-----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, J/ltvVG0tTeEEpMBuuJLxwHXiEuZ5z9ftI3mqWbc0Vodn6KUOMEQh5wcrAJMlzYD zPb7QlRL/KZ62OVbu+Pjeg== 0000950120-04-000611.txt : 20040927 0000950120-04-000611.hdr.sgml : 20040927 20040927142056 ACCESSION NUMBER: 0000950120-04-000611 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20040927 DATE AS OF CHANGE: 20040927 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: 070-10220 FILM NUMBER: 041046836 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 dc171590.txt FORM U-1/A AMENDMENT NO. 2 TO APP. OR DEC. (As filed on September 27, 2004) File No. 70-10220 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 ILLINOIS POWER COMPANY 500 South 27th Street Decatur, Illinois 62521 (Names of companies filing this statement and addresses of principal executive offices) --------------------------------------- AMEREN CORPORATION (Name of top registered holding company parent) ------------------------------------- Steven R. Sullivan Senior Vice President Governmental/Regulatory Policy, General Counsel and Secretary Ameren Corporation 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, Managing William T. Baker, Jr., Esq. Associate General Counsel Thelen Reid & Priest LLP Ameren Services Company 875 Third Avenue 1901 Chouteau Avenue New York, New York 10022 St. Louis, Missouri 63103 Joseph L. Lakshmanan, Senior C.M. (Mike) Naeve, Esq. Corporate Counsel & Chief Legal William C. Weeden Officer Skadden, Arps, Slate, Meagher Illinois Power Company & Flom LLP 500 South 27th Street 1440 New York Avenue, N.W. Decatur, Illinois 62521 Washington, D.C. 20005 Alisa B. Johnson, Esq., William J. Harmon, Esq. Group General Counsel - Jones Day Regulatory Affairs 77 West Wacker Drive Dynegy Inc. Chicago, Illinois 60601-1692 1000 Louisiana St., Suite 5800 Houston, Texas 77002 ii TABLE OF CONTENTS PAGE ---- ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION...................................1 1.1 Introduction.....................................................1 1.2 Description of Ameren and Its Subsidiaries.......................2 a. Ameren's Public-Utility Subsidiaries........................2 b. Direct Non-Utility Subsidiaries of Ameren...................4 c. Direct Non-Utility Subsidiaries of AmerenUE.................5 d. Direct Non-Utility Subsidiaries of CILCORP..................5 e. Direct Non-Utility Subsidiaries of AmerenCILCO..............6 f. Capitalization of Ameren....................................6 1.3 Description of Illinois Power...................................7 a. Electric Utility Operations.................................7 b. Gas Utility Operations......................................8 c. Regulation of Illinois Power................................9 d. Non-Utility Subsidiaries of Illinois Power..................9 e. Capitalization of Illinois Power...........................10 1.4 Principal Terms of Amended Stock Purchase Agreement............11 1.5 Recapitalization of Illinois Power.............................13 1.6 Operation of the Combined System Following the Acquisition.....13 1.7 Financing the Purchase Price...................................14 1.8 Affiliate Transactions.........................................14 a. Ameren Services............................................14 b. Ameren Fuels...............................................14 1.9 Financing by Illinois Power....................................15 a. External Short-term Debt...................................15 b. Participation in Utility Money Pool........................17 c. Interest Rate Hedging Transactions.........................17 1.10 Organization and Acquisition of Financing Subsidiaries.........19 1.11 Accounting Treatment for the Transaction; Impact on Rates......20 1.12 Reports Pursuant to Rule 24....................................21 ITEM 2. FEES, COMMISSIONS AND EXPENSES.......................................22 iii ITEM 3. APPLICABLE STATUTORY PROVISIONS......................................22 3.1 General Overview of Applicable Statutory Provisions............22 3.2 Compliance with Section 10(b)..................................24 a. Section 10(b)(1)...........................................24 b. Section 10(b)(2)...........................................27 c. Section 10(b)(3)...........................................28 3.3 Section 10(c)..................................................30 a. Section 10(c)(1)...........................................31 (a) The Transaction will be lawful under Section 8........31 (b) The Transaction will not be detrimental to carrying out the provisions of Section 11......................31 (i) Integration of Electric Operations..............32 A. Interconnection.............................32 B. Coordination................................32 C. Single Area or Region.......................34 D. Size........................................34 (ii) Integration of Gas Operations...................35 A. Coordination................................35 B. Single Area or Region.......................36 C. Size........................................36 (c) Retention of Combined Gas System......................36 (i) Loss of Economies...............................37 (ii) Same State or Adjoining States..................38 (iii) Size............................................39 (d) Retention of Illinois Power's Non-Utility Subsidiaries and Investments..........................39 b. Section 10(c)(2)...........................................40 3.4 Section 10(f)..................................................41 3.5 Intra-system Transactions......................................42 3.6 Rule 54 Analysis...............................................42 ITEM 4. REGULATORY APPROVALS.................................................43 4.1 Illinois Commerce Commission...................................43 4.2 Federal Energy Regulatory Commission...........................44 iv 4.3 HSR Act........................................................44 4.4 Federal Communications Commission..............................44 ITEM 5. PROCEDURE................................. ..........................45 ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS....................................45 a. Exhibits...................................................45 b. Financial Statements.......................................47 ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS..............................48 v The Application/Declaration filed in this proceeding on March 31, 2004, as amended and restated in its entirety by Amendment No. 1, filed on June 25, 2004, 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/ whose principal business address is at 1901 Chouteau Avenue, St. Louis, Missouri 63103, Ameren Energy Fuels and Services Company ("Ameren Fuels"), an indirect wholly-owned non-utility subsidiary of Ameren, of the same address, and Illinois Power Company ("Illinois Power"), an electric and gas utility company operating in the State of Illinois, whose principal business address is at 500 South 27th Street, Decatur, Illinois, 62521, are filing this Application/Declaration pursuant to Sections 6(a), 7, 8, 9(a), 10, 11(b), 12(b), 12(f) and 13(b) of the Act and Rules 43, 45, 51, 54, 87 and 90-91 thereunder. Ameren, Ameren Fuels, and Illinois Power are herein referred to collectively as the "Applicants." As described in greater detail below, Ameren has entered into an agreement to purchase all of the issued and outstanding common stock (the "Common Shares") of Illinois Power from Illinova Corporation ("Illinova"), an exempt holding company under Section 3(a)(1) of the Act, which is itself a wholly-owned subsidiary of Dynegy Inc. ("Dynegy"),/2/ and the issued and outstanding shares of preferred stock of Illinois Power that are held by Illinova (the "Preferred Shares"), and the 20% interest in the common stock of Electric Energy, Inc. ("EEInc"), an "exempt wholesale generator" ("EWG") under Section 32 of the Act, that is held by Illinova Generating Company ("IGC"),/3/ an indirect subsidiary of Dynegy (the "EEInc Shares," and together with the Common Shares and the Preferred Shares, the "Shares"), for an aggregate purchase price of $2,300,000,000, subject to certain adjustments as described below (the "Transaction"). Ameren intends to acquire and hold the Common Shares and Preferred Shares of Illinois Power directly, and to acquire the EEInc Shares through its non-utility subsidiary, Ameren Energy Resources Company ("Ameren Energy Resources"), pursuant to Section 32 of the Act. Illinois Power will also enter into a firm power purchase agreement (the "New PPA") with Dynegy Power Marketing, Inc. ("DYPM"), a power marketing affiliate of Dynegy, pursuant to which Illinois Power will purchase up to 2,800 MW of capacity and energy commencing with the later of the date the Transaction closes or January 1, 2005 - ---------- 1 See Ameren Corporation, Holding Co. Act Release No. 26809 (Dec. 30, 1997) (the "1997 Merger Order"). 2 Dynegy claims an exemption under Section 3(a)(1) of the Act pursuant to Rule 2. See Statement on Form --- U-3A-2, filed February 27, 2004, in File No. 69-483. Illinova is an exempt holding company pursuant to an order issued under Section 3(a)(1) of the Act. See Illinova Corporation, Holding Co. Act Release No. 26054 (May 18, 1994). 3 IGC owns 12,400 shares of common stock of EEInc, $100 par value per share, representing 20% of the total number outstanding. EEInc is an EWG under Section 32 of the Act. See Electric Energy, Inc., 92 FERC P. 62,079 (2000). 1 through December 31, 2006, as well as certain other ancillary agreements. 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). The boards of directors of Ameren and Dynegy have approved the proposed Transaction. The Transaction does not require any approval by the shareholders of Ameren or Dynegy. In addition to authorization of the jurisdictional aspects of the Transaction, the Applicants are requesting authorization herein, once the Transaction closes, for: (i) Illinois Power to issue and sell from time to time from the closing of the Transaction through June 30, 2007 (the "Authorization Period") short-term debt securities, to become a participant in the Ameren System Utility Money Pool Arrangement ("Utility Money Pool"), to enter into interest rate hedging transactions, and to engage in certain other related transactions; (ii) Ameren to acquire, from time to time during the Authorization Period, outstanding long-term debt securities and/or shares of preferred stock of Illinois Power or any subsidiary of Illinois Power that are held by unaffiliated third parties in open market purchases, through invitations for tenders and/or through negotiated purchases; and (iii) Ameren Fuels to provide gas management services to Illinois Power pursuant to a fuel supply management agreement that is substantially identical to agreements between Ameren Fuels and Ameren's current public-utility subsidiaries. 1.2 Description of Ameren and Its Subsidiaries. a. Ameren's Public-Utility Subsidiaries. Ameren directly owns all of the issued and outstanding common stock of Union Electric Company d/b/a AmerenUE ("AmerenUE") and Central Illinois Public Service Company d/b/a AmerenCIPS ("AmerenCIPS") and indirectly through CILCORP Inc. ("CILCORP"), an intermediate holding company, owns all of the issued and outstanding common stock of Central Illinois Light Company d/b/a AmerenCILCO ("AmerenCILCO"). Together, AmerenUE, AmerenCIPS and AmerenCILCO provide retail and wholesale electric service to approximately 1.7 million customers and retail natural gas service to approximately 500,000 customers in a 49,000 square-mile area of Missouri and Illinois, including the St. Louis, Missouri and Peoria and Springfield, Illinois metropolitan areas. In addition to the foregoing, AmerenCILCO owns all of the issued and outstanding common stock of AmerenEnergy Resources Generating Company (f/k/a Central Illinois Generation, Inc.) ("AERG"), a generating subsidiary company. AERG was formed by AmerenCILCO in November 2001 in order to facilitate the restructuring of AmerenCILCO in accordance with the Illinois Electric Service Customer Choice and Rate Relief Law of 1997 ("Customer Choice Law"). In October 2003, AmerenCILCO transferred substantially all of its generating assets 2 representing in the aggregate approximately 1,130 megawatts (MW) of electric generating capacity to AERG./4/ As of December 31, 2003, AmerenUE, AmerenCILCO and AERG together owned and operated approximately 9,186 MW of electric generating capacity, all of which is located in Missouri and Illinois, and AmerenUE, AmerenCIPS and AmerenCILCO together owned approximately 5,433 circuit miles of primary electric transmission lines, substantially all of which are located in Missouri and Illinois./5/ In addition, as of December 31, 2003, AmerenUE, AmerenCIPS and AmerenCILCO owned and operated approximately 11,700 miles of natural gas transmission lines and distribution mains, all located in Missouri and Illinois, and leased or owned natural gas storage capacity providing a total of 468,000 MMBtu of storage deliverability to meet peak day requirements and total storage capacity of 28.85 billion cubic feet to meet winter season demand. AmerenUE, AmerenCIPS and AmerenCILCO are subject to regulation by the Illinois Commerce Commission ("ICC"), and AmerenUE is also subject to regulation by the Missouri Public Service Commission ("MoPSC"), as to rates, service, issuance of equity securities, issuance of debt having a maturity of more than twelve months, mergers, affiliate transactions, and various other matters. AmerenUE, AmerenCIPS and AmerenCILCO are also subject to regulation by the Federal Energy Regulatory Commission ("FERC") as to rates and charges in connection with the wholesale sale of energy and transmission in interstate commerce, mergers, affiliate transactions, and certain other matters. AmerenUE, AmerenCIPS and AmerenCILCO 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. MAIN operates in Illinois and portions of Michigan, Wisconsin, Iowa, Minnesota and Missouri. AmerenUE, AmerenCIPS and AmerenCILCO provided formal written notice to the MAIN Board of Directors in June 2003 of their intent to withdraw from MAIN effective January 1, 2005. In July 2004, however, AmerenUE, AmerenCIPS and AmerenCILCO further notified MAIN that they would agree to delay their withdrawal to January 1, 2006, provided that the configuration of MAIN remains the same. The right to withdraw from MAIN effective January 1, 2005, was reserved in the event that certain utilities elect not to remain as regular MAIN members after December 31, 2004. AmerenUE, AmerenCIPS and AmerenCILCO intend to join another regional electric reliability organization prior to their withdrawal from MAIN becoming effective. Until their withdrawal is effective, they will continue to honor all of their obligations as members of MAIN. If they do not join another regional electric reliability organization, they may withdraw their notice of intent to withdraw from MAIN. - ---------- 4 AmerenCILCO retained ownership of approximately 36 MW (net summer capability) of generation capacity at three sites in Illinois. 5 AmerenCIPS does not own any electric generation facilities. Ameren owns interconnecting electric transmission facilities in southeastern Iowa but does not serve any customers in Iowa. 3 AmerenUE and AmerenCIPS also participate in the Midwest Independent Transmission System Operator ("MISO"), a FERC-approved regional transmission organization. Effective May 1, 2004, AmerenUE and AmerenCIPS transferred functional control of their transmission assets to the MISO. AmerenCILCO is already a member of the MISO and has also transferred functional control of its transmission system to the MISO. In its order approving Ameren's acquisition of CILCORP, which was completed on January 31, 2003, the Commission determined that the electric generation, transmission and distribution facilities of AmerenUE, AmerenCIPS, AmerenCILCO and AERG together constitute an integrated electric utility system, as defined in Section 2(a)(29)(A) of the Act, and that the gas utility properties of AmerenUE, AmerenCIPS and AmerenCILCO together constitute an integrated gas utility system, as defined in Section 2(a)(29)(B) of the Act./6/ b. Direct Non-Utility Subsidiaries of Ameren. Ameren has five direct wholly-owned non-utility subsidiaries (in addition to CILCORP, the direct parent of AmerenCILCO), as follows: Ameren Services Company ("Ameren Services"), a service company subsidiary, which provides administrative, management and technical services to Ameren and its associate companies in the Ameren system; Ameren Development Company, an intermediate non-utility holding company, which directly owns all of the outstanding common stock of Ameren ERC, Inc. ("Ameren ERC"), an "energy-related company" under Rule 58 that provides energy management services. Ameren ERC in turn owns all of the outstanding common stock of Missouri Central Railroad Company, a fuel transportation subsidiary, and an 89.1% interest in Gateway Energy Systems, L.C., which in turn owns Gateway Energy WGK Project, L.L.C., which together are developing thermal energy projects. These entities are also "energy-related companies" under Rule 58. Ameren Development also directly owns all of the outstanding common stock of Ameren Energy Communications, Inc., an "exempt telecommunications company" under Section 34 of the Act; Ameren Energy Resources, an intermediate non-utility holding company, which directly holds all of the outstanding voting securities of the following subsidiaries: (1) Ameren Energy Development Company, an EWG which, in turn, owns all of the outstanding common stock of Ameren Energy Generating Company ("Ameren GenCo"), also an EWG; (2) Ameren Energy Marketing Company, an "energy-related company" under Rule 58; (3) Ameren Energy Fuels and Services Company, also an "energy-related company" under Rule 58, which directly and through AFS Development Company, L.L.C., a wholly-owned subsidiary, and Cowboy Railroad - ---------- 6 See Ameren Corporation, et al., Holding Company Act Release No. 27645 (Jan. 29, 2003) (the "CILCORP Order"). The Commission also determined that the integrated gas utility system is retainable by Ameren as an additional system under the standards of the "A-B-C" clauses of Section 11(b)(1). 4 Development Co., L.L.C., a 71%-owned subsidiary, makes investments in and engages in operating activities related to fuel procurement, handling, transportation and storage facilities and provides related fuel management services to associate and nonassociate companies; (4) Illinois Materials Supply Co., which is a registered retailer of goods, material and equipment to Ameren Energy Development Company and other non-utility associate companies; and (5) AmerenEnergy Medina Valley Cogen (No. 4), L.L.C., an intermediate non-utility holding company that indirectly through AmerenEnergy Medina Valley Cogen (No. 2), L.L.C., holds all of the membership interests in AmerenEnergy Medina Valley Cogen, L.L.C., an EWG, and directly holds all of the membership interests in AmerenEnergy Medina Valley Operations, L.L.C. Ameren Energy Resources also directly holds 20% of the outstanding common stock of EEInc, which owns and operates a six-unit coal-fired generating facility with a capacity of approximately 1,014 MW located in Joppa, Illinois. Through a subsidiary, Midwest Electric Power Inc., which is also an EWG,/7/ EEInc owns and operates two combustion turbines with a summer net capability of approximately 72 MW, located at the Joppa plant site; 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 GenCo and provides a range of energy and risk management services; and CIPSCO Investment Company, which holds various nonregulated and passive investments, including passive investments in affordable housing projects that qualify for federal income tax credits and investments in equipment leases. c. Direct Non-Utility Subsidiaries of AmerenUE. AmerenUE has one direct wholly-owned non-utility subsidiary, Union Electric Development Corporation, which holds investments in affordable housing projects that qualify for federal income tax credits and other passive investments. AmerenUE also directly holds 40% of the outstanding common stock of EEInc./8/ d. Direct Non-Utility Subsidiaries of CILCORP. CILCORP directly owns all of the common stock of three non-utility subsidiaries, as follows:/9/ - ---------- 7 See Midwest Electric Power Inc., Letter Order in Docket No. EG00-149-000, July 21, 2000. 8 As previously indicated, as part of the Transaction, Ameren has also agreed to purchase IGC's 20% interest in EEInc, which, upon closing, will increase the aggregate ownership of EEInc by Ameren system companies from 60% to 80%. The remaining 20% interest in EEInc will continue to be held by an unaffiliated utility. 9 Under the CILCORP Order, supra n. 6, the Commission reserved jurisdiction over Ameren's retention of certain nonutility subsidiaries and investments of CILCORP (the "CILCORP Investments"). On April 15, 2004, the Commission issued a supplemental order directing Ameren to take the appropriate actions to cause CILCORP Investment Management Inc. and CILCORP Ventures Inc. to sell or otherwise dispose of certain of the CILCORP Investments not later than January 31, 2006. See Ameren Corporation, et al., Holding Co. Act Release No. 27835 (Apr. 15, 2004). 5 CILCORP Investment Management Inc., which, through subsidiaries, manages CILCORP's investments in equipment leases, affordable housing projects that qualify for federal income tax credits, non-regulated independent power projects, and other passive investments; CILCORP Ventures Inc., which, through a wholly-owned subsidiary, CILCORP Energy Services, Inc., provides energy-related products and services, including gas management services for gas management customers; and QST Enterprises Inc., which, through subsidiaries, provides energy and related services in non-regulated retail and wholesale markets, including predictive and preventive testing and maintenance for industrial customers and affiliated companies, and formerly held interests in environmentally distressed parcels of real estate acquired for resale. e. Direct Non-Utility Subsidiaries of AmerenCILCO. AmerenCILCO directly owns all of the issued and outstanding common stock of two non-utility subsidiaries, neither of which conducts any significant business at this time: CILCO Exploration and Development Company, which previously engaged in the exploration and development of gas, oil, coal and other mineral resources; and CILCO Energy Corporation, which was formed to research and develop new sources of energy, including the conversion of coal and other minerals into gas. For the twelve months ended December 31, 2003, Ameren reported total operating revenues of $4,593,000,000, operating income of $1,090,000,000, and net income of $524,000,000, and for the six months ended June 30, 2004, Ameren reported total operating revenues of $2,368,000,000, operating income of $462,000,000, and net income of $215,000,000. On a consolidated basis, approximately 85.7% of Ameren's 2003 operating revenues were derived from sales of electricity (inclusive of sales by Ameren GenCo), 14.1% from sales of gas and gas transportation service, and 0.2% from other sources. At June 30, 2004, Ameren had $14,677,000,000 in total assets, including net property and plant of $11,052,000,000. f. Capitalization of Ameren. Under its Restated Articles of Incorporation, as amended (Exhibits A-1 and A-2 hereto), Ameren is authorized to issue 500,000,000 shares of capital stock consisting of 400,000,000 shares of common stock, $.01 par value, and 100,000,000 shares of preferred stock, $.01 par value. At June 30, 2004, Ameren had issued and outstanding 183,266,254 shares of common stock; it did not have 6 any outstanding preferred stock./10/ In addition, at June 30, 2004, Ameren had issued and outstanding $445 million principal amount of senior unsecured debt securities that mature in 2007. At June 30, 2004, Ameren did not have any outstanding short-term debt. Ameren's common stock is listed and traded on the New York Stock Exchange. As of June 30, 2004, Ameren's capitalization on a consolidated basis was as follows:
- -------------------------- ----------------------- ----------------------- Common equity $ 5,238,000,000 53.4% - -------------------------- ----------------------- ----------------------- Preferred equity of $ 182,000,000 1.8% subsidiaries - -------------------------- ----------------------- ----------------------- Long-term debt* $ 4,072,000,000 41.5% - -------------------------- ----------------------- ----------------------- Short-term debt** $ 326,000,000 3.3% - -------------------------- ----------------------- ----------------------- Total $ 9,818,000,000 100.0% - -------------------------- ----------------------- ----------------------- * Includes mandatorily redeemable preferred stock ** Includes current portion of long-term debt
Ameren's senior unsecured debt securities are currently rated BBB+ by Standard & Poor's Inc. ("S&P") and A3 by Moody's Investors Service ("Moody's"). Ameren's commercial paper is rated A-2 by S&P and P-2 by Moody's. 1.3 Description of Illinois Power. Illinois Power is engaged in the transmission, distribution and sale of electric energy and the distribution, transportation and sale of natural gas in substantial portions of northern, central and southern Illinois. Its service area includes 11 cities with a population greater than 30,000 (including the cities of Decatur, Bloomington, and Champaign-Urbana) and 37 cities with a population greater than 10,000 based on 2000 census data. Illinois Power also provides electric transmission service to other utilities, electric cooperatives, municipalities and marketers. a. Electric Utility Operations. Illinois Power provides electric service to approximately 600,000 customers in 313 incorporated municipalities, adjacent suburban and rural areas and numerous unincorporated communities, all in Illinois. Illinois Power's electric transmission and distribution system includes 1,672 circuit miles of electric transmission lines and 37,765 circuit miles of overhead and underground distribution lines. Illinois Power owns virtually no generation./11/ Illinois Power currently purchases the vast majority of its electric power requirements under contracts with Dynegy Midwest Generation, Inc. ("DMG"), an indirect - ---------- 10 In July 2004, Ameren completed the sale of approximately 10.9 million additional shares of common stock for net proceeds of approximately $445 million. As a result, at July 30, 2004, Ameren had issued and outstanding 194,274,842 shares of common stock. 11 Illinois Power is joint owner with a large commercial customer of three diesel generators having a total capacity of 5.25 MW. The units, which are located on or near the customer's headquarters in Bloomington, Illinois, are available for on-site emergency back-up power and at other times are dispatched by Illinois Power to serve system load. 7 subsidiary of Dynegy, AmerGen Energy Company, L.L.C. ("AmerGen"), and EEInc./12/ The existing contract with AmerGen will expire at the end of 2004. The existing contract with DMG will also expire by its terms on December 31, 2004,/13/ and will be replaced by the New PPA./14/ The EEInc contract expires at the end of 2005. A map of the electric utility service areas of Ameren and Illinois Power is filed herewith as Exhibit E-1. Illinois Power is directly interconnected with AmerenUE, AmerenCIPS and AmerenCILCO at numerous locations. Exhibit K hereto lists and describes these existing interconnections. Illinois Power also participates, together with AmerenUE and AmerenCIPS, in the Illinois-Missouri Power Pool, which operates under a transmission interconnection agreement. Illinois Power is currently a member of MAIN, although its continued membership in MAIN beyond December 31, 2004 will depend on whether the Transaction is consummated. As explained below, Illinois Power committed in its application to the FERC for approval of the Transaction (Exhibit D-3 hereto) that it will join the MISO within a reasonable time after the FERC issues an order approving the Transaction and transfer of functional control of Illinois Power's transmission assets to the MISO without conditions that are unacceptable to the applicants, but prior to closing of the Transaction. On July 29, 2004, the FERC approved the Transaction, conditioned on Illinois Power joining the MISO prior to closing. (See Item 4 and Exhibit D-4 hereto.) b. Gas Utility Operations. Illinois Power provides retail gas service to approximately 415,000 customers in 258 incorporated municipalities and adjacent areas in northern, central and southern Illinois, including the cities of Decatur, Champaign-Urbana and East St. Louis. Illinois Power owns 763 miles of "Hinshaw" natural gas transportation pipeline and 7,669 miles of natural gas distribution pipeline. Illinois Power also owns seven on-system underground natural gas storage fields with a total capacity of approximately 11.6 billion cubic feet and total - ---------- 12 The power purchase agreement between DMG and Illinois Power was entered into in October 1999 concurrently with the sale of Illinois Power's generating assets to Illinova, which Illinova then transferred to DMG. The agreement with AmerGen was entered into in connection with the sale by Illinois Power of the Clinton nuclear generation facility to AmerGen in December 1999. 13 In the event the Transaction closes before December 31, 2004, Illinois Power and DMG will enter into an Interim PPA Rider that will modify the terms of the existing contract with DMG only insofar as to divest Illinois Power of dispatch control over DMG's generation units (except under very limited circumstances). The limited change is necessary so that, post closing, Ameren's aggregate generating capacity (owned or controlled) does not increase and, thus, possibly give rise to market power concerns. The Interim PPA Rider will, by its terms, terminate along with the existing DMG contract on December 31, 2004. 14 If the Transaction does not close by January 1, 2005, Illinois Power and DYPM will enter into an interim power purchase agreement that is virtually identical to the New PPA. In such event, the interim agreement would be replaced by the New PPA upon closing of the Transaction. 8 deliverability on a peak day of approximately 339 million cubic feet. To supplement the capacity of these underground storage facilities, Illinois Power has contracted with natural gas pipelines for an additional 5.4 billion cubic feet of underground storage capacity, representing additional total deliverability on a peak day of approximately 93 million cubic feet. A map of the gas utility service areas of Ameren and Illinois Power is filed herewith as Exhibit E-2. c. Regulation of Illinois Power. Illinois Power is regulated by the ICC with respect to retail electric and gas rates and service, classification of accounts, the issuance of stock and evidences 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. d. Non-Utility Subsidiaries of Illinois Power. Illinois Power's non-utility subsidiaries are as follows: IP Gas Supply Company ("Illinois Gas Supply"), an Illinois corporation, which was formed for the purpose of acquiring interests in oil and gas leases. There is little activity in this subsidiary; Illinois Power Securitization Limited Liability Company, a Delaware limited liability company that is the sole beneficial owner of Illinois Power Special Purpose Trust ("IPSPT"), a Delaware business trust that was formed in 1998 to issue transitional funding trust notes as allowed under the Illinois Electric Utility Transition Funding Law to securitize the revenue stream associated with future recovery of a portion of revenues received from retail ratepayers;/15/ Illinois Power Transmission Company, LLC, a Delaware limited liability company, was formed in 2002 for the purpose of acquiring and holding Illinois Power's transmission assets, but is currently inactive; Illinois Power Financing I, a Delaware statutory trust, is a financing subsidiary through which Illinois Power issued $100 million of trust originated preferred securities ("TOPrS") in January 1996. These securities were redeemed in 2001 and this entity is now inactive; and Illinois Power Financing II, also a Delaware special purpose trust, is a financing subsidiary that was created for a potential shelf registration in 2002. It is not currently active. - ---------- 15 With the adoption of FIN 46R (FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities"), at December 31, 2003, this variable interest entity is no longer consolidated with Illinois Power. 9 For the twelve months ended December 31, 2003, Illinois Power reported total operating revenues of $1,567,800,000, operating income of $166,200,000, and net income applicable to common shareholder of $114,700,000, and for the six months ended June 30, 2004, Illinois Power reported total operating revenues of $781,000,000, operating income of $78,000,000, and net income applicable to common stock of $60,000,000. Approximately 70.3% of Illinois Power's 2003 operating revenues was derived from electric utility operations and approximately 29.7% was derived from gas utility operations. At June 30, 2004, Illinois Power had $5,020,000,000 in total assets, including net utility plant of $2,107,000,000 and an intercompany receivable from Illinova with a principal balance of $2,271,000,000 (the "Intercompany Note") that was issued by Illinova in consideration for the purchase of Illinois Power's fossil-fuel generating plants and other generation-related assets in 1999. e. Capitalization of Illinois Power. Under its Amended and Restated Articles of Incorporation (Exhibit A-3 hereto), Illinois Power is authorized to issue 100,000,000 shares of common stock, no par value, 5,000,000 shares of serial preferred stock, $50 par value, 5,000,000 shares of serial preferred stock, no par value, and 5,000,000 shares of preference stock, no par value. As of June 30, 2004, Illinois Power had issued and outstanding 62,892,213 shares of common stock, no par value, all of which are held by Illinova, and six series of cumulative preferred stock, $50 par value, having an aggregate stated amount of approximately $46,000,000. Illinova holds 662,924 shares of Illinois Power's outstanding preferred stock, representing approximately 73% of the total number outstanding. In addition, as of June 30, 2004, Illinois Power had outstanding $1,444,600,000 principal amount of first mortgage bonds having maturities through 2032, certain series of which are pledged to secure obligations under pollution control revenue obligations, and $374,000,000 principal amount of transitional funding trust notes with maturities through 2008. Exhibit I hereto lists and describes Illinois Power's outstanding long-term debt and preferred stock as of December 31, 2003. Illinois Power does not have any outstanding short-term debt (other than the current portion of long-term debt). As of June 30, 2004, Illinois Power's capitalization on a consolidated basis was as follows:
- -------------------------- ----------------------- ----------------------- Common equity $1,545,000,000 44.4% - -------------------------- ----------------------- ----------------------- Preferred equity $ 46,000,000 1.3% - -------------------------- ----------------------- ----------------------- Long-term debt* $1,668,000,000 48.0% - -------------------------- ----------------------- ----------------------- Current portion of $ 220,000,000 6.3% long-term debt** - -------------------------- ----------------------- ----------------------- Total $3,479,000,000 100.0% - -------------------------- ----------------------- ----------------------- * Includes $302,000,000 of transitional funding trust notes issued by IPSPT. ** Includes $72,000,000 of transitional funding trust notes issued by IPSPT and $77,000,000 capital lease obligation classified as current.
10 Illinois Power's senior secured debt is currently rated B by S&P and Ba3 by Moody's. Illinois Power's preferred stock is rated CCC by S&P and B3 by Moody's./16/ Ameren expects that, as a result of the consummation of the Transaction and related recapitalization of Illinois Power, as described in Item 1.5 below, Illinois Power will receive an investment grade rating for its long-term debt from at least one of the major statistical rating organizations. 1.4 Principal Terms of Amended Stock Purchase Agreement. Ameren, Dynegy, Illinova, and IGC have entered into a Stock Purchase Agreement, dated as of February 2, 2004 (the "Original Agreement") (Exhibit B-1 hereto), as amended by Amendment No. 1, dated as of March 23, 2004 (Exhibit B-1(a) hereto), Amendment No. 2, dated April 30, 2004 (Exhibit B-1(b) hereto), Amendment No. 3, dated May 31, 2004 (Exhibit B-1(c) hereto), and Amendment No. 4, dated as of September 24, 2004 (Exhibit B-1(d) hereto) (the Original Agreement, as so amended, being referred to as the "Amended SPA"). The Amended SPA provides that, subject to the receipt of all necessary regulatory approvals and the satisfaction of other conditions precedent, Ameren will purchase the Common Shares and the Preferred Shares of Illinois Power from Illinova and the EEInc Shares from IGC for an aggregate purchase price of $2,300,000,000, less an amount equal to the "Existing IPC Obligations" (as described below), plus (or minus) the amount by which actual contributions made by Dynegy or any of its affiliates prior to the closing date for plan year 2004 with respect to certain pension plans exceeds (or is less than) $17,500,000, and plus or minus the change in adjusted working capital between September 30, 2003 and the closing date, as determined in accordance with the procedures set forth in the Amended SPA (such aggregate amount being the "Purchase Price"). The Amended SPA allocates $125,000,000 of the Purchase Price to the EEInc Shares and the balance ($2,175,000,000, subject to the adjustments described above) to the Common Shares and the Preferred Shares. The term "Existing IPC Obligations" is defined in the Amended SPA to mean an amount equal to the sum of (a) the unpaid principal amount of all short-term and long-term indebtedness (including current portion) for borrowed money of Illinois Power and any subsidiary of Illinois Power, (b) the total liquidation preference of the 249,751 shares of preferred stock, $50 par value, of Illinois Power that are not owned by Illinova, (c) any accrued and unpaid dividends on such shares of preferred stock, to the extent that dividends are in arrears, and (d) any capital lease obligations of Illinois Power or any subsidiary of Illinois Power, in each case as of the date of closing, subject to certain adjustments related to the Transitional Funding Trust Notes, Series 1998-1, in the original amount of $864,000,000, issued by Illinois Power Special Purpose Trust. The Existing IPC Obligations as of September 30, 2003, totaled $1,909,508,000. At closing, Ameren will pay $2,300,000,000 in cash, minus the sum of (a) an amount equal to the Existing IPC Obligations and (b) $100,000,000, which, subject to certain exceptions, will be deposited in escrow to secure certain indemnities from Dynegy under the Amended SPA relating to potential liabilities - ---------- 16 Illinois Power's senior secured debt and preferred stock ratings reflect upgrades by Moody's following announcement of the Transaction. 11 that Illinois Power faces, principally due to its former ownership of generating facilities now owned by DMG. The Amended SPA provides that, no more than two days prior to closing, Dynegy and Illinova will cause the unpaid principal balance of and all accrued and unpaid interest on the Intercompany Note to be eliminated pursuant to the following steps, which will be part of the total recapitalization of Illinois Power (further described in Item 1.5 below): first, the principal amount of the Intercompany Note will be reduced or offset by (i) the amount of certain payables owed by Illinois Power to Illinova or other affiliates of Dynegy and (ii) the amount of interest that has been paid by Illinova to Illinois Power on the Intercompany Note that has not been earned, i.e., prepaid interest; and second, Dynegy and Illinova will, and Illinova will cause Illinois Power to, immediately following such reduction, eliminate or reduce the remaining Intercompany Note to zero, which elimination or reduction may occur (in whole or in part) through one or more of the following: (i) distribution of the Intercompany Note (net of any prepaid interest) to Dynegy or Illinova; (ii) a repurchase of common equity by Illinois Power from Illinova; (iii) the assignment of the Intercompany Note by Illinois Power, after the balance thereof has been reduced by the amount of any prepaid interest thereon theretofore paid by Illinova, to Dynegy or one of its affiliates and subsequent elimination of the Intercompany Note; (iv) a release of Illinova by Illinois Power from Illinova's remaining obligations under the Intercompany Note; or (v) other means reasonably acceptable to Dynegy and Ameren. The elimination of the Intercompany Note through these measures requires approval by the ICC. Also at closing, Illinois Power and DYPM will enter into the New PPA. The New PPA requires DYPM to sell capacity and energy and to provide ancillary services to Illinois Power for the period from the later of the date the Transaction closes or January 1, 2005 through December 31, 2006. The total monthly capacity committed under the New PPA to Illinois Power will range from 2,300 MW in the non-summer months (October through April) to 2,800 MW in the summer months (May through September). DYPM is responsible under the New PPA for obtaining and/or providing firm transmission service and ancillary services to points of delivery on Illinois Power's transmission system. Illinois Power may utilize energy purchased under the New PPA only to serve its retail load and provide ancillary services and, except under limited circumstances, may not resell to other customers any energy, capacity or ancillary services provided by DYPM. Illinois Power and DYPM will also enter into the "Negotiated Tier 2 Memorandum," pursuant to which DYPM will sell to Illinois Power an additional 300 MW of firm capacity in 2005 and 150 MW of firm capacity in 2006, at a fixed price. Illinois Power will have an option to purchase energy associated with this capacity at a price based on the Power Markets Week's index for energy at the Cinergy hub. The Amended SPA also obligates Illinois Power to submit an application to FERC to join the MISO, conditioned on the closing of the Transaction. As part of the joint application filed with FERC (Exhibit D-3 hereto), Illinois Power requested, and, on July 29, 2004, received all necessary authorizations from FERC to transfer functional control over its transmission facilities to the MISO. As previously indicated, FERC conditioned its approval of the Transaction on Illinois Power transferring functional control over its transmission facilities to the MISO prior to the closing. 12 The obligations of the parties under the Amended SPA are subject to conditions precedent that are usual and customary for a transaction of this nature, including the receipt of required regulatory approvals from this Commission, the FERC and the ICC. The Amended SPA may be terminated by Dynegy or Ameren if the closing shall not have occurred on or before December 31, 2004. 1.5 Recapitalization of Illinois Power. After the Transaction closes, Ameren intends to complete the recapitalization of Illinois Power by infusing substantial equity into Illinois Power, the proceeds of which will be used by Illinois Power to retire debt, including $550 million principal amount of 11 1/2% first mortgage bonds. Ameren believes that these intercompany financing transactions will be exempt under Rules 45(b)(4) and 52(a), as applicable. The Amended SPA obligates Ameren to commit to the ICC that it will eliminate at least $750 million of Illinois Power's debt and that Ameren will cause Illinois Power's common equity to total capitalization ratio to be between 50% and 60% by December 31, 2006. As previously noted, Ameren expects that the recapitalized Illinois Power will receive an investment grade rating for its long-term debt from at least one of the major statistical rating organizations. In addition, Ameren requests authorization to acquire, from time to time during the Authorization Period, up to $300 million principal or face amount of the outstanding long-term debt securities and/or shares of preferred stock of Illinois Power or any subsidiary of Illinois Power. All such securities would be purchased in open-market purchases, through invitations for tenders and/or through direct negotiations with the holders of such securities. Any such securities that are acquired by Ameren may be held by Ameren until they mature or are called, or, at Ameren's option, may be contributed to and canceled on the books of Illinois Power or its subsidiary, as the case may be. Such securities would not be reissued or resold by Ameren. 1.6 Operation of the Combined System Following the Acquisition. Following the acquisition of Illinois Power, Illinois Power will maintain its headquarters in Decatur for a period of at least five years and will maintain a local management team and adequate staffing levels to operate its utility system. Although Illinois Power will maintain its separate corporate existence and will continue to operate as its own control area, its electric utility operations will be fully integrated with those of AmerenUE, AmerenCIPS and AmerenCILCO. Importantly, AmerenUE, AmerenCIPS and AmerenCILCO have already transferred functional control over their respective transmission facilities to the MISO, and, as indicated, Illinois Power will transfer functional control over its transmission facilities to the MISO prior to closing. Likewise, the gas utility operations of Illinois Power will also be fully integrated with those of AmerenUE, AmerenCIPS and AmerenCILCO following completion of the Transaction. A fuller description of Ameren's plans to integrate Illinois Power's operations with those of its existing subsidiaries and estimates of merger savings are set out in Item 3.3 below. 13 1.7 Financing the Purchase Price. Ameren will finance the cash portion of the Purchase Price and subsequent equity infusions in Illinois Power using the proceeds of common stock and other securities issued and to be issued pursuant to its existing authorization in File No. 70-10206 or as authorized in a separate proceeding./17/ On April 7, 2004, Ameren filed a "shelf" Registration Statement on Form S-3 (Exhibit C hereto) with respect to offering an aggregate of $2 billion of common stock and other long-term securities. The "shelf" Registration Statement became effective in June 2004. 1.8 Affiliate Transactions. a. 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 ("GSA"). Ameren Services has entered into substantially identical GSAs with Ameren, AmerenUE, AmerenCIPS, AmerenCILCO and certain of Ameren's non-utility subsidiaries. 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 a substantially identical GSA with Illinois Power following completion of the Transaction. Thus, after the Transaction closes, Ameren Services will provide to Illinois Power administrative, management, and technical services substantially similar to those that it now provides to other Ameren system companies under the GSA, utilizing the same work order procedures and the same methods of allocating costs that are specified in the GSA. Subject to Ameren's commitment to the ICC regarding workforce reductions, certain employees of Illinois Power and its subsidiaries may be transferred to and become employees of Ameren Services. b. Ameren Fuels. By order dated April 5, 2001 in File No. 70-9775,/18/ 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 - ---------- 17 See Ameren Corporation, Holding Co. Act Release No. 27860 (June 18, 2004) (the "2004 Financing Order"). Ameren is authorized under the 2004 Financing Order to issue and sell from time to time through June 30, 2007 up to $2.5 billion at any time outstanding of common stock, unsecured long-term debt securities, and other preferred or equity-linked securities and up to $1.5 billion of short-term debt securities at any time outstanding. 18 See Ameren Energy Fuels and Services Company, Holding Co. Act Release No. 27374. 14 ("Fuel Services Agreement")./19/ Ameren Fuels was authorized to provide AmerenCILCO with similar services under the CILCORP Order, supra n. 6. Under the Fuel Services Agreement (Exhibit B-3 hereto), 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 a separate Fuel Services Agreement with Illinois Power pursuant to which Ameren Fuels will manage gas supply resources for Illinois Power. These services will be provided at cost, in accordance with Rule 90 and 91. 1.9 Financing by Illinois Power. The existing equity and long-term debt securities of Illinois Power, as described in Item 1.3 above, will remain outstanding after the Transaction closes. In general, all securities issuances by Illinois Power, other than indebtedness with a final maturity of less than one year, renewable for a period of not more than two years, must be approved by the ICC. In addition, the ICC must approve borrowings by Illinois Power from any affiliated company. Accordingly, after Illinois Power becomes a subsidiary of Ameren, Rule 52(a) will exempt from Sections 6(a) and 7 of the Act (i) all external securities issued by Illinois Power, other than short-term indebtedness, and (ii) all intercompany borrowings by Illinois Power. Illinois Power is herein requesting authorization to issue and sell from time to time during the Authorization Period short-term debt securities to unaffiliated lenders, to enter into interest rate hedging transactions, and to become a participant in the Utility Money Pool, all as described below. Illinois Power 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) is at least 30%. a. External Short-term Debt. Illinois Power does not currently have any outstanding short-term debt (other than the current portion of long-term debt) or maintain any credit lines./20/ After becoming a subsidiary of Ameren, however, Illinois Power wishes to have the flexibility to establish credit lines and make short-term borrowings as needed to finance its operations and support - ---------- 19 Following the transfer of AmerenCIPS' generating assets to Ameren GenCo, Ameren Fuels entered into an identical agreement with Ameren Energy Resources, the indirect parent of Ameren GenCo. 20 Currently, Illinois Power satisfies its working capital requirements in part from interest income received from Illinova under the Intercompany Note. As described in Item 1.4, prior to closing of the Transaction, Dynegy and Illinova will take steps to eliminate the Intercompany Note. 15 working capital needs. Accordingly, Illinois Power requests authorization to issue commercial paper and/or establish and make secured or unsecured short-term borrowings (i.e., maturities 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 principal amount of commercial paper and short-term borrowings by Illinois Power at any time outstanding under credit facilities, when added to the aggregate amount of borrowings at any time by Illinois Power under the Utility Money Pool (see Item 1.9(b) below) and direct borrowings at any time by Illinois Power from Ameren, will not exceed $500 million. Subject to such limitation, Illinois Power requests 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. Illinois Power also proposes to establish credit lines with banks or other institutional lenders and other credit arrangements and/or borrowing facilities generally available to borrowers with comparable credit ratings as it 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 Illinois Power 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. The issuance of secured short-term debt by Illinois Power would be limited to those circumstances in which Illinois Power can expect a savings in costs over the issuance of unsecured short-term debt or in which unsecured credit is unavailable. Illinois Power anticipates that the collateral offered as security for short-term debt would generally be limited to short-term assets, such as inventory and/or accounts receivable. Illinois Power represents that, except for securities issued for the purpose of funding Utility Money Pool operations (see below), it will not issue any short-term debt securities in reliance upon the authorization granted by the Commission pursuant to this Application/Declaration, unless (i) the security to be issued, if rated, is rated investment grade; (ii) all outstanding securities of Illinois Power that are rated are rated investment grade; and (iii) all outstanding securities of Ameren that are rated are rated investment grade. For purposes of this provision, a security will be deemed to be rated "investment grade" if it is rated investment grade 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, as amended. Illinois Power requests that the Commission reserve 16 jurisdiction over the issuance of any short-term debt securities that are rated below investment grade. b. Participation in Utility Money Pool. By order dated February 27, 2003 in File No. 70-10106 (Holding Co. Act Release No. 27655), as supplemented by order dated September 15, 2003 (Holding Co. Act Release No. 27721) (the "Money Pool Order"), Ameren is authorized to fund loans to AmerenUE, AmerenCIPS, AmerenCILCO and Ameren Services through the Utility Money Pool in order to provide for the short-term cash and working capital needs of these companies./21/ Further, to the extent not exempt under Rule 52, AmerenUE, AmerenCIPS, AmerenCILCO and Ameren Services are authorized to make unsecured short-term borrowings from the Utility Money Pool, to contribute surplus funds to the Utility Money Pool, and to lend and extend credit to (and acquire promissory notes from) one another through the Utility Money Pool./22/ Ameren may not make borrowings under the Utility Money Pool. If surplus funds made available by the participants in the Utility Money Pool (i.e., "Internal Funds") are used to fund loans to eligible borrowers, the interest rate applicable to such loans is equal to the CD yield equivalent of the 30-day Federal Reserve "AA" Non-Financial commercial paper composite rate. If proceeds from external borrowings by any participant in the Utility Money Pool (i.e., "External Funds") are used to fund loans to eligible borrowers, the interest rate is equal to the lending company's cost of borrowing. In cases where both Internal Funds and External Funds are used to fund loans to eligible borrowers, the applicable interest rate is a composite rate equal to the weighted average of the Internal Funds and External Funds. Illinois Power requests authorization herein to become a party to the Utility Money Pool Agreement (Exhibit B-2 hereto) after the closing of the Transaction on the same basis as AmerenUE, AmerenCIPS and AmerenCILCO. Borrowings by Illinois Power under the Utility Money Pool have been approved by the ICC (see Item 4 below) and therefore will be exempt pursuant to Rule 52(a)./23/ c. Interest Rate Hedging Transactions. To the extent not exempt under Rule 52(a), Illinois Power requests authorization to enter into interest rate hedging transactions with respect to outstanding long-term and short-term indebtedness ("Interest Rate Hedges"), subject to certain limitations and restrictions, in order to reduce or manage its effective interest rate cost. - ---------- 21 The authorization period under the February 27, 2003 order extends through March 31, 2006. 22 Borrowings by AmerenCIPS and AmerenCILCO under the Utility Money Pool have been approved by ICC and are therefore exempt under Rule 52(a). Borrowings by Ameren Services are exempt under Rule 52(b). 23 The ICC has authorized Illinois Power to make borrowings under the Utility Money Pool and direct short-term borrowings from Ameren in an aggregate amount at any time outstanding not to exceed $500 million. (See Exhibit D-2.) Under the ICC order, Illinois Power's authority to make loans to the Utility Money Pool is subject to certain limitations, as discussed in Item 4.1 below. 17 Illinois Power would employ interest rate derivatives as a means of prudently managing the risk associated with any of its outstanding debt issued pursuant to this authorization or an applicable exemption by, in effect, synthetically (i) converting variable rate debt to fixed rate debt, (ii) converting fixed rate debt to variable rate debt, and (iii) limiting the impact of changes in interest rates resulting from variable rate debt. In no case will the notional principal amount of any interest rate swap exceed the face value of the underlying debt instrument and related interest rate exposure. Transactions will be entered into for a fixed or determinable period. Thus, Illinois Power will not engage in speculative transactions. Interest Rate Hedges (other than exchange-traded interest rate futures contracts) would only be entered into with counterparties ("Approved Counterparties") whose senior debt ratings, or the senior debt ratings of any credit support providers who have guaranteed the obligations of such counterparties, as published by S&P, are equal to or greater than BBB, or an equivalent rating from Moody's or Fitch, Inc. Interest Rate Hedges will involve the use of financial instruments commonly used in today's capital markets, such as exchange-traded interest rate futures contracts and over-the-counter 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 or U.S. governmental (e.g., Fannie Mae) obligations, or LIBOR-based swap instruments. 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, Illinois Power requests 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 (other than exchange-traded interest rate futures contracts) 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 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. Illinois Power 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. 18 Further, Illinois Power 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/ 1.10 Organization and Acquisition of Financing Subsidiaries. In connection with the issuance of long-term debt and preferred securities, Illinois Power requests 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 such long-term debt and/or preferred securities and for the loan or other transfer of the proceeds thereof to Illinois Power. In connection with any such financing transactions, Illinois Power may enter into one or more guarantees or other credit support agreements in favor of its Financing Subsidiary./25/ Illinois Power also requests authorization to enter into an expense agreement with any Financing Subsidiary, pursuant to which it would agree to pay all expenses of such Financing Subsidiary. 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 efficiencies, increased access to capital markets and/or lower cost of capital for Illinois Power. 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. Illinois Power also requests authorization to issue 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 the 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./26/ - ---------- 24 The authority sought for interest rate hedging transactions in this Application/Declaration is identical to the authorization previously granted to AmerenUE and AmerenCIPS in File No. 70-10106 by order dated February 27, 2003 (Holding Co. Act Release No. 27655) and to AmerenCILCO under the CILCORP Order, supra n. 6. 25 Guarantees or other credit support provided by Illinois Power 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. 26 "Mirror image" Notes issued by Illinois Power to any Financing Subsidiary will be exempt under Rule 52(a) if the conditions of Rule 52(a) are satisfied. 19 In cases where it is necessary or desirable to ensure legal separation for purposes of isolating a Financing Subsidiary from its parent for bankruptcy purposes, the ratings agencies may require that any expense agreement whereby the parent provides services related to the financing to the Financing Subsidiary be at a price, not to exceed a market price, consistent with similar services for parties with comparable credit quality and terms entered into by other companies so that a successor service provider could assume the duties of the parent in the event of the bankruptcy of the parent without interruption or an increase of fees. Therefore, Illinois Power requests approval under Section 13(b) of the Act and Rules 87 and 90 to provide the services described in this paragraph at a fee not to exceed a market price but only for so long as such expense agreement established by the Financing Subsidiary is in place./27/ 1.11 Accounting Treatment for the Transaction; Impact on Rates. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," Ameren will use the purchase method of accounting for the Transaction. Under this method of accounting, the total cost of acquiring Illinois Power 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 cost over the fair values of the net assets acquired) will be recorded as goodwill./28/ In this case, Ameren intends to "push down" the purchase accounting and establish a new basis of accounting for the stand-alone financial statements of Illinois Power./29/ It is expected that, for accounting purposes, the goodwill recorded on Illinois Power'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 No. 141 and SFAS No. 142 , "Goodwill and Other Intangible Assets." In its September 22, 2004 order (Exh. D-2 hereto), the ICC approved the Transaction, subject to the condition that Illinois Power will reverse the effects of push-down accounting for ratemaking purposes, and will not reflect push-down adjustments for debt or preferred stock in its annual reports to the - ---------- 27 The Commission has previously granted exemptions under Section 13(b) in these circumstances. See e.g., Exelon Corporation, et al., Holding Co. Act Release No. 27830 (Apr. 1, 2004). 28 Ameren estimates that the total cost of acquiring Illinois Power will be approximately $2.36 billion, consisting of the portion of the Purchase Price allocated to the Common Shares and the Preferred Shares ($2.175 billion), stock issuance costs of approximately $35 million, transaction costs of approximately $25 million, integration costs of approximately $10 million, severance costs of approximately $9 million, and debt redemption premiums of approximately $100 million. 29 Staff Accounting Bulletin (SAB) Topic 5-J does not require Ameren to "push down" the purchase accounting to Illinois Power since Illinois Power has substantial amounts of publicly-held debt. Nevertheless, if the purchase accounting is not "pushed-down" to Illinois Power, the accounting adjustments required in connection with the elimination of the Intercompany Note, as described in Item 1.4 above, would leave Illinois Power with negative retained earnings, a result that is not acceptable to Ameren since it would impair Illinois Power's ability to pay dividends. 20 ICC. Illinois Power will reflect the reversal of the impact of the push-down accounting in Account 114 (Plant Acquisition Adjustments) for all Illinois regulatory purposes. The ICC also authorized Ameren to reflect up to $67 million of the costs of accomplishing the reorganization of Illinois Power on Illinois Power's books, as a regulatory asset, to be amortized ratably over the period 2007 - 2010. 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. In addition, Ameren and Illinois Power 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 1.9 and 1.10 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 principal amount, type (e.g., commercial paper, bank notes, etc.) and material terms (e.g., interest rate and maturity) of any short-term debt securities issued by Illinois Power to lenders other than Ameren and the principal amount outstanding at the end of the reporting period; (b) the principal amount and material terms (e.g., interest rate and maturity) of any short-term note issued by Illinois Power to Ameren;/30/ (c) the notional amount and principal terms of any Interest Rate Hedge or Anticipatory Hedge entered into by Illinois Power during the quarter and the identity of the parties to such instruments (or the exchange in the case of an exchange-traded futures contract) which also shall separately show the outstanding amount of Interest Rate Hedges or Anticipatory Hedges at the end of the reporting period; (d) with respect to each Financing Subsidiary that has been formed, a representation that the financial statements of Illinois Power 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 Illinois Power in such Financing Subsidiary; and (iii) the amount and terms of any securities issued by any Financing Subsidiary during the reporting period which shall also separately show the outstanding balance of all securities issued by such Financing Subsidiaries during the Authorization Period; (e) if any Financing Subsidiaries are "Variable Interest Entities" ("VIEs"), as that term is used in FASB Interpretation 46R, "Consolidation of Variable Interest Entities," a description of any financing transactions conducted during the reporting period that were used to fund such VIEs, and, if - ---------- 30 For convenience, it is proposed to combine information on borrowing and lending activity by Illinois Power under the Utility Money Pool with the information on such activity provided for Ameren's other utility subsidiaries in reports under Rule 24 filed in File No. 70-10106. 21 any financing proceeds are used for VIEs, a description of the accounting for such transaction under FASB Interpretation 46R; and (f) the consolidated balance sheet of Illinois Power as of the end of the calendar quarter, which may be incorporated by reference to annual, quarterly and other reports filed by Illinois Power 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, by Ameren in connection with the Transaction will not exceed $25 million, assuming that the Transaction closes, as follows:
Investment bankers fees and expenses.................................$15,000,000 Consultants fees and expenses.........................................$2,000,000 Accountants fees......................................................$2,000,000 Legal fees and expenses...............................................$5,000,000 Other.................................................................$1,000,000 ---------- TOTAL....................................................$25,000,000
Total fees, commissions and expenses incurred or to be incurred by Illinois Power in connection with the issuance of short-term debt securities to any non-associate company, including 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./31/ 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 and related transactions: APPLICABLE SECTIONS OF THE ACT AND RULES. DESCRIPTION OF TRANSACTION. Sections 6(a), 7, 9(a), 10, 12(b) Issuance of short-term debt and 12(f); Rules 45 and 52(a) securities by Illinois Power to Ameren and to unaffiliated lenders and borrowings pursuant to Utility Money Pool - ---------- 31 This is the same limitation on fees, commissions and expenses approved by the Commission under the 2004 Financing Order, supra n. 17, in connection the issuance of equity and debt securities by Ameren. 22 Sections 8, 9(a), 10, and 11(b)(1); Acquisition by Ameren of Common Rule 51 Shares and Preferred Shares of Illinois Power Sections 9(a), 10 and 12(b) Acquisition of common stock or other equity securities of Financing Subsidiaries by Illinois Power; acquisition of outstanding senior securities of Illinois Power by Ameren and contribution thereof to Illinois Power Sections 8 and 11(b)(1) Retention by Ameren of the gas utility properties of Illinois Power as part of additional public utility system; retention of non-utility subsidiaries and investments of Illinois Power Section 13(b); Rules 87, 90 - 91 Approval of the services to be provided at cost by Ameren Fuel to Illinois Power; and exemption from at cost standard for any services provided by Illinois Power to any Financing Subsidiary 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. 23 3.2 Compliance with Section 10(b). Section 10(b) provides that, if the requirements of Section 10(f) are satisfied, the Commission shall approve an acquisition under Section 9(a) unless the Commission finds that: (1) such acquisition will tend towards interlocking relations or the concentration of control of public-utility companies, of a kind or to an extent detrimental to the public interest or the interests of investors or consumers; (2) in case of the acquisition of securities or utility assets, the consideration, including all fees, commissions, and other remuneration, to whomsoever paid, to be given, directly or indirectly, in connection with such acquisition is not reasonable or does not bear a fair relation to the sums invested in or the earning capacity of the utility assets to be acquired or the utility assets underlying the securities to be acquired; or (3) such acquisition will unduly complicate the capital structure of the holding-company system of the applicant or will be detrimental to the public interest or the interests of investors or consumers or the proper functioning of such holding-company system. a. Section 10(b)(1). The standards of Section 10(b)(1) are satisfied because the proposed Transaction will not "tend towards interlocking relations or the concentration of control of public-utility companies, of a kind or to an extent detrimental to the public interest or the interests of investors or consumers." By its nature, any merger results in new links between previously unrelated companies. The Commission has recognized, however, that such interlocking relationships are permissible in the interest of efficiencies and economies. See Northeast Utilities, 50 S.E.C. 427, 443 (1990) ("Northeast Utilities"), as modified, 50 S.E.C. 511 (1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992) (finding that interlocking relationships are necessary to integrate the two merging entities). The links that will be established as a result of the Transaction are not the types of interlocking relationships targeted by Section 10(b)(1), which was primarily aimed at preventing utility mergers unrelated to operating economies./32/ As described elsewhere in this Application/Declaration, the Transaction will achieve various operating synergies. Among other things, Illinois Power 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 Illinois Power, whatever interlocking relationships may arise from the combination are not detrimental. - ---------- 32 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 . . .."). 24 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. Illinois Power serves approximately 600,000 retail electric customers and approximately 415,000 retail gas customers. If the Transaction is approved, the Ameren system will serve approximately 2.3 million electric customers and approximately 915,000 retail gas customers in parts of Missouri and Illinois. On a pro forma basis, as of June 30, 2004, Ameren will have consolidated assets of about $17.4 billion, including net utility plant of approximately $13 billion. For the twelve months ended December 31, 2003, pro forma operating revenues will total approximately $6.1 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 and (where applicable) retail gas customers (total assets of Ameren as of June 30, 2004, all other data as of and for the year ended December 31, 2003):
Utility Customers - System Total Assets Operating Revenues Electric (E)/Gas (G) - ------ ------------ ------------------ -------------------- Exelon Corp. $41,941,000,000 $15,812,000,000 E - 5.1 million G - .46 million American $36,744,000,000 $14,545,000,000 E - 5.0 million Electric Power Co. FirstEnergy $32,910,000,000 $12,307,000,000 E - 4.4 million Entergy Corp. $28,554,000,000 $ 9,195,000,000 E - 2.6 million G - .24 million Xcel Corp. $20,205,000,000 $ 7,938,000,000 E - 3.2 million G - 1.7 million Cinergy Corp. $14,119,000,000 $ 4,416,000,000 E - 1.5 million G - .5 million
25
Ameren (pro $17,415,000,000 $ 6,108,000,000 E - 2.3 million forma) G - .92 million
As the foregoing table shows, following the acquisition of Illinois Power, the Ameren system will be substantially smaller than Exelon Corporation ("Exelon"), 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 contiguous regions. In any case, the Commission has rejected an interpretation of Section 10(b)(1) that would impose per se limits on the post-merger size of a registered holding company. Instead, the Commission assesses the size of the resulting system with reference to the economic efficiencies that can be achieved through the integration and coordination of utility operations. In AEP, the Commission noted that, although the framers of the Act were concerned about "the evils of bigness, they were also aware that the combination of isolated local utilities into an integrated system afforded opportunities for economies of scale, the elimination of duplicate facilities and activities, the sharing of production capacity and reserves and generally more efficient operations... [and] [t]hey wished to preserve these opportunities." AEP, 46 S.E.C. at 1309. By virtue of the Transaction, Ameren will be in a position to realize precisely these types of benefits. Among other things, the Transaction is expected to yield operating cost savings, corporate and administrative savings and purchasing 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 Dynegy 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, and the statutory waiting period has expired. 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")/33/ and Order No. 642./34/ Specifically, the FERC considered the effects of combining Ameren's and Illinois Power's generation assets (horizontal market power), the effects of combining generation and transmission assets (one aspect of vertical market power), and - ---------- 33 See Inquiry Concerning Merger Policy under the Federal Power Act: Policy Statement, Order No. 592, FERC Stats. & Regs. [Regs. Preambles 1996 - 2000] P. 31,044 (1996), reconsideration denied, Order No. 592-A, 79 FERC P. 61,321 (1997) (codified at 18 C.F.R. ss. 2.26). 34 See Revised Filing Requirements Under Part 33 of the Commission's Regulations, Order No. 642, FERC Stats. & Regs. [Regs. Preambles July 1996 - December 2000] P. 31,111 (2000), reh'g denied, Order No. 642-A, 94 FERC P. 61,289 (2001). 26 the effects of combining electric and natural gas assets. On July 29, 2004, the FERC approved the Transaction, finding that, as conditioned on Illinois Power joining the MISO prior to closing and Ameren selling 125 MW of power produced by EEInc's Joppa plant to non-affiliates, the Transaction will not harm competition. (See Item 4 and Exhibit D-4 hereto.) The Commission has found, and the courts have agreed, that it may appropriately rely upon the FERC with respect to such matters. See City of Holyoke v. SEC, 972 F.2d at 363-64, quoting Wisconsin's Environmental Decade v. SEC, 882 F.2d 523, 527 (D.C. Cir. 1989). The ICC also considered the effect of the Transaction on competition in Illinois. In its September 22, 2004 order approving the Transaction (Exh. D-2 hereto), the ICC found that the Transaction is not likely to have a significant adverse effect on competition in those markets over which the ICC has jurisdiction, which finding was conditioned on Ameren's commitment to increase, via transmission projects or upgrades, competitive access into AmerenCIPS' delivery market by 300 MW and into Illinois Power's delivery market by 200 MW. Pending completion of such projects or upgrades, Ameren will continue its power sales offer to unaffiliated entities from the 125 MW share of EEInc's Joppa plant to be acquired from Dynegy. 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 Dynegy for Illinois Power's common stock. Dynegy solicited and received non-binding expressions of interest for the purchase of Illinois Power from several potential purchasers, including Ameren. After evaluating these expressions of interest, Dynegy and Exelon entered into a purchase agreement on October 31, 2003, pursuant to which Exelon, through a new subsidiary, agreed to acquire substantially all of Illinois Power's assets and liabilities. That agreement was terminated by the parties on November 22, 2003, and, on December 5, 2003, Dynegy and Ameren announced that they were engaged in exclusive discussions regarding the sale of Illinois Power to Ameren. The Original Agreement was entered into on February 2, 2004, following intense negotiations between the parties, in which each was assisted by a financial advisor, and completion of substantial due diligence by Ameren. There is also no basis for the Commission to conclude that the consideration to be paid for Illinois Power does not bear a fair relation to the earning capacity of Illinois Power'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 27 of the consideration to be paid for Illinois Power (as well as for IGC's 20% interest in EEInc). On February 2, 2004, 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 Aggregate Purchase Price (as defined in the opinion) to be paid by Ameren for Illinois Power (and for IGC's 20% interest in EEInc) 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 of the Transaction paid or incurred by Ameren, approximately $25 million (see Item 2 - Fees, Commissions and Expenses), are less than 1% of the Purchase Price. This is consistent with (and in fact generally lower than) percentages previously approved by the Commission. See, e.g., Entergy Corp., 51 S.E.C. at 881, n. 63 (fees and expenses of $38 million, representing approximately 2% of the value of the consideration paid to the shareholders of Gulf States Utilities); Northeast Utilities, Holding Co. Act Release No. 25548 (June 3, 1992) (fees and expenses of approximately 2% of the value of the assets to be acquired); and American Electric Power Company, Inc., et al., Holding Company Act Release No. 27186 (June 14, 2000), n. 40 (total fees, commissions and expenses of approximately $72.7 million, representing 1.1% of the value of the total consideration paid by American Electric Power to the shareholders of Central and South West Corp.). 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 issued and outstanding common stock of Illinois Power. Hence, the Transaction will not create any publicly-held minority stock interest in the voting securities of any public utility company. The outstanding debt securities and preferred stock of Illinois Power will also remain as outstanding obligations of Illinois Power and will not be recourse to Ameren or any other company in the Ameren system. Set forth below are summaries of the capital structures of Ameren and Illinois Power as of June 30, 2004, and the pro forma consolidated capital structure of Ameren, assuming the Transaction had been consummated on June 30, 2004, and reflecting various pro forma adjustments (including, among others, elimination of the Intercompany Note, Ameren's issuance of 10.9 million shares of common stock in July 2004, and Illinois Power's termination of a $77 million 28 capital lease, also in July 2004) which are set forth in the Notes to the unaudited pro forma financial statements filed herewith as Exhibit FS-3 hereto):
Ameren and Illinois Power Historical Consolidated Capital Structures Ameren Illinois Power ------ -------------- Common stock equity $5,238,000,000 53.4% $1,545,000,000 44.4% Preferred securities $ 182,000,000 1.8% $ 46,000,000 1.3% Long-term debt * $4,072,000,000 41.5% $1,668,000,000 48.0% Short-term debt ** $ 326,000,000 3.3% $ 220,000,000 6.3% -------------- ------- -------------- ------- Total $9,818,000,000 100.0% $3,479,000,000 100.0%
Ameren Pro Forma Consolidated Capital Structure (dollars in millions) (unaudited) Common stock equity $ 5,669,000,000 46.4% Preferred securities $ 228,000,000 1.9% Long-term debt $ 5,840,000,000 47.9% Short-term debt $ 469,000,000 3.8% ---------------- ----- Total $12,206,000,0000 100.0%
* Includes mandatorily redeemable preferred stock. Also, in the case of Illinois Power, includes $302,000,000 of transitional funding trust notes issued by IPSPT. ** In the case of Illinois Power, includes $72,000,000 of transitional funding trust notes issued by IPSPT. As the foregoing shows, Ameren's pro forma consolidated common equity to total capitalization ratio of 46.4% will comfortably exceed the "traditionally acceptable 30% level." See Northeast Utilities, 50 S.E.C. at 440, n. 47. As a result of the Transaction and related recapitalization of Illinois Power, the Intercompany Note will be retired and approximately $1 billion of accumulated deferred income taxes will be removed from Illinois Power's balance sheet. Ameren has made a commitment to increase common equity as a percentage of 29 Illinois Power's total capitalization (including short-term debt) to 50-60% by December 31, 2006./35/ The Transaction will have no effect on the capitalization of AmerenUE, AmerenCIPS, AmerenCILCO, or AERG, Ameren's other public-utility subsidiaries. Common equity as a percentage of capitalization of each of these companies is and will remain well over 30%. Section 10(b)(3) also requires the Commission to determine whether the proposed combination will be detrimental to the public interest, the interests of investors or consumers or the proper functioning of the combined Ameren system. The proposed combination of Ameren and Illinois Power is entirely consistent with the proper functioning of a registered holding company system. Ameren's and Illinois Power's electric utility operations are contiguous and interconnected and will be operated as a single interconnected and coordinated system following the Transaction. Likewise, Ameren's existing gas utility operations and Illinois Power's gas operations, which serve adjoining areas of Illinois and Missouri, will be coordinated following the Transaction. The Transaction will result in substantial, and otherwise unavailable, savings and benefits to the public and to consumers and investors of both companies. Moreover, the Transaction must be approved by both the ICC and the FERC, which ensures that the interests of customers will be adequately protected. Among other things, both of those agencies will review the proposed Transaction for its possible adverse effects on competition in relevant markets. For these reasons, Ameren believes that the Transaction will be in the public interest and the interest of investors and consumers and will not be detrimental to the proper functioning of the resulting holding company system. 3.3 Section 10(c). Section 10(c) of the Act provides that, notwithstanding the provisions of Section 10(b), the Commission shall not approve: (1) an acquisition of securities or utility assets, or of any other interest, which is unlawful under the provisions of section 8 or is detrimental to the carrying out of the provisions of section 11; or (2) the acquisition of securities or utility assets of a public utility or holding company unless the Commission finds that such acquisition will serve the public interest by tending towards the economical and the efficient development of an integrated public utility system. - ---------- 35 Assuming that the Transaction had closed on June 30, 2004 and that the recapitalization of Illinois Power, as described above in Item 1.5, was also completed as of June 30, 2004, common equity would represent about 51% of Illinois Power's consolidated capitalization. See pro forma financial statements of Illinois Power filed confidentially pursuant to Rule 104 as Exhibit FS-6 hereto. The $750 million debt reduction assumed in these pro forma statements may not be completed until December 2006. 30 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. Illinois Power 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 the ABC clauses. Likewise, in the CILCORP Order, the Commission determined that AmerenCILCO's electric utility assets and Ameren's primary electric utility system together comprises an integrated electric utility system, and that AmerenCILCO's gas utility properties, when added to Ameren's existing gas utility system, constitutes an integrated gas utility system that is retainable under the standards of the ABC clauses. At issue in this proceeding is whether Ameren's acquisition of Illinois Power, which also operates as both an electric and gas utility in substantially the same areas 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, AmerenCILCO (including the generating assets of AmerenCILCO now held by AERG) and Illinois Power will result in a single, integrated electric utility system. In addition, the combination of Illinois Power's gas utility properties with those of AmerenUE, AmerenCIPS and AmerenCILCO 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. 31 (i) Integration of Electric Operations. The threshold question is whether the electric utility properties of Illinois Power can be combined with those of AmerenUE, AmerenCIPS, AmerenCILCO and AERG 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 611 (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 AmerenUE, AmerenCIPS, AmerenCILCO and Illinois Power in Illinois are adjacent and their facilities are physically interconnected at numerous points (see Exhibit K). 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 32 dispatch all system generating units automatically on an economic basis in order to achieve the lowest overall cost of electricity. However, in recent cases, the Commission has recognized that joint economic dispatch is not per se a requirement for a finding of coordinated operations. See e.g., American Electric Power Company, Inc., Holding Co. Act Release No. 27186 (June 14, 2000); Exelon Corporation, Holding Co. Act Release No. 27256 (Oct. 19, 2000); and CP&L Energy, Inc., Holding Co. Act Release No. 27284 (Nov. 27, 2000). Since Illinois Power does not own any material generating assets, the coordination of electric utility operations between Illinois Power and Ameren's other utility subsidiaries will not be achieved through joint dispatch of generating facilities. Notwithstanding, after the Transaction closes, there will be a high degree of coordination in both energy supply and energy delivery functions of the two companies. For example, the actual management and staffing of many of the separate control area functions of Ameren and Illinois Power will be centralized in Ameren Services' Energy Supply department, which will manage the day-to-day operations of the combined transmission systems of AmerenUE, AmerenCIPS, AmerenCILCO and Illinois Power. Ameren's and Illinois Power's respective Energy Delivery groups will also be combined for reporting purposes under a single manager within Ameren Services. The Energy Delivery groups will jointly manage transmission and distribution construction, maintenance programs and emergency restoration services, will have access to each other's electric and gas training facilities, and will share certain existing information systems. Illinois Power will also benefit from having greater access to supplemental equipment and critical spare parts used in responding to emergency conditions. Finally, because AmerenUE, AmerenCIPS, AmerenCILCO and Illinois Power are directly or indirectly, members of MISO, their transmission assets will be under common day-to-day control and management. Thus, there will be a high degree of coordination of their respective transmission facilities. 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 below, the Transaction will meet this standard. In short, all aspects of the combined system will be centrally directed and efficiently planned and coordinated. As with other utility combinations 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. 33 C. Single Area or Region. As required by Section 2(a)(29)(A), the operations of Ameren following the Transaction will be confined to a "single area or region in one or more States." The retail service area of the Ameren system will continue to be confined to the two adjoining states (Missouri and Illinois) in which Ameren already operates. Moreover, as indicated, subject to receiving regulatory approvals, AmerenUE, AmerenCIPS, AmerenCILCO and Illinois Power all intend to transfer functional control over their transmission systems to the MISO. 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 Illinois Power 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. This operational structure, which is similar to that currently in place at AmerenUE, AmerenCIPS, and AmerenCILCO, will permit the local, district and regional management teams of Illinois Power to budget for operation of the electric distribution system and to schedule work forces in order to provide the same (or better) quality of service to customers of Illinois Power.36 In short, Illinois Power 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 below in the analysis of Section 10(c)(2), the Transaction will result in greater 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. Illinois Power 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. - ---------- 36 In the ICC application (Exh. D-1 hereto), Illinois Power and Ameren have committed, among other things, to maintain Illinois Power's headquarters in Decatur for at least five years after the Transaction closes and to limit workforce reductions to not more than 25 employees for a period of four years after closing, other than workforce reductions that occur through attrition and voluntary separation programs. 34 (ii) Integration of Gas Operations. The gas utility properties of Illinois Power, when added to those owned by AmerenUE, AmerenCIPS, and AmerenCILCO, will form an "integrated gas-utility system," which is defined in Section 2(a)(29)(B) to mean: 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, AmerenCILCO and Illinois Power currently manage similar physical properties and contractual assets: natural gas supply and transportation contracts and owned and leased storage capacity. Following the acquisition of Illinois Power, Ameren Fuels will enter into a fuel services agreement with Illinois Power that is substantially identical to the existing Fuel Services Agreements between Ameren Fuels and AmerenUE, AmerenCIPS, and AmerenCILCO. Under these agreements, personnel of Ameren Fuels will manage all of the natural gas supply, transportation and storage activities on behalf of the four utility 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. In order to perform these functions, Ameren Fuels personnel will utilize both Ameren's and Illinois Power's existing Supervisory Control and Data Acquisition ("SCADA") systems, which are connected, through dedicated communications links, to hundreds of locations where gas measurement, pressure regulation, and odorization are monitored. The SCADA systems will also be used to monitor and control injections and withdrawals from all on-system storage fields. 35 Other areas in which the gas operations of Ameren's current utilities and Illinois Power will likely be coordinated include centralized management of gas price hedging activities, monitoring compliance with pipeline safety regulations (including inspection and maintenance programs), and training programs. B. Single Area or Region......The combined gas system of AmerenUE, AmerenCIPS, AmerenCILCO and Illinois Power will also be confined to Missouri and Illinois. The areas served in Illinois are mostly contiguous. The high pressure distribution and transmission systems currently operated by Ameren are connected to eight interstate pipelines: Panhandle Eastern Pipe Line Company ("Panhandle"), Trunkline Gas Company ("Trunkline"), Texas Eastern Transmission Corporation, Natural Gas Pipeline Company of America, Inc. ("NGPL"), Texas Gas Transmission Corporation, Midwestern Gas Transmission Corporation, ANR Pipeline Company ("ANR") and Mississippi River Transmission Corporation ("MRT"). The high pressure distribution and transmission systems currently operated by Illinois Power are connected to five of these interstate pipelines: Panhandle, Trunkline, MRT, NGPL and ANR. These common pipelines will give all of Ameren's utility subsidiaries 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 extent, the Rocky Mountain and western Canada producing basins. Thus, the four utilities will 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 public utility 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, AmerenCILCO and Illinois Power) 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 has considered four ratios as a "guide" to determining whether lost economies would be "substantial" under Section 36 11(b)(1)(A). Specifically, the Commission has 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 in earlier cases. 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 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, AmerenCILCO and Illinois Power into a new, stand-alone company ("New Gasco"). The Divestiture Study (Exh. H hereto), which uses data for the twelve months ended December 31, 2003, shows that a divestiture of the combined gas operations would result in an increase in annual operating costs (excluding income taxes) of approximately $54,150,000,/37/ which is equal to - ---------- 37 It is estimated that a spin off of New Gasco to the public following Ameren's acquisition of Illinois Power would result in federal and state income taxes of approximately $73 million (based on data as of December 31, 2003, and assuming that the fair market value of the assets is the same as their net book value). 37 approximately 5.04% of gas operating revenues, 5.42% of gas operating revenue deductions, 72.21% of gross gas income and 101.68% of net gas income./38/ These increased operating costs would result primarily from additional capital costs (including an estimated $23.2 million increase in costs for information services required by New Gasco), additional annual operating and maintenance costs in several categories (e.g., labor, insurance, office and crew facilities, transportation equipment, and costs associated with various new service functions that would duplicate those of AmerenUE, AmerenCIPS, AmerenCILCO and Illinois Power), and transition costs (estimated at $49 million, amortized over ten years) associated with establishing New Gasco as a separate corporate entity. These lost economies would be offset only in part by the quantifiable benefits (estimated at approximately $2.3 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 10.04% ($107.8 million per year) in order to provide an 8.14% rate of return on rate base, which is based on the weighted average cost of capital of AmerenUE, AmerenCIPS, AmerenCILCO and Illinois Power as of December 31, 2003. In the absence of rate relief, return on rate base would be only 1.32%. 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 Illinois Power and Ameren's current utility 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 the opportunity to reconsider this issue in connection with its approval of Ameren's acquisition of both CILCORP and Illinois Power. (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 New Gasco are located and operate exclusively in Illinois and Missouri, the same two States in which AmerenUE, AmerenCIPS, AmerenCILCO and Illinois Power already operate as electric utilities. Thus, the requirement that each additional system be located in one State or adjoining States is satisfied. - ---------- 38 While the resulting loss of operating revenues and increase in operating revenues deductions percentages are somewhat lower than found acceptable in Engineers, the loss of gross gas income and loss of net income percentages are much higher. In any event, as previously indicated, the Commission has stated 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. 38 (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, 2003, and giving effect to the Transaction, the operations of New Gasco would represent only about 7% of Ameren's post-Transaction gross utility plant, and only about 18% of Ameren's post-Transaction net operating revenues. As indicated, the gas procurement functions of Illinois Power, AmerenUE, AmerenCIPS, and AmerenCILCO will be centralized in Ameren Fuels. Ameren Fuels will administer the combined portfolios of natural gas supply, transportation and storage contracts as agent for all four companies. In most other respects, the local operations of Illinois Power will continue to be handled from Illinois Power's local and regional operations centers, with supplemental support provided by other Ameren system companies with personnel and other resources in close proximity. Thus, the advantages of localized management will be preserved. (d) Retention of Illinois Power'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. As described in Item 1.3, Illinois Gas Supply was formed for the purpose of acquiring interests in oil and gas leases./39/ Illinois Power's other - ---------- 39 The Commission has authorized other registered electric utility holding companies to acquire or retain interests in companies engaged in natural gas exploration, production, gathering, processing and storage. See e.g., Progress Energy, Inc., Holding Co. Act Release No. 27673 (May 5, 2003); Cinergy Corp., Holding Co. Act Release No. 27717 (Aug. 29, 2003). 39 non-utility subsidiaries are special purpose financing subsidiaries,/40/ or entities that are inactive (and in some cases in the process of liquidation). Thus, all of Illinois Power's non-utility subsidiaries are retainable under the standards of Section 11(b)(1). b. Section 10(c)(2). The Commission and the courts have interpreted Section 10(c)(2) of the Act to require that, in addition to satisfying the four single-integrated-system requirements of Section 2(a)(29)(A), a proposed acquisition of an electric utility company must also produce net efficiencies and economies. National Rural Electric Cooperative Association, 276 F.3rd at 611 (citing Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523, 528 (D.C. Cir. 1989). In this case, the Transaction will "serve the public interest by tending toward the economical and efficient development of an integrated public utility system," and therefore will 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. The Transaction will benefit Illinois Power's customers in several important respects. Presently, Illinois Power has below investment grade ratings, which has prevented Illinois Power from accessing lower cost sources of capital. The Transaction and subsequent recapitalization of Illinois Power will result in significant improvement of Illinois Power's credit ratings, enhance its access to capital, and lower its capital costs for the long term./41/ It is expected that one of the major ratings agencies will rate Illinois Power's long-term debt investment grade subsequent to closing. These benefits will be passed on to consumers. The integration of Illinois Power into the Ameren system will also allow Illinois Power, and therefore its customers, to benefit from economies of scale associated with a larger energy procurement function and delivery system. In - ---------- 40 The Commission has also authorized registered holding companies to acquire the securities of companies organized exclusively for the purpose of facilitating the issuance of securities. See e.g., Ameren Corporation, et al., Holding Co. Act Release No.10159 (Dec. 18, 2003). 41 As previously described, Illinois Power currently does not have a facility in place to access working capital through short-term borrowings. Further, additional long-term debt financing has been made available to Illinois Power only at relatively high interest rates with restrictive covenants. Following the Transaction, Illinois Power will have the ability to access the capital markets on more reasonable terms, as well as the ability to borrow under the Utility Money Pool and/or directly from Ameren. this regard, Ameren has committed to make additional investments in Illinois Power's infrastructure. Specifically, Ameren has committed that Illinois Power will make capital expenditures of at least $275 million to $325 million in its system in the first two years after the Transaction closes. The Transaction is also expected to produce cost savings 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 savings associated with non-fuel operations and maintenance expenses will be approximately $33 million per year. Ameren estimates that, in order to achieve the projected level of savings, approximately $19 million in one-time transition expenses will be incurred. These expenditures are required principally to enable Illinois Power 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 by 5 to 10 cents per share in the first year after the Transaction is completed. 3.4 Section 10(f). Section 10(f) provides that: The Commission shall not approve any acquisition as to which an application is made under this section unless it appears to the satisfaction of the Commission that such State laws as may apply in respect of such acquisition have been complied with, except where the Commission finds that compliance with such State laws would be detrimental to the carrying out of the provisions of section 11. As previously indicated, the Transaction has been approved by the ICC. In addition, closing conditions under the Amended SPA are designed to assure compliance with all other applicable State laws. 3.5 Intra-system Transactions. The sale of goods and services to Illinois Power and its subsidiaries following the effective date of the Transaction pursuant to the Service Agreement and the Fuel Services Agreement will be carried out in accordance with the requirements and provisions of Section 13(b) of the Act and Rules 87, 90 and 91 and the agreements that have been previously filed with the Commission. 41 The acquisition of Illinois Power 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, subject to Ameren's commitment to the ICC regarding work force reductions, it is contemplated that certain employees of Illinois Power 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 as of June 30, 2004 was $440,567,725, or approximately 23.7% of Ameren's "consolidated retained earnings" (also as defined in Rule 53(a)(1)) for the four quarters ended June 30, 2004 ($1,860,246,642). On a pro forma basis, to take into account Ameren's acquisition of IGC's 20% interest in EEInc, Ameren's "aggregate investment" would be $565,567,725, or about 30.4% of "consolidated retained earnings" for the four quarters ended June 30, 2004. 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 Illinois Power and AERG) will, at any one time, directly or indirectly, render services to EWGs and FUCOs. Rule 53(a) (4): Ameren will submit a copy of each Application or Declaration, and each amendment thereto, relating to any EWG or FUCO, and will submit copies of any Rule 24 certificates required thereunder, as well as a copy of the relevant portions of Ameren's Form U5S, to each of the public service commissions having jurisdiction over the retail rates of Ameren's domestic public utility subsidiaries. In addition, Ameren states that the provisions of Rule 53(a) are not made inapplicable to the authorization herein requested by reason of the occurrence or continuance of any of the circumstances specified in Rule 53(b). Rule 53(c) is inapplicable by its terms. 42 ITEM 4. REGULATORY APPROVALS. 4.1 Illinois Commerce Commission. On September 22, 2004, the ICC approved the Transaction and certain other related transactions, subject to certain conditions. In accordance with the requirements of Section 7-204 of the Illinois Public Utilities Act, the ICC found that: (a) the Transaction will not diminish Illinois Power'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 Illinois Power or its customers; (c) the costs and facilities of Illinois Power 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 Illinois Power's ability to raise necessary capital on reasonable terms or to maintain a reasonable capital structure; (e) Illinois Power 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 further approved Illinois Power's request to enter into the Fuel and Natural Gas Services Agreement, the GSA, and the Ameren system tax allocation agreement, to make direct short-term borrowings from Ameren, and to eliminate the Intercompany Note. The ICC also approved Illinois Power's request to participate in the Utility Money Pool, subject to the condition that, until Illinois Power achieves investment grade ratings from both S&P and Moody's, (i) loans by Illinois Power to the Utility Money Pool shall not exceed the lesser of $100 million or 90% of cash on hand, and (ii) all affiliates making borrowings under the Utility Money Pool that consist of funds loaned by Illinois Power must meet certain credit standards that would otherwise apply only to non-utility borrowers under applicable provisions of the Illinois Administrative Code. Once Illinois Power achieves investment grade ratings from both S&P and Moody's, Illinois Power may participate in the Utility Money Pool subject to the same restrictions under the Illinois Administrartive Code that apply to AmerenUE, AmerenCIPS and AmerenCILCO. A copy of the ICC's order, including, as Appendix A, certain conditions of approval, is filed herewith as Exhibit D-2. The approval of the ICC may be required in order for Illinois Power to acquire the equity securities of any Financing Subsidiary. Such approval, if required, will be obtained at the time Illinois Power seeks ICC approval to issue securities through any Financing Subsidiary. Illinois Power requests that the Commission reserve jurisdiction over the acquisition of the securities of any Financing Subsidiary pending the receipt of any required ICC authorization and the filing of such authorization as a supplement to the record in this proceeding and the issuance of a supplemental order of the Commission approving any such state-jurisdictional acquisition. 43 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 joint application filed with the FERC seeking approval of the Transaction (and of the related acquisition of IGC's 20% interest in EEInc) under the Federal Power Act is filed herewith as Exhibit D-3. On July 29, 2004, the FERC approved Ameren's acquisition of the stock of Illinois Power held by Illinova and IGC's 20% interest in EEInc. The FERC also approved the New PPA and certain other related agreements, and also granted necessary authorizations for Illinois Power to transfer functional control of its transmission facilities to the MISO. The order is conditioned on Illinois Power joining the MISO before the Transaction closes. Also, the FERC accepted, as a mitigation measure intended to address asserted harm to competition, Ameren's commitment to sell, for an indeterminate period, 125 MW of the capacity and energy associated with EEInc's Joppa plant to an entity or entities not affiliated with Ameren. A copy of the FERC's order is filed herewith as Exhibit D-4. 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 Dynegy 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. Ameren and Dynegy have filed the required notification statements with the FTC and DOJ and the statutory waiting period has expired. 4.4 Federal Communications Commission. In connection with the Transaction, the Federal Communications Commission ("FCC") must authorize Illinois Power to transfer various communications licenses that it holds. A copy of the application filed with the FCC to request such authorization is filed herewith as Exhibit D-5. On April 14, 2004, the FCC issued a notice indicating that the transfer of the licenses had been approved. Except as described above, no other state or federal commission, other than this Commission, has jurisdiction over the proposed Transaction or other related transactions. 44 ITEM 5. PROCEDURE. The Commission has issued a notice under Rule 23 with respect to the filing of this Application/Declaration (Holding Co. Act Release No. 27862), and no request for hearing has been made. The Applicants respectfully request that the Commission issue an order approving the Application/Declaration as soon as its rules permit. The Applicants request that there should not be a 30-day waiting period between issuance of the Commission's order and the date on which the order is to become effective; waive a recommended decision by a hearing officer or other responsible officer of the Commission; and consent to the participation by the Division of Investment Management in the preparation of the Commission's decision and/or order, unless the Division of Investment Management opposes the matters proposed herein. ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS. a. Exhibits. A-1 Restated Articles of Incorporation of Ameren Corporation (incorporated by reference to Annex F to Ameren's Registration Statement on Form S-4 in File No. 33-64165) A-2 Certificate of Amendment to the Restated Articles of Incorporation of Ameren Corporation, as filed with the Secretary of State of the State of Missouri on December 14, 1998 (incorporated by reference to Exhibit 3(i) to Ameren's Annual Report on Form 10-K for the year ended December 31, 1998 in File No. 1-14756) A-3 Amended and Restated Articles of Incorporation of Illinois Power Company, dated September 7, 1994 (incorporated by reference to Exhibit 3(a) to Illinois Power's Current Report on Form 8-K dated September 7, 1994 (File No. 1-3004)) A-4 Amendment to the Articles of Incorporation of Illinois Power Company (incorporated by reference to Exhibit 4.1(ii) to Illinois Power's Registration Statement on Form S-3/A, dated April 12, 2002, in File No. 333-84808) A-5 Bylaws of Illinois Power Company (incorporated by reference to Exhibit 3(b)(1) to the Illinois Power's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-3004)) B-1 Stock Purchase Agreement, dated as of February 2, 2004, among Ameren Corporation, Illinova Corporation, Illinova Generating Company, and Dynegy Inc. (certain Exhibits and Schedules filed confidentially pursuant to Rule 104) (previously filed) 45 B-1(a) Amendment No. 1 to Stock Purchase Agreement, dated as of March 23, 2004, by and among Ameren Corporation, Illinova Corporation, Illinova Generating Company, and Dynegy Inc. (previously filed) B-1(b) Amendment No. 2 to Stock Purchase Agreement, dated as of April 30, 2004, by and among Ameren Corporation, Illinova Corporation, Illinova Generating Company, and Dynegy Inc. (previously filed) B-1(c) Amendment No. 3 to Stock Purchase Agreement, dated as of May 31, 2004, by and among Ameren Corporation, Illinova Corporation, Illinova Generating Company, and Dynegy Inc. (previously filed) B-1(d) Amendment No. 4 to Stock Purchase Agreement, dated as of September 24, 2004, by and among Ameren Corporation, Illinova Corporation, Illinova Generating Company, and Dynegy Inc. (filed herewith) B-2 Ameren System Utility Money Pool Agreement (incorporated by reference to Exhibit B to Form U-1 Application/Declaration, dated November 25, 1998, in File No. 70-9423) B-3 Form of Fuel and Natural Gas Services Agreement between Ameren Fuels and Illinois Power (previously filed) C Registration Statement on Form S-3 ("shelf" registration) (incorporated by reference to File Nos. 333-114274, 333-114274-01, and 333-114274-02) D-1 Application to the Illinois Commerce Commission for Approval of Transaction (previously filed) 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) D-4 Order of the Federal Energy Regulatory Commission (filed herewith) D-5 Application to the Federal Communications Commission (Form SE - Continuing Hardship Exemption) (previously filed) D-6 Public Notice of Action by the Federal Communications Commission Approving Assignment of Communications Licenses (available on FCC online Universal Licensing System, Report dated April 21, 2004 (http://wireless/fcc.gov/uls)) 46 E-1 Map of Electric Service Areas of Ameren and Illinois Power (Form SE - Required paper format filing) (previously filed) E-2 Map of Gas Service Areas of Ameren and Illinois Power (Form SE - Required paper format filing) (previously filed) F-1 Opinion of counsel to Ameren Corporation (filed herewith) F-2 Opinion of Wachtell, Lipton, Rosen & Katz, special New York counsel to Ameren Corporation (filed herewith) F-3 Opinion of Jones Day, special Illinois counsel to Ameren Corporation (filed herewith) F-4 Opinion of counsel to Illinois Power Company (filed herewith) F-5 Opinion of O'Melveny & Myers LLP, special New York counsel to Illinois Power Company (filed herewith) G Proposed form of Federal Register notice (previously filed) H Analysis of the Economic Impact of a Divestiture of the Gas Operations of AmerenUE, AmerenCIPS, AmerenCILCO and Illinois Power (filed herewith) I List and description of outstanding long-term debt securities and preferred stock of Illinois Power Company as of December 31, 2003 (previously filed) J Fairness Opinion of Goldman Sachs (previously filed) K List and description of existing electrical interconnection points between Illinois Power and Ameren system companies (previously filed) b. Financial Statements. FS-1 Consolidated Balance Sheet and Statement of Income of Ameren Corporation as of and for the year ended December 31, 2003 (incorporated by reference to the Annual Report on Form 10-K of Ameren Corporation for the year ended December 31, 2003, in File No. 1-14756) 47 FS-2 Consolidated Balance Sheet and Statement of Income of Illinois Power Company as of and for the year ended December 31, 2003 (incorporated by reference to the Annual Report on Form 10-K of Illinois Power Company for the year ended December 31, 2003, in File No. 1-3004) FS-3 Unaudited Pro Forma Combined Condensed Financial Statements of Ameren Corporation (filed herewith) FS-4 Consolidated Balance Sheet and Statement of Income of Ameren Corporation as of and for the six months ended June 30, 2004 (incorporated by reference to the Quarterly Report on Form 10-Q of Ameren Corporation for the period ended June 30, 2004, in File No. 1-14756) FS-5 Consolidated Balance Sheet and Statement of Income of Illinois Power Company as of and for the six months ended June 30, 2004 (incorporated by reference to the Quarterly Report on Form 10-Q of Illinois Power Company for the period ended June 30, 2004, in File No. 1-3004) FS-6 Unaudited Pro Forma Condensed Financial Statements of Illinois Power (filed herewith confidentially pursuant to Rule 104) 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. 48 SIGNATURES Pursuant to the requirements of the Public Utility Holding Company Act of 1935, as amended, the undersigned companies have duly caused this amended and restated 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: Senior Vice President Governmental/Regulatory Policy, General Counsel and Secretary ILLINOIS POWER COMPANY By: /s/ Alisa B. Johnson --------------------- Name: Alisa B. Johnson Title: Senior Vice President Date: September 27, 2004 49 EX-99 2 dc176875_exhb1d.txt EX B-1D AMEND NO. 4 TO STKPURAGMT EXHIBIT B-1(d) AMENDMENT NO. 4 TO STOCK PURCHASE AGREEMENT THIS AMENDMENT NO. 4, dated as of September 24, 2004, to the STOCK PURCHASE AGREEMENT, dated as of February 2, 2004, is entered into by and among Ameren Corporation, a Missouri corporation ("Purchaser"), Illinova Corporation, an Illinois corporation ("Seller"), Illinova Generating Company, an Illinois corporation ("IGC"), and Dynegy Inc., an Illinois corporation ("Dynegy"). Dynegy, IGC and Seller are referred to herein as the "Dynegy Parties". W I T N E S S E T H: WHEREAS, Purchaser and the Dynegy Parties entered into a Stock Purchase Agreement, dated February 2, 2004, as amended by Amendment No. 1 dated as of March 23, 2004, Amendment No. 2 dated as of April 30, 2004 and Amendment No. 3 dated as of May 31, 2004 (the "Amended Agreement"), providing for the sale to Purchaser of all of the capital stock of Illinois Power Company, an Illinois corporation, held by Seller, and IGC's 20% share of Electric Energy, Inc., an Illinois corporation; and WHEREAS, Purchaser and the Dynegy Parties wish to amend the Amended Agreement as set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual terms, conditions and agreements set forth herein, the parties hereto hereby agree as follows: Section 1 Defined Terms. All capitalized terms used and not defined herein have the meanings set forth in the Amended Agreement. Section 2 Amendment to Section 5.3(d). Section 5.3(d) of the Amended Agreement is amended by relabeling it as Section 5.3(d)(i) and adding the following paragraph as Section 5.3(d)(ii): "Purchaser acknowledges that IPC filed, on or about August 2, 2004, in Docket No. ER04-1091-000, an application with FERC for the recovery of the MISO exit fee and Alliance development costs previously incurred by IPC (in each case with interest) (such amounts, collectively, the "MISO Amounts"), and that FERC on September 20, 2004 issued an order granting IPC's request for a return of all such MISO Amounts. From and after the Closing, at Dynegy's direction and expense, Purchaser shall cause IPC diligently to pursue the maximum recovery of the MISO Amounts from MISO for the benefit of Dynegy. Purchaser further acknowledges that IPC may at any time direct MISO to pay after the Closing any such MISO Amounts directly to Dynegy, rather than to IPC. In the event that (i) any MISO Amounts are recovered and received by IPC after the Closing, Purchaser will pay, or will cause IPC to pay, all such amounts to Dynegy, by wire transfer to Bank One Chicago, ABA Number 071000013, Account Name: Dynegy Inc. New, Account Number 654204452, no later than the third business day after any such receipt by IPC, and (ii) any MISO Amounts are set-off or reduced by MISO (x) to the extent applicable to the business conducted by or the operations of IPC or its Subsidiaries after the Closing, including, without limitation, the participation of IPC or its Subsidiaries in MISO (such as credits or prepaid amounts applicable to periods after the Closing), or (y) to the extent applicable to the business conducted by or the operations of Purchaser or its Subsidiaries (other than IPC), whether before or after the Closing, Purchaser will pay, or will cause IPC to pay, to Dynegy, by wire transfer to Bank One Chicago, ABA Number 071000013, Account Name: Dynegy Inc. New, Account Number 654204452, the amount of such set-off or reduction no later than the third business day after MISO advises IPC or Purchaser of such set-off or reduction." Section 3 Amendments to Exhibit A. (a) Exhibit A to the Amended Agreement is amended by adding new items 12 and 13 to Section A thereof, immediately following item 11 of such Section A, to read in their entirety as follows: "12. MISO Exit Fee and Alliance Development Costs: In the event that any MISO Amounts have not been repaid, returned or reimbursed to IPC prior to the Closing, such unpaid, unreturned and unreimbursed MISO Amounts will not be included in the calculation of Proposed Final Adjusted Working Capital or Final Adjusted Working Capital as an increase to current assets. For the avoidance of doubt, neither the Adjusted Working Capital nor the Target Adjusted Working Capital shall be increased or decreased by any such MISO Amounts. 13. Effect of Asbestos Trust. The establishment and funding of the trust referred to in Section 5.21(i) shall have no effect on the calculation of Adjusted Working Capital." (b) The second paragraph of Section C of Exhibit A to the Amended Agreement is hereby amended by deleting the reference to "$25,000,000" and replacing it with "$26,000,000." Section 4 Amendment to Section 5.21. Section 5.21 of the Amended Agreement is amended by adding thereto the following as a new Section 5.21(i): "(i) At the Closing, each of Purchaser and Dynegy will contribute $10 million in cash to the trust to be established by Purchaser as contemplated on page 1 of Exhibit B to the Final Order of the ICC in ICC Docket No. 04-0294." Section 5 No Other Amendments. Except as set forth herein, the Amended Agreement remains in full force and effect. Section 6 Counterparts. This Agreement may be executed in one or more counterparts, and by the parties in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. -2- IN WITNESS WHEREOF, Seller, IGC, Dynegy and Purchaser have caused this Amendment No. 4 to the Original Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. ILLINOVA CORPORATION By /s/ R. Blake Young ------------------------------------ Name: R. Blake Young Title: Executive Vice President- Administration and Technology ILLINOVA GENERATING COMPANY By /s/ R. Blake Young ------------------------------------ Name: R. Blake Young Title: Executive Vice President- Administration and and Technology DYNEGY INC. By /s/ R. Blake Young ------------------------------------ Name: R. Blake Young Title: Executive Vice President- Administration and Technology AMEREN CORPORATION By /s/ Steven R. Sullivan ------------------------------------ Name: Steven R. Sullivan Title: Senior Vice President Governmental/Regulatory Policy, General Counsel and Secretary EX-99 3 dc176691_exhd-2.txt EX D-2 - ORDER OF ILLINOIS COMMERCE COMMISSION EXHIBIT D-2 STATE OF ILLINOIS ILLINOIS COMMERCE COMMISSION ILLINOIS POWER COMPANY AND AMEREN : CORPORATION : : APPLICATION FOR AUTHORITY TO ENGAGE IN A : REORGANIZATION, AND TO ENTER INTO VARIOUS : 04-0294 AGREEMENTS IN CONNECTION THEREWITH, : 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: September 22, 2004 04-0294 TABLE OF CONTENTS ----------------- I. Introduction and Procedural History.......................................1 II. Relief Requested..........................................................3 III. Description of the Reorganization.........................................4 A. Identification of Companies Involved and Affiliates....................4 B. Mechanics of the Reorganization........................................6 C. Post-Closing Operations................................................7 D. Asserted Benefits of the Reorganization................................7 1. Recapitalization of IP and Restoration of Investment Grade Status...8 2. Rates...............................................................8 3. Service Area, Community, and Labor Commitments......................8 4. Power Supply........................................................9 IV. Discussion of Requested Approvals........................................10 A. Section 7-204: Reorganization Approval................................10 1. Finding 1: "the proposed reorganization will not diminish the utility's ability to provide adequate, reliable, efficient, safe and least-cost public utility service."..................................................10 2. Finding 2: "the proposed reorganization will not result in the unjustified subsidization of non-utility activities by the utility or its customers.".......................11 3. Finding 3: "costs 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."..................12 4. Finding 4: "the proposed reorganization will not significantly impair the utility's ability to raise necessary capital on reasonable terms or to maintain a reasonable capital structure."...................................12 i 04-0294 5. Finding 5: "the utility will remain subject to all applicable laws, regulations, rules, decisions and policies governing the regulation of Illinois public utilities."........................................................13 6. Finding 6: "the proposed reorganization is not likely to have a significant adverse effect on competition in those markets over which the Commission has jurisdiction.".....................................................14 7. Finding 7: "the proposed reorganization is not likely to result in any adverse rate impacts on retail customers."........19 B. Treatment of Costs and Savings........................................25 C. Approval of Affiliated Interest Agreements............................28 1. General Services Agreement.........................................28 2. Fuel and Natural Gas Services Agreement............................28 3. Tax Allocation Agreement...........................................28 4. Money Pool Agreement...............................................29 5. Unilateral Borrowing Agreement.....................................29 D. Books and Records.....................................................30 E. Section 7-102.........................................................31 F. Section 6-103.........................................................31 G. Other Findings........................................................32 1. Approval of Accounting Entries.....................................32 2. Prudence and Reasonableness of Share Acquisition...................34 3. Termination of Dividend Restriction................................35 4. Asbestos Rider.....................................................38 5. Elimination of Intercompany Note...................................50 6. Cancellation of Existing Affiliate Agreements......................51 V. Findings and Ordering Paragraphs.........................................52 ii STATE OF ILLINOIS ILLINOIS COMMERCE COMMISSION ILLINOIS POWER COMPANY AND AMEREN : CORPORATION : : APPLICATION FOR AUTHORITY TO ENGAGE IN A : REORGANIZATION, AND TO ENTER INTO VARIOUS : 04-0294 AGREEMENTS IN CONNECTION THEREWITH, : 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. INTRODUCTION AND PROCEDURAL HISTORY On March 24, 2004, Illinois Power Company ("IP") and Ameren Corporation ("Ameren") (jointly, "Applicants") filed an Application requesting the Illinois Commerce Commission's ("Commission") approval of a reorganization ("Reorganization") pursuant to which Ameren would acquire under a Stock Purchase Agreement, (as amended by Amendment No. 1, the "Stock Purchase Agreement" or "SPA") all of the outstanding common stock and all of the outstanding preferred stock of IP held by Illinova Corporation. IP is a subsidiary of Illinova Corporation ("Illinova"), which in turn is a subsidiary of Dynegy Inc. ("Dynegy"). Ameren is the parent of three Illinois public utilities: Central Illinois Public Service Company, d/b/a AmerenCIPS ("AmerenCIPS"); Central Illinois Light Company, d/b/a AmerenCILCO ("AmerenCILCO"); and Union Electric Company, d/b/a AmerenUE ("AmerenUE") (collectively, the "Ameren Utilities"). Subsequent to the Reorganization, IP would operate as a wholly-owned subsidiary of Ameren, and would be known as "AmerenIP." AmerenIP would be a separate entity from the other Ameren Utilities, and would continue to operate as a public utility within the meaning of Section 3-105 of the Public Utilities Act ("PUA"). As a result of the Reorganization, Dynegy and Illinova would cease to be affiliated with any public utility in Illinois. Petitions to Intervene were filed by: the Citizens Utility Board ("CUB"); the People of the State of Illinois by the Office of the Attorney General ("AG"); Constellation NewEnergy, Inc., Direct Energy Marketing Inc., MidAmerican Energy Company, and Peoples Energy Services Corporation (collectively referred to in this Order as the "Coalition of Retail Energy Suppliers"); Exelon Corporation, Exelon Energy Company, Exelon Generation LLC, AmerGen Energy LLC, and Commonwealth Edison Company (collectively, the "Exelon Companies"); Soyland Electric Power Cooperative; Wabash Valley Electric Power Cooperative; Illinois Electric Transmission Company ("IETC"); Locals 51, 309, 702 and 1306 of the 04-0294 International Brotherhood of Electrical Workers, AFL-CIO ("IBEW"); Air Products & Chemicals Company, U.S. Steel Company, International Steel Group, Marathon Ashland Petroleum LLC, A.E. Staley Manufacturing Corporation, Archer-Daniels Midland Company, Caterpillar Inc., Precoat Metals Company, Cargill, Inc., Olin Corporation, Conoco-Phillips Company, Illinois Cement Company, ASF-Keystone and the University of Illinois (collectively, "IIEC"); and Aquila Merchant Services Company ("Aquila"). All of the petitions to intervene were granted. In addition, appearances were filed by the following municipalities: the City of Springfield ("Springfield"), the City of Champaign and the City of Urbana (collectively, "Champaign-Urbana"). Subsequently, the following parties filed notices of withdrawal: IETC, Springfield, Champaign-Urbana, Peoples Energy Service Corporation, Wabash Valley Power Association, and the Coalition of Retail Energy Suppliers. Pursuant to due notice as required by law and by the rules and regulations of the Commission, prehearing conferences were held in this matter before a duly authorized Administrative Law Judge ("ALJ") of the Commission at its offices in Springfield on April 13, May 26, June 4, June 21, July 13, August 10 and September 14, 2004. Evidentiary hearings were held on August 25, 26, 30 and 31, 2004. At the hearings, the following witnesses presented testimony on behalf of Applicants: Gary L. Rainwater, Warner L. Baxter, Jerre Birdsong, Craig Nelson, Martin Lyons, David Whiteley, Jim Warren, Rodney Frame, Robert J. Mill, David J. Schepers, Jimmy L. Davis, Jon R. Carls, Keith P. Hock, Edward C. Pfeiffer, Steven R. Sullivan, Richard E. Goldberg, Scott A. Glaeser, Timothy Kingston, Peggy E. Carter, Barry N.P. Huddleston, Frank A Starbody, Layne J. Albert, and Patricia K. Spinner; on behalf of the Staff of the Commission: Dr. Howard J. Haas, Ms. Dianna Hathhorn, Ms. Sheena Kight, Mr. Ronald Linkenback, Mr. Eric Lounsberry, Mr. Mike Luth, Mr. Michael McNally, Ms. Bonita A. Pearce, Dr. David Rearden, Mr. Greg Rockrohr, Dr. Eric P. Schlaf, Mr. James D. Spencer, and Mr. Rex Evans; on behalf of the AG: David Effron, a regulatory accountant, and Kathryn Tholin, General Manager of the Community Energy Cooperative, who runs a real time pricing program in the Commonwealth Edison Company ("ComEd") service territory; on behalf of CUB, Brian Ross, a principal with CR Planning of Minneapolis, Minnesota; and on behalf of the AG and CUB, James Rothschild, President of Rothschild Financial Consulting. IP published notice of Applicants' proposal to place into effect, commencing January 1, 2007, an automatic adjustment clause rider for recovery of asbestos-related costs (as discussed in greater detail later in this Order) in newspapers of general circulation throughout IP's electric service area, in compliance with Section 9-201 of the PUA and Part 255 of the Commission's Rules. On September 16, 2004, the ALJ marked the record "Heard and Taken." Comments in support of the Reorganization were filed by the IBEW, Aquila, and the Coalition of Retail Energy Suppliers. In addition, the IIEC filed comments indicating that those companies did not oppose the Reorganization. A draft order agreed to by Applicants and certain active parties in the proceeding was filed with the Commission. A Proposed Order was served on all of the parties on the service list. 2 04-0294 II. RELIEF REQUESTED In the Application, Ameren and IP requested (Application, pp. 4-7): (i) the Commission's approval, under Section 7-204 and, to the extent necessary, 7-102 of the PUA, for IP to engage in the Reorganization, pursuant to which Ameren will acquire all of the outstanding common stock of IP and all of the preferred stock of IP held by Illinova; (ii) the Commission's approval of the capitalization of IP resulting from the Reorganization, including the steps set forth in Schedule 5.3(b) to the SPA and the elimination of all payables and receivables associated with the unsecured intercompany note ("Intercompany Note") between IP and Illinova, pursuant to Section 6-103 of the PUA; (iii) authorization, pursuant to Sections 7-101 and 7-204A(b) of the PUA, for the entry by IP into four affiliated interest agreements: a General Services Agreement, a Fuel and Natural Gas Services Agreement, a Tax Allocation Agreement, and the Ameren Money Pool Agreement; (iv) the Commission's approval, pursuant to Section 5-106 of the PUA, for IP to maintain certain books and records out of state subsequent to the Reorganization; (v) a finding by the Commission that Ameren's acquisition under the SPA of the common stock and the preferred stock of IP is prudent and reasonable, and that the public will benefit thereby, taking into consideration the effect of the purchase on IP's deferred tax balances and base rate valuation; and approval of IP's proposed accounting entries associated with the acquisition, including the entries associated with the changes in the deferred tax balances and the application of purchase accounting and the "push down" of associated accounting entries to the financial statement of IP (but not for rate making purposes other than with respect to costs described in (vi) below for which recovery is approved by the Commission); (vi) a finding by the Commission, pursuant to Section 7-204(c) of the PUA, that IP will be allowed to amortize ratably over a period beginning in 2007 and ending in 2010, no more than $67 million of costs incurred in accomplishing the Reorganization, and to recover the unamortized portion in rates, beginning in 2007, over this amortization period; (vii) termination of the Commission's restriction, imposed in Docket No. 02-0561, on IP's ability to declare and pay dividends on its common stock, and a finding that IP can declare and pay dividends on its common stock when IP's first mortgage bonds are rated either: (1) at least BBB- by Standard & Poor's ("S&P") or (2) at least Baa3 by Moody's Investor Services ("Moody's"); 3 04-0294 (viii) the Commission's approval, pursuant to Section 9-201 of the PUA, of an electric automatic adjustment clause tariff rider ("HMAC Rider"), applicable to both bundled electric service and electric delivery service, to become effective on January 2, 2007, under which IP may recover the prudent costs, net of insurance recoveries and other contributions, associated with certain claims or damages related to asbestos exposure; (ix) approval by the Commission pursuant to Section 7-101 of the PUA of the elimination of the $2.3 billion Intercompany Note between IP and Illinova; (x) approval, pursuant to Section 7-101 of the PUA, of the termination at the closing of (a) the Services and Facilities Agreement among IP, Dynegy and other affiliates of Dynegy, and (b) the Netting Agreement among IP, Dynegy and certain other affiliates of Dynegy; (xi) approval, pursuant to Sections 7-101 and 6-102 of the PUA, of an arrangement pursuant to which IP can borrow funds directly from Ameren, if necessary, at interest rates determined pursuant to the same methodology as reflected in the Ameren Money Pool Agreement; and (xii) authorization to take certain and such other measures as are explained in the Application in connection with the Reorganization or as are or may be reasonably necessary to effectuate the Reorganization. III. DESCRIPTION OF THE REORGANIZATION A. IDENTIFICATION OF COMPANIES INVOLVED AND AFFILIATES ILLINOIS POWER. IP is an Illinois corporation that provides electric service to approximately 600,000 customers and gas service to approximately 415,000 customers in a 15,000 square mile territory across Illinois. IP operates as an integrated distribution company ("IDC"). IP has no retail marketing function, and no IP employees negotiate competitive electric power supply arrangements with any retail customers, on any system. IP owns virtually no generation, and presently receives its electric power supply under contracts with Dynegy Midwest Generation, Inc. ("DMG") (currently an affiliate), Electric Energy, Inc. ("EEInc.") (also currently a 20% affiliate), and AmerGen Energy Company, L.L.C. ("AmerGen"). The AmerGen contract expires at the end of 2004. The DMG contract expires at the end of 2004. The EEInc. contract terminates at the end of 2005. Application, p. 11. ILLINOVA. Illinova is an Illinois corporation that owns all of the outstanding common stock and approximately 73% of the issued and outstanding preferred stock of IP. Illinova is also the obligor on the Intercompany Note. Id. DYNEGY. Dynegy is an Illinois corporation, with its headquarters in Houston, Texas. Dynegy owns all of the outstanding common stock of Illinova. Dynegy acquired Illinova in 2000. Dynegy owns and operates a diverse portfolio of energy assets, including power plants totaling 12,713 megawatts of net generating capacity and gas processing plants that process more than 2 billion 4 04-0294 cubic feet of natural gas per day. Application, pp. 11-12. DYNEGY POWER MARKETING. DYPM is a Texas corporation that markets electric power at wholesale. Application, p. 12. AMEREN. Ameren is a Missouri corporation with its headquarters in St. Louis, Missouri. Ameren is a registered holding company under the Public Utility Holding Company Act of 1935 ("PUHCA") and is the parent of three state-regulated utility subsidiaries, AmerenCIPS, AmerenCILCO and AmerenUE, all of which provide electric and gas service to the public and are public utilities under Section 3-105 of the PUA. Id. AMERENCIPS. 