-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KO05k+bPA4+pPPqihbq8/Hrj9DiLPWxPIkGghU1a3Q6rd6BrBxlCb2+aTpmcBFTC p2nrar1QjuGxO26RppLwZg== 0000950120-03-000048.txt : 20030128 0000950120-03-000048.hdr.sgml : 20030128 20030128171916 ACCESSION NUMBER: 0000950120-03-000048 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20030128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMEREN CORP CENTRAL INDEX KEY: 0001002910 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 431723446 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1/A SEC ACT: 1935 Act SEC FILE NUMBER: 070-10078 FILM NUMBER: 03528483 BUSINESS ADDRESS: STREET 1: 1901 CHOUTEAU AVE STREET 2: MC 1370 CITY: ST LOUIS STATE: MO ZIP: 63166-6149 BUSINESS PHONE: 431723446 MAIL ADDRESS: STREET 1: 1901 CHOUTEAU AVE STREET 2: MC 1370 CITY: ST LOUIS STATE: MO ZIP: 63103 U-1/A 1 d131610.txt AMENDMENT NO. 2 TO FORM U-1 (As filed on January 28, 2003) File No. 70-10078 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ________________________________________ FORM U-1/A AMENDMENT NO. 2 TO APPLICATION OR DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ______________________________________ 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) _______________________________________ AMEREN CORPORATION (Name of top registered holding company parent) _____________________________________ Steven R. Sullivan Vice President Regulatory Policy, General Counsel and Secretary Ameren Services Company 1901 Chouteau Avenue St. Louis, Missouri 63103 (Name and address of agent for service) ________________________________________________________ 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 875 Third Avenue St. Louis, Missouri 63103 New York, New York 10022 William J. Harmon, Esq. William C. Weeden Jones Day Skadden, Arps, Slate, Meagher 77 West Wacker Drive & Flom, L.L.P. Chicago, Illinois 60601-1692 1440 New York Avenue, NW Washington, DC 20005 2 TABLE OF CONTENTS PAGE ---- ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION...................................1 1.1 Introduction....................................................1 1.2 Description of Ameren and Its Subsidiaries......................2 1.3 Description of CILCORP and Its Subsidiaries.....................5 a. CILCO's Electric Utility Operations.........................5 b. CILCO's Gas Utility Operations..............................7 c. Regulation of CILCO and CIGI................................8 d. CILCORP's Non-Utility Businesses............................8 e. Capitalization of CILCORP and Subsidiaries..................9 1.4 Principal Terms of Stock Purchase Agreement....................10 1.5 Operation of the Combined System Following the Acquisition.....11 1.6 Financing the Purchase Price...................................11 1.7 Affiliate Transactions.........................................11 a. Existing Sales, Service and Construction Contracts.........11 b. Ameren Services............................................13 c. Ameren Fuels...............................................13 1.8 Financing by CILCORP, CILCO and CIGI...........................14 a. External Financing Transactions............................14 (a) CILCORP...............................................14 (i) Short-term Debt.................................14 (ii) Refinancing of CILCORP Senior Notes.............15 (b) CILCO and CIGI........................................15 (i) Short-term Debt.................................16 (ii) Long-term Securities of CIGI....................16 (c) Interest Rate Hedging Transactions....................17 b. Intrasystem Financing Transactions and Guarantees..........19 (a) Long-term and Short-term Securities of CILCORP........19 (b) Long-term and Short-term Securities of CIGI...........19 (c) Short-term Securities of CILCO........................19 (d) Guarantees Issued by CILCORP and Its Subsidiaries.....20 1.9 Organization and Acquisition of Financing Subsidiaries.........20 1.10 Payment of Dividends by CILCORP Out of Capital and Unearned Surplus........................................................22 1.11 Exemption of CILCORP and CILCO as Holding Companies............22 1.12 Reports Pursuant to Rule 24....................................23 ITEM 2. FEES, COMMISSIONS AND EXPENSES.......................................24 ITEM 3. APPLICABLE STATUTORY PROVISIONS......................................24 3.1 General Overview of Applicable Statutory Provisions............24 3.2 Compliance with Section 10(b)..................................26 a. Section 10(b)(1)...........................................27 b. Section 10(b)(2)...........................................31 3 c. Section 10(b)(3)...........................................32 3.3 Section 10(c)..................................................35 a. Section 10(c)(1)...........................................36 (a) The Transaction will be lawful under Section 8........36 (b) The Transaction will not be detrimental to carrying out the provisions of Section 11......................36 (i) Integration of Electric Operations..............37 A. Interconnection.............................37 B. Coordination................................37 C. Single Area or Region.......................39 D. Size........................................40 (ii) Integration of Gas Operations...................40 A. Coordination ..............................41 B. Single Area or Region.......................41 C. Size........................................42 (c) Retention of Combined Gas System......................42 (i) Loss of Economies...............................42 (ii) Same State or Adjoining States..................44 (iii) Size............................................44 (d) Retention of CILCORP's Non-Utility Subsidiaries and Investments.......................................45 (e) Retention of CIGI as Subsidiary of CILCO..............46 b. Section 10(c)(2)...........................................47 3.4 Section 10(f)..................................................48 3.5 Intra-system Transactions......................................49 3.6 Rule 54 Analysis...............................................49 ITEM 4. REGULATORY APPROVALS.................................................50 4.1 Illinois Commerce Commission...................................50 4.2 Federal Energy Regulatory Commission...........................51 4.3 HSR Act........................................................51 4.4 Federal Communications Commission..............................51 ITEM 5. PROCEDURE. 51 ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS....................................52 a. Exhibits...................................................52 b. Financial Statements.......................................54 ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS..............................55 4 The Application/Declaration filed in this proceeding on August 2, 2002, as amended and restated in its entirety by Amendment No. 1, filed October 28, 2002, is hereby further 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(d), 12(f) and 13(b) of the Act and Rules 26(c), 44, 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. - ---------- /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 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). 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 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. ------------------------------------------ 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 - ---------- /5/ In conjunction with the Transaction, Ameren has also agreed to acquire from AES all of the membership interests in AES Medina Valley Cogen (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 Cogen (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. /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, and on July 31, 2002, the FERC issued an order accepting the formation of GridAmerica, LLC as an independent transmission company under the MISO, subject to further compliance filings ordered by the FERC. A compliance filing to facilitate the formation and operation of GridAmerica, LLC as an independent transmission company within the MISO was submitted on November 1, 2002 and - ---------- /7/ Ameren owns interconnecting electric transmission facilities in southeastern Iowa but does not serve any customers in Iowa. 3 conditionally accepted by the FERC in an order dated December 19, 2002./8/ The compliance filing stated that GridAmerica, LLC is scheduled to become operational in April 2003. 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; 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./9/ An organizational chart showing the relationship of Ameren and its subsidiaries is filed herewith as Exhibit E-1. - ---------- /8/ See Alliance Companies, et al., 100 F.E.R.C.P. 61,137 (July 31, 2002) (order accepting formation of GridAmerica, LLC) and Ameren Services Company, et al., 101 F.E.R.C.P. 61,320 (Dec. 19, 2002) (order conditionally accepting compliance filing). /9/ The remaining 40% of the stock of EEI is held equally by two unaffiliated electric utility companies. 4 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 September 30, 2002, Ameren had $11,214,000,000 in total assets, including net property and plant of $8,689,000,000. As of November 12, 2002, Ameren had issued and outstanding 153,613,096 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. ------------------------------------------- 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 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
5 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. 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./10/ 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.11 The transfer of these assets to CIGI may not be completed for several months following closing of the Transaction. Unless a release is obtained, 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")./12/ The restructuring of CILCO is being undertaken - ---------- /10/ As described in Item 3.2(a) below, the FERC has approved the Transaction, conditioned upon, among other things, Ameren's agreement to join the MISO (directly or indirectly through GridAmerica, LLC) and to implement certain transmission system upgrades in order to increase import capability into the control areas of Ameren, CILCO and CWLP. /11/ 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. /12/ 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 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 Illinois Commerce Commission ("ICC")/13/ and the FERC/14/ for the transfer of these assets, and CIGI has received a determination by the FERC that it is an EWG./15/ As part of the restructuring of CILCO, 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./16/ As a condition to the ICC order approving the Transaction (see Item 4, below), Ameren and CILCO have agreed that they will seek timely approval from FERC for an extension of the PSA, on its existing terms, from December 31, 2004 to 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 - ---------- /13/ See Central Illinois Light Company, Docket Nos. 02-0140 (consolidated) and 02-0153 (April 10, 2002), 2002 Ill. PUC LEXIS 414. /14/ See Central Illinois Light Company, 99 F.E.R.C. P. 62,143 (May 28, 2002). /15/ See note 3, supra. Although all necessary regulatory approvals have been obtained for the restructuring of CILCO, the transfer of CILCO's generating assets to CIGI may be delayed for several months after closing of the Transaction in order to enhance CIGI's financing flexibility in the future. Ameren will file a supplemental certificate of notification pursuant to Rule 24 upon completing the restructuring of CILCO if such restructuring takes place after the Transaction closes. If the restructuring of CILCO is not completed in one year following closing of the Transaction, Ameren will file a post-effective amendment in this proceeding to describe what steps it will take in order to complete the transfer and seek any necessary further approvals in connection therewith. /16/ CIGI has filed the PSA with the FERC in a separate proceeding. 7 (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. 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, 8 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 September 30, 2002, CILCORP had $1,877,606,000 in total assets, including total net property, plant and equipment of $900,764,000. 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./17/ The CILCORP Senior Notes are currently rated BB+ by Standard & Poor's ("S&P") and Baa2 by Moody's Investor Service ("Moody's"). At September 30, 2002, CILCORP did not have any committed bank lines or any outstanding short-term borrowings. At September 30, 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 $342,767,000 of long-term debt (including current portion), 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 borrowings and secured credit facilities totaling $104,700,000. At September 30, 2002, CILCO also had in place bank lines totaling $90,000,000, which are used to backstop its commercial paper program, but did not have any commercial paper outstanding. 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. - ---------- /17/ 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 On a consolidated basis, CILCORP's capitalization at September 30, 2002 was as follows:
Common equity $549,537,000 39.02% Preferred stock $41,120,000 2.92% Long-term debt $791,016,000 56.16% Short-term debt (incl. current $26,750,000 1.90% portion of long term debt) ============== ======= Total capitalization $1,408,423,000 100.00%
CILCO's consolidated capitalization at September 30, 2002 was as follows:
Common equity $362,886,000 48.59% Preferred stock $41,120,000 5.51% Long-term debt $316,017,000 42.32% Short-term debt (incl. current $26,750,000 3.58% portion of long term debt) ============ ======= Total capitalization $746,773,000 100.00%
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 September 30, 2002, and based on current estimates of the change in the Base Working Capital amount and of the CapEx Adjustment Amount, the cash paid by 10 Ameren at closing for the common stock of CILCORP would have been at least $500 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. 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./18/ 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 - ---------- /18/ 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. 11 under a service agreement that has been approved by the ICC./19/ 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 11), 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. 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 AES Medina Valley Cogen (No. 4), L.L.C., an intermediate non-utility holding company that indirectly holds all of the membership interests in 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./20/ - ---------- /19/ With one exception, CILCO's non-utility associate companies do not have employees of their own. /20/ 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 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 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,/21/ 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")./22/ 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 - ---------- /21/ See Ameren Energy Fuels and Services Company, Holding Co. Act Release No. 27374. /22/ 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 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%. 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 September 30, 2002, CILCORP did not have any outstanding short-term debt or committed bank lines, although from time to time CILCORP does utilize such facilities. 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. 14 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 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./23/ (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 - ---------- /23/ 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 18). 15 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 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 16 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. 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. CILCORP and CIGI request that the Commission reserve jurisdiction over the investment grade criteria with respect to the undertaking in the previous sentence and commit to file a post-effective amendment in this proceeding on or before September 30, 2003 to seek authorization to continue use such investment grade criteria. It is further 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 17 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 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./24/ - ---------- /24/ 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. 18. 18 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./25/ 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 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. - ---------- /25/ 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. 19 (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 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 20 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./26/ 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 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./27/ 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./28/ 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. - ---------- /26/ 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. /27/ "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. /28/ 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. 21 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./29/ As a result of the push-down of the purchase accounting to CILCORP, the current retained earnings of CILCORP ($39.1 million at September 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 $527 million, most of which will be reflected on CILCORP's balance sheet./30/ 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./31/ 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 - ---------- /29/ 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. /30/ 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. /31/ 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). 22 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./32/ 1.12 Reports Pursuant to Rule 24. --------------------------- Ameren will file certificates of notification pursuant to Rule 24 within 10 days following closing of the Transaction and within 10 days following the completion of the transfer of CILCO's generating assets to CIGI, if such transfer occurs after the closing of the Transaction. In addition, Ameren, 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 Items 1.8 and 1.9 of this Application/Declaration. Such certificates of notification would be filed within 60 days after the end of each of the first three calendar 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 - ---------- /32/ 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). 23 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 (g) 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 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./33/ 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: - ---------- /33/ 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 18. 24 APPLICABLE SECTIONS OF THE ACT DESCRIPTION OF TRANSACTION. AND 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) Issuance of short-term and long-term and 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 Acquisition by Ameren of common stock of (f), 11(b)(1); Rule 51 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 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. 25 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; 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 26 (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./34/ As described elsewhere in this 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 - ---------- /34/ 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 ...."). 27 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 September 30, 2002, Ameren will have consolidated assets of about $13.0 billion, including net utility plant of approximately $9.9 billion. For the twelve months ended December 31, 2001, pro forma combined operating revenues will total approximately $5.3 billion, and for the nine months ended September 30, 2002, pro forma combined operating revenues will total approximately $3.9 billion. The following table compares Ameren after the Transaction to other registered holding company systems that compete with Ameren in the midwest and central U.S. power markets in terms of total assets, operating revenues and electric customers (all data as of and for the year ended December 31, 2001):
System Total Assets Operating Revenues Utility Customers - ($ Millions) ($ Millions) Electric (E)/Gas (G) ------------ ------------ -------------------- Exelon Corp. $34,860 $15,140 E - 5.1 million 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 Corp. $25,910 $9,621 E - 2.6 million G - .24 million Cinergy Corp. $12,300 $12,923 E - 1.5 million G - .5 million Ameren E - 1.7 million (pro forma) $12,516 $5,298 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 28 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. 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 have filed 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. By agreement with the FTC, the DOJ reviewed the Transaction under the HSR Act and, on January 15, 2003, verbally notified Ameren and AES that it had completed its competitive review and would not challenge the Transaction. The competitive impact of the Transaction on wholesale power markets was also considered by the FERC in light of the criteria set forth in FERC's Order No. 592 (hereinafter, the "Merger Policy Statement")/35/ and Order No. 642./36/ Specifically, the FERC has considered 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 initially proposed 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 and around the area traversed by its transmission system. These included 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. - ---------- /35/ 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 FERCP. 61,321 (1997) (codified at 18 C.F.R.ss. 2.26). /36/ 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 As part of a settlement reached in the FERC proceeding with CWLP, Ameren agreed to construct, at its cost, a new 345 kV interconnection between CWLP and Commonwealth Edison Company ("ComEd"), together with an associated transformer, breakers and other equipment, in lieu of the 138 kV line that was originally proposed./37/ Pending completion of construction of the ComEd intertie, estimated at two years, Ameren agreed to hold CWLP harmless from any increased costs resulting from CWLP's inability to purchase economy energy due to transmission constraints on the Ameren and CILCO transmission systems. CWLP has an option to acquire the ComEd interconnection from Ameren at depreciated original cost for a period of fifteen years after it is placed in service. The ICC also considered the effect of the Transaction on competition in those markets over which the ICC has jurisdiction. In order to obtain ICC approval, Ameren and CILCO agreed to accept 25 separate conditions, as a package. Certain of these conditions are intended to promote development of independent generation within Ameren's service territory and to enhance import capability into the Ameren and CILCO territories. As to the latter, Ameren has agreed that, within 24 months after the Transaction closes, Ameren is obligated to make the investment needed to increase the simultaneous first contingency incremental transfer capability ("SFITC") into the CILCO control area by at least 192 MW, which can be accomplished by rebuilding approximately 50 miles of 138 kV line between East Springfield, Illinois, and CILCO's Tazewell substation. Ameren has also agreed that it will construct, no later than December 31, 2008, such additional facilities as are needed to increase the SFITC into the CILCO control area by at least an additional 189 MW. In the interim, pending completion of the first series of upgrades, Ameren has agreed to sell to non-affiliated companies 100 MW of power and energy priced at a market value index approved by the ICC for ultimate delivery to retail customers connected to the CILCO distribution system; and, pending completion of the second series of upgrades, Ameren has agreed to sell 50 MW of power and energy on the same basis. By order dated November 21, 2002 (Exhibit D-4 hereto), the FERC conditionally approved the Transaction (as well as Ameren's acquisition of AES Medina Valley). In addition to the transmission upgrades proposed by Ameren, the FERC conditioned its approval on Ameren's commitment to join the MISO. The FERC found that the combination of the transmission upgrades and the interim mitigation measures are sufficient to address any horizontal market power concerns. The FERC further found that, with Ameren's commitment to join the MISO (in which CILCO is already a member), the Transaction is not likely to enhance the ability of the combined system to use its transmission resources to affect electricity prices or power output in electric markets. Finally, the FERC held that, although both Ameren and CILCO own gas distribution facilities, neither currently serves independent generators, and, therefore, neither has the ability to affect the supply of, or prices for, delivered gas to their competitors. 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. - ---------- /37/ The cost to Ameren of the new CWLP-ComEd interconnection will be comparable to the cost of the facilities originally proposed to be installed in order to expand CWLP's import capability. 30 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 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 31 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.). 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. Using current Treasury rates, the amount of the "make whole" premium would be approximately $193 million. Ameren estimates that, if the CILCORP Senior Notes plus the amount of the "make whole" premium (a total of about $668 million) were to be paid with the proceeds of new unsecured debt issued by CILCORP having maturities corresponding to the CILCORP Senior Notes, the after-tax net present value of the increased cost of debt would be $64 million, based on current interest rates for similar debt of similarly rated issuers. Ameren's calculation of this amount, and the assumptions used in the calculation, are set forth on Exhibit K hereto. If 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 32 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 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 September 30, 2002, and the pro forma consolidated capital structure of Ameren (assuming the Transaction and the acquisition of AES Medina Valley Cogen (No. 4) L.L.C. had been consummated on September 30, 2002): 33
Ameren and CILCORP Historical Consolidated Capital Structures (dollars in millions) Ameren CILCORP ------ ------- Common stock equity $4,047 51% $550 39% Preferred securities 194 2% 41 3% Long-term debt 3,484 44% 791 56% Short-term debt, 261 3% 27 2% incl. current portion ------- ------- -------- ------- Total $7,986 100% $1,409 100%
Ameren Pro Forma Consolidated Capital Structure (dollars in millions) (unaudited) Common stock equity $4,267 46% Preferred securities 235 3% Long-term debt 4,376 48% Short-term debt, incl. current portion 289 3% ------ ------ Total $9,167 100.0%
As the foregoing shows, Ameren's pro forma consolidated common equity to total capitalization ratio of 46% will comfortably exceed the "traditionally acceptable 30% level."/38/ 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%. - ---------- /38/ 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. 34 The continued existence of the CILCO stock pledge to secure the CILCORP Senior Notes also will not unduly complicate Ameren's capital structure. Importantly, the continued existence of the CILCO stock pledge will not negatively impact CILCORP's ability to service its existing unsecured debt holders. See Allegheny Energy, Inc., et al., Holding Co. Act Release No. 27579 (Oct. 17, 2002) ("Allegheny"). In Allegheny, the Commission authorized a subsidiary of Allegheny Energy, Inc., Allegheny Energy Supply Company, LLC ("AE Supply"), to issue debt secured in part by a pledge of the stock of certain of its utility subsidiaries. The Commission determined that the financing was necessary in order to enable AE Supply to meet urgent cash requirements relating to its unregulated energy marketing operations and that the granting of security in its assets to some creditors of AE Supply would not prevent the full payment of other creditors of the company. The Commission further found that AE Supply's issuance of secured debt would not harm the holders of Allegheny Energy's common stock, since the amount of the debt was within previously authorized limits In the present case, the CILCORP Senior Notes are already outstanding; neither CILCORP nor Ameren is seeking any authorization to issue additional debt secured by a pledge of CILCO's common stock. Moreover, CILCORP is not experiencing liquidity problems that could jeopardize its ability to service other debt. The fact that the CILCORP Senior Notes are secured, rather than unsecured, will also not have any negative impact on the holders of Ameren's common stock. In this regard, as shown above, the impact of the Transaction (which includes the assumption of CILCORP's Senior Notes, as well as secured and unsecured debt of CILCO) on Ameren's consolidated capitalization ratios is not material. Common equity will represent approximately 46% of Ameren's pro forma consolidated capitalization, which is well above the traditionally acceptable 30% minimum. 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 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 has been approved by the ICC and the FERC, which ensures that the interests of customers will be adequately protected. The FERC approval, including the FERC's acceptance of mitigation measures proposed by Ameren and Ameren's commitment to join the MISO, ensure 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: 35 (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 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. 36 (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 Association 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 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 37 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 and CILCO have committed, as part of their application to the ICC, to use their best efforts to obtain from FERC authorization to extend the PSA, on its existing terms, through December 31, 2006. Thus, at least through 2006, there will be a high degree of coordination between CIGI and CILCO./39/ AmerenUE and CIGI (and, as well, Ameren Energy Generating, even though it is an EWG) will also have opportunities to coordinate their generating resources through joint planning, joint operation and maintenance programs, and joint management of fuel resources by Ameren Fuels. For example, Ameren Services' Energy Supply Operations Department ("Energy Supply"), which already has responsibility for the dispatch of AmerenUE's and Ameren Energy Generating's power plants, will take over responsibility for the dispatch of CIGI's plants for reliability purposes. Moreover, although CILCO and Ameren will continue to operate in separate control areas, the actual management and staffing of certain control area operations will be combined in Energy Supply in St. Louis, and the information systems utilized for that purpose will be shared. AmerenUE, CIGI and - ---------- /39/ 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. 38 Ameren Energy Generating will also have opportunities to coordinate their generating facilities through power sales under their FERC-authorized market based tariffs. Energy Supply will also manage the operations of the combined transmission systems of AmerenUE, AmerenCIPS and CILCO, and Ameren Services and the Energy Delivery group within CILCO will jointly manage transmission and distribution construction and maintenance programs, call center operations, emergency restoration services, and customer services (i.e., billing and billing information). After the Transaction closes, Ameren intends to take several actions designed to integrate CILCO's and Ameren's power delivery operations. For example, Ameren intends to update and ultimately replace CILCO's customer information system, connect CILCO's call center operations in Peoria to Ameren's other call centers in order to reduce the wait time on emergency services, make its existing electric and gas training facilities available to CILCO's employees, and make its various outage analysis programs (Supervisory Control and Data Acquisition, Outage Analysis, AM/FM Digital Mapping, Mobile Data, Transformer Load Management, and possibly Network Meter Reading) available to CILCO. CILCO will also gain access to Ameren's significantly greater human resources, specialized equipment and critical spare parts used in responding to emergency conditions. Finally, 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 39 (Missouri and Illinois) in which Ameren already operates. Moreover, as 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./40/ 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: - ---------- /40/ 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. 40 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 Panhandle) and Gulf Coast onshore and offshore (Louisiana and Texas) producing areas and, to a lesser 41 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 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 42 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 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 has prepared an analysis (the "Divestiture Study") that quantifies the estimated economic impact of a divestiture of the combined gas operations of AmerenUE, AmerenCIPS and CILCO into a new, stand-alone company ("New GasCo"). The Divestiture Study (Exh. H hereto), which uses data for the twelve months ended December 31, 2001, shows that a divestiture of the combined gas operations would result in an increase in annual operating costs (excluding income taxes) of approximately $50.2 million,/41/ which is equal to approximately 8.35% of gas operating revenues, 9.05% of gas operating revenue deductions, 106.89% of gross gas income and 176.21% of net gas income./42/ 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. These lost economies would be offset only in part by the quantifiable benefits ($6.1 million in the first year) expected to be derived from a combination of the gas operations. The Divestiture Study also indicates that in order to recover these lost economies, New GasCo would need to increase customer rates by about 13.02% ($78.3 million) in order to provide an 8.70% rate of return on rate base, which is based on the weighted average cost of capital of AmerenUE, AmerenCIPS and CILCO. In the absence of rate relief, the Divestiture Study concludes that the lost economies would result in a negative 0.38% rate of return on rate base. - ---------- /41/ It is estimated that a spin off of New GasCo to the public following Ameren's acquisition of CILCORP would result in federal and state income taxes of $18.3 million (based on data as of December 31, 2001). /42/ The Commission has indicated that it will no longer require a comparison of resulting loss ratios to those of earlier precedent. CP&L Energy, Inc., Holding Co. Act Release No. 27284 (Nov. 27, 2000), fn. 40. 43 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 had another opportunity to consider this issue in connection with its review of the Transaction. (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. (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. 44 (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,/43/ 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 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). - ---------- /43/ "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"). 45 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./44/ (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 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 upon or following closing of the Transaction)./45/ 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 - ---------- /44/ See, e.g., New Century Energies, Inc., 53 S.E.C. 54 at 82 (1997). /45/ 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. 46 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). 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. 47 Specifically, the Transaction will produce savings in the energy delivery business through purchasing economies, elimination of duplicate energy delivery services (such as transmission and distribution system maintenance programs, call center operations, customer services, etc.) 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. Moreover, Ameren expects that the aggregate of all potential savings, as described above, will exceed the cost to achieve such savings and that the Transaction will be accretive to earnings. 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./46/ 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./47/ 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. - ---------- /46/ 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. /47/ 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. 48 As previously indicated, the Transaction has been approved by 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 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 $406, 397,430, or approximately 23.1% of Ameren's "consolidated retained earnings" (also as defined in Rule 53(a)(1)) for the four quarters ended September 30, 2002 ($1,757,119,306). On a pro forma basis, to take into account Ameren's investment in AES Medina Valley, Ameren's "aggregate investment" would be $429,497,430, or about 24.4% of "consolidated retained earnings" for the four quarters ended September 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 49 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 has been approved by the ICC by order dated December 4, 2002, subject to certain conditions. In accordance with the requirements of Section 7-204 of the Illinois Public Utilities Act, the ICC held that: (a) the Transaction will not diminish CILCO's ability to provide adequate, reliable, efficient, safe and least-cost public utility service; (b) the Transaction will not result in the unjustified subsidization of non-utility activities by CILCO or its customers; (c) the costs and facilities of CILCO are fairly and reasonably allocated between utility and non-utility activities in a manner such that the ICC may identify those costs and facilities which are properly included by the utility for ratemaking purposes; (d) the Transaction will not significantly impair CILCO's ability to raise necessary capital on reasonable terms or to maintain a reasonable capital structure; (e) CILCO will remain subject to all applicable laws, regulations, rules, decisions and policies governing the regulation of Illinois public utilities; (f) the Transaction is not likely to have a significant adverse effect on competition in those markets over which the ICC has jurisdiction; and (g) the Transaction is not likely to result in any adverse rate impacts on retail customers. The ICC also authorized CILCO to enter into the Services Agreement and the Fuel Services Agreement and to maintain certain books and records outside Illinois and approved CILCO's post-closing capitalization. As previously indicated, in order to obtain ICC approval of the Transaction, Ameren and CILCO agreed to 25 separate conditions, as a package. These conditions are set forth in Appendix A to the ICC order. As described in Item 3.2(a), above, several of these conditions are intended to address competition concerns. Ameren and CILCO also agreed, among other actions, to expend best efforts to ensure that their Illinois transmission systems and power markets will be under the control of a single, fully-operational, FERC-approved regional transmission organization by December 31, 2004; to seek timely approval from the FERC of an extension of the CILCO-CIGI PSA from December 31, 2004 to December 31, 2006; and to dissolve CILCORP as soon as reasonably practicable after all the indebtedness and other liabilities for which CILCORP is the obligor is paid or otherwise satisfied. In addition, the ICC has authorized CILCO to transfer its generation assets to CIGI./48/ - ---------- /48/ See note 13, supra. 50 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 FERC's order conditionally approving the Transaction (and related acquisition of AES Medina Valley) under the Federal Power Act is filed herewith as Exhibit D-4. The findings of the FERC with respect to the impact of the Transaction on competition have been summarized in Item 3.2(a), above. In addition, the FERC has authorized CILCO to transfer its generation assets to CIGI./49/ 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. Both Ameren and AES have made the required HSR Act filings. On January 15, 2003, following the expiration of the HSR Act waiting period, the DOJ, which reviewed the Transaction pursuant to an agreement with the FTC, verbally notified Ameren and AES that it had completed its competitive review and would not challenge the Transaction. 4.4 Federal Communications Commission. --------------------------------- In connection with the Transaction, the Federal Communications Commission has authorized CILCO to transfer 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./50/ ITEM 5. PROCEDURE. --------- The Commission has issued a notice of the filing of the Application/ Declaration, and no request for hearing was made. The Applicants request that the Commission issue an order approving the Application/Declaration as soon as - ---------- /49/ See note 14, supra. /50/ 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 51 practicable. The Applicants further request that there 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 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). 52 B-2 Fuel Services Agreement between Ameren Fuels and CILCO and CIGI. (Previously filed). B-3 Services and Facilities Agreement between CILCO and CIGI. (Filed herewith). 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. (Filed herewith). 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. (Filed herewith). 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-1 Opinion of counsel to Ameren Corporation. (Filed herewith). F-2 Opinion of Jones Day, special counsel to Ameren. (Filed herewith). F-3 Opinion of counsel to CILCORP. (Filed herewith). G Proposed form of Federal Register notice. (Previously filed). 53 H Analysis of the Economic Impact of a Divestiture of the Gas Operations of AmerenUE, AmerenCIPs, and CILCO. (Filed herewith). 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). K Calculation of net present value impact of refinancing the CILCORP Notes with proceeds of new unsecured debt. (Filed herewith). 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 nine months ended September 30, 2002. (Incorporated by reference to the Quarterly Report on Form 10-Q of Ameren Corporation for the period ended September 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 nine months ended September 30, 2002. (Incorporated by reference to the Quarterly Report on Form 10-Q of CILCORP Inc. for the period ended September 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 nine months ended September 30, 2002. (Incorporated by reference to the Quarterly Report on Form 10-Q of Central Illinois Light Company for the period ended September 30, 2002, in File No. 1-2732). 54 FS-7 Opening Balance Sheet of Central Illinois Generation, Inc. (To be filed pursuant to Rule 24). FS-8 Unaudited Pro Forma Combined Condensed Financial Statements of Ameren Corporation (revised and updated) (Filed herewith). ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS. --------------------------------------- The Transaction and other related transactions do not involve a "major federal action" nor will they "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 and other related transactions will not result in changes in the operation of the Applicants or their subsidiaries that will have an impact on the environment. The Applicants are not aware of any federal agency that has prepared or is preparing an environmental impact statement with respect to the Transaction and other related transactions. 55 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 behalves 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 Regulatory Policy, 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: January 28, 2003 56 EX-10 3 exhb3.txt EX. B-3 - SERVICES AND FACILITIES AGREEMENT EXHIBIT B-3 SERVICES AND FACILITIES AGREEMENT Dated as of _______________ Among The AES Corporation, Central Illinois Light Company and Each of the Entities Identified on Exhibit A Hereto ARTICLE I Definitions and Interpretation..................... 1 ------------------------------ Section 1.1 Definitions................................................... 1 Section 1.2 Purpose and Intent; Interpretation............................ 2 ARTICLE II Use of Facilities and Services..................... 2 ------------------------------ Section 2.1 Facilities.................................................... 2 Section 2.2 Services...................................................... 4 Section 2.3 Joint Purchasing.............................................. 4 Section 2.4 Cash Management............................................... 4 Section 2.5 Tax Sharing................................................... 5 Section 2.6 Agreements, Etc............................................... 5 ARTICLE III Asset Sales.............................. 5 ----------- Section 3.1 Real Property Transfers....................................... 5 Section 3.2 Tangible Personal Property.................................... 5 Section 3.3 Intangible Assets............................................. 5 Section 3.4 AES Stock..................................................... 5 Section 3.5 Agreements, Etc............................................... 6 ARTICLE IV Charges: Payment......................... 6 ----------------- Section 4.1 Charges....................................................... 6 Section 4.2 Accounting.................................................... 6 Section 4.3 Invoicing, Payment............................................ 7 ARTICLE V Cost Apportionment Methodology..................... 8 ------------------------------ Section 5.1 General Principles............................................ 8 Section 5.2 Fully Distributed Costs....................................... 9 Section 5.3 Costs Charged to/from CILCORP................................. 11 ARTICLE VI Limitations of Liability........................ 12 ------------------------ Section 6.1 No Warranties For Facilities or Services...................... 12 Section 6.2 Limited Warranties For Asset Sales............................ 13 Section 6.3 No Partnership................................................ 13 Section 6.4 No Third Party Beneficiaries.................................. 13 i ARTICLE VII Term.................................. 13 ---- Section 7.1 Term.......................................................... 13 Section 7.2 Termination................................................... 14 Section 7.3 Tax Sharing Agreement......................................... 14 ARTICLE VIII Confidential Information........................ 14 ------------------------ ARTICLE IX Miscellaneous............................. 14 ------------- Section 9.1 Entire Agreement; Amendments................................... 14 Section 9.2 New Parties.................................................... 15 Section 9.3 Assignment..................................................... 15 Section 9.4 Access to Records.............................................. 15 Section 9.5 Partial Invalidity............................................. 15 Section 9.6 Waiver......................................................... 