(As filed on October 28, 2002)
File No. 70-10078
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM U-1/A
AMENDMENT NO. 1
TO
APPLICATION OR DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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AMEREN CORPORATION
AMEREN ENERGY FUELS AND SERVICES COMPANY
1901 Chouteau Avenue
St. Louis, Missouri 63103
CILCORP INC.
CENTRAL ILLINOIS LIGHT COMPANY
CENTRAL ILLINOIS GENERATION, INC.
300 Liberty Street
Peoria, Illinois 61602
(Names of companies filing this statement and
addresses of principal executive offices)
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AMEREN CORPORATION
(Name of top registered holding company parent)
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Steven R. Sullivan
Vice President, General Counsel and Secretary
Ameren Services Company
1901 Chouteau Avenue
St. Louis, Missouri 63103
(Name and address of agent for service)
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The Commission is requested to send copies of all notices, orders and other
communications in connection with this Application/Declaration to:
Joseph H. Raybuck, Esq. William T. Baker, Jr., Esq.
Ameren Services Company Thelen Reid & Priest LLP
1901 Chouteau Avenue 40 West 57th Street
St. Louis, Missouri 63103 New York, New York 10019
William J. Harmon, Esq. William C. Weeden
Jones, Day, Reavis & Pogue Skadden, Arps, Slate,
77 West Wacker Drive Meagher & Flom, L.L.P.
Chicago, Illinois 1440 New York Avenue, NW
60601-1692 Washington, DC 20005
2
TABLE OF CONTENTS
PAGE
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.................................1
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1.1 Introduction...................................................1
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1.2 Description of Ameren and Its Subsidiaries.....................2
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1.3 Description of CILCORP and Its Subsidiaries....................5
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a. CILCO's Electric Utility Operations.......................5
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b. CILCO's Gas Utility Operations............................7
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c. Regulation of CILCO and CIGI..............................7
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d. CILCORP's Non-Utility Businesses..........................8
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e. Capitalization of CILCORP and Subsidiaries................9
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1.4 Principal Terms of Stock Purchase Agreement...................10
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1.5 Operation of the Combined System Following the Acquisition....11
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1.6 Financing the Purchase Price..................................11
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1.7 Affiliate Transactions........................................11
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a. Existing Sales, Service and Construction Contracts.......11
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b. Ameren Services..........................................12
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c. Ameren Fuels.............................................13
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1.8 Financing by CILCORP, CILCO and CIGI..........................13
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a. External Financing Transactions..........................14
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(a) CILCORP.............................................14
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(i) Short-term Debt................................14
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(ii) Refinancing of CILCORP Senior Notes............14
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(b) CILCO and CIGI......................................15
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(i) Short-term Debt................................15
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(ii) Long-term Securities of CIGI...................16
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(c) Interest Rate Hedging Transactions..................17
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b. Intrasystem Financing Transactions and Guarantees........18
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(a) Long-term and Short-term Securities of CILCORP......18
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(b) Long-term and Short-term Securities of CIGI.........19
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(c) Short-term Securities of CILCO......................19
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(d) Guarantees Issued by CILCORP and Its Subsidiaries...19
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1.9 Organization and Acquisition of Financing Subsidiaries........20
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1.10 Payment of Dividends by CILCORP Out of Capital and Unearned
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Surplus.......................................................21
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1.11 Exemption of CILCORP and CILCO as Holding Companies...........22
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1.12 Reports Pursuant to Rule 24...................................23
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ITEM 2. FEES, COMMISSIONS AND EXPENSES.....................................24
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ITEM 3. APPLICABLE STATUTORY PROVISIONS....................................24
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3.1 General Overview of Applicable Statutory Provisions...........24
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3.2 Compliance with Section 10(b).................................26
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a. Section 10(b)(1).........................................27
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b. Section 10(b)(2).........................................30
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3
c. Section 10(b)(3).........................................32
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3.3 Section 10(c).................................................35
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a. Section 10(c)(1).........................................35
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(a) The Transaction will be lawful under Section 8......35
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(b) The Transaction will not be detrimental to
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carrying out the provisions of Section 11..........35
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(i) Integration of Electric Operations.............36
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A. Interconnection............................36
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B. Coordination...............................37
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C. Single Area or Region......................38
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D. Size.......................................39
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(ii) Integration of Gas Operations..................39
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A. Coordination .............................40
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B. Single Area or Region......................40
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C. Size.......................................41
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(c) Retention of Combined Gas System....................41
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(i) Loss of Economies..............................41
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(ii) Same State or Adjoining States.................42
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(iii)Size...........................................43
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(d) Retention of CILCORP's Non-Utility Subsidiaries and
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Investments.........................................43
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(e) Retention of CIGI as Subsidiary of CILCO............44
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b. Section 10(c)(2).........................................46
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3.4 Section 10(f).................................................47
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3.5 Intra-system Transactions.....................................47
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3.6 Rule 54 Analysis..............................................48
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ITEM 4. REGULATORY APPROVALS...............................................48
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4.1 Illinois Commerce Commission..................................48
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4.2 Federal Energy Regulatory Commission..........................49
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4.3 HSR Act.......................................................49
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4.4 Federal Communications Commission.............................49
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ITEM 5. PROCEDURE..........................................................50
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ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS..................................50
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a. Exhibits.................................................50
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b. Financial Statements.....................................52
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ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS............................53
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4
The Application/Declaration filed in this proceeding on August 2, 2002 is
hereby amended and restated in its entirety to read as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
-----------------------------------
1.1 Introduction. Ameren Corporation ("Ameren"), a Missouri corporation
and a registered holding company under the Public Utility Holding Company Act of
1935, as amended (the "Act"),(1) Ameren Energy Fuels and Services Company
("Ameren Fuels"), an indirect wholly-owned non-utility subsidiary of Ameren,
CILCORP Inc. ("CILCORP"), an exempt holding company under Section 3(a)(1) of the
Act,(2) CILCORP's public-utility subsidiary, Central Illinois Light Company
("CILCO"), and Central Illinois Generation, Inc. ("CIGI"), a subsidiary of CILCO
that has been determined by the Federal Energy Regulatory Commission ("FERC") to
be an "exempt wholesale generator" ("EWG"),(3) are filing this
Application/Declaration pursuant to Sections 3(a)(1), 6(a), 7, 8, 9(a), 10,
11(b), 12(b), 12(c), 12(f) and 13(b) of the Act and Rules 26(c), 45, 46, 51, 54,
87 and 90-91 thereunder to request approval for the acquisition by Ameren of all
of the issued and outstanding common stock of CILCORP (the "Transaction") and
for certain other related proposals, as more fully described below. CILCORP is a
wholly-owned subsidiary of The AES Corporation ("AES"), an exempt holding
company under Section 3(a)(5) of the Act.(4)
Ameren requests that the Commission issue a final order approving the
Transaction without an evidentiary hearing, as expeditiously as feasible. Ameren
and AES intend to close the Transaction in December 2002 or as early in the
first quarter of 2003 as possible.
As described in greater detail below, upon receipt of all necessary
regulatory approvals, Ameren will purchase the common stock of CILCORP from AES
for cash.(5) The Transaction is subject to, among other usual and customary
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1 See Ameren Corporation, Holding Co. Act Release No. 26809 (Dec. 30, 1997)
(the "1997 Merger Order").
2 CILCORP is an exempt holding company under Section 3(a)(1) of the Act,
pursuant to Rule 2. See Statement on Form U-3A-2 in File No. 69-305, filed
February 27, 2002.
3 See Central Illinois Generation, Inc., 100 F.E.R.C. P. 62,011 (July 5,
2002). As explained below, CIGI will relinquish its EWG status on or shortly
after Ameren completes its acquisition of the common stock of CILCORP, such that
CIGI will become an additional public utility subsidiary of Ameren. Accordingly,
for purposes of Sections 9(a) and 10 of the Act, Ameren's acquisition of CILCORP
is treated as an indirect acquisition of the securities of two public-utility
companies: CILCO and CIGI.
4 The Commission granted AES an exemption under Section 3(a)(5) of the Act
in 1999 in connection with AES's acquisition of CILCORP. Subsequently, in 2001,
the Commission authorized AES to acquire another utility holding company, IPALCO
Enterprises, Inc., and extended AES's exemption under Section 3(a)(5), subject
to the condition that AES divest its interest in CILCORP within two years
following its acquisition of IPALCO Enterprises, Inc. See The AES Corporation,
Holding Co. Act Release Nos. 27063 (Aug. 20, 1999) and 27363 (Mar. 23, 2001).
5 In conjunction with the Transaction, Ameren has also agreed to acquire
from AES all of the membership interests in AES Medina Valley (No. 4), L.L.C.,
which indirectly through intermediate subsidiaries holds all of the membership
interests in AES Medina Valley Cogen, L.L.C. ("AES Medina Valley"). AES Medina
Valley, which has been determined by FERC to be an EWG, owns a 40 MW gas-fired
cogeneration facility in Mossville, Illinois that produces electricity, steam
and chilled water for sale to CILCO. See AES Medina Valley Cogen, L.L.C., 94
F.E.R.C. P. 62,264 (Mar. 30, 2001). Ameren's indirect acquisition of AES Medina
Valley is exempt pursuant to Section 32(g) of the Act. AES Medina Valley
(No. 4), L.L.C. also owns all of the membership interests in AES Medina Valley
Operations, L.L.C., which operates the Mossville facility.
conditions precedent, receipt by the parties of required state and federal
regulatory approvals and filing of pre-merger notification statements under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"),
and the expiration or termination of the statutory waiting period thereunder.
(See Item 4 - Regulatory Approvals, below). The boards of directors of Ameren
and AES have each approved the proposed Transaction. The Transaction does not
require any approval by the shareholders of Ameren or AES.
In addition to authorization of the Transaction, CILCORP, CILCO and CIGI
are requesting authorization herein through March 31, 2006 (the "Authorization
Period") for a program of long-term and short-term financing, including
authorization for CILCORP, CILCO and CIGI to issue long-term and short-term
notes to Ameren to evidence borrowings from Ameren. Ameren Fuels is requesting
authorization to enter into a fuel services agreement with CILCO and CIGI on
terms that are substantially identical to the terms of a Fuel Services Agreement
with AmerenUE and AmerenCIPS that the Commission has previously approved.
CILCORP is requesting authorization to issue guarantees and provide other forms
of credit support on behalf of its subsidiaries, and to pay dividends out of
capital and unearned surplus, subject to certain limitations. Finally, CILCORP
and CILCO are requesting an order granting to each of them an exemption under
Section 3(a)(1) of the Act.
1.2 Description of Ameren and Its Subsidiaries.
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Ameren's primary operating subsidiaries are Central Illinois Public
Service Company ("AmerenCIPS") and Union Electric Company ("AmerenUE"), which
are electric and gas utility companies, and Ameren Energy Generating Company
("Ameren Energy Generating"), which is an EWG.(6) These companies are engaged
principally in the generation, transmission, distribution and sale of electric
energy and the purchase, distribution, transportation and sale of natural gas.
AmerenCIPS, an Illinois corporation, supplies electric and gas utility
service in a 20,000 square-mile area in central and southern Illinois having an
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6 See Ameren Energy Generating Co., 93 F.E.R.C. P. 62,210 (Dec. 18, 2000).
2
estimated population of 820,000. AmerenCIPS supplies electric service to about
325,000 customers and natural gas service to about 170,000 customers.
AmerenUE, a Missouri corporation, is the largest electric utility in the
State of Missouri. It supplies electric and gas service in territories in a
24,500 square-mile area in Missouri and Illinois having an estimated population
of 2,600,000, including the greater St. Louis area. AmerenUE supplies electric
service to about 1.2 million customers and natural gas service to about 130,000
customers.
Ameren Energy Generating is an indirect wholly-owned electric generating
subsidiary of Ameren that was organized in order to facilitate the restructuring
of AmerenCIPS in accordance with the Illinois Electric Service Customer Choice
and Rate Relief Law of 1997 ("Customer Choice Law"). In May 2000, Ameren Energy
Generating acquired all of the existing generating assets of AmerenCIPS.
AmerenUE and Ameren Energy Generating together own and operate about
12,600 MW of electric generating capacity, all of which is located in Missouri
and Illinois. As of December 31, 2001, AmerenUE and AmerenCIPS owned and
operated, or partially owned, a total of approximately 5,400 circuit miles of
electric transmission lines and approximately 7,800 miles of natural gas
transmission and distribution mains, substantially all of which are located in
Missouri and Illinois.(7) AmerenUE and AmerenCIPS are members of the Mid-
American Interconnected Network ("MAIN"), which is one of the ten regional
electric reliability councils organized for coordinating the planning and
operation of the nation's bulk power supply. AmerenUE and AmerenCIPS operate
their electric transmission systems as a single control area, subject to a
single open access transmission tariff on file with the FERC. On May 28, 2002,
Ameren informed the FERC that AmerenUE and AmerenCIPS intend to participate in
the Midwest Independent System Operator ("MISO"), either as transmission owners
or as members of an independent transmission company that is itself a member of
the MISO. Subsequently, on June 20, 2002, Ameren and two other utilities
(American Transmission Systems, Inc., a subsidiary of FirstEnergy Corp., and
Northern Indiana Public Service Company, a subsidiary of NiSource Inc.) agreed
to form a for-profit independent transmission company, called GridAmerica, LLC,
as the vehicle through which they would participate in the MISO and filed a
letter of intent to that effect with the FERC. On July 3, 2002, definitive
agreements establishing GridAmerica, LLC as a participant in the MISO were filed
with the FERC.
Ameren's direct non-utility subsidiaries are:
o CIPSCO Investment Company, which holds various nonregulated and
passive investments, including passive investments in low income
housing projects and investments in equipment leases;
o Ameren Services Company ("Ameren Services"), a service company
subsidiary that provides administrative, accounting, legal,
engineering, executive, and other corporate support services to
Ameren and its associate companies;
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7 Ameren owns interconnecting electric transmission facilities in
southeastern Iowa but does not serve any customers in Iowa.
3
o Ameren Energy, Inc., an energy-related company under Rule 58 that
primarily serves as the short-term energy trading and marketing
agent for AmerenUE and Ameren Energy Generating and provides a range
of energy and risk management services;
o Ameren Development Company, an intermediate non-utility holding
company, which directly and indirectly owns all of the outstanding
stock of two energy-related companies under Rule 58 (Ameren ERC,
Inc., which provides energy management services, and Missouri
Central Railroad, a fuel transportation subsidiary) and of an exempt
telecommunications company within the meaning of Section 34 of the
Act (Ameren Energy Communications, Inc.);
o Ameren Energy Resources Company, also an intermediate non-utility
holding company, which holds all of the outstanding common stock of
Ameren Energy Development Company, an EWG, as well as of two
energy-related companies under Rule 58 (Ameren Energy Marketing
Company, a power marketer, and Ameren Fuels, which brokers and
markets energy commodities and owns and manages fuel procurement and
delivery assets). Ameren Energy Generating is a wholly-owned
subsidiary of Ameren Energy Development Company.
In addition, Ameren indirectly owns 60% of the common stock of Electric
Energy, Inc. ("EEI"), an EWG. EEI owns and/or operates electric generation and
transmission facilities in Illinois that supply electric power primarily to a
uranium enrichment plant located in Paducah, Kentucky.(8)
An organizational chart showing the relationship of Ameren and its
subsidiaries is filed herewith as Exhibit E-1.
For the twelve months ended December 31, 2001, Ameren reported total
operating revenues of $4,505,867,000, operating income of $664,987,000, and net
income of $468,545,000. On a consolidated basis, approximately 92.2% of Ameren's
2001 operating revenues were derived from sales of electricity, 7.6% from sales
of gas and gas transportation service, and .2% from other sources. At
December 31, 2001, Ameren had $10,400,575,000 in total assets, including net
property and plant of $8,426,562,000. As of August 9, 2002, Ameren had issued
and outstanding 144,946,829 shares of common stock, $.01 par value. Ameren's
common stock is listed and traded on the New York Stock Exchange ("NYSE").
1.3 Description of CILCORP and Its Subsidiaries.
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CILCORP, an Illinois corporation, owns all of the issued and outstanding
common stock of CILCO, its predominant subsidiary. CILCO is engaged in the
generation, transmission, distribution and sale of electric energy in an area of
approximately 3,700 square miles in central and east-central Illinois, and the
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8 The remaining 40% of the stock of EEI is held equally by two unaffiliated
electric utility companies.
4
purchase, distribution, transportation and sale of natural gas in an area of
approximately 4,500 square miles in central and east-central Illinois.
a. CILCO's Electric Utility Operations.
-----------------------------------
CILCO furnishes electric service to retail customers in 136 Illinois
communities (including Peoria, East Peoria, Pekin, Lincoln and Morton). At
December 31, 2001, CILCO had approximately 201,000 retail electric customers.
CILCO owns and operates two coal-fired base load generating plants, a natural
gas-fired cogeneration plant, two natural gas combustion turbine generators and
16 diesel-fueled power modules and leases 14 diesel-fueled power modules, all of
which are located in Illinois. These facilities had an available summer
capability of 1,172 MW in 2001 and 1,197 MW in 2002. The natural gas combustion
turbine generators and the power modules are typically used for peaking service.
