阿莫林 (AEE) 2002 Q3 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Ameren third quarter earnings conference call.

At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference up for questions and answers after the presentation.

I will now turn the conference over to Mr. Bruce Steinke (phonetic). Please go ahead, sir.

Thank you, Raul, and good morning.

I'm Bruce Steinke (phonetic), Manager of Investor Relations at Ameren Corporation. Here with me today is our President and Chief Operating Officer, Gary Rainwater, our Senior Vice President of Finance and CFO, Warner Baxter, and our Controller and Chief Accounting Officer, Marty Lyons (phonetic).

Before we begin, let me cover a few housekeeping details. This hour long call is available to anyone who wishes to hear it, for one week, by dialing a playback number. The announcement you received carries instructions on replay on the call by telephone.

In addition, we would like to welcome everyone listening to this you call on the Internet. The webcast will be available for one week on www.ameren.com, our website.

This call receives time sensitive data that is accurate only as of today's live broadcast. Redistribution of this broadcast is prohibited.

I also need to let you know that comments made on this conference call may contain statements that are commonly referred to as forward-looking statements. Such statements include those about future expectations, beliefs, strategies, plans, objectives, and financial performance. We caution you that there are various factors that could cause actual results to differ materially from those projected in the forward-looking statements. For additional information concerning these factors, we ask you to read the Safe Harbor statement and the release we issued today, and in our filings with the SEC.

Again, let me thank you for joining us. We will be brief in our remarks today to give you an opportunity to ask questions. Gary will begin this call with an update on some of our operating and regulatory matters, and Warner will follow with a more detailed financial review. And finally, Gary will give you some of our perspectives on 2003. Here's Gary.

Thanks, Bruce. Good morning, and thank you for joining us.

This morning we reported earnings for the third quarter of 2002 of $1.64 per share, compared to third quarter earnings of $1.94 per share last year. These third quarter results were in line with our expectations.

Earnings benefited from higher demand due to warmer weather but were unfavorably impacted by weak wholesale energy markets, soft economic conditions, higher employee benefit costs, and lower electric rates in our Missouri service territory. This morning, we effectively reaffirmed our earnings guidance for 2002, adjusting it only for the dilutive effect of our September equity offering.

Of course, one major operating milestone that we have to complete during the fourth quarter is the refueling of our Callaway Nuclear Plant. That outage is scheduled to begin next week and is expected to last about 35 days. This outage is expected to reduce fourth quarter earnings approximately 9 cents per share, compared to last year.

With regard to our unregulated generation operations, two of four units at the Elgin Energy Center have been declared commercially available. The remaining two units are on schedule to be completed by year end. In total, we will add 470 megawatts of generation at Elgin and this will complete our unregulated generation development program.

We are also taking steps to transfer 428 megawatts of our unregulated generation assets to our regulated Missouri operations at net book value, consistent with the provisions set forth in our Missouri electric rate case settlement. Assuming that we complete the transfer of these assets in early 2003, over 90 percent of our available unregulated generating capacity, after satisfying reserve margin requirements, will be under contract for the summer of 2003.

On the regulatory front, we continue to move forward with the regulatory approval process for CILCORP. All initial regulatory filings were made and we believe we're still on target for a March 2003 closing. We have been in discussions with the Illinois Commerce Commission staff and last Friday we filed revised testimony that we believe addresses their concerns, which were principally market power issues.

We believe the ICC is the critical path in the regulatory approval process. The ICC staff and intervenors are expected to file their testimony today and rebuttal testimony due on October 22nd.

Hearings are scheduled for October 24th and 25th. We've also held meetings with the Department of Justice seeking to narrow the scope of their data request associated with our Hart-Scott-Rodino filing. We have made progress on this front and expect to satisfy their second request for information in November, triggering the 30-day clock for them to act.

We've also made our filings with FERC and the SEC under PUCA and their reviews continue to proceed.

There's been little change on RTO issues and our proposed participation in MISO through GridAmerica. If anything, the process has slowed as the FERC is focused on their standard market design proposal. Our current expectation is that our participation in MISO could be effective by this coming spring.

With that, I'd like to turn the discussion over to Warner.

Thanks, Gary.

Now on to a more details discussion of earnings results and related financial matters. As Gary mentioned, today we reported third quarter 2002 earnings of $1.64 per share, compared to third quarter earnings of $1.94 per share last year. Earnings for the first nine months of 2002 were $2.88 per share, versus $3.06 per share in the year-ago period.

Third quarter earnings were favorably impacted by strong increases in residential and commercial electric revenues, primarily due to warm summer weather. Warm summer weather drove increases in residential and commercial sales up 9 percent and 4 percent, respectively.

