ILLINOIS POWER COMPANY INFORMATION STATEMENT
AND 1994 ANNUAL REPORT TO SHAREHOLDERS
notice of annual meeting of shareholders
- ----------------------------------------
Table of Contents
Notice of Annual Meeting . . . . . . . . . . . . . . 2
Information Statement . . . . . . . . . . . . . . . 3
Appendix:
1994 Annual Report to Shareholders . . . . . . . . . A-1
TO THE SHAREHOLDERS OF ILLINOIS POWER COMPANY:
Notice is Hereby Given that the Annual Meeting of
Shareholders of Illinois Power Company (the "Company") will be
held on April 12, 1995, at 10:00 A.M., at its Corporate
Headquarters, 500 South 27th Street, Decatur, Illinois 62525-
1805, for the following purposes:
(1) To elect the Board of Directors for the ensuing year.
(2) To transact any other business which may properly come
before the meeting or any adjournment.
Shareholders of record at the close of business on February
13, 1995, will be entitled to notice of and to vote at the
Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner,
Vice President, General Counsel and Corporate Secretary
Decatur, Illinois
March 15, 1995
IMPORTANT
Only shareholders of the Company are entitled to attend the
Annual Meeting. Shareholders will be admitted upon verification
of record share ownership at the admission desk. Shareholders who
own shares through banks, brokerage firms, nominees or other
account custodians must present proof of beneficial share
ownership (such as a brokerage account statement) at the
admission desk.
information statement (pursuant to Section 14(c) of the
Securities Exchange Act of 1934)
- --------------------------------------------------------
March 15, 1995
(Date first sent or given
to security holders)
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO
SEND US A PROXY.
This Information Statement is furnished in connection with
the Annual Meeting of Shareholders of Illinois Power. The Annual
Meeting will be held on April 12, 1995, at 10:00 A.M., at the
Company's corporate headquarters, 500 South 27th Street, Decatur,
Illinois 62525-1805, for the purposes set forth in the accompanying
Notice of Annual Meeting of Shareholders.
On February 13, 1995 ("Record Date"), Illinova Corporation
("Illinova") beneficially owned all of the 75,643,937 shares of
the Company's Common Stock then outstanding and there were
4,718,365 shares of the Company's Preferred Stock then
outstanding, none of which was held by Illinova.
VOTING RIGHTS
Shareholders of record at the close of business on the
Record Date will be entitled to receive notice of and to vote at
the Annual Meeting. Shareholders who are present at the Annual
Meeting will be entitled to one vote for each share of the
Company's Stock which they held of record at the close of
business on the Record Date.
When voting for candidates nominated to serve as directors,
all shareholders will be entitled to 12 votes (the number of
directors to be elected) for each of their shares and may cast
all of their votes for any one candidate whose name has been
placed in nomination prior to the voting or distribute their
votes among two or more such candidates in such proportions as
they may determine. In voting upon other matters presented for
consideration at the Annual Meeting, each shareholder will be
entitled to one vote for each share of Stock held of record at
the close of business on the Record Date.
ANNUAL REPORT AND INFORMATION STATEMENT
Accompanying this Information Statement, which includes
Consolidated Financial Statements, is a Notice of Annual Meeting
of Shareholders and the Summary Annual Report to Shareholders
covering operations of Illinova for the year 1994. This
Information Statement and accompanying documents are first being
mailed to shareholders on or about March 15, 1995.
BOARD OF DIRECTORS
Information Regarding
the Board of Directors
The Board of Directors held six Board meetings in 1994.
Other than Mr. Vannoy, all directors attended at least 75% of the
aggregate meetings of the Board and Committees of which they were
members during 1994. The Board has two standing committees: the
Audit Committee and the Nuclear Operations Committee.
The duties and members of the standing committees are:
Audit Committee
(1) Review with the Chairman, President and Chief Executive
Officer and the independent accountants the scope and adequacy of
the Company's system of internal controls; (2) review the scope
and results of the annual examination performed by the
independent accountants; (3) review the activities of the
Company's internal auditors; (4) report its findings to the Board
and provide a line of communication between the Board and both
the internal auditors and the independent accountants; and (5)
recommend to the Board the appointment of the independent
accountants and approval of the services performed by the
independent accountants, considering their independence with
regard thereto.
The Audit Committee met three times in 1994.
This Committee consists of the following non-employee
directors ("Outside Directors"): Vernon K. Zimmerman, Chairman,
Richard R. Berry, Donald E. Lasater, Robert M. Powers, Walter M.
Vannoy, and Marilou von Ferstel.
Nuclear Operations Committee
(1) Review the safety, reliability and quality of nuclear
operations; (2) review the effectiveness of the management of
nuclear operations; (3) review the strategic plan of nuclear
operations; and (4) report its findings to the Board.
The Nuclear Operations Committee met three times during
1994.
This Committee consists of the following members of the
Board: Walter M. Vannoy, Chairman, Richard R. Berry, Larry D.
Haab, Donald E. Lasater, Charles W. Wells, and Vernon K.
Zimmerman.
Board Compensation
The Outside Directors of the Company, who also serve on the
Board of Illinova, receive a retainer fee of $18,000 per year.
Outside Directors who also chair Board committees receive an
additional $2,000 per year retainer. Outside Directors receive a
grant of 600 shares of Illinova Common Stock on the date of
each Annual Shareholders Meeting, representing payment in lieu of
attendance-based fees for all Board and Committee meetings to be
held during the subsequent one-year period. Outside Directors
elected to the Board between Annual Shareholders Meetings are
paid $850 for each Board and Committee meeting attended prior to
the first Annual Shareholders Meeting after their election to
the Board.
Illinova has a Retirement Plan for Outside Directors. Under
this plan, each Outside Director who has attained age 65 and has
served on the Board for a period of 60 or more consecutive months
is eligible for annual retirement benefits at the rate of the
annual retainer fee in effect when the director retires. These
benefits, at the discretion of the Board, may be extended to
Outside Directors who have attained the age of 65 but not served
on the Board for the specified period. The benefits are payable
for a number of months equal to the number of months of Board
service, subject to a maximum of 120 months, and cease upon the
death of the retired Outside Director.
Pursuant to a Deferred Compensation Plan for Certain
Directors, Outside Directors of the Company may elect to defer
all or any portion of their fees until termination of their
services as a director. Such deferred dollar amounts are
converted into stock units representing shares of Illinova Common
Stock with the value of each stock unit based upon the closing
price of such stock at the end of each calendar quarter.
Additional credits are made to the participating director's
account in dollar amounts equal to the dividends paid on the
Common Stock which the director would have received if the
director had been the record owner of the shares represented by
stock units, and are converted into additional stock units. Upon
termination of a participating director's services as a director,
payment of the deferred fees is made in shares of Illinova Common
Stock in an amount equal to the aggregate number of stock units
credited to his or her account. Such payment is made in such
number of annual installments as Illinova may determine beginning
in the year following the year of termination.
ELECTION OF DIRECTORS
The Company's entire Board of Directors is elected at each
Annual Meeting of Shareholders. Directors hold office until the
next Annual Meeting of Shareholders and until their successors
are elected and qualified. At the Annual Meeting a vote will be
taken on a proposal to elect the 12 directors nominated by the
Company's Board of Directors. The names and certain additional
information concerning each of the director nominees is set forth
below. Each of the director nominees is currently a director of
the Company. If any nominee should become unable to serve as a
director, another nominee may be selected by the current Board of
Directors.
Year in Which
First Elected
Name of Director Nominee, Age, a Director of
Business Experience and Other Information the Company
- ------------------------------------------------------------
Richard R. Berry, 63 1988
Prior to retirement in February 1990, Mr. Berry was Executive
Vice President and director of Olin Corporation, Stamford,
Connecticut, a diversified manufacturer concentrated in
chemicals, metals and aerospace/defense products, since June
1983.
Larry D. Haab, 57 1986
Chairman, President and Chief Executive Officer of Illinois Power
since June 1991, and an employee of Illinois Power since 1965.
He is a director of First Decatur Bancshares, Inc.,
The First National Bank of Decatur and Firstech, Incorporated.
Donald E. Lasater, 69 1981
Prior to retirement in April 1989, Mr. Lasater was Chairman of
the Board and Chief Executive Officer of Mercantile
Bancorporation, Inc., St. Louis, Missouri, a bank holding
company, since 1970. He is a director of Interco Incorporated,
General American Life Insurance Company and A.P. Green
Industries, Inc.
Donald S. Perkins, 67 1988
Prior to retirement in June 1983, as Chairman of the Executive
Committee, Mr. Perkins was Chairman of the Board and Chief
Executive Officer of Jewel Companies, Inc., Chicago, Illinois, a
diversified retailer, from 1970 to 1980. He is Chairman of the
Board and a director of Kmart Corporation and a director of
AT&T, Aon Corporation, Cummins Engine Company, Inc., Inland
Steel Industries, Inc., LaSalle Street Fund, Inc., The Putnam
Funds, and Time Warner, Inc.
Robert M. Powers, 63 1984
Prior to retirement in December 1988, Mr. Powers was President
and Chief Executive Officer of A. E. Staley Manufacturing
Company, Decatur, Illinois, a processor of grain and oil seeds,
since 1980. He is Chairman of the Board and a director of A. E.
Staley Manufacturing Company, and a director of Tate & Lyle,
PLC.
Walter D. Scott, 63 1990
Professor of Management and Senior Austin Fellow, J. L. Kellogg
Graduate School of Management, Northwestern University,
Evanston, Illinois, since 1988. Previously, Mr. Scott served as
Chairman of GrandMet USA, from 1984 to 1986, and as President
and Chief Executive Officer of IDS Financial Services, from 1980
to 1984. Mr. Scott is a director of Chicago Title and Trust
Company, Chicago Title Insurance Company, Intermatic
Incorporated, and Orval Kent Food Company, Inc.
Ronald L. Thompson, 45 1991
Chairman and Chief Executive Officer of Midwest Stamping and
Manufacturing Co., Bowling Green, Ohio, a manufacturer of
automotive parts, since 1993. He was President and Chief
Executive Officer and a director of The GR Group, Inc., St.
Louis, Missouri a diversified holding company with interests in
manufacturing and service activities, from 1980 to 1993. He is
Chairman of the Board of The GR Group and a director of
McDonnell Douglas Corporation.
Walter M. Vannoy, 67 1990
Chairman of the Board and a director of Figgie International,
Inc., a diversified operating
company serving consumer, industrial, technical, and service
markets world-wide, Willoughby, Ohio, since 1994. He is a
director of Chempower, Inc.
Marilou von Ferstel, 57 1990
Executive Vice President and General Manager of Ogilvy Adams &
Rinehart, Inc., a public relations firm in Chicago, Illinois,
since June 1990. She had previously been Managing Director and
Senior Vice President of Hill and Knowlton, Chicago, Illinois, a
public relations consulting firm, from May 1981 to June 1990.
Ms. von Ferstel is a director of Walgreen Company.
Charles W. Wells, 60 1976
Executive Vice President of Illinois Power Company since 1976.
Mr. Wells has been an employee of Illinois Power since 1956. He
was elected a Vice President in 1972. He is a director of First
of America Decatur N.A.
John D. Zeglis, 47 1993
Senior Vice President, General Counsel and Government Affairs of
AT&T, Basking Ridge, New Jersey, a diversified communications
company, since 1989. He had been Senior Vice President and
General Counsel from 1986 to 1989. He is a director of the
Helmerich & Payne Corporation.
Vernon K. Zimmerman, 66 1973
Director of the Center for International Education Research and
Accounting, and Distinguished Service Professor of Accountancy,
University of Illinois, Urbana, Illinois, since August 1985. He
is a director of First Busey Corporation and Southwestern Life
Corporation.
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table shows shares of Illinova Common Stock
and Illinois Power Preferred Stock beneficially owned as
of January 25, 1995, by each director nominee and the executive
officers named in the Summary Executive Compensation Table.
All owners of more than five percent of Illinois Power Preferred
Stock are also listed.
<TABLE>
<CAPTION>
Number
of Shares
Name of Class Beneficially Percent
Beneficial Owner of Stock Owned (1) of Class
- ----------------------------------------------------------------
<S> <C> <C> <C>
Richard R. Berry Common 2,802 (2)
Larry D. Haab Common 9,647 (2)
Donald E. Lasater Common 3,313 (2)
Donald S. Perkins Common 7,353 (2)
Robert M. Powers Common 6,600 (2)
Preferred 1,200
Walter D. Scott Common 3,200 (2)
Ronald L. Thompson Common 2,391 (2)
Walter M. Vannoy Common 2,700 (2)
Marilou von Ferstel Common 3,353 (2)
Charles W. Wells Common 8,157 (2)
John D. Zeglis Common 1,659 (2)
Vernon K. Zimmerman Common 7,432 (2)
Paul L. Lang Common 2,587 (2)
Larry F. Altenbaumer Common 3,642 (2)
Larry S. Brodsky Common 1,534 (2)
American Express Company (3)Preferred 233,245 16.7%
</TABLE>
(1) The nature of beneficial ownership for shares shown is sole
voting and/or investment power, except for Mr. Powers and Mr.
Wells, who disclaim beneficial ownership of 1,200 shares of
Illinois Power Preferred Stock and 1,000 shares of Illinova
Common Stock, respectively, held in the names of their wives.
(2) Except as indicated above, no director or any executive
officer owns any other equity securities of the Company. No
director or executive officer owns as much as 1% of Illinova
Common Stock. All directors and executive officers of both
Illinova and Illinois Power as a group own 75,791 shares of
Illinova Common Stock (less than 1%).
(3) According to its Form 4 filing, American Express Company,
American Express Tower, World Financial Center, New York, NY
10285, and its subsidiaries owned 233,245 shares of Preferred
Stock, without par value, as of October 25, 1994, as to which
beneficial ownership is disclaimed, with sole power to vote
and dispose of all shares.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation
of the Chief Executive Officer and the four other most highly
compensated executive officers of the Company for the years
indicated. The compensation shown includes all compensation paid
for service to the Company, its parent and subsidiaries.
<TABLE>
Summary Compensation Table
<CAPTION>
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
----------------------------- ---------------------- --------
Restricted
Other Stock Securities LTIP All Other
Bonus Annual Awards Underlying Payouts Compensation
Name and Principal Position Year Salary (1) Compensation (2) Options (3) (4)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Larry D. Haab 1994 $451,375 $42,881 $15,783 $42,881 20,900 shs. $22,869 $3,578
Chairman, President and 1993 437,500 22,531 13,199 20,000 shs. 3,555
Chief Executive Officer of1992 403,958 28,883 7,099 16,000 shs. 3,373
Illinova and Illinois Power
Charles W. Wells 1994 $276,625 $25,242 $12,404 $25,242 8,500 shs. $15,152 $5,533
Executive Vice President 1993 265,875 12,629 9,697 6,500 shs 5,341
of Illinois Power 1992 252,500 16,160 7,034 6,000 shs. 5,129
Paul L. Lang 1994 $213,562 $20,289 $ 8,672 $20,289 6,800 shs. $11,036 $ 543
Senior Vice President 1993 205,625 9,767 7,508 6,000shs. 527
of Illinois Power 1992 188,667 13,490 4,472 5,000 shs. 536
Larry F. Altenbaumer 1994 $196,562 $18,674 $8,975 $18,674 6,800 shs. $ 9,519 $2,007
Chief Financial Officer, 1993 187,750 8,918 7,093 6,000 shs. 2,009
Treasurer and Controller 1992 166,500 10,656 3,588 5,000 shs. 1,867
of Illinova and Senior
Vice President and Chief
Financial Officer of
Illinois Power
Larry S. Brodsky 1994 $174,186 $16,548 $4,973 $16,548 4,400 shs. $ 8,766 $1,587
Senior Vice President 1993 157,875 8,131 4,220 4,500 shs. 1,527
of Illinois Power 1992 146,791 9,395 3,676 3,000 shs. 1,508
</TABLE>
(1) The amounts shown in this column are the cash award portion
of grants made to these individuals under the Executive Incentive
Compensation Plan ("Compensation Plan"), including amounts
deferred under the Executive Deferred Compensation Plan. See the
Compensation Plan description in footnote (2) below.
(2) This table sets forth stock unit awards under the Company's
Compensation Plan. One-half of each year's award under this plan
is converted into stock units representing shares of Illinova
Common Stock based on its closing price on the last trading day
of the award year. The other one-half of the award is paid
to the recipient in cash in the following year and is included
under Bonus in the Summary Compensation Table. Stock units
awarded in a given year, together with cash representing the
accumulated dividend equivalents on those stock
units, become fully vested after a three-year holding period.
Stock units are converted into cash and paid based on the closing
price of Illinova Common Stock on the first trading day of the
distribution year. Participants (or beneficiaries of deceased
participants) whose employment is terminated by retirement on or
after age 55, disability or death receive the present value of
all unpaid awards on the date of such termination. Participants
whose employment is terminated for reasons other than retirement,
disability or death forfeit all unvested awards. In the event of
a termination of employment within two years after a change in
control of the Company, without good cause or by any participant
with good reason, all awards of the participant become fully
vested and payable. As of December 31, 1994, named executive
officers were credited with the following total aggregate number
of unvested stock units under the Compensation Plan, valued on
the basis of the closing price of Illinova Common Stock on
December 31, 1994: Mr. Haab, 4,427 units valued at $96,713; Mr.
Wells, 2,535 units valued at $55,384; Mr. Lang, 2,044 units
valued at $44,653; Mr. Altenbaumer, 1,792 units valued at
$39,157; Mr. Brodsky, 1,596 units valued at $34,880. Although
stock units have been rounded, valuation is based on total
stock units, including partial shares.