The cogeneration plant, which became operational in 1995, produces steam for
sale to a large agricultural processing customer and electricity for
distribution to CILCO's customers.
The major generating facilities of CILCO (representing 92.4% of CILCO's
available summer generating capability projected for 2002), all of which are
fueled with coal, are as follows:
STATION & UNIT INSTALLED AVAILABLE SUMMER
CAPABILITY (MW)
Duck Creek
Unit 1 1976 366
E. D. Edwards
Unit 1 1960 117
Unit 2 1968 262
Unit 3 1972 361
CILCO's transmission system (all of which is located in Illinois) includes
approximately 285 circuit miles operating at 138 kV, 48 circuit miles operating
at 345 kV and 18 principal substations with an installed capacity of
approximately 3,724 megavolt-amperes. CILCO's electric distribution system (all
of which is located in Illinois) includes approximately 6,516 circuit miles of
overhead pole and tower lines and 1,933 miles of underground distribution
cables. The distribution system also includes approximately 108 substations with
an installed capacity of 1,766 megavolt-amperes.
CILCO has a power purchase agreement with AmerenCIPS for the purchase of
100 MW of capacity and firm energy for the months of June through September
through 2003 which, additionally, provides for 100 MW of firm energy for the
month of January through 2003. CILCO and Ameren also make short-term sales of
power to each other from time to time under market-based rate tariffs as
authorized by the FERC.
5
CILCO's service territory is adjacent to AmerenCIPS' service territory.
The transmission systems of the two companies are directly interconnected via a
345 kV line that runs approximately 21.3 miles between CILCO's Duck Creek
station, which is southwest of Peoria, to a 345/138 kV transformer owned by
AmerenCIPS near Ipava, Illinois. AmerenCIPS owns about 9.5 miles of this line,
and CILCO owns the rest. CILCO is also directly interconnected with Commonwealth
Edison Company, Illinois Power Company and City Water, Light and Power, the
municipal utility in the City of Springfield, Illinois ("CWLP"). Like AmerenUE
and AmerenCIPS, CILCO is a member of MAIN. CILCO is already a transmission
owning member of the MISO, and operates its transmission system under the
direction of the MISO pursuant to the terms of the MISO Open Access Transmission
Tariff on file with the FERC.(9)
CILCO intends to transfer substantially all of its generating assets and
certain associated transmission facilities, such as step-up transformers and
generation tie lines, to CIGI, in the form of a capital contribution of these
assets in exchange for all of CIGI's common stock and CIGI's assumption of
certain liabilities.(10) This transfer is expected to be completed prior to
closing of the Transaction, but could possibly be delayed until after closing.
The transferred assets will remain subject to the lien of CILCO's Indenture of
Mortgage and Deed of Trust, which secures CILCO's first mortgage bonds ("CILCO
Mortgage").(11) This reorganization is being undertaken pursuant to the Customer
Choice Law. CILCO will retain all of its other electric transmission and
distribution assets and operations. CILCO has obtained the approvals of the
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9 As described in Item 3.2(a) below, Ameren is proposing in its FERC
application, as a condition for obtaining FERC approval of the Transaction, to
implement certain transmission system upgrades in order to increase import
capability into the control areas of Ameren, CILCO and CWLP.
10 CILCO will transfer generating facilities representing 1,136 MW of its
total generating capacity. These include the Duck Creek and E.D. Edwards
coal-fired units and certain peaking units. CILCO will continue to own and
maintain a natural gas-fired cogeneration plant and 26 MW of capacity provided
by 16 diesel-fueled power modules located at various substations, which will be
managed by CIGI.
11 CILCO does not have sufficient unfunded property additions at this time to
obtain a complete release of the generation assets under the CILCO Mortgage.
Under the CILCO Mortgage, CILCO does not require the trustee's approval to
transfer the generating assets to CIGI (although CILCO has notified the trustee
of its intent to do so) and also would not require the trustee's approval to
transfer CIGI's common stock to CILCORP or another subsidiary of Ameren after
the Transaction closes. In general, the CILCO Mortgage permits CILCO to transfer
a portion of its assets, subject to the lien. However, even after the transfer
of the assets to CIGI, CILCO will continue to have certain ongoing obligations
with respect to the transferred property, such as ensuring that the lien is
maintained, taxes are paid and the property is insured. The trustee under the
CILCO Mortgage will continue to have recourse against the transferred assets in
the event of a CILCO default under the CILCO Mortgage.
6
Illinois Commerce Commission ("ICC")(12) and the FERC(13) for the transfer of
these assets, and CIGI has received a determination by the FERC that it is an
EWG.(14)
As part of this reorganization, CILCO and CIGI will also enter into a
Power Supply Agreement ("PSA") and an Interconnection Agreement pursuant to
which CIGI will supply the full requirements of CILCO's customers through
December 31, 2004.(15) In light of recently enacted legislation in Illinois,
which extends the rate freeze for CILCO through 2006 if Ameren completes the
acquisition of CILCORP, Ameren anticipates that CILCO and CIGI will file a
request with FERC to extend the PSA, on its existing terms, until December 31,
2006. After December 31, 2006, CILCO will obtain its full requirements from
market sources, which could include CIGI or other affiliates of CILCO and
Ameren, if any of such entities offer the most economical and reliable source of
power and energy.
b. CILCO's Gas Utility Operations.
------------------------------
CILCO provides gas service to customers in 128 Illinois communities
(including Peoria, East Peoria, Pekin, Lincoln and Springfield). At December 31,
2001, CILCO had approximately 204,000 gas customers, including 160 industrial,
commercial and residential gas transportation customers that purchase gas
directly from suppliers for transportation through CILCO's system. CILCO's gas
system includes approximately 3,632 miles of transmission and distribution mains
(all of which are located in Illinois). CILCO has an underground gas storage
facility located about ten miles southwest of Peoria near Glasford, Illinois.
The facility has a present working capacity of approximately 3,700,000 Mcf with
daily withdrawal capacity of up to approximately 120,000 Mcf, depending on field
pressure. An additional storage facility near Lincoln, Illinois, has a present
working capacity of approximately 4,200,000 Mcf with a daily withdrawal capacity
of up to approximately 65,000 Mcf, depending on field pressure.
c. Regulation of CILCO and CIGI.
----------------------------
CILCO is regulated by the ICC with respect to retail electric and
gas rates and service, classification of accounts, the issuance of stock and
evidence of indebtedness (other than indebtedness with a final maturity of less
than one year and renewable for a period of not more than two years), contracts
with any affiliated interest, and other matters, and by the FERC with respect to
transmission service and wholesale electric rates. CIGI is not a public utility
company under the laws of Illinois and is therefore not subject to regulation by
the ICC. However, CIGI is subject to regulation by the FERC with respect to
wholesale electric rates and other matters.
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12 See Central Illinois Light Company, Docket Nos. 02-0140 (consolidated) and
02-0153 (April 10, 2002), 2002 Ill. PUC LEXIS 414.
13 See Central Illinois Light Company, 99 F.E.R.C. P. 62,143 (May 28, 2002).
14 See note 3, supra.
15 CIGI has filed the PSA with the FERC in a separate proceeding.
7
d. CILCORP's Non-Utility Businesses.
--------------------------------
CILCORP directly owns all of the common stock of three
non-utility subsidiaries: CILCORP Investment Management Inc. ("CIM"), CILCORP
Ventures Inc. ("CVI"), and QST Enterprises Inc. ("QST"). CIM manages the
Company's investment portfolio. CIM, through subsidiaries, is a lessor in seven
leveraged lease transactions covering electric production facilities,
warehouses, office buildings, passenger railway equipment and an aircraft that
are leased to third parties. CIM's subsidiaries are CILCORP Lease Management
Inc., which was formed in 1985, and CIM Leasing Inc. and CIM Air Leasing Inc.,
which were both formed in 1993. CIM's other wholly-owned subsidiary is CIM
Energy Investments Inc., which was formed in 1989 to invest in non-regulated,
independent power production facilities. CIM also directly owns limited
partnership interests in affordable housing portfolios. CVI primarily invests in
ventures in energy-related products and services. CVI has an 80% interest in the
Agricultural Research and Development Corporation and has one wholly-owned
subsidiary, CILCORP Energy Services Inc. ("CESI"). CESI was formed to pursue
energy-related opportunities in the non-regulated market. CESI's primary
business is gas management services, including commodity purchasing for gas
management customers. QST was organized to provide energy and related services
in non-regulated retail and wholesale markets. QST has two active subsidiaries:
CILCORP Infraservices Inc., which provides utility operation and maintenance
services (predominantly to Caterpillar Inc., CILCO's largest customer); and ESE
Land Corporation, which holds interests in environmentally distressed parcels of
real estate acquired for resale.
As previously noted, CILCO directly engages in making steam sales to a
large agricultural processing customer. In addition to CIGI, CILCO owns all of
the issued and outstanding common stock of two non-utility subsidiaries. The
first, CILCO Exploration and Development Company, engages in the exploration and
development of gas, oil, coal and other mineral resources. The second, CILCO
Energy Corporation, was formed to research and develop new sources of energy,
including the conversion of coal and other minerals into gas. Neither company
conducts any significant business at this time.
An organizational chart showing the relationship of CILCORP and its
subsidiaries is filed herewith as Exhibit E-2. A more complete description of
CILCORP's non-utility subsidiaries and investments and an analysis of the legal
basis upon which Ameren is entitled to retain such subsidiaries and investments
is filed herewith as Exhibit I. Ameren is committing to divest or discontinue
certain non-utility businesses and investments of CILCORP.
For the twelve months ended December 31, 2001, CILCORP reported
consolidated revenues of $814,870,000, of which $391,811,000 (48.1%) were
derived from sales of electricity, $271,434,000 (33.3%) from sales of gas and
gas transportation service, and $151,625,000 (18.6%) from CILCORP's non-utility
operations. At December 31, 2001, CILCORP had $1,811,698,000 in total assets,
including total net property, plant and equipment of $857,987,000.
8
e. Capitalization of CILCORP and Subsidiaries.
------------------------------------------
CILCORP currently has issued and outstanding 1,000 shares of common
stock, no par value, all held by AES. In addition, CILCORP has outstanding $225
million of 8.7% senior notes, due 2009, and $250 million of 9.375% senior notes,
due 2029 (the "CILCORP Senior Notes"), which are secured by a pledge of the
common stock of CILCO.(16) The CILCORP Senior Notes are currently rated BB+ by
Standard & Poor's ("S&P") and Baa2 by Moody's Investor Service ("Moody's").
CILCORP also had committed bank lines totaling $35 million at December 31, 2001,
under which it had outstanding borrowings of $20 million.
At March 31, 2002, CILCO had issued and outstanding 13,563,871 shares of
common stock, no par value, all of which are held by CILCORP; 191,204 shares of
cumulative preferred stock, $100 par value, and 220,000 shares of Class A
preferred stock, no par value, totaling $41,120,000; and $242,250,000 of
long-term debt, as follows: two series of first mortgage bonds totaling
$115,000,000, with maturities of 2007 and 2022; four series of medium term notes
totaling $71,350,000, with maturities ranging from 2003 to 2025; four series of
pollution control revenue bonds totaling $52,200,000, with maturities ranging
from 2010 to 2023; and bank loans totaling $6,100,000. In addition, at
December 31, 2001, CILCO had issued and outstanding $43,000,000 of commercial
paper, and had in place bank lines totaling $100,000,000 which are used to
backstop its commercial paper. CILCO's secured long-term debt is currently rated
BBB- by S&P and A2 by Moody's. CILCO's commercial paper is currently rated P-1
by Moody's. Following the announcement of the Transaction, both CILCO and
CILCORP were placed on "credit watch" by S&P, with positive implications to
their ratings. Moody's currently has CILCORP and CILCO under review for possible
downgrade.
On a consolidated basis, CILCORP's capitalization at December 31, 2001 was
as follows:
Common equity $515,112,000 38%
Preferred stock $41,120,000 3%
Long-term debt $717,730,000 54%
Short-term debt (incl. $64,400,000 5%
current portion of long ______________ _____
term debt)
Total capitalization $1,338,362,000 100%
-------------------
16 As explained in Item 3 below, the pledge of CILCO's shares cannot be
eliminated without redeeming the CILCORP Senior Notes. Because of the current
high cost of redeeming the CILCORP Senior Notes, Ameren is proposing that the
CILCORP Senior Notes and the pledge securing them remain outstanding after the
acquisition of CILCORP.
9
CILCO's capitalization at December 31, 2001 was as follows:
Common equity $339,901,000 51%
Preferred stock $41,120,000 6%
Long-term debt $242,730,000 36%
Short-term debt (incl. $44,400,000 7%
current portion of long ____________ _____
term debt)
Total capitalization $668,151,000 100%
1.4 Principal Terms of Stock Purchase Agreement.
-------------------------------------------
The Stock Purchase Agreement provides that, subject to the receipt of all
necessary regulatory approvals and the satisfaction of other conditions
precedent, Ameren will pay AES, in consideration for all of the issued and
outstanding common stock of CILCORP, cash in an amount equal to $1,340,000,000,
less the amount of "Assumed Obligations," increased or decreased, as
appropriate, by the amount, if any, by which "Working Capital" of CILCORP as of
the closing date exceeds or is less than the "Base Working Capital" of CILCORP,
and increased or decreased, as appropriate, by the amount of the "CapEx
Adjustment," as such terms are defined below, the net amount of the foregoing
being the "Purchase Price."
The term Assumed Obligations means the amounts required to be included on
CILCORP's balance sheet as of the closing date as long-term debt (including the
current portion), short-term debt, capital lease obligations, preferred stock of
subsidiaries, and other obligations for borrowed money. Working Capital means
the current assets of CILCORP less current liabilities (not counting in current
liabilities any short-term debt or current maturity of long-term debt that is
included in Assumed Obligations) as of the closing date. As agreed to in the
Stock Purchase Agreement, Base Working Capital is $75 million. The CapEx
Adjustment Amount represents the amount, if any, by which expenditures by
CILCORP for certain capital improvements prior to closing are less or greater
than the amounts agreed to under the Stock Purchase Agreement.
If the closing date under the Stock Purchase Agreement had occurred on
March 31, 2002, and assuming no change in the Base Working Capital amount and no
CapEx Adjustment Amount, the cash paid by Ameren at closing for the common stock
of CILCORP would have been approximately $522 million.
The Stock Purchase Agreement further provides that, in the event that the
closing date does not occur by the "Trigger Date," as defined below, then the
Purchase Price shall be increased by $33,699 per day from the Trigger Date
through the closing date, subject to certain limitations. The Trigger Date is
the later of (i) December 31, 2002, (ii) the date on which AES is capable
(without further action by any third party) of completing performance in all
material respects of its obligations required to be performed on or prior to
closing, and (iii) the date which is 90 days following the date on which the ICC
grants its approval of the Transaction. Subject to certain limitations and
exceptions, either party may terminate the Stock Purchase Agreement if closing
has not occurred by March 27, 2003.
10
1.5 Operation of the Combined System Following the Acquisition.
----------------------------------------------------------
Following the acquisition of CILCORP, Ameren proposes to retain CILCORP as
a direct subsidiary for the foreseeable future, and CILCORP will continue to own
all of the common stock of CILCO. CILCO, in turn, will continue to hold all of
the common stock of CIGI for the foreseeable future. CILCO will maintain its
headquarters in Peoria for a period of at least five years and will maintain a
local management team and adequate staffing levels to operate its utility
system. CILCO will continue to operate as a separate control area. CILCO's
generating plants (which CILCO intends to transfer to CIGI by the time of the
closing) will not be jointly dispatched with the generating plants owned by
AmerenUE and Ameren Energy Generating. Nevertheless, CILCO's electric
operations, as well as it gas operations, will be integrated with those of
AmerenUE and AmerenCIPS. A fuller description of Ameren's plans to integrate
CILCO's operations with those of its existing subsidiaries and estimates of
merger savings are set out in Item 3.3 below.
1.6 Financing the Purchase Price.
----------------------------
Ameren will finance the cash portion of the Purchase Price, estimated not
to exceed $525 million, using cash on hand and/or proceeds of debt and/or equity
financings previously authorized in File No. 70-9877.(17) Ameren is not
requesting any new or additional financing authority as part of this
Application/Declaration.
1.7 Affiliate Transactions.
----------------------
a. Existing Sales, Service and Construction Contracts.
--------------------------------------------------
Historically, CILCO has provided certain administrative, management and
technical services at cost to CILCORP and all of its other associate companies
under a service agreement that has been approved by the ICC.(18) Although it is
expected that Ameren Services will assume the responsibility for providing these
services after the Transaction closes pursuant to new service agreements, as
described below, there may be a period, not to exceed two years, during the
transition in which CILCO will continue to provide certain corporate support
services, such as accounting, tax, cash management and billing and sales
services, to its associate companies. In addition, following the transfer of its
generating assets to CIGI, CILCO and CIGI request authorization to provide to
each other, on a permanent basis, certain technical services relating to the
operation and maintenance of generating assets located at CILCO substations
(supra, note 10), and the equipment connecting CIGI's generation facilities with
CILCO's transmission facilities. All of these services will be performed at cost
in accordance with Rules 90 and 91 pursuant to a Services and Facilities
Agreement (Exhibit B-3 hereto) to be executed when the generating assets are
transferred to CIGI
-------------------
17 See Ameren Corporation, Holding Co. Act Release No. 27449 (Oct. 5, 2001).
On September 10, 2002, Ameren sold 8.05 million new shares of common stock in a
public offering at $42.00 per share. Net proceeds (after underwriting discount)
to Ameren were $327 million.