Compared to the prior year, we estimate the warmer summer weather increased earnings per share approximately 11 cents over the third quarter of 2001. However, the benefit of weather was offset by a number of factors during the quarter.

Electric margins were negatively impacted by the rate decrease associated with our Missouri electric rate case settlement in July that reduced electric revenues by approximately $23 million during the quarter. Continued soft economic conditions also caused a 3 percent decrease in industrial sales.

In addition, interchange revenues and sales were down during the quarter due to lower energy prices and less low-cost generation being available for sale, primarily due to increased native load demand.

AmerenEnergy, our short-term energy marketing operation, continues to carry out the company's asset optimization strategy while employing conservative risk management principles.

Currently, AmerenEnergy's value at risk is below $1 million. At the beginning of the year, we stated that we expected AmerenEnergy to contribute approximately 18 cents per share to 2002 earnings, due largely to the dilutive effect of the Ameren Corporation common stock issuances during 2002, and lower-than-expected energy prices in the wholesale markets. We now expect AmerenEnergy to contribute about 15 cents per share to 2002 earnings, slightly lower than our previous guidance.

Lower interchange sales and lower energy prices also drove down purchase power costs during the quarter. These decreases were offset, in part, by increased purchase power costs associated with unscheduled coal plant outages and increased sales at Electric Energy, Inc.

Maintenance and other operations expenses increased $27 million compared to the prior quarter largely due to higher employee medical and pension benefit costs and higher labor and professional services expenses.

Employee benefit costs have been increasing due to rising medical costs and the impact of the poor stock market performance on the company's benefit plan assets.

Earnings were also unfavorably impacted in the third quarter of 2002 by increased depreciation and financing costs, resulting from plant additions over the past year. These increases were offset, in part, by lower depreciation expenses in the quarter due to our Missouri electric rate case settlement.

As many of you know, we are proactively access the capital markets during the 2002 as we have issued almost $1 billion of equity and equity-linked securities. Our financing activity stems from our commitment to remaining a financially strong company and maintaining our financial flexibility in order to effectively pursue our business strategy.

In March 2002, we issued adjustable conversion rate equity securities and 5.75 million shares of common stock that, together, generated net proceeds of approximately $554 million. This issuance was a pro-active move to further strengthen our already strong balance sheet and maintain financial flexibility.

We further strengthened our financial position throughout the year by cost effectively issuing approximately 2 million shares of common stock through our dividend reinvestment and stock purchase plan, and employee savings plans.

And we recently completed an 8-million share common stock offering in September, raising approximately $327 million. The proceeds from this offering will fund a portion of the cash purchase price for CILCORP that, as Gary said, we expect to close by March 2003.

We estimate that the total cash purchase price for CILCORP will approximate $500 million. And while we believe that we will ultimately have to issue more common equity to complete our funding for the CILCORP acquisition, our existing credit lines, which total approximately $1 billion, and our overall strong financial position, give us the flexibility to access the capital markets, subsequent to the closing of this transaction, in order to better match our financing for the acquisition with the synergies we expect to attain.

Combined, our equity issuances reduced third quarter earnings per share by 11 cents compared to the prior year. And we expect 2002 earnings per share to be reduced by 21 cents compared to 2001.

As Gary stated earlier, due to the new common stock we issued in September, we have appropriately revised our previous earnings guidance, due to the near term dilutive effect of this equity issuance. For 2002, we now expect ongoing earnings to range from $3 to $3.20 per share. This guidance factors in all of the equity issuances we have made during 2002.

Looking ahead to 2003, we believe that challenges lie ahead for the company and the energy sector as a whole. While approximately 95 percent of our earnings and corresponding cash flows are derived from our regulated operations, we expect to be unfavorably impacted by continued weakness in power market prices.

In addition, the economy continues to be very slow in recovering. Should the economy continue to stall, organic growth in our service territory, most notably with our commercial and industrial customers, will be impacted.

Obviously, the lackluster economy and world events, among other things, have negatively impacted the stock market, which ultimately has yielded poor returns on our employee benefit plan assets. These returns, when combined with rising medical care costs and trends, add up to rising employee benefit costs.

While on the subject of employee benefits, I would like to provide some color on the hot topic of pension funding. As a result of the poor stock market performance in 2001, at the end of last year, we reported a $193 million deficiency with regard to our pension plans funding status. As a result of our continued poor stock market performance this year, we expect that deficiency to grow in 2002.

This has resulted greater pension expense in 2002 and will result in a reduction to equity at December 31st, 2002, that will have less than a 1 percent impact on our capital structure. However, unlike many other companies, Ameren does not face an imminent need to fund the pension trust under ERISA guidelines.

At this time, we estimate that we would only be required to provide 25 to $50 million of funding in 2004 and 175 to $200 million in 2005. Of course, these estimates could change as market conditions and interest rates change. Nonetheless, the company is proactively making contributions to its pension trust so that it will remain prudently funded.