15 Section 9.7 Governing Law.................................................. 16 ii SERVICES AND FACILITIES AGREEMENT THIS SERVICES AND FACILITIES AGREEMENT (this "Agreement") is made and entered into as of the _______________, 2002, among The AES Corporation, a Delaware corporation ("AES"), CILCORP Inc., an Illinois corporation ("CILCORP"), Central Illinois Light Company, an Illinois corporation ("CILCO"), and each of the entities identified on Exhibit A hereto, as such Exhibit A may be amended from time to time in accordance with the provisions of this Agreement. W I T N E S S E T H: WHEREAS, the parties are related by virtue of common ownership, directly or indirectly, of their equity securities by AES; and WHEREAS, the parties believe that the central management of certain services, the provision to each other of certain services and facilities, and the transfer of certain property are or may be efficient and cost-effective, and the parties desire to make provision for these and other transactions as between CILCO and an AES Entity or Entities; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties hereby agree as follows: ARTICLE I Definitions and Interpretation ------------------------------ Section 1.1. Definitions. As used in this Agreement, the following terms shall have the respective meanings set forth below unless the context otherwise requires: "Acquiring Party" means a Party who desires to acquire real property, interests in real property, tangible personal property or Intangible Assets from a Selling Party. "AES Entity" means any of AES and the entities identified on Exhibit A. "ICC" means the Illinois Commerce Commission. "Intangible Assets" mean, for the purposes of this Agreement, items for which costs have been incurred to create future economic benefits that have not been recorded as assets on the Selling Party's financial statements. Intangible Assets include, but are not limited to, operational activities or intellectual property derived from internal research and development efforts. "Investment Guidelines" means the investment guidelines attached hereto as Exhibit B, as such Exhibit may be amended from time to time with the approval of the ICC. "Party" means each, and "Parties" means all, of the entities who are from time to time a party to this Agreement. "Provider" means a Party who has been requested to, and who is able and willing to, furnish facilities, provide services or both to a Requestor under the terms of this Agreement. "Requestor" means a Party who desires to use facilities, receive services or both, and has requested another Party to furnish such facilities, provide such services or both. "Selling Party" means a Party who is willing to sell and transfer real property, interests in real property, tangible personal property or Intangible Assets to an Acquiring Party. "Tax Sharing Agreement" means the AES Group Income Tax Allocation Agreement. Section 1.2. Purpose and Intent; Interpretation. (a) The purposes and intent of this Agreement are to set forth procedures and policies to govern (i) transactions between an AES Entity and CILCO, whether such transactions occur directly or indirectly as the end result of a series of related transactions and (ii) the allocation of certain joint service costs. It is not intended to govern transactions between AES Entities, although such entities may elect to apply the provisions of this Agreement to specific transactions, or to govern transactions between CILCO and its subsidiaries. This Agreement shall be interpreted in accordance with such purposes and intent. (b) The headings of Articles and Sections contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. References to Articles, Sections and Exhibits refer to articles, sections and exhibits of this Agreement unless otherwise stated. Words such as "herein", "hereinafter", "hereof", "hereto", "hereby" and "hereunder", and words of like import, unless the context requires otherwise, refer to this Agreement (including the Exhibits hereto). ARTICLE II Use of Facilities and Services ------------------------------ Section 2.1. Facilities. Upon the terms and subject to the conditions of this Agreement, a Requestor may request a Provider or Providers to make available or provide, and, subject to the provisos at the end of this Section, such Provider or Providers shall make available or provide to such Requestor, the use of: -2- (a) facilities, including, without limitation, office space, warehouse and storage space, transportation facilities, repair facilities, manufacturing and production facilities, fixtures and office furniture and equipment; (b) computer equipment (both stand-alone and mainframe) and networks, peripheral devices, storage media, and software; (c) communications equipment, including, without limitation, audio and video equipment, radio equipment, telecommunications equipment and networks, and transmission and switching capability; (d) vehicles, including, without limitation, automobiles, trucks, vans, trailers, railcars, marine vessels, transport equipment, material handling equipment and construction equipment; and (e) machinery, equipment, tools, parts and supplies; provided, however, that a Provider shall have no obligation to provide any of the foregoing to the extent that such item or items are not available (either because such Provider does not possess the item or the item is otherwise being used); and provided further, it is understood that a Provider has sole discretion in scheduling the use by a Requestor of facilities, equipment or capabilities so as to avoid interference with such Provider's operations. Section 2.2. Services. Upon the terms and subject to the conditions of this Agreement, a Requestor may request a Provider or Providers to provide, and, subject to the provisos at the end of this Section, such Provider or Providers shall provide to such Requestor: (a) Administrative and management services, including, without limitation, accounting (including, without limitation, bookkeeping, billing, accounts receivable administration and accounts payable administration, and financial reporting); audit; executive; finance; insurance; information systems services; investment advisory services; legal; record keeping; secretarial and other general office support; real estate management; security holder services; tax; treasury; and other administrative and management services; (b) personnel services, including, without limitation, recruiting; training and evaluation services; payroll processing; employee benefits administration and processing; labor negotiations and management; and related services; (c) purchasing services, including, without limitation, preparation and analysis of product specifications, requests for proposals and similar solicitations; vendor and vendor-product evaluations; purchase order processing; receipt, handling, warehousing and disbursement of purchased items; contract negotiation and administration; inventory management and disbursement; and similar services; and -3- (d) operational services, including, without limitation, drafting and technical specification development and evaluation; consulting; engineering; environmental; nuclear; construction; design; resource planning; economic and strategic analysis; research; testing; training; customer solicitation, support and other marketing related services; public and governmental relations; and other operational services; provided, however, that a Provider shall have no obligation to provide any of the foregoing to the extent that it is not capable of providing such service (either because such Provider does not have personnel capable of providing the requested service or the service is otherwise being used); and provided further, it is understood that a Provider has sole discretion in scheduling the use by a Requestor of services so as to avoid interference with such Provider's operations. Section 2.3. Joint Purchasing. A Party may also request that another Party or Parties enter into arrangements to effect the joint purchase of goods or services from third parties; provided, however, that if CILCO is so requested to enter into or to participate in such arrangements, it shall do so only if its fully distributed cost for such goods or services is not thereby increased; and provided further, that no Party shall be required to purchase a service which it is otherwise capable of providing or obtaining. In the event that any such arrangements are established, one Party may be designated as, or serve as, agent for the other Parties to the arrangement and may administer the arrangement (including billing and collecting amounts due the vendor(s)) for the other Parties. Section 2.4. Cash Management. The Parties may enter into one or more arrangements providing for the central collection, management, investment and disbursement of cash by a Party. If such an arrangement is established, then: (a) the Parties participating in such arrangement shall establish appropriate intercompany accounts to track the amount of cash transferred and/or received by each Party to such arrangement and the pro rata portion of the earnings received by each such Party from the investment of cash; (b) the Party responsible under the arrangement for the management and investment of such cash shall establish a separate account or accounts for such purpose, which account(s) and the records associated therewith shall clearly indicate that other Parties have an interest in said account(s) and the proceeds thereof and shall not be subject to set-off by the bank or other institution holding the same except to the limited extent of expenses arising from the management, handling and investment of the account(s); and (c) if and to the extent that an account contains cash received from CILCO, such account may be invested, and reinvested, in the investments described in the Investment Guidelines, subject, however, to the need to maintain suitable liquidity in such account in order to meet the cash needs of the Parties participating in the arrangement; it being understood that the Investment Guidelines shall not be the exclusive means by which cash of Parties other than CILCO may be invested. -4- Section 2.5. Tax Sharing. Each Party who is eligible to be included in a consolidated tax return filing by AES shall, by virtue of this Section 2.5, be deemed a party to, and shall observe and comply with the provisions of, the Tax Sharing Agreement. Section 2.6. Agreements, Etc. A Provider and Requestor may evidence their agreement with respect to the availability, provision or use of the facilities, services and activities described in this Article II by entering into an agreement, lease, license or other written memorandum or evidence; provided such agreement, lease, license or other written memorandum or evidence shall not contain terms inconsistent with this Agreement; and further provided that this Section 2.6 shall not be deemed to require any such agreement, lease, license or other written memorandum or evidence. ARTICLE III Asset Sales ----------- Section 3.1. Real Property Transfers. Upon the terms and subject to the conditions of this Agreement, an Acquiring Party may purchase from a Selling Party, and the Selling Party may sell to the Acquiring Party, real property or interests in real property; provided, however, that the value of the real property or interests in the real property proposed to be transferred (as such value is determined in accordance with Section 5.1(a)) shall not exceed $5,000,000 without approval of the specific agreement by the ICC. Section 3.2. Tangible Personal Property. Upon the terms and subject to the conditions of this Agreement, an Acquiring Party may purchase from a Selling Party, and the Selling Party may sell to the Acquiring Party, tangible personal property; provided, however, that the value of the tangible personal property proposed to be transferred (as such value is determined in accordance with Section 5.1(a)) shall not exceed $5,000,000 without approval of the specific agreement by the ICC (it being understood that the foregoing limitation shall not apply to the transfer of tangible personal property by CILCO which is not necessary or useful to CILCO in the performance of its duties to the public); and provided further, that this Section 3.2 shall not apply to joint purchasing arrangements (and the transactions thereunder) entered into pursuant to Section 2.3 of this Agreement. Section 3.3. Intangible Assets. Subject to approval by the ICC of the specific agreement, an Acquiring Party may enter into an agreement with a Selling Party to purchase, and the Acquiring Party may purchase from the Selling Party and the Selling Party may sell to the Acquiring Party pursuant to such agreement, Intangible Assets. Any such Intangible Assets shall be valued in accordance with Section 5.1(c). Section 3.4. AES Stock. Upon the terms and subject to the conditions of this Agreement, AES may issue and sell to CILCO shares of AES's Common Stock for the sole purpose of enabling CILCO to meet its obligations to its directors and employees in respect of compensation (it being understood that CILCO would cause -5- any shares so purchased and received to be reissued to such directors or employees in payment of such compensation obligations). Section 3.5. Agreements, Etc. An Acquiring Party and a Selling Party may evidence their agreement with respect to the sale of real property and/or tangible personal property described in Sections 3.1 or 3.2 by entering into an agreement or other written memorandum or evidence; provided such agreement or other written memorandum or evidence shall not contain terms inconsistent with this Agreement; and further provided that this Section 3.5 shall not be deemed to require any such agreement or other written memorandum or evidence. ARTICLE IV Charges: Payment ---------------- Section 4.1. Charges. (a) Charges for the use of facilities, equipment, capabilities or services under Sections 2.1 and 2.2 shall be determined in accordance with Section 5.1(b); charges for assets sold and transferred under Sections 3.1, 3.2 and 3.4 shall be determined in accordance with the provisions of Section 5.1(a); and charges for assets sold and transferred under Section 3.3 shall be determined in accordance with the provisions of Section 5.1(c). By requesting the use of facilities, equipment, capabilities and/or services, a Requestor shall be deemed to have agreed to pay, and shall pay, to the Provider or Providers the charge determined therefor in accordance with Section 5.1(b). By acquiring real property, interests therein, tangible personal property or Intangible Assets in accordance with the provisions of Article III, an Acquiring Party shall be deemed to have agreed to pay, and shall pay, to the Selling Party the charge determined therefor in accordance with Section 5.1(a) or, in the case of Intangible Assets, Section 5.1(c). (b) Charges related to arrangements under Section 2.3 for the joint purchase of goods or services shall be determined in accordance with Section 5.1(a), in the case of asset transfers, and Section 5.1(b), in the case of services and overhead, administrative and other costs. (c) Charges of third parties related to the establishment and operation of any account or accounts established under Section 2.4 and the investment of the proceeds, and the earning resulting from the investment thereof, shall be allocated to the Parties participating therein based upon the daily balance of cash maintained by each Party in such account or accounts. Charges related to the administration of the account by a Party's personnel shall be determined in accordance with Section 5.1(b). Section 4.2. Accounting. Each Party shall maintain adequate books and records with respect to the transactions subject to this Agreement and shall establish unique account numbers in its general ledger system which shall be used to record the costs to be apportioned to the other Parties. Each Party shall be responsible for maintaining internal controls to ensure the costs associated with transactions covered by this Agreement are properly and consistently allocated and billed in accordance with the terms and provisions of this Agreement. -6- Section 4.3. Invoicing, Payment. Invoicing and payment for the facilities and services specified in Article II, the asset sales specified in Article III or the joint services costs specified in Section 5.3(a) shall be as follows: (a) for the use of facilities, equipment or capabilities specified in Section 2.1 or the provision of services specified in Section 2.2, a Provider shall invoice the Requestor on a monthly basis for the charges therefor as provided in Section 4.1(a), and such invoices shall be payable within thirty days of receipt; (b) for joint purchasing arrangements specified in Section 2.3, a Party participating in any such arrangement shall be invoiced for charges as provided in Section 4.1(b), which invoices will be payable according to the terms set by the vendor(s) providing the purchased goods or services, or if a Party has been selected to administer such arrangement, pursuant to invoices rendered by such Party or the vendor of the goods or services, which invoices will be payable no later than thirty days after receipt; (c) for cash management activities under Section 2.4, (i) the Party responsible for administering the activities shall invoice the other participating Parties for the charges therefor as provided in Section 4.1(c), which invoices shall be payable within thirty days of receipt, or (ii) the charges for such activities may be offset against the cash amounts held thereunder, provided a written statement of such charges and the amount of the offset is provided to the participating Parties monthly; (d) for the tax sharing arrangement specified in Section 2.5, charges and payments shall be made as provided in the Tax Sharing Agreement; (e) for the sale of real property or interests in real property specified in Section 3.1, the Acquiring Party shall pay the charges therefor as provided in Section 4.1(a) to the Selling Party upon the closing of the sale and transfer of such real property or interests therein; (f) for the sale of tangible personal property specified in Section 3.2, the Selling Party shall invoice the Acquiring Party for the charges therefor as provided in Section 4.1(a), and such invoices shall be payable within thirty days of receipt; (g) for the transfer of AES Common Stock specified in Section 3.4, CILCO shall pay the charges therefor as provided in Section 4.1(a) and such payment shall be made to AES concurrently with the issuance and delivery of the shares of such stock; and (h) for joint service costs under Section 5.3(a), CILCORP shall invoice the other Parties for such costs as provided in Section 5.3(c), and such invoices shall be payable within thirty days of receipt. -7- Late payments shall bear interest at a rate per annum equal to the sum of the prime rate of interest as published in the Wall Street Journal, plus 2% per annum, and such interest shall be based on the period of time that the payment is late. ARTICLE V Cost Apportionment Methodology ------------------------------ Section 5.1. General Principles. The following general principles shall be used in setting charges for transactions between CILCO and AES Entities: (a) Sales of Assets. Asset sales between CILCO and an AES Entity shall be charged by the Selling Party to the Acquiring Party at: (i) the fair market value of the transferred asset, as evidenced by (1) the prevailing price for which the same or similar assets are offered for sale to the general public by the Selling Party (e.g., for CILCO, the tariffed charge or other pricing mechanism approved by the ICC) or, if no such prevailing price exists, (2) the price at which nonaffiliated vendors offer the same or similar assets for sale by reference to quoted market prices, independent appraisals or other objectively determinable evidence or, if no such fair market value is objectively or practicably determinable, (ii) the historical cost of the asset to the Selling Party, less all applicable valuation reserves. (b) Use of Facilities or Services. (i) Facilities or services provided by CILCO to an AES Entity shall be charged by the Provider to the Requestor at: (1) the prevailing price for which the facility or service is provided for sale to the general public by the Provider (i.e., the tariffed rate or other pricing mechanism approved by the ICC) or, if no such prevailing price exists, (2) the fully distributed cost (determined as provided in Section 5.2) incurred by the Provider in providing such facility or service to the Requestor. (ii) Facilities or services provided by an AES Entity to CILCO shall be charged by the Provider to the Requestor at: (1) the prevailing price for which the facility or service is provided for sale to the general public by the Provider (i.e., the price charged to nonaffiliates if such transactions with nonaffiliates constitute a substantial portion of such AES Entity's total revenues from such transactions) or, if no such prevailing price exists, (2) an amount not to exceed the fully distributed cost (determined as provided in Section 5.2) incurred in providing such facility or service. (c) Sales of Intangible Assets. Intangible Asset sales between CILCO and an AES Entity shall be charged by the Selling Party to the Acquiring Party (i) under a mechanism to reflect the fair market value of the asset as determined by an appraisal or other fair market value study or, if no such fair market value is objectively or practicably determinable, (ii) at -8- the fully distributed cost incurred to purchase or develop the asset, adjusted to reflect imputed depreciation of, if applicable, and carrying costs on the unrecorded asset. Costs shall be charged to a Party in accordance with these general principles using either a direct charge or an allocation methodology. Costs of assets or services specifically attributable to a Party should be charged directly to such Party. Joint and common costs not specifically attributable to a Party should be charged to the appropriate Parties based on specific allocation methodologies. The Parties intend to develop and implement a set of guidelines to address applications of the foregoing general principles. Section 5.2. Fully Distributed Costs. Costs charged on a fully distributed cost basis shall reflect the amounts of direct labor, direct materials and direct purchased services associated with the related asset or service as provided in subsections (a) and (b). These amounts shall be increased by a portion of indirect costs to reflect labor, administrative and general and other overhead amounts as provided in subsection (c). (a) Direct Costs. Costs incurred that are specifically attributable to a Party shall be directly charged to the appropriate account based on that Party's usage of the provided resource. (i) Direct Labor. Amounts of direct labor charged to a Party shall be based on an employee's actual direct labor rate, reflecting the effects of overtime and nonproductive time. For most employees, direct labor shall be charged to a Party under a positive time reporting methodology under which an employee shall report each pay period the number of hours incurred in performing activities for such Party. Based on the time reported each pay period, the regular, predetermined account distribution for the employee shall be adjusted to reflect the distribution of direct labor charges to the appropriate affiliate account. Some departments or organizations are expected to provide a recurring, predictable level of services to a Party or Parties. For these departments or organizations, annual reviews shall be performed to determine a normal distribution of time to such Party or Parties. The distribution percentages derived from such reviews shall then be used to allocate time with respect to each pay period. For these departments or organizations, direct labor shall be charged to a Party or Parties under an exception time reporting methodology. That is, significant deviations of actual activity from these predetermined percentages shall be reported and shall result in adjustments to the predetermined distribution of direct labor charges to the affiliate accounts. Officers of each Party shall also utilize an exception time reporting methodology. Distribution percentages derived from an annual -9- review for each Officer shall be used to allocate time with respect to each pay period. Significant deviations of actual activity from the predetermined percentages shall be reported and shall result in adjustments to the predetermined distribution of direct labor charges to the affiliate accounts. Overtime shall be reflected in the direct labor rates charged to a Party. For bargaining unit employees, direct labor shall be charged based on the base and overtime pay amounts actually incurred under a Party's collective bargaining agreements. Likewise, for management employees who are compensated for overtime, direct labor shall be charged based on the actual pay amounts incurred for such employees, including overtime. All direct labor charges shall be increased by a factor to reflect nonproductive time. The nonproductive time factor shall be developed annually based on a review of actual nonproductive time incurred for the previous year. The nonproductive time factor reflects time incurred for such items as vacations, holidays, disability, jury duty and other paid absences. (ii) Direct Materials and Purchased Services. Amounts incurred for materials or purchased services directly attributable to a Party shall be charged directly to the appropriate account for that Party using standard voucher account distribution procedures. (iii) Costs of Facilities, Equipment, Machinery, Furniture, and Fixtures. The costs allocated to any Party for the use of a Party's facilities, equipment, machinery, furniture or fixtures shall include an amount to reflect the cost of such assets (e.g., depreciation, operations, maintenance, etc.) and, for owned assets or assets leased under capital leases, a return equal to the rate of return on rate base most recently allowed to CILCO by the ICC. (b) Allocated Costs. Costs incurred that are not specifically attributable to a Party but that have joint benefit to two or more Parties shall be charged to the appropriate functions based on specified allocation methodologies. The allocation methodologies used shall be reasonably based on cost causative measures to ensure an equitable allocation among such Parties. (c) Indirect Costs. The direct and allocated costs apportioned to a Party or Parties shall be increased to reflect indirect labor, administrative and general and other overhead amounts. The indirect costs are not specifically identifiable or attributable to the direct costs incurred on behalf of a Party. (i) Labor Loading. All direct labor charges apportioned to a Party (either apportioned directly or using an allocation methodology) shall be increased by a loading factor to reflect indirect labor-driven costs. For each Party, this loading factor shall be determined annually based on an estimate of indirect labor-driven -10- charges to be incurred for the coming year (adjusted to reflect differences between the estimated and actual amounts incurred in the prior year) as a percentage of total direct labor charges incurred. The labor loading rate pool shall include payroll taxes; medical and dental insurance costs; pension and other postretirement health care benefits costs; incentive compensation plan costs; and employee savings plans' costs. (ii) Information Systems Loading. All direct labor costs apportioned to a Party shall be increased by a loading factor to reflect information systems related costs that benefit all Parties associated with mainframe and local area network usage and operations, hardware and software costs and telecommunications services. For each Party, this loading factor shall be based on the actual costs incurred during the prior year as a percentage of the corresponding actual total direct labor charges incurred in that year. (iii) Common Costs Loading. All direct labor, direct materials, direct purchased services and indirect labor costs (including the information systems loading amounts) apportioned to a Party shall be increased by a loading factor to reflect administrative and general and other overhead amounts, including the overhead costs of each Party's information systems function. For each Party, this loading factor shall be determined annually based on actual administrative and general and other overhead expenses incurred during the prior year as a percentage of actual total operations and maintenance expense incurred in that year. The common costs loading rate pool shall include costs for departments that support other departments that provide services directly to a Party. In addition to the general and administrative costs of the information systems function, representative costs in the common costs pool shall include printing and duplicating services, forms and office supplies, communications services and other similar costs. Section 5.3. Costs Charged to/from CILCORP. CILCORP shall maintain unique account numbers in its general ledger system: Consolidated Pool accounts (as described in Section 5.3(a)) and Unallocated Pool accounts (as described in Section 5.3(b)). All costs incurred by CILCORP and not directly charged to another Party and all costs apportioned and billed to CILCORP by other Parties shall be charged to one of these two types of accounts. (a) Consolidated Pool. The Consolidated Pool shall be charged with applicable costs related to activities that jointly benefit all of the Parties. Each month, the costs accumulated in the Consolidated Pool shall be apportioned and billed to the Parties (other than CILCORP) using a three factor formula methodology. A representative listing of the types of services for which costs may be charged to the Consolidated Pool is as follows: Corporate Services Mail Office and Building -11- Financial and Accounting Services Information Systems Investor Relations Legal Procurement Regulatory Risk Management Secretary's Office Shareholder Services (b) Unallocated Pool. The Unallocated Pool shall be charged with costs that have been determined as not appropriate for apportionment by CILCORP to the other Parties. These costs primarily relate to CILCORP's diversification, political and philanthropic activities. A representative listing of the types of services for which costs may be charged to the Unallocated Pool is as follows: Advertising Corporate Contributions, Public Relations and Lobbying Diversification Efforts (i.e., new business development) Marketing Research and Development Strategic Analysis (c) Three Factor Formula Methodology. Monthly, costs charged to the Consolidated Pool shall be apportioned and billed by CILCORP to the other Parties based on a three factor formula methodology. Under this approach, each such Party is allocated and billed for a portion of the total costs in the Consolidated Pool based on an average of such Party's gross payroll, operating revenues and capital asset amounts relative to the corresponding averages for the other Parties. The gross payroll, operating revenues and capital asset amounts used in this allocation shall be for the twelve-month period ending with the last day of the calendar year prior to the month being allocated. Capital assets shall include, without limitation, the net book value of property, plant and equipment, coal and material and supplies inventories, as applicable. ARTICLE VI Limitations of Liability ------------------------ Section 6.1. No Warranties For Facilities or Services. Each Party acknowledges and agrees that any facilities, equipment or capabilities made available, and any services provided, by a Provider to a Requestor hereunder, are so made available or provided WITHOUT ANY WARRANTY (WHETHER EXPRESS, IMPLIED OR STATUTORY AND NOTWITHSTANDING ANY ORAL OR WRITTEN STATEMENT BY A PARTY'S EMPLOYEES, REPRESENTATIVES OR AGENTS TO THE CONTRARY) WHATSOEVER. ALL SUCH -12- WARRANTIES (INCLUDING, WITHOUT LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) ARE HEREBY DISCLAIMED AND EXCLUDED. Section 6.2. Limited Warranties For Asset Sales. (a) Except as provided in Section 6.2(b), each Party acknowledges and agrees that any real property, interests in real property, tangible personal property or Intangible Assets sold and transferred in accordance with Article III is so sold and transferred WITHOUT ANY WARRANTY (WHETHER EXPRESS, IMPLIED OR STATUTORY AND NOTWITHSTANDING ANY ORAL OR WRITTEN STATEMENT BY A SELLING PARTY'S EMPLOYEES, REPRESENTATIVES OR AGENTS TO THE CONTRARY) WHATSOEVER. ALL SUCH WARRANTIES (INCLUDING, WITHOUT LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) ARE HEREBY DISCLAIMED AND EXCLUDED. (b) In connection with a sale and transfer of real property, interests in real property, tangible personal property or Intangible Assets pursuant to Article III, the Selling Party shall be deemed to have represented and warranted to the Acquiring Party that: (i) title conveyed is good, (ii) conveyance of such title is authorized and rightful, and (iii) the title so conveyed is free and clear of all liens, claims, encumbrances or security interests of persons or entities claiming by or through the Selling Party, except, in the case of this clause (iv), as the Acquiring Party and the Selling Party may otherwise agree. Section 6.3. No Partnership. The Parties acknowledge and agree that this Agreement does not create a partnership between, or a joint venture of, a Party and any other Party. Each party is an independent contractor and nothing contained in this Agreement shall be construed to constitute any Party as the agent of any other Party except as expressly set forth in Sections 2.3 and 2.4. Section 6.4. No Third Party Beneficiaries. This Agreement is intended for the exclusive benefit of the Parties hereto and is not intended, and shall not be deemed or construed, to create any rights in, or responsibilities or obligations to, third parties. ARTICLE VII Term ---- Section 7.1. Term. This Agreement will be effective within 60 days of the date it is approved by the ICC and shall continue, unless terminated as provided in Section 7.2 or renewed as hereinafter provided, until the tenth anniversary of such date (the "Initial Term"). Unless written notice that this Agreement shall terminate on the last day of the Initial Term or any then current renewal term is provided by a Party at least 30 days prior to the expiration of the Initial Term or such renewal term, this Agreement shall continue for successive renewal terms of five years as to such Party and any other Parties not providing any such termination notice. -13- Section 7.2. Termination. Any Party may terminate this Agreement as to it by providing at least 30 days prior written notice to the other Parties of the effective date of such termination. In addition, this Agreement shall terminate as to a Party upon the date that AES determines that such Party shall no longer be a party to this Agreement and shall automatically terminate as to a Party upon the date that AES ceases, directly or indirectly, to own equity securities in such Party. Any such termination shall not affect the terminating Party's accrued rights and obligations under this Agreement arising prior to the effective date of termination or its obligations under Section 9.4. Section 7.3. Tax Sharing Agreement. Notwithstanding anything to the contrary in Sections 7.1 or 7.2, a Party shall continue to be bound by the provisions of the Tax Sharing Agreement until the earlier of (i) the termination of the Tax Sharing Agreement, as provided in the Tax Sharing Agreement or (ii) the time at which such Party is not permitted, under applicable law, to be a "Member" or an "Included Member", as those terms are defined in the Tax Sharing Agreement. ARTICLE VIII Confidential Information ------------------------ Each Party shall treat in confidence all information which it shall have obtained regarding the other Parties and their respective businesses during the course of the performance of this Agreement. Such information shall not be communicated to any person other than the Parties to this Agreement, except to the extent disclosure of such information is required by a governmental authority. If a Party is required to disclose confidential information to a governmental authority, such Party shall take reasonable steps to make such disclosure confidential under the rules of such governmental authority. Information provided hereunder shall remain the sole property of the Party providing such information. The obligation of a Party to treat such information in confidence shall not apply to any information which (i) is or becomes available to such Party from a source other than the Party providing such information, or (ii) is or becomes available to the public other than as a result of disclosure by such Party or its agents. ARTICLE IX Miscellaneous ------------- Section 9.1. Entire Agreement; Amendments. Upon its effectiveness as provided in Section 7.1, this Agreement shall constitute the sole and entire agreement among the Parties with respect to the subject matter hereof and shall supersede all previous agreements, proposals, oral or written, negotiations, representations, commitments and all other communications between some or all of the Parties. Except as provided in Section 9.2 with respect to new Parties and except that AES may amend Exhibit A to this Agreement to delete any terminated Party, this Agreement shall not be amended, modified or supplemented except by a written instrument signed by an authorized representative of each of the Parties hereto. -14- Section 9.2. New Parties. Any other entity which is or may become an affiliate of AES or any of the other Parties to this Agreement may become a party to this Agreement by executing an agreement adopting all of the terms and conditions of this Agreement. Such agreement must be signed by AES in order to become effective, but need not be signed by any other Party to this Agreement. Upon such execution by AES, such entity shall be deemed to be a Party and shall be included within the definition of "Party" for all purposes hereof, and Exhibit A shall be amended to add such entity. Before such execution by AES, CILCO shall provide the staff of the ICC with thirty days' notice that another Party will be added to this Agreement. Section 9.3. Assignment. This Agreement may not be assigned by any Party without the prior written consent of AES. Section 9.4. Access to Records. During the term of this Agreement and for a period of seven years after the expiration or termination of this Agreement as to a Party, such Party shall have reasonable access to and the right to examine any and all books, documents, papers and records which pertain to services and facilities provided by the other Parties under this Agreement to such Party, and such Party shall provide access to, and the opportunity to examine, all such records which pertain to services and facilities provided to the other Parties under this Agreement by such Party. Each Party shall maintain all such records for a period of seven years after expiration or termination of this Agreement as to such Party. In addition, during the term of this Agreement and for a period of seven years after the expiration or termination of this Agreement as to an AES Entity, the ICC shall have access to the books and records of such AES Entity in accordance with the provisions contained in Section 7-101 of the Illinois Public Utilities Act, amended by the Electric Service Customer Choice and Rate Relief Law of 1997 and subject to Section 5-108 of the Illinois Public Utilities Act. Section 9.5. Partial Invalidity. Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable. In the event that it is determined that the charges for a particular transaction covered by this Agreement were not determined properly for any reason, such determination and/or finding shall not affect the validity of such transaction; provided, however, that if the transaction involved CILCO and an AES Entity, AES (or, if AES so determines, such AES Entity) shall pay to or reimburse CILCO, or CILCO shall pay to or reimburse such AES Entity, as the case may be, for the difference between the amount that was charged in connection with the transaction and the charge that is determined to be proper under the provisions of Article V. Section 9.6. Waiver. Failure by any Party to insist upon strict performance of any term or condition herein shall not be deemed a waiver of any rights or remedies that such Party may have against any other Party nor in any -15- way to affect the validity of this Agreement or any part hereof or the right of such Party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. Section 9.7. Governing Law. This Agreement shall be governed by, construed and interpreted pursuant to, the laws of the State of Illinois. *** NEXT PAGE IS SIGNATURE PAGE *** -16- IN WITNESS WHEREOF, the Parties have each caused this Agreement to be executed by a duly authorized representative as of the day and year first above written. THE AES CORPORATION By: ________________________ Name: Title: CILCORP INC. By: ________________________ Name: Title: CENTRAL ILLINOIS LIGHT COMPANY By: ________________________ Name: Title: CENTRAL ILLINOIS GENERATION, INC. By: ________________________ Name: Title: CILCORP INVESTMENT MANAGEMENT INC. By: ________________________ Name: Title: CILCORP VENTURES INC. By: ________________________ Name: Title: CILCORP ENERGY SERVICES INC. By: ________________________ Name: Title: -17- QST ENTERPRISES INC. By: ________________________ Name: Title: -18- EXHIBIT A AES Entities (in addition to AES) -------------------- The AES Corporation CILCORP Inc. Central Illinois Light Company Central Illinois Generation, Inc. CILCORP Investment Management Inc. CILCORP Ventures Inc. CILCORP Energy Services Inc. QST Enterprises Inc. A-1 EXHIBIT B Investment Guidelines --------------------- A Party or Parties may invest cash in any one or more of the following investments: (a) Direct obligations of, or obligations the timely payment of the principal of and interest on which is fully guaranteed by, the United States of America; (b) Direct obligations of any agency or instrumentality of the United States of America and obligations on which the timely payment of principal and interest is fully guaranteed by any such agency or instrumentality; (c) Certificates of deposit or time deposits of any bank, trust company or savings and loan association if all of the direct, unsecured debt obligations of such bank, trust company or savings and loan association at the time of purchase of such certificates of deposit or time deposits, which are rated by a Rating Agency are rated in one of the four highest rating categories assigned by such Rating Agency (without regard to any refinement or gradation of rating category by numerical modifier or otherwise), or which certificates of deposit or time deposits are fully secured by obligations described in clauses (a), (b) or (g) of these Guidelines; provided, however, that if such certificates of deposit or time deposits are so secured (1) the Party or Parties for whose benefit such investments have been acquired shall have a perfected first security interest in the obligations securing such certificates of deposit or time deposits, (2) such Party or Parties shall hold or shall have the option to appoint an intermediary bank, trust company or savings and loan association as its agent to hold the obligations securing such certificates of deposit or time deposits, and (3) such Party or Parties shall hold such obligations free and clear of the liens or claims of third parties; (d) Certificates of deposit or time deposits of any bank, trust company or savings and loan association which certificates of deposit or time deposits are fully insured by the Federal Deposit Insurance Corporation or the Federal Savings & Loan Insurance Corporation or any other similar United States governmental deposit insurance program; (e) Securities of the type described in clauses (a) or (b) above purchased under agreements to resell such securities to any registered broker/dealer subject to the Securities Investors Protection Corporation jurisdiction or any commercial bank, if such broker/dealer or bank's uninsured, unsecured and unguaranteed obligations which are B-1 rated by a Rating Agency are rated by such Agency at the time of entrance into such agreement in one of the four highest rating categories assigned by such Agency (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) provided: (i) a master repurchase agreement or specific written repurchase agreement governs the transaction; (ii) the repurchase agreement has a term of 45 days or less; (iii) the fair market value of the securities in relation to the amount of the repurchase obligation, including principal and interest, is equal to at least 100%; and (iv) the securities are held free and clear of any lien or claims of a third party by an independent third party acting solely as agent for the Party or Parties, such agent is a Federal Reserve Bank, or a bank which is a member of the Federal Deposit Insurance Corporation and which bank has combined capital, surplus and undivided profits of not less than $50,000,000, the Party or Parties shall have received written confirmation from such agent that it holds such securities, free and clear of any lien or claim, as agent for such Party or Parties, and a perfected first security interest under the Uniform Commercial Code, or book entry procedures prescribed at 31 CFR 306.1 et seq. or 31 CFR 350.0 et seq. in such securities is created for the benefit of such Party or Parties; (f) Investment agreements with banks which meet the rating criteria set forth in (c) above or investment agreements with non-bank financial institutions provided: (i) all of the unsecured, direct long-term debt of such non-bank financial institutions or all of the unsecured, direct long-term debt of such non-bank financial institutions which is guaranteed by the guarantor of the investment agreement involved, which is rated by a Rating Agency is rated at time of entrance into such agreement in one of the four highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) for obligations of that nature; or (ii) if such non-bank financial institutions have no such outstanding long-term debt which is rated, all of the short-term debt of such non-bank financial institutions or all of the short-term debt of such non-bank financial institutions which is guaranteed by the guarantor of the investment agreement involved, which is rated by a Rating Agency is rated at the time of entrance into such agreement in the highest rating category (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) assigned to short-term indebtedness by such Agency, all of which agreements referred to in this subsection (f) provide that if such banks or non-bank financial institutions' debt no longer satisfies such rating criteria such banks or institutions will secure such agreements as soon as reasonably practicable to the extent and in the manner provided in subsection (c) above; (g) Shares of a fund registered under the Investment Company Act of 1940, as amended, whose shares are registered under the Securities Act of 1933, as amended, having assets of at least $100,000,000, whose only assets are obligations described in subsections (a), (b), (c), (e), (h), (i), (j), (k), (l), (m) or (n) of these Investment Guidelines; (h) Commercial paper which, at the time of purchase, is rated by a Rating Agency in one of the two highest categories (without regard to any refinements or gradation of rating category by numerical modifier or otherwise) assigned by such Agency for obligations of that nature; B-2 (i) Obligations of, or obligations fully guaranteed by, any state of the United States of America or any political subdivision thereof which obligations, at the time of purchase, are rated by a Rating Agency in one of the four highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) assigned by such Agency to obligations of that nature; (j) Obligations of, or obligations fully guaranteed by, and foreign government or any political subdivision thereof which obligations, at the time of purchase, are rated by a Rating Agency in one of the four highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) assigned by such Agency to obligations of that nature; (k) Debt securities of any corporation organized under the laws of any state of the United States of America which securities, at the time of purchase, are rated by a Rating Agency in one of the four highest rating categories (without regard to any refinements or gradation of rating category by numerical modifier or otherwise) assigned by such Agency for obligations of that nature; (l) Debt securities of any corporation organized under the laws of any jurisdiction outside of the United States of America which securities, at the time of purchase, are rated by a Rating Agency in one of the four highest rating categories (without regard to any refinements or gradation of rating category by numerical modifier or otherwise) assigned by such Agency for obligations of that nature; (m) Obligations which are rated "AAA" by Standard & Poor's and "Aaa" by Moody's and which are not subject to redemption prior to maturity (except as provided in the security agreement described below) and are issued or incurred by any state, commonwealth or territory of the United States of America or any political subdivision, public instrumentality or public authority of any state, commonwealth or territory of the United States of America, which obligations are fully secured by and payable solely from an escrow fund consisting of direct obligations of, or obligations the timely payment of principal and interest on which are fully guaranteed by, the United States of America, which is held by a corporate fiduciary pursuant to a security agreement (which may not be amended to provide for redemption on a date earlier than that originally contemplated by the parties on the date such security agreement was first executed); (n) Bankers acceptances of any bank, if all of the direct, unsecured debt obligations of such institution at the time of purchase of such acceptances which are rated by a Rating Agency are rated by such Agency in one of the three highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) by such Agency; and (o) Money market mutual funds managed for the purpose of investing substantially all of the assets of such fund in short-term obligations B-3 having a stated maturity date of one year or less or having a maturity date of one year or less from the date of purchase by such fund, including but not necessarily limited to (i) corporate or governmental obligations or related repurchase agreements, (ii) tax-exempt obligations, (iii) domestic, yankee and eurodollar certificates of deposit, (iv) domestic, yankee and eurodollar bankers' acceptances, or (v) variable amount notes of borrowers of prime credit, provided that any such money market mutual fund shall be classified at the time of purchase as "Aaa" by Moody's Investors Service Inc. or "AAA" by Standard & Poor's Ratings Group; provided, however, that the total cost of investments in any such money market mutual fund shall not exceed at any one time 5% of the total of all assets of such money market mutual fund. For purposes of the foregoing, the term "Rating Agency" means any one of Moody's Investors Service Inc. or Standard & Poor's Ratings Group or any other nationally recognized securities rating organization, or any successor to any of the foregoing. B-4 EX-99 4 exhd2.txt EX. D-2 - ORDER OF ILLINOIS COMMERCE COMMISSION EXHIBIT D-2 STATE OF ILLINOIS ILLINOIS COMMERCE COMMISSION CENTRAL ILLINOIS LIGHT COMPANY AND : AMEREN CORPORATION : : : APPLICATION FOR AUTHORITY TO ENGAGE IN A : 02-0428 REORGANIZATION AND ENTER INTO VARIOUS : AGREEMENTS, INCLUDING AGREEMENTS WITH : AFFILIATED INTERESTS, AND FOR SUCH OTHER : APPROVALS AS MAY BE REQUIRED UNDER THE : ILLINOIS PUBLIC UTILITIES ACT TO : EFFECTUATE THE REORGANIZATION. : ORDER ----- DATED: December 4, 2002 TABLE OF CONTENTS ----------------- I. PROCEDURAL HISTORY.....................................................1 II. description of the reorganization......................................3 A. Companies and Affiliates Related to the Transaction..............3 1. CILCO......................................................3 2. CILCORP and AES............................................3 3. Ameren and Its Affiliates..................................4 B. The Reorganization Transaction...................................5 C. Applicants' Statement of Benefits................................5 III. Relief Requested.......................................................6 IV. Compliance with Section 7-204..........................................6 A. Finding 1: "[T]he proposed reorganization will not diminish the utility's ability to provide adequate, reliable, efficient, safe and least-cost public utility service."................................................7 B. Finding 2: "[T]he proposed reorganization will not result in the unjustified subsidization of non-utility activities by the utility or its customers."......................................................7 C. Finding 3: "[C]osts and facilities are fairly and reasonably allocated between utility and non-utility activities in such a manner that the Commission may identify those costs and facilities which are properly included by the utility for ratemaking purposes."............................................8 D. Finding 4: "[T]he proposed reorganization will not significantly impair the utility's ability to raise necessary capital on reasonable terms or to maintain a reasonable capital structure."...................................9 E. Finding 5: "[T]he utility will remain subject to all applicable laws, regulations, rules, decisions and policies governing the regulation of Illinois public utilities.".....................................................11 F. Finding 6: "[T]he proposed reorganization is not likely to have a significant adverse effect on competition in those markets over which the Commission has jurisdiction."......11 1. Applicants' Position......................................11 i a. Horizontal Market Power.............................11 (i) Mr. Frame's Analysis..........................11 b. Vertical Market Power...............................16 c. Applicants' Additional Commitments..................17 2. IIEC's Position...........................................18 a. Horizontal Market Power.............................18 b. Vertical Market Power...............................22 3. Staff's Position..........................................23 a. Overview............................................23 b. Study Period........................................23 c. Standard Applied....................................25 d. Markets Examined....................................26 e. Study Inputs and Assumptions........................26 f. Study Results.......................................29 g. Competitive Concerns................................31 h. Staff's Analysis....................................32 i. Number of Competitors...............................33 4. Commission Conclusion.....................................35 G. Finding 7: "[T]he proposed reorganization is not likely to result in any adverse rate impacts on retail customers.".....35 1. Applicants' Position......................................35 2. OAG's Position............................................36 3. Staff's Position..........................................37 4. OAG-Applicants Stipulation................................38 5. Commission Conclusion.....................................39 H. Allocation of Savings and Recovery of Costs.....................39 ii V. Compliance with other Applicable lawS.................................40 A. Section 7-204A(a) Submission of Required Data...................40 B. Approval of Affiliated Interest Agreements......................40 1. CILCO Services Agreement..................................40 2. Fuel Services Agreement...................................40 C. Section 5-106: Books and Records...............................41 D. Section 7-102...................................................41 E. Section 6-103...................................................41 VI. Findings and ordering paragraphS......................................42 iii STATE OF ILLINOIS ILLINOIS COMMERCE COMMISSION CENTRAL ILLINOIS LIGHT COMPANY AND : AMEREN CORPORATION : : APPLICATION FOR AUTHORITY TO ENGAGE IN A : 02-0428 REORGANIZATION AND ENTER INTO VARIOUS : AGREEMENTS, INCLUDING AGREEMENTS WITH : AFFILIATED INTERESTS, AND FOR SUCH OTHER : APPROVALS AS MAY BE REQUIRED UNDER THE : ILLINOIS PUBLIC UTILITIES ACT TO : EFFECTUATE THE REORGANIZATION. : ORDER ----- By the Commission: I. PROCEDURAL HISTORY On June 19, 2002, Ameren Corporation ("Ameren")(1) and Central Illinois Light Company ("CILCO") (jointly, "Applicants") filed a joint application ("Application") with the Illinois Commerce Commission ("ICC" or "Commission") seeking approval for CILCO to engage in a reorganization (the "Reorganization") pursuant to Section 7-204 and 7-204A of the Illinois Public Utilities Act (the "Act"), (220 ILCS 5/7-204, 7-204A), and, to the extent applicable, Section 7-102 of the Act, (220 ILCS 5/7-102), after which CILCO would become a subsidiary of Ameren. The Application further seeks approval for CILCO's entry into two affiliated interest agreements under Section 7-101 of the Act, and approval under Section 5-106, allowing CILCO to maintain certain books and records outside of the State. Lastly, the Applicants request that the Commission approve CILCO's post-transaction capitalization under Section 6-103 of the Act. The following parties filed petitions to intervene in this proceeding: the Cities of Pekin and Peoria, Illinois (the "Cities"); the City of Springfield, Illinois ("CWLP"); a coalition of Illinois Industrial Energy Consumers ("IIEC"), comprising the Archer-Daniels-Midland Company, Caterpillar, Inc., Keystone Steel and Wire Company, Marathon Ashland Petroleum, Central Soya Company, Big River Zinc, Inc., and Williams Ethanol Services, Inc.; the People of the State of Illinois through the Office of the Attorney General ("OAG"); the Citizens Utility Board ("CUB"); and Freeman United Coal Company ("Freeman"). All of the above petitions were granted. Subsequently, Big River Zinc, Inc., and Williams - -------------------- (1) Ameren is the holding company parent of two other Illinois public utilities, Central Illinois Public Service Company ("AmerenCIPS") and Union Electric Company ("AmerenUE"). Ethanol Services, Inc. filed a motion to withdraw as parties from this proceeding. This motion was also granted. Pursuant to proper legal notice, a pre-hearing conference was held in this matter before a duly authorized Administrative Law Judge ("ALJ") of the Commission at its offices in Springfield, Illinois, on August 8, 2002. This matter was heard at that time and continued to August 16, 2002. The matter was again heard and continued to October 17, 2002. On October 11, 2002, the ALJ granted Applicants' Motion to Modify Schedule, to accommodate Applicants' filing of certain "Conditions of Approval" (the "Approval Conditions") that Applicants believed would minimize the contested issues in this proceeding. The ALJ continued the hearing to October 24, 2002. Evidentiary hearings were held in this matter on October 24 and 25, 2002. At the hearings, appearances were entered by counsel on behalf of Applicants, IIEC, OAG, Freeman and the Commission Staff ("Staff"), and by a representative on behalf of CWLP. The following nine witnesses presented evidence on behalf of Applicants in support of the Application: Gary L. Rainwater, President and Chief Operating Officer of Ameren; Warner L. Baxter, Senior Vice President of Finance and Chief Financial Officer of Ameren; Craig D. Nelson, Vice President - Corporate Planning of Ameren Services Company ("Ameren Services," an Ameren subsidiary); Thomas Voss, Senior Vice President - Energy Delivery of Ameren Services; Mark Birk, General Manager, Energy Delivery Technical Services of Ameren Services; Martin Lyons, Ameren's Controller; Scott Cisel, Senior Vice President of CILCO; Brenda Freeman, Investments Manager, CILCO Finance and Administration Team; and Rodney Frame, a Principal with Analysis Group/Economics. James R. Dauphinais, a Public Utility Regulation Consultant with Brubaker & Associates, Inc., presented testimony on behalf of the IIEC. David J. Effron, a Utility Regulation Consultant, testified on behalf of the OAG. The following nine Commission employees presented testimony on behalf of Staff: Randy Rismiller, Manager of the Federal Energy Program in the Energy Division; Dr. Eric P. Schlaf, Economist in the Energy Division; Bruce A. Larson, Senior Energy Engineer in the Electric Section of the Engineering Department in the Energy Division; Dennis L. Anderson, Senior Energy Engineer in the Gas Section of the Engineering Department of the Energy Division; Michael McNally, Senior Financial Analyst in the Finance Department of the Financial Analysis Division; Dianna Hathhorn, Accountant in the Accounting Department of the Financial Analysis Division; Thomas Q. Smith, Accountant in the Accounting Department of the Financial Analysis Division; David A. Borden, Economic Analyst in the Policy Section of the Energy Division; and Serhan Ogur, Economic Analyst in the Federal Energy Program of the Energy Division. At the conclusion of the hearing on October 25, 2002, the record was marked "Heard and Taken." As a result of (i) Applicants' supplementing their initial filing with the Approval Conditions, which are attached hereto as Appendix A, and (ii) a 2 stipulation between Applicants and the OAG filed with the Commission on November 1, 2002, there were no contested issues in this matter. On November 14, 2002, Applicants submitted a Draft Proposed Order, which had previously been reviewed by all parties, and to which no party objected. II. DESCRIPTION OF THE REORGANIZATION A. COMPANIES AND AFFILIATES RELATED TO THE TRANSACTION 1. CILCO CILCO is an Illinois corporation, operating as a public utility pursuant to the Act, whose principal business is 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 purchase, distribution, transportation and sale of natural gas in an area of approximately 4,500 square miles in central and east-central Illinois. CILCO furnishes electric service to over 201,000 retail customers in 136 Illinois communities and gas service to over 204,000 customers in 128 Illinois communities. In Docket Nos. 02-0140/02-0153 (consolidated), the Commission entered an order approving the transfer of substantially all of CILCO's generation assets to a wholly-owned, but unregulated subsidiary, Central Illinois Generation, Inc. ("CIGI"). FERC has approved the transfer of CILCO's generation assets to CIGI as well as a power supply agreement between CIGI and CILCO. CILCO presently is engaging in various activities necessary to close that transfer. CILCO also has a retail marketing unit that negotiates special contracts with retail load within and outside of CILCO's service territory. Under the Commission's standards of conduct, CILCO has elected to operate as a functionally separated utility ("FSU"). If the Reorganization is approved, and CILCO thereby becomes a subsidiary of Ameren, CILCO intends to file, pursuant to authority under recently enacted legislation, a revised implementation plan to operate as an Integrated Distribution Company ("IDC"). The two existing Ameren utilities, AmerenCIPS and AmerenUE (jointly, the "Ameren Utilities"), have already elected to operate as IDCs. 2. CILCORP AND AES CILCORP is an Illinois corporation, operating as a holding company, which owns 100% of the common stock of CILCO. CILCORP is a wholly-owned subsidiary of The AES Corporation ("AES"), a global power company whose primary lines of business are electricity generation and distribution. AES' electricity generation business consists of sales to non-affiliated wholesale customers (generally electric utilities, regional electric companies, or wholesale commodity markets) for further resale to end-users. AES' electricity distribution business consists of direct sales to end-users such as commercial, industrial, governmental and residential customers. AES' generating assets include interests in 177 facilities totaling 59 gigawatts of capacity. AES' 3 electricity distribution network sells over 108,000 gigawatt hours per year to over 16 million end-use customers. AES acquired 100% ownership of the common stock of CILCORP in 1999. Subsequent to the acquisition of CILCORP, AES acquired IPALCO Enterprises, Inc., another utility holding company. In a decision affirming AES' exempt status under the Public Utility Holding Company Act of 1935 ("PUHCA"), the SEC required AES to either divest its interest in CILCO or restructure, no later than March 27, 2003. AES elected to sell CILCORP to comply with the SEC's decision. 