1996 Information Statement and Annual Report to Shareholders
First
Notice of Annual Meeting of Shareholders
Information Statement
Table of Contents
Notice of Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . 2
Information Statement . . . . . . . . . . . . . . . . . . . . . . . . . 3
Appendix: 1996 Annual Report to Shareholders . . . . . . . . . . . . . . A-1
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/ /
/ /
/ /
/ Map to Location of Annual /
/ Shareholders Meeting /
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To the Shareholders
of Illinois Power:
Notice is Hereby Given that the Annual Meeting of Shareholders of Illinois
Power Company ("Illinois Power") will be held at 10 a.m. Wednesday, April 9,
1997, at Shilling Community Education Center, Richland Community College,
One College Park, Decatur, Illinois 62521, 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 10, 1997, will be
entitled to notice of and to vote at the Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner,
Vice Presiden, General Counsel and Corporate Secretary
Decatur, Illinois
March 3, 1997
IMPORTANT
Only shareholders of Illinois Power are entitled to attend the Annual Meeting.
Shareholders will be admitted on 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 (pursuanat to Section 14(C) of the Securities Exchange
Act of 1934)
March 3, 1997
(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. Annual Meeting will be held at 10:00 a.m.
Wednesday, April 9, 1997, at Shilling Community Education Center, Richland
Community College, One College Park, Decatur, Illinois 62521, for the purposes
set forth in the accompanying Notice of Annual Meeting of Shareholders.
On February 10, 1997 ("Record Date"). Illinova Corporation ("Illinova")
beneficially owned all of the 72,233,040 shares of Illinois Power Common Stock
then outstanding and there were 1,919,900 shares of Illinois Power 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 Illinois Power 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 10 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 on 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
1996. This Information Statement and accompanying documents are first
being mailed to shareholders on or about March 3, 1997.
Board of Directors
Information Regarding
the Board of Directors
The Board of Directors held six Board meetings in 1996. All directors
attended at least 75 percent of the aggregate meetings of the Board and
Committees of which they were members during 1996. The Board has four
standing committees: the Audit Committee, the Finance Committee, the
Compensation and Nominating 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 Illinois Power'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
Illinois Power'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 during 1996.
This Committee consists of the following non-employee directors ("Outside
Directors"): Robert M. Powers, Chairman, Richard R. Berry, C. Steven McMillan,
Walter M. Vannoy, and Marilou von Ferstel.
Finance Committee
(1) Review management's capital and operations and maintenance expenditure
budgets, financial forecasts and financing program, and make recommendations
to the Board regarding the approval of such budgets and plans; (2) review
Illinois Power's banking relationships, short-term borrowing arrangements,
dividend policies, arrangements with the transfer agent and registrar,
investment objectives and the performance of Illinois Power's pension and
other trust funds, evaluate fund managers, and make recommendations to the
Board concerning such matters; (3) review Illinois Power's risk management
programs, including insurance coverage, and make recommendations to the Board;
and (4) act in an advisory capacity to management, the Board of Directors, and
the Chairman, President and Chief Executive Officer on other financial
matters as they may arise.
The Finance Committee met three times during 1996.
This Committee consists of the following members of the Board: Walter D. Scott,
Chairman, Richard R. Berry, Larry D. Haab, C. Steven McMillan,
Robert M. Powers, and Marilou von Ferstel.
Compensation and Nominating Committee
(1) Review performance and recommend salaries plus other forms of compensation
of elected Illinois Power officers and the Board of Directors; (2) review
Illinois Power's benefit plans for elected Illinova officers and make
recommendations to the Board regarding any changes deemed necessary;
(3) review with the Chairman, President and Chief Executive Officer any
organizational or other personnel matters; and (4) recommend to the Board
nominees to stand for election as director to fill vacancies in the Board of
Directors as they occur.
The Compensation and Nominating Committee will consider shareholders'
recommendations for nominees for director made pursuant to timely notice in
writing addressed to the Chairman of the Committee at the executive offices
of Illinois Power, together with a full description of the qualifications and
business and professional experience of the proposed nominees and a statement
of the nominees' willingness to serve. To be timely, the notice shall be
delivered to or mailed and received at the executive offices of Illinois
Power not less than 90 nor more than 120 days prior to the Annual Meeting.
The Compensation and Nominating Committee met four times during 1996.
This Committee consists of the following Outside Directors: Donald S. Perkins,
Chairman, Robert M. Powers, Walter D. Scott, Ronald L. Thompson, Marilou
von Ferstel, and John D. Zeglis.
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; (4) review various nuclear reports;
and (5) report its findings to the Board.
The Nuclear Operations Committee met three times during 1996.
This Committee consists of the following members of the Board: Walter M.
Vannoy, Chairman, Richard R. Berry, Larry D. Haab, and Robert M. Powers.
Board Compensation
The Outside Directors of Illinois Power, all of whom also serve on the Board of
Illinova, receive a total retainer fee of $18,000 per year for their service
on these boards. Outside Directors who also chair Board Committees receive
an additional $2,000 per year retainer. Outside Directors receive a grant of
650 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 had a Retirement Plan for Outside Directors. Under this plan, each
Outside Director who attained age 65 and served on the Board for a period of
60 or more consecutive months was eligible for annual retirement benefits at
the rate of the annual retainer fee in effect when the director retired. In
1996, the Board of Directors adopted a Comprehensive Deferred Stock Plan for
Outside Directors, replacing the Retirement Plan. Each former Outside
Director whose right to receive the retirement benefit had vested continues
to receive such benefits in accordance with the term of the Retirement Plan.