In the third quarter, we contributed $15 million to the trust and expect to make a similar contribution at year end. Further contributions in 2003 will be assessed at year end. These pro-active contributions will lessen the future funding requirements.

Going back to other 2003 operating matters, the different world in which we live today has also impacted our other operating costs. We expect to incur greater insurance and security costs for all of our operations in 2003 because of events associated with terrorist activity. These challenges, when combined with an assumed return to more normal weather patterns next year, the impact of the Missouri electric rate case settlement, and the incremental dilution of equity issued in 2002, are expected to put earnings pressure on the company for next year.

To outline our initiatives to meet these challenges, I will turn the conversation back over to Gary. Gary?

Thanks, Warner.

We are moving forward in the analysis of these challenges. But more importantly, in the analysis of a variety of action plans to address these issues.

Cost control has always been one of our strengths. While many of these operating expense pressures are, for all practical purposes, beyond our control, we will seek to aggressively manage these expenses that are within our control.

We will actively manage our employee head count. At the same time, we are reviewing our employee benefit plans and will take actions to reduce our future costs in this area.

We will assess the value being contributed by some of our plants and business support functions and implement plans, as appropriate, to more effectively manage those aspects of our business.

We will also actively look to capitalize on long-term wholesale sales opportunities, and once our acquisition of CILCORP is completed, we'll look to accelerate synergy opportunities. In fact, we have already begun joint integration planning efforts.

Of course, as we move forward in the completion of our 2003 budget process, we'll look at a variety of other alternatives to enhance revenues and reduce costs in 2003 and beyond.

We'll also carefully assess our discretionary capital expenditures. However, we are committed to meeting our energy infrastructure obligations, as well as maintaining our already strong dividend.

As we have said all along, we continue to focus on executing our core energy business strategy. This strategy has served us well in the past, and we're confident that it will continue to allow us to produce, and deliver, reliable energy for our customers, maintain financial strength and flexibility for all our stakeholders, and provide solid long-term returns for our shareholders.

With that I'd like to open this up for your questions.

Thank you. The question-and-answer session will begin at this time.

If you are using a speaker phone, please pick up the handset before pressing any numbers. Should have you a question, please press 1-4 on your push button telephone. If you wish to withdraw your question, please press 1-3. Your question will be taken in the order that it is received.

Please stand by for your first question.

Thank you. Your first question comes from Doug Fischer.

Thank you. And good morning.

Warner, could you go over those numbers about pension funding again? I didn't get all those down. And then I have a follow-up after that.

Sure, Doug. Give me a moment, I'll get back to my notes.

But essentially, with regard to pension funding, we are not required under ERISA guidelines to provide any pension funding until 2004. And at that time, based upon our current estimates, that would approximate 25 to $50 million. And in 2005, we would then have to provide additional funding of $175 million to $200 million.

Now, what we're doing in the interim is that we are proactively funding some of our pension trust. And to date, we have funded $15 million, and we will fund by the end of the year another $15 million. What we do throughout 2003 will be assessed at year end.

So just to the -- $25 to -- the 30 or so that you'll put in over the second half of this year, applies towards that 25 to 50 in '04 and diminishes that? Is that accurate?

That is absolutely accurate. The funding, the pro-active funding that we have, will lessen our funding requirements down the road and in fact, if we continue on that plan, may push out any additional funding out to 2005.

Okay.

And then talk -- that's on a cash basis. Talk to us a little bit on an income statement expense basis, as to the impact of this in '02 and how it is shaping up for '03, what the delta might be.

I guess with regard to '02, the impact of the funding that we're doing, really will have little impact, in total, on pension costs. With regard to, you know, pensions for the rest of '02, we expect them to not really change materially from where we have been. They expect to go up about 15 to $20 million in '02.

That's still the same number we were talking about?

Yeah. Nothing is changing. As evidenced by the fact that we are firming our 2002 earnings guidance. None of these issues are changing our employee benefits expenses for 2002.

Now, with regard to 2003, and pensions, and looking at employee benefits as a whole, we're not commenting specifically on how those costs could go up, largely due to the fact that, Doug, because we are looking at our existing employee benefit plans, and as Gary said, looking to take some actions in that area, which would go to reduce potential increases in those expenses going forward.

But you would still expect that there would likely be some kind of increase?

Yes. We would likely expect that, and that's due largely to the fact that we -- the stock market performance, increasing medical trend rates, discount rates which continue to fall, all those factors all point to rising employee benefit costs in the future. And we are looking to take actions to try and alleviate some of those expenses.

Okay. And then, , I guess that will serve for right now. I might follow up later.

Okay. Thanks, Doug.