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. It has no retail marketing function, and no AmerenCIPS employees negotiate competitive electric power supply arrangements with any retail customers, on any system. Id. AMERENCILCO. AmerenCILCO is also an Illinois corporation whose principal business is the 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. AmerenCILCO owns no generation (except certain small units, including various power modules), and is served presently under an agreement with AmerenEnergy Resources Generating Company ("AERG"), an affiliate. AmerenCILCO furnishes electric service to over 200,000 retail customers in 136 Illinois communities and gas service to over 204,000 customers in 128 Illinois communities. Application, pp. 12-13. AMERENUE. 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 has no Illinois retail marketing function; no AmerenUE employees negotiate competitive power supply arrangements with retail load on any system in Illinois. AmerenUE intends to transfer its Illinois electric and gas assets, distribution assets, and businesses to AmerenCIPS. Regulatory proceedings relating to this transfer are pending before this Commission and the Missouri Public Service Commission. The Federal Energy Regulatory Commission ("FERC") approved this transfer in December of 2003. FERC Docket EC 04-21, Order issued December 16, 2003. Upon completion of this transaction, AmerenUE will cease to be a public utility in Illinois. OTHER AMEREN AFFILIATES. Ameren also has several other subsidiaries, including: Ameren Services Company ("Ameren Services"), which provides various corporate support, technical, and administrative services to Ameren and its affiliates; Ameren Energy Generating Company ("AEG"), which owns and operates 5 04-0294 over 4,330 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 Company ("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. Id. B. MECHANICS OF THE REORGANIZATION Under the SPA, Ameren will acquire all of the outstanding common stock of IP and all of the preferred stock of IP held by Illinova (approximately 73%). In addition, under the SPA, Ameren will acquire from Illinova Generating Company its 20% ownership interest in EEInc., an exempt wholesale generator that owns a 1,014 MW generating station in Joppa, Illinois ("Joppa Plant"). Application, p. 14. In exchange for the common and preferred shares of IP and the 20% share in EEInc., Ameren will pay $2.3 billion, consisting of the assumption of debt and of certain obligations with respect to the portion of IP's preferred stock not held by Illinova (together totaling approximately $1.8 billion as of September 30, 2003) and cash for the balance (subject to certain adjustments), of which $100,000,000 will be deposited in escrow, to secure certain indemnities from Dynegy relating to potential liabilities that IP faces, principally due to its former ownership of generating facilities now owned by DMG. Id. Shortly prior to closing, the Intercompany Note will be eliminated. The current principal balance of the Intercompany Note is approximately $2.27 billion. The Intercompany Note matures in 2009. Presently, the Intercompany Note is the largest single asset on IP's books, and contributes to a severe imbalance between the size of IP's rate base and the size of its capital structure. IP has combined electric and gas property, plant and equipment less accumulated depreciation of approximately $1.95 billion, with a capitalization of approximately $3.31 billion. Applicants stated that elimination of the Intercompany Note will result in a reduction in total capitalization at IP, thus more closely aligning its total capitalization with its rate base. Application, pp. 14-15. After the closing, Ameren will complete the Reorganization by recapitalizing IP. Ameren will do so by infusing substantial equity into IP and using that new equity to repurchase or retire $750 million of IP's outstanding debt by December 31, 2006. Applicants stated that the issuance of new common equity to fund the debt repurchases and retirement, and the early redemption, of a substantial portion of IP's debt, carry with them significant costs. Application, p. 15. Applicants stated that the result of Ameren's efforts and expenditures will be a capital structure at IP that consists of 50%-60% common equity by December 31, 2006, the end of the "mandatory transition period" under the PUA. Ameren expects that the recapitalized IP will receive an investment grade rating for its long-term debt from at least one of the principal rating agencies at or shortly after the closing date of the Reorganization and from additional rating agencies on or before December 31, 2006. 6 04-0294 C. POST-CLOSING OPERATIONS According to Applicants, subsequent to the closing, IP will continue to operate as a separate company, and will not be merged into any of the three existing Ameren utilities. Further, unless and until otherwise authorized by this Commission, IP will maintain its own rate schedules. Applicants explained, however, that while IP will maintain its separate corporate existence, IP will be integrated fully into the Ameren system through the receipt of corporate support and other services from Ameren affiliates. Application, p. 15. Applicants stated that after the closing, Ameren plans to begin introducing new systems, work processes, and initiatives that will move IP toward performance leadership in Illinois and the nation in terms of reliability, customer satisfaction, and service response. After the closing, IP will continue to operate as its own control area, within the Midwest Independent Transmission System Operator ("MISO"). In this regard, IP has submitted an application to the FERC to join the MISO, with the transfer of functional control over IP's transmission system to occur prior to the closing of the Reorganization. Application, p. 15. Accordingly, Applicants stated, the Reorganization will not delay the integration of IP's transmission system into a regional transmission organization ("RTO"). After the closing, IP will continue to own virtually no generation, and will continue to operate as an IDC. It will have no active marketing function. Applicants stated that in 2005 and 2006, part of IP's electric requirements will be met by an electric power purchase agreement ("PPA") with DYPM, and one or more other agreements with suppliers reached through a competitive bidding process. At closing, IP will have no binding power purchase obligations beyond 2006, and will be free to participate fully in the competitive power markets when the mandatory transition period ends. Applicants' Ex. 3.0, p. 4-7. D. ASSERTED BENEFITS OF THE REORGANIZATION According to Applicants, the Reorganization will benefit IP's customers and the competitive retail electric marketplace in Illinois. The Application states that presently, IP suffers from poor credit ratings, which have prevented IP from accessing lower cost sources of capital. The Reorganization will include a recapitalization of IP that will restore IP's capital structure to an appropriate debt-equity ratio and to consistency with IP's net utility assets, which Ameren believes will lead to restoration of an investment grade credit rating and lower capital costs for the long term. Application, p. 17. Applicants also stated that the integration of IP's administrative, overhead, and managerial functions into the Ameren system will allow IP, and therefore its customers, to benefit from economies of scale associated with a larger energy procurement function and delivery system. Id. In addition, Ameren has committed to enhancing IP's quality of service through additional infrastructure investments. Specifically, Ameren committed that IP will make at least $275 million to $325 million of capital expenditures in the first two years after the transaction closes. Applicants' Ex. 1.0, p. 7. 7 04-0294 1. RECAPITALIZATION OF IP AND RESTORATION OF INVESTMENT GRADE STATUS The Application points out that IP, as well as its immediate parent company, Illinova, and its ultimate parent company, Dynegy, presently have below-investment grade credit ratings. Further, the Intercompany Note, which has a principal balance of $2.27 billion, represents a large percentage of IP's assets and is an unsecured obligation from an obligor with below investment grade credit ratings, and therefore places significant downward pressure on IP's credit ratings. Application, pp. 17-18. The Application also notes that, correspondingly, there is a large difference between the size of IP's capital structure and its rate base (i.e., its net property, plant and equipment). As noted above, while IP has net electric and gas utility property plant and equipment of approximately $1.95 billion at December 31, 2003, it had debt and preferred stock totaling about $1.91 billion. Application, p. 18. Applicants also noted that IP does not currently have a facility in place to access working capital through short-term borrowings, and a limited amount of additional long-term debt is available to it at relatively high interest rates with restrictive covenants. Applicants stated that Ameren has committed to implement measures to restore IP to financial health, balance its capital structure, and enable it to access the capital markets more easily and at a more competitive cost, on a specific timetable. Application, pp. 18-19. 2. RATES The Application states that Ameren does not seek to effectuate any immediate change in IP's bundled electric rates. Application, p. 19. Ameren also committed that AmerenIP will not seek any increases in its electric delivery services rates to be effective before 2007. Ameren may seek to conform AmerenIP's electric delivery service tariffs to those of the Ameren Utilities before 2007; however, these changes would not affect the level of AmerenIP's charges or fees for delivery services. Ameren does seek approval now for one change in electric rate design to be effective January 2, 2007. As noted above, Ameren seeks to implement a rider for AmerenIP to address asbestos costs, to be approved in this proceeding and to become effective when the mandatory transition period ends. The HMAC Rider is discussed in Section IV.G.4, infra. IP, which has not had a gas rate case since 1994, filed for a proposed increase in its base gas rates on June 25, 2004. Applicants stated that after the order is issued in that case (expected in the normal course of such cases to be in May, 2005), IP will not seek another increase in gas base rates to be effective until after December 31, 2006. Application, p. 20. 3. SERVICE AREA, COMMUNITY, AND LABOR COMMITMENTS Applicants stated that Ameren has committed to maintaining a presence and enhancing the service and support in IP's service territory and the communities that IP serves. Specifically, Ameren committed that: 8 04-0294 o Ameren has contributed a total of $300,000 to the Decatur and other IP service area United Way organizations. After closing, Ameren would thereafter increase its total contribution to United Way, civic, charitable, and social service organizations in IP's service territory to at least $1.5 million annually. (In contrast, IP's contributions to such organizations totaled about half that amount in 2003.); o As noted above, Ameren will cause IP to make between $275 million and $325 million of capital expenditures during Ameren's first two years of ownership of IP; o Ameren will commit additional resources to support and enhance economic development aimed at attracting new jobs in the IP service territory; o Ameren will maintain IP's headquarters in Decatur, Illinois for not less than five years following closing; o IP workforce reductions resulting from the acquisition will not exceed 25 employees for a period of four years following the closing, except to the extent additional reductions occur through attrition or voluntary separation programs; o IP will honor all existing labor agreements; and o IP employees, retirees and retirees' surviving dependents will remain in their current IP benefit plans or be moved into appropriate Ameren plans. Applicants' Exhibit 1.0, p. 7. Applicants stated that these commitments will ensure a continued and vital presence in the IP service territory, and safe, reliable utility service, for years to come. Application, pp. 20-21. 4. POWER SUPPLY IP presently receives its power supply under separate contracts with DMG, an affiliate, EEInc., also an affiliate, and AmerGen, which owns and operates the Clinton nuclear unit. The AmerGen contract expires at the end of 2004. The DMG contract also expires at the end of 2004. The EEInc. contract expires at the end of 2005. In connection with the transactions contemplated by the SPA, IP, and another Dynegy affiliate, DYPM, will enter into a new PPA pursuant to which DYPM will supply IP with up to 2,800 MW of capacity and energy for a period of two years, 2005-2006. Ameren, acting on behalf of IP as its future owner, and DYPM negotiated this PPA at arms-length for over two months. Applicants stated that the PPA reflects market-based terms and conditions for the amounts of capacity, energy, and ancillary services that will be provided by DYPM to allow IP to reliably serve its retail load. Application, pp. 21-22. The remainder of IP's requirements, approximately 700 MW for 2005 and 900 MW for 2006, will be offered for bid in the market place, pursuant to an independently-administered 9 04-0294 competitive bidding process. Applicants explained that these arrangements will assure IP a reliable supply of power and energy to meet its retail load requirements as an IDC, at reasonable cost, through the end of the mandatory transition period. Application, p. 22. IV. DISCUSSION OF REQUESTED APPROVALS A. SECTION 7-204: REORGANIZATION APPROVAL The Application requests approval of a "reorganization" within the meaning of Section 7-204 of the PUA. That Section states, in part, that For purposes of this Section, "reorganization" means 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...." 220 ILCS 5/7-204. Section 7-204 requires that the Commission make a series of findings, each of which is addressed below. 1. FINDING 1: "THE PROPOSED REORGANIZATION WILL NOT DIMINISH THE UTILITY'S ABILITY TO PROVIDE ADEQUATE, RELIABLE, EFFICIENT, SAFE AND LEAST-COST PUBLIC UTILITY SERVICE." APPLICANTS' POSITION: Ameren brings a strong record of customer service to this transaction. Ameren has a proven track record of high quality service that is second to none in communities much like those that IP serves. Thus, Ameren is fully qualified to oversee IP's provision of service to its diverse service territory, and is committed to maintaining and improving IP's service quality. Mr. David Whiteley, Ameren's Senior Vice President-Energy Delivery and Mr. Jimmy L. Davis, Ameren's Vice President-Energy Delivery, testified that Ameren provides high quality and highly reliable utility service, and is highly rated in terms of customer service. In the IP area, Ameren will make and follow through on the same commitment to improve customer service that it has made in its other service areas. In no regard will the quality of IP service diminish. Applicants' Exs. 7.0 and 9.0. Mr. Gary Rainwater, Ameren's Chairman, Chief Executive Officer and President, testified that Ameren has committed to invest at least $275-$325 million on capital projects during Ameren's first two years of ownership of IP. Applicants' Ex. 1.0, p. 7. This will enable IP to continue to make necessary investments in its electric and gas systems throughout its service area. Moreover, the improvement in IP's credit ratings that Ameren anticipates and IP's affiliation with a parent with its own superior credit ratings will ensure that IP will have ready and continued access, on reasonable terms, to the capital necessary to maintain and enhance its infrastructure. In addition, Ameren is making the service area, community, and labor commitments listed in 10 04-0294 Section III.D.3 of this Order. STAFF'S POSITION: Staff witness Eric Lounsberry recommended that the Commission find that the Reorganization meets the requirements of Section 7-204(b)(1) and will not diminish IP's ability to provide adequate, reliable, efficient, safe, and least-cost public utility service for its natural gas customers. ICC Staff Ex. 4.0, p. 2. In addition, Staff witness Ronald Linkenback testified that there were no indications that the Reorganization would diminish IP's ability to provide adequate, reliable, efficient and safe public utility service for its electric customers. ICC Staff Ex. 5.0, p. 2. Staff witness Rex Evans testified that after the merger is complete, Ameren will effectively have a service territory that will allow qualified gas personnel to be placed in a manner that will provide a high level of quality response times for the new organization. ICC Staff Ex. 13.0, p. 4. COMMISSION ANALYSIS AND CONCLUSION: The Commission concludes that the Reorganization will not diminish IP's ability to provide adequate, reliable, efficient, safe and least-cost public utility service. No party has contended that the Reorganization does not satisfy the requirements of Section 7-204(b)(1). Accordingly, the Commission finds that the Reorganization will satisfy the criteria of Section 7-204(b)(1). 2. FINDING 2: "THE PROPOSED REORGANIZATION WILL NOT RESULT IN THE UNJUSTIFIED SUBSIDIZATION OF NON-UTILITY ACTIVITIES BY THE UTILITY OR ITS CUSTOMERS." APPLICANTS' POSITION: Ameren is a registered holding company under PUHCA and operates under clear and fair cost-allocation guidelines. Those guidelines are reflected in both the Ameren General Services Agreement ("Ameren GSA"), which the Commission originally approved in Docket No. 95-0551, and which was modified recently in Docket No. 03-0279 to include AmerenCILCO as a party and to address SEC regulations. Mr. Baxter testified that IP will be allocated and charged costs pursuant to: (i) the Ameren GSA, and (ii) the SEC's rules. (A copy of the amended Ameren GSA was provided as Applicants' Ex. 5.2.) The Ameren GSA and the SEC regulations will preclude any unjustified subsidization of non-utility activities. Moreover, assuming the Reorganization closes, IP 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 and that AmerenCILCO made in Docket No. 02-0428. Specifically, IP committed that it would accept Conditions U.1 and U.2 imposed in the Commission's Order in Docket 02-0428. Applicants' Ex. 11.0, lines 239-286. These conditions are Conditions 9 and 10 listed on Appendix A to this Order. STAFF'S POSITION: Staff witness Dianna Hathhorn recommended in her direct testimony that the Commission find that the Reorganization will not result in the unjustified subsidization of non-utility activities by IP or its customers as required by Section 7-204(b)(2). ICC Staff Ex. 8.0, p. 3. 11 04-0294 COMMISSION ANALYSIS AND CONCLUSION: The Commission concludes that the Reorganization will not result in the unjustified subsidization of non-utility activities by IP or its customers. No party is contending that the criteria of Section 7-204(b)(2) will not be met. Accordingly, the Commission finds that the Reorganization will satisfy the criteria of Section 7-204(b)(2). 3. FINDING 3: "COSTS 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." APPLICANTS' POSITION: Applicants' witness Mr. Lyons testified that Ameren will allocate and charge costs in accordance with the Ameren GSA, as approved by the Commission in Docket No. 03-0279, and in accordance with the SEC's regulations. Applicants' Ex. 5.0, p. 9. Moreover, as discussed above, IP has 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 and AmerenCILCO made in Docket No. 02-0428. STAFF'S POSITION: Staff witness Hathhorn testified that Applicants adequately addressed the issue of whether costs and facilities will be fairly and reasonably allocated. She recommended, therefore, that the Commission find that costs and facilities will be 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. ICC Staff Ex. 8.0, p. 5. COMMISSION ANALYSIS AND CONCLUSION: The Commission concludes that the Reorganization will result in costs and facilities being 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. Accordingly, the Commission finds that the Reorganization will satisfy the criteria of Section 7-204(b)(3) of the PUA. 4. FINDING 4: "THE 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' POSITION: Mr. Jerre Birdsong, Ameren's Treasurer, testified that the Reorganization will have a positive impact on IP's ability to raise necessary capital on reasonable terms and to maintain a reasonable capital structure, because Ameren will recapitalize IP, which will improve IP's financial condition through a strengthened balance sheet and which Ameren expects to result in investment grade credit ratings for IP. Moreover, IP will be a subsidiary of a parent company that has a credit rating higher than that of Illinova or Dynegy. Applicants' Ex. 4.0, p. 3-4. Mr. Birdsong also testified that these recapitalization efforts will result in a capital structure at IP that more closely matches its net utility assets and consists of 50-60% common equity by December 31, 2006. Applicants' Ex. 4.0, p.6. Mr. Baxter also explained 12 04-0294 that the Reorganization will produce a balanced capital structure more closely related to IP's utility assets. Applicants' Ex. 2.0, p. 3. STAFF'S POSITION: In her direct testimony, Staff witness Sheena Kight stated that the Reorganization will not significantly impair IP's ability to raise necessary capital on reasonable terms or maintain a reasonable capital structure. Ms. Kight testified that both S&P and Moody's view the transaction as a positive influence on IP's financial health. ICC Staff Ex. 10.0R, pp. 2, 7-8. COMMISSION ANALYSIS AND CONCLUSION: The record, including the commitments made by and the conditions agreed to by Applicants as set forth on Appendix A to this Order, establishes that the Reorganization will not significantly impair IP's ability to raise necessary capital on reasonable terms or to maintain a reasonable capital structure. In fact, the record shows that Ameren plans to redeem approximately $750 million of higher-cost debt currently outstanding at IP by December 31, 2006. The record also shows that Ameren anticipates that at least one of the major rating agencies will raise IP's bond rating to an investment grade level at or shortly after the closing of the Reorganization. No party is contending that the Reorganization will have an adverse impact on IP's ability to raise necessary capital on reasonable terms or to maintain a reasonable capital structure. Accordingly, the Commission finds that the Reorganization will satisfy the criteria of Section 7-204(b)(4) of the PUA. This Commission finding should not be construed as an endorsement of the Applicants' stated common equity target range for IP for the purpose of setting rates. 5. FINDING 5: "THE UTILITY WILL REMAIN SUBJECT TO ALL APPLICABLE LAWS, REGULATIONS, RULES, DECISIONS AND POLICIES GOVERNING THE REGULATION OF ILLINOIS PUBLIC UTILITIES." APPLICANTS' POSITION: AmerenIP will be an Illinois public utility, subject to all laws and rules applicable to Illinois public utilities. In Docket No. 95-0551 and Docket No. 02-0428, the Ameren Utilities made certain commitments intended to assure 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. As noted earlier in this Order, IP made the same commitments here assuming regulatory approval and closing of the Reorganization. Applicants' Ex. 11.0, p. 11-12. This commitment is embodied in Conditions 9 and 10 set forth on Appendix A to this Order. STAFF'S POSITION: Staff witness Bonita Pearce testified that nothing indicates that the Reorganization will change the applicability of laws, regulations, rules, decisions and policies governing the regulation of the Applicants. ICC Staff Ex. 9.0, p. 22. She recommended, therefore, that the Commission find that IP will remain subject to the laws, regulations, rules decisions, and policies governing the regulation of Illinois public utilities after closing of the Reorganization. Id. COMMISSION ANALYSIS AND CONCLUSION: The evidence of record, including the conditions agreed to by Applicants, establishes that the Reorganization will not affect IP's status as an Illinois utility and that it will remain subject to all 13 04-0294 applicable laws, regulations, rules, decisions, and policies governing the regulation of Illinois utilities. Accordingly, the Commission finds that the Reorganization will satisfy the criteria of Section 7-204(b)(5). 6. FINDING 6: "THE PROPOSED REORGANIZATION IS NOT LIKELY TO HAVE A SIGNIFICANT ADVERSE EFFECT ON COMPETITION IN THOSE MARKETS OVER WHICH THE COMMISSION HAS JURISDICTION." APPLICANTS' POSITION: Applicants stated that Ameren is acquiring only a very small amount of generation from Dynegy, consisting of Illinova Generating Company's 20% share of EEInc., which owns and operates the 1,014 MW Joppa Plant. Applicants also explained that Ameren's acquisition of Illinova Generating's interest in the Joppa Plant does not require this Commission's approval. Ameren and Dynegy required, and requested, the FERC's approval of that acquisition. On July 28, 2004, FERC approved that acquisition. FERC Docket EC 04-81-000, Order issued July 29, 2004. Mr. Rodney Frame, a principal with Analysis Group, assessed the competitive effects of Ameren's proposed acquisition of IP and Illinova Generating's 20% interest in EEInc. Mr. Frame explained that Ameren's acquisition of IP and Dynegy's 20% interest in EEInc. will result in virtually no change in market concentration. Applicants' Ex. 10.0, p. 10. To arrive at this conclusion, Mr. Frame performed a detailed competitive screen analysis under the FERC's merger guidelines. Applicants' Ex. 10.0, p. 4. Mr. Frame explained that, in addition, Ameren's acquisition of IP should have no materially adverse impact on the competitive retail electric or gas markets. Applicants' Ex. 10.0, p. 4-5. Ameren cannot exclude competitors from the IP electric and gas systems. Federal and state laws and regulations, as well as IP's tariffs filed pursuant to those laws and regulations, generally prohibit IP from discriminating against non-affiliates. Applicants' Ex. 10.0, p. 4. Further, IP has no separate retail marketing function. Two other Dynegy affiliates (Dynegy Energy Services ("DES") and Illinois Power Energy ("IPE")) provide competitive retail electric service in Illinois. Even if these other affiliates were to cease making retail electric sales in the state, for whatever reason, there would still be an ample number of competitors to assure robust competition for retail electric load. Applicants' Ex. 10.0, p. 4. Applicants' witness Barry Huddleston of Dynegy described options that these affiliates are pursuing to be able to maintain their certifications as alternative retail electric suppliers ("ARES") in Illinois. Applicants' Ex. 18.0, pp. 5-6. He also explained why there would not be a significant adverse impact on competition in retail electricity markets in Illinois even if these two entities were no longer certified as ARES. Applicants Ex. 18.0, pp. 6-10. Nonetheless, Ameren agreed to certain conditions in response to Staff's expressed concerns about the competitive effect of Ameren's acquisition of Dynegy's share of EEInc. Specifically, Ameren agreed as follows: 14 04-0294 As a condition of Ameren's proposed acquisition of IP, Ameren commits to increase, via transmission projects or upgrades, competitive access into the AmerenCIPS delivery market by 300 MW and into the AmerenIP delivery market by 200 MW. The transmission projects or upgrades proposed and completed will be specific to addressing this mitigation commitment and will be specifically designed to address the need to increase simultaneous import capability into AmerenCIPS and AmerenIP delivery markets by 300 MW and 200 MW, respectively. Until such time as transmission projects or upgrades, specific to this mitigation commitment, have increased competitive access into the AmerenCIPS delivery market by 300 MW, Ameren will continue its power sales offer to unaffiliated entities from the 125 MW share of Joppa that Ameren is acquiring from Dynegy. Ameren further commits that: (1) it will meet with the Staff no later than June 30, 2005, to discuss the transmission projects or upgrades that would satisfy these commitments to increase competitive access; (2) it will use best efforts to work with Staff to reach an agreement by December 16, 2005 on the projects which will best serve the interest of increasing competitive access, provided that if Ameren and Staff are unable to reach an agreement, the matter shall be brought to the Commission's attention via a Staff report; and (3) to the extent required by law, within 6 months of reaching an agreement with Staff, Ameren (through its public utility subsidiaries) will file petitions for certificates of convenience and necessity with the Commission seeking authority to engage in the projects. ICC Staff Ex. 15.0, Attachment 1. In addition, in response to Staff witness Dr. Eric Schlaf's recommendation, Applicants committed to make a filing with the Commission within 180 days following closing to conform the non-rate provisions of the delivery services tariffs of AmerenCIPS, AmerenCILCO and IP. (See Condition 17 set forth in Appendix A to this Order.) STAFF'S POSITION: Staff witness Dr. Howard Haas testified that the Ameren service territory was likely to see a significant adverse effect on competition as a result of Ameren's proposed acquisition of Dynegy's 20% share of EEInc., unless adequate mitigation was adopted. ICC Staff Ex. 1.0, pp. 3-4, 23. Dr. Haas testified THAT Ameren's proposed acquisition of the 20% share of EEInc. would increase Ameren's market power in its own delivery market. ICC Staff Ex. 1.0, p. 3. He stated that, generally speaking, market power exists in markets where market concentrations are high, particularly where one or two firms control a significant portion of the capacity in such a market. In the pre-acquisition environment, Ameren's market is already heavily concentrated and Ameren has a dominant position in its own market. Ameren's current dominant share of the generation that can serve Ameren's delivery market raises concerns that Ameren has a measure of market power within that market. Id. Ameren's proposed acquisition of Dynegy's share of EEInc. will increase Ameren's dominant share of the generation in the already heavily concentrated Ameren delivery market. He testified that the proposed acquisition of Dynegy's share of EEInc. would therefore exacerbate the market power that Ameren already has in its delivery market. ICC Staff Ex. 1.0, pp. 3-4. 15 04-0294 Dr. Haas testified that, as a result, the proposed acquisition would have a significant effect on both the competitiveness of the Illinois retail electric market that the Commission does regulate and on the prices retail customers would have to pay. ICC Staff Ex. 1.0, p. 6-7. He stated that the levels of concentration in this wholesale market, and the impact this acquisition will have on the level of concentration, are such that there is, by accepted standards, a presumption that this acquisition will have a negative impact on competition in the wholesale market that can serve load in AmerenCIPS' and AmerenUE's service territory. This, in turn, is a significant concern due to the potential influence the wholesale suppliers in this market, specifically Ameren, will have over prices they can charge to all end-use bundled and unbundled retail customers. ICC Staff Ex. 1.0, pp. 13-14. He explained that the less competition that exists in the wholesale market, the higher the prices will tend to be relative to a more competitive marketplace, all else held equal. By decreasing the amount of competition, the acquisition will tend to have a negative impact on retail customers relative to the status quo. ICC Staff Ex. 1.0, p. 14. Dr. Haas explained that the post-2005 Herfindahl-Hirshmann Index ("HHI") numbers show a very clear problem exists in the Ameren delivery market. ICC Staff Ex. 1.0, p. 16. He testified that the Ameren delivery market is very heavily concentrated and dominated by Ameren's unregulated affiliate. As a result, competition is limited, and there should be real concerns about the competitiveness of that market. Under these circumstances, an increase in concentration, generated via acquisitions that decrease the numbers of competitors, should be avoided or prevented regardless of how small or how large the increment may be. Id. Dr. Haas stated that, as long as the premise is accepted that competition in the electricity market is a good thing, increases in concentration through the consolidation of competitors under the circumstances evident in the Ameren market only serves to hurt competition, and, ultimately, retail customers. He concluded that the Ameren market has a serious market concentration problem now and steps should be made to reduce the level of concentration that exists, rather than allow moves that make the situation worse. Id. Dr. Haas also testified that Ameren's market is so heavily concentrated that even this "very small" amount of EEInc. capacity being added to Ameren's assets is enough to cause a significant screen violation in the Post-2006 market analysis, despite the use of what he believed to be an apparently overgenerous list of potential competitors. Id. The HHI tests are designed to show where the acquisition of competitors is likely to cause harm to competition. He testified that Ameren's acquisition of 20% of EEInc. fails this test. The "very small" amount of capacity in question is not small enough to avoid failing the test given the level of concentration and given the relative amount of capacity in the marketplace. ICC Staff Ex. 1.0, pp. 16-17. Dr. Haas also stated that by Mr. Frame's proposed standard, the existing level of concentration in a market should be ignored so long as the increments being acquired by the dominant company appear to be "very small." Dr. Haas stated, however, that the acquisition is not "very small" by FERC's merger standards, given the current level of concentration in Ameren's market and Ameren's current share of capacity in that market. Additionally, ignoring "small" increment acquisitions is a dangerous path, because over time, such an approach would allow a dominant company to eliminate all the competition in its 16 04-0294 market via a series of "very small" amounts over an extended period of time. ICC Staff Ex. 1.0, p. 17. Dr. Haas testified that, moreover, contrary to Mr. Frame's position, regional power supply changes that occur between now and 2006 are not likely to reduce potential concerns about competitive problems in wholesale electricity markets. ICC Staff Ex. 1.0, p. 18. Dr. Haas explained that he expects that, while functional RTOs would improve the market, the market will still be operating in the context of the underlying market structures. The promised liquidity that will come from financial markets for transmission, congestion hedging, and energy will help make regional competition more robust than it is today, but market concentrations will still cause concerns regarding the existence of market power. ICC Staff Ex. 1.0, p. 19. Transmission limitations will still exist. Initial Financial Transmission Rights allocations will still go to the parties that hold transmission rights now. The preferential treatment of grandfathered transmission rights, in terms of hedging against congestion, in the various RTO market designs will tend to maintain the current supplier/buyer relationships to the detriment of new entrants and existing potential suppliers in the various regional markets. Id. He stated that these limitations maintain the importance of local power sources, and existing supply relationships, in a given market, as will concerns about non-price issues such as reliability. All of this will maintain the importance of the competitiveness of these localized sub-markets within the regional footprint in determining prices to end use customers. ICC Staff Ex. 1.0, p. 19. Dr. Haas then explained why Applicants' initial mitigation proposal to offer 125 MW of capacity from the Joppa Plant to the wholesale market via competitive solicitation was inadequate. He stated that there is a structural problem in the Ameren delivery market in the form of the current heavy concentration of ownership of capacity. ICC Staff Ex. 1.0, p. 20-21. Ameren's proposed acquisition of 20% of EEInc. would exacerbate this structural problem. He stated that while correcting for the pre-existing market problems are beyond the scope of this proceeding, any problems exacerbated by the proposed transaction should be addressed. Any mitigation should address the structural nature of the problem by eliminating this increment in the concentration of capacity ownership in the delivery market. Dr. Haas stated that a temporary sale of power does not do this. ICC Staff Ex. 1.0, p. 21. Dr. Haas proposed that any mitigation would have to address the structural nature of the problem by eliminating this increment in the concentration of capacity ownership in the delivery market. ICC Staff Ex. 1.0, p. 23. He stated that if Ameren did not buy Dynegy's share of EEInc. or if Ameren sold off an equivalent portion of its ownership of EEInc. to a third party, that would solve the structural problem. Absent that, building sufficient transmission import capacity to eliminate the increase in the HHI caused by Ameren's acquisition would address the structural problem that the proposed acquisition would introduce. Id. He stated that there would have to be a commitment to build this transmission within a limited window of time. Dr. Haas recommended that in the meantime, Ameren should provide its non-structural mitigation via the sale of power from the acquired capacity from the plant until the transmission in question is built. The terms of the sale of the power could otherwise be as Ameren proposed. Id. 17 04-0294 In his rebuttal testimony, Dr. Haas explained that Ameren's revised commitment, in which it committed to build sufficient transmission to mitigate the anti-competitive wholesale effects of the proposed acquisition (see Condition 16 on Appendix A to this Order), is an appropriate structural remedy to the structural problem that is being introduced to the marketplace via this proposed acquisition. ICC Staff Ex. 14.0, p. 4. Dr. Haas stated that in order to negate the adverse competitive effect of losing Dynegy's share of the Joppa output as a potential competitor in the Ameren service territory, as measured using HHI analysis, Ameren would have to increase transmission import capability into the AmerenCIPS service territory by 300 MW. Dr. Haas stated that Ameren's commitment to build 300 MW of simultaneous import capability into the AmerenCIPS service territory would therefore mitigate his primary concern with regard to the proposed acquisition's impact on wholesale competition. ICC Staff Ex. 14.0, p. 5. Ameren has also agreed to provide the 125 MW of capacity to third parties until such time that it has successfully completed the transmission projects to be identified as part of the mitigation proposal presented here. ICC Staff Ex. 14.0, pp. 4-5. This will mitigate competitive concerns until such time that these projects are completed and will also serve to provide an incentive for Ameren to complete the projects. ICC Staff Ex. 14.0, p. 5. Dr. Haas testified that, overall, Ameren's commitments addressed his concerns regarding the adverse competitive effect of this transaction. In his direct testimony, Staff witness Dr. Eric Schlaf testified that the Reorganization may have an adverse effect on retail competition because two Dynegy affiliates, DES and IPE, may be forced to relinquish the ARES certificates they hold that permit them to provide power and energy service to retail customers. ICC Staff Ex. 2.0, p. 3. Dr. Schlaf expressed his view that DES and IPE will have difficulty in complying, or find it impossible to comply, with the "reciprocity requirements" of Illinois Administrative Code Part 451 ("Part 451") and Section 16-115(d) of the Act. ICC Staff Ex. 2.0, p. 3-4. Dr. Schlaf stated that, since DES and IPE are successful retail suppliers, retail competition would suffer if these entities were to lose their ARES certificates. He also stated that there would be substantial harm to the IP retail market where IPE currently operates as one of only two major suppliers, and a lesser amount of harm to the more vibrant ComEd retail market where DES is a relatively small market participant. ICC Staff Ex. 2.0, p. 3. As a result of the merger, the currently unaffiliated ARES in the IP market, AEM will become an affiliated ARES of IP. Id. The net effect of the merger would be a move from a situation of two major suppliers, one of which is an affiliate of IP, to a situation where there exists only one major active supplier and that supplier would be an affiliate of IP. Dr. Schlaf testified that with little or no ARES competition, AEM would likely have little reason to compete against IP. Id. Dr. Schlaf explained that retail competition is just beginning to gain a foothold in the IP market. ICC Staff Ex. 2.0, p. 10. A significant portion of IP's largest customers have indicated their interest in delivery services, so it appears possible that retail competition could begin to develop in the future should new unaffiliated suppliers appear to offer service to IP's customers. Id. Dr. Schlaf stated that, accordingly, the potential harm to retail competition could be mitigated. He stated that the key to mitigation is to encourage new, unaffiliated marketers to enter the market to replace IPE as quickly as possible 18 04-0294 and return the market to its former status. ICC Staff Ex. 2.0, p. 11. Dr. Schlaf recommended that IP construct new transmission, or upgrade existing transmission lines, to permit power imports into IP's service territory equal to the amount of RES load lost when IPE exits the market. ICC Staff Ex. 2.0, p. 15. New transmission could enable retail suppliers to access remotely generated power rather than relying on the generation located in the IP service territory. Id. Additionally, should no supplier emerge to serve IPE's customers and those customers return to bundled service, the new transmission would enable IP itself to obtain access to a wider set of generators than those generators now located in IP's service territory. Dr. Schlaf also recommended that IP conform its delivery service tariffs to those of the other Ameren companies, just as CILCO was required to do after Ameren acquired it. ICC Staff Ex. 2.0, pp. 15-16. In his rebuttal testimony, Dr. Schlaf stated that the additional 200 MW of transmission capacity into the IP control area which Ameren committed to construct would reasonably mitigate the potential damage to the retail market that could ensue as a result of the loss of IPE as a competitor in the IP retail market. He stated that Ameren's commitment to upgrade the IP transmission system by 200 MW would satisfy his recommendation. ICC Staff Ex. 15.0, p. 1-2. Dr. Schlaf also recommended Ameren commit to filing tariffs within 180 days of the closing of the merger that conform IP's delivery services tariffs and non-rate terms and conditions and business practices to those of the other Ameren companies. This commitment would mirror the condition the Commission imposed on Ameren in Docket No. 02-0428. Id., pp. 2-3. Ameren agreed to this commitment. Applicants' Ex. 40.0, pp. 1-2. Dr. Schlaf concluded that, with these two commitments, the Reorganization would not violate Section 7-204(b)(6) of the Public Utilities Act, with respect to retail competition. ICC Staff Ex. 15.0, p. 3. COMMISSION ANALYSIS AND CONCLUSION: In light of Applicants' commitments and the conditions they have agreed to, including Conditions 16 and 17 set forth on Appendix A to this Order, there is no remaining contested issue among the parties with respect to the criteria of Section 7-204(b)(6), and the record establishes that based upon the commitments of the Applicants, the Reorganization is not likely to have a significant adverse effect on competition in those markets over which the Commission has jurisdiction. Ameren's commitment to install additional transmission into the AmerenCIPS service area and into the IP service area adequately addresses any concerns that the wholesale or retail markets would be adversely affected by the Reorganization or by Ameren's acquisition of 20% of EEInc. Accordingly, the Commission finds that the Reorganization will satisfy the criteria of Section 7-204(b)(6) of the PUA. 7. FINDING 7: "THE PROPOSED REORGANIZATION IS NOT LIKELY TO RESULT IN ANY ADVERSE RATE IMPACTS ON RETAIL CUSTOMERS." APPLICANTS' POSITION: Ameren assessed the effect of the transaction on rates by comparing IP's 2007 revenue requirements under two scenarios: Dynegy ownership and Ameren ownership. There were four key differences between the two scenarios: under Ameren ownership, (i) rate base was greater due to the effect 19 04-0294 of the transaction on accumulated deferred income taxes ("ADIT"), (ii) non-fuel O&M was lower due to Ameren's forecast of synergies that the Reorganization will produce, (iii) the Ameren ownership scenario reflected amortization of the regulatory asset, and (iv) purchased power and gas costs were lower due to Ameren's forecast of savings of 1.5% that would be realized through greater combined purchasing power ("bulk purchases") and savings of 4.7% due to Ameren's calculation of lower costs arising from IP's improved credit rating under Ameren ownership. The analysis showed that, overall, IP's 2007 revenue requirements would be lower under Ameren ownership than under Dynegy ownership. With respect to the effect on ADIT of the transaction, Dynegy and Ameren have elected to treat the transaction as an asset purchase for income tax purposes under Section 338(h)(10) of the Internal Revenue Code, even though it is a stock purchase. If this transaction were treated as a stock purchase for income tax purposes, Dynegy would experience an unacceptable, significantly adverse tax treatment. Accordingly, Dynegy explained that without the Section 338(h)(10) election it would not proceed with this transaction. The specific effect of the 338(h)(10) election is to reduce IP's ADIT, and thus to increase rate base, by $310 million in the 2007 study period. Applicants' Ex. 3.4. Ameren also requested recovery of various expenses, totaling $67 million, as a regulatory asset, to be amortized from 2007 through 2010. Applicants' witness Martin J. Lyons, Jr., testified that the following expenses were included in this amount: (i) the stock issuance costs associated with the equity issued by Ameren to acquire IP; (ii) the severance and relocation costs associated with integration of IP into Ameren; (iii) the implementation costs associated with integration of IP into Ameren; (iv) any acquisition adjustment associated with the acquisition of IP by Ameren; and (v) any debt redemption costs associated with the recapitalization of IP. Applicants' Exs. 24.0 and 24.1. Ameren's revenue requirements analysis was intended to show that cost reductions resulting from the Reorganization would at least offset the increase in revenue requirement associated with the change in the ADIT balance. Applicants' witness Nelson testified that Ameren has identified at least $33 million of non-fuel O&M savings. With respect to purchased power and gas costs, he also testified that Ameren identified approximately $13 million of bulk purchasing savings, and $42 million of credit-related savings. Applicants' Ex. 41.1. The result of Mr. Nelson's analysis was that IP's total revenue requirement would be lower under Ameren ownership than under Dynegy ownership. Id. In response to the testimony of Staff and the AG, Ameren offered the surrebuttal testimony of Scott Glaeser, its Manager of Supply, and two outside experts, Mr. Timothy Kingston of Goldman, Sachs, and Mr. Richard Goldberg of the Brattle Group. Mr. Glaeser offered specific examples of gas supply savings achieved in Ameren's acquisition of CILCO in support of Mr. Nelson's calculation of the bulk purchasing savings. His analysis showed that Ameren could achieve the projected $13 million of bulk purchasing savings. Applicants' Ex. 43.0, pp. 3-4. Mr. Kingston offered testimony regarding the effect of poor credit ratings on power and gas procurement costs. He testified that entities with poor credit can expect to incur costs associated with credit enhancement, such as posting of collateral. Applicants' Ex. 44.0, p. 3. His analysis identified 13 publicly traded utility companies presently rated speculative by Moody's and S&P 20 04-0294 (excluding Dynegy and bankrupt companies). Of those 13, 12 are currently posting collateral, and the thirteenth had not filed a 10-K that would allow a determination to be made. Id. at 4. Mr. Goldberg reviewed three potential sources of credit-related savings for IP. Applicants' Ex. 42.0, p. 3. The three areas reviewed by Mr. Goldberg were: higher commodity costs due to the increased risk to suppliers that credit concerns may result in failure to fulfill purchased commodity contracts; the costs associated with prepayments or other credit enhancement mechanisms; and higher costs due to a reduced number of suppliers willing to contract with a buyer with poor credit standing. He then quantified the savings that would be associated with each. Id., at 3-4. Mr. Goldberg's analysis estimated that the three components of credit-related savings identified totaled $46 million annually, an amount comparable to Mr. Nelson's initial estimate of $42 million. Applicants' Ex. 42.0, p. 6. STAFF'S POSITION: The Staff reviewed Ameren's savings analysis. The Staff accepted the Applicants' estimate of non-fuel O&M savings, but did not attribute any savings to purchased power and gas. Staff noted that while it is possible that the consolidation of purchased power and purchased gas for IP with the other Ameren companies may generate savings for IP, the achievement of savings through greater buying power is neither automatic nor certain. ICC Staff Ex. 16.0, p. 7. Staff concluded that Ameren's generalized reliance on its business experience is inadequate and does not provide the Commission with a sufficient basis to find that the Reorganization will produce the buying power savings asserted by Ameren. ICC Staff Ex. 16.0, p. 8. Further, while IP may experience higher costs as a result of its below-investment grade credit rating, Staff concluded that the Applicants had not adequately quantified the additional costs (and thus the savings that the Reorganization will produce). ICC Staff Ex. 11.0, p. 11; ICC Staff Ex. 21.0, p. 2. As a result, Staff's calculations showed that IP's revenue requirement would be higher under Ameren ownership than under Dynegy ownership. ICC Staff Ex. 8.0, Schedule 8.1. AG'S POSITION: AG witness David Effron testified that the costs of the transaction to ratepayers are known and certain, but that the estimates of savings were highly subjective. He observed that Applicants had merely provided a listing of steps to be taken to achieve O&M, or non-fuel savings, and stated his belief that Applicants had not substantiated their projected purchased power and gas savings or their projected non-fuel O&M savings. The AG offered two potential rate mitigation measures. First, Mr. Effron stated that if the Applicants sincerely believe that their forecast of savings is realistic and will be achieved, and if they expect the Commission to make a finding that there will be no adverse rate effects based on the realization of those savings, then they should be willing to stand behind those estimates and hold customers harmless if the savings are not achieved. He proposed a bench-marking analysis to insure that ratepayers receive the benefit of the forecasted O&M synergies and savings. He testified that substantially all of the O&M savings would have to be achieved to assure that the costs of the transaction to customers do not exceed the benefits to customers. Mr. Effron also questioned the validity of the purchased gas and power savings identified by the Applicants. He testified that the amount of purchased gas and power 21 04-0294 savings associated with credit-worthiness should be considered no more than $18.3 million, and the savings associated with bulk power purchases should be considered no more than $13.5 million; he testified that as a result, it would be necessary for $28.9 million of the projected $33 million O&M savings to be achieved in order for the costs to ratepayers not to exceed the benefits associated with the Reorganization. AG Ex. 5, pp. 4-5; Sch. DJE-2. Second, the AG offered the testimony of Kathryn Tholin, the General Manger of Community Energy Cooperative, who discussed a residential real-time pricing ("RTP") program as a means of mitigating adverse rate effects. Ms. Tholin explained that she has worked with ComEd on an Energy Smart Pricing Plan ("ESPP") that brings the benefits of real-time pricing to residential customers. Ms. Tholin testified that, under the ESPP in effect in ComEd's territory, participants have reduced their electricity bills by an average of 20%. AG Ex. 4, p. 9. Ms. Tholin also explained that a program such as the ESPP brings significant benefits to non-participants, as well. Because participants in such a program reduce their usage at time of peak, the peak is lower, reducing electrical stress on the system. Additionally, because the price of power at peak is highly elastic, a lower peak means lower prices for all consumers. Id., p. 11.Ms. Tholin proposed that IP and the other Ameren utilities be required to implement a residential RTP program for the post-2006 period. She stated that such a program would reduce costs for all customers. Id., pp. 12 -13. AGREED RESOLUTION: To attempt to resolve the issues relating to the impact of the Reorganization on rates, Applicants, Staff, the AG, and CUB entered into discussions, which resulted in a Memorandum of Agreement ("MoA") executed by Ameren, CUB, and the AG. The MoA (Applicants' Ex. 47.0) provides that Ameren will take a number of actions with respect to the $33 million of non-fuel synergies it has identified. Specifically, the MoA provides that Ameren commits to make the results of projects planned to produce these savings transparent, and establishes a "liquidated damages"-type system of penalties for failure to complete cost savings projects. To that end, the MoA contains a "Schedule of Integration Projects and Projected 2007 Savings" (the "Savings Schedule"), which breaks out the projects and associated savings amounts ("Associated Savings Amount") underlying Ameren's calculation of $33 million of merger synergies. Applicants' Ex. 47.0. Attachment B. Under the MoA, in order to verify that Ameren achieves the synergies described in Applicants' Exhibit 47.0, Attachment B, IP is subject to the following provisions: 1. Beginning in the second quarter of 2005, IP will provide quarterly updates to the Commission (via a filing on e-Docket under Docket No. 04-0294), CUB, and the AG of its progress towards reaching the merger synergy milestones. Meetings will be scheduled at mutually convenient times and places. Updates on the work effort towards each project will be provided. 2. In its next electric rate case and next gas rate case, IP will file as a component of its initial filing a report (verified by a witness in the case) detailing the milestones achieved, as well as other identified savings. The verified report shall provide information 22 04-0294 current as of the time of the rate filing. 3. In IP's next electric rate case and next gas rate case, for all Associated Savings Amounts not reflected in the proposed test year, the Commission may reduce O&M expenses by the jurisdictional (i.e., electric vs. gas) portion of any Associated Savings Amount ("Jurisdictional O&M Reduction") for any milestone that IP has not achieved or cannot demonstrate that it is reasonably certain to achieve by the time the rates approved in that case go into effect, unless and to the extent that IP can demonstrate: (i) greater savings than estimated from other milestones on the Savings Schedule ("Greater Savings"); (ii) other O&M savings not reflected on the Savings Schedule ("Other Savings"); or (iii) that, in light of facts or circumstances then known, achieving the milestone is imprudent or would materially and adversely affect customer service or system reliability; provided, however, that normal utility operating and maintenance practices may not be deemed to materially and adversely affect customer service or system reliability. The burden of proving (i) that IP has achieved or is reasonably certain of achieving a milestone, (ii) the amount of Greater Savings and Other Savings, and (iii) the imprudence or adverse effect of achieving a milestone that has not been achieved, shall be on IP. Thus, to the extent that IP meets its burden to show that a milestone is imprudent or would materially and adversely affect customer service or system reliability, or that there are Greater Savings or Other Savings, the Commission may offset the amount of a Jurisdictional O&M Reduction, if any, that otherwise would be appropriate. 4. In IP's next electric rate case and gas rate case, IP will allocate Associated Savings Amounts on a basis consistent with the underlying O&M expenses to which they relate. In addition, in the MoA, Ameren agrees to a condition that requires IP to propose a residential RTP tariff effective after 01/01/07 on the following terms: 1. RTP generation service tariff will be optional. 2. The Delivery Services tariff applicable to RTP residential customers will be IP's standard Delivery Service tariff available to all residential consumers taking generation services from IP or from an alternative electric supplier. 3. Customers taking the optional RTP tariff can switch to RES supplied service at any time, subject to standard DASR rules. 4. The Hourly Energy Prices developed by IP will be applicable to all hourly energy consumed by the customer during the monthly billing period. 5. There will be a monthly Customer Charge that will also reflect the cost of the special metering installed to monitor hourly usage and price accordingly. 