All Outside Directors serving at the time this new plan was adopted were
granted a lump sum amount based on the net present value of these benefits
to them, were they to have retired under the Retirement Plan, based on the
number of years they have served on the Board but not to exceed 10. This
dollar amount was converted into stock units, based on the then market value
of Illinova Common Stock, and placed into an account. The value of these
stock units is to be paid out to the director in cash on termination of
service, based on the then market value of Illinova Common Stock, plus
dividend equivalents, in a lump sum or installments. In addition, each
Outside Director receives an annual award of stock units having a value of
$6,000, to be paid to the Outside Director in cash on retirement, at once
or in installments as the Director may elect, with the amount of such
payment determined by multiplying the number of stock units in the account
times the then market value of Illinova Common Stock, and adding the dividend
equivalents attributable to such stock units.
Pursuant to Illinova's Deferred Compensation Plan for Certain Directors,
Outside Directors may elect to defer all or any portion of their fees and
stock grants until termination of their services as directors. Such deferred
amounts are converted into stock units representing shares of Illinova
Common Stock with the value of each stock unit based on the last reported
sales price of such stock. 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. On termination of the participating directors'
services as directors, payment of their deferred fees and stock grants is
made in shares of Illinova Common Stock in an amount equal to the aggregate
number of stock units credited to their accounts. 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
Illinois Power's entire Board of Directors is elected at each Annual Meeting of
Shareholders. Directors hold office until the next Annual Meeting of
Shareholders or until their successors are elected and qualified. At the
Annual Meeting a vote will be taken on a proposal to elect the 10 directors
nominated by Illinois Power's Board of Directors. The names and certain
additional information concerning each of the director nominees is set forth
on the following pages. If any nominee should become unable to serve as a
director, another nominee may be selected by the current Board of Directors.
Name of Director Nominee, Age, Year in Which First
Business Experience and Elected a Director
Other Information of Illinova
Richard R. Berry, 65 1988
- ----------
/ / From June 1983 until retirement in February 1990, Mr. Berry was
/ / Executive Vice President and director of Olin Corporation, Stamford,
/ Picture/ Conn., a diversified manufacturer concentrated in chemicals, metals
/ / and aerospace/defense products.
- ----------
Larry D. Haab, 59 1986
- -----------
/ / Chairman, President and Chief Executive Officer of Illinova since
/ / December 1993, and of Illinois Power since June 1991, and an
/ Picture / employee of Illinois Power since 1965. He is a director of First
/ / Decatur Bancshares, Inc.; The First National Bank of Decatur; and
- ----------- Firstech, Incorporated.
C. Steven McMillan, 51 1996
- -----------
/ / Executive Vice President and Director of Sara Lee Corporation,
/ / Chicago, Ill., a global packaged food and consumer products
/ Picture / company, since 1993. He was Senior Vice President-Strategy
/ / Development from 1986 to 1993. He is Chairman of the Board of
- ----------- Electrolux Corporation.
Robert M. Powers, 65 1984
- -----------
/ / From 1980 until retirement in December 1988, Mr. Powers was
/ / President and Chief Executive Officer of A. E. Staley
/ Picture / Manufacturing Company, Decatur, Ill., a processor of grain and
/ / oil seeds. He is a director of A. E. Staley Manufacturing Company.
- -----------
Sheli Z. Rosenberg, 55
- ------------
/ / President and Chief Executive Officer since 1994 and General
/ / Counsel 1980 to 1994 of Equity Group Investments, Inc.,
/ Picture / Chicago, Ill., a privately held business conglomerate holding
/ / controlling interests in 10 publicly traded corporations involved
- ------------ in basic manufacturing, radio stations, retail, insurance, and
real estate. She is a director of American Classic Voyages Company; REVCO D.S.,
Inc.; Quality Food Centers, Inc.; Jacor Communications, Inc.; Anixter
Corporation; Capsure Holdings Corporation; Falcon Building Products; and
Equity Residential Properties Trust.
Walter D. Scott, 65 1990
- -------------
/ / Professor of Management and Senior Austin Fellow, J. L. Kellogg
/ / Graduate School of Management, Northwestern University,
/ Picture / Evanston, Ill., since 1988. He was Chairman of GrandMet USA
/ / from 1984 to 1986 and President and Chief Executive Officer of
- ------------- IDS Financial Services from 1980 to 1984. He is a director
of Chicago Title and Trust Company, Chicago Title Insurance Company, and
Intermatic Incorporated.
Ronald L. Thompson, 47 1991
- -------------
/ / Chairman and Chief Executive Officer of Midwest Stamping
/ / and Manufacturing Co., Bowling Green, Ohio, a manufacturer
/ Picture / of automotive parts, since 1993. He was President and
/ / Chief Executive Officer and a director of The GR Group, Inc.,
- ------------- St. Louis, Mo., from 1980 to 1993. He is a director of McDonnell
Douglas Corporation, Teachers Insurance and Annuity Association, and Ryerson
Tull.
Walter M. Vannoy, 69 1990
- --------------
/ / Chairman until retirement in May 1995 and Chief Executive
/ / Officer from May 1994 until January 1995 of Figgie
/ Picture / International, Inc., Willoughby, Ohio, a diversified
/ / operating company serving consumer, industrial, technical,
- -------------- and service markets world-wide. From 1980 to 1988 he was
President and Chief Operating Officer, Babcock and Wilcox, and Vice Chairman
of McDermott International. He is a director of Figgie International, Inc.
Marilou von Ferstel, 59 1990
- --------------
/ / Executive Vice President and General Manager of Ogilvy
/ / Adams & Rinehart, Inc., a public relations firm in Chicago,
/ Picture / Ill., since June 1990. She was Managing Director and Senior
/ / Vice President of Hill and Knowlton, Chicago, Ill., from 1981
- -------------- to 1990. She is a director of Walgreen Company.
John D. Zeglis, 49 1993
- --------------
/ / Senior Executive Vice President and General Counsel of
/ / AT&T, Basking Ridge, N.J., a diversified communications
/ Picture / company, since 1995. He was Senior Vice President-General
/ / Counsel and Government Affairs from 1989 to 1995. He is a
- -------------- director of the Helmerich & Payne Corporation.