(3) The amounts shown in this column reflect the cash value of
the stock units granted in 1992 for the year 1991, including
amounts deferred, under the Compensation Plan. See the
compensation Plan description in footnote (2) above.
(4) The amounts shown in this column are the Company's
contributions under the Incentive Savings Plan (including the
market value of shares of Illinova Common Stock at the time of
allocation).
The following tables summarize grants during 1994 of stock
options under Illinova's 1992 Long-Term Incentive Compensation
Plan ("LTIC Plan") and awards outstanding at year end for the
individuals named in the Summary Compensation Table. No options
were exercisable or exercised during 1994.
<TABLE>
OPTION GRANTS IN 1994
Individual Grants
-------------------------------------
<CAPTION>
Number % of
of Securities Total Options Exercise Grant
Underlying Granted to or Base Date
Options Employees Price Expiration Present
Granted(1) in 1994 Per Share(1) Date Value(2)
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Larry D. Haab 20,900 25% $20.875 6/8/2003 $158,500
Charles W. Wells 8,500 10 20.875 6/8/2003 64,100
Paul L. Lang 6,800 8 20.875 6/8/2003 51,500
Larry F. Altenbaumer 6,800 8 20.875 6/8/2003 51,500
Larry S. Brodsky 4,400 5 20.875 6/8/2003 33,300
</TABLE>
(1) Each option becomes exercisable on June 30, 1997. In
addition to the specified expiration date, the grant expires on
the first anniversary of the recipient's death and/or the 90th
day following retirement, and is not exercisable in the event a
recipient's employment terminates. In the event of certain change-
in-control circumstances, the Compensation and Nominating
Committee may declare the option immediately exercisable. The
exercise price of each option is equal to the fair market value
of Illinova Common Stock on the date of the grant.
(2) The Grant Date Present Value has been calculated using the
Black-Scholes option pricing model. Disclosure of the Grant Date
Present Value, using the Black-Scholes model or potential
realizable value assuming 5% and 10% annualized growth rates, is
mandated by SEC rules; however, the Company and Illinova do not
necessarily view the Black-Scholes pricing methodology, or any
other present methodology, as a valid or accurate means of
valuing stock option grants. Illinova elected to use the standard
Black-Scholes model, which uses the following factors: fair
market value of share at grant; option exercise price; term of
the option; current yield of the stock; risk-free interest rate;
volatility of the stock. The fair market value of the stock on
June 8, 1994, was $20.875; the exercise price of the options is
$20.875; and the term of the option is 10 years. The annual
dividend yield on Illinova Common Stock was 3.623%. The risk-free
interest rate used was 7.50%, based on the yield of a
zero-coupon government bond maturing at the end of the option
term. The volatility of the stock used was 0.1975.
<TABLE>
AGGREGATED OPTION AND FISCAL
YEAR-END OPTION VALUE TABLE
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End at Fiscal Year-End
Name Exercisable/Unexercisable Exercisable/Unexercisable
- -----------------------------------------------------------------
<S> <C> <C>
Larry D. Haab 0 shs./56,900 shs. 0/20,168
Charles W. Wells 0 shs./21,000 shs. 0/8,202
Paul L. Lang 0 shs./17,800 shs. 0/6,562
Larry F. Altenbaumer 0 shs./17,800 shs. 0/6,562
Larry S. Brodsky 0 shs./11,900 shs. 0/4,246
</TABLE>
PENSION BENEFITS
The Company maintains a Retirement Income Plan for Salaried
Employees (the "Retirement Plan") providing pension benefits for
all eligible salaried employees. In addition to the Retirement
Plan, the Company also maintains a nonqualified Supplemental
Retirement Income Plan for Salaried Employees of the
Company (the "Supplemental Plan") that covers all elected
officers eligible to participate in the Retirement Plan and
provides for payments from the general funds of Illinois Power of
any monthly retirement income not payable under the Retirement
Plan because of benefit limits imposed by law or because of
certain Retirement Plan rules limiting the amount of credited
service accrued by a participant.
The following table shows the estimated annual pension
benefits on a straight life annuity basis payable upon retirement
based on specified annual average earnings and years of credited
service classifications, assuming continuation of the Retirement
Plan and Supplemental Plan and employment until age 65. This
table does not show, but any actual pension benefit payments
would be subject to, the Social Security offset.
<TABLE>
ESTIMATED ANNUAL BENEFITS (ROUNDED)
<CAPTION>
Annual
Average 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
Earnings Service Service Service Service Service
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$125,000 $37,500 $50,000 $62,500 $75,000 $87,500
150,000 45,000 60,000 75,000 90,000 105,000
175,000 52,500 70,000 87,500 105,000 122,500
200,000 60,000 80,000 100,000 120,000 140,000
250,000 75,000 100,000 125,000 150,000 175,000
300,000 90,000 120,000 150,000 180,000 210,000
350,000 105,000 140,000 175,000 210,000 245,000
400,000 120,000 160,000 200,000 240,000 280,000
450,000 135,000 180,000 225,000 270,000 315,000
500,000 150,000 200,000 250,000 300,000 350,000
550,000 165,000 220,000 275,000 330,000 385,000
600,000 180,000 240,000 300,000 360,000 420,000
650,000 195,000 260,000 325,000 390,000 455,000
</TABLE>
The earnings used in determining pension benefits under the
Retirement Plan are the participants' regular base compensation,
as set forth under Salary in the Summary Compensation Table.
At December 31, 1994, for purposes of both the Retirement
Plan and the Supplemental Plan, Messrs. Haab, Wells, Lang,
Altenbaumer, and Brodsky had completed 29, 31, 8, 22, and 20
years of credited service, respectively.
EMPLOYEE RETENTION AGREEMENTS
The Company has entered into Employee Retention Agreements
with each of its executive officers. Under each of these
agreements, the officer would be entitled to receive a lump sum
cash payment if his or her employment were terminated by the
Company without good cause or voluntarily by the officer for
good reason within two years following a change in control of
Illinova Corporation (as defined in the Agreement). The amount of
the lump sum payment would be equal to (1) 36 months' salary at
the greater of the officer's salary rate in effect on the date
the change in control occurred or the salary rate in effect on
the date the officer's employment with the Company terminated;
plus (2) three times the largest bonus earned by the officer
during the three calendar years preceding termination of
employment. Under the agreement, the officer would continue,
after any such termination of employment, to participate
in and receive benefits under other benefit plans of the Company.
Such coverage would continue for 36 months following termination
of employment, or, if earlier, until the officer reached age 65
or was employed by another employer; provided that, if the
officer was 50 years of age or older at the time of such
termination, then coverage under health, life insurance and
similar welfare plans would continue until the officer became 55
years of age, at which time he or she would be eligible to
receive the type of coverage extended to the employees of the
Company who elect early retirement.
COMPENSATION AND NOMINATING COMMITTEE
REPORT ON OFFICER COMPENSATION
The six-member Compensation and Nominating Committee of the
Illinova Board of Directors (the "Committee") is composed
entirely of Outside Directors. The Committee's role includes a
review of the performance of the elected officers and the
establishment of specific officer salaries subject to Board
approval. The Committee establishes performance goals for the
officers under the Compensation Plan, approves payments made
pursuant to the Compensation Plan and recommends grants under the
Long-Term Incentive Compensation Plan approved by the
shareholders in 1992. The Committee also reviews other forms of
compensation and benefits making recommendations to the Board on
changes whenever appropriate. The Committee carries out these
responsibilities with assistance from an executive compensation
consulting firm and with input from the Chief Executive Officer
and management as it deems appropriate.
Officer Compensation Philosophy
The Company's compensation philosophy reflects a commitment
to compensate officers competitively with other companies in the
electric and gas utility industry while rewarding executives for
achieving levels of operational excellence and financial returns
consistent with continuous improvement in customer satisfaction
and shareholder value. The Company's compensation policy
is to provide a total compensation opportunity equal to a peer
group of comparable electric utility companies. One-third of the
companies in the compensation group are included in the S&P
Utilities Index. The S&P index covers the utility industry,
broadly including electric, gas, and telecommunications
utilities. After careful consideration, the Committee has decided
to maintain a separate peer group limited to electric or
combination electric and gas companies for compensation purposes.
The compensation program for officers consists of base
salary, annual incentive and long-term incentive components. The
combination of these three elements balances short- and long-term
business performance goals and aligns officer financial rewards
with those of the shareholders. The compensation program is
structured so that, depending on the salary level, between 25 and
35 percent of an officer's total compensation opportunity is
composed of incentive compensation.
Base Salary Plan
The Committee determines base salary ranges for executive
officers based upon competitive pay practices. Officer salaries
correspond to approximately the average of the companies in the
compensation peer group. Individual increases were based on
several factors including the officer's performance during the
year and the relationship of the officer's salary to the market
salary level for the position.
Executive Incentive Compensation Plan
The Board of Directors established this Compensation Plan
for the Company's officers in 1989. Annual incentive awards are
earned based on the achievement of specific annual financial and
operational goals by the officer group as a whole and
consideration of the officer's individual contribution. If
payment is earned under this Compensation Plan, one-half of the
bonus is payable in cash during the year following the award year
and one-half is credited to the participant in the form of
Illinova Common Stock units, the number of which is determined by
dividing half of the earned bonus amount by the closing price of
Illinova Common Stock on the last trading day of the award year.
The officer's interest in the stock units vests at the end of the
three-year period which begins the year after the award year. The
officer receives this award in cash equal to (1) the closing
stock price on the first trading day of the distribution year
times the number of units held plus (2) dividend equivalents
that would have been received if the stock had actually been
issued.
For 1994, awards under the Compensation Plan are based on
achievement in the performance areas: earnings per share,
customer satisfaction, employee teamwork, cost management, and
operating effectiveness. Based on an assessment of performance
relative to the standard set for each goal, each officer is
eligible for the same percentage of base salary. However, 15
percent of the awarded amount is based on an assessment of the
individual officer's performance during the year.
Awards shown under Bonus in the Summary Compensation Table
for performance during 1994 were based on the following results.
Earnings per share and operating effectiveness (as measured by
power plant availability) were better than the threshold level
for the award. Customer satisfaction was at the threshold target
level. Employee teamwork did not result in an award. Cost
management was better than the maximum level for the award.
Long-Term Incentive Compensation Plan
In 1992, the Board of Directors adopted and the Company's
shareholders approved the LTIC Plan. The initial grant of stock
options was made in that year. Awards under the LTIC Plan are
made to individual officers based on their contribution
to corporate performance based on the review of this Committee.
The Committee may grant awards in the form of stock options,
stock appreciation rights, or restricted stock grants. The stock
option grants for the officers named in the Summary Compensation
Table were based on Illinova's philosophy of providing a
total compensation opportunity consistent with the practices and
levels of the compensation peer group. The shares granted to the
officers for 1994 represent a long-term incentive award based on
Illinova, the Company and individual performance as evaluated by
the Chairman and reviewed by the Committee.
CEO Compensation
Larry Haab became Chairman, President and Chief Executive
Officer ("CEO") of the Company on June 12, 1991, and Chairman,
President and Chief Executive Officer of Illinova in December
1993. Mr. Haab's 1994 compensation was based on the policies and
plans described above.
The Committee invokes the active participation of all
Outside Directors in reviewing Mr. Haab's performance before
it makes recommendations regarding his compensation. The
Committee is responsible for administering the processes for
completing this review. The process starts early in the year when
the Board of Directors works with Mr. Haab to establish his
personal goals and short- and long-term strategic goals for
Illinova and the Company. At the conclusion of the year Mr. Haab
reviews his performance with the Outside Directors. The Committee
oversees this review and recommends to the Board appropriate
adjustments to compensation. For 1994 the Committee, with the
participation of all Outside Directors, determined that
almost all goals were achieved and that the results for Illinova
and the Company for the year were excellent. They concluded that
his performance continued to lead Illinova and the Company to the
accomplishment of their strategic objectives.
The 1994 Compensation Plan award for the CEO was calculated
consistent with the determination of awards for all other
officers. Under the terms of the plan, one-half of the award was
paid in cash and one-half was converted to 1,963 stock units
which vest over a three-year period as described above.
The 20,900 option shares granted to the CEO reflect the
Committee's recognition of his work in directing Illinova and the
Company toward their long-term objectives of outstanding customer
satisfaction and sustained growth in shareholder return.
Compensation and Nominating Committee
Donald S. Perkins, Chairman
Robert M. Powers
Walter D. Scott
Ronald L. Thompson
Marilou von Ferstel
John D. Zeglis
COMPLIANCE WITH SECTION 16(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") requires executive officers and directors, and
persons who beneficially own more than ten percent (10%) of the
Company's equity securities registered under the Exchange Act to
file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission ("SEC").
Executive officers, directors and greater than 10 percent
beneficial owners are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms
furnished to the Company and written representations from the
executive officers and directors, the Company believes that all
Section 16(a) filing requirements applicable to its executive
officers and directors were complied with during 1994.
INDEPENDENT AUDITORS
The Board of Directors of the Company has selected Price
Waterhouse LLP as independent auditors for the Company for 1995.
A representative of that firm will be present at the Annual
Meeting and available to make a statement and to respond to
appropriate questions.
OTHER MATTERS
Illinova's 1994 Summary Annual Report to Shareholders was
mailed to the Company's shareholders commencing on March 15,
1995. Copies of the Company's Annual Report on Form 10-K will be
provided to shareholders, after the filing thereof with the SEC
on or before March 31, 1995. Requests should be addressed
to Investor Relations, G-21, Illinois Power Company, 500 South
27th Street, Decatur, Illinois 62525-1805.
Any proposal by a shareholder to be presented at the next
Annual Meeting must be received at the Company's executive
offices not later than October 31, 1995.
OTHER BUSINESS
Management does not know of any matter which will be
presented for consideration at the Annual Meeting other than the
matters described in the accompanying Notice of Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner
Vice President, General Counsel and Corporate Secretary
Decatur, Illinois
March 15, 1995
Illinois Power Company
appendix: 1994 annual report to shareholders
- --------------------------------------------
TABLE OF CONTENTS
Management's Discussion and Analysis . . . . . . . . . . . A-2
Responsibility for Information . . . . . . . . . . . . . A-10
Report of Independent Accountants . . . . . . . . . . . . A-10
Consolidated Statements of Income . . . . . . . . . . . . A-11
Consolidated Balance Sheets . . . . . . . . . . . . . . . A-12
Consolidated Statements of Cash Flows . . . . . . . . . . A-13
Consolidated Statements of Retained Earnings (Deficit) . . A-13
Notes to Consolidated Financial Statements . . . . . . . . A-14
Selected Consolidated Financial Data . . . . . . . . . . . A-32
Selected Statistics . . . . . . . . . . . . . . . . . . . A-33
management's discussion and analysis
- ------------------------------------
In this report, we make reference to the Consolidated
Financial Statements, related Notes to Consolidated Financial
Statements, Selected Consolidated Financial Data and Selected
Statistics for information concerning consolidated financial
position and results of operations. The factors having
significant impact upon consolidated financial position and
consolidated results of operations since January 1, 1992, are
discussed below.
Illinois Power Company (IP) is a subsidiary of Illinova
Corporation (Illinova), a holding company. Illinova was
officially formed on May 27, 1994, with the filing of documents
with the Illinois Secretary of State. Illinova became the
parent of IP through a merger pursuant to a share-for-share
conversion of IP common stock into Illinova common stock. On June
8, 1994, Illinova Generating Company (formerly IP Group, Inc.),
originally a subsidiary of IP, was transferred to Illinova,
establishing Illinova Generating Company as a wholly
owned subsidiary of Illinova. IP is the primary business and
subsidiary of Illinova, and is engaged in the generation,
transmission, distribution and sale of electric energy and the
distribution, transportation and sale of natural gas
in the State of Illinois.
COMPETITION
Competition has become a dominant issue for the electric
utility industry. Competition has been promoted by federal
legislation, starting with the Public Utility Regulatory Policy
Act of 1978, which facilitated the development of co-generators
and independent power producers, and continuing with enactment of
the Energy Policy Act of 1992 which authorized the Federal Energy
Regulatory Commission (FERC) to mandate wholesale wheeling of
electricity by utilities at the request of certain authorized
generating entities and electric service providers. Wheeling is
the transport of electricity generated by one entity over
transmission and distribution lines belonging to another entity.
For many years prior to enactment of the Energy Policy Act, the
FERC imposed wholesale wheeling obligations as a condition of
approving mergers and granting operating privileges, a practice
that continues.
Competition arises not only from co-generation or
independent power production, but from municipalities seeking to
extend their service boundaries to include customers being served
by IP. This is not a new risk in the industry, as the
right of municipalities to have power wheeled to them by
utilities was established in 1973. The Illinois Commerce
Commission (ICC) has been supportive of IP's attempts to maintain
its customer base through approval of special contracts and
flexible pricing that help IP to compete with existing municipal
providers.
Further competition may be introduced by state action or by
further federal regulatory action. While the Energy Policy Act
precludes the FERC from mandating retail wheeling, state
regulators and legislators could open utility franchise
territories to full competition at the retail level. Retail
wheeling involves the transport of electricity to end-use
residential, commercial or industrial customers. Such a change
would be a significant departure from existing regulation in
which public utilities have a universal obligation to serve the
public in return for relatively protected service territories and
regulated pricing designed to allow a reasonable return on
prudent investment and recovery of operating costs. State
attempts to lay the groundwork for retail wheeling have been
hampered by opposition from various interest groups, as well as
the complexity of related issues, including recovery of costs
associated with pre-existing generation investment.