3. AMEREN AND ITS AFFILIATES Ameren is a Missouri corporation with its headquarters in St. Louis, Missouri. Ameren is a registered holding company under PUHCA and is the parent of two state-regulated utility subsidiaries, AmerenCIPS and AmerenUE, both of which provide electric and gas service to the public and are public utilities under Section 3-105 of the Act. AmerenCIPS is an Illinois corporation that provides electric service to approximately 325,000 customers and gas service to about 170,000 customers, in 527 incorporated and unincorporated communities in central and southern Illinois. AmerenCIPS owns no generation, and is served presently under an agreement with Ameren Energy Marketing Company ("AEM"), an affiliate. AmerenCIPS engages only in passive provision of retail sales service, rather than engaging in an active retail marketing function; no AmerenCIPS employees negotiate competitive electric power supply arrangements with any retail customers, on any system. As noted above, AmerenCIPS has elected to operate as an IDC. AmerenUE is a Missouri corporation that provides electric service to approximately 62,000 customers and gas service to approximately 18,000 customers in Illinois, and electric service to nearly one million customers and gas service to over 100,000 customers in Missouri. AmerenUE owns 8,290 MW of electric generating capacity. AmerenUE engages only in passive provision of retail sales service rather than engaging in an active Illinois retail marketing function; no AmerenUE employees negotiate competitive power supply arrangements with retail load on any system in Illinois. As noted above, AmerenUE also has elected to operate as an IDC. Ameren also has several other subsidiaries, including: Ameren Services, which provides services to various Ameren affiliates; Ameren Energy Generating Company ("AEG"), which owns and operates over 4330 MW of electric generating capacity, all of which is located in Illinois and Missouri; AEM, which markets power and energy at wholesale and at retail, and has responsibility for all Ameren retail marketing in Illinois; Ameren Energy ("AE"), which provides short-term energy trading services and acts as agent to AmerenUE and AEG; and Ameren Energy Fuels and Services Company ("Ameren Fuels"), which provides generation fuels, natural gas procurement, management and related services for Ameren affiliates and other entities. 4 B. THE REORGANIZATION TRANSACTION Ameren and AES have entered into a stock purchase agreement (the "Purchase Agreement") pursuant to which Ameren will acquire all of the outstanding common stock of CILCORP in exchange for cash and the assumption of debt held by CILCORP and its subsidiaries. At the closing of the transaction, CILCORP will become a wholly-owned subsidiary of Ameren. Thus, Ameren will become the indirect owner of CILCO, and CILCO will do business as AmerenCILCO. Subsequent to the closing, CILCO will continue to operate as a separate company, and will not be merged into either of the two existing Ameren utilities. Ameren does not seek approval to eliminate CILCO as a company or to alter CILCO's rate areas or tariffs in any respect. Accordingly, unless and until otherwise authorized by this Commission, CILCO will maintain its own rate schedules. Applicants noted in the Application, however, that while CILCO will maintain its separate corporate existence, CILCO will be integrated fully into the Ameren system, and will receive corporate support and other services from Ameren affiliates. Ameren also stated that it intends to maintain CILCO's headquarters in Peoria. CILCO will operate as its own control area, within the Midwest Independent System Operator ("MISO"). On May 28, 2002, AmerenCIPS and AmerenUE informed the FERC of their intent to operate within the MISO. The Applicants made certain additional commitments in this regard, as noted below. C. APPLICANTS' STATEMENT OF BENEFITS Applicants' witnesses Rainwater, Baxter and Voss described how the proposed transaction will benefit CILCO's customers and the competitive retail electric marketplace in Illinois. First, the Applicants state that the Reorganization will bring rate stability to CILCO's customers, with regard to both gas and electric rates. CILCO's electric rates are currently frozen, and, under recently enacted legislation, the Reorganization will extend that freeze for an additional two years. CILCO also commits that, except with respect to any proposed change in gas base rates filed with the Commission prior to the closing of this transaction, it will not propose an increase in gas base rates that would become effective prior to October 1, 2005. Additionally, Ameren and CILCO natural gas customers will benefit from Ameren's expected increase in buying power in gas purchasing, integration of pipeline transportation and storage agreements, and optimization of gas storage and delivery assets. These expected synergies will allow rate stability during a period when Ameren intends to enhance CILCO's performance. In addition, Ameren commits to improving CILCO's level of customer service, through implementation of Ameren's proven reliability and customer service methods. The Ameren Utilities have recently received top statewide rankings regarding reliability and customer service, in Commission reports and 5 customer opinion surveys. Ameren is committed to its focus on customer service and efficient operation of delivery systems, and will continue this focus through and by the CILCO transaction. Ameren has also committed to implement various upgrades to its transmission system that will enhance the ability of providers not affiliated with Ameren to import electric power and energy into Illinois markets, including CILCO and Ameren. Accordingly, Ameren contends, the Reorganization will expand retail customers' options for choice among electric service providers. III. RELIEF REQUESTED Applicants have requested that the Commission enter an order granting the following relief: 1) authorizing Ameren and CILCO to reorganize as set forth in the Application pursuant to Sections 7-204 and 7-204A of the Act, and to the extent required, Section 7-102; 2) finding that the cost allocation principles reflected in the CILCO Services Agreement are reasonable; 3) a finding that CILCO's entry into the CILCO Services Agreement is prudent and reasonable and consenting thereto pursuant to Sections 7-101 and 7-204A(b); 4) a finding that CILCO's entry into a Fuel Services Agreement is prudent and reasonable and consenting thereto pursuant to Sections 7-101 and 7-204A(b); 5) authorizing CILCO to maintain certain books and records outside of the State of Illinois pursuant to Section 5-106; 6) approving the post-Reorganization capitalization of CILCO, as set forth in the Application pursuant to Section 6-103; and 7) authorizing, to the extent necessary, Applicants' performance of such other and further actions or transactions which are not contrary to the Act or the rules of the Commission, or inconsistent with the Application, as may be necessary and appropriate to carry out the actions and transactions proposed by the Application. IV. COMPLIANCE WITH SECTION 7-204 The action of the Commission in this proceeding with respect to the transaction at issue in this matter is governed principally by Section 7-204, relating to the approval of reorganizations. A "reorganization" is defined in Section 7-204 as: "any transaction which, regardless of the means by which it is accomplished, results in a change in the . . . ownership or control of any entity which owns or controls the majority of the voting capital stock of a public utility. . . ." This Section further provides that the "Commission shall not approve any proposed reorganization if the Commission finds, after notice and hearing, that the reorganization will adversely affect the utility's ability to perform its duties under this Act." 220 ILCS 5/7-204. In reviewing the proposed reorganization, the Commission is required under Section 7-204 to make a series of findings, each of which is addressed in turn. 6 A. FINDING 1: "[T]HE PROPOSED REORGANIZATION WILL NOT DIMINISH THE UTILITY'S ABILITY TO PROVIDE ADEQUATE, RELIABLE, EFFICIENT, SAFE AND LEAST-COST PUBLIC UTILITY SERVICE." Applicants contend that the Reorganization will enhance CILCO's service and offer many other opportunities for benefits. Applicants' witness Thomas Voss, Senior Vice President-Energy Delivery of Ameren Services, testified that: 1) AmerenCIPS is the top-rated Illinois electric utility in terms of reliability and customer service, based on reports filed with the ICC; 2) Ameren will make and follow through on the same commitment to improve customer service for CILCO's customers that it has made in its other service areas; and 3) in no regard will the quality of CILCO's service diminish. Mr. Voss further testified that the Reorganization will not alter the low-cost nature of CILCO's service. To the contrary, CILCO will obtain the benefits of scale within the larger Ameren organization, which, together with other synergies, will enable Ameren to hold the line on CILCO's rates while taking steps to improve CILCO's performance. Applicants contend that Ameren has a proven track record of high quality service in communities much like those that CILCO serves. In this regard, Ameren has a century of experience serving both smaller communities, such as Petersburg, Illinois, and large cities, including St. Louis, making it qualified to oversee CILCO's provision of service to its diverse service territory. After the Reorganization occurs, Applicants have committed to seeing that CILCO improves its performance. Staff witness Larson testified that after reviewing the Application, the testimony provided by the Applicants, and responses to data requests, he found no indication that the proposed reorganization would diminish the Applicants' ability to provide adequate, reliable, efficient and safe public utility service for its electric customers. Staff witness Anderson reached the same conclusion with respect to the Applicants' natural gas customers. Accordingly, the record supports a finding that the Reorganization will not diminish CILCO's ability to provide adequate, reliable, efficient, safe and least-cost public utility service. B. FINDING 2: "[T]HE PROPOSED REORGANIZATION WILL NOT RESULT IN THE UNJUSTIFIED SUBSIDIZATION OF NON-UTILITY ACTIVITIES BY THE UTILITY OR ITS CUSTOMERS." As noted above, Applicant Ameren is a registered holding company under PUHCA and operates under clear and fair cost-allocation principles. The principles that Ameren and its regulated affiliates apply are reflected in the provisions of the Ameren General Services Agreement (the "Ameren GSA"), which the Commission approved in Docket No. 95-0551, and/or in the SEC's regulations. Applicants have proposed that CILCO enter into a services agreement (the "CILCO 7 Services Agreement") that is materially identical to the Ameren GSA. A copy of the CILCO Services Agreement was attached to the Application at Tab N. Applicants' witness Mr. Warner Baxter, Ameren's Chief Financial Officer, testified that costs will be allocated and charged to CILCO pursuant to: (1) the CILCO Services Agreement and (2) the SEC's rules. The CILCO Services Agreement and the SEC regulations will preclude any unjustified subsidization of non-utility activities. In addition, in the Approval Conditions, Applicants have agreed to file, within 90 days of closing, an application to consolidate the Ameren GSA and the CILCO Services Agreement into a single general services agreement. Staff witness Dianna Hathhorn, upon review of Mr. Baxter's testimony, the Application and its supporting documents, concluded that the Reorganization would not result in any unjustified subsidization. Accordingly, the record supports such a finding. C. FINDING 3: "[C]OSTS AND FACILITIES ARE FAIRLY AND REASONABLY ALLOCATED BETWEEN UTILITY AND NON-UTILITY ACTIVITIES IN SUCH A MANNER THAT THE COMMISSION MAY IDENTIFY THOSE COSTS AND FACILITIES WHICH ARE PROPERLY INCLUDED BY THE UTILITY FOR RATEMAKING PURPOSES." Ameren states that it will allocate and charge costs in accordance with the CILCO Services Agreement, which, as noted above, is materially identical to the Commission-approved Ameren GSA, and in accordance with the SEC's regulations. Moreover, in the Approval Conditions, Applicants have made the same commitment regarding the preservation of the Commission's authority to determine appropriate cost allocations that AmerenCIPS and AmerenUE made in Docket No. 95-0551. Staff witness Hathhorn noted that Applicants have agreed to the following additional commitments: 1) Ameren Services and CILCORP will enter into a separate services agreement for any services between those two entities, 2) no new parties may be added to the CILCO Services Agreement without Commission approval, 3) Commission approval for asset sales or transfers would be necessary to the extent required under the Act, 4) upon closing the transaction, Ameren intends to add CILCORP and its subsidiaries as parties to Ameren's existing tax sharing agreement, and 5) Commission approval for services from Ameren to Ameren Services would be necessary to the extent required under the Act and the Commission's rules. Ms. Hathhorn testified that the foregoing commitments, together with those contained in the CILCO Services Agreement and Condition Y of the Applicants' Approval Conditions and with the other evidence, are sufficient to support a finding that the Reorganization will not result in any inappropriate allocation of costs. Thus, the record adequately supports entry of this finding. 8 D. FINDING 4: "[T]HE PROPOSED REORGANIZATION WILL NOT SIGNIFICANTLY IMPAIR THE UTILITY'S ABILITY TO RAISE NECESSARY CAPITAL ON REASONABLE TERMS OR TO MAINTAIN A REASONABLE CAPITAL STRUCTURE." Applicants' witness Warner Baxter testified that the Reorganization should have a positive impact on CILCO's ability to raise capital on reasonable terms, because CILCO will become a subsidiary of a parent company that has a credit rating higher than that of AES. Mr. Baxter testified that, at the time of his testimony, Ameren had credit ratings (senior unsecured) of A2 from Moody's and A from S&P, while AES (CILCO's pre-transaction parent corporation) had ratings (senior unsecured) of Ba1 from Moody's and BB- from S&P. Ratings agencies have indicated that the proposed transaction is viewed as a positive influence on CILCO's financial health. Mr. Baxter noted that, as the overall financial strength of a utility (reflected by independent ratings) is the key factor in raising capital, there is no expectation that the transaction will have a material adverse effect on CILCO's ability to raise capital. Mr. Baxter also testified that the Reorganization will have no adverse effect on CILCO's capital structure. To the extent that GAAP accounting for the transaction requires entries that produce any changes in CILCO's capital structure, Applicants have committed that (with the Commission's authorization) CILCO will reverse the effect of any such entries for regulatory reporting and ratemaking purposes. As such, the recognition of any goodwill in connection with the Reorganization would not have any impact on rates, or on the assessment of CILCO's rate of return on common equity under Sections 16-111(d) and 16-111(e) of the Act. Additionally, Mr. Baxter testified that the transaction would have no impact on the manner by which CILCO has and will continue to service $475 million of debt outstanding at the CILCORP level. Upon review of Applicants' testimony and supporting documentation, Staff witness Michael McNally supported a Commission finding that the proposed Reorganization, subject to Approval Conditions K, N, O, and P, would not significantly impair CILCO's ability to raise necessary capital on reasonable terms or its ability to maintain a reasonable capital structure. Mr. McNally agreed that Ameren's ratings indicate that Ameren's current financial position is strong. Furthermore, both S&P and Moody's expect Ameren's corporate credit rating to remain in the A rating category upon completion of the acquisition. In contrast, CILCO's current parent, AES, is assigned much weaker corporate credit ratings, which indicates that AES' ability to meet its debt service obligations is speculative. Thus, as CILCO's parent, Ameren's financial strength will not significantly impair, and will more likely improve, CILCO's ability to raise equity on reasonable terms. Mr. McNally did note, however, that there are circumstances in which, in the absence of appropriate commitments, the Reorganization could impair CILCO's financial strength. Specifically, in their petition before the SEC seeking authorization for this same transaction, Applicants requested authorization for CIGI to issue up to $500 million additional long-term debt as well as authorization to refinance the $475 million in debt that CILCORP incurred when 9 AES acquired it. Mr. McNally testified that additional debt at CIGI would place an additional burden on CILCO in two ways: First, as a wholly-owned subsidiary of CILCO, CIGI debt would increase the riskiness of CIGI's cash flows, which in turn, would increase CILCO's risk and hinder CILCO's ability to support CILCORP's debt. Second, in the event that CIGI defaults on that debt, CILCO could be held liable unless measures are taken to insulate CILCO from CIGI. Mr. McNally noted also that Applicants' request for authority to refinance the $475 million in CILCORP debt could extend the term of maturity for one of the two CILCORP notes by up to 20 years and, as such, extend CILCO's exposure to that note to the detriment of CILCO's ability to raise necessary capital on reasonable terms for utility purposes. Mr. McNally said that, according to S&P, no barriers meaningfully restrict CILCORP's access to the assets and cash flow of CILCO, and CILCORP's financial profile remains "extremely frail." Mr. McNally said that, given that the Commission cannot control the actions of CILCO's non-regulated affiliates, and given CILCORP's "extremely frail" financial profile, CILCO could ultimately be liable for both the CIGI debt and the $475 million acquisition debt. This potential burden could significantly impair CILCO's financial strength and, thus, its ability to raise debt on reasonable terms in the long term, despite the prospect of a near term improvement in CILCO's financial strength. Mr. McNally went on to note that certain of the Approval Conditions mitigate his concerns. Condition K of the Approval Conditions would ensure that Staff of the Commission is informed of requests to, and the effect of authorizations received from, the SEC that may affect Illinois ratepayers. Conditions N and P require the Applicants, at least through January 1, 2007, to demonstrate to the Commission that the transactions described therein are in the public interest or that the public would be convenienced thereby, and to obtain Commission approval before such transactions can be executed. Mr. McNally explained that Condition N, part (ii), precludes CILCO from being held liable for the debt of a non-regulated affiliate. This potential burden would increase the riskiness of CILCO, thereby significantly impairing its ability to raise necessary capital on reasonable terms and adversely affecting utility rates. Further, Condition P allows the Commission to assess the effect on CILCO's financial strength of transferring CIGI in return for promissory notes if Ameren sought to transfer CIGI under Section 16-111(g)(vi) of the Act. A default by the issuer of such promissory notes would adversely affect CILCO's ability to raise capital on reasonable terms. Condition O commits Ameren to retire as expeditiously as possible the $475 million in senior notes issued to finance AES' acquisition of CILCORP. The burden of indirectly servicing that debt could significantly impair CILCO's ability to raise necessary capital on reasonable terms or to maintain a reasonable capital structure. In Mr. McNally's judgment, the Reorganization, subject to Approval Conditions K, N, O, and P, meets the criteria of Section 7-204(b)(4) of the Act. Accordingly, the Commission finds that the record supports entry of this finding. 10 E. FINDING 5: "[T]HE UTILITY WILL REMAIN SUBJECT TO ALL APPLICABLE LAWS, REGULATIONS, RULES, DECISIONS AND POLICIES GOVERNING THE REGULATION OF ILLINOIS PUBLIC UTILITIES." The record shows that CILCO will remain an Illinois public utility, subject to all applicable laws and rules. In Conditions U1 and U2 of the Approval Conditions , Applicants have made commitments to ensure that the Commission would not be preempted from regulating certain aspects of their businesses solely due to Ameren's status as a registered holding company under PUHCA. Accordingly, the record supports this finding. F. FINDING 6: "[T]HE PROPOSED REORGANIZATION IS NOT LIKELY TO HAVE A SIGNIFICANT ADVERSE EFFECT ON COMPETITION IN THOSE MARKETS OVER WHICH THE COMMISSION HAS JURISDICTION." Three parties -- Applicants, the Staff, and IIEC -- addressed this issue. While there were some significant differences in approach among them, all ultimately concluded that, subject to the Approval Conditions, the Reorganization will not be likely to significantly adversely affect Illinois retail electric markets. 1. APPLICANTS' POSITION A. HORIZONTAL MARKET POWER (I) MR. FRAME'S ANALYSIS Applicants presented the testimony of Rodney Frame, a Principal with Analysis Group/Economics. Mr. Frame was asked by Applicants to provide a competitive assessment of the transaction, and in particular to perform the Competitive Analysis Screen that is described in Appendix A of FERC Order No. 592, (FERC's Merger Policy Statement),(2) and in Order 642, (Revised Filing Requirements Under Part 33 of the Commission's Regulations).(3) An Appendix A analysis addresses potential horizontal market power concerns that might arise from a contemplated merger. Mr. Frame also examined whether the transaction might create vertical market power concerns. The Appendix A analysis focuses on markets for short-term or non-firm energy. In addition to assessing the merger's effects on short-term and non-firm energy markets through an Appendix A analysis, he also considered whether the merger will have an adverse effect on competition to supply short-term capacity - -------------------- (2) Inquiry Concerning the Commission's Merger Policy Under the Federal Power Act: Policy Statement, Order No. 592, 77 FERCP. 61, 263, issued December 18, 1996 ("Merger Policy Statement"). (3) Revised Filing Requirements Under Part 33 of the Commission's Regulations, Final Rule in Docket No. RM 98-4-000, Order 642, 93 FERC P. 61, 164, issued November 5, 2000 ("Order 642"). 11 and long-term capacity. Mr. Frame explained that, as concerns the latter, examinations of market power in long-term capacity markets generally focus upon perceived entry barriers. He stated that, because neither of the Applicants has the ability to erect barriers to those that might compete with them in the construction of new generation capacity, he concluded that the merger will not have an adverse effect on competition to supply long-term capacity. As concerns short-term capacity, he found that, while Ameren has capacity in excess of that required to meet its firm load plus planning reserve obligations in the near term, which could be used to support short-term capacity sales, CILCO does not have any such excess capacity. Accordingly, CILCO cannot reasonably be viewed as a seller in short-term capacity markets and the proposed transaction, therefore, will not combine two formerly independent sellers of short-term capacity or eliminate competition among them. To perform the Appendix A Competitive Analysis Screen that is used for examining non-firm or short-term energy markets, he assembled available data concerning generator costs and other characteristics, load levels by time period, long term purchases and sales contracts, market prices, transmission prices and losses (both for existing single system and regional tariffs) and transmission capacities between various market participants including Applicants and interconnected utilities. Ameren's utility affiliates are interconnected with numerous other regional suppliers and control areas while CILCO is interconnected with only a few. All of the entities with which CILCO is directly interconnected also are directly interconnected with Ameren. Mr. Frame's analysis included as separate destination markets each of the entities that are directly interconnected with both Ameren and CILCO and also most of the other entities that are interconnected with only Ameren but not CILCO. He also assembled data on historical wholesale transactions of applicants to determine whether this initial list of destination markets should be expanded. Based upon this review, as well as the results that he reported for the individual destination markets that are included in his analysis, he concluded that there was no need to expand the initial list of destination markets. Mr. Frame explained that the Appendix A Competitive Analysis Screen focuses upon Economic Capacity and Available Economic Capacity. Economic Capacity is all generation capacity located within the relevant destination market, or generation capacity that can be delivered there, after accounting for transmission prices, losses and limits, at a delivered price that is no more than 1.05 times the competitive price in the market. Available Economic Capacity is equal to Economic Capacity less the capacity required to meet firm retail and pre-existing wholesale load commitments. To develop computations for Economic Capacity and Available Economic Capacity, he first determined the "competitive" price for each destination market. He developed a range of prices for this purpose from publicly available historical and forward price information. In determining which generators could deliver Economic Capacity and Available Economic Capacity, Mr. Frame used the generation cost and transmission price and loss data which had been assembled. Transmission flows into each 12 destination market were capped by transmission limits. The transmission data that he used was developed by Ameren. Mr. Frame used three types of transmission limits for the Appendix A analysis: non-simultaneous single path limits between individual control areas, directional limits that included all paths into the control area being analyzed from a single direction (e.g., into Ameren from the west) and simultaneous limits that reflected all paths into the control area being analyzed from all directions. Pre-transaction and post transaction shares and Herfindahl-Hirshmann Indexes ("HHIs") were computed using both the generation within each destination market as well as generation that could be delivered to the destination market from the outside up to appropriate (non-simultaneous, directional and simultaneous) transmission limits. The HHI for a market is equal to the sum of the squared market shares of the individual firms in the market. Thus, a market with four equally sized competitors has an HHI of 2,500 (i.e., 25(2) x 4 = 625 x 4 = 2,500) and a market with 10 equally sized competitors has an HHI of 1,000 (i.e., 10(2) x 10 = 100 x 10 = 1,000). Mr. Frame's computations for the Available Economic Capacity measure were performed in the same fashion except that each supplier's load and firm long term wholesale obligations were deducted from its Economic Capacity in order to determine the Available Economic Capacity that it might have available to sell in the destination market. Mr. Frame explained that determining Available Economic Capacity is becoming increasingly difficult as retail customer choice evolves. For his study, the implementation of retail customer choice most importantly affects determination of Available Economic Capacity for suppliers in Illinois. The process he used was to assume that each traditional supplier (including applicants) that historically had a native load sales obligation continued to serve that same native load. He determined each traditional supplier's native load obligation using publicly-filed data on load shapes and peak demands except for Ameren and CILCO's peak demands, which were supplied by those entities. As appropriate, the peak demands were escalated to 2003, the study year for his analysis. For his base case analysis, Mr. Frame computed and compared pre- and post-merger HHIs, for a number of different destination market, season and load level combinations. He examined 15 different destination markets, three seasons (summer, winter and spring/fall) and five different load levels within each season. These different load levels and seasons collectively establish a range of demand and price levels, reflect different generator capabilities and availabilities and incorporate different base case uses of the transmission system. As indicated, he did the analyses both for Economic Capacity and Available Economic Capacity. Mr. Frame stated that his analyses employ a variety of conservative assumptions. He explained that, by "conservative," he meant that he selected a technique or assumption that, in comparison to available alternatives, produces higher HHIs and higher HHI changes. If the transaction safely falls short of threshold levels for concern about transaction-induced competitive problems when 13 these conservative assumptions are employed, one can be assured that it also will fall short of those threshold levels in cases where less conservative assumptions are employed. Mr. Frame explained that, in an Appendix A analysis, the measured influence of any one supplier naturally will be greatest inside the control area where its generation assets are located. Moreover, given the traditional vertically-integrated structure of the industry, coupled with exclusive or largely exclusive service territories, the HHIs for Economic Capacity inside of a traditional supplier's control area inevitably will be in the range that the joint U.S. Department of Justice-Federal Trade Commission "Horizontal Merger Guidelines" ("Merger Guidelines") refers to as a "highly concentrated" market. Under the Merger Guidelines, a highly concentrated market is one where the HHI is 1,800 or more while a "moderately concentrated market" is one where the HHI is between 1,000 and 1,800. An "unconcentrated" market under the Merger Guidelines is one where the HHI is less than 1,000. Under the Merger Guidelines, which were adopted by the Commission in its Merger Policy Statement, a "screen violation" occurs if the merger-induced HHI change is greater than 50 in a highly concentrated market and greater than 100 in a moderately concentrated market. The HHI change from a merger generally is given by the formula 2 x a x b, where "a" and "b" are the pre-merger market shares of each of the merging parties. If one of the merging parties has a market share of 50 percent (which means that the market will be highly concentrated, because that one party's HHI contribution i.e., 502 = 2,500, by itself is greater than the 1,800 HHI level that defines a highly concentrated market under the Merger Guidelines), a screen violation will occur if the other merging party has a market share in excess of 1/2 of one percent. Mr. Frame noted that a very minor adjustment to the "2 x a x b" formula is required to assess the concentration effects of Ameren's proposed acquisition of CILCO because CILCO is being sold by AES, another market participant, whose market share, and therefore HHI contribution, is decreased as a result of the transaction. Outside the control area where its generation assets are located, the measured influence of a supplier decreases principally because the supplier's generation capacity must be adjusted to account for transmission limits and to a lesser extent because additional transmission charges and losses may be incurred. The effects of these adjustments increase as the destination market becomes more remote from the supplier's generation. CILCO has interconnections only with Ameren, Commonwealth Edison Company ("ComEd"), Illinois Power Company ("IP") and CWLP. Each of these entities also is interconnected with Ameren. CILCO naturally will have a large market share, and therefore HHI contribution, inside its own control area but, because it is a relatively small supplier -- owning generation capacity of only approximately 1,200 MW -- has only a limited market share (and HHI contribution) outside its control area. Mr. Frame explained that the fact that Ameren and CILCO are both traditional, vertically integrated electric suppliers that are directly interconnected with each other suggests, almost inevitably, that there will be 14 screen violations in the Ameren and CILCO destination markets with the transaction. However, CILCO's relatively small size suggests that, as a general matter, there are not likely to be significant screen violations in other destination markets. The only exception is likely to be the CWLP destination market, simply because CWLP is directly interconnected with only three other entities, Ameren, CILCO and IP, and two of these three will be combined into one under the transaction. ComEd and IP also are directly interconnected with both Ameren and CILCO but screen violations seem much less likely in these two destination markets simply because each has several important interconnections with entities other than Ameren and CILCO and because of CILCO's relatively small size. Mr. Frame's Appendix A Competitive Analysis Screen centered on (1) Ameren and CILCO, (2) the three entities that are interconnected with both Ameren and CILCO (i.e., ComEd, CWLP and IP) and (3) ten other entities that are interconnected with Ameren but not CILCO. The transaction produces screen violations in each of the Ameren, CILCO and CWLP destination markets for both the Economic Capacity and Available Economic Capacity measures. There are no screen violations in the ComEd and IP markets, or in any of the other markets examined. Mr. Frame stated that the fact that there are screen violations in the Ameren and CILCO markets is not surprising. Ameren and CILCO are directly interconnected and each (naturally) controls a high percentage of the pre-transaction supply in their respective control areas. Under these circumstances, screen violations will occur even if the other merging partner -- e.g., Ameren for the CILCO destination market and CILCO for the Ameren destination market -- has only a very small market share. To mitigate concerns about the potential for transaction-induced market power that otherwise might be suggested by the screen violations in the Ameren and CILCO destination markets, Ameren initially agreed, as a condition of merger approval, to implement certain transmission system upgrades that will allow increased power flows in and around the area traversed by its transmission system.(4) To increase import capability into the Ameren control area, Ameren proposed to upgrade the current transformers and bus conductors at its West Frankfort and East Frankfort substations and to fund the upgrade of terminal equipment (bus conductor, wave trap, disconnect switch, current transformers and breaker) at IP's Baldwin substation. To increase import capability into the CILCO control area, Ameren proposed to reconductor (change to a higher ampacity) a 50 mile 138 kV line between Tazewell and East Springfield. Mr. Frame examined the effects of implementing these proposed transmission system upgrades on concentration in the Ameren and CILCO destination markets. He found that screen violations remain in both the Ameren and the CILCO destination markets. - -------------------- (4) Ameren also has made commitments with respect to the CWLP market, but those commitments are not addressed herein. 15 Mr. Frame testified that the remaining screen violations in the CILCO destination market do not suggest any real competitive problems. One effect of the transaction is to remove from the market some generating capacity that otherwise would have been independently-supplied (e.g., the Ameren generating capacity participating in the CILCO destination market). He stated that the effect of implementing the mitigation measures will be to increase market size, by allowing more external supplies to enter the destination market after the transaction than before. He stated that a useful comparison is between (1) the amount of independent supply that the transaction takes out of the market, and (2) the amount of new supply that the mitigation allows to be brought in. Mr. Frame stated that for the CILCO destination market, Ameren's initially proposed mitigation measures always allow more new supply from other market participants than the amount of independent supply that is taken from the market when Ameren and CILCO are combined. Accordingly, he found that the combined effects of the transaction and the proposed accompanying mitigation are pro-competitive notwithstanding what the HHI changes might suggest. Mr. Frame stated that customers are better off after than before the transaction and accompanying mitigation, because the independent supply that is competing to serve them is greater. For this reason, Mr. Frame concluded that the remaining screen violations in the CILCO market, after accounting for the proposed mitigation, do not suggest any real competitive problems from the transaction and therefore should be disregarded. B. VERTICAL MARKET POWER Mr. Frame stated that he did not believe that the transaction presents realistic concerns about vertical market power. Principal vertical market power concerns involving wholesale electricity supply generally are associated with fears that vertically integrated transmission owners will use their transmission assets to favor sales of their generation over sales of generation by their competitors. However, CILCO is already a member of the MISO, which has assumed operational control of its transmission system and the transmission systems of several other Midwest entities. Ameren has stated its intention to join the MISO and have the MISO assume operational control of its transmission facilities as well. Accordingly, there should be no legitimate concern that the Applicants will be able to use their transmission assets in an anticompetitive fashion. Both Ameren and CILCO own local gas distribution networks and, in principle, there could be concern that the Applicants might use control of their gas distribution networks to deny gas transport to their generation competitors. However, Mr. Frame testified that there are no independently-owned electric generators (i.e., owned by an entity other than Ameren or CILCO) that make wholesale electricity sales and receive gas transport over CILCO's local distribution networks and only a single such generating unit (a small combustion turbine owned by the Columbia MO Municipal System) that receives gas transport over Ameren's local distribution network. Accordingly, concerns on this score would appear misplaced. Moreover, there are six interstate pipelines that traverse Ameren's service territory (Panhandle Eastern Pipeline, Mississippi River Transmission, Natural Gas Pipeline, Texas Eastern Transmission Company, Trunkline and Midwestern) and five that traverse CILCO's service territory 16 (Panhandle Eastern, ANP Pipeline, Natural Gas Pipeline, Trunkline and Midwestern). Northern Border Pipeline and Alliance Pipeline also come very close. Rather than receive local gas transport from either Ameren or CILCO, it is likely that any new gas-fired generator in the area would locate in proximity to one or more of these interstate pipelines and avoid entirely the need to procure local transport from Ameren post-transaction. Mr. Frame also considered whether vertical market power issues might arise from the proposed transaction because Ameren or CILCO control the supply of other inputs that their generation competitors might need. He determined that, while there are certain fuel and fuel transport facilities that the applicants own, it is not reasonable to consider any of these as "entry barriers" that might thwart their generation competitors. Accordingly, he concluded that the proposed merger does not present any legitimate concerns about the creation or exercise of vertical market power. C. APPLICANTS' ADDITIONAL COMMITMENTS Applicants' witness Nelson filed Supplemental Direct Testimony, in which he sponsored the Approval Conditions, which are 25 separate conditions to approval that Applicants are willing to accept, as a package, in order to achieve closing of the transaction in a timely manner. The Approval Conditions contain several conditions that relate to the market power inquiry. Certain of the conditions are intended to promote development of independent generation, both large and small, within the Ameren service territories. Applicants will develop and make available a list of optimal generating sites within the Ameren and CILCO service territories. Ameren will also waive certain generator interconnection study costs, both for large IPP projects and small generators. Other conditions are intended to enhance import capability into the Ameren and CILCO territories. Ameren has committed to expanding CILCO's import capability in two phases. During Phase I, Ameren will increase Simultaneous FCITC into CILCO by 192 MW; during Phase II, Ameren will increase the Simultaneous FCITC by an additional 189 MW. Ameren also agreed to a specific methodology by which to measure the increases it achieves, and to a procedure by which the Commission can review and approve Ameren's progress. Ameren also committed to complete the two specific transmission projects described above (East-West Frankfort and Baldwin Station) to improve Ameren's import capability within 270 days of closing. Ameren also agreed to interim mitigation measures, pending completion of the transmission upgrades. Ameren will make 100 MW of power and energy available during Phase I to non-affiliated providers within the CILCO control area at the Commission-approved Market Value Index, and 50 MW available during Phase II. Ameren further agreed to penalties for failure to complete transmission projects by the deadlines specified in the conditions. Ameren agreed as well to suspend transition charge recovery in the AmerenCIPS, AmerenUE and CILCO territories from June, 2003 through at least May, 2005, and to conform the non-rate 17 provisions of the delivery service tariffs in the three service territories (AmerenCIPS, AmerenUE and CILCO). So as to not further increase Ameren corporate control over generation sources in the CILCO market, Ameren also agreed that neither it nor its affiliates would purchase power from any new, unaffiliated capacity installed in the CILCO control area prior to 2010, provided that CILCO would be permitted to purchase such power at any time to serve its native load. Finally, Ameren committed to expend its best efforts to ensure that its transmission systems and power markets will be under the control of a single, fully operational FERC-approved regional transmission organization ("RTO") by December 31, 2004. Ameren made various commitments in this regard with respect to the scope of the RTO's authority and the Commission's ability to review and approve changes in RTO affiliation. 2. IIEC'S POSITION IIEC presented the testimony of James R. Dauphinais, a consultant with Brubaker & Associates. Mr. Dauphinais testified that the Approval Conditions provide sufficient mitigation of the increase in horizontal and vertical market power that would have otherwise occurred under the Applicants' transaction. Mr. Dauphinais recommended that the Commission approve the Applicants' proposed transaction subject to the Approval Conditions. A. HORIZONTAL MARKET POWER Mr. Dauphinais disagreed with Mr. Frame's direct application of FCITC to the analysis. Mr. Dauphinais testified that Appendix A requirements call for the use of ATC values, not FCITC. Moreover, the requirements call for adding back into ATC those firm transmission rights that are short-term in nature. He stated that Mr. Frame is correct that ATC information from the OASIS is only really available for 13 months at a time. Therefore, the OASIS ATC values are on occasion artificially too low producing understated HHI changes. However, he stated Mr. Frame's direct use of FCITC results in his analysis understating absolute HHIs and overstating changes to the HHIs due to the transaction. According to Mr. Dauphinais, this is because FCITC is not a commercially available product. Mr. Dauphinais testified that a more precise approach for an Appendix A analysis, especially for retail markets where customers are predominantly (if not entirely) purchasing firm power, would be to back into an "Effective Firm ATC" by taking the FCITC values, adjusting them down for Transmission Reliability Margin ("TRM"), adjusting them up for base case load flow imports into the destination market (effectively adding back in short-term firm transmission rights consistent with Appendix A), and finally adjusting the value down for Capacity Benefit Margin ("CBM"). The portion of FCITC consumed by CBM 18 and TRM is not commercially available for firm transmission service, and should, according to Mr. Dauphinais, be deducted from FCITC in determining firm ATC. According to Mr. Dauphinais, the Effective Firm ATC is transfer capability that would be commercially available to market participants if there were currently no firm transmission reservations for delivery into the destination market. For Economic Capacity, which in itself assumes no pre-existing generation commitments, the use of Effective Firm ATC will give estimates of absolute HHIs and changes to HHIs that are more consistent with the FERC's requirements for Appendix A. Mr. Dauphinais derived Effective Firm ATC values for imports into the CILCO destination market for the summer season without any mitigation measures. According to Mr. Dauphinais, the CILCO destination market has the most severe screen violations and those violations are generally the most severe in summer months when transmission facilities have lower ratings due to higher ambient temperatures. He prepared a sensitivity analysis for the summer season for CILCO for the transaction using Mr. Frame's proprietary model. The results were as follows: TRANSACTION WITH NO MITIGATION CILCO DESTINATION MARKET ECONOMIC CAPACITY HERFINDAHL-HIRSCHMAN INDICES SUMMER LOAD LEVEL 1 2 3 4 5 ------- -------------- ----------- FCITC Pre-Transaction HHI 2,904 2,659 2,699 2,773 1,366 Post-Transaction HHI 3,727 3,519 3,602 3,839 1,508 HHI Change 823 859 903 1,066 141 Effective Firm ATC Pre-Transaction HHI 3,933 3,652 3,699 3,743 1,525 Post-Transaction HHI 4,953 4,735 4,847 5,088 1,814 HHI Change 1,019 1,083 1,148 1,346 289 Mr. Dauphinais stated that these results show the extent to which Mr. Frame's results understated the absolute competitiveness of the destination market. While the HHI changes are higher as well in this case without mitigation measures, with mitigation measures applied, the change in HHIs due to the transaction will be lower when using the more precise Effective Firm ATC Values rather than FCITC. Mr. Dauphinais indicated that the use of FCITC incorrectly shows significant screen violations after the transmission mitigation measures in the conditions have been added. 19 Mr. Dauphinais testified that the adverse impact of the transaction on competition in the Ameren market was substantially addressed by the Applicants' initial mitigation proposal (i.e., the mitigation plan offered before Applicants submitted the Approval Conditions), but significant problems still exist with the CILCO market for Economic Capacity due to the transaction, even when the transmission mitigation measures offered in the Applicants' initial filing were included. Mr. Dauphinais performed an Appendix A analysis with these upgrades using Effective Firm ATC instead of FCITC for the summer season for Economic Capacity in the CILCO destination market using Mr. Frame's model. The results of this analysis are summarized below: TRANSACTION WITH CILCO MITIGATION PROJECTS CILCO DESTINATION MARKET ECONOMIC CAPACITY HERFINDAHL-HIRSCHMAN INDICES SUMMER LOAD LEVEL 1 2 3 4 5 ------- ------ ------- ------ ----- FCITC Pre-Transaction HHI 2,904 2,659 2,699 2,773 1,366 Post-Transaction HHI 3,325 3,125 3,199 3,444 1,483 HHI Change 421 465 500 671 117 Effective Firm ATC Pre-Transaction HHI 3,933 3,652 3,699 3,743 1,525 Post-Transaction HHI 4,288 4,073 4,166 4,406 1,579 HHI Change 355 421 467 663 54 Mr. Dauphinais explained that these results show that even when Effective Firm ATC is used to more precisely calculate the HHIs, there continues to be a problem with Economic Capacity in the CILCO destination market. However, the problem is less severe than HHIs calculated using FCITC suggest. Mr. Dauphinais performed an Appendix A analysis for the CILCO destination market with all of mitigation projects in the Approval Conditions in place, using Mr. Frame's model. The analysis was conducted using Effective Firm ATC consistent with Mr. Dauphinais' other analyses. The results were as follows: 20 TRANSACTION WITH CILCO MITIGATION PROJECTS AND ADDITIONAL CILCO MITIGATION PROJECTS CILCO DESTINATION MARKET ECONOMIC CAPACITY USING EFFECTIVE FIRM ATC HERFINDAHL-HIRSCHMAN INDICES SUMMER LOAD LEVEL 1 2 3 4 5 ------- ------ ------- ------ ----- Pre-Transaction HHI 3,933 3,652 3,699 3,743 1,525 Post-Transaction HHI 3,800 3,586 3,671 3,920 1,508 HHI Change (133) (66) (28) 177 (17) These results show that all Economic Capacity screens except the Summer 4 load level are met for the CILCO destination market with both the CILCO Mitigation Projects and Additional CILCO Mitigation Projects added. However, even the Summer 4 load level is significantly mitigated. Final resolution of the Summer 4 load level is achieved through mitigation measures other than transmission upgrades to which the Applicants have committed under the Approval Conditions. Mr. Dauphinais believes that the remaining screen violation for the CILCO destination market is resolved by the non-transmission mitigation provisions of the Approval Conditions, including the listing of preferred generation sites, reimbursement of generation interconnection study costs, and encouragement of small generators. He stated that the listing of preferred generation sites will help guide third-party generation developers to attractive sites in the CILCO, AmerenUE/Illinois and AmerenCIPS service territories that are conducive to new generation development. This reduces barriers to generation market entry in the Ameren and CILCO destination markets. Reducing barriers to entry in the generation market helps to mitigate any residual horizontal market power that will exist in the Ameren and CILCO destination markets following completion of the Applicants' transaction. Mr. Dauphinais also explained that the benefit of reimbursing generation interconnection costs for a limited period will reduce the cost of interconnection for third-party generators in the Ameren and CILCO destination markets and, thus, serve as an incentive to these generators. This reduces barriers to entry and thus reduces any residual market power in those destination markets. 