Thank you. Your next question comes from Vedula Merty (phonetic).

Good morning.

Good morning, Vedula. How are you?

I'm doing fine, thank you.

Good.

Couple of things here.

Can you walk through, like for, maybe in '03, kind of what you're seeing as operating cash flows, what you would then see in terms of regular capital expenditures, and then maybe, what we have been (indiscernible) in the CILCORP cash on hand at the end of '02, and dividend requirements, kind of, where you see cash flows going, and any deficiencies that might be there?

Well, I guess in sort of broad terms, it would be hard for me to give you black and white specifics on '03 because as we said, we continue to move through the 2003 budget process and we'll look at a number of issues which will affect cash flows, including capital expenditures among other things.

But I will say, with regard to sort of maintenance Cap Ex, historically our maintenance Cap Ex has been right around 450 million-ish. And we would expect that really not to change.

CILCORP on a maintenance Cap Ex probably is around 50 million. Now, they have some incremental capital expenditures that we would expect to see in the early phases of our acquisition due to some environmental matters. But that just is from a maintenance Cap Ex.

Well, I mean, as an example, how much cash on the balance sheet do you expect to end up with at the end of the year?

Well, right now, we are sitting on over $600 million of cash at September 30, of which, 300 to 350 million of that cash is really for the CILCORP acquisition. We would expect certainly by the end of the year this we would still have meaningful numbers in cash.

In the interim between now and then, we will utilize some of that cash for operating purposes and for some capital expenditures that we will incur between now and the end of the year. But we are sitting on over 600 million today.

As an example, maybe to ask it a different way. If I exclude, you know, CILCORP here, if I look at operating cash flow less capital expenditures, less common dividends, will you be in a, you know, surplus, neutral, or deficient position for '03?

I think when you exclude CILCORP, we would believe, with our operating cash flows, that we would be able to adequately provide our maintenance Cap Ex needs as well as our dividends.

Okay. So you would be neutral to positive including CILCORP?

That excludes CILCORP at this time, that's correct.

Okay.

And I'm wondering, , you have obviously talked a lot about various expenses that will be going up, a whole host of categories here. Then you also indicated that you'll be looking at various cost containment measures in response to that. I'm wondering if we just take a look at O&M in aggregate, without going through each of the specific categories, can you get a sense off of '02 right now, what type of a growth rate you are expecting at the O&M line? Or whether you think, despite the pressures, you can keep it flat ,or can you kind of, you know, qualitatively give us some sense as to how we should expect that line to look year over year?

Yeah, I think, Vedula, with regard to that particular issue, it's difficult for me to give you again, specific guidance on O&M because of the issues that we have described and we continue not only to analyze those issues, and again as Gary said, we are looking to actively take plans to alleviate some of those pressures.

So we, as you know, have been very successful in the past in cost management, and we expect to continue to do that moving forward, as that is going to be one of our initiatives, is again cost containment during these times.

One last thing.

I mean, during the road show back in September, you know, you indicated that you have grown earnings by about 5 percent annually since 1997. And you've historically targeted a growth rate somewhere kind of in that range. I'm wondering, given the challenges that you have, I mean, just for our own purposes without -- until, you know, maybe get more specific details, you know, early next year, would you -- would you think that, assuming kind of a, comparable outlook in '03 versus '02, accurately reflects the magnitude of challenges, you currently face?

I guess the challenges that we see in '03, we -- I mean, talk about magnitude. I think that by pointing some of the issues out, we see that pressures, which would suggest that some of those magnitudes are certainly increasing as we look out in '03.

With regard to your comment on the 5 percent EPS growth rate target, I think clearly, what we have said in the past and what we have actually delivered, is on our 5 percent commitment.

Looking ahead, as we have said, we are not commenting specifically on 2003 earnings, or really, earnings growth targets today. That's not to say that we are moving on or off of any things that we have said in the past, but that we are just not commenting specifically.

What we're simply doing is pointing out issues and challenges that we are facing, not just as a company, but frankly, with the energy sector as a whole, and probably industry as a whole, what they are facing for 2003.

We are continuing to assess those issues and I think more importantly, we are proactively looking to take several action plans to address these challenges as part of our overall budget process.

I guess, Vedula, we have said all along is that 2002 would be a rebasing year for the company, due in large extent to the rate case, as well as the bears common equity issuances that we have done throughout the year. But I will say that our company remains committed to long-term earnings growth, certainly off of its core energy business, but because of some of the issues that we discussed, and issues, frankly, we have discussed in the past, we expect that earnings growth could be a little bit lumpy here in the short term.

But probably even more importantly, we are committed, as a company, to provide an overall solid returns, total returns, to our shareholders and, of course, as you know, that does factor in our currently strong dividend yield, which today stands at over 6 percent. And we believe when you look at our total return potential, with our already strong balance sheet, we think that clearly differentiates us from many others in this sector.