23 04-0294 The MoA also provides that IP will work cooperatively with neighborhood/community groups seeking to provide educational support for the residential RTP; and that IP will cooperate in good faith with the AG to design a residential RTP tariff that: (i) includes reasonable, appropriate and economic protections against unfavorable RTP outcomes, provided that the cost of any such protections shall be reflected in charges under the residential RTP tariff; (ii) establishes a reasonable means of recovering firm capacity charges, if any, and setting hourly energy prices; (iii) establishes reasonable rules on switching to and from standard generation service (i.e., IP's generally available generation service offering to residential customers after the end of the mandatory transition period) by residential RTP customers; and (iv) establishes reasonable means of customer access to pricing information. Nothing in the MoA was intended to alter in any respect any other commitment or condition of approval agreed to by Ameren or IP in this proceeding. The foregoing conditions and commitments agreed to by Ameren in the MoA are Conditions 19 through 25 on Appendix A to this Order. The MoA also memorializes the agreement of Ameren, the AG, and CUB concerning the terms of the proposed HMAC Rider, which is addressed in Section IV.G.4 below. Staff filed comments responding to the MoA indicating that in light of the terms of the MoA it did not oppose a Commission finding that the proposed Reorganization is not likely to result in adverse rate impacts on retail customers. Staff further indicated that its non-opposition was based on the particular facts and circumstances presented in this proceeding (including but not limited to the MoA). Staff also indicated that although it does not oppose approval of the Reorganization or a finding that the proposed reorganization is not likely to result in adverse rate impacts on retail customers, Staff's non-opposition should not be construed in connection with any future proceeding as (i) acceptance of the positions or arguments presented in the Applicants' testimony, or (ii) waiver or rejection of any of the positions or arguments presented in the testimony of Staff witnesses. COMMISSION CONCLUSION: The Commission finds that Ameren, AG, and CUB have agreed that, with the conditions agreed to by Ameren, including Conditions 19 through 25 on Appendix A to this Order, the record supports a conclusion that the Reorganization is not likely to result in any adverse rate impacts for retail customers. No other party has disputed this conclusion. While there was some disagreement in the record as to the specific amounts of savings that IP will achieve after closing, Ameren has agreed to measures to assure that IP is taking adequate steps to produce savings and to impose quantifiable measures to insure that rates are not increased if savings fail to materialize. Further, Ameren has agreed to cost mitigation in the form of a residential RTP program, which, the record indicates, should reduce costs not only for program participants, but for non-participants as well. Accordingly, based on the terms of the MoA, Applicants' Exhibit 47.0, and Attachment B thereto, including the commitments made by and the conditions agreed to by Applicants therein, and taking into account other information in the record as necessary, the Commission finds that the proposed Reorganization is not likely to result in any adverse rate impacts on retail customers. The Commission therefore concludes that the Reorganization satisfies the criteria of Section 7-204(b)(7) of the PUA. While 24 04-0294 the Commission's finding is conclusive with respect to making the finding required by Section 7-204(b)(7), it is based on the particular facts and circumstances presented in this proceeding, including the MoA. In this regard, the Commission's finding is not intended and should not be interpreted to limit or restrict the arguments or positions that Staff or other parties may make in future proceedings. B. TREATMENT OF COSTS AND SAVINGS Under Section 7-204 of the PUA, in this proceeding the Commission must rule on: (i) the allocation of any savings resulting from the Reorganization; and (ii) whether IP should be allowed to recover any costs incurred in accomplishing the Reorganization and, if so, the amount of costs eligible for recovery and how the costs will be allocated. APPLICANTS' POSITION: Ameren asserts that it is making a significant investment and incurring substantial expenses to acquire and recapitalize IP. Ameren expects the total costs of accomplishing the Reorganization to exceed $450 million. Applicants' Ex. 5.0, pp. 7-9. Ameren explained that it does not seek recovery of the full amount of the costs of accomplishing the Reorganization. Rather, Ameren proposes to reflect $67 million of these costs on AmerenIP's books, as a regulatory asset, to be amortized ratably over the period 2007--2010. This proposal means that, out of the total projected Reorganization costs of more than $450 million, IP customers will be asked to pay approximately $67 million of those costs. Applicants' Ex. 5.0, p. 8. Ameren explained that the requested finding is well within the Commission's authority. Section 7-204(c) compels the Commission to address this issue: "the Commission shall not approve a reorganization without ruling on... whether the companies should be allowed to recover any costs incurred in accomplishing the reorganization and, if so, the amount of costs eligible for recovery and how costs will allocated." 220 ILCS 5/7-204(c) (emphasis added). Application, p. 29. Mr. Baxter explained that a significant portion of these costs are necessary in connection with the actions to be taken to improve IP's credit rating, which will be one of the principal benefits of the Reorganization, and which will have a positive effect on IP's cost of service, in the form of lower cost funds and goods and services. Applicants' Ex. 2.0, pp. 7-8. Without incurring these costs Ameren states that it could not undertake and complete this transaction. Id. at 8. Accordingly, Ameren does not believe that it should be required to fully absorb these costs. Id. Ameren also explained that it does not intend to retain any savings produced by the transaction. STAFF'S POSITION: Staff witness Bonita Pearce reviewed Ameren's proposal and requested that: Ameren specifically identify the specific costs that make up the requested $67 million regulatory asset; Ameren provide estimates of the time periods over which the underlying costs are expected to be incurred; Ameren address how the costs would directly benefit ratepayers; Ameren specifically address how the underlying costs would be recoverable under normal ratemaking 25 04-0294 circumstances; and Ameren specifically agree not to include the underlying costs in any future test year of an IP rate proceeding. ICC Staff Ex. 9.0, p. 14. In response to Ms. Pearce's request, Mr. Lyons explained that Ameren is willing to identify a more specific pool of costs, totaling $137 million, from which the $67 million regulatory asset would be derived. Applicants' Ex. 24.0, p.2. The $137.0 million cost pool consists of: integration costs ($19.3 million); voluntary and involuntary severance and relocation benefits ($20.5 million); costs to issue common stock to fund the reorganization ($22.6 million); and debt redemption premiums ($74.6 million), totaling $137 million. Ameren proposes to include the integration costs of $19.3 million plus the voluntary and involuntary severance and relocation benefits of $20.5 million as components of the requested $67 million regulatory asset as such costs are incurred. Applicants' Ex. 24.0, p. 2. These two components total $39.8 million. For the remainder of the requested $67 million regulatory asset, Ameren proposes to defer, as part of the asset, some portion of the costs related to issuance of stock to fund the reorganization plus debt redemption premiums to the extent needed to reach the requested $67 million. Applicants' Ex. 24.1. Ms. Pearce noted that, accordingly, up to $27.2 million of stock issuance costs and debt redemption premiums would be deferred. ICC Staff Ex. 19.0, p. 7. Ms. Pearce testified that the integration, severance, and relocation costs are properly includable in the regulatory asset. ICC Staff Ex. 19.0, p. 6. Staff witness Michael McNally testified that none of the stock issuance costs would be includable, but that debt redemption premiums up to $27.2 million would be recoverable. ICC Staff Ex. 21.0, pp. 10-11. Therefore, Staff would consider $67.0 million of the $137 million identified by Ameren for potential recovery in the form of a regulatory asset, as follows: severance, relocation, and integration costs, $39.8 million; costs to issue common stock to fund reorganization $00.0; and debt redemption premium, $27.2 million, totaling $67 million. ICC Staff Ex. 19.0, pp. 5-6. Ms. Pearce stated that she inferred that IP will incur most of the integration, severance, relocation, and debt redemption premium costs related to the reorganization prior to 2007. Therefore, assuming IP files an electric rate increase for the post-2006 rate period, the Commission and other parties to the rate proceeding will be able to review IP's actual costs associated with the requested regulatory asset prior to amortization of the regulatory asset and its inclusion in rates. ICC Staff Ex. 19, p. 7. Ms. Pearce also explained that Mr. Nelson addressed her third concern, regarding direct benefit to ratepayers, by identifying the following reorganization costs as directly benefiting ratepayers: (1) costs to issue stock will allow Ameren to acquire and recapitalize IP, which in turn, restores IP to an investment grade credit rating and reduces IP's cost of service; (2) costs to redeem debt benefit customers for the same reasons noted above; (3) costs to integrate the systems and facilities of IP and Ameren reduce the cost of service (because Ameren will not incur costs that do not produce savings); and (4) costs related to severance and relocation also reduce the cost of service. Applicants' Ex. 23.0, p. 17; ICC Staff Ex. 19.0, pp. 7-8. 26 04-0294 Ms. Pearce also testified that her concern regarding how the underlying costs would be treated under normal ratemaking circumstances is mitigated by Ameren's willingness to recognize the regulatory asset as specific costs are incurred as opposed to its previous request to recognize such asset immediately upon closing. ICC Staff Ex. 19, p. 8. Ms. Pearce proposed that, for ratemaking purposes IP should capture all costs related to the reorganization in a deferred asset account, and that IP accumulate within sub-accounts the costs for each category approved by the Commission. Subject to Commission review of the actual costs incurred, IP would, in post-2006 rates, be allowed to amortize up to $39.8 million for integration, severance, and relocation expenses, and up to $27.2 million of debt redemption premium costs. ICC Staff Ex. 19, p. 9. She further stated that Ameren's proposal to allocate the regulatory asset between electric and gas business lines based on electric and gas rate bases as a percent of IP's total rate base is reasonable. Remaining costs in excess of the aforementioned $67.0 million, if any, would be excluded from rate recovery in any other rate proceeding. Thus, if Applicants incurred $50 million of integration, severance, and relocation costs to effect the reorganization, a maximum of $39.8 million would be includable in rates. If less than the requested $39.8 million were incurred, the lesser amount would be includable in rates. Likewise, if less than $27.2 million were incurred for debt redemption premium costs, the lesser amount would be includable in rates. ICC Staff Ex. 19, p. 9. She also stated that, if the Commission adopts her proposal, the issue of double recovery would be eliminated. ICC Staff Ex. 19, p. 10. Ms. Pearce recommended that the Commission could consider the full $67 million requested by the Applicants for the creation of a regulatory asset. If the Commission were to approve the creation of a regulatory asset, she recommended that the Commission impose the following requirements: (1) Applicants would record all actual costs related to the reorganization as the costs were incurred; (2) Applicants would submit an annual report to the Commission with a copy to the Manager of Accounting by March 15th for the years 2004 - 2006 that would set forth: (i) a cost summary of the actual costs incurred to date and ii) a listing of each cost incurred in the calendar year that would include a description of the cost, the amount, and a reference to a supporting document; (3) Applicants would support the requested regulatory asset during the anticipated proceeding to set rates for the post-2006 period by (a) Providing for the record the following: (i) a cost summary of the actual costs incurred and (ii) a listing of the actual costs incurred that would include a description of each cost, the amount, and a reference to a supporting document; and (b) making the supporting documents available for review by the parties in the proceeding; and (4) Applicants would have the burden to demonstrate that the Applicants have incurred actual costs underlying the requested regulatory asset in accordance with the amount approved by the Commission. ICC Staff Ex. 19.0, pp. 10-11. COMMISSION CONCLUSION: Based on the foregoing, the Commission concludes that the proposed allocation of savings and costs is reasonable, and that establishment of a regulatory asset of up to $67 million, to be amortized over the period 2007-2010, is acceptable and should be approved, subject to the conditions proposed by Staff and set forth in Paragraph 11 of Appendix A to this Order. 27 04-0294 C. APPROVAL OF AFFILIATED INTEREST AGREEMENTS Applicants propose that AmerenIP will enter into five affiliated interest agreements, for which Commission approval is required under Sections 7-101 and 7-204A of the PUA. 1. GENERAL 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. Thereafter, in Docket No. 03-0279, the Commission approved AmerenCILCO's entry into the Ameren GSA, as well as certain modifications of the agreement. The Ameren GSA has also been approved by the SEC pursuant to PUHCA. Ameren seeks authority for AmerenIP to enter into, and become a party to, the Ameren GSA. The Ameren GSA was provided for the record as Applicants' Ex. 5.2. 2. FUEL AND NATURAL GAS SERVICES AGREEMENT AmerenCIPS, AmerenCILCO and AmerenUE are parties to a Fuel and Natural Gas Services agreement ("Ameren FSA") with Ameren Fuels. Under the Ameren FSA, Ameren Fuels provides fuel procurement and fuel management services to AmerenCIPS, AmerenUE, and AmerenCILCO. The Ameren FSA was modified most recently by the Commission in Docket No. 03-0279 to add AmerenCILCO as a party. Ameren seeks authority for AmerenIP to enter into the Ameren FSA. Ameren stated that this will allow AmerenIP to achieve the same kind of fuel procurement and fuel management benefits which Ameren Fuels provides to AmerenCIPS, AmerenUE and AmerenCILCO. (A copy of the Ameren FSA was provided as Applicants' Ex. 5.3.) 3. TAX ALLOCATION AGREEMENT The Ameren Companies are parties to a tax allocation agreement ("Ameren TAA"), which allocates federal income tax liabilities amongst them. The Ameren TAA was most recently approved in Docket No. 03-0279. (A copy of the TAA was provided as Applicants' Ex. 5.4.) Ameren seeks authority for AmerenIP to enter into the Ameren TAA or a materially identical TAA. STAFF'S POSITION: Staff witness Dianna Hathhorn testified that she reviewed the Ameren GSA, the Ameren FSA, and the Ameren TAA, and recommend that the Commission approve these agreements. ICC Staff Ex. 8.0, pp. 3-5. However, Ms. Hathhorn also recommended that Commission approval not allow for changes to be made to the TAA identified as Applicants' Exhibit 5.4 without Commission approval (i.e., in approving the TAA identified as Applicants' Exhibit 5.4 not include language approving that TAA "or a materially identical TAA.") Id. at 4-5. Ms. Hathhorn also recommended that the Commission order the Applicants to file copies of the signed, executed agreements that are approved by the Commission in this proceeding with the Commission and with the Manager of the Commission's Accounting Department, within 60 days of the date of the acquisition. Id. at 5. 28 04-0294 4. MONEY POOL AGREEMENT APPLICANTS' POSITION: Ameren affiliates participate in the Ameren Money Pool Agreement (or "Utility Money Pool"), which allows them to engage in short-term loans from time to time. The Ameren Money Pool Agreement was most recently approved in Docket No. 03-0214. (A copy of the Money Pool Agreement was provided as Applicants' Ex. 5.5 Revised.) Ameren seeks authority for AmerenIP to enter into the Ameren Money Pool Agreement. The aggregate amount of borrowings outstanding at any time by IP under the Ameren Money Pool Agreement and the Unilateral Borrowing Agreement (see Section IV.C.5 below) will not exceed $500 million. Application, p. 40 and Applicants' Ex. 22.1, p. 15. In his surrebuttal testimony, Applicants' witness Jerre Birdsong described an agreement among the parties regarding IP's participation in the Utility Money Pool, which was intended to address concerns expressed by Staff and the AG and CUB (as summarized below). The agreement among Staff, the AG, CUB, and Applicants is that IP's ability to put money into the pool will be limited until it achieves investment grade ratings from both Moody's and S&P. The specific limitations that Ameren agrees to accept are set forth in Condition 7 on Appendix A to this Order. Applicants' Ex. 36.0, pp. 4-5 STAFF'S POSITION: In her direct testimony, Staff witness Sheena Kight stated that IP should be allowed to participate only as a borrower in the Ameren Money Pool Agreement until such time as it can show it has sufficient cash flows to do so. ICC Staff Ex. 10.0R, p. 13. Ms. Kight further stated in her rebuttal testimony that the Money Pool Agreement to which IP would become a party would not permit the utility to invest its surplus cash in the pool. She also questioned the use of any surplus cash at IP by stating that it would first be used for lending before it would be invested in the pool. ICC Staff Ex. 20.0, p. 10. ATTORNEY GENERAL'S AND CUB'S POSITIONS: AG and CUB witness James Rothschild recommended in his direct testimony and again in his rebuttal testimony that the total amount of short-term debt that IP be allowed to loan to Ameren be capped at 5% of IP's total capitalization. AG Ex. 1.0, p. 21; AG Ex. 6.0, p. 10. 5. UNILATERAL BORROWING AGREEMENT APPLICANTS' POSITION: The Applicants seek authorization for Ameren to make short-term loans to IP after closing (and in connection therewith to acquire promissory notes of IP evidencing such loans) in order to fund IP's capital expenditure and working capital requirements. At present, IP does not have a bank credit facility and relies on prepayments of interest by Illinova on the Intercompany Note to fund working capital needs. Accordingly, in order to insure that immediately upon closing there is a mechanism in place by which IP can obtain short-term capital, IP requests authority to issue to Ameren, from time to time until January 1, 2007, up to $500 million principal amount at any time outstanding of promissory notes having maturities of less than one year. Note that the aggregate amount of borrowings outstanding at any time by IP under the 29 04-0294 Ameren Money Pool Agreement (see Section IV.C.4 above) and the Unilateral Borrowing Agreement will not exceed $500 million. Application, p. 40 and Applicants' Ex. 22.1, p. 15. Further, under this proposal, any promissory note issued by IP to Ameren evidencing a loan may be subordinated to other indebtedness of IP 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. Applicants' Ex. 22.1. STAFF'S POSITION: Staff witness Sheena Kight testified in her direct testimony that the Commission should not approve Applicants' request for authority to make short-term loans to IP because no written agreement that meets the requirements of Part 340 of the Administrative Code was provided. ICC Staff Ex. 10.0R, p. 13. In response to Ms. Kight's testimony, Mr. Birdsong provided a unilateral borrowing agreement between Ameren and IP as required under Part 340 of the Administrative Code. Applicants' Ex. 22.0, pp. 15-16 and Applicants' Ex. 22.1. As a result, in her rebuttal testimony Ms. Kight recommended that Ameren be allowed to provide short-term financing to IP under the terms of the unilateral borrowing agreement, not to exceed $500 million. ICC Staff Ex. 20.0, p. 1-2. COMMISSION CONCLUSION: The conditions agreed to by Ameren and Staff are reasonable, and the five affiliate agreements should be approved subject to the conditions discussed herein. Those conditions are contained in Appendix A to this Order. D. BOOKS AND RECORDS APPLICANTS' POSITION: Ameren stated in the Application that it intends to maintain a substantial portion of IP's books and records at IP's headquarters in Decatur. Application, pp. 31-32. However, Ameren stated that certain records -- particularly those relating to services provided by affiliated service companies, such as Ameren Services or Ameren Fuels -- are more efficiently maintained at Ameren's headquarters in St. Louis. Accordingly, Ameren requested approval under Section 5-106 of the PUA for IP to maintain its books and records outside of the State of Illinois after closing. Ameren acknowledged that IP will be liable for, and upon proper invoice from the Commission will 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 PUA. 220 ILCS 5/5-106. STAFF'S POSITION: Staff witness Bonita Pearce recommended that the Commission approve the Applicants' request to maintain certain records at Ameren's offices in St. Louis, given Ameren's acknowledgement that IP will be liable for the reasonable costs and expenses associated with the audit or inspection of any out-of-state books, accounts, papers, records and memoranda. ICC Staff Ex. 9.0, pp. 4, 21-22. No other party addressed this portion of the Application. COMMISSION CONCLUSION: The Commission concludes that the record supports approval of Ameren's request that it be allowed to maintain certain records of AmerenIP outside of the State, subject to the requirements of Section 5-106 of 30 04-0294 the PUA, including Ameren's acknowledgement of its responsibility for certain costs as described above. E. SECTION 7-102 APPLICANTS' POSITION: Section 7-102 of the PUA 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. Applicants stated their belief that the Reorganization does not constitute a direct or indirect merger or consolidation of two utilities' businesses or property. Rather, in their view the Reorganization is a change in control transaction over which the Commission plainly has jurisdiction under Sections 7-204 and 7-204A. Applicants stated, however, that to the extent that the Commission determines that the Reorganization is also subject to the approval requirements of Section 7-102, Applicants seek approval pursuant to that Section. Section 7-102 would require that Applicants demonstrate that the approval should reasonably be granted and that the public should be convenienced thereby. COMMISSION CONCLUSION: The Commission concludes that the findings it is making pursuant to Section 7-204 of the PUA and the conditions attached hereto as Appendix A are sufficient to support a conclusion that approval for the Reorganization should reasonably be granted and that the Reorganization is in the public interest and that the public will be convenienced thereby. Therefore, if and to the extent that Section 7-102 of the PUA is applicable to the proposed Reorganization, the record shows that the criteria for approval under Section 7-102 have been met. F. SECTION 6-103 Section 6-103 of the PUA 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 making its determination, shall not exceed the fair value of the property involved. APPLICANTS' POSITION: Mr. Jerre Birdsong testified that Ameren plans to recapitalize IP in a manner that will allow IP to regain financial health and obtain investment grade ratings. Mr. Birdsong explained that Ameren's plan involves the elimination of the Intercompany Note and a significant infusion of equity by Ameren, to be used to eliminate preferred stock and at least $750 million of long-term debt, $550 million of which carries an interest rate of 11.5%. Applicants' Ex. 4.0, p. 5-7. He explained that this will not only restore IP to financial health, but will also appropriately balance its capital structure, the size of which presently far exceeds the net book cost of its utility assets. Accordingly, Applicants requested that the Commission approve the capitalization of IP resulting from the Reorganization, under Section 6-103. Id. 31 04-0294 Mr. Birdsong stated the Applicants have not sought approval of the capital structure for ratemaking purposes. Ameren understands that IP will have to justify its capital structure in subsequent rate proceedings. Applicants' Ex. 36.1. STAFF'S POSITION: Staff witness Sheena Kight stated that based on the information that Applicants presented, IP's capitalization will not exceed the fair value of its property after the completion of the recapitalization by Ameren. In addition, she stated that the elimination of the Intercompany Note will reduce IP's capitalization to equal the fair market value of its property, as required by Section 6-103. ICC Staff Ex. 10.0R, p. 9. AG AND CUB POSITION: AG and CUB witness James Rothschild discussed the proposed capital structure for IP post-Reorganization. Mr. Rothschild expressed concern that the capital structure contained excessive equity, and would not be appropriate for ratemaking purposes. He stated that as long as the excess equity in the capital structure is not used as the basis for the capital structure used to set rates, it will not pose any problems for ratepayers. As a result, he stated that he is not opposed to Ameren causing the capital structure of IP to contain the level of common equity as requested in the Reorganization. AG/CUB Ex. 6.0, p. 8. COMMISSION CONCLUSION: The Commission concludes based on the record that the Reorganization will not result in IP having a capitalization in excess of the fair value of the property involved, and therefore that the requirements of Section 6-103 of the PUA will be met. The Commission emphasizes that its approval of IP's total capitalization is not a determination of a reasonable capital structure for ratemaking purposes. G. OTHER FINDINGS 1. APPROVAL OF ACCOUNTING ENTRIES APPLICANTS' POSITION: The Applicants seek the Commission's approval for the accounting entries associated with the Reorganization, including those related to the elimination of the Intercompany Note and those related to the amortization of a portion of Ameren's transaction costs. These proposed entries were sponsored by, and discussed in the testimony of, Ms. Peggy Carter, IP's Managing Director, Controller, and Mr. Martin Lyons, Jr., Ameren's Controller. The proposed accounting entries for elimination of the Intercompany Note and estimated balance of common equity at closing were presented on Applicants' Exhibit 11.2 sponsored by Ms. Carter. The proposed accounting entries for the Reorganization were presented in Applicants' Ex. 5.1, sponsored by Mr. Lyons. It is Applicants' position that the proposed entries are, for the reasons Ms. Carter and Mr. Lyons discuss, reasonable and in accordance with generally accepted accounting principles and the Uniform System of Accounts ("USoA") applicable to electric and gas utilities in Illinois. STAFF'S POSITION: Staff witness Michael McNally recommended that, if the proposed transaction is authorized, the Order in this proceeding should instruct IP to not include push-down adjustments in its annual reports to the Commission. He noted that the Applicants have agreed to reverse the effect of push down 32 04-0294 accounting for ratemaking purposes. ICC Staff Ex.11.0, p. 21. However, the Applicants have suggested that IP intends to reflect push-down accounting in Accounts 221 and 204. Those accounts do not permit adjustments for push-down accounting. The USoA for electric utilities states that Account 204 is to reflect the cash consideration received for preferred stock. Similarly, the USoA for electric utilities states that Account 221 is to reflect the face value of bonds. The proposed reorganization does not change the cash consideration received for preferred stock nor the face value of outstanding bonds. Thus, IP should not reflect push-down adjustments for debt or preferred stock in its annual reports to the Commission. Staff witness Pearce discussed the proposed accounting entries in her direct testimony and testified that because the Applicants are required to use push down accounting for financial reporting purposes and committed to reverse the effects of push down accounting for regulatory ratemaking purposes, she did not object to the accounting entries. ICC Staff Ex. 9.0, p. 17. Staff witness Pearce further recommended in her rebuttal testimony (ICC Staff Ex. 19.0, p. 3) that the reversal of the impact of push down accounting be collapsed into account 114, plant acquisition adjustments, for all Illinois regulatory reporting purposes, such as Form 21 ILCC. Ms. Pearce also discussed Applicants' proposed accounting entries for elimination of the Intercompany Note as presented in the direct testimony of Ms. Carter. Ms. Pearce testified that the accounting treatment proposed by Applicants for elimination of the Intercompany Note conformed to the requirements of the USoA for electric and gas utilities in Illinois. ICC Staff Ex. 9.0, p. 19. Ms. Pearce also recommended that IP file the final actual accounting entries, including the amounts, associated with the elimination of the Intercompany Note with the Chief Clerk of the Commission, and provide a copy to the Commission's Manager of Accounting, within 120 days following the closing of the acquisition. ICC Staff Ex. 9.0, p. 20. In her rebuttal testimony, Staff witness Pearce noted that a FERC order directs the Applicants to submit complete details of all merger-related accounting entries, along with appropriate narrative explanations describing the basis for the entries in their proposed accounting for the merger within 60 days of the date on which the merger is consummated. Accordingly, Ms. Pearce recommended that Applicants provide a copy of such entries and explanations to the Chief Clerk of the ICC, with copies to the Manager of Accounting of the ICC, at the time the information is supplied to FERC. This recommendation superseded the request of Ms. Pearce in her direct testimony (ICC Staff Ex. 9.0, lines 395-398 and lines 438-442) that relate to filing copies of the actual accounting entries used to record the acquisition and the elimination of the Intercompany Note, respectively, on the books of IP. COMMISSION ANALYSIS AND CONCLUSION: Based on the record, and subject to the Applicants' agreement to reverse the effect of push down accounting for state regulatory purposes, the Commission concludes that IP's proposed accounting entries for elimination of the Intercompany Note, as presented on Applicants' Exhibit 11.2, are reasonable and in accordance with the applicable accounting requirements, and should be approved. The Commission also adopts the recommendation of Staff witness Ms. Pearce that the impact of push down accounting should be collapsed into account 114, plant acquisition adjustments, 33 04-0294 for all Illinois regulatory purposes, such as reporting in Form 21 ILCC. IP is directed to file a copy of the final actual accounting entries, showing the actual amounts and including appropriate narrative explanations describing the basis for the entries, with the Chief Clerk of the Commission, and to provide a copy to the Commission's Manager of Accounting, within 60 days following the closing date of the acquisition. The Commission further finds that Applicants' proposed accounting entries for IP are reasonable and should be approved subject to the conditions set forth in this Order, including Appendix A. 2. PRUDENCE AND REASONABLENESS OF SHARE ACQUISITION APPLICANTS' POSITION: Ameren seeks a finding that its acquisition of the shares of IP pursuant to the Stock Purchase Agreement is prudent and reasonable, taking into consideration the effect of the Reorganization on the deferred tax balances on the books of IP. Ms. Carter testified that all of IP's deferred taxes will be eliminated from its books in exchange for reduction of the principal balance of the Intercompany Note. Applicants' Ex. 11.0, pp. 4-8. Mr. Craig Nelson explained that overall the Reorganization will reduce IP's cost of service because reductions in IP's cost of service will more than offset the impact of the change in the deferred tax balances and the recovery of a portion of the costs of accomplishing the Reorganization. Applicants' Ex. 23.0, p. 17. Mr. Baxter explained that as indicated by the terms of the Stock Purchase Agreement, Ameren is not willing to proceed with the transaction in the absence of reasonable assurance from the Commission (in the form of prudence and reasonableness findings) that efforts will not be undertaken in the future to undo (i.e., revise or reverse) the change in the deferred tax balances for rate base purposes or in any other respect. It is Applicants' position that disregard of AmerenIP's actual post-closing deferred tax balances for ratemaking purposes in the future could result in a violation of the Internal Revenue Service's ("IRS") tax normalization rules. Further, Mr. Baxter testified that any downward adjustment in rate base in a future rate case, based on imputation of accumulated deferred taxes that are no longer on AmerenIP's financial books, would deny Ameren the ability to earn a return of and on the investment it is making in IP. Applicants' Ex. 2.0, pp. 5-6. Ameren witness James Warren explained the potential impacts of the IRS' tax normalization rules resulting from any post-closing effort to undo the elimination of IP's deferred tax balances. Applicants' Ex. 6.0, p. 3. In a 338(h)(10) election, the legal form of the transaction, a stock purchase, is ignored for tax purposes (and only for tax purposes) and the transaction is treated for tax purposes as if IP ("Old IP") had sold all of its assets and transferred all of its liabilities to a new corporation ("New IP") and immediately thereafter Old IP liquidates into its parent, Illinova. Ameren will be treated as if it had formed New IP as a new subsidiary, which then purchased Old IP's assets in exchange for Old IP's liabilities and the cash purchase price. Id. Ameren acknowledged that the effect of Illinova's assumption of IP's deferred tax liabilities and the tax treatment of the Reorganization will be an increase in IP's combined electric and gas rate base at December 31, 2006 by 34 04-0294 approximately $310 million. Mr. Baxter argued, however, that this increase in future rate base does not represent a windfall for Ameren, which maintains that it is investing much more in IP than the amount of the increase in future rate base. Applicants also asserted that the increase in rate base should not be viewed in isolation, but in the broader context of the overall effect of the Reorganization on IP's costs. Mr. Nelson explained that overall the Reorganization will have a positive effect on IP's financial condition, cost of service, and quality and reliability of service. He testified that Ameren expects to achieve synergies and other cost savings at IP that more than offset the effect of the change in rate base. Applicants' Ex. 3.0. The overall impact of the proposed Reorganization and of Applicants' proposed treatment of certain costs for ratemaking purposes has been discussed at length earlier in this Order in the sections concerning the criteria of Section 7-204(b)(7) of the PUA and the treatment of costs and savings. Additionally, Mr. Baxter emphasized that the Reorganization will produce significant benefits for IP's customers and the communities it serves, because IP will emerge from the Reorganization as a recapitalized, creditworthy, investment grade entity with the financial wherewithal to meet its service obligations. Applicants' Ex. 2.0. COMMISSION ANALYSIS AND CONCLUSION: As discussed at length earlier in this Order, the Commission has concluded based on the evidence, including the commitments made by and conditions accepted by Applicants, that the Reorganization and the related ratemaking treatments proposed by Applicants are not likely to have an adverse rate impact on IP's customers and that the criteria of Section 7-204(b)(7) of the PUA will be satisfied. The Commission also recognizes that the Reorganization is expected to result in benefits for IP's customers and the communities it serves, including recapitalization of IP, commitments to specific capital expenditure minimums and restoration of an investment grade bond rating for IP. Accordingly, the Commission concludes that the evidence shows that Ameren's acquisition of IP is prudent and reasonable, taking into account the effect of the transaction on IP's deferred tax balances. The Commission will therefore make the following finding as proposed by Applicants: Ameren's acquisition of the Common Shares and the Preferred Shares of IP is prudent and reasonable, and the public will benefit thereby, taking into consideration the effect of the purchase on IP's deferred tax balances and rate-base valuation; Ameren's proposed IP accounting entries associated with the acquisition, including the entries associated with the changes in the deferred tax balances, are approved. 3. TERMINATION OF DIVIDEND RESTRICTION APPLICANTS' POSITION: In Docket No. 02-0561, the Commission restricted IP's ability to declare and pay dividends on its common stock, barring IP from declaring or paying a dividend unless IP's first mortgage bonds are rated at least BBB- by Standard & Poor's ("S&P") and Baa3 by Moody's Investor Services ("Moody's") and IP first obtains specific approval from the Commission for the declaration and payment of a dividend pursuant to Section 7-103 of the PUA. Mr. Baxter asserted that, because Ameren is undertaking to recapitalize IP, and 35 04-0294 Ameren itself, unlike Dynegy, has an investment grade credit rating, the restrictions ordered in Docket No. 02-0561 are no longer necessary to protect IP and its customers in the future. Applicants' Exhibit 2.0, p. 9. Accordingly, in the Application, Ameren requested that the Commission terminate the Docket No. 02-0561 restriction, and enter a finding allowing IP to declare and pay a dividend on its common stock when its first mortgage bonds are rated either (i) at least BBB- by S&P or (ii) at least Baa3 by Moody's. Mr. Baxter stated that the requirement that at least one (rather than both) of these major rating agencies upgrade IP's bond ratings to investment grade will provide adequate protection in the future, because IP will be owned by a financially strong, investment-grade-rated parent, and because of the other commitments that Ameren is making for the purpose of restoring IP's financial health. Id. Mr. Baxter also offered that Ameren does not intend to misuse dividend authority in any respect. He stated that Ameren commits to establish a dividend policy at IP that is comparable to the dividend policies in effect at the other Ameren Utilities, consistent with achieving and maintaining the targeted capital structure with a common equity component of 50%-60%. Id. In response to Staff's concerns, as described below, Ameren revised its request relating to lifting the current dividend restriction. As presented in Mr. Birdsong's surrebuttal testimony, Ameren's revised request is that the Commission adopt a condition providing that after the acquisition of IP by Ameren is completed, the dividend payment restriction imposed in Docket No. 02-0561 will be lifted based upon the following conditions (Applicants' Ex. 36.1): 1. The common dividend restriction the Commission imposed on IP in Docket No. 02-0561 would be terminated after the closing of the proposed reorganization if and at such time as IP achieves an investment grade credit rating from at least one nationally recognized credit rating agency, subject to the conditions and agreements indicated below. 2. Ameren agrees that until IP achieves an investment grade credit rating from both S&P and Moody's, IP will not pay common dividends unless (i) Ameren maintains at least a BBB- corporate credit rating from S&P and a Baa3 corporate credit rating from Moody's or (ii) the Commission issues an order authorizing IP to resume declaring and paying common dividends. Ameren will provide the Manager of Finance evidence of its investment grade credit rating and the amount of the common dividend within five business days of IP's declaration of a common dividend. 3. Ameren agrees that in the event IP has not redeemed all of the 11.5% bonds by December 31, 2006, IP may not thereafter declare or pay common dividends until such time as the Commission issues an order authorizing IP to resume declaring and paying common dividends. 36 04-0294 4. Ameren agrees that, until such time as all of IP's 11.5% first mortgage bonds are redeemed, the upper limit of total common dividends IP can pay to Ameren at any given calendar year will be determined as follows: a. For 2005: $80 million b. For 2006: $160 million less cumulative common dividends paid to Ameren since the consummation of Ameren's acquisition of IP. 5. Ameren agrees that for ratemaking purposes, the cost of any long-term debt issued by IP after acquisition by Ameren and before it returns to investment grade level (as rated by Moody's and S&P) would be imputed at the cost of utility bonds rated in the triple-B category (i.e. Baa/BBB) with similar terms to maturity. 6. Ameren agrees that for gas and electric ratemaking purposes, IP's 11.5% long-term debt series will be imputed to the cost of utility bonds rated in the triple-B category (i.e. Baa/BBB) with eight-year terms to maturity. This would include the current IP gas rate case, Docket No. 04-0476, if the proposed Reorganization in 04-0294 is consummated before the end of that rate case. The foregoing components of Ameren's revised proposal are embodied in Conditions 1 through 6 as set forth on Appendix A to this Order. STAFF'S POSITION: Staff witness Kight testified that since IP has required prepayment of interest on the Intercompany Note to meet cash needs and, after the closing, will need to borrow from affiliates in order to meet its working capital needs, the current dividend restriction should not be lifted until IP can show it has sufficient earnings and cash flow to pay dividends. ICC Staff Ex. 10.0R, p. 10. She recommended that the current restriction remain in place due to the unknown amount of time it would take for IP to improve its financial strength to the point where it can pay dividends. Id. Ms. Kight proposed an alternative whereby the Applicants' proposal that IP achieve either a BBB- rating from S&P or a Baa3 rating from Moody's be accepted provided that IP also meet the following conditions: (1) Ameren must maintain a credit rating of at least BBB- from S&P and at least Baa3 from Moody's; (2) IP completes defeasance of the 11.5% first mortgage bonds; and (3) IP obtains specific approval from the Commission for the declaration and payment of dividends on its common stock. ICC Staff Ex.10.0R, p. 11. In her rebuttal testimony, Ms. Kight expressed concern that the lifting of the restrictions on IP's ability to pay dividends potentially could violate Section 7-103 of the Act. ICC Staff Ex. 20.0, p. 3. She testified that given that the success of the proposed recapitalization of IP is uncertain, the dividend restriction should not be lifted until the Applicants demonstrate that the resumption of dividend payments by IP will not violate Section 7-103. Id. 37 04-0294 ATTORNEY GENERAL'S/CUB'S POSITION: AG and CUB witness James Rothschild testified that it is reasonable to allow IP to pay a dividend to Ameren once IP's bond rating reaches investment grade. Mr. Rothschild said that the dividend payments should not be so great that they push IP's bond ratings below BBB-standards. This limitation would give the Commission an early warning if IP were again in danger of falling below investment grades. COMMISSION ANALYSIS AND CONCLUSION: Based on Ameren's revised proposal as presented in Mr. Birdsong's surrebuttal testimony and as embodied in Conditions 1 through 6 on Appendix A to this Order, there is no remaining issue among the parties with respect to the dividend restriction. The record establishes that lifting the dividend restriction imposed on IP in Docket No. 02-0561 subject to the revised conditions proposed by Ameren will be consistent with Section 7-103 of the PUA and that safeguards have been established to protect the financial integrity of IP before it resumes paying dividends. The revised conditions proposed by Ameren and accepted by Staff provide a reasonable opportunity for IP to pay dividends, but protects the public interest in maintaining IP's financial integrity and insuring that it retains or has access to sufficient cash to meet its operating and capital requirements. Accordingly, the Commission approves Ameren's revised proposal concerning the lifting of the Docket No. 02-0561 dividend restriction, as set forth as Conditions 1 through 6 on Appendix A to this Order. 4. ASBESTOS RIDER APPLICANTS' POSITION: Applicants requested approval of the HMAC Rider, an automatic adjustment clause rider, that would provide for the recovery of certain prudent costs incurred in connection with asbestos-related claims, to become effective after January 2, 2007. Recovery under the proposed rider would be limited to those costs that AmerenIP becomes legally obligated to pay after January 1, 2007, and that relate to claims arising from alleged exposure to asbestos at IP facilities prior to October 1, 1999. Ameren witness Steven Sullivan explained why the HMAC Rider is important to Ameren as the future owner of IP. He stated that exposure to asbestos fibers may lead to a number of diseases including lung cancer and mesothelioma. Due to the prevalence of asbestos, perhaps millions of workers throughout the nation have been exposed. This has led to thousands of lawsuits and judgments which, in turn, have resulted in hundreds of defendant companies and their insurers filing for bankruptcy. Mr. Sullivan explained that since 2001, a new type of asbestos litigation has developed. Instead of suing asbestos manufacturers (the original set of defendants in the asbestos litigation), plaintiffs are now seeking recovery against "premises" defendants. Applicants' Ex. 25.0, p. 3. In other words, plaintiffs are suing owners of property that have had asbestos on their premises. For electric utilities, this typically means that they are being sued because they had asbestos installed in structures or equipment at their power plants. Most of these lawsuits have been filed by contractors' employees that worked at utility power plants. Mr. Sullivan explained that although IP is now solely a transmission and distribution utility and no longer owns any power plants, it owned fossil-fueled power plants through September 30, 1999, at which time the plants were transferred to IP's parent, Illinova, which in turn transferred the plants to DMG. Id., pp. 3-4. IP has been and will continue to be 38 04-0294 sued for alleged asbestos exposures at its former fossil power plants up to the date of transfer. Many of the alleged exposures which now serve as the basis of current lawsuits against IP occurred at its power plants in the 1940's, 1950's, and 1960's. Mr. Sullivan explained that this liability is now Ameren's concern. Since Ameren is purchasing the stock of IP, it is essentially purchasing all responsibility for the claims now pending and those that may be filed in the future, based on exposure allegedly experienced at the former IP plants prior to October 1, 1999. Id., p. 4. He also noted that since Ameren will not be the owner of the power plants that give rise to the potential liability, it will have neither the opportunity to attempt to mitigate its costs and risks, nor the ongoing earning power of the plants to wholly or partially offset these costs and risks. Mr. Sullivan responded to suggestions of other parties that Ameren should have sought some means of mitigating the liability that IP faces. He explained that there were several alternatives, but none of them was acceptable or feasible. First, Dynegy could have indemnified IP for these liabilities. Id., p. 5. This request was made during negotiations but flatly rejected. In any event, in light of Dynegy's current credit ratings, this would have created an unacceptable risk for Ameren. Second, Ameren could have purchased the physical assets of IP instead of the common stock. Id., p. 5. Assuming that a court did not thereafter rule that by purchasing substantially all of the assets Ameren acquired successorship liability for claims arising out of asbestos exposure, this option would have effectively trapped these claims at a then-penniless IP. Such a scheme could have triggered intervention in the Commission approval docket by actual and potential asbestos claimants. Third, Ameren did not want to adopt a "wait and see" policy. Id., p. 5. Mr. Sullivan testified that Ameren is engaging in significant efforts to restore IP to an investment grade credit rating. Ameren is not interested in purchasing IP and then waiting to see if asbestos claims lead to significant financial harm. Mr. Sullivan stated that Ameren requires a general determination of recoverability now, and not in IP's next rate case, because once Ameren closes this deal, it has accepted liability. Id., p. 6. If the Commission later decides that these costs are not recoverable, Ameren is left without any legal recourse. Thus, it is critical to Ameren that the Commission make this determination prior to the close of this transaction. Mr. Sullivan also responded to arguments that the Commission must make a threshold decision that the asbestos costs are recoverable. Mr. Sullivan stated that the question before the Commission in this regard is whether asbestos-related costs are generally eligible for recovery in rates. Id., p. 7. He stated that the Commission need not determine whether any specific costs incurred by IP were prudently incurred, and thus recoverable, in order to approve the rider. He pointed out that a small amount of asbestos claim costs is already being recovered in IP's rates. Id. Moreover, the components of these costs are not unusual or of a type typically excluded from rates. For example, the asbestos costs will include legal costs for defense of claims. Legal expenses for defense of claims are generally recoverable in rates. The costs will also include settlements and judgments, which are also generally recoverable in rates. He also noted that settlement and judgment amounts are included in rates even where the judgment resulted from a finding that the utility was negligent or the settlement occurs in a lawsuit in which the utility was accused of negligence. Id. He further noted that most asbestos complaints 39 04-0294 articulate several theories of recovery, including "strict liability," which does not require a finding that the defendant was negligent. Id. Mr. Sullivan testified that whether specific costs incurred were prudent and thus eligible for rider recovery is a question that would be addressed in the periodic reconciliation proceedings under the rider, as is the case with costs charged to customers under other riders. The HMAC Rider would operate no differently, and the Commission would retain its full authority to disallow imprudent expenditures. Id., p. 8. Mr. Sullivan also explained that the HMAC Rider would not result in double recovery of costs. Ameren has proposed that the HMAC go into effect on January 2, 2007. Ameren also expects that new base rates for IP will go into effect on that date, as determined in a rate case to be litigated during 2006. Because the HMAC Rider would be placed into effect contemporaneously with the setting of new base rates, IP, the Commission and its Staff, and intervenors would be able to make sure that no asbestos related judgments, settlements or legal defense costs are included in setting the new base rates, and there would be no double recovery of these costs. Id. Mr. Sullivan also testified that there is no need to conduct a separate proceeding to decide on the appropriateness of the rate mechanism. Id. The HMAC Rider was part of Ameren's assessment of the overall transaction and was openly and plainly proposed in the Application in this matter, and interested parties have had (and availed themselves of) the opportunity to participate and make their views known with respect to the rider. The components of the costs are of types typically recovered in rates, and some asbestos costs are already being recovered in IP's rates. Id. Accordingly, the only significant question is one of rate design - are these costs of a type that warrants rider treatment? Mr. Sullivan testified that the proper criteria to be used to determine whether the rider is appropriate (and the criteria that the Commission and the Illinois courts have used) are that costs are uncertain (not easily predicted), volatile and potentially large or significant. He explained how Applicants' proposed rider satisfies each criterion. Id., p. 10. UNCERTAINTY: The level of asbestos-related costs that IP will incur will be a function of how many and when claims are brought against IP. Management can control costs by deciding how to respond to individual claims - how to manage the cases, what strategy to pursue, whether to settle, and so on. What management cannot control is how many cases are filed against the utility, when cases are filed, and how expeditiously plaintiffs' counsel prosecutes them. Those are factors entirely outside the control of management. Other factors that are beyond management's control, and thus add to the uncertainty, are the individual factors unique to each claim, such as type of disease, plaintiff's age, number of dependents and time on the premises, and the continuing escalation of health care costs. Moreover, while a utility might prepare periodic estimates of costs, it does not follow that costs are predictable over the longer term. 40 04-0294 VOLATILITY: Mr. Sullivan described the volatility of asbestos costs, using Ameren's costs as an example. Before 2000, AmerenCIPS' and AmerenUE's combined asbestos costs were zero. In the next four years, those companies experienced the following level of asbestos claim costs: 2000, $255,128; 2001, $796,355; 2002, $1,610,415; 2003, $3,537,022. Id., p. 13. If AmerenCIPS and AmerenUE had used 2000 as a test year, actual costs would have been over 300% of the test year amount the next year, almost 600% in 2002, and over 1400% of the test year amount in 2003. Even annual rate adjustments would have consistently understated these costs. Moreover, the volatility could go the other way. In a given year, asbestos claim activity and expenditures could be significantly lower than in prior years, meaning that the utility would over recover asbestos costs. MAGNITUDE OF COSTS: Mr. Sullivan noted that the standard used by the Commission in approving rider treatment for costs is that such costs be "potentially large"; the Commission used that standard when approving the use of riders to recover costs associated with manufactured gas plants ("MGPs"). He stated that asbestos claim costs are potentially large. Id., p. 15. In 2003, Ameren's asbestos litigation costs were over 60% greater than its MGP costs, and the trend is that asbestos costs are increasing each year. Mr. Sullivan testified that even at relatively low settlement amounts and with limited litigation, the sheer volume of claimants can produce a very large number in terms of the aggregate settlement and defense costs. Id. Further, a single judgment could be enormous. To date, Ameren has been successful in settling with plaintiffs; that is, no case against the Ameren utilities has gone to trial. Similarly, Ameren has in its view been successful with regard to the settlement terms between the parties, especially given the dollar exposure for which Ameren was at risk. Nonetheless, Ameren is aware that other defendants have not been as successful. For example, in a recent case Shell Oil Company had a judgment entered against it in the amount of $34 million, as a result of a lawsuit brought by a plaintiff in Madison County, Illinois, claiming damages associated with asbestos exposure. Id., p. 17. In 2003 a Madison County jury awarded a plaintiff $250 million in an asbestos suit brought against U.S. Steel. Id. Thus, the liability associated with these claims are truly unknown and certainly can be of a significant magnitude. Mr. Sullivan also explained why IP's rate of return does not compensate it for the risk of a large judgment. Most jurisdictions allow utilities to defer certain one-time, extraordinary expenses not contemplated in the ratemaking process for later recovery in rates. Illinois used to do so, but limitations were placed on the Commission's ability to authorize deferrals in the Supreme Court's BPI decisions. Subsequently, when setting an Illinois utility's rate of return, the Commission has not adjusted the rate of return developed by reference to sample companies in other jurisdictions to account for differences in deferral authority or to compensate the utility for the risks of being hit with a single large litigation judgment. Id., p. 19. Mr. Sullivan also addressed the contention that a pass-through rider poses a "moral hazard" and removes the utility's incentive to minimize costs. Under the HMAC, as is the case under other riders that have been used by Illinois utilities, including the FAC and PGA riders and the MGP cost riders, IP's actions will be subject to a prudence review. The prudence review has been deemed sufficient to address any "moral hazard" associated with those other 41 04-0294 riders. There is no other mechanism in place to address this concern with respect to the FAC, PGA and MGP riders presumably because the Commission (and in the case of the FAC and the PGA, the General Assembly) has concluded that a prudence review is a sufficient check against imprudent behavior. Additionally, the suggestion that IP could hold off settling claims until such time that the proposed rider goes into effect fails to recognize that the claims resolution process is highly driven by the scheduled trial date. Id., p. 21. Mr. Sullivan also explained that Ameren was willing to make several modifications to the HMAC Rider in response to concerns that have been raised by other parties. In response to Staff witness Hathhorn's recommendation, Ameren agreed to modify the HMAC Rider to exclude from recoverable costs the salaries or expenses of employees of IP and its affiliates, including training and legal seminar and conference costs, and travel for such training events. Id., p. 22. In addition, Ameren was willing to impose an annual cap on the amount to be recovered under the HMAC Rider, set at 3% of 2002 revenues. Id., p. 22. This cap will protect customers from severe spikes in asbestos costs in a year, while allowing IP to recover some level of actual asbestos litigation costs. To the extent actual costs exceed the cap in a given year, the excess will be carried forward, with carrying costs, for inclusion in recoverable costs in the following year. Further, Ameren added clarifying language to the rider to ensure there is no recovery of punitive damages awards. Mr. Sullivan disagreed with Staff witness Hathhorn's recommendation that insurance premiums be excluded from rider recovery. He stated that it is reasonable that the premiums for this insurance coverage be recoverable to the extent recoverable costs are offset by any insurance coverage proceeds that are received. Id., p. 23. The HMAC Rider specifically provides that recoverable HMAC costs will be offset by proceeds from insurance carriers. Therefore, the insurance premiums that make it possible for there to be such an offset should flow through the rider. In his surrebuttal testimony, Mr. Sullivan presented a revised proposal containing a number of additional revisions to the rider in response to the concerns of other parties. Ameren proposed to commit $15,000,000 (or $20,000,000 if the acquisition closes by September 30, 2004) to a trust fund (the "Fund") that would be used to absorb post-2006 asbestos cost volatility before the HMAC Rider would apply. Applicants' Ex. 45.0, p. 2. Under this revised proposal, the Rider would be approved now, but no HMAC charge would apply to customers for some, presumably extended, period of time. In IP's initial electric rate filing for the post-2006 period, its new base rates would reflect the test year level of asbestos costs, identified in the revised Rider as the "Base" amount. Beginning in 2007, in the event that actual costs paid in a given year exceed the Base, the excess would be covered from the Fund. The Commission would revise the Base amount in subsequent electric base rate proceedings consistent with test year principles. This situation would continue until such time as the Fund is exhausted. At that time, customers would be subject to charges under the HMAC Rider for costs (as defined in the Rider) in excess of the amount included in base rates. Id., p. 3-4. Mr. Sullivan explained that the Fund will be a standard trust or segregated account, established for the purpose of reimbursing IP for asbestos costs in excess of the Base. Id., p. 5. The Fund will be subject to the continuing 42 04-0294 jurisdiction of the Commission, meaning that the Commission will have the authority to determine whether IP's withdrawals from the Fund were appropriate and consistent with the purpose and terms of the Fund. None of Ameren, nor IP, nor any affiliate will hold any beneficial interest in the income or corpus of the Fund. All income earned by the Fund, net of expenses of administering the Fund (such as an independent trustee's fees), will be added to the balance of the Fund. If in the future it is determined that IP has no further asbestos liability (e.g., federal legislation resolves the asbestos crisis), the balance of the Fund will be credited to ratepayers in the next ensuing IP base rate case. Mr. Sullivan explained that this proposal addressed three concerns that other parties have raised: 1) SUFFICIENCY OF BASE RATES. Under the revised proposal, the initial, and primary, mechanism for recovery of asbestos costs is base rates. A rider charge would only apply when base rates are demonstrably inadequate (i.e., the Fund plus its accrued earnings has been depleted by costs significantly in excess of the levels reflected in base rates). Id. 2) SHARING. This proposal accomplishes significant sharing. Assuming closing by September 30, 2004, shareholders are now assuming more than $20 million of cost responsibility ($20 million initial funding plus earnings on the Fund), which they are funding up front. Moreover, this proposal directly and unequivocally provides ratepayers a benefit in excess of $20 million when compared to recovery solely through base rates. Id., p. 6. 