21 Mr. Dauphinais explained that the benefit of encouraging small generators further lowers the barriers to entry for smaller third-party generators. He noted that a large number of new diversely owned small generators would be more effective at reducing residual horizontal market power than a small number of diversely owned large generators because it results in lower HHI values. Therefore, according to Mr. Dauphinais, it is desirable from a market power mitigation perspective to provide additional encouragement for smaller third-party generators. Mr. Dauphinais explained how the elimination of the CILCO, AmerenCIPS and AmerenUE/Illinois transition charges until at least June 30, 2005 is beneficial. Transition charges amount to a premium that must be paid by retail customers who choose to use retail access. Moreover, there is no product in either the wholesale or retail electricity markets that allows retail customers or their RES to hedge against changes in transition charges. Thus, the transition charge contributes to the Applicants' market power at retail. The Applicants' elimination of the transition charge as outlined in the Approval Conditions will mitigate this retail market power concern at least through June 30, 2005. The Approval Conditions provide for verification that the CILCO mitigation projects and additional CILCO projects will actually provide the additional 192 MW and 189 MW, respectively, of additional transmission capacity for imports. Approval Condition C.1 calls for the Applicants to perform an analysis no more than 120 days and no less than 60 days before the completion of the CILCO Mitigation Projects and then again before the completion of the Additional CILCO Projects. The results will be subject to the review and approval of the Commission. This will allow the Commission to verify that the additional transmission capability for imports into the CILCO destination market (as shown by an equivalent increase in simultaneous FCITC) is actually provided. B. VERTICAL MARKET POWER Mr. Dauphinais stated his view that certain of the Approval Conditions provide additional assurances related to vertical market power concerns. The Applicants have committed to expend their best efforts to ensure their Illinois transmission systems and power markets will be under the control of a single, fully operational FERC-approved RTO by December 31, 2004. They have also committed to use their best efforts to ensure that the RTO has operational authority to approve and implement transmission service schedules, approve all outages of critical transmission facilities and to implement the necessary congestion management procedures. The Applicants have also agreed that they will not change their RTO affiliation prior to 2008 if such a change would produce a new or different RTO seam in Illinois unless the Applicants obtain this Commission's approval under a public interest standard. Mr. Dauphinais stated that these provisions further ensure the Applicants will not likely be able to exercise vertical market power through their ownership of transmission facilities. 22 3. STAFF'S POSITION A. OVERVIEW The Staff presented the testimony of four witnesses with respect to the effect of the Reorganization on retail markets: Randy Rismiller, the Director of the ICC's Federal Energy Program with the Energy Division; Serhan Ogur, an Economic Analyst in the Federal Energy Program with the Energy Division; Dr. Eric Schlaf, an Economist in the Energy Division; and David Borden, an Economic Analyst in the Energy Division. Mr. Ogur evaluated Applicants' "competitive assessment" economic analysis of the Reorganization; Mr. Rismiller and Dr. Schlaf assessed the likely effect of the Reorganization on competition in the retail electric market. In that regard, Mr. Rismiller assessed impacts at the wholesale level (which would then impact the retail level) and Dr. Schlaf focused on retail-specific effects. Mr. Borden addressed the effect on competition of Applicants' proposal to make CILCO an IDC. Mr. Rismiller and Dr. Schlaf stated that it was their opinion that the Reorganization, as it is proposed to be conditioned by Applicants, will satisfy the statutory standards regarding the effect of the Reorganization on markets over which the Commission has jurisdiction. Mr. Rismiller stated that Mr. Frame's Direct Testimony and Exhibits in the FERC proceeding provide a meaningful competitive economic analysis of the proposed merger. However, based upon the results of that analysis, and on the evaluation of Applicants' analysis performed by Mr. Ogur, Mr. Rismiller said that he would conclude that the merger fails to satisfy Section 7-204(b)(6) of the Act. It is the Approval Conditions, in conjunction with Applicants' other evidence and information, and information provided by Mr. Dauphinais that allowed Staff to reach a conclusion that Applicants have met their burden. If the Conditions are imposed by the Commission and subsequently timely implemented by Applicants, Staff believes that the merger is not likely to have a significant adverse effect on competition. However, Mr. Rismiller stated that the Reorganization presents a "close call" and that the Approval Conditions should be considered the minimum commitments needed to support a positive competition and rate finding in this case. B. STUDY PERIOD FERC's Order 642 Merger Rule at page 31,887 states that, "merger analysis should be as forward-looking as practicable" and "the competitive analysis screen is intended to be a forward-looking measure." Staff noted, however, that it does not impose a particular test year to be employed in the analysis. Mr. Rismiller noted that Mr. Frame stated that he modeled conditions as he expects them to exist in 2003, and that using such a near-term test year, in 23 some respects, "acts to overstate the effects of the transaction" as measured by his analysis. Mr. Frame also assumed that, over time, additional generating capacity will come on line and new regional tariffs will be implemented. Mr. Frame also stated that, because of those possible developments, the impacts of Applicants' proposed merger will be less than that shown in his economic analysis. Mr. Rismiller cautioned that there is no guarantee that FERC will be successful in putting properly designed regional tariffs into place. In addition, he noted, the trade press is currently full of articles about independent power plant developers discontinuing progress on planned power plants, and even some of those already permitted and under construction are being abandoned. He said that placing hope on the development of regional tariffs and unspecified new independent power plants in the region to lessen the concern about the presumed anti-competitive effect of the Applicants' proposed merger is tenuous at best. Similarly, other market concentrating events, like mergers of other regional industry participants, could have the effect of further concentrating the regional market and aggravating the possible anti-competitive effect of Applicants' proposed merger. Load growth throughout the region and in Applicants' service areas can make it easier for those entities possessing market power to exercise it. Mr. Rismiller explained further that, while the post-2006 period is very important, it was not Staff's only concern in this case. The retail rate freeze provides retail customers some protection from retail rate volatility and the rate effects of possible wholesale price manipulation until December 31, 2006. However, it is possible for retail customers to be harmed prior to December 31, 2006 if the merger were to have a significant anti-competitive effect on power markets in the Ameren and/or CILCO control areas. Exercise of market power by the merged company could result in wholesale power prices in those areas being artificially increased. This would have an immediate negative effect on the ability of Retail Electric Suppliers ("RESs") to compete in the Ameren and CILCO markets due to the current transmission constraints in the CILCO service area. If RESs were unable to compete in the Ameren or CILCO markets because of anti-competitive activity of the merged company, retail customers would be worse off than they otherwise would have been in the period prior to December 31, 2006, because of lost RES opportunities. The impact of any market manipulation that the merged company might engage in and the associated anti-competitive effect would be compounded after December 31, 2006 because of the elimination of the statutory retail rate freeze. Also, because CILCO and AmerenCIPS have transferred their power plants to affiliates and subsidiaries, Ameren and CILCO will be acquiring the power in the wholesale market to serve their Illinois bundled retail load customers. Consequently, the effects of artificially high wholesale power prices could be reflected in bundled retail rates after the expiration of the current retail rate freeze (December 31, 2006). Therefore, the post-2006 period deserves a great deal of attention, but the possible anti-competitive effect of the merger in the period prior to December 31, 2006 cannot be ignored. 24 C. STANDARD APPLIED Mr. Ogur explained that, like Mr. Frame, he applied the competitiveness standard adopted by FERC in its Merger Guidelines to the question of whether Applicants' proposed merger satisfies the competitiveness requirement in Section 7-204(b)(6) of the Illinois Public Utilities Act. FERC's regular competitiveness standard, or some variant thereof, is commonly applied in merger review circumstances. FERC's Appendix A Competitive Analysis Screen is a data-based analytical method of measuring the likely anti-competitive effects of a merger and the thresholds are based on those long used by the Department of Justice in merger cases. In other words, FERC's merger screen test has become a fairly standardized method to assess a merger's likely effect on competition. For example, the ICC referred to FERC's Merger Guidelines in its 1997 Order on the joint application of Central Illinois Public Service Company and Union Electric Company for approval of merger and reorganization. (ICC Docket No. 95-0551, September 10, 1997 at pages 44-45) Mr. Ogur testified that, under these circumstances, it appears reasonable to apply the FERC standard to the competitiveness question with variation, as necessary, to accommodate any Illinois-specific or case-specific circumstances. Mr. Ogur described the range of standards that could be applied to assess the statutory mandate that requires Applicants to demonstrate that the proposed merger "is not likely to have a significant adverse effect on competition." According to Mr. Ogur, the standards that could be applied to this question can be considered to lie as points along a continuum. At the far left of the continuum, the standard would be to approve no merger. Moving to the right, the merger would be approved only if it results in an HHI of 1000, or less, given the fact that 1000 is the benchmark at which the guidelines begin finding market concentration. Further to the right on the continuum would be a standard under which the merger is approved provided that it does not increase the HHI from its pre-merger level. Moving further to the right would be a standard in which the merger is approved if it passes FERC and DOJ Merger Guideline thresholds. Further to the right would be a standard in which the merger is approved even if it fails the Merger Guideline thresholds, provided that Applicants satisfy the additional issues stated in the FERC and DOJ Merger Guidelines. Further to the right on the continuum would be a standard in which the merger is approved provided that it adds as much independent supply options to the market as the merger takes away. Finally, at the far right of the continuum would be a standard in which all proposed mergers are approved. Mr. Ogur explained that he proposed to apply a standard fairly far to the right on this continuum above -- that is, the merger may be approved even though it fails the Merger Guideline thresholds, provided that Applicants satisfy the additional issues stated in the FERC and DOJ Merger Guidelines. 25 D. MARKETS EXAMINED Mr. Ogur explained that Staff was principally interested in the CILCO and Ameren destination markets and tangentially interested in the ComEd, IP and CWLP destination markets. E. STUDY INPUTS AND ASSUMPTIONS Staff expressed significant concerns regarding the inputs used in Mr. Frame's analysis. Mr. Ogur testified that he did not believe that, contrary to Mr. Frame's testimony, Mr. Frame consistently used "conservative" assumptions in his analysis. For example, on page 54 of Exhibit 8.1, Mr. Frame describes using a "proportional" method to allocate limited transmission capability to suppliers (proportional to the total amount of power potentially competing to use a constrained path) rather than using an "economic" method that allocates limited transmission capability to suppliers with the lowest delivered costs or lowest bids. Using the "proportional" allocation method will likely result in lower HHIs (and lower HHI changes in many cases) than using an "economic" allocation method because it distributes the supply contribution more broadly than just to the lowest cost (or price) supplier. Consequently, according to Mr. Ogur, it should be recognized that the HHIs (and HHI changes) that result from Mr. Frame's analysis could be even higher under some alternate modeling assumptions. Moreover, Mr. Ogur noted that at pages 31,894 of FERC's Order No. 642 adopting a merger rule in FERC Docket No. RM98-4-000 (November 15, 2000) (93 FERC 61,164), FERC stated, We note that transmission allocation is a key issue in defining relevant geographic markets in the analysis of constrained networks. However, it is not clear to what arbitrary procedures for allocating transmission capability in the delivered price test WEPCO [Wisconsin Electric Power Company] is referring. In the NOPR [Notice of Proposed Rulemaking], we did not propose a particular method of allocating limited transmission capability among suppliers of economic generation capacity in the same market, but invited comments on various approaches. A variety of allocation methods are possible, and the Commission has acknowledged that certain methods provide more accurate and reasonable results than others (i.e., pro-rata as opposed to least-cost). Applicants must describe and support the method used and show the resulting transfer capability allocation. We will not at this time specify particular rules or require a single method for transmission allocation. However, since transmission allocation is a key parameter in defining relevant markets, there are benefits to sensitivity analysis using different allocation methods. We encourage such analysis. Mr. Ogur stated that the proportional method that Mr. Frame used in his analysis is not necessarily a "conservative" method. Beyond that, Mr. Ogur also 26 noted that an economic, rather than a proportional, method of allocating limited transmission capability in economic analyses may be a better model of future reality given that FERC has proposed in its Standard Market Design Notice of Proposed Rulemaking ("NOPR") to adopt a requirement that RTOs employ a regional, security constrained, bid-based dispatch. FERC encouraged merger applicants (in its Merger Order) to conduct sensitivity analyses using different allocation methods given that transmission allocation is a key parameter in defining relevant markets. However, Mr. Ogur said, Mr. Frame provided no sensitivity analysis to demonstrate the robustness of his merger competitiveness conclusions under a modeling approach using an economic (bid-based or least-cost), rather than a proportional, method of allocating limited transmission capability. Mr. Ogur also noted that, at page 30,132 of FERC's Merger Guidelines, it states, "[Economic Capacity] is the most important of the measures because it determines which suppliers may be included in the geographic market." FERC's Merger Guidelines also state, The presumption underlying this measure [Available Economic Capacity] is that the lowest running cost units are used to serve native load and other firm contractual obligations and would not be available for other sales. As competition develops, this presumption may not be valid. [Footnote 81: For example, in a market with full retail access and a bid-based power exchange, all generation units would be in the market]. FERC Merger Guidelines at 30,132. Mr. Ogur did not agree with Mr. Frame that Available Economic Capacity, rather than Economic Capacity, is the more meaningful measure to use in the economic analysis of the proposed merger. He acknowledged that the Available Economic Capacity has some relevance due to existing power purchase contracts and, to some extent, to the retail rate freeze in Illinois. CILCO has a power purchase contract with its generation affiliate CIGI for its entire retail load obligation until the end of 2004. Similarly, AmerenCIPS has a power purchase contract with its generation affiliate AEG for its entire retail load obligation until the end of 2004. However, even under these circumstances, Mr. Ogur said, it is not clear that Available Economic Capacity is a better model of reality than the Economic Capacity. For Available Economic Capacity to be considered a valid measure of capacity in market power analysis, its validity as a measure of capacity for all of the market participants included in the HHI calculations should be supported. Such support is presented only for CILCO and Ameren. Therefore, Available Economic Capacity is not necessarily the method of choice even for the period until the retail rate freeze ends in Illinois. Mr. Ogur stated that, for the period beginning with 2007, the Economic Capacity measure is the best model of reality for at least three reasons. First, power purchase contracts of CILCO and AmerenCIPS will expire; thus these utilities will have to purchase the power they need to serve their retail load in the wholesale market. Second, the retail rate freeze in Illinois will be over 27 so these load serving entities (CILCO and AmerenCIPS) will be able to pass the potentially high wholesale power prices through to their ratepayers. Third, according to current developments and timelines, wholesale power markets will be organized as bid-based, security-constrained and centrally dispatched regional power exchanges. Since market power studies should be forward-looking, and the Economic Capacity measure is almost a perfect model of reality under such circumstances, as FERC has noted, Economic Capacity is a much better measure for the purposes of this case than the Available Economic Capacity. Mr. Ogur stated that, if we employ a forward-looking stance (as, he asserted, merger analysis requires) rather than a backward-looking one, the Economic Capacity measure is a much better measure of reality to use in the market power analysis than is the Available Economic Capacity measure. Existing trends will cause the Available Economic Capacity measure to become less and less relevant as we proceed into the future. According to Mr. Ogur, Mr. Frame's own analysis shows that the proposed merger fails FERC's merger screen test for the CILCO and Ameren markets on the Economic Capacity measure to an even greater extent than the merger fails on the Available Economic Capacity measure. This is true in the base case and remains true even after taking into account Applicants' proposed transmission upgrade projects as described in Mr. Birk's testimony. Transmission import capability is an important variable in the market power analysis. FERC's Merger Guidelines state, "It is important to assess accurately the amount of transmission capability available for each supplier's use. The key to incorporating transmission limitations into the merger analysis is to include each supplier in the relevant market only to the extent of the transmission capability available to them." (Merger Guidelines at 30,132.) Indeed, transmission import capability is a key variable used in the economic analysis and it has a major impact on the results of that analysis. Mr. Ogur stated that the Applicants offered no testimony at all on this important subject. He said Staff made numerous efforts to obtain the necessary information about transmission import capability calculations used by the Applicants, and the closest thing to an explanation provided by the Applicants was their response to ICC Staff Data Request RPR-10. Applicants stated in response to ICC Staff Data Request RPR-10 that their simultaneous import capability methodology "involved linear transfer capability analysis performed using Power Technologies Inc. MUST software." Accordingly, Mr. Ogur was not able to confirm the validity of this key input into Mr. Frame's economic analysis. The Staff also disagreed with the use of FCITC values. Mr. Ogur noted that Applicants' witness Birk stated that FCITC represents "the ability of the system to move power." He indicates, on the other hand, that ATC represents "the availability of transmission service as indicated in OASIS postings." He then 28 states, "The former is limited by physical constraints on the system; OASIS postings reflect business constraints." (See ICC Staff Exhibit 1.1, p. 9) Mr. Ogur observed, however, that potential competitors would be just as effectively thwarted by "business constraints" that prevent them from competing in power markets against the Applicants as they would be by "physical constraints" that prevent them from competing. He stated the Commission should not cavalierly disregard the "business constraints" faced by potential competitors in the current and future market context. In particular, at this time, a formidable business constraint facing potential competitors of Applicants within the CILCO market is the limited availability, or outright unavailability, of ATC that competitors need if they are to successfully compete against Applicants with firm service offerings like those available for supply by Applicants. In order for a competing supplier to satisfy a need for firm power within the CILCO market, the supplier will, most likely, have to first obtain firm transmission capability. If no ATC is available, no request for firm transmission service can be granted. FERC's Order 642 merger rule confirmed this approach stating, "The NOPR proposed that transmission capability that is not subject to existing firm reservations by others may be presumed for purposes of the competitive analysis screen to be available to economic suppliers to reach the relevant markets." (Order 642 at 31,893.) Consequently, while the HHI economic analysis employs physical transmission availability as an assumption, business constraints such as ATC availability limits are not taken into account. This ATC problem is not likely to extend into perpetuity. Once the regional market operator initiates a regional, security constrained, least-cost dispatch procedure using locational marginal pricing ("LMP"), the concept of physical transmission capacity reservations underlying the ATC approach will become an anachronism. Under an LMP approach, customers seeking transmission service will be able to obtain it for a price. However, in the interim, both "business constraints" on transmission availability and "physical constraints" on transmission availability may negatively impact competition. F. STUDY RESULTS Mr. Ogur found that the Reorganization, absent the Approval Conditions, fails the HHI screen test. While the transaction fails the screen in some time/load periods using the Available Economic Capacity measure, it fails the screen by greater amounts and in many more time/load periods using the Economic Capacity measure, which, Mr. Ogur testified, is the better measure to use because it more accurately models reality. Therefore, the screen analyses present significant competitiveness concerns with the merger despite Mr. Frame's testimony that gives lesser weight to the Economic Capacity measure than to the Available Economic Capacity measure. But, he noted, the merger fails the screen test even using the Available Economic Capacity measure. Mr. Ogur noted that FERC's Merger Guidelines do not state that a merger that fails the Appendix A HHI screen should automatically be denied. FERC's Merger Guidelines state, "It is reasoned analysis, not blind faith in the 29 thresholds, that must carry the day." (Merger Guidelines at 30,134.) The HHI screen is not meant to be a definitive test of the likely competitive effects of a proposed merger (See FERC Order 642 at 31,879). If the merger proposal fails the Appendix A HHI screen thresholds, FERC's Merger Guidelines state that the Applicants should present further analysis. Specifically, The additional analysis could address the potential for adverse competitive effects, the potential for entry in the market and the role entry could play in mitigating the increased market power, any efficiency gains that reasonably could not be achieved by other means, and whether, but for the merger, either party would likely fail causing its assets to exit the market. Merger Guidelines at 30,135. FERC's Order 642 at 31,896 states that if the HHI statistics "exceed the thresholds, the applicants must either propose mitigation measures that would remedy the merger's potential adverse effects on competition or address the other DOJ/FTC merger analysis factors." Mr. Ogur did not agree with Mr. Frame that the initially proposed transmission upgrades will add more independent supply than the merger eliminates. To reach his conclusion, Mr. Frame had to assume that all of the additional simultaneous import capability created by the transmission upgrades is used by entities other than Ameren and its affiliates. Unfortunately, Mr. Ogur said, we know that will never be true. In a network transmission system, such as that in Illinois, and taking into account the kinds of transmission upgrades proposed by Applicants in this case, some of the increased transmission import capability into the CILCO market will necessarily be available to Ameren; i.e., it is not "independent" of the merger Applicants. This can readily be shown by Mr. Frame's own exhibits. Exhibit APP-516 to Mr. Frame's FERC testimony (Applicants Ex. 8.1 in this proceeding) shows the results for the CILCO destination market using the Economic Capacity measure with the transmission upgrades in place. It is clear from this Exhibit that the "Ameren Capacity-Post" is greater than the sum of the "Ameren Capacity-Pre" and the "AES/CILCO Share-Pre." The amount of capacity by which the Ameren "post" results exceeds the sum of the "pre" amounts on Exhibit APP-516 is the amount of the simultaneous import capability created by the transmission upgrades that the model allocates to Ameren. This amount is as follows for each of Mr. Frame's study periods: AMOUNT IN MW OF THE "NEW" SIMULTANEOUS IMPORT CAPABILITY ALLOCATED TO AMEREN IN THE MODEL (CILCO MARKET, ECONOMIC CAPACITY MEASURE) - --------------------------------------------------------------------------- Summer Winter Spring/Fall - --------------------------------------------------------------------------- 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 - --------------------------------------------------------------------------- 25 25 24 27 17 68 68 77 82 69 46 52 53 52 41 - --------------------------------------------------------------------------- 30 Mr. Ogur confirmed these calculations by examining Applicants' answer to ICC Staff data requests. Mr. Ogur stated that, consequently, if Mr. Frame's analysis is adjusted for the foregoing amounts of the "new" simultaneous import capability that are allocated by the model to Ameren, the result is as follows: "GENUINE" NET ADDITIONAL INDEPENDENT SUPPLY FROM MERGER PLUS INITIAL CILCO MITIGATION PROJECTS (CILCO MARKET, ECONOMIC CAPACITY MEASURE) - ------------------------------------------------------------------------ Summer Winter Spring/Fall - ------------------------------------------------------------------------ 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 - ------------------------------------------------------------------------ - -18 -25 -33 -72 -43 46 46 15 -9 21 27 -3 -15 -7 40 - ------------------------------------------------------------------------ Therefore, the only time periods/load levels in which the proposed transmission upgrades (plus merger) can be considered to genuinely create "net additional independent supply" in the CILCO market are in the winter 1 (46 MW), winter 2 (46 MW) winter 3 (15 MW), winter 5 (21 MW), spring/fall 1 (27 MW), and spring/fall 5 (40 MW). In other words, the merger, even taking into account the proposed transmission upgrades (and relying on Mr. Frame's own data and analysis) will reduce the amount of independent supply available within the CILCO markets in all summer periods, one winter period, and three spring/fall periods. In all other periods, the genuine "net additional independent supply" into the CILCO market resulting from the merger and associated transmission upgrades is no more than 46 MW (as shown by Table 2). Mr. Ogur testified that, accordingly, even if Mr. Frame's recommendation to downplay the significance of the HHI (and HHI change) results (on which the merger fails the screen) is accepted, his argument that the transmission upgrades create more independent supply options than the merger eliminates cannot be accepted because it is not true for nine of the fifteen study periods/load levels, including the very important summer periods. G. COMPETITIVE CONCERNS Mr. Ogur identified five particular strategies under which the merger, as initially proposed by Applicants, and without additional mitigation, could create increased opportunities for the merged company to exercise market power, thereby harming competition (both during and after the rate freeze) and creating conditions that could lead to higher retail rates after the rate freeze than would otherwise be the case without the merger: (1) foreclosing transmission access into the Ameren and/or CILCO markets to raise prices in the Ameren and/or CILCO market; (2) generation withholding in the Ameren control area to raise power prices in the CILCO market; (3) generation withholding within the CILCO control area to raise power prices in the CILCO market; (4) joint Ameren/CILCO generation withholding to raise power prices in the CILCO market; and (5) coordinated strategic behavior (e.g., collusion) between the merged company and 31 a significant neighboring generation owner to raise power prices in the CILCO market. H. STAFF'S ANALYSIS The Additional CILCO Projects referenced in the Approval Conditions (which will produce an additional 189 MW of import capability, above the original 192 MW commitment) constitute a significant new commitment by Applicants to mitigating market power opportunities created by the Reorganization. Nonetheless, as explained by Mr. Ogur, based only on the increase in transmission capability expected to result from the initially proposed mitigation projects, the Reorganization still would violate the relevant competitiveness tests. Mr. Dauphinais' Direct Testimony shows that, once adjustments to more accurately measure transmission import capability are taken into account, along with Applicants' proposed Additional CILCO Projects addressed in the Approval Conditions, FERC's HHI merger screen will be passed in all summer periods except period 4. Mr. Ogur's original Table 2 showed that the "Genuine" Net Additional Independent Supply from the merger plus the initial upgrade projects (the "CILCO Mitigation Projects") and that, without the Additional CILCO Projects, the merger would not create genuine net additional independent supply in nine of the fifteen study periods/load levels, including the very important summer periods. Assuming that one-third of the additional 189 MW of import capability to be created by the Additional CILCO Projects gets allocated to Ameren, results in an increase of 126 MW of additional new independent supply. If Mr. Ogur's Table 2 is adjusted accordingly by 126 MW, the following results are obtained: "GENUINE" NET ADDITIONAL INDEPENDENT SUPPLY FROM MERGER PLUS CILCO MITIGATION PROJECTS PLUS ADDITIONAL CILCO PROJECTS (CILCO MARKET, ECONOMIC CAPACITY MEASURE) - ------------------------------------------------------------------------------- Summer Winter Spring/Fall - ------------------------------------------------------------------------------- 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 - ------------------------------------------------------------------------------- 108 101 93 54 83 172 172 141 117 147 153 123 111 119 166 - ------------------------------------------------------------------------------- Consequently, this Table shows that the merger plus the initial mitigation projects plus the Additional CILCO Projects should result in an increase in the net independent supply opportunities. Mr. Rismiller explained that, if it is determined that the merger plus the initial mitigation projects plus the Additional CILCO Projects create additional net independent supply opportunities for customers in the CILCO control area, it does not necessarily mean that FERC's HHI screen test is passed. Even if the Additional CILCO Projects were to increase import capability (as measured by Applicants) by as much as 250 MW, FERC's HHI screen test would still not be passed, using Mr. Frame's method for measuring transmission import capability. 32 Mr. Dauphinais' alternative method for measuring transmission import capability, however, shows that the initial CILCO Mitigation Projects plus the Additional CILCO Projects, will result in FERC's HHI merger screen test being passed in all but the Summer 4 period. Staff's determination that the Commission should approve the Reorganization does not mean that Staff is not concerned with the screen violation in the CILCO market in the Summer 4 period. However, in the Conditions, Applicants have committed to other additional mitigation measures (in addition to the Additional CILCO Projects) that will help lessen concern about anti-competitive impacts of the merger in the CILCO market in that load period. Staff was also concerned that neither the CILCO Mitigation Projects nor the Additional CILCO Projects will be in place and in service on the date the merger closes. The CILCO Mitigation Projects may not be in service until as much as 24 months after merger closing. The Additional CILCO Projects may not be in place until December 31, 2008. Without the new import capability expected to be created by these projects, under certain circumstances, the merger might possibly permit the merged company to engage in anticompetitive behavior. Staff noted with particularity certain commitments that addressed these concerns. The most meaningful additional mitigation commitments relating to HH1 screen violations are Conditions A1, A2, and A3. Condition A1 requires the Applicants to develop and keep a current list of generator sites that are physically proximate to electric transmission facilities, gas delivery facilities and water resources. Condition A2 requires Applicants to reimburse generators for the costs of siting studies undertaken by Applicants. Condition A3 requires Applicants to develop a standardized small generator interconnection agreement and procedure and waiver costs attributable to small generator siting. These measures are designed to reduce barriers to entry and to encourage new independent generation to locate in Applicants' service areas. Condition D1 commits Applicants to offer specified amounts of power and energy to non-affiliates in the CILCO control area at specified index prices. This commitment will enable non-affiliated RESs in the CILCO market the opportunity to obtain some amount of power and energy without necessarily having to import that power into the CILCO control area over limited transmission capacity. When Applicants' commitment to the Additional CILCO Projects is taken into account (in association with Mr. Dauphinais' transmission import figures), the merger passes the merger review screen in all summer periods except Summer 4. Furthermore, as Mr. Dauphinais' HHI analyses show, the HHI changes in the Summer 1, 2, and 3 periods actually become negative with the inclusion of the import capability from the Additional CILCO Projects, which would indicate a reduction in market concentration in those periods. I. NUMBER OF COMPETITORS Dr. Schlaf's principal concern about the effect of the Reorganization on retail competition is that CILCO would eventually cease its retail marketing 33 operations in the AmerenCIPS service territory and leave the AmerenCIPS market with one fewer competitor after the merger. If this were to occur (and Dr. Schlaf believes that it is reasonably likely that it will occur), the effect on retail competition could be significant, as CILCO was (until only very recently) the most successful retail marketer in the AmerenCIPS service area. Dr. Schlaf stated that the additional mitigation measures proposed by the Applicants in the Approval Conditions will likely have the effect of encouraging new suppliers to consider entering the AmerenCIPS service area and essentially replace CILCO as an independent marketer. The additional measures to which Dr. Schlaf referred include the following: A. Eliminating transition charges in the AmerenCIPS and AmerenUE service areas for at least two years, starting when existing Power Purchase Option contracts expire in June 2003 (Condition H). B. Offering to make power and energy available to suppliers in the AmerenCIPS and CILCO service areas under specified terms and conditions (Conditions D(1) and D(2)). C. Offering to conform CILCO's delivery services tariffs and business practices with those in effect for AmerenCIPS and AmerenUE (Condition S). Dr. Schlaf observed that it would be hard to argue that the mere existence of transition charges, especially volatile transition charges, is not an obstacle, perhaps the main obstacle, to retail competition. Eliminating transition charges for at least two years will increase customer interest in switching to alternative suppliers. As the customer interest level increases, supplier interest in the AmerenCIPS market should also increase. He added that there is also no guarantee that transition charges will ever return in the Ameren service areas. Under Approval Condition H, the Ameren Utilities would need Commission approval to reinstitute transition charges. Conditions D(1) and D(2), which would require AmerenCIPS and CILCO to make power and energy available to suppliers, should lessen, at least to a certain extent, any concern that a new supplier might have about the availability of market-priced power in the AmerenCIPS service area that could be sold to retail customers while the Applicants' transmission projects are under construction. Finally, under Condition S, CILCO would conform its delivery services tariffs and business practices with those in use in the rest of the AmerenCIPS service areas, which would reduce start-up costs for suppliers operating in the CILCO market. The combination of power sales and familiar tariffs and business practices should interest suppliers in the CILCO market. 34 Mr. Borden explained that requiring CILCO to seek to operate as an IDC, as required under Condition I, would benefit retail competition. Mr. Borden noted that Section 452.230(b) of the Commission's Rules expressly prohibits an IDC from providing various non-tariffed retail electric services. Mr. Borden indicated that non-retail supply services, contract services, billing and pricing experiments, etc. can be used by an incumbent utility to inhibit entry into the retail market by alternative suppliers in a manner that harms the development of retail competition. A Functionally Separated Utility, in contrast to an Integrated Distribution Company, can supply such services. Mr. Borden explained that, in his opinion, the FSU rules may not be as effective as the IDC rules at preventing anti-competitive behavior because the FSU rules rely, in part, on a variety of Chinese walls to separate functions within the utility that may be inadequate to address conflicts of interest between the delivery and retail supply functions existing within the same company. Additionally, the IDC rules are somewhat clearer in what they preclude and thus may result in less harm to the development of competition. 4. COMMISSION CONCLUSION While the parties have presented differing approaches to measurement of the impact of the Reorganization on the Illinois retail electric markets, all agree that, with the implementation of the additional Approval Conditions, the Reorganization will not be likely to have a significant adverse effect on competition. Accordingly, the Commission finds that the record supports such a finding. G. FINDING 7: "[T]HE PROPOSED REORGANIZATION IS NOT LIKELY TO RESULT IN ANY ADVERSE RATE IMPACTS ON RETAIL CUSTOMERS." 1. APPLICANTS' POSITION Applicants contend that two beneficial effects of the Transaction, the continued rate freeze and expected long-term synergies, will result in both short- and long-term rate stability for retail customers. Applicants note that CILCO's electric rates subsequent to the Transaction will be frozen by statute through December 31, 2006. Additionally, Applicants have proposed the use of a rate stabilization period -- a period of time during which gas rates will remain constant, based on the pre-closing cost of service. The Applicants contend this will protect customers from any unanticipated acquisition-induced changes in the level of gas base rates related to the Reorganization and Ameren's initial efforts to improve CILCO's service. Applicant witness Thomas Voss testified that, subsequent to the closing of the transaction, various steps will be taken to improve CILCO's service. Notwithstanding these steps, Applicants' proposal will ensure that there will be no change in rates charged to customers during the rate stabilization period for electric and gas service. Applicants' witness Craig D. Nelson testified that the change in control over CILCO and the incorporation of CILCO in the Ameren system, with the resulting synergies, are expected over the long term to reduce CILCO's cost of service, not increase it, from what it otherwise would have been. CILCO will not 35 seek to retain any portion of the synergies in any future electric or gas rate filing. Changes in rates effective after the rate stabilization period will reflect the then-actual cost of service, including the effect of all applicable synergies. Significantly for customers, the proposal ensures that there can be no adverse rate impact from the Reorganization. If transition costs exceed expectations, or if synergies fail to materialize on the schedule foreseen by the Applicants, customers will not be harmed. Applicants note that the rate stabilization period plan will not create any windfall for Applicants. Mr. Nelson explained in his testimony that the Reorganization promises to produce for CILCO's regulated operations pre-tax net cost reductions ranging from $0.5 to $3.2 million per year; this range reflects neither the transaction costs nor transition expenses associated with the Reorganization, which in the aggregate are expected to be approximately $39 million. Mr. Cisel testified, in response to the OAG's witness, discussed below, that the CILCO gas rate case being filed before closing was contemplated prior to this transaction; hence this transaction is not causing gas rates to increase. In addition, Mr. Cisel testified that CILCO sought an exception to the extension of the electric rate freeze in the event that it did not become part of a larger utility holding company because it was forecasting a $10 million unrecoverable increase in power costs. As a result, CILCO, absent the transaction, would have sought an electric rate increase in 2005. 2. OAG'S POSITION The OAG initially recommended that approval of the Reorganization be conditioned upon CILCO agreeing to reduce its rates by crediting electric customers for any actual over-earnings in the years 2005 and 2006. OAG witness David J. Effron testified that CILCO's current electric rates appear to be producing excess revenues, and that electric retail customers would be harmed by, rather than protected from, the statutory extension of the rate freeze that would occur upon (and as a result of) Ameren's acquisition of CILCO. While Mr. Effron did not provide expert testimony on CILCO's cost of common equity, he estimated that CILCO's costs were "well in excess of any reasonable range," and that current and future excess revenues were "a possibility." Mr. Effron recommended that, as a condition of the Commission's approval, CILCO must credit any excess earnings over a return on common equity of 11.00%, for its retail electric operations. With respect to retail gas rates, Mr. Effron testified that the Reorganization's effect would be neutral at best. If CILCO's proposed gas rate filing were planned irrespective of the Reorganization, then there would be no adverse effect on retail gas customers; if the gas rate filing would not take place absent the transaction, then the Reorganization would adversely impact consumers. Mr. Effron further testified that Applicants' commitment to freeze gas base rates until October 1, 2005 has no meaning, because the identified time frame would not practically allow for any further increase in gas rates regardless of the commitment. 36 3. STAFF'S POSITION Three Staff witnesses addressed the effect of the Reorganization on retail rates. Staff witness Smith performed a review and found no evidence that CILCO's customers will experience any adverse rate impacts as a result of this reorganization. Mr. Smith found Condition V of the Approval Conditions, which commits Applicants to propose no increases in CILCO's base gas rates prior to October 1, 2005, to be appropriate. Mr. Rismiller identified provisions of the Approval Conditions that mitigate potential adverse effects on electric rates. He explained that Applicants' commitment in Condition E to extend the cost-based power purchase contracts with their affiliates through December 31, 2006, helps to ensure that bundled retail rates in the CILCO and AmerenCIPS markets will remain stable at current levels and not have to be adjusted upward during the rate freeze. Mr. Rismiller also noted that Applicants have offered a mitigation measure to address retail rate concerns after the expiration of the retail rate freeze. Condition F commits Applicants to develop and seek ICC approval of an RFP process for native load supply after the expiration of the retail rate freeze. This commitment will help to ensure that Applicants choose the least-cost supply options on behalf of bundled retail load customers in the period after the expiration of the retail rate freeze. Mr. Rismiller testified that if the conditions offered by Applicants are imposed by the ICC and subsequently timely implemented by Applicants, the merger is not likely to result in any adverse rate impacts on retail customers with respect to the wholesale power and transmission components of retail rates. Mr. McNally stated that, in his judgment, the proposed transaction, subject to the Approval Conditions, is not likely to adversely affect retail customer rates through an increase in CILCO's risk and cost of capital. Mr. McNally noted that Ameren has, in the past, attempted to remove the cost of its low interest rate tax-exempt debt from the calculation of the overall cost of capital used to determine retail customer rates. That precedent suggests to Mr. McNally that Ameren might attempt to transfer the tax-exempt debt of its utilities to non-utility affiliates, leaving the Ameren utilities with only higher cost taxable debt. Such actions would adversely impact retail customer rates by increasing CILCO's overall cost of capital. Mr. McNally also noted that the Applicants, in their petition with the SEC seeking authorization for this same transaction, requested authorization for CIGI to issue up to $500 million additional long-term debt. This, too, could adversely impact retail customer rates by increasing CILCO's risk and, consequently, increasing CILCO's overall cost of capital. Therefore, Condition N of the Approval Conditions requires the Applicants to demonstrate that such transactions would be in the public interest or that 37 the public would be convenienced thereby before they can be executed. Without Condition N, part (i), CILCO and the other Ameren utilities may attempt to transfer some or all of their low cost tax-exempt debt to an affiliate without Commission authorization, which would adversely impact retail customer rates through an increase in the Ameren utilities' overall costs of capital. Without Condition N, part (ii), CILCO could be held liable for the debt of a non-regulated affiliate. This potential burden would increase the riskiness of CILCO, thereby adversely affecting utility rates. Additionally, Condition R would prevent the Ameren utilities from arguing, in any rate proceeding, that the Commission should not include the cost of its outstanding tax-exempt debt in the rate of return it seeks to reflect in tariffed rates. Excluding the cost of low interest rate tax-exempt debt from the rate of return in a rate proceeding would adversely impact retail customer rates by increasing the utility's overall cost of capital. The Staff also responded to Mr. Effron's testimony. Mr. Smith testified that, while Mr. Effron offers an example of a reasonable return on equity, he neither provides nor cites evidence of the reasonable return on equity for CILCO's electric operations. Mr. Smith stated that he is aware of no evidence supporting a conclusion that CILCO's electric operations will earn excess profits in either the year 2005 or 2006, and that it is premature to consider ratemaking issues at this time. Mr. Effron's testimony did not impact his position. Mr. Smith also testified that he knows of no basis in law which would support Mr. Effron's refund proposal. According to Mr. Smith, utilities are neither allowed to recover earnings deficiencies nor required to refund excess earnings, other than as provided for by the Act. While the Applicants may be willing to voluntarily adopt Mr. Effron's recommendation, Mr. Smith is not aware of any authority under which the Commission could order a refund of the type being recommended. 4. OAG-APPLICANTS STIPULATION Subsequent to the time the record was marked "heard and taken," the OAG and Applicants entered into a Stipulation with respect to the projected effect of the Reorganization on CILCO's rates in 2005 and 2006. The Stipulation provides that the OAG has reviewed the additional materials and information, which included: (1) CILCO's current power costs, (2) the effect of the establishment of CIGI, (3) the extension of the power supply agreement between CILCO and CIGI under the Conditions to which the Applicants agreed as part of the voluntary Conditions proposed in this docket, (4) projected power costs throughout Illinois in the years 2005-2006 and the uncertainty associated with those projections, (5) a sensitivity analysis of the effect of projected power supply costs on CILCO's cost of service in the years 2005-2006, (6) the anticipated condition of the power supply market in the CILCO service area in the years 2005 and 2006 in the absence of the market opening conditions to which the Applicants have agreed in this docket, and (7) the need for the additional investment which Applicants pledged to make as part of their Application and to which Applicants agreed as part of the Conditions. 38 The Stipulation further provides that, based on a review of these additional materials and information, the OAG has concluded that the reorganization proposed by Applicants is not likely to result in adverse rate impacts on residential customers in that, despite the earned return on common equity in prior years, CILCO's prospective revenues and expected costs are not likely to result in an excessive return on common equity during the 2005-2006 period. 5. COMMISSION CONCLUSION Based on the foregoing, the Commission concludes that the record supports a finding that the Reorganization is not likely to have an adverse impact on rates. H. ALLOCATION OF SAVINGS AND RECOVERY OF COSTS Section 7-204 of the Act requires that, before approving a reorganization, the Commission must make findings with respect to: "(i) the allocation of any savings resulting from the proposed reorganization; and (ii) whether the companies should be allowed to recover any costs incurred in accomplishing the proposed reorganization and, if so, the amount of costs eligible for recovery and how the costs will be allocated." Applicants' witness Nelson testified that, notwithstanding Ameren's plans to enhance CILCO's performance (articulated in Mr. Voss' testimony), the Reorganization will create sufficient savings through synergies and economies of scale such that CILCO will be able to maintain existing rates and absorb the costs of reorganization. Further, Mr. Nelson testified that Applicants' proposed rate stabilization plan will ultimately pass savings created by the Reorganization on to customers. Applicants pledged not to seek recovery of any transaction or transition costs related to the Reorganization. In Condition L, Applicants commit that "AmerenCIPS, AmerenUE, and AmerenCILCO will not seek to recover in any electric or gas rates subject to ICC jurisdiction . . . any transition or transaction expenses, regardless of whether such expenses are booked above or below the line." Further, with respect to future rate filings and proceedings, Applicants agreed to account for transition and transaction expenses, to provide proof of excluding such expenses from the proposed revenue requirement and to refrain from attempts to adjust revenue requirements in order to include such expenses. Staff witness Smith testified that the commitments made by Applicants are sufficient to meet the requirements of Section 7-204. Mr. Smith testified that he understands these commitments to mean that Applicants' costs of Reorganization will not be passed through to customers, and that savings will accrue to benefit CILCO's customers. Based on the record, the Commission finds the allocations of savings and treatment of related costs proposed by Applicants to be reasonable. 