Security Ownership of Management and
Certain Beneficial Owners
The following table shows shares of stock beneficially owned as of January 31,
1997, by each director nominee and the executive officers named in the
Summary Compensation Table. To the best of Illinova's knowledge, no owner
holds more than 5 percent of Illinova Common Stock.
<TABLE>
<C> <C> <C> <C>
Number
of Shares
Name of Class Beneficially Percent
Beneficial Owner of Stock Owned (1) of Class
- ------------------------------------------------------------------------------
Richard R. Berry Common 4,390 (2)
Larry D. Haab Common 10,725 (2)
C. Steven McMillan Common 650 (2)
Robert M. Powers Common 7,900 (2)
Sheli Z. Rosenberg Common 0 (2)
Walter D. Scott Common 4,500 (2)
Ronald L. Thompson Common 4,338 (2)
Walter M. Vannoy Common 4,000 (2)
Marilou von Ferstel Common 4,907 (2)
John D. Zeglis Common 3,154 (2)
Paul L. Lang Common 3,162 (2)
Larry F. Altenbaumer Common 4,644 (2)
John G. Cook Common 1,862 (2)
Wilfred Connell Common 1,630 (2)
</TABLE>
(1) The nature of beneficial ownership for shares shown is sole voting and/or
investment power.
(2) No director or executive officer owns any other equity securities of
Illinova. No director or executive officer owns as much as 1% of the Common
Stock. All directors and executive officers of both Illinova and Illinois
Power Company as a group own 64,658 shares of Common Stock (less than 1%).
(3) This number includes 1105 stock units under the Directors' Deferred
Compensation Plan.
(4) This number includes 664 stock units under the Directors' Deferred
Compensation Plan.
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 Illinois Power Company for the years indicated. The compensation
shown includes all compensation paid for service to Illinois Power, its
parent and subsidiaries.
<TABLE>
Summary Compensation Table
<C>
Long-Term Compensation
<C> <C>
Annual Compensation Awards
--------------------------------- -----------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
Other Restricted Securities All Other
Bonus Annual Stock Awards Underlying Compensation
Name and Principal Position Year Salary (1) Compensation (2) Options (3)
- ------------------------------------------------------------------------------------------------------------------------------
Larry D. Haab 1996 $ 493,709 $ 69,267 $ 15,973 $ 69,267 22,000 shs. $ 2,615
Chairman, President and 1995 472,250 91,144 19,088 91,144 20,000 shs. 2,550
Chief Executive Officer of 1994 451,375 42,881 15,783 42,881 20,900 shs. 360
Illinova and Illinois Power
Paul L. Lang 1996 $ 233,450 $ 19,747 $ 8,863 $ 19,747 6,500 shs. $ 2,595
Senior Vice President 1995 222,812 23,841 8,265 23,841 6,500 shs. 2,510
of Illinois Power 1994 213,562 20,289 8,672 20,289 6,800 shs. 440
Larry F. Altenbaumer 1996 $ 222,374 $ 19,832 $ 8,459 $ 19,832 7,500 shs. $ 1,976
Chief Financial Officer, 1995 204,937 20,391 7,686 20,391 6,500 shs. 2,378
Treasurer and Controller 1994 196,562 18,674 8,975 18,674 6,800 shs. 400
of Illinova, and Senior
Vice President and Chief
Financial Officer of
Illinois Power
John G. Cook 1996 $ 196,474 $ 16,293 $ 7,409 $ 16,293 6,500 shs. $ 2,575
Senior Vice President 1995 179,069 16,620 6,930 16,620 4,500 shs. 2,530
of Illinois Power 1994 163,708 15,553 7,068 15,553 4,400 shs. 400
Wilfred Connell 1996 $ 185,950 $ 9,832 $ 7,373 $ 9,832 4,500 shs. $ 2,559
Vice President 1995 172,975 16,087 7,230 16,087 3,900 shs. 2,402
of Illinois Power 1994 165,562 15,729 7,705 15,729 4,400 shs. 480
</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") for 1996, 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 for 1996 under the 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 the closing price
of Common Stock on the last trading day of the award year. The other one-half
of the award is cash 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 based
on the closing price of 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 Illinova, without good cause or by any participant with good reason, all
awards of the participant become fully vested and payable. As of December 31,
1996, named executive officers were credited with the following total aggregate
number of unvested stock units under the Compensation Plan since its inception,
valued on the basis of the closing proce of Common Stock on December 31, 1996:
Mr. Haab, 7,085 units valued at $214,633; Mr. Lang, 2,550 units valued at
$70,123; Mr. Altenbaumer, 2,353 units valued at $64,718; Mr. Cook, 1,939 units
valued at $53,330; Mr. Connell, 1,695 units valued at $46,600. Although
stock units have been rounded, valuation is based on total stock units,
including partial shares.
(3) The amounts shown in this column are Illinois Power'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 1996 of stock options under
Illinova's 1992 Long-Term Incentive Compensation Plan ("LTIC") and awards
outstanding at year end for the individuals named in the Summary Compensation
Table.