While IP is confident of its present ability to compete with
all current alternate sources of energy supply, the issue of
competition is one that raises both risks and opportunities. At
this time, the ultimate effect of competition on consolidated
financial position and results of operations is uncertain. See
"Note 1 - Summary of Significant Accounting Policies" of the
"Notes to Consolidated Financial Statements" for additional
discussion of the effects of regulation.
OPEN ACCESS AND WHEELING
Under the Energy Policy Act, an investor-owned utility must
respond to any bona fide transmission service request within 60
days. Although the Energy Policy Act created, for the first time,
a FERC-administered mechanism for imposing wholesale wheeling
obligations on utilities, IP has had the obligation to wheel
power for interconnected electricity suppliers since 1976. That
condition was included in IP's Clinton Power Station (Clinton)
construction permit and operating license issued by the Nuclear
Regulatory Commission. IP currently wheels power at rates
originally approved by the FERC in 1984.
Illinova Power Marketing, Inc. (IPM) is a wholly owned
subsidiary of Illinova formed in July 1994. IPM plans to become
active in the business of brokering and marketing electric power
to various customers. In accordance with FERC standards, IPM's
affiliated utility must file an open access transmission tariff
offering transmission services and prices comparable to those
which the utility provides to its customers. IP plans to submit
the comparable open access transmission tariff, designed to
satisfy the FERC's "comparability" requirements, to the FERC
during the first quarter of 1995. It is too soon to predict the
long-term financial impact of increasing transmission access and
other issues arising from such access.
EARLY RETIREMENT
In December 1994, IP announced plans for a voluntary early
retirement program. Approximately 200 salaried employees would
qualify for early retirement under this program. The offer will
be made to employees during the fourth quarter of 1995. A similar
program for union employees is the subject of contract
negotiations currently underway between IP and the International
Brotherhood of Electrical Workers. Approximately 450 union
employees would qualify for the program if current negotiations
result in the same package as offered to salaried employees. At
December 31, 1994, IP employed 4,350 people, as compared
to 4,540 at December 31, 1993.
The early retirement program for salaried employees is
expected to generate a pre-tax charge of approximately $22
million against fourth quarter 1995 earnings and to generate
savings of approximately $15 million annually beginning in 1996.
A combined early retirement program for both salaried and union
employees, based on the same package as announced for salaried
employees, would generate a pre-tax charge of approximately $42
million against fourth quarter 1995 earnings and would generate
savings of approximately $35 million annually beginning in
1996.
CONSOLIDATED RESULTS OF OPERATIONS
Overview
Net income (loss) applicable to common stock was $162
million for 1994, $(82) million for 1993 and $93 million for
1992. The 1994 results include $6.4 million for the excess of
carrying amount over consideration paid for preferred stock
redeemed in December 1994. The 1994 results also reflect an
increase in gas rates as a result of IP's 1994 gas rate order,
increased electric sales, lower operating and maintenance
expenses due to on-going cost management efforts, no Clinton
refueling and maintenance outage and lower financing costs. In
1993, net income applicable to common stock was $118 million,
excluding the September 1993 write-off of disallowed Clinton post-
construction costs of $200 million, net of income taxes. The 1993
net income before the write-off reflects increased
electric and gas sales due to closer-to-normal temperatures,
increased interchange sales, lower operating and maintenance
expenses and lower interest expense as a result of a continued
refinancing program. The 1992 net income was primarily due to the
February 1992 increase in electric rates of 9.2%, which was
modified in August 1992, resulting in a net increase of 7.2%.
Additionally, in 1992 IP reduced its interest expense by retiring
and refinancing certain long-term debt and lowered its electric
depreciation expense as a result of new depreciation rates
approved in the 1992 electric rate case order.
IP operating revenues are based on rates authorized by the
ICC and the FERC. These rates are designed to recover the cost of
service and to allow shareholders a fair rate of return as
determined by the ICC and the FERC. Future electric and natural
gas sales, including interchange sales, will continue to be
affected by an increasingly competitive marketplace, changes in
the regulatory environment, increased transmission access,
weather conditions, competing fuel sources, interchange market
conditions, plant availability, fuel cost recoveries, customer
and IP conservation efforts and the overall economy.
<TABLE>
[GRAPH APPEARS HERE]
OPERATING REVENUES
(in millions of dollars)
<CAPTION>
Year Revenue Amount
- ---- --------------
<S> <C>
1994 1589.5
1993 1581.2
1992 1479.5
1991 1474.9
1990 1469.5
</TABLE>
ELECTRIC OPERATIONS - For the years 1992 through 1994, electric
revenues including interchange increased 8.1% and the gross
electric margin increased 5.5% as follows:
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Electric revenues $1,177.5 $1,135.6 $1,117.9
Interchange revenues 110.0 130.8 73.0
Fuel cost & power purchased (319.2) (313.6) (272.8)
- -----------------------------------------------------------------
Electric margin $ 968.3 $ 952.8 $ 918.1
=================================================================
The components of annual changes in electric revenues are
summarized as follows:
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Price $(23.2) $(30.0) $ 71.2
Volume and other 44.1 72.1 (45.8)
Fuel cost recoveries 21.0 (24.4) (8.7)
- -----------------------------------------------------------------
Revenue increase $ 41.9 $ 17.7 $ 16.7
=================================================================
From 1995 through 1999 electric sales excluding interchange
are expected to increase approximately 2% per year.
1994 - The 3.7% increase in electric revenues was primarily due
to a 6.3% increase in kilowatt-hour sales to ultimate consumers
(excluding interchange sales and wheeling). Volume increases
resulted from higher commercial sales (8.3%) and higher
industrial sales (7.0%) due to an improving economy. Residential
sales remained essentially unchanged from 1993 primarily due to
milder temperatures in 1994 as compared to 1993. Interchange
sales decreased 19.6% primarily due to unusually large sales
opportunities during 1993.
1993 - The 1.6% increase in electric revenues was primarily due
to a 3.2% increase in kilowatt-hour sales to ultimate consumers
(excluding interchange sales and wheeling) reflecting closer-to-
normal temperatures during the summer season. Volume increases
resulted from higher residential sales (9.9%), commercial sales
(6.3%), and industrial sales (.5%). The increase in electric
revenues was partially offset by the reduction in rates resulting
from the August 1992 ICC Rehearing Order. Interchange revenues
increased $57.8 million (79.2%) primarily as a result of
increased sales opportunities.
1992 - The 1.5% increase in electric revenues was primarily due
to the 9.2% rate increase in February 1992, which was modified in
August 1992, resulting in a net increase of 7.2%, partially
offset by decreased usage due to unusually mild weather. Total
kilowatt-hour sales to ultimate consumers (excluding interchange
sales and wheeling) decreased 2.1%. The decreases in residential
sales (10.4%) and commercial sales (1.8%) were due to unusually
cool summer and mild winter temperatures as compared to a warmer
summer and colder winter during 1991. Industrial sales increased
5.8% due to higher usage by several of IP's larger customers. The
14.7% decrease in interchange revenues in 1992 as compared to
1991 was attributable to milder weather.
<TABLE>
[GRAPH APPEARS HERE]
MAJOR SOURCES OF ELECTRIC ENERGY
(in millions of MWH)
<CAPTION>
Year Fossil Nuclear Purchases
- -----------------------------------------------------------------
<S> <C> <C> <C>
1994 13.2 6.4 3.1
1993 13.1 5.1 5.1
1992 13.5 4.3 1.6
- -----------------------------------------------------------------
</TABLE>
The cost of meeting IP's system requirements was reflected
in fuel costs for electric plants and power purchased. Changes in
these costs are summarized as follows:
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Fuel for electric plants
Volume and other $ 13.8 $ 3.5 $(17.4)
Price (14.3) 7.4 (7.9)
Fuel cost recoveries 32.0 (24.6) 7.5
- -----------------------------------------------------------------
31.5 (13.7) (17.8)
Power purchased (25.9) 54.5 (.7)
- -----------------------------------------------------------------
Total increase (decrease) $ 5.6 $40.8 $(18.5)
=================================================================
Weighted average system
generating fuel cost ($/MWH) $12.72 $13.88 $13.77
=================================================================
Changes in these costs were caused by system load
requirements, generating unit availability, fuel prices,
purchased power prices, resale of energy to other utilities and
fuel cost recovery through the Uniform Fuel Adjustment Clause.
<TABLE>
[GRAPH APPEARS HERE]
Equivalent Availability -- Clinton and Fossil
<CAPTION>
Year Clinton Fossil
- -----------------------------------------------------------------
<S> <C> <C>
1994 92% 78%
1993 73% 85%
1992 62% 82%
1991 76% 81%
1990 47% 76%
- -----------------------------------------------------------------
</TABLE>
Changes in factors affecting the cost of fuel for electric
generation are summarized as follows:
- -----------------------------------------------------------------
1994 1993 1992
- -----------------------------------------------------------------
Increase (decrease)
in generation 8.2% 2.5% (7.0%)
Generation mix
Coal and other 67% 72% 75%
Nuclear 33% 28% 25%
=================================================================
1994 - The cost of fuel increased 13.4% and electric generation
increased 8.2%. The increase in fuel cost was attributable to the
effects of the Uniform Fuel Adjustment Clause, partially offset
by a decrease in fossil generation and an increase in lower-cost
nuclear generation. Clinton's equivalent availability and
generation were higher in 1994 as compared to 1993 due to no
refueling and maintenance outage. Clinton's next refueling and
maintenance outage is scheduled to begin in March 1995. Power
purchased for the period decreased $25.9 million. Unusually large
interchange sales opportunities during 1993, not recurring in
1994, were the primary cause of the decrease in purchased power.
<TABLE>
[GRAPH APPEARS HERE]
FUEL COST PER MILLION BTU
(percent of generation)
<CAPTION>
Fuel
Type Cost Percent
- ----------------------------------------------------------------
<S> <C> <C>
Coal $1.42 66.2%
Nuclear .85 33.3
Gas 3.06 .2
Oil 3.89 .3
- ----------------------------------------------------------------
</TABLE>
1993 - The cost of fuel decreased 5.5%, while electric generation
increased 2.5%. The decrease in fuel cost was attributable to the
effects of the Uniform Fuel Adjustment Clause and lower
generation at IP's largest fossil plant. This decrease was
partially offset by an increase in transportation costs due to
flooding in the Midwest and the United Mine Workers' Strike.
Power purchased for the period increased $54.5 million. Coal
delivery concerns and coal conservation measures stemming from
the United Mine Workers' Strike, combined with favorable
interchange prices and increased sales opportunities, contributed
to IP's increase in purchased power. Clinton returned to service
December 10, 1993, after completing its fourth refueling and
maintenance outage which began September 26, 1993.
1992 - The cost of fuel decreased 6.7% and electric generation
decreased at fossil plants as a result of mild weather and a
credit refund from one coal supplier, partially offset by the
effects of the Uniform Fuel Adjustment Clause. The credit refund
resulted from a price reduction arrived at through arbitration
under the applicable coal supply contract. Clinton returned to
service June 1, 1992, after completing a refueling and
maintenance outage that began February 27, 1992.
GAS OPERATIONS - For the years 1992 through 1994, gas revenues,
including transportation, increased 4.6% and the gross margin on
gas revenues increased 11.1% as follows:
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Gas revenues $ 293.2 $ 306.8 $ 281.8
Gas cost (172.4) (187.3) (171.9)
Transportation revenues 8.8 8.0 6.8
- -----------------------------------------------------------------
Gas margin $ 129.6 $ 127.5 $ 116.7
=================================================================
(Millions of therms)
Therms sold 584 597 613
Therms transported 262 229 204
- -----------------------------------------------------------------
Total consumption 846 826 817
=================================================================
Changes in the cost of gas purchased for resale are
summarized as follows:
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Gas purchased for resale
Cost (excluding take-or-pay) $ (6.4) $13.3 $ 1.0
Take-or-pay costs 2.8 5.3 (16.0)
Volume (13.6) (3.4) 16.5
Gas cost recoveries 2.3 .2 2.6
- -----------------------------------------------------------------
Total increase (decrease) $(14.9) $15.4 $ 4.1
=================================================================
Average cost per therm delivered .261 .275 .260
=================================================================
The 1994 decrease in the cost of gas purchased was primarily
due to lower natural gas prices, the expanded use of additional
gas storage and a decrease in therms purchased. Also contributing
to the higher gas margin in 1994 was the 6.1% increase in gas
base rates approved by the ICC in April 1994. The 1993 increase
in the cost of gas purchased was primarily due to an increase in
the price of purchased gas and take-or-pay costs. From 1995
through 1999, gas sales including therms transported are expected
to remain close to 1994 levels. Other Expenses and Taxes. A
comparison of significant increases (decreases) in other expenses
and deferred Clinton costs for the last three years is presented
in the following table:
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Other operating expenses $(9.2) $(2.1) $17.9
Maintenance (11.2) (1.3) 14.9
Depreciation and amortization 12.2 7.9 (15.5)
Deferred Clinton costs (5.8) (1.9) -
=================================================================
The decrease in operating and maintenance expenses for 1994
is due to ongoing re-engineering efforts, improved operating
efficiencies at IP's fossil plants and at Clinton and no
refueling and maintenance outage at Clinton. The decrease
in operating and maintenance expenses for 1993 is primarily due
to decreased costs at Clinton, partially offset by increased
fossil plant maintenance. The Clinton refueling and maintenance
outage and higher administration and general expenses contributed
to the increase in other operating and maintenance expenses
in 1992. The 1994 increase in depreciation expense is due
primarily to a higher utility plant balance in 1994 as compared
to 1993. The 1993 increase in depreciation expense is due
principally to the effects of the adoption of Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes." See "Note 1 - Summary of Significant Accounting Policies"
of the "Notes to Consolidated Financial Statements" for
additional information. The 1992 decrease in depreciation expense
reflects the reduction of the non-Clinton electric plant
composite rate approved in the 1992 rate order. Deferred Clinton
costs decreased in 1994 and 1993 as a result of the September
1993 write-off of disallowed Clinton post-construction costs.
<TABLE>
[GRAPH APPEARS HERE]
OPERATING AND MAINTENANCE EXPENSES
(in millions of dollars)
<CAPTION>
Year Dollars
- -----------------------------------------------------------------
<S> <C>
1994 349.6
1993 370.0
1992 373.4
1991 340.6
1990 365.6
- -----------------------------------------------------------------
</TABLE>
OTHER INCOME AND DEDUCTIONS - Total allowance for funds used
during construction (AFUDC), a non-cash item of income, increased
in 1994 compared to 1993 and 1992. The 1994 increase was due to
higher construction work-in-progress balances eligible for AFUDC,
partially offset by a lower AFUDC rate. The AFUDC effective
rate was 7.0%, 7.5% and 7.5% in 1994, 1993 and 1992,
respectively. The 1994 increase in Miscellaneous-net deductions
was primarily due to a decrease in allocated income taxes.
INTEREST CHARGES - Total interest charges decreased $21.0 million
in 1994, $3.7 million in 1993 and $12.3 million in 1992. These
decreases were primarily due to the refinancing with lower cost
debt or the retirement of debt from 1992 through 1994. From 1992
to 1994, IP retired or refinanced approximately $1.5 billion of
long-term debt, excluding revolving loan agreements, with a
weighted average interest rate of 9.27%. During this time,
approximately $1.4 billion of new debt was issued at a weighted-
average interest rate of 6.97%.
INFLATION - Inflation, as measured by the Consumer Price Index,
was 2.5%, 3.1% and 3.0% in 1994, 1993 and 1992, respectively. The
primary effect of inflation on IP is that historical rather than
current plant costs are recovered in IP's rates.
LIQUIDITY AND CAPITAL RESOURCES
Regulatory Matters
1994 GAS RATE ORDER - On April 6, 1994, the ICC approved an
increase of $18.9 million, or 6.1%, in IP's natural gas base
rates. The increase will be partially offset by savings from
lower gas costs resulting from the expansion of the Hillsboro gas
storage field. The approved authorized rate of return on rate
base is 9.29%, with a rate of return on common equity of 11.24%.
Concurrent with the gas rate increase, IP's gas utility plant
composite depreciation rate decreased to 3.4%.
FERC ORDER 636 - Pursuant to Orders 636 and 636-A, issued in
April and August 1992, respectively, the FERC approved amendments
to its rules that are intended to increase competition among
natural gas suppliers by "unbundling" the interstate pipelines'
merchant sales service into separate sales and transportation
services and by mandating that the pipelines' firm transportation
service be comparable to the transportation service included in
their traditional bundled sales service. As a result of Orders
636 and 636-A, the pipelines are charging their customers
"transition" costs, which arise from unbundling services. IP
estimates that approximately $10.5 million in transition
costs will be incurred. In 1993, IP began to pay transition costs
billed by gas pipelines and to recover these payments through a
tariff rider. On September 23, 1994, the ICC issued a final order
approving recovery of Order 636 transition costs.
Dividends
On October 12, 1994, the Board of Directors of Illinois
Power increased the common stock dividend 25 percent, declaring
the common stock dividend for the first quarter of 1995 at 25
cents per share, payable February 1, 1995, to shareholders of
record as of January 10, 1995. On December 14, 1994, IP declared
preferred stock dividends for the first quarter of 1995, payable
February 1, 1995, to shareholders of record as of January 10,
1995.
