSC in July 2006 for an electric rate increase and for a natural gas delivery rate increase. In March 2007, a stipulation and agreement approved by the MoPSC authorized an increase in annual natural gas delivery revenues of $6 million effective April 1, 2007. As part of this stipulation and agreement, UE agreed not to file a natural gas delivery rate case before March 15, 2010. This agreement did not prevent UE from filing to recover gas infrastructure replacement costs through an ISRS during this three-year rate moratorium. In February 2008, the MoPSC approved UE’s petition requesting the establishment of an ISRS to recover annual revenues of $4 million effective March 29, 2008.

 

In May 2007, the MoPSC issued an order, which, as clarified, granted UE an increase in base rates for electric service, effective June 4, 2007. For further information on Missouri rate matters, including the Missouri law enabling fuel and purchased power and environmental cost recovery mechanisms, see Results of Operations and Outlook in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7, Quantitative and Qualitative Disclosures About Market Risk under Part II, Item 7A, and Note 2 – Rate and Regulatory Matters, and Note 13 – Commitments and Contingencies to our financial statements under Part II, Item 8, of this report.

 

Illinois Regulated

 

The following table presents the approximate percentage of electric and gas operating revenues subject to regulation by the ICC for each of the Illinois Regulated companies for the year ended December 31, 2007:

 

 

 

If certain criteria are met, CIPS’, CILCO’s and IP’s gas rates may be adjusted without a traditional rate proceeding. PGA clauses permit prudently incurred natural gas costs to be passed directly to the consumer.

Environmental adjustment rate riders authorized by the ICC permit the recovery of prudently incurred MGP remediation and litigation costs from CIPS’, CILCO’s and IP’s Illinois electric and natural gas utility customers. As a part of the order approving Ameren’s acquisition of IP, the ICC also approved a tariff rider that allows IP to recover the costs of asbestos-related litigation claims, subject to the following terms. Beginning in 2007, 90% of cash expenditures in excess of the amount included in base electric rates is recoverable by IP from a trust fund established by IP and financed with contributions of $10 million each by Ameren and Dynegy. At December 31, 2007, the trust fund balance was $22 million, including accumulated interest. If cash expenditures are less than the amount in base rates, IP will contribute 90% of the difference to the fund. Once the trust fund is depleted, 90% of allowed cash expenditures in excess of base rates will be recoverable through charges assessed to customers under the tariff rider.

 

New electric rates for CIPS, CILCO and IP went into effect on January 2, 2007, reflecting delivery service tariffs approved by the ICC in November 2006 and full cost recovery of power purchased on behalf of Ameren Illinois Utilities’ customers in the September 2006 power procurement auction in accordance with a January 2006 ICC order. See Results of Operations and Outlook in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7, Quantitative and Qualitative Disclosures About Market Risk under Part II, Item 7A, and Note 2 – Rate and Regulatory Matters, and Note 13 – Commitments and Contingencies to our financial statements under Part II, Item 8, of this report for further information on rate matters. This material summarizes actions taken by certain Illinois legislators, the Illinois governor, the Illinois attorney general, and others regarding the expiration of the rate freeze at the beginning of 2007, opposition to the 2006 power procurement auction, and the Illinois electric settlement agreement and establishment of the IPA, as well as electric and gas delivery service rate cases filed by CIPS, CILCO and IP in November 2007.

 

General Regulatory Matters

 

UE, CIPS, CILCO and IP must receive FERC approval to issue short-term debt securities and to conduct certain acquisitions, mergers and consolidations involving electric utility holding companies having a value in excess of $10 million. In addition, these Ameren utilities must receive authorization from the applicable state public utility regulatory agency to issue stock and long-term debt securities (with maturities of more than 12 months) and to conduct mergers, affiliate transactions, and various other activities. Genco, AERG and EEI are subject to FERC’s jurisdiction when they issue any securities.

 

Under PUHCA 2005, FERC and any state public utility regulatory agencies may access books and records of Ameren and its subsidiaries that are determined to be relevant to costs incurred by Ameren’s rate-regulated subsidiaries with respect to jurisdictional rates. PUHCA 2005 also permits Ameren, the ICC, or the MoPSC to request that FERC review cost allocations by Ameren Services to other Ameren companies.

 

Operation of UE’s Callaway nuclear plant is subject to regulation by the NRC. Its facility operating license expires on June 11, 2024. UE intends to submit a license extension application with the NRC to extend its Callaway nuclear plant’s operating license to 2044. UE’s Osage hydroelectric plant and UE’s Taum Sauk pumped-storage hydroelectric plant, as licensed projects under the Federal Power Act, are subject to FERC regulations affecting, among other things, the general operation and maintenance of the projects. On March 30, 2007, FERC granted a new 40-year license for UE’s Osage hydroelectric plant and approved a settlement agreement among UE, the U.S. Department of the Interior, and various state agencies that was submitted in May 2005 in support of the license renewal. The license for UE’s Taum Sauk plant expires on June 30, 2010. UE intends to file with FERC an application for license renewal of the Taum Sauk facility no later than June 30, 2008. The Taum Sauk plant is currently out of service and being rebuilt due to a major breach of the upper reservoir in December 2005. UE’s Keokuk plant and its dam, in the Mississippi River between Hamilton, Illinois, and Keokuk, Iowa, are operated under open-ended authority granted by an Act of Congress in 1905.

 

For additional information on regulatory matters, see Note 2 – Rate and Regulatory Matters and Note 13 – Commitments and Contingencies to our financial statements under Part II, Item 8, of this report, which include a discussion about the December 2005 breach of the upper reservoir at UE’s Taum Sauk pumped-storage hydroelectric plant.