39 V. COMPLIANCE WITH OTHER APPLICABLE LAWS A. SECTION 7-204A(A) SUBMISSION OF REQUIRED DATA Section 7-204A(a) requires the submission of certain data in connection with any application under Section 7-204. Applicants provided this data at Tabs J through P of the Application. B. APPROVAL OF AFFILIATED INTEREST AGREEMENTS Applicants' proposed services agreements, the CILCO Services Agreement and the Fuel Services Agreement, require Commission approval under Sections 7-101 and 7-204A(b), governing transactions with affiliated interests. 1. CILCO SERVICES AGREEMENT In Docket No. 95-0551, in connection with the formation of Ameren as the parent to AmerenUE and AmerenCIPS, the Commission approved the entry of those two utilities into the Ameren GSA with Ameren Services. CILCO proposes to enter into a virtually identical services agreement with Ameren Services, the CILCO Services Agreement. Applicants contend that because all allocations within the Ameren system will be made pursuant to the same set of methodologies as the Ameren GSA, and the Ameren GSA remains reasonable, and continues to govern transactions among existing Ameren affiliates, the Commission should approve the CILCO Services Agreement. Applicants further note that under Section 16-111 of the Act and Applicants' rate stabilization period proposal, rates will continue at pre-closing levels for some time after closing, eliminating any need for the Commission to alter allocations of costs or the basis for affiliate charges. The Commission has approved a service agreement for CILCO and CIGI to provide services to one another. Under Applicants' proposal, that service agreement will remain in effect to the extent not inconsistent with the CILCO Services Agreement. 2. FUEL SERVICES AGREEMENT CILCO intends to enter into a fuel services agreement with Ameren Fuels which is identical in all material respects to an existing fuel services agreement ("FSA") between Ameren Fuels, AmerenCIPS and AmerenUE. The FSA was filed with the Commission in Docket No. 00-0757, and approved as being reasonable. (Order issued March 7, 2001.) Under the FSA, Ameren Fuels provides fuel procurement and fuel management services to AmerenCIPS and to AmerenUE. Applicants contend that the FSA will allow CILCO to achieve the same kind of fuel procurement and fuel management benefits which Ameren Fuels provides to AmerenCIPS and AmerenUE; that is, because Ameren Fuels would be purchasing larger volumes of gas and other energy related commodities on CILCO's behalf, this would allow Ameren Fuels to have a greater presence in applicable fuels 40 markets, and an enhanced negotiating position in such markets. A copy of the CILCO Fuel Services Agreement was attached to the Application at Tab N. C. SECTION 5-106: BOOKS AND RECORDS Section 5-106 of the Act requires Commission approval for a public utility to maintain books and records outside of the state. Applicants contend that Ameren intends to maintain a substantial portion of CILCO's books and records at CILCO's headquarters in Peoria. However, Applicants seek Commission approval to maintain certain records -- particularly those relating to services provided by an affiliated service company, such as Ameren Services or Ameren Fuels -- at Ameren's headquarters in St. Louis. CILCO acknowledges that it will be liable for, and upon proper invoice from the Commission, must promptly reimburse the Commission for, the reasonable costs and expenses associated with the audit or inspection of any books, accounts, papers, records and memoranda kept outside the State, all as required under Section 5-106 of the Act. Applicants' request is reasonable and should be granted. D. SECTION 7-102 Section 7-102 of the Act requires the Commission's approval whenever a "public utility may by any means, direct or indirect, merge or consolidate its franchises, license, permits, plants, equipment, business or other property with that of any other public utility." (220 ILCS 5/7-102) Under Section 7-102, the Commission must find that the transfer is reasonable "and that the public will be convenienced thereby." Applicants do not believe the Reorganization constitutes a direct or indirect merger or consolidation of two utilities' businesses or property. Rather, Applicants contend the Reorganization is a change in control transaction over which the Commission has jurisdiction under Sections 7-204 and 7-204A. In Docket No. 95-0551, the Commission concluded that bringing AmerenUE and AmerenCIPS under the control of a common holding company required approval under Section 7-102. The Commission declines to reach a different conclusion here. Accordingly, the Commission will assess this transaction under the Section 7-102 criteria, in addition to its review under Section 7-204. For all the reasons stated in Section IV of this Order, the Commission finds that the Reorganization is reasonable and that the public will be convenienced thereby. E. SECTION 6-103 Section 6-103 of the Act provides, in relevant part, as follows: In any reorganization of a public utility, resulting from forced sale, or in any other manner, the amount of capitalization, including therein all stocks and stock certificates and bonds, notes and other evidences of indebtedness, shall be such as is authorized by the Commission, which in 41 making its determination, shall not exceed the fair value of the property involved. Applicants' witness Warner Baxter testified that CILCO's assets will be stated at fair value at closing, consistent with purchase accounting. Applicants do not believe that this action will produce any change in the level of CILCO's capitalization. However, to the extent that it does, Applicants have committed to reverse the effects on CILCO's capitalization of any such change for regulatory reporting and ratemaking purposes. Accordingly, the record supports approval of CILCO's capitalization. VI. FINDINGS AND ORDERING PARAGRAPHS The Commission, having considered the entire record, is of the opinion and finds that: (1) CILCO is an Illinois corporation providing electric and natural gas services to the public in Illinois as a public utility within the meaning of the Act; (2) CILCORP is an Illinois corporation formed as the holding company parent of CILCO; (3) AES is a global power company owning 100% of the common stock of CILCORP; (4) AmerenUE is a Missouri corporation providing electric and natural gas services to the public in Illinois as a public utility within the meaning of the Act; (5) AmerenCIPS is an Illinois corporation providing electric and natural gas services to the public in Illinois as a public utility within the meaning of the Act; (6) Ameren is a Missouri corporation formed as the holding company of AmerenUE and AmerenCIPS; (7) the Commission has jurisdiction over the Applicants and over the subject matter hereof; (8) the recitals of fact and conclusions reached in the prefatory portion of this Order are supported by the evidence of record and are hereby adopted as findings of fact; (9) the evidence demonstrates that the Reorganization should reasonably be granted and that the public will be convenienced thereby; (10) the Applicants have supplied the information required of them by Section 7-204A of the Act; 42 (11) the Reorganization meets the criteria set forth in Section 7-204 of the Act in that: (a) the Reorganization will not diminish CILCO's ability to provide adequate, reliable, efficient, safe and least-cost public utility service; (b) the Reorganization will not result in the unjustified subsidization of non-utility activities by CILCO or its customers; (c) costs and facilities will be fairly and reasonably allocated between utility and non-utility activities in a manner such that the Commission may identify those costs and facilities which are properly included by CILCO for ratemaking purposes; (d) the Reorganization will not significantly impair CILCO's ability to raise necessary capital on reasonable terms or to maintain a reasonable capital structure; (e) CILCO will remain subject to all applicable laws, regulations, rules, decisions and policies governing the regulation of Illinois public utilities; (f) the Reorganization is not likely to have a significant adverse effect on competition in those markets over which the Commission has jurisdiction; (g) the Reorganization is not likely to result in any adverse rate impacts on retail customers; (12) The allocations of savings and treatment of related costs proposed by Applicants is reasonable; (13) Applicants' "CILCO Services Agreement" is approved; (14) Applicants' "Fuel Services Agreement" is approved; (15) Applicants have not requested that the Commission, and the Commission does not hereby intend to, alter, limit or otherwise affect any of CILCO's obligations with regard to CILCO's accelerated tree trimming program or the completion of CILCO's reliability audit project; (16) Applicants' request to maintain certain CILCO records -- particularly those relating to services provided by an affiliated service company, such as Ameren Services or Ameren Fuels -- at Ameren's headquarters in St. Louis is reasonable and should be approved on the condition that CILCO shall, upon proper invoice from 43 the Commission, promptly reimburse the Commission for the reasonable costs and expenses associated with the audit or inspection of any books, accounts, papers, records and memoranda kept outside the State, as required under Section 5-106 of the Act; (17) CILCO's capitalization is approved, pursuant to Section 6-103 of the Act, subject to the condition that CILCO reverse any effects of purchase accounting on CILCO's capitalization for regulatory reporting and ratemaking purposes; and (18) the joint application of Ameren and CILCO for approval of the merger and reorganization should be approved subject to the conditions that are necessary to protect the interests of CILCO and its customers, which conditions are set forth in Appendix A hereto; Applicants shall implement and abide by each and every of the "Conditions of Approval" set forth in Appendix A hereto. IT IS THEREFORE ORDERED that the joint application of Ameren and CILCO for approval of the merger and reorganization shall be, and is hereby, approved subject to the conditions stated in this Order that are necessary to protect the interests of CILCO and its customers IT IS FURTHER ORDERED that consent, authority and approval of the Commission is granted to CILCO, CILCORP, AES, and Ameren Corporation, to the extent necessary, to do any and all other things not contrary to law or to the rules and regulations of the Commission or inconsistent with the findings and ordering paragraphs herein that are necessary, appropriate or merely incidental to the performance of any and all acts specifically authorized by the Commission in this Order. IT IS FURTHER ORDERED that, as a condition of approval of the Reorganization proposed in this docket, Applicants shall comply with each of the conditions set forth in Appendix A to this Order. IT IS FURTHER ORDERED that subject to the provisions of Section 10-113 of the Public Utilities Act and 83 Ill. Adm. Code 200.880, this order is final; it is not subject to the Administrative Review Law. By order of the Commission this 4th day of December, 2002. (SIGNED) KEVIN K. WRIGHT Chairman 44 Appendix CONDITIONS OF APPROVAL A. 1) List of Preferred Generator Sites -- Applicants will develop and make available, no later than 30 days after closing of the transaction, a list of sites or areas for generation within the CILCO, AmerenUE/Illinois, and AmerenCIPS service territories ("Service Territories") that are physically proximate to electric transmission facilities, gas delivery facilities, and water resources. Nothing herein shall require Applicants to guarantee actual availability of gas or water to the sites/areas. In developing the list of preferred sites/areas, Applicants will analyze their electrical networks and identify sites/areas where new facilities could connect to the transmission system so as to maximize power delivery from the generating facility while minimizing the need for interconnection facilities or transmission network upgrades. Applicants will update the list and related information at least annually, through 2006; at the time of each update, Applicants will provide a current updated copy of the list and related information to the Director of the ICC's Energy Division. The current updated list and related information will be made available in electronic format and will be publicly posted on the applicable RTO OASIS (or, prior to participation in an RTO, on the MAIN OASIS). 2) Generator Interconnection study costs -- Applicants agree to reimburse to generators (upon initiation of the generator's operation) the costs of all facilities, feasibility, interconnection and system impact studies conducted by Applicants pursuant to FERC-approved tariffs that are requested prior to January 1, 2009, by independent (non-affiliated) generators locating within the Service Territories. Applicants shall post the availability of this offer in a prominent place on a company website. This commitment shall expire when the total cost to Applicants of this commitment exceeds $250,000. 3) Small Generators -- Applicants shall: (a) within 30 days of closing, propose to the appropriate authorities to adopt and place into effect within 75 days of closing a standardized small generator interconnection agreement and standardized small generator interconnection procedure ("Small Generator Tariffs"); the Small Generator Tariffs shall be substantially based on those proposed in FERC's RM02-12 small generator interconnection NOPR issued August 16, 2002 ("NOPR"); nothing herein shall prohibit Applicants from conforming the Small Generator Tariffs to the requirements of the final rule adopted by FERC in the NOPR proceeding; and (b) waive the costs of all facilities, feasibility, interconnection, and system impact studies for small generators (as defined in the NOPR) in the Service Territories requested prior to January 1, 2009; the commitment in this 1 Section A(3)(b) shall expire when the total cost to Applicants of this commitment exceeds $100,000. Applicants shall post the availability of this offer in a prominent place on a company website. B. RTO Commitment -- Applicants commit to expend best efforts to ensure that their Illinois transmission systems and power markets will be under the control of a single, fully-operational, FERC-approved and regional transmission organization ("RTO") by December 31, 2004. Applicants commit to use their best efforts to ensure that the RTO has operational authority to approve and implement transmission service schedules, approve all outages of critical transmission facilities and to implement the necessary congestion management procedures. "Critical transmission facilities" are: (i) all transmission facilities 230 kV and above; and (ii) transmission facilities below 230 kV where outages of these facilities have been found to limit available flowgate capacity on RTO monitored flowgates, or have resulted in transmission loading relief. Thereafter, no Ameren affiliate that is an "electric utility" within the meaning of Section 16-102 of the Illinois Public Utilities Act ("Ameren Electric Utility") shall change its RTO affiliation prior to 2008 if such change would produce a new or different RTO seam in Illinois unless the Ameren Electric Utility obtains ICC approval under a public interest standard. A transaction or event by which the RTO to which an Ameren Electric Utility belongs merges with, or becomes part of, another RTO shall not constitute a change in RTO participation, provided that preexisting seams arrangements are substantially kept in place or assigned to the surviving RTO. C. 1) CILCO Transmission Project Commitment -- Applicants shall complete, by a date twenty-four months after closing, subject to receipt of all necessary regulatory approvals ("Phase I Completion Date"), those transmission projects ("CILCO Mitigation Projects") necessary to ensure that the Simultaneous First Contingency Incremental Transfer Capability ("SFCITC") into the CILCO control area will be increased by at least 192 MW (summer). Applicants commit to expend best efforts to complete as soon as practicable, and in no event any later than December 31, 2008, subject to all regulatory approvals ("Phase II Completion Date"), such additional projects ("Additional CILCO Projects") as necessary to increase the SFCITC into the CILCO control area at least 189 MW (summer) above the SFCITC produced by the CILCO Mitigation Projects. The effect of the CILCO Mitigation Projects will be measured by an analysis performed at a date no more than 120 days and no less than 60 days prior to the completion of the CILCO Mitigation Projects comparing the then best available regional summer peak base case ("Phase I Base Case"), with another case modeling the same summer peak but reflecting the completion of the CILCO Mitigation Projects ("Phase I Mitigation Case"). 2 Applicants shall file the analysis and the results with the Illinois Commerce Commission for review and approval. The effect of the CILCO Mitigation Projects shall be measured by comparing the SFCITC from the Phase I Mitigation Case with the SFCITC from the Phase I Base Case. The effect of the Additional CILCO Projects shall be measured by an analysis performed at a date no more than 120 days and no less than 60 days before the completion of the Additional Projects which uses the then best available 2008 summer peak base case, which shall include the CILCO Mitigation projects but not the Additional CILCO projects ("Phase II Base Case"), and comparing it with a second case that models the regional summer 2008 peak including both the CILCO Mitigation Projects and the Additional CILCO projects ("Phase II Mitigation Case"). Applicants shall file the analysis and the results with the Illinois Commerce Commission for review and approval. The effect of the Additional CILCO Projects will be measured by comparing the SFCITC from the Phase II Mitigation Case with the SFCITC from the Phase II Base Case. 2) Ameren Transmission Commitment -- Subject to receipt of all necessary regulatory approvals, Applicants shall, by a date no later than 270 days after closing, complete the Frankfort and Baldwin substation upgrades described on page 5 of Applicants' Ex. 5.0 ("Ameren Mitigation Projects"). D. 1) Beginning on the date of the closing of the acquisition and continuing through the date that the CILCO Mitigation Projects described in Section III.C. have been placed into service, Applicants and/or their affiliates, subject to receipt of all necessary approvals from the FERC, will offer for sale at wholesale to non-affiliated entities, for delivery within or into the CILCO control area and for ultimate delivery to retail customers connected to CILCO's distribution system, at least 100 MW of power and energy priced using the Market Value Index ("MVI") methodology most recently approved by the ICC for AmerenCIPS ("AmerenCIPS MVI"). If the CILCO Mitigation Projects are not in service by the Phase I Completion Date, as a result of Applicants' failure to use best efforts to complete the CILCO Mitigation Projects by such date, then Applicants shall continue to offer the 100 MW of power and energy but at the MVI price minus 10% until such CILCO Mitigation Projects have been satisfactorily completed, provided that the total value of discounts from the MVI price applicable to the CILCO Mitigation Projects shall not exceed $1,000,000. Failure to obtain, or a significant delay in obtaining, timely required regulatory approval shall not constitute a failure to use best efforts. Beginning on the date the CILCO Mitigation Projects have been placed into service, and continuing through the date the Additional CILCO Projects have been placed into service, Applicants and/or their affiliates, subject to receipt of all necessary approvals from the FERC, will offer for sale at wholesale to non-affiliated entities, for delivery within or into the CILCO control area and for ultimate delivery to 3 retail customers connected to CILCO's distribution system, at least 50 MW of power and energy priced using the AmerenCIPS MVI. If the Additional CILCO Projects are not in service by the Phase II Completion Date, as a result of Applicants' failure to use best efforts to complete the Additional CILCO Projects by such date, then Applicants shall continue to offer the 50 MW of power and energy but at the MVI price minus 10% until such Additional CILCO Projects have been satisfactorily completed, provided that the total value of discounts from the MVI price applicable to the Additional Mitigation Projects shall not exceed $500,000. Failure to obtain, or a significant delay in obtaining, required regulatory approval shall not constitute a failure to use best efforts. In the event that there is no AmerenCIPS MVI in effect as of the date 45 days prior to closing of the acquisition, then by such date Applicants will file such a methodology with the ICC for approval, and such methodology, as approved, will be applicable to sales under this Section D1. Provision of the power and energy offered under this Section D1. shall not be used as evidence to support a request that any service be declared competitive under Section 16-113 of the Public Utilities Act. Applicants shall provide at least 60 days notice to the ICC before discontinuing or reducing the sale of any amount of power and energy under this Section D1. The notice shall include such data as are necessary to demonstrate that, as of the date sales are to be discontinued or reduced, Applicants will have completed such steps under the CILCO Transmission Commitment as are necessary to discontinue or reduce sales. 2) In the event that Applicants have not placed the Ameren Mitigation Projects in service by a date 270 days after closing, Applicants and/or their affiliates, will, subject to receipt of all necessary approvals from the FERC, offer for sale at wholesale to non-affiliated entities, for delivery within or into the Ameren control area and for ultimate delivery to retail customers connected to the AmerenCIPS and/or AmerenUE/Illinois distribution systems, 50 MW of power and energy using the AmerenCIPS MVI. Applicants shall provide at least 60 days notice to the ICC before discontinuing or reducing the sale of any amount of power and energy under this Section D2. The notice shall include such data as are necessary to demonstrate that, as of the date sales are to be discontinued or reduced, Applicants will have completed such steps under the Ameren Transmission Commitment as are necessary to discontinue or reduce sales. E. Applicants and their affiliates shall seek timely approval from the FERC of an extension of the CILCO-CIGI Power Supply Agreement from December 31, 2004 until December 31, 2006, and an extension of the AmerenCIPS-AEM Power Supply Agreement from December 31, 2004 until December 31, 2006, on the same terms and conditions as effective on 4 December 31, 2004, including the use of cost-based rates, subject to receipt of all necessary regulatory approvals. F. Applicants will work with the Staff to develop an RFP process for supply of the native load of CILCO and AmerenCIPS subsequent to the expiration of their respective supply arrangements with CIGI and Ameren Energy Marketing, and agree to seek ICC approval of such RFP process, provided that approval of such RFP process may not be conditioned on the divestiture of any asset. The RFP process shall exclude sole supplier arrangements, unless specifically authorized by the ICC. In the event that AmerenUE (i) remains an Ameren Electric Utility, and (ii) transfers more than 15% of its generating capacity to an affiliated or unaffiliated entity, AmerenUE shall be subject to the terms of this commitment. G. In the event that new generating capacity ("New Capacity") is installed in the CILCO market, no Ameren affiliate may purchase power and energy from such facility prior to January 1, 2010, provided that nothing herein shall prohibit CILCO from purchasing power and energy from New Capacity at any time to serve its native load. H. CILCO, AmerenCIPS and AmerenUE agree that they will eliminate transition charges in the period commencing June, 2003, through at least May, 2005. The ICC's acceptance of, this condition does not constitute an admission by any Party, or a finding by the ICC, that any provision of the Illinois Public Utilities Act, as presently effective, permits either CILCO, AmerenCIPS or AmerenUE to reinstate transition charges as of or after June 30, 2005. I. Within one calendar year of closing of the Acquisition, AmerenCILCO will file a petition with the ICC requesting authority to operate as an Integrated Distribution Company, pursuant to Section 16-119A of the Illinois Public Utilities Act. J. Within 90 days of closing of the acquisition, CILCO, AmerenCIPS and AmerenUE (the "Ameren Companies") will file an application with the ICC seeking: (i) to consolidate the various general services agreements into a single general services agreement; and (ii) to consolidate the various fuel services agreements into a single fuel services agreement. The Ameren Companies will use their best efforts to adopt and adhere to a schedule that will lead to issuance of an order by the ICC within 180 days of filing. K. Ameren will provide a copy of the SEC reports described in Section 1.12 of the SEC Application dated August 2, 2002 to the Manager of the ICC's Finance Department. Ameren will provide copies of all future applications or reports filed with the SEC pursuant to PUHCA, 5 including its "60 day SEC letters," to the Manager of the ICC's Finance Department at the time that such filings are made with the SEC. L. AmerenUE, AmerenCIPS and AmerenCILCO will not seek to recover in any electric or gas rates subject to ICC jurisdiction ("Rates") any transition or transaction expenses, regardless of whether such expenses are booked above or below the line. For purposes of this Section L., "transition or transaction expenses" shall include, but shall not be limited to, expenses related to or caused by the Acquisition such as investment banking, accounting and legal fees; employee separation or relocation payments. "Transition or transaction expenses" shall not include any capitalized costs, such as investment in information systems, which are used and useful in providing public utility service. In any proceeding initiated by one of the Ameren Companies by filing a change in rates on or before January 1, 2007, the company's initial filing shall show both the amount of transition or transaction expenses incurred during the test period and the exclusion of those expenses from the proposed revenue requirement. Furthermore, the company shall not propose, in any proceeding to establish Rates, any adjustment to the company's revenue requirement to retain for shareholders any portion of merger savings related to the service(s) for which Rates are being established. M. When filing annual reliability reports, the Ameren Companies shall use a format that follows the sequence of requirements of the ICC's then applicable rules. Currently, 83 Ill. Adm. Code 411.140, as most recently amended, sets forth the applicable reliability reporting rules. N. Notwithstanding any provision of the Illinois Public Utilities Act, through at least January 1, 2007, each of the Ameren Companies shall seek ICC approval under Article VII of the Act whenever it seeks to engage in: (i) any transfer of tax-exempt debt to an affiliate; and (ii) any guarantee of performance of any affiliate's obligations. Notwithstanding any provision of the Illinois Public Utilities Act, the ICC may decline to grant any application for approval filed prior to January 1, 2007 pursuant to this Section N. if the applicant has not demonstrated that the transaction is in the public interest or that the public would be convenienced thereby. O. Ameren commits to dissolve the legal entity CILCORP as soon as reasonably practicable after all of the indebtedness and other liabilities for which CILCORP is the obligor is paid or otherwise satisfied or discharged. P. Notwithstanding any provision of the Illinois Public Utilities Act, through at least January 1, 2007, in the event that CIGI is transferred from CILCO, and CILCO is to receive a promissory note or other evidence of indebtedness in compensation, CILCO will seek authority under Article VII of the Act rather than 16-111(g)(vi). 6 Q. The Ameren Utilities shall not argue in any proceeding, or on appeal of any ICC Order, unless Section 9-230 of the Illinois Public Utilities Act is repealed or amended to state otherwise, that the ICC lacks the authority to adopt an appropriate adjustment to the cost of service of one or more of the Ameren Utilities to reflect any adverse effects of the activities or circumstances of any unregulated or non-utility affiliate, including any adverse effect of such activities or circumstances on the Ameren Utilities' credit ratings. R. None of the Ameren Utilities shall argue in any rate proceeding that the ICC should not include the cost of its outstanding tax-exempt debt in the rate of return it seeks to reflect in tariffed rates. S. Ameren commits that, within 180 days of closing, the Ameren Companies will make such filings with the ICC as may be necessary to conform the non-rate provisions of their delivery service tariffs and business procedures. Nothing in this Section III.S. is intended to limit the ICC's authority to investigate such filings pursuant to Section 9-201 of the Illinois Public Utilities Act. T. Applicants will jointly conduct a study, subject to such requirements and restrictions as may be applicable under federal and state antitrust laws, including the Hart-Scott-Rodino Act, and will prepare a Projected Saving and Costs document in the form of Applicants' Ex. 3.0, Schedule 2 and provide such document to the Staff no later than December 16, 2002. U. 1) All contracts, agreements, tariffs or arrangements, including any amendments thereto, of any kind between CILCO and any Affiliated Interest(s), as that term is defined in the Illinois Public Utilities Act, that are required to be filed with and/or approved by the SEC, pursuant to the Public Utility Holding Company Act, as amended, and/or FERC, pursuant to the Federal Power Act, as hereinafter amended, or the Natural Gas Act, as hereinafter amended, shall be conditioned upon the following without modification or alteration: Neither CILCO nor any Affiliated Interest will seek to overturn, reverse, set aside, change or enjoin, whether through appeal or the initiation or maintenance of any action in any forum, a decision or order of the ICC which pertains to recovery, disallowance, deferral or ratemaking treatment of any expense, charge, cost or allocation incurred or accrued by CILCO in or as a result of a contract, tariff, agreement, arrangement or transaction with any Affiliated Interest on the basis that such expense, charge, cost or allocation has itself been filed with, accepted for filing, made effective or approved by the SEC and/or FERC or was incurred pursuant to a contract, tariff, arrangement, agreement or allocation method which was filed with, accepted for filing, made effective or approved by the SEC and/or FERC. Nothing in this Section U.1. is 7 intended to alter, change or modify the same condition imposed on AmerenCIPS and AmerenUE by the ICC in the proceeding regarding their merger and reorganization (Docket No. 95-0551). 2) CILCO will file with the ICC all contracts, tariffs, agreements, arrangements or transactions between CILCO and any Affiliated Interest(s) that require approval under Section 7-101 of the Illinois Public Utilities Act, irrespective of whether such contracts, tariffs, agreements, arrangements or transactions have been filed with, accepted for filing, made effective or approved by or otherwise subject to the jurisdiction of the SEC and/or FERC. Neither CILCO nor any Affiliated Interest will seek to overturn, reverse, set aside, change or enjoin, whether through appeal or the initiation or maintenance of any action in any forum, a decision or order of the ICC under Section 7-101 of the Illinois Public Utilities Act, as hereinafter amended, which pertains to a contract, tariff, agreement, arrangement or transaction has been filed with, accepted for filing, made effective or approved, or is otherwise subject to the jurisdiction of the SEC and/or FERC. Nothing in this Section U.2. is intended to alter, change or modify the same condition imposed on AmerenCIPS and AmerenUE in the proceeding regarding their merger and reorganization (Docket No. 95-0551). V. Except with respect to any proposed change in gas base rates filed with the ICC prior to closing of the Acquisition, CILCO will not propose any increases in gas base rates that would become effective prior to October 1, 2005. Nothing herein is intended to restrict, diminish, limit or otherwise alter the ICC's jurisdiction over CILCO's gas base rates, including the authority to reduce those rates, where supported by the evidence after investigation and hearing, either on complaint of a third party or on its own motion. W. CILCO shall be liable for, and upon proper invoice from the ICC, shall promptly reimburse the ICC for, the reasonable costs and expenses associated with the audit or inspection of any books, accounts, papers, records and memoranda kept outside the State, all as required under Section 5-106 of the Illinois Public Utilities Act. X. Wherever in these conditions an obligation is conditioned upon receipt of all necessary regulatory approvals, Ameren and its affiliates will use their best efforts to obtain such approvals. Y. Ameren will file with the ICC the final accounting entries for the transaction, showing the actual dollar values of all involved accounts, within 45 days after the date of the acquisition. At the time of this filing, Ameren will provide a copy to the Manager of the ICC's Accounting Department. 8 EX-99 5 exhd4.txt EX. D-4 - ORDER OF FERC EXHIBIT D-4 101 FERC P. 61, 202 UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION Before Commissioners: Pat Wood, III, Chairman; William L. Massey, Linda Breathitt, And Nora Mead Brownell. Ameren Services Company Docket No. EC02-96-000 on behalf of Ameren's Public Utility Company Subsidiaries ORDER CONDITIONALLY AUTHORIZING MERGER AND GRANTING WAIVERS AND AUTHORIZATIONS (Issued November 21, 2002) INTRODUCTION - ------------ 1. On July 19, 2002, Ameren Services Company (Ameren Services), on behalf of the public utilities owned wholly or partially by Ameren Corporation (Ameren),(1) Central Illinois Light Company (CILCO), and AES Medina Valley Cogen (No. 4), LLC (Medina), an exempt wholesale generator affiliated with CILCO (collectively, Applicants) filed a joint application for approval of a merger and related waivers and authorizations pursuant to section 203 of the Federal Power Act (FPA).(2) Applicants request Commission authorization for Ameren to acquire CILCO and Medina. Applicants assert that the proposed acquisition is in the public interest, will have no adverse impact on competition, rates or regulation, and will, in fact, benefit regional power markets in the Midwest. - -------------------- (1) Ameren owns the following jurisdictional subsidiaries: Union Electric Company d/b/a AmerenUE, Central Illinois Public Service Company d/b/a AmerenCIPS, Ameren Energy Development Company (AED), Ameren Energy Generating Company (AmerenGenCo), Ameren Energy Marketing Company (AEM), and Ameren Energy, Inc. Ameren Corp. also has controlling interest in Electric Energy Inc. (EE). (2) 16 U.S.C. ss. 824b (1994). 2. As discussed below, the Commission has reviewed the proposed merger under the Commission's Merger Policy Statement(3) and its regulations implementing section 203 of the FPA,(4) and in this order we conclude that the proposed merger, as conditioned below, will not adversely affect competition, rates, or regulation. Therefore, we conditionally approve the merger as consistent with the public interest. Furthermore, we grant the requested waivers and authorizations. BACKGROUND - ---------- I. DESCRIPTION OF THE PARTIES -------------------------- A. AMEREN CORP. AND ITS SUBSIDIARIES --------------------------------- I. AMEREN CORP. 3. Ameren Corp. is an exempt holding company under the Public Utility Holding Company Act of 1935 (PUHCA). Subsequent to a 1997 merger in which Ameren became the parent company of AmerenUE and AmerenCIPS,(5) Ameren formed several - -------------------- (3) See Inquiry Concerning the Commission's Merger Policy Under the Federal Power Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (1996), FERC Stats. and Regs.P. 31,044 at 30,117-18 (1996), reconsideration denied, Order No. 592-A, 62 Fed. Reg. 33,341 (1997), 79 FERCP. 61,321 (1997) (Merger Policy Statement). (4) 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 FERCP. 61,289 (2001). (5) Union Electric Co., 81 FERCP. 61,011 (1997). -2- non-operating company subsidiaries, including AER, a holding company, and Ameren Services, the registered system's service company. AER controls Ameren Corp.'s generating and wholesale merchant function; and, indirectly through AED, owns AmerenGenCo. AmerenGenCo owns several generating facilities, including those formerly owned by AmerenCIPS. AER's marketing subsidiary, AEM, functions primarily as AmerenGenCo's power marketing agent. AED, AEM, and AmerenGenCo are public utilities as defined in section 201 of PUHCA. II. AMERENCIPS 4. AmerenCIPS serves approximately 325,000 electric customers from five generating stations, and approximately 170,000 gas customers, all within the state of Illinois. III. AMERENUE 5. AmerenUE supplies electric service to over one million customers and gas service to 130,000 customers, primarily in Missouri and some parts of Illinois. AmerenUE provides wholesale electric service to many municipalities in Missouri, and utilizes 24 generating stations to supply its electric power and energy. In addition, AmerenUE is entitled to 40 percent of the output of generators owned by EE and its subsidiary, Midwest Electric Power, Inc. (MWE). IV. AMERENGENCO 6. AmerenGenCo, an exempt wholesale generator (EWG),(6) does not hold any service area franchises. AmerenGenCo acquired ownership of its five generating stations from AmerenCIPS in 2002 and has subsequently acquired additional generating units to own and control approximately 4,138 MW of generating capacity in Missouri and Illinois. AmerenGenCo is authorized to sell power at market-based rates.(7) AmerenGenCo is also directly owned by AED, a holding company subsidiary of AER, which is owned directly by Ameren Group. - -------------------- (6) Ameren Energy Generating Co., 92 FERCP. 62,023 (2000), 93 FERC P. 62,210 (2000), 95 FERCP. 62,203 (2001). See also Docket No. EG01-267-000. (7) Ameren Energy Generating Co., 93 FERCP. 61,024(2000). -3- V. AEM 7. AEM, a wholesale power marketer and broker, does not own or operate any generating facilities, purchases capacity and energy at wholesale and sells power to unaffiliated buyers under a market-based sales tariff.(8) AEM is authorized to sell power to AmerenUE at market-based rates.(9) VI. EE 8. EE, a jointly owned corporation,(10) owns and operates a 1010MW, six-unit coal-fired generating station (Joppa). EE, an EWG, owns 161 kV transmission lines used to transmit power from the Joppa Station to the Department of Energy's uranium enrichment plant near Paducah, Kentucky. EE formed Midwest Power Inc. (MEP), an EWG with approximately 260 MW total generating capacity. VII. CILCO 9. CILCO is a corporation organized under the laws of the State of Illinois, and is a wholly-owned subsidiary of CILCORP Inc. CILCORP is an exempt public utility holding company under the Public Utility Holding Company Act of 1935 (PUHCA), and is a wholly-owned subsidiary of The AES Corporation (AES), which is also an exempt public utility holding company under PUHCA. Historically, CILCO has provided regulated retail electric and natural gas service to customers in franchised service territories in central Illinois. - -------------------- (8) Ameren Energy Marketing Co., 95 FERCP. 61,397 (2001). (9) Ameren Energy Marketing Co., 95 FERCP. 61,397 (2001). (10) AER owns 20 percent, AmerenUE owns 40 percent, and the remaining 40 percent is owned equally by two unaffiliated utilities, LG&E Energy Corp. and Illinova Generating Company. -4- 10. CILCO is a vertically integrated utility and has three wholly-owned subsidiaries; namely, CILCO Exploration and Development Company (CEDCO), CILCO Energy Corporation (CECO), and Central Illinois Generation, Inc. (CIGI). CILCO serves approximately 201,000 electricity customers in 136 communities in Illinois and approximately 204,000 natural gas customers in 128 communities also in Illinois. -5- VIII. MEDINA 11. Medina, an EWG, makes wholesale energy sales exclusively to CILCO, pursuant to the terms of a Tolling Agreement that is on file with the Commission.(11) Medina owns a gas-fired cogenerator located in Mossville, Illinois, that has a summer rated capacity of 35 MW. B. DESCRIPTION OF THE JURISDICTIONAL FACILITIES I. AMEREN 12. The Ameren companies sell power at wholesale, pursuant to tariffs and contracts on file with the Commission. The Ameren public utilities own approximately 4,500 circuit miles of transmission lines. II. CILCO 13. CILCO owns approximately 333 circuit miles of transmission lines that operate at 13 kV and above. The Commission has approved CILCO's transfer of control over its transmission facilities to the Midwest ISO, as of February 1, 2002, the date the Midwest ISO commenced operation. CILCO provides ancillary services pursuant to an Ancillary Service Tariff (AST) as approved by the Commission in Docket No ER02-708-000. CILCO sells power at wholesale, pursuant to tariffs and agreements on file with the Commission. The Commission recently granted authorization for CILCO to transfer certain jurisdictional facilities associated with CILCO's generating units to CIGI. 14. Applicants request waiver of the requirement to provide information related to the jurisdictional facilities of other AES subsidiaries, since such information is not relevant to the proposed Transaction. III. MEDINA 15. Medina does not own any transmission facilities other than those limited facilities used to interconnect its plant to CILCO's system. - -------------------- (11) See Docket No. ER01-2623-000. -6- THE PROPOSED MERGER - ------------------- 16. On April 28, 2002, Ameren Corp. and AES executed a Stock Purchase Agreement and a Membership Interest Purchase Agreement (collectively, Agreements). Pursuant to the terms of the Stock Purchase Agreement, Ameren will acquire all of the issued and outstanding shares of common stock of CILCORP, CILCO's parent company. Under the terms of the Membership Interest Agreement, Ameren will acquire all issued and outstanding units of the membership interest in AES Medina Valley Cogen (No. 4), L.L.C., AES Medina Valley Cogen, L.L.C's parent company. AES Medina Valley Cogen (No. 4), L.L.C. is also AES Medina Valley Operations, L.L.C.'s parent company. According to Applicants, the above-mentioned entities will continue to exist as separate entities after the Transaction closes. 17. Under the terms of the Agreement, Ameren Corp. will pay $1.3 billion less the amount of CILCORP's consolidated indebtedness outstanding at the time of closing(12) to acquire CILCORP, as adjusted to account for changes in working capital and capital expenditures. Ameren Corp. will also pay for Medina, $60 million less the amount of Medina consolidated indebtedness outstanding at closing.(13) The Agreement further states that AES may repay certain existing Medina indebtedness prior to closing, in which case, such debt would not offset Ameren Corp.'s cash purchase price. NOTICE, INTERVENTIONS, AND RESPONSE - ----------------------------------- 18. Notice of the merger application was published in the Federal Register, 67 Fed. Reg. 49,683 (2002), with comments, protests, or motions to intervene due on or before September 17, 2002. - -------------------- (12) CILCORP's indebtedness was reported to be $820 million on December 31, 2001. (13) Medina's indebtedness was approximately $37 million on December 31, 2001. -7- 19. Timely motions to intervene were filed by City Water Light & Power of the City of Springfield, Illinois (Springfield); Illinois Commerce Commission (ICC); Midwest ISO; Missouri Joint Municipal Electric Utility Commission Missouri Municipal Commission); NRG Companies(14); and Wayne-White Counties Electric Cooperative (Wayne-White). Springfield and Missouri Municipal Commission also filed protests. On November 15, 2002, Springfield submitted a motion to withdraw its protest. According to Springfield, after engaging in intensive settlement discussions with Ameren for the past two months, the parties have entered into a settlement agreement that resolves the concerns that Springfield raised in its protest. On November 18, 2002, Ameren filed a letter discussing the settlement of concerns with Springfield and the resolution of proceedings before the ICC (November 18 Letter). DISCUSSION - ---------- A. PROCEDURAL ISSUES ----------------- 20. Under Rule 214 of the Commission's Rules of Practice and Procedure, 18 C.F.R. ss. 385.214 (2000), the timely, unopposed motions to intervene serve to make the entities that filed them parties to this proceeding. 21. Rule 213 of the Commission's Rules of Practice and Procedure, 18 C.F.R. ss. 385.213 (2000), prohibits answers unless otherwise permitted by the decisional authority. We find that good cause exists to allow Applicants' answer because it provides additional information that assists us in the decision-making process. B. INTERVENOR'S COMMENTS --------------------- 22. Missouri Municipal Commission, in its protest, requests that the Commission condition its approval of the merger to ensure Applicants' full participation in the Midwest ISO at the time of merger consummation and continuing thereafter, as proffered in the Application. Missouri Municipal Commission contends that while Applicants have offered some commitments as well as proposed mitigation, more is necessary to ensure that the proposed transaction is consistent with the public interest. Missouri Municipal Commission notes that Applicants acknowledge that merger screen failures will - -------------------- (14) NRG Power Marketing, Inc., LSP-Kendall Energy LLC, LSP-Nelson Energy LLC, NRG Audrain Generating LLC, NRG McCain LLC, NRG Rockford LLC, NRG Rockford II LLC, Cadillac Renewable Energy LLC, and Morris Cogeneration LLC. -8- occur, despite their proposed mitigation measures. Missouri Municipal Commission contends that the impact of the proposed merger and upgrades should be addressed through the Regional Planning Process called for in the Commission's Standard Market Design (SMD) Notice of Proposed Rulemaking (NOPR). C. APPLICANTS' ANSWER ------------------ 23. In Answer to intervenors' protests, Applicants request that, particularly in light of the fact that no intervenor opposes the merger, the Commission should issue an order approving the transaction, subject only to the mitigation condition that Applicants have designed to counter the concentrating effects that the transaction may have in a few destination markets. D. RESOLUTION OF ISSUES WITH SPRINGFIELD ------------------------------------- 24. In its November 18 Letter to the Commission, Ameren states that it has reached an agreement with Springfield and ICC Staff. Moreover, it says that the outstanding issue regarding agreements relating to GridAmerica's participation in the Midwest ISO and proceedings before the ICC relating to the merger was resolved. In particular, the parties have agreed that Ameren will, at its cost, support the construction of a new interconnection between Springfield and Commonwealth Edison Company (ComEd). Ameren further states that in regard to RTO matters, GridAmerica will be a for-profit independent transmission company (ITC) operating within, and integrated into, the Midwest ISO, and that GridAmerica is requesting Commission approval by December 31, 2002, as GridAmerica is expected to be operational in April 2003. Ameren also states that on November 13, 2002, it filed with the ICC a draft proposed order which reflects agreements negotiated by several parties, including Ameren and ICC staff. Ameren contends that given the resolution of Springfield's concerns, the Commission should approve the transaction proposed here with no conditions other than those proposed by Applicants. E. THE PROPOSED MERGER ------------------- 1. STANDARD OF REVIEW ------------------ 25. Section 203(a) of the FPA provides that the Commission must approve a proposed merger if it finds that the merger "will be consistent with the public interest." The Commission generally takes account of three factors in analyzing proposed mergers: (a) the effect on competition; (b) the effect on rates; and (c) the effect on regulation. -9- 2. EFFECT ON COMPETITION --------------------- I. HORIZONTAL EFFECTS ------------------ A. APPLICANTS' ANALYSIS -------------------- 26. Applicants performed an Appendix A analysis to determine the effect of the acquisition on competition in the relevant energy, capacity and ancillary services markets. They identify non-firm energy, delineated into 15 seasonal/load periods (five load levels within three seasons: Summer, winter and Spring/Fall or shoulder) as the relevant products. Applicants state that they did not conduct an analysis specific to the acquisition's effects on competition to supply short-term capacity because, although Ameren projects a surplus of 212 MW for Summer 2003 above MAIN's recommended minimum planning reserve margin, CILCO projects a surplus of only 47 MW for Summer 2003 and a deficit for Summer 2004. As a result, Applicants contend, the acquisition will not eliminate competition between Ameren and CILCO in short-term capacity markets. Relying on an analysis of key inputs to the entry of new capacity, Applicants assert that neither company has the ability to erect barriers to the construction of new capacity and hence, the transaction will not adversely affect competition in long-term capacity markets. Applicants also do not include an analysis of the acquisition's effect on ancillary services markets, such as operating reserves, regulation and imbalance energy, on the basis that the necessary data, such as ramping rates of individual generators, are generally not available from public sources. Applicants point out that Order No. 642 does not require a separate analysis for ancillary services in this circumstance. Applicants also note that CILCO has not historically been a supplier of ancillary services, and, further, that the 22 control areas physically or contractually interconnected with Ameren have generally supplied their own needs for ancillary services. Thus, Applicants contend that there should be little impact on ancillary services. 27. Applicants identify 15 different destination markets or control areas as the relevant geographic markets, based on Ameren's and CILCO's interconnections with other utilities or control areas. These markets also include the areas in which both applicants made more than de minimis sales. A specific market price was determined for each destination market for each load level with each of the Summer, Winter and Spring/Fall seasons. To measure transmission capacity, Applicants principally relied on First Contingency Incremental Transfer Capability (FCITC), although also providing analysis and results based on the available transmission capability (ATC), the measure most often used in merger analysis. Applicants note that posted ATC typically refers to the availability of transmission capacity for monthly or annual service and thus does not reflect the availability of short-term products, such as weekly, daily or hourly service, to move power to an area of high-priced generation. -10- These products become available from the secondary transmission market and the redirecting of confirmed reservations. Thus, according to Applicants, ATC values may tend to understate the actual amount of transfer capability available. As a result, Applicants contend, when low ATC values are used, it is possible that merging entities will be less likely to be deemed significant suppliers in the same destination market. 28. Applicants differentiate the empirical results in two other significant ways. First, they provide separate analyses for economic capacity and available economic capacity. Economic capacity is all generating capacity located within the destination market or that can be delivered there, after accounting for transmission prices, losses and limits, at a price that does not exceed 1.05 times the competitive price in the market. Available economic capacity is economic capacity less firm retail load and pre-existing wholesale load commitments. Applicants contend that available economic capacity results are more useful in assessing competitive effects in this application because (1) in Missouri, where most of Ameren's load is located, retail choice has not been implemented and (2) in Illinois, where the rest of Ameren's load and all of CILCO's load are located, very little switching of retail suppliers has occurred. Applicants state that both Ameren and CILCO are obligated to remain as the default supplier at current prices for their retail load through 2006. Hence, Applicants argue, findings should be based on measures of capacity which is truly available to be sold on the market, i.e., available economic capacity. 