<TABLE>
Option Grants In 1996
<C>
Individual Grants
--------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Grant Date
Granted (1) in 1996 Price Per Share (1) Expiration Date Present Value (2)
----------------------------------------------------------------------------------------------------------
Larry D. Haab 22,000 27% $29.75 2/7/2006 $ 125,400
Paul L. Lang 6,500 8% 29.75 2/7/2006 37,050
Larry F. Altenbaumer 7,500 9% 29.75 2/7/2006 42,750
John G. Cook 6,500 8% 29.75 2/7/2006 37,050
Wilfred Connell 4,500 6% 29.75 2/7/2006 26,650
</TABLE>
(1) Each option becomes exercisable on February 7, 1999. 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 the Common Stock on the
date of the grant. Recipients shall also receive, on or shortly after
February 7, 1999, a target performance award, determined by calculating the
difference between the return earned by Illinova on its invested capital and
its cost of capital (the "spread"), then comparing this spread to that of a
peer group and reducing or increasing the target award depending on Illinova's
relative performance, but not reducing the payment below zero. The target
award is equal to one-half of the mid-point of compensation for each officer's
salary grade (a market-based number) times a percentage, determined by the
Compensation and Nominating Committee. In 1996 those percentages ranged
between 15 and 35 percent. At the discretion of the Board of Directors, the
foregoing payment may be made in the form of Illinova Common Stock of
equivalent value based on the average New York Stock Exchange price of the
stock during February, 1999, or in cash.
(2) The Grant Date Present Value has been calculated using the Black-Scholes
option pricing model. Disclosure of the Grant Date Present Value, or the
potential realizable value of option grants assuming 5% and 10% annualized
growth rates, is mandated by regulation; however, Illinova does not
necessarily view the Black-Scholes pricing methodology, or any other present
methodology, as a valid or accurate means of valuing stock option grants. The
calculation was based on the following assumptions: (i) As of the grant date,
Illinova's calculated Black-Scholes ratio was .2036. After discounting for
risk of forfeiture at three percent per year over Illinova's three-year
vesting schedule, the ratio is reduced to .1914; (ii) An annual dividend
yield on Illinova Common Stock of 3.84%; (iii) A risk-free interest rate of
5.87%, based on the yield of a zero-coupon government bond maturing at the
end of the option term; and (iv) Stock volatility of 17.34%.
<TABLE>
Aggregated Option and Fiscal Year-End Option Value Table
<C> <C> <C>
Number of Securities Underlying Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year-End Options at Fiscal Year-End
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------------------------------------------------------------------------------
Larry D. Haab 16,000 shs./82,900 shs. $66,000/$255,963
Paul L. Lang 5,000 shs./25,800 shs. $20,625/$81,613
Larry F. Altenbaumer 5,000 shs./26,800 shs. $20,625/$81,613
John G. Cook 2,500 shs./18,400 shs. $10,313/$50,713
Wilfred Connell 3,000 shs./17,300 shs. $12,375/$54,013
</TABLE>
Pension Benefits
Illinois Power 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, Illinois Power also maintains
a nonqualified Supplemental Retirement Income Plan for Salaried Employees (the
"Supplemental Plan") that covers all elected officers eligible to participate
in the Retirement Plan and provides for payments from 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)
------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Annual
Average 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
Earnings Service Service Service Service Service
- -----------------------------------------------------------------------------
$ 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, 1996, for purposes of both the Retirement Plan and the
Supplemental Plan, Messrs. Haab, Lang, Altenbaumer, Cook and Connell had
completed 31, 10, 24, 21 and 13 years of credited service, respectively.
Employee Retention Agreements
Illinova has entered into Employee Retention Agreements with each of its
executive officers and officers of its subsidiaries. Under each agreement,
the officer would be entitled to receive a lump sum cash payment if his or
her employment were terminated by Illinova without good cause or voluntarily
by the officer for good reason within two years following a change in control
of Illinova (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 Illinova
terminated; plus (2) three times the latest 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 Illinova. 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 benefits extended to the employees of Illinova who elect early retirement.
Compensation and Nominating Committee
Report on Officer Compensation
The six-member Compensation and Nominating Committee of the 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
Illinova'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 and
financial excellence consistent with continuous improvement in customer
satisfaction and shareholder value. Illinova's compensation policy is to
provide a total compensation opportunity targeted to all utilities in the
Edison Electric Institute (EEI) database. Eighty-four percent of the companies
in the S & P Utilities Index are also in the EEI database. The S&P Utilities
Index is used to relate Illinova's shareholder value in the following
performance graphs. The S&P index covers the utility indsutry broadly
including electric, gas, and telecommunication utilities. After careful
consideration, the Committe has decided to maintain a separate compensation
peer group limited to electric or combination electric and gas companies
for reference purposes. As an additional point of reference, Illinova also
looks at the pay practices of general industry (non-utility) companies. While
such pay practices have not traditionally been a major driver of Illinova's
compensation philosophy, this reference point may be regarded more closely in
the future as the utility indsutry migrates toward deregulation and
diversification.
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 Illinova's shareholders. The
compensation program is structured so that, depending on the salary level,
between 25 and 45 percent of an officer's total compensation target is
composed of incentive compensation.
Base Salary Plan
The Committee determines base salary ranges for executive officers based on
competitive pay practices of similar utilities. Officer salaries correspond
to approximately the average of the companies in the compensation peer group.
Individual increases are based on several factors, including the officer's
performance during the year, the relationship of the officer's salary to the
market salary level for the position and competitive industry salary increase
practices.
Annual Incentive Compensation Plan
Annual incentive awards are earned based on the achievement of specific annual
financial and operational goals by the Illinois Power officer group as a whole
and consideration of the officer's individual contribution. If payment is
earned under this 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 Common Stock units, the number of which is determined by dividing
half of the earned bonus amount by the closing price of the 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 Illinois Power officers, 1996 awards under the Compensation Plan are based
on achievement in the performance areas: earnings per share, customer
satisfaction, safety and employee teamwork, cost management and shareholder
value added. Up to 25 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 1996 were based on the following results. Earnings per share, customer
satisfaction and shareholder value added were at or better than the threshold
level for the award. Safety performance and cost management performance were
not at threshold for the award.