18 With one exception, CILCO's non-utility associate companies do not have
employees of their own.
11
As previously noted (supra, note 5), in conjunction with the Transaction,
Ameren has also agreed to purchase from AES all of the membership interests in
an entity that indirectly owns AES Medina Valley, an EWG. AES Medina Valley owns
a 40 MW gas-fired cogeneration facility in Mossville, Illinois that produces
electricity, steam heat and chilled water that is sold to CILCO pursuant to a
FERC and ICC-approved Tolling Agreement, dated December 22, 2000, for resale to
Caterpillar Inc., CILCO's largest customer. The term of the Tolling Agreement
extends until July 2021. As part of the development of the Mossville facility,
AES Medina Valley also entered into a 10-year Fuel Supply and Services Agreement
with CESI, CILCORP's gas marketing subsidiary, pursuant to which CESI supplies
all of AES Medina Valley's gas requirements and also provides certain ancillary
services relating to the supply of gas to the Mossville facility. In addition,
under the terms of a FERC-approved Interconnection Agreement between CILCO and
AES Medina Valley, CILCO provides metering and other ancillary services to AES
Medina, at cost. All of these agreements have been collaterally assigned as
security for non-recourse debt financing for the Mossville facility and will
remain in place following Ameren's indirect purchase of AES Medina Valley. To
the extent required, Ameren requests authorization for CILCO, CESI and AES
Medina Valley to continue to perform their respective obligations under the
foregoing agreements in accordance with their terms.(19)
b. Ameren Services.
---------------
Under the 1997 Merger Order, the Commission authorized Ameren to
organize and capitalize Ameren Services as a service company subsidiary, and
authorized Ameren Services to provide AmerenUE, AmerenCIPS and other companies
in the Ameren system with administrative, management, engineering, construction,
environmental, and other support services pursuant to a General Services
Agreement, which Ameren Services has entered into with Ameren, AmerenUE,
AmerenCIPS and certain other associate companies. Under the 1997 Merger Order,
Ameren Services is required to give written notice to the Commission at least 60
days prior to implementing any change in the type and character of the companies
receiving services, the methods of allocating costs to associate companies, or
the scope or character of services to be rendered.
Ameren Services intends to enter into separate service agreements
("Service Agreements") with CILCORP, CILCO, CIGI and certain of CILCORP's other
subsidiaries that are identical in all material respects with the General
Services Agreement. Thus, Ameren Services will provide to the new client
companies the same administrative, management, and technical services that it
now provides to Ameren system companies under the General Services Agreement,
utilizing the same work order procedures and the same methods of allocating
-------------------
19 The sale of electricity by AES Medina Valley and natural gas by CESI are
not subject to the Act. The sale of steam and chilled water by AES Medina Valley
involves "goods produced by the seller" subject to Rules 87(b)(6), 90(d)(2) and
92(b). As indicated, these transactions have been reviewed by both the FERC and
the ICC. The ancillary services provided by CESI and CILCO to AES Medina Valley
under the Fuel Supply and Services Agreement and the Interconnection Agreement
are exempt under Rule 87(b)(1). In any event, these costs are ultimately passed
through to Caterpillar, a non-affiliate.
12
costs that are specified in the General Services Agreement. In connection with
the Transaction, certain employees of CILCORP and its subsidiaries may be
transferred to and become employees of Ameren Services.
c. Ameren Fuels.
------------
By order dated April 5, 2001 in File No. 70-9775,(20) the Commission
authorized Ameren Fuels to provide AmerenUE and AmerenCIPS fuel management
services pursuant to the terms of a Fuel and Natural Gas Services Agreement
("Fuel Services Agreement").(21) Under the Fuel Services Agreement, Ameren
Fuels, as agent for its associate companies, manages all aspects of procurement,
storage, transportation and handling of coal, natural gas, and other fuels. Such
services include negotiating contracts with third parties, contract
administration, regulatory reporting and ash management services, among others.
For the services rendered, Ameren Fuels is reimbursed for all costs properly
chargeable or allocable thereto, as controlled through a work order procedure.
Costs are computed in accordance with Rule 90 and 91. Ameren Fuels is authorized
under the Fuel Services Agreement to take title to and resell fuel to its
associate companies, but solely in an agency capacity.
In conjunction with the Transaction, Ameren Fuels proposes to enter into
separate fuel services agreements with CILCO and CIGI that are identical in all
material respects to the Fuel Services Agreement, pursuant to which Ameren Fuels
will manage gas supply resources for CILCO and manage fuel procurement for CIGI.
These services will be provided at cost, in accordance with Rule 90 and 91.
1.8 Financing by CILCORP, CILCO and CIGI
------------------------------------
The existing equity and long-term and short-term debt securities of
CILCORP, CILCO and CIGI, as described in Item 1.3 above, will remain outstanding
after the Transaction closes. In addition, CILCORP, CILCO and CIGI herein
request authority, to the extent such transactions are not exempt, to engage in
certain ongoing external and intrasystem financing transactions from time to
time during the Authorization Period. Any securities issued by CILCORP, CILCO or
CIGI to third parties (including any securities issued by CILCO pursuant to Rule
52(a)) may be issued directly, or may be issued indirectly through one or more
Financing Subsidiaries, as defined and described in Item 1.9 below. CILCORP,
CILCO and CIGI will not engage in any financing transactions for which approval
is sought herein unless, on a pro forma basis to take into account the amount
and types of such financing and the application of the proceeds thereof, common
equity as a percentage of capitalization (including short-term debt and current
maturities of long-term debt) of each company is at least 30%.
-------------------
20 See Ameren Energy Fuels and Services Company, Holding Co. Act Release
No. 27374.
21 Following the transfer of AmerenCIPS' generating assets to Ameren Energy
Generating, Ameren Fuels entered into an identical agreement with Ameren Energy
Resources Company, the indirect parent of Ameren Energy Generating.
13
a. External Financing Transactions.
-------------------------------
(a) CILCORP. After it is acquired by Ameren, CILCORP will not
issue any additional equity securities, other than to Ameren. Subject to the
limitations set forth below, CILCORP herein requests authorization to issue and
sell from time to time during the Authorization Period short-term and long-term
debt securities.
(i) Short-term Debt. As previously indicated, at
December 31, 2001, CILCORP had $35 million of committed bank lines and
borrowings thereunder totaling $20 million at an average interest rate of 2.3%
per annum. The proceeds of short-term borrowings by CILCORP are used primarily
to fund the operations of its non-utility subsidiaries. CILCORP requests
authorization to issue and sell commercial paper and/or establish and make
unsecured short-term borrowings (i.e., less than one year) under credit lines
with banks or other institutional lenders from time to time during the
Authorization Period, provided that the aggregate amount of borrowings by
CILCORP at any time outstanding under all such credit facilities, when added to
the amount of any direct short-term borrowings by CILCORP from Ameren (see
Item 1.8.b.(a) below), will not exceed $250 million. Subject to such
limitations, CILCORP requests authorization to sell commercial paper, from time
to time, in established domestic or foreign commercial paper markets. Such
commercial paper would typically be sold to dealers at the discount rate per
annum prevailing at the date of issuance for commercial paper of comparable
quality and maturities sold to commercial paper dealers generally. It is
expected that the dealers acquiring such commercial paper will reoffer it at a
discount to corporate, institutional and, with respect to European commercial
paper, individual investors. It is anticipated that such commercial paper will
be reoffered to investors such as commercial banks, insurance companies, pension
funds, investment trusts, foundations, colleges and universities, finance
companies and nonfinancial corporations.
CILCORP also proposes to continue or to establish and maintain back-up
credit lines with banks or other institutional lenders to support its commercial
paper programs and other credit arrangements and/or borrowing facilities
generally available to borrowers with comparable credit ratings as CILCORP deems
appropriate in light of its needs and existing market conditions providing for
revolving credit or other loans and having commitment periods not longer than
the Authorization Period. Only the amounts drawn and outstanding under these
agreements and facilities will be counted against the proposed limit on
short-term debt. The effective cost of money on all external short-term
borrowings by CILCORP will not exceed at the time of issuance the greater of (i)
300 basis points over the six-month London Interbank Offered Rate ("LIBOR"), or
(ii) a gross spread over LIBOR that is consistent with similar securities of
comparable credit quality and maturities issued by other companies.
(ii) Refinancing of CILCORP Senior Notes.
-----------------------------------
CILCORP requests authorization to issue, in one or more transactions from time
to time during the Authorization Period, long-term notes for the purpose of
refinancing or acquiring the CILCORP Senior Notes at or prior to their scheduled
maturity. The principal amount of any new long-term notes issued will not exceed
the unpaid principal amount of the CILCORP Senior Notes (currently
$475 million), plus any "make whole" premium required to be paid in connection
14
with any prepayment and/or the premium, if any, that is paid in connection with
any acquisition of the CILCORP Senior Notes in open market purchases. The
maturity date of any new series of long-term notes will be not later than
October 15, 2029, which is the maturity date of the longest of the two series of
CILCORP Senior Notes. It is proposed that any new notes issued by CILCORP in a
refinancing transaction bear interest at a rate not to exceed at the time of
issuance the greater of (i) 500 basis points over the yield to maturity of a
U.S. Treasury security having a remaining term equal to the average life of such
new notes (or, if no such Treasury security is outstanding, then the yield to
maturity of a 30-year U.S. Treasury Bond), or (ii) a gross spread over U.S.
Treasuries that is consistent with similar securities of comparable credit
quality and maturities issued by other companies.
Ameren requests authorization to guaranty any new CILCORP notes issued in
a refinancing transaction or to issue a guarantee of the outstanding CILCORP
Senior Notes in order to obtain a termination and release of the pledge of
CILCO's common stock or for other corporate purposes.(22)
(b) CILCO and CIGI. Rule 52(a) exempts from the prior
authorization requirements of the Act securities issued by any public utility
company that have been approved by the state commission in the state in which
such company is organized and doing business. In general, all securities issued
by CILCO must be approved by the ICC, other than indebtedness with a final
maturity of less than one year, renewable for a period of not more than two
years. In contrast, because CIGI will not be regulated by the ICC as a public
utility company under Illinois law, and because CIGI intends to relinquish its
EWG status, securities issued by CIGI will generally not be exempt from the
provisions of the Act.
The authority herein sought by CILCO excludes financings exempt under Rule
52(a). The proceeds of financings by CILCO and CIGI will be used for general
corporate purposes, including funding of capital projects and working capital
requirements. These financings may be made under instruments in place at the
time of the Transaction or new agreements so long as any such instrument or
agreement complies with the limitations described herein.
(i) Short-term Debt. CILCO and CIGI request
authorization to issue commercial paper and/or establish and make unsecured
short-term borrowings (i.e., less than one year) under credit lines with banks
or other institutional lenders from time to time during the Authorization
Period, provided that the aggregate amount of borrowings by CILCO at any time
outstanding under all such credit facilities, when added to the amount of any
direct short-term borrowings by CILCO from Ameren (see Item 1.8.b.(c) below),
will not exceed $250 million, and that the aggregate amount of borrowings by
CIGI at any time outstanding under all such credit facilities, when added to the
amount of any direct short-term borrowings by CIGI from Ameren (see
Item 1.8.b.(b) below), will not exceed $250 million. Subject to such
limitations, CILCO and CIGI request authority to sell commercial paper, from
-------------------
22 It is proposed that the amount of any such guarantee not count against the
authorized limits on guarantees that may be issued by Ameren pursuant to the
Commission's order in File No. 70-9877 (supra, note 17).
15
time to time, in established domestic or foreign commercial paper markets. Such
commercial paper would typically be sold to dealers at the discount rate per
annum prevailing at the date of issuance for commercial paper of comparable
quality and maturities sold to commercial paper dealers generally. It is
expected that the dealers acquiring such commercial paper will reoffer it at a
discount to corporate, institutional and, with respect to European commercial
paper, individual investors. It is anticipated that such commercial paper will
be reoffered to investors such as commercial banks, insurance companies, pension
funds, investment trusts, foundations, colleges and universities, finance
companies and nonfinancial corporations.
CILCO and CIGI also propose to continue or to establish and maintain
back-up credit lines with banks or other institutional lenders to support their
commercial paper programs and other credit arrangements and/or borrowing
facilities generally available to borrowers with comparable credit ratings as
either company deems appropriate in light of its needs and existing market
conditions providing for revolving credit or other loans and having commitment
periods not longer than the Authorization Period. Only the amounts drawn and
outstanding under these agreements and facilities will be counted against the
proposed limit on short-term debt. The effective cost of money on all external
short-term borrowings by CILCO and CIGI will not exceed at the time of issuance
the greater of (i) 300 basis points over the six-month LIBOR, or (ii) a gross
spread over LIBOR that is consistent with similar securities of comparable
credit quality and maturities issued by other companies.
(ii) Long-term Securities of CIGI. CIGI requests
authorization to issue and sell from time to time during the Authorization
Period long-term securities consisting of any combination of preferred stock or
other forms of preferred securities and long-term debt ("Long-term Securities"),
provided that the aggregate amount of all such securities at any time
outstanding, when added to the amount of any direct long-term borrowings by CIGI
from Ameren (see Item 1.8.b.(b) below), will not exceed $500 million.
Preferred stock or other types of preferred securities may be issued in
one or more series with such rights, preferences, and priorities as may be
designated in the instrument creating each such series. All such securities will
be redeemed no later than 50 years after the issuance thereof. The dividend rate
on any series of preferred stock or other preferred securities will not exceed
at the time of issuance the greater of (i) 700 basis points over the yield to
maturity of a U.S. Treasury security having a remaining term equal or closest to
the term of such securities (or, if no such Treasury security is outstanding,
then the yield to maturity of a 30-year U.S. Treasury Bond), or (ii) a gross
spread over U.S. Treasuries that is consistent with similar securities of
comparable credit quality and maturities issued by other companies. Dividends or
distributions on preferred stock or other preferred securities will be made
periodically and to the extent funds are legally available for such purpose, but
may be made subject to terms that allow the issuer to defer dividend payments or
distributions for specified periods.
Long-term debt of a particular series (a) may be secured or unsecured, (b)
will have a maturity ranging from one to 50 years, (c) will bear interest at a
rate not to exceed at the time of issuance the greater of (i) 600 basis points
over the yield to maturity of a U.S. Treasury security having a remaining term
equal or closest to the average life of such series (or, if no such U.S.
16
Treasury security is outstanding, then the yield to maturity of a 30-year U.S.
Treasury Bond), or (ii) a gross spread over U.S. Treasuries that is consistent
with similar securities of comparable credit quality and maturities issued by
other companies, (d) may be subject to optional and/or mandatory redemption, in
whole or in part, at par or at various premiums above the principal amount
thereof, (e) may be entitled to mandatory or optional sinking fund provisions,
(f) may provide for reset of the coupon pursuant to a remarketing or auction
arrangement, and (g) may be called from existing investors by a third party. The
maturity dates, interest rates, and redemption and sinking fund provisions, if
any, with respect to the long-term debt of a particular series, will be
established by negotiation or competitive bidding.
Except in accordance with a further order of the Commission in this
proceeding, CILCORP and CIGI will not publicly issue any Long-term Securities
unless such securities are rated at the investment grade level as established by
at least one nationally recognized statistical rating organization, as that term
is used in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the
Securities Exchange Act of 1934. It is requested that the Commission reserve
jurisdiction over CILCORP and CIGI in connection with any publicly issued
Long-term Securities that are rated below investment grade.
(c) Interest Rate Hedging Transactions. To the extent not
exempt under Rule 52(a), CILCORP, CILCO and CIGI request authorization to enter
into interest rate hedging transactions with respect to outstanding indebtedness
("Interest Rate Hedges"), subject to certain limitations and restrictions, in
order to reduce or manage the effective interest rate cost. In no case will the
notional amount of any Interest Rate Hedge exceed the principal amount of the
underlying debt instrument. Transactions will be entered into for a fixed or
determinable period. Thus, the applicants will not engage in speculative
transactions. Interest Rate Hedges would only be entered into with
counterparties ("Approved Counterparties") whose senior debt ratings, or the
senior debt ratings of any credit support providers who have guaranteed the
obligations of such counterparties, as published by S&P, are equal to or greater
than BBB, or an equivalent rating from Moody's or Fitch, Inc.