Thank you very much.

You're welcome.

Thank you. Your next question comes from Jessica Rutledge.

Hi.

Could you talk through the-- You talked about the 18 cents optimization margin that you had previously expected to generate this year, and that it had now fallen to 15 cents, in your mind. Could you talk through how much of that has been realized year to date and what your expectations are going forward?

Well, I think with regard to AmerenEnergy, we don't give sort of specific guidance with regard to earnings on a quarterly basis. But as you might expect as we proceeded through the summer, we've again gone through a fair amount of what you would expect to see from that trading operation.

Basically, we started at 18 cents. That was at the beginning of the year. But since the beginning of the year, as I have pointed out, we have issued quite a bit of common equity and so when we that discreet entity, and you simply effect that earnings per share contribution by dilution, that goes down by a penny or two, just because the share issuance of the common stock.

So for all practical purposes, we're moving AmerenEnergy's expectations for the year, while down 15 cents, only down maybe a penny or so, due to the energy markets. And we feel confident that, certainly by the end of the year, that we'll be able to deliver that 15 cents earnings per share.

Of that 15 cents, however, how much have you already realized? You know, we're three quarters of the way through the year here.

Again, with regard to AmerenEnergy and their interim targets, we don't give specifics on where they're at at any particular point. We have always provided annual targets. And again, as we proceeded through three quarters of the year, a fair amount of that has already been realized.

Okay.

And if we are -- so we're not quantifying the quarterly impact. But if I'm looking at the pattern of earnings out of AmerenEnergy through the year, have we seen earnings margins or earnings power fall as we've progressed through the year at AmerenEnergy? Has it become harder to realize that optimization margin?

I think, , what we've seen throughout the year is AmerenEnergy's margins are down, but just slightly. They're fairly -- they're pretty much in line throughout the year in what we had generally expected them to be. No major differences.

I mean, obviously, we have seen softness in the energy markets, but again, AmerenEnergy's strategy is one of simply asset optimization. And so they take our excess generation, generally into the short term markets, and attempt to sell it.

Obviously, to the extent that those prices have been less, and we have clearly seen that, that affects our overall earnings. But we went into the year with some fairly modest expectations on the forward curve, so that's why really, when you see that the needle, with regard to our AmerenEnergy operations or our trading operations, not moving as much, it's because; one, I think we went in with reasonable expectations; two, the strategy they employ is one that's looking for singles and doubles in an asset optimization portfolio; and three, it's a fairly low-risk business that we do.

And so again, the other piece of it that AmerenEnergy does for us isn't just selling our excess generation but, to the extent that we have circumstances where we have unscheduled plan outages and the like, they are able to access the market in a pro-active way and minimize our overall cost there, as well.

And on a completely separate note, the billion-dollar credit revolver that you referenced a minute ago?

That's correct.

Has that recently been renewed, or when does it expire?

That billion-dollar credit line, by and large, we just upsized overall lines of credit, recently from, it was originally up to 300, we upsized it to 400 million just at this past June. We have that revolver probably going out until, I guess a portion of it goes out to the middle of next year, and some of it goes out as far as, actually, July of 2005.

Thank you.

You're welcome.

Thank you. Your next question comes again from Doug Fischer.

Thank you.

Could you elaborate on these unscheduled plant outages that you incurred in the third quarter? And is that what is explaining the increase in other operating expense, 197 million versus 173, or is that primarily due to the new generation?

Yeah, Doug, I think with regard to that, what -- those unscheduled plan outages affected some of our purchase power costs and some of our maintenance, as you would expect. I mean, it wasn't, in the quarter we had one of our plants that was down for about a week or two, to try to get back operational. So it wasn't a significant effect. Probably when you look at maintenance and purchase power, that's probably around 4 cents, maybe.

That's probably not really driving the other operations. That's really being driven, mostly, on a year-to-year basis by employee benefit expenses, which are up, as well as, as you know, professional services are up, in large part, due to the activity we have had in the regulatory arena this year. So that's probably really driving that piece more than anything else. The maintenance line item is really set out separately and you can see that is up very modestly, $3 million

Okay.

And professional services? I assume that was due primarily to the Missouri rate case and the -- I don't suppose you're expensing things relating to CILCORP acquisition. Are those being capitalized or expensed?

The expenses associated with CILCORP are being capitalized, and you are correct that those fees are really, regulatory fees associated with the Missouri complaint case. But we have to keep in mind that at the same time, we've also been very active dealing with the RTO issues. And so that, too, has had some pressure. And what we hope to, looking forward into 2003, that obviously, we will not be as active in the regulatory arena and we'll be able to bring some of those expenses down.

And what is roughly the level of those? I seem to recall reading somewhere some disclosure on that.

With regard to professional services, the impact they had in the quarter was about 4 cents. Up on a year-to-year basis.

Okay. Thank you.

Sure.

Thank you. Your next question comes from Greg Oru (phonetic).

Thanks. Good morning.

Good morning, Greg.

I was wondering if you might address the impact on '03 from, you know, the economy just sort of, you know, how you see industrial sales progressing or overall retail sales next year?

I think historically, Greg, we grow at about 2 percent on a company basis, not talking basically the native load sales, which is residential, commercial and industrial. What we have seen throughout this year, as we've noted, is that industrial sales have seen pressure.

We have still seen some solid growth in the residential and commercial -- and even in the commercial category, although probably a little more pressure there. But certainly the industrial sales in the quarter are down 3 percent and year to date about 6 percent.

Certainly if the economy continues to stall or be slow in recovery, we would expect that our organic growth in those customers would be affected. And so, while we do expect to be effective, it may go down to a percent-ish, from 2 percent, as a result, based upon what we see today.

But because of our diversified customer mix, between residential, commercial and industrial, we're really not -- I mean, industrial sales account for about 20 percent of our native load revenues. And so we don't see wild swings in our overall organic growth, although we still are affected by the overall economy.

So industrial could be down and retail sales could still be up 1 percent?

Yeah. We would see that industrial sales if -- certainly if you look at this year and the impact, we could see similar types of circumstances next year, if the economy continues. That will flip a little bit into our commercial, as well, because some of our large commercial customers, obviously, look a lot like industrial customers. But the residential customers continue to look fairly strong in their growth in our service territory. So they will help alleviate some of the SUs from an economic standpoint.

Thank you.

You're welcome.

Greg, it's Gary Rainwater.

Just to add a couple of things to that. We are in a recession now in St. Louis. I'm not sure where the rest of the country is. Some data I have seen indicates that the US in general is coming out of the recession. We do tend to lag the US economy a bit. And I think we went into this recession a little late. We're coming out of the recession a little late.

Historically, in our economy, as we come out of a recession, we generally have a surge in demand growth. And in the past, we've always exceeded our sales expectations. In this recession, we aren't predicting that. Well, in fact, in the past we didn't predict it, either. It just occurred.

And Warner isn't, one reason Warner can't give you a lot of specifics is that, we're still in the process of preparing our formal energy sales forecast. But the outlook is for continued low growth at this point. We don't see a strong surge in demand for '03. We're hopeful that beyond '03, though, we will see a good rebound.

Great. Thanks.

Thank you. Just a reminder, ladies and gentlemen, if you do have a question, please press 1-4 at this time.

Thank you. Your next question comes from Devon Gillian (phonetic).

Hi, this is Devon Gillian, can you guys hear me?

We can hear you fine, thanks.

Great.

In terms of the CILCORP financing, is it right that, in terms of maximum equity, you need to do again, it would probably be about 200 million, just given the cash numbers you said you were reserving?

That would be fair. As we said, we have raised 325 million, approximately, already for CILCORP, and we estimate that, at this time, that 500 million would be the necessary cash portion of financing. So doing that math would be right around the $200 million-ish but we expect it to actually be a little bit less than.

Okay, that makes sense.

In terms of the facilities, I guess a portion is due in 364 and a portion is probably a 3-year. How much of that is drawn down to date and how much is used to backstop CP?

Nothing has been drawn down to date.

Great. That's great. And okay, that's great.

In terms of balance -- just a couple more questions. Balance sheet capitalization, it seems to me, you guys are like around 50 percent equity, 51 percent. Do you have an updated, of where you expect to be at the end of the year?

Actually, the way we look at it, well, we believe that 53 percent equity to total capitalization, and that excludes the fact that we have the (indiscernible) units, which is a convertible debt that's going to convert into equity in a couple of years. That's not taking any equity credit for that.

Obviously, you can put your own metrics as to what level of equity credit, but it probably wouldn't be unfair to believe that there's probably, at least, two percent to the cap structure equity credit that you could put forth to that. So depending upon how you want to look at it, we're probably sitting around 53 percent with regard to that.

Now, of course, as I said a little bit before, that might be modified a little bit by year end because of the charge to equity as a result of the pension deal. But again, that's only going to be less than one percent, so that's really not going to affect our capital structure at all at year end.

Right. You guys are in a really good position overall.

Yes.

Just one last question.

If I'm looking at just liquidity, the numbers I thought I had for '02 would be around, maybe, 800 million in CFO, about 800 million in Cap Ex, and then you have the dividend, and then, it seems next year, the Cap Ex drops off by maybe, down 575?