Long-Term Incentive Compensation Plan
Awards under the LTIC Plan are based on corporate performance as well as
individual officers' contribution to corporate performance subject to the
review of this Committee. The Committee may grant awards in the form of stock
options, stock appreciation rights, dividend equivalents, restricted stock
grants or performance-based cash awards. In 1996, it was determined that
awards under the LTIC plan be delivered in two components. One-half of each
officer's LTIC plan award is delivered in the form of stock options granted
at fair market value. The stock options granted to the officers for 1996
represent an award based on Illinova and individual performance as evaluated
by the Chairman and reviewed by the Committee. The other half of the LTIC
plan award is distributed to officers in cash based upon Illinova's Share-
holder Value-Added (SVA) performance relative to a peer group of other
utility companies, as measured in overlapping three-year periods. Since 1996
represented the first year of SVA plan's first measurement cycle, no awards
are due to be paid out under the plan until 1999.
CEO Compensation
Larry Haab became Chairman, President, and Chief Executive Officer ("CEO") of
Illinois Power on June 12, 1991, and Chairman, President and Chief Executive
Officer of Illinova in December 1993. Illinova based Mr. Haab's 1996
compensation on the policies and plans described above.
The Committee invokes the active participation of all non-management 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. At the conclusion of the
year Mr. Haab reviews his performance with the non-management directors. The
Committee oversees this review and recommends to the Board appropriate
adjustments to compensation. In setting the CEO's salary for 1996, the
Committee, with the participation of all Outside Directors, determined that
important goals were achieved and the results for Illinova for the year were
strong. Mr. Haab's vision of the industry's evolution has led, and is
continuing to lead, to appropriate redeployment of Illinova resources. The
Committee concluded that in 1996 Mr. Haab's performance continued to advance
Illinova toward the accomplishment of its strategic objectives.
The 1996 Annual Incentive Compensation Plan award for the Chief Executive
Officer was calculated consistent with the determination of awards for all
other Illinois Power officers. Under the terms of the plan, one-half of the
award was paid in cash and one-half was converted to 2,519 stock units which
vest over a three-year period as described above.
The 22,000 option shares granted to the CEO reflect the Committee's
recognition of his work in directing Illinova towards its 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
Independent Auditors
The Board of Directors of Illinois Power has selected Price Waterhouse LLP as
independent auditors for the Company for 1997. A representative of that firm
will be present at the Annual Meeting and available to make a statement and to
respond to questions.
Other Matters
Illinova's 1996 Summary Annual Report to Shareholders was mailed to Illinois
Power's shareholders commencing on March 3, 1997. Copies of Illinois Power's
Annual Report on Form 10-K will be available to shareholders, after its filing
with the Securities and Exchange Commission on or before March 31, 1997.
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 Illinois Power's executive offices not later than November 3,
1997.
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 3, 1997
Appendix: 1996 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 . . . . . . . . . . . . . . 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 refer 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. A discussion of the
factors having significant impact upon consolidated financial position and
results of operations since January 1, 1994, is 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 Secreatry 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. Illinova Generating Company,
Illinova Power Marketing, Inc., Illinova Energy Partners, Inc. and Illinova
Insurance Company are also wholly owned subsidiaries 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.
Open Access and Wheeling
On March 29, 1995, the Federal Energy Regulatory Commission (FERC) issued a
Notice of Proposed Rulemaking (NOPR) initiating the process of mandating
non-discriminatory open access to public utility transmission services at
cost-based rates. Transmission of electricity for a reseller or redistributor
of energy is called wholesale wheeling. Transmission of electricity for end-
use customers is known as retail wheeling.
On April 24, 1996, FERC issued Orders 888 and 889 which established the Final
Rule resulting from the NOPR. The Orders became effective July 9, 1996. The
Rule requires that all public utilities under FERC jurisdiction that own
transmission facilities file Open Access Transmission Tariffs (OATTs) in
compliance with Pro Forma Tariffs attached to the Order. FERC also requires
that all wholesale sales made by a utility provide for transmission of the
power under the terms and conditions of the OATTs. Public utilities serving
customers at retail are not required, at this time, to use the OATTs to serve
retail customers. The Orders do not require that retail customers be given
access to alternate energy suppliers or be found eligible as customers under
the OATTs. IP made a compliance filing as required on July 9, 1996, which has
been accepted by FERC.
While the move to open-access transmission service will likely increase the
level of competition in the wholesale energy market, it is not expected to
have a significant financial impact.
Competition
On November 21, 1996, IP and its partners in the Illinois Coalition for
Responsible Electricity Choice announced a legislative proposal which would
begin transformation of the Illinois electric industry from a highly regulated
monopoly to a competitive, customer-choice environment. The proposal, which
was introduced in the Illinois House of Representatives on January 29, 1997,
would allow for a managed transition to direct access for all consumers by
the year 2005. The plan would balance the need to ensure the financial
stability of current utility providers with the timing of customer choice.
Other parties have introduced plans that would not provide for this balance,
and would allow full competition by as early as 1998.
The Joint Committee on Electric Utility Regulatory Reform of the Illinois
General Assembly deliberated the issue of regulatory reform for 18 months.
Their report, issued December 4, 1996, stated that the Committee was unable
to reach consensus on a legislative proposal. It is reasonable to assume that
significant change will be made to the state laws governing IP's electric
operations, but impossible to predict what these changes will be.
IP received approval from the Illinois Commerce Commission (ICC) on March 13,
1996, and from FERC on April 24, 1996, to conduct an open access experiment
beginning in 1996 and ending on December 31, 1999.
The experiment allows certain industrial customers to purchase electricity
and related services from other sources. On April 25, 1996, the first of the
21 eligible customers began buying part of their electricity from a supplier
other than IP. Currently, 16 customers are participating in the experiment.
The experiment has demonstrated some of the immediate advantages competition
brings to customers, such as lower prices and innovative service offerings.
It has also provided evidence of some of the challenges the industry faces as
it moves toward customer choice. Challenges include dispatching small
amounts of electricity such as one or two megawatt hours (MWHs), and the
absence of requisite technology to dispatch fractional MWHs.