Interest Rate Hedges will involve the use of financial instruments
commonly used in today's capital markets, such as interest rate swaps, caps,
collars, floors, swaptions and structured notes (i.e., a debt instrument in
which the principal and/or interest payments are indirectly linked to the value
of an underlying asset or index), or transactions involving the purchase or
sale, including short sales, of U.S. Treasury securities. The transactions would
be for fixed periods and stated notional amounts. Fees, commissions and other
amounts payable to the counterparty or exchange (excluding, however, the swap or
option payments) in connection with an Interest Rate Hedge will not exceed those
generally obtainable in competitive markets for parties of comparable credit
quality.
In addition, CILCORP, CILCO and CIGI request authorization to enter into
interest rate hedging transactions with respect to anticipated debt offerings
(the "Anticipatory Hedges"), subject to certain limitations and restrictions.
Such Anticipatory Hedges would only be entered into with Approved
Counterparties, and would be utilized to fix the interest rate and/or limit the
interest rate risk associated with any new issuance through (i) a forward sale
17
of exchange-traded U.S. Treasury futures contracts, U.S. Treasury securities
and/or a forward swap (each a "Forward Sale"), (ii) the purchase of put options
on U.S. Treasury securities (a "Put Options Purchase"), (iii) a Put Options
Purchase in combination with the sale of call options on U.S. Treasury
securities (a "Zero Cost Collar"), (iv) transactions involving the purchase or
sale, including short sales, of U.S. Treasury securities, or (v) some
combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or
other derivative or cash transactions, including, but not limited to structured
notes, caps and collars, appropriate for the Anticipatory Hedges.
Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades")
with brokers through the opening of futures and/or options positions traded on
the Chicago Board of Trade, Chicago Mercantile Exchange or other financial
exchange, the opening of over-the-counter positions with one or more
counterparties ("Off-Exchange Trades"), or a combination of On-Exchange Trades
and Off-Exchange Trades. CILCORP, CILCO and CIGI will determine the optimal
structure of each Anticipatory Hedge transaction at the time of execution.
Each Interest Rate Hedge and Anticipatory Hedge will qualify for hedge
accounting treatment under the current Financial Accounting Standards Board
("FASB") guidelines in effect and as determined at the time entered into.
Further, the applicants will comply with the Statement of Financial Accounting
Standards ("SFAS") 133 ("Accounting for Derivatives Instruments and Hedging
Activities") and SFAS 138 ("Accounting for Certain Derivative Instruments and
Certain Hedging Activities") or other standards relating to accounting for
derivative transactions as are adopted and implemented by the FASB.(23)
b. Intrasystem Financing Transactions and Guarantees.
-------------------------------------------------
(a) Long-term and Short-term Securities of CILCORP. Ameren may
from time to time during the Authorization Period acquire additional shares of
CILCORP's common stock, make additional capital contributions or non-interest
bearing cash advances to CILCORP, and/or make loans to CILCORP (and in
connection therewith acquire unsecured promissory notes of CILCORP evidencing
such loans) in order to enable CILCORP to fund additional investments in CILCO
and its other existing subsidiaries, to redeem or retire the CILCORP Senior
Notes, and to fund working capital.(24) CILCORP will not use the proceeds of any
such financing by Ameren to acquire the securities of or other interest in any
new company. Accordingly, CILCORP requests authority to issue, and Ameren
requests authority to acquire, from time to time during the Authorization
Period, (i) up to $1 billion at any time outstanding of additional common stock
and/or promissory notes having maturities of one year or more, and (ii) up to
$250 million at any time outstanding of promissory notes having maturities of
less than one year. Any promissory note issued by CILCORP to Ameren evidencing a
-------------------
23 The authority sought for interest rate hedging transactions in this
Application/Declaration is identical to the authorization previously granted to
Ameren in File No. 70-9877, supra n. 17.
24 By its terms, Rule 52(b) would not exempt any securities issued by
CILCORP, and Rule 45(b)(7) would not exempt any guarantee by CILCORP of
securities issued by its subsidiaries. In contrast, Rule 45(a)(4) would exempt
cash capital contributions and open account advances without interest by Ameren
to CILCORP.
18
loan will be unsecured and will bear interest at a rate and have a maturity date
designed to parallel the effective cost of capital and maturity date of a
similar debt instrument issued by Ameren.
(b) Long-term and Short-term Securities of CIGI. Ameren
requests authorization to make long-term and short-term loans to CIGI (and in
connection therewith acquire promissory notes of CIGI evidencing such loans) in
order to fund CIGI's capital improvements and working capital requirements.
Accordingly, CIGI requests authority to issue, and Ameren requests authority to
acquire, from time to time during the Authorization Period, (i) up to $500
million at any time outstanding of promissory notes having maturities of one
year or more, and (ii) up to $250 million at any time outstanding of promissory
notes having maturities of less than one year. Any promissory note issued by
CIGI to Ameren evidencing a loan will be unsecured and will bear interest at a
rate and have a maturity date designed to parallel the effective cost of capital
and maturity date of a similar debt instrument issued by Ameren.
(c) Short-term Securities of CILCO. Ameren requests
authorization to make short-term loans to CILCO (and in connection therewith
acquire promissory notes of CILCO evidencing such loans) in order to fund
CILCO's capital improvements and working capital requirements. Accordingly,
CILCO requests authority to issue, and Ameren requests authority to acquire,
from time to time during the Authorization Period, up to $250 million at any
time outstanding of promissory notes having maturities of less than one year.
Any promissory note issued by CILCO to Ameren evidencing a loan will be
unsecured and will bear interest at a rate and have a maturity date designed to
parallel the effective cost of capital and maturity date of a similar debt
instrument issued by Ameren.
(d) Guarantees Issued by CILCORP and Its Subsidiaries. CILCORP
from time to time is called upon to provide guarantees and other forms of credit
support with respect to the obligations of its subsidiaries. Currently, CILCORP
has outstanding guarantees totaling $4 million with respect to obligations of
CESI under two gas marketing contracts. The subsidiaries of CILCO (CIGI, CILCO
Exploration and Development Company and CILCO Energy Corporation) have
guaranteed borrowings by CILCO under an existing $100 million credit facility.
CIM, a direct non-utility subsidiary of CILCORP, and CILCORP Lease Management
Inc. ("CLM"), a subsidiary of CIM, have also provided guarantees with respect to
certain obligations of their subsidiaries, as lessors, under various equipment
and real estate leases. Currently, there are a total of six of these guarantees
outstanding. Neither CIM nor CLM has ever been called upon to make a payment
under any of these guarantees. The exposure of CIM and CLM under these
guarantees is not quantifiable; however, the potential financial impact is
considered immaterial in the aggregate.
To the extent required, CILCORP and its subsidiaries request authorization
to maintain, renew and extend all guarantees and other forms of credit support
that are outstanding at the time that the Transaction closes. In addition,
CILCORP requests authorization to provide additional guarantees and other forms
of credit support from time to time during the Authorization Period on behalf of
or for the benefit of any of its subsidiaries, provided that the aggregate
19
amount of all CILCORP guarantees at any time outstanding shall not exceed $500
million. Credit support provided by CILCORP may be in the form of guarantees of
indebtedness or of contractual obligations of its subsidiaries, agreements to
indemnify, reimburse, or assume joint liability with respect to obligations of
subsidiaries, capital maintenance or contribution agreements, or other forms of
credit support (collectively, "Guarantees"). Any Guarantee outstanding on
March 31, 2006 will expire or terminate in accordance with its terms.
In some cases, the obligations of a subsidiary of CILCORP that are
guaranteed by CILCORP may not be susceptible of exact quantification. In such
cases, CILCORP will determine its exposure under such Guarantee for purposes of
measuring compliance with the $500 million limit by appropriate means, including
estimation of exposure based on loss experience or projected potential payment
amounts. Any such estimates will be made in accordance with generally accepted
accounting principles and will be reevaluated periodically.
1.9 Organization and Acquisition of Financing Subsidiaries.
------------------------------------------------------
In connection with the issuance of any securities for which authorization
is requested in Item 1.8 above, or (in the case of CILCO) pursuant to
Rule 52(a), CILCORP, CILCO and CIGI request authorization to acquire, directly
or indirectly, the common stock or other equity securities of one or more
entities (each a "Financing Subsidiary") formed exclusively for the purpose of
facilitating the issuance of long-term debt and/or preferred securities and the
loan or other transfer of the proceeds thereof to the parent company of a
Financing Subsidiary. The proceeds of any financing carried out through a
Financing Subsidiary will be counted against the limits proposed in Item 1.8 for
such securities issued by CILCORP or CIGI, as the case may be, and the terms,
conditions and other limitations applicable to any securities issued by a
Financing Subsidiary will conform to those proposed in Item 1.8 for the
specified type of security (e.g., long-term debt, preferred securities, etc.).
In connection with any such financing transactions, CILCORP or CIGI, as the case
may be, may enter into one or more guarantees or other credit support agreements
in favor of its Financing Subsidiary.(25) CILCORP, CILCO and CIGI also request
authorization to enter into an expense agreement with its respective Financing
Subsidiary, pursuant to which each such company would agree to pay all expenses
of such Financing Subsidiary. No Financing Subsidiary shall acquire or dispose
of, directly or indirectly, any interest in any "utility asset," as that term is
defined under the Act.
CILCORP and CIGI also request authority to issue and sell to any Financing
Subsidiary, at any time or from time to time in one or more series, unsecured
debentures, unsecured promissory notes or other unsecured debt instruments
(individually, a "Note" and, collectively, the "Notes") governed by an indenture
or indentures or other documents, and the Financing Subsidiary will apply the
proceeds of any external financing by such Financing Subsidiary plus the amount
of any equity contribution made to it from time to time to purchase Notes. The
terms (e.g., interest rate, maturity, amortization, prepayment terms, default
provisions, etc.) of any such Notes would generally be designed to parallel the
terms of the securities issued by the Financing Subsidiary to which the Notes
-------------------
25 Guarantees or other credit support provided by CILCO with respect to
securities issued by any Financing Subsidiary will be exempt under Rules 52(a)
and 45(b)(7) if the conditions of such rules are satisfied.
20
relate. The principal amount of Notes issued to a Financing Subsidiary by its
parent will not be counted against the limits proposed in Item 1.8 on securities
issued by CILCORP or CIGI to third parties or to Ameren.(26)
Ameren represents that it has in place sufficient internal controls to
enable it to monitor the creation and use of any Financing Subsidiary by
CILCORP, CILCO and CIGI.(27) Any Financing Subsidiary organized pursuant to the
authority granted by the Commission in this proceeding shall be organized only
if, in management's opinion, the creation and utilization of such Financing
Subsidiary, will likely result in tax savings, increased access to capital
markets and/or lower cost of capital for CILCORP, CILCO or CIGI, as applicable.
1.10 Payment of Dividends by CILCORP Out of Capital and Unearned Surplus.
-------------------------------------------------------------------
Ameren will use the purchase method of accounting for the Transaction.
Under this method of accounting, the Purchase Price will be assigned to the
tangible and identifiable intangible assets acquired and liabilities assumed in
the Transaction on the basis of their fair values on the date of the
acquisition. Any premium (i.e., the excess of the Purchase Price over the fair
values of the net assets acquired) will be recorded as goodwill. In this case,
Ameren will "push down" the purchase accounting and establish a new basis of
accounting for the stand-alone accounts of CILCORP.(28) As a result of the
push-down of the purchase accounting to CILCORP, the current retained earnings
of CILCORP ($16.4 million at June 30, 2002), the traditional source for dividend
payments, will be eliminated (i.e., recharacterized as additional paid-in
capital). The Transaction and the acquisition of AES Medina together will create
goodwill of approximately $556 million, most of which will be reflected on
-------------------
26 "Mirror image" Notes issued by CILCO to any Financing Subsidiary will be
exempt under Rule 52(a) if the conditions of Rule 52(a) are satisfied.
27 The creation of any Financing Subsidiary, issuance of securities through
such entities, and the use of financing proceeds to make investments will be
subject to a comprehensive set of formal internal controls that Ameren has
adopted. These include delegation of authority limits on expenditures, board of
director budget approvals and comparison of budgets against actual financial
results on a monthly basis, daily reconciliations of disbursements from major
accounts by the Treasurer's group, monthly review of financial statements of
each legal entity in the Ameren system by Ameren's Accounting Manager,
Controller and Vice President of Finance, external auditor review of financial
statements for each legal entity filing reports under the Securities Exchange
Act of 1934 on a quarterly basis, internal audits, and corporate compliance
procedures that are applicable to all management employees.
28 Although Staff Accounting Bulletin (SAB) Topic 5-J does not require Ameren
to "push down" the purchase accounting to CILCORP, because of the existence of
substantial amounts of publicly-held debt of CILCORP, Ameren has nevertheless
concluded that CILCORP's stand-alone financial statements would be more
meaningful to the public debt holders if they reflected a new basis of
accounting. However, the purchase accounting will not be pushed down to the
stand-alone accounts of CILCO or its subsidiaries for financial reporting
purposes to the Commission, for regulatory reporting to the ICC or FERC, or for
any other purpose.
21
CILCORP's balance sheet.(29) It is expected that, for accounting purposes, the
goodwill recorded on CILCORP's books as a result of the Transaction will
generally remain unchanged, but it will be reviewed for potential impairment on
a regular basis in accordance with SFAS Nos. 141 and 142.
CILCORP requests authorization to declare and pay dividends on its common
stock and/or redeem or repurchase its outstanding shares of common stock from
time to time through the Authorization Period out of capital and unearned
surplus (including revaluation reserve) to the extent permitted under applicable
corporate law and the terms of any applicable covenants in its financing
documents (including the CILCORP Indenture) in an amount equal to CILCORP's
retained earnings at the time that the Transaction is consummated plus the
amount, if any, recorded as an impairment to goodwill on the books of CILCORP in
accordance with SFAS Nos. 141 and 142.(30)
1.11 Exemption of CILCORP and CILCO as Holding Companies.
---------------------------------------------------
In its capacity as a holding company over CILCO and CIGI, CILCORP will
continue to be entitled to an exemption pursuant to Section 3(a)(1) of the Act
because CILCORP, CILCO and CIGI are all incorporated in Illinois, the state in
which all of CILCO's and CIGI's public utility operations are conducted.
Likewise, in its capacity as a holding company over CIGI, CILCO will be entitled
to an exemption under Section 3(a)(1). Accordingly, CILCORP and CILCO request
that the Commission issue an order exempting them from the registration
requirements of Section 5 of the Act pursuant to Section 3(a)(1). Ameren,
CILCORP and CILCO acknowledge that such order shall have no effect upon the
status of CILCORP or CILCO as subsidiary companies of Ameren, a registered
holding company. Thus, CILCORP and CILCO will continue to be subject to all
provisions of the Act that would apply to them as subsidiary companies of a
registered holding company.(31)
1.12 Reports Pursuant to Rule 24.
---------------------------
CILCORP, CILCO and CIGI propose to file certificates of notification
pursuant to Rule 24 that report each of the financing transactions carried out
in accordance with the terms and conditions of and for the purposes represented
in Item 1.8 of this Application/Declaration. Such certificates of notification
would be filed within 60 days after the end of each of the first three calendar
-------------------
29 CILCORP's existing goodwill, which was created when it was acquired by AES
($579 million at December 31, 2001), will be eliminated and replaced by the
goodwill created in the Transaction.
30 The Commission granted substantially identical authority in connection
with the acquisition of Powergen plc by E.ON AG. See E.ON AG, et al., Holding
Co. Act Release No. 27539 (June 14, 2002).
31 The Commission has granted exemptions under Section 3(a)(1) to second-tier
holding companies under similar circumstances in several recent merger cases.
See, e.g., CP&L Energy, Inc., Holding Co. Act Release No. 27284 (Nov. 27, 2000);
National Grid Group plc, et al., Holding Co. Act Release No. 27490 (Jan. 16,
2002).
22
quarters, and 90 days after the end of the last calendar quarter, in which
transactions occur. The Rule 24 certificates will contain the following
information for the reporting period:
(a) the type of securities issued (e.g., common stock, long-term debt,
short-term debt, etc.) and the amount of consideration received;
(b) the principal terms thereof (e.g., interest rate, maturity, dividend
rate, sinking fund provisions, etc.);
(c) if payment of any debt securities may be accelerated by the holders
thereof by reason of a default by any associate company of the issuer under any
obligation of such associate company (i.e., a cross default), the identity of
such associate company and the nature of obligation of the associate company to
which the cross default relates;
(d) the amount and purpose of any Guarantee issued by CILCORP;
(e) the notional amount and principal terms of any Interest Rate Hedge or
Anticipatory Hedge entered into during the quarter and the identity of the
parties to such instruments;
(f) with respect to each Financing Subsidiary that has been formed, a
representation that the financial statements of the parent company of the
Financing Subsidiary shall account for the Financing Subsidiary in accordance
with generally accepted accounting principles and further, with respect to each
such entity, (i) the name of the Financing Subsidiary, (ii) the amount invested
by the parent company in such Financing Subsidiary; (iii) the balance sheet
account where the investment and the cost of the investment are booked; (iv) the
form of organization (e.g., corporation, limited partnership, trust, etc.) of
such Financing Subsidiary; (v) the percentage owned by the parent company; and
(vi) if any equity interests in the Financing Subsidiary are sold in a
non-public offering, the identity of the purchasers; and
(h) consolidated balance sheets of CILCORP, CILCO and CIGI as of the end
of the calendar quarter, which may be incorporated by reference to filings, if
any, by such companies under the Securities Act of 1933 or Securities Exchange
Act of 1934.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
------------------------------
It is estimated that the fees, commissions and expenses paid or incurred,
or to be paid or incurred, directly or indirectly, in connection with the
Transaction will not exceed $14 million, assuming that the Transaction closes,
as follows
Investment bankers fees and expenses................................$8,000,000
Consultants fees and expenses.......................................$1,000,000
Accountants fees....................................................$1,000,000
Legal fees and expenses.............................................$3,500,000
Other.................................................................$500,000
-----------
TOTAL..................................................$14,000,000
23
Total fees, commissions and expenses incurred or to be incurred by
CILCORP, CILCO or CIGI in connection with the issuance of securities to any
non-associate company, including underwriting fees, registration fees under the
Securities Act of 1933, dealer discounts, commitment fees, compensating
balances, fees for obtaining letters of credit, rating agency fees, and other
fees and costs customarily incurred in connection with the issuance of such
securities or obtaining third-party credit support, will not exceed 6% of the
amount of any specific financing transaction.(32)
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
-------------------------------
3.1 General Overview of Applicable Statutory Provisions. The following
sections of the Act and the Commission's rules thereunder are or may be directly
or indirectly applicable to the proposed Transaction:
APPLICABLE SECTIONS OF THE ACT AND DESCRIPTION OF TRANSACTION.