3) STANDARDS. Ameren modified the HMAC Rider to include certain Occupational Safety and Health Act ("OSHA") regulations as a measure to be used in determining whether IP should be able to recover costs. In particular, Ameren agreed that any costs otherwise recoverable under the Rider cannot be recovered if those costs resulted from the exceedance of "personal [asbestos] exposure limits" (as provided for in the OSHA regulations) that resulted in an OSHA citation. Id. STAFF'S POSITION: Staff witness Dr. Howard Haas raised a number of concerns with the proposed HMAC Rider. Dr. Haas testified that assuming that costs are recoverable, and that the costs are hard to predict and completely out of the utility's control, riders might be a good way to recover costs and avoid the test year issues raised by Applicants. He stated, however, that Applicants had not made a case that these characteristics are generally applicable to asbestos claim resolution costs. He stated that where the utility has some control over costs, riders are not a good way to pass through costs. Staff Ex. 1.0, pp. 26-27. Dr. Haas also explained that prudently incurred costs should be recoverable, but costs associated with injury due to negligence or punitive damages should not. Since the claims being brought appear to be based on charges of negligence or wrongful action on the part of IP, he expressed concern that some or all of the costs associated with asbestos litigation should not be recoverable. To the extent that IP was following generally accepted safety procedures, following OSHA guidelines, etc., there is reason to believe that at 43 04-0294 least some of the costs in question might be recoverable. However, where IP is found to be negligent, or cannot prove that it was not negligent, costs associated with claim resolution should not be recoverable to the extent that management decisions caused the harm. He stated that ratepayers should not be obliged to pay for economic consequences of utility actions that result in punitive damages or damages incurred as a consequence of management negligence. Staff Ex. 1.0, pp. 27-28. Dr. Haas explained that to the extent an economic agent has some influence over the costs that are to be recovered via a rider, full-pass-through-riders provide what is known as a moral hazard problem. A moral hazard problem refers to a situation where an economic agent has some control over its costs, yet has no, or limited, incentives to minimize its costs due to the fact that it does not bear the burden of the costs that it incurs. Under these circumstances, the costs that are passed on to those that do have to pay, whether that is society in general or rate payers in particular, will tend, all else held equal, to be higher than they would be in the case where the agent with the decision-making power bore some portion of the costs associated with the decisions being made. With a full cost-pass-through-rider, the incentives to keep costs down are limited and may not sufficiently encourage the agent (in this case, Ameren), to minimize the costs it imposes on other parties. ICC Staff Ex. 1.0, pp. 28-29. Dr. Haas pointed out that the proposed HMAC Rider presented a moral hazard problem. He explained that, in fulfilling their fiduciary responsibility to their shareholders, the utilities have an obligation to minimize costs borne by the shareholders. Companies have control over the costs associated with asbestos litigation in any one year. While a company does not have control over the timing of claims, it has some control over the timing of the process of resolving the claims once they are made. For example, a company can attempt to settle, or not to settle, any time between the time the complaint is filed and a court decision or final verdict is reached. A company could, for example, hold off settling some of its currently pending claims, until such time that the proposed rider goes into effect on December 31, 2006. A company, in fulfilling its fiduciary responsibility to its shareholders, will have an incentive to do this because any costs incurred before December 31, 2006 are at shareholder expense under the proposed arrangement. As such, the proposed rider would present a moral hazard problem from the start. ICC Staff Ex. 1.0, p. 29. In addition to having some control over the timing of costs, a company also has control over the costs of resolving each case in terms of settlements, legal fees, and other costs. While, in the case of settlement, the claimant must decide whether or not to take the offer, the company determines whether or not a settlement is even offered and determines its terms. A company's cost burden affects its incentives to expend money to challenge claims on their legitimacy. Bearing a portion of these settlement costs creates a direct monetary incentive for the company to keep its costs down and to challenge illegitimate claims. Dr. Haas pointed out that the proposed rider would eliminate this direct monetary incentive, thereby reducing the overall incentives to keep settlement costs down and to challenge illegitimate claims. In addition, the proposed rider, with its lack of direct monetary incentives to keep the costs of resolving claims down, may, all else held equal, increase the number of claims made and the settlement 44 04-0294 expectations of the prospective and actual claimants. Dr. Haas testified that absent a direct monetary incentive to challenge claims, more claims, valid and invalid, may be made and more claims may result in settlements and other legal costs at ratepayer expense. ICC Staff Ex. 1.0, pp. 29-30. In his rebuttal testimony, Dr. Haas explained that there is a way to mitigate the moral hazard problem if a rider were used to recover some or all of these costs. The use of a sharing mechanism, where some portion of the recoverable costs would remain IP's responsibility, would mitigate the moral hazard problem, thereby providing some assurance of prudently incurred costs, while ensuring that the company had cost recovery. A sharing mechanism would make sure that any costs associated with asbestos claim resolution would by borne both by ratepayers and IP. A sharing mechanism would therefore ensure that IP has an incentive to minimize the cost of asbestos case resolution. ICC Staff Ex. 14.0, p. 11. Dr. Haas also questioned whether the Applicants presented evidence that the costs for asbestos claim resolution are of greater magnitude than other liability based costs. An examination of incurred costs of general liability claims, workers' compensation claims, and asbestos claims over a concurrent period (1999 through 2003 period) shows the annual incurred costs of the three types of claims are, according to Dr. Haas, in the same ballpark. ICC Staff Ex. 1.0, p. 30. Dr. Haas recognized the possibility that the number of asbestos claims along with the costs of resolving the claims could grow appreciably in the near future. He stated, however, that if the data from other forms of litigation are any indication, they can also fall unexpectedly. He testified that, in general, based on the limited data that has been made available, the forecasts that have been made, as well as IP's own projections with regard to their foreseeable risks, and recent experience do not support Ameren's assertions regarding the potential magnitude or the volatility of the asbestos related litigation costs faced by IP. ICC Staff Ex. 1.0, p. 31. Dr. Haas stated that, even assuming away the issues of possible negligence and allowable recovery, the possibility of a sudden increase in costs still does not mean that the proposed HMAC Rider is the best way to address the problem. Assuming the costs are recoverable, IP could come in for a rate case in the event that asbestos related costs were unexpectedly high. He asserted that IP could also pursue insurance to cover these potential costs. ICC Staff Ex. 1.0, p. 36. Staff witness Dianna Hathhorn also addressed the HMAC Rider in her direct testimony. She testified that it is common for a utility's costs to vary from the level approved in a test year. Further, if IP's experience demonstrates that current and forecasted claims will cause it to not earn its authorized return, IP can seek to recover those costs through a request for new rates. ICC Staff Ex. 8.0, p. 13. Ms. Hathhorn recommended that, if the Commission decides to approve the HMAC Rider, the costs of company affiliate employees (i.e. affiliates of IP), as well as the costs of employees, should be excluded, to avoid the risk of cost shifting. Further, training, legal seminar and conference costs, as well as insurance premiums for asbestos liability insurance, should specifically be excluded, as these costs are not volatile, not dependent on the outcome of asbestos litigation, and includable in base rates. She stated that 45 04-0294 this will avoid issues of possibly double-recovering these costs through the HMAC Rider while at the same time recovering this type of cost in base rates. Id., p. 15. CUB'S POSITION: CUB witness Brian Ross testified that Applicants did not demonstrate a compelling need for a rider. He stated that, if the costs in question are indeed recoverable, IP can adjust test year costs to insure that base rates appropriately reflect the costs of providing utility service. He also stated that a rider shifts the risk of on-going asbestos litigation from Ameren/IP to ratepayers, creating disincentives to pursue reasonable legal strategies both in regard to the ongoing lawsuits and to recovering costs from insurance companies or other parties to the lawsuits. He recommended that the Commission not approve the HMAC rider, but instead address costs associated with asbestos-related lawsuits within the context of rate cases that Ameren/IP plans to initiate starting in 2007. Mr. Ross stated that ratemaking goals do not change because of the cost recovery mechanism, i.e., base rates versus a rider. Under either form of cost recovery, the Commission allows utilities to recover costs only if they meet specific standards, consistent with statutory goals of rate regulation. First, regulators must determine that the utility's costs are eligible for recovery. Regulators have a number of policies for determining whether to allow utilities to recover test year costs through utility rates, including whether the cost provides a benefit to ratepayers, whether the cost has a direct connection to current service, and whether the cost is reasonable in amount for the benefit derived. Second, regulators require utilities to demonstrate that they prudently incurred and managed their costs. Regulators may not allow utilities to recover costs if the utility failed to exercise a reasonable standard of care in managing those costs. CUB Ex. 2.0, p. 4. According to Mr. Ross, the Commission allows utilities to use riders as a means of cost recovery when basic ratemaking principles are in conflict. When specific costs are both large enough and volatile such that test-year based rates no longer reflect the costs of providing service, the method of cost recovery and rate making may need to be changed. Id., p. 5. Mr. Ross contended that whether the Commission should allow IP to recover asbestos costs depends on whether they relate to providing utility services and whether the costs result from prudent and reasonable management. He stated that the Commission has not determined whether IP can recover the costs of asbestos litigation. He testified that, until recently, the dollar amounts associated with asbestos litigation were quite small or nonexistent, and thus did not garner attention in rate cases, and that these costs are still not excessive. He recommended that prior to identifying a cost recovery mechanism, the Commission assess whether the HMAC costs are reasonable to recover. Under test-year rate standards, one-time costs such as large judgments or settlements are generally considered to be a risk borne by shareholders (a risk accounted for in the utility's target rate of return) rather than a reason to change the revenue requirement or rate structure. Moreover, costs associated with failing to comply with regulatory standards, such as fines levied by regulatory entities, are not considered to be recoverable. Finally, costs due to unreasonable management 46 04-0294 decisions, as is alleged in some of the asbestos complaints, may fail the prudent management test. Mr. Ross also testified that, to the extent that litigation costs, including legal costs for outside counsel, settlements, and judgments, are recovered from ratepayers, the cost recovery is typically part of base rates rather than a rider. Mr. Ross stated that, if asbestos litigation costs are simply another manifestation of an existing recoverable cost category, then IP needs to prevent double recovery. If, for instance, test-year based rates include $1 million for outside counsel and in 2007 IP incurs $1 million in costs for outside counsel as a result of asbestos litigation, but has no other litigation during the year, then rider cost recovery would lead to double recovery. Thus, the Commission should limit rider cost recovery to costs easily distinguished from costs already recovered in existing rates. Mr. Ross testified that the Commission should assume that the utility will act in its economic self-interest, including when making decisions to minimize risk. In order to maximize economic efficiency, the utility's cost management should be focused on minimizing expenses, not minimizing exposure to regulatory risk. He stated that the proposed HMAC rider does not eliminate the uncertainty and risk associated with asbestos litigation, but merely shifts the risk from the utility to the consumer. Mr. Ross stated that the utility, instead of having an incentive to reduce costs, faces only regulatory risk via the after-the-fact prudency review. A cost recovery mechanism should not indemnify the utility from risk associated with cost management and should not discourage the utility from actions that increase productivity or cost savings. He argued that prudency reviews capture little of the cost risk associated with asbestos litigation costs, and are problematic in two regards. First, prudency reviews do not evaluate what is the best strategy, just what is a reasonable strategy. The utility may chose a safe but mediocre strategy even if an alternative, but somewhat riskier, management strategy would have been preferred if costs were recovered via test-year based rates. Second, in order to pass the cost risk on to the utility through a prudency review, the Commission must be able to distinguish between reasonable and unreasonable management decisions. He stated that evaluating the prudency of strategic legal decisions is considerably different from evaluating the prudency of fuel contracts or utility construction projects, and the Commission is ill-equipped to review the prudency of strategic decisions in asbestos litigation. Moreover, the Commission is normally reluctant to substitute its judgment for the utility's day-to-day management decisions even for matters in which the Commission is equipped for such evaluation. Given the environment of asbestos lawsuits, after-the-fact prudency review would not pass cost risk to the utility, or provide the utility an incentive for cost reduction. He recommended that the Commission should instead evaluate whether asbestos-related costs are recoverable and include a reasonable level of recoverable costs in base rate in the 2007 rate case. Mr. Ross offered some modifications to the rider that he opined could make the rider more appropriate. He stated that to ensure that the utility bears decision-making risk and reward, the amount to be recovered under the rider could be capped; cost recovery would match approved recoverable expenses up to the cap, then the utility would bear all risk of additional costs. Such a mechanism undermines, however, the reason to use a rider rather than base rates. 47 04-0294 If costs exceed the cap, then the rider is no different from base rates. If costs are less than the cap, then the costs may not have qualified for special treatment in the first place (as the costs are unlikely to have caused financial distress or the need for repeated modifications to base rates). He stated that the rider also could be modified to lessen some problems with rider recovery of asbestos litigation costs, but the modifications either undermine the purpose of the rider or create new problems. One issue is the interrelationship between costs already recovered in base rates and those costs recovered through the proposed rider. To prevent double counting, the Commission would have to require the utility to record separately asbestos-related outside counsel, settlement, and judgment costs and non-asbestos outside counsel, settlement, and judgment costs. However, a rider that allows the utility to recover cost increases for a single base rate category may violate single-issue ratemaking standards. Another issue identified by Mr. Ross is the breadth of types of costs, or the dissimilarity of cost categories, that the Applicants propose to recover under the rider. He stated that the cost of using outside legal counsel is not similar in cost causation to judgments against the utility. Judgments are more similar to fines, a non-recoverable cost, than to legal costs of defense. Judgment costs could be excluded, but that creates an incentive to settle cases that have a risk of judgment. To eliminate the incentive for inappropriate settlements, the Commission could also eliminate rider recovery of settlement costs. But, the potential volatility of remaining costs, chiefly legal fees, would be dramatically reduced, largely eliminating the justification for a rider. In his rebuttal testimony, Mr. Ross addressed Mr. Sullivan's position that a prudency review under the HMAC Rider would be sufficient to protect ratepayers. Mr. Ross noted that the Commission has accepted prudency review as an appropriate means of evaluating the reasonableness of costs that are recovered through a rider. However, according to Mr. Ross, Mr. Sullivan neglected to add that utilities recover most of their costs via test-year-based rates, not via riders. He stated that the question before the Commission is not whether prudency reviews are appropriate for costs recovered through a rider, but rather whether asbestos litigation costs are better recovered through test-year-based rates or a rider, in terms of cost efficiency. For test year-based rates, the Commission has deemed it best to evaluate the prudency of recoverable costs only during test year-based rate proceedings, leaving the utility to manage those costs at all other times. Mr. Ross stated that, normally, market mechanisms promote cost efficiency when those bearing the risk manage the costs. Rate regulation is sometimes necessary, but clearly a second-best, means of ensuring reasonable cost management compared to market mechanisms. Base rate cost recovery of asbestos litigation costs puts the utility at some risk for the cost consequences of its management decisions, similar to what would happen in an unregulated market. The Commission needs to decide whether the circumstances justify relying wholly upon a second-best means of cost management, i.e., prudency review, or relying partially upon the risk sharing inherent in base rate recovery. If the utility, and not ratepayers, is at risk between rate cases, the Commission minimizes its need to make after-the-fact judgments regarding the utility's management. Mr. Ross reiterated his concerns relating to the effect of the HMAC rider on efficient management of asbestos litigation decisions; by removing the 48 04-0294 management incentive to reduce costs, the rider could increase the likelihood of excessively large settlements. Mr. Ross did testify that dividing the cost risk of asbestos litigation between shareholders and ratepayers could result in more appropriate management incentives. CUB Ex. 3.0 at 6. Mr. Ross also responded to Mr. Sullivan's statement that Applicants have no intention of doubly recovering costs. Mr. Ross explained that Mr. Sullivan mistook Mr. Ross's concerns regarding double-recovery for a concern that the Applicants would claim asbestos costs under both the HMAC rider and base rates. Mr. Ross stated that his concern with double-recovery arose from splitting recovery for a single cost category into two separate cost-recovery mechanisms, which could result in inadvertent double recovery. If asbestos claim costs are part of an existing base rate cost, the rider mechanism must ensure that total cost recovery of the category (all litigation claim costs) does not exceed total costs. Mr. Ross also responded to Mr. Sullivan's testimony that the Commission has not adjusted the rate of return to account for the risks of being hit with a single large litigation judgment. Mr. Ross stated that if the risk of such judgments is considered to be a genuine possibility that is borne by most utilities, then a properly functioning capital market would incorporate the risk into the rate of return. The Commission would not have to make a special adjustment for a risk that is endemic to the industry. A rate of return developed by reference to sample companies would likely incorporate a risk premium to account for the industry-wide exposure to this litigation. AGREED RESOLUTION: Subsequent to the filing of Applicants' surrebuttal testimony, Ameren, the AG, and CUB executed the MoA in which Ameren agreed to make certain additional revisions to its proposed HMAC Rider beyond those described above. In particular, Ameren agreed to establish a Fund with an initial balance of $20 million, irrespective of when the Reorganization closes. Over-recoveries and under-recoveries from base rates will be reflected in the Fund balance on a 90/10 basis; that is, IP will be reimbursed from the Fund for 90% of any under-recoveries in a year; and will deposit 90% of any over-recoveries (i.e., if the amount included in base rates exceeds actual, prudently incurred costs for a year) into the Fund. If and when the Fund is exhausted, an HMAC charge will be applied to recover 90% of prudent actual costs in excess of the amount included in base rates; IP will bear 10% of cost responsibility. Applicants' Ex. 47.0. The agreed HMAC Rider is attached to this Order as Appendix B ("agreed HMAC Rider"). The agreed HMAC Rider also provides the Commission with oversight authority over IP's use of the Fund. The Commission can determine whether the costs being reimbursed through the Fund are prudent, and whether deposits and withdrawals are proper in amount - i.e., whether IP is using the Fund properly. As noted above, the Staff filed comments indicating that it did not oppose approval of the agreed HMAC Rider. Staff further indicated that its non-opposition was based on the particular facts and circumstances presented in this proceeding (including but not limited to the MoA). Staff also indicated that although it does not oppose approval of the HMAC Rider pursuant to the MoA, Staff's non-opposition should not be construed in connection with any future 49 04-0294 proceedings as (i) acceptance of any rider for recovery of asbestos costs in proceedings for any other electric utility or utilities, (ii) acceptance of the positions or arguments presented in the Applicants' testimony, or (iii) waiver or rejection of any of the positions or arguments presented in the testimony of Staff witnesses. COMMISSION ANALYSIS AND CONCLUSION: The Commission finds that the proposed HMAC Rider attached to this Order as Appendix B is reasonable and should be approved. First, the HMAC Rider accomplishes sharing of asbestos costs between shareholders and ratepayers. By virtue of Ameren's contribution to the Fund, shareholders will bear at least $20 million of asbestos costs, plus 10% of costs subject to the HMAC. Second, the sharing that is achieved will provide IP a sufficient incentive to minimize costs, even while the Fund is in operation. Although 90% of IP's Fund-eligible costs, and later, Rider-eligible costs, are reimbursed, IP has some incentive to keep costs down, thereby benefiting customers. This mitigates the moral hazard problem identified by Staff and CUB. Third, the agreed HMAC Rider preserves the Commission's ratemaking authority by providing that the Commission determines the prudence of costs reimbursed from the Fund and recovered through the Rider. If costs are not large and volatile, it is unlikely that the Fund will ever be exhausted, and thus, no HMAC charge will ever apply. If on the other hand the Fund is exhausted, this will occur only if base rates have been inadequate to recover large and volatile costs - which is when the Commission would normally approve a rider. Fourth, the agreed HMAC Rider incorporates revisions made by Ameren earlier in the case to its initial proposal in order to address concerns of other parties. These provisions include the cap on annual recoverable costs; the exclusion of punitive damage awards from recoverable costs; and the exclusion from recoverable costs of amounts paid on claims that arose from violations of OSHA personal exposure limits. Accordingly, the agreed HMAC Rider represents a resolution of the many concerns expressed by the parties in this docket. The Commission directs IP to file such a rider in the form of Appendix B to this Order, to be effective January 2, 2007, as a compliance filing in this docket, within 15 days following the closing of the transaction. While the Commission's finding is conclusive with respect to approval of the agreed HMAC Rider for IP, it is based on the particular facts and circumstances presented in this proceeding, including the MoA. In this regard, the Commission conclusion is not intended and should not be interpreted or construed in connection with any future proceeding as a finding that rider recovery of asbestos costs for any other electric utility or utilities is appropriate, or limit or restrict the arguments or positions that Staff or other parties may make in future proceedings. 5. ELIMINATION OF INTERCOMPANY NOTE APPLICANTS' POSITION: A condition to closing set forth in the SPA is that neither Dynegy nor any affiliate have any continuing obligation under the Intercompany Note beyond closing. As stated earlier in this Order, the current 50 04-0294 principal balance of the Intercompany Note is approximately $2.27 billion. Ms. Carter testified that this balance is not expected to change until immediately prior to the closing of the acquisition, at which time the steps to eliminate the Intercompany Note will be implemented. Applicants' Ex. 11.0, p. 3. Ms. Carter described the steps that will be implemented to eliminate the Intercompany Note. These steps are summarized in Schedule 5.15 to the SPA. These steps are to occur shortly prior to the closing of the acquisition. First, no more than two days prior to the closing of the acquisition, the principal balance of the Intercompany Note will be reduced or offset by the amount of certain intercompany payables owed by IP to Illinova or to other Dynegy entities, and will be offset by the amount of interest that has been paid by Illinova to IP on the Intercompany Note but not yet earned. A portion of the remaining balance of the Intercompany Note will be eliminated in consideration of Illinova's assumption of IP's then-existing net deferred tax obligations and IP's contemporaneous repurchase (and cancellation immediately thereafter) of a portion of its common stock. Applicants' Ex. 11.0, pp. 3-8. Applicants' Exhibit 11.1 is an Assumption Agreement between Illinova and IP by which Illinova will assume IP's net deferred tax obligations. Finally, the remaining principal balance of the Intercompany Note will be eliminated, as part of the overall recapitalization of IP, with a corresponding reduction to IP's balance of retained earnings. Applicants' Ex. 11.0, pp. 4, 8. As noted earlier in this Order, Ms. Carter presented IP's proposed accounting entries associated with elimination of the Intercompany Note on Applicants' Exhibit 11.2. STAFF'S POSITION: Staff witness Sheena Kight recommended that Applicants' request for approval to eliminate all payables and receivables associated with the Intercompany Note should be granted. She pointed out that elimination of all payables and receivables associated with the Intercompany Note will reduce IP's capitalization to equal the fair value of its property as required under Section 6-103 of the PUA. ICC Staff Ex. 10.0R, p. 9. In addition, as noted earlier in this Order, Staff witness Ms. Pearce testified that the accounting treatment proposed by the Applicants with regard to the elimination of the Intercompany Note conforms with the requirements of the USoA for electric and gas utilities operating in Illinois, based on the information in Ms. Carter's testimony. ICC Staff Ex. 9.0, p. 19. COMMISSION CONCLUSION: Based on the evidence of record, the Commission concludes that Applicants' request for approval to eliminate the Intercompany Note, in accordance with the steps set forth in Section 5.15 of the SPA and as described above, should be approved. The elimination of the Intercompany Note is a key component of Ameren's recapitalization plan for AmerenIP. In particular, elimination of the Intercompany Note, along with the elimination of a significant amount of outstanding higher-cost debt, will restore IP's balance sheet to a condition in which its capital is approximately equivalent to the book value of its utility assets. 6. CANCELLATION OF EXISTING AFFILIATE AGREEMENTS APPLICANTS' POSITION: Presently, IP is party to two affiliate agreements that will no longer be necessary after the Reorganization, and therefore should be terminated: a Services and Facilities Agreement among IP, Dynegy and other 51 04-0294 affiliates of Dynegy; and a Netting Agreement among IP, Dynegy and certain other affiliates of Dynegy. The Services and Facilities Agreement and Netting Agreements, which were approved by the Commission in Docket Nos. 99-0114 and 02-0561, respectively, are unnecessary once the transaction closes since IP will no longer be an affiliate of the other parties to these agreements. Applicants' Ex. 11.0, pp. 10-11. Applicants requested that, accordingly, the Commission authorize cancellation of these affiliate agreements in connection with the closing of Ameren's acquisition of IP. STAFF'S POSITION: Staff witness Dianna Hathhorn testified that the request to cancel the existing IP Services and Facilities and Netting Agreements should be granted. ICC Staff Ex. 8.0, p. 5. COMMISSION CONCLUSION: The Commission concludes that IP should be authorized to terminate the Services and Facilities Agreement and the Netting Agreement in connection with the closing of the Reorganization. V. FINDINGS AND ORDERING PARAGRAPHS The Commission, having considered the entire record and being fully advised in the premises, is of the opinion and finds that: (1) IP is an Illinois corporation that is engaged in the transmission, distribution, delivery, and sale of electricity and the transmission, distribution, delivery, and sale of natural gas at retail in this State, and is a "public utility" as that term is defined in Section 3-105 of the PUA; (2) the Commission has jurisdiction over the parties hereto and the subject matter herein; (3) the recitals of fact set forth in the prefatory portion of this Order are supported by the record and are hereby adopted as findings of fact; (4) subject to IP's and Ameren's written acceptance of the conditions set forth on Appendix A to this Order, Applicants' request for approval under Section 7-204 and, to the extent necessary, 7-102 of the PUA, for IP to engage in a Reorganization, pursuant to which Ameren will acquire all of the outstanding common stock of IP and all of the preferred stock of IP held by Illinova, should be granted; (5) the capitalization of IP resulting from the Reorganization, including the steps set forth in Schedule 5.3(b) to the SPA, and the elimination of all receivables and payables associated with the Intercompany Note between IP and Illinova, should be approved pursuant to Section 6-103 of the PUA, subject to the condition that this approval is not determinative for ratemaking purposes; 52 04-0294 (6) consent and approval, pursuant to Section 7-101 of the PUA, to the entry by IP into the General Services Agreement, the Fuel Services Agreement, the Tax Allocation Agreement the Ameren Money Pool Agreement, and the Unilateral Borrowing Agreement, submitted in evidence as Applicants' Exhibits 5.2, 5.3, 5.4, 5.5 (Rev.), and 22.1, respectively, should be granted; (7) pursuant to Section 5-106 of the PUA, IP should be authorized to maintain books and records out of state, subject to the condition that Ameren will be liable for, and upon proper invoice from the Commission, will 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; (8) Ameren's acquisition of the common stock and the preferred stock of IP is prudent and reasonable, and the public will benefit thereby, taking into consideration the effect of the purchase on IP's deferred tax balances and rate-base valuation; and IP's proposed accounting entries associated with the acquisition, including the entries associated with the changes in the deferred tax balances, as revised to reflect the reversal of the impact of push down accounting for Illinois regulatory purposes as proposed by Staff, should be approved, subject to the conditions set forth above and in Appendix A hereto; (9) IP should be allowed to amortize ratably over a period beginning in 2007 and ending in 2010, no more than $39.8 million of severance, relocation and integration costs and up to $27.2 million of early debt redemption premium costs, for a total of up to $67 million of costs incurred in accomplishing the Reorganization, and to recover the unamortized portion beginning in 2007 over the remainder of the amortization period, subject to the conditions set forth above and in Appendix A hereto; (10) the restriction imposed in Docket No. 02-0561, on IP's ability to declare and pay dividends on its common stock should be terminated after the closing of the Reorganization if and at such time as IP achieves an investment grade credit rating from at least one nationally recognized credit rating agency; and IP should be authorized to declare and pay dividends on its common stock after the closing of the Reorganization when it has achieved an investment grade credit rating from at least one nationally recognized credit rating agency, subject to the following conditions: (a) Until IP achieves an investment grade credit rating from both Standard & Poor's ("S&P") and Moody's Investors Service ("Moody's"), IP shall not pay common dividends unless (i) Ameren maintains at least a BBB-corporate credit rating from S&P and a Baa3 corporate credit rating from Moody's or (ii) the Commission issues an order authorizing IP to resume declaring and paying 53 04-0294 common dividends. Ameren shall provide the Manager of Finance evidence of its investment grade credit rating and the amount of the common dividend within five business days of IP's declaration of a common dividend. (b) In the event IP has not redeemed all of the 11.5% bonds by December 31, 2006, IP shall not thereafter declare or pay common dividends until such time as the commission issues an order authorizing IP to resume declaring and paying common dividends. (c) Until such time as all of IP's 11.5% first mortgage bonds are redeemed the upper limit of total common dividends IP can pay to Ameren in any given calendar year will be determined as follows: 1. For 2005: $80 million 2. For 2006: $160 million less cumulative common dividends paid to Ameren since the consummation of Ameren acquisition of IP. (d) For ratemaking purposes, the cost of any long-term debt issued by IP after acquisition by Ameren and before it returns to investment grade level (as rated by Moody's and S&P) would be imputed at the cost of utility bonds rated in the triple-B category (i.e., Baa/BBB) with similar terms to maturity. (e) For gas and electricity ratemaking purposes, IP's 11.5% long-term debt series will be imputed to the cost of utility bonds rated in the triple-B category (i.e., Baa/BBB) with eight-year terms to maturity. This includes the current IP gas rate case, Docket No. 04-0476, if the proposed transaction in Docket No. 04-0294 is consummated before the end of that rate case; (11) an electric automatic adjustment clause tariff rider in the form attached to this Order as Appendix B, to become effective on January 2, 2007, under which IP may recover the prudent costs, net of insurance recoveries and other contributions, associated with certain claims or damages related to asbestos exposure, all in accordance with the specific terms and conditions set forth in the tariff sheets attached hereto as Appendix B, should be filed as a compliance filing in this docket within 15 days following the closing of the transaction; (12) the elimination of the Intercompany Note between IP and Illinova in accordance with the steps described in Schedule 5.15 to the SPA, as described in Section IV.G.5 of this Order, should be approved pursuant to Section 7-101 of the PUA; (13) at the closing of the Reorganization, the following agreements between IP and certain affiliated interests should be terminated: (a) the Services and Facilities Agreement among IP, Dynegy and other 54 04-0294 affiliates of Dynegy, and (b) the Netting Agreement among IP, Dynegy and certain other affiliates of Dynegy; (14) IP is authorized to engage in an arrangement pursuant to which IP can borrow funds directly from Ameren, if necessary, at interest rates determined pursuant to the same methodology as reflected in the Ameren Money Pool Agreement. IP's participation in the Ameren Money Pool Agreement will be restricted until IP achieves investment grade credit ratings from both S&P and Moody's. The following are the restrictions on IP's participation in the Ameren Money Pool Agreement: (i) IP's lending into the money pool shall not exceed the less of $100 million or 90% of cash on hand, and (ii) all affiliates borrowing money through the money pool from IP must meet the requirements of a non-utility borrower under Section 340.40 of the Administrative Code. Once IP receives investment grade ratings from both S&P and Moody's, these restrictions will no longer apply and, for purposes of its participation in Ameren's utility money pool, IP will only be subject to the terms, conditions and other provisions of the ICC money pool rules and Ameren's Utility Money Pool Agreement. The aggregate amount of borrowings outstanding at any time by IP under the Ameren Money Pool Agreement and the Unilateral Borrowing Agreement shall not exceed $500 million; (15) IP is authorized to engage in an arrangement pursuant to which IP can borrow funds directly from Ameren, if necessary, at interest rates determined pursuant to the same methodology as reflected in the Ameren Money Pool Agreement (Applicants' Ex. 5.5 revised) and the Unilateral Borrowing Agreement proposed in Applicants' Ex. 22.1. The aggregate amount of borrowings outstanding at any time by IP under the Ameren Money Pool Agreement and the Unilateral Borrowing Agreement shall not exceed $500 million; (16) Each of the authorizations granted to IP and to Ameren in this Order is expressly conditioned on the receipt by the Commission of verified statements signed by officers of each of IP and Ameren stating the acceptance of each of Ameren and IP of the conditions set forth on Appendix A to this Order; such verified statements shall be filed with the Chief Clerk of the Commission no later than two business days prior to the closing of the Reorganization; (17) Applicants should be required to close the transaction described herein no later than February 24, 2005; and (18) any objections, motions, or petitions filed in this proceeding that remain unresolved should be disposed of in a manner consistent with the ultimate conclusions contained in this Order. 55 04-0294 IT IS THEREFORE ORDERED by the Illinois Commerce Commission that, subject to Illinois Power Company's and Ameren Corporation's written acceptance of the conditions set forth in Appendix A to this Order, Applicants' request for approval under Sections 7-204 and 7-102 of the PUA, for Illinois Power Company to engage in a Reorganization, pursuant to which Ameren Corporation will acquire all of the outstanding common stock of Illinois Power Company and all of the preferred stock of Illinois Power Company held by Illinova Corporation shall be, and is hereby, granted. IT IS FURTHER ORDERED pursuant to Section 6-103 of the PUA that the capitalization of Illinois Power Company resulting from the Reorganization, including the steps set forth in Schedule 5.3(b) to the Stock Purchase Agreement and the elimination of all receivables and payables associated with the Intercompany Note between Illinois Power Company and Illinova Corporation, shall be, and is hereby, approved, subject to the condition that this approval is not determinative for ratemaking purposes. IT IS FURTHER ORDERED pursuant to Section 7-101 of the PUA that entry by Illinois Power Company into the General Services Agreement, the Fuel Services Agreement, the Tax Allocation Agreement and the Money Pool Agreement submitted in evidence as Applicants Ex. 5.2, 5.3, 5.4 and 5.5 Revised, respectively, shall be, and is hereby, granted, subject to the conditions set forth in Appendix A to this Order. IT IS FURTHER ORDERED pursuant to Section 5-106 of the PUA that Illinois Power Company is authorized to maintain books and records out of state, subject to the conditions set forth in Finding (7) of this Order. IT IS FURTHER ORDERED that Applicants' request for a finding that Ameren's acquisition of the common stock and the preferred stock of Illinois Power Company is prudent and reasonable, and the public will benefit thereby, taking into consideration the effect of the purchase on Illinois Power Company's deferred tax balances and rate-base valuation, and for approval of Illinois Power Company's proposed accounting entries associated with the acquisition, including the entries associated with the changes in the deferred tax balances, shall be, and is hereby, granted. IT IS FURTHER ORDERED that Illinois Power Company shall be, and is hereby, allowed to amortize ratably over a period beginning in 2007 and ending in 2010, no more than $67 million of costs incurred in accomplishing the Reorganization, and to recover the unamortized portion beginning in 2007 over the remainder of the amortization period, subject to the conditions set forth in Appendix A to this Order. IT IS FURTHER ORDERED that the restriction imposed in Docket No. 02-0561 on Illinois Power Company's ability to declare and pay dividends on its common stock shall be terminated upon closing of the Reorganization; after closing, Illinois Power Company shall be subject to the restrictions set forth in Finding (10) of this Order, above. IT IS FURTHER ORDERED pursuant to Section 9-201 of the PUA that an electric automatic adjustment clause tariff rider in the form of Appendix B to this Order, to become effective on January 2, 2007, shall be filed as a compliance 56 04-0294 filing in this docket within 15 days following the closing of the transaction. IT IS FURTHER ORDERED pursuant to Section 7-101 of the PUA that approval for the elimination of the Intercompany Note between Illinois Power Company and Illinova Corporation in accordance with Finding (12) of this Order shall be, and is hereby, granted. IT IS FURTHER ORDERED that at closing of the Reorganization, the following agreements shall be terminated: (a) the Services and Facilities Agreement among Illinois Power Company, Dynegy, Inc. and other affiliates of Dynegy, Inc., and (b) the Netting Agreement among Illinois Power Company, Dynegy, Inc. and certain other affiliates of Dynegy, Inc. IT IS FURTHER ORDERED that the Unilateral Borrowing Agreement between Ameren Corporation and Illinois Power Company, in the form submitted in evidence as Applicants' Ex. 22.1 shall be, and is hereby, approved. IT IS FURTHER ORDERED that Illinois Power Company and Ameren Corporation shall close the transaction described herein no later than February 24, 2005. IT IS FURTHER ORDERED that any objections, motions, or petitions filed in this proceeding that remain unresolved should be disposed of in a manner consistent with the ultimate conclusions contained in this Order; and IT IS FURTHER ORDERED that, subject to the provisions of Section 10-113 of the PUA 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 22nd day of September, 2004 (SIGNED) EDWARD C. HURLEY Chairman 57 04-0294 Appendix A CONDITIONS OF APPROVAL ---------------------- 1. The common dividend restriction the Commission imposed on Illinois Power Company ("IP") in Docket No. 02-0561 will be terminated after the closing of the proposed reorganization if and at such time as IP achieves an investment grade credit rating from at least one nationally recognized credit rating agency, subject to the conditions and agreements indicated in Conditions 2, 3, and 4 below. 2. Until IP achieves an investment grade credit rating from both Standard & Poor's ("S&P") and Moody's Investors Service ("Moody's"), IP will not pay common dividends unless (i) Ameren Corporation ("Ameren") maintains at least a BBB- corporate credit rating from S&P and a Baa3 corporate credit rating from Moody's or (ii) the Commission issues an order authorizing IP to resume declaring and paying common dividends. Ameren will provide the Manager of Finance evidence of its investment grade credit rating and the amount of the common dividend within five business days of IP's declaration of a common dividend. 3. In the event IP has not redeemed all of the 11.5% first mortgage bonds by December 31, 2006, IP may not thereafter declare or pay common dividends until such time as the Commission issues an order authorizing IP to resume declaring and paying common dividends. 4. Until such time as all of IP's 11.5% first mortgage bonds are redeemed, the upper limit of total common dividends IP can pay to Ameren during any given calendar year will be determined as follows: for 2005, $80 million; for 2006, $160 million less cumulative common dividends paid to Ameren since the consummation of Ameren's acquisition of IP. 5. For ratemaking purposes, the cost of any long-term debt issued by IP after acquisition by Ameren and before IP returns to investment grade level (as rated by Moody's and S& P) would be imputed at the cost of utility bonds rated in the triple-B category (i.e. Baa/BBB) with similar terms to maturity. 6. For gas and electric ratemaking purposes, IP's 11.5% first mortgage bonds will be imputed to the cost of utility bonds rated in the triple-B category (i.e. Baa/BBB) with eight-year terms to maturity. This includes the current IP gas rate case, Docket No. 04-0476, if the proposed transaction in Docket No. 04-0294 is consummated before Docket No. 04-0476 is concluded. 7. Until IP achieves investment grade credit ratings from both S&P and Moody's, (i) IP's lending into the Ameren utility money pool shall not exceed the lesser of $100 million or 90% of cash on hand, and (ii) all affiliates borrowing money through the money pool from IP must meet the requirements of a non-utility borrower under Section 340.40 of the Administrative Code. (i.e., each affiliate must satisfy one of the requirements set forth at 340.40(b)(1)-(b)(5)). Once IP receives investment grade ratings from both S&P and Moody's, these restrictions will no longer apply and, for purposes of its participation in Ameren's utility money pool, IP will only be subject to the 04-0294 Appendix A terms, conditions and other provisions of 83 Ill. Adm. Code Part 340 and Ameren's Utility Money Pool Agreement. 8. IP will not file any proposed increase in gas base rates to be effective prior to January 1, 2007, beyond the proceeding currently in progress in Docket No. 04-0476. 9. All contracts, agreements, tariffs or arrangements, including any amendments thereto, of any kind between IP and any Affiliated Interest, as that term is defined in the Public Utilities Act, that are required to be filed with and/or approved by the Securities and Exchange Commission ("SEC"), pursuant to the Public Utility Holding Company Act, as hereinafter amended, and/or the Federal Energy Regulatory Commission ("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 IP nor any Affiliated Interest will seek to overturn, reverse, set aside, change or enjoin, whether through appeal or the maintenance of any action in any forum, a decision or order of the ICC that pertains to recovery, disallowance, deferral or ratemaking treatment of any expense, charge, costs or allocation incurred or accrued by IP 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 Condition 9 is intended to alter, change or modify the same condition imposed on AmerenCIPS and AmerenUE by the Commission in the proceeding regarding their merger and reorganization (Docket No. 95-0551). 10. IP will file with the ICC all contracts, tariffs, agreements, arrangements or transactions between IP and any Affiliated Interest(s) that require approval under Section 7-101 of the PUA, 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 IP 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 Commission under Section 7-101 of the PUA, 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 Condition 10 is intended to alter, change or modify the same condition imposed on AmerenCIPS and AmerenUE by the Commission in the proceeding regarding their merger and reorganization (Docket No. 95-0551). 11. Except to the extent reflected in the regulatory asset approved in this Order, IP will not seek recovery in rate proceedings of: (i) the stock issuance costs associated with the equity issued by Ameren to acquire IP; (ii) the severance and relocation costs associated with integration of IP into Ameren; (iii) the implementation costs associated with integration of IP into 2 04-0294 Appendix A Ameren; (iv) any acquisition adjustment associated with the acquisition of IP by Ameren; and (v) any debt redemption costs associated with the recapitalization of IP described in Applicants' Ex. 24.1. 12. IP will file a tariff as reflected inAppendix B to this Order to be effective January 2, 2007 through a compliance filing in Docket No. 04-0294. 13. IP shall reverse the effects of push-down accounting for ratemaking purposes, and shall not reflect push-down adjustments for debt or preferred stock in its annual reports to the Commission. IP will reflect in Account 114, plant acquisition adjustments, the impacts of all push down accounting, for all Illinois regulatory purposes. 14. Ameren will file with the Chief Clerk the final accounting entries and explanations for the transaction, showing the actual dollar values of all involved accounts, within 60 days after the date on which the reorganization is consummated. At the time of this filing, Ameren will provide a copy to the Manager of the ICC's Accounting Department. 15. IP will file with the Chief Clerk the final accounting entries for the elimination of the Intercompany Note, showing the actual dollar amounts for all entries, within 60 days after the closing date . At the time of this filing, IP will provide a copy to the Manager of the ICC's Accounting Department. 16. IP 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 PUA. 17. Ameren shall increase, via transmission projects or upgrades, competitive access into the AmerenCIPS delivery market by 300 MW and into the AmerenIP delivery market by 200 MW. The transmission projects or upgrades proposed and completed will be specific to addressing this mitigation commitment and will be specifically designed to address the need to increase simultaneous import capability into AmerenCIPS and AmerenIP delivery markets by 300 MW and 200 MW, respectively. Until such time as transmission projects or upgrades, specific to this mitigation commitment, have increased competitive access into the AmerenCIPS delivery market by 300 MW, Ameren will continue its power sales offer to unaffiliated entities from the 125 MW share of Joppa that Ameren is acquiring from Dynegy, Inc. Ameren further commits that: (1) it will meet with the ICC Energy Division Staff no later than June 30, 2005, to discuss the transmission projects or upgrades that would satisfy these commitments to increase competitive access; (2) it will use best efforts to work with the ICC Energy Division Staff to reach an agreement by December 16, 2005 on the projects which will best serve the interest of increasing competitive access, provided that if Ameren and Staff are unable to reach an agreement, the matter shall be brought to the Commission's attention via a Staff report; and (3) to the extent required by law, within 6 months of reaching an agreement with Staff, Ameren (through its public utility subsidiaries) will file petitions for certificates 3 04-0294 Appendix A of convenience and necessity with the Commission seeking authority to engage in the projects. 18. Within 180 days of closing, IP shall make such filings with the ICC as may be necessary to conform the non-rate provisions of its delivery service tariffs and business procedures to those of the AmerenCIPS, AmerenCILCO, and AmerenUE; Nothing herein shall require IP to propose, or prohibit IP from proposing, any modification to its Rider PPO - Purchase Power Option Service, Rider TC - Transition Charge, Rider MVI or Rider MVII - both Market Value Indexes, Rider PRS - Partial Requirement Service or Rider ISS - Interim Supply Service or the rates and charges contained in SC 110 - Delivery Services; provided, however, that IP may not propose any increase in electric delivery service rates that would be effective prior to January 1, 2007. 19. Ameren will cause IP to make between $275 million and $325 million of capital expenditures during Ameren's first two years of ownership of IP. 20. With respect to the synergies ("Associated Savings Amounts") described in Attachment B to Applicants' Ex. 47.0, beginning in the second quarter of 2005, IP will provide quarterly updates to the Commission (via a filing on e-Docket under Docket No. 04-0294), Citizens Utility Board ("CUB") and the People of the State of Illinois ("People") of its progress towards reaching the merger synergy milestones. Meetings will be scheduled at mutually convenient times and places. Updates on the work effort towards each project will be provided. 21. In its next electric rate case and next gas rate case, IP will file as a component of its initial filing a report (verified by a witness in the case) detailing the milestones achieved, as well as other identified savings. The verified report shall provide information current as of the time of the rate filing. 22. In IP's next electric rate case and next gas rate case, for all Associated Savings Amounts not reflected in the proposed test year, the Commission may reduce O&M expenses by the jurisdictional (i.e., electric vs. gas) portion of any Associated Savings Amount ("Jurisdictional O&M Reduction") for any milestone that IP has not achieved or cannot demonstrate that it is reasonably certain to achieve by the time the rates approved in that case go into effect, unless and to the extent that IP can demonstrate : (i) greater savings than estimated from other milestones on the Savings Schedule ("Greater Savings"); (ii) other O&M savings not reflected on the Savings Schedule ("Other Savings"); or (iii) that, in light of facts or circumstances then known, achieving the milestone is imprudent or would materially and adversely affect customer service or system reliability; provided, however, that normal utility operating and maintenance practices may not be deemed to materially and adversely affect customer service or system reliability. The burden of proving that (i) IP has achieved or is reasonably certain of achieving a milestone, (ii) the amount of Greater Savings and Other Savings, and (iii) the imprudence or adverse effect of a milestone, shall be on IP. Thus, to the extent that IP meets its burden to show that a milestone is imprudent or would materially and adversely affect customer service or system reliability, or that there are 4 04-0294 Appendix A Greater Savings or Other Savings, the Commission may offset the amount of a Jurisdictional O&M Reduction, if any, that otherwise would be appropriate. 23. In IP's next electric rate case and gas rate case, IP will allocate Associated Savings Amounts on a basis consistent with the underlying O&M expenses to which they relate. 24. IP will propose a residential real time pricing ("RTP") tariff effective after 1/1/07 on the following terms: A. RTP generation service tariff will be optional. B. The Delivery Services tariff applicable to RTP residential customers will be IP's standard Delivery Service tariff available to all residential consumers taking generation services from IP or from an alternative electric supplier. C. Customers taking the optional RTP tariff can switch to RES supplied service at any time, subject to standard DASR rules. D. The Hourly Energy Prices developed by IP will be applicable to all hourly energy consumed by the customer during the monthly billing period. E. There will be a monthly Customer Charge that will also reflect the cost of the special metering installed to monitor hourly usage and price accordingly. 25. IP will work cooperatively with neighborhood/community groups seeking to provide educational support for the residential RTP. 26. IP shall cooperate in good faith with the People to design a residential RTP tariff that: (i) includes reasonable, appropriate and economic protections against unfavorable RTP outcomes, provided that the cost of any such protections shall be reflected in charges under the residential RTP tariff; (ii) establishes a reasonable means of recovering firm capacity charges, if any, and setting hourly energy prices; (iii) establishes reasonable rules on switching to and from standard generation service by residential RTP customers; and (iv) establishes practical and timely procedures to inform participating customers of the actual hourly prices to be charged under this RTP tariff. 27. Ameren will provide quarterly progress reports to the Commission (via a compliance filing in Docket No. 04-0294) and the Director of the Energy Division regarding its IP integration efforts. Ameren will also hold periodic meetings with Energy Division Staff, the People and CUB to review the progress Ameren is making with regard to the integration of systems, work processes, and initiatives. Information relevant to these endeavors will be supplied at these meetings. Within 180 days of the transaction close, Ameren will provide a final 5 04-0294 Appendix A report to the Commission and the Director of the Energy Division regarding its integration efforts. 28. Ameren will incorporate its relay testing and calibration standards into IP as soon as practicable following integration. Ameren will provide a copy of the Ameren relay testing standards to the Director of the Energy Division. 29. Ameren will complete the testing and calibration of all electromechanical relays at AmerenCILCO by the end of 2004. 30. Ameren will begin installing excess flow valves for new and replacement residential services for its operating utilities within six (6) months of closing. 31. Ameren will incorporate the AmerenCILCO electrical system model into the overall Ameren model regarding relay testing and calibration schedules (for coordination purposes) by the end of 2004, and the IP system will be incorporated into the model by the end of 2005. 32. Ameren will expedite the tap fusing program in the Illinois properties of AmerenUE and complete the analysis and implementation of necessary tap fuses by the end of 2007. 33. Ameren will include IP in the tap fusing program following integration. 34. Ameren agrees to a 4-year trimming cycle for IP and further agrees to incorporate Ameren's "cycle-buster" mid-cycle trim program to address problem areas between scheduled trimmings following integration. 35. Ameren will conduct a review of the IP gas system after closing. The review will also include the gas storage assets and will identify any capital expenditures necessary to ensure that the storage fields continue to be maintained and operated in a safe and reliable manner. The review will proceed in an expeditious fashion and the resultant information will be provided to the Director of the Energy Division. 36. Ameren will perform a study that identifies the possible points of interconnection between all of the Ameren gas utilities, including IP. The gas systems interconnection study should proceed on an expedited basis after closing. The scope of the integration study shall be defined jointly by the Staff and Ameren upon closing of the transaction. Once the final scope is defined, the study should be completed within eighteen (18) months. Ameren will provide a copy of the completed study to the Commission and the Director of the Energy Division. 37. Ameren shall maintain adequate employee levels, including supervision, throughout its gas operations. Ameren will provide the Director of the Energy Division with formal organizational charts once this information is compiled. 38. Ameren will continue to study the balance between in-house and vendor testing and repair of meters, and make any adjustments to this balance 6 04-0294 Appendix A that are appropriate. All results from these analyses will be shared with the Director of the Energy Division. 39. Ameren will integrate the O&M plans as well as the gas standards, training, and qualification programs, pipeline integrity management and other fundamental gas operations practices of AmerenCIPS, AmerenCILCO and IP as rapidly as possible. Ameren shall provide the ICC Energy Division Director, the People, and CUB quarterly updates on its efforts in these areas. 40. Ameren shall consolidate the quality assurance personnel programs of Ameren and IP as part of the overall objective of moving to common practices, and in so doing will consider the best practices of each. 41. After closing, IP will increase its total contribution to United Way, civic, charitable, and social service organizations in IP's service territory to at least $1.5 million annually. 42. Ameren will commit additional resources to support and enhance economic development aimed at attracting new jobs in the IP service territory; 43. Ameren will maintain IP's headquarters in Decatur, Illinois for not less than five years following closing; 44. IP workforce reductions resulting from the acquisition will not exceed 25 employees for a period of four years following the closing, except to the extent additional reductions occur through attrition or voluntary separation programs; 45. IP will honor all existing labor agreements; and 46. IP employees, retirees and retirees' surviving dependents will remain in their current IP benefit plans or be moved into appropriate Ameren plans. 47. IP shall provide quarterly reporting to the Commission as a compliance filing of Docket No. 04-0294 45 days following the end of each calendar quarter until the first Annual Report is filed under the HMAC Rider to report the following: 1) A description of any HMAC activity that has taken place during the quarter; 2) A description of the costs and expenses incurred during the quarter; 3) The amount of costs and expenses incurred during the quarter and the total-to-date for the year; 4) The account to which the cost or expense was recorded; 7 04-0294 Appendix A 5) The amount of any settlements, judgments and awards that were paid, charged, owed, or in any way accounted for, due or owing as a result of any liability, adjudication, claim, compromise, settlement or judgment, for personal injury, wrongful death, bodily harm, or personal or property damage of every kind and nature arising from asbestos, materials containing asbestos and asbestos related activities, filed or claimed by or on behalf of any person, entity, or otherwise against the Company, its employees, officers or agents, or any predecessor to the Company or in connection with assets or facilities of the Company previously sold, transferred or otherwise disposed of; 6) The total of all cash expenditures for costs and expenses of defense against claims arising from asbestos, materials containing asbestos and asbestos related activities, or of litigation or legal activities associated with efforts to recover costs associated with any such activities from insurers or other responsible parties; 7) The amount of costs and expenses recorded during the quarter that would be recoverable HMAC costs if the HMAC Rider were effective; and 8) A reporting of activity in the HMAC Cost Fund indicating a) Beginning balance for the quarter; b) Interest amount added for the quarter; c) Rate of interest received on balance; d) Amount and description of any other additions to the Fund balance during the quarter; and e) Amount and description of any deductions to the Fund balance during the quarter. 48. Regarding the regulatory asset, IP shall submit an annual report to the Commission and provide a copy to the Manager of Accounting by March 15th of the year succeeding each of the years 2004-2006 that would set forth: a) A cost summary of the actual costs incurred to date, and b) A listing of each cost incurred in the calendar year that would include a description of the cost, the amount, and a reference to a supporting document 8 04-0294 Appendix A Furthermore, IP shall support the requested regulatory asset during the anticipated proceeding to set rates for the post-2006 period by providing for the record the following: a) A cost summary of the actual costs incurred, and b) A listing of the actual costs incurred that would include a description of each cost, the amount, and a reference to a supporting document; and making the supporting documentation available for review by the parties in the proceeding. 9 04-0294 APPENDIX B ILLINOIS POWER COMPANY Ill. C.C. No. __ Electric Service Schedule Ill. C.C. No. __ Original Sheet No. __ - -------------------------------------------------------------------------------- HAZARDOUS MATERIALS ADJUSTMENT CLAUSE ("HMAC") RIDER - -------------------------------------------------------------------------------- PURPOSE OF RIDER The Hazardous Materials Adjustment Clause (HMAC) shall operate to recover allowable HMAC Costs (as defined herein) of the Company. APPLICABLE RATE CLASSES This rider is applicable to all customers receiving electric service from the Company and will be applied to all kWh delivered, including bundled and delivery service rates. The "Applicable Rate Classes" shall be: (1) Residential, (2) Commercial/Municipal, and (3) Industrial. HAZARDOUS MATERIALS ADJUSTMENT FORMULA As of the date of closing of Ameren Corporation's purchase of the Company, Ameren Corporation shall create a trust fund to reflect shareholders' contribution to asbestos costs ("HMAC Cost Fund"), with an initial balance of $20 million, to fund the portion of the Company's HMAC Costs that the Company agreed to bear in Docket No. 04-0294. In each year subsequent to 2006 and until such time as the HMAC Cost Fund terminates, the Company shall withdraw from the Fund 90% of the amount by which its annual cash expenditures for prudently incurred HMAC Costs exceed the BASE amount, or shall deposit in the Fund 90% of the amount by which the BASE amount exceeds the Company's cash expenditures for prudently incurred HMAC Costs, as applicable. The HMAC Cost Fund shall be invested in short-term investment funds and all earnings thereon, net of expenses of the trust fund, shall be added to the HMAC Cost Fund balance. When the balance of the HMAC Cost Fund has reached zero, the HMAC Cost Fund shall terminate and an HMAC shall be applied. At such time as it is determined that the Company faces no further asbestos liability, the remaining balance of the HMAC Cost Fund will be credited to ratepayers in the next ensuing base rate proceeding upon an order of the Commission. Prior to application of an HMAC the Commission may initiate a proceeding ("Fund operation proceeding") on its own motion, or on the petition of any party, to (i) determine the prudence of annual cash expenditures for HMAC Costs, (ii) reconcile the amount of prudently incurred HMAC Costs for each year with the amounts withdrawn from the Fund, and (iii) determine that the amounts deposited into and withdrawn from the Fund were correct. If the Commission finds, after hearing, that any amounts were incorrectly deposited into or withdrawn from the Fund for any reason, the amount necessary to reconcile the amounts actually deposited into and withdrawn from the fund with the amounts determined by the Commission to be correct or proper shall be deposited into or withdrawn from the Fund by the Company as ordered by the Commission. In the event that no such review proceeding is commenced prior toapplication of the HMAC, the review described in this paragraph shall be conducted in the first review of an Annual Report as described below. In the event that the review described in this paragraph is conducted in the first review of an Annual Report, or in the event that the review described in this paragraph is pending but has not been completed at the time of termination of the Fund, the amount of any necessary deposit or withdrawal from the Fund shall be treated as an adjustment to the ARA component of the HMAC Factor. The pendency of a Fund operation proceeding shall not delay the termination of the Fund or the application of the HMAC. The HMAC shall be calculated for each Applicable Rate Class using the following formulas: AC = (SUM - BASE + ARA) * 0.90 ACC = AC * (CBR/EBR) FACT = ACC / Applicable Rate Class annual forecasted kWh Where: AC = Annual Cost is the amount of HMAC Costs to be recovered during an Annual Recovery Period. Annual Cost is subject to the condition that the Annual Cost shall not exceed 3 % of the Company's retail revenue for sales to customers as reported in the Form 21 for 2002. HMAC Costs shall include: (i) all cash expenditures for costs and expenses, settlements, judgments and awards paid, charged, owed, or in any way accounted for, due or owing as a result of any liability, adjudication, claim, compromise, settlement or judgment, for personal injury, wrongful death, bodily harm, or personal or property damage of every kind and nature arising from asbestos, materials containing asbestos and asbestos related activities, filed or claimed by or on behalf of any person, entity, or otherwise against the Company, its employees, officers or agents, or any predecessor to the Company or in connection with assets or facilities of the Company previously sold, transferred or otherwise disposed of; and (ii) all cash expenditures for costs and expenses of defense against claims arising from asbestos, materials containing asbestos and asbestos related activities, or of litigation or other legal activities related to the activities listed above, including, but not limited to, litigation or legal activities associated with efforts to recover costs associated with any such activities from insurers or other responsible parties. Provided, however, no HMAC Costs shall be recoverable under this Rider if, with respect to such costs: 1) the events giving rise to the incurrence of such costs resulted from the Company's failure to exercise ordinary care to ensure compliance with the Permissible Exposure Limits ("PEL") required by 29 C.F.R. ss. 1910.1001(c), or by PELs contained in Occupational Safety and Health Administration ("OSHA") standards in effect prior to Section 1910.1001(c) that regulated asbestos exposure in general industry worksites (those predecessor standards being located at 29 C.F.R. ss.ss. 1910.93a(a), 1910.93a(b)(1), and Table G-3; 29 C.F.R. ss. 1910.1001(b)(2)); and 2) the noncompliance with the PEL resulted in a citation issued by OSHA pursuant to 29 U.S.C. ss. 658; and, provided further, that HMAC Costs shall be limited to such costs that (1) arise from or relate to the Company's ownership or operation of facilities at the Company prior to October 1, 1999, and (2) that the Company becomes legally obligated to pay after December 31, 2006. HMAC Costs will be credited to reflect proceeds received from insurance carriers or other entities which represent reimbursement of HMAC Costs. HMAC Costs shall not include the salaries or expenses of Company employees or Company affiliate employees, nor any benefits related thereto (except to the extent such salaries or expenses, or benefits, are included under (i) above), nor shall HMAC Costs include any removal or remediation costs or expenses, nor shall HMAC Costs include costs or expenses related to asbestos training, legal seminar and conferences and related traveling, and nor shall HMAC Costs include any punitive damages paid by the Company. - -------------------------------------------------------------------------------- Date of Filing, _______, 200_ Date Effective, January 1, 2007 Issued by _________, President ________Decatur, IL 6_____ ILLINOIS POWER COMPANY Ill. C.C. No.__ Electric Service Schedule Ill. C.C. No. __ Original Sheet No. ______ - -------------------------------------------------------------------------------- HAZARDOUS MATERIALS ADJUSTMENT CLAUSE ("HMAC") RIDER - -------------------------------------------------------------------------------- SUM = The sum of the annual forecasted balance of HMAC Costs for the Annual Recovery Period and the net unrecovered HMAC Costs that have not been previously reflected in the HMAC. The net unrecovered HMAC Costs shall include any prior period costs resulting from the application of the 3% cap as defined under AC, including carrying costs as determined by the Commission under 83 Ill. Adm. Code 280.70(e)(1). BASE = The amount of HMAC Costs reflected in the test year in the most recent electric rate case Commission Order. ARA = The Annual Reconciliation Amount is a dollar adjustment necessary to reflect the difference between i) actual recoverable HMAC Costs for an Annual Recovery Period and ii) actual HMAC revenues arising through the application of this rider for an Annual Recovery Period plus the amount of HMAC Costs recovered through base rates for the Annual Recovery Period, and any over/under-recovery for the prior Annual Recovery Period ordered by the Commission to be refunded or collected during the Annual Recovery Period. ACC = Annual Class Cost (ACC) is the projected annual amount of HMAC Costs to be recovered from an Applicable Rate Class during the Annual Recovery Period. The ACC for each Applicable Rate Class is the product of: i) AC and; ii) a ratio, the numerator of which is the CBR, and the denominator of which is EBR. CBR = Class Base Revenue represents the annual forecasted base rate revenue, excluding power supply revenue, for an Applicable Rate Class for the Annual Recovery Period. EBR = Electric Base Revenue represents the total annual forecasted base rate revenue, excluding power supply revenue, for all Applicable Rate Classes for the Annual Recovery Period. FACT = An HMAC Factor shall be calculated for each Applicable Rate Class to recover the respective estimated Annual Class Cost associated with each such Applicable Rate Class. The HMAC Factor shall be calculated by dividing: (i) ACC for each Applicable Rate Class by ii) the annual kilowatt hours of electric energy forecasted to be delivered during the Annual Recovery Period to all Customers in the Applicable Rate Class. - -------------------------------------------------------------------------------- Date of Filing, ______, 200_ Date Effective, January 1, 2007 Issued by ________, President ______, Decatur, IL 6_____ ILLINOIS POWER COMPANY Ill. C. C.No. __ Electric Service Schedule Ill. C.C. No. __ Original Sheet No. ______ - -------------------------------------------------------------------------------- HAZARDOUS MATERIALS ADJUSTMENT CLAUSE ("HMAC") RIDER - -------------------------------------------------------------------------------- TERMS AND CONDITIONS The amount of any HMAC Factor shall be shown on an Information Sheet supplemental to this Rider and filed with the Commission not later than the 20th day of December immediately preceding the January of the Annual Recovery Period in which the HMAC Factor is to become effective. The standard Annual Recovery Period shall be a calendar year. The Information Sheet shall be accompanied by backup data showing the calculation of each HMAC Factor. Unless otherwise ordered by the Commission, each HMAC Factor shown on an Information Sheet filed in accordance with this paragraph shall become effective as indicated in the Information Sheet and shall remain in effect for all kWh delivered during the effective Annual Recovery Period. If the Company determines during the Annual Recovery Period that it is appropriate to revise the HMAC Factors in an effort to better match Annual Cost with expected revenues recovered under this rider or to implement an ordered ARA factor, the Company shall file revised HMAC Factors on a revised Information Sheet not later than the 20th day of the billing month immediately preceding the billing month in which the revised HMAC Factor is to become effective. In the event significant increases in HMAC occur in mid-year or later, the Company may choose to not attempt to recover said increases entirely in the Annual Recovery Period, instead carrying over portions into the next Annual Recovery Period through the ARA factor. The Company will file an Annual Report with the Commission for each Annual Recovery Period, no later than 60 days following the end of the Annual Recovery Period. The Annual Report will provide a reconciliation between the Proportional Costs recovered through the HMAC Factor and the HMAC revenue for the immediately preceding Annual Recovery Period (including all amounts actually recovered through application of an HMAC Factor under this rider plus the amount of HMAC Costs included in base rates for the Annual Recovery Period) as well as provide a summary of the Company's Hazardous Materials Activities. The total amount of any over or under recovery of HMAC Costs for the immediately preceding Annual Recovery Period will be included in the ARA component of Annual Costs and thereby be reflected in the HMAC Factor for the succeeding Annual Recovery Period. In conjunction with the filing of its Annual Report, the Company shall file with the Commission a statement, which shall be certified by the Company's independent public accountants and verified by an Officer of the Company, certifying the accuracy of the information provided in the Annual Report. Upon review of the Annual Report filed by the Company, the Commission may, by order, require a hearing (Annual Review) to receive evidence regarding HMAC Costs collected in the preceding Annual Recovery Period and any aspect of the Company's Hazardous Materials Activities associated therewith, including a prudence review of HMAC Costs that have not been previously reviewed. Included in such review, the Company will provide testimony regarding the prudence of the Company's asbestos related costs included in the filing in accordance with: (1) reasonable and appropriate business and legal standards; (2) the requirements of other relevant state and/or federal authorities; and (3) the minimization of costs to ratepayers. If within 10 months after the filing of any Annual Report filed under this Rider, the Commission has not ordered a hearing to review this filing, the Company may at any time thereafter file a petition with the Commission to initiate a hearing to reconcile the amounts collected under this Rider with the costs prudently incurred by the Company for HMAC Costs. If the Commission finds, after hearing, that any amounts were incorrectly included in the HMAC Factor during an Annual Recovery Period or that the Company has not shown all HMAC Costs to be prudently incurred or that the Company has made errors in its Annual Report for an Annual Recovery Period, any difference in the amounts included and the amounts determined by the Commission to be correct or proper shall be refunded or recovered, as appropriate, with any interest or other carrying charge authorized by the Commission, through an appropriate adjustment to the ARA component of the HMAC Factor or as otherwise may be ordered by the Commission. - -------------------------------------------------------------------------------- Date of Filing, ______, 200_ Date Effective, January 1, 2007 Issued by ________, President _______Decatur, IL 6____ EX-99 4 dc173083_exhd4.txt EX D-4 - ORDER OF THE FERC EXHIBIT D-4 108 FERC P. 61,094 UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, Joseph T. Kelliher, and Suedeen G. Kelly. Ameren Corporation Docket No. EC04-81-000 Dynegy Inc. Illinova Corporation Illinova Generating Company Illinois Power Company Dynegy Midwest Generation, Inc. Docket No. ER04-673-000 Dynegy Power Marketing, Inc. Dynegy Power Marketing, Inc. Docket No. ER04-711-000 ORDER AUTHORIZING DISPOSITION OF JURISDICTIONAL ASSETS AND ACCEPTING POWER PURCHASE AGREEMENTS SUBJECT TO CONDITIONS (Issued July 29, 2004) 1. In this order, we authorize a merger involving Ameren Corporation (Ameren), Dynegy, Inc. (Dynegy), Illinova Corporation (Illinova), and Illinova Generating Company (Illinova Generating) (collectively, the Applicants) under section 203/1/ of the Federal Power Act (FPA)./2/ The section 203 Application also requests that the Commission grant any authorization deemed necessary for Illinois Power to transfer functional control of its transmission facilities to the Midwest Independent Transmission System Operator (Midwest ISO) (the Midwest ISO Transfer). - ---------- 1 16 U.S.C. ss. 824b. 2 16 U.S.C. ss.ss. 791a - 825r. Docket No. EC04-81-000 -2- 2. The Commission also accepts for filing the following transactions by Dynegy Midwest Generation, Inc. (Dynegy Midwest) and Dynegy Power Marketing, Inc. (Dynegy Power) under section 205/3/ of the FPA: 1) a rider to an existing power purchase agreement between Dynegy Midwest and Illinois Power (the Interim PPA Rider); 2) a power purchase agreement between Dynegy Power and Illinois Power (the Base PPA); and, 3) a second power purchase agreement between Dynegy Power and Illinois Power (the Memorandum PPA). 3. Finally, the Commission accepts for filing a market-based Power Purchase Agreement (the Interim PPA) filed by Dynegy Power under section 205 of the FPA and proposed to go into effect only if the sale of Illinois Power to Ameren in Docket No. EC04-81-000 is not completed by December 31, 2004. 4. The Commission's actions in accepting the section 203 Application and PPAs will benefit customers by providing for continued service from the jurisdictional facilities at just and reasonable rates. Moreover, the Illinois Power sale and the transfer of its transmission assets resulting from the section 203 Application will promote the Commission's objective of establishing regional power markets. It will benefit customers by filling a transmission void in the Midwest ISO./4/ I. BACKGROUND ---------- A. DESCRIPTION OF THE APPLICANTS ----------------------------- 5. Ameren is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA)./5/ According to the Application, Ameren does not directly own or operate any facilities subject to the Commission's jurisdiction and does not own any significant assets other than the stock of the following subsidiaries: o AmerenCILCO - an Illinois corporation, wholly-owned by Ameren, provides retail electric service to approximately 205,000 customers in central - ---------- 3 16 U.S.C. ss. 824d. 4 Section 203 Application at 4. 5 15 U.S.C. ss.ss. 79, et seq. Docket No. EC04-81-000 -3- and east central Illinois. Its retail operations are subject to the jurisdiction of the Illinois Commerce Commission (ICC). AmerenCILCO owns approximately 36 MW of generating capacity at three facilities in Illinois, and it owns approximately 331 circuit miles of electric transmission lines and 8,901 miles of electric distribution lines. It is interconnected with Commonwealth Edison Company, Illinois Power, AmerenCIPS, and the Springfield City Water, Light and Power Department. o AmerenCIPS - an Illinois corporation, wholly-owned by Ameren, provides retail electric service to approximately 325,000 customers and natural gas service to approximately 170,000 customers in central and southern Illinois. Its retail operations are subject to the jurisdiction of the ICC, and its provision of electric energy and capacity to retail customers is subject to the Illinois Customer Choice Law./6/ AmerenCIPS owns approximately 1,916 circuit miles of electric transmission lines and approximately 13,324 circuit miles of electric distribution lines. AmerenCIPS and its affiliate AmerenUE operate a single control area and provide open access transmission service on a single-system basis under their joint Open Access Transmission Tariff. They are interconnected with 23 control areas. AmerenCIPS has a market-based rate tariff on file with the Commission. o AmerenUE - a Missouri corporation, wholly-owned by Ameren, provides retail electric service to approximately 1.2 million customers and natural gas service to approximately 130,000 customers in central and eastern Missouri and west-central Illinois. Its retail operations are subject to the jurisdiction of the Missouri Public Service Commission (MoPSC) and the ICC. AmerenUE owns approximately 7,961 MW of generating capacity at nine power plants in Missouri and Illinois. It owns approximately 3,230 circuit miles of electric transmission lines and 32,596 circuit miles of electric distribution lines. o AmerenEnergy Resources Company (AER) - an Illinois corporation, wholly-owned by Ameren, AER conducts Ameren's generation and wholesale merchant function (with the exception of wholesale sales made directly - ---------- 6 The Illinois Customer Choice and Rate Relief Law of 1997, 220 Ill. Comp. Stat. Ann. 5/16-101 (2004). Docket No. EC04-81-000 -4- by the Ameren Operating Companies). o AmerenGenerating Company (AEG) - wholly-owned by AER, AEG owns approximately 4,754 MW generating capacity at power plants located in Missouri and Illinois. o Electric Energy, Inc.(EEInc) - jointly owned by four parties, AER (20 percent), AmerenUE (40 percent), Illinova Generating (20 percent) and LG&E Corporation's Kentucky Utilities (20 percent), EEInc owns and operates a six-unit coal-fired generating facility with a capacity of approximately 1,014 MW in Joppa, Missouri (the Joppa Facility). Through a wholly-owned subsidiary, EEInc owns and operates two combustion turbines of approximately 72 MW also located at the Joppa Facility. 6. Dynegy Inc. is an Illinois corporation and an exempt holding company under PUHCA. Through its subsidiaries, Dynegy is engaged in the gathering, processing, marketing and distribution of natural gas and natural gas liquids, as well as the generation, marketing, transmission and distribution of electric power. The following subsidiaries are relevant to the Application: o Dynegy Midwest Generation (Dynegy Midwest) - an Illinois corporation and indirect wholly-owned subsidiary of Dynegy, owns and operates eight fossil fuel generating facilities, with an aggregate generating capacity of 3,812 MW located entirely within Illinois Power's control area. Dynegy Midwest has blanket authorization to make wholesale sales of capacity and energy at market-based rates. o Illinova Corporation - an Illinois corporation and wholly-owned subsidiary of Dynegy, Illinova is an exempt holding company under PUHCA. It does not directly own, operate or control any facilities used for the generation, transmission or distribution of electric energy and power in interstate commerce. It is the parent of Illinois Power and Illinova Generating. o Illinois Power Company (Illinois Power) - a direct wholly-owned subsidiary of Illinova, Illinois Power is an electric and natural gas public utility that owns and operates electric transmission and distribution facilities and natural gas distribution facilities in central and southern Illinois. Illinois Power provides retail electric service to approximately 600,000 customers and retail natural gas distribution service to approximately 415,000 customers located in northern, central and southern Illinois. Its retail operations are subject to ICC jurisdiction. Illinois Power also transmits electric energy at wholesale, subject to the Commission's jurisdiction, and it provides unbundled retail transmission service. Illinois Power owns Docket No. EC04-81-000 -5- approximately 1,672 circuit miles of electric transmission lines, 17 transmission-only substations, six transmission substations with distribution facilities, 41 distribution substations with transmission facilities and approximately 37,765 circuit miles of electric distribution lines. Following consummation of the transaction, Illinois Power will continue to operate as a single control area. o Illinova Generating Company - a direct wholly-owned subsidiary of Illinova, Illinova Generating owns 20 percent of EEInc. o Dynegy Power Marketing (Dynegy Power) - an indirect wholly-owned subsidiary of Dynegy, Dynegy Power has Commission authorization to sell capacity and energy at market-based rates. It has the exclusive right to market all of the capacity and energy produced by the Dynegy Midwest units not sold to Illinois Power under the existing power purchase agreements. B. THE SECTION 203 APPLICATION - DOCKET NO. EC04-81-000 ---------------------------------------------------- 7. The section 203 Application seeks approval for the transfer of jurisdictional facilities associated with: 1) the sale from Illinova to Ameren of all of the outstanding common shares and approximately 73 percent of the preferred shares of Illinois Power, a public utility serving retail customers in Illinois and also serving wholesale customers (collectively, the IP Shares); and 2) the sale from Illinova Generating to AmerenEnergy Resources Company (AER), a direct wholly-owned subsidiary of Ameren, of Illinova Generating's 20 percent interest in Electric Energy, Inc. (the EEInc Shares). The jurisdictional facilities include transmission lines, substations and transformers. The Applicants request that the Commission approve the sale of the IP Shares to Ameren and the EEInc Shares to AER (collectively, the IP Sale) effective on the date of the IP Sale. 8. In addition to the IP Sale, Ameren seeks Commission authorization for Illinois Power to transfer functional control of its transmission facilities to the Midwest ISO under section 203 of the FPA. The Applicants state that Illinois Power intends to join the Midwest ISO "within a reasonable time" after the Commission approves the IP Sale and the MISO Transfer and accepts the PPAs filed under section 205. Applicants state that they wish to close the IP Sale as soon as possible, "ideally in the third quarter of 2004," and that a Commission order approving the merger on or before July 28 is necessary to close on this Docket No. EC04-81-000 -6- timetable./7/ C. THE APRIL 2 SECTION 205 APPLICATION - DOCKET NO. ER04-673-000 ------------------------------------------------------------- 9. Contemporaneously with the section 203 Application, Ameren Corporation - on behalf of the Applicants - filed, pursuant to section 205 of the FPA certain agreements intended to replace three existing power purchase agreements: 1) the Original Power Purchase Agreement through which Illinois Power purchases its power supply from Dynegy Midwest; 2) the Negotiated Tier 1 Memorandum amending the Original Power Purchase Agreement's price terms; and, 3) the Negotiated Tier 2 Memorandum, which provides additional capacity and energy under terms contemplated by the Original Power Purchase Agreement. 10. The Original Power Purchase Agreement will expire on December 31, 2004, and immediately following the IP Sale to Ameren, Dynegy Power and Illinois Power will enter into the Base PPA and Memorandum PPA to replace the Existing Power Purchase Agreements. The Base PPA will begin on the later of January 1, 2005, or the closing of the IP Sale. It calls for Dynegy Power to sell to Illinois Power: 1) 2,300 MW of firm capacity October through April, and 2) 2,800 MW of firm capacity from May through September. Furthermore, Dynegy Power will provide to Illinois Power all of its energy and ancillary services needs that are not met by third parties. The Memorandum PPA, also set to begin on the later of January 1, 2005, or the closing of the IP Sale, states that Dynegy Power will sell to Illinois Power 300 MW of firm capacity in 2005 and 150 MW of firm capacity in 2006. 11. However, if the IP Sale closes before January 1, 2005, Dynegy Midwest will continue to supply capacity, energy, and ancillary services to Illinois Power from the date of closing of the IP Sale through December 31, 2004, under the terms of the Existing Power Purchase Agreements, as modified by the Interim PPA Rider. This will prevent a gap in Illinois Power's power supply. According to the Interim PPA Rider, dispatch control of the Dynegy Midwest units is with Dynegy Midwest rather than Illinois Power (which will no longer be a Dynegy Midwest affiliate). The Interim PPA Rider does not change the pricing and only amends those sections of the Original Power Purchase Agreement necessary to remove from Illinois Power any control over dispatch of Dynegy Midwest's units, except when necessary to preserve grid reliability. - ---------- 7 Section 203 Application at 5. Docket No. EC04-81-000 -7- 12. In addition, immediately after the closing of the IP Sale, Illinois Power and Dynegy Midwest will enter into a Black Start Agreement taking effect as of the date of the closing of the IP Sale and continuing through December 31, 2006. Under the Black Start Agreement, Dynegy Midwest will provide Illinois Power black start service, which is energy needed to re-energize the transmission grid in the event of a widespread failure. 13. Two of the Applicants, Dynegy Midwest and Dynegy Power, request that the Commission grant them authorization, effective January 1, 2005, to sell ancillary services at market-based rates in accordance with the conditions for such sales set forth by the Commission in Avista Corporation./8/ In particular, Dynegy Midwest and Dynegy Power state that they will "establish an Internet-based OASIS-like site for providing information about and transacting ancillary services."/9/ D. THE APRIL 2 SECTION 205 APPLICATION - DOCKET NO. ER04-711-000 ------------------------------------------------------------- 14. On April 2, 2004, Dynegy Power filed the Interim PPA between Dynegy Power and Illinois Power. According to Dynegy, this agreement will take effect on January 1, 2005, but only if the sale of Illinois Power does not close by the end of the year. Dynegy Power states that the Interim PPA pricing terms are identical to the Base PPA and that it is intended to fill a gap in Illinois Power's power supply if the sale of Illinois Power has not occurred by January 1, 2005. Additionally, Dynegy Power will provide reserve sharing services to Illinois Power in order for Illinois Power to remain in compliance with its reliability agreements. II. NOTICES AND INTERVENTIONS ------------------------- 15. Notice of the section 203 Application and the contemporaneous section 205 filings was published in the Federal Register,/10/ with comments, protests, and interventions due on or before May 10, 2004./11/ Timely motions to intervene raising no substantive issues were filed by: Clay Electric Cooperative; the - ---------- 8 87 FERC P. 61,223, order on reh'g, 89 FERC P. 61,136 (1999). 9 Contemporaneous section 205 Application at 18. 10 69 Fed. Reg. 18,069 (2004). 11 On April 12, 2004, Citizens Electric Corporation and Missouri Joint Municipal Electric Utility Commission filed a motion for extension of time, and on April 16, 2004, the Commission issued an order denying the motion. Docket No. EC04-81-000 -8- Coalition of Retail Suppliers (Direct Energy Marketing Inc., MidAmerican Energy Company, and Peoples Energy Services Corporation); Constellation Power Source, Inc. (CPS) jointly with Constellation NewEnergy, Inc. (CNE); Edison Mission Energy (EME) jointly with Edison Mission Marketing & Trading, Inc. (EMMT) and Midwest Generation EME, LLC; FirstEnergy Service Company (FirstEnergy); the ICC; the Midwest Independent Transmission System Operator, Inc. (Midwest ISO); Northern Indiana Public Service Company (NIPSCO); Wabash Valley Power Association, Inc. (Wabash). In addition, the Wisconsin Public Service Company (Wisconsin Electric) filed a motion to intervene out-of-time raising no substantive issues. The Illinois Municipal Electric Agency (IMEA) filed a timely motion to intervene and comments in support of the applications. Timely motions to intervene with comments or protests were filed by: Archer-Daniels-Midland Company (ADM); Aquila Merchant Services, Inc. (Aquila); Citizens Electric Corporation (Citizens) jointly with Missouri Joint Municipal Electric Utility Commission (MJMEUC);/12/ Exelon Corporation (Exelon); the Illinois Industrial Energy Consumers (IIEC); the Missouri Industrial Energy Consumers (MIEC); the Missouri Office of the Public Counsel (MOPC); Southwestern Electric Cooperative, Inc. (Southwestern); City Water Light & Power of the City of Springfield, Illinois (CWLP);/13/ and Soyland Power Cooperative, Inc. (Soyland). 16. In addition to the motions to intervene and comments, a number of motions seeking to file answers and other responsive pleadings have been filed: the Applicants filed a motion for leave to submit an answer and an answer; MIEC filed a motion for leave to file a response and a response in support of the protest of the MOPC; Citizens/MJMEUC filed a reply to Applicants' answer, as well as an answer to the Applicants' motion for continued confidentiality; and Aquila filed opposing Applicants' motion for leave to submit an answer; in the alternative, Aquila sought leave to file and submitted an answer to the Applicants' answer. - ---------- 12 Citizens filed a motion withdrawing its participation in the joint pleadings with MJMEUC on July 9, 2004. Trans-Elect, Inc. also withdrew its motion to intervene on May 26, 2004. 13 CWLP filed a motion withdrawing its protest but not its intervention on July 27, 2004. Docket No. EC04-81-000 -9- PROCEDURAL MATTERS - ------------------ 17. Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure,/14/ the notices of intervention and timely, unopposed motions to intervene serve to make the entities that filed them parties to this proceeding. Additionally, Rule 213(a)(2) of the Commission's Rules of Practice and Procedure/15/ prohibits an answer to a protest unless otherwise ordered by the decisional authority. We will accept the Applicants' answer and the other answers and responsive pleadings, as they have provided information that assisted us in our decision-making process. The Commission will also grant Wisconsin Electric's unopposed motion to intervene out-of-time due to the early stage of the proceedings and the fact that its participation at this point will not harm other parties. III. THE SECTION 203 APPLICATION - DOCKET NO. EC04-81-000 ---------------------------------------------------- 18. Section 203(a) of the FPA provides that the Commission must approve a disposition of facilities if it finds that the disposition "will be consistent with the public interest."/16/ The Commission's analysis under the Merger Policy Statement of whether a disposition is consistent with the public interest generally involves consideration of three factors: 1) the effect on competition; 2) the effect on rates; and 3) the effect on regulation./17/ As discussed below, we will approve the proposed disposition of jurisdictional facilities as consistent with the public interest. A. EFFECT ON COMPETITION --------------------- - ---------- 14 18 C.F.R. ss. 385.214 (2004). 15 18 C.F.R. ss. 385.213(a)(2)(2004). 16 16 U.S.C. ss. 824 (2004). 17 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. & Regs., Regulations Preambles July 1996-December 2000 P. 31,044 (1996), reconsideration denied, Order No. 592-A, 62 Fed. Reg. 33,341 (1997), 79 FERC P. 61,321 (1997) (Merger Policy Statement); see also Revised Filing Requirements Under Part 33 of the Commission's Regulations, Order No. 642, 65 Fed. Reg. 70,984 (2000), FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 P. 31,111 (2000), order on reh'g, Order No. 642-A, 66 Fed. Reg. 16,121 (2001), 94 FERC P. 61,289 (2001). Docket No. EC04-81-000 -10- 19. Applicants analyze the effect of the proposed merger on relevant wholesale energy and capacity markets. Applicants define non-firm energy, short-term capacity, long-term capacity and ancillary services as the relevant products. They conclude that the merger will not adversely affect competition for these products in the relevant geographic markets. i. ANCILLARY SERVICES AND LONG-TERM CAPACITY ----------------------------------------- 20. Applicants do not formally analyze the effect on competition in relevant ancillary services markets. They note that the Commission requires analysis of such markets where the relevant data are available but state that the data are not available. Applicants' witness, Mr. Rodney Frame, states that he would not expect the transaction to adversely affect competition in ancillary services markets because: 1) there is a relatively small amount of generation being transferred to Ameren; 2) other market participants have not historically relied upon Ameren or EEInc for ancillary services; and 3) Dynegy will continue to be a potential supplier of ancillary services in the relevant markets, so the transaction does not eliminate a competitor in those markets. 21. Applicants state that the transaction will not harm competition in long- term capacity markets. They note that the Commission has determined that absent entry barriers, including control of generation sites or key inputs, long-term capacity markets are competitive. They argue that they do not control any key facilities that could be used to block entry. ii. NON-FIRM ENERGY AND SHORT-TERM CAPACITY MARKETS ----------------------------------------------- 22. Applicants provide an Appendix A analysis using the Delivered Price Test (DPT) to analyze the effect of the proposed merger on non-firm energy and short-term capacity. Applicants analyze six destination markets: Ameren and CILCO, where Ameren is the traditional integrated supplier; CWLP, Southern Illinois Power Cooperative (SIPCO), and ComEd, which are directly interconnected with both Ameren and Illinois Power; and Illinois Power, where Dynegy and EEInc own generation. 23. Applicants analyze the effect of the proposed merger on both Economic Capacity (EC) and Available Economic Capacity (AEC) in the relevant geographic markets using the DPT. They evaluate conditions assuming market prices ranging from $20 per MWh in the shoulder off-peak to $100 per MWh in the summer super peak. The prices are based on a review of estimated forward prices in a multi-region production cost model. 24. Applicants attribute the capacity associated with the Base PPAs to the seller, Dynegy. They argue that the contracts do not confer operational control on the buyer, Illinois Power. They state that Dynegy controls which generation Docket No. EC04-81-000 -11- sources will be used to meet its obligation to provide capacity and energy to Illinois Power under the PPAs. 25. Applicants use First Contingency Incremental Transfer Capability (FCITC)/18/ as the measure of transmission availability in the DPT. Applicants also perform sensitivity analyses using Available Transfer Capability (ATC) posted on transmission providers' OASIS sites. Applicants argue that FCITC is the better measure of transmission availability because many of the posted ATC values are zero, which could be inaccurate because it does not show the amount of transmission capacity that might be available for future commercial transactions when Ameren and Illinois Power join the Midwest ISO. Applicants conclude that using ATC would distort the analysis, given that both Ameren and Illinois Power will be in the Midwest ISO by the time of the merger consummation./19/ Applicants also include simultaneous transfer limits on certain transmission interfaces. Applicants allocate the scarce transmission on a pro rata basis. 26. Applicants analyze three scenarios to reflect changing contractual positions between 2004 and 2006: 1) pre-2006; 2) post-2005; and 3) United States Enrichment Corporation (USEC) Load./20/ Applicants state that the pre-2006 scenario is most relevant for the time period through December 31, 2005, when existing arrangements for the output of the Joppa Facility are in effect. Under those arrangements, the output from the Joppa Facility is delivered to the control areas of the respective owning parties under long-term grandfathered transmission arrangements, and those arrangements are reflected in Applicants' analysis. The post-2005 scenario reflects market conditions after the expiration of the long-term grandfathered transmission arrangements. In that scenario, Applicants assume the Joppa Facility capacity is in the Ameren control area. In the USEC Load scenario, Applicants define the combined EEInc and Tennessee - ---------- 18 Applicants' Witness, Mr. David A. Whitely, explains that "FCITC is a measure of the ability of the transmission system to transfer power from a source to a sink for a given set of base case conditions such that there would be no constraints: (i) with all facilities in service; or (ii) when the most limiting single contingency occurs." Whitely testimony at 19. 19 Frame Testimony at 53. 20 The third scenario is named for the USEC's Gaseous Diffusion Plant, which is located in Paducah, Kentucky. Applicants explain that the USEC's Paducah plant is the only load that can be served directly by the EEInc control area, and this plant can be served either from the TVA or EEInc control area. Docket No. EC04-81-000 -12- Valley Authority (TVA) control areas as a relevant geographic market and analyze the effect on competition in that market. iii. DPT RESULTS ----------- 27. Applicants report no failures of the Competitive Analysis Screen for EC or AEC for the pre-2006 scenario. For the post-2005 scenario, Applicants report screen failures for EC in the Ameren control area for all seasons/load levels, for both the base case and ATC sensitivity case. For the base case, the Ameren market is highly concentrated for all season/load levels (HHI ranging from 3,251 to 3,799), with merger related-changes in HHI ranging from 117 to 143 HHI. Applicants also report screen failures for AEC in the Ameren market for the base case in off-peak for all seasons. For the ATC sensitivity case in the Ameren market, Applicants report screen failures for AEC in the summer and spring/fall off-peak, and all load levels in the winter. There are no screen failures for EC or AEC in any other markets. Applicants state that the results for the ATC sensitivity have only minor differences. Applicants report no screen violations for the USEC Load scenario. 28. Applicants propose to offer 125 MW of capacity and energy from the Joppa Facility ("Divested" Joppa Power) through a competitive bidding process to mitigate the harm to competition indicated by the screen failures in the Ameren market. Applicants state that the proposed sale would eliminate any harm to competition, because it would reduce their ability and incentive to withhold capacity from the market. Because the purchaser of the 125 MW of capacity would have the right to the first 125 MW of output from the Joppa Facility, Ameren would only have an additional 78 MW of capacity from which it could withhold output (203 MW of additional capacity from the transaction minus the 125 MW committed to the buyer). Applicants conclude that, with this mitigation, there is little incentive for Ameren to withhold output in order to increase prices. Applicants commit that the owner of the remaining 20 percent (i.e., EEInc/KU) will be able to receive up to 20 percent of the output of the Joppa Facility. Applicants' proposed mitigation would begin on January 1, 2006 and continue until the earliest of: 1) the date when Applicants increase transmission capacity enough to offset the competitive harm indicated by the screen failures; 2) the date when Applicants make a showing to the Commission that they should no longer be subject to mitigation; or 3) April 30, 2009./21/ - ---------- 21 Testimony of Craig D. Nelson, Application, Appendix 6 at 6. Docket No. EC04-81-000 -13- PROTESTS - -------- 29. Aquila and ADM argue that the capacity sold to Illinois Power by Dynegy Power under the New PPAs should be attributed to Illinois Power post-merger in the Appendix A analysis, rather than to Dynegy Power. Aquila argues that the capacity and energy under the Base PPA are not available to mitigate attempts by Ameren to exercise market power, so it must be attributed to Ameren in the post-merger analysis. 30. MJMEUC argues that Applicants' analysis of AEC for the post-2005 scenario incorrectly accounts for Dynegy's obligations to Illinois Power under the PPAs. They state that because Dynegy's obligations to provide capacity and energy do not expire until the end of 2006, Applicants' assumption that Dynegy capacity is free to compete in the relevant markets in the post-2005 scenario is not correct, and that Applicants should assign that capacity to Ameren in the post-2005 scenario. 31. Aquila argues that Applicants' use of FCITC rather than ATC as the measure of transmission availability in the DPT overstates the actual transmission import capabilities into the relevant markets, thus understating the competitive effects of the merger. It also argues that Applicants overstate the amount of competing supply by including 4,107 MW of capacity from independent power producers in the analysis that Ameren stated, in Docket No. EC03-53, were inadequate to provide AmerenUE with firm network capacity. 32. ADM argues that the Base PPA will adversely affect competition by eliminating a competitor from a market that has very few competitors. MJMEUC asserts that Applicants' analysis may not be complete, because there may be tolling agreements, strategic alliances and/or joint ventures involving Ameren, and the related capacity was not attributed to Ameren in Applicants' analysis. 33. Aquila states that Applicants should define the relevant geographic market as the entire post-merger market (Ameren and Illinois Power) rather than analyzing the individual control areas. Aquila's witness, Dr. Craig Roach, contends that merger-related changes in concentration would be greater in the broader market, because all of Ameren's control areas are directly interconnected and geographically adjacent. Docket No. EC04-81-000 -14- 34. Aquila argues that the 700 MW of capacity associated with the requests for proposals (RFPs) should be attributed to Illinois Power in Applicants' Appendix A analysis because it is not clear who will be the winner, or whether non-affiliates can effectively compete in the RFP process./22/ 35. A number of protesters raise questions regarding Applicants' proposed mitigation. Aquila argues that Applicants' proposed sale of capacity should be to a non-affiliate. Aquila and MJMEUC state that a sale to Illinois Power, for example, would not fix the transaction's harm to competition because the Ameren family would retain control of the output from the Joppa Facility. MJMEUC argues that Applicants' assertion that the mitigation should end upon the completion of sufficient transmission expansion runs afoul of the Commission's finding in OG&E,/23/ where it says that applicants must show that they did not already plan to upgrade the transmission, in order for the upgrade to be considered market power mitigation. MJMEUC also argues that the mitigation may end too soon because Applicants' choice of the date April 30, 2009 is arbitrary. APPLICANTS' RESPONSE - -------------------- 36. In response to MJMEUC's concern about other possible arrangements that are not included in the analysis,/24/ Applicants state that neither Illinois Power nor any subsidiary of Ameren is a purchaser under any tolling agreement, strategic alliance and/or joint venture that provides them any right to control or receive electric capacity or energy that was not attributed to Ameren in the Appendix A analysis./25/ - ---------- 22 Illinois Power will conduct an RFP process during 2004 for 400 MW of baseload capacity and energy and 300 MW of peaking capacity and energy to be provided in 2005 and 2006. Testimony of Rodney Frame at p. 24. 23 Citing Oklahoma Gas and Electric Company and NRG McClain LLC (OG&E), 105 FERC P. 61,297 (2003) at P. 32. 24 MJMEUC at 16. 25 Ameren Answer at 19. Docket No. EC04-81-000 -15- 37. Applicants state that the Commission's regulations provide that generation capacity should be assigned under an Appendix A analysis to the "party that has authority to decide when generation resources are available for operation."/26/ They argue that the very purpose of a market power analysis is to determine whether an entity could withhold generating capacity and energy from the marketplace, thus artificially driving up the price for energy or capacity. Applicants conclude that a firm delivery obligation to a purchaser - absent additional contractual rights not present here - does not provide that purchaser the ability to withhold capacity and energy that might give rise to market power concerns, and such arrangements do not provide a basis for attributing ownership or control of capacity to a purchaser./27/ Applicants further argue that because Dynegy Midwest is free to sell energy from any of the Dynegy Midwest units to any purchaser, as long as Dynegy Power also is able to meet its capacity, energy, and ancillary services obligations to Illinois Power, Dynegy Power will be the party with the authority to decide when the Dynegy Midwest resources are available for operation. They conclude that the merger will not result in Illinois Power having any ability to withhold any Dynegy Midwest capacity or energy from the market in an effort to drive up market prices or otherwise harm competition. 38. Applicants assert that the use of FCITC values as a proxy for transmission import capability into destination markets is appropriate and consistent with Commission precedent. They cite to previous section 203 cases before the Commission where applicants have used FCITC values instead of or in addition to ATC values./28/ They argue that FCITC values indicate the level of available energy transmission capability over a transmission system better than do ATC values in this case, due to the pending Midwest ISO participation by Illinois Power. They also note that Mr. Frame conducted sensitivity analyses using ATC values, resulting in HHI increases often lower than when using FCITC values and, in most cases, the change in market concentration was essentially the same when - ---------- 26 Applicants' Answer at 9, citing 18 CFR ss. 33.3(c)(4)(i)(A) (2003). 27 Applicants' Answer at 9. 28 Citing Ameren Services Co., 101 FERC P. 61,202 (2002); Western Resources, Inc., 86 FERC P. 61,312 (1999); and WPS Resources Corp., 83 FERC P. 61,196 (1998). Docket No. EC04-81-000 -16- using ATC rather than FCITC measures./29/ 39. Applicants contend that there is no inconsistency between their position toward the independent power producer capacity in the present matter and Ameren's position in the AmerenUE Pinckneyville-Kinmundy proceedings./30/ They state that those proceedings involve AmerenUE acquiring the rights to firm network resources to serve growing native load (particularly, growing residential and commercial load) based on the wishes of its state regulatory commission, whereas an Appendix A analysis, by its very nature, focuses on energy markets. Applicants assert that an Appendix A analysis looks at what energy could be supplied in order to defeat any efforts to exert market power. /31/ 40. Applicants state that they have properly treated the 700 MW under RFPs in 2005 and 2006 in their Appendix A analysis. Contrary to Aquila's claim that control of that capacity should be attributed to Illinois Power, they state that the RFPs seek non-dispatchable must take/must deliver agreements that will clearly give operational control of the capacity to the sellers, not Illinois Power. 41. Applicants state that the Ameren and Illinois Power control areas are each relevant geographic markets, rather than the entire post-merger market (Ameren and Illinois Power), as suggested by Aquila. They state that using the control area as the relevant market is consistent with Commission policy. If they did analyze the broader market, the result would be a lower concentration level and a smaller change in concentration, because Ameren's increase in capacity would be proportionately smaller./32/ COMMISSION DETERMINATION - ------------------------ 42. The Commission finds that the combination of generation assets resulting from the proposed transactions, as conditioned, will not harm competition. We base this determination principally upon the fact that the transaction does not eliminate a competitor. The firm being acquired in this transaction, Illinois Power, purchases all of its power and, accordingly, is not a competitor for - ---------- 29 Id. at 17. 30 See Ameren Energy Generating Company and Union Electric Company d/b/a Ameren UE, Docket No. EC03-53-000, 108 FERC P. 61,081, issued contemporaneously. 31 Applicants' Answer at 18. 32 Ameren Answer at 29. Docket No. EC04-81-000 -17- sales in the relevant wholesale electricity markets. Illinois Power's supplier, Dynegy, will remain a viable competitor after the transaction. We address the specific issues raised by protestors below. 43. We reject MJMEUC's assertion that there may be "tolling agreements, strategic alliances and/or joint ventures" involving Ameren whose capacity was not attributed to Ameren in the Appendix A analysis. MJMUEC has provided no evidence such arrangements exist, and Applicants have stated that there are none./33/ 44. We reject Aquila's and ADM's arguments that Applicants have not properly accounted for the PPAs in their analysis of the effect on competition. As we stated in Order No. 642, "If contracts do not confer operational control over the generation resources to the purchaser then the capacity should be attributed to the seller."/34/ Here, Applicants have shown that Dynegy, not Illinois Power, controls the capacity associated with the contracts. If Illinois Power elects not to take all of the capacity to which it is entitled, Dynegy is free to sell that output elsewhere; Illinois Power cannot direct that the capacity be withheld from the market. In fact, the PPAs keep a viable competitor - Dynegy - in the marketplace, while providing for Illinois Power's capacity needs. Applicants have properly accounted for the capacity in their analysis. 45. Likewise, the Commission finds that Applicants have properly accounted for transmission availability in their analysis. They have used both FCITC and ATC in various scenarios, and the results were substantially the same. The Commission encourages applicants to perform tests of the sensitivity of their results to changes in critical parameters. Because perfect data are not always available for estimating transmission availability, the use of both FCITC and ATC helps to provide a more complete picture of the market structure. 46. The Commission agrees with MJMEUC's position that the Applicants should assign control of the Joppa Facility capacity to Ameren in the analysis of AEC for the post-2005 scenario. This is a reasonable way to model market conditions, because assigning control of the 218 MW additional Joppa capacity to Ameren - ---------- 33 Id. at 19. 34 See Revised Filing Requirements Under Part 33 of the Commission's Regulations, Order No. 642, 65 Fed. Reg. 70,983 (2000), FERC Stats. & Regs., Regulations Preambles July 1996-December 2000 P. 31,111 (2000), order on reh'g, Order No. 642-A, 66 Fed. Reg. 16,121 (2001), 94 FERC P. 61,289 (2001). Docket No. EC04-81-000 -18- would indeed result in screen failures for AEC in off-peak periods. However, Applicants have already identified screen failures for those periods in the post-2005 analysis of AEC in the Ameren market. They have proposed mitigation that addresses the harm to competition indicated by those screen failures and would also address the screen failures resulting from an assignment of the Joppa capacity to Ameren. We discuss the mitigation below. 47. The Commission agrees with Applicants that there is no inconsistency between the position taken toward the independent power producer capacity by Applicants in this proceeding and the position taken by Ameren in the AmerenUE Pinckneyville-Kinmundy proceeding. The Competitive Analysis Screen focuses on energy and short-term capacity markets by using the DPT. The DPT considers all resources that could compete in the relevant geographic market for those products, subject to allocating scarce transmission availability. It identifies those competitors that could respond to a price increase in the relevant market. The AmerenUE Pinckneyville-Kinmundy transaction involves the purchase of a different product, long-term capacity, which the DPT does not consider. We would not expect all resources modeled in the DPT to be suitable for a long-term capacity purchase such as the one in that case. 48. The Commission finds that Applicants' Appendix A analysis treats properly the 700 MW under RFPs in 2005 and 2006. Given that the RFPs seek non-dispatchable "must take/must deliver" agreements, we agree with Applicants that the sellers will have operational control of the capacity; thus, the capacity should not be assigned to Ameren in the post-merger scenarios. Moreover, we have no basis to conclude that an affiliate of Illinois Power will be the winner of the competitive solicitation and no intervenor has shown that it will. However, we agree with Aquila that it is critical that non-affiliates be able to effectively compete in the RFP process. Applicants have committed to an open and transparent competitive solicitation process for the 700 MW PPAs in question. We rely on that commitment in our finding that Applicants have properly analyzed the effect of the merger on competition, and we find this process to be consistent with the Commission's order in Ameren Energy Generating Company and Union Electric Company d/b/a Ameren UE, Docket No. EC03-53-000, issued contemporaneously./35/ 49. With respect to the Applicants' proposed mitigation, the Commission finds that Applicants' proposed capacity sale from the Joppa Facility, as modified - ---------- 35 The Ameren case in Docket No. EC03-53-000 is an order on an Initial Decision, and it establishes the elements of what the Commission considers to constitute an open and transparent competitive solicitation process. Docket No. EC04-81-000 -19- below, mitigates the harm to competition indicated by the screen failures. The Joppa Capacity Sale limits Ameren's ability to withhold capacity from the market. However, we agree with Aquila that Applicants' proposed capacity sale would not adequately mitigate the transaction's effect on competition if the capacity were sold to an affiliate. While Applicants commit that the Divested Joppa Power will not be sold by AEM to AmerenUE or AmerenCIPS, they do not preclude selling it to another affiliate, Illinois Power. The purpose of this mitigation is to remove control of a sufficient amount of capacity from the Ameren corporate family to offset the harm to competition indicated by the screen failures. Shifting control of the capacity to an affiliate would not sufficiently restore competition in the relevant market. Therefore, we require that the Divested Joppa Power not be sold to any Ameren affiliate. 50. In addition, MJMEUC raises valid concerns regarding the duration of the mitigation. MJMEUC also argues that, consistent with OG&E, Ameren must show that any transmission upgrade was not already planned in order to serve as mitigation. MJMEUC asserts that the proposed termination date of the mitigation, April 30, 2009, is arbitrary and could result in the harm to competition not being sufficiently mitigated./36/ We will require that the mitigation be in place until such time as Ameren makes a showing that the competitive harm from the merger has been otherwise mitigated, and that any mitigation was not already planned./37/ Furthermore, we rely on Applicants' commitment that EEInc/KU will be able to receive up to 20 percent of the Joppa Facility's output in our finding of no harm to competition. 51. A number of Aquila's arguments are built on the assumption that Applicants should have assigned control of the capacity associated with the Base PPAs to Illinois Power rather than Dynegy. For example, Aquila's contention that the relevant geographic market should be Ameren and Illinois Power rather than the individual control area would only be relevant if the capacity were assigned to Illinois Power. Since we reject that argument, we also reject arguments that rely on that assumption. iv. VERTICAL COMPETITIVE ANALYSIS ----------------------------- - ---------- 36 MJMUEC Answer at 25. 37 Applicants proposed making such a showing as one of the three options to trigger the end of the mitigation. See Testimony of Craig D. Nelson, Application, Appendix 6 at 6. Docket No. EC04-81-000 -20- 52. Applicants address the effect of combining their transmission and generation assets. They state that all of Ameren's operating companies have either become members or are seeking to become members of the Midwest ISO, a Commission-approved regional transmission organization (RTO). Furthermore, Applicants commit that Illinois Power will join the Midwest ISO before the consummation of the transaction./38/ Applicants conclude that the combination of transmission and generation assets will not harm competition because it will be impossible for any of the Ameren operating companies to use their transmission facilities to disadvantage their competitors in wholesale electricity markets. /39/ The Midwest ISO will have operational control of, and be the transmission provider for, Applicants' transmission facilities. 53. Applicants also address the effect of combining their natural gas distribution and generation assets. Applicants' witness, Rodney Frame, states that both Ameren and IP own local gas distribution networks. Mr. Frame states that only Dynegy's gas-fired generators in the Illinois Power control area are served by Illinois Power. He also states that there are numerous interstate natural gas pipelines that traverse the Ameren and Illinois Power service territories./40/ Mr. Frame argues that a vertical competitive analysis is not required to show that the transaction would not harm competition because: 1) Ameren and IP provide de minimis gas inputs in relevant markets; and 2) assigning control of the one plant that is served by Applicants' gas distribution assets to Ameren would actually deconcentrate the market because Dynegy has a larger market share than Ameren in the relevant downstream market. PROTESTS - -------- 54. Aquila asserts that Applicants should attribute approximately 473 MW of Dynegy Midwest's natural gas-fired generating capacity to Illinois Power in the DPT, because Illinois Power controls the gas distribution lines serving these facilities. In addition, Aquila asserts that Ameren's participation in the Midwest ISO will not alleviate all transmission-related market power concerns. - ---------- 38 Application at 3. 39 Application at 30. 40 Frame Testimony at 60. Docket No. EC04-81-000 -21- APPLICANTS' RESPONSE - -------------------- 55. Applicants state that Illinois Power cannot use its gas assets to control Dynegy Midwest's generating units. Illinois Power operates its gas distribution business under the laws and regulations of the State of Illinois and the oversight of the ICC. Illinois Power's state-jurisdictional gas tariff provides nonresidential gas customers - including Dynegy Midwest - open access to third-party suppliers over Illinois Power's natural gas distribution system, and this tariff can only be changed with the consent of the ICC. The delivery of such gas over Illinois Power's gas distribution system - regardless of supplier - - is thus guaranteed, and Illinois Power has no ability to withhold gas supply or increase gas prices to exercise control over Dynegy Midwest's gas-fired generating units./41/ 56. Applicants assert that participation in the Midwest ISO will indeed eliminate any vertical market power concerns relating to the combination of generation and transmission assets by eliminating any ability Ameren would have to use its transmission to harm competition. COMMISSION DETERMINATION - ------------------------ 57. Applicants have shown that combining their transmission and generation assets will not harm competition. As noted by Applicants, all of Ameren's operating companies have either become members or are seeking to become members of the Midwest ISO. As we have stated in numerous orders, we believe that turning over operational control of transmission assets to a Commission-approved RTO mitigates vertical market power relating to generation and transmission. That is the case here. Applicants will not have the ability to use their transmission assets to harm competition in wholesale electricity markets. In making this finding, we condition our approval of the Application on Applicants' commitment that Illinois Power will join the Midwest ISO before the consummation of the transaction. 58. Applicants have shown that combining their natural gas transportation and generation assets will not harm competition. In the Ameren market, Applicants provide de minimis inputs to electricity production. In the Illinois Power market, Applicants do provide inputs to generation, providing natural gas for 473 MW of generation in an approximately 9,000 MW market, but the natural gas is provided under the Illinois state-jurisdictional tariff for local gas distribution companies. That tariff cannot be changed without the approval of - ---------- 41 Applicants' Answer at 22. Docket No. EC04-81-000 -22- the ICC; thus, Applicants would not be able to harm competition by raising rivals' costs or foreclosing competitors without the knowledge of the ICC./42/ Moreover, no intervenor has presented evidence contradicting Applicants' assertion that there is competition in the upstream delivered natural gas market. v. VERTICAL FORECLOSURE ARGUMENTS ------------------------------ PROTESTS - -------- 59. Aquila and other protesters argue that Ameren may have underpaid for Illinois Power in return for paying above-market prices to Dynegy in the PPAs, the costs of which they could presumably pass on to customers. In addition, Aquila's witness, Dr. Roach, argues that the non-price terms of the Base PPA may have excluded potential suppliers. Dr. Roach asserts that the prices in the PPAs appear to be four to six percent above the Into-Cinergy forward prices for 2005 and 2006, indicating that Ameren will be able to exercise market power through the PPAs. He concludes that competition in the Illinois wholesale market could be harmed because suppliers, who do not have a fair chance to compete, would lose confidence in the market. He states that Illinois Power should have an open and competitive solicitation for the 2,800 MW of energy and capacity under the Base PPAs to show that the transaction does not harm competition./43/ He states that Ameren's ability to execute the Base PPA as a part of the acquisition gives Ameren an unfair advantage when competing to acquire companies, which is a source of vertical market power that the Commission must investigate. Aquila argues that, given the lack of a transparent competitive solicitation process, a hearing is necessary to determine whether the PPAs, which are an integral part of the merger, will harm competition. APPLICANT'S RESPONSE - -------------------- 60. Applicants assert that Aquila fails to explain how the Base PPAs as part of the acquisition give Ameren an unfair advantage when competing to acquire Illinois Power and facilitate the exercise of vertical market power. COMMISSION DETERMINATION - ------------------------ - ---------- 42 Applicants' Answer at 13. 43 Roach testimony at 30. Docket No. EC04-81-000 -23- 61. The Commission recognizes Aquila's argument that mergers and long-term PPAs may serve as vehicles for vertical foreclosure. This is because mergers and long-term PPAs can increase the ability and incentive for the utility to impede rivals' access to wholesale customers, e.g., by erecting entry barriers or dispatching the system to block transmission access to wholesale customers. The Commission is especially concerned where the acquiring firm is also the monopoly transmission provider and the dominant wholesale electricity customer in the market. However, that is not the case here, for a number of reasons. First, Ameren is a member of the Midwest ISO, and Illinois Power will be a member by the time of consummation of the merger. Thus, Ameren will not have an increased ability to use transmission to foreclose competitors from the market. Second, Dynegy will remain a viable competitor in the region's wholesale markets: the PPAs are for two years, during which Dynegy will still be able to participate in the wholesale market, and when they expire, many competitors (including Dynegy) will have the opportunity to compete to serve Illinois Power's load. Finally, for 2007 and beyond, Illinois Power's retail load obligations will be served through a competitive bidding process that will ensure that competitors are not foreclosed. Moreover, we note that Illinois is under a retail rate freeze through 2006./44/ The PPAs are for 2005 and 2006, so there will be no time when they are in effect and Illinois is not under a retail rate freeze. Therefore, Illinois Power would be unable to pass any inflated power purchase costs onto customers. This eliminates Applicants' incentive to engage in regulatory evasion though the PPAs. The Commission finds that Applicants have shown that the PPAs do not serve as a vehicle for vertical foreclosure in this case. B. EFFECT ON RATES --------------- 62. Applicants state that the transaction will not adversely affect the wholesale rates of any customer. First, they state that no wholesale rates will be affected, because all of Ameren's customers are charged market-based rates that will not be affected by the seller's cost of service and, thus, will not be affected by the IP Sale./45/ Finally, Ameren commits to hold transmission customers harmless from any increase in the Commission-jurisdictional transmission rates that results from the IP Sale for a period of five years to - ---------- 44 The Illinois Customer Choice and Rate Relief Law of 1997, 220 Ill. Comp. Stat. Ann. 5/16-101 (2004), froze retail rates through the end of 2004, and the freeze was extended through the end of 2006. 45 Application at 31. Docket No. EC04-81-000 -24- the extent that such costs exceed savings related to the IP Sale./46/ PROTESTS - -------- 63. MJMEUC requests clarification as to whether Applicants' hold harmless commitment protects only transmission customers in the Illinois Power zone or whether it also covers transmission customers in the AmerenUE and AmerenCIPS zone. 64. A number of protestors argue that Applicants' hold harmless commitment should extend beyond the IP Sale to cover the Midwest ISO Transfer as well. ADM states that it should not have to bear any of the costs of the Midwest ISO Transfer. It states that Applicants should not be able to "selectively apply their offered protections"/47/ and that both the IP Sale and the Midwest ISO Transfer are "transaction-related events to which ADM must be held harmless." /48/ 65. Missouri Office of the Public Counsel (MOPC) requests that the Commission not approve the transaction without a condition that requires Ameren to protect AmerenUE's current entitlement to the 40 percent share of the EEInc capacity and output from the Joppa Facility. MOPC notes that Applicants commit to protect EEInc/KU from being frozen out from its 20 percent share of the output of the Joppa Facility, but AmerenUE has no such protection, and AmerenUE's ratepayers, who have supported Ameren's investment in EEInc, should have access to the low-cost power from the Joppa Facility. APPLICANTS' RESPONSE - -------------------- 66. Applicants clarify that the hold harmless commitment extends to all customers in the IP and Ameren operating company zones./49/ Regarding MOPC's request that Applicants commit that AmerenUE's current 40 percent entitlement to the output of the Joppa Facility be preserved, Applicants argue that this is a state retail ratemaking issue that will be addressed by the Missouri Commission. - ---------- 46 Id. at 32. 47 ADM Protest at 9. 48 Id. at 10. 