In 1996, the experiment cost IP approximately $3.2 million in lost revenue net
of avoided fuel cost and variable operating expenses. This loss was partially
offset by selling the surplus energy and capacity on the open market and by
$.9 million in transmission service charges.
The issue of competition is one that raises both risks and opportunities. At
this time, the ultimate effect of competition on Illinova's 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.
Regulatory Matters
On September 6, 1996, a leaking seal in one of two reactor recirculation pumps
caused IP to shut down Clinton Power Station (Clinton). While a plant shutdown
to correct this problem would not be a major concern in itself, the event was
significant because of broader issues which surfaced during subsequent
internal investigations, involving operating philosophies, procedure
compliance issues, degree of management oversight, and tolerance of equipment
problems.
This event prompted two special team inspections by the Nuclear Regulatory
Commission (NRC). The first inspection covered the events associated with the
leaking pump seal and the shutdown, while the second focused more broadly on
operations at Clinton. In a public meeting held on October 4, 1996, the NRC
discussed its findings, expressing concern over both the handling of the pump
seal problem and general plant operating philosophies. It also commended
subsequent actions taken by IP to address the issues raised.
IP decided not to restart Clinton prior to the start of the scheduled
refueling outage on October 13, 1996. An action plan was developed to address
the operational weaknesses identified by IP. Work began to correct the items
in the action plan while the refueling outage progressed.
On November 19, 1996, the NRC issued a formal report of its two teams'
inspections. IP agreed with the majority of the report's findings. The concerns
of the NRC that had not already been addressed were incorporated into IP's
action plan. On January 29, 1997, the NRC informed IP that it viewed Clinton
as having a declining safety performance trend. The NRC did not, however,
place Clinton on its "watch list." The NRC acknowledged that IP has allocated
additional resources to correct deficiencies and noted recent conservative
decisions made by management that have impacted the length of the refueling
outage schedule. The NRC held an enforcement conference with IP on February 4,
1997, to discuss the event and other issues identified during assessments and
inspections. The plant will remain shut down until IP management is satisfied
that all safety concerns have been addressed.
The operation and maintenance expense of the outage, including the scheduled
refueling outage, is estimated at $30 million. The refueling outage was
budgeted at $18 million.
Enhanced Retirement
In December 1994, IP announced plans for voluntary enhanced retirement and
severance programs. During the fourth quarter of 1995, 727 employees accepted
enhanced retirement or severance under these programs. The combined enhanced
retirement and severance programs generated a pretax charge of $38 million
against fourth quarter 1995 earnings.
Consolidated Results of Operations
Overview
Earnings applicable to common stock were $206 million for 1996, $156 million
for 1995 and $162 million for 1994. The increase in 1996 net income over 1995
was due primarily to the one-time charge in 1995 for the enhanced retirement
and severance programs, lower operations expense due to the employment
decrease, and lower financing costs. The 1995 results include $(22.8)
million net-of-tax for the enhanced retirement and severance programs and
$(3.5) million for the carrying amount under consideration paid for
preferred stock redeemed in December 1995. The 1995 earnings as compared
to 1994 also reflect increased electric sales due to unseasonably warm
summer weather; partially offset by increased operating and maintenance
expenses due to the Clinton refueling and maintenance outage. The 1994
results include $6.4 million for the carrying amount over consideration paid
for preferred stock redeemed in December 1994 and reflect an increase in
gas rates as a result of IP's 1994 gas rate order. The 1994 earnings also
reflect increased electric sales, lower operating and maintenance expenses
due to cost management efforts, no Clinton refueling and maintenance outage,
and lower financing costs as compared to 1993.
The ICC and FERC determine IP's rates for electric service at the retail and
wholesale levels, respectively, and the ICC determines IP's rates for gas
service. These rates are designed to recover the cost of service and allow
shareholders the opportunity to earn a fair rate of return. 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 conservation efforts and the overall economy.
<TABLE>
Operating Revenues
(Millions of dollars)
<C> <C>
1996 $1,688.7
1995 $1,641.4
1994 $1,589.5
1993 $1,581.2
1992 $1,479.5
</TABLE>
Electric Operations For the years 1994 through 1996, electric revenues
including interchange increased 4.1% and the gross electric margin increased
6.1% as follows:
<TABLE>
<C> <C> <C> <C>
- ---------------------------------------------------------------------
(Millions of dollars) 1996 1995 1994
- ---------------------------------------------------------------------
Electric revenues $ 1,202.9 $ 1,252.6 $ 1,177.5
Interchange revenues 137.6 116.3 110.0
Fuel cost & power purchased (313.3) (333.4) (319.2)
- ----------------------------------------------------------------------
Electric margin $ 1,027.2 $ 1,035.5 $ 968.3
</TABLE>
The components of annual changes in electric revenues were:
<TABLE>
<C> <C> <C> <C>
- ----------------------------------------------------------------------
(Millions of dollars) 1996 1995 1994
- ----------------------------------------------------------------------
Price $ (7.2) $ 13.3 $ (23.2)
Volume and other 6.4 42.7 44.1
Fuel cost recoveries (48.9) 19.1 21.0
- ----------------------------------------------------------------------
Revenue increase (decrease) $ (49.7) $ 75.1 $ 41.9
</TABLE>
1996 Electric revenues excluding interchange sales decreased 4.0%, primarily
due to reduction in revenues under the Uniform Fuel Adjustment Clause (UFAC).
Volume changes by customer class were insignificant, as kilowatt-hour sales
<TABLE>
Major Sources of Electric Energy
(Millions of megawatt-hours)
<C> <C> <C> <C>
1996 1995 1994
Fossil 16.3 14.5 13.2
Nuclear 4.6 5.3 6.4
Purchases 3.4 3.2 3.1
</TABLE>
to ultimate consumers (excluding interchange sales and wheeling) decreased .3%.