 

Environmental Matters

 

Certain of our operations are subject to federal, state, and local environmental statutes or regulations relating to the safety and health of personnel, the public, and the environment. These matters include identification, generation, storage, handling, transportation, disposal, record keeping, labeling, reporting, and emergency response in connection with hazardous and toxic materials, safety and health standards, and environmental protection requirements, including standards and limitations relating to the discharge of air and water pollutants. Failure to comply with those statutes or regulations could have material adverse effects on us. We could be subject to criminal or civil penalties by regulatory agencies. We could be ordered to make payment to private parties by the courts. Except as indicated in this report, we believe that we are in material compliance with existing statutes and regulations.

 

For additional discussion of environmental matters, including NOx, SO₂, and mercury emission reduction requirements and the December 2005 breach of the upper reservoir at UE’s Taum Sauk hydroelectric plant, see Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7, and Note 13 –

Commitments and Contingencies to our financial statements under Part II, Item 8, of this report.

 

Ameren operates an integrated transmission system that comprises the transmission assets of UE, CILCO, CIPS, and IP. Ameren also operates two balancing authority areas, AMMO (which includes UE) and AMIL (which includes CILCO, CIPS, IP, AERG and Genco). During 2007, the peak demand in AMMO was 8,606 MW and in AMIL was 9,386 MW. Factors that could cause us to purchase power include, among other things, absence of sufficient owned generation, plant outages, the failure of suppliers to meet their power supply obligations, extreme weather conditions, and the availability of power at a cost lower than the cost of generating it. The Ameren transmission system directly connects with 17 other balancing authority areas for the exchange of electric energy.

 

UE, CIPS, CILCO and IP are transmission-owning members of MISO, and they have transferred functional control of their systems to MISO. Transmission service on the UE, CIPS, CILCO and IP transmission systems is provided pursuant to the terms of the MISO OATT on file with FERC. See Note 2 – Rate and Regulatory Matters to our financial statements under Part II, Item 8, of this report for further information. EEI operates its own balancing authority area and its own transmission facilities in southern Illinois. The EEI transmission system is directly connected to MISO and TVA. EEI’s generating units are dispatched separately from those of UE, Genco and AERG.

 

The Ameren Companies and EEI are members of SERC, a regional electric reliability organization with NERC-delegated authority for proposing and enforcing reliability standards. SERC is responsible for the bulk electric power supply system in much of the southeastern United States, including all or portions of Missouri, Illinois, Arkansas, Kentucky, Tennessee, North Carolina, South Carolina, Georgia, Mississippi, Alabama, Louisiana, Virginia, Florida, Oklahoma, Iowa, and Texas. The Ameren membership covers UE, CIPS, CILCO and IP.

 

Missouri Regulated

 

Factors that could cause UE to purchase power include, among other things, absence of sufficient owned generation, plant outages, the failure of suppliers to meet their power supply obligations, extreme weather conditions, and the availability of power at a cost lower than the cost of generating it.

 

UE’s electric supply is obtained primarily from its own generation. In March 2006, UE completed the purchase of three CT facilities, totaling 1,490 megawatts of capacity at a price of $292 million. These purchases were designed to help meet UE’s increased generating capacity needs and to provide UE with additional flexibility in determining when to add future baseload generating capacity. UE expects these CT facilities to satisfy demand growth until 2018 to 2020. However, due to the significant time required to plan, acquire permits for, and build a baseload power plant, UE is actively studying future plant alternatives, including those that would use coal or nuclear fuel. See Outlook in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7 and Note 13 – Commitments and Contingencies to our financial statements under Part II, Item 8, of this report. UE filed in February 2008 an integrated resource plan with the MoPSC. The plan includes proposals to pursue energy efficiency programs, expand the role of renewable energy sources in UE’s overall generation mix, increase operational efficiency at existing power plants, and possibly retire some generating units that are older and less efficient.

 

Illinois Regulated

 

As of January 1, 2007, CIPS, CILCO and IP were required to obtain all electric supply requirements for customers who did not purchase electric supply from third-party suppliers through the Illinois reverse power procurement auction held in September 2006. CIPS, CILCO and IP entered into power supply contracts with the winning bidders, including their affiliate, Marketing Company. Under these contracts, the electric suppliers are responsible for providing to CIPS, CILCO and IP energy, capacity, certain transmission, volumetric risk management, and other services necessary for the Ameren Illinois Utilities to serve their customers at an all-inclusive fixed price with one-third of the supply contracts expiring in each of May 2008, 2009 and 2010. New electric rates for CIPS, CILCO and IP went into effect on January 2, 2007. The new rates reflected delivery service tariffs approved by the ICC in November 2006 and full cost recovery of power purchased on behalf of Ameren Illinois Utilities’ customers in the September 2006 reverse power procurement auction.

 

A portion of the electric power supply required for the Ameren Illinois Utilities to satisfy their distribution customers’ requirements is purchased from Marketing Company on behalf of Genco, AERG and EEI. As part of the Illinois electric settlement agreement reached in 2007, the reverse power procurement auction in Illinois was discontinued and will be replaced with a new process led by the IPA, beginning in 2009. In 2008, utilities will contract for necessary power and energy requirements not already supplied through the September 2006 auction contracts, primarily through a request-for-proposal process, subject to ICC review and approval. Existing supply contracts from the September 2006 reverse power procurement auction remain in place. Also as part of the Illinois electric settlement agreement, the Ameren Illinois Utilities entered into financial contracts with Marketing Company (for the benefit of Genco and AERG), to lock in energy prices for 400 to 1,000 megawatts annually of their around-the-clock power requirements during the period June 1, 2008, to December 31, 2012, at relevant market prices. These financial contracts do not include capacity, are not load-following products, and do not involve the physical delivery of energy. See Note 2 – Rate and Regulatory Matters and Note 12 – Related Party Transactions to our financial

statements under Part II, Item 8, of this report for a discussion of the ICC-approved power procurement auction.

 

Non-rate-regulated Generation

 

Factors that could cause Marketing Company to purchase power for the Non-rate-regulated Generation business segment include, among other things, absence of sufficient owned generation, plant outages, the failure of suppliers to meet their power supply obligations, and extreme weather conditions.