Capital Resources and Requirements
IP needs cash for operating expenses, interest and dividend
payments, debt and IP preferred stock retirements and
construction programs. To meet these needs, IP has used
internally generated funds and external financings including the
issuance of preferred stock, debt and revolving lines of credit.
The timing and amount of external financings depend primarily
upon economic and financial market conditions, cash needs and
capitalization ratio objectives. To a significant degree, the
availability and cost of external financing depend upon
the financial health of the company seeking those funds.
Short-term debt is used to meet temporary cash needs for
operations or to meet capital requirements until the timing is
considered appropriate to issue long-term securities.
Cash flow from operations during 1994 provided sufficient
working capital to meet ongoing operating requirements, to
service existing common and preferred stock dividends and debt
requirements and a substantial portion of construction
requirements. Additionally, IP expects current revenues will
enable it to meet future operating requirements and continue to
service its existing debt, preferred and common stock dividends,
sinking fund requirements and all of its anticipated construction
requirements. The current ratings of securities by two principal
securities rating agencies are as follows:
- -----------------------------------------------------------------
Standard
Moody's & Poor's
- -----------------------------------------------------------------
IP first/new mortgage bonds Baa2 BBB
IP preferred stock baa3 BBB-
IP commercial paper P-2 A-2
=================================================================
These ratings are an indication of IP's financial position
and may affect the cost of securities, as well as the willingness
of investors to invest in securities. Under current market
conditions, these ratings are unlikely to impair IP's ability to
issue or significantly increase the cost of issuing additional
securities through external financing. IP has adequate short-term
and intermediate-term bank borrowing capacity.
In 1993, Standard and Poor's (S&P) published revised
standards for review of utility business and financial risks,
based in part on a subjective evaluation of such factors as
anticipated growth in service territory, industrial sales as
a proportion of total revenues, regulatory environment and
nuclear plant ownership. S&P's preliminary assessment placed IP,
along with approximately one-third of the industry, in the "below
average" category. On April 13, 1994, S&P lowered IP's mortgage
bond rating to BBB from BBB+. This action came after S&P reviewed
IP's specific business position in light of the revised
standards.
In February 1994, IP redeemed $12 million of mandatorily
redeemable serial preferred stock and issued $35.6 million of
First Mortgage Bonds, 5.7% Series due 2024 (Pollution Control
Series K). In May, the proceeds of the debt issuance were used to
retire $35.6 million of First Mortgage Bonds, 11 5/8% Series due
2014 (Pollution Control Series D). In August 1994, $100 million
of 8 1/2% debt securities were retired.
Illinois Power Capital, L.P., (IP Capital), is a limited
partnership in which IP serves as a general partner. IP Capital
issued $97 million of tax-advantaged monthly income preferred
securities (MIPS) at 9.45% (5.67% after-tax rate) in
October 1994. The proceeds were loaned to IP and were used to
redeem $79.1 million (principal value) of higher-cost outstanding
preferred stock of IP. The excess of carrying amount of redeemed
preferred stock over consideration paid amounted to $6.4 million
which was recorded in equity and included in net income
applicable to common stock. See "Note 9 - Preferred Stock" of the
"Notes to Consolidated Financial Statements" for additional
information.
In December 1994, IP issued $84.1 million of First Mortgage
Bonds, 7.4% Series due 2024 (Pollution Control Series L). In
March 1995, the proceeds of the debt issuance will be used to
retire $84.1 million First Mortgage Bonds, 10 3/4% Series due
2015 (Pollution Control Series E). See "Note 8 - Long-Term Debt"
of the "Notes to Consolidated Financial Statements" for
additional information.
For the years 1994, 1993 and 1992, changes in long-term debt
and preferred stock outstanding, including normal maturities and
elective redemptions, were as follows:
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Bonds $ (10) $ 35 $(21)
Other long-term debt (100) - (66)
Preferred stock 6 (51) (10)
- -----------------------------------------------------------------
Total decrease $(104) $(16) $(97)
=================================================================
In February 1995, 1994, 1993 and 1992, IP redeemed $12
million of mandatorily redeemable 8% serial preferred stock.
The amounts shown in the preceding table for debt retirements do
not include all mortgage sinking fund requirements.
IP has generally met these requirements by pledging property
additions as permitted under the 1943 mortgage. For additional
information, see "Note 8 - Long-Term Debt" and "Note 9 -
Preferred Stock" of the "Notes to Consolidated Financial
Statements." See "Note 3 - Commitments and Contingencies" of the
"Notes to Consolidated Financial Statements" for information
related to coal and gas purchases, nuclear fuel commitments and
emission allowance purchases.
In 1992, the IP Board authorized a new general obligation
mortgage (New Mortgage), which is intended to replace IP's 1943
Mortgage and Deed of Trust (First Mortgage). Bonds issued under
the New Mortgage are secured by a corresponding issue of First
Mortgage bonds under the First Mortgage. At December 31, 1994,
based upon the most restrictive earnings test contained in
the First Mortgage, IP could issue approximately $691 million of
additional first mortgage bonds for other than refunding
purposes. The amount of available unsecured borrowing capacity
totaled $160 million at December 31, 1994. Also at December 31,
1994, the unused portion of IP bank lines of credit was $250
million. As of December 31, 1994, IP has $120 million of unissued
debt securities and $56.5 million of unissued preferred stock
authorized by the Securities and Exchange Commission in September
1993 and August 1993, respectively.
IP has filed a petition with the ICC seeking approval of a
program whereby IP will reacquire shares of its common stock from
Illinova, from time to time, at prices determined to be
equivalent to current market value. The reacquired stock
will be retained as treasury stock or cancelled. IP expects to
receive ICC approval, and to implement the program, in the first
quarter of 1995.
Construction expenditures for the years 1992 through 1994
were approximately $715.8 million, including $21.7 million of
AFUDC. IP estimates that $1.13 billion will be required for
construction and capital requirements during the 1995-99 period
as follows:
- -----------------------------------------------------------------
Five-Year Period
- -----------------------------------------------------------------
(Millions of dollars) 1995 1995-1999
- -----------------------------------------------------------------
Construction requirements
Electric generating facilities $82 $246
Electric transmission and
distribution facilities 70 296
General plant 28 112
Gas facilities 24 121
- -----------------------------------------------------------------
Total construction requirements 204 775
Nuclear fuel 11 107
Debt retirements - 214
Preferred stock retirements 12 36
- -----------------------------------------------------------------
Total $227 $1,132
=================================================================
Construction and capital requirements are expected to be met
primarily through internal cash generation. The expenditures in
the preceding table do not include any capital expenditures for
compliance with the Clean Air Act. See "Note 3 - Commitments and
Contingencies" of the "Notes to Consolidated Financial
Statements" for additional information.
Environmental Matters
See "Note 3 - Commitments and Contingencies" of the "Notes
to Consolidated Financial Statements" for a discussion of the
Clean Air Act and manufactured-gas plant sites.
Tax and Accounting Matters
IP is subject to the Alternative Minimum Tax (AMT)
provisions of the Internal Revenue Code. As a result, in 1994,
1993 and 1992, federal income tax liabilities were approximately
$51 million, $27 million and $23 million, respectively, greater
than they would have been had IP not been subject to AMT. As of
December 31, 1994, IP had approximately $187 million of AMT
credit carryforwards that can be carried forward indefinitely.
This credit is available to offset regular tax liabilities in
excess of the tentative minimum tax. In 1994, IP continued to
utilize a portion of its tax net operating loss carryforward. As
of December 31, 1994, the balance of the tax net operating loss
carryforward was approximately $25 million.
In October 1994, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 119,
"Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments" (FAS 119). FAS 119 requires
expanded disclosure in the consolidated financial statements
beginning with the year ended December 31, 1994.
responsibility for
information
- -------------------
The consolidated financial statements and all information in
this annual report are the responsibility of management. The
consolidated financial statements have been prepared in
conformity with generally accepted accounting principles
applied on a consistent basis and include amounts that are based
on management's best estimates and judgments. Management also
prepared the other information in the annual report and is
responsible for its accuracy and consistency with the
consolidated financial statements. In the opinion of management,
the consolidated financial statements fairly reflect IPOs
financial position, results of operations and cash flows.
IP believes that the accounting and internal accounting
control systems are maintained so that these systems provide
reasonable assurance that assets are safeguarded against loss
from unauthorized use or disposition and that the financial
records are reliable for preparing the consolidated financial
statements.
The consolidated financial statements have been audited by
IP's independent accountants, Price Waterhouse LLP, in accordance
with generally accepted auditing standards. Such standards
include the evaluation of internal accounting controls to
establish a basis for developing the scope of the examination of
the consolidated financial statements. In addition to the use of
independent accountants, IP maintains a professional staff of
internal auditors who conduct financial, procedural and special
audits. To assure their independence, both Price Waterhouse LLP
and the internal auditors have direct access to the Audit
Committee of the Board of Directors.
The Audit Committee is composed of members of the Board of
Directors who are not active or retired employees of IP. The
Audit Committee meets with Price Waterhouse LLP and the internal
auditors and makes recommendations to the Board of Directors
concerning the appointment of the independent accountants and
services to be performed. Additionally, the Audit Committee meets
with Price Waterhouse LLP to discuss the results of their annual
audit, IPOs internal accounting controls and financial reporting
matters. The Audit Committee meets with the internal auditors to
assess the internal audit work performed, including tests of
internal accounting controls.
/S/Larry D. Haab /s/Larry F. Altenbaumer
- ------------------- ------------------------
Larry D. Haab Larry F. Altenbaumer
Chairman, President Senior Vice President
and Chief Executive Officer and Chief Financial Officer
report of independent accountants
- ---------------------------------
PRICE WATERHOUSE LLP
To the Board of Directors
of Illinois Power Company
In our opinion, the consolidated financial statements of
Illinois Power Company and its subsidiaries appearing on pages A-
11 through A-31 of this report present fairly, in all material
respects, the financial position of Illinois Power Company and
its subsidiaries at December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/Price Waterhouse LLP
- -----------------------------
Price Waterhouse LLP
St. Louis, Missouri
February 1, 1995
<TABLE>
consolidated statements of income
- ---------------------------------
<CAPTION>
(Millions of dollars
- -----------------------------------------------------------------
For the Years Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
OPERATING REVENUES
Electric $1,177.5 $1,135.6 $1,117.9
Electric interchange 110.0 130.8 73.0
Gas 302.0 314.8 288.6
- -----------------------------------------------------------------
Total 1,589.5 1,581.2 1,479.5
- -----------------------------------------------------------------
OPERATING EXPENSES AND TAXES
Fuel for electric plants 266.6 235.1 248.8
Power purchased 52.6 78.5 24.0
Gas purchased for resale 172.4 187.3 171.9
Other operating expenses 260.0 269.2 271.3
Maintenance 89.6 100.8 102.1
Depreciation and amortization 175.8 163.6 155.7
General taxes 130.3 125.6 122.2
Deferred Clinton costs 3.5 9.3 11.2
Income taxes 118.3 106.5 86.2
- -----------------------------------------------------------------
Total 1,269.1 1,275.9 1,193.4
- -----------------------------------------------------------------
Operating income 320.4 305.3 286.1
- -----------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Allowance for equity funds
used during construction 3.8 2.7 1.5
Disallowed Clinton costs - (271.0) -
Income tax effects of disallowed costs - 70.6 -
Miscellaneous-net (5.5) (3.3) (.6)
- -----------------------------------------------------------------
Total (1.7) (201.0) .9
- -----------------------------------------------------------------
Income before interest charges 318.7 104.3 287.0
- -----------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 135.1 154.1 160.8
Other interest charges 8.8 10.8 7.8
Allowance for borrowed funds
used during construction (5.5) (4.5) (3.7)
- -----------------------------------------------------------------
Total 138.4 160.4 164.9
- -----------------------------------------------------------------
Net income (loss) 180.3 (56.1) 122.1
Less-Preferred dividend requirements 24.9 26.1 28.9
Plus-Excess of carrying amount over
consideration paid for redeemed
preferred stock 6.4 - -
- -----------------------------------------------------------------
Net income (loss) applicable
to common stock $161.8 ($82.2) $93.2
=================================================================
</TABLE>
See notes to consolidated financial statements which are an
integral part of these statements.
<TABLE>
consolidated balance sheets
- ---------------------------
<CAPTION>
(Millions of dollars)
- -----------------------------------------------------------------
December 31, 1994 1993
ASSETS
<S> <C> <C>
Utility Plant, at original cost
Electric (includes construction work in progress
of $202.8 million and $218.7
million, respectively) $6,023.1 $5,889.4
Gas (includes construction work in progress of
$16.8 million and $18.8 million,
respectively) 606.1 589.9
- -----------------------------------------------------------------
6,629.2 6,479.3
Less -- accumulated depreciation 2,102.7 1,974.6
- -----------------------------------------------------------------
4,526.5 4,504.7
Nuclear fuel in process 6.2 6.6
Nuclear fuel under capital lease 111.5 128.5
- -----------------------------------------------------------------
4,644.2 4,639.8
- -----------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS 15.4 15.4
- -----------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 47.9 9.3
Accounts receivable (less allowance for doubtful
accounts of $3 million and $4 million,
respectively)
Service 110.4 85.2
Other 52.6 37.5
Accrued unbilled revenue 78.9 49.0
Materials and supplies, at average cost
Fossil fuel 18.7 17.0
Gas in underground storage 23.1 23.2
Operating materials 92.1 91.4
Prepaid and refundable income taxes 11.5 14.7
Prepayments and other 23.4 17.0
- -----------------------------------------------------------------
458.6 344.3
- -----------------------------------------------------------------
DEFERRED CHARGES
Deferred Clinton costs 110.8 114.3
Recoverable income taxes 147.3 108.0
Other 219.5 223.3
- -----------------------------------------------------------------
477.6 445.6
- -----------------------------------------------------------------
$5,595.8 $5,445.1
=================================================================
CAPITAL AND LIABILITIES
CAPITALIZATION
Common stock -- No par value, 100,000,000
shares authorized; 75,643,937
shares outstanding, stated at $1,424.6 $1,424.6
Retained earnings (deficit) 51.1 (71.0)
Less -- Capital stock expense 9.7 10.8
- -----------------------------------------------------------------
Total common stock equity 1,466.0 1,342.8
- -----------------------------------------------------------------
Preferred stock 321.7 303.7
Mandatorily redeemable preferred
stock 36.0 48.0
Long-term debt 1,946.1 1,926.3
- -----------------------------------------------------------------
Total capitalization 3,769.8 3,620.8
- -----------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable 108.2 128.4
Notes payable 238.8 92.3
Long-term debt and lease obligations
maturing within one year 33.5 187.7
Dividends declared 23.4 49.9
Taxes accrued 32.3 32.0
Interest accrued 38.4 64.6
Other 55.8 51.4
- -----------------------------------------------------------------
530.9 606.3
- -----------------------------------------------------------------
DEFERRED CREDITS
Accumulated deferred income taxes 981.4 906.6
Accumulated deferred investment tax credits 230.9 230.5
Other 82.8 80.9
- -----------------------------------------------------------------
(Commitments and Contingencies Note 3) 1,295.1 1,218.0
- -----------------------------------------------------------------
$5,595.8 $5,445.1
=================================================================
</TABLE>
See notes to consolidated financial statements which are an
integral part of these statements.
<TABLE>
consolidated statements of cash flows
- -------------------------------------
<CAPTION>
(Millions of dollars)
- -----------------------------------------------------------------
For the Years Ended December 31, 1994 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $180.3 ($56.1) $122.1
Items not requiring (providing) cash --
Disallowed Clinton costs,
net of income tax - 200.4 -
Depreciation and amortization 178.8 167.3 157.7
Allowance for funds used during
construction (9.3) (7.2) (5.2)
Deferred income taxes 38.9 67.9 56.6
Deferred Clinton costs 3.5 9.3 11.2
Changes in assets and liabilities --
Accounts and notes receivable (40.2) (21.3) 25.1
Accrued unbilled revenue (29.9) 42.9 (4.7)
Materials and supplies (2.3) 6.2 (2.2)
Accounts payable (19.7) 13.8 6.7
Interest accrued and other, net (19.9) (26.6) 7.2
- -----------------------------------------------------------------
Net cash provided by operating
activities 280.2 396.6 374.5
- -----------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (193.7) (277.7) (244.4)
Allowance for funds used during
construction 9.3 7.2 5.2
Other investing activities (2.4) (2.1) 9.7
- -----------------------------------------------------------------
Net cash used in investing
activities (186.8) (272.6) (229.5)
- -----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock (86.6) (88.0) (90.2)
and preferred stock
Redemptions --
Short-term debt (258.2) (254.5) (221.6)
Long-term debt (230.0) (832.0) (480.6)
Preferred stock (91.0) (94.4) (10.0)
Issuances --
Short-term debt 404.7 279.7 412.7
Long-term debt 119.8 866.8 269.0
Preferred stock 97.0 43.5 -
Premium paid on redemption of
long-term debt (2.8) (25.8) (14.6)
Other financing activities (7.7) (18.7) (12.0)
- -----------------------------------------------------------------
Net cash used in financing
activities (54.8) (123.4) (147.3)
- -----------------------------------------------------------------
Net change in cash and cash
equivalents 38.6 .6 (2.3)
Cash and cash equivalents at
beginning of year 9.3 8.7 11.0
- -----------------------------------------------------------------
Cash and cash equivalents at
end of year $47.9 $9.3 $8.7
=================================================================
</TABLE>
<TABLE>
consolidated statements of retained earnings (deficit)
- ------------------------------------------------------
<CAPTION>
(Millions of dollars)
- -----------------------------------------------------------------
For the Years Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Balance (deficit) at
Beginning of Year ($71.0) $41.0 $75.8
Net Income (loss) before dividends 180.3 (56.1) 122.1
- -----------------------------------------------------------------
109.3 (15.1) 197.9
- -----------------------------------------------------------------
Less-
Dividends-
Preferred stock 11.1 20.1 51.6
Common Stock 53.5 35.8 105.3
Plus-
Excess of carrying amount
over consideration paid
for redeemed preferred stock 6.4 - -
- -----------------------------------------------------------------
(58.2) (55.9) (156.9)
- -----------------------------------------------------------------
Balance (deficit) at End of Year $51.1 ($71.0) $41.0
=================================================================
</TABLE>
See notes to consolidated financial statements which are an
integral part of these statements.
notes to consolidated financial statements
- ------------------------------------------
Note 1 Summary of Significant Accounting Policies
- -------------------------------------------------
Principles of Consolidation Illinois Power Company (IP) is a
subsidiary of Illinova Corporation (Illinova), a holding company.