Interchange revenues increased 18.3% as a result of higher plant availability
in the first half of the year.
1995 The 6.4% increase in electric revenues was primarily due to a 1.9%
increase in kilowatt-hour sales to ultimate consumers (excluding interchange
sales and wheeling). Volume increases resulted from higher residential sales
(4.8%) and higher commercial sales (8.2%) due to an improving economy and
warmer summer temperatures compared to 1994. Industrial sales remained
essentially unchanged from 1994. Interchange revenues increased $6.3 million
(5.8%) as a result of increased sales opportunities.
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% from 1993 levels primarily due to unusually large sales opportunities
in 1993.
The cost of meeting IP's system requirements was reflected in fuel costs for
electric plants and power purchased. Changes in these costs are detailed
below:
<TABLE>
<C> <C> <C> <C>
- ----------------------------------------------------------------------
(Millions of dollars) 1996 1995 1994
Fuel for electric plants
Volume and other $ 15.4 $ 9.8 $ 13.8
Price (12.0) (35.5) (14.3)
Emission allowances .8 18.5 -
Fuel cost recoveries (30.0) 14.5 32.0
- -----------------------------------------------------------------------
(25.8) 7.3 31.5
Power purchased 5.7 6.9 (25.9)
- -----------------------------------------------------------------------
Total increase (decrease) $ (20.1) $ 14.2 $ 5.6
- -----------------------------------------------------------------------
Weighted average system
generating fuel cost ($/MWH) $ 11.01 $ 11.41 $ 12.72
- ------------------------------------------------------------------------
</TABLE>
System load requirements, generating unit availability, fuel prices, purchased
power prices, resale of energy to other utilities, emission allowance
purchases and fuel cost recovery through UFAC caused changes in these costs.
Changes in factors affecting the cost of fuel for electric generation are
below:
<TABLE>
<C> <C> <C> <C>
- -----------------------------------------------------
1996 1995 1994
- -----------------------------------------------------
Increase in generation 5.4% .7% 8.2%
Generation mix
Coal and other 78% 73% 67%
Nuclear 22% 27% 33%
- -----------------------------------------------------
</TABLE>
1996 The cost of fuel decreased 9.4% and electric generation increased 5.4%.
The decrease in fuel cost was primarily attributable to the effects of the
UFAC, as well as a favorable price variance. These factors were partially
offset by an increase in fuel cost due to the increase in generation. Power
purchased increased $5.7 million primarily due to the extended Clinton outage.
Clinton's equivalent availability and generation were lower than in 1995 due
to that outage.
<TABLE>
Fuel Cost Per Million Btu
(Percent of generation)
<C> <C> <C>
Coal $1.28 76%
Nuclear $ .81 22%
Other $1.68 2%
</TABLE>
1995 The cost of fuel increased 2.8% and electric generation increased .7%.
The increase in fuel cost was attributable to the effects of the UFAC, the
increase in higher-cost fossil generation and the cost of emission allowances.
Clinton's equivalent availability and generation were lower in 1995 as
compared to 1994 due to the scheduled refueling and maintenance outage.
Clinton returned to service April 29, 1995, after completing its fifth
refueling and maintenance outage, which began March 12, 1995. Power purchased
increased $6.9 million.
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 UFAC,
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.
Power purchased for the period decreased $25.9 million. Unusually large
interchange sales opportunities during 1993, which did not recur in 1994,
were the primary cause of the decrease in purchased power.
Gas Operations For the years 1994 through 1996, gas revenues including
transportation increased 15.3%, while the gross margin on gas revenues
increased 12.4% as follows:
<TABLE>
- --------------------------------------------------------
<C> <C> <C> <C>
(Millions of dollars) 1996 1995 1994
- --------------------------------------------------------
Gas revenues $ 341.4 $ 264.5 $ 293.2
Gas cost (202.6) (138.8) (172.4)
Transportation revenues 6.8 8.0 8.8
- ---------------------------------------------------------
Gas margin $ 145.6 $ 133.7 $ 129.6
- ---------------------------------------------------------
(Millions of therms)
Therms sold 703 588 584
Therms transported 251 273 262
- ----------------------------------------------------------
Total consumption 954 861 846
- ----------------------------------------------------------
</TABLE>
Changes in the cost of gas purchased for resale were:
<TABLE>
- ------------------------------------------------------------------------
<C> <C> <C> <C>
(Millions of dollars) 1996 1995 1994
Gas purchased for resale
Cost (excluding take-or-pay) $ 48.6 $ (43.1) $ (6.4)
Take-or-pay costs .4 (.4) 2.8
Volume 8.5 25.3 (13.6)
Gas cost recoveries 6.3 (15.4) 2.3
- --------------------------------------------------------------------------
Total increase (decrease) $ 63.8 $ (33.6) $ (14.9)
- --------------------------------------------------------------------------
Average cost per therm delivered 26.7 cents 20.1 cents 26.1 cents
- ---------------------------------------------------------------------------
</TABLE>
The 1996 increase in gas costs was primarily due to higher prices from
suppliers and the effects of the Uniform Gas Adjustment Clause (UGAC). The
1995 decrease in the cost of gas purchased was due to lower gas prices caused
by unusually warm winter weather nationwide. The 1994 decrease in the cost of
gas purchased was primarily due to lower gas prices, the expanded use of
additional gas storage and a decrease in therms purchased. Also contributing
to the higher gas margins in 1995 and 1994 was the 6.1% increase in gas base
rates approved by the ICC in April 1994.