 

In December 2006, Genco and Marketing Company, and AERG and Marketing Company, entered into new power supply agreements whereby Genco and AERG sell and Marketing Company purchases all the capacity available from Genco’s and AERG’s generation fleets and such amount of associated energy commencing on January 1, 2007. All of Genco’s and AERG’s generating capacity now competes for the sale of energy and capacity in the competitive energy markets through Marketing Company. See Note 12 – Related Party Transactions to our financial statements under Part II, Item 8, of this report for additional information.

 

On December 31, 2005, EEI’s power supply contract with its affiliates, including UE, CIPS and IP, expired. EEI entered into a power supply agreement with Marketing Company whereby EEI sells 100% of its capacity and energy to Marketing Company at market-based prices. All of EEI’s generating capacity now competes for the sale of energy and capacity in the competitive energy markets through Marketing Company. See Note 12 – Related Party Transactions to our financial statements under Part II, Item 8, of this report for additional information.

 

The following table presents the source of electric generation by fuel type, excluding purchased power, for the years ended December 31, 2007, 2006 and 2005:

 

 

 

The following table presents the cost of fuels for electric generation for the years ended December 31, 2007, 2006 and 2005.

 

 

 

Coal

 

UE, Genco, AERG and EEI have agreements in place to purchase a portion of their coal needs and to transport it to electric generating facilities through 2012. UE, Genco, AERG and EEI expect to enter into additional contracts to purchase coal. Coal supply agreements typically have an initial term of five years, with about 20% of the contracts expiring annually. Ameren burned 40.6 million (UE – 22.4 million, Genco – 10.1 million, AERG – 3.1 million, EEI – 5.0 million) tons of coal in 2007. See Part II, Item 7A – Quantitative and Qualitative Disclosures about Market Risk of this report for additional information about coal supply contracts.

 

About 94% of Ameren’s coal (UE – 97%, Genco – 88%, AERG – 92%, EEI – 100%) is purchased from the Powder River Basin in Wyoming. The remaining coal is typically purchased from the Illinois Basin. UE, Genco, AERG and EEI have a policy to maintain coal inventory consistent with their projected usage. Inventory may be adjusted because of uncertainties of supply due to potential work stoppages, delays in coal deliveries, equipment breakdowns, and other factors. As of December 31, 2007, coal inventories for UE, Genco, AERG and EEI were adequate and in excess of historical levels, but below targeted levels. Disruptions in coal deliveries could cause UE, Genco, AERG and EEI to pursue a strategy that could include reducing sales of power during low-margin periods, buying higher-cost fuels to generate required electricity, and purchasing power from other sources.

 

Nuclear

 

Fuel assemblies for the 2008 fall refueling at UE’s Callaway nuclear plant will begin manufacture during the second quarter of 2008. Enriched uranium for such assemblies is already at the facility. UE also has agreements or inventories to price-hedge 87% of Callaway’s 2010 and 2011 refueling requirements. There is no refueling scheduled in 2009 or 2012. UE expects to enter into additional contracts to purchase nuclear fuel. UE is a member of Fuelco, which allows UE to join with other member

companies to increase its purchasing power and opportunities for volume discounts. The Callaway nuclear plant normally requires refueling at 18-month intervals. The last refueling was completed in May 2007.

 

Natural Gas Supply for Power Generation

 

Ameren’s portfolio of natural gas supply resources includes firm transportation capacity and firm no-notice storage capacity leased from interstate pipelines to maintain gas deliveries to our gas-fired generating units throughout the year, especially during the summer peak demand. UE, Genco and EEI primarily use the interstate pipeline systems of Panhandle Eastern Pipe Line Company, Trunkline Gas Company, Natural Gas Pipeline Company of America, and Mississippi River Transmission Corporation to transport natural gas to generating units. In addition to physical transactions, Ameren uses financial instruments, including some in the NYMEX futures market and some in the OTC financial markets, to hedge the price paid for natural gas.

 

UE, Genco and EEI’s natural gas procurement strategy is designed to ensure reliable and immediate delivery of natural gas to their generating units. UE, Genco and EEI do this in two ways. They optimize transportation and storage options and minimize cost and price risk through various supply and price hedging agreements that allow them to maintain access to multiple gas pools, supply basins, and storage. As of December 31, 2007, UE had hedged about 25% of its required gas supply for generation in 2008 and Genco about 90%. As of December 31, 2007, EEI did not have any of its required gas supply for generation hedged for price risk.

 

UE, CIPS, CILCO and IP are responsible for the purchase and delivery of natural gas to their gas utility customers. UE, CIPS, CILCO and IP develop and manage a portfolio of gas supply resources, including firm gas supply under term agreements with producers, interstate and intrastate firm transportation capacity, firm storage capacity leased from interstate pipelines, and on-system storage facilities to maintain gas deliveries to our customers throughout the year and especially during peak demand. UE, CIPS, CILCO and IP primarily use the Panhandle Eastern Pipe Line Company, the Trunkline Gas Company, the Natural Gas Pipeline Company of America, the Mississippi River Transmission Corporation, and the Texas Eastern Transmission Corporation interstate pipeline systems to transport natural gas to their systems. In addition to physical transactions, financial instruments, including those entered into in the NYMEX futures market and in the OTC financial markets, are used to hedge the price paid for natural gas. Prudently incurred natural gas purchase costs are passed on to customers of UE, CIPS, CILCO and IP in Illinois and Missouri under PGA clauses, subject to prudency review by the ICC and the MoPSC.