Illinova was officially formed on May 27, 1994, with the filing
of documents with the Illinois Secretary of State. Illinova
became the parent of IP through a merger pursuant to a share-for-
share conversion of IP common stock into Illinova common stock.
On June 8, 1994, Illinova Generating Company (formerly IP Group,
Inc.), originally a subsidiary of IP, was transferred to
Illinova, establishing Illinova Generating Company as a wholly
owned subsidiary of Illinova. The transfer of Illinova Generating
Company and other equity to Illinova is reflected in the 1993 and
1994 Consolidated Statements of Retained Earnings (Deficit) as a
component of common stock dividends. IP is the primary business
and subsidiary of Illinova, and is engaged in the generation,
transmission, distribution and sale of electric energy and the
distribution, transportation and sale of natural gas in the State
of Illinois. The consolidated financial statements include the
accounts of IP, a combination electric and gas utility, and
Illinois Power Capital, L.P. See "Note 9 - Preferred Stock" for
additional information.
All significant intercompany balances and transactions have
been eliminated from the consolidated financial statements. Prior
year amounts have been restated on a basis consistent with the
December 31, 1994, presentation.
REGULATION - IP is subject to regulation by the Illinois Commerce
Commission (ICC) and the Federal Energy Regulatory Commission
(FERC) and, accordingly, prepares its consolidated financial
statements based on the concepts of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" (FAS 71), which require that the
effects of the ratemaking process be recorded. Such effects
primarily concern the time at which various items enter the
determination of net income in order to follow the principle of
matching costs and revenues. Accordingly, IP records various
regulatory assets and liabilities to reflect the actions of
regulators. Management believes that IP currently meets the
criteria for continued application of FAS 71, but will
continue to evaluate significant changes in the regulatory and
competitive environment to assess IP's overall compliance with
such criteria. These criteria include:
(1) whether rates set by regulators are designed to recover the
specific costs of providing regulated services and products to
customers; and (2) whether regulators continue to establish rates
based on cost. In the event that management determines that IP no
longer meets the criteria for application of FAS 71, an
extraordinary noncash charge to income would be recorded in order
to remove the effects of the actions of regulators from the
consolidated financial statements. The discontinuation of
application of FAS 71 would likely have a material adverse effect
on IP's consolidated financial position and results of
operations. IP's principal accounting policies are:
UTILITY PLANT - The cost of additions to utility plant and
replacements for retired property units is capitalized. Cost
includes labor, materials and an allocation of general and
administrative costs, plus an allowance for funds used
during construction (AFUDC) as described below. Maintenance and
repairs, including replacement of minor items of property, are
charged to maintenance expense as incurred. When depreciable
property units are retired, the original cost and dismantling
charges, less salvage value, are charged to accumulated
depreciation.
REGULATORY ASSETS - Regulatory assets include deferred Clinton
Power Station (Clinton) post-construction costs, unamortized debt
discount, premium and expense, recoverable income taxes, deferred
electric fuel and purchased gas costs and manufactured-gas plant
site cleanup costs.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - The FERC Uniform
System of Accounts defines AFUDC as the net costs for the period
of construction of borrowed funds used for construction purposes
and a reasonable rate on other funds when so used. AFUDC is
capitalized at a rate that is related to the approximate weighted
average cost of capital. In 1994, 1993 and 1992, the pre-tax rate
used for all construction projects was 7.0%, 7.5% and 7.5%,
respectively. Although cash is not currently realized from the
allowance, it is realized under the ratemaking process over the
service life of the related property through increased revenues
resulting from a higher rate base and higher depreciation
expense.
DEPRECIATION - For financial statement purposes, IP depreciates
the various classes of depreciable property over their estimated
useful lives by applying composite rates on a straight-line
basis. In 1994, 1993 and 1992, provisions for depreciation were
2.8% of the average depreciable cost for Clinton. Provisions
for depreciation for all other electric plant were 2.5% in 1994,
1993 and 1992. Provisions for depreciation of gas utility plant,
as a percentage of the average depreciable cost, were equivalent
to 4% in 1993 and 1992. Effective with the April 6, 1994, ICC
order in IP's gas rate case, the gas depreciation rate was
lowered to 3.4%.
AMORTIZATION OF NUCLEAR FUEL - IP leases nuclear fuel from
Illinois Power Fuel Company under a capital lease. Amortization
of nuclear fuel (including related financing costs) is determined
on a unit of production basis. See "Note 3 - Commitments and
Contingencies" for discussion of decommissioning and nuclear
fuel disposal costs. A provision for spent fuel disposal costs is
charged to fuel expense based on kilowatt-hours generated.
Deferred Clinton Costs In accordance with an ICC order in April
1987, IP began deferring certain Clinton post-construction
operating and financing costs until rates to reflect such costs
became effective (April 1989). After issuance of the
March 1989 ICC rate order, deferral of Clinton post-construction
costs ceased and amortization of the previously deferred post-
construction costs over a 37.5-year period commenced. Although
cash is not currently realized from these deferrals, it is
realized under the ratemaking process over the service life of
Clinton through increased revenues resulting from a higher rate
base and higher amortization expense. See "Note 2 - Clinton Power
Station" for additional information.
UNAMORTIZED DEBT DISCOUNT, PREMIUM AND EXPENSE - Discount,
premium and expense associated with long-term debt are amortized
over the lives of the related issues. Costs related to refunded
debt are amortized over the lives of the related new debt issues
or the remaining life of the old debt if no new debt is
issued.
REVENUE AND ENERGY COST - IP records revenue for services
provided but not yet billed to more closely match revenues with
expenses. Unbilled revenues represent the estimated amount
customers will be billed for service delivered from the
time meters were last read to the end of the accounting period.
Operating revenues include related taxes that have been billed to
customers in the years 1994, 1993 and 1992 in the amount of $66
million, $65 million and $61 million, respectively. The cost of
fuel for the generation of electricity, purchased power and gas
purchased for resale is recovered from customers pursuant to the
electric fuel and purchased gas adjustment clauses. Accordingly,
allowable energy costs that are to be passed on to customers in a
subsequent accounting period are deferred. The recovery of costs
deferred under these clauses is subject to review and approval by
the ICC. On April 6, 1994, the ICC approved an increase of $18.9
million, or 6.1%, in IP's natural gas base rates. The increase
will be partially offset by savings from lower gas costs
resulting from the expansion of the Hillsboro gas storage
field. The approved authorized rate of return on rate base is
9.29%, with a rate of return on common equity of 11.24%.
INCOME TAXES - Under Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (FAS 109), deferred tax
assets and liabilities are recognized for the tax consequences of
transactions that have been treated differently for financial
reporting and tax return purposes, measured on the basis of the
statutory tax rates. In accordance with FAS 71, a regulatory
asset (Recoverable income taxes) has been recorded representing
the probable recovery from customers of additional deferred
income taxes established under FAS 109.
Investment tax credits used to reduce federal income taxes
have been deferred and are being amortized to income over the
"service life" of the property that gave rise to the credits. IP
is included in Illinova's consolidated federal income tax return.
Income taxes are allocated to the individual companies based
on their respective taxable income or loss. See "Note 6 - Income
Taxes" for additional discussion.
PREFERRED DIVIDEND REQUIREMENTS - Preferred dividend requirements
reflected in the consolidated income statements are recorded on
the accrual basis and relate to the period for which the
dividends are applicable.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Cash and cash equivalents
include cash on hand and temporary investments purchased with an
initial maturity of three months or less. Capital lease
obligations not affecting cash flow increased by $28 million, $27
million and $14 million during 1994, 1993 and 1992,
respectively. Income taxes and interest paid are as follows:
Years ended December 31,
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Income taxes $ 72.1 $ 26.0 $ 27.5
Interest $165.9 $166.4 $177.3
=================================================================
The increase in income taxes paid from 1993 to 1994 was due
to an increase in taxable income and the settlement of an IRS
audit. The results of the settlement did not have a material
effect on IP's consolidated financial position or results of
operations. See "Note 6 - Income Taxes" for additional
information.
SALE OF ACCOUNTS RECEIVABLE AND ACCRUED UNBILLED REVENUE - In
June 1993, IP entered an agreement for the sale of an undivided
interest in a designated pool of IP's accounts receivable and
accrued unbilled revenue up to a maximum of $50 million. At
December 31, 1993, $15 million of accounts receivable and $35
million of accrued unbilled revenue had been sold. In December
1994, IP bought back all of the accounts receivable and accrued
unbilled revenue that were sold under the agreement. All costs
associated with the agreement have been reflected in Other Income
and Deductions, "Miscellaneous-net," on IP's Consolidated
Statements of Income.
FORWARD CONTRACTS - Realized and unrealized gains and losses on
forward contracts held as hedges of interest rate exposure are
deferred and recognized as interest expense over the lives of the
hedged liabilities.
INTEREST RATE CAP - Premiums paid for the purchased interest rate
cap agreement are being amortized to interest expense over the
terms of the cap. Unamortized premiums are included in Deferred
Charges, "Other" in the Consolidated Balance Sheets. Amounts
received under the cap agreement are recognized as a reduction
in interest expense.
TRANSACTIONS WITH ILLINOVA - In addition to transfers of capital
reflected in the Consolidated Statements of Retained Earnings
(Deficit), IP provided approximately $20 million in funds to
Illinova for operations and investments during 1994. Illinova is
paying IP interest on these funds at a rate equal to that which
Illinova would have paid had it used a currently outstanding line
of credit. In addition, Illinova and IP have recorded an
intercompany payable and receivable, respectively, for
approximately $23.5 million in order to recognize the effect on
the Employees Stock Ownership Plan of the conversion of IP common
stock to Illinova common stock concurrent with the formation of
Illinova. This was a noncash transaction. See "Note 10 - Common
Stock and Retained Earnings" for additional information.
Note 2 Clinton Power Station
- ----------------------------
IP and Soyland Power Cooperative, Inc. (Soyland) share
ownership of Clinton, with IP owning 86.8% and Soyland owning
13.2%. IP's ownership percentage is reflected in utility plant
(at original cost) and in accumulated depreciation in the
Consolidated Balance Sheets. Clinton was placed in service in
1987 and represents approximately 18% of IP's installed
generation capacity. The investment in Clinton and its related
deferred costs represented approximately 52% of IP's total assets
at December 31, 1994. IP's 86.8% share of Clinton-related costs
represented 32% of IP's total 1994 other operating, maintenance
and depreciation expenses. Clinton's equivalent availability was
92%, 73% and 62% for 1994, 1993 and 1992, respectively. Clinton's
equivalent availability was higher in 1994 due to no
refueling outage.
Ownership of an operating nuclear generating unit exposes IP
to significant risks, including increased and changing
regulatory, safety and environmental requirements and the
uncertain future cost of closing and dismantling the unit. IP
expects to be allowed to continue to operate Clinton; however, if
any unforeseen or unexpected developments would prevent IP from
doing so, IP could be materially adversely affected. See "Note 3
- - Commitments and Contingencies" for additional information.
RATE AND REGULATORY MATTERS
1992 RATE ORDER - A September 1993 decision by the Illinois
Appellate Court, Third District (Appellate Court Decision),
upheld key components of the August 1992 Rehearing Order
(Rehearing Order) issued by the ICC. The Rehearing Order denied
IP recovery of certain deferred Clinton post-construction costs,
which were composed of all deferred depreciation and real estate
taxes and 72.8% of the deferred common equity return.
IP originally recorded these deferred Clinton post-
construction costs as a regulatory asset when such costs were
believed probable of recovery through future rates, based on
prior ICC orders. The deferred costs were recorded from
the time Clinton began operations (April 1987) to the time the
ICC allowed IP to begin recovering these deferred costs in rates
(March 1989), otherwise known as the regulatory lag period.
Based upon IP's assessment of the Appellate Court Decision
and in accordance with FAS 71, IP recorded a loss of $271 million
($200 million, net of income taxes) in September 1993. This write-
off included revenues and related interest of approximately $8.9
million to be refunded for deferred costs included in electric
rates between April 1992 and August 1992, which were disallowed
by the Rehearing Order.
The Appellate Court Decision remanded the case to the ICC
for further proceedings to determine the amount of actual
financial harm incurred by IP during the regulatory lag period.
The decision also remanded the case for verification of the
calculation of the amortization of deferred Clinton post-
construction costs from March 1989 to June 1992.
On February 25, 1994, IP and the remaining parties to this
case presented a joint motion to the Appellate Court requesting
entry of an order remanding the case to the Commission for
further pro-ceedings in accordance with a stipulated agreement of
the parties. The Appellate Court granted the joint motion on
March 2, 1994. On March 16, 1994, the ICC issued an order on
remand that did not result in any change in IP's rates from those
adopted in the Rehearing Order. The order on remand required IP
to refund $8.9 million of revenue that had been collected between
April and August 1992 subject to refund. The refunds began in
March 1994 and were completed in October 1994.
1987 UNIFORM FUEL ADJUSTMENT CLAUSE RECONCILIATION - In January
1994, the ICC issued an order on remand consistent with an
Illinois Appellate Court, Third District, decision which held
that evidence did not support the findings in a February 1992 ICC
order that IP incurred $29.3 million in imprudent nuclear fuel
procurement and management costs. As a result of the Appellate
Court decision and subsequent related ICC orders, IP is in the
process of recovering approximately $12.7 million of nuclear fuel
costs, which will not have an impact on consolidated results of
operations.
Note 3 Commitments and Contingencies
- ------------------------------------
COMMITMENTS - Estimated construction requirements in 1995 are
$204 million, which includes $152 million for electric
facilities, $24 million for gas facilities and $28 million for
general plant. The five-year construction program for 1995
through 1999 is estimated to be $775 million. These expenditures
do not include capital expenditures for compliance with the Clean
Air Act, as discussed below.
In addition, IP has substantial commitments for the purchase
of coal under long-term contracts. Coal contract commitments for
1995 through 1999 are estimated to be $779 million (excluding
price escalation provisions). Total coal purchases for 1994, 1993
and 1992 were $191 million, $184 million and $186 million,
respectively. IP has existing contracts with various natural gas
suppliers and interstate pipelines to provide natural gas supply,
transportation and leased storage. Committed natural gas,
transportation and leased storage costs (including pipeline
transition costs) for 1995 through 1999 are estimated to total
$75 million. Total natural gas purchased for 1994, 1993 and 1992
was $168 million, $188 million and $184 million, respectively.
IP's share of nuclear fuel commitments for Clinton is
approximately $22 million for uranium concentrates through 1998,
$8.4 million for conversion through 2002, $51 million
for enrichment through 1999 and $164 million for fabrication
through 2017. IP has commitments for emission allowances through
1999 estimated at $101 million. It is anticipated that all of
these costs will be recoverable under IP's electric fuel and
purchased gas adjustment clauses, if found by the ICC to be
prudently incurred.
INSURANCE - IP maintains insurance on behalf of IP and Soyland
for certain losses involving the operation of Clinton. One
insurance program provides coverage for physical damage to the
plant. Based upon a review of this insurance, IP has reduced its
limits from $2.7 billion to $1.6 billion effective December 15,
1994. IP's insurance program has two layers: 1) a primary layer
of $500 million provided by nuclear insurance pools; and 2) an
excess coverage layer of $1.1 billion provided by an industry-
owned mutual insurance company. In the event of an accident with
an estimated cost of reactor stabilization and site
decontamination exceeding $100 million, Nuclear Regulatory
Commission (NRC) regulations require that insurance proceeds be
dedicated and used first to return the reactor to, and maintain
it in, a safe and stable condition. After providing for
stabilization and decontamination, the insurers would then cover
property damage up to a total payout of $1.38 billion. Second,
the NRC requires decontamination of the reactor and reactor
station site in accordance with a plan approved by the NRC. The
insurers would provide up to $220 million to cover
decommissioning costs in excess of funds already collected for
decommissioning, as discussed later. In the event insurance
limits are not exhausted, the excess coverage may also be applied
to a portion of the value of the undamaged property. In addition,
while IP has no reason to anticipate a serious nuclear accident
at Clinton, if such an incident should occur, the claims for
property damage and other costs could materially exceed the
limits of current or available insurance coverage. IP also
carries approximately $.9 million per week of business
interruption insurance coverage for its ownership share of
Clinton through the industry-owned mutual insurance company in
the event of an extended shutdown of Clinton due to accidental
property damage. This insurance does not provide coverage until
Clinton has been out of service for 21 weeks. Thereafter,
the insurance provides up to 156 weeks of coverage.