RULES.
Section 3(a)(1) Exemption of CILCORP and CILCO
as holding companies.
Sections 6(a) and 7 Issuance of securities, directly or
indirectly through a Financing
Subsidiary, by CILCORP, CILCO and CIGI
after becoming subsidiaries of Ameren;
issuance of Notes by CILCORP, CILCO or
CIGI to any Financing Subsidiary.
Sections 6(a), 7, 9(a), 10, 12(b) and Issuance of short-term and long-term
12(f); Rule 45 notes to Ameren by CILCORP and GIGI
and issuance of short-term notes to
Ameren by CILCO.
Sections 9(a), 10(a), (b), (c) and (f), Acquisition by Ameren of common stock
11(b)(1); Rule 51 of CILCORP.
Sections 9(a), 10 and 12(b) Acquisition of common stock or other
equity securities of Financing
Subsidiaries by CILCORP, CILCO and
CIGI.
Section 12(b); Rule 45 Issuance of Guarantees by CILCORP;
issuance of guarantees and other forms
of credit support by CILCORP, CILCO or
-------------------
32 This is the same limitation on fees, commissions and expenses approved by
the Commission in File No. 70-9877 in connection the issuance of equity and debt
securities by Ameren, supra note 17.
24
CIGI in respect of securities issued
by any Financing Subsidiary; guarantee
of new CILCORP notes by Ameren in lieu
of pledge of CILCO stock and/or of
CILCORP Senior Notes in order to
obtain termination of existing stock
pledge.
Sections 12(b) and 12(d) Contribution of generating assets by
CILCO to CIGI if completed subsequent
to closing of the Transaction.
Section 12(c); Rules 26(c) and 46 Payment of dividends by CILCORP out of
capital and unearned surplus.
Sections 8, 9(c)(3), 11(b)(1) Retention by Ameren of the gas utility
properties of CILCO as part of
additional public utility system;
retention of non-utility subsidiaries
and investments of CILCORP.
Section 11(b)(2) Retention of CIGI as a subsidiary of
CILCO.
Section 13(b); Rules 87, 90 - 91 Approval of the services to be
provided by Ameren Fuel to CILCO and
CIGI and by CILCO and CIGI to
associate companies.
Section 32(h); Rule 54. Generally applicable to all of the
above transactions.
As set forth more fully below, the Transaction complies with all of the
applicable provisions of Section 10 of the Act and should be approved by the
Commission. Specifically, the Commission should find that:
o the consideration to be paid in the Transaction is fair and
reasonable;
o the Transaction will not create detrimental interlocking relations
or concentration of control;
o the Transaction will not result in an unduly complicated capital
structure for the Ameren system;
o the Transaction is in the public interest and the interests of
investors and consumers;
25
o the Transaction is consistent with Section 8 of the Act and not
detrimental to carrying out the provisions of Section 11;
o the Transaction will tend toward the economical and efficient
development of an integrated electric utility system; and
o the Transaction will comply with all applicable state laws.
3.2 Compliance with Section 10(b).
-----------------------------
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a) unless
the Commission finds that:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or
to an extent detrimental to the public interest or the interests of
investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or
indirectly, in connection with such acquisition is not reasonable or
does not bear a fair relation to the sums invested in or the earning
capacity of the utility assets to be acquired or the utility assets
underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of the
holding-company system of the applicant or will be detrimental to
the public interest or the interests of investors or consumers or
the proper functioning of such holding-company system.
a. Section 10(b)(1).
----------------
The standards of Section 10(b)(1) are satisfied because the
proposed Transaction will not "tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or to an extent
detrimental to the public interest or the interests of investors or consumers."
By its nature, any merger results in new links between previously unrelated
companies. The Commission has recognized, however, that such interlocking
relationships are permissible in the interest of efficiencies and economies. See
Northeast Utilities, 50 S.E.C. 427, 443 (1990) ("Northeast Utilities"), as
modified, 50 S.E.C. 511 (1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d
358 (D.C. Cir. 1992) (finding that interlocking relationships are necessary to
integrate the two merging entities). The links that will be established as a
result of the Transaction are not the types of interlocking relationships
targeted by Section 10(b)(1), which was primarily aimed at preventing utility
mergers unrelated to operating economies.(33) As described elsewhere in this
-------------------
33 See Section 1(b)(4) of the Act (finding that the public interest and
interests of consumers and investors are adversely affected "when the growth and
extension of holding companies bears no relation to the economy of management
and operation or the integration and coordination of related operating
properties . . . .").
26
Application/Declaration, the Transaction will achieve various operating
synergies. Among other things, CILCO and CIGI will enter into contractual
arrangements with other Ameren system companies under which various
administrative and management services will be provided. Because substantial
benefits will accrue to the public, investors and consumers from the affiliation
of Ameren and CILCORP, whatever interlocking relationships may arise from the
combination are not detrimental.
In applying Section 10(b)(1) to a utility acquisition, the Commission must
further determine whether such acquisition will result in "the type of
structures and combinations at which the Act was specifically directed." Vermont
Yankee Nuclear Power Corp., 43 S.E.C. 693, 700 (1968). The Transaction will not
create a "huge, complex and irrational system" but, rather, will afford the
opportunity to achieve economies of scale and efficiencies for the benefit of
investors and consumers. See American Electric Power Company, Inc., 46 S.E.C.
1299, 1307 (1978) ("AEP"). The Transaction will combine the strengths of the
companies, enabling them to offer customers a broader array of energy products
and services more efficiently and cost-effectively than either could alone, and
at the same time create a larger and more diverse asset and customer base with
enhanced opportunities for operating efficiencies and risk diversification.
CILCO is a relatively small utility company, with only about 201,000
electric and 204,000 retail gas customers. Thus, the indirect acquisition of
CILCO will add only modestly to the size of the present Ameren system, which
serves 1.5 million electric and 300,000 retail gas customers in two States,
Missouri and Illinois. If approved, the Ameren system will serve approximately
1.7 million electric customers and 500,000 retail gas customers in the same two
States. The acquisition of CILCORP will add about 1,200 MW of generating
capacity to the 12,600 MW of generating capacity that Ameren already owns or
controls. On a pro forma basis, as of December 31, 2001, Ameren will have
consolidated assets of about $12.5 billion, including net utility plant of
approximately $9.6 billion. For the twelve months ended December 31, 2001, pro
forma combined operating revenues will total approximately $5.3 billion.
The following table compares Ameren after the Transaction to other
registered holding company systems that compete with Ameren in the midwest and
central U.S. power markets in terms of total assets, operating revenues and
electric customers (all data as of and for the year ended December 31, 2001):
27
System Total Assets Operating Revenues Utility Customers -
($ Millions) ($ Millions) Electric (E)/Gas (G)
------------ ---------- --------------------
Exelon $34,860 $15,140 E - 5.1 million
Corp. G - .44 million
FirstEnergy $37,351 $7,999 E - 4.3 million
American $47,281 $61,257 E - 4.9 million
Electric
Power Co.
Xcel Corp. $28,735 $15,028 E - 3.2 million
G - 1.7 million
Entergy $25,910 $9,621 E - 2.6 million
Corp. G - .24 million
Cinergy $12,300 $12,923 E - 1.5 million
Corp. G - .5 million
Ameren $12,516 $5,310 E - 1.7 million
(pro forma) G - .5 million
As the foregoing table shows, even after the Transaction, the Ameren
system will be substantially smaller than Exelon Corp., which is the largest
utility, by far, in Illinois, as well as American Electric Power Company, Xcel
Corp., FirstEnergy and Entergy Corp., which operate in adjoining States. In any
case, the Commission has rejected an interpretation of Section 10(b)(1) that
would impose per se limits on the post-merger size of a registered holding
company. Instead, the Commission assesses the size of the resulting system with
reference to the economic efficiencies that can be achieved through the
integration and coordination of utility operations. In AEP, the Commission noted
that, although the framers of the Act were concerned about "the evils of
bigness, they were also aware that the combination of isolated local utilities
into an integrated system afforded opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations... [and] [t]hey
wished to preserve these opportunities." AEP, 46 S.E.C. at 1309. By virtue of
the Transaction, Ameren will be in a position to realize precisely these types
of benefits. Among other things, the Transaction is expected to yield operating
cost savings, corporate and administrative and purchasing savings, and fuel cost
savings, among others. These expected economies and efficiencies from the
combined utility operations are described in greater detail in Item 3.3 below.
28
Finally, Section 10(b)(1) also requires the Commission to consider
possible anticompetitive effects of a proposed combination. See Municipal
Electric Association of Massachusetts v. SEC, 413 F.2d 1052 (D.C. Cir. 1969). As
the Commission noted in Northeast Utilities, the "antitrust ramifications of an
acquisition must be considered in light of the fact that public utilities are
regulated monopolies and that federal and state administrative agencies regulate
the rates charged to customers." Northeast Utilities, 50 S.E.C. at 445 (citing
AEP, 46 S.E.C. at 1324 - 25). In this case, Ameren and AES will file
Notification and Report Forms with the Department of Justice ("DOJ") and the
Federal Trade Commission ("FTC") pursuant to the HSR Act describing the effects
of the Transaction on competition in the relevant market. The competitive impact
of the Transaction on wholesale power markets will also be considered by the
FERC, which will include analyses required under the FERC's Order No. 592
(hereinafter, the "Merger Policy Statement")(34) and Order No. 642.(35)
Specifically, the FERC will consider the effects of combining Ameren's and
CILCORP's generation assets (horizontal market power), the effects of combining
generation and transmission assets (one aspect of vertical market power), and
the effects of combining electric and natural gas assets. To mitigate concerns
about the potential for increased market power that otherwise might be suggested
by the analyses used, Ameren is proposing to the FERC, as a condition of merger
approval, to implement certain transmission upgrades at a cost of approximately
$18 million that will allow increased power flows in an around the area
traversed by its transmission system. These include construction of a new
12.5-mile 138 kV line interconnecting with CWLP to increase import capability to
CWLP, rebuilding approximately 50 miles of an existing 138 kV line to increase
import capability to CILCO, and upgrades/changes to certain substation
equipment. The purpose of these transmission improvements is to eliminate
transmission congestion in central Illinois and thereby increase the available
transfer capability.
The Commission has found, and the courts have agreed, that it may
appropriately rely upon the FERC with respect to such matters. See City of
Holyoke v. SEC, 972 F.2d at 363-64, quoting Wisconsin's Environmental Decade v.
SEC, 882 F.2d 523, 527 (D.C. Cir. 1989). For these reasons, the proposed
Transaction will not "tend toward interlocking relations or the concentration of
control of public-utility companies, of a kind or to the extent detrimental to
the public interest or the interests of investors or customers."
b. Section 10(b)(2).
----------------
Section 10(b)(2) of the Act precludes approval of an acquisition
if the consideration to be paid in connection with the transaction, including
all fees, commissions and other remuneration, is "not reasonable or does not
bear a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the securities to
be acquired." The Commission has found "persuasive evidence" that the standards
-------------------
34 See Inquiry Concerning Merger Policy under the Federal Power Act: Policy
Statement, Order No. 592, III FERC Stats. & Regs. P. 31,044 (1996),
reconsideration denied, Order No. 592-A, 79 FERC P. 61,321 (1997) (codified at
18 C.F.R.ss. 2.26).
35 See Revised Filing Requirements Under Part 33 of the Commission's
Regulations, Order No. 642, III FERC Stats. & Regs. P. 31,111 (2000), reh'g
denied, Order No. 642-A, 94 FERC P. 61,289 (2001).
29
of Section 10(b)(2) are satisfied where, as here, the agreed consideration for
an acquisition is the result of arms-length negotiations between the managements
of the companies involved, supported by an opinion of a financial advisor. See
Entergy Corp., 51 S.E.C. 869 at 879 (1993); Southern Company, Holding Co. Act
Release No. 24579 (Feb. 12, 1988).
There is no basis for the Commission to question the fairness of the
consideration to be paid to AES for CILCORP's common stock. AES announced its
decision to sell CILCORP on November 13, 2001, and thereafter solicited
expressions of interest from several potential purchasers. On February 19, 2002,
AES disclosed that it had narrowed the list of potential purchasers to seven,
including Ameren, and conducted further negotiations with them over price and
other terms. Ameren was selected as the successful bidder at the conclusion of
this auction process.
There is also no basis for the Commission to conclude that the
consideration to be paid for CILCORP does not bear a fair relation to the
earning capacity of CILCORP's utility assets. In this case, Ameren requested its
financial advisor, Goldman, Sachs & Co. ("Goldman Sachs"), to provide an opinion
as to the fairness from a financial point of view to Ameren of the consideration
to be paid for CILCORP (including the membership interests in AES Medina Valley
Cogen, L.L.C.). On April 28, 2002, Goldman Sachs provided its opinion addressed
to the Board of Directors of Ameren to the effect that, as of that date and
based upon and subject to the matters and assumptions set forth therein, the
Consideration (as defined in the opinion) to be paid by Ameren for CILCORP
(including the membership interests in AES Medina Valley Cogen, L.L.C.) pursuant
to the relevant agreements "is fair from a financial point of view to [Ameren]."
Goldman Sachs' fairness opinion is filed herewith as Exhibit J.
Another consideration under Section 10(b)(2) is the overall fees,
commissions and expenses to be incurred in connection with the Transaction.
Ameren believes that the transaction costs are reasonable and fair in light of
the size and complexity of the proposed Transaction, and that the anticipated
benefits of the Transaction to the public, investors and consumers are
consistent with recent precedents and meet the standards of Section 10(b)(2).
The total estimated fees and expenses, approximately $14 million (see Item 2 -
Fees, Commissions and Expenses), are about 1% of the Purchase Price under the
Stock Purchase Agreement. This is consistent with (and in fact generally lower
than) percentages previously approved by the Commission. See, e.g., Entergy
Corp., 51 S.E.C. at 881, n. 63 (fees and expenses of $38 million, representing
approximately 2% of the value of the consideration paid to the shareholders of
Gulf States Utilities); Northeast Utilities, Holding Co. Act Release No. 25548
(June 3, 1992) (fees and expenses of approximately 2% of the value of the assets
to be acquired); and American Electric Power Company, Inc., et al., Holding
Company Act Release No. 27186 (June 14, 2000), n. 40 (total fees, commissions
and expenses of approximately $72.7 million, representing 1.1% of the value of
the total consideration paid by American Electric Power to the shareholders of
Central and South West Corp.).
30
c. Section 10(b)(3).
----------------
Section 10(b)(3) requires the Commission to determine whether the
Transaction will "unduly complicate the capital structure" or be "detrimental to
the public interest or the interest of investors or consumers or the proper
functioning" of the Ameren system.
The capital structure of the Ameren system will not change materially as a
result of the Transaction. In the Transaction, Ameren will acquire 100% of the
outstanding common stock of CILCORP for cash. Hence, the transaction will not
create any publicly-held minority stock interest in any public utility company.
The existing debt securities and preferred stock of CILCORP and CILCO will
remain outstanding as obligations of those companies.
The continued existence of CILCORP as a secondary holding company
following the Transaction will not unduly complicate Ameren's capital structure.
In this regard, the Commission has permitted other registered holding companies
to retain secondary holding companies in order to preserve tax advantages and/or
existing structural and financial benefits. See e.g., American Electric Power
Company, Inc., Holding Co. Act Release No. 27186, June 14, 2000); Energy East
Corp., Holding Co. Act Release No. 27224 (August 31, 2000); NiSource Inc.,
Holding Co. Act Release No. 27263 (Oct. 30, 2000); and CP&L Energy, Inc., et
al., Holding Co. Act Release No. 27284 (Nov. 27, 2000).