 

For additional information on our fuel and purchased power supply, see Results of Operations, Liquidity and Capital Resources and Effects of Inflation and Changing Prices in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7, of this report. Also see Quantitative and Qualitative Disclosures About Market Risk under Part II, Item 7A, of this report, Note 1 – Summary of Significant Accounting Policies, Note 7 – Derivative Financial Instruments, Note 12 – Related Party Transactions, Note 13 – Commitments and Contingencies, and Note 14 – Callaway Nuclear Plant to our financial statements under Part II, Item 8.

 

We are facing issues common to the electric and gas utility industry and the non-rate-regulated electric generation industry. These issues include:

 

 

We are monitoring these issues. Except as otherwise noted in this report, we are unable to predict what impact, if any, these issues will have on our results of operations, financial position, or liquidity. For additional information, see Risk Factors under Part I, Item 1A, and Outlook and Regulatory Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7, and Note 2 – Rate and Regulatory Matters, and Note 13 – Commitments and Contingencies to our financial statements under Part II, Item 8, of this report.

 

 

The following tables present key electric and natural gas operating statistics for Ameren for the past three years.

 

 

 

 

The Ameren Companies make available free of charge through Ameren’s Internet Web site (www.ameren.com) their annual reports 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 Exchange Act as soon as reasonably possible after such reports are electronically filed with, or furnished to, the SEC. These documents are also available through an Internet Web site maintained by the SEC (www.sec.gov).

 

The Ameren Companies also make available free of charge through Ameren’s Web site (www.ameren.com) the charters of Ameren’s board of directors’ audit and risk committee, human resources committee, nominating and corporate governance committee, nuclear oversight committee, and public policy committee; the corporate governance guidelines; a policy regarding communications to the board of directors; policies and procedures with respect to related-person transactions; a code of ethics for principal executive officers and senior financial officers; a code of business conduct applicable to all directors, officers and employees; and a director nomination policy that applies to the Ameren Companies.

 

These documents are also available in print upon written request to Ameren Corporation, Attention: Secretary, P.O. Box 66149, St. Louis, Missouri 63166-6149. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

The electric and gas rates that UE, CIPS, CILCO and IP are allowed to charge are determined through regulatory proceedings and are subject to legislative actions, which are largely outside of our control. Any such events that prevent UE, CIPS, CILCO or IP from recovering their respective costs or from earning appropriate returns on their investments could have a material adverse effect on future results of operations, financial position, or liquidity.

 

The rates that certain Ameren Companies are allowed to charge for their services are the single most important item influencing the results of operations, financial position, and liquidity of the Ameren Companies. The electric and gas utility industry is highly regulated. The regulation of the rates that we charge our customers is determined, in large part, by governmental entities outside of our control, including the MoPSC, the ICC, and FERC. Decisions made by these entities could have a material adverse effect on results of operations, financial position, or liquidity.

 

Our electric and gas utility rates are typically established in a regulatory proceeding that takes up to 11 months to complete. Rates established in those proceedings are primarily based on historical costs and include an allowed return on our investments by the regulator.

 

Our company, and the industry as a whole, is going through a period of rising costs, including increases in fuel, purchased power, labor and material costs, coupled with significant increases in capital, operation and maintenance and financing costs targeted at enhanced distribution system reliability and environmental compliance. Due to rising costs and the fact that our rates are primarily based on historical costs, UE, CIPS, CILCO and IP are not earning the allowed return established by their regulators (often referred to as regulatory lag). As a result, UE, CIPS, CILCO and IP expect to be entering a period where more frequent rate cases and

requests for cost recovery mechanisms will be necessary. A period of increasing rates to our customers could result in additional regulatory, legislative, political, economic and competitive pressures that could have a material adverse effect on our results of operations, financial position, or liquidity.

 

Illinois

 

Pending Delivery Service Rate Cases

 

Due to inadequate recovery of costs and low returns on equity experienced in 2007 and expected in 2008, CIPS, CILCO and IP filed requests with the ICC in November 2007 to increase their annual revenues for electric delivery service by $180 million in the aggregate (CIPS – $31 million, CILCO – $10 million, and IP – $139 million). In addition, CIPS, CILCO and IP filed requests with the ICC in November 2007 to increase their annual revenues for natural gas delivery service by $67 million in the aggregate (CIPS – $15 million increase, CILCO – $4 million decrease and IP – $56 million increase). The ICC has until the end of September 2008 to render a decision in these rate cases. It could materially reduce the amount of the increase requested, or even reduce rates.

 

Illinois Electric Settlement Agreement

 

Due to the magnitude of rate increases that went into effect following the end of a rate freeze on January 2, 2007 under the Illinois Customer Choice Law, various legislators supported legislation that would have reduced and frozen the electric rates of CIPS, CILCO and IP at the level in effect prior to January 2, 2007, or would have imposed a tax on electric generation in Illinois to help fund customer assistance programs. The Illinois governor also supported rate rollback and freeze legislation. The rate rollback and freeze legislation would have prevented the Ameren Illinois Utilities from recovering from retail customers substantial portions of the cost of electric energy that the Ameren Illinois Utilities are obligated to purchase under wholesale contracts, and would also have caused the Ameren Illinois Utilities to under-recover their delivery service costs until the ICC could approve higher delivery service rates.

 

In order to address these concerns, the Illinois electric settlement agreement was reached in 2007. Ameren, on behalf of Marketing Company, Genco and AERG, the Ameren Illinois Utilities, Exelon, on behalf of Exelon Generation Company LLC, Commonwealth Edison Company, Exelon’s Illinois electric utility subsidiary, Dynegy Holdings, Inc., Midwest Generation, LLC, and MidAmerican Energy Company agreed to contribute an aggregate of $1 billion over four years to fund both rate relief programs and a new power procurement agency, the IPA. Approximately $488 million of the funding is earmarked as rate relief for customers of the Ameren Illinois Utilities. The Ameren Illinois Utilities, Genco and AERG agreed to make aggregate contributions of $150 million over a four-year period, which commenced in 2007, with $60 million coming from the Ameren Illinois Utilities (CIPS – $21 million; CILCO – $11 million; IP – $28 million), $62 million from Genco and $28 million from AERG. The Illinois electric settlement agreement provides that if legislation freezing or reducing retail electric rates or imposing or authorizing a new tax, special assessment or fee on generation of electricity is enacted before August 1, 2011, then the remaining funding commitments will expire. Any funds set aside in support of those commitments will be refunded to the utilities and electric generators. See Note 2 – Rate and Regulatory Matters to our financial statements under Part II, Item 8, of this report for additional information on the Illinois electric settlement agreement.