Multiple major losses covered under the current property
damage and business interruption insurance coverages involving
Clinton or other stations insured by the industry-owned mutual
insurance company could result in retrospective premium
assessments of up to approximately $13 million. About $12 million
of this assessment would be allocated between IP and Soyland
based on their respective ownership interests in Clinton.
All United States nuclear power station operators are
subject to the Price-Anderson Act. Under that Act, public
liability for a nuclear incident is currently limited to $8.9
billion. Coverage of the first $200 million is provided by
private insurance. Excess coverage is provided by retrospective
premium assessments against each licensed nuclear reactor in the
United States. Currently, the liability to these reactor
operators/owners for such an assessment would be up to $79.3
million per incident, not including premium taxes which may be
applicable, payable in annual installments of not more than
$10 million.
A Master Worker Policy covers worker tort claims alleging
bodily injury, sickness or disease as a result of initial
radiation exposure occurring on or after January 1, 1988. The
policy has an aggregate limit of $200 million applying to the
commercial nuclear industry as a whole. As claims are paid under
the policy, there is a provision for automatic reinstatement of
policy limits up to an additional $200 million. There is also a
provision for retrospective assessment of additional premiums if
claims exceed funds available in the insurance company's reserve
accounts. The maximum retrospective premium assessment for this
contingency is approximately $3 million and may be subject
to state premium taxes. Any retrospective premium assessments
pertaining to the Master Worker Policy or the Price-Anderson Act
would be allocated between IP and Soyland based on their
respective ownership interests in Clinton.
IP may be subject to other risks which may not be insurable,
or the amount of insurance carried to offset the various risks
may not be sufficient to meet potential liabilities and losses.
There is also no assurance that IP will be able to maintain
insurance coverages at their present levels. Under those
circumstances, such losses or liabilities would have a
substantial adverse effect on IP's consolidated financial
position.
DECOMMISSIONING AND NUCLEAR FUEL DISPOSAL COSTS - IP is
responsible for its ownership share of the costs of
decommissioning Clinton and for spent nuclear fuel disposal
costs. IP is collecting future decommissioning costs through its
rates based on an ICC-approved formula that allows IP to adjust
rates annually for changes in decommissioning cost estimates.
Based on NRC regulations that establish a minimum funding
level, IP's 86.8% share of Clinton decommissioning costs is
estimated to be approximately $357 million (1994 dollars). The
NRC minimum is based only on the cost of removing radioactive
plant structures. A site-specific study to estimate the costs of
dismantlement, removal and disposal of Clinton has not been made;
however, IP plans to undertake this study in 1995. This study may
result in projected decommissioning costs higher than the NRC-
specified funding level. At December 31, 1994 and 1993, IP had
recorded a liability of $22.4 million and $17.2 million,
respectively, for the future decommissioning of Clinton.
External decommissioning trusts, as prescribed under
Illinois law and authorized by the ICC, have been established to
accumulate funds based on the expected service life of the plant
for the future decommissioning of Clinton. For the years 1994,
1993 and 1992, IP has contributed $5.5 million, $3.9 million and
$3.7 million, respectively, to its external nuclear
decommissioning trust funds. The balances in these nuclear
decommissioning funds at December 31, 1994 and 1993, were $22.4
million and $17.2 million, respectively. IP recognizes earnings
and expenses from the trust funds as changes in its assets and
liabilities relating to these funds. In November 1994, the ICC
granted IP permission to invest up to 60% of the nuclear
decommissioning trust assets in selected equity securities. As a
result, funding in this manner commenced with an initial
investment in December 1994. Future contributions will be
directed to this asset class until the approved equity allocation
is reached.
The Securities and Exchange Commission staff has questioned
certain current accounting practices of the electric utility
industry, including those practices used by IP, regarding the
recognition, measurement and classification of decommissioning
costs for nuclear generating stations in financial statements.
In response to these questions, the Financial Accounting
Standards Board has agreed to review the accounting for removal
costs of nuclear generating stations, including decommissioning.
If current electric utility industry accounting practices for
such decommissioning are changed: 1) annual provisions
for decommissioning could increase; 2) the estimated total cost
for decommissioning could be recorded as a liability; and 3)
trust fund income from the external decommissioning trusts could
be reported as investment income rather than as a reduction to
decommissioning expense. Although it is too early to determine
whether any changes to current electric utility industry
accounting practices for decommissioning will be adopted, IP
believes that based on current information, any required changes
would not have an adverse effect on consolidated results of
operations due to existing and anticipated future ability to
recover decommissioning costs through rates.
In 1992, the ICC entered an order in which it expressed
concern that IP take all reasonable action to ensure that Soyland
contributes its ownership share of the current or any revised
estimate of decommissioning costs. The order also states
that if IP becomes liable for decommissioning expenses
attributable to Soyland, the ICC will then decide whether that
expense should be the responsibility of IP stockholders or its
customers.
Under the Energy Policy Act of 1992, IP is responsible for a
portion of the cost to decontaminate and decommission the U.S.
Department of Energy's (DOE) uranium enrichment facilities. Based
on quantities purchased from the DOE facilities prior to passage
of the Act, each utility is being assessed an annual fee for a
period of 15 years. At December 31, 1994, IP has a remaining
liability of $5.7 million representing future assessments. IP is
recovering these costs, as amortized, through its fuel adjustment
clause.
Under the Nuclear Waste Policy Act of 1982, the DOE is
responsible for the permanent storage and disposal of spent
nuclear fuel. The DOE currently charges one mill ($0.001) per net
kilowatt-hour (one dollar per MWH) generated and sold for future
disposal of spent fuel. IP is recovering these charges through
rates.
ENVIRONMENTAL MATTERS
CLEAN AIR ACT - In August 1992, IP announced that it had
suspended construction of two scrubbers at the Baldwin Power
Station, on which IP had expended approximately $34.6 million. IP
has recovered approximately $3.1 million as a result of the sale
of excess materials that were not used on the project. After
suspending scrubber construction, IP reconsidered its
alternatives for complying with Phase I of the 1990 Clean Air Act
Amendments. In March 1993, IP announced its compliance plan for
Phase I (1995-1999) of the Clean Air Act, which is to
continue using high-sulfur Illinois coal and acquire emission
allowances to comply with the Clean Air Act requirements. An
emission allowance is the authorization by the United States
Environmental Protection Agency (U.S.EPA) to emit one ton of
sulfur dioxide. The ICC approved IP's Phase I Clean Air Act
compliance plan in September 1993, and IP is continuing to
implement that plan. Sufficient emission allowances have been
acquired to meet anticipated needs for 1995. IP will be active in
the emissions allowance market in order to meet requirements for
allowances in 1996 and beyond. In 1993, the Illinois General
Assembly passed and the governor signed legislation authorizing
but not requiring the ICC to permit expenditures and revenues
from emission allowance purchases and sales to be reflected in
rates charged to customers as a cost of fuel. In December 1994,
the ICC approved the recovery of emission allowance costs through
the Uniform Fuel Adjustment Clause. IP's compliance plan will
defer, until at least 2000, any need for scrubbers or other
capital projects associated with sulfur dioxide emission
reductions. Additional actions and capital expenditures will be
required by IP to achieve compliance with the Phase II (2000 and
beyond) sulfur dioxide emission requirements of the Clean Air
Act.
IP planned to comply with the Phase I nitrogen-oxide
emission reduction requirements of the acid rain provisions of
the Clean Air Act by installing low-nitrogen-oxide (NOx) burners
at Baldwin Unit 3. On November 29, 1994, the U.S. Appellate Court
remanded the Phase I NOx rules back to the U.S.EPA. IP is
positioned to comply with the previously established rules and
does not expect the new rules to be any more stringent.
Therefore, the Court's decision is not expected to have a
material impact on IP's compliance activity.
Additional capital expenditures are anticipated prior to
2000 to comply with the Phase II nitrogen-oxide requirements, as
well as potential requirements to further reduce nitrogen-oxide
emissions from IP plants to help achieve compliance with air
quality standards in the St. Louis and/or Chicago metropolitan
areas. IP has installed continuous emission monitoring systems at
its major generating stations, as required by the acid rain
provisions of the Clean Air Act.
In July 1993, the Alliance for Clean Coal (Alliance), a
coalition of Western coal producers and railroads, filed suit
against the ICC in the U.S. District Court in Chicago. The
Alliance sought a declaration that an Illinois statute
regarding the filing with and approval by the ICC of utility
Clean Air Act compliance plans, including provisions on the
construction of scrubbers or other devices to facilitate
continued use of high-sulfur Illinois coal as a fuel, is
unconstitutional. In December 1993, the U.S. District Court
issued an opinion and an order in Alliance for Clean Coal vs.
Ellen Craig, et al. declaring the statute unconstitutional. The
order prohibits the ICC from enforcing the statute, and declares
void compliance plans prepared and approved in reliance on
the statute. Subsequent to that decision, IP filed its plan with
the ICC, not for approval as it believes no approval of the plan
is required, but as a supplement to informational filings made in
a pending least-cost plan proceeding. The ICC concluded in its
final order that IP's compliance plan represented the least-cost
option for compliance. On January 9, 1995, the Seventh Circuit
Court of Appeals affirmed the U.S. District Court decision.
MANUFACTURED-GAS PLANT (MGP) SITES - IP, through its predecessor
companies, was identified on a State of Illinois list as the
responsible party for potential environmental impairment at 24
former manufactured-gas plant sites. IP is investigating each of
the sites to determine: 1) the type and amount of residues
present; 2) whether the residues constitute environmental or
health hazards and, if present, their extent; and 3) whether IP
has any responsibility for remedial action. Because of the
unknown and unique characteristics of each site (such as
amount and type of residues present, physical characteristics of
the site and the environmental risk) and uncertain regulatory
requirements, IP is not able to determine its ultimate liability
for the investigation and remediation of the 24 sites. However,
at December 31, 1994, IP had estimated and recorded a minimum
liability of $35 million. In 1994, IP spent approximately $1.3
million for investigation and remediation activities. IP is
unable to determine at this time what portion of these costs, if
any, will be eligible for recovery from insurance carriers or
other potentially responsible parties. In addition, IP is
unable to determine the time frame over which these costs may be
paid out. IP has recorded a regulatory asset in the amount of $35
million, reflecting management's expectation that investigation
and remediation costs for the manufactured-gas plant sites will
be recovered from customers or insurers.
In September 1992, the ICC issued a generic order concluding
that utilities will be allowed to collect from customers MGP
remediation costs paid to third parties, subject to prudency
evaluation. The order allowed recovery of such prudently incurred
costs over a five-year period but with no recovery from
customers of carrying costs on the unrecovered balance.
IP is currently recovering MGP site cleanup costs from its
customers through a tariff rider approved by the ICC in April
1993. In February 1994, an intervening consumer group appealed
the September 1992 ICC order and an affirming December
1993 Appellate Court decision to the Illinois Supreme Court,
arguing that utilities should not be permitted to recover MGP
cleanup costs from customers or should not be permitted to
recover such costs through riders. IP and other utilities have
also appealed to the Illinois Supreme Court seeking to include
carrying costs on the unrecovered balance of cleanup costs
through the tariff rider. The Illinois Supreme Court agreed to
hear both appeals, and briefing and oral arguments were held in
September 1994. Management believes that the final disposition of
these appeals will not have a material adverse effect on IPOs
consolidated financial position or results of operations.
ELECTRIC AND MAGNETIC FIELDS - The possibility that exposure to
electric and magnetic fields (EMF) emanating from power lines,
household appliances and other electric sources may result in
adverse health effects continues to be the subject of litigation
and governmental, medical and media attention. Litigants have
also claimed that EMF concerns justify recovery from utilities
for the loss in value of real property exposed to power lines,
substations and other such sources of EMF. Scientific research
worldwide has produced conflicting results and no conclusive
evidence that electric and/or magnetic field exposure causes
adverse health effects. Research is continuing to resolve
scientific uncertainties. It is too soon to tell what, if any,
impact these actions may have on IP's consolidated financial
position.
LEGAL PROCEEDINGS
IP is involved in legal or administrative proceedings before
various courts and agencies with respect to matters occurring in
the ordinary course of business, some of which involve
substantial amounts of money. Management believes that the
final disposition of these proceedings will not have a material
adverse effect on consolidated financial position or results of
operations.
OTHER
IP sells electric energy and natural gas to residential,
commercial and industrial customers throughout Illinois. At
December 31, 1994, 60%, 21% and 19% of accounts receivable were
from residential, commercial and industrial customers,
respectively. IP maintains reserves for potential credit losses
and such losses have been within management's expectations.
Note 4 Lines of Credit
and Short-Term Loans
- ----------------------
IP has total lines of credit represented by bank commitments
amounting to $250 million, all of which were unused at December
31, 1994. The weighted average borrowings for 1994 were $1.1
million at a weighted average interest rate of 3.7%. These lines
of credit are renewable in July 1995 and September 1996. These
bank commitments support the amount of commercial paper
outstanding at any time, limited only by the amount of unused
bank commitments, and are available to support other IP
activities.
IP pays facility fees up to 0.25% per annum, on $250 million
of the total line of credit, regardless of usage. The interest
rate on borrowings under these agreements is, at IP's option,
based upon the lending banks' reference rate, their Certificate
of Deposit rate, the borrowing rate of key banks in the London
interbank market or competitive bid.
IP has letters of credit totaling $204.8 million and pays
fees up to 0.55% per annum on the unused amount of credit.
In addition, IP has short-term financing options to obtain funds
not to exceed $80 million. IP pays no fees for these uncommitted
facilities and funding is subject to availability upon request.
For the years 1994, 1993 and 1992, IP had short-term borrowings
consisting of bank loans, commercial paper, extendible floating
rate notes and other short-term debt outstanding at various times
as follows:
- -----------------------------------------------------------------
(Millions of dollars, except rates) 1994 1993 1992
- -----------------------------------------------------------------
Balance at December 31
Short-term borrowings $238.8 $ 92.3 $ 67.1
Weighted average interest
rate at December 31 6.2% 3.5% 3.8%
Maximum amount outstanding
at any month end $238.8 $123.7 $181.9
Average daily borrowings
outstanding during the year $165.4 $ 85.0 $115.1
Weighted average interest
rate during the year 4.6% 3.5% 4.0%
- -----------------------------------------------------------------
IP has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are
used to manage well-defined interest rate risks arising out of
core activities without the use of leverage and without risk to
principal.
Interest rate cap agreements are used to reduce the
potential impact of increases in interest rates on floating-rate
commercial paper. In 1994, IP entered a five-year variable rate
interest rate cap agreement covering up to $140 million of
commercial paper. The agreement entitles IP to receive from a
counterparty on a monthly basis the amount, if any, by which IP's
interest payments on a nominal amount of commercial paper exceed
the interest rate set by the cap. At December 31, 1994, the cap
rate was set at 5.0% while the current market rate available to
IP was 6.125%.
Note 5 Facilities Agreements
- ----------------------------
IP and Soyland share ownership of Clinton, with IP owning
86.8% and Soyland owning 13.2%. Agreements between IP and Soyland
provide that IP has control over construction and operation of
the generating station, that the parties share electricity
generated in proportion to their ownership interests and that IP
will have certain obligations to provide replacement power to
Soyland if IP ceases to operate or reduces output from Clinton.
Under the provisions of a Power Coordination Agreement (PCA)
between Soyland and IP dated October 5, 1984, as amended, IP was
required to provide Soyland with 8.0% (288 megawatts) of
electrical capacity from its fossil-fueled generating
plants through 1994. This requirement will increase to 12% in
1995 and each year thereafter until the agreement expires or is
terminated. This is in addition to the capacity Soyland receives
as an owner of Clinton. IP is compensated with capacity charges
and for energy costs and variable operating expenses. IP
transmits energy for Soyland through IP's transmission and
subtransmission systems. Under provisions of the PCA, Soyland has
the option of participating financially in major capital
expenditures at the fossil-fueled plants, such as those needed
for Phase II Clean Air Act compliance, to the extent of its
capacity entitlement with each party bearing its own direct
capital costs, or by having the costs treated as plant additions
and billed to Soyland in accordance with other billing provisions
of the PCA. See "Note 3 - Commitments and Contingencies" for
discussion of the Clean Air Act. At any time after December
31, 2004, either IP or Soyland can terminate the PCA by giving
not less than seven years' prior written notice to the other
party. The party to whom termination notice has been given may
designate an earlier effective date of termination which shall be
not less than twelve months after receiving notice.
Note 6 Income Taxes
- --------------------
Deferred tax assets and liabilities were composed of the
following:
Balance as of December 31,
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993
- -----------------------------------------------------------------
Deferred Tax Assets:
- -----------------------------------------------------------------
Current:
Misc. book/tax recognition differences $ 19.7 $ 25.6
- -----------------------------------------------------------------
Noncurrent:
Depreciation and other property related 52.6 56.3
Alternative minimum tax 187.0 131.0
Tax credit and net operating loss
carryforward 27.6 111.9
Unamortized investment tax credit 122.0 129.1
Misc. book/tax recognition differences 53.2 17.3
- -----------------------------------------------------------------
442.4 445.6
- -----------------------------------------------------------------
Total deferred tax assets $462.1 $471.2
=================================================================
Deferred Tax Liabilities:
- -----------------------------------------------------------------
Current:
Misc. book/tax recognition differences $ 8.2 $ 10.9
- -----------------------------------------------------------------
Noncurrent:
Depreciation and other property related 1,252.0 1,187.3
Deferred Clinton costs 62.1 64.0
Misc. book/tax recognition differences 109.7 100.9
- -----------------------------------------------------------------
1,423.8 1,352.2
- -----------------------------------------------------------------
Total deferred tax liabilities $1,432.0 $1,363.1
=================================================================
Income taxes included in the Consolidated Statements of
Income consist of the following components:
Years Ended December 31,
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Current taxes -
Included in operating
expenses and taxes $ 58.3 $ 25.3 $ 22.9
- -----------------------------------------------------------------
Total current taxes 58.3 25.3 22.9
- -----------------------------------------------------------------
Deferred taxes -
Included in operating
expenses and taxes
Property related differences 60.0 72.3 73.2
Alternative minimum tax (50.4) (31.8) (31.4)
Gain/loss on reacquired debt - 16.5 4.8
Take-or-pay charges - .3 2.3
Net operating loss carryforward 62.0 22.8 18.3
Internal Revenue Service
interest on tax issues 7.5 (1.9) .7
Misc. book/tax recognition
differences (7.8) 3.8 (4.1)
Included in other income
and deductions
Property related differences 10.0 6.0 9.2
Net operating loss carryforward (17.4) (15.4) (15.5)
Misc. book/tax recognition
differences 1.9 (2.3) .4
Disallowed Clinton costs - (62.2) -
- -----------------------------------------------------------------
Total deferred taxes 65.8 8.1 57.9
- -----------------------------------------------------------------
Deferred investment tax credit - net
Included in operating
expenses and taxes (11.3) (.8) (.5)
Included in other income
and deductions (.3) (.7) (.8)
Disallowed investment tax credit - (8.4) -
- -----------------------------------------------------------------
Total investment tax credit (11.6) (9.9) (1.3)
- -----------------------------------------------------------------
Total income taxes $112.5 $23.5 $79.5
=================================================================
The reconciliations of income tax expense to amounts
computed by applying the statutory tax rate to reported pretax
results for the period are set forth below:
Years Ended December 31,
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Income tax expense at the
federal statutory tax rate $102.5 $(11.4) $68.5
Increases/(decreases) in taxes
resulting from -
State taxes, net of federal effect 13.8 5.8 11.3
Investment tax credit -
amortization (7.8) (8.8) (8.4)
Depreciation not normalized 4.3 7.1 9.4
Disallowed Clinton costs
(including ITC) - 27.4 -
Other-net (.3) 3.4 (1.3)
- -----------------------------------------------------------------
Total income taxes $112.5 $ 23.5 $ 79.5
=================================================================
Combined federal and state effective income tax rates were
38.4%, (72.4%) and 39.4% for the years 1994, 1993 and 1992,
respectively. The negative effective tax rate for 1993 is a
result of the loss recorded by IP due to the Rehearing
Order which denied IP recovery of certain deferred Clinton costs.
The 1993 effective tax rate excluding the effect of this loss was
39.5%. At December 31, 1994, IP had approximately $25 million of
federal income tax net operating loss carryforwards to offset
future taxable income. Approximately $15 million of these
carryforwards expire in 2006 and $10 million expire in 2007.
IP is subject to the provisions of the Alternative Minimum
Tax System (AMT). As a result, IP has an alternative minimum tax
credit carryforward at December 31, 1994, of approximately $187
million. This credit can be carried forward indefinitely to
offset future regular income tax liabilities in excess of the
tentative minimum tax.
The Internal Revenue Service (IRS) has completed its audit
of IP's federal income tax returns for the years 1986 through
1988. IP and the IRS have reached an agreement on all audit
issues. The results of the agreement did not have a
material effect on IP's consolidated financial position or
results of operations.
Note 7 Capital Leases
- ---------------------
Illinois Power Fuel Company (Fuel Company), which is 50%
owned by IP, was formed in 1981 for the purpose of leasing
nuclear fuel to IP for Clinton. Lease payments are equal to the
Fuel Company's cost of fuel as consumed (including
related financing and administrative costs). Billings under the
lease agreement during 1994, 1993 and 1992 were $52 million, $45
million and $43 million, respectively, including financing costs
of $7 million, $6 million and $8 million, respectively. IP is
obligated to make subordinated loans to the Fuel Company at any
time the obligations of the Fuel Company that are due and payable
exceed the funds available to the Fuel Company. IP has an
obligation for nuclear fuel disposal costs of leased nuclear
fuel. See "Note 3 - Commitments and Contingencies" for discussion
of decommissioning and nuclear fuel disposal costs. Nuclear fuel
lease payments are included with fuel for electric plants on
IP's Consolidated Statements of Income.
At December 31, 1994 and 1993, current obligations under
capital lease for nuclear fuel are $33.3 million and $41.6
million, respectively. Over the next five years estimated
payments under capital leases are as follows:
- -----------------------------------------------------------------
(Millions of dollars)
- -----------------------------------------------------------------
1995 $39.2
1996 34.6
1997 26.7
1998 13.0
1999 8.5
Thereafter 2.9
- -----------------------------------------------------------------
124.9
Less: Interest 13.4
- -----------------------------------------------------------------
Total $111.5
=================================================================
<TABLE>
Note 8 Long-Term Debt
- ---------------------
<CAPTION>
(Millions of dollars)
- --------------------------------------------------------------------------------
December 31, 1994 1993
<S> <C> <C>
First mortgage bonds--
5.85% series due 1996 $ 40.0 $ 40.0
6 1/2% series due 1999 72.0 72.0
6.60% series due 2004 (Pollution Control 7.0 7.2
Series A)
9 7/8% series due 2004 - 10.0
7.95% series due 2004 72.0 72.0
6% series due 2007 (Pollution Control Series B) 18.7 18.7
11 5/8% series due 2014 (Pollution Control - 35.6
Series D)
10 3/4% series due 2015 (Pollution Control - 84.1
Series E)
7 5/8% series due 2016 (Pollution Control 150.0 150.0
Series F, G and H)
8.30% series due 2017 (Pollution Control 33.8 33.8
Series I)
7 3/8% series due 2021 (Pollution Control 84.7 84.7
Series J)
8 3/4% series due 2021 125.0 125.0
5.7% series due 2024 (Pollution Control Series K) 35.6 -
7.4% series due 2024 (Pollution Control Series L] 84.1 -
- --------------------------------------------------------------------------------
Total first mortgage bonds 722.9 733.1
- --------------------------------------------------------------------------------
New mortgage bonds--
6 1/8% series due 2000 40.0 40.0
5 5/8% series due 2000 110.0 110.0
6 1/2% series due 2003 100.0 100.0
6 3/4% series due 2005 70.0 70.0
8.0% series due 2023 235.0 235.0
7 1/2% series due 2025 200.0 200.0
Adjustable rate series due 2028
(Pollution Control Series M, N and O) 111.8 111.8
- --------------------------------------------------------------------------------
Total new mortgage bonds 866.8 866.8
- --------------------------------------------------------------------------------
Total mortgage bonds 1,589.7 1,599.9
- --------------------------------------------------------------------------------
Short-term debt to be refinanced as long-term debt 125.0 125.0
8 1/2% debt securities due 1994 - 100.0
Medium-term notes, series A 100.0 100.0
Variable rate long-term debt due 2017 75.0 75.0
- --------------------------------------------------------------------------------
Total other long-term debt 300.0 400.0
- --------------------------------------------------------------------------------
1,889.7 1,999.9
Unamortized discount on debt (21.6) (15.4)
- --------------------------------------------------------------------------------
Total long-term debt excluding
capital lease obligations 1,868.1 1,984.5
Obligation under capital leases 111.5 129.5
- --------------------------------------------------------------------------------
1,979.6 2,114.0
Long-term debt and lease obligations
maturing within one year (33.5) (187.7)
- --------------------------------------------------------------------------------
Total long-term debt $ 1,946.1 $1,926.3
=================================================================================
</TABLE>
In May 1994, $35.6 million of 11 5/8% Pollution Control Bonds
Series D due 2014 were retired with the same principal amount of
5.7% Pollution Control Bonds Series K due 2024. In December 1994,
$84.1 million of 7.4% Pollution Control Bonds Series L due 2024
were issued. The proceeds and additional funds were placed in an
irrevocable trust and invested in U. S. Treasury securities, and
will be used to extinguish the outstanding $84.1 million 10 3/4%
Pollution Control Bonds Series E due 2015 on March 1, 1995. This
resulted in an in-substance defeasance in accordance with
Statement of Financial Accounting Standards No. 76, "
Extinguishment of Debt." The $84.1 million of 10 3/4% Pollution
Control Bonds Series E due 2015 have been removed from the
consolidated financial statements.
Short-term debt to be refinanced as long-term debt consists of
commercial paper that will be renewed regularly on a long-term
basis. Ongoing credit support is provided by IP's revolving
credit agreements of $250 million. In 1989 and 1991, IP issued a
series of fixed rate medium-term notes. At December 31, 1994, the
maturity dates on these notes ranged from 1996 to 1998 with
interest rates ranging from 9% to 9.31%. Interest rates on
variable rate long-term debt due 2017 are adjusted weekly and
ranged from 5.25% to 5.6% at December 31, 1994.
For the years 1995, 1996, 1997, 1998 and 1999, IP has long-term
debt maturities and cash sinking fund requirements in the
aggregate of (in millions) $.2, $61.7, $10.8, $68.8 and $72.8,
respectively. These amounts exclude capital lease requirements.
See "Note 7 - Capital Leases." Certain supplemental indentures to
the First Mortgage require that IP make annual deposits, as a
sinking and property fund, in amounts not to exceed $.4 million
in 1995, $1.8 million in 1997, $1.8 million in 1998 and $1.8
million in 1999. These amounts are subject to reduction and
historically have been met by pledging property additions, as
permitted by the First Mortgage.
At December 31, 1994, the aggregate total of unamortized debt
expense and unamortized loss on reacquired debt was approximately
$107.4 million.
IP's first mortgage bonds are secured by a first mortgage lien on
substantially all of the fixed property, franchises and rights of
IP with certain minor exceptions expressly provided in the First
Mortgage. In 1992, the Board authorized a new general obligation
mortgage, which is intended to replace the First Mortgage. Bonds
issued under the New Mortgage were secured by a corresponding
issue of first mortgage bonds under the First Mortgage. The
remaining balance of net bondable additions at December 31, 1994,
was approximately $1.0 billion.
Note 9 Preferred Stock
- ----------------------
(millions of dollars)
- -----------------------------------------------------------------
December 31, 1994 1993
SERIAL PREFERRED STOCK OF SUBSIDIARY,
cumulative, $50 par value --
Authorized 5,000,000 shares; 3,325,815 and 4,150,000 shares
outstanding, respectively
Series Share Redemption prices
4.08% 300,000 $51.50 $15.0 $15.0
4.26% 150,000 51.50 7.5 7.5
4.70% 200,000 51.50 10.0 10.0
4.42% 150,000 51.50 7.5 7.5
4.20% 180,000 52.00 9.0 9.0
8.24% 600,000 51.90 30.0 30.0
7.56% 675,040 51.685 33.8 35.0
8.00% 693,975 52.29 34.7 50.0
7.75% 376,800 50.00 after July 1, 2003 18.8 43.5
Net premium on preferred stock 0.8 0.7
- -----------------------------------------------------------------
Total Preferred Stock,
$50 par value 167.1 208.2
- -----------------------------------------------------------------
SERIAL PREFERRED STOCK,
cumulative, without par value--
Authorized 5,000,000 shares; 1,512,550 and 2,390,300 shares
outstanding, respectively (including 360,000 and 480,000 shares,
respectively, of redeemable preferred stock)
Series Share Redemption prices
A 742,300 $ 50.00 37.1 50.0
B 410,250 ($51.50 prior to May 1, 1995, 20.5 45.5
$50 thereafter)
- -----------------------------------------------------------------
Total Preferred Stock of Subsidiary,
without par value 57.6 95.5
- -----------------------------------------------------------------
PREFERENCE STOCK,
cumulative, without par value --
Authorized 5,000,000 shares; none outstanding --- ---
PREFERRED SECURITIES OF SUBSIDIARY
(Illinois Power Capital, L.P.)
Monthly Income Preferred Securities 97.0 ---
- -----------------------------------------------------------------
Total Serial Preferred Stock, Preference
Stock and Preferred Securities
of Subsidiary $321.7 $303.7
- -----------------------------------------------------------------
MANDATORILY REDEEMABLE SERIAL PREFERRED
STOCK, cumulative --
Series Share Par Value
8.00% 360,000 none $36.0 $48.0
=================================================================
Serial Preferred Stock ($50 par value) is redeemable at the
option of IP in whole or in part at any time not less than 30
days and not more than 60 days notice by publication.
Quarterly dividend rates for Serial Preferred Stock, Series A,
are determined based on market interest rates of certain U. S.
Treasury securities. Dividends paid in 1994 and 1993 were $.75
per quarter. The dividend rate for any dividend period will not
be less than 6% per annum or greater than 12% per annum applied
to the liquidation preference value of $50 per share.
Quarterly dividend rates for Serial Preferred Stock, Series B,
are determined based on market interest rates of certain U. S.
Treasury securities. Dividends paid in 1994 and 1993 were $.875
per quarter. The dividend rate for any dividend period will not
be less than 7% per annum or greater than 14% per annum applied
to the liquidation preference value of $50 per share.
Illinois Power Capital, L.P., is a limited partnership in which
IP serves as a general partner. Illinois Power Capital issued $97
million of tax-advantaged monthly income preferred securities
(MIPS) at 9.45% (5.67% after-tax rate) in October 1994. The
proceeds were loaned to IP and were used to redeem $79.1
million (principal value) of higher-cost outstanding preferred
stock of IP. The excess of carrying amount of redeemed preferred
stock over consideration paid amounted to $6.4 million, which
was recorded in equity and included in net income applicable to
common stock. IP consolidates the accounts of Illinois
Power Capital.
In February 1993, IP redeemed $10 million of 8.52% and $12
million of 8.00% mandatorily redeemable preferred stock. In July
1993, IP redeemed the remaining $30 million of 8.52% mandatorily
redeemable serial preferred stock. In February 1994 and 1993, IP
redeemed $12 million of 8.00% mandatorily redeemable serial
preferred stock. For each year, 1995 through 1997, IP is required
to redeem $12 million of mandatorily redeemable preferred stock
outstanding at stated value.
Note 10 Common Stock
and Retained Earnings
- ----------------------
On May 31, 1994, common shares of IP began trading as common
shares of Illinova. Illinova is the sole shareholder of IP common
stock.
IP has an Incentive Savings Plan (Plan) for salaried
employees. IP's matching contribution is used to purchase
Illinova common stock. Under this Plan, 27,545 shares of common
stock were designated for issuance at December 31, 1994.
IP has an Incentive Savings Plan for Employees Covered Under
a Collective Bargaining Agreement. IP's matching contribution is
used to purchase Illinova common stock. Under this plan, 69,167
shares of stock were designated for issuance at December 31,
1994.
IP employees participate in an Employees Stock Ownership
Plan (ESOP) that includes an incentive compensation feature which
is tied to achievement of specified corporate performance goals.
This arrangement began in 1991 when IP loaned $35 million to the
Trustee of the Plans, who used the loan proceeds to purchase
2,031,445 shares of IP's common stock on the open market. The
loan and common shares were converted to Illinova instruments
pursuant to formation of the Holding Company in May 1994. These
shares are held in a suspense account under the Plans and are
being distributed to the accounts of participating employees as
the loan is repaid by the Trustee with funds contributed by IP,
together with dividends on the shares acquired with the loan
proceeds. IP financed the loan with funds borrowed under its bank
credit agreements.
For the year ended December 31, 1994, 42,008 shares were
allocated to salaried employees and 47,530 shares to employees
covered under the Collective Bargaining Agreement through the
matching contribution feature of the ESOP arrangement. Under the
incentive compensation feature, 184,079 shares were allocated to
employees for the year ended December 31, 1994. During 1994, IP
contributed $5.5 million to the ESOP and using the shares
allocated method, recognized $5.6 million of expense. Interest
paid on the ESOP debt was approximately $2.5 million in 1994 and
dividends used for debt services were approximately $1.6
million.
In 1992, the Board of Directors adopted and the shareholders
approved a Long-Term Incentive Compensation Plan (the Plan) for
officers or employee members of the Board, but excluding
directors who are not officers or employees. The types of awards
that may be granted under the Plan are restricted stock,
incentive stock options, non-qualified stock options, stock
appreciation rights, dividend equivalents and other stock-based
awards. The Plan provides that any one or more types of awards
may be granted for up to 1,500,000 shares of Illinova's common
stock. The following table outlines the activity thus far
under this plan:
- -----------------------------------------------------------------
Year Options Grant Year
Granted Granted Price Exercisable
- -----------------------------------------------------------------
1992 62,000 $23 3/8 1996
1993 73,500 $24 1/4 1997
1994 82,650 $20 7/8 1997
- -----------------------------------------------------------------
The provisions of Supplemental Indentures to IP's General
Mortgage Indenture and Deed of Trust contain certain restrictions
with respect to the declaration and payment of dividends. IP was
not limited by any of these restrictions at December 31, 1994.
Under the Restated Articles of Incorporation, common stock
dividends are subject to the preferential rights of the holders
of preferred and preference stock.
Note 11 Pension and Other Benefit Costs
- ---------------------------------------
IP has defined-benefit pension plans covering all officers
and employees. Benefits are based on years of service and
compensation. IP's funding policy is to contribute annually at
least the minimum amount required by government funding
standards, but not more than can be deducted for federal income
tax purposes.