29. Second, Applicants present a base case analysis, which does not reflect market power mitigation measures proposed by Applicants, and a transmission mitigation case. The transmission mitigation case is an HHI analysis which reflects the effects of increasing import transfer capability into three control area markets, where screen failures were prevalent over almost all season and load conditions. As stated in the application, Applicants propose to increase import transfer capability into the Ameren market by upgrading terminal equipment at two substations. These two projects are each estimated to take approximately six months to complete. Applicants propose to increase import transfer capability into the CILCO market by rebuilding a 138 kV line. Applicants estimate that this project will take almost 24 months to complete. Applicants propose to increase import transfer capability into the Springfield market by building a new 138 kV interconnection with Springfield and by replacing a 345/138 kV transformer with a 560 MVA unit. These two projects are each expected to take 18 months to complete. As will be described infra, Applicants also propose certain interim mitigation measures to be in effect from the time the acquisition is consummated until the upgrades are completed. 30. The base case analysis (without mitigation) of economic capacity, based on FCITC data, identifies three markets - Ameren, CILCO, and Springfield - where screen failures are prevalent across almost all seasons and load levels. Nearly all of the screen failures occur in highly concentrated markets, with post-acquisition HHI levels ranging from 1,845 to 4,957 and HHI increases from 108 to 1,066.(15) Based on ATC, screen failures in economic capacity occur only - -------------------- (15) Under the Department of Justice Merger Guidelines that are utilized by the Commission in its analysis of the effects of mergers on competition, a highly concentrated market is defined as having an HHI of 1800 or greater and a screen failure occurs if a merger-induced change in the HHI in a highly concentrated market is 50 or greater. Such a merger is viewed as having a potential adverse effect on competition. -11- in the CILCO and Springfield markets, under Summer load conditions. Those markets are also highly concentrated, with post-acquisition HHIs from 2,410 to 4,254 and HHI increases of 178 to 864. After transmission mitigation, screen failures persist in the CILCO market across nearly all load levels, with HHIs from 2,360 to 3,444, and HHI increases from 394 to 576. In the Springfield market, transmission mitigation eliminates all screen failures except during the lowest load level in each season. In the Ameren market, transmission mitigation eliminates screen failures during the Summer load periods (although the screen failures in the Winter and Shoulder seasons remain). 31. The base case analysis using available economic capacity as the measure of supply and FCITC as the measure of transmission capability shows a total of six screen failures in two markets, CILCO and Springfield, all occurring during an off-peak season or low or mid-range Summer load level. Nearly all of the markets in which the screen failures occur are moderately concentrated, with HHIs from 1,163 to 1,663 and HHI increases of 235 to 484.(16) Based on ATC, screen failures also occur only in the CILCO and Springfield markets, during the Summer mid-level and off-peak load periods. After transmission mitigation, the two off-peak screen failures remain in the CILCO market (although their size decreases). In the Springfield market, all screen failures except for an off-peak Summer load level are eliminated. 32. Applicants recognize the need for interim market power mitigation measures during the period from the date the acquisition is consummated to the - -------------------- (16) Under the Merger Guidelines, a moderately concentrated market is defined as having an HHI between 1000 and 1800, and a screen failure occurs if the merger-induced increase in the HHI is 100 or more. -12- date the upgrades are completed and in service. They propose two interim measures. First, for the Springfield market, Applicants agree to pay Springfield the difference between Springfield's incremental cost to generate and the Into Cinergy price (adjusted to account for transmission costs, losses and ancillary service charges) for each hour when constraints on the Ameren or CILCO transmission systems prevent Springfield from importing the energy that it wishes to import to serve its native load. This "hold harmless" transmission congestion condition would be in effect until the identified transmission system upgrades for the Springfield area are completed, or if other upgrades are agreed to by Applicants and Springfield, until Applicants have discharged their portion of the responsibility for constructing those other upgrades. Second, for wholesale customers purchasing in the Ameren and CILCO markets, Applicants agree to extend any existing fixed contract which is due to expire before the upgrades proposed for those markets are completed through the month in which construction is actually completed. 33. Applicants contend that the screen failures remaining after the transmission upgrade mitigation are of little competitive significance. They argue that available economic capacity results, which show only a few, off-peak failures, are more relevant here than the economic capacity results in that they reflect Applicants' continuing retail load obligations and status as default supplier for their current retail load. Because this obligated service will be provided at fixed, low-cost rates through 2006, Applicants state that their lowest-cost generation is committed to serving native loads and thus will not be available for sale to others. They also point out that both utilities are operating close to the margin at peak times and thus have little capacity to withhold. With respect to the few off-peak screen failures, Applicants note that their resource circumstances comport with the Commission's findings elsewhere that in off-peak periods, when demand is low and is met by nuclear and minimum run coal units, a utility will find it difficult and costly to strategically dispatch units as part of a profitable withholding strategy. They point as well to the large amount of low-cost capacity in the region that would increase Applicants' difficulty in withholding sufficient capacity to drive up price to profitable levels during off-peak periods. 34. In addition, Applicants suggest that the numerical HHI results are not truly indicative of the extent of competitive effects arising from the acquisition, particularly in conjunction with the impact of the upgrades. They stress that in the Springfield market in all periods and in the CILCO market in all except the three lowest load periods in Summer, the upgrades bring in more new independent supply than is taken away through the consolidation of Ameren and CILCO; with more new supply the market is (with mitigation) more structurally competitive than before the acquisition, notwithstanding the increases in the HHI that remain. With respect to the screen failures in the off-peak seasons in the Ameren market, Applicants note that the import capability into the market far exceeds the amount of energy that has ever been imported during those periods, thus indicating that purchasers have an ability to seek outside sources of supply. Finally, Applicants point out that the contracts of most of their wholesale customers are not due to expire until 2005 -13- or later, well past when the upgrades are expected to be completed, and thus no anticompetitive effects from the acquisition could be felt until then. Applicants note that they also have agreed to extend the contracts which expire before the transmission upgrades are completed. 35. Finally, Applicants argue that generation divestiture is appropriate for generalized market power concerns, but here, screen failures do not occur in the broader, more distant markets, which can be reached both within and beyond the MISO. Because market power concerns are localized, Applicants contend that the remedy should also be localized, such as through the upgrades. They also assert that generation divestiture of the magnitude required to eliminate all screen failures would leave the merged system with insufficient capacity to meet load. B. DISCUSSION ---------- 36. Applicants' HHI analysis generally conforms to the requirements of Order No. 642. Although providing analysis based on ATC as the measure of transmission capability, the measure commonly used in the Appendix A analysis, Applicants also provided analysis based on FCITC as the measure of transmission capability. Applicants have argued that ATC tends to underestimate the actual amount of transmission capacity that is available to move power from areas with low prices to high-price areas where market power is exercised and also that in periods when ATC is low, an HHI based on ATC for markets in which both applicants actually compete will tend to show little effect on concentration from the acquisition. 37. In this case, the Commission notes that the use of FCITC data does not appear to be critical in determining whether the acquisition causes increases in concentration that merit further inquiry as to possible adverse competitive effects. Applicants themselves acknowledge that legitimate questions regarding competition are raised by their HHI analysis, an analysis that, when based on FCITC data, reveals screen failures in two markets, Ameren and Illinois Power, in addition to the CILCO and Springfield markets, that do not arise when ATC data are used. We further note that intervenors, while not offering an alternative HHI analysis, also do not fault the data, methodology and assumptions of Applicants' analysis. Therefore, the Commission does not find it necessary to evaluate here the relative merits of FCITC versus ATC as a measure of transmission capability. 38. The Commission finds that the proposed acquisition, subject to the conditions discussed below, will not adversely affect competition in relevant markets from either a horizontal perspective (i.e., the consolidation of generating resources) or a vertical perspective (consolidation of generating resources with electric transmission or fuel delivery systems). With the exception of the CILCO market, which we address below, we recognize that Applicants' proposed transmission upgrades mitigate most of the screen failures identified in the Ameren and Springfield markets (Applicants did not propose a transmission upgrade to increase import transfer capability into the Illinois Power market and the increase in concentration due to the acquisition in that market is not materially affected by the upgrades in the other markets). Also, -14- we note that Applicants, as a result of their agreement with the ICC Staff, have made commitments to obtain the ICC's approval of the acquisition, in addition to the commitments originally set forth in their application here. These commitments are set forth in the filing dated November 18, 2002, from Ameren Services Company. In addition to the commitment to increase import transfer capability into the CILCO control area by 192 MW within 24 months of closing, Ameren will also construct, no later than December 31, 2008, such additional transmission projects as are needed to increase import transfer capability into the CILCO control area by at least an additional 189 MW. 39. However, all of the screen failures identified by Applicants' analysis will continue to exist during the construction period, and, as Applicants recognize, any potential anticompetitive effects of the acquisition would be unabated during that time. Also, while Applicants characterize the upgrades as local, in-area improvements, it is not clear that these projects will be completed within the contemplated time frames, particularly if any required regulatory approvals are delayed. Thus, we will require Applicants to provide quarterly reports on the status of the transmission upgrades, with the first due 3 months after the transaction is consummated. 40. The Commission concludes that additional interim mitigation is necessary until the upgrades are completed in order to be certain that full and effective mitigation is in place at the time the acquisition is completed, as is required under the Merger Policy Statement.(17) This interim mitigation must reflect a balancing of the interim screen failures and other factors. We note that although screen failures occur over most load periods in the Ameren, Springfield and CILCO markets using economic capacity, very few failures occur in available economic capacity and those occur only in off-peak periods in the CILCO and Springfield markets.(18) - -------------------- (17) Merger Policy Statement at 30,136. (18) We also note that capacity is plentiful at this time in the midwestern markets. See "Midwestern Energy Infrastructure Assessment," Office of Market Oversight and Investigations, Federal Energy Regulatory Commission, Docket No. AD02-22-000, October, 2002. -15- 41. In the interim, pending completion of the first upgrade scheduled for the CILCO control area, Ameren agrees to sell to non-affiliated entities 100 MW of power and energy priced at a market value index approved by the ICC for ultimate delivery to retail customers connected to CILCO's distribution system. Pending completion of the second upgrade, scheduled to be in place by December 31, 2008, Ameren also agrees to sell 50 MW on the same basis as noted above. 42. The amount of these sales is sufficient to eliminate the screen failures for the available economic capacity measure and reduces market concentration for the economic capacity measures in relevant markets. We find that the combination of the sales with the transmission upgrade commitment will provide a result that, in this case, is consistent with the public interest. In the circumstances of this case, although the sales are required until transmission upgrades are completed, generation dominance concerns have not been raised by protesters, and the ICC Staff has endorsed a mitigating sale in the same amount as required by this order. Thus, we find that this mitigation is sufficient to prevent any potential competitive harm resulting from the transaction. 43. In addition, we regard Applicants' offer to extend the contracts of all of their wholesale customers until the originally proposed upgrades are completed as an important mitigating factor interim anticompetitive effects of the acquisition. Wholesale customers will be able to maintain the status quo with respect to power supply costs. 44. Finally, a significant factor in our decision is the fact that Applicants have committed that both utilities will be participating in the MISO, an action we regard as essential to our approval of the transaction. As a result, the MISO's scope will be broadened. 45. With respect to the adequacy of Applicants' proposed transmission upgrades as long-term mitigation, we note that Applicants have reached agreement with Springfield to resolve its concerns regarding the impact of the acquisition. First, Applicants and Springfield have agreed that Ameren will, at its own cost, construct and own a new 345 kV interconnection between Springfield and ComEd, with Springfield to have the option to acquire the new substation for a period of 15 years after the interconnection is placed in service, as outlined in the November 18, 2002 letter. This project will substitute for the Toronto-Pawnee Road project originally proposed in the application. Applicants state that this project will not diminish the import capability of any other control area. As noted previously, Ameren has also agreed with the ICC Staff to construct projects that will increase import capability into the CILCO control area by an additional 189 MW, beyond the 192 MW originally proposed in the application. A number of considerations persuade us that on a long-term basis, the transmission upgrades will adequately mitigate any adverse competitive effects of this acquisition. First, except for screen failures in the CILCO market, the transmission upgrade mitigation eliminates almost all other screen failures, except for a few in the off-peak winter and shoulder seasons and the -16- lowest load levels in Summer. As indicated previously, market power concerns are less severe when excess capacity is available. 46. Second, we agree with the thrust of Applicants' arguments that by adding to import capability into the Springfield and CILCO markets by more than the pre-acquisition independent supply provided by Ameren, the transmission upgrades are consistent with the public interest. The availability of more power supply should restrain price increases. We note further that, during the off-peak seasons, excess import capability exists in the Ameren markets, thereby not limiting transmission customers of Ameren in seeking outside sources of supply. The transmission customers will also be able to obtain delivery service on the same basis as Ameren. 47. Third, as noted previously, Ameren has committed to join with CILCO in participating in the MISO However, Applicants are directed to make the MISO aware of the proposed transmission upgrades and to implement any required modifications that may emanate from the MISO's transmission review process. Other entities, particularly transmission customers, would then presumably be able to voice their concerns about possible adverse impacts to the MISO and, if necessary, file a complaint here. This approach is preferable to that suggested by Missouri Municipal Commission, which urges that the proposed upgrades be made subject to a regional planning process such as proposed in the SMD NOPR. However, since the SMD rulemaking is a work-in-progress, coordination through the MISO is more appropriate at this time. C. INTERVENORS' CONCERNS --------------------- 48. Missouri Municipal Commission is a municipal joint action agency that administers the Missouri Public Energy Pool #1 (MoPEP). MoPEP serves as the full requirements supplier for its 24 municipal members and meets their needs through generation and purchased power resources contributed by the members and additional resources arranged by MoPEP. The four MoPEP members located on the Ameren system serve a peak load of 109 MW and provide some of the resources administered by MoPEP. 49. Missouri Municipal Commission has two principal concerns. First, it regards Applicants' commitment to join the MISO as uncertain. Although Applicants state that they expect to be fully participating in the MISO before the proposed transaction closes, Missouri Municipal Commission notes that in a different docket, Ameren has indicated that unless certain seams issues are resolved to its satisfaction, it might withhold its participation in the MISO until satisfied, join PJM, or adopt some other alternative. Also, Missouri Municipal Commission points out, the GridAmerica documents submitted in Docket No. EL02-65-000, permit Ameren to withdraw from the MISO upon 30 days notice if it merges with, or sells its transmission facilities to, a third party. In addition, the GridAmerica documents provide for an initial term of only three -17- years for GridAmerica's participation in the MISO. Missouri Municipal Commission requests that the Commission make Ameren's "RTO commitment" an express condition of transaction approval in a form that will protect Ameren customers for a reasonable period after the transaction. 50. In response to Missouri Municipal Commission's concern, Applicants state that they intend to join the MISO, preferably as a member of GridAmerica, but if GridAmerica is not formed, Ameren will join the MISO individually as a transmission owner. The Commission regards Ameren's RTO commitment to join the MISO as firm and hereby make this commitment a condition of the acquisition's approval. We note that we have conditionally accepted the ITC agreement between the MISO and GridAmerica, 100 FERC P. 61,137 at 61,526 and 100 FERC P. 61,135 at 61,513. Prior Commission approval will be required if Ameren should seek to not comply with this commitment, either by withdrawing from the MISO, or not joining the MISO. 51. We note here that Applicants have asked for waiver of the requirement that merger applicants file a single system open access transmission tariff (OATT). Because both Ameren and CILCO are expected to be fully participating in the MISO before the transaction closes, Applicants regard the filing of an OATT at this time as wasteful. Applicants have also asserted that customers moving power between Ameren and CILCO will not be subject to pancaked rates because both companies will be members of the same RTO. We will provisionally grant the waiver. However, if at some point in the future, Ameren and CIPS should not belong to the same RTO, Applicants are directed to file a single system OATT, which does not include pancaked rates. The single system OATT must be effective prior to the companies not being under the operational control of the same RTO. 52. Missouri Municipal Commission's other concern is that the post-acquisition operation of the affiliated companies and the proposed transmission upgrades, which are intended to allow increased imports into the Ameren control area from the East, will exacerbate transmission congestion in the AmerenUE market. Missouri Municipal Commission suggests that there will be increased power exchanges between Ameren and CILCO and that these flows in combination with the additional flows caused by transmission upgrades will increase congestion and TLRs in the western portion of Ameren's transmission system, where some MJM members are located. Missouri Municipal Commission identifies the Bland-Franks line in Missouri as a critical regional flowgate that is often subject to TLRs. Missouri Municipal Commission argues that the potential harms of the upgrades and post-acquisition operation should be promptly addressed through an appropriate regional planning process, such as proposed in the SMD rulemaking. If this process identifies transmission constraints that are exacerbated by the upgrades or merger-related flows, Missouri Municipal Commission requests that Applicants be required to remedy the adverse effects, such as by constructing additional upgrades. In the interim, Missouri Municipal Commission contends that all of Applicants' transmission customers that are similarly-situated to Springfield, including MoPEP members, -18- should receive as a condition of acquisition approval, the same interim protection, i.e., the hold harmless transmission congestion commitment, afforded Springfield. 53. Applicants have indicated that they do not intend, at this time, to integrate CILCO into the current joint dispatch operations of AmerenUE and AmerenCIPS. They also state that they will continue to maintain separate control areas and to schedule any power transfers through the interface on OASIS. 54. The Commission notes that Applicants' Appendix A analysis was conducted on the basis that none of the transfer capability of the interface was dedicated to Applicants in the post-transaction, post-mitigation scenario. In the event that Applicants propose to combine control areas, we will require them to provide the Commission with 120 days notice before the fact. We also expect that any adverse effects of such proposed changes in the use of the transmission system, which will be subject to the functional control of the MISO, would be addressed within the MISO. 55. Applicants point out that Missouri Municipal Commission has not supported with any evidence the allegation that the proposed transmission upgrades will exacerbate transmission congestion within the AmerenUE area. They also point out that Missouri Municipal Commission has not claimed that its members have been prevented in the past from obtaining access to power supplies due to transmission limitations on the Ameren system or that the acquisition will impede such access. Applicants further note that the overloading of the Bland-Franks line referred to by Missouri Municipal Commission occurs principally in a north-to-south direction and that the overloading is actually reduced by Missouri Municipal Commission purchases that come from the South. Applicants also state that Ameren is currently seeking state approval to construct a new 345 kV line, which is expected to relieve the overloading of the Bland-Franks line. 56. Missouri Municipal Commission's concern regarding the effect of the upgrades on transmission congestion is unsupported and appears somewhat speculative. Delaying the proposed upgrades pending establishment and implementation of a regional planning process that is currently a work-in-progress, would be inappropriate. In any case, given that Ameren expects to be participating in the MISO before the acquisition closes and that Applicants will not be initiating construction until the acquisition closes, the proposed upgrades must be subject to the scrutiny of the MISO. Affected entities will have the opportunity to raise concerns regarding impacts. 57. The Commission also finds that it is not necessary that the hold harmless transmission congestion commitment afforded Springfield be extended to all of Applicants' transmission customers. Applicants have indicated that they will maintain separate control areas and that CILCO's generating resources will not be integrated into Ameren's current economic dispatch operations. Applicants have also indicated that all transactions between Ameren and CILCO will be scheduled on the OASIS. In these circumstances, the acquisition is not likely to -19- increase transmission congestion on the Ameren or CILCO transmission systems. The Commission is required to remedy only those effects caused or exacerbated by a merger. II. VERTICAL EFFECTS ---------------- A. APPLICANTS' ANALYSIS -------------------- 58. Applicants assert that the combination of CILCO and Ameren as vertically integrated generation and transmission entities should raise little concern that they will be able to use their transmission facilities so as to favor sales of their generating capacity over that of competitors, either by denying transmission access or limiting the amount of transmission service available. Apart from the open access tariffs and standards of conduct that are required by Order Nos. 888 and 889, Applicants note that CILCO is already a member of the MISO and that the MISO will also gain functional control of Ameren's transmission system when Ameren joins the MISO. 59. Both Applicants own local gas distribution networks. Applicants state that no independent wholesale generators are served from either of those networks. Applicants also note that numerous interstate pipelines cross their service areas. They contend that new generators are more likely to site their facilities in proximity to one of these pipelines, thus eliminating the need to obtain service from the merged entity. 1. B. DISCUSSION ---------- 60. The Commission finds, for the reasons provided by Applicants that are summarized above, and with Ameren's commitment to join the MISO, that the acquisition is not likely to enhance the ability of the combined Ameren-CILCO system to adversely affect prices or output in electric markets through the use of their transmission resources. In addition, although both Applicants own gas distribution facilities, neither currently serves independent generators and, therefore, they cannot affect the supply of, or prices for, delivered gas to their competitors. This fact, in combination with several pipeline options for delivering gas supplies to new competitors, persuades us that the acquisition is not likely to enhance the ability of Ameren, post-transaction, to adversely affect wholesale electric prices and output through vertical market power. We note that no intervenor has suggested that the acquisition presents vertical market power concerns. 3. EFFECT ON RATES --------------- 61. Regarding rates, the Merger Policy Statement explains our concern that there be adequate protection from adverse rate effects as a result of a transfer. The Commission evaluates whether a proposed section 203 transaction -20- results in an increase in the cost-based power or transmission rates.(19) According to the application, the proposed merger will have no adverse effect on rates, and thus will not harm any ratepayers.(20) With respect to wholesale rates, Applicants' claim that there will be no adverse effect because all of Applicants' wholesale customers take service at fixed rates that are not subject to change under contracts that extend at least until December 31, 2003, and most of these contracts terminate between 2005 and 2008. 62. In light of the above, we conclude that the proposed merger will not adversely affect rates. We note that the intervenors did not raise any rate issues. 4. EFFECT ON REGULATION -------------------- - --------------------- (19) Merger Policy Statement at 30, 123-124. (20) Application at Exhibit J, page 4. 63. As explained in the Merger Policy Statement, the Commission's primary concern with the effect on regulation of a proposed merger involves possible changes in the Commission's jurisdiction when a registered holding company is formed, thus invoking the jurisdiction of the SEC. We are also concerned with the effect on state regulation where a state does not have authority to act on a merger and has asked the Commission to examine the effect on its regulation of the merged entity.(21) 64. Applicants state that in the UE/CIPS proceeding, the Commission found that Applicants' waiver of the Ohio Power(22) immunity with regard to transactions among affiliates was an adequate commitment to eliminate any concern about the effect of the merger on regulation. Applicants reaffirm their waiver. In addition, Applicants, for ratemaking purposes, agree to follow the Commission's policy regarding the treatment of costs and revenue of affiliate non-power transaction. Finally, Applicants explain that state regulation will not be adversely affected as Applicants will remain subject to state regulation upon consummation of the transaction, to the extent such state regulation currently exist. 65. Based on these considerations, the Commission finds that the proposed merger will not adversely affect regulation. We note that no intervenor argues otherwise. THE COMMISSION ORDERS: - --------------------- (A) Applicants' answer is hereby accepted, as discussed herein. (B) Applicants' proposed merger is authorized upon the terms and conditions and for the purposes set forth in the application. (C) Applicants shall file with the Commission quarterly reports concerning the status of the transmission upgrades. (D) Nothing in this order shall be construed to imply acquiescence in any estimate or determination of cost or any valuation of property claimed or asserted. - -------------------- (21) Merger Policy Statement at 30,124-125. (22) Ohio Power Co. v. FERC, 954 F.2d 779, 782-86 (D.C. Cir.) cert. denied, 498 U.S. 73 (1992). See also Merger Policy Statement at 30,124-125. -21- (E) The Commission retains authority under sections 203(b) and 309 of the FPA to issue supplemental orders as appropriate. (F) Applicants shall promptly notify the Commission of the date on which the merger is consummated. (G) The foregoing authorization is without prejudice to the authority of the Commission or any other regulatory body with respect to rates, service, accounts, valuation, estimates, or determinations of cost, or any other matter whatsoever now pending or which may come before the Commission. By the Commission. ( S E A L ) Linwood A. Watson, Jr., Deputy Secretary. EX-5 6 exhf1.txt EX. F-1 - OPINION OF COUNSEL TO AMEREN EXHIBIT F-1 [Steven R. Sullivan letterhead] AMEREN CORPORATION 1901 Chouteau Avenue St. Louis, Missouri 63166 314-554-2098 January 22, 2003 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Ameren Corporation, et al. Form U-1 Application-Declaration (File No. 70-10078) Dear Sirs: I refer to the Form U-1 Application/Declaration, as amended, in the above-referenced proceeding (the "Application"), under the Public Utility Holding Company Act of 1935, as amended (the "Act"), filed with the Securities and Exchange Commission (the "Commission") by Ameren Corporation ("Ameren"), a Missouri corporation, its indirect wholly-owned non-utility subsidiary, Ameren Energy Fuels and Services Company ("Ameren Fuels"), an Illinois corporation, CILCORP Inc. ("CILCORP"), an Illinois corporation, and CILCORP's direct and indirect public-utility subsidiaries, Central Illinois Light Company ("CILCO") and Central Illinois Generation, Inc. ("CIGI"), both of which are Illinois corporations (the "Applicants"). Capitalized terms used in this letter without definition have the meanings ascribed to such terms in the Application. In the Application, Ameren is seeking authorization under the Act to acquire all of the issued and outstanding common stock of CILCORP (the "Transaction"), as a result of which Ameren would indirectly acquire all of the issued and outstanding common stock of CILCO and CIGI. Ameren is also requesting findings by the Commission that would permit it to retain all of CILCORP's existing direct and indirect non-utility subsidiaries and investments, with certain exceptions; to retain the combined gas utility system of CILCO, Union Electric Company and Central Illinois Public Service Company as an additional integrated public-utility system; and to retain CILCORP as a subsidiary holding company. CILCORP and CILCO are requesting that the Commission issue an order pursuant to Section 3(a)(1) of the Act exempting each company, as a holding company, and its subsidiary companies as such from all provisions of the Act, except Section 9(a)(2). CILCO is seeking approval to transfer its generating assets to CIGI, in the event that such transfer occurs following closing of the Transaction. In the Application, the Applicants are also requesting that the Commission approve the following related transactions: (i) CILCO to continue to provide certain administrative, management and technical services at cost to CILCORP and its other associate companies for a period not to exceed two years following closing of the Transaction; (ii) Ameren Fuels to enter into separate fuel services agreements with CILCO and CIGI pursuant to which Ameren Fuels will manage, at cost, gas supply resources and fuel procurement for CILCO and CIGI; (iii) the issuance of short-term debt securities (i.e., maturities of less than one year) by CILCORP, CILCO and CIGI in aggregate amounts at any time outstanding during the Authorization Period not to exceed $250 million for each company, less the amount, if any, of short-term borrowings by any of such companies from Ameren; (iv) the issuance of long-term notes by CILCORP to refinance the CILCORP Senior Notes in an aggregate principal amount not to exceed the current principal amount of the CILCORP Senior Notes ($475 million) plus the amount of any prepayment or "make whole" premium required to be paid in connection with any prepayment of the CILCORP Senior Notes, and the guarantee of such notes (or of the CILCORP Senior Notes) by Ameren; (v) the issuance of Long-term Securities by CIGI in an aggregate amount at any time outstanding during the Authorization Period not to exceed $500 million; (vi) to the extent not exempt under Rule 52(a), CILCORP, CILCO and CIGI to enter into and perform Interest Rate Hedges and Anticipatory Hedges; (vii) CILCORP to issue and Ameren to acquire long-term equity and debt securities in an aggregate amount at any time outstanding during the Authorization Period not to exceed $1 billion and short-term debt securities (i.e., maturities of up to one year) in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $250 million; (viii) CIGI to issue and Ameren to acquire long-term notes in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $500 million and short-term notes in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $250 million; 2 (ix) CILCO to issue and Ameren to acquire short-term notes in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $250 million; (x) CILCORP to maintain, renew and extend any guarantees and other forms of credit support that are outstanding on the date that the Transaction closes, and from time to time during the Authorization Period, to issue new guarantees and provide other forms of support with respect to securities or other obligations of its subsidiaries in an aggregate amount at any time outstanding during the Authorization Period not to exceed $500 million; (xi) CILCORP, CILCO and CIGI to organize and acquire the common stock or other equity securities of one or more Financing Subsidiaries formed exclusively for the purpose of facilitating the issuance of long-term debt or equity securities of such companies, and to issue, and any Financing Subsidiary to acquire, Notes to evidence the loan of financing proceeds by any Financing Subsidiary to CILCORP, CILCO or CIGI, as the case may be; and (xii) CILCORP to pay dividends out of capital or unearned surplus in an amount equal to CILCORP's retained earnings at the time the Transaction closes plus the amount, if any, recorded as an impairment to goodwill on the books of CILCORP in accordance with applicable accounting rules. I have acted as counsel for Ameren and Ameren Fuels (the "Ameren Companies") in connection with the Application and, as such counsel, I am familiar with the corporate proceedings taken by the Ameren Companies in connection with the Transaction and related transactions, as described in the Application. I have examined originals, or copies certified to my satisfaction, of such corporate records of the Ameren Companies, certificates of public officials, certificates of officers and representatives of the Ameren Companies, and other documents as I have deemed it necessary to examine as a basis for the opinions hereinafter expressed. In such examination, I have assumed the genuineness of all signatures and the authenticity of all documents submitted to me as originals and the conformity with the originals of all documents submitted to me as copies. As to various questions of fact material to such opinions, I have, when relevant facts were not independently established, relied upon certificates of officers of the Ameren Companies and other appropriate persons and statements contained in the Application and the exhibits thereto. The opinions expressed below are subject to the following further assumptions and conditions: a. The authorization and approval of the Transaction by the Boards of Directors of Ameren and The AES Corporation, the parent company of CILCORP, and, to the extent required, the authorization and approval of the other related transactions by the Boards of Directors and shareholders of each of the Applicants shall have been adopted and remain in full force and effect; 3 b. All required approvals, authorizations, consents, certificates, and orders of, and all filings and registrations with, all applicable federal and state commissions and regulatory authorities with respect to the Transaction and other related transactions shall have been obtained or made, as the case may be, and shall remain in effect (including the approval and authorization of the Commission under the Act, the Federal Energy Regulatory Commission under the Federal Power Act, as amended, and the rules and regulations thereunder, and the Illinois Commerce Commission under the applicable laws of the State of Illinois), and the Transaction and other related transactions shall have been accomplished in accordance with all such approvals, authorizations, consents, certificates, orders, filings and registrations; c. The Commission shall have duly entered an appropriate order or orders with respect to the Transaction and other related transactions as described in the Application granting and permitting the Application to become effective under the Act and the rules and regulations thereunder; d. The applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder shall have expired; e. The Applicants shall have obtained all consents, waivers and releases, if any, required for the Transaction and other related transactions under all applicable governing corporate documents, contracts, agreements, debt instruments, indentures, franchises, licenses and permits; f. No act or event other than as described herein shall have occurred subsequent to the date hereof which would change the opinions expressed herein; g. The Transaction and other related transactions shall have been consummated as described in the Application and under the supervision of me and Jones, Day, Reavis & Pogue, Chicago, Illinois acting for the Applicants, and all legal matters incident thereto shall be satisfactory to each of us; and h. For purposes of this opinion, with respect to all matters governed by the laws of Illinois and Delaware as applicable to Ameren and Ameren Fuels, I have relied upon the opinion of even date herewith of Jones, Day, Reavis & Pogue, Chicago, Illinois, filed as an Exhibit to the Application; and as to all matters governed by the laws of Illinois and Delaware as applicable to CILCORP, CILCO and CIGI, I have relied upon the opinion of even date herewith of Craig W. Stensland, also filed as an Exhibit to the Application. A copy of this opinion is being delivered to Craig W. Stensland, Corporate Secretary of CILCORP, who, in rendering his opinion of even date herewith to the Commission, is hereby authorized to rely upon the opinions expressed herein to the same extent as if this opinion had also been addressed directly to him. 4 Based upon the foregoing, and subject to the assumptions and conditions set forth herein, and having regard to legal considerations which I deem relevant, I am of the opinion that, in the event that the proposed Transaction and other related transactions are consummated in accordance with the Application: 1. All state laws applicable to the proposed Transaction and other related transactions will have been complied with. 2. Each of the Applicants is validly organized and duly existing under the laws of the state of its incorporation. 3. The common stock of CILCORP to be acquired in the Transaction will be validly issued, fully paid and nonassessable, and Ameren, as the holder thereof, will be entitled to the rights and privileges appertaining thereto set forth in the Articles of Incorporation of CILCORP, and the debt securities to be issued by CILCORP, CILCO and CIGI will be valid and binding obligations of the issuer thereof in accordance with their terms. 4. Ameren will legally acquire the common stock of CILCORP. 5. The consummation of the Transaction and other related transactions will not violate the legal rights of the holders of any securities issued by Ameren or any associate company of Ameren. I hereby consent to the use of this opinion in connection with the Application. This opinion is intended solely for the use of the Commission and, except as indicated in paragraph h. above, may not be relied upon by any other person. Very truly yours, /s/ Steven R. Sullivan EX-5 7 exhf2.txt EX. F-2 - OPINION OF SPECIAL COUNSEL TO AMEREN EXHIBIT F-2 [Jones Day] January 22, 2003 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Ameren Corporation, et al. Form U-1 Application-Declaration (File No. 70-10078) Dear Sirs: We refer to the Form U-1 Application/Declaration, as amended, in the above-referenced proceeding (the "Application"), under the Public Utility Holding Company Act of 1935, as amended (the "Act"), filed with the Securities and Exchange Commission (the "Commission") by Ameren Corporation ("Ameren"), a Missouri corporation, its indirect wholly-owned non-utility subsidiary, Ameren Energy Fuels and Services Company ("Ameren Fuels"), an Illinois corporation, CILCORP Inc. ("CILCORP"), an Illinois corporation, and CILCORP's direct and indirect public-utility subsidiaries, Central Illinois Light Company ("CILCO") and Central Illinois Generation, Inc. ("CIGI"), both of which are Illinois corporations (the "Applicants"). CILCORP, CILCO and CIGI are herein referred to as the "CILCORP Companies." Capitalized terms used in this letter without definition have the meanings ascribed to such terms in the Application. In the Application, Ameren is seeking authorization under the Act to acquire all of the issued and outstanding common stock of CILCORP (the "Transaction"), as a result of which Ameren would indirectly acquire all of the issued and outstanding common stock of CILCO and CIGI. Ameren is also requesting findings by the Commission that would permit it to retain all of CILCORP's existing direct and indirect non-utility subsidiaries and investments, with certain exceptions; to retain the combined gas utility system of CILCO, Union Electric Company and Central Illinois Public Service Company as an additional integrated public-utility system; and to retain CILCORP as a subsidiary holding company. CILCORP and CILCO are requesting that the Commission issue an order pursuant to Section 3(a)(1) of the Act exempting each company, as a holding company, and its subsidiary companies as such from all provisions of the Act, except Section 9(a)(2). CILCO is seeking approval to transfer its generating assets to CIGI, in the event that such transfer occurs following closing of the Transaction. In the Application, the Applicants are also requesting that the Commission approve the following related transactions: (i) CILCO to continue to provide certain administrative, management and technical services at cost to CILCORP and its other associate companies for a period not to exceed two years following closing of the Transaction; (ii) Ameren Fuels to enter into separate fuel services agreements with CILCO and CIGI pursuant to which Ameren Fuels will manage, at cost, gas supply resources and fuel procurement for CILCO and CIGI; (iii) the issuance of short-term debt securities (i.e., maturities of less than one year) by CILCORP, CILCO and CIGI in aggregate amounts at any time outstanding during the Authorization Period not to exceed $250 million for each company, less the amount, if any, of short-term borrowings by any of such companies from Ameren; (iv) the issuance of long-term notes by CILCORP to refinance the CILCORP Senior Notes in an aggregate principal amount not to exceed the current principal amount of the CILCORP Senior Notes ($475 million) plus the amount of any prepayment or "make whole" premium required to be paid in connection with any prepayment of the CILCORP Senior Notes, and the guarantee of such notes (or of the CILCORP Senior Notes) by Ameren; (v) the issuance of Long-term Securities by CIGI in an aggregate amount at any time outstanding during the Authorization Period not to exceed $500 million; (vi) to the extent not exempt under Rule 52(a), CILCORP, CILCO and CIGI to enter into and perform Interest Rate Hedges and Anticipatory Hedges; (vii) CILCORP to issue and Ameren to acquire long-term equity and debt securities in an aggregate amount at any time outstanding during the Authorization Period not to exceed $1 billion and short-term debt securities (i.e., maturities of up to one year) in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $250 million; (viii) CIGI to issue and Ameren to acquire long-term notes in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $500 million and short-term notes in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $250 million; (ix) CILCO to issue and Ameren to acquire short-term notes in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $250 million; (x) CILCORP to maintain, renew and extend any guarantees and other forms of credit support that are outstanding on the date that the Transaction closes, and from time to time during the Authorization Period, to issue new guarantees and provide other forms of support with respect to securities or other obligations of its subsidiaries in an 2 aggregate amount at any time outstanding during the Authorization Period not to exceed $500 million; (xi) CILCORP, CILCO and CIGI to organize and acquire the common stock or other equity securities of one or more Financing Subsidiaries formed exclusively for the purpose of facilitating the issuance of long-term debt or equity securities of such companies, and to issue, and any Financing Subsidiary to acquire, Notes to evidence the loan of financing proceeds by any Financing Subsidiary to CILCORP, CILCO or CIGI, as the case may be; and (xii) CILCORP to pay dividends out of capital or unearned surplus in an amount equal to CILCORP's retained earnings at the time the Transaction closes plus the amount, if any, recorded as an impairment to goodwill on the books of CILCORP in accordance with applicable accounting rules. We have acted as counsel to Ameren in connection with the Transaction. In connection with this opinion, we have examined the Application and the exhibits thereto, the Stock Purchase Agreement, and originals, or copies certified to our satisfaction, of such corporate records of Ameren and other entities, certificates of public officials, orders of regulatory bodies having jurisdiction over aspects of the Transaction and related transactions, certificates of officers and representatives of the Ameren and other entities and such other documents, records and matters of law as we have deemed necessary for the purposes of this opinion. Based upon the foregoing, and subject to the assumptions and conditions set forth herein, and having regard to legal considerations which we deem relevant, we are of the opinion that, in the event that the proposed Transaction and other related transactions are consummated in accordance with the Application: 1. All state laws applicable to the proposed Transaction and other related transactions will have been complied with by Ameren and Ameren Fuels. 2. Ameren will legally acquire the common stock of CILCORP. 