 

The following factors resulting from implementation of the Illinois electric settlement agreement could have a material adverse effect on the results of operations, financial position or liquidity of Ameren, the Ameren Illinois Utilities, Genco or AERG:

 

 

If, notwithstanding the Illinois electric settlement agreement, any decision is made or any action occurs that impairs the ability of CIPS, CILCO and IP to fully recover purchased power or distribution costs from their electric customers in a timely manner, and such decision or action is not promptly enjoined, it could result in material adverse consequences to Ameren, CIPS, CILCORP, CILCO and IP.

 

Missouri

 

With the expiration of multiyear electric and gas rate moratoriums, effective July 1, 2006, UE filed requests with the MoPSC in July 2006 for an electric rate increase of $361 million and for a natural gas delivery rate increase of $11 million. In March 2007, a stipulation and agreement approved by the MoPSC authorized an increase in annual natural gas delivery revenues of $6 million, effective April 1, 2007. As part of this stipulation and agreement, UE agreed not to file a natural gas delivery rate case before March 15,

2010. This agreement did not prevent UE from filing to recover infrastructure costs through an ISRS during this three-year rate moratorium. In February 2008, the MoPSC approved UE’s petition requesting the establishment of an ISRS to recover annual revenues of $1 million effective March 29, 2008.

 

In May 2007, the MoPSC issued an order authorizing a $43 million increase in UE’s base rates for electric service based on a return on equity of 10.2%. Certain aspects of the MoPSC decision have been appealed by UE, the Office of Public Counsel and the Missouri attorney general to the Court of Appeals for the Western District of Missouri. In its order, the MoPSC denied UE the use of a fuel and purchased power cost recovery mechanism. UE expects to incur significant increases in fuel and related transportation costs over the next three years. Without a rate recovery mechanism, UE may experience regulatory lag and not fully recover these costs.

 

Increased federal and state environmental regulation will cause UE, Genco, CILCO (through AERG) and EEI to incur large capital expenditures and increased operating costs. Future limits on greenhouse gas emissions would likely require UE, Genco, CILCO (through AERG) and EEI to incur significant additional increases in capital expenditures and operating costs. Such expenses, if excessive, could result in the closures of coal-fired generating plants.

 

About 61% of Ameren’s (UE – 54%, Genco – 60%, AERG – 95%, EEI – 95%) generating capacity is coal-fired. About 84% (UE – 76%, Genco – 96%, AERG – 99%, EEI – 100%) of its electric generation was produced by its coal-fired plants in 2007. The remaining electric generation comes from nuclear, gas-fired, hydroelectric, and oil-fired power plants. The EPA has issued final regulations with respect to SO₂, NOx, and mercury emissions from coal-fired power plants. These regulations require significant additional reductions in the emissions from UE, Genco, AERG and EEI power plants in phases, beginning in 2009, and significant capital expenditures. Missouri has adopted rules that substantially follow the federal regulations.

 

Illinois has adopted rules for mercury emissions that are significantly stricter than the federal regulations. In 2006, Genco, AERG, EEI, and the Illinois EPA entered into an agreement that was incorporated into Illinois’ mercury emission regulations. Under the regulations, Illinois generators may defer until 2015 the requirement to reduce mercury emissions by 90% in exchange for accelerated installation of NOx and SO₂ controls. In 2009, Genco, AERG and EEI will begin putting into service equipment designed to reduce mercury emissions.

 

In February 2008, the U.S. Court of Appeals for the District of Columbia issued a decision that effectively vacated the federal Clean Air Mercury Rule. The court ruled that the EPA erred in the method used to remove electric generating units from the list of sources subject to the maximum available control technology requirements under the Clean Air Act. The Court’s decision is subject to appeal, and it is uncertain how the EPA will respond. At this time, we are unable to determine the impact that this action would have on our estimated expenditures for compliance with environmental rules, our results of operations, financial position, or liquidity.

 

Ameren’s estimated capital costs based on current technology to comply with both the federal Clean Air Interstate Rule and Clean Air Mercury Rule and related state implementation plans range from $4 billion to $5 billion by 2017 (UE – $1.8 billion to $2.3 billion; Genco – $1.3 billion to $1.6 billion, AERG – $620 million to $760 million, EEI – $310 million to $410 million).

 

Future initiatives regarding greenhouse gas emissions and global warming are subject to active consideration in the U.S. Congress. Ameren believes that currently proposed legislation can be classified as moderate to extreme depending upon proposed CO₂ emission limits, the timing of implementation of those limits, and the method of allocating allowances. The moderate scenarios include provisions for a “safety valve” that provides a ceiling price for emission allowance purchases. As a result of our diverse fuel portfolio, our contribution to greenhouse gases varies among our generating facilities, but coal-fired power plants are significant sources of CO₂, a principal greenhouse gas. Ameren’s current analysis shows that under some policy scenarios being considered in Congress, household costs and rates for electricity could rise significantly. The burden could fall particularly hard on electricity consumers and the Midwest economy because of the region’s reliance on electricity generated by coal-fired power plants. When consumed natural gas emits about half the amount of CO₂ as coal. As a result, economy-wide shifts favoring natural gas as a fuel source for electric generation also would affect the cost of nonelectric transportation, heating for our customers and many industrial processes. Under some policy scenarios being considered by Congress, Ameren believes that wholesale natural gas costs could rise significantly as well. Higher costs for energy could contribute to reduced demand for electricity and natural gas.