There are significant financial disincentives to eliminating CILCORP as a
secondary holding company at this time. Specifically, in order to eliminate
CILCORP as a subsidiary, Ameren would either have to prepay the CILCORP Senior
Notes, or, alternatively, assume the CILCORP Senior Notes by means of a merger
or otherwise. As previously indicated, any prepayment or redemption of the
CILCORP Senior Notes would require payment of a yield maintenance, or "make
whole," premium which, at current interest rates, would approximate $175
million. If, on the other hand, CILCORP were to be merged into Ameren, the
CILCORP Senior Notes would not have to be prepaid but would, by operation of
law, become the direct obligations of Ameren. In this regard, however, the
indenture under which the CILCORP Senior Notes were issued (the "CILCORP
Indenture") includes limitations on future activities and other covenants that
are far more onerous and restrictive than those in Ameren's existing debt
instruments. For example, the CILCORP Indenture provides (in section 10.04
thereof) that future indebtedness of CILCORP and any subsidiary cannot be
secured without the same property also securing the CILCORP Senior Notes, with
certain exceptions. If CILCORP were merged into Ameren, this limitation would
apply to future secured debt issued not only by Ameren, but AmerenUE and
AmerenCIPS as well. This would be unacceptable from a business perspective.
Under section 10.06, CILCORP and its subsidiaries cannot incur certain new debt
unless CILCORP receives the written confirmation from certain ratings agencies
that the issuance of such debt would not result in a ratings downgrade from the
then-existing rating on the CILCORP Senior Notes. If CILCORP were merged into
Ameren, this ratings affirmation covenant would apply to any debt issued by
Ameren or any subsidiary of Ameren. Further, if the current rating for the
CILCORP Senior Notes is raised as a result of the Transaction, then the higher
rating becomes the "floor" for purposes of future ratings affirmations. Under
section 10.07 of the CILCORP Indenture, CILCORP can only engage in businesses in
31
addition to (i) those businesses in which it and its subsidiaries were engaged
at the time the CILCORP Senior Notes were issued and (ii) other businesses that
are deemed to be necessary, useful or desirable in connection with such existing
businesses, if, prior to entering into any such additional business, CILCORP
obtains the written confirmation of the ratings agencies that a ratings
downgrade will not result.
There are other limitations and restrictions under the CILCORP Indenture
that Ameren would find unacceptable if they were to apply to Ameren and its
subsidiaries. In this regard, it should be kept in mind that the CILCORP Senior
Notes were issued as part of a highly leveraged transaction in which CILCORP
became a wholly-owned subsidiary of AES, and consequently the covenants in the
CILCORP Indenture reflect that status. In contrast, Ameren is a publicly-held
company that has a substantially higher credit rating than either AES or
CILCORP. Thus, while the limitations under the CILCORP Indenture may have been
appropriate for CILCORP at the time the CILCORP Senior Notes were issued, they
would not be appropriate for Ameren.
In any event, leaving the CILCORP Senior Notes in place will not
negatively affect CILCO's capital structure or be detrimental to investors.
CILCO's common equity ratio has averaged around a minimum of 45% both before and
after the issuance of the CILCORP Senior Notes. Also, CILCO's operating cash
flow has been sufficient to cover the debt service requirements on the CILCORP
Senior Notes, a trend that Ameren expects to continue. By becoming part of the
Ameren system, CILCO's credit ratings may improve, thus providing CILCO with
better access to capital. Further, CILCORP and CILCO will have additional access
to short-term and long-term funding through their ability to borrow from Ameren.
Set forth below are summaries of the capital structures of Ameren and
CILCORP as of December 31, 2001, and the pro forma consolidated capital
structure of Ameren (assuming the Transaction had been consummated on December
31, 2001 and acquisition of AES Medina Valley (No. 4) L.L.C. had been
consummated on June 30, 2002):
32
Ameren and CILCORP Historical Consolidated Capital Structures
(dollars in millions)
Ameren CILCORP
------ -------
Common stock $3,349 47% $515 38%
equity
Preferred 235 3% 41 3%
securities
Long-term 2,835 39% 718 54%
debt
Short-term 780 11% 64 5%
debt, incl.
current
portion ______ ____ ______ ____
Total $7,199 100% $1,338 100%
Ameren Pro Forma Consolidated Capital Structure
(dollars in millions) (unaudited)
Common stock equity $3,889 45%
Preferred securities 276 3%
Long-term debt 3,653 42%
Short-term debt, incl. current 845 10%
portion ------ ------
Total $8,663 100.0%
As the foregoing shows, Ameren's pro forma consolidated common equity to
total capitalization ratio of 45% will comfortably exceed the "traditionally
acceptable 30% level."(36) See Northeast Utilities, 50 S.E.C. at 440, n. 47.
Moreover, the Transaction will have no effect on the capitalization of AmerenUE,
AmerenCIPS, CILCO or CIGI. Common equity as a percentage of capitalization of
each of these companies is and will remain well over 30%.
Section 10(b)(3) also requires the Commission to determine whether the
proposed combination will be detrimental to the public interest, the interests
of investors or consumers or the proper functioning of the combined Ameren
system. The proposed transaction between Ameren and CILCORP is entirely
-------------------
36 Under section 7(d)(1) of the Act, the Commission generally has required a
registered holding company system and its public-utility subsidiaries to
maintain a 65/30 debt/common equity ratio, the balance generally being preferred
equity. Such debt/equity capitalization requirement was included in Rule 52, as
originally adopted, as applied to securities issued by public-utility
subsidiaries, but was eliminated in 1992.
33
consistent with the proper functioning of a registered holding company system.
Ameren's and CILCORP's utility operations are contiguous and interconnected. The
Transaction will result in substantial, otherwise unavailable, savings and
benefits to the public and to consumers and investors of both companies.
Moreover, the Transaction is subject to approval by the ICC and the FERC, which
will ensure that the interests of customers will be adequately protected. The
FERC approval will also confirm that the Transaction will have no adverse effect
on competition. For these reasons, Ameren believes that the Transaction will be
in the public interest and the interest of investors and consumers and will not
be detrimental to the proper functioning of the resulting holding company
system.
3.3 Section 10(c).
-------------
Section 10(c) of the Act provides that, notwithstanding the
provisions of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of section 8 or is
detrimental to the carrying out of the provisions of section 11; or
(2) the acquisition of securities or utility assets of a public utility
or holding company unless the Commission finds that such acquisition
will serve the public interest by tending towards the economical and
the efficient development of an integrated public utility system.
a. Section 10(c)(1).
----------------
(a) The Transaction will be lawful under Section 8.
-----------------------------------------------
Section 10(c)(1) first requires that the Transaction be lawful
under Section 8. That section was intended to prevent holding companies, by the
use of separate subsidiaries, from circumventing state restrictions on common
ownership of gas and electric operations. The Transaction will not result in any
new situation of common ownership of so-called "combination" systems within a
given state. CILCO already provides electric and gas service in overlapping
areas of Illinois. Moreover, the ICC has jurisdiction over the Transaction.
Accordingly, the Transaction does not raise any issue under Section 8.
(b) The Transaction will not be detrimental to carrying out the
-----------------------------------------------------------
provisions of Section 11.
-------------------------
Section 10(c)(1) also requires that the Transaction not be
"detrimental to the carrying out of the provisions of section 11."
Section 11(b)(1), in turn, directs the Commission generally to limit a
registered holding company "to a single integrated public-utility system,"
either electric or gas. An exception to this requirement, as discussed below, is
provided in Section 11(b)(1)(A) - (C) (the "ABC clauses"), which permits a
registered holding company to retain one or more additional (i.e., secondary)
integrated public-utility systems if the system satisfies the criteria of the
ABC clauses. In the 1997 Merger Order, the Commission determined that Ameren's
34
primary system, comprised of the electric utility facilities of AmerenUE and
AmerenCIPS, constitutes an integrated electric utility system; and that the gas
utility properties of AmerenUE and AmerenCIPS together constitute an integrated
gas utility system that is retainable under the standards of Section 11(b)(1).
At issue in this proceeding is whether Ameren's acquisition of CILCORP, whose
principal subsidiary (CILCO) currently operates as both an electric and gas
utility in substantially the same area of Illinois, will result in a system that
is "detrimental to the carrying out of the provisions of section 11."
As explained more fully below, the combination of the electric utility
operations of AmerenUE, AmerenCIPS, and CILCO (including CIGI following the
transfer of CILCO's generation assets to that company) will result in a single,
integrated electric utility system. In addition, the combination of CILCO's gas
utility properties with those of AmerenUE and AmerenCIPS will comprise an
integrated gas utility system that may be retained by Ameren as an additional
system under the ABC clauses of Section 11(b)(1). These standards are addressed
below.
(i) Integration of Electric Operations.
----------------------------------
The threshold question is whether the electric utility
properties of CILCO can be combined with those of AmerenUE and AmerenCIPS to
form a single "integrated public-utility system," which, as applied to electric
utility companies, is defined in Section 2(a)(29)(A) to mean:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility assets,
whether owned by one or more electric utility companies, are physically
interconnected or capable of physical interconnection and which under
normal conditions may be economically operated as a single interconnected
and coordinated system confined in its operations to a single area or
region, in one or more States, not so large as to impair (considering the
state of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
Reading the statutory definition closely, there are four distinct and
separate components of integration, as applied to an electric system: physical
interconnection; coordination; limitation to a single area or region; and no
impairment of localized management, efficient operation, and the effectiveness
of regulation. See National Rural Electric Cooperative Ass'n v. Securities and
Exchange Commission, 276 F.3d 609 at __ (D.C. Cir. 2002). The Transaction
satisfies each of these tests.
A. Interconnection. The first requirement for an
integrated electric utility system is that the electric generation and/or
transmission and/or distribution facilities comprising the system be "physically
interconnected or capable of physical interconnection." As previously noted, the
electric service areas of AmerenCIPS and CILCO in Illinois are adjacent and
physically interconnected by a 345 kV line. Under traditional analysis, this
35
fact alone satisfies the interconnection requirement. See e.g., Energy East, et
al., Holding Company Act Release No. 27546 (June 27, 2002).
B. Coordination. Historically, the Commission has
interpreted the requirement that an integrated electric system be economically
operated under normal conditions as a single interconnected and coordinated
system "to refer to the physical operation of utility assets as a system in
which, among other things, the generation and/or flow of current within the
system may be centrally controlled and allocated as need or economy directs."
See, e.g., Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25, 1998),
citing The North American Company, 11 S.E.C. 194, 242 (1942), aff'd, 133 F.2d
148 (2d Cir. 1943), aff'd on constitutional issues, 327 U.S. 686 (1946). The
Commission has noted that, through this standard, "Congress intended that the
utility properties be so connected and operated that there is coordination among
all parts, and that those parts bear an integral operating relationship to one
another." See Cities Service Co., 14 S.E.C. 28 at 55 (1943). Traditionally, the
most obvious indicia of "coordinated operations" was the ability to jointly
dispatch all system generating units automatically on an economic basis in order
to achieve the lowest overall cost of electricity. However, in recent cases, the
Commission has recognized that joint economic dispatch is not per se a
requirement for a finding of coordinated operations. See e.g., American Electric
Power Company, Inc., Holding Co. Act Release No. 27186 (June 14, 2000); Exelon
Corporation, Holding Co. Act Release No. 27256 (Oct. 19, 2000); and CP&L Energy,
Inc., Holding Co. Act Release No. 27284 (Nov. 27, 2000).
In connection with the formation of Ameren in 1997, AmerenUE and
AmerenCIPS entered into a Joint Dispatch Agreement ("JDA"), which was amended in
2000 in order to add Ameren Energy Generating upon the transfer of AmerenCIPS'
generating units to Ameren Energy Generating. Under the JDA, the existing
generation resources in the Ameren system are jointly dispatched on a
single-system basis, without regard to ownership. The applicants in this
proceeding, however, do not intend to make CILCO a party to the JDA or otherwise
dispatch CILCO's plants and Ameren's plants on a single-system basis. CILCO is
currently "short" of generating capacity, meaning that, for the foreseeable
future, it will continue to require all of the capacity and associated energy
from its existing generating units in order to serve its own load. Under these
circumstances, it is clear that no advantage would be gained by making CILCO's
generation subject to the JDA. Also, to expedite the state and federal
regulatory approval process, Ameren and CILCO desire to keep the existing
operating structure in place as much as possible, consistent with the
requirements of the Act.
Moreover, it is clear that the transfer of CILCO's generating assets to
CIGI will not, at least for the foreseeable future, eliminate the need for close
coordination between CILCO's transmission and distribution operations and CIGI's
generation operations. As explained in Item 1, in connection with the
restructuring of CILCO, CIGI will provide the full requirements of CILCO's
retail customers pursuant to the PSA through December 31, 2004. Ameren
anticipates that CILCO and CIGI will file a request with FERC to extend the PSA,
36
on its existing terms, until December 31, 2006. Thus, at least through 2006,
there will be a high degree of coordination between CIGI and CILCO.(37)
Notwithstanding the foregoing, AmerenUE and CIGI (and, as well, Ameren
Energy Generating, even though it is an EWG) will have opportunities to
coordinate their generating resources through joint planning, operation and
maintenance programs, and through joint management of fuel resources by Ameren
Fuels. It is anticipated that Ameren Services' Energy Supply Operations
Department, for example, will have overall responsibility for dispatching CIGI's
plants as well as Ameren's other plants. They will also have opportunities to
coordinate their generating facilities through power sales under their
FERC-authorized market based tariffs. Further, because AmerenUE, AmerenCIPS and
CILCO are, or will become, directly or indirectly, members of MISO, their
transmission assets will be under common day-to-day control and management.
Thus, in terms of both generation and transmission facilities, there will be
high degree of coordination.
Under Section 2(a)(29)(A), the Commission must also find that the
resulting interconnected and coordinated system may be "economically operated."
This calls for a determination that coordinated operation of the combined
company's facilities is likely to produce economies and efficiencies. The
question of whether a combined system will be economically operated under
Section 10(c)(2) and Section 2(a)(29)(A) was recently addressed by the U.S.
Court of Appeals in Madison Gas and Electric Company v. SEC, 168 F.3d 1337 (D.C.
Cir. 1999). In that case, the court determined that in analyzing whether a
system will be economically coordinated, the focus must be on whether the
acquisition "as a whole" will "tend toward efficiency and economy." Id. at 1341.
As discussed in Item 3.3 below, the Transaction will meet this standard.
In short, all aspects of the combined system will be centrally and
efficiently planned and coordinated. As with other merger applications approved
by the Commission, the combined system will be capable of being economically
operated as a single interconnected and coordinated system as demonstrated by
the variety of means through which its operations will be coordinated and the
efficiencies and economies expected to be realized by the proposed transaction.
C. Single Area or Region. As required by
Section 2(a)(29)(A), the operations of Ameren following the Transaction will be
confined to a "single area or region in one or more States." The retail service
area of the Ameren system will continue to be confined to the two adjoining
states (Missouri and Illinois) in which Ameren already operates. Moreover, as
-------------------
37 Contrast Reliant Energy, Inc., et al., Holding Co. Act Release No. 27548
(July 5, 2002), where the Commission concluded that, following the separation of
Reliant's generation assets and "wires" business into separate subsidiaries, in
accordance with Texas' restructuring law, coordination between the two would
cease. Under Texas restructuring law, however, Reliant's transmission and
distribution subsidiary will no longer purchase or sell any electricity and will
not have any responsibility to be a provider of last resort, and Reliant's
generating subsidiary will sell all of its output into the wholesale market.
37
indicated, AmerenUE, AmerenCIPS and CILCO are all members of MAIN, one of the
ten regional electric reliability councils in the United States.
D. Size. The final clause of Section 2(a)(29)(A)
requires the Commission to look to the size of the combined system (considering
the state of the art and the area or region affected) and its effect upon
localized management, efficient operation, and the effectiveness of regulation.
In the instant matter, these standards are easily met. The size of the Ameren
electric system will not impair the advantages of localized management,
efficient operation or the effectiveness of regulation. Instead, the proposed
Transaction will actually increase the efficiency of operations.
Localized Management -- Although CILCO will necessarily come under new
management as a result of the Transaction, it will continue to exist as a
separate legal entity and will continue to operate through regional offices with
local service centers and line crews available to respond to customers' needs.
Ameren will preserve the well-established delegations of authority -- currently
in place at AmerenUE and AmerenCIPS -- which permit the local, district and
regional management teams to budget for, operate and maintain the electric
distribution system, and to schedule work forces in order to provide the same
(or better) quality of service to customers of CILCO.(38) In short, CILCO will
continue to be managed on a day-to-day basis at a local level, particularly in
areas that must be responsive to local needs. Accordingly, the advantages of
localized management will not be impaired.
Efficient Operation -- As discussed above in the analysis of
Section 10(c)(2), the Transaction will result in significant economies and
efficiencies. Operations will be more efficiently performed on a centralized
basis because of economies of scale, standardized operating and maintenance
practices and closer coordination of system-wide matters.
Effective Regulation -- The Transaction will not impair the effectiveness
of regulation at either the state or federal level. CILCO will continue to be
regulated by the ICC with respect to retail rates, service, securities issuances
and other matters, and by FERC with respect to interstate electric sales for
resale and transmission services.