3. The consummation of the Transaction and other related transactions will not violate the legal rights of the holders of any securities issued by any associate company of Ameren incorporated in Illinois. The opinions expressed above are subject to the following further assumptions and conditions: a. The authorization and approval of the Transaction by the Board of Directors of Ameren and, to the extent required, the authorization and approval of the other related transactions, to the extent that they concern Ameren and Ameren Fuels, by the Boards of Directors and shareholders of such companies remain in full force and effect; 3 b. All required approvals, authorizations, consents, certificates, and orders of, and all filings and registrations with, all applicable federal and state commissions and regulatory authorities with respect to the Transaction and other related transactions, to the extent that they concern Ameren and Ameren Fuels, shall have been obtained or made, as the case may be, and shall remain in effect (including the approval and authorization of the Commission under the Act, the Federal Energy Regulatory Commission under the Federal Power Act, as amended, and the rules and regulations thereunder, and the Illinois Commerce Commission under the applicable laws of the State of Illinois), and the Transaction and other related transactions, to the extent that they concern Ameren and Ameren Fuels, shall have been accomplished in accordance with all such approvals, authorizations, consents, certificates, orders, filings and registrations; c. The Commission shall have duly entered an appropriate order or orders with respect to the Transaction and other related transactions as described in the Application granting and permitting the Application to become effective under the Act and the rules and regulations thereunder; d. The applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder shall have expired with respect to the Transaction; e. Ameren and Ameren Fuels shall have obtained all consents, waivers and releases, if any, required for the Transaction and other related transactions under all applicable governing corporate documents, contracts, agreements, debt instruments, indentures, franchises, licenses and permits; f. No act or event other than as described herein shall have occurred subsequent to the date hereof which would change the opinions expressed herein; g. The Transaction and other related transactions shall have been consummated as described in the Application and under the supervision of us and of Steven R. Sullivan, Vice President Regulatory Policy, General Counsel and Secretary of Ameren, acting for the Applicants and all legal matters incident thereto shall be satisfactory to each of us; h. We are members of the Bar of the State of Illinois and do not express any opinion herein concerning any law other than the laws of the State of Illinois, the Federal law of the United States of America and the corporate law of the State of Delaware. A copy of this opinion is being delivered to Steven R. Sullivan, Vice President Regulatory Policy, General Counsel and Secretary of Ameren, and Craig W. Stensland, Corporate Secretary of CILCORP, each of whom, in rendering his opinion of even date herewith to the Commission, is hereby authorized to rely upon the opinions expressed herein to the same extent as if this opinion had also been addressed directly to him. For purposes of this opinion, with respect to all matters governed by the laws of Illinois and Delaware as applicable to the CILCORP Companies, we have relied upon the opinion of even date herewith of Craig W. Stensland, as filed as an Exhibit to the Application; and 4 i. We have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity with the originals of all documents submitted to us as copies. As to various questions of fact material to such opinions we have, when relevant facts were not independently established, relied upon certificates by officers of Ameren and other appropriate persons and statements contained in the Application. We hereby consent to the use of this opinion in connection with the Application. This opinion is intended solely for the use of the Commission and, except as indicated in paragraph h. above, may not be relied upon by any other person. Very truly yours, /s/ Jones Day 5 EX-5 8 exhf3.txt EX. F-3 - OPINION OF COUNSEL TO CILCORP EXHIBIT F-3 [Craig W. Stensland Letterhead] CILCORP Inc. 300 Liberty Street Peoria, Illinois 61602 January 22, 2003 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Ameren Corporation, et al. Form U-1 Application-Declaration (File No. 70-10078) Dear Sirs: I refer to the Form U-1 Application/Declaration, as amended, in the above-referenced proceeding (the "Application"), under the Public Utility Holding Company Act of 1935, as amended (the "Act"), filed with the Securities and Exchange Commission (the "Commission") by Ameren Corporation ("Ameren"), a Missouri corporation, its indirect wholly-owned non-utility subsidiary, Ameren Energy Fuels and Services Company ("Ameren Fuels"), an Illinois corporation, CILCORP Inc. ("CILCORP"), an Illinois corporation, and CILCORP's direct and indirect public-utility subsidiaries, Central Illinois Light Company ("CILCO") and Central Illinois Generation, Inc. ("CIGI"), both of which are Illinois corporations (the "Applicants"). Capitalized terms used in this letter without definition have the meanings ascribed to such terms in the Application. In the Application, Ameren is seeking authorization under the Act to acquire all of the issued and outstanding common stock of CILCORP (the "Transaction"), as a result of which Ameren would indirectly acquire all of the issued and outstanding common stock of CILCO and CIGI. Ameren is also requesting findings by the Commission that would permit it to retain all of CILCORP's existing direct and indirect non-utility subsidiaries and investments, with certain exceptions; to retain the combined gas utility system of CILCO, Union Electric Company and Central Illinois Public Service Company as an additional integrated public-utility system; and to retain CILCORP as a subsidiary holding company. CILCORP and CILCO are requesting that the Commission issue an order pursuant to Section 3(a)(1) of the Act exempting each company, as a holding company, and its subsidiary companies as such from all provisions of the Act, except Section 9(a)(2). CILCO is seeking approval to transfer its generating assets to CIGI, in the event that such transfer occurs following closing of the Transaction. In the Application, the Applicants are also requesting that the Commission approve the following related transactions: (i) CILCO to continue to provide certain administrative, management and technical services at cost to CILCORP and its other associate companies for a period not to exceed two years following closing of the Transaction; (ii) Ameren Fuels to enter into separate fuel services agreements with CILCO and CIGI pursuant to which Ameren Fuels will manage, at cost, gas supply resources and fuel procurement for CILCO and CIGI; (iii) the issuance of short-term debt securities (i.e., maturities of less than one year) by CILCORP, CILCO and CIGI in aggregate amounts at any time outstanding during the Authorization Period not to exceed $250 million for each company, less the amount, if any, of short-term borrowings by any of such companies from Ameren; (iv) the issuance of long-term notes by CILCORP to refinance the CILCORP Senior Notes in an aggregate principal amount not to exceed the current principal amount of the CILCORP Senior Notes ($475 million) plus the amount of any prepayment or "make whole" premium required to be paid in connection with any prepayment of the CILCORP Senior Notes, and the guarantee of such notes (or of the CILCORP Senior Notes) by Ameren; (v) the issuance of Long-term Securities by CIGI in an aggregate amount at any time outstanding during the Authorization Period not to exceed $500 million; (vi) to the extent not exempt under Rule 52(a), CILCORP, CILCO and CIGI to enter into and perform Interest Rate Hedges and Anticipatory Hedges; (vii) CILCORP to issue and Ameren to acquire long-term equity and debt securities in an aggregate amount at any time outstanding during the Authorization Period not to exceed $1 billion and short-term debt securities (i.e., maturities of up to one year) in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $250 million; 2 (viii) CIGI to issue and Ameren to acquire long-term notes in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $500 million and short-term notes in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $250 million; (ix) CILCO to issue and Ameren to acquire short-term notes in an aggregate principal amount at any time outstanding during the Authorization Period not to exceed $250 million; (x) CILCORP to maintain, renew and extend any guarantees and other forms of credit support that are outstanding on the date that the Transaction closes, and from time to time during the Authorization Period, to issue new guarantees and provide other forms of support with respect to securities or other obligations of its subsidiaries in an aggregate amount at any time outstanding during the Authorization Period not to exceed $500 million; (xi) CILCORP, CILCO and CIGI to organize and acquire the common stock or other equity securities of one or more Financing Subsidiaries formed exclusively for the purpose of facilitating the issuance of long-term debt or equity securities of such companies, and to issue, and any Financing Subsidiary to acquire, Notes to evidence the loan of financing proceeds by any Financing Subsidiary to CILCORP, CILCO or CIGI, as the case may be; and (xii) CILCORP to pay dividends out of capital or unearned surplus in an amount equal to CILCORP's retained earnings at the time the Transaction closes plus the amount, if any, recorded as an impairment to goodwill on the books of CILCORP in accordance with applicable accounting rules. I have acted as counsel for CILCORP, CILCO and CIGI (the "CILCORP Companies") in connection with the Application and, as such counsel, I am familiar with the corporate proceedings taken by the CILCORP Companies in connection with the Transaction and the related transactions, as described in the Application. I have examined originals, or copies certified to my satisfaction, of such corporate records of the CILCORP Companies, certificates of public officials, certificates of officers and representatives of the CILCORP Companies, and other documents as I have deemed it necessary to examine as a basis for the opinions hereafter expressed. In such examination, I have assumed the genuineness of all signatures and the authenticity of all documents submitted to me as originals and the conformity with the originals of all documents submitted to me as copies. As to various questions of fact material to such opinions, I have, when relevant facts were not independently established, relied upon certificates of officers of the CILCORP Companies and other appropriate persons and statements contained in the Application and the exhibits thereto. Based upon the foregoing, and subject to the assumptions and conditions set forth herein, and having regard to legal considerations which I deem relevant, I am of the opinion that, in the event that the proposed Transaction and other related transactions are consummated in accordance with the Application: 1. All state laws applicable to the proposed Transaction and other related transactions will have been complied with by the CILCORP Companies. 3 2. Each of the CILCORP Companies is validly organized and duly existing under the laws of the State of Illinois. 3. The common stock of CILCORP to be acquired in the Transaction will be validly issued, fully paid and nonassessable, and Ameren, as the holder thereof, will be entitled to the rights and privileges appertaining thereto set forth in the Articles of Incorporation of CILCORP, and the debt securities to be issued by CILCORP, CILCO and CIGI will be valid and binding obligations of the issuer thereof in accordance with their terms. 4. Ameren will legally acquire the common stock of CILCORP. 5. The consummation of the Transaction and other related transactions will not violate the legal rights of the holders of any securities issued by CILCORP or any associate company of CILCORP. The opinions expressed below are subject to the following further assumptions and conditions: a. The authorization and approval of the Transaction by the Boards of Directors of Ameren and The AES Corporation ("AES"), the parent company of CILCORP and , to the extent required, the authorization and approval of the other related transactions by the Boards of Directors and shareholders of AES and each of the Applicants shall have been adopted and remain in full force and effect; b. All required approvals, authorizations, consents, certificates, and orders of, and all filings and registrations with, all applicable federal and state commissions and regulatory authorities with respect to the Transaction and other related transactions, to the extent that they concern any of the CILCORP Companies, shall have been obtained or made, as the case may be, and shall remain in effect (including the approval and authorization of the Commission under the Act, the Federal Energy Regulatory Commission under the Federal Power Act, as amended, and the rules and regulations thereunder, and the Illinois Commerce Commission under the applicable laws of the State of Illinois), and the Transaction and other related transactions, to the extent that they concern any of the CILCORP Companies, shall have been accomplished in accordance with all such approvals, authorizations, consents, certificates, orders, filings and registrations; c. The Commission shall have duly entered an appropriate order or orders with respect to the Transaction and other related transactions as described in the Application granting and permitting the Application to become effective under the Act and the rules and regulations thereunder; 4 d. The applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder shall have expired; e. The CILCORP Companies shall have obtained all consents, waivers and releases, if any, required for the Transaction and other related transactions under all applicable governing corporate documents, contracts, agreements, debt instruments, indentures, franchises, licenses and permits; f. No act or event other than as described herein shall have occurred subsequent to the date hereof which would change the opinions expressed herein; g. The Transaction and other related transactions, to the extent that they concern any of the CILCORP Companies, shall have been consummated as described in the Application and under the supervision of AES and Skadden, Arps, Slate, Meagher & Flom LLP, acting for AES, and all legal matters incident thereto shall be satisfactory to each of them; and h. I am a member of the Bar of the State of Illinois and do not express any opinion herein concerning any law other than the laws of the State of Illinois, the Federal law of the United States of America and the corporate law of the State of Delaware, as applicable to the CILCORP Companies; as to all matters governed by the laws of Missouri applicable to Ameren and Ameren Fuels, I have relied upon the opinion of even date herewith of Steven R. Sullivan, filed as an Exhibit to the Application; and, as to all matters governed by the laws of Illinois and Delaware as applicable to Ameren and Ameren Fuels, I have relied upon the opinion of even date herewith of Jones, Day, Reavis & Pogue, Chicago, Illinois, also filed as an Exhibit to the Application. A copy of this opinion is being delivered to Steven R. Sullivan, Vice President Regulatory Policy, General Counsel and Secretary of Ameren, who, in rendering his opinion of even date herewith to the Commission, is hereby authorized to rely upon the opinions expressed herein to the same extent as if this opinion had also been addressed directly to him. I hereby consent to the use of this opinion in connection with the Application. This opinion is intended solely for the use of the Commission and, except as indicated in paragraph h. above, may not be relied upon by any other person. Very truly yours, /s/ Craig W. Stensland 5 EX-99 9 exhh.txt EX. H - ANALYSIS OF ECONOMIC IMPACT EXHIBIT H AMEREN CORPORATION & CENTRAL ILLINOIS LIGHT COMPANY ANALYSIS OF THE ECONOMIC IMPACT OF A DIVESTITURE OF THE GAS OPERATIONS OF AMERENUE, AMERENCIPS AND CILCO This Study was undertaken by the management and staff of Ameren Corporation on behalf of AmerenUE (UE), AmerenCIPS (CIPS) and Central Illinois Light Company (CILCO) to evaluate the costs from lost economies that would be associated with the spin-off of UE's, CIPS', and CILCO's natural gas assets and operations as a single stand-alone gas company, all of which would take place after the acquisition of CILCO by Ameren Corporation. SEPTEMBER 30, 2002 TABLE OF CONTENTS PAGE ---- SECTION I. EXECUTIVE SUMMARY AND CONCLUSIONS 1 SECTION II. GENERAL STUDY ASSUMPTIONS 4 SECTION III. NEWGAS-UE/CIPS/CILCO A. OVERVIEW 6 B. ANALYSIS 7 C. SCHEDULE OF EXHIBITS 14 SECTION I. EXECUTIVE SUMMARY AND CONCLUSIONS This Study was undertaken by the management and staff of Ameren Corporation on behalf of AmerenUE (UE), AmerenCIPS (CIPS) and Central Illinois Light Company (CILCO) to evaluate the costs from lost economies that would be associated with the spin-off of UE's, CIPS' and CILCO's natural gas assets and operations as a single stand-alone gas company, all of which would take place after the acquisition of CILCO by Ameren Corporation. This Study demonstrates that the lost economies from divestiture would be significant, and that continued retention of the gas operations by UE, CIPS and CILCO following the merger is in the best interest of the utility ratepayers and shareholders alike. The effects on shareholders were calculated using the increased costs caused by divestiture assuming no rate relief. The effects on ratepayers or customers were calculated assuming recovery of additional costs through rate increases. INCOME TAXES ON THE DIVESTITURE TRANSACTION - ------------------------------------------- Assuming that the natural gas assets of UE, CIPS and CILCO are combined into a single natural gas subsidiary after Ameren acquires CILCORP and that such subsidiary were subsequently spun off to the public, there would be an income tax liability of approximately $18.3 million (based on data as of December 31, 2001 and assuming that the fair market value of the assets is the same as their net book value). If the gas assets themselves were sold to another company, the income tax liability would be substantially higher. SHAREHOLDERS - ------------ The projected effects on the shareholders of the lost economies resulting from the spin-off of UE's, CIPS' and CILCO's gas businesses into NEWGAS-UE/CIPS/CILCO are shown in Table I-1: 1 TABLE I-1* ANNUAL EFFECT OF LOST ECONOMIES ON SHAREHOLDERS ---------------------------------------------------------------- NEWGAS-UE/CIPS/CILCO ---------------------------------------------------------------- Lost Economies $50,192,000 ---------------------------------------------------------------- Lost Economies as a Percent of: ---------------------------------------------------------------- Total Gas Operating Revenue 8.35% ---------------------------------------------------------------- Total Gas Operating Revenue Deductions 9.05% ---------------------------------------------------------------- Gross Gas Income 106.89% ---------------------------------------------------------------- Net Gas Income 176.21% ---------------------------------------------------------------- In the Absence of Rate Relief: ---------------------------------------------------------------- Return on Rate Base -0.38% ---------------------------------------------------------------- Return on Net Plant -0.40% ---------------------------------------------------------------- * The effect of lost economies shown in this table does not reflect the income tax liability of $18.3 million, as previously explained. In Table I-1, Lost Economies represents the increased costs, excluding income taxes, to operate as one stand-alone company. Total Gas Operating Revenue is the sum of all gas revenues for the 12 months ended December 31, 2001. Total Gas Operating Revenue Deductions include all purchased gas and gas withdrawn from storage, operation and maintenance expenses, depreciation and taxes other than income taxes. Gross Gas Income is the difference between Total Gas Operating Revenue and Total Gas Operating Revenue Deductions. Net Gas Income is Gross Gas Income minus Income Taxes. (See SECTION III.C. NEWGAS-UE/CIPS/CILCO Exhibit 1 for detailed information.) GAS CUSTOMERS - ------------- The projected effect on gas customers, assuming the stand-alone organization is allowed rate increases to recover lost economies and applicable income taxes, is shown in Table I-2: TABLE I-2* ANNUAL EFFECT OF LOST ECONOMIES ON GAS CUSTOMERS ---------------------------------------------------------------- RATE REVENUE NEWGAS-UE/CIPS/CILCO ---------------------------------------------------------------- Pre Spin-off $601,294,000 ---------------------------------------------------------------- Post Spin-off $679,566,000 ---------------------------------------------------------------- Dollar Increase $78,272,000 ---------------------------------------------------------------- Percent Increase 13.02% ---------------------------------------------------------------- * The effect of lost economies shown in this table does not reflect the income tax liability of $ 18.3 million, as previously explained. 2 (See SECTION III.C. NEWGAS-UE/CIPS/CILCO Exhibit 1 for detailed information supporting Table I-2.) ELECTRIC CUSTOMERS - ------------------ In addition to the forgoing impacts, divesting the gas business would result in rate increases of 0.08% for UE electric customers, 1.90% for CIPS electric customers, and 5.17% for CILCO electric customers. This impact is due to each company transferring all common property and applicable O&M and depreciation expenses into the respective electric rate bases and income statements, requiring rate increases to maintain the existing rates of return. CONCLUSIONS - ----------- The economies that UE, CIPS and CILCO will realize from combined electric and gas operations will provide significant benefits to customers and shareholders. This Study demonstrates that spinning off the three gas divisions into a separate entity would be inefficient due to lost economies, which would be passed on to gas customers, electric customers and/or to shareholders. Without increased rates, the immediate negative effect on shareholders' earnings would be substantial, making ownership of shares in NEWGAS-UE/CIPS/CILCO unattractive. The pass-through of increased costs to customers would cause significant increases in gas rates, with no increase in the level or quality of service. The rate increases required to operate NEWGAS-UE/CIPS/CILCO would total about $78,272,000 (Table I-2). Such increases would make NEWGAS-UE/CIPS/CILCO less competitive at a time when competition in the energy industry is rapidly increasing. In addition, NEWGAS-UE/CIPS/CILCO would receive none of the benefits expected to accrue from the proposed acquisition. It is estimated there would be no substantial benefits from the divestiture of the gas businesses for electric customers. Minimal savings could be achieved for items such as data processing costs, and minimal personnel reductions could occur in the combination gas and electric districts. These savings would be offset by additional costs such as changing meter reading routes and modifying data processing applications. Income tax liability of $18.3 million from the sale of the spun off gas assets would substantially increase the lost economies, previously illustrated on Tables I-1 and I-2. 3 SECTION II. GENERAL STUDY ASSUMPTIONS The assumptions, information and data utilized for this Study are based on the industry expertise and experience of the Ameren management and staffs. Below are the major assumptions employed for this Study: 1. ORGANIZATION: The assets and operations to be spun off would be combined to create one independent, stand-alone, publicly held, regulated company. It would have all the necessary management personnel, along with facilities, equipment, materials, supplies, etc., required to operate as a stand-alone company. 2. SYSTEM OPERATION & MAINTENANCE: The gas and electric systems would continue to be operated and administered in the existing manner to ensure safe and reliable service. In addition, current system renewal programs (i.e. cast iron main replacements) would be continued. 3. STAFFING: Staffing levels of the stand-alone gas company would be sufficient to ensure that customers receive the present level and quality of service. 4. LABOR COSTS: Labor cost estimates were based upon assessments of work assignments, using UE and CIPS wage structures. Senior management salary estimates were based on industry averages. 5. NON-LABOR COSTS: These costs were estimated based upon actual costs incurred by UE and CIPS for their gas businesses assuming the customers of NEWGAS-UE/CIPS/CILCO would receive existing levels and quality of service. 6. COST PASS-THROUGH: Full pass-through to customers of increased costs due to lost economies would be allowed in formal rate proceedings. 7. SPECIFIC LABOR ASSUMPTIONS: a) Organization size and spans of control (i.e. amount of management supervision) were estimated using existing UE, CIPS and CILCO structures, adjusted to recognize the broader functional responsibilities that would exist in the new, smaller company. b) Pensions and benefits were estimated as a percent of direct labor cost. c) Employee benefits would be similar to the combined companies of UE and CIPS. 8. CAPITAL EXPENDITURE AND COST ASSUMPTIONS: a) The accounting for direct and indirect capital expenditures would remain the same as that currently used in the combined utilities of UE, CIPS and CILCO. b) The actual capital costs for the divested company would be higher than those of UE, CIPS and CILCO. Since gas purchases are highly seasonal and market prices are volatile, the stand-alone gas 4 company would experience great volatility in its cash positions. At the same time, the book value of the assets of NEWGAS-UE/CIPS/CILCO would be much smaller than those of the combined utility predecessors. As a result, the new company would be perceived as riskier and would be subject to higher borrowing rates. Because of the constraints of the UE, CIPS and CILCO mortgage indentures, the debt associated with the spun-off facilities would have to be refinanced at today's rates. 9. TRANSITION COST ASSUMPTIONS: Costs such as the legal, investment banking, filing and printing fees associated with the public spin-off of stock, creation of new indenture agreements, negotiation of new service contracts and costs to establish business processes would be incurred and amortized appropriately. 10. TRANSACTIONS BETWEEN COMPANIES: All transactions and transfers between NEWGAS-UE/CIPS/CILCO and UE/CIPS/CILCO, would be arms-length transactions based upon fair market values. 11. OTHER ASSUMPTIONS: a) Facility costs would include separate headquarters, storerooms, and office space for employees currently using facilities shared by the electric and gas businesses. b) To facilitate the assessment of financial effects, it was assumed the costs for outsourcing and performing work in-house would be comparable. c) Information Technology work would be outsourced. d) Additional equipment (i.e., vehicles, trenchers, and heavy power operated equipment) would be leased under an operating lease. e) External auditing costs were estimated based on an industry survey. f) Insurance costs were quotes based on protecting the gas utility against losses and damages to leased properties used in its operations, as well as injuries and damage claims. g) Regulatory commission expenses would be similar to those currently incurred in connection with formal cases before regulatory commissions involving gas operations. h) Potential costs for clean-up of environmental sites (coal gasification plants) would be the same whether or not the gas businesses are spun off. For this reason such costs were not considered in this Study. 5 SECTION III.A. NEWGAS-UE/CIPS/CILCO OVERVIEW Spinning off UE's, CIPS' and CILCO's gas operations into a separate stand-alone company (NEWGAS-UE/CIPS/CILCO) would result in the following: o NEWGAS-UE/CIPS/CILCO would need to establish service functions duplicating those at UE, CIPS and CILCO, including gas management, treasury, shareholder service, financial planning, accounting, tax planning and compliance, rates, risk management, employee benefits, marketing, legal, customer service, regulatory and public affairs. o Annual operating revenue deductions, exclusive of income taxes, for NEWGAS-UE/CIPS/CILCO would be about 9.05% ($50.2 million) greater than UE's, CIPS' and CILCO's gas operating revenue deductions. (SECTION III.C, Exhibit 1). o NEWGAS-UE/CIPS/CILCO's customers would experience a rate increase of about 13.02% ($78.3 million) in order to provide an 8.70% rate of return for stockholders (SECTION III.C, Exhibit 1). o NEWGAS-UE/CIPS/CILCO would be at a competitive disadvantage because of higher operating expenses. o There would be no substantial benefits for customers or shareholders. 6 SECTION III.B. NEWGAS-UE/CIPS/CILCO ANALYSIS The UE, CIPS and CILCO gas distribution systems serve a total of approximately 508,000 (as of December 31, 2001) customers over a 27,500 square mile area in Missouri and Illinois. There are 11,412 miles of mains and 7,097 miles of service lines in the combined systems. Natural gas revenues for 2001 were $601.3 million on total system throughputs of 100.5 billion cubic feet of gas. Ameren and CILCO operate as tightly integrated companies with many employees supporting both gas and electric operations. Of Ameren's and CILCO's 8,300 employees (as of December 31, 2001), only 473 devote 100% of their time to gas operations. Shared operations include customer service personnel who deal with service requests for both gas and electric customers, and CIPS and CILCO meter readers who read both the electric and gas meters. Additionally, UE's, CIPS' and CILCO's gas and electric businesses also share services in the areas of treasury, financial planning, accounting, tax planning and compliance, rates, risk management, employee benefits, marketing, legal, customer service, regulatory and public affairs. The shared gas/electric responsibilities of many of UE's, CIPS' and CILCO's employees have enabled UE, CIPS and CILCO to provide quality service at low costs. ORGANIZATION STRUCTURE AND STAFFING IMPACT - ------------------------------------------ The Ameren organization, as of December 31, 2001, was used as a pattern for developing the NEWGAS-UE/CIPS/CILCO organization structure. See SECTION III.C, Exhibit 5 for the proposed organization. Divesting the gas operations would eliminate the effective use of SHARED STAFF to the detriment of both the gas and electric operations. To operate the gas business on a stand-alone basis, 665 additional employees would be required, in addition to the 473 employees mentioned above. UE, CIPS and CILCO could expect very minimal staffing reductions in the electric business as a result of a gas divestiture. SECTION III.C, Exhibit 6 shows the proposed staffing, salaries and wages summary, while Exhibit 2d shows that NEWGAS-UE/CIPS/CILCO would incur an estimated net labor increase, including benefits, of $15,526,000. The following comments demonstrate some of the reasons for additional staffing: Each customer of UE, CIPS and CILCO receives one bill for both gas and electric service and pay with one check. When treasury personnel process the checks, automated equipment posts both electric and gas payments to customers' accounts. NEWGAS-UE/CIPS/CILCO would have to hire staff to handle gas payments that are now handled at essentially no additional cost by UE, CIPS and CILCO. Spinning off the gas operations would only 7 minimally reduce the workload on UE's, CIPS' and CILCO's cash processing personnel, since most gas customers also have electric service and would still send a check monthly. An automated meter reading system has replaced UE's meter readers, while CIPS' and CILCO's meter readers read gas and electric meters on the same routes. NEWGAS-UE/CIPS/CILCO would have to hire meter readers to read meters in Missouri, and hire meter readers to re-trace the same routes to read the gas meters in Illinois. Spinning off the gas operations would not significantly reduce the number of meter readers needed by CIPS and CILCO since their routes would remain essentially the same. Ameren and CILCO's financial and accounting personnel maintain the books of the Companies and arrange for insurance. They arrange for long-term financing and borrow short-term funds for operations. They maintain stockholder records and perform various investor services. NEWGAS-UE/CIPS/CILCO would require personnel to provide the same services. Spinning off the gas operations would not provide any measurable savings for UE, CIPS and CILCO in the finance and accounting area, since all the existing books and records of the Company would remain essentially unchanged, insurance needs would be similar, and staff time devoted to financing activities would not be significantly reduced. Ameren's and CILCO's Human Resources Divisions administer benefit and salary plans. NEWGAS-UE/CIPS/CILCO would need to hire personnel to perform the same duties. Spinning off the gas operations would not provide substantial savings to UE, CIPS and CILCO, because each of UE's, CIPS' and CILCO's existing benefit and salary plans, and the associated reporting requirements, would remain. Ameren and CILCO are staffed to provide materials, supplies, transportation equipment, etc. to operating divisions. NEWGAS-UE/CIPS/CILCO would need to hire personnel to perform the same duties for gas operations. Spinning off the gas operations would reduce the number of purchase orders handled by Ameren and CILCO, as well as the amount of material handled and storage costs. However, the quantities involved are a small percentage of the total, so few, if any, staffing reductions could be affected and no facilities could be eliminated, making the actual savings for Ameren and CILCO minimal. Ameren's legal staff supplemented by external counsel provides legal, regulatory and claims services for UE's and CIPS' operating divisions, while CILCO exclusively uses external counsel to perform these services. NEWGAS-UE/CIPS/CILCO would need to hire personnel to perform these duties, or pay the increased cost of additional outside counsel. Since many legal issues are not divided into gas and electric considerations, the amount of 8 work performed by Ameren's legal departments would not decrease significantly, and there would be no staffing reductions. INDEPENDENT ACCOUNTANT IMPACT - ----------------------------- Ameren and CILCO hire independent accountants to audit the financial statements of the companies. NEWGAS-UE/CIPS/CILCO would need to hire independent accountants to perform the same duties. Ameren and CILCO would not achieve any savings, since the existing level of work for the independent accountants would remain the about the same. INFORMATION TECHNOLOGY IMPACT - ----------------------------- Ameren and CILCO provide extensive information technology assistance to its operating and support divisions. NEWGAS-UE/CIPS/CILCO would need to provide the same assistance to its divisions. Hardware costs are reflective of the quantity of information to be processed, so NEWGAS-UE/CIPS/CILCO's hardware and telecommunications costs would be substantially less than Ameren's and CILCO's. Software costs are generally less dependent on quantity and more dependent on function, so NEWGAS-UE/CIPS/CILCO software costs would be similar to Ameren's and CILCO's. See SECTION III. C, Exhibit 2b, which identifies a net increase in cost for information services of $23,971,000. Divesting the gas operations would eliminate opportunities for sharing information technology resources to the detriment of both the gas and electric operations: NEWGAS-UE/CIPS/CILCO would be subject to the same regulatory accounting requirements as UE, CIPS and CILCO; so similar general ledger, payroll distribution, fixed asset and other accounting systems would be needed. It is estimated that the required software would be similar to Ameren's and CILCO's, and would cost about $10 million. Ameren and CILCO would retain all existing software, resulting in no software savings. Also, Ameren and CILCO would expend considerable resources changing accounting systems to reflect the divestiture of the gas business. Ameren and CILCO operate integrated material management, purchasing and accounts payable systems. The systems provide ordering, purchasing, tracking, receiving, paying and inventory control functions. To maintain existing levels of customer service, NEWGAS-UE/CIPS/CILCO would need a similar integrated system, which would cost about $7.5 million. Ameren and CILCO would require slightly less data storage, producing negligible savings. There would be no software savings since Ameren and CILCO would require all existing software. 9 Ameren's and CILCO's customer information systems are extensively integrated with numerous other systems, providing seamless flow of information and efficient processing of customer service requests, payments and data updates. When customers call, the systems retrieve information and present it to the call-taker, requiring customers to spend less time on the line. The systems automatically handle customers' payments made by mail, electronically, at pay stations or banks, or by charitable and government organizations. It provides a multitude of services such as budget billing, installment financing payments, combined billing for electric and gas, preferred pay dates, etc. NEWGAS-UE/CIPS/CILCO would require a similar system to maintain the current level of service to customers. Scaling down might be possible for a smaller utility, making the estimated cost about $20 million. Both Ameren and CILCO maintain distribution job management systems that receive and track customer requests for service or work, maintain the status of jobs for customer inquiries, automatically bill the customers for work completed and provide accurate accounting and work order control. NEWGAS-UE/CIPS/CILCO would need a similar system, costing about $4 million, to maintain current levels of customer service. Ameren and CILCO would no longer process gas customers but data storage savings would be insignificant. Ameren and CILCO maintain sophisticated human resources, payroll, scheduling, time entry and absence tracking systems. The systems provide scheduling for time worked, vacation and other allowed time. They track absences and automatically update records and restore sick leave bank balances. The systems provide distributed entry of time worked and the associated accounting. The systems provide for the reporting of information to government, regulatory and other agencies. NEWGAS-UE/CIPS/CILCO would need a similar system estimated at $5.1 million. Processing 473 fewer employees would provide insignificant savings for Ameren and CILCO. Ameren's and CILCO's Information Technology personnel maintain the above systems. To maintain similar systems, it is estimated NEWGAS-UE/CIPS/CILCO would expend about $2,476,000 annually. NEWGAS-UE/CIPS/CILCO software maintenance would cost about three-fourths of Ameren's and CILCO's cost since some systems would not exist in a gas-only company. Because all of the existing systems would remain, Ameren and CILCO would achieve no maintenance savings by spinning off the gas operations. Ameren and CILCO maintain communications networks, telephone services, radio systems, etc. To maintain similar systems, NEWGAS-UE/CIPS/CILCO would need personnel and equipment costing about $6,744,000 annually. Ameren and CILCO would achieve minimal savings because the number of 10 locations would remain the same, although slightly less equipment (e.g. telephones) would be needed because there would be fewer employees at some locations. Ameren and CILCO maintain data centers to serve all of the above systems. To operate similar systems, NEWGAS-UE/CIPS/CILCO would need a similar data center, costing about $4,255,000 annually. There would be no equipment or manpower savings for Ameren and CILCO, since all existing systems would remain. INSURANCE COSTS - --------------- Ameren and CILCO obtain property, liability, directors and officers, workers compensation and other insurance. NEWGAS-UE/CIPS/CILCO would require similar policies, at similar costs. See SECTION III.C, Exhibit 2c, which shows an estimated increase in insurance cost of $467,000 to NEWGAS-UE/CIPS/CILCO. Since all coverages would remain in effect, Ameren and CILCO would experience no savings for insurance. OFFICE AND CREW FACILITIES COSTS - -------------------------------- UE, CIPS and CILCO maintain combined electric and gas office and crew facilities at several locations. NEWGAS-UE/CIPS/CILCO would need facilities for office and crew personnel at each of the existing combined electric/gas locations. See SECTION III.C, Exhibit 2e, which identifies $4.8 million in additional office and crew facilities costs. Since UE, CIPS and CILCO would still operate the electric systems, the existing office and crew facilities would still be needed at each location. TRANSPORTATION AND MOTORIZED EQUIPMENT COSTS - -------------------------------------------- UE, CIPS and CILCO maintain transportation and motorized equipment used by both gas and electric crew and support personnel. NEWGAS-UE/CIPS/CILCO would need to obtain similar equipment for gas operations. NEWGAS-UE/CIPS/CILCO's additional transportation cost would be about $4.2 million as identified in SECTION III.C, Exhibit 2g-1. Since vehicle needs correlate closely with personnel needs, it is estimated that the reduction in equipment to be achieved by UE and CIPS would equal the additional equipment required by NEWGAS-UE/CIPS/CILCO, except for vehicles used by meter readers at CIPS and CILCO to read both electric and gas meters. CIPS and CILCO would still need about the same number of meter reader vehicles currently used in the combination gas and electric districts. 11 TRANSITION COSTS - ---------------- The divestiture of the gas operations of Ameren and CILCO and the creation of a stand-alone gas company would be a complex legal and financial transaction that would involve substantial transition costs. These costs would include legal and financial advising fees, and the services of independent accountants, actuaries and other consultants. Real estate services would be needed to procure facilities. Several hundred personnel would have to be hired and trained. Benefit plans would need to be established. The estimated transition costs of $11,031,000 for NEWGAS-UE/CIPS/CILCO were developed by calculating the average of such costs incurred in several other publicly reported business spin-offs. For this Study, we amortized these estimated costs over ten years. See SECTION III.C, Exhibit 2f. COST OF CAPITAL - --------------- The effective cost of capital for the stand-alone gas business was based upon capitalization ratios of Ameren's and CILCO's capital structure as of December 31, 2001, and estimated current costs of debt and equity, which average about 8.70%. See SECTION III.C, Exhibit 4 for detailed information. INCOME TAXES ON THE DIVESTITURE TRANSACTION - ------------------------------------------- Assuming that the natural gas assets of UE, CIPS and CILCO are combined into a single natural gas subsidiary after Ameren acquires CILCORP and that such subsidiary were subsequently spun off to the public, there would be an income tax liability of approximately $18.3 million (based on data as of December 31, 2001 and assuming that the fair market value of the assets is the same as their net book value). These costs would substantially increase the lost economies already illustrated in Section I, Tables I-1 and I-2. If the gas assets themselves were sold to another company, the income tax liability would be substantially higher. CONCLUSION - ---------- This study concludes that a separate gas distribution company would require 1,138 full-time employees, an increase of approximately 141% over the number of employees currently devoted to UE, CIPS and CILCO gas operations full-time. Based upon the assumptions set forth in SECTION II and the staffing requirements of the organizational structure, increased annual costs (excluding Federal and State income taxes) for NEWGAS-UE/CIPS/CILCO are projected to be $50,192,000. The exhibits (SECTION III.C) that follow show the economic effects of operating UE's, CIPS' and CILCO's gas divisions as one separate entity. 12 SECTION III.C. NEWGAS-UE/CIPS/CILCO SCHEDULE OF EXHIBITS EXHIBIT NO. EXHIBIT TITLE - ----------------------- ----------------------------------------------------- 1 Income Statement, Proforma Adjustments & Revenue Requirement 1a Consolidation of UE's, CIPS' and CILCO's Income Statements 2 Estimated Additional Operating Expenses 2a Estimated External Audit Fees Based on Survey Data 2b Estimated Information Technology Costs 2c Estimated Increased Cost of Insurance Coverage 2d Estimated Net Labor Increase, Including Benefits 2e thru 2e-3 Estimated Operating Lease Facilities and Furniture Costs 2f Estimated Transition Costs 2g-1 thru 2g-3 Estimated Net Increase in Transportation & Motorized Equipment Expense 3 Consolidated Gas Rate Base Reduced for Common Plant 3a Consolidation of UE's, CIPS' and CILCO's Gas Rate Base 3b Consolidation of UE's, CIPS' and CILCO's Common Plant Allocated to Gas 4 Stand-alone Cost of Capital 5 Organization Chart 6 Salaries and Wages Summary 7 Estimated Executive Salaries 8 UE's, CIPS' and CILCO's Electric Rate Base & Rate of Return Adjusted for Common Plant 8a Consolidation of UE's, CIPS' and CILCO's Electric Rate Bases 13 NEWGAS-UE/CIPS/CILCO EXHIBIT 1
NEWGAS-UE/CIPS/CILCO INCOME STATEMENT PROFORMA ADJUSTMENTS & REVENUE REQUIREMENT (In Thousands of Dollars) Existing UE/CIPS/CILCO Consolidated Proformed Revenue Year Ending Proforma NEWGAS- Requirement 12/31/2001 (1) Adjustments (2) UE/CIPS/CILCO Increase (3) -------------- --------------- ------------- ------------ OPERATING REVENUE: $ 601,294 $ - $ 601,294 $ 679,566 TOTAL OPERATING REVENUE DEDUCTIONS $ 554,336 $ 50,192 $ 604,528 $ 604,528 --------- --------- --------- GROSS GAS INCOME $ 46,958 $ (3,234) $ 75,038 FEDERAL & STATE INCOME TAXES (4) $ 18,473 $ (1,272) $ 29,520 --------- --------- --------- NET GAS INCOME $ 28,485 $ (1,962) $ 45,518 ========= ========= ========= RATE BASE (5) $ 563,057 $ 523,194 $ 523,194 ========= ========= ========= INDICATED RATE OF RETURN 5.06% -0.37% 8.70%(6) ========= ========= ========= (1) See Exhibit 1a for consolidation detail. (2) See Exhibit 2 for a detailed summary of proforma adjustments. (3) An increase of $78,272,000 or 13.02% in revenue is required to achieve a rate of return of 8.70%. For the purposes of this Study, gross receipts taxes were not considered since both the resulting revenue and taxes (revenue deduction) would nullify any impact from this calculation. (4) For 12 months ended 12/31/2001, the UE/CIPS/CILCO combined effective Federal & State Income Taxes were 39.34% of gross income. This effective tax rate was used to calculate taxes for the Proformed NEWGAS-UE/CIPS/CILCO and Revenue Requirement Increase columns. (5) See Exhibit 3. (6) The effective rate of return is assumed to be the weighted cost of capital per Exhibit 4.
NEWGAS-UE/CIPS/CILCO EXHIBIT 1a
CONSOLIDATION OF UE's, CIPS', & CILCO's GAS INCOME STATEMENTS FOR THE YEAR ENDED 12/31/2001 (IN THOUSANDS OF DOLLARS) Existing Existing Existing Existing UE Gas CIPS Gas CILCO Gas UE/CIPS/CILCO Company Company Company Consolidated Year Ended Year Ended Year Ended Year Ended 12/31/01 12/31/01 12/31/01 12/31/01 -------- -------- -------- -------- OPERATING REVENUE: $ 145,444 $ 170,151 $ 285,699 $ 601,294 TOTAL OPERATING REVENUE DEDUCTIONS $ 131,904 $ 157,727 $ 264,705 $ 554,336 --------- --------- --------- --------- GROSS GAS INCOME $ 13,540 $ 12,424 $ 20,994 $ 46,958 FEDERAL & STATE INCOME TAXES $ 4,666 $ 5,501 $ 8,306 $ 18,473 --------- --------- --------- --------- NET GAS INCOME $ 8,874 $ 6,923 $ 12,688 $ 28,485 ========= ========== ========= =========
NEWGAS-UE/CIPS/CILCO EXHIBIT 2
NEW GAS-UE/CIPS/CILCO ESTIMATED ADDITIONAL OPERATING EXPENSES PROFORMA ADJUSTMENTS (In Thousands of Dollars) Exhibit Reference Number Amount ---------- ---------- External Auditing Costs 2a $ 119 Information Technology (Outsourced) 2b $ 23,971 Insurance Premiums 2c $ 467 Labor & Benefits 2d $ 15,526 Leased Facilities/Furniture 2e $ 4,802 Transition Costs (Amortized) 2f $ 1,103 Transportation & Work equipment 2g-1 $ 4,204 ---------- TOTAL ADDITIONAL O & M EXPENSES $ 50,192 ==========
NEWGAS-UE/CIPS/CILCO EXHIBIT 2a
NEWGAS-UE/CIPS/CILCO EXTERNAL AUDITOR COSTS ESTIMATED EXTERNAL AUDIT FEES BASED ON SURVEY DATA PROFORMA ADJUSTMENT Average cost of external audit fees for companies having 500,000 plus customers - per GAIN survey $ 230,778 Less: External Audit Fees Allocated to UE's, CIPS' and CILCO's Gas operations in 2001 $ 111,711 ----------- NET ESTIMATED ANNUAL AUDIT FEES INCREASE FOR NEWGAS-UE/CIPS/CILCO $ 119,067 =========== Information Source: Global Auditing Information Network (GAIN) Survey, a service of The Institute of Internal Auditors.
NEWGAS-UE/CIPS/CILCO EXHIBIT 2b
NEWGAS-UE/CIPS/CILCO INFORMATION TECHNOLOGY ESTIMATED INFORMATION TECHNOLOGY (IT) COSTS PROFORMA ADJUSTMENT (IN THOUSANDS OF DOLLARS) ONE-TIME CAPITAL ANNUAL SOFTWARE APPLICATION COSTS: COST EXPENSE -------------------------- -------- ------- Financial Systems $10,000 $2,000 Investor Services $450 $90 Customer Information System $20,000 $4,000 Customer Telephony Integration $1,000 $200 Field Order/Trouble Tracking $4,000 $800 Materials Management/Procurement $7,500 $1,500 Gas Meter Management $2,000 $400 Gas Management Systems $6,250 $1,250 HR/Payroll/Benefits $5,100 $1,020 Time Reporting $1,000 $200 Gas SCADA $600 $120 Software Implementation Contingency $11,580 $2,316 ------- ------- TOTAL Software Application Costs $69,480 $13,896 ======= ANNUAL AMORTIZED HARDWARE/OPERATIONS COSTS: Hardware $4,255 Systems Software $2,476 Telecommunications $6,744 ------- TOTAL ANNUAL SUPPORT/OPERATING COSTS $27,371 Less: Estimated Annual IT Costs Allocated to UE, CIPS & CILCO $3,400 ------- NET INCREASE IN COST FOR INFORMATION TECHNOLOGY $23,971 =======
NEWGAS-UE/CIPS/CILCO EXHIBIT 2c
NEWGAS-UE/CIPS/CILCO ESTIMATED INCREASED COST OF INSURANCE COVERAGE PROFORMA ADJUSTMENT Estimated Net Increase to Limits Stand Alone NEWGAS- Coverage (Millions) Deductible Premium Cost UE/CIPS/CILCO - --------------------------------------- ---------- ---------- ------------ --------------- Property $ 5 $ 500,000 $ 250,000 General Liability $ 60 $ 250,000 $ 750,000 Auto Liability $ 1 $ 10,000 $ 200,000 Directors & Officers Liability $ 10 $ 250,000 $ 150,000 Workers Compensation Statutory $ 350,000 $ 150,000 Fiduciary Liability $ 5 $ 5,000 $ 10,000 Crime (Fidelity) $ 5 $ 5,000 $ 10,000 ----------- Total NEWGAS-UE/CIPS/CILCO Premium $ 1,520,000 Less: 2001 Insurance Cost Allocated to UE/CIPS/CILCO Gas Operations $ 1,053,010 ----------- NET INCREASE IN INSURANCE COSTS FOR NEWGAS-UE/CIPS/CILCO $ 466,990 =========
Source: Premiums are based on estimated costs obtained from Ameren's Treasurer's Department, Insurance Division. NEWGAS-UE/CIPS/CILCO EXHIBIT 2d
NEWGAS-UE/CIPS/CILCO ESTIMATED NET LABOR INCREASE, INCLUDING BENEFITS PROFORMA ADJUSTMENT (IN THOUSANDS OF DOLLARS) Total Estimated NEWGAS-UE/CIPS/CILCO Salaries and Wages (Exhibit 6) $ 67,162 Less: Amount for Construction & Removals (24.22%) - (1) $ 16,267 -------- Total Estimated NEWGAS-UE/CIPS/CILCO Salaries & Wages Charged to O & M $ 50,895 Less: 2001 UE/CIPS/CILCO Gas Salaries & Wages computed going to O & M $ 40,261 -------- Increase in NEWGAS-UE/CIPS/CILCO Salaries & Wages Charged to O & M $ 10,634 Benefits (2): Employee Life, Hospitalization, savings plans, etc. $ 3,143 Pension Plan $ 901 FICA & Unemployment Insurance $ 848 -------- Total Benefits $ 4,892 -------- NEWGAS-UE/CIPS/CILCO NET LABOR INCREASE, INCLUDING BENEFITS $ 15,526 ======== (1) The percentage of gas labor allocated to construction and removal is based on the actual amount spent by UE, CIPS and CILCO in 2001. (2) Benefit costs were estimated based upon the cost (as a percentage of payroll) currently used by CIPS for: Life, Hospitalization, savings plans, post employment benefit, etc. 29.56% Pension Plan 8.47% FICA & Unemployment Insurance 7.97% -------- Total 46.00% ========
NEWGAS-UE/CIPS/CILCO EXHIBIT 2e
NEWGAS-UE/CIPS/CILCO ESTIMATED OPERATING LEASE FACILITIES AND FURNITURE COSTS PROFORMA ADJUSTMENT EST. ANNUAL LOCATION: COST (1) - ------------------------------------ ----------- General Office (IL) $ 2,057,616 Southeast District (MO) $ 409,036 Wentzville District (MO) $ 81,352 Little Dixie District (MO) $ 444,676 Capital District (MO) $ 256,183 Alton District (IL) $ 214,926 Eagle View Region (IL) $ 288,246 Four Rivers Region (IL) $ 328,018 Heritage Region (IL) $ 302,502 Nothern Prairie Region (IL) $ 235,096 Shawnee Region (IL) $ 322,388 Wabash Region (IL) $ 263,608 Gas Support (MO & IL) $ 154,800 Gas Operations North (IL) $ 1,350,027 Gas Operations South (IL) $ 690,921 Tuscola Operations (IL) $ 181,720 Lincoln Operations (IL) $ 130,312 Office Furniture for all areas $ 513,877 ----------- NEWGAS-UE/CIPS/CILCO TOTAL $ 8,225,304 Less: UE/CIPS/CILCO Amount allocated Gas Operations in 2001 $ 3,423,690 ----------- NET INCREASE IN EXPENSE $ 4,801,614 =========== (1) Refer to Exhibits 2e-1 through 2e-3 for detail information.
NEWGAS-UE/CIPS/CILCO EXHIBIT 2e-1
NEWGAS-UE/CIPS/CILCO ESTIMATED OPERATING LEASE FACILITIES AND FURNITURE COSTS PROFORMA ADJUSTMENT ----------------------------------------------------- Office Space Calculation ----------------------------------------------------- Management Office Space ---------- ------------ & Staff Needs in Cost Per Total Works Total Leased Employee Square Feet Square Foot Office Space Hqtrs. Facilities Count (1) (2) Cost (3) Cost ----------------------------------------------------- ---------- ------------ GENERAL OFFICE: Springfield, Illinois 433 171,468 $ 12.00 $ 2,057,616 - $ 2,057,616 =========== SOUTHEAST DISTRICT (MO): Cape Girardeau 18 7,128 $ 9.00 $ 64,152 $152,556 Chaffee 0 - $ - $ 19,886 Dexter 0 - $ - $152,556 Hayti 0 - $ - $ 19,886 ----------- -------- TOTAL $ 409,036 ============ WENTZVILLE DISTRICT (MO): Louisiana 15 5,940 $ 7.00 $ 41,580 $ 19,886 Troy 0 - $ - $ 19,886 ----------- -------- TOTAL $ 81,352 =========== LITTLE DIXIE DISTRICT (MO): Boonville 0 - $ - $ 19,886 Centralia 0 - $ - $ 19,886 Columbia 21 8,316 $ 12.00 $ 99,792 $ - Mexico 0 - $ - $152,556 Moberly 0 - $ - $152,556 ----------- -------- TOTAL $ 444,676 =========== CAPITAL DISTRICT (MO): Jefferson City 15 5,940 $ 10.75 $ 63,855 $152,556 Eldon 0 - $ - $ 19,886 Versailles 0 - $ - $ 19,886 ----------- -------- TOTAL $ 256,183 =========== ILLINOIS DISTRICT: Alton 15 5,940 $ 10.50 $ 62,370 $ 152,556 $ 214,926 =========== EAGLE VIEW REGION (IL): Jerseyville 0 - $ - $ - $ 19,886 Pittsfield 0 - $ - $ - $ 19,886 Quincy 16 6,336 $ 12.00 $ 76,032 $ 152,556 Virden 0 - $ - $ - $ 19,886 ----------- --------- TOTAL $ 288,246 ============ (1) This square footage requirement is based on the number of office staff to be housed and density estimates of 396 square feet per employee obtained from Ameren's Building Service Department. (2) These cost estimates are based on cost quotes/estimates obtained from Ameren's Real Estate Department. (3) These costs were determined by estimating the leased cost of required buildings, based on actual costs of buildings recently constructed, and then amortizing these costs over 10 years to arrive at the estimated lease expense. Facilities include space for applicable construction and service supervision, staff, materials & supplies, vehicles, and equipment.
NEWGAS-UE/CIPS/CILCO EXHIBIT 2e-2
NEWGAS-UE/CIPS/CILCO ESTIMATED OPERATING LEASE FACILITIES AND FURNITURE COSTS PROFORMA ADJUSTMENT ----------------------------------------------------- Office Space Calculation ----------------------------------------------------- Management Office Space ---------- ------------ & Staff Needs in Cost Per Total Works Total Leased Employee Square Feet Square Foot Office Space Hqtrs. Facilities Count (1) (2) Cost (3) Cost ----------------------------------------------------- ---------- ------------ FOUR RIVERS REGION (IL): Beardstown 16 6,336 $ 12.00 $ 76,032 $152,556 Canton 0 - $ - $ - $ 19,886 Carthage 0 - $ - $ - $ 19,886 Havana 0 - $ - $ - $ 19,886 Macomb 0 - $ - $ - $ 19,886 Pertersburg 0 - $ - $ - $ 19,886 TOTAL $ 328,018 ========= HERITAGE (IL): Mattoon 19 7,524 $ 12.00 $ 90,288 $152,556 North Pana 0 - $ - $ - $ 19,886 Paris 0 $ 19,886 Tuscola 0 - $ - $ - $ 19,886 TOTAL $ 302,502 ========= NORTHERN PRAIRIE REGION (IL): Gilman 0 - $ - $ - $ 19,886 Paxton 9 3,564 $ 12.00 $ 42,768 $152,556 Watseka 0 - $ - $ - $ 19,886 TOTAL $ 235,096 ========= SHAWNEE REGION (IL): Anna 0 - $ - $ - $ 19,886 Benton 0 - $ - $ - $ 19,886 Carbondale 0 - $ - $ - $ 19,886 Harrisburg 0 - $ - $ - $ 19,886 Marion 19 7,524 $ 12.00 $ 90,288 $152,556 TOTAL $ 322,388 ========= WABASH REGION (IL): Effingham 15 5,940 $ 12.00 $ 71,280 $152,556 Olney 0 - $ - $ - $ 19,886 Robinson 0 - $ - $ - $ 19,886 TOTAL $ 263,608 ========= GAS SUPPORT : Springfield Meter Shop 0 - $ - $ - 86,400 Mexico Meter Shop 0 - $ - $ - 68,400 TOTAL $ 154,800 ========= (1) This square footage requirement is based on the number of office staff to be housed and density estimates of 396 square feet per employee obtained from Ameren's Building Service Department. (2) These cost estimates are based on cost quotes/estimates obtained from Ameren's Real Estate Department. (3) These costs were determined by estimating the leased cost of required buildings, based on actual costs of buildings recently constructed, and then amortizing these costs over 10 years to arrive at the estimated lease expense. Facilities include space for applicable construction and service supervision, staff, materials & supplies, vehicles, and equipment.
NEWGAS-UE/CIPS/CILCO EXHIBIT 2e-3
NEWGAS-UE/CIPS/CILCO ESTIMATED OPERATING LEASE FACILITIES AND FURNITURE COSTS PROFORMA ADJUSTMENT Number of Cost Per CILCO: Customers Customer(1) Total Leased Facilities Cost --------- ----------- ---------------------------- GAS OPERATIONS NORTH (IL): Peoria 71,215 $ 11.02 $ 784,789 Pekin 19,289 $ 11.02 $ 212,565 Eastern 16,479 $ 11.02 $ 181,599 Western 5,952 $ 11.02 $ 65,591 Lacon 9,572 $ 11.02 $ 105,483 TOTAL $ 1,350,027 =========== GAS OPERATIONS SOUTH (IL): Springfield 62,697 $ 11.02 $ 690,921 =========== TUSCOLA OPERATIONS (IL): Tuscola 16,490 $ 11.02 $ 181,720 =========== LINCOLN OPERATIONS (IL): Lincoln 11,825 $ 11.02 $ 130,312 =========== ESTIMATED OFFICE FURNITURE OPERATING LEASE EXPENSE FOR ALL UE/CIPS/CILCO AREAS (2): $ 513,877 =========== (1) CILCO office space & Wrks. Hqtrs. costs are based on the average cost per customer extimated for the UE/CIPS operating areas. (2) The office furniture operating lease expense is based on an estimated $5,500 cost of furniture per employee multiplied by 678 management & office staff employees at an annual interest rate of 6.3% over 10 years.