 

Future federal and state legislation or regulations that mandate limits on the emission of greenhouse gases would result in significant increases in capital expenditures and operating costs. Excessive costs to comply with future legislation or regulations might force Ameren and other similarly-situated electric power generators to close some coal-fired facilities. Mandatory limits could have a material adverse impact on Ameren’s, UE’s, Genco’s, AERG’s and EEI’s results of operations, financial position, or liquidity.

 

The EPA has been conducting an enforcement initiative to determine whether modifications at a number of coal-fired power plants owned by electric utilities in the United States are subject to New Source Review requirements or New Source Performance Standards under the Clean Air Act. The EPA’s inquiries focus on whether the best available emission control technology was or should have been used at such power plants when major maintenance or capital improvements were made.

 

In April 2005, Genco received a request from the EPA for information pursuant to Section 114(a) of the Clean Air

Act seeking detailed operating and maintenance history data with respect to its Meredosia, Hutsonville, Coffeen and Newton facilities, EEI’s Joppa facility, and AERG’s E.D. Edwards and Duck Creek facilities. In December 2006, the EPA issued a second Section 114(a) request to Genco regarding projects at the Newton facility. All of these facilities are coal-fired power plants. We are currently in discussions with the EPA and the state of Illinois regarding these matters, but we are unable to predict the outcome of these discussions. Resolution of the matters could have a material adverse impact on the future results of operations, financial position, or liquidity of Ameren, Genco, AERG and EEI. A resolution could result in increased capital expenditures, increased operations and maintenance expenses, and fines or penalties. We believe that any potential resolution would probably require the installation of emission control technology, some of which has already been planned for compliance with other regulatory requirements, such as the Clean Air Interstate Rule and the Illinois mercury emission rules.

 

New environmental regulations, voluntary compliance guidelines, enforcement initiatives, or legislation could result in a significant increase in capital expenditures and operating costs, decreased revenues, increased financing requirements, penalties and closure of power plants for UE, Genco, AERG and EEI. Although costs incurred by UE would be eligible for recovery in rates over time, subject to MoPSC approval in a rate proceeding, there is no similar mechanism for recovery of costs by Genco, AERG or EEI. We are unable to predict the ultimate impact of these matters on our results of operations, financial position or liquidity.

 

The construction of, and capital improvements to, UE’s, CIPS’, CILCO’s and IP’s electric and gas utility infrastructure as well as to Genco’s, CILCO’s (through AERG) and EEI’s non-rate-regulated power generation facilities involve substantial risks, particularly as the Ameren Companies expect to incur significant capital expenditures over the next five years and beyond for compliance with environmental regulations and to make significant investments in our utility infrastructure to improve overall system reliability. Should construction or capital improvement efforts be unsuccessful, it could have a material adverse impact on Ameren’s, UE’s, CIPS’, Genco’s, CILCORP’s, CILCO’s and IP’s results of operations, financial position, or liquidity.

 

The Ameren Companies will incur significant capital expenditures over the next five years for compliance with environmental regulations and to make significant investments in their electric and gas utility infrastructure and their non-rate-regulated power generation facilities. The Ameren Companies estimate that they will incur up to $10.6 billion (UE – up to $4.9 billion; CIPS – up to $505 million; Genco – up to $2.1 billion; CILCO (Illinois Regulated) – up to $425 million; CILCO (AERG) – up to $870 million; IP – up to $1.1 billion; EEI – up to $555 million, Other – up to $205 million) of capital expenditures during the period from 2008 through 2012, including construction expenditures, capitalized interest and allowance for funds used during construction (except for Genco, which has no allowance for funds used during construction), and estimated expenditures for compliance with EPA and state regulations regarding SO₂ and NOx emissions and mercury emissions from coal-fired power plants. Costs for these types of projects continue to escalate.

 

Investment in Ameren’s regulated operations is expected to be recoverable from ratepayers. The recoverability of amounts expended in non-rate-regulated operations will depend on whether market prices for power adjust as a result of market conditions reflecting increased costs generally for generators.

 

The ability of the Ameren Companies to successfully complete those facilities currently under construction, and those projects yet to begin construction within established estimates is contingent upon many variables and are subject to substantial risks. These variables include, but are not limited to, project management expertise and escalating costs for materials, labor and environmental compliance. Delays in obtaining permits, shortages in materials and qualified labor, suppliers and contractors not performing as required under their contracts, changes in the scope and timing of projects, and other events beyond our control may occur that may materially affect the schedule, cost and performance of these projects. With respect to capital expenditures related to the installation of pollution control equipment, there is a risk that such electric generating plants would not be permitted to continue to operate if pollution control equipment is not installed by prescribed deadlines or does not perform as expected. Should any such construction efforts be unsuccessful, the Ameren Companies could be subject to additional costs and the loss of their investment in the project or facility. The Ameren Companies may also be required to purchase additional electricity or gas to supply its customers until the projects are completed. All of these risks may have a material adverse effect on the Ameren Companies’ results of operations, financial position or liquidity.

 

Our counterparties may not meet their obligations to us.

 

We are exposed to the risk that counterparties to various arrangements who owe us money, energy, coal or other commodities or services will not be able to perform their obligations. Should the counterparties to these arrangements fail to perform, we might be forced to replace or to sell the underlying commitment at then-current market prices. In such event, we might incur losses, or our results of operations, financial position, or liquidity could otherwise be adversely affected.

 

Certain of the Ameren Companies have obligations to other Ameren Companies or other Ameren subsidiaries because of transactions involving energy, coal, or other commodities and services and because of hedging transactions. If one Ameren entity failed to perform under any of these arrangements, other Ameren entities might incur losses. Their results of operations, financial position or liquidity could be adversely affected, resulting in such nondefaulting Ameren entity being unable to meet its obligations to unrelated third parties. Hedging activities are generally undertaken with a view

to the Ameren-wide exposures. Some Ameren Companies may therefore be more or less hedged than if they were to engage in such hedging alone.