Well, as we went into the beginning of the year, we announced our five-year capital expenditure plan, and at that time, when we looked out to '03, those numbers were probably around 800 million total system.

Okay.

Now, as I said before, one of the things that we always do as we go through the budget process, as we will do now, is that we will assess our overall capital expenditure requirements. And so that number, the 800 million, again, was one that we did beginning of the year. I would expect that number to be modified, and it could very well go down, certainly as we go into next year.

Okay.

And then the DRIP, again, is 75 million? I think, is that the right number to be using,?

That's correct.

Okay, great. Congratulations on everything. Thank you for your time.

We appreciate it.

Thank you. Your next question is again from Jessica Rutledge.

Hi. A quick follow-up on a completely different issue.

Could you talk about where you guys are right now on the control rod drive mechanism cracking issues with Callaway and what, if anything, you expect to do during the 4Q outage?

I'd be happy to do that, Jessica. I will turn it over to Gary Rainwater, he has a little more information on that.

Jessica, we will do a complete inspection of the reactor vessel head during this outage. But we don't expect to find any problems. And the reason is, that we have done some cursory inspections in the past, have not done -- or have not found any indication of reactor head vessel cracking. And also, the reactor vessel type at the Callaway plant is one that is in the lowest risk category for this kind of a problem.

Generally, the NRC divides reactor vessels into three categories, the Davis Bessie (phonetic) unit, of course, was in the highest risk. There are others in the, kind of, medium risk, but Callaway is considered to be in the lowest risk category for this kind of a problem, so we just don't expect a problem.

And when you say a complete inspection, what -- what does that entail? Is that a complete visual or is that ultrasound or what's --

It will be a robotic inspection, and I don't know what the robot looks like. But a robotic inspection using a video camera that will go in and actually visually inspect the reactor vessel head for cracking.

And is that something that you usually do at outages, or is that a new addition here?

That is a new addition. We have not done that in the past. What we have done in the past is, you know, look for indications of cracking, like boron crystal deposits that can be found inside the reactor building. And we have never found any indication.

Terrific. Thanks.

Thank you. Your next question comes from Paul Ridzon.

Actually, that was my question.

But when you talk about '03 challenges, do you think it's possible that growth could be a challenge?

I think again, Paul, I think we're not giving any specific guidance or even, you know, really color, with regard to 2003 at this point, because as we have said before, we continue to work through the budget process. We continue to look at a number of these issues.

And as I said, at the end of the day, we are absolutely committed to long-term growth and long-term total returns to our shareholders. And so, we expect, as we complete the budget process, we fully expect that by the end -- before year end, to provide specific earnings guidance with regard to 2003.

Thank you.

And again, on Callaway, you are going to do a visual and do you have 100 percent access to the head at Callaway?

I believe Gary said it isn't just visual. We'll actually do a robotic with regard to that particular inspection.

The way I understood was robotic was a video camera which is, sounds like visual to me.

Yeah. It is with a video camera, although I'm not -- I can't answer your question completely. I'm not sure if there may be some x-ray inspection involved, as well.

You have 100 percent access to --

But it is a complete inspection that meets all the NRC requirements to satisfy the NRC that we have no reactor vessel head cracking.

And Callaway is in the lowest susceptibility band?

That's correct.

Yes. It's at the lowest level.

Thank you you very much.

You're welcome.

Thank you. Your next question comes from Andy Levy.

Hi, guys.

I just -- I know people have been asking a lot of questions about '03. I guess, kind of, just to ask it more simply, are earnings expected to be higher than '02? Or not?

Well, Andy, I guess again, we're not trying to be evasive. We are just trying to tell you where we're at with things. We're simply finishing the budget process and we're looking at these matters. And so it would be premature, at this time, to just sort of lay out any expectations. It probably goes to, sort of, our conservative way.

Frankly, at this time last year, we were really at the same spot. We didn't provide specific earnings guidance for '02, because we like to make sure that we not only analyze the issues, but we have the full game plan in place. And so, you know, that's really where we're at in commenting on 2003 and we will be back to the market and telling them where we think 2003 will be, before year end, when we complete our analysis of, not only just the issues, but also our action plans going forward.

Thank you.

Thank you. Your next question comes from Scott Knight.

Hi, just noticing the footnote on the end of your quarterly income statement regarding contracts involved in energy trading. I'm just wondering if you could add a little color, elaborate a little on why those are going up so fast and what exactly they entail?

I believe, Marty Lyons, our Controller, will address the footnote on the financial statements. And I believe it relates simply to some reclassifications that we had to do as a result of the implementation of EITF 0203. I'll let Marty address that.

I think that what you see in the footnote simply indicates that certain contracts that had been classified this past year as speculative type transactions, really under FAS 130 -- well, actually under EITF 9810, are included in there and have been netted down for financial statement purposes. So you know, that's what you see. And for the most part, these were transactions that were entered into last year that culminated in the current year.