Pension costs, a portion of which have been capitalized, for
1994, 1993 and 1992 include the following components:
Years Ended December 31,
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993 1992
- -----------------------------------------------------------------
Service cost on benefits earned
during the year $11.9 $11.3 $ 9.4
Interest cost on projected
benefit obligation 21.8 20.8 18.3
Return on plan assets (7.9) (28.1) (20.9)
Net amortization and deferral (19.2) 1.9 (5.0)
- -----------------------------------------------------------------
Total pension cost $ 6.6 $ 5.9 $ 1.8
=================================================================
The estimated funded status of the plans at December 31,
1994 and 1993, using discount rates of 8.75% and 7.75%,
respectively, and future compensation increases of 4.5% was as
follows:
Balances as of December 31,
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993
- -----------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $(209.6) $(231.9)
- -----------------------------------------------------------------
Accumulated benefit obligation $(220.8) $(233.6)
- -----------------------------------------------------------------
Projected benefit obligation $(267.3) $(285.8)
Plan assets at fair value 284.0 281.4
- -----------------------------------------------------------------
Excess (deficit) of assets over projected
benefit obligation 16.7 (4.4)
Unamortized net (gain) loss (38.8) 9.1
Unrecognized net asset at transition (15.0) (43.1)
Prior service costs 24.5 23.9
- -----------------------------------------------------------------
Accrued pension cost included in
accounts payable $ (12.6) $ (14.5)
=================================================================
The plan assets consist primarily of common stocks, fixed
income securities, cash equivalents and real estate. The
actuarial present value of accumulated plan benefits at January
1, 1994 and 1993, were $230 million and $205 million,
respectively, including vested benefits of $213 million and $203
million, respectively. The pension cost for 1994, 1993 and 1992
was calculated using: a discount rate of 7.75%, 8.25% and 8.5%,
respectively; future compensation increases of 4.5% for 1994 and
5.5% for 1993 and 1992; and a return on assets of 9% for 1994,
1993 and 1992. The unrecognized net asset at transition and prior
service costs are amortized on a straight-line basis over the
average remaining service period of employees who are expected to
receive benefits under the plan. IP did not make any cash
contributions during 1993 for the pension plan due to its
overfunded status. IP made cash contributions of $10 million in
1994 and $3 million in 1992.
IP provides health care and life insurance benefits to
certain retired employees, including their eligible dependents,
who attain specified ages and years of service under the terms of
the defined-benefit plans. Postretirement benefits, a portion of
which have been capitalized, for 1994 and 1993 included
the following components:
Years Ended December 31,
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993
- -----------------------------------------------------------------
Service cost on benefits earned
during the year $ 3.3 $ 2.9
Interest cost on projected benefit
obligation 6.2 5.9
Return on plan assets .2 (.5)
Amortization of unrecognized
transition obligation 2.1 3.3
- -----------------------------------------------------------------
Total postretirement cost $11.8 $11.6
- -----------------------------------------------------------------
The net periodic postretirement benefit cost in the table
above includes amortization of the previously unrecognized
accumulated postretirement benefit obligation, which was $55.2
million and $63.9 million as of January 1, 1994 and 1993,
respectively, over 20 years on a straight-line basis.
IP has established two separate trusts for those retirees
who were subject to a collectively bargained agreement and all
other retirees to fund retiree health care and life insurance
benefits. IP's funding policy is to contribute annually an amount
at least equal to the revenues collected for the amount of
postretirement benefit costs allowed in rates. IP made cash
contributions of $8.4 million in 1994 and $9.5 million in 1993.
The plan assets consist of common stocks and fixed income
securities at December 31, 1994 and 1993. The estimated funded
status of the plans at December 31, 1994 and 1993, using weighted
average discount rates of 8.75% and 7.75%, respectively, and a
return on assets of 9% was as follows:
Balances as of December 31,
- -----------------------------------------------------------------
(Millions of dollars) 1994 1993
- -----------------------------------------------------------------
Accumulated postretirement
benefit obligation
Retirees $(26.7) $(29.2)
Other fully eligible participants (11.6) (14.0)
Other active plan participants (27.3) (38.0)
- -----------------------------------------------------------------
Total benefit obligation (65.6) (81.2)
Plan assets at fair value 15.2 10.1
- -----------------------------------------------------------------
Funded status (50.4) (71.1)
Unrecognized transition obligation 52.3 60.6
Unrecognized net (gain) loss (7.8) 7.4
- -----------------------------------------------------------------
Accrued postretirement benefit cost
included in accounts payable $ (5.9) $ (3.1)
- -----------------------------------------------------------------
The assumed 1995 weighted average health-care-cost trend
rate used to measure the expected cost of benefits covered by the
plans is 11%. This trend rate decreases through 2005 to an
ultimate weighted average rate of 5% for 2005 and subsequent
years. The effect of a 1% increase in each future year's assumed
health-care-cost trend rates increases the service and interest
cost from $9.4 million to $11.4 million and the accumulated
postretirement benefit obligation from $65.6 million to $75.4
million.
EARLY RETIREMENT
In December 1994, IP announced plans for a voluntary early
retirement program. Approximately 200 salaried employees would
qualify for early retirement under this program. The offer will
be made to employees during the fourth quarter of 1995. A similar
program for union employees is the subject of contract
negotiations currently underway between IP and the International
Brotherhood of Electrical Workers. Approximately 450 union
employees would qualify for the program if current negotiations
result in the same package as offered to salaried employees. At
December 31, 1994, IP employed 4,350 people, as compared to 4,540
at December 31, 1993.
The early retirement program for salaried employees is
expected to generate a pre-tax charge of approximately $22
million against fourth quarter 1995 earnings and to generate
savings of approximately $15 million annually beginning in 1996.
A combined early retirement program for both salaried and union
employees, based on the same package as announced for salaried
employees, would generate a pre-tax charge of approximately $42
million against fourth quarter 1995 earnings and would generate
savings of approximately $35 million annually beginning in
1996.
Note 12 Segments of Business
- ----------------------------
Illinois Power Company is a public utility engaged in the
generation, transmission, distribution, and sale of electric
energy, and the distribution, transportation and sale of natural
gas. The following is a summary of operations:
<TABLE>
<CAPTION> (millions of dollars)
- ------------------------------------------------------------------------------------------------------------
1994 1993 1992
Total TotalTotal
Electric Gas Company Electric GasCompany Electric Gas Company
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operation information -
Operating revenues $1287.5 $302.0 $1,589.5 $1,266.4 $314.8 $1,581.2 $1,190.9 $288.6 $1,479.5
Operating expenses, excluding
provision for income taxes
and deferred Clinton 872.6 274.7 1,147.3 873.9 286.2 1,160.1 831.3 264.7 1,096.0
Deferred Clinton costs 3.5 - 3.5 9.3 - 9.3 11.2 - 11.2
- ------------------------------------------------------------------------------------------------------------
Pre-tax operating income 411.4 27.3 438.7 383.2 28.6 411.8 348.4 23.9 372.3
Allowance for funds used
during construction 8.9 0.4 9.3 6.2 1.0 7.2 4.5 0.7 5.2
Disallowed Clinton costs - - - (200.4) - (200.4) - - -
- ------------------------------------------------------------------------------------------------------------
Pre-tax operating income,
including AFUDC and disallowed
Clinton costs $420.3 $ 27.7 $ 448.0 $ 189.0 $ 29.6 $218.6 $ 352.9 $ 24.6 $ 377.5
- ------------------------------------------------- --------------- ----------------
Other deductions, net 11.3 15.6 7.2
Interest charges 143.9 164.9 168.6
Provision for income taxes 112.5 94.2 79.6
- ------------------------------------------------------------------------------------------------------------
Net income (loss) 180.3 (56.1) (122.1)
Preferred dividend requirements (24.9) (26.1) (28.9)
Excess of carrying amount over consideration paid
for redeemed preferred stock 6.4 - -
- ------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 161.8 $(82.2) $ 93.2
============================================================================================================
Other information -
Depreciation $ 156.1 $ 21.1 $ 177.2 $ 148.2 $ 21.0 $169.2 $ 141.3 $ 20.0 $ 161.3
- ------------------------------------------------------------------------------------------------------------
Capital expenditures $ 173.1 $ 20.6 $ 193.7 $ 221.3 $ 56.4 $277.7 $ 203.1 $ 41.3 $ 244.4
- ------------------------------------------------------------------------------------------------------------
Investment information -
Identifiable assets* $4,589.0 $442.6 $5,031.6 $4,526.8 $406.4 $4,933.2 $4,602.9 $355.4 $4,958.3
- ------------------------------------------------- --------------- ----------------
Nonutility plant and other investments 15.2 15.2 9.3
Assets utilized for overall Company operations 549.0 496.7 364.1
- ------------------------------------------------------------------------------------------------------------
Total assets $5,595.8 $5,445.1 $5,331.7
============================================================================================================
</TABLE>
*Utility plant, nuclear fuel, materials and supplies, deferred Clinton costs and
prepaid and deferred energy costs.
NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------
1994 1993
- -----------------------------------------------------------------
(Millions of dollars) Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------
Nuclear decommissioning
trust funds $ 22.4 $22.9 $17.2 $18.3
Cash and cash equivalents 47.9 47.9 9.3 9.3
Mandatorily redeemable
preferred stock 36.0 36.0 48.0 48.5
Long-term debt 1,868.1 1,750.7 1,984.5 2,048.6
Notes payable 238.8 238.8 92.3 92.3
- -----------------------------------------------------------------
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments listed in
the table above:
NUCLEAR DECOMMISSIONING TRUST FUNDS - The fair values of
available-for-sale marketable debt securities and equity
investments held by the Nuclear Decommissioning Trust are based
on quoted market prices at the reporting date for those or
similar investments.
CASH AND CASH EQUIVALENTS - The carrying amount of cash and cash
equivalents approximates fair value due to the short maturity of
these instruments.
MANDATORILY REDEEMABLE SERIAL PREFERRED STOCK AND LONG-TERM DEBT
- - The fair value of mandatorily redeemable preferred stock and
long-term debt is estimated based on the quoted market prices for
similar issues or by discounting expected cash flows at the rates
currently offered for debt of the same remaining maturities.
NOTES PAYABLE - The carrying amount of notes payable approximates
fair value due to the short maturity of these instruments.
Note 14 Quarterly Consolidated Financial Information and
Common Stock Data (Unaudited)
- ---------------------------------------------------------
(Millions of dollars)
- -----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
1994 1994 1994 1994
- -----------------------------------------------------------------
Operating revenues $442.9 $349.6 $428.9 $368.1
Operating income 71.3 72.2 112.2 64.7
Net income 34.4 36.5 78.4 31.0
Net income applicable
to common stock 28.5 30.5 72.5 30.3
Cash dividends declared on
common stock - 15.1 15.1 18.9
Cash dividends paid on
common stock 15.1 30.2 - 15.2
First Second Third Fourth
Quarter Quarter Quarter Quarter
1993 1993 1993 1993
- -----------------------------------------------------------------
Operating revenues $395.1 $350.5 $452.4 $383.2
Operating income 68.3 67.9 114.3 54.8
Net income (loss) 27.9 29.3 (123.9) 10.6
Net income (loss) applicable
to common stock 21.0 22.5 (130.2) 4.5
Cash dividends declared on
common stock 15.1 15.1 - -
Cash dividends paid on
common stock 15.1 15.1 15.1 15.2
The 1994 fourth quarter net income applicable to common stock
includes $6.4 million for the excess of carrying amount over
consideration paid for redeemed preferred stock.
The 1993 third quarter loss reflects the write-off of disallowed
Clinton costs of $200 million, net of income taxes. See "Note 2 -
Clinton Power Station."
On May 31, 1994, common shares of Illinois Power began trading as
common shares of Illinova. Illinova is the sole shareholder of
Illinois Power Company common stock.
selected consolidated financial data
- ------------------------------------
1994 1993 1992 1991 1990 1984
- -----------------------------------------------------------------
Operating revenues
Electric $1,177.5 $1,135.6 $1,117.9 $1,101.2 $1084.6 $810.3
Electric
interchange 110.0 130.8 73.0 85.5 73.8 21.1
Gas 302.0 314.8 288.6 288.2 311.1 470.2
- -----------------------------------------------------------------
Total
operating
revenues $1,589.5 $1,581.2 $1,479.5 $1,474.9 $1,469.5 $1,301.6
- -----------------------------------------------------------------
Net income (loss) $180.3 $(56.1) $122.1 $109.3 $(78.5) $235.5
Effective income
tax rate 38.4% (72.4)% 39.4% 40.4% (37.9)% 34.4%
- -----------------------------------------------------------------
Net income (loss)
applicable to
common stock $161.8 $(82.2) $93.2 $78.4 $(115.3) $210.2
Cash dividends
declared on
common stock $ 49.1 $30.2 $105.9 $30.2 $ - $140.0
Cash dividends
paid on common
stock $ 60.5 $60.5 $60.5 $15.1 $ - $137.0
- -----------------------------------------------------------------
Total
assets* $5,595.8 $5,445.1 $5,331.7 $5,271.8 $5,345.5 $4,083.5
- -----------------------------------------------------------------
Capitalization
Common stock
equity $1,466.0 $1,342.8 $1,454.0 $1,488.8 $1,414.9 $1,337.1
Preferred
stock 321.7 303.7 303.1 303.1 308.9 265.2
Mandatorily
redeemable
preferred stock36.0 48.0 100.0 110.0 140.0 86.0
Long-term debt* 1,946.1 1,926.3 2,017.4 2,153.1 2,198.9 1,621.0
- -----------------------------------------------------------------
Total
capitalization*
$3,769.8 $3,620.8 $3,874.5 $4,055.0 $4,062.7 $3,309.3
- -----------------------------------------------------------------
Embedded cost
of long-term
debt 7.6% 7.5% 8.3% 8.7% 9.3% 10.1%
- -----------------------------------------------------------------
Retained earnings
(deficit) $51.1 $(71.0) $41.0 $75.8 $1.2 $350.6
- -----------------------------------------------------------------
Capital
expenditures $193.7 $277.7 $244.4 $141.2 $130.6 $553.4
Cash flows
from
operations $280.2 $396.6 $374.5 $313.1 $252.6 $235.5
AFUDC as a
percent of
earnings applicable
to common stock 5.7% N/A 5.6% 3.7% N/A 56.6%
Ratio of earnings
to fixed charges 2.73 .80 2.02 1.85 .70 3.15
=================================================================
* Restated for the effect of capitalized nuclear fuel lease.
illinois power company
selected statistics
- ------------------------------------------
1994 1993 1992 1991 1990 1984
- -----------------------------------------------------------------
ELECTRIC SALES IN KWH (MILLIONS)
Residential 4,537 4,546 4,138 4,620 4,223 3,977
Commercial 3,517 3,246 3,055 3,111 2,981 2,698
Industrial 8,685 8,120 8,083 7,642 7,751 6,968
Other 536 337 466 699 987 1,822
- -----------------------------------------------------------------
Sales to
ultimate
consumers 17,275 16,249 15,742 16,072 15,942 15,465
Interchange 4,837 6,015 2,807 3,360 2,715 762
Wheeling 622 569 402 292 19 -
- -----------------------------------------------------------------
Total
electric
sales 22,734 22,833 18,951 19,724 18,676 16,227
- -----------------------------------------------------------------
ELECTRIC REVENUES (MILLIONS)
Residential $471 $463 $435 $447 $411 $279
Commercial 295 269 263 251 246 179
Industrial 378 360 381 355 373 277
Other 30 40 38 47 55 76
- -----------------------------------------------------------------
Revenues from
ultimate
consumers 1,174 1,132 1,117 1,100 1,085 811
Interchange 110 131 73 86 74 21
Wheeling 3 3 1 1 - -
- -----------------------------------------------------------------
Total
electric
revenues $1,287 $1,266 $1,191 $1,187 $1,159 $832
- -----------------------------------------------------------------
GAS SALES IN THERMS (MILLIONS)
Residential 359 371 339 339 322 399
Commercial 144 148 138 133 134 183
Industrial 81 78 136 98 99 230
- -----------------------------------------------------------------
Sales to
ultimate
consumers 584 597 613 570 555 812
Transportation
of customer-
owned gas 262 229 204 253 269 -
- -----------------------------------------------------------------
Total gas
sold and
transported 846 826 817 823 824 812
Interdepart-
mental sales 5 7 12 8 18 1
- -----------------------------------------------------------------
Total gas
delivered 851 833 829 831 842 813
- -----------------------------------------------------------------
GAS REVENUES (MILLIONS)
Residential $192 $200 $181 $184 $180 $248
Commercial 66 68 61 61 62 99
Industrial 31 34 37 31 42 110
- -----------------------------------------------------------------
Revenues from
ultimate
consumers 289 302 279 276 284 457
Transportation
of customer-
owned gas 9 8 7 9 10 -
Miscellaneous 4 5 3 3 17 13
- -----------------------------------------------------------------
Total gas
revenues $302 $315 $289 $288 $311 $470
- -----------------------------------------------------------------
System peak demand (native load) in kw (thousands)
3,395 3,415 3,109 3,272 3,394 3,371
Firm peak demand (native load) in kw (thousands)
3,232 3,254 2,925 3,108 3,180 3,217
Net generating capability in kw (thousands)
4,121 4,045 4,052 3,909 3,891 3,774
- -----------------------------------------------------------------
Electric customers (end of year)
553,869 554,270 549,391 565,421 560,045 533,364
Gas customers (end of year)
388,170 394,379 386,261 401,763 398,891 381,710
Employees (end of year)
4,350 4,540 4,624 4,514 4,402 4,236
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