 

Increasing costs associated with our defined benefit retirement plans, health care plans, and other employee-related benefits may adversely affect our results of operations, financial position, or liquidity.

 

We offer defined benefit and postretirement plans that cover substantially all of our employees. Assumptions related to future costs, returns on investments, interest rates, and other actuarial matters have a significant impact on our earnings and funding requirements. In May 2007, the MoPSC issued an electric rate order that allows UE to recover through customer rates pension expense incurred under GAAP. Ameren expects to fund its pension plans at a level equal to the pension expense. Based on Ameren’s assumptions at December 31, 2007, and reflecting this pension funding policy, Ameren expects to make annual contributions of $40 million to $65 million in each of the next five years. We expect UE’s, CIPS’, Genco’s, CILCO’s, and IP’s portion of the future funding requirements to be 65%, 8%, 11%, 5%, and 11%, respectively. These amounts are estimates. They may change with actual stock market performance, changes in interest rates, any pertinent changes in government regulations, and any voluntary contributions.

 

In addition to the costs of our retirement plans, the costs of providing health care benefits to our employees and retirees have increased substantially in recent years. We believe that our employee benefit costs, including costs of health care plans for our employees and former employees, will continue to rise. The increasing costs and funding requirements associated with our defined benefit retirement plans, health care plans, and other employee benefits may adversely affect our results of operations, financial position, or liquidity.

 

UE’s, Genco’s, AERG’s, Medina Valley’s and EEI’s electric generating facilities are subject to operational risks that could result in unscheduled plant outages, unanticipated operation and maintenance expenses, liability, and increased purchased power costs.

 

UE, Genco, AERG, Medina Valley, and EEI own and operate coal-fired, nuclear, gas-fired, hydroelectric, and oil-fired generating facilities. Operation of electric generating facilities involves certain risks that can adversely affect energy output, efficiency levels, operating costs, and investment levels. Among these risks are:

 

 

Even though agreements have been reached with state and federal authorities, the breach of the upper reservoir of UE’s Taum Sauk pumped-storage hydroelectric facility could continue to have an adverse effect on Ameren’s and UE’s results of operations, liquidity, and financial condition.

 

In December 2005, there was a breach of the upper reservoir at UE’s Taum Sauk pumped-storage hydroelectric facility. This resulted in significant flooding in the local area, which damaged a state park.

 

In October 2006, FERC approved a stipulation and consent agreement between UE and FERC’s Office of Enforcement that resolves all issues arising from an investigation by FERC’s Office of Enforcement into alleged violations of license conditions and FERC regulations by UE, as the licensee of the Taum Sauk hydroelectric facility, that may have contributed to the breach of the upper reservoir. In November 2007, UE entered into a settlement agreement with the state of Missouri represented by the Missouri attorney general, the Missouri Conservation Commission and the Missouri Department of Natural Resources. The agreement resolved the state of Missouri’s lawsuit and claims for damages and other relief related to the December 2005 Taum Sauk breach. A business owners’ suit, which was filed in the Missouri Circuit Court of Reynolds County and remains pending, seeks damages relating to business losses and lost profit and unspecified punitive damages.

 

In February 2007, UE submitted to FERC an environmental report to rebuild the upper reservoir at Taum Sauk. UE received approval from FERC in August 2007 and hired a contractor in November 2007. The estimated cost to rebuild the upper reservoir is in the range of $450 million. The Taum Sauk plant is expected to be out of service at least through the fall of 2009.

 

As part of the settlement agreement with the state of Missouri, UE agreed not to attempt to recover from ratepayers in any future rate increase any in-kind or monetary payments to the state parties required by the settlement agreement or any costs incurred in the rebuilding of the upper reservoir (expressly excluding, however, enhancements, costs incurred due to circumstances or conditions that are currently not reasonably foreseeable, and costs that would have been incurred absent the December 2005 breach of the upper reservoir at the Taum Sauk plant).

 

If UE needs to purchase power because of the unavailability of the Taum Sauk facility during the rebuild of the upper reservoir, UE has committed to not seek these additional costs from ratepayers. The Taum Sauk incident is expected to reduce Ameren’s and UE’s 2008 pretax earnings by $15 million to $20 million. UE expects to face higher-cost sources of

power, reduced interchange sales, and increased expenses, net of insurance reimbursement for replacement power costs.

 

UE believes that substantially all damages and liabilities caused by the breach, including costs related to the settlement agreement with the state of Missouri, the cost of rebuilding the plant, and the cost of replacement power, up to $8 million annually, will be covered by insurance. Insurance will not cover lost electric margins and penalties paid to FERC. Under UE’s insurance policies, all claims by or against UE are subject to review by its insurance carriers. Until litigation has been resolved and the insurance review is completed, among other things, we are unable to determine the total impact the breach may have on Ameren’s and UE’s results of operations, financial position, or liquidity beyond those amounts already recognized.

 

The Missouri Parks Association and the Missouri Coalition for the Environment initiated legal proceedings over FERC’s decision to authorize the rebuilding of the upper reservoir at Taum Sauk. They seek injunctive and other relief. If they obtain injunctive relief, it could delay the construction of the rebuild and could delay the return of the plant to service.

 

Genco’s, AERG’s, and EEI’s electric generating facilities must compete for the sale of energy and capacity, which exposes them to price risks.

 

In December 2006, Genco and Marketing Company, and AERG and Marketing Company, entered into new power supply agreements whereby Genco and AERG sell and Marketing Company purchases all the capacity available from Genco’s and AERG’s generation fleets and such amount of associated energy commencing on January 1, 2007. All of Genco’s and AERG’s generating capacity now competes for the sale of energy and capacity in the competitive energy markets through Marketing Company.