49 Applicants' Answer at 42. Docket No. EC04-81-000 -25- 67. Applicants respond to ADM's protest by stating that: 1) the hold harmless commitment is consistent with other commitments recently accepted by the Commission in Tucson Electric Power Company,/50/ Consolidated Edison,/51/ and Northwest Natural Gas,/52/ where the Commission found that the hold harmless commitment did not need to take the form of a rate freeze and did not need to cover RTO-related costs. Applicants further state that when the Commission approved Appendix O of the Midwest ISO tariff, the rates of certain transmission owners increased, while the rates of others decreased, so the Commission has recognized that even in cases where some customers' rates increase, countervailing benefits can allow for a finding of no adverse effect on rates. COMMISSION DETERMINATION - ------------------------ 68. The Commission finds that Applicants have shown that the IP Sale will not adversely affect wholesale rates. We rely on Applicants' hold harmless commitment. Regarding MOPC's request that Applicants commit that AmerenUE's current entitlement to the output of the Joppa Facility be preserved, we agree with Applicants that the issue is under the state's jurisdiction. The Missouri Commission has intervened in the proceeding but has not filed comments or a protest. Regarding RTO-related costs and effects on rates, we have stated in a number of cases that we believe RTOs are pro-competitive and will result in significant benefits to customers. The addition of Illinois Power to the Midwest ISO will significantly reduce seams, which will further enhance competition and reduce rates. As we stated in International Transmission Company: Although the Commission recognizes that rates as well as compensation for losses may differ according to the RTO which encompasses a given utility's facilities, the Commission must balance competing considerations in approving the boundaries and scope of RTOs. While some transmission customers may incur a higher rate for service in their local area and their transactions may be assigned larger losses, the formation of RTOs would result in a significant reduction, if not elimination, of rate pancaking for these same customers for transactions covering greater distances or traversing multiple transmission providers' systems. Their competitive options have also increased in comparison to the circumstances before RTO - ---------- 50 103 FERC P. 62,100 (2003). 51 91 FERC P. 61,225 at 61,825-6 (2000), reh'g denied 94 FERC P. 61,079 (2001). 52 98 FERC P. 61,134 (2002). Docket No. EC04-81-000 -26- formation./53/ C. EFFECT ON REGULATION -------------------- 69. Applicants state that the IP Sale will not adversely affect regulation. They state that the transfer will not result in the formation a new holding company under the PUHCA that would preempt the Commission's jurisdiction. They note that Ameren is already a registered holding company under PUHCA, and Ameren's operating companies along with Illinois Power commit to follow the Commission's policies on the pricing of non-power goods and services between affiliates./54/ Applicants state the IP Sale will not adversely affect state regulation. They state that the IP Sale requires the approval of the ICC and that after the transfer is complete, Illinois Power will remain under the jurisdiction of the ICC. COMMISSION DETERMINATION - ------------------------ 70. Applicants have shown that the IP Sale will not adversely affect regulation. As noted in the application, the transfer will not result in the creation of a new holding company system that would shift jurisdiction from the Commission to the SEC. Applicants have committed to abide by the Commission's policies on the pricing of non-power goods and services between affiliates./55/ Furthermore, the IP Sale will not impair the ability of any state commission to regulate any of the Applicants. No state commission has protested the IP Sale. D. MERGER ACCOUNTING ----------------- 71. The Applicants have entered into a Stock Purchase Agreement under which Ameren Corporation (Ameren) will acquire all of the outstanding common stock of Illinois Power and 73 percent of Illinois Power's outstanding preferred stock held by Illinova Corporation, as well as Illinova Generating's 20 percent interest in Electric Energy, Inc. for $2.3 billion. - ---------- 53 International Transmission Company at 62,538. 54 Section 203 Application at 33. 55 See Ohio Power Co. v. FERC, 954 F.2d 779 (D.C. Cir. 1992). Docket No. EC04-81-000 -27- 72. The Applicants propose to account for the merger using the "purchase" method of accounting. In addition, the applicants intend to use push down accounting to reflect the acquisition on Illinois Power's books and records. COMMISSION DETERMINATION - ------------------------ 73. The Applicants' proposed accounting generally appears to comply with the Commission's accounting requirements./56/ However, the Commission cannot determine whether the proposed accounting complies with the Uniform System of Accounts' requirements in all aspects of the transaction, as it is unclear from the filing as to the basis of assigning the values to the items pushed down to Illinois Power. Accordingly, the Commission directs the Applicants to submit complete details of all merger-related accounting entries, along with appropriate narrative explanations describing the basis for the entries in their proposed accounting for the merger within 60 days of the date on which the merger is consummated. E. MIDWEST ISO TRANSFER -------------------- 74. Applicants also request Commission authorization under section 203 of the FPA for Illinois Power to transfer operational control of its transmission facilities to the Midwest ISO (the Midwest ISO Transfer). Applicants note that pursuant to Atlantic City,/57/ no prior Commission authorization is required for Illinois Power to transfer functional control of its transmission facilities to the Midwest ISO. However, Applicants state that, because the Midwest ISO tariff requires that transmission-owning members receive section 203 authorization for the transfer of operational control of transmission facilities to the Midwest ISO, Applicants request such authorization./58/ Applicants have shown that the Midwest ISO Transfer will not adversely affect competition, rates, or regulation and therefore satisfies the Commission's standards for section 203 approval. Therefore, the Commission finds that this satisfies the provisions of the Midwest ISO tariff. - ---------- 56 18 C.F.R. Part 101 (2004). 57 295 F.3d 1 (D.C. Cir. 2002). 58 Citing Midwest ISO Tariff ss. 1.62; Midwest ISO Owners Agreement, Appendix G, Recital A, Original Sheet No. 203. Docket No. EC04-81-000 -28- IV. THE POWER PURCHASE AGREEMENTS - DOCKET NOS. ER04-673-000 -------------------------------------------------------- APPLICANTS' POSITION - -------------------- 75. The Applicants assert that the Commission should find that the new PPAs do not raise any of the issues with which the Commission has expressed concern regarding affiliate transactions, because Ameren negotiated the proposed agreements with Dynegy on behalf of Illinois Power at arms'-length. Applicants state that the new PPAs were negotiated by representatives of Dynegy Power and Dynegy Midwest who advocated their companies' interests, while representatives of Ameren negotiated on behalf of the interests of Illinois Power, as its future owner. Therefore, Applicants assert, the new PPAs are actually non-affiliate market-based rate transactions that do not need to meet the requirements outlined in the Edgar order. Applicants also point out that Illinois Power's retail customers are currently subject to a rate freeze, pursuant to the Electric Service Customer Choice and Rate Relief Law of 1997 (Illinois Restructuring Act),/59/ and that the new PPAs' terms do not extend past the expiration of the rate freeze. Also, Illinois Power does not provide traditional requirements service to any wholesale customers and does not have any wholesale power contracts with fuel adjustment clauses. Applicants explain that these are the same customer protection provisions that the Commission relied upon when it approved the original affiliate agreement between Dynegy Midwest and Illinois Power./60/ 76. The Applicants state that Dynegy Midwest will provide Illinois Power with black start generation service to re-energize the transmission grid following a widespread failure. Specifically, Dynegy Midwest would provide black start service to Illinois Power for purposes of re-energizing and restoring the Illinois Power transmission and distribution system following a system-wide blackout on the Illinois Power System. According to the Applicants, Illinois Power will pay Dynegy Midwest based on a formula including: 1) actual costs of - ---------- 59 220 Ill. Comp. Stat. Ann. 5/16-101 (2004). 60 Illinova Power Marketing, Inc., 88 FERC P. 61,189 (1999). Docket No. EC04-81-000 -29- start-up; 2) annual personnel training costs; and 3) fuel storage and carrying costs. PROTESTS - -------- 77. Aquila alleges that the new PPAs create a potential for self-dealing among Illinois Power, Dynegy Midwest, and Dynegy Power. For this reason, according to Aquila, the Commission should treat the agreements as affiliate transactions that fail to satisfy the conditions set forth in the Edgar order, because they provide no evidence to establish that Illinois Power, as the buyer, has chosen the lowest cost supplier. Aquila states that it compared the prices in the new PPAs with prevailing market prices and found that Illinois Power has not chosen the lowest cost non-affiliated supplier, but rather has elected to pay above-market prices under the new PPAs. Aquila asserts that, while it does not oppose the merger, there are fundamental flaws in the Application that require further investigation./61/ COMMISSION DETERMINATION - ------------------------ 78. In evaluating the PPAs, the Commission must assure that customers do not pay excessive rates and that there is no long-term harm to the wholesale competitive market because of affiliate preference./62/ In this case, we are satisfied that the PPAs do not involve affiliate abuse. Because Illinois Power has no traditional cost based rates with fuel adjustment clauses for wholesale customers and because retail rates are frozen for the duration of the PPAs contract terms, we find that Ameren and Illinois Power have no ability to recover any premium that may be included in the PPA rates from Illinois Power's wholesale or retail customers. Therefore, Ameren and Illinois Power have no incentive to overpay for the PPAs and evade regulation, which, as noted by Aquila, would indeed harm competition. Moreover, the term of the PPAs is only the two-year transition period until Illinois Power will purchase the capacity - ---------- 61 Aquila Protest at 4. 62 See, e.g., Edgar, 55 FERC at 62,127-28; Southern California Edison Company, on behalf of Mountainview Power Company, LLC, 106 FERC P. 61,183 at P 58-59 (2004), reh'g pending. Docket No. EC04-81-000 -30- and energy for its retail customers through a competitive solicitation process. While the terms of the contracts have changed to confer operational control of the capacity to Dynegy, the PPAs are largely a continuation of the existing arrangement between Dynegy and Illinois Power. Accordingly, we will accept the new PPAs for filing. In addition, the Commission will accept the Black Start Agreement, because black start service is important for restarting the transmission system after a failure, and because the agreement itself is based on actual costs. V. REQUEST FOR MARKET BASED RATES FOR ANCILLARY SERVICES ----------------------------------------------------- 79. The Commission will conditionally grant Dynegy Midwest and Dynegy Power's request to sell ancillary services at market-based rates. Dynegy Midwest and Dynegy Power have agreed to the conditions and limitations on engaging in sales of ancillary services at market-based rates pursuant to Avista Corporation./63/ The Avista order states that third party ancillary service sellers that cannot perform a market power study should be allowed to sell ancillary services at flexible rates, but only in conjunction with a requirement that such third parties establish an Internet-based OASIS-like site for providing information about and transacting ancillary services. Avista also specified three situations that prohibit the sale of ancillary services at market based rates./64/ However, - ---------- 63 87 FERC P. 61,223 (1999); order on rehg, 89 FERC P. 61,136 (1999). 64 The Commission will not apply the Avista policy to sales of ancillary services by a third-party supplier in the following situations: 1) the approach will not apply to sales to a regional transmission organization (RTO) such as an independent system operator (ISO) or Transco, i.e., where the RTO has no ability to self-supply ancillary services but instead depends on third parties; 2) to address affiliate abuse concerns, the approach will not apply to sales to a traditional, franchised public utility affiliated with the third-party supplier, or to sales where the underlying transmission service is on the system of the public utility affiliated with the third-party supplier; and 3) the approach will not apply to sales to a public utility who is purchasing ancillary services to satisfy its own open access transmission tariff requirements to offer ancillary services to its own customers (the Commission is open, however, to considering requests for market-based rates in such circumstances on a case-by-case basis). Id. at 61,883 n. 12. Docket No. EC04-81-000 -31- in their filing, Dynegy Midwest and Dynegy Power did not submit any tariff sheets incorporating the required conditions. Therefore, we will grant the request, subject to Dynegy Midwest and Dynegy Power making a compliance filing submitting revised tariff sheets incorporating all of the conditions outlined in the Avista order. VI. THE INTERIM PPA - DOCKET NO. ER04-711-000 ----------------------------------------- 80. The Commission accepts for filing the Interim PPA for the same reason it accepts the new PPAs in Docket No. ER04-673-000. The Commission orders: - ---------------------- After consideration, the Commission finds that the proposed transactions are consistent with the public interest and are authorized, subject to the following conditions: (1) Applicants' request for authorization under section 203 for the disposition of jurisdictional facilities is hereby granted, subject to Ameren's consent to the conditions, as discussed in the body of this order. (2) The proposed transactions are authorized, upon the terms and conditions and for the purposes set forth in the application; (3) 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; (4) The authorizations to sell ancillary services at market based rates requested by Dynegy Midwest and Dynegy Power are granted subject to the condition that they submit revised tariff sheets within 30 days of the date of this order incorporating all of the conditions outlined in the Avista order, as discussed in the body of this order; (5) The Commission directs the Applicants to submit their proposed final accounting within 60 days after the merger is consummated. The accounting submission should provide all merger-related accounting entries, along with appropriate narrative explanations describing the basis for the entries, as discussed in the body of this order; (6) 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; Docket No. EC04-81-000 -32- (7) The Commission retains authority under sections 203(b) and 309 of the FPA to issue supplemental orders as appropriate; (8) Applicants shall notify the Commission within 10 days of the date that the transaction has been consummated. By the Commission. ( S E A L ) Linda Mitry, Acting Secretary. EX-99 5 dc166171_exhf-1.txt EX F-1 - OPINION LETTER EXHIBIT F-1 [Letterhead of Steven R. Sullivan, Esq.] AMEREN CORPORATION 1901 Chouteau Avenue St. Louis, Missouri 63166 September 24, 2004 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. 70-10220) Ladies and Gentlemen: 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, and Illinois Power Company ("Illinois Power"), an Illinois corporation (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 the Common Shares and Preferred Shares of Illinois Power from Illinova Corporation ("Illinova"), an Illinois corporation and the parent company of Illinois Power (the "Transaction"). Ameren is also requesting findings by the Commission that would permit it to retain all of Illinois Power's existing direct and indirect non-utility subsidiaries and investments and to retain the combined gas utility properties of Illinois Power, Union Electric Company, Central Illinois Public Service Company and Central Illinois Light Company as an additional integrated public-utility system. In the Application, the Applicants are also requesting that the Commission approve the following related transactions (the "Related Transactions"): (i) the acquisition by Ameren from time to time during the Authorization Period of up to $300 million principal or face amount of the outstanding long-term debt securities and/or shares of preferred stock of Illinois Power or any subsidiary of Illinois Power; (ii) the entering into and performance of the Fuel Services Agreement between Ameren Fuels and Illinois Power pursuant to which Ameren Fuels will manage, at cost, gas supply resources and procurement for Illinois Power; (iii) the issuance of short-term debt securities (i.e., maturities of less than one year) by Illinois Power in an aggregate amount which, when added to borrowings by Illinois Power from Ameren and/or borrowings by Illinois Power under the Utility Money Pool at any time outstanding during the Authorization Period, will not exceed $500 million; (iv) the participation of Illinois Power in the Utility Money Pool; (v) to the extent not exempt under Rule 52(a), the entering into and performance by Illinois Power of Interest Rate Hedges and Anticipatory Hedges; and (vi) the organization and acquisition by Illinois Power of 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, the issuance to and acquisition by any Financing Subsidiary of Notes evidencing the loan of financing proceeds by any Financing Subsidiary to Illinois Power, and the rendering of services by Illinois Power to any Financing Subsidiary at market prices. 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 the Related Transactions, as described in the Application. I have examined the Application and the exhibits thereto, the Amended SPA, and 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. 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 the Related Transactions are consummated in accordance with the Application: 1. All state laws applicable to the Transaction and the 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 Shares and Preferred Shares to be acquired in the Transaction are 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 Amended and Restated 2 Articles of Incorporation, as amended, of Illinois Power, and the short-term debt securities to be issued by Illinois Power will be valid and binding obligations of Illinois Power in accordance with their terms. 4. Ameren will legally acquire the Common Shares and the Preferred Shares. 5. The consummation of the Transaction and the Related Transactions will not violate the legal rights of the holders of any securities issued by Ameren or any associate company of Ameren. The opinions expressed above are subject to the following further assumptions and conditions: a. The authorizations and approvals of the Transaction by the Boards of Directors of Ameren, Illinova and Dynegy Inc. ("Dynegy"), and, to the extent required, the authorizations and approvals of the Related Transactions by the Boards of Directors of 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 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 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 the 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 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; 3 g. The Transaction shall have been consummated as described in the Application and under the supervision of me and Wachtell, Lipton, Rosen & Katz, New York, New York, special New York counsel for Ameren, acting for the Ameren Companies, and all legal matters incident thereto shall be satisfactory to each of us; and h. 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. I am a member of the bar of the State of Missouri. For purposes of this opinion, with respect to all matters governed by the laws of New York as applicable to Ameren, I have relied upon the opinion of even date herewith of Wachtell, Lipton, Rosen & Katz, New York, New York, filed as Exhibit F-2 to the Application; with respect to all matters governed by the laws of Illinois as applicable to the Ameren Companies, I have relied upon the opinion of even date herewith of Jones Day, Chicago, Illinois, filed as Exhibit F-3 to the Application; and, with respect to all matters governed by the laws of Illinois, as applicable to Illinois Power, Illinova and Dynegy, I have relied upon the opinion of even date herewith of Joseph L. Lakshmanan, Esq., filed as Exhibit F-4 to the Application. 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 may not be relied upon by any other person. Very truly yours, /s/ Steven R. Sullivan EX-99 6 dc166176_exhf-2.txt EX F-2 - OPINION LETTER EXHIBIT F-2 [Wachtell, Lipton, Rosen & Katz] September 24, 2004 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. 70-10220) Ladies and Gentlemen: 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, and Illinois Power Company ("Illinois Power"), an Illinois corporation (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 the Common Shares and Preferred Shares of Illinois Power from Illinova Corporation ("Illinova") (the "Transaction"). We have acted as special New York counsel to Ameren in connection with the Transaction. In connection with this opinion, we have examined the Application and the exhibits thereto, the Amended SPA, 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, certificates of officers and representatives of Ameren 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 is consummated in accordance with the Amended SPA: 1. All New York State laws applicable to the proposed Transaction will have been complied with by Ameren. 2. Ameren will legally acquire the Common Shares and the Preferred Shares. The opinions expressed above are subject to the following further assumptions and conditions: a. The authorizations and approvals of the Transaction by the boards of directors of Ameren, Illinova and Dynegy Inc. 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 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 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 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 shall have obtained all consents, waivers and releases, if any, required for the Transaction 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 shall have been consummated as described in the Application and under the supervision of us and of Steven R. Sullivan, Senior Vice President Governmental/Regulatory Policy, General Counsel and Secretary of Ameren, acting for Ameren and all legal matters incident thereto shall be satisfactory to each of us; h. Each person who signed the agreements or other documents executed or delivered by Ameren in connection with the Transaction was, at the time of such signing, duly authorized, qualified, and acting on behalf of Ameren and each such person's signatures appearing on such agreements or other documents are genuine, and each such person's titles are correctly stated; and 2 i. 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 are members of the Bar of the State of New York and do not express any opinion herein concerning any law other than the laws of the State of New York and the Federal law of the United States of America. A copy of this opinion is being delivered to Steven R. Sullivan, Senior Vice President Governmental/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. 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 immediately above, may not be relied upon by any other person. Very truly yours, /s/ Wachtell, Lipton, Rosen & Katz EX-99 7 dc166173_exhf-3.txt EX F-3 - OPINON LETTER EXHIBIT F-3 [Jones Day] September 24, 2004 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. 70-10220) Ladies and Gentlemen: 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, and Illinois Power Company ("Illinois Power"), an Illinois corporation (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 the Common Shares and Preferred Shares of Illinois Power from Illinova Corporation ("Illinova") (the "Transaction"). Ameren is also requesting findings by the Commission that would permit it to retain all of Illinois Power's existing direct and indirect non-utility subsidiaries and investments and to retain the combined gas utility properties of Illinois Power, Union Electric Company, Central Illinois Public Service Company and Central Illinois Light Company as an additional integrated public-utility system. In the Application, the Applicants are also requesting that the Commission approve the following related transactions (the "Related Transactions"): (i) the acquisition by Ameren from time to time during the Authorization Period of up to $300 million principal or face amount of the outstanding long-term debt securities and/or shares of preferred stock of Illinois Power or any subsidiary of Illinois Power; (ii) the entering into and performance of the Fuel Services Agreement between Ameren Fuels and Illinois Power pursuant to which Ameren Fuels will manage, at cost, gas supply resources and procurement for Illinois Power; (iii) the issuance of short-term debt securities (i.e., maturities of less than one year) by Illinois Power in an aggregate amount which, when added to borrowings by Illinois Power from Ameren and/or borrowings by Illinois Power under the Utility Money Pool at any time outstanding during the Authorization Period, will not exceed $500 million; (iv) the participation of Illinois Power in the Utility Money Pool; (v) to the extent not exempt under Rule 52(a), the entering into and performance by Illinois Power of Interest Rate Hedges and Anticipatory Hedges; and (vi) the organization and acquisition by Illinois Power of 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, the issuance to and acquisition by any Financing Subsidiary of Notes evidencing the loan of financing proceeds by any Financing Subsidiary to Illinois Power, and the rendering of services by Illinois Power to any Financing Subsidiary at market prices. We have acted as special Illinois counsel to Ameren and Ameren Fuels (the "Ameren Companies") in connection with the Transaction and the Related Transactions insofar as they relate to the Ameren Companies. In connection with this opinion, we have examined the Application and the exhibits thereto, the Amended SPA, and originals, or copies certified to our satisfaction, of such corporate records of the Ameren Companies, certificates of public officials, orders of regulatory bodies having jurisdiction over aspects of the Transaction and the Related Transactions, certificates of officers and representatives of the Ameren Companies 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 the Related Transactions are consummated in accordance with the Application: 1. All state laws applicable to the proposed Transaction and the Related Transactions will have been complied with by the Ameren Companies. 2. Ameren will legally acquire the Common Shares and the Preferred Shares. 3. The consummation of the Transaction and the Related Transactions by the Ameren Companies 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 authorizations and approvals of the Transaction by the boards of directors of Ameren, Illinova and Dynegy Inc. and, to the extent required, the authorization and approval of the Related Transactions, to 2 the extent that they concern the Ameren Companies, by the boards of directors and shareholders of such companies shall have been adopted and remain in full force and effect; b. The Amended SPA is the legal, valid, binding and enforceable agreement of the parties thereto; c. 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 Related Transactions, to the extent that they concern the Ameren 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 Related Transactions, to the extent that they concern the Ameren Companies, shall have been accomplished in accordance with all such approvals, authorizations, consents, certificates, orders, filings and registrations; d. The Commission shall have duly entered an appropriate order or orders with respect to the Transaction and the Related Transactions as described in the Application granting and permitting the Application to become effective under the Act and the rules and regulations thereunder; e. 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; f. The Ameren Companies and any associate company of Ameren incorporated in Illinois shall have obtained all consents, waivers and releases, if any, required for the Transaction and the Related Transactions under all applicable governing corporate documents, contracts, agreements, debt instruments, indentures, franchises, licenses and permits; g. No act or event other than as described herein shall have occurred subsequent to the date hereof which would change the opinions expressed herein; h. The Transaction and the Related Transactions shall have been consummated as described in the Application and under the supervision of Steven R. Sullivan, Senior Vice President Governmental/Regulatory Policy, General Counsel and Secretary of Ameren and Ameren Fuels, acting for such companies, and all legal matters incident thereto shall be satisfactory to him; and 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 3 relevant facts were not independently established, relied upon certificates by officers of the Ameren Companies and other appropriate persons and statements contained in the Application. 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 and the Federal law of the United States of America. A copy of this opinion is being delivered to Steven R. Sullivan, Senior Vice President Governmental/Regulatory Policy, General Counsel and Secretary of Ameren and Ameren Fuels, 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. 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 immediately above, may not be relied upon by any other person. Very truly yours, /s/ Jones Day EX-99 8 dc166174_exhf-4.txt EX F-4 - OPINION LETTER EXHIBIT F-4 [Letterhead of Joseph L. Lakshmanan, Esq.] September 24, 2004 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. 70-10220) Ladies and Gentlemen: 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, and Illinois Power Company ("Illinois Power"), an Illinois corporation (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 the Common Shares and Preferred Shares of Illinois Power from Illinova Corporation ("Illinova"), an Illinois corporation and the parent company of Illinois Power (the "Transaction"). Ameren is also requesting findings by the Commission that would permit it to retain all of Illinois Power's existing direct and indirect non-utility subsidiaries and investments and to retain the combined gas utility properties of Illinois Power, Union Electric Company, Central Illinois Public Service Company and Central Illinois Light Company as an additional integrated public-utility system. In the Application, the Applicants are also requesting that the Commission approve a number of related transactions, of which the following are pertinent to this opinion (the "Related Transactions"): (i) the acquisition by Ameren from time to time during the Authorization Period of up to $300 million (principal or face amount) of the outstanding long-term debt securities and/or shares of preferred stock of Illinois Power or any subsidiary of Illinois Power; (ii) the issuance of short-term debt securities (i.e., maturities of less than one year) by Illinois Power in an aggregate amount which, when added to borrowings by Illinois Power from Ameren and/or borrowings by Illinois Power under the Utility Money Pool at any time outstanding during the Authorization Period, will not exceed $500 million; (iii) the entering into and performance by Illinois Power of its obligations under the Ameren Utility Money Pool Agreement; (iv) to the extent not exempt under Rule 52(a), the entering into and performance by Illinois Power of Interest Rate Hedges and Anticipatory Hedges; and (v) the organization and acquisition by Illinois Power of 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, the issuance to and acquisition by any Financing Subsidiary of Notes evidencing the loan of financing proceeds by any Financing Subsidiary to Illinois Power, and the rendering of services by Illinois Power to any Financing Subsidiary at market prices. I have acted as counsel for Illinois Power in connection with the Application and, as such counsel, I am familiar with the corporate proceedings taken by Illinois Power, Illinova and Dynegy Inc. ("Dynegy") in connection with the Transaction and the Related Transactions, as described in the Application. I have examined the Application and the exhibits thereto, the Amended SPA, and originals, or copies certified to my satisfaction, of such corporate records of Illinois Power, Illinova and Dynegy, certificates of public officials, certificates of officers and representatives of Illinois Power, Illinova and Dynegy, and other documents as I have deemed it necessary to examine as a basis for the opinions hereafter expressed. 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 Transaction and the Related Transactions are consummated in accordance with the Application: 1. All state laws applicable to the Transaction and Related Transactions will have been complied with by Illinois Power, Illinova and Dynegy. 2. Illinois Power and Illinova are each validly organized and duly existing under the laws of the State of Illinois. 3. The Common Shares and the Preferred Shares to be acquired in the Transaction are 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 Amended and Restated Articles of Incorporation, as amended, of Illinois Power, and the short-term debt securities to be issued by Illinois Power will be valid and binding obligations of Illinois Power in accordance with their terms. 2 4. The consummation of the Transaction and Related Transactions will not violate the legal rights of the holders of any securities issued by Illinois Power. The opinions expressed above are subject to the following further assumptions and conditions: a. The authorizations and approvals of the Transaction by the Boards of Directors of Ameren, Illinova and Dynegy, and, to the extent required, the authorizations and approvals of the 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; 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 Related Transactions, to the extent that such requirements are applicable to Illinois Power, 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 Related Transactions shall have been accomplished in accordance with all such required approvals, authorizations, consents, certificates, orders, filings and registrations, to the extent that such requirements are applicable to Illinois Power; c. The Commission shall have duly entered an appropriate order or orders with respect to the Transaction and 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. Illinois Power shall have obtained all authorizations, approvals, consents, waivers and releases, if any, required for the Related Transactions under all applicable laws and 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 the Related Transactions, to the extent that Illinois Power, Illinova or Dynegy is a party to them, shall have been consummated as described in the Application and all legal matters incident thereto shall be satisfactory to me; 3 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 and the Federal law of the United States of America, as applicable to Illinois Power, Illinova and Dynegy. A copy of this opinion is being delivered to Steven R. Sullivan, Senior Vice President Governmental/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, for the limited purpose of rendering his opinion to the Commission, to the same extent as if this opinion had also been addressed directly to him; i. Each person who signed the agreements or other documents executed or delivered by Illinova or Dynegy in connection with the Transaction was, at the time of such signing, duly authorized qualified, and acting on behalf of Illinova or Dynegy, as applicable, and each such person's signatures appearing on such agreements or other documents are genuine, and each such person's titles are correctly stated; and j. As to various questions of fact material to such opinions I have, when relevant facts were not independently established, relied upon certificates by officers of Illinois Power, Illinova and Dynegy and other appropriate persons and statements contained in the Application. This opinion is given as of the date hereof. To the extent that this opinion speaks to matters occurring after the date hereof, I have assumed that they will occur under the conditions listed above. To the extent that these matters occur under conditions involving facts and circumstances that differ from those listed above, this opinion may not be relied upon. I undertake no obligation to amend or supplement this opinion in the event any laws change after the date of this letter, nor in the event I become aware after the date of this letter of any facts that might affect the opinions set forth herein. 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, it may not be used or relied upon by the Commission for any other purpose or by any other person or entity, without in each instance my prior written consent. This opinion is expressly limited to the matters set forth above, and I render no opinion, whether by implication or otherwise, as to any other matters. Very truly yours, /s/ Joseph L. Lakshmanan EX-99 9 dc175869_exhf-5.txt EX F-5 - OPINION LETTER EXHIBIT F-5 [O'Melveny & Myers LLP] September 24, 2004 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. 70-10220) -------------------------------- Ladies and Gentlemen: 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, and Illinois Power Company ("Illinois Power"), an Illinois corporation (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 the Common Shares and Preferred Shares of Illinois Power from Illinova Corporation ("Illinova") (the "Transaction"). We have acted as special New York counsel to Illinova and Dynegy Inc. ("Dynegy") in connection with the Transaction. In connection with this opinion, we have examined the Application and the exhibits thereto, the Amended SPA, and originals, or copies certified to our satisfaction, of such corporate records of Illinois Power, Illinova and Dynegy, certificates of public officials, orders of regulatory bodies having jurisdiction over aspects of the Transaction, certificates of officers and representatives of Illinois Power, Illinova and Dynegy and such other documents, records and matters of law as we have deemed necessary for the purposes of this opinion. On the basis of such examination, our reliance upon the assumptions in this opinion and our consideration of those questions of law that we have, in the exercise of customary professional diligence, recognized as applicable to transactions of this type, and subject to the limitations and qualifications in this opinion, we are of the opinion that, in the event that the proposed Transaction is consummated in accordance with the Amended SPA, all New York State laws applicable to the proposed Transaction will have been complied with by Illinova and Dynegy. The opinion expressed above is subject to the following further assumptions and conditions: a. The authorizations and approvals of the Transaction by the boards of directors of Ameren, Illinova and Dynegy 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 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 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 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. Illinois Power, Illinova and Dynegy shall have obtained all authorizations, approvals, consents, waivers and releases, if any, required for the Transaction under all applicable laws and 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 shall have been consummated as described in the Application and all legal matters incident thereto shall be satisfactory to us; h. Each person who signed the agreements or other documents executed or delivered by Illinova or Dynegy in connection with the Transactions was, at the time of such signing, duly authorized, qualified, and acting on behalf of Illinova or Dynegy, as applicable, and each such person's signatures appearing on such agreements or other documents are genuine, and each such person's titles are correctly stated; i. The law covered by this opinion is limited to the federal law of the United States and the law of the State of New York, each as in effect on the date hereof, and we express no opinion as to the laws of any other jurisdiction and no opinion regarding the statutes, administrative 2 decisions, rules, regulations or requirements of any county, municipality, subdivision or local authority of any jurisdiction; j. 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 Illinova and Dynegy and other appropriate persons and statements contained in the Application; and k. We express no opinion concerning (i) federal or state securities laws or regulations, (ii) federal or state antitrust, unfair competition or trade practice laws or regulations, (iii) pension and employee benefit laws and regulations, (iv) compliance with fiduciary requirements, (v) federal or state environmental laws and regulations, (vi) federal or state land use or subdivision laws or regulations or (vii) federal or state laws and regulations concerning filing requirements. 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 it may not be used or relied upon by the Commission for any other purpose or by any other person or entity, nor may copies be delivered to any other person or entity, without in each instance our prior written consent. This opinion letter is expressly limited to the matters set forth above, and we render no opinion, whether by implication or otherwise, as to any other matters. We assume no obligation to update or supplement this opinion letter to reflect any facts or circumstances that arise after the date of this opinion letter and come to our attention, or any future changes in laws. Very truly yours, /s/ O'Melveny & Myers LLP EX-99 10 dc173650_exhh.txt EX H - ANALYSIS OF ECONOMIC IMPACT EXHIBIT H AMEREN CORPORATION & ILLINOIS POWER COMPANY ANALYSIS OF THE ECONOMIC IMPACT OF A DIVESTITURE OF THE GAS OPERATIONS OF AMERENUE, AMERENCIPS, AMERENCILCO, AND IP This Study was undertaken by the management and staff of Ameren Corporation on behalf of Union Electric Company d/b/a AmerenUE (UE), Central Illinois Public Service Company d/b/a AmerenCIPS (CIPS), and Central Illinois Light Company d/b/a AmerenCILCO (CILCO), in cooperation with Illinois Power Company (IP) to evaluate the costs from lost economies that would be associated with the spin-off of UE's, CIPS', CILCO's, and IP's natural gas assets and operations as a single stand-alone gas company, all of which would take place after the acquisition of IP by Ameren Corporation. AUGUST 2004 TABLE OF CONTENTS ----------------- PAGE ---- SECTION I. EXECUTIVE SUMMARY AND CONCLUSIONS 1 SECTION II. GENERAL STUDY ASSUMPTIONS 4 SECTION III. NEW GASCO A. OVERVIEW 6 B. ANALYSIS 7 C. SCHEDULE OF EXHIBITS 13 ================================================= SECTION I. EXECUTIVE SUMMARY AND CONCLUSIONS ================================================= This Study was undertaken by the management and staff of Ameren Corporation (Ameren) on behalf of Union Electric Company d/b/a AmerenUE (UE), Central Illinois Public Service Company d/b/a AmerenCIPS (CIPS), and Central Illinois Light Company d/b/a AmerenCILCO (CILCO), in cooperation with Illinois Power Company (IP), to evaluate the costs from lost economies that would be associated with the spin-off of UE's, CIPS',CILCO's, and IP's natural gas assets and operations as a single stand-alone gas company, all of which would take place after the acquisition of IP by Ameren Corporation. This Study demonstrates that the lost economies from divestiture would be substantial, and that continued retention of the gas operations by UE, CIPS, CILCO, and IP following the acquisition of IP 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, CILCO, and IP are combined into a single natural gas subsidiary (New Gasco) after Ameren acquires IP and that such subsidiary was subsequently spun off to the public, there would be an income tax liability of approximately $73 million (based on data as of December 31, 2003 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', CILCO's, and IP's gas businesses into New Gasco are shown in Table I-1: 1
----------------------------------------------------------------------------- TABLE I-1* ANNUAL EFFECT OF LOST ECONOMIES ON SHAREHOLDERS ----------------------------------------------------------------------------- NEW GASCO ----------------------------------------------------------------------------- Lost Economies $54,150,000 ----------------------------------------------------------------------------- Lost Economies as a Percent of: ----------------------------------------------------------------------------- Total Gas Operating Revenue 5.04% ----------------------------------------------------------------------------- Total Gas Operating Revenue Deductions 5.42% ----------------------------------------------------------------------------- Gross Gas Income 72.21% ----------------------------------------------------------------------------- Net Gas Income 101.68% ----------------------------------------------------------------------------- In the Absence of Rate Relief: ----------------------------------------------------------------------------- Return on Rate Base 1.32% ----------------------------------------------------------------------------- Return on Net Plant 1.52% ----------------------------------------------------------------------------- * The effect of lost economies shown in this table does not reflect the income tax liability of $73 million, as previously explained. -----------------------------------------------------------------------------
In Table I-1, Lost Economies represents the increased costs, excluding income taxes, for New Gasco to operate as a single stand-alone company. Total Gas Operating Revenue is the sum of all gas revenues for the 12 months ended December 31, 2003. 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. NEW GASCO 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 NEW GASCO ----------------------------------------------------------------------------- Pre Spin-off $1,074,189,000 ---------------------------------------------------------------------------- Post Spin-off $1,182,004,000 ---------------------------------------------------------------------------- Dollar Increase $107,815,000 ---------------------------------------------------------------------------- Percent Increase 10.04% ---------------------------------------------------------------------------- * The effect of lost economies shown in this table does not reflect the income tax liability of $ 73 million, as previously explained. ----------------------------------------------------------------------------
2 (See SECTION III.C. NEW GASCO Exhibit 1 for detailed information supporting Table I-2.) ELECTRIC CUSTOMERS - ------------------ In addition to the foregoing impacts, divesting the gas business would result in rate increases of .06% for UE electric customers, 2.12% for CIPS electric customers, 6.26% for CILCO electric customers, and 4.08% for IP 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, CILCO, and IP will realize from combined electric and gas operations will provide significant benefits to customers and shareholders. This Study demonstrates that spinning off the four 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 New Gasco 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 New Gasco would total about $107.8 million (Table I-2). Such increases would make New Gasco less competitive at a time when competition in the energy industry is rapidly increasing. In addition, New Gasco 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 $73 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, CIPS, CILCO, and IP 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 Ameren and IP for their gas businesses assuming the customers of New Gasco 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, CILCO, and IP 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/CIPS/CILCO. 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, CILCO, and IP. 4 b) The actual capital costs for New Gasco would be higher than those of UE, CIPS, CILCO, and IP. Since gas purchases are highly seasonal and market prices are volatile, New Gasco would experience great volatility in its cash positions. At the same time, the book value of the assets of New Gasco would be much smaller than those of the combined utility predecessors. As a result, New Gasco would be perceived as riskier and would be subject to higher borrowing rates. Because of the constraints of the UE, CIPS, CILCO, and IP mortgage indentures, it would likely be difficult to transfer gas properties out from these entities, and out from under the lien of the respective indentures, or in order to accommodate the property transfer provisions in the indentures, would necessitate reduction of outstanding debt at substantial premiums over par value in addition to the new financing costs at the new entity. 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 New Gasco and UE/CIPS/CILCO/IP, 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. NEW GASCO OVERVIEW ================================================= Spinning off UE's, CIPS', CILCO's, and IP's gas operations into a separate stand-alone company (New Gasco) would result in the following: o New Gasco would need to establish service functions duplicating those at UE, CIPS, CILCO, and IP, 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 New Gasco would be about 5.42% ($54.2 million) greater than UE's, CIPS', CILCO's, and IP's gas operating revenue deductions. (SECTION III.C, Exhibit 1). o New Gasco's customers would experience a rate increase of about 10.04% ($107.8 million) in order to provide an 8.14% rate of return on rate base and a 10.57% return for stockholders (SECTION III.C, Exhibit 4). o New Gasco 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. NEW GASCO ANALYSIS ================================================= The UE, CIPS, CILCO, and IP gas distribution systems serve a total of approximately 915,000 (as of December 31, 2003) customers over a 64,000 square mile area in Missouri and Illinois. There are 20,100 miles of mains and 12,700 miles of service lines in the combined systems. Natural gas revenues for 2003 were $1,074 million on total system throughputs of 183 billion cubic feet of gas. Ameren and IP operate as tightly integrated companies with many employees supporting both gas and electric operations. Of Ameren's and IP's 9,400 employees (as of December 31, 2003), only 696 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, CILCO, and IP meter readers who read both the electric and gas meters. Additionally, UE's, CIPS', CILCO's, and IP'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', CILCO's, and IP's employees have enabled UE, CIPS, CILCO, and IP to provide quality service at low costs. ORGANIZATION STRUCTURE AND STAFFING IMPACT - ------------------------------------------ The Ameren organization, as of December 31, 2003, was used as a pattern for developing the New Gasco 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, 1,028 additional employees would be required, in addition to the 696 employees mentioned above. UE, CIPS, CILCO, and IP 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 New Gasco would incur an estimated net labor increase, including benefits, of $13.2 million. The following comments demonstrate some of the reasons for additional staffing: Each customer of UE, CIPS, CILCO, and IP 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. New Gasco would have to hire staff to handle gas payments that are now handled at essentially no additional cost by UE, CIPS, CILCO, and IP. Spinning off the gas operations would only minimally reduce the workload on UE's, CIPS', CILCO's, and IP's cash processing 7 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', CILCO's, and IP's meter readers read gas and electric meters on the same routes. New Gasco 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, CILCO, and IP since their routes would remain essentially the same. Ameren's and IP's financial and accounting personnel maintain the books and arrange for insurance of their respective companies. They arrange for long-term financing and borrow short-term funds for operations. They maintain stockholder records and perform various investor services. New Gasco would require personnel to provide the same services. Spinning off the gas operations would not provide any measurable savings for UE, CIPS, CILCO, and IP in the finance and accounting areas, since all the existing books and records of the electric utility would remain essentially unchanged, insurance needs would be similar, and staff time devoted to financing activities would not be significantly reduced. Ameren's and IP's Human Resources Divisions administer benefit and salary plans. New Gasco would need to hire personnel to perform the same duties. Spinning off the gas operations would not provide substantial savings to UE, CIPS, CILCO, and IP, because each of UE's, CIPS',CILCO's, and IP's existing benefit and salary plans, and the associated reporting requirements, would remain. Ameren and IP are staffed to provide materials, supplies, transportation equipment, etc. to operating divisions. New Gasco 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 IP, 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 IP minimal. Ameren's and IP's legal staffs supplemented by external counsel provide legal, regulatory and claims services for UE's, CIPS', CILCO's, and IP's operating divisions. New Gasco 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 work performed by Ameren's legal departments 8 would not decrease significantly, and there would be no staffing reductions. INDEPENDENT ACCOUNTANT IMPACT - ----------------------------- Ameren and IP hire independent accountants to audit the financial statements of the companies. New Gasco would need to hire independent accountants to perform the same duties, and also incur additional fees from independent accountant and third party auditors to provide compliance with the Sarbanes-Oxley Act of 2002. Increased costs to New Gasco are estimated at $2.5 million. Ameren and IP would not achieve any savings from this divestiture, since the existing level of work for the independent accountants would remain about the same. INFORMATION TECHNOLOGY IMPACT - ----------------------------- Ameren and IP provide extensive information technology assistance to its operating and support divisions. New Gasco would need to provide the same assistance to its divisions. Hardware costs are reflective of the quantity of information to be processed, so New Gasco's hardware and telecommunications costs would be substantially less than Ameren's and IP's. Software costs are generally less dependent on quantity and more dependent on function, so New Gasco software costs would be similar to Ameren's and IP's. See SECTION III. C, Exhibit 2b, which identifies a net increase in cost for information services of $23.2 million. Divesting the gas operations would eliminate opportunities for sharing information technology resources to the detriment of both the gas and electric operations: New Gasco would be subject to the same regulatory accounting requirements as UE, CIPS, CILCO, and IP; 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 IP's, and would cost about $10.8 million. Ameren and IP would retain all existing software, resulting in no software savings. Also, Ameren and IP would expend considerable resources changing accounting systems to reflect the divestiture of the gas business. Ameren and IP 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, New Gasco would need a similar integrated system, which would cost about $8.1 million. Ameren and IP would require slightly less data storage, producing negligible savings. There would be no software savings since Ameren and IP would require all existing software. 9 Ameren's and IP'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. New Gasco 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 $21.6 million. Both Ameren and IP 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. New Gasco would need a similar system, costing about $4.3 million, to maintain current levels of customer service. Ameren and IP would no longer process gas customers but data storage savings would be insignificant. Ameren and IP 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. New Gasco would need a similar system estimated at $5.5 million. Processing fewer employees would provide insignificant savings for Ameren and IP. Ameren's and IP's Information Technology personnel maintain the above systems. To maintain similar systems, it is estimated New Gasco would expend about $2.7 million annually. New Gasco software maintenance would cost about three-fourths of Ameren's and IP's cost since some systems would not exist in a gas-only company. Because all of the existing systems would remain, Ameren and IP would achieve no maintenance savings by spinning off the gas operations. Ameren and IP maintain communications networks, telephone services, radio systems, etc. To maintain similar systems, New Gasco would need personnel and equipment costing about $9.6 million annually. Ameren and IP would achieve minimal savings because the number of locations would remain the same, although slightly less equipment (e.g. telephones) would be needed 10 because there would be fewer employees at some locations. Ameren and IP maintain data centers to serve all of the above systems. To operate similar systems, New Gasco would need a similar data center, costing about $6.0 million annually. There would be no equipment or manpower savings for Ameren and IP, since all existing systems would remain. INSURANCE COSTS - --------------- Ameren and IP obtain property, liability, directors and officers, workers compensation and other insurance. New Gasco would require similar policies. See SECTION III.C, Exhibit 2c, which shows an estimated increase in insurance cost of $3.6 million to New Gasco. Since all coverages would remain in effect, Ameren and IP would experience no savings for insurance. OFFICE AND CREW FACILITIES COSTS - -------------------------------- UE, CIPS, CILCO, and IP maintain combined electric and gas office and crew facilities at several locations. New Gasco 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 $3.3 million in additional office and crew facilities costs. Since UE, CIPS, CILCO, and IP 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, CILCO, and IP maintain transportation and motorized equipment used by both gas and electric crew and support personnel. New Gasco would need to obtain similar equipment for gas operations. New Gasco's additional transportation cost would be about $3.4 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, CIPS, and CILCO would equal the additional equipment required by New Gasco, 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. TRANSITION COSTS - ---------------- The divestiture of the gas operations of Ameren and IP 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 11 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 $49 million for New Gasco were developed by calculating the average of such costs incurred in several other publicly reported utility related business spin-offs. For this Study, we amortized these costs over 10 years to arrive at an annualized amount of $4.9 million. 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 IP's capital structure as of December 31, 2003, and estimated current costs of debt and equity, which average about 8.14%. See SECTION III.C, Exhibit 4 for detailed information. INCOME TAXES ON THE DIVESTITURE TRANSACTION - ------------------------------------------- Assuming that the natural gas assets of UE, CIPS, CILCO, and IP are combined into New Gasco after Ameren acquires IP and that such subsidiary was subsequently spun off to the public, there would be an income tax liability of approximately $73 million (based on data as of December 31, 2003 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 New Gasco would require 1,724 full-time employees, an increase of approximately 148% over the number of employees currently devoted to UE, CIPS, CILCO, and IP 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 New Gasco are projected to be $54.2 million. The exhibits (SECTION III.C) that follow show the economic effects of operating UE's, CIPS', CILCO's, and IP's gas divisions as one separate entity. 12 ================================================= SECTION III.C. NEW GASCO SCHEDULE OF EXHIBITS =================================================
EXHIBIT NO. EXHIBIT TITLE - ----------------------- --------------------------------------------------------------------- 1 Income Statement, Proforma Adjustments & Revenue Requirement 1a Consolidation of UE, CIPS, CILCO, CILCO, and IP Gas Income Statements 2 Estimated Additional Operating Expenses 2a Estimated External and Third Party Audit Fees 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-4 Estimated Net Increase in Transportation & Motorized Equipment Expense 3 Consolidated Gas Rate Base Reduced for Common Plant 3a Consolidation of UE, CIPS, CILCO, and IP Gas Rate Bases 3b Consolidation of UE's, CIPS' CILCO's; and IP'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 Electric Rate Base & Rate of Return Adjusted for Common Plant 8a Consolidation of UE, CIPS, CILCO, and IP Electric Rate Bases
13 NEW GASCO EXHIBIT 1 NEW GASCO INCOME STATEMENT PROFORMA ADJUSTMENTS & REVENUE REQUIREMENT (In Thousands of Dollars)
Existing UE/CIPS/CILCO/IP Consolidated Revenue Year Ending Proforma Proformed Requirement 12/31/2003 (1) Adjustments (2) New Gasco Increase (3) ------------------- ---------------- ------------------ --------------- OPERATING REVENUE: $ 1,074,189 $ - $ 1,074,189 $ 1,182,004 TOTAL OPERATING REVENUE DEDUCTIONS $ 999,204 $ 54,150 $ 1,053,354 $ 1,053,354 ------------------- ------------------ --------------- GROSS GAS INCOME $ 74,985 $ 20,835 $ 128,650 FEDERAL & STATE INCOME TAXES (4) $ 21,731 $ 7,917 $ 48,887 ------------------- ------------------ --------------- NET GAS INCOME $ 53,254 $ 12,918 $ 79,763 =================== ================== =============== RATE BASE (5) $ 1,068,869 $ 979,895 $ 979,895 =================== ================== =============== INDICATED RATE OF RETURN 4.98% 1.32% 8.14% (6) =================== ================== =============== (1) See Exhibit 1a for consolidation detail. (2) See Exhibit 2 for a detailed summary of proforma adjustments. (3) An increase of $107,815,000 or 10.04% in revenue is required to achieve a rate of return of 8.14%. 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) The effective tax rate for Ameren's gas utilities is expected to be about 38% in 2004. This is the effective tax rate used to calculate taxes for the "Proformed New Gasco" 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.
NEW GASCO EXHIBIT 1A CONSOLIDATION OF UE, CIPS, CILCO, AND IP GAS INCOME STATEMENTS FOR THE YEAR ENDED 12/31/2003 (IN THOUSANDS OF DOLLARS)
Existing Existing Existing Existing Existing UE Gas CIPS Gas CILCO Gas IP Gas UE/CIPS/CILCO/IP Company Company Company Company Consolidated Year Ended Year Ended Year Ended Year Ended Year Ended 12/31/2003 12/31/2003 12/31/2003 12/31/2003 12/31/2003 ----------- ----------- -------------- -------------- ---------------- OPERATING REVENUE: $ 145,179 $ 184,959 $ 278,192 $ 465,859 $ 1,074,189 TOTAL OPERATING REVENUE DEDUCTIONS $ 141,172 $ 169,944 $ 255,458 $ 432,630 $ 999,204 ----------- ----------- -------------- -------------- ---------------- GROSS GAS INCOME $ 4,007 $ 15,015 $ 22,734 $ 33,229 $ 74,985 FEDERAL & STATE INCOME TAXES $ 100 $ 6,487 $ 12,038 $ 3,106 $ 21,731 ----------- ----------- -------------- -------------- ---------------- NET GAS INCOME $ 3,907 $ 8,528 $ 10,696 $ 30,123 $ 53,254 =========== =========== ============== ============== ================
NEW GASCO EXHIBIT 2 NEW GASCO ESTIMATED ADDITIONAL OPERATING EXPENSES PROFORMA ADJUSTMENTS (In Thousands of Dollars)
Exhibit Reference Number Amount ------------- ----------------- External Auditing Costs 2a $ 2,518 Information Technology (Outsourced) 2b $ 23,242 Insurance Premiums 2c $ 3,559 Labor & Benefits 2d $ 13,244 Leased Facilities/Furniture 2e $ 3,255 Transition Costs (Amortized) 2f $ 4,908 Transportation & Work equipment 2g-1 $ 3,424 ----------------- TOTAL ADDITIONAL O & M EXPENSES $ 54,150 =================
NEW GASCO EXHIBIT 2A NEW GASCO ESTIMATED EXTERNAL & THIRD PARTY AUDIT FEES PROFORMA ADJUSTMENT
Average cost of external and third party audit fees for companies having revenue in the $1 billion to $5 billion range - GAIN survey, and adjusted for additional estimated costs of compliance with the Sarbanes-Oxley Act of 2002. $ 2,671,220 Less: External/Third Party Audit Fees Allocated to UE's, CIPS', CILCO's, and IP's Gas operations in 2003 $ 153,100 ----------- NET ESTIMATED ANNUAL AUDIT FEES INCREASE FOR NEW GASCO $ 2,518,120 =========== Information Source: Global Auditing Information Network (GAIN) Survey, a service of The Institute of Internal Auditors.
NEW GASCO EXHIBIT 2B NEW GASCO INFORMATION TECHNOLOGY ESTIMATED INFORMATION TECHNOLOGY (IT) COSTS PROFORMA ADJUSTMENT (In Thousands of Dollars)
ONE-TIME CAPITAL ANNUAL SOFTWARE APPLICATION COSTS: COST EXPENSE --------------------------- -------------- -------------- Financial Systems $10,800 $2,160 Investor Services $486 $97 Customer Information System $21,600 $4,320 Customer Telephony Integration $1,080 $216 Field Order/Trouble Tracking $4,320 $864 Materials Management/Procurement $8,100 $1,620 Gas Meter Management $2,160 $432 Gas Management Systems $6,750 $1,350 HR/Payroll/Benefits $5,508 $1,102 Time Reporting $1,080 $216 Gas SCADA $648 $130 Software Implementation Contingency $12,506 $2,501 -------------- -------------- TOTAL Software Application Costs $75,038 $15,008 ============== ANNUAL AMORTIZED HARDWARE/OPERATIONS COSTS: Hardware $6,042 Systems Software $2,674 Telecommunications $9,576 -------------- TOTAL ANNUAL SUPPORT/OPERATING COSTS $33,300 Less: Estimated Annual IT Costs Allocated to UE, CIPS, CILCO, and IP $10,058 -------------- NET INCREASE IN COST FOR INFORMATION TECHNOLOGY $23,242 ==============
NEW GASCO EXHIBIT 2C NEW GASCO ESTIMATED INCREASED COST OF INSURANCE COVERAGE PROFORMA ADJUSTMENT
Estimated Limits Stand Alone Net Increase to Coverage (Millions) Deductible Premium Cost New Gasco - ----------------------------------- ---------- -------------- -------------- ----------------- Property $ 25 $ 500,000 $ 50,000 General Liability $ 60 $ 250,000 $ 1,000,000 Auto Liability $ 1 $ 10,000 $ 300,000 Directors & Officers Liability $ 30 $ 250,000 $ 750,000 Workers Compensation Statutory $ 350,000 $ 3,000,000 Fiduciary Liability $ 10 $ 5,000 $ 50,000 Crime (Fidelity) $ 5 $ 5,000 $ 20,000 -------------- TOTAL PREMIUM FOR NEW GASCO $ 5,170,000 Less: 2003 Insurance Cost Allocated to UE/CIPS/CILCO/IP Gas Operations $ 1,610,587 -------------- NET INCREASE IN INSURANCE COSTS FOR NEW GASCO $ 3,559,413 ================= Source: Premiums are based on estimated costs obtained from Ameren's Treasurer's Department, Insurance Division.
NEW GASCO EXHIBIT 2D NEW GASCO ESTIMATED NET LABOR INCREASE, INCLUDING BENEFITS PROFORMA ADJUSTMENT (IN THOUSANDS OF DOLLARS)
Total Estimated New Gasco Salaries and Wages (Exhibit 6) $ 106,426 Less: Amount for Construction & Removals (25.79%) - (1) $ 25,776 -------------- Total Estimated New Gasco Salaries & Wages Charged to O & M $ 80,650 Less: 2003 UE/CIPS/CILCO/IP Gas Salaries & Wages computed going to O & M $ 71,845 -------------- Increase in New Gasco Salaries & Wages Charged to O & M $ 8,805 Benefits (2): Employee Life, Hospitalization, savings plans, etc. $ 2,465 Pension Plan $ 1,321 FICA & Unemployment Insurance $ 653 ------------- Total Benefits $ 4,439 ------------- NEW GASCO NET LABOR INCREASE, INCLUDING BENEFITS $ 13,244 ============= (1) The percentage of gas labor allocated to construction and removal is based on the actual amount spent by UE, CIPS, CILCO, and IP in 2003. (2) Benefit costs were estimated based upon the cost (as a percentage of payroll) currently used by UE for: Life, Hospitalization, savings plans, post employment benefit, etc. 28.00% Pension Plan 15.00% FICA & Unemployment Insurance 7.42% ------------- Total 50.42% =============
NEW GASCO EXHIBIT 2E NEW GASCO ESTIMATED OPERATING LEASE FACILITIES AND FURNITURE COSTS PROFORMA ADJUSTMENT
EST. ANNUAL LOCATION: COST (1) - ----------------------------------------- -------------------- General Office (IL) $ 1,839,024 Semo Division (MO) $ 405,318 Boone Trails Division (MO) $ 83,894 Missouri Valley Division (MO) $ 440,958 Central Ozarks Division (MO) $ 254,110 Metro East Division (IL) $ 216,251 Great Rivers Division (IL) $ 611,262 Illini Division (IL) $ 770,349 Shawnee Division (IL) $ 319,887 Gas Support (MO & IL) $ 154,800 CILCO Gas Operations Total $ 2,131,800 IP Gas Operations Total $ 4,233,000 Office Furniture for all areas $ 661,283 -------------------- NEW GASCO TOTAL $ 12,121,936 Less: UE/CIPS/CILCO/IP Amount allocated Gas Operations in 2003 $ 8,867,021 -------------------- NET INCREASE IN EXPENSE $ 3,254,915 ==================== (1) Refer to Exhibits 2e-1 through 2e-3 for detail information.
NEW GASCO EXHIBIT 2E-1 NEW GASCO 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 387 153,252 $ 12.00 $ 1,839,024 - $ 1,839,024 ============== SEMO DIVISION (MO): Cape Girardeau 18 7,128 $ 9.00 $ 64,152 $150,911 Chaffee 0 - $ - $ 19,672 Dexter 0 - $ - $150,911 Hayti 0 - $ - $ 19,672 -------------- ---------- TOTAL $ 405,318 ============== BOONE TRAILS DIVISION (MO): Louisiana 15 5,940 $ 7.50 $ 44,550 $ 19,672 Troy 0 - $ - $ 19,672 -------------- ---------- TOTAL $ 83,894 ============== MISSOURI VALLEY DIVISION (MO): Boonville 0 - $ - $ 19,672 Centralia 0 - $ - $ 19,672 Columbia 21 8,316 $ 12.00 $ 99,792 $ - Mexico 0 - $ - $150,911 Moberly 0 - $ - $150,911 -------------- ---------- TOTAL $ 440,958 ============== CENTRAL OZARKS DIVISION (MO): Jefferson City 15 5,940 $ 10.75 $ 63,855 $150,911 Eldon 0 - $ - $ 19,672 Versailles 0 - $ - $ 19,672 ------------- ---------- TOTAL $ 254,110 ============== METRO EAST DIVISION: Alton 15 5,940 $ 11.00 $ 65,340 $150,911 $ 216,251 ============== GREAT RIVERS DIVISION (IL): Jerseyville 0 - $ - $ - $ 19,672 Pittsfield 0 - $ - $ - $ 19,672 Quincy 16 6,336 $ 12.00 $ 76,032 $150,911 Virden 0 - $ - $ - $ 19,672 Beardstown 16 6,336 $ 12.00 $ 76,032 $150,911 Canton 0 - $ - $ - $ 19,672 Carthage 0 - $ - $ - $ 19,672 Havana 0 - $ - $ - $ 19,672 Macomb 0 - $ - $ - $ 19,672 Pertersburg 0 - $ - $ - $ 19,672 TOTAL $ 611,262 ============== (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 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.
NEW GASCO EXHIBIT 2E-2 NEW GASCO 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 ---------- -------------- ------------- -------------- ---------- -------------- ILLINI DIVISION (IL): Mattoon 19 7,524 $ 12.00 $ 90,288 $150,911 North Pana 0 - $ - $ - $ 19,672 Paris 0 $ 19,672 Gilman 0 - $ - $ - $ 19,672 Paxton 8 3,168 $ 12.00 $ 38,016 $150,911 Watseka 0 - $ - $ - $ 19,672 Effingham 15 5,940 $ 12.00 $ 71,280 $150,911 Olney 0 - $ - $ - $ 19,672 Robinson 0 - $ - $ - $ 19,672 TOTAL $ 770,349 ============== SHAWNEE DIVISION (IL): Anna 0 - $ - $ - $ 19,672 Benton 0 - $ - $ - $ 19,672 Carbondale 0 - $ - $ - $ 19,672 Harrisburg 0 - $ - $ - $ 19,672 Marion 19 7,524 $ 12.00 $ 90,288 $150,911 -------------- TOTAL $ 319,887 ============== 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 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.
NEW GASCO EXHIBIT 2E-3 NEW GASCO ESTIMATED OPERATING LEASE FACILITIES AND FURNITURE COSTS PROFORMA ADJUSTMENT
------------------- ------------------ ---------------- Number of Cost Per Total Leased Customers Customer (1) Facilities ------------------- ------------------ ---------------- CILCO GAS OPERATIONS 209,000 $ 10.20 $ 2,131,800 ================ IP GAS OPERATIONS 415,000 $ 10.20 $ 4,233,000 ================ ESTIMATED OFFICE FURNITURE OPERATING LEASE EXPENSE FOR ALL UE/CIPS/CILCO/IP AREAS (2): $ 661,283 ================ (1) CILCO & IP office space & Wrks. Hqtrs. costs are based on the average cost per customer estimated for the UE/CIPS operating areas. (2) The office furniture operating lease expense is based on an estimated $4,500 cost of furniture per employee multiplied by 1,078 management & office staff employees at an annual interste rate of 6.07% (Long term rate shown on Exhibit 4).
NEW GASCO EXHIBIT 2F NEW GASCO ESTIMATED TRANSITION COSTS PROFORMA ADJUSTMENT Transition costs required to establish a new corporation would include, but not necessarily be limited to, 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 New Gasco were estimated based upon an average of the following published transition costs for four utility related corporate spin-offs:
TRANSITION ORIGINAL CORPORATION SPIN-OFF COMPANY Costs(000) -------------------- ---------------- ---------- Southern Company Mirant $ 80,000 Centerpoint Reliant Resources $ 81,000 Xcel Energy NRG Energy $ 16,300 Constellation Energy Orion Power $ 19,000 ---------- Average Transition Costs of the Above Companies $ 49,075 ---------- ANNUAL AMORTIZATION OF TRANSITION COSTS FOR NEW GASCO (10%) $ 4,908 ==========
Source: Transition costs reported in Annual Reports and/or SEC Form 10-K filings. NEW GASCO EXHIBIT 2G-1 NEW GASCO ESTIMATED NET INCREASE IN TRANSPORTATION & MOTORIZED EQUIPMENT EXPENSE PROFORMA ADJUSTMENT
EST. ANNUAL COST LOCATION: (1) & (2) - ------------------------------------ ---------------- General Office (IL) $ 182,880 Semo Division (MO) $ 311,076 Boone Trails Division (MO) $ 203,868 Missouri Valley Division (MO) $ 504,996 Central Ozarks Division (MO) $ 286,656 Metro East Division (IL) $ 242,472 Illini Division (IL) $ 527,520 Shawnee Division (IL) $ 345,420 Great Rivers Division (IL) $ 601,632 Peoria Operations (IL) $ 1,151,520 Springfield Operations (IL) $ 531,792 Tuscola Operations (IL) $ 139,356 Lincoln Operations (IL) $ 166,428 CILCO Support $ 323,640 Gas Support - Illinois $ 109,500 Galesburg (IL) $ 448,526 LaSalle (IL) $ 238,709 Champaign (IL) $ 817,567 Decatur (IL) $ 561,434 Jacksonville (IL) $ 107,604 Metro (IL) $ 986,852 Maryville (IL) $ 871,037 Mt. Vernon (IL) $ 218,225 Sparta (IL) $ 81,327 Hillsboro (IL) $ 278,838 ---------------- NEW GASCO TOTAL $ 10,238,875 Less: UE/CIPS/CILCO/IP Amount previously allocated Gas Operations $ 6,814,423 ---------------- NET INCREASE IN EXPENSE $ 3,424,452 ================ (1) See Exhibits 2g-2, 2g-3, & 2g-4 for detail information. Projected costs for UE/CIPS/CILCO based on management's assessment of transportation & equipment needs. (2) IP transportation & equipment costs based on UE/CIPS/CILCO transportation costs per customer.
NEW GASCO EXHIBIT 2G-2 NEW GASCO ESTIMATED NET INCREASE IN TRANSPORTATION & MOTORIZED EQUIPMENT EXPENSE PROFORMA ADJUSTMENT
-------------------------- ------------------------ ----------------------- General Office(GO)\ Pool Semo Division Boone Trails Division - ------------------------------- ----------- -------------------------- ------------------------ ----------------------- 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 - -------------------------------------------- -------------------------- ------------------------ ----------------------- Customer Service Supervisor $ 613 1 $ 7,356 1 $ 7,356 - -------------------------------------------- -------------------------- ------------------------ ----------------------- Meter Reader $ 497 4 $ 23,856 2 $ 11,928 - -------------------------------------------- -------------------------- ------------------------ ----------------------- Customer Service Consultant $ 613 2 $ 14,712 4 $ 29,424 - -------------------------------------------- -------------------------- ------------------------ ----------------------- Corrosion Technician $ 497 - -------------------------------------------- -------------------------- ------------------------ ----------------------- Other transportation & - -------------------------------------------- -------------------------- ------------------------ ----------------------- Motorized Equipment - ------------------------------- ----------- -------------------------- ------------------------ ----------------------- Not Indicated Above $ - $210,084 $100,092 - ------------------------------- ----------- -------------------------- ------------------------ ----------------------- TOTAL $ 182,880 $311,076 $203,868 ============= ============ ===========
-------------------------- ------------------------ ----------------------- Mo Valley Division Central Ozarks Div. Metro East Division - ------------------------------- ----------- -------------------------- ------------------------ ----------------------- 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 2 $ 14,712 1 $ 7,356 1 $ 7,356 - -------------------------------------------- -------------------------- ------------------------ ----------------------- Meter Reader $ 497 10 $ 59,640 4 $ 23,856 3 $ 17,892 - -------------------------------------------- -------------------------- ------------------------ ----------------------- Customer Service Advisor $ 613 1 $ 7,356 2 $ 14,712 1 $ 7,356 - -------------------------------------------- -------------------------- ------------------------ ----------------------- District Meter Tester $ 613 1 $ 7,356 2 $ 14,712 - -------------------------------------------- -------------------------- ------------------------ ----------------------- Other transportation & - -------------------------------------------- -------------------------- ------------------------ ----------------------- Motorized Equipment - -------------------------------------------- -------------------------- ------------------------ ----------------------- Not Indicated Above $338,796 $178,308 $132,732 - -------------------------------------------- -------------------------- ------------------------ ----------------------- TOTAL $504,996 $286,656 $242,472 ============== ============= ============
NEW GASCO EXHIBIT 2G-3 NEW GASCO ESTIMATED NET INCREASE IN TRANSPORTATION & MOTORIZED EQUIPMENT EXPENSE PROFORMA ADJUSTMENT
----------------------- ----------------------- ----------------------- Illini Division Shawnee Division Great Rivers Division - -------------------------------------------- ----------------------- ----------------------- ----------------------- 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 3 $ 20,376 1 $ 6,792 1 $ 6,792 - -------------------------------------------- ----------------------- ----------------------- ----------------------- Supervising Engineer $406 0 0 0 - -------------------------------------------- ----------------------- ----------------------- ----------------------- Coordinator of Gas Engineering $406 0 0 1 $ 4,872 - -------------------------------------------- ----------------------- ----------------------- ----------------------- Gas Engineer $406 2 $ 9,744 1 $ 4,872 1 $ 4,872 - -------------------------------------------- ----------------------- ----------------------- ----------------------- 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 Service Specialist - ESS $406 6 $ 29,232 1 $ 4,872 4 $ 19,488 - -------------------------------------------- ----------------------- ----------------------- ----------------------- Service Delivery Supervisor $406 1 $ 4,872 3 $ 14,616 - -------------------------------------------- ----------------------- ----------------------- ----------------------- Other transportation & - -------------------------------------------- ----------------------- ----------------------- ----------------------- Motorized Equipment - -------------------------------------------- ----------------------- ----------------------- ----------------------- Not Indicated Above $456,504 $302,604 $558,816 - -------------------------------------------- ----------------------- ----------------------- ----------------------- TOTAL $527,520 $345,420 $601,632
NEW GASCO EXHIBIT 2G-4 NEW GASCO ESTIMATED NET INCREASE IN TRANSPORTATION & MOTORIZED EQUIPMENT EXPENSE PROFORMA ADJUSTMENT
----------------------- ------------------------ --------------------- Peoria Springfield Tuscola - -------------------------------------------- ----------------------- ------------------------ --------------------- Rate Per Est. Annual Est. Annual Est. Annual Description Month Number Cost Number Cost Number Cost - -------------------------------------------- ----------------------- ------------------------ --------------------- Manager $ 566 1 $ 6,792 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Gas Estimators $ 406 6 $ 29,232 2 $ 9,744 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Region Coordinating Supervisor $ 566 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Gas Fitters Supervisors $ 406 4 $ 19,488 2 $ 9,744 1 $ 4,872 - -------------------------------------------- ----------------------- ------------------------ --------------------- Gas Superintendent $ 406 1 $ 4,872 - -------------------------------------------- ----------------------- ------------------------ --------------------- Gas Engineer $ 406 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Customer Service Supervisor $ 406 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Meter Reader $ 406 0 8 $ 38,976 4 $ 19,488 - -------------------------------------------- ----------------------- ------------------------ --------------------- Customer Service Advisor $ 406 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Energy Services Specialist $ 406 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Other transportation & - -------------------------------------------- ----------------------- ------------------------ --------------------- Motorized Equipment - -------------------------------------------- ----------------------- ------------------------ --------------------- Not Indicated Above $1,096,008 $468,456 $114,996 - -------------------------------------------- ----------------------- ------------------------ --------------------- TOTAL $1,151,520 $531,792 $139,356 ============= =============== ============
----------------------- ------------------------ --------------------- Lincoln CILCO - Support GAS Support - Ill - -------------------------------------------- ----------------------- ------------------------ --------------------- Rate Per Est. Annual Est. Annual Est. Annual Description Month Number Cost Number Cost Number Cost - -------------------------------------------- ----------------------- ------------------------ --------------------- Manager $ 566 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Gas Ops Supervisor $ 406 1 $ 4,872 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Region Coordinating Supervisor $ 566 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Coordinator of Gas Engineering $ 406 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Gas Engineer $ 406 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Customer Service Supervisor $ 406 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Meter Reader $ 406 2 $ 9,744 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Customer Service Advisor $ 406 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Energy Services Specialist $ 406 0 0 0 - -------------------------------------------- ----------------------- ------------------------ --------------------- Other transportation & - -------------------------------------------- ----------------------- ------------------------ --------------------- Motorized Equipment - -------------------------------------------- ----------------------- ------------------------ --------------------- Not Indicated Above $151,812 $323,640 $109,500 - -------------------------------------------- ----------------------- ------------------------ --------------------- TOTAL $166,428 $323,640 $109,500 ============= =============== ============
CUSTOMER COUNT COST PER TRANSPORTATION ILLINOIS POWER OPERATIONS SCHEDULE MTR CUSTOMER (1) COST - ------------------------- -------------- ------------ -------------- Galesburg (IL) 41,187 $ 10.89 $ 448,526 ============== LaSalle (IL) 21,920 $ 10.89 $ 238,709 ============== Champaign (IL) 75,075 $ 10.89 $ 817,567 ============== Decatur (IL) 51,555 $ 10.89 $ 561,434 ============== Jacksonville (IL) 9,881 $ 10.89 $ 107,604 ============== Metro (IL) 90,620 $ 10.89 $ 986,852 ============== Maryville (IL) 79,985 $ 10.89 $ 871,037 ============== Mt. Vernon (IL) 20,039 $ 10.89 $ 218,225 ============== Sparta (IL) 7,468 $ 10.89 $ 81,327 ============== Hillsboro (IL) 25,605 $ 10.89 $ 278,838 ============== (1) IP transportation & equipment costs based on UE/CIPS/CILCO projected transportation & equipment costs per customer.
NEW GASCO EXHIBIT 3 NEW GASCO CONSOLIDATED GAS RATE BASE REDUCED FOR COMMON PLANT FOR YEAR ENDED 12/31/2003 (In Thousands of Dollars)
UE GAS DATA ======================================= Existing Reduction for UE Gas Year Ending Common New Gasco Company Reduction 12/31/2003 Gas Plant (1) Net of Common Year Ending For Common NEWGAS- (Exhibit 3a) (Exhibit 3b) Plant 12/31/2003 12/31/2003 Plant (1) UE -------------- ------------- ---------------- ------------ ------------ ---------- Gas Plant In Service $ 1,890,379 $ (123,047) $ 1,767,332 $ 287,727 $ (5,397) $ 282,330 Reserve For Depreciation $ 949,653 $ (34,073) $ 915,580 $ 93,987 $ (1,632) $ 92,355 -------------- ------------- --------------- ------------ ------------ ---------- Net Plant $ 940,726 $ (88,974) $ 851,752 $ 193,740 $ (3,765) $ 189,975 Fuel, Materials & Supplies $ 168,806 $ 168,806 $ 29,490 $ 29,490 Prepayments $ 11,925 $ 11,925 $ 1,924 $ 1,924 Customer Advances $ (7,296) $ (7,296) $ (1,119) $ (1,119) Accumulated Deferred Income Taxes $ (45,292) $ (45,292) $ (18,154) $ (18,154) -------------- ------------- --------------- ------------ ------------ ---------- TOTAL RATE BASE $ 1,068,869 $ (88,974) $ 979,895 $ 205,881 $ (3,765) $ 202,116 ============== ============= =============== ============ ============ ========== TABLE CONTINUED CIPS GAS DATA CILCO GAS DATA ================================================== ======================================= Existing Existing CIPS Gas CILCO Gas Company Reduction Company Reduction Year Ending For Common NEWGAS- Year Ending For Common NEWGAS- 12/31/2003 Plant (1) CIPS 12/31/2003 Plant (1) CILCO -------------- ------------- --------------- ----------- ---------- --------- Gas Plant In Service $ 312,680 $ (17,277) $ 295,403 $ 457,589 $(12,669) $ 444,920 Reserve For Depreciation $ 151,367 $ (9,068) $ 142,299 $ 284,561 $ 8,502 $ 293,063 -------------- ------------- --------------- ------------ ----------- ---------- Net Plant $ 161,313 $ (8,209) $ 153,104 $ 173,028 $(21,171) $ 151,857 Fuel, Materials & Supplies $ 41,932 $ 41,932 $ 40,256 $ 40,256 Prepayments $ 1,708 $ 1,708 $ 361 $ 361 Customer Advances $ (849) $ (849) $ (2,369) $ (2,369) Accumulated Deferred Income Taxes $ (15,444) $ (15,444) $ (2,686) $ (2,686) -------------- ------------- --------------- ------------ ----------- ---------- TOTAL RATE BASE $ 188,660 $ (8,209) $ 180,451 $ 208,590 $(21,171) $ 187,419 ============== ============= =============== ============ =========== ========== TABLE CONTINUED IP GAS DATA ================================================== Existing IP Gas Company Reduction Year Ending For Common NEWGAS- 12/31/2003 Plant (1) IP -------------- ------------- --------------- Gas Plant In Service $ 832,383 $ (87,704) $ 744,679 Reserve For Depreciation $ 419,738 $ (31,875) $ 387,863 -------------- ------------- --------------- Net Plant $ 412,645 $ (55,829) $ 356,816 Fuel, Materials & Supplies $ 57,128 $ 57,128 Prepayments $ 7,932 $ 7,932 Customer Advances $ (2,959) $ (2,959) Accumulated Deferred Income Taxes $ (9,008) $ (9,008) -------------- ------------- --------------- TOTAL RATE BASE $ 465,738 $ (55,829) $ 409,909 ============== ============= =============== (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 utility company.
NEW GASCO EXHIBIT 3A CONSOLIDATION OF UE, CIPS, CILCO, & IP GAS RATE BASES FOR YEAR ENDED 12/31/2003 (IN THOUSANDS OF DOLLARS)
Existing Existing Existing Existing Existing UE Gas CIPS Gas CILCO Gas IP Gas UE/CIPS/CILCO/IP Company Company Company Company Consolidated Year Ended Year Ended Year Ended Year Ended Year Ended 12/31/2003 12/31/2003 12/31/2003 12/31/2003 12/31/2003 ------------ ----------- ------------ ------------ ---------------- Gas Plant In Service $287,727 $312,680 $457,589 $ 832,383 $ 1,890,379 Reserve For Depreciation $ 93,987 $151,367 $284,561 $ 419,738 $ 949,653 ------------ ----------- ------------ ------------ ---------------- Net Plant $193,740 $161,313 $173,028 $ 412,645 $ 940,726 Fuel, Materials & Supplies $ 29,490 $ 41,932 $ 40,256 $ 57,128 $ 168,806 Prepayments $ 1,924 $ 1,708 $ 361 $ 7,932 $ 11,925 Customer Advances $ (1,119) $ (849) $ (2,369) $ (2,959) $ (7,296) Accumulated Deferred Income Taxes $(18,154) $(15,444) $ (2,686) $ (9,008) $ (45,292) ------------ ----------- ------------ ------------ ---------------- TOTAL RATE BASE $205,881 $188,660 $208,590 $ 465,738 $ 1,068,869 ============ =========== ============ ============ ================
NEW GASCO EXHBIT 3B CONSOLIDATION OF UE'S, CIPS', CILCO'S, & IP'S COMMON PLANT ALLOCATED TO GAS FOR YEAR ENDED 12/31/2003
UE CIPS CILCO IP UE, CIPS, CILCO & IP Common Plant Common Plant Common Plant Common Plant Common Plant Allocated to Allocated to Allocated to Allocated to Allocated to Gas Plant (1) Gas Plant (1) Gas Plant (1) Gas Plant (1) Gas Plant (1) -------------- -------------- -------------- -------------- ----------------------- Gas Plant In Service $ 5,397,126 $ 17,277,236 $ 12,669,219 $ 87,703,629 $ 123,047,210 Reserve For Depreciation $ 1,631,893 $ 9,068,035 $ (8,501,521) $ 31,874,558 $ 34,072,965 -------------- -------------- -------------- -------------- ----------------------- Net Plant $ 3,765,233 $ 8,209,201 $ 21,170,740 $ 55,829,071 $ 88,974,245 ============== ============== ============== ============== ======================= (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 utility company.
NEW GASCO EXHIBIT 4 NEW GASCO STAND-ALONE COST OF CAPITAL AS OF 12/31/2003
UE/CIPS/CILCO IP -------------------------------------------- ------------------------------------------- % of % of Capitalization UE/CIPS/CILCO/IP Weighted Capitalization UE/CIPS/CILCO/IP Weighted Type of Capital Ratios Gas Rate Base Ratios Ratios Gas Rate Base Ratios - ---------------------------- ------------- --------------- ----------- ----------- --------------- --------- Long-Term Debt 47.18% 56.43% 26.62% 58.56% 43.57% 25.51% Preferred Stock 2.35% 56.43% 1.33% 1.34% 43.57% 0.58% Common Equity 50.47% 56.43% 28.48% 40.10% 43.57% 17.47% TABLE CONTINUED NEW GASCO ------------------------------------- Weighted Capitalization Cost Weighted Type of Capital Ratios Component Cost - ---------------------------- ------------ ----------- --------- Long-Term Debt 52.13% 6.07% 3.16% Preferred Stock 1.91% 6.54% 0.12% Common Equity 45.95% 10.57% 4.86% --------- WEIGHTED COST OF CAPITAL 8.14%
Note:Capitalization ratios are based on the total Ameren (UE/CIPS/CILCO) and IP capital structures as of 12/31/2003. Ameren's Corporate Finance Department places the cost of capital for a gas distribution business as follows: 1) Common Equity: 10.57% (based on recent state regulatory final orders for gas cost of equity received by Ameren) 2) Long-Term Debt: 6.07% (based on end of year 10 year treasury forecast and 25 bps for smaller entity & lower credit rating) 3) Preferred Stock: 6.54% (based on average of underwriter estimate and end of year 30 year treasury forecast) NEW GASCO EXHIBIT 5 NEW GASCO ORGANIZATION CHART President & CEO Vice President - Customer Service Manager - Customer Relations Manager - Economic Development Manager - General Services Manager - Gas Marketing Vice President - Energy Delivery Operations Manager - Boone Trails Operating Division Manager - Central Ozarks Operating Division Manager - Illini Operating Division Manager - Missouri Valley Operating Division Manager - SEMO Operating Division Manager - Metro East Operating Division Manager - Great Rivers Operating Division Manager - Shawnee Operating Division Manager - CILCO Operations Manager - Central Division - Decatur Manager - Metro North Division Manager - Metro South Division Manager - North Division Vice President - Gas Supply & Operations Support Manager - Gas Control & System Planning Manager - Gas Supply Manager - Meter Testing Manager - Technical Support Manager - Gas System Assets - Decatur Manager - Gas Planning - Decatur Manager - Pipeline Integrity - Decatur Manager - Reliability Programs - Decatur Manager - Administrative Services - Decatur Manager - Claims - Decatur Manager - Safety Health & Training - Decatur Manager - Gas Storage Operations Vice President - Corporate Services General Manager - Corporate Communications Manager - Fleet Services Manager - Purchasing Manager - Real Estate Manager - Stores Vice President - General Counsel Managing Associate General Counsel - Legal Associate General Counsel - Legal Associate General Counsel - Claims Manager - Regulatory Policy & Planning Manager - Security Vice President - Finance & Controller Manager - Accounting Manager - Tax Manager - Internal Audit Vice President - Treasurer's Assistant Treasurer & General Manager Manager - Investor Relations Manager - Risk Management Manager - Treasury Operations Vice President - Human Resources Manager - Communication & Training Services Manager - Employee Benefits Manager - Employee Compensation Vice President - Industrial Relations Manager - Industrial Relations NEW GASCO EXHIBIT 6 NEW GASCO SALARIES AND WAGES SUMMARY (IN THOUSANDS OF DOLLARS)
TOTALS --------------------------------------- EMPLOYEES SALARIES/WAGES --------------------------------------- Executive Staff & Secretarial Support 20 $ 2,181 Customer Service Division: 106 $ 5,503 Energy Delivery Division: 1191 $ 70,373 Gas Supply & Operations Support: 227 $ 15,968 Corporate Services: 59 $ 4,282 General Counsel : 19 $ 1,549 Finance & Controller : 32 $ 2,370 Treasurer's : 43 $ 2,298 Human Resources : 21 $ 1,506 Industrial Relations: 6 $ 396 ----------------- --------------- GRAND TOTAL 1,724 $ 106,426 ================= ================
NEW GASCO EXHIBIT 7 NEW GASCO ESTIMATED EXECUTIVE SALARIES -------------------------------------- Ameren's Human Resources Compensation Department performed an analysis in 2002, updated to 2004, to establish a reasonable range for the New Gasco executive salary levels. For existing positions that would become part of the spun-off company, existing salary ranges were used. POSITION SURVEY DATA RANGE NEW GASCO SALARY LEVELS - ------------------------- ---------------------- ------------------------- President $263,000-$395,000 $325,000 Vice President Level $103,000-$224,000 $152,000-$200,000 NEW GASCO EXHIBIT 8 UE/CIPS/CILCO/IP ELECTRIC RATE BASE & RATE OF RETURN ADJUSTED FOR COMMON PLANT TWELVE MONTHS ENDED 12/31/2003 (IN THOUSANDS OF DOLLARS)
Existing UE/CIPS/CILCO/IP Adjustment Electric For Common UE/CIPS/CILCO/IP Consolidated Plant (1)&(2) Electric (Exhibit 8a) (Exhibit 3b) As Adjusted ----------------- -------------- ---------------- Electric Plant In Service $ 14,312,436 $ 123,047 $ 14,435,483 Reserve For Depreciation $ 6,271,602 $ 34,073 $ 6,305,675 ----------------- -------------- ---------------- Net Plant $ 8,040,834 $ 88,974 $ 8,129,808 Fuel and Materials & Supplies $ 195,272 $ 195,272 Prepayments $ 42,454 $ 42,454 Customer Advances $ (20,689) $ (20,689) Accumulated Deferred Income Taxes $ (1,298,560) $ (1,298,560) ----------------- ----------------- ---------------- TOTAL RATE BASE $ 6,959,311 $ 88,974 $ 7,048,285 ================= ================= ================ NET OPERATING INCOME $ 726,238 $ (5,320) $ 720,918 ================= ================= ================ RETURN ON RATE BASE 10.44% 10.23% ================= ================ TABLE CONTINUED =============================================================== UE ELECTRIC DATA =============================================================== Existing Addition Electric Electric For Common Company Company Plant (1) As Adjusted ----------------- -------------- ---------------- Electric Plant In Service $ 9,950,935 $ 5,397 $ 9,956,332 Reserve For Depreciation $ 4,322,424 $ 1,632 $ 4,324,056 ----------------- -------------- ---------------- Net Plant $ 5,628,511 $ 3,765 $ 5,632,276 Fuel and Materials & Supplies $ 173,180 $ 173,180 Prepayments $ 7,675 $ 7,675 Customer Advances $ (2,478) $ (2,478) Accumulated Deferred Income Taxes $ (936,151) $ (936,151) ----------------- -------------- ---------------- TOTAL RATE BASE $ 4,870,737 $ 3,765 $ 4,874,502 ================= ============== ================ NET OPERATING INCOME $ 524,191 $ 261 $ 523,930 ================= ============== ================ RETURN ON RATE BASE 10.76% 10.75% ================= ================ TABLE CONTINUED =============================================================== CIPS ELECTRIC DATA =============================================================== Existing Addition Electric Electric For Common Company Company Plant (1) As Adjusted ----------------- -------------- ---------------- Electric Plant In Service $ 1,271,552 $ 17,277 $ 1,288,829 Reserve For Depreciation $ 617,968 $ 9,068 $ 627,036 ----------------- -------------- ---------------- Net Plant $ 653,584 $ 8,209 $ 661,793 Fuel and Materials & Supplies $ 8,940 $ 8,940 Prepayments $ 653 $ 653 Customer Advances $ (1,516) $ (1,516) Accumulated Deferred Income Taxes $ (272,334) $ (272,334) ----------------- -------------- ---------------- TOTAL RATE BASE $ 389,327 $ 8,209 $ 397,536 ================= ============== ================ NET OPERATING INCOME $ 23,785 $ 838 $ 22,947 ================= ============== ================ RETURN ON RATE BASE 6.11% 5.77% ================= ================ TABLE CONTINUED =============================================================== CILCO ELECTRIC PLANT DATA =============================================================== Existing Addition Electric Electric For Common Company Company Plant (1) As Adjusted ----------------- -------------- ---------------- Electric Plant In Service $ 812,119 $ 12,669 $ 824,788 Reserve For Depreciation $ 447,454 $ (8,502) $ 438,952 ----------------- -------------- ---------------- Net Plant $ 364,665 $ 21,171 $ 385,836 Fuel and Materials & Supplies $ 4,831 $ 4,831 Prepayments $ 3,136 $ 3,136 Customer Advances $ (5,136) $ (5,136) Accumulated Deferred Income Taxes $ (29,363) $ (29,363) ----------------- -------------- ---------------- TOTAL RATE BASE $ 338,133 $ 21,171 $ 359,304 ================= ============== =============== NET OPERATING INCOME $ 38,446 $ 905 $ 37,541 ================= ============== ================ RETURN ON RATE BASE 11.37% 10.45% ================= ================ TABLE CONTINUED =============================================================== IP ELECTRIC PLANT DATA =============================================================== Existing Addition Electric Electric For Common Company Company Plant (1) As Adjusted ----------------- -------------- ---------------- Electric Plant In Service $ 2,277,830 $ 87,704 $ 2,365,534 Reserve For Depreciation $ 883,756 $ 31,875 $ 915,631 ----------------- -------------- ---------------- Net Plant $ 1,394,074 $ 55,829 $ 1,449,903 Fuel and Materials & Supplies $ 8,321 $ 8,321 Prepayments $ 30,990 $ 30,990 Customer Advances $ (11,559) $ (11,559) Accumulated Deferred Income Taxes $ (60,712) $ (60,712) ----------------- -------------- ---------------- TOTAL RATE BASE $ 1,361,114 $ 55,829 $ 1,416,943 ================= ============== ================ NET OPERATING INCOME $ 139,816 $ 3,317 $ 136,499 ================= ============== ================ RETURN ON RATE BASE 10.27% 9.63% ================= ================ (1) This represents an allocation of all plant and property jointly used by the electric and gas departments. Under a divestiture, all common property allocated to the gas department would go with the electric utility 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 UE CIPS CILCO IP ------------- ---------- ------------- ------------ ----------- O&M & Depreciation expense on common plant originally allocated to gas plant $ 8,867 $ 435 $ 1,396 $ 1,508 $ 5,528 Less: Est. tax impact (40%) from the above expense $ 3,547 $ 174 $ 558 $ 603 $ 2,211 ------------- ---------- ------------- ------------ ------------ Net reduction to Net Operating Income $ 5,320 $ 261 $ 838 $ 905 $ 3,317 ============= ========== ============= ============ ============
NEW GASCO EXHIBIT 8A CONSOLIDATION OF UE, CIPS, CILCO, & IP ELECTRIC RATE BASES FOR THE YEAR ENDED 12/31/2003 (IN THOUSANDS OF DOLLARS)
UE's CIPS' CILCO's IP's Existing Electric Electric Electric Electric UE/CIPS/CILCO/IP Company Company Company Company Electric at 12/31/2003 at 12/31/2003 at 12/31/2003 at 12/31/2003 Consolidated -------------- --------------- ----------------- ---------------- -------------------- Electric Plant In Service $ 9,950,935 $ 1,271,552 $ 812,119 $ 2,277,830 $ 14,312,436 Reserve For Depreciation $ 4,322,424 $ 617,968 $ 447,454 $ 883,756 $ 6,271,602 -------------- --------------- ----------------- ---------------- -------------------- Net Plant $ 5,628,511 $ 653,584 $ 364,665 $ 1,394,074 $ 8,040,834 Fuel and Materials & Supplies $ 173,180 $ 8,940 $ 4,831 $ 8,321 $ 186,951 Prepayments $ 7,675 $ 653 $ 3,136 $ 30,990 $ 11,464 Customer Advances $ (2,478) $ (1,516) $ (5,136) $ (11,559) $ (9,130) Accumulated Deferred Income Taxes $ (936,151) $ (272,334) $ (29,363) $ (60,712) $ (1,237,848) -------------- --------------- ----------------- ---------------- -------------------- $ 4,870,737 $ 389,327 $ 338,133 $ 1,361,114 $ 6,992,271 ============== =============== ================= ================ ====================
EX-99 11 dc176481_exhfs3.txt EX FS-3 - UNAUDITED PRO FORMA COMBINED FS-3 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma combined condensed financial statements have been prepared to give effect to Ameren Corporation's proposed purchase of the stock of Illinois Power Corporation from Dynegy Inc. and Dynegy's 20% ownership interest in Electric Energy, Inc. (EEI), (the Transaction), 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, 2003 for statement of income purposes and June 30, 2004 for balance sheet purposes. 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 been completed on the dates referenced above, nor is it necessarily indicative of the future financial position or results of operations. The pro forma combined condensed financial statements include adjustments to reflect the elimination of Illinois Power's intercompany note receivable from the Illinova Corporation, the parent company of Illinois Power and a subsidiary of Dynegy, which is a condition to closing the Transaction under Ameren's agreement with Dynegy to purchase Illinois Power's stock. In addition, 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 Illinois Power and Ameren's increased ownership in EEI, before any integration adjustments. The final allocation of the purchase price will be determined after the completion of the Transaction and will be based upon the determined fair value of actual tangible and intangible assets acquired, as well as liabilities assumed. Because the unaudited pro forma combined condensed financial statements are based upon preliminary estimates, the pro forma adjustments may differ materially from actual adjustments 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 and Illinois Power and should be read in conjunction with the historical consolidated financial statements of Ameren and Illinois Power 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 Illinois Power have on file with the Securities and Exchange Commission (SEC). Ameren currently holds a 60% ownership interest in EEI and consolidates it for financial reporting purposes. These pro forma combined condensed financial statements are unaudited and are not in compliance with the SEC's Regulation S-X Article 11. Assumptions reflected in the unaudited pro forma combined condensed financial statements are described in the notes to the unaudited pro forma combined condensed financial statements. Ameren Corporation and Illinois Power Company (In millions)
JUNE 30, 2004 ------------------------------------------------------------------------------- HISTORICAL PRO FORMA ------------------------- ------------------------------------------------- FINANCING PRE-CLOSE ILLINOIS POWER AMEREN ILLINOIS POWER ADJUSTMENTS ADJUSTMENT ADJUSTMENTS ------------------------- ------------------------------------------------- Current assets $ 1,652 $ 374 $ 431(a) $ (93)(b)(c) $ (290)(d) Property and plant, net 11,052 2,107 (133)(e) Note receivable from affiliate - 2,271 (2,271)(b) Goodwill and intangible assets, net 565 - 87 (f) Investments and other non-current assets 1,408 268 (1)(b) ------------------------------------------------------------------------------- Total assets $ 14,677 $ 5,020 $ 431 $ (2,365) $ (336) =============================================================================== Short-term debt and current maturities of long-term debt $ 326 $ 220 $ - $ (77)(c) $ - Other current liabilities 708 179 (33)(b) 59 (g) Long-term debt and preferred stock subject to mandatory redemption 4,072 1,668 100 (h) Deferred credits and other non-current liabilities 4,126 1,362 (1,157)(b) (48)(g) Preferred stock not subject to mandatory redemption 182 46 Minority interest in consolidated subsidiaries 25 - Common stockholders' equity 5,238 1,545 431(a) (1,098)(b) (447)(i) ------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 14,677 $ 5,020 $ 431 $ (2,365) $ (336) =============================================================================== (Table Break) JUNE 30, 2004 ------------------------------ PRO FORMA ------------------------------ EEI ADJUSTMENTS COMBINED ------------------------------ Current assets $ (125(j) $ 1,949 Property and plant, net 13,026 Note receivable from affiliate - Goodwill and intangible assets, net 113(j) 765 Investments and other non-current assets 1,675 ------------------------------ Total assets $ (13) $ 17,415 ============================== Short-term debt and current maturities of long-term debt $ - $ 469 Other current liabilities 913 Long-term debt and preferred stock subject to mandatory redemption 5,840 Deferred credits and other non-current liabilities 4,283 Preferred stock not subject to mandatory redemption 228 Minority interest in consolidated subsidiaries (13)(j) 13 Common stockholders' equity 5,669 ------------------------------ Total liabilities and stockholders' equity $ (13) $ 17,415 ==============================
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME AMEREN CORPORATION AND ILLINOIS POWER COMPANY (IN MILLIONS)
SIX MONTHS ENDED JUNE 30, 2004 -------------------------------------------------------------------- HISTORICAL PRO FORMA ------------------------------ ------------------------------ AMEREN ILLINOIS POWER ADJUSTMENTS COMBINED ------------------------------ ------------------------------ OPERATING REVENUES $ 2,368 $ 781 $ - (a) $ 3,149 OPERATING EXPENSES: Fuel and purchased power 553 305 (53)(a),(b) 806 Gas purchased for resale 288 193 481 Other operations and maintenance 649 99 748 Depreciation and amortization 262 61 323 Taxes other than income taxes 154 37 191 -------------------------------------------------------------------- TOTAL OPERATING EXPENSES 1,906 695 (53) 2,549 -------------------------------------------------------------------- OPERATING INCOME 462 86 53 601 OTHER INCOME AND (DEDUCTIONS) 7 96 (83)(c),(d) 20 INTEREST CHARGES AND PREFERRED DIVIDENDS` 135 80 215 INCOME TAXES 119 42 (12)(e) 149 -------------------------------------------------------------------- NET INCOME FROM CONTINUING OPERATIONS $ 215 $ 60 $ (19) 256 ==================================================================== EARNINGS FROM CONTINUING OPERATIONS PER COMMON SHARE: Basic $ 1.20 (f) 1.32 Diluted $ 1.20 (f) 1.32 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 178.5 14.8 (f) 193.3 Diluted 178.7 14.8 (f) 193.5
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME AMEREN CORPORATION AND ILLINOIS POWER COMPANY (IN MILLIONS)
YEAR ENDED DECEMBER 31, 2003 -------------------------------------------------------------------- HISTORICAL PRO FORMA ------------------------------ ------------------------------ AMEREN ILLINOIS POWER ADJUSTMENTS COMBINED ------------------------------ ------------------------------ OPERATING REVENUES $ 4,593 $ 1,568 $ (53)(a) $ 6,108 OPERATING EXPENSES: Fuel and purchased power 1,055 681 (119)(a),(b) 1,617 Gas purchased for resale 457 316 773 Other operations and maintenance 1,173 204 1,377 Depreciation and amortization 519 121 640 Taxes other than income taxes 299 68 367 -------------------------------------------------------------------- TOTAL OPERATING EXPENSES 3,503 1,390 (119) 4,774 -------------------------------------------------------------------- OPERATING INCOME 1,090 178 66 1,334 OTHER INCOME AND (DEDUCTIONS) 5 178 (166)(c),(d) 17 INTEREST CHARGES AND PREFERRED DIVIDENDS` 288 165 453 INCOME TAXES 301 74 (38)(e) 337 -------------------------------------------------------------------- NET INCOME FROM CONTINUING OPERATIONS $ 506 $ 117 $ (62) 561 ==================================================================== EARNINGS FROM CONTINUING OPERATIONS PER COMMON SHARE: Basic $ 3.14 (f) $ 2.94 Diluted $ 3.14 (f) $ 2.93 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 161.1 30.0 (f) 191.1 Diluted 161.4 30.0 (f) 191.4
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION On February 2, 2004, Ameren entered into an agreement with Dynegy to purchase the stock of Decatur, Illinois-based Illinois Power and Dynegy's 20% ownership interest in EEI. Illinois Power operates a rate-regulated electric and natural gas transmission and distribution business serving approximately 600,000 electric and 415,000 gas customers in areas contiguous to our existing Illinois utility service territories. The total Transaction value is approximately $2.3 billion, including the assumption of Illinois Power debt and preferred stock, which is expected to approximate $1.8 billion at closing, with the balance of the purchase price to be paid in cash at closing. Ameren will place $100 million of the cash portion of the purchase price in a six-year escrow pending resolution of certain contingent environmental obligations of Illinois Power and other Dynegy affiliates for which Ameren has been provided indemnification by Dynegy. In addition, this Transaction includes a firm capacity power supply contract for Illinois Power's annual purchase of up to 2,800 megawatts of electricity from a subsidiary of Dynegy. This contract will extend through 2006 and is expected to supply about 70% of Illinois Power's customer requirements. Ameren's financing plan for this Transaction includes the issuance of new Ameren common stock. In February 2004, Ameren issued 19.1 million common shares that generated net proceeds of $853 million, and in July 2004, Ameren completed its issuance of common stock for this Transaction with the issuance of 10.9 million common shares that generated net proceeds of $445 million. Proceeds from these sales are expected to be used to finance the cash portion of the purchase price, to reduce Illinois Power debt assumed as part of this Transaction and to pay any related premiums. Upon completion of the acquisition, expected by the end of 2004, Illinois Power will become an Ameren subsidiary operating as AmerenIP. The Transaction remains subject to the approval of the Illinois Commerce Commission (ICC), the SEC under the Public Utilities Holding Company Act and other customary closing conditions. The purchase price allocation utilized 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 evaluate the fair value of assets acquired and liabilities assumed. NOTE 2 - PRO FORMA ADJUSTMENTS The following adjustments reflected in the unaudited pro forma combined condensed balance sheet at June 30, 2004, reflect the estimated impact of events that are attributable to the acquisition by Ameren of Illinois Power and Dynegy's 20% ownership interest in EEI. (a) To record the net proceeds ($445 million) of Ameren's issuance of 10.9 million common shares in July 2004 to complete its issuance of common stock for this Transaction. In February 2004, Ameren issued 19.1 million common shares that generated net proceeds of $853 million. Proceeds from these sales are expected to be used to finance the cash portion of the purchase price, to reduce Illinois Power debt assumed as part of this Transaction and to pay any related premiums. Net proceeds are offset by $14 million to reflect an equity adjustment for the first two quarters of 2004 for dividend payments on the 10.9 million common shares. (b) To eliminate Illinois Power's intercompany note receivable from Illinova bearing interest at an annual rate of 7.5%. Ameren's agreement with Dynegy to purchase the stock of Illinois Power requires that within no more than two days prior to closing the Transaction, the intercompany note must be eliminated. The intercompany note receivable will be eliminated as follows : (i) the principal balance of the intercompany note ($2.3 billion) will be reduced by the offsetting of certain payables owed by Illinois Power to Illinova or other Dynegy entities ($33 million); (ii) the principal balance of the intercompany note will also be offset by the amount of the interest that has been paid by Illinova on the intercompany note but not yet earned ($85 million); and (iii.) a portion of the remaining balance of the intercompany note and related assets ($16 million current and $1 million non-current) will be eliminated in consideration of Illinova's assumption of Illinois Power's net deferred tax obligations ($1.1 billion) and Illinois Power's contemporaneous repurchase (and cancellation immediately thereafter) of a portion of its common stock. The remaining principal balance of the intercompany note ($1.1 billion) will be eliminated with a corresponding reduction to Illinois Power's retained earnings. (c) To reflect Illinois Power's July 2004 termination of a capital lease with the original lessor for four gas turbines located in Tilton, Illinois. These gas turbines had been sublet to a Dynegy subsidiary. This adjustment eliminates the receivable from the Dynegy subsidiary of $77 million and the corresponding current obligation to the original lessor. (d) To reflect the cash portion of Ameren's acquisition of Illinois Power's stock ($250 million) and the estimated cash paid for Transaction and transition costs ($40 million). (e) To reflect the elimination of a fair value adjustment ($133 million) related to Illinois Power's power supply agreement with EEI. As a condition to FERC's approval of the Transaction, 125 megawatts of EEI's power must be sold to a nonaffiliate of Ameren. (f) To record goodwill arising from Ameren's acquisition of Illinois Power's stock of $87 million. Goodwill was calculated as follows: Cash purchase price, including transaction and transition costs............................................ $ 290 Debt assumption, including current maturities................. 1,911 Other liabilities assumed..................................... 362 Preferred stock............................................... 46 Tangible assets............................................... (2,522) Specifically-identifiable intangible assets................... ( -) ------- Allocation to goodwill........................................$ 87 ======= (g) To accrue liabilities for estimated severance costs ($9 million - assumed current) and the estimated difference between (1) energy prices under the firm capacity power supply contract, which was entered into as part of the Transaction, for Illinois Power's annual purchase of up to 2,800 megawatts of electricity from a subsidiary of Dynegy and (2) the market prices at the date the Transaction closes (assumed hypothetically to be $100 million for purposes of the pro forma condensed balance sheet - $50 million assumed current, $50 assumed non-current). To eliminate accumulated deferred investment tax credits ($19 million- non-current) since Ameren's acquisition of Illinois Power is an asset purchase for tax purposes. To record net deferred tax assets attributable to the tax effect of pro forma adjustments ($79 million - assumed non-current). (h) To establish a $100 million liability for estimated premiums to redeem certain Illinois Power debt. (i) To eliminate Illinois Power's historical stockholder's equity. (j) To reflect Ameren's cash payment for Dynegy's 20% ownership in EEI ($125 million), the resulting reduction in Ameren's minority interest ($12.5 million) associated with EEI, and the goodwill arising from Ameren's increased ownership interest in EEI calculated as the difference between the cash purchase price and the fair value of Ameren's incremental share of the fair value of EEI's assets and liabilities ($113 million). Prior to the Transaction, Ameren owned a 60% ownership interest in EEI. The following adjustments in the pro forma combined condensed income statements reflect the estimated impact of the Transaction on the historical combined results of Ameren and Illinois Power for the six months ended June 30, 2004, and the year ended December 31, 2003. The income tax effect of certain pro forma adjustments was calculated using an estimated 38% effective tax rate. (a) To eliminate the effects of electricity and other agreements between Ameren and Illinois Power (June 30, 2004 - less than $1 million; December 31, 2003 - $53 million). (b) To record a credit to purchased power expense reflecting: o estimated lower purchased power costs under Ameren's firm capacity power supply contract for Illinois Power's purchase of electricity from a subsidiary of Dynegy entered into as part of the agreement to acquire Illinois Power compared to the costs historically incurred by Illinois Power under a different power purchase agreement (June 30, 2004 - $28 million; December 31, 2003 - $16 million), and o amortization of the purchased power contract fair value adjustment, which was hypothetically assumed to be $100 million in the pro forma combined condensed balance sheet. Assumed straight-line amortization of the purchased power contract fair value adjustment over the contract's two year life; however, the actual fair market adjustment will be amortized based on actual units purchased under the contract (June 30, 2004 - $25 million; December 31, 2003 - $50 million). (c) To eliminate interest income previously reported by Illinois Power from Illinois Power's intercompany note receivable from Illinova, which will be eliminated prior to closing the Transaction (June 30, 2004 - $85 million; December 31, 2003 - $170 million). (d) To reflect lower minority interest in EEI with Ameren's acquisition of Dynegy's 20% ownership in EEI (June 30, 2004 - $2 million; December 31, 2003 - $4 million). (e) To reflect the tax effect of the pro forma adjustments at the estimated combined federal and state statutory rate of 38% (June 30, 2004 - $12 million; December 31, 2003 - $38 million). (f) 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 the weighted average shares issued to complete the financing of the Transaction. -----END PRIVACY-ENHANCED MESSAGE-----