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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27645; 70-10078)

Ameren Corporation, et al.

Order Authorizing Acquisition of Exempt Holding Company, Internal and External Financing Transactions, Retention of Nonutility Businesses and Continued Exemptions; Reservation of Jurisdiction

January 29, 2003

Ameren Corporation ("Ameren"), a registered public utility holding company, Ameren Energy Fuels and Services Company ("Ameren Fuels"), Ameren's indirect wholly owned nonutility subsidiary, both located at 1901 Chouteau Avenue, St. Louis, Missouri 63103; and CILCORP Inc. ("CILCORP"), an exempt holding company under section 3(a)(1) of the Act and a wholly owned subsidiary of The AES Corporation ("AES"), an exempt holding company under section 3(a)(5) of the Act, CILCORP's direct wholly owned public utility subsidiary, Central Illinois Light Company ("CILCO"), and CILCO's wholly owned nonutility subsidiary, Central Illinois Generation, Inc. ("CIGI"), all located at 300 Liberty Street, Peoria, Illinois 61602 (collectively, and together with Ameren and Ameren Fuels, "Applicants"), have filed an application-declaration under sections 3(a)(1), 6(a), 7, 8, 9(a), 9(c)(3), 10, 11(b), 12(b), 12(c), 12(d), 12(f), 13(b) and 32 of the Act and rules 44, 45, 46, 51, 54, 87, 90 and 91 under the Act ("Application"). The Commission issued a notice of the Application on October 25, 2002 (HCAR No. 27586).

I. Introduction

Applicants request authority for the acquisition of CILCORP by Ameren and associated transactions. The proposed transactions will be effected through a stock purchase agreement ("Stock Purchase Agreement") entered into by Ameren and AES, CILCORP's parent company, under which Ameren has agreed to purchase, for cash, all of the issued and outstanding shares of common stock of CILCORP. As a result of the proposed transactions, Ameren will indirectly acquire all of the common stock of CILCO and CIGI, which will become additional public utility subsidiaries of Ameren,1 and the nonutility subsidiaries and investments held directly and indirectly by CILCORP. In conjunction with the proposed transactions, Ameren states that it has also agreed to purchase from AES all of the membership interests in AES Medina Valley Cogen (No. 4), LLC, which indirectly through intermediate subsidiaries holds all of the membership interests of AES Medina Valley Cogen, L.L.C. ("AES Medina Valley"), an EWG. AES Medina Valley owns a 40 MW gas-fired cogeneration facility in Mossville, Illinois that produces electricity, steam and chilled water that is sold to CILCO for resale to CILCO's largest customer, Caterpillar Inc.

II. Summary of Requests

In addition to authorization of the proposed transactions, CILCORP, CILCO and CIGI are requesting authorization through March 31, 2006 ("Authorization Period") for a program of long-term and short-term financing. CILCORP is requesting authorization to issue guarantees and provide other forms of credit support on behalf of its subsidiaries, and to pay dividends out of capital and unearned surplus, subject to certain limitations. Applicants are requesting authorization to permit Ameren Services to enter into separate service agreements with CILCORP, CILCO, CIGI and certain of CILCORP's other subsidiaries. Ameren Fuels is requesting authorization to enter into a fuel services agreement with CILCO and CIGI. Ameren is requesting authority to retain certain of CILCORP's nonutility subsidiaries and investments. To the extent required, Applicants are requesting authorization to maintain in place a tolling agreement with AES Medina Valley, a fuel supply and services agreement between a gas marketing subsidiary of CILCORP and AES Medina Valley and a FERC-approved interconnection agreement between CILCO and AES Medina Valley. Finally, CILCORP and CILCO are requesting an order granting to each of them an exemption under section 3(a)(1) of the Act.

III. Parties to the Proposed Transactions

A. Ameren

Ameren's primary operating subsidiaries are AmerenCIPS and AmerenUE, which are electric and gas utility companies, and Ameren Energy Generating Company ("Ameren Energy Generating"), which is an EWG. Together, AmerenCIPS and AmerenUE provide electric service to approximately 1.5 million customers in Missouri and Illinois and natural gas service to approximately 300,000 customers, also in Missouri and Illinois. Ameren Energy Generating, an indirect wholly owned subsidiary of Ameren, was organized to facilitate the restructuring of AmerenCIPS in accordance with the Illinois Electric Service Customer Choice and Rate Relief Law of 1997 ("Customer Choice Law"). In May 2000, Ameren Energy Generating acquired all of the existing generating assets of AmerenCIPS.

Ameren also directly owns CIPSCO Investment Company, Ameren Services Company ("Ameren Services"), Ameren Energy, Inc., Ameren Development Company and Ameren Energy Resources Company, all nonutility subsidiaries. CIPSCO Investment Company holds various nonutility businesses, including passive investments in low income housing projects and investments in equipment leases. Ameren Services is a service company subsidiary that provides administrative, accounting, legal, engineering, executive, and other corporate support services to Ameren and its associate companies. Ameren Energy, Inc. is an energy-related company under rule 58 that primarily serves as the short-term energy trading and marketing agent for AmerenUE and Ameren Energy Generating and provides a range of energy and risk management services. Ameren Development Company is an intermediate nonutility holding company that directly and indirectly owns all of the outstanding stock of two energy-related companies under rule 58 (Ameren ERC, Inc., which provides energy management services, and Missouri Central Railroad, a fuel transportation subsidiary) and of Ameren Energy Communications, Inc., an exempt telecommunications company within the meaning of section 34 of the Act. Ameren Energy Resources Company, also an intermediate nonutility holding company, holds all of the outstanding common stock of Ameren Energy Development Company, an EWG, as well as of two energy-related companies under rule 58, Ameren Energy Marketing Company, a power marketer, and Ameren Fuels, which brokers and markets energy commodities and owns and manages fuel procurement and delivery assets. Ameren Energy Generating is a wholly owned subsidiary of Ameren Energy Development Company.

In addition, Ameren indirectly owns 60% of the common stock of Electric Energy, Inc. ("EEI"), an EWG. EEI owns and/or operates electric generation and transmission facilities in Illinois that supply electric power primarily to a uranium enrichment plant located in Paducah, Kentucky.2

For the twelve months ended December 31, 2001, Ameren reported total operating revenues of $4,505,867,000, operating income of $664,987,000, and net income of $468,545,000. On a consolidated basis, approximately 92.2% of Ameren's 2001 operating revenues were derived from sales of electricity, 7.6% from sales of gas and gas transportation service, and .2% from other sources. At September 30, 2002, Ameren had $11,214,000,000 in total assets, including net property and plant of $8,689,000,000. As of November 12, 2002, Ameren had issued and outstanding 153,613,096 shares of common stock, $.01 par value. Ameren's common stock is listed and traded on the New York Stock Exchange.

B. CILCORP, CILCO and CIGI

CILCORP, an Illinois corporation, directly owns all of the issued and outstanding common stock of CILCO, its predominant subsidiary. CILCO is engaged in the generation, transmission, distribution and sale of electric energy in an area of approximately 3,700 square miles in central and east-central Illinois, and the purchase, distribution, transportation and sale of natural gas in an area of approximately 4,500 square miles in central and east-central Illinois. CILCO furnishes electric service to approximately 201,000 retail customers in 136 Illinois communities (including Peoria, East Peoria, Pekin, Lincoln and Morton). CILCO owns and operates two coal-fired base load generating plants, a natural gas-fired cogeneration plant, two natural gas combustion turbine generators and 16 diesel-fueled power modules and leases 14 diesel-fueled power modules, all of which are located in Illinois. These facilities had an available summer capability of 1,172 MW in 2001 and 1,197 MW in 2002. CILCO's transmission system (all of which is located in Illinois) includes approximately 285 circuit miles operating at 138 kV, 48 circuit miles operating at 345 kV and 18 principal substations with an installed capacity of approximately 3,724 megavolt-amperes. CILCO's electric distribution system (all of which is located in Illinois) includes approximately 6,516 circuit miles of overhead pole and tower lines and 1,933 miles of underground distribution cables. The distribution system also includes approximately 108 substations with an installed capacity of 1,766 megavolt-amperes.

CILCO has a power purchase agreement with AmerenCIPS for the purchase of 100 MW of capacity and firm energy for the months of June through September through 2003. The agreement also provides for CILCO to purchase 100 MW of firm energy for the month of January through 2003. CILCO and Ameren also make short-term sales of power to each other from time to time under market-based rate tariffs, as authorized by the FERC.

CILCO's service territory is adjacent to AmerenCIPS' service territory. The transmission systems of the two companies are directly interconnected via a 345 kV line that runs approximately 21.3 miles between CILCO's Duck Creek station, which is southwest of Peoria, to a 345/138 kV transformer owned by AmerenCIPS near Ipava, Illinois. AmerenCIPS owns about 9.5 miles of this line, and CILCO owns the rest. CILCO is also directly interconnected with Commonwealth Edison Company, Illinois Power Company and City Water, Light and Power, the municipal utility in the City of Springfield, Illinois ("CWLP").

Applicants state that CILCO intends to transfer substantially all of its generating assets and certain associated transmission facilities to CIGI in exchange for all of CIGI's common stock and CIGI's assumption of certain liabilities.3 Applicants state the transfer of these assets to CIGI may not be completed for several months following closing of the proposed transactions.4 Unless a release is obtained, the transferred assets will remain subject to the lien of CILCO's Indenture of Mortgage and Deed of Trust, which secures CILCO's first mortgage bonds ("CILCO Mortgage").5 The restructuring of CILCO is being undertaken pursuant to the Customer Choice Law. CILCO will retain all of its other electric transmission and distribution assets and operations.

CILCO is regulated by the Illinois Commerce Commission ("ICC") with respect to retail electric and gas rates and other matters, and by the FERC with respect to the transmission service and wholesale electric rates. CIGI is not a public utility company under the laws of Illinois and is therefore not subject to regulation by the ICC. However, CIGI is subject to regulation by the FERC with respect to wholesale electric rates and other matters.

CILCORP directly owns all of the common stock of three nonutility subsidiaries: CILCORP Investment Management Inc., CILCORP Ventures Inc., and QST Enterprises Inc. CILCORP's nonutility businesses are more fully described in the Appendix to this order.

For the twelve months ended December 31, 2001, CILCORP reported consolidated revenues of $814,870,000, of which $391,811,000 (48.1%) were derived from sales of electricity, $271,434,000 (33.3%) from sales of gas and gas transportation service, and $151,625,000 (18.6%) from CILCORP's nonutility operations. At September 30, 2002, CILCORP had $1,877,606,000 in total assets, including total net property, plant and equipment of $900,764,000.

IV. The Proposed Transactions

Applicants request approval for the acquisition by Ameren of all of the issued and outstanding common stock of CILCORP pursuant to the Stock Purchase Agreement. Under the Stock Purchase Agreement, Ameren will pay AES, in consideration for all of the issued and outstanding common stock of CILCORP, cash in an amount equal to $1.34 billion less certain "Assumed Obligations"6 (which includes long-term debt, short-term debt and preferred stock of CILCORP and its subsidiaries), increased or decreased, as appropriate, by the amount, if any, by which "Working Capital" of CILCORP as of the closing date exceeds or is less than the "Base Working Capital" of CILCORP, and increased or decreased, as appropriate, by the amount of the "Cap Ex Adjustment," the net amount of the foregoing being the "purchase price." Applicants state if the closing date under the Stock Purchase Agreement had occurred on September 30, 2002, and based on current estimates of the change in the base working capital amount and of the Cap Ex Adjustment, the cash paid by Ameren at closing for the common stock of CILCORP would have been at least $500 million. Ameren states that it will finance the cash portion of the purchase price using cash on hand and/or proceeds of debt and/or equity financings previously authorized by the Commission.

The Stock Purchase Agreement further provides that, in the event that the closing date does not occur by the "Trigger Date," then the "purchase price" shall be increased by $33,699 per day from the Trigger Date through the closing date, subject to certain limitations. The Trigger Date is the later of (a) December 31, 2002, (b) the date on which AES is capable (without further action by any third party) of completing performance in all material respects of its obligations required to be performed on or prior to closing, and (c) the date which is 90 days following the date on which the ICC grants its approval of the proposed transactions.

V. Operation of the Combined System Following the Proposed Transactions

Following the acquisition of CILCORP, Ameren proposes to retain CILCORP as a direct subsidiary for the foreseeable future, and CILCORP will continue to own all of the common stock of CILCO. CILCO, in turn, will continue to hold all of the common stock of CIGI for the foreseeable future. CILCO will maintain its headquarters in Peoria for a period of at least five years and will maintain a local management team and adequate staffing levels to operate its utility system. CILCO will continue to operate as a separate control area. CILCO's generating plants (which CILCO intends to transfer to CIGI by the time of the closing) will not be jointly dispatched with the generating plants owned by AmerenUE and Ameren Energy Generating. Nevertheless, Applicants state that CILCO's electric operations, as well as it gas operations, will be integrated with those of AmerenUE and AmerenCIPS.

VI. Economic Benefits of the Proposed Transactions

Applicants have identified potential cost savings from the proposed transactions that establish economies and efficiencies created by the new Ameren system. Specifically, the proposed transactions will produce savings in the energy delivery business ranging from $500,000 to $3.2 million per year in the first four years (2003 through 2006). Ameren also believes that there will be opportunities to achieve substantial savings in power supply and through administrative and corporate purchasing economies, elimination of duplicate administrative and corporate services, and limited staff reductions.

Ameren estimates that, to achieve the projected level of savings, approximately $25 million in one-time transition expenses, along with approximately $14 million of capital expenditures will be incurred. Ameren states these expenditures are required principally to enable CILCO to utilize Ameren's systems and to pay for relocation and severance costs and facilities integration. Although these quantifiable savings are modest in relation to savings that have been projected in other recent merger cases approved by the Commission, they are nevertheless meaningful in relation to the overall size of the proposed transactions. Moreover, Ameren expects that the aggregate of all potential savings, as described above, will exceed the cost to achieve such savings and that the proposed transactions will be accretive to earnings.

Ameren states the proposed transactions should also have a beneficial effect on CILCO's ability to raise capital on reasonable terms and on the cost of future debt capital since Ameren has a higher credit rating than AES.7 Ameren does not expect CILCO's existing ratings for senior secured debt, preferred stock and commercial paper to be adversely affected as a result of the proposed transactions.8

VII. Agreements for Sale of Goods and Services

Applicants expect that Ameren Services will assume the responsibility for providing administrative, management and technical services at cost after the proposed transactions close under new service agreements. There may be a period, however, not to exceed two years, during the transition in which CILCO will continue to provide certain corporate support services, such as accounting, tax, cash management and billing and sales services, to the same associate companies to which these services were provided prior to the proposed transaction. In addition, following the transfer of its generating assets to CIGI, CILCO and CIGI request authorization to provide to each other, on a permanent basis, certain technical services relating to the operation and maintenance of generating assets located at CILCO substations and the equipment connecting CIGI's generation facilities with CILCO's transmission facilities. Applicants state that all of these services will be performed at cost in accordance with rules 90 and 91 under a services and facilities agreement to be executed when the generating assets are transferred to CIGI.

As previously noted, in conjunction with the proposed transactions, Ameren has also agreed to purchase from AES all of the membership interests in AES Medina Valley Cogen (No. 4), L.L.C., which indirectly holds all of the membership interests in AES Medina Valley. To the extent required, Applicants request authorization to maintain in place (a) a tolling agreement under which AES Medina Valley sells electricity, steam and chilled water to CILCO, (b) a fuel supply and services agreement between CILCORP Energy Services Inc. ("CESI"), a nonutility gas marketing subsidiary of CILCORP, and AES Medina Valley, under which CESI supplies AES Medina Valley's gas requirements and also provides certain ancillary services relating to the supply of gas to the Mossville facility, and (c) a FERC-approved interconnection agreement between CILCO and AES Medina Valley, under which CILCO provides metering and other ancillary services to AES Medina Valley, at cost.

Applicants state that Ameren Services intends to enter into separate service agreements with CILCORP, CILCO, CIGI and certain of CILCORP's other subsidiaries that are identical in all material respects to an existing general service agreement between Ameren Services, Ameren, AmerenUE, AmerenCIPS and certain other associate companies.

In addition, Ameren Fuels requests authorization to enter into separate fuel services agreements with CILCO and CIGI under which Ameren Fuels will manage gas supply resources for CILCO and manage fuel procurement for CIGI. These services will be provided at cost, in accordance with rule 90 and 91.9

VIII. Financing by CILCORP, CILCO and CIGI

The existing equity and long-term and short-term debt securities of CILCORP, CILCO and CIGI will remain outstanding after the proposed transactions close.10 In addition, CILCORP, CILCO and CIGI are requesting authority, to the extent these transactions are not exempt, to engage in certain ongoing external and intrasystem financing transactions from time to time during the Authorization Period. Any securities issued by CILCORP, CILCO or CIGI to third parties may be issued directly, or may be issued indirectly through one or more special purpose entities formed solely for this purpose ("Financing Subsidiaries").

A. Financing Parameters

The financing authorizations requested in the Application will be subject to the following parameters:

  • CILCORP, CILCO and CIGI state that they will not engage in any financing transactions for which approval is sought unless, on a pro forma basis to take into account the amount and types of the financing and the subsequent application of the proceeds, common equity as a percentage of capitalization (including short-term debt and current maturities of long-term debt) of each company is at least 30%;

  • Except in accordance with a further order of the Commission in this proceeding, CILCORP and CIGI will not publicly issue any Refinancing Notes (defined below) or Long-term Securities (defined below), respectively, unless the securities are rated at the investment grade level as established by at least one nationally recognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the Securities Exchange Act of 1934. CILCORP and CIGI request that the Commission reserve jurisdiction over the investment grade criteria with respect to the undertaking in the previous sentence and commit to file a post-effective amendment in this proceeding on or before September 30, 2003 to seek authorization to continue use such investment grade criteria;

  • The effective cost of money on all external short-term borrowings by CILCORP will not exceed at the time of issuance the greater of (1) 300 basis points over the six-month London Interbank Offered Rate ("LIBOR"), or (2) a gross spread over LIBOR that is consistent with similar securities of comparable credit quality and maturities issued by other companies;

  • The maturity date of any new series of long-term notes issued by CILCORP will be not later than October 15, 2029, which is the maturity date of the longest of the two series of outstanding Senior Notes;

  • Any new long-term notes issued by CILCORP in a refinancing transaction will bear interest at a rate not to exceed at the time of issuance the greater of (1) 500 basis points over the yield to maturity of a U.S. Treasury security having a remaining term equal to the average life of the new notes (or, if no Treasury security is outstanding, then the yield to maturity of a 30-year U.S. Treasury Bond), or (2) a gross spread over U.S. Treasuries that is consistent with similar securities of comparable credit quality and maturities issued by other companies;

  • The effective cost of money on all external short-term borrowings by CILCO and CIGI will not exceed at the time of issuance the greater of (1) 300 basis points over the six-month LIBOR, or (2) a gross spread over LIBOR that is consistent with similar securities of comparable credit quality and maturities issued by other companies;

  • Any preferred stock or other types of preferred securities issued by CIGI will be redeemed no later than 50 years after issuance;

  • The dividend rate on any series of preferred stock or other preferred securities issued by CIGI will not exceed at the time of issuance the greater of (1) 700 basis points over the yield to maturity of a U.S. Treasury security having a remaining term equal or closest to the term of the securities (or, if no Treasury security is outstanding, then the yield to maturity of a 30-year U.S. Treasury Bond), or (2) a gross spread over U.S. Treasuries that is consistent with similar securities of comparable credit quality and maturities issued by other companies;

  • Long-term debt issued by CIGI will have a maturity ranging from one to 50 years; and

  • Long-term debt issued by CIGI will bear interest at a rate not to exceed at the time of issuance the greater of (1) 600 basis points over the yield to maturity of a U.S. Treasury security having a remaining term equal or closest to the average life of the series (or, if no U.S. Treasury security is outstanding, then the yield to maturity of a 30-year U.S. Treasury Bond), or (2) a gross spread over U.S. Treasuries that is consistent with similar securities of comparable credit quality and maturities issued by other companies.

B. External Financing Transactions

1. CILCORP

Applicants state that, after it is acquired by Ameren, CILCORP will not issue any additional equity securities, other than to Ameren. Subject to the limitations set forth below, CILCORP requests authorization to issue and sell from time to time during the Authorization Period short-term and long-term debt securities.

a. Short-Term Debt

CILCORP requests authorization to issue and sell commercial paper and/or establish and make unsecured short-term borrowings (i.e., less than one year) under credit facilities with banks or other institutional lenders on terms that are generally available to borrowers with a comparable credit rating as CILCORP, as CILCORP deems appropriate in light of its needs and existing market conditions, provided that the aggregate amount of borrowings by CILCORP at any time outstanding under all credit facilities, when added to the amount of any direct short-term borrowings by CILCORP from Ameren, will not exceed $250 million.

CILCORP proposes to sell, from time to time, commercial paper in established domestic or foreign commercial paper markets. 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. CILCORP expects that the dealers acquiring the commercial paper will reoffer it at a discount to corporate, institutional and, with respect to European commercial paper, individual investors. CILCORP anticipates that the commercial paper will be reoffered to investors such as commercial banks, insurance companies, pension funds, investment trusts, foundations, colleges and universities, finance companies and nonfinancial corporations.

CILCORP also proposes to continue, or to establish and maintain, back-up credit lines with banks or other institutional lenders to support its commercial paper programs and other credit arrangements and/or borrowing facilities generally available to borrowers with comparable credit ratings, as CILCORP deems appropriate in light of its needs and existing market conditions, providing for revolving credit or other loans and having commitment periods not longer than the Authorization Period. Only the amounts drawn and outstanding under these agreements and facilities will be counted against the proposed limit on short-term debt. The effective cost of money on all external short-term borrowings by CILCORP will not exceed at the time of issuance the greater of (i) 300 basis points over the six-month London Interbank Offered Rate ("LIBOR"), or (ii) a gross spread over LIBOR that is consistent with similar securities of comparable credit quality and maturities issued by other companies.

b. Refinancing Notes

CILCORP also requests authorization to issue, in one or more transactions from time to time during the Authorization Period, long-term notes ("Refinancing Notes") for the purpose of refinancing or acquiring the CILCORP Senior Notes that are currently outstanding at or prior to their scheduled maturity. The principal amount of any Refinancing Notes issued will not exceed the unpaid principal amount of the CILCORP Senior Notes, plus any "make whole" premium required to be paid in connection with any prepayment and/or the premium, if any, that is paid in connection with any acquisition of the Senior Notes in open market purchases. In connection with any issuance, Ameren requests authorization to guarantee any Refinancing Notes or to issue a guarantee of the outstanding CILCORP Senior Notes in order to obtain a termination and release of the pledge of CILCO's common stock11 or for other corporate purposes.

CILCORP requests authority to issue Refinancing Notes that are rated below investment grade. CILCORP requests that the Commission reserve jurisdiction over the investment grade criteria with respect to the undertaking in the previous sentence and commit to file a post-effective amendment in this proceeding on or before September 30, 2003 to seek authorization to continue use such investment grade criteria. It is further requested that the Commission reserve jurisdiction over CILCORP in connection with any publicly issued Refinancing Notes that are rated below investment grade.

2. CILCO and CIGI

a. Short-Term Debt

CILCO and CIGI are requesting authorization to issue commercial paper and establish and make unsecured short-term borrowings (i.e., less than one year) under credit lines from time to time during the Authorization Period, provided that the aggregate amount of external short-term borrowings by CILCO at any time outstanding under all credit facilities, when added to the amount of any direct short-term borrowings by CILCO from Ameren (see part VIII.C.1., "Intrasystem Financing Transactions" below), will not exceed $250 million, and that the aggregate amount of borrowings by CIGI at any time outstanding under all credit facilities, when added to the amount of any direct short-term borrowings by CIGI from Ameren (see part VIII.C.1., "Intrasystem Financing Transactions" below), will not exceed $250 million.

b. Long-Term Securities of CIGI

CIGI is also requesting authorization to issue and sell from time to time during the Authorization Period long-term securities consisting of any combination of preferred stock or other forms of preferred securities and long-term debt ("Long-term Securities"). Preferred stock or other types of preferred securities may be issued in one or more series with rights, preferences, and priorities as may be designated in the instrument creating each series; provided that the aggregate amount of all these securities at any time outstanding, when added to the amount of any direct long-term borrowings by CIGI from Ameren (see part VIII.C.1., "Intrasystem Financing Transactions" below), will not exceed $500 million.

Long-term debt of a particular series (i) may be secured or unsecured, (ii) may be subject to optional and/or mandatory redemption, in whole or in part, at par or at various premiums above the principal amount, (iii) may be entitled to mandatory or optional sinking fund provisions, (iv) may provide for reset of the coupon under a remarketing or auction arrangement, and (v) may be called from existing investors by a third party. CIGI requests authority to issue Long-term Securities that are rated below investment grade. CIGI requests that the Commission reserve jurisdiction over the investment grade criteria with respect to the undertaking in the previous sentence and commit to file a post-effective amendment in this proceeding on or before September 30, 2003 to seek authorization to continue use such investment grade criteria. It is further requested that the Commission reserve jurisdiction over CIGI in connection with any publicly issued Long-term Securities that are rated below investment grade.

3. Interest Rate and Anticipatory Hedging Transactions<

To the extent not exempt under rule 52, CILCORP, CILCO and CIGI also request authorization to enter into interest rate hedging transactions with respect to outstanding indebtedness ("Interest Rate Hedges"), subject to certain limitations and restrictions, in order to reduce or manage the effective interest rate cost. In no case will the notional amount of any Interest Rate Hedge exceed the principal amount of the underlying debt instrument. Transactions will be entered into for a fixed or determinable period. Thus, the Applicants will not engage in speculative transactions. Interest Rate Hedges would only be entered into with counterparties ("Approved Counterparties") whose senior debt ratings, or the senior debt ratings of any credit support providers who have guaranteed the obligations of the Approved Counterparties, as published by S&P, are equal to or greater than BBB, or an equivalent rating from Moody's or Fitch. In addition, CILCORP, CILCO and CIGI request authorization to enter into interest rate hedging transactions with respect to anticipated debt offerings (the "Anticipatory Hedges"), subject to certain limitations and restrictions.

Applicants state that each Interest Rate Hedge and Anticipatory Hedge will qualify for hedge accounting treatment under the current Financial Accounting Standards Board ("FASB") guidelines in effect and as determined at the time entered into. Further, the Applicants will comply with the Statement of Financial Accounting Standards ("SFAS") 133 ("Accounting for Derivatives Instruments and Hedging Activities") and SFAS 138 ("Accounting for Certain Derivative Instruments and Certain Hedging Activities") or other standards relating to accounting for derivative transactions as are adopted and implemented by the FASB.12

C. Intrasystem Financing Transactions

1. Long-Term and Short-Term Securities of CILCORP, CILCO and CIGI

Ameren may from time to time during the Authorization Period acquire additional shares of CILCORP's common stock, make additional capital contributions or non-interest bearing cash advances to CILCORP, and/or make loans to CILCORP, CILCO and CIGI (and acquire unsecured promissory notes of CILCORP, CILCO and CIGI evidencing the loans) in order to enable CILCORP to fund additional investments in CILCO and its other existing subsidiaries, to redeem or retire the outstanding Senior Notes, and to fund working capital. Accordingly, CILCORP requests authority to issue, and Ameren requests authority to acquire, from time to time during the Authorization Period, (a) up to $1 billion at any time outstanding of additional common stock and/or promissory notes having maturities of one year or more, and (b) up to $250 million at any time outstanding of promissory notes having maturities of less than one year. Any promissory note issued by CILCORP to Ameren evidencing a loan will be unsecured and will bear interest at a rate and have a maturity date designed to parallel the effective cost of capital and maturity date of a similar debt instrument issued by Ameren.

Ameren requests authorization to make long-term and short-term loans to CIGI (and acquire promissory notes of CIGI evidencing the loans) in order to fund CIGI's capital improvements and working capital requirements. Accordingly, CIGI requests authority to issue, and Ameren requests authority to acquire, from time to time during the Authorization Period, (a) up to $500 million at any time outstanding of promissory notes having maturities of one year or more, and (b) up to $250 million at any time outstanding of promissory notes having maturities of less than one year.

Ameren requests authorization to make short-term loans to CILCO (and acquire promissory notes of CILCO evidencing the loans) in order to fund CILCO's capital improvements and working capital requirements. Accordingly, CILCO requests authority to issue, and Ameren requests authority to acquire, from time to time during the Authorization Period, up to $250 million at any time outstanding of promissory notes having maturities of less than one year.

2. Guarantees Issued by CILCORP and Its Subsidiaries

CILCORP and its subsidiaries request authorization to maintain, renew and extend all guarantees and other forms of credit support that they have issued and which are outstanding at the time that the proposed transactions close. In addition, CILCORP requests authorization to provide additional guarantees and other forms of credit support (collectively, "Guarantees") from time to time during the Authorization Period on behalf of, or for the benefit of, any of its subsidiaries, provided that the aggregate amount of all Guarantees at any time outstanding shall not exceed $500 million. Any Guarantee outstanding on March 31, 2006 will expire or terminate in accordance with its terms.

D. Organization and Acquisition of Financing Subsidiaries

In connection with the issuance of any securities for which authorization is requested in the Application, or (in the case of CILCO) under rule 52(a), CILCORP, CILCO and CIGI request authorization to acquire, directly or indirectly, the common stock or other equity securities of one or more entities (each, a "Financing Subsidiary") formed exclusively for the purpose of facilitating the issuance of long-term debt and/or preferred securities and the loan or other transfer of the proceeds to the parent company of a Financing Subsidiary. The proceeds of any financing carried out through a Financing Subsidiary will be counted against the limits proposed in the Application for the securities issued by CILCORP or CIGI, as the case may be, and the terms, conditions and other limitations applicable to any securities issued by a Financing Subsidiary will conform to those proposed for the specified type of security (e.g., long-term debt, preferred securities, etc.). In connection with any these financing transactions, CILCORP or CIGI, as the case may be, may enter into one or more guarantees or other credit support agreements in favor of its Financing Subsidiary. CILCORP, CILCO and CIGI also request authorization to enter into an expense agreement with its respective Financing Subsidiary, under which each company would agree to pay all expenses of the Financing Subsidiary.

In addition, CILCORP and CIGI also request authority to issue and sell to any Financing Subsidiary, at any time or from time to time in one or more series, unsecured debentures, unsecured promissory notes or other unsecured debt instruments (individually, a "Note," and collectively, the "Notes") governed by an indenture or indentures or other documents, and the Financing Subsidiary will apply the proceeds of any external financing by the Financing Subsidiary plus the amount of any equity contribution made to it from time to time to purchase Notes. The terms (e.g., interest rate, maturity, amortization, prepayment terms, default provisions, etc.) of any Notes would generally be designed to parallel the terms of the securities issued by the Financing Subsidiary to which the Notes relate. The principal amount of Notes issued to a Financing Subsidiary by its parent will not be counted against the limits proposed in this Application on securities issued by CILCORP or CIGI to third parties or to Ameren.13

Applicants state that any Financing Subsidiary organized under the authority granted by the Commission in this proceeding shall be organized only if, in management's opinion, the creation and utilization of a Financing Subsidiary will likely result in tax savings, increased access to capital markets and/or lower cost of capital for CILCORP, CILCO or CIGI, as applicable.14

E. Payment of Dividends by CILCORP Out of Capital Surplus

Ameren will use the purchase method of accounting for the proposed transactions. Under this method of accounting, the purchase price of the proposed transactions will be assigned to the tangible and identifiable intangible assets acquired and liabilities assumed in the proposed transactions on the basis of their fair values on the date of the acquisition. Any premium (i.e., the excess of the Purchase Price over the fair values of the net assets acquired) will be recorded as goodwill. In this case, Ameren will "push down" the purchase accounting and establish a new basis of accounting for the stand-alone accounts of CILCORP.15 As a result of the push-down of the purchase accounting to CILCORP, the current retained earnings of CILCORP ($39.1 million at September 30, 2002), the traditional source for dividend payments, will be eliminated (i.e., recharacterized as additional paid-in capital). The proposed transactions, including the acquisition of AES Medina Valley Cogen (No. 4), L.L.C, will create goodwill of approximately $527 million, most of which will be reflected on CILCORP's balance sheet.16 Applicants expect that, for accounting purposes, the goodwill recorded on CILCORP's books as a result of the proposed transactions will generally remain unchanged, but it will be reviewed for potential impairment on a regular basis in accordance with SFAS Nos. 141 and 142.

CILCORP requests authorization to declare and pay dividends on its common stock and/or to redeem or repurchase its outstanding shares of common stock from time to time through the Authorization Period out of capital surplus (including revaluation reserve), to the extent permitted under applicable corporate law and the terms of any applicable covenants in its financing documents (including the CILCORP Indenture), in an amount equal to CILCORP's retained earnings at the time that the proposed transactions are consummated plus the amount, if any, recorded as an impairment to goodwill on the books of CILCORP in accordance with SFAS Nos. 141 and 142.17

IX. Exemption of CILCORP and CILCO as Holding Companies

In its capacity as a holding company over CILCO and CIGI, CILCORP states that it will continue to be entitled to an exemption under section 3(a)(1) of the Act because CILCORP, CILCO and CIGI are all incorporated in Illinois, the state in which all of CILCO's and CIGI's public utility operations are conducted. Likewise, Applicants state that CILCO will be entitled to an exemption under section 3(a)(1) of the Act by nature of its capacity as a holding company over CIGI. Accordingly, CILCORP and CILCO request that the Commission issue an order exempting them from the registration requirements of section 5 of the Act under section 3(a)(1).

X. Rule 54 Analysis

Ameren states, for purposes of rule 54, that the conditions specified in rule 53(a) are satisfied and that none of the adverse conditions specified in rule 53(b) exists. As a result, the Commission will not consider the effect on the Ameren system of the capitalization or earnings of any Ameren subsidiary that is an exempt wholesale generator or foreign utility company, as each is defined in sections 32 and 33 of the Act, respectively, in determining whether to approve the proposed transaction.

XI. Fees and Expenses; Jurisdiction

Applicants estimate that the fees, commissions and expenses paid or incurred, or to be paid or incurred, directly or indirectly, in connection with the proposed transactions will not exceed $14 million, assuming that the proposed transactions close, as follows

Investment bankers fees and expenses $8,000,000
Consultants fees and expenses $1,000,000
Accountants fees $1,000,000
Legal fees and expenses $3,500,000
Other $500,000
 
TOTAL $14,000,000

Total fees, commissions and expenses incurred or to be incurred by CILCORP, CILCO or CIGI in connection with the issuance of securities to any non-associate company, including underwriting fees, registration fees under the Securities Act of 1933, dealer discounts, commitment fees, compensating balances, fees for obtaining letters of credit, rating agency fees, and other fees and costs customarily incurred in connection with the issuance of these securities or obtaining third-party credit support, will not exceed 6% of the amount of any specific financing transaction.18

The ICC has jurisdiction over, and has approved, the proposed transactions, subject to certain conditions.19 In addition, the ICC authorized CILCO to enter into the Services Agreement and the Fuel Services Agreement and to maintain certain books and records outside Illinois, and approved CILCO's post-closing capitalization. Finally, the ICC authorized CILCO to transfer its generation assets to CIGI.20

Applications or filings regarding the proposed transactions were filed with the FERC according to the Federal Power Act, the FTC and the DOJ, according to the HSR Act, and the Federal Communications Commission. The FERC issued an order conditionally approving the proposed transactions, including Ameren's acquisition of AES Medina Valley, on November 21, 2002. On January 15, 2003, following the expiration of the HSR Act waiting period, the DOJ, which reviewed the proposed transactions pursuant to an agreement with the FTC, verbally notified Ameren and AES that it had completed its competitive review and would not challenge the proposed transactions.

XII. Discussion

The Commission has reviewed the proposed transactions and requested authorizations and finds that the applicable statutory standards are satisfied. The Commission wishes to discuss, in particular, the capital structure of CILCORP and the continuing existence of CILCORP as a holding company following the proposed transactions.

A. Capital Structure of CILCORP

The continued existence of CILCORP as a secondary holding company following the proposed transactions will not unduly complicate Ameren's capital structure. Moreover, significant financial disincentives to eliminating CILCORP as a secondary holding company exist at this time.

Specifically, in order to eliminate CILCORP as a subsidiary, Ameren would either have to prepay the CILCORP Senior Notes, or, alternatively, assume the CILCORP Senior Notes by means of a merger or otherwise. Any prepayment or redemption of the CILCORP Senior Notes would require payment of a yield maintenance, or "make whole," premium. Using current Treasury rates, the amount of the "make whole" premium would be approximately $193 million. Ameren estimates that, if the CILCORP Senior Notes, plus the amount of the "make whole" premium (a total of about $668 million), were to be paid with the proceeds of new unsecured debt issued by CILCORP having maturities corresponding to the CILCORP Senior Notes, the after-tax net present value of the increased cost of debt would be $64 million, based on current interest rates for similar debt of similarly rated issuers. 21

If CILCORP were to be merged into Ameren, the CILCORP Senior Notes would not have to be prepaid but would, by operation of law, become the direct obligations of Ameren. In this regard, however, the indenture under which the CILCORP Senior Notes were issued ("CILCORP Indenture") includes limitations on future activities and other covenants that are far more onerous and restrictive than those in Ameren's existing debt instruments. For example, the CILCORP Indenture provides (in section 10.04) that future indebtedness of CILCORP and any subsidiary cannot be secured without the same property also securing the CILCORP Senior Notes, with certain exceptions. If CILCORP were merged into Ameren, this limitation would apply to future secured debt issued not only by Ameren, but AmerenUE and AmerenCIPS as well. Ameren states that this would be unacceptable from a business perspective. Under section 10.06, CILCORP and its subsidiaries cannot incur certain new debt unless CILCORP receives the written confirmation from certain ratings agencies that the issuance of the debt would not result in a ratings downgrade from the then-existing rating on the CILCORP Senior Notes. If CILCORP were merged into Ameren, this ratings affirmation covenant would apply to any debt issued by Ameren or any subsidiary of Ameren. Further, if the current rating for the CILCORP Senior Notes is raised as a result of the proposed transactions, then the higher rating becomes the "floor" for purposes of future ratings affirmations. Under section 10.07 of the CILCORP Indenture, CILCORP can only engage in businesses in addition to (i) those businesses in which it and its subsidiaries were engaged at the time the CILCORP Senior Notes were issued and (ii) other businesses that are deemed to be necessary, useful or desirable in connection with the existing businesses, if, prior to entering into any the additional business, CILCORP obtains the written confirmation of the ratings agencies that a ratings downgrade will not result.

The CILCORP Senior Notes were issued as part of a highly leveraged transaction in which CILCORP became a wholly-owned subsidiary of AES, and consequently the covenants in the CILCORP Indenture reflect that status. In contrast, Ameren is a publicly-held company that has a substantially higher credit rating than either AES or CILCORP. Thus, while the limitations under the CILCORP Indenture may have been appropriate for CILCORP at the time the CILCORP Senior Notes were issued, they would not be appropriate for Ameren.

Leaving the CILCORP Senior Notes in place will not negatively affect CILCO's capital structure or be detrimental to investors. CILCO's common equity ratio has averaged around a minimum of 45% both before and after the issuance of the CILCORP Senior Notes. Also, CILCO's operating cash flow has been sufficient to cover the debt service requirements on the CILCORP Senior Notes, a trend that Ameren expects to continue. By becoming part of the Ameren system, Applicants state that CILCO's credit ratings may improve, thus providing CILCO with better access to capital. Further, CILCORP and CILCO will have additional access to short-term and long-term funding through their ability to borrow from Ameren.

Set forth below are summaries of the capital structures of Ameren and CILCORP as of September 30, 2002, and the pro forma consolidated capital structure of Ameren (assuming the proposed transactions, including the acquisition of AES Medina Valley Cogen (No. 4) L.L.C., had been consummated on September 30, 2002):

Ameren and CILCORP Historical Consolidated Capital Structures
(dollars in millions)

  Ameren CILCORP
Common stock equity $4,047 51% $550 39%
Preferred securities 194 2% 41 3%
Long-term debt 3,484 44% 791 56%
Short-term debt, incl. current portion 261 3% 27 27
Total $7,986 100% $1,409 $1,409

Ameren Pro Forma Consolidated Capital Structure

  (dollars in millions) (unaudited)
Common stock equity $4,267 46%
Preferred securities 235 3%
Long-term debt 4,376 48%
Short-term debt, incl. current portion 289 3%
Total $9,167 100.0%

The continued existence of the CILCO stock pledge to secure the CILCORP Senior Notes also will not unduly complicate Ameren's capital structure. Importantly, the continued existence of the CILCO stock pledge will not negatively impact CILCORP's ability to service its existing unsecured debt holders.22 In Allegheny, the Commission authorized a subsidiary of Allegheny Energy, Inc., Allegheny Energy Supply Company, LLC ("AE Supply"), to issue debt secured in part by a pledge of the stock of certain of its utility subsidiaries. The Commission determined that the financing was necessary in order to enable AE Supply to meet urgent cash requirements relating to its unregulated energy marketing operations and that the granting of security in its assets to some creditors of AE Supply would not prevent the full payment of other creditors of the company. The Commission further found that AE Supply's issuance of secured debt would not harm the holders of Allegheny Energy's common stock, since the amount of the debt was within previously authorized limits In the present case, the CILCORP Senior Notes are already outstanding; neither CILCORP nor Ameren is seeking any authorization to issue additional debt secured by a pledge of CILCO's common stock. Moreover, CILCORP is not experiencing liquidity problems that could jeopardize its ability to service other debt. The fact that the CILCORP Senior Notes are secured, rather than unsecured, will also not have any negative impact on the holders of Ameren's common stock. In this regard, as shown above, the impact of the proposed transactions (which includes the assumption of CILCORP's Senior Notes, as well as secured and unsecured debt of CILCO) on Ameren's consolidated capitalization ratios is not material. Common equity will represent approximately 46% of Ameren's pro forma consolidated capitalization, which is well above the traditionally acceptable 30% minimum.

B. Continued Existence of CILCORP Following the Proposed Transactions

Section 11(b)(2) of the Act requires the Commission to ensure that "the corporate structure or continued existence of any company in the holding company system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of the holding company system." Section 11(b)(2) also directs the Commission to require each registered holding company "to take such steps as the Commission shall find necessary in order that such holding company shall cease to be a holding company with respect to each of its subsidiary companies which itself has a subsidiary company which is a holding company," in other words, to eliminate so-called "great-grandfather" holding companies.

As a result of the proposed transactions, and assuming the continued interposition of CILCORP as an intermediate holding company, Ameren will become a "great-grandfather" holding company with respect to CIGI. If CILCORP were eliminated as an intermediate holding company, or if CIGI were again determined to be an EWG, the "great-grandfather" relationship between Ameren and CIGI would no longer exist. However, Ameren is proposing to retain CILCORP as an intermediate holding company for the indefinite future and is also proposing to acquire CIGI as an additional public utility subsidiary (by causing CIGI to relinquish its EWG status upon or following closing of the proposed transactions).23 We have previously discussed the need to retain CILCORP as an intermediate holding company and why its presence does not create an unduly complicated capital structure.

Ameren could also eliminate the "great-grandfather" relationship with CIGI by causing CILCO to distribute the common stock of CIGI to CILCORP or by otherwise transferring the stock of CIGI to another company in the Ameren system. In this connection, it is Ameren's intention ultimately to move CIGI out from under CILCO in order to achieve a clearer delineation between CILCO's regulated utility business and CIGI's unregulated business. However, this action would require approval by this Commission, and may require other regulatory approvals and corporate actions as well. Ameren is also examining whether such a change in corporate structure would result in any adverse federal and/or state tax consequences and/or would negatively affect CILCO's ability to service its debt. Ameren has not completed its analysis of these issues or determined the likelihood or timing of receiving necessary regulatory approvals for this action. Accordingly, Ameren proposes that CIGI remain as a subsidiary of CILCO for the indefinite future.

In any event, the continued ownership of CILCORP, CILCO and CIGI does not implicate any of the abuses that section 11(b)(2) of the Act was intended to prevent. These abuses, facilitated by the pyramiding of holding company groups, involved the diffusion of control and the creation of different classes of debt or stock with unusual voting rights. These abuses are not present in this case. CIGI is wholly-owned by CILCO; it does not have any other class of equity securities or any third-party debt outstanding. In fact, for the time being at least, its assets will continue to secure first mortgage bonds issued by CILCO. Moreover, at least through the end of 2004 (a date likely to be extended through the end of 2006), all of CIGI's generating capacity will be dedicated under the PSA to serving the needs of CILCO; CIGI will not have any retail customers that are subject to cost-of-service rates. The continued ownership of CIGI by CILCO will therefore enhance operational efficiency and coordination.

XIII. Conclusion

Due notice of the filing of the Application has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of, or ordered by, the Commission. Based on the facts in the record, the Commission finds that, except as to matters over which jurisdiction has been reserved, the applicable standards of the Act are satisfied and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that, except as to those matters over which jurisdiction has been reserved, the Application, as amended, be, and it hereby is, granted and permitted to become effective immediately, subject to the terms and conditions contained in rule 24 under the Act; except that Ameren will file certificates of notification under rule 24 within 10 days following closing of the proposed transactions and within 10 days following the completion of the transfer of CILCO's generating assets to CIGI, if the transfer occurs after the closing of the proposed transactions. In addition, Ameren, CILCORP, CILCO and CIGI propose to file certificates of notification under 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, Part VIII.B-D. The rule 24 certificates will contain the following information for the reporting period:

  • the type of securities issued (e.g., common stock, long-term debt, short-term debt, etc.) and the amount of consideration received;

  • the principal terms thereof (e.g., interest rate, maturity, dividend rate, sinking fund provisions, etc.);

  • if payment of any debt securities may be accelerated by the holders thereof by reason of a default by any associate company of the issuer under any obligation of that associate company (i.e., a cross default), the identity of that associate company and the nature of obligation of the associate company to which the cross default relates;

  • the amount and purpose of any Guarantee issued by CILCORP;

  • the notional amount and principal terms of any Interest Rate Hedge or Anticipatory Hedge entered into during the quarter and the identity of the parties to the instruments;

  • with respect to each Financing Subsidiary that has been formed, a representation that the financial statements of the parent company of the Financing Subsidiary shall account for the Financing Subsidiary in accordance with generally accepted accounting principles and further, with respect to each entity, (i) the name of the Financing Subsidiary, (ii) the amount invested by the parent company in the Financing Subsidiary; (iii) the balance sheet account where the investment and the cost of the investment are booked; (iv) the form of organization (e.g., corporation, limited partnership, trust, etc.) of the Financing Subsidiary; (v) the percentage owned by the parent company; and (vi) if any equity interests in the Financing Subsidiary are sold in a non-public offering, the identity of the purchasers; and

  • consolidated balance sheets of CILCORP, CILCO and CIGI as of the end of the calendar quarter, which may be incorporated by reference to filings, if any, by these companies under the Securities Act of 1933 or Securities Exchange Act of 1934.

IT IS FURTHER ORDERED, that jurisdiction is reserved, pending completion of the record, over (a) the public issuance by CILCORP of Refinancing Notes that are rated below investment grade; (b) over the public issuance by CIGI of Long-Term Securities that are rated below investment grade; and (c) the retention of certain nonutility businesses owned by CILCORP, as described more fully in Appendix A. Jurisdiction is also reserved, pending the filing of a Post-Effective Amendment by CILCORP and CIGI seeking authorization to continue use of the investment grade criteria set forth in this Application, over the investment grade

criteria with respect to CILCORP's public issuance of Refinancing Notes and and CIGI's public issuance of Long-Term Securities.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

Margaret H. McFarland
Deputy Secretary

 


APPENDIX A

I. Direct Nonutility Subsidiaries of CILCORP

CILCORP has three wholly owned direct non-utility subsidiaries, as follows:

A. CILCORP Investment Management Inc. ("CIM")

CIM, an Illinois corporation, is an intermediate non-utility subsidiary that was organized to administer CILCORP's investment policy and to manage its investment portfolio.24 At December 31, 2001, CIM had total consolidated assets of $146,920,000, consisting primarily of investments in affordable housing funds and leveraged leases.

CIM directly holds limited partnership interests ranging from approximately 3.4% to 9.9% in seven affordable housing funds. Each fund holds a portfolio of investments in affordable housing projects that qualify for income tax credits under section 42 of the Internal Revenue Code. Most of the projects are located in Illinois. The names of these funds, CIM's percentage interest, and the location of affordable housing projects held by each fund are as follows:

  • Illinois Equity Fund 1992 Limited Partnership (6.428571%) - holds investments in two separate housing projects, all in Illinois.

  • Illinois Equity Fund 1994 Limited Partnership (3.716216%) - holds investments in four separate housing projects, all in Illinois.

  • Illinois Equity Fund 1996 Limited Partnership (3.666671%) - holds investments in five separate housing projects, all in Illinois.

  • Illinois Equity Fund 1998 Limited Partnership (5.5%) - holds investments in five separate housing projects, all in Illinois.

  • House Investments - Midwest Corporate Tax Credit Fund, L.P. (3.3975%) - holds investments in 21 separate housing projects located in Illinois and other Midwestern states.

  • House Investments - Midwest Corporate Tax Credit Fund II, L.P. (8.005504%) - holds investments in 26 separate housing projects located in Illinois and other Midwestern states.

  • Provident Tax Credit Fund III, L. P. (9.9%) - holds investments in 16 separate housing projects located in Illinois and other Midwestern states.

At December 31, 2001, CIM's investment in the above funds was approximately $9,740,000. CIM has made commitments to invest an additional $526,000 in these funds. CIM made these investments for the purpose of obtaining the tax credits that are available. CIM's ownership interest in each fund is passive. In each case, responsibility for the day-to-day management of the fund and the underlying affordable housing projects in which the fund invests (including leasing activities, rent collection and property maintenance) resides in the general partner or in an independent management company.25

In addition, CIM owns 100% of the stock of four subsidiaries, as follows:

  • CIM Energy Investments Inc., an intermediate subsidiary,26 holds a 2.5% limited partnership interest in the Energy Investors Fund, L.P., which invests in power generation projects within the United States that are either "exempt wholesale generators" under Section 32 of the Act or "qualifying facilities" under the Public Utility Regulatory Policies Act of 1978, as amended.27

  • CIM Leasing Inc. ("CIM Leasing"), an intermediate subsidiary,28 holds a passive interest in passenger railcars that are leased to an unaffiliated third party pursuant to leveraged leases,29 and a limited partnership interest in SunAmerica Affordable Housing Partners 51, which invests in affordable housing projects that qualify for federal tax credits.30

  • CIM Air Leasing Inc. ("Air Leasing"), an intermediate subsidiary,31 holds a partnership interest in a leveraged lease investment in a commercial aircraft.32

  • CILCORP Lease Management Inc. ("CLM"), a Delaware corporation, was organized to enter into leveraged lease transactions. CLM directly holds an interest as an owner participant in an owner-trust that leases Unit No. 1 of the Springerville Power Plant to Tucson Electric Power Company.33 In addition, CLM has the following wholly-owned subsidiaries which own passive interests in leveraged leases: CLM Inc., IV (holds a partnership interest in a leveraged lease investment in an office building in California); CLM X, Inc. (which, through two wholly-owned subsidiaries, CLM XI, Inc. and CLM Inc., VI, holds interests in leveraged leases of an office building in Delaware and a waste-to-energy electric generating facility in the Netherlands); and CLM Inc. - VII and CLM Inc. VIII (which own passive interests in commercial real estate in eight states (Walmart-Sam's Club retail facilities)).34

At December 31, 2001, CIM's net investment in leveraged leases was $29,979,000; its net investment in Energy Investors Fund, L.P. was $658,000.

B. CILCORP Ventures Inc. ("CVI")

CVI, an intermediate subsidiary,35 has one wholly-owned subsidiary, CILCORP Energy Services Inc., an Illinois corporation, which provides energy management services, including gas purchasing and management services for large gas customers.36 CVI also holds an 80% interest in Agricultural Research and Development Corporation ("ARDC"), an Illinois corporation that pursues commercialization of agricultural research in central Illinois as part of a combined private/government effort to boost the local economy and create jobs in the region.37 Furthermore, CILCORP, as a good corporate citizen of Peoria, through CVI holds a 2% interest in Peoria Chiefs Community Baseball Club ("Peoria Chiefs"), a minor league baseball team, and a 4.2% interest in Peoria Medical Research Corporation ("PMRC"), the general partner of a limited partnership engaged in clinical research.38 At December 31, 2001, CVI had total consolidated assets of $11,051,000.

C. QST Enterprises Inc. ("QST")

QST, an intermediate subsidiary,39 provides energy and related products and services in non-regulated retail and wholesale energy markets through the following direct or indirect wholly-owned subsidiaries: CILCORP Infraservices Inc., an Illinois corporation, which provides utility operation and maintenance services to large industrial companies (predominantly Caterpillar Inc., CILCO's largest customer)40; and ESE Land Corporation ("ESE"), also an Illinois corporation, which, directly and through special purpose subsidiaries of its own, maintains interests in environmentally distressed parcels of real estate acquired for resale. ESE has two wholly-owned subsidiaries, ESE Placentia Development Corporation, which is currently inactive, and Savannah Resources Corp., which holds 15% of the common units and 100% of the junior preferred units of McCadden Development, LLC ("McCadden"), a Delaware limited liability company. McCadden owns approximately 590 acres of environmentally distressed real estate in Santa Barbara County, California, which it acquired in 1997 to develop into a master planned residential project. In addition, ESE holds 15% of the common units and 100% of the junior preferred units of California/Nevada Developments, LLC, a Delaware limited liability company that owns environmentally distressed real estate acquired for resale. ESE's investments are not in the CILCO service territory and, to the extent not already discontinued and being divested, will be discontinued. Ameren commits to discontinue or divest all of ESE's investments within three years following an order approving this Application-Declaration.

The following direct and indirect subsidiaries of QST are inactive: QST Energy Inc., which previously provided energy and related products and services to retail energy customers, and QST Energy Trading Inc., which previously engaged in wholesale energy marketing. In the event that Ameren seeks to reactivate any of these inactive subsidiaries, Ameren will file a post-effective amendment in this proceeding seeking authorization to engage in the new activities, if such authorization is required under the Act or rules thereunder, or, if applicable, inform the Commission of the reactivation of any of these inactive companies on Form U-9C-3 or other applicable form or report.41

At December 31, 2001, QST had total consolidated assets of $9,036,000.

II. Direct Nonutility Subsidiaries of CILCO

CILCO directly sells steam to an agricultural processing customer.42 In addition, CILCO has two direct non-utility subsidiaries, both of which are Illinois corporations, as follows:

A. CILCO Exploration and Development Company ("CEDC")

CEDC engages with others in joint ventures for the exploration and development of new or additional sources or supplies of natural gas or supplemental gas.43

B. CILCO Energy Corporation

CILCO Energy Corporation engages with others in a joint venture for research and development of new sources of energy, including conversion of coal and other minerals into gas.44

 


1 Applicants state that CIGI, which has been determined by the Federal Energy Regulatory Commission ("FERC") to be an "exempt wholesale generator" ("EWG"), as defined under section 32 of the Act, will relinquish its EWG status on or after completion of Ameren's acquisition of CILCORP. Accordingly, in the Application, Ameren is treating CIGI as a public utility company for all purposes under the Act.

2 Applicants state that the remaining 40% of the stock of EEI is held equally by two unaffiliated electric utility companies.

3 Applicants state that CILCO will transfer generating facilities representing 1,136 MW of its total generating capacity. CILCO will continue to own and maintain a natural gas-fired cogeneration plant and 26 MW of capacity provided by 16 diesel-fueled power modules located at various substations, which will be managed by CIGI.

4 Although all necessary regulatory approvals have been obtained for the restructuring of CILCO, Applicants state that the transfer of CILCO's generating assets to CIGI may be delayed for several months after closing of the proposed transactions in order to enhance CIGI's financing flexibility in the future. Ameren will file a supplemental certificate of notification under rule 24 upon completing the restructuring of CILCO if the restructuring takes place after the proposed transactions close. If the restructuring of CILCO is not completed in one year following closing of the proposed transactions, Ameren states that it will file a post-effective amendment in this proceeding to describe what steps it will take in order to complete the transfer and seek any necessary further approvals.

5 Applicants state that CILCO does not have sufficient unfunded property additions at this time to obtain a complete release of the generation assets under the CILCO Mortgage. Under the CILCO Mortgage, CILCO does not require the trustee's approval to transfer the generating assets to CIGI (although CILCO has notified the trustee of its intent to do so) and also would not require the trustee's approval to transfer CIGI's common stock to CILCORP or another subsidiary of Ameren after the proposed transactions close. In general, the CILCO Mortgage permits CILCO to transfer a portion of its assets, subject to the lien. However, even after the transfer of the assets to CIGI, CILCO will continue to have certain ongoing obligations with respect to the transferred property, such as ensuring that the lien is maintained, taxes are paid and the property is insured. The trustee under the CILCO Mortgage will continue to have recourse against the transferred assets in the event of a CILCO default under the CILCO Mortgage.

6 Applicants state that the term "Assumed Obligations" means the amounts required to be included on CILCORP's balance sheet as of the closing date as long-term debt (including the current portion), short-term debt, capital lease obligations, preferred stock of subsidiaries, and other obligations for borrowed money. Applicants state that the term "Working Capital" means the current assets of CILCORP less current liabilities (not counting in current liabilities any short-term debt or current maturity of long-term debt that is included in Assumed Obligations) as of the closing date. Applicants state that, as agreed to in the Stock Purchase Agreement, "Base Working Capital" is $75 million. Applicants state that the term "Cap Ex Adjustment" represents the amount, if any, by which expenditures by CILCORP for certain capital improvements prior to closing are less or greater than the amounts agreed to under the Stock Purchase Agreement.

7 As previously noted, Ameren's senior unsecured debt is rated A2 by Moody's Investor Service ("Moody's") and A by Standard and Poor's ("S&P"). AES's senior unsecured debt is rated Ba3 by Moody's and B+ by S&P.

8 Following the announcement of the proposed transactions in April 2002, S&P and Fitch Ratings ("Fitch") both indicated in press releases that the proposed transactions are viewed as a positive influence on CILCO's credit worthiness.

9 By order dated April 5, 2001 in File No. 70-9775 (HCAR No. 27374), the Commission authorized Ameren Fuels to provide AmerenUE and AmerenCIPS with the same fuel management services that Ameren Fuels is now proposing to provide to CILCO and CIGI.

10 At September 30, 2002 CILCORP had issued and outstanding 1,000 shares of common stock, no par value, all held by AES. In addition, CILCORP has outstanding the $225 million of 8.7% senior notes, due 2009, and $250 million of 9.375% senior notes, due 2029 (the "CILCORP Senior Notes"), which are secured by a pledge of the common stock of CILCO. The CILCORP Senior Notes are currently rated BB+ by S&P and Baa2 by Moody's. At September 30, 2002, CILCORP did not have any committed bank lines or any outstanding short-term borrowings.

At September 30, 2002, CILCO had issued and outstanding 13,563,871 shares of common stock, no par value, all of which are held by CILCORP; 191,204 shares of cumulative preferred stock, $100 par value, and 220,000 shares of Class A preferred stock, no par value, totaling $41,120,000; and $342,767,000 of long-term debt (including current portion), as follows: two series of first mortgage bonds totaling $115,000,000, with maturities of 2007 and 2022; four series of medium term notes totaling $71,350,000, with maturities ranging from 2003 to 2025; four series of pollution control revenue bonds totaling $52,200,000, with maturities ranging from 2010 to 2023; and bank borrowings and secured credit facilities totaling $104,700,000. At September 30, 2002, CILCO also had in place bank lines totaling $90,000,000, which are used to backstop its commercial paper program, but did not have any commercial paper outstanding.

CILCO's secured long-term debt is currently rated BBB- by S&P and A2 by Moody's. CILCO's commercial paper is currently rated P-1 by Moody's. Following the announcement of the proposed transactions, both CILCO and CILCORP were placed on "credit watch" by S&P, with positive implications to their ratings. Moody's currently has CILCORP and CILCO under review for possible downgrade.

11 Applicants state that CILCORP has outstanding $225 million of 8.7% senior notes, due 2009, and $250 million of 9.375% senior notes, due 2029, that are secured by a pledge of the common stock of CILCO

12 Applicants state that the authority sought for interest rate hedging transactions in this Application is identical to the authorization previously granted to Ameren in SEC File No. 70-9877.

13 "Mirror image" notes issued by CILCO to any Financing Subsidiary will be exempt under rule 52(a) if the conditions of rule 52(a) are satisfied.

14 Applicants state that the creation of any Financing Subsidiary, issuance of securities through these entities, and the use of financing proceeds to make investments will be subject to a comprehensive set of formal internal controls that Ameren has adopted. These include delegation of authority limits on expenditures, board of director budget approvals and comparison of budgets against actual financial results on a monthly basis, daily reconciliations of disbursements from major accounts by the Treasurer's group, monthly review of financial statements of each legal entity in the Ameren system by Ameren's Accounting Manager, Controller and Vice President of Finance, external auditor review of financial statements for each legal entity filing reports under the Securities Exchange Act of 1934 on a quarterly basis, internal audits, and corporate compliance procedures that are applicable to all management employees.

15 Although Staff Accounting Bulletin (SAB) Topic 5-J does not require Ameren to "push down" the purchase accounting to CILCORP, because of the existence of substantial amounts of publicly-held debt of CILCORP, Ameren has nevertheless concluded that CILCORP's stand-alone financial statements would be more meaningful to the public debt holders if they reflected a new basis of accounting. However, the purchase accounting will not be pushed down to the stand-alone accounts of CILCO or its subsidiaries for financial reporting purposes to the Commission, for regulatory reporting to the ICC or FERC, or for any other purpose.

16 CILCORP's existing goodwill, which was created when it was acquired by AES ($579 million at December 31, 2001), will be eliminated and replaced by the goodwill created in the proposed transactions.

17 See, E.ON AG, et al., HCAR No. 27539 (June 14, 2002).

18 This is the same limitation on fees, commissions and expenses approved by the Commission in File No. 70-9877 in connection with the issuance of equity and debt securities by Ameren, see note 11.

19 Applicants received approval from the ICC on December 4, 2002. The order is included as Exhibit D-2 in this file.

20 See Central Illinois Light Company, Docket Nos. 02-0140 (consolidated) and 02-0153 (April 10, 2002), 2002 Ill. PUC LEXIS 414.

21 Ameren's calculation of this amount, and the assumptions used in the calculation, are included as Exhibit K in this file.

22 See Allegheny Energy, Inc., et al., HCAR No. 27579 (Oct. 17, 2002) ("Allegheny").

23 Although the acquisition of CIGI as an EWG would be exempt under section 32(g) of the Act, it could result in Ameren exceeding the limitation under rule 53(a)(1) on use of proceeds of authorized financing to acquire interests in EWGs. After the proposed transactions close, Ameren may file a separate application to request relief from the investment limitation under rule 53(a)(1), and, assuming that relief is obtained, may then choose to seek a new determination from the FERC that CIGI is an EWG.

24 The Commission has authorized registered holding companies to acquire the securities of intermediate non-utility subsidiaries formed exclusively for the purpose of acquiring, financing and holding investments in other exempt and authorized non-utility subsidiaries. See e.g., Ameren Corporation, et al., HCAR No. 27053 (July 23, 1999).

25 The Commission has previously permitted registered holding companies (including Ameren) to retain passive interests in affordable housing projects that qualify for tax credits. See e.g., Ameren Corporation, HCAR No. 26809 (Dec. 30, 1997) ("1997 Merger Order"); WPL Holdings, Inc., 53 S.E.C. 501 (1998); Exelon Corporation, HCAR No. 27256 (Oct. 19, 2000); and CP&L Energy, Inc., HCAR No. 27284 (Nov. 27, 2000). The Commission also recently authorized Ameren to make new investments in such entities pursuant to section 9(c)(3) of the Act. See Ameren Corporation, et al., HCAR No. 27536 (June 3, 2002) (authorizing new investments of up to $125 million in tax credit projects through December 31, 2005).

26 See note 1, above.

27 Section 32 (exempt wholesale generators); and Rule 58(b)(viii) (qualifying facilities and certain other integrated facilities).

28 See note 1, above.

29 Ameren requests that the Commission reserve jurisdiction over its retention of CIM Leasing's railcar lease investments. Ameren will file a post-effective amendment in this proceeding on or before January 31, 2004 to request authorization to retain such lease investments or, alternatively, will commit to divest them as nonretainable interests.

30 See note 2, above.

31 See note 1, above.

32 Ameren requests that the Commission reserve jurisdiction over its retention of Air Leasing. Ameren will file a post-effective amendment in this proceeding on or before January 31, 2004 to request authorization to retain Air Leasing or, alternatively, will commit to divest Air Leasing as a nonretainable interest.

33 This transaction and the status of CLM and the other owner participants in the Springerville lease have been reviewed by the Commission staff. See Tucson Electric Power Company/Springerville, SEC No-Act. LEXIS 1145, dated November 10, 1992. The Commission staff concurred that, on the facts and circumstances presented, CLM and the other owner participants would not be deemed to not "own" an interest in the leased facility, and therefore would not be considered "electric utility companies."

34 Ameren requests that the Commission reserve jurisdiction over its retention of CLM and its subsidiaries. Ameren will file a post-effective amendment in this proceeding on or before January 31, 2004 to request authorization to retain such companies or, alternatively, to commit to divest such companies as nonretainable interests.

35 See note 1, above.

36 Rule 58(b)(1)(i) (energy management services); rule 58(b)(1)(v) (brokering and marketing of energy commodities); and rule 58(b)(1)(vii) (sale of technical, operating, management and other services in various areas, including fuel procurement, delivery and management).

37 EDC, Inc., the Economic Development Council for the Peoria Area, holds the remaining 20% interest in ARDC. Ameren requests that the Commission reserve jurisdiction over its retention of its investment in ARDC. Ameren will file a post-effective amendment in this proceeding on or before January 31, 2004 to request authorization to retain such interest or, alternatively, to commit to divest it as a nonretainable interest.

38 Ameren requests that the Commission reserve jurisdiction over its retention of these investments. Ameren will file a post-effective amendment in this proceeding on or before January 31, 2004 to request authorization to retain such investments or, alternatively, will commit to divest them as nonretainable interests.

39 See note 1, above.

40 Rule 58(b)(1)(vii).

41 See Energy East Corporation, et al., HCAR No. 27546 (June 27, 2002).

42 See 1997 Merger Order (AmerenUE engages directly in steam sales).

43 The Commission has authorized registered electric utility holding companies, including Ameren, to acquire various types of non-utility energy assets, including natural gas production properties. See Ameren Corporation, HCAR No. 27053 (July 23, 1999).

44 Rule 58(b)(1)(vi) (production, conversion, sale and distribution of, among other things, alternative fuels and renewable energy resources). Also, rule 58(b)(1)(x) (development and commercialization of technologies or processes that utilize coal waste products).

 

http://www.sec.gov/divisions/investment/opur/filing/35-27645.htm


Modified: 08/04/2003