(ii) Integration of Gas Operations.
-----------------------------
The gas utility properties of CILCO, when added to those
owned by AmerenUE and AmerenCIPS, will form an "integrated gas-utility system,"
which is defined in Section 2(a)(29)(B) to mean:
-------------------
38 In their application to the ICC (Exh. D-1 hereto), CILCO and Ameren
committed, among other things, to maintain CILCO's headquarters in Peoria for at
least five years after the Transaction closes, to continue to employ at least
800 full-time employees of CILCO and its affiliates in the CILCO service area at
least through 2005, and to maintain a management presence in the Peoria region
by having two vice presidents (or higher level business leaders) work out of the
Peoria region.
38
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by being
operated as a single coordinated system confined in its operations to a
single area or region, in one or more States, not so large as to impair
(considering the state of the art and the area or region affected) the
advantages of localized management, efficient operation, and the
effectiveness of regulation: Provided, That gas utility companies deriving
natural gas from a common source of supply may be deemed to be included in
a single area or region.
Thus, the definition of an integrated gas-utility system has three
distinct parts, each of which will be satisfied in this case.
A. Coordination. In order to find coordination
among the gas-utility companies in the same holding company system, the
Commission has historically focused primarily on the operating economies that
may be effectuated through coordinated management of gas supply portfolios,
i.e., gas purchase arrangements, transportation agreements, and storage assets,
the access of the gas-utility companies in the same holding company system to
common market and supply-area hubs, the functional merger of separate gas supply
departments under common management, and sharing of data management software
systems. See NIPSCO Industries, Inc., 53 S.E.C. 1296 at 1306 - 1309 (1999); New
Century Enterprises, Inc., Holding Co. Act Release No. 27212 (Aug. 16, 2000).
The Commission has also recognized that substantial operating economies can be
achieved through access to the resources of an affiliated gas marketer. See
Sempra Energy, 53 S.E.C. 1242 at 1251 - 1252 (1999).
AmerenUE, AmerenCIPS and CILCO currently manage similar physical
properties and contractual assets: natural gas supply, interstate pipeline
transportation contracts, and storage contracts of varying types and duration.
Following the acquisition of CILCO, Ameren Fuels will enter into a fuel services
agreement with CILCO that is substantially identical to the existing Fuel
Services Agreement between Ameren Fuels and AmerenUE and AmerenCIPS. Under these
agreements, personnel of Ameren Fuels will manage all of the natural gas supply,
transportation and storage activities on behalf of the three companies. This
will include procuring natural gas supply, transportation services and storage
capacity, negotiating agreements, nominating and scheduling gas deliveries,
balancing system demand and supply, and performing state and federal regulatory
responsibilities, in each case as agent for the three companies.
B. Single Area or Region. The combined gas system
of AmerenUE, AmerenCIPS and CILCO will also be confined to Missouri and
Illinois. The areas served in Illinois are mostly contiguous. CILCO takes
delivery of gas on five interstate pipelines: Panhandle Eastern Pipe Line
Company, Natural Gas Pipeline Company of America, Trunkline Gas Company,
Midwestern Gas Transmission Company, and ANR Pipeline Company. Ameren is
currently served by all of these interstate pipelines with the exception of ANR
Pipeline Company. The common pipelines give both companies access to gas
supplies produced in the Mid-Continent region (Kansas and the Texas/Oklahoma
39
Panhandle) and Gulf Coast onshore and offshore (Louisiana and Texas) producing
areas and, to a lesser extent, the Rocky Mountain and western Canada producing
basins. Thus, the companies share a "common source of supply."
C. Size. For the same reasons given above in
connection with the discussion of impacts of the Transaction on the combined
electric system, localized management, efficient operation, and the
effectiveness of regulation will not be impaired by the resulting size of the
integrated gas utility system.
(c) Retention of Combined Gas System.
--------------------------------
As indicated, under the "ABC clauses" of Section 11(b)(1), a
registered holding company can own "one or more" additional integrated systems
if certain conditions are met. Specifically, the Commission must find that (A)
the additional system "cannot be operated as an independent system without the
loss of substantial economies which can be secured by the retention of control
by such holding company of such system," (B) the additional system is located in
one state or adjoining states, and (C) the combination of systems under the
control of a single holding company is "not so large ... as to impair the
advantages of localized management, efficient operation, or the effectiveness of
regulation."
(i) Loss of Economies.
-----------------
Clause A requires a showing that each additional integrated
system (in this case, the integrated gas utility system formed by combining the
operations of AmerenUE, AmerenCIPS and CILCO) cannot be operated as an
independent system without the loss of substantial economies which can be
secured by the retention of control by a holding company of such system.
Historically, the Commission considered four ratios as a "guide" to determining
whether lost economies would be "substantial" under Section 11(b)(1)(A).
Specifically, the Commission considered the estimated loss of economies
expressed in terms of the ratio of increased expenses to the system's total
operating revenues, operating revenue deductions, gross income and net income.
See Engineers Public Service Co., 12 SEC 41 (1942), rev'd on other grounds and
remanded, 138 F. 2d 936 (DC Cir. 1943), vacated as moot, 332 US 788 (1947)
("Engineers"), and New England Electric System, 41 S.E.C. 888, 893 - 899 (1964).
In Engineers, the Commission suggested that cost increases resulting in a 6.78%
loss of operating revenues, a 9.72% increase in operating revenue deductions, a
25.44% loss of gross income, and 42.46% loss of net income would afford an
"impressive basis for finding a loss of substantial economies" associated with a
divestiture. 12 SEC at 59. More recently, the Commission has indicated that it
will no longer require a comparison of resulting loss ratios to those of earlier
precedent. See CP&L Energy, Inc., Holding Co. Act Release No. 27284 (Nov. 27,
2000), fn. 40.
In its early decisions, the Commission also considered the increases in
operational expenses that were anticipated upon divestiture, but also took into
account, as offsetting benefits, the significant competitive advantages that
were perceived to flow from a separation of gas and electric operations. The
Commission's assumption was that a combination of gas and electric operations is
typically disadvantageous to the gas operations and, hence, the public interest
and the interests of investors and consumers would be benefited by a separation
of gas from the electric operations. In more recent cases, however, the
Commission has recognized that these assumptions are outdated and that the
40
historical ratios do not provide an adequate indication of the substantial loss
of economies that may occur by forcing a separation of electric and gas.
Specifically, beginning with its decision in New Century Energies, Inc., 53
S.E.C. 54 (1997), the Commission took notice of the changing circumstances in
today's electric and gas industries, notably the increasing convergence of the
electric and gas industries. The Commission concluded that, "in these
circumstances, separation of gas and electric businesses may cause the separated
entities to be weaker competitors than they would be together. This factor adds
to the quantifiable loss of economies caused by increased costs." 53 S.E.C. at
76. This view was repeated in subsequent cases, including the 1997 Merger Order
and WPL Holdings, Inc., 53 S.E.C. 501 (1997). The Commission has also recognized
that revenue enhancement opportunities and other benefits likely to be realized
from a "convergence" merger would be diminished or lost if the Commission forced
a divestiture of the additional system. See SCANA Corp., Holding Co. Act Release
No. 27133 (Feb. 9, 2000); and Northeast Utilities, Holding Co. Act Release
No. 27127 (Jan. 31, 2000).
Ameren intends to prepare and file a Severance Study that will quantify
the economic impact of a divestiture of the gas assets of AmerenUE, AmerenCIPS
and CILCO into a new, stand-alone company. The Severance Study will be filed by
amendment as Exhibit H hereto. The study will include estimates of the increase
in annual operating costs that would result if the gas properties were divested.
These increased operating costs would result primarily from additional capital
costs and annual operating and maintenance costs in several categories (e.g.,
establishing new service centers), including one-time transition costs
associated with establishing the gas department as a separate company. The study
will also include an estimate of the offsetting economies that would be derived
from combining CILCO's gas operations with AmerenUE and AmerenCIPS' gas
operations.
Finally, in its analysis of clause A, the Commission has also taken into
account the historical association of the electric and gas operations and the
views of the interested state commissions. New Century Energies, 53 S.E.C. at
78. As in that case, the electric and gas assets of both CILCO and Ameren's
subsidiaries have been under common control for many years, and the Transaction
will not alter the status quo. Further, the Missouri Public Service Commission,
which has jurisdiction over AmerenUE, and the ICC, which has jurisdiction over
both AmerenUE and AmerenCIPS, did not object at the time that the Ameren system
was formed to the continued ownership of both electric and gas utility
operations in a single system. The ICC has jurisdiction over the Transaction and
will have another opportunity to consider this issue.
(ii) Same State or Adjoining States.
------------------------------
The proposed Transaction does not raise any issue under
Section 11(b)(1)(B) of the Act, as the gas utility properties of AmerenUE,
AmerenCIPS and CILCO are located and operate exclusively in Illinois and
Missouri, the same two States in which they operate as electric utilities. Thus,
the requirement that each additional system be located in one State or adjoining
States is satisfied.
41
(iii) Size.
----
Further, retention of the combined gas utility business
does not raise any issues under Section 11(b)(1)(C) of the Act. The combination
of both electric and gas utility systems under the control of a single holding
company will be "not so large ... as to impair the advantages of localized
management, efficient operation, or the effectiveness of regulation." As the
Commission has recognized, the determinative consideration is not size alone or
size in an absolute sense, either big or small, but size in relation to its
effect, if any, on localized management, efficient operation and effective
regulation. From these perspectives, it is clear that the continued ownership of
the combined gas system by Ameren is not too large.
As of December 31, 2001, and giving effect to the Transaction, the
combined gas operations of AmerenUE, AmerenCIPS, and CILCO would represent only
about 5% of Ameren's post-Transaction net utility plant, and only about 12% of
Ameren's post-Transaction net operating revenues.
As indicated, the gas procurement functions of CILCO, AmerenUE and
AmerenCIPS will be centralized in Ameren Fuels. Ameren Fuels will administer the
combined portfolios of natural gas supply, transportation and storage contracts
as agent for the three companies. In most other respects, the local operations
of CILCO will continue to be handled from CILCO's headquarters in Peoria.
Management will therefore remain geographically close to the gas operations,
thereby preserving the advantages of localized management.
(d) Retention of CILCORP's Non-Utility Subsidiaries and
---------------------------------------------------
Investments.
------------
Section 11(b)(1) permits a registered holding company to
retain "such other businesses as are reasonably incidental, or economically
necessary or appropriate, to the operations of [an] integrated public utility
system." The Commission has historically interpreted this provision to require
an operating or "functional" relationship between the non-utility activity and
the system's core utility business. See, e.g. Michigan Consolidated Gas Co., 44
S.E.C. 361 (1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971); United Light and
Railways Co., 35 S.E.C. 516 (1954); CSW Credit, Inc., 51 S.E.C. 984 (Mar. 2,
1994); and Jersey Central Power and Light Co., Holding Co. Act Release No. 24348
(Mar. 18, 1987). In addition, the Commission has permitted new registered
holding companies to retain passive investments which, although not meeting the
functional relationship test, could nevertheless be acquired under the standards
of Section 9(c)(3) of the Act.
In 1997, the Commission adopted Rule 58,(39) which conditionally exempts
from the pre-approval requirements of Sections 9(a) and 10 of the Act the
acquisition by a registered holding company of securities of companies engaged
in certain specified categories of "energy-related" businesses which the
-------------------
39 "Exemption of Acquisition by Registered Public-utility Holding Companies
of Securities of Non-utility Companies Engaged in Certain Energy-related and
Gas-related Activities," Holding Co. Act Release No. 26667 (Feb. 14, 1997)
("Rule 58 Release").
42
Commission has determined, on the basis of experience, are so closely related to
the business of a public-utility company as to be considered in the ordinary
course of a public utility business. In adopting Rule 58, the Commission "has
sought to respond to developments in the industry by expanding its concept of a
functional relationship." Rule 58 Release at 11. Importantly, Rule 58 does not
require that non-utility businesses of the type covered by the rule be
"functionally" related to a holding company's utility operations at all.
As set forth more fully in Exhibit I, the direct and indirect non-utility
subsidiaries and investments of CILCORP meet the Commission's standards for
retention under Section 11(b)(1) or Section 9(c)(3), as applicable, with certain
exceptions that are noted in Exhibit I. Certain of CILCORP's non-utility
subsidiaries fit within the definition of "energy-related company" under Rule
58. Rule 58 provides in section (a)(1)(ii) thereof that investments in
non-utility activities that are exempt under Rule 58 cannot exceed 15% of the
consolidated capitalization of the registered holding company. In its statement
supporting the adoption of the Rule, the Commission stated:
The Commission believes that all amounts that have actually been invested
in energy-related companies pursuant to commission order prior to the date
of effectiveness of the Rule should be excluded from the calculation of
aggregate investment under Rule 58. The Commission also believes it is
appropriate to exclude from the calculation all investments made prior to
that date pursuant to available exemptions. (Rule 58 Release at 50-51).
Moreover, in recent merger orders, the Commission has also excluded from
the Rule 58 investment limit investments in "energy-related companies" acquired
and held by exempt holding companies prior to the time they registered or were
acquired by a registered holding company, on the ground that the restrictions of
Section 11(b)(1) are applicable to registered holding companies and not to
exempt holding companies. Because CILCORP is an exempt holding company, none of
the investments it has heretofore made in non-utility businesses was pursuant to
Commission order. Accordingly, investments made by CILCORP in "energy-related
companies" prior to the effective date of the Transaction should not be counted
in the calculation of the 15% investment limitation.(40)
(e) Retention of CIGI as Subsidiary of CILCO.
----------------------------------------
Section 11(b)(2) of the Act requires the Commission to
ensure that "the corporate structure or continued existence of any company in
the holding company system does not unduly or unnecessarily complicate the
structure, or unfairly or inequitably distribute voting power among security
holders, of the holding company system." Section 11(b)(2) also directs the
Commission to require each registered holding company "to take such steps as the
Commission shall find necessary in order that such holding company shall cease
to be a holding company with respect to each of its subsidiary companies which
itself has a subsidiary company which is a holding company," in other words, to
eliminate so-called "great-grandfather" holding companies. As a result of the
Transaction, and assuming the continued interposition of CILCORP as an
--------------------
40 See, e.g., New Century Energies, Inc., 53 S.E.C. 54 at 82 (1997).
43
intermediate holding company, Ameren will become a "great-grandfather" holding
company with respect to CIGI. If CILCORP were eliminated as an intermediate
holding company, or if CIGI is again determined to be an EWG, the
"great-grandfather" relationship between Ameren and CIGI would no longer exist.
However, as discussed above in Item 3.2, Ameren is proposing to retain CILCORP
as an intermediate holding company for the indefinite future and is also
proposing to acquire CIGI as an additional public utility subsidiary (by causing
CIGI to relinquish its EWG status).(41)
Ameren could also eliminate the "great-grandfather" relationship with CIGI
by causing CILCO to distribute the common stock of CIGI to CILCORP or otherwise
transfer the stock of CIGI to another company in the Ameren system. In this
connection, it is Ameren's intention ultimately to move CIGI out from under
CILCO in order to achieve a clearer delineation between CILCO's regulated
utility business and CIGI's unregulated business. However, such action would
require approval by this Commission, and may require other regulatory approvals
and corporate actions as well. Ameren is also examining whether such a change in
corporate structure would result in any adverse federal and/or state tax
consequences and/or would negatively affect CILCO's ability to service its debt.
Ameren has not completed its analysis of these issues or determined the
likelihood or timing of receiving necessary regulatory approvals for such
action. Accordingly, Ameren proposes that CIGI remain as a subsidiary of CILCO
for the indefinite future.
In any event, the continued ownership of CIGI by CILCO does not implicate
any of the abuses that Section 11(b)(2) of the Act was intended to prevent.
These abuses, facilitated by the pyramiding of holding company groups, involved
the diffusion of control and the creation of different classes of debt or stock
with unusual voting rights. These abuses are not present in this case. CIGI is
wholly-owned by CILCO; it does not have any other class of equity securities or
any third-party debt outstanding. In fact, for the time being at least, its
assets will continue to secure first mortgage bonds issued by CILCO. Moreover,
at least through the end of 2004 (as is likely to be extended through the end of
2006), all of CIGI's generating capacity will be dedicated under the PSA to
serving the needs of CILCO; it will not have any retail customers who are
subject to cost of service rates. The continued ownership of CIGI by CILCO will
therefore enhance operational efficiency and coordination. Compare Energy East
Corp., et al., Holding Co. Act Release No. 27224 (Aug. 31, 2000) (permitting
Central Maine Power Company, a third tier subsidiary of Energy East, to retain
ownership of certain single purpose utility subsidiaries whose assets are
directly related to the utility operations of their parent); and Exelon
Corporation, Holding Co. Act Release No. 27256 (Oct. 19, 2000) (permitting
retention of third tier generating utility subsidiary that was created as part
of implementation of state restructuring plans and certain other fourth and
lower tier generating companies that had been in existence for a long period of
time).
-------------------
41 Although the acquisition of CIGI as an EWG would be exempt under
Section 32(g) of the Act, it could result in Ameren exceeding the limitation
under Rule 53(a)(1) on use of proceeds of authorized financing to acquire
interests in EWGs. After the Transaction closes, Ameren may file a separate
application to request relief from the investment limitation under
Rule 53(a)(1), and, assuming that such relief is obtained, may then choose to
seek a new determination from the FERC that CIGI is an EWG.
44
b. Section 10(c)(2).
----------------
The Transaction will "serve the public interest by tending toward
the economical and efficient development of an integrated public utility
system." It will therefore satisfy the requirements of Section 10(c)(2) of the
Act.
The Transaction will produce economies and efficiencies that are
sufficient (given the size of the Transaction) to satisfy the standards of
Section 10(c)(2) of the Act. Although some of the anticipated economies and
efficiencies will be fully realized only in the longer term, they are properly
considered in determining whether the standards of Section 10(c)(2) have been
met. See AEP, 46 S.E.C. at 1320 - 1321. Some potential benefits cannot be
precisely estimated; nevertheless, they too are entitled to be considered. As
the Commission has observed, "[s]pecific dollar forecasts of future savings are
not necessarily required; a demonstrated potential for economies will suffice
even when these are not precisely quantifiable." Centerior Energy Corp., 49
S.E.C. at 480.
Because of its size, with more than 1.5 million electric customers and
more than 300,000 gas customers, Ameren has greater purchasing power for
equipment, materials, supplies, services and fuels than CILCO. Ameren believes
that its size advantage will help to stabilize CILCO's cost of operations during
a period of service improvements. Likewise, AmerenUE's and AmerenCIPS' customers
will benefit from the Transaction. Such benefits will be derived from greater
economies of scale and the ability to maximize the utilization of existing
systems and infrastructure.
Specifically, the Transaction will produce savings in the energy delivery
business through purchasing economies, elimination of duplicate energy delivery
services and limited staff reductions. Ameren estimates that ongoing pre-tax net
savings associated with the energy delivery function will range from $500,000 to
$3.2 million per year in the first four years (2003 through 2006). Ameren also
believes that there will be opportunities to achieve substantial savings in
power supply through the integration of CIGI's and Ameren's generation functions
in such areas as fuel purchasing, transportation and handling, joint planning,
joint plant maintenance programs, and spare parts inventory management. Ameren
also believes that additional savings can be achieved through administrative and
corporate purchasing economies, elimination of duplicate administrative and
corporate services, and limited staff reductions.
Ameren estimates that, in order to achieve the projected level of savings,
approximately $25 million in one-time transition expenses, along with
approximately $14 million of capital expenditures will be incurred. These
expenditures are required principally to enable CILCO to utilize Ameren's
systems and to pay for relocation and severance costs and facilities
integration.
Although these quantifiable savings are modest in relation to savings that
have been projected in other recent merger cases approved by the Commission,
they are nevertheless meaningful in relation to the overall Transaction size.
45
The Transaction should also have a beneficial effect on CILCO's ability to
raise capital on reasonable terms and on the cost of future debt capital since
Ameren has a higher credit rating than AES.(42) It is expected, for example,
that CILCO will achieve savings in the cost of short-term debt through its
ability to borrow from Ameren, which should enable CILCO to terminate or reduce
the size of its existing external credit facilities, with a reduction in
associated facility fees. CILCO's existing ratings for senior secured debt,
preferred stock and commercial paper are not expected to be adversely affected
as a result of the Transaction.(43)
3.4 Section 10(f).
-------------
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect of such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be detrimental
to the carrying out of the provisions of section 11.
As previously stated, the Transaction is subject to the approval of the
ICC. In addition, closing conditions under the Stock Purchase Agreement are
designed to assure compliance with all other applicable State laws.
3.5 Intra-system Transactions.
-------------------------
The sale of goods and services to CILCORP and its subsidiaries following
the effective date of the Transaction will be carried out in accordance with the
requirements and provisions of Section 13(b) of the Act and Rules 87, 90 and 91
unless otherwise authorized by the Commission by order or by rule. These include
the Service Agreements and the Fuel Services Agreement.
The acquisition of CILCORP will not necessitate any change in the
organization of Ameren Services, the type and character of the companies to be
served, the methods of allocating costs to associate companies, or the scope or
character of the services to be rendered. However, it is contemplated that
certain employees of CILCORP and its subsidiaries may be transferred to and
become employees of Ameren Services after the Transaction closes.
3.6 Rule 54 Analysis.
----------------
Rule 54 provides that the Commission shall not consider the effect of the
capitalization or earnings of any EWG or "foreign utility company" ("FUCO"), as
-------------------
42 As previously noted, Ameren's senior unsecured debt is rated A2 by Moody's
and A by S&P. AES's senior unsecured debt is rated Ba3 by Moody's and B+ by S&P.
43 Following the announcement of the Transaction in April 2002, S&P and
FitchRatings both indicated in press releases that the Transaction is viewed as
a positive influence on CILCO's credit worthiness.
46
defined in Sections 32 and 33, respectively, in which a registered holding
company holds an interest in determining whether to approve any transaction
unrelated to any EWG or FUCO if the requirements of Rule 53 (a), (b) and (c) are
satisfied. These standards are met.
Rule 53(a)(1): Ameren's "aggregate investment" (as defined in
Rule 53(a)(1)) in EWGs is currently $374,632,130, or approximately 21.6% of
Ameren's "consolidated retained earnings" (also as defined in Rule 53(a)(1)) for
the four quarters ended June 30, 2002 ($1,733,028,750). On a pro forma basis, to
take into account Ameren's investment in AES Medina Valley, Ameren's "aggregate
investment" would be $397,732,130, or about 23.0% of "consolidated retained
earnings" for the four quarters ended June 30, 2002. Ameren does not currently
hold an interest in any FUCO.
Rule 53(a)(2): Ameren will maintain books and records enabling it to
identify investments in and earnings from each such EWG and FUCO in which it
directly or indirectly acquires and holds an interest. Ameren will cause each
domestic EWG in which it acquires and holds an interest, and each foreign EWG
and FUCO that is a majority-owned subsidiary, to maintain its books and records
and prepare its financial statements in conformity with U.S. generally accepted
accounting principles ("GAAP"). All of such books and records and financial
statements will be made available to the Commission, in English, upon request.
Rule 53(a)(3): No more than 2% of the employees of Ameren's domestic
public utility subsidiaries (including CILCO and CIGI) will, at any one time,
directly or indirectly, render services to EWGs and FUCOs.
Rule 53(a)(4): Ameren will submit a copy of each Application or
Declaration, and each amendment thereto, relating to any EWG or FUCO, and will
submit copies of any Rule 24 certificates required thereunder, as well as a copy
of the relevant portions of Ameren's Form U5S, to each of the public service
commissions having jurisdiction over the retail rates of Ameren's domestic
public utility subsidiaries.
In addition, Ameren states that the provisions of Rule 53(a) are not made
inapplicable to the authorization herein requested by reason of the occurrence
or continuance of any of the circumstances specified in Rule 53(b). Rule 53(c)
is inapplicable by its terms.
ITEM 4. REGULATORY APPROVALS.
--------------------
4.1 Illinois Commerce Commission.
----------------------------
The Transaction requires approval by the ICC. Under the applicable
provisions of Illinois law, in order to approve the Transaction, the ICC must
find that: the Transaction will not diminish CILCO's ability to provide
adequate, reliable, efficient, safe and least-cost public utility service; the
Transaction will not result in the unjustified subsidization of non-utility
activities by CILCO or its customers; the costs and facilities of CILCO are
fairly and reasonably allocated between utility and non-utility activities in
such a manner that the ICC may identify those costs and facilities which are
properly included by the utility for ratemaking purposes; the Transaction will
not significantly impair CILCO's ability to raise necessary capital on
47
reasonable terms or to maintain a reasonable capital structure; CILCO will
remain subject to all applicable laws, regulations, rules, decisions and
policies governing the regulation of Illinois public utilities; the Transaction
is not likely to have a significant adverse effect on competition in those
markets over which the ICC has jurisdiction; and the Transaction is not likely
to result in any adverse rate impacts on retail customers. In addition, the
authorization of the ICC is required for CILCO to enter into the Services
Agreement and the Fuel Services Agreement. A copy of the application filed with
the ICC, including the Proposed Acquisition Conditions, is filed herewith as
Exhibit D-1.
4.2 Federal Energy Regulatory Commission.
------------------------------------
Under Section 203 of the Federal Power Act, the FERC is directed to
approve a merger if it finds such merger consistent with the public interest. In
reviewing transactions under the standards of Section 203, the FERC generally
evaluates: whether the merger will adversely affect competition; whether the
merger will adversely affect rates; and whether the merger will impair the
effectiveness of regulation. A copy of the application filed by Ameren and
CILCO(44) with the FERC requesting approval of the Transaction under the Federal
Power Act is filed herewith as Exhibit D-3.
4.3 HSR Act.
-------
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Transaction may not be consummated until Ameren and AES file notifications and
provide certain information to the FTC and the DOJ and specified waiting period
requirements are satisfied. Even after the HSR Act waiting period expires or
terminates, the FTC or the DOJ may later challenge the transaction on antitrust
grounds. If the transaction is not completed within 12 months after the
expiration or earlier termination of the initial HSR Act waiting period, the
parties would be required to submit new information under the HSR Act and a new
waiting period would begin.
4.4 Federal Communications Commission.
---------------------------------
In connection with the Transaction, CILCO will file an application with
the Federal Communications Commission to request the transfer of various
communications licenses that it holds to Ameren Services.
Except as described above, no other state or federal commission, other
than this Commission, has jurisdiction over the proposed Transaction.(45)
-------------------
44 AES Medina Valley is also an applicant on the joint application filed with
FERC since the transfer of its facilities is also subject to Section 203 of the
Federal Power Act.
45 By order made effective June 23, 2002, the Missouri Public Service
Commission ruled that it does not have jurisdiction over the Transaction. In the
Matter of the Proposed Acquisition of Cilcorp, Inc. by Ameren Corporation, Case
No. EO-2002-1082
48
ITEM 5. PROCEDURE.
---------
The Applicants request that the Commission publish a notice under Rule 23
with respect to the filing of this Application/Declaration as soon as
practicable, and issue an order approving the Application/Declaration as soon as
its rules permit after the end of the required notice period. The Applicants
request that there should not be a 30-day waiting period between issuance of the
Commission's order and the date on which the order is to become effective; waive
a recommended decision by a hearing officer or other responsible officer of the
Commission; and consent to the participation by the Division of Investment
Management in the preparation of the Commission's decision and/or order, unless
the Division of Investment Management opposes the matters proposed herein.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
---------------------------------
a. Exhibits.
--------
A-1 Articles of Incorporation of CILCORP Inc. as amended
effective November 15, 1999. (Incorporated by reference to
Exhibit 3 to Annual Report of Form 10-K for the year ended
December 31, 1999, File No. 1-8946).
A-2 Bylaws of CILCORP Inc. as amended and restated effective
October 18, 1999. (Incorporated by reference to Exhibit (3)a
to Annual Report of Form 10-K for the year ended
December 31, 1999, File No. 1-8946).
A-3 Articles of Incorporation of Central Illinois Light Company,
as amended April 28, 1998. (Incorporated by reference to
Exhibit (3) to Annual Report of Form 10-K for the year ended
December 31, 1998, File No. 1-8946).
A-4 Bylaws of Central Illinois Light Company, as amended
effective April 1, 1999. (Incorporated by reference to
Exhibit (3)a to Annual Report of Form 10-K for the year
ended December 31, 1999, File No. 1-8946).
A-5 Articles of Incorporation of Central Illinois Generation,
Inc. (Previously filed).
A-6 Bylaws of Central Illinois Generation, Inc. (Previously
filed).
A-7 Indenture, dated as of October 18, 1999, between Midwest
Energy, Inc. and The Bank of New York, as Trustee, and First
Supplemental Indenture, dated as of October 18, 1999,
between CILCORP Inc. and The Bank of New York. (Incorporated
by reference to exhibits 4.1 and 4.2 of Registration
49
Statement on Form S-4 filed by CILCORP on November 5, 1999
in File No. 333-90373).
B-1 Stock Purchase Agreement, dated as of April 28, 2002, by and
between The AES Corporation and Ameren Corporation.
(Previously filed).
B-2 Fuel Services Agreement between Ameren Fuels and CILCO and
CIGI. (Previously filed).
B-3 Services and Facilities Agreement. (To be filed by
amendment).
C Registration Statement on Form S-4 with respect to CILCORP
Senior Notes, filed by CILCORP on November 5, 1999.
(Incorporated by reference to File No. 333-90373).
D-1 Application to the Illinois Commerce Commission for Approval
of Transaction. (Previously filed - Form SE - Continuing
hardship exemption).
D-2 Order of the Illinois Commerce Commission Approving
Transaction. (To be filed by amendment).
D-3 Joint Application to the Federal Energy Regulatory
Commission for Approval of Transaction. (Previously filed -
Form SE - Continuing hardship exemption).
D-4 Order of the Federal Energy Regulatory Commission. (To be
filed by amendment).
E-1 Organizational Chart of Ameren and its Subsidiaries.
(Previously filed -Form SE - Required paper format filing).
E-2 Organizational Chart of CILCORP and its Subsidiaries.
(Previously filed - Form SE - Required paper format filing).
E-3 Electric Service Territory Map. (Previously filed - Form SE
- Required paper format filing).
E-4 Gas Service Territory Map. (Previously filed - Form SE -
Required paper format filing).
E-5 Electric Transmission Facilities Maps. (Included in Exhibit
D-3 hereto as Exhibit K).
F Opinion of counsel to Ameren Corporation. (To be filed by
amendment).
50
G Proposed form of Federal Register notice. (Previously
filed).
H Severance Study: Loss of Economies from Divestiture of
Combined Ameren/CILCORP Gas Utility Business into a
Stand-Alone Company. (To be filed by amendment).
I Description of and Legal Basis for Retention of Non-Utility
Subsidiaries and Investments of CILCORP. (Previously filed).
J Fairness Opinion of Goldman, Sachs & Co. (Previously filed).
b. Financial Statements.
--------------------
FS-1 Consolidated Balance Sheet and Statement of Income of Ameren
Corporation as of and for the year ended December 31, 2001.
(Incorporated by reference to the Annual Report on Form 10-K
of Ameren Corporation for the year ended December 31, 2001,
in File No. 1-14756).
FS-2 Consolidated Balance Sheet and Statement of Income of Ameren
Corporation as of and for the six months ended June 30,
2002. (Incorporated by reference to the Quarterly Report on
Form 10-Q of Ameren Corporation for the period ended June
30, 2002, in File No. 1-14756).
FS-3 Consolidated Balance Sheet and Statement of Income of
CILCORP Inc. as of and for the year ended December 31, 2001.
(Incorporated by reference to the Annual Report on Form 10-K
of CILCORP Inc. for the year ended December 31, 2001, in
File No. 1-8946).
FS-4 Consolidated Balance Sheet and Statement of Income of
CILCORP Inc. as of and for the six months ended June 30,
2002. (Incorporated by reference to the Quarterly Report on
Form 10-Q of CILCORP Inc. for the period ended June 30,
2002, in File No. 1-8946).
FS-5 Consolidated Balance Sheet and Statement of Income of
Central Illinois Light Company as of and for the year ended
December 31, 2001. (Incorporated by reference to the Annual
Report on Form 10-K of Central Illinois Light Company for
the year ended December 31, 2001, in File No. 1-2732).
FS-6 Consolidated Balance Sheet and Statement of Income of
Central Illinois Light Company as of and for the six months
51
ended June 30, 2002. (Incorporated by reference to the
Quarterly Report on Form 10-Q of Central Illinois Light
Company for the period ended June 30, 2002, in File
No. 1-2732).
FS-7 Balance Sheet of Central Illinois Generation, Inc. (To be
filed by amendment).
FS-8 Unaudited Pro Forma Combined Condensed Financial Statements
of Ameren Corporation. (Filed herewith).
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
---------------------------------------
The Transaction does not involve a "major federal action" nor will it
"significantly affect the quality of the human environment" as those terms are
used in section 102(2)(C) of the National Environmental Policy Act. The
Transaction will not result in changes in the operation of the applicant or its
subsidiaries that will have an impact on the environment. The applicant is not
aware of any federal agency that has prepared or is preparing an environmental
impact statement with respect to the Transaction.
52
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, as amended, the undersigned companies have duly caused this amended
Application/Declaration to be signed on their behalf by the undersigned
thereunto duly authorized.
AMEREN CORPORATION
AMEREN ENERGY FUELS AND SERVICES
COMPANY
By: /s/Steven R. Sullivan
------------------
Name: Steven R. Sullivan
Title: Vice President, General Counsel,
and Secretary
CILCORP INC.
CENTRAL ILLINOIS GENERATION, INC.
By: /s/Leonard M. Lee
Name: Leonard M. Lee
Title: President
CENTRAL ILLINOIS LIGHT COMPANY
By: /s/Leonard M. Lee
Name: Leonard M. Lee
Title: Chairman of the Board and
Chief Executive Officer
Date: October 28, 2002