NEWGAS-UE/CIPS/CILCO EXHIBIT 2f NEWGAS-UE/CIPS/CILCO ESTIMATED TRANSITION COSTS PROFORMA ADJUSTMENT Transition costs required to establish a new corporation would include the following: Legal fees Financial advisory fees Consulting services of independent accountants, actuaries and others Real estate services for acquisitions Hiring and training costs to staff newly created positions Benefit plans established Data Conversion Transition costs for NEWGAS-UE/CIPS/CILCO were estimated based upon an average of the following published transition costs for other corporate spin-offs:
TRANSITION ORIGINAL CORPORATION SPIN-OFF COMPANY COSTS(000) -------------------- ---------------- ---------- Baxter International Caremark $ 13,300 Adolph Coors ACX Technologies $ 7,200 Dial Corporation GFC Financial $ 13,000 Union Carbide Praxair $ 11,000 Ryder Avial $ 9,000 Price Costco Price Enterprises $ 15,250 Humana Galen $ 15,000 Honeywell Aliant $ 4,500 --------- Average Transition Costs of the Above Companies $ 11,031 --------- ANNUAL AMORTIZATION OF TRANSITION COSTS FOR NEWGAS-UE/CIPS/CILCO (10%) $ 1,103 =========
Source: Transition costs reported in SEC Form 10-K filings. NEWGAS-US/CIPS/CILCO EXHIBIT 2G-1 NEWGAS-UE/CIPS/CILCO ESTIMATED NET INCREASE IN TRANSPORTATION & MOTORIZED EQUIPMENT EXPENSE PROFORMA ADJUSTMENT EST. ANNUAL COST LOCATION: (1) & (2) - ----------------------------- ----------- General Office (IL) $ 182,880 Southeast District (MO) $ 335,328 Wentzville District (MO) $ 275,196 Little Dixie District (MO) $ 935,940 Capital District (MO) $ 355,500 Illinois District (IL) $ 297,576 Eagle View Region (IL) $ 416,244 Four Rivers Region (IL) $ 549,336 Heritage Region (IL) $ 626,388 Nothern Prairie Region (IL) $ 69,192 Shawnee Region (IL) $ 559,464 Wabash Region (IL) $ 269,580 Gas Operations North (IL) $ 1,918,460 Gas Operations South (IL) $ 981,835 Tuscola Operations (IL) $ 258,233 Lincoln Operations (IL) $ 185,180 ----------- WGAS-UE/CIPS/CILCO TOTAL $8,216,332 Less: UE/CIPS/CILCO Amount allocated Gas Operations in 2001 $4,012,143 ========== NET INCREASE IN EXPENSE $4,204,189 ========== (1) See Exhibits 2g-2 & 2g-3 for detail information. Projected costs For UE/CIPS based on management's assessment of transportation & equipment needs. (2) CILCO transportation & equipment costs based on UE/CIPS transportation costs per customer. NEWGAS-USE/CIPS/CILCO EXHIBIT 2G-2
NEWGAS-UE/CIPS/CILCO ESTIMATED NET INCREASE IN TRANSPORTATION & MOTORIZED EQUIPMENT EXPENSE PROFORMA ADJUSTMENT General Office(GO)\Pool Southeast District Wentzville District ------------------------ -------------------- -------------------- Rate Per Est. Annual Est. Annual Est. Annual Description Month Number Cost Number Cost Number Cost - ---------------------------- -------- ------ ----------- ------ ----------- ------ ----------- GO\Pool Vehicles - Standard $ 911 10 $ 109,320 GO\Pool Vehicles - Compact $ 613 10 $ 73,560 Manager $ 911 1 $ 10,932 1 $ 10,932 Operations Superintendent $ 613 1 $ 7,356 1 $ 7,356 Construction Supervisor $ 613 3 $ 22,068 2 $ 14,712 Supervising Engineer $ 613 1 $ 7,356 1 $ 7,356 Engineer $ 613 1 $ 7,356 2 $ 14,712 Engineer Assistant $ 613 0 $ - 0 $ - Customer Service Supervisor $ 613 1 $ 7,356 1 $ 7,356 Meter Reader $ 497 4 $ 23,856 2 $ 11,928 Customer Service Advisor $ 613 0 $ - 1 $ 7,356 Customer Service Consultant $ 613 2 $ 14,712 2 $ 14,712 Corrosion Technician $ 497 1 $ 5,964 Other transportation & Motorized Equipment Not Indicated Above $ - $228,372 $178,776 --------- -------- -------- TOTAL $ 182,880 $335,328 $275,196 ========= ======== ======== Little Dixie District Capital District Illinois District --------------------- -------------------- -------------------- Rate Per Est. Annual Est. Annual Est. Annual Description Month Number Cost Number Cost Number Cost - ---------------------------- -------- ------ ----------- ------ ----------- ------ ----------- Manager $ 911 1 $ 10,932 1 $ 10,932 1 $ 10,932 Operations Superintendent $ 613 1 $ 7,356 1 $ 7,356 1 $ 7,356 Construction Supervisor $ 613 5 $ 36,780 2 $ 14,712 2 $ 14,712 Supervising Engineer $ 613 1 $ 7,356 1 $ 7,356 1 $ 7,356 Engineer $ 613 0 $ - 0 $ - 1 $ 7,356 Customer Service Consultant $ 613 3 $ 22,068 2 $ 14,712 2 $ 14,712 Customer Service Supervisor $ 613 1 $ 7,356 1 $ 7,356 1 $ 7,356 Meter Reader $ 497 10 $ 59,640 4 $ 23,856 3 $ 17,892 Customer Service Advisor $ 613 2 $ 14,712 2 $ 14,712 1 $ 7,356 District Meter Tester $ 613 1 $ 7,356 2 $ 14,712 Other transportation & Motorized Equipment Not Indicated Above $ 769,740 $247,152 $187,836 --------- -------- -------- TOTAL $ 935,940 $355,500 $297,576 ========= ======== ========
NEWGAS-UE/CIPS/CILCO EXHIBIT 2G-3
NEWGAS-UE/CIPS/CILCO ESTIMATED NET INCREASE IN TRANSPORTATION & MOTORIZED EQUIPMENT EXPENSE PROFORMA ADJUSTMENT Heritage Region Shawnee Region Northern Prairie Region --------------------- -------------------- ----------------------- Rate Per Est. Annual Est. Annual Est. Annual Description Month Number Cost Number Cost Number Cost - ---------------------------- -------- ------ ----------- ------ ----------- ------ ----------- Manager $ 566 1 $ 6,792 1 $ 6,792 1 $ 6,792 Regional Operations Coordinator $ 566 1 $ 6,792 1 $ 6,792 1 $ 6,792 Supervising Engineer $ 406 0 $ - 0 $ - 0 $ - Gas Engineer $ 406 2 $ 9,744 1 $ 4,872 0 $ - Engineer Assistant $ 406 0 $ - 0 $ - 0 $ - Customer Service Supervisor $ 406 0 $ - 1 $ 4,872 0 $ - Meter Reader (included in other) $ 427 0 $ - 0 $ - 0 $ - Energy Services Specialist - ESS $ 406 3 $ 14,616 1 $ 4,872 1 $ 4,872 Service Delivery Supervisor - Gas $ 406 1 $ 4,872 3 $ 14,616 Other transportation & Motorized Equipment Not Indicated Above $ 583,572 $516,648 $ 50,736 --------- -------- -------- TOTAL $ 626,388 $559,464 $ 69,192 ========= ======== ======== Eagle View Region Four Rivers Region Wabash Region --------------------- -------------------- -------------------- Rate Per Est. Annual Est. Annual Est. Annual Description Month Number Cost Number Cost Number Cost - ---------------------------- -------- ------ ----------- ------ ----------- ------ ----------- Manager $ 566 1 $ 6,792 1 $ 6,792 1 $ 6,792 Service Delivery Supervisor $ 406 3 $ 14,616 3 $ 14,616 1 $ 4,872 Region Coordinating Supervisor $ 566 1 $ 6,792 0 $ - 1 $ 6,792 Coordinator of Gas Engineering $ 406 0 $ - 1 $ 4,872 0 $ - Gas Engineer $ 406 0 $ - 1 $ 4,872 0 $ - Customer Service Supervisor $ 406 0 $ - 0 $ - 0 $ - Meter Reader (included in other) $ 427 0 $ - 0 $ - 0 $ - Customer Service Advisor $ 406 0 $ - 0 $ - 0 $ - Energy Services Specialist $ 406 2 $ 9,744 2 $ 9,744 2 $ 9,744 Other transportation & Motorized Equipment Not Indicated Above $ 378,300 $508,440 $241,380 --------- -------- -------- TOTAL $ 416,244 $549,336 $269,580 ========= ======== ======== CUSTOMER COUNT COST PER TRANSPORTATION CILCO OPERATIONS: AS OF AUGUST 2002 CUSTOMER (1) COST ----------------- ------------ -------------- Gas Operations North (IL) - 122,507 $ 15.66 $ 1,918,460 Gas Operations South (IL) - 62,697 $ 15.66 $ 981,835 Tuscola Operations (IL) - 16,490 $ 15.66 $ 258,233 Lincoln Operations (IL) - 11,825 $ 15.66 $ 185,180 (1) CILCO transportation & equipment costs based on UE/CIPS projected transportation & equipment costs per customer.
NEWGAS-UE/CIPS/CILCO EXHIBIT 3 NEWGAS-UE/CIPS/CILCO CONSOLIDATED GAS RATE BASE REDUCED FOR COMMON PLANT (IN THOUSANDS OF DOLLARS)
Reduction for NEWGAS- Year Ending Common UE/CIPS/CILCO 12/31/01 Gas Plant (1) Net of Common (Exhibit 3a) (Exhibit 3b) Plant 12/31/2001 ------------- ------------- ---------------- Gas Plant In Service $ 1,013,815 $ (53,255) $ 960,560 Reserve For Depreciation $ 488,907 $ (13,392) $ 475,515 ------------- ------------- --------------- Net Plant $ 524,908 $ (39,863) $ 485,045 Fuel, Materials & Supplies $ 88,512 $ 88,512 Prepayments $ 4,287 $ 4,287 Customer Advances $ (4,344) $ (4,344) Accumulated Deferred Income Taxes $ (50,306) $ (50,306) ------------- ------------- --------------- TOTAL RATE BASE $ 563,057 $ (39,863) $ 523,194 ============= ============ =============== (1) Mainly buildings, equipment, and intangible software costs benefiting both the electric and gas departments. Under a divestiture, all common property would go with the electric company.
NEWGAS-UE/CIPS/CILCO EXHIBIT 3a CONSOLIDATION OF UE'S, CIPS' & CILCO'S GAS RATE BASES FOR YEAR ENDED 12/31/2001 (IN THOUSANDS OF DOLLARS)
Existing Existing Existing Existing UE Gas CIPS Gas CILCO Gas UE/CIPS/CILCO Company Company Company Consolidated Year Ended Year Ended Year Ended Year Ended 12/31/01 12/31/01 12/31/01 12/31/01 ---------- ---------- ---------- ------------- Gas Plant In Service $ 258,826 $ 293,108 $ 461,881 $ 1,013,815 Reserve For Depreciation $ 85,577 $ 134,845 $ 268,485 $ 488,907 ---------- ---------- ---------- ----------- Net Plant $ 173,249 $ 158,263 $ 193,396 $ 524,908 Fuel, Materials & Supplies $ 25,506 $ 34,454 $ 28,552 $ 88,512 Prepayments $ 210 $ 256 $ 3,821 $ 4,287 Customer Advances $ (1,632) $ (716) $ (1,996) $ (4,344) Accumulated Deferred Income Taxes $ (18,321) $ (21,401) $ (10,584) $ (50,306) ---------- ---------- ---------- ----------- TOTAL RATE BASE $ 179,012 $ 170,856 $ 213,189 $ 563,057 ========== ========== ========== ===========
NEWGAS-UE/CIPS/CILCO EXHIBIT 3b CONSOLIDATION OF UE'S, CIPS' & CILCO'S COMMON PLANT ALLOCATED TO GAS FOR YEAR ENDED 12/31/2001
UE CIPS CILCO UE, CIPS & CILCO Common Plant Common Plant Common Plant Common Plant Allocated to Allocated to Allocated to Allocated to Gas Plant (1) Gas Plant (1) Gas Plant (1) Gas Plant (1) ------------- ------------- ------------- ---------------- Gas Plant In Service $ 6,328,663 $ 13,293,015 $ 33,633,218 $ 53,254,896 Reserve For Depreciation $ 1,839,794 $ 6,165,989 $ 5,386,052 $ 13,391,835 ------------- ------------- -------------- ---------------- Net Plant $ 4,488,869 $ 7,127,026 $ 28,247,166 $ 39,863,061 ============= ============ ============= ================ (1) Mainly buildings, equipment, and intangible software costs benefiting both the electric and gas departments. Under a divestiture, all common property would go with the electric company.
NEWGAS-UE/CIPS/CILCO EXHIBIT 4 NEWGAS-UE/CIPS/CILCO STAND-ALONE COST OF CAPITAL
UE/CIPS CILCO ---------------------------------------------------- -------------------------------------------- % of % of Capitalization UE/CIPS/CILCO Weighted Capitalization UE/CIPS/CILCO Weighted Type of Capital Ratios Gas Rate Base Ratios Ratios Gas Rate Base Ratios - ------------------------------ --------------- ------------------ ------------- ------------- ----------------- ----------- Long-Term Debt 44.17% 64.65% 28.56% 38.44% 35.35% 13.59% Preferred Stock 3.66% 64.65% 2.37% 6.44% 35.35% 2.28% Common Equity 52.17% 64.65% 33.73% 55.12% 35.35% 19.48% WEIGHTED COST OF CAPITAL TABLE CONTINUED UE/CIPS/CILCO --------------------------------------------- Weighted Capitalization Cost Weighted Type of Capital Ratios Component Cost - ------------------------------ --------------- ------------- ----------- Long-Term Debt 42.15% 6.30% 2.66% Preferred Stock 4.65% 6.30% 0.29% Common Equity 53.21% 10.80% 5.75% ----------- WEIGHTED COST OF CAPITAL 8.70% ===========
Note: Capitalization ratios are based on the total Ameren (UE/CIPS) and CILCO capital structures as of 12/31/2001. Ameren's Corporate Finance Department places the cost of capital for a gas distribution business as follows: 1) Common Equity: 10.8% 2) Long-Term Debt: 6.30% (assumes mid to weak "A" credit rating, senior unsecured, 10 year No-call life) 3) Preferred Stock: 6.30% (with little/no issuance in years, used debt cost as a proxy) NEWGAS-UE/CIPS/CILCO EXHIBIT 5 NEWGAS-UE/CIPS/CILCO ORGANIZATION CHART President & CEO Vice President - Energy Delivery - Customer Service Manager - Customer Service Support Manager - Gas Marketing Vice President - Energy Delivery - Distribution Service Manager - Capital District Manager - Illinois District Manager - Little Dixie District Manager - Southeast District Manager - Wentzville District Manager - Eagle View Region Manager - Four Rivers Region Manager - Heritage Region Manager - Northern Prairie Region Manager - Shawnee Region Manager - Wabash Region Manager - Peoria Region Manager- Springfield Region Vice President - Corporate Services Division Manager - Corporate Communications Manager - Corporate Planning Manager - Fleet Services Manager - Purchasing Manager - Real Estate & Facilities Manager - Stores Vice President - General Counsel & Secretary Managing Associate General Counsel - Claims & Legal Managing Associate General Counsel - Secretary's Manager - Security Vice President - Controller Manager - Accounting Manager - Internal Audit Manager - Tax Vice President - Treasurer Manager - Investor Relations Manager - Treasury Operations Vice President - Human Resources Manager - Communication & Training Services Manager - Employee Benefits Manager - Employee Compensation Manager - Industrial Relations Vice President - Gas Supply & Operations Support Manager - Gas Control Manager - Gas Supply Manager - Meter Testing Manager - Technical Support NEWGAS-UE/CIPS/CILCO EXHIBIT 6 NEW GAS - UE/CIPS/CILCO SALARIES AND WAGES SUMMARY (In Thousands of Dollars)
TOTALS ------------------------------- EMPLOYEES SALARIES/WAGES EMPLOYEES SALARIES/WAGES --------- -------------- ------------------------------- EXECUTIVE STAFF & SECRETARIAL SUPPORT 22 $2,294 CUSTOMER SERVICE DIVISION: Customer Service Support 78 $3,475 Gas Marketing 5 $352 CUSTOMER SERVICE DIVISION TOTAL 83 $3,827 ENERGY DELIVERY DIVISION: Southeast District 39 $2,164 Illinois District 32 $1,945 Wentzville District 30 $1,874 Little Dixie District 81 $4,484 Capital District 39 $2,276 Northern Prairie 14 $828 Heritage 52 $3,251 Wabash 32 $1,824 Shawnee 60 $3,062 Four Rivers 49 $2,918 Eagle View 41 $2,341 CILCO - Peoria 42 $7,589 CILCO - Springfield 62 $3,258 CILCO - Tuscola 17 $884 CILCO - Lincoln 15 $786 --------- -------------- ENERGY DELIVERY DIVISION TOTAL 705 $39,484 CORPORATE SERVICES DIVISION: Purchasing 11 $567 Stores 9 $682 Fleet Services 10 $750 Real Estate & Facilities 10 $607 Corporate Communications 9 $795 Corporate Planning 20 $1,570 --------- -------------- CORPORATE SERVICES DIVISION TOTAL 69 $4,971 GENERAL COUNSEL DIVISION: Claims & Legal 10 $700 Secretary's 7 $474 Security 7 $307 --------- -------------- GENERAL COUNSEL DIVISION TOTAL 24 $1,481 CONTROLLER DIVISION: Accounting 22 $1,483 Internal Audit 8 $436 Tax 14 $913 --------- -------------- CONTROLLER DIVISION TOTAL 44 $2,832 SECRETARY/TREASURER DIVISION: Investor Relations 4 $271 Treasury Operations 21 $1,037 Insurance 3 $178 --------- -------------- SECRETARY/TREASURER DIVISION TOTAL 28 $1,486 HUMAN RESOURCES DIVISION: Employee Benefits 12 $795 Communication & Training Services 9 $650 Employee Compensation 15 $531 Industrial Relations 8 $412 --------- -------------- HUMAN RESOURCES DIVISION TOTAL 44 $2,388 GAS SUPPLY & OPERATIONS SUPPORT: Gas Supply 17 $1,520 Gas Technical Support 66 $4,363 Gas Control 14 $1,193 Meter Test 22 $1,323 --------- -------------- GAS SUPPLY & OPERATIONS SPPT TOTAL 119 $8,399 ------- --------- GRAND TOTAL 1,138 $67,162 ======= =========
NEWGAS-UE/CIPS/CILCO EXHIBIT 7 NEWGAS-UE/CIPS/CILCO ESTIMATED EXECUTIVE SALARIES Ameren's Human Resources Compensation Department performed an analysis of companies with revenues around $600 million to establish a reasonable range for the NEWGAS-UE/CIPS/CILCO executive salary levels. For existing positions that would become part of the spun-off company, existing UE/CIPS salary ranges were used. NEWGAS-UE/CIPS/ POSITION SURVEY DATA RANGE CILCO SALARY LEVELS -------- ----------------- ------------------- President $243,000-$365,000 $300,000 Vice President Level $90,500-$207,000 $140,000-$170,000 NEWGAS-UE/CIPS/CILCO EXHIBIT 8
UE/CIPS/CILCO ELECTRIC RATE BASE & RATE OF RETURN ADJUSTED FOR COMMON PLANT TWELVE MONTHS ENDED 12/31/2001 (In Thousands of Dollars) Existing UE/CIPS/CILCO Adjustment Electric For Common UE/CIPS/CILCO Consolidated Plant (1) & (2) Electric (Exhibit 8a) (Exhibit 3b) As Adjusted ------------- --------------- ---------------- Electric Plant In Service $ 11,650,936 $ 53,255 $ 11,704,191 Reserve For Depreciation $ 5,238,086 $ 13,392 $ 5,251,478 ------------ -------- ------------ Net Plant $ 6,412,850 $ 39,863 $ 6,452,713 Fuel and Materials & Supplies $ 214,802 $ 214,802 Prepayments $ 21,921 $ 21,921 Customer Advances $ (15,589) $ (15,589) Accumulated Deferred Income Taxes $ (1,219,568) $ (1,219,568) ------------ -------- ------------ TOTAL RATE BASE $ 5,414,416 $ 39,863 $ 5,454,279 ============ ======== ============ NET OPERATING INCOME $ 468,382 $ (2,054) $ 466,328 ============ ======== ============ RETURN ON RATE BASE 8.65% 8.55% ============ ============
(1) This represents an allocation of all plant and property jointly used by the electric and gas departments. Under a divestiture, all common property would go with the electric company. (2) In addition, there would be additional O&M and depreciation expenses added back to the electric operations. We have made the following adjustment to Electric Net Operating Income: UE/CIPS/CILCO ------------- O&M & Depreciation expense on common plant originally allocated to gas plant $ 3,423 Less: Est. tax impact (40%) from the above expense $ 1,369 Net reduction to Net Operating Income $ 2,054 NEWGAS-UE/CIPS/CILCO EXHIBIT 8a
CONSOLIDATION OF UE, CIPS & CILCO ELECTRIC RATE BASES FOR THE YEAR ENDED 12/31/2001 (In Thousands of Dollars) UE's CIPS' CILCO's Existing Electric Electric Electric UE/CIPS/CILCO Company Company Company Electric at 12/31/2001 at 12/31/2001 at 12/31/2001 Consolidated ------------- ------------- ------------- ------------ Electric Plant In Service $9,106,024 $1,206,218 $ 1,338,694 $ 11,650,936 Reserve For Depreciation $3,947,271 $ 555,586 $ 735,229 $ 5,238,086 ---------- ---------- ----------- ------------ Net Plant $5,158,753 $ 650,632 $ 603,465 $ 6,412,850 Fuel and Materials & Supplies $ 176,509 $ 7,922 $ 30,371 $ 214,802 Prepayments $ 10,442 $ 1,148 $ 10,331 $ 21,921 Customer Advances $ (10,254) $ (636) $ (4,699) $ (15,589) Accumulated Deferred Income Taxes $ (853,536) $ (286,159) $ (79,873) $ (1,219,568) ---------- ---------- ----------- ------------ $4,481,914 $ 372,907 $ 559,595 $ 5,414,416 ========== ========== =========== ============
EX-99 10 exhk.txt EX. K - CALCULATION OF IMPACT OF REFINANCING EXHIBIT K REFUNDING ANALYSIS - FINANCIAL IMPACT CILCORP $475 MILLION SENIOR NOTES (all amounts in 000s unless otherwise specified)
2003 2004 2005 2006 2007 2008 2009 2010 2011 ---- ---- ---- ---- ---- ---- ---- ---- ---- interest expense - 8.70s $17,944 $19,575 $19,575 $19,575 $19,575 $19,575 $15,497 interest expense - 9.375s $21,484 $23,438 $23,438 $23,438 $23,438 $23,438 $23,438 $23,438 $23,438 interest expense - new 7-yr ($15,571) ($16,987) ($16,987) ($16,987) ($16,987) ($16,987) ($14,221) ($3,712) ($3,712) interest expense - new 27-yr ($26,302) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ------------------------------------------------------------------------------------------------- pre-tax interest savings/(cost) ($2,445) ($2,668) ($2,668) ($2,668) ($2,668) ($2,668) ($3,980) ($8,968) ($8,968) after-tax ($1,492) ($1,627) ($1,627) ($1,627) ($1,627) ($1,627) ($2,428) ($5,470) ($5,470) PRE-TAX AFTER-TAX ------- --------- overlapping interest (30 days) ($3,584) ($2,186) underwriting fee ($6,680) ($6,680) other issuance fees ($750) ($750) pre-tax NPV ($100,095) after-tax NPV ($63,956) [TABLE CONT'D] 2012 2013 2014 2015 2016 2017 2018 2019 2020 ---- ---- ---- ---- ---- ---- ---- ---- ---- interest expense - 8.70s interest expense - 9.375s $23,438 $23,438 $23,438 $23,438 $23,438 $23,438 $23,438 $23,438 $23,438 interest expense - new 7-yr ($3,712) ($3,712) ($3,712) ($3,712) ($3,712) ($3,712) ($3,712) ($3,712) ($3,712) interest expense - new 27-yr ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ------------------------------------------------------------------------------------------------- pre-tax interest savings/(cost) ($8,968) ($8,968) ($8,968) ($8,968) ($8,968) ($8,968) ($8,968) ($8,968) ($8,968) after-tax ($5,470) ($5,470) ($5,470) ($5,470) ($5,470) ($5,470) ($5,470) ($5,470) ($5,470) overlapping interest (30 days) underwriting fee other issuance fees pre-tax NPV after-tax NPV [TABLE CONT'D] 2021 2022 2023 2024 2025 2026 2027 2028 2029 ---- ---- ---- ---- ---- ---- ---- ---- ---- interest expense - 8.70s interest expense - 9.375s $23,438 $23,438 $23,438 $23,438 $23,438 $23,438 $23,438 $23,438 $18,555 interest expense - new 7-yr ($3,712) ($3,712) ($3,712) ($3,712) ($3,712) ($3,712) ($3,712) ($3,712) ($2,939) interest expense - new 27-yr ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($28,693) ($22,715) ------------------------------------------------------------------------------------------------- pre-tax interest savings/(cost) ($8,968) ($8,968) ($8,968) ($8,968) ($8,968) ($8,968) ($8,968) ($8,968) ($7,099) after-tax ($5,470) ($5,470) ($5,470) ($5,470) ($5,470) ($5,470) ($5,470) ($5,470) ($4,331) overlapping interest (30 days) underwriting fee other issuance fees pre-tax NPV after-tax NPV - ---------------------------------------------------------------------------------------------------------------------------------- assumptions: CILCORP Senior Notes: 8.70% series due 10/15/2009 $225,000 9.375% series due 10/15/2029 $250,000 principal amt of new issue 7-yr $287,914 principal amt of new issue 27-yr $380,042 redemption premium 8.70s $62,914 redemption premium 9.375s $130,042 new issue coupon - 7-yr 5.90% new issue coupon - 27-yr 7.55% tax rate 39.00% underwriting fee 1.00% other issuance fees $750 discount rate - UST 5.50%
CILCORP $475MM SENIOR DEBT REFUNDING ANALYSIS SUMMARY 1. Redeem both series, incur make-whole premium of $193 million, redemption premium is financed as a part of the new (refinancing) issuance. Upon maturity of the 2009 series, the associated $63 million redemption premium incurred initially is refinanced as this effectively has become a permanent part of the company's capital structure. 2. The economic impact, measured in terms of the net present value (NPV) of the cash flows associated with this action, is a cost, or economic harm, of $100 million on a pre-tax basis and $64 million on an after-tax basis. 3. However, a highly likely result of incurring the additional $193 million of debt associated with the redemption premium would be a decline in the company's credit ratings. Analyzing the refinancing to fully incorporate related effects on other Ameren financing activity (such as increased interest rates on upcoming debt issuances) would result in a much greater negative financial impact. On a pre-tax basis the incremental cost (in addition to the cost/analysis described in #1 and #2 above) would near $271 million and this incremental amount would near $167 million on an after-tax basis. EX-99 11 exhfs8.txt EX. FS-8 - FINANCIAL STATEMENTS OF AMEREN EXHIBIT FS-8 SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF AMEREN, CILCORP AND AES MEDINA VALLEY COGEN (NO. 4) L.L.C. We are providing the following summary unaudited pro forma combined condensed financial information to give you a better picture of what the results of operations and the financial position of the combined businesses of Ameren, CILCORP and AES Medina Valley Cogen (No.4) L.L.C. might have looked like had the Transaction and acquisition of Medina Valley occurred on January 1, 2001 for statement of operations purposes and September 30, 2002 for balance sheet purposes. Medina Valley began start-up operations in June 2001 and began commercial operations in September 2001. This information is provided for illustrative purposes only and is not necessarily indicative of what the results of operations or financial position of Ameren would have been if the acquisition of CILCORP and Medina Valley actually occurred on the dates assumed. In addition, this information is not necessarily indicative of what Ameren's future consolidated operating results or consolidated financial position will be. SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION (In millions, except per share data)
FOR THE NINE FOR THE YEAR MONTHS ENDED ENDED SEPTEMBER 30, 2002 DECEMBER 31, 2001 (a) ------------------ --------------------- Operating Revenues $ 3,897 $ 5,298 Net Income from Continuing Operations 444 511 Earnings per Share: Basic 2.84 3.39 Diluted 2.83 3.38 Weighted Average Common Shares Outstanding 157 151 SEPTEMBER 30, 2002 ------------------ Working Capital $ 153 Property and Plant, net 9,859 Total Assets 13,046 Long-term Debt 4,376 Total Debt 4,665 Shareowners' Equity (both common and preferred) 4,502 Equity per Share (at period end) 28.32 (a) Includes Medina Valley's results of operations for the five months ended December 31, 2001.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma combined condensed financial statements have been prepared to give effect to the proposed acquisition by Ameren of CILCORP and AES Medina Valley Cogen (No. 4), L.L.C. using the purchase method of accounting and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma combined condensed financial statements. These pro forma statements were prepared as if the Transaction had been completed as of January 1, 2001 for statement of income purposes and September 30, 2002 for balance sheet purposes. The pro forma statements of income were prepared as if the acquisition of Medina Valley had been completed in June 2001, when Medina Valley began start-up operations. The unaudited pro forma combined condensed financial statements are presented for illustrative purposes only and are not necessarily indicative of the financial position or results of operations that would have actually been reported had the Transaction and acquisition of Medina Valley occurred, nor is it necessarily indicative of the future financial position or results of operations. The pro forma combined condensed financial statements include adjustments, which are based upon preliminary estimates, to reflect the allocation of the purchase price to the acquired assets and liabilities of CILCORP and Medina Valley. The pro forma adjustments do not reflect any estimates of cost savings or other efficiencies that may be achieved from the integration of Ameren, CILCORP and Medina Valley. The final allocation of the purchase price will be determined after the completion of the Transaction and acquisition of Medina Valley and will be based upon actual tangible and intangible assets acquired as well as liabilities assumed related to the acquisitions. Because the unaudited pro forma combined condensed financial statements are based upon preliminary estimates, the accompanying pro forma adjustments may differ materially based upon the final purchase price allocation. These unaudited pro forma combined condensed financial statements are based upon the respective historical consolidated financial statements of Ameren, CILCORP and Medina Valley and should be read in conjunction with the historical consolidated financial statements of Ameren and CILCORP and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the reports and other information Ameren and CILCORP have on file with the Securities and Exchange Commission (SEC). UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AMEREN CORPORATION, CILCORP INC. AND AES MEDINA VALLEY (NO. 4) L.L.C. (IN MILLIONS)
SEPTEMBER 30, 2002 ---------------------------------------------------------------------------------------- HISTORICAL PRO FORMA -------------------------------------- --------------------------------------------- MEDINA FINANCING OTHER AMEREN CILCORP VALLEY ADJUSTMENTS ADJUSTMENTS COMBINED -------------------------------------- --------------------------------------------- Property and Plant, net $ 8,689 $ 901 $ 60 $ - $ 209 (b) $ 9,859 Goodwill & Intangible Assets, net - 579 - - 35 (c) 614 Investments & Other Assets 353 152 - - - 505 Other 712 28 4 - - 744 Current Assets 1,460 218 5 220(a) (579)(a)(g) 1,324 -------------------------------------------------------------------- ---------- TOTAL ASSETS $ 11,214 $ 1,878 $ 69 $ 220 $ (335) $ 13,046 ==================================================================== ========== Common Stockholders' Equity 4,047 550 21 220(a) (571)(d) 4,267 Preferred Stock 194 41 - - - 235 Long-term Debt 3,484 791 35 66 (e) 4,376 -------------------------------------------------------------------- ---------- Total Capitalization 7,725 1,382 56 220 505) 8,878 Current Maturity of Long-term Debt 255 27 1 - - 283 Short-term Debt 6 - - - - 6 Other Current Liabilities 769 114 6 - (7)(g) 882 Deferred Credits & Other Liabilities 2,459 355 6 - 177 (f) 2,997 -------------------------------------------------------------------- ---------- TOTAL CAPITAL AND LIABILITIES $ 11,214 $ 1,878 $ 69 $ 220 $ (335) $ 13,046 ==================================================================== ==========
See accompanying notes. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME AMEREN CORPORATION, CILCORP INC. AND AES MEDINA VALLEY (NO. 4) L.L.C. (IN MILLIONS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 2002 ------------------------------------------------------------------------------------- HISTORICAL PRO FORMA -------------------------------------- ------------------------------------------ MEDINA AMEREN CILCORP VALLEY ADJUSTMENTS COMBINED -------------------------------------- ------------------------------------------ OPERATING REVENUES $ 3,338 $ 579 $ 20 $ (40)(a) $ 3,897 OPERATING EXPENSES: Operations and maintenance 1,939 401 14 (44)(a)(c) 2,310 Depreciation and amortization 321 54 2 9 (d)(e) 386 Income taxes 265 14 - - (g) 279 Other taxes 211 31 - - 242 OPERATING INCOME 602 79 4 (5) 680 ----------------------------------- -------- ---------- OTHER INCOME AND (DEDUCTIONS) (21) 1 - - (20) INTEREST CHARGES AND PREFERRED DIVIDENDS 167 51 2 (4)(f) 216 ----------------------------------- -------- ---------- NET INCOME FROM CONTINUING OPERATIONS $ 414 $ 29 $ 2 $ (1) $ 444 =================================== ======== ========== EARNINGS PER SHARE: Basic $ 2.88 (h) $ 2.84 Diluted $ 2.87 (h) $ 2.83 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 144 13 (h) 157 Diluted 144 13 (h) 157
See accompanying notes. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME AMEREN CORPORATION, CILCORP INC. AND AES MEDINA VALLEY (NO. 4) L.L.C. (IN MILLIONS, EXCEPT PER SHARE DATA)
HISTORICAL ------------------------------------------ AMEREN CILCORP MEDINA VALLEY YEAR ENDED YEAR ENDED SEVEN MONTHS PRO FORMA DECEMBER DECEMBER ENDED DECEMBER ---------------------------------- 31, 2001 31, 2001 31, 2001 ADJUSTMENTS COMBINED ------------------------------------------ ---------------------------------- OPERATING REVENUES $ 4,506 $ 815 $ 11 $ (34) (a) $ 5,298 OPERATING EXPENSES: Operations and maintenance 2,874 564 9 (39)(a)(c) 3,408 Depreciation and amortization 406 86 1 (2)(b)(d)(e) 491 Income taxes 300 24 - 5 (g) 329 Other taxes 261 40 - - 301 ------------------------------------------------------------------------------------- OPERATING INCOME 665 101 1 2 769 OTHER INCOME AND (DEDUCTIONS) 13 (1) - - 12 INTEREST CHARGES AND PREFERRED DIVIDENDS 203 72 - (5)(f) 270 -------------------------------------------------------------- ---------- NET INCOME FROM CONTINUING OPERATIONS $ 475 $ 28 $ 1 $ 7 $ 511 ============================================================== ========== EARNINGS PER SHARE: Basic $ 3.46 (h) $ 3.39 Diluted $ 3.45 (h) $ 3.38 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 137 14 (h) 151 Diluted 138 14 (h) 152
See accompanying notes. NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION On April 28, 2002, Ameren entered into an agreement with The AES Corporation to purchase all of the outstanding stock of CILCORP Inc., a wholly-owned subsidiary of The AES Corporation. CILCORP is the parent company of Peoria-based Central Illinois Light Company, which operates as CILCO. We also agreed to acquire AES Medina Valley Cogen (No. 4), L.L.C., another wholly-owned subsidiary of The AES Corporation, which indirectly owns a 40 megawatt, gas-fired electric generation plant. The total purchase price is approximately $1.4 billion, subject to adjustment for changes in CILCORP's working capital, and includes the assumption of CILCORP and AES Medina Valley debt at closing, estimated to be approximately $900 million, with the balance of the purchase price in cash. The pro forma combined condensed financial statements assume the cash component of the purchase price will be financed through prior and future issuances of new common equity by Ameren and available cash. The purchase will include CILCORP's regulated natural gas and electric businesses in Illinois serving approximately 205,000 and 200,000 customers, respectively, of which approximately 150,000 are combination electric and gas customers. In addition, the purchase includes approximately 1,200 megawatts of largely coal-fired generating capacity most of which is expected to be nonregulated in 2003. Upon completion of the acquisition, expected by March 2003, CILCO will become an indirect Ameren subsidiary, but will remain a separate utility company, operating as AmerenCILCO. The transaction is subject to the approval of the Illinois Commerce Commission, the Securities and Exchange Commission under the Public Utilities Holding Company Act, the Federal Energy Regulatory Commission, the expiration of the waiting period under the Hart-Scott-Rodino Act and other customary closing conditions. The purchase price allocation utilized for purposes of the unaudited pro forma combined condensed financial statements is preliminary. The final determination of the allocation of purchase price will be determined based on the fair value of assets acquired and the fair value of liabilities assumed as of the date that the acquisition is consummated. The purchase price allocation will remain preliminary until Ameren is able to (a) complete a third party valuation of acquired property and plant and intangible assets, (b) conduct a detailed review of the value of deferred tax assets and liabilities of CILCORP, and (c) evaluate the fair value of other assets and liabilities acquired. Because the unaudited pro forma combined condensed financial statements are based upon preliminary estimates, the pro forma adjustments may differ materially based upon the final purchase price allocation. NOTE 2 - PRO FORMA ADJUSTMENTS Balance Sheet The following adjustments reflected in the unaudited pro forma combined conden sed balance sheet at September 30, 2002 reflect the estimated impact of events that are directly attributable to the acquisition by Ameren of CILCORP and Medina Valley. (a) To record the net proceeds ($220 million) of an anticipated equity offering of 5.5 million common shares by Ameren to partially fund the cash purchase price for the CILCORP acquisition to be paid to The AES Corporation of approximately $540 million. In September 2002, Ameren issued 8.1 million common shares that generated net proceeds of $327 million after underwriters' fees to fund a portion of the cash purchase price. (b) To adjust CILCORP and Medina Valley's property and plant ($209 million) to the estimated fair value based on a preliminary valuation report from an independent third party appraisal firm. (c) To eliminate CILCORP's historical goodwill and intangible assets of $579 million and to record goodwill arising from the transaction of $527 million and specifically-identifiable intangible assets of $87 million. Goodwill was determined as follows: Cash purchase price, including transaction and related costs..$ 572 Debt assumption, including current maturities................. 920 Other liabilities assumed..................................... 651 Preferred stock assumed....................................... 41 Tangible assets acquired...................................... (1,570) Specifically-identifiable intangible assets acquired.......... (87) -------- Allocation to goodwill........................................$ 527 ======== Specifically-identifiable intangible assets are comprised of emission credits ($47 million), trade names ($15 million), and customer contracts ($25 million). The estimated fair value of these assets have been based on a preliminary valuation report from an independent third party appraisal firm. Emission credits will be amortized as fuel is burned. Customer contracts have an estimated life between 10 and 20 years. Trade names have indefinite lives. (d) To eliminate CILCORP and Medina Valley's historical common stock, retained earnings, treasury stock, and accumulated comprehensive income. (e) To adjust CILCORP's 8.7% notes due 2009 and 9.375% notes due 2029 to the estimated fair value based on current market conditions for notes of similar maturity and Ameren's credit profile. (f) To accrue additional liability for CILCORP's pension plan ($80 million) to reflect the fair value of liabilities at September 30, 2002 and to conform CILCORP's actuarial assumptions to Ameren's actuarial assumptions. To record deferred taxes attributable to the tax effect of pro forma adjustments ($83 million) and to adjust certain of CILCORP's coal supply contracts with greater than market prices to estimated fair market value ($14 million). (g) To eliminate $7 million in accounts receivable and accounts payable related to electricity, natural gas, steam, chilled water sales and other agreements between Ameren, CILCORP and Medina Valley and to reflect the estimated cash paid for transaction and related costs of approximately $32 million. Statements of Income The following adjustments are reflected in the pro forma combined condensed statements of income to reflect the estimated impact of the Transaction and the acquisition of Medina Valley on the historical combined results of Ameren, CILCORP and Medina Valley for the nine months ended September 30, 2002 and on the historical combined results of Ameren and CILCORP for the year ended December 31, 2001 and Medina Valley for the seven months ended December 31, 2001. Medina Valley began start-up operations in June 2001 and began commercial operations in September 2001. The income tax effect of certain pro forma adjustments was calculated using an estimated 40% effective tax rate. (a) To eliminate the effects of electricity, natural gas, steam, chilled water sales and other agreements between Ameren, CILCORP and Medina Valley (September 30, 2002 - $40 million; December 31, 2001 - $34 million). (b) To remove amortization of historical goodwill previously reported by CILCORP (December 31, 2001 - $15 million). (c) To record a credit to expense to amortize the fair value adjustment of $14 million for CILCORP coal contracts that have prices in excess of the estimated fair market value, excluding Ameren synergies, based on a three year life and required minimum quantities (September 30, 2002 - $4 million; December 31, 2001 - $5 million). (d) To increase depreciation for the effect of the fair value adjustment of $209 million of CILCORP's property and plant based on an estimated 25 year life (September 30, 2002 - $6 million; December 31, 2001 - $8 million). (e) To amortize the fair value adjustment of $47 million for emission credits as fuel is burned (September 30, 2002 - $2 million; December 31, 2001 - $3 million) and estimated definite-lived customer contracts of $25 million, utilizing estimated useful lives between 10 and 20 years (September 30, 2002 - $1 million; December 31, 2001 - $2 million). (f) To record an interest expense credit related to the amortization of the $66 million fair market value adjustment to CILCORP's debt based on the average remaining life of the debt. (g) To reflect the tax effect of the pro forma adjustments at the combined estimated federal and state statutory rate of 40%. (h) Pro forma basic and diluted earnings per common share are computed by dividing the pro forma net income attributable to common stockholders by Ameren's weighted-average number of common shares outstanding, plus shares issued or expected to be issued to complete the financing of the cash portion of the purchase. NOTE 3 - CILCORP NON-RECURRING ITEMS During 2001, CILCORP settled preacquisition contingencies related to a fuel adjustment clause refund and an out-of-market long-term coal supply contract resulting in charges against net liabilities established at the time of CILCORP's acquisition by The AES Corporation in 1999. The settlement of these contingencies resulted in the reversal of an accrued liability and a credit to operations of approximately $23 million, net of taxes, which is reflected in CILCORP's income statement for the year ended December 31, 2001. As of December 31, 2001, all significant preacquisition contingencies related to CILCORP's acquisition by The AES Corporation were resolved. Ameren expects to recognize synergies related to the Transaction and acquisition of Medina Valley associated with coal supply management, enhancement of generation assets, elimination of duplicate corporate and administrative services, and other staffing efficiencies. The expected benefits of these synergies, the most significant of which are related to coal supply management, are not included in the pro forma combined condensed financial statements. Coal costs averaged $41 per ton, including transportation, for CILCORP in 2001. Even with the renegotiation of certain coal supply agreements, we believe CILCORP's coal costs under existing contracts, including transportation, will average approximately $34 per ton for 2002. Ameren's coal costs, including transportation, averaged approximately $19 per ton in 2001, and coal for its Illinois operations averaged approximately $23 per ton. Each $1 per ton savings would reduce CILCORP's coal costs by approximately $3 million. -----END PRIVACY-ENHANCED MESSAGE-----