 

On December 31, 2005, EEI’s power supply contract with its affiliates, including UE, CIPS and IP, expired. EEI entered into a power supply agreement with Marketing Company whereby EEI sells 100% of its capacity and energy to Marketing Company. All of EEI’s generating capacity now competes for the sale of energy and capacity in the competitive energy markets through Marketing Company.

 

To the extent that electricity generated by these facilities is not under a fixed-price contract to be sold, the revenues and results of operations of these non-rate-regulated subsidiaries generally depend on the prices that they can obtain for energy and capacity in Illinois and adjacent markets. Among the factors that could influence such prices (all of which are beyond our control to a significant degree) are:

 

 

UE’s ownership and operation of a nuclear generating facility creates business, financial, and waste disposal risks.

 

UE owns the Callaway nuclear plant, which represents about 12% of UE’s generation capacity and produced 19% of UE’s 2007 generation. Therefore, UE is subject to the risks of nuclear generation, which include the following:

 

 

The NRC has broad authority under federal law to impose licensing and safety requirements for nuclear generation facilities. In the event of noncompliance, the NRC has the authority to impose fines, shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. Revised safety requirements promulgated by the NRC could necessitate substantial capital expenditures at nuclear plants such as UE’s. In addition, if a serious nuclear incident were to occur, it could have a material but indeterminable adverse effect on UE’s results of operations, financial position, or liquidity. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or relicensing of any domestic nuclear unit.

UE’s Callaway nuclear plant’s next scheduled refueling and maintenance outage is in the fall of 2008. During an outage, which occurs approximately every 18 months, maintenance and purchased power costs increase, and the amount of excess power available for sale decreases, compared with non-outage years.

 

Operating performance at UE’s Callaway nuclear plant has resulted in unscheduled or extended outages. The operating performance at UE’s Callaway nuclear plant declined both in comparison with its past operating performance and in comparison with the operating performance of other nuclear plants in the United States. Ameren and UE are actively working to address the factors that led to the decline in Callaway’s operating performance. Management and supervision of operating personnel, equipment reliability, maintenance worker practices, engineering performance, training, and overall organizational effectiveness have been reviewed. Some actions have been taken. However, Ameren and UE cannot predict whether such efforts will result in an overall improvement of operations at Callaway. Any additional actions taken are expected to result in incremental operating costs at Callaway. Further, additional unscheduled or extended outages at Callaway could have a material adverse effect on the results of operations, financial position, or liquidity of Ameren and UE.

 

Our energy risk management strategies may not be effective in managing fuel and electricity procurement and pricing risks, which could result in unanticipated liabilities or increased volatility in our earnings and cash flows.

 

We are exposed to changes in market prices for natural gas, fuel, electricity, emission allowances, and transmission congestion. Prices for natural gas, fuel, electricity, and emission allowances may fluctuate substantially over relatively short periods of time and expose us to commodity price risk. We use long-term purchase and sales contracts in addition to derivatives such as forward contracts, futures contracts, options, and swaps to manage these risks. We attempt to manage our risk associated with these activities through enforcement of established risk limits and risk management procedures. We cannot ensure that these strategies will be successful in managing our pricing risk or that they will not result in net liabilities because of future volatility in these markets.

 

Although we routinely enter into contracts to hedge our exposure to the risks of demand, weather, and changes in commodity prices, we do not hedge the entire exposure of our operations from commodity price volatility. Furthermore, our ability to hedge our exposure to commodity price volatility depends on liquid commodity markets. To the extent that commodity markets are illiquid, we may not be able to execute our risk management strategies, which could result in greater unhedged positions than we would prefer at a given time. To the extent that unhedged positions exist, fluctuating commodity prices can adversely affect our results of operations, financial position, or liquidity.

 

Our facilities are considered critical energy infrastructure and may therefore be targets of acts of terrorism.

 

Like other electric and gas utilities, our power generation plants, fuel storage facilities, and transmission and distribution facilities may be targets of terrorist activities that could result in disruption of our ability to produce or distribute some portion of our energy products. Any such disruption could result in a significant decrease in revenues or significant additional costs for repair, which could have a material adverse effect on our results of operations, financial position, or liquidity.

 

Our businesses are dependent on our ability to access the capital markets successfully. We may not have access to sufficient capital in the amounts and at the times needed.

 

We use short-term and long-term capital markets as a significant source of liquidity and funding for capital requirements not satisfied by our operating cash flow, including requirements related to future environmental compliance. As a result of rising costs and increased capital and operations and maintenance expenditures, coupled with near-term regulatory lag, we expect to need more short-term and long-term debt financing. The inability to raise capital on favorable terms, particularly during times of uncertainty in the capital markets, could negatively affect our ability to maintain and to expand our businesses. Our current credit ratings cause us to believe that we will continue to have access to the capital markets. However, events beyond our control, such as the recent collapse of the subprime mortgage market may create uncertainty that could increase our cost of capital or impair our ability to access the capital markets. Certain of the Ameren Companies rely in part on Ameren for access to capital. Circumstances that limit Ameren’s access to capital, including those relating to its other subsidiaries, could impair its ability to provide those Ameren Companies with needed capital. See the Credit Ratings section in Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7, of this report for a discussion of credit rating changes in response to actions in Illinois with respect to the matter of power procurement commencing in 2007.

 

None.

 

 

For information on our principal properties, see the generating facilities table below. See also Liquidity and Capital Resources and Regulatory Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7, of this report for any planned additions, replacements or transfers. See also Note 5 – Long-term Debt and Equity Financings, and Note 13 – Commitments and Contingencies to our financial statements under Part II, Item 8, of this report.

The following table shows what our electric generating facilities and capability are anticipated to be at the time of our expected 2008 peak summer electrical demand:

 

 

 

The following table presents electric and natural gas utility-related properties for UE, CIPS, CILCO and IP as of December 31, 2007: