SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27835; 70-10078)
Ameren Corporation, et al.
Supplemental Order Releasing Jurisdiction, Ordering Divestiture of Certain Subsidiaries, and Permitting Retention of Certain Subsidiaries
April 15, 2004
Ameren Corporation ("Ameren"), St. Louis, Missouri, a registered public-utility holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), and its subsidiaries CILCORP Inc. ("CILCORP"), an exempt holding company, CILCORP Investment Management Inc. ("CIM"), CILCORP Ventures Inc. ("CVI"), and AmerenEnergy Resources Generating Company ("AERG" formerly known as Central Illinois Generation, Inc.), all of Peoria, Illinois, (collectively, "Applicants"), have filed post-effective amendments ("Amendment") to their previously-filed application ("Application").
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 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 parts of Missouri and Illinois. AmerenCILCO holds all of the outstanding common stock of AERG, an electric utility generating subsidiary to which AmerenCILCO transferred substantially all of its generating assets in October 2003. CIM, through subsidiaries, manages CILCORP's investments in equipment leases, affordable housing projects and non-regulated independent power projects. CVI, through its subsidiary, CILCORP Energy Services, Inc., provides energy-related services and products.
By order dated January 29, 2003, in this proceeding (Holding Co. Act Release No. 27645) ("Prior Order") the Commission authorized CILCORP, AmerenCILCO and AERG to engage in a program of external long-term and short term financing and intrasystem financing transactions for the period through March 31, 2006, subject to various conditions and limitations and subject to a reservation of jurisdiction over the investment grade criteria applicable to long-term debt securities of CILCORP and AERG. In the Prior Order, the Commission also reserved jurisdiction over Ameren's retention of certain indirect non-utility subsidiaries and investments of CILCORP, as described below.
Applicants now (i) request a release of jurisdiction over the investment grade criteria applicable to CILCORP's and AERG's long-term debt securities; and (ii) acknowledging that certain indirect non-utility subsidiaries and investments of CILCORP are not retainable under the standards of the Act, request that the Commission enter an order under section 11(b)(1) of the Act directing Ameren to sell or otherwise dispose of the stock or assets of those subsidiaries.
Modification of Investment Grade Criteria.
Among other specific approvals granted by the Prior Order, the Commission (i) authorized CILCORP to issue and sell in one or more transactions unsecured long-term notes ("Refinancing Notes") for the purpose of refinancing or acquiring certain outstanding senior notes of CILCORP in an aggregate amount equal to the unpaid principal amount of those outstanding senior notes plus any "make whole" premium required to be paid in connection with any prepayment and/or premium paid in connection with any acquisition of those senior notes on the open market, and (ii) authorized AERG to issue from time to time any combination of preferred stock, other preferred securities and long-term debt securities ("Long-term Securities") in an aggregate amount not to exceed $500 million at any time outstanding.
Among other terms and conditions applicable to the Refinancing Notes and the Long-term Securities, the Prior Order states:
Except in accordance with a further order of the Commission in this proceeding, CILCORP and [AERG] will not publicly issue any Refinancing Notes [ . . .] or Long-term Securities [ . . . ], 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 [AERG] 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 use such investment grade criteria.
In accordance with that reservation of jurisdiction under the Prior Order, CILCORP and AERG now request authorization to continue to use the investment grade criteria quoted above after September 30, 2003, with certain modifications to reflect the Commission's current policy on investment grade criteria as applied to securities issued by registered holding companies and their subsidiaries. Specifically, CILCORP and AERG represent that:
No Refinancing Notes or Long-term Securities will be issued by CILCORP or AERG, respectively, in reliance upon the authorization granted by the Commission under the Prior Order, unless (i) the security to be issued, if rated, is rated investment grade; (ii) all outstanding securities of the issuer that are rated are rated investment grade; and (iii) all outstanding securities of the top level registered holding company 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 ("NRSRO"), 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. CILCORP and AERG request that the Commission reserve jurisdiction over the issuance of any such securities that are rated below investment grade. CILCORP and AERG further request that the Commission reserve jurisdiction over the issuance of any guarantee or other securities at any time that the conditions set forth in clauses (i) through (iii) above are not satisfied.
Non-Retainable Interests of CILCORP
Under the Prior Order, the Commission reserved jurisdiction over Ameren's retention of the following direct and indirect subsidiaries and investments of CILCORP's direct subsidiaries CIM and CVI:
(a) Subsidiaries of CIM
CIM Leasing Inc. ("CIM Leasing"), a direct subsidiary of CIM, owns, among other investments, passenger railcars that are leased to a foreign governmental entity under a leveraged lease.
CIM Air Leasing Inc. ("Air Leasing"), also a direct subsidiary of CIM, holds a 40% partnership interest in Freighter Express Partners, which leases a commercial aircraft to Federal Express.
CILCORP Lease Management Inc. ("CLM"), also a direct subsidiary of CIM, holds investments in several leveraged lease transactions. CLM directly holds a 7% interest as an owner participant in an owner-trust that leases Unit No. 1 of the Springerville Power Plant to Tucson Electric Power Company. In addition, CLM has the following wholly-owned subsidiaries which own passive interests in leveraged leases: CLM Inc., IV is a general partner and a limited partner in D.C.L. Leasing Partners Limited Partnership, Ltd. - IV, which leases an office building in California to Xerox Corporation;1 CLM X, Inc., through two wholly-owned subsidiaries (CLM XI, Inc. and CLM Inc., VI) holds general and limited partnership interests in D.C.L. Leasing Partners Limited Partnership, Ltd. - VI, which leases an office building in Delaware to Hercules, Inc. and through CLM Inc., VI also owns an undivided interest in a waste-to-energy electric generating facility with AVI-TWENTE, B.V., which is majority-owned by a number of municipalities in the Netherlands; and CLM Inc. - VII and CLM Inc. VIII each owns a 50% undivided interest in 24 separate commercial real estate properties located in eight states that are leased to Wal-Mart for use in its Sam's Wholesale Clubs operations. At December 31, 2003, CIM's aggregate net investment in the above leveraged leases was approximately $25 million.
(b) Subsidiaries and Investments of CVI
Agricultural Research and Development Corporation ("ARDC"), an 80%-owned subsidiary of CVI2, serves as the conduit for investments in ventures formed to commercialize agricultural research in central Illinois as part of a combined private/government effort to boost the local economy and create jobs in the region. ARDC funds these investments through the Biotechnology Research and Development Corporation ("BRDC"). BRDC provides research grants to universities and other research organizations. ARDC currently owns about 11% of the common stock of BRDC. At December 31, 2003, CVI's investment in ARDC was approximately $30,000.
Other Investments CVI holds a 2% membership interest in Peoria Chiefs Community Baseball Club, L.L.C. ("Peoria Chiefs"), which owns a minor league baseball team, and 4.2% of the outstanding common stock of Peoria Medical Research Corporation ("PMRC"), the general partner of a limited partnership engaged in clinical research. At December 31, 2003, CVI's investment in these entities was approximately $225,000.
Under the Prior Order, the Commission directed Ameren to file a post-effective amendment in this proceeding on or before January 31, 2004 to either request authorization to retain the above-described subsidiaries and investments of CIM and CVI or, alternatively, commit to divest them as non-retainable interests under the Act. The filing of Post-Effective Amendment No. 1 on September 25, 2003 satisfied this requirement.
Section 11(b)(1) of the Act provides that the Commission "may permit as reasonably incidental, or economically necessary or appropriate to the operations" of a registered holding company system "the retention of an interest in any business . . . which the Commission shall find necessary or appropriate in the public interest or for the protection of investors or consumers and not detrimental to the proper functioning" of such holding company system. The Commission has traditionally interpreted this provision as requiring an operating or functional relationship between the non-utility activity and the holding company's core utility business. Section 11(b)(1), by its terms, was not applicable to CILCORP prior to its acquisition by Ameren. Under section 9(c)(3) of the Act, the Commission has also authorized registered holding companies and their subsidiaries to make or retain passive investments (i.e. investments that do not result in the creation of an "affiliate" relationship) "in the ordinary course of business." This provision has been interpreted to permit, among other things, the acquisition or retention of passive investments in low-income housing projects qualifying for tax credits3 and other types of local economic development activities.4 In one case, the Commission authorized a registered holding company to make passive equity investments in leveraged leases for the purpose of obtaining tax benefits in the form of accelerated depreciation and investment credits.5
Ameren has concluded that CIM's leveraged lease investments and CVI's membership interest in the Peoria Chiefs are not retainable under the standards of either section 9(c)(3) or section 11(b)(1) of the Act. With regard to section 11(b)(1), there is no operating or functional relationship between any of these investments and Ameren's core utility operations. With regard to section 9(c)(3), certain of the leveraged lease investments held by CIM are not passive, since CIM is a general as well as a limited partner. Further, CIM has already captured substantially all of the tax benefits (in the form of accelerated depreciation) available under these leases. Likewise, CVI's investment in the Peoria Chiefs is not sufficiently linked to local economic development activity in Ameren's service territory.6 Accordingly, Ameren will undertake to sell or otherwise dispose of (i) all of the stock of CIM Leasing, Air Leasing and CLM and/or the assets (including, without limitation, partnership interests) held by those companies in the leveraged leases described above, and (ii) CVI's membership interest in the Peoria Chiefs (that stock, other interests and assets are collectively referred to hereafter as the "Non-Retainable Interests"), in one or more transactions, to one or more purchasers, on or before January 31, 2006.
Applicants request that if the Commission concurs with Ameren's conclusion that those companies and investments are not retainable, that the Commission's order in this proceeding: (i) declare that the sale or disposition of those companies and investments is necessary or appropriate to the integration or simplification of the Ameren holding company system and to effectuate the provisions of section 11(b)(1); (ii) require Ameren to take the appropriate actions to cause CIM and CVI and/or any subsidiary or either company, as the case may be, to complete the sale or disposition of the Non-Retainable Interests not later than January 31, 2006; (iii) require that the net proceeds from that sale or disposition be utilized within 24 months of their receipt to retire or cancel securities representing indebtedness of the transferor or otherwise expended for property other than "nonexempt property" within the meaning of section 1083 of the Internal Revenue Code, as amended ("Code") or invested as a contribution to the capital, or as paid-in surplus, of another direct or indirect subsidiary of Ameren in a manner that satisfies the nonrecognition provisions of Code section 1081; and (iv) declare that that expenditure or investment by the transferor is necessary or appropriate to the integration or simplification of the Ameren holding company system. This is intended to enable Ameren to obtain the tax treatment for any gain (deferral of gain) on that sale or disposition provided for in section 1081 of the Code.7
Retainable Interests of CILCORP
Ameren asserts that CVI's 4.2% interest in PMRC is retainable under the standards of section 9(c)(3) of the Act. The Commission has previously permitted new registered holding companies to retain passive and/or de minimis investments in ventures formed to promote local economic development through, among other things, investment in research and development of new technologies.8 ARDC's interest in BRDC would be retainable under these same precedents if ARDC owned less than 5% of the voting securities of BRDC. Accordingly, Ameren commits to reducing ARDC's ownership interest in the voting securities of BRDC to below 5% of the total number outstanding on or before January 31, 2006, either by selling some or all of those shares or by converting voting securities of BRDC into non-voting securities.
Rule 54 Analysis
Applicants state that the transactions proposed in the Amendment are also subject to rule 54 under the Act, which provides that in determining whether to approve the issue or sale of any securities for purposes other than the acquisition of an "exempt wholesale generator" ("EWG") or "foreign utility company" ("FUCO") or other transactions unrelated to EWGs or FUCOs, the Commission shall not consider the effect of the capitalization or earnings of subsidiaries of a registered holding company that are EWGs or FUCOs if the criteria of rule 53(a), (b) and (c) are satisfied. Under Rule 53(a), the Commission shall not make certain specified findings under sections 7 and 12 in connection with a proposal by a holding company to issue securities for the purpose of acquiring the securities of or other interest in an EWG, or to guarantee the securities of an EWG, if each of the conditions in its paragraphs (a)(1) through (a)(4) are met, provided that none of the conditions specified in paragraphs (b)(1) through (b)(3) of rule 53 exists.
Applicants state that these standards are met.
Rule 53(a)(1): Ameren's "aggregate investment" (as defined in Rule 53(a)(1)) in EWGs as of December 31, 2003 was $479,020,230, or approximately 26.8% of Ameren's "consolidated retained earnings" (also as defined in rule 53(a)(1)) for the four quarters ended December 31, 2003 ($1,785,326,604). 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 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. 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 utility subsidiaries 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/Declaration relating to investments in EWGs and FUCOs and copies of any related rule 24 certificates, as well as a copy of Ameren's Form U5S, to each of the public service commissions having jurisdiction over the retail rates of Ameren's domestic utility subsidiaries.
In addition, Ameren states that the provisions of rule 53(a) are not made inapplicable to the authorization requested due to the occurrence or continuance of any of the circumstances specified in rule 53(b). Rule 53(c) is inapplicable by its terms.
The fees, commissions and expenses paid or incurred and to be paid or incurred in connection with the proposals in the Amendment are estimated not to exceed $8,000. Applicants state that the proposed transactions are not subject to the jurisdiction of any state commission or of any federal commission other than this Commission.
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 those matters over which jurisdiction is 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 the rules under the Act, that, except as to those matter over which jurisdiction has been reserved, the Application, as amended, be, and hereby is, granted, effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED that jurisdiction is reserved, pending completion of the record, over (i) the issuance by CILCORP or AERG of any Refinancing Notes or Long-Term Securities, respectively, that are rated below investment grade; and (ii) over the issuance by CILCORP or AERG of any such securities at any time that any of the following conditions is not satisfied:
IT IS FURTHER ORDERED, pursuant to section 11(b)(1) of the Act, that Ameren shall take appropriate action to (i) effect the sale of all of its right, title and interest in and to the Non-Retainable Interests on or before January 31, 2006; and (ii) reduce ARDC's ownership interest in the voting securities of BRDC to below 5% of the total number outstanding on or before January 31, 2006, either by selling some or all of those shares or by converting voting securities of BRDC into non-voting securities.
IT IS FURTHER ORDERED that Ameren and CILCORP shall include information on each sale or other disposition of a Non-Retainable Interest in a rule 24 report filed in this proceeding for the calendar quarter in any which such sale or other disposition occurs within 60 days after the end of the first three calendar quarters and 90 days after the end of the last calendar quarter.
IT IS FURTHER ORDERED AND RECITED IN ACCORDANCE WITH section 1081(f) of the Internal Revenue Code of 1986, as amended, that the proposed transactions are necessary or appropriate to the integration or simplification of the Ameren holding company system and will effectuate the provisions of section 11(b)(1) of the Act.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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