And what, what, I mean -- 123 million in the -- you know, for the three-month period, what -- you know, what, what sort of costs are there are they incurring? Is this mark-to-market on the contracts that are --

No, no. Let's be clear. This is -- this has absolutely no effect on the bottom line. This is net-net zero. And this is basically reduced -- you offset your revenues with your fuel costs, so this is not mark-to-market. This is not -- there is no margin even associated with this this is simply a financial presentation issue.

So it's a hedging activity, then?

Yes.

Okay. Thank you.

Thank you. Your next question comes again from Devon Gillian.

One last question.

Just on CILCORP. I just wanted to -- I don't think I had heard before, are there any rate case issues of them, or any sort of proceedings once you guys merge them?

This is Warner. The issue with CILCORP is that we want again to go through the regulatory proceedings. We expect to have those done by March 2003. There are no specific rate case matters on the electric side of the business because of the Illinois law which has now extended the rate freeze from 2004 through 2006.

Oh, that's right. That's right.

So we really don't -- in fact, that actually creates an opportunity for us, that any synergies that would have been part of a rate case are now -- we have the ability to potentially get those synergies as part of our overall business for again, a couple of other years.

That's right. I forgot about that. That makes a nice situation for you guys.

Right.

And then aside from just the environmental Cap Ex of CILCORP, which ought to be eventually included in rate base, is CILCORP running free cash flow-positive just holding that environmental Cap Ex off to the side?

I think if I, going back to some of our models, we -- we basically saw CILCORP running fairly neutral looking out.

Okay.

From a free cash flow standpoint. How they stand today again, you know, we can see that the things that are, sort of, visible in the marketplace. We, because of Hart-Scott-Rodino and other actions, we don't have an opportunity to look at all the specific budgets in all those things, but we certainly did a great deal of due diligence around this effort, and that's what we are expecting to see out of CILCORP and moving ahead.

Great, I appreciate the time and continue the good work. Thank you very much.

Thank you.

Thank you. Your next question comes from James Thelacker (phonetic).

Yes. I was just wondering, as were you talking about the optimization function in AmerenEnergy, and relative to that 15 cents contribution, can you talk a little bit about what percent of your sales are, say to, you know, other utilities or maybe, you know, munis and co-ops versus, you know, some of the traders and marketers who have had, you know, some more financial distress recently?

Sure. I would characterize AmerenEnergy's sales today, really to be mostly to other utilities. We operate a very conservative risk management position, as evidenced by the bar that we disclosed a little bit earlier.

For those entities that are traders and for those entities who are not liquid and don't have sufficient collateral, we simply limit the amounts of trade, and if not limit, totally avoid, basically not allow them to trade with those entities.

So we have other entities but we also have some of those trades to some of the munis and co-ops, as well. But by and large, it's mostly other utilities.

Gotcha. So the volumes and your level of activity there would, really be limited more to, I guess, demand-related issues as opposed to any sort of financial issues?

Yeah. I think that's fair. It is demand-related issues and I think that's why, when we made the comment before, that our interchange revenues was down, was due to the higher demand that we had on our own system. The native load demand. And so their access generation simply was less that they could sell into the open market.

Okay. Great. Thank you very much.

Sure.

Thank you. Your final question comes from Cherina Choudre (phonetic).

Warner, wondering if you can give us what the weather impact has been year to date on a per-share basis?

Sure. Absolutely. It is 11 cents, as I said, for the third quarter. Year to date is 14 cents.

Is that versus normal or versus last year?

That is versus last year. The prior year.

Do you have a number versus normal?

No. We don't have a number --

Making assumptions for next year?

Yeah. We don't have a number versus normal, but I will say that last year, probably through this period of time, the summer was warmer than normal, even last year. I don't know to what extent, but it was slightly normal.

At the end of the year, through last year, when you looked year to date, the impact of weather was fairly minimal last year, because of, when you factored in both winter and summer. But for the discreet third quarter, I think that last summer was still slightly higher than normal.

And also, should the Callaway, absence of the Callaway refueling next year not help?

Yes. The 9 cents that we are talking about in the fourth quarter, that absence should be -- should be a net positive. But again, we're finalizing our overall budget process and a variety of our operations, but all things being equal, historically, we have had a pickup in earnings as a result of the Callaway -- the lack of a Callaway refueling outage. And I won't be able to give you more specific guidance on that when we come out with regard to our 2003 specific guidance later this year.

Okay, thanks.

You're welcome.

Thank you. If there are no further questions, I will now turn the conference back to Mr. Warner Baxter to conclude.

Great. Thank you for participating in this call. We hope to see many of you at the EEI financial conference next week.

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Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.