Other Expenses A comparison of significant increases (decreases) in other
operating expenses, maintenance and depreciation for the last three years is
presented in the following table:
<TABLE>
- ----------------------------------------------------------
<C> <C> <C> <C>
(Millions of dollars) 1996 1995 1994
Other operating expenses $ (9.8) $ (.3) $ (9.2)
Maintenance (.3) 10.4 (11.2)
Depreciation and amortization 3.5 7.2 6.4
- -----------------------------------------------------------
</TABLE>
The decrease in operating expenses for 1996 is due primarily to the savings
from the enhanced retirement and severance program, partially offset by the
costs of the extended Clinton outage and increased amortization of
Manufactured Gas Plant (MGP) site expenses. The ICC approved tariff riders in
March 1996 that resulted in the current recognition of MGP site remediation
costs in operating expenses. The 1996 increase amounted to $5.5 million. This
increase is offset by increased revenues collected under the riders.
The increase in maintenance expense for 1995 is primarily due to the refueling
and maintenance outage at Clinton. The decrease in operating and maintenance
expenses for 1994 is due to re-engineering efforts, improved operating
efficiencies at IP's fossil plants and at Clinton, and no refueling and
maintenance outage at Clinton. The increases in depreciation for each of the
three years were due to increases in utility plant balances. The 1994 increase
in depreciation expense is partially offset by the decrease in deferred
Clinton costs as a result of a September 1993 write-off of disallowed Clinton
post-construction costs.
<TABLE>
Operating and Maintenance Expenses
(Millions of Dollars)
<C> <C>
1996 $349.6
1995 $359.7
1994 $349.6
1993 $370.0
1992 $373.4
</TABLE>
Other Income and Deductions The 1996 increase in Miscellaneous-net
deductions was due primarily to increased losses for the subsidiary companies
other than IP, partially offset by an increase in the credit for allocated
income taxes. The 1995 change in Miscellaneous-net deductions was negligible.
The 1994 increase in deductions was primarily due to the change in allocated
taxes.
Interest Charges Interest charges decreased $15.0 million in 1996, $4.1
million in 1995 and decreased $21.0 million in 1994. The 1996 decrease was
due to lower short-term interest rates and the impact of refinancing efforts
and capitalization reduction during 1996. The 1995 increase was due to
increased short-term borrowings at higher interest rates. The 1994 decrease
was primarily due to refinancing with lower cost debt and the retirement of
debt in 1994 and 1993.
Inflation Inflation, as measured by the Consumer Price Index, was 3.3%,
2.5% and 2.5% in 1996, 1995 and 1994, respectively. IP recovers historical
rather than current plant costs in rates.
Liquidity and Capital Resources
Soyland Power Cooperative Negotiations
IP and Soyland Power Cooperative (Soyland) have entered into an agreement to
transfer Soyland's 13.2% ownership of Clinton to IP, contingent on approval
by the NRC. The NRC is expected to act on IP's request during the first
quarter of 1997.
IP and Soyland have renegotiated the existing Power Coordination Agreement.
This agreement is expected to result in a reduction of rates for Soyland while
IP will be assured a long-term sales agreement for 10 to 20 years. IP is
expected to file a request for approval of this agreement with FERC by the
end of February 1997.
1994 Gas Rate Order
On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in
IP's gas base rates. For customers, the increase is 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%.
Dividends
On December 11, 1996, Illinova increased the quarterly common stock dividend
by 11%, declaring the common stock dividend for the first quarter of 1997,
payable February 1, 1997 to shareholders of record as of January 10, 1997.
On December 13, 1995, IP increased the quarterly common stock dividend 12%,
declaring the common stock dividend for the first quarter of 1996. On
October 12, 1994, IP increased the quarterly common stock dividend 25%,
declaring the common stock dividend for the first quarter of 1995.
Capital Resources and Requirements
IP needs cash for operating expenses, interest and dividend
payments, debt and certain 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 on economic and financial market conditions, cash
needs and capitalization ratio objectives.
Cash flows from operations during 1996 provided sufficient working capital to
meet ongoing operating requirements, to service existing common and
preferred stock dividends and debt requirements, and to meet all of IP's
construction requirements. Additionally, IP expects that future cash
flows 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.
To a significant degree, the availability and cost of external financing
depend on the financial health of the company seeking those funds. Security
ratings are an indication of a company's financial position and may affect
the cost of securities, as well as the willingness of investors to invest in
these securities. The current ratings of IP's securities by three principal
securities rating agencies are as follows:
<TABLE>
- -------------------------------------------------------------------------
<C> <C> <C> <C>
Standard Duff &
Moody's & Poor's Phelps
- -------------------------------------------------------------------------
IP first/new mortgage bonds Baa1 BBB BBB+
IP preferred stock baa2 BBB- BBB-
IP commercial paper P-2 A-2 D-2
- -------------------------------------------------------------------------
</TABLE>
Under current market conditions, these ratings would afford IP the ability to
issue additional securities through external financing. IP has
adequate short-term and intermediate-term bank borrowing capacity.
Based on its 1993 revised standards for review of utility business and
financial risks, Standard & Poor's (S&P) placed IP, along with approximately
one-third of the industry, in a "somewhat below average" category. In April
1994, S&P lowered IP's mortgage bond rating to BBB from BBB+. In August 1995,
S&P revised its ratings outlook from stable to positive. In February 1996,
Moody's also revised its ratings outlook from stable to positive.
Moody's upgraded IP's securities on July 1, 1996. The rating for mortgage
bonds was raised from Baa2 to Baa1, while preferred stock ratings went from
baa3 to baa2. In March 1996, the Duff & Phelps credit rating company
established credit ratings for IP's fixed income securities, as shown on the
preceding page. The agency has indicated that it expects IP's ratings to
remain stable, reflecting a modestly strengthening financial profile
characterized by good cash flow and an average business risk profile.
In 1996, IP repurchased 714,811 shares of its common stock from Illinova.
Under Illinois law, such shares may be held as treasury stock and treated as
authorized but unissued, or may be cancelled by resolution of the Board of
Directors. IP holds 3,410,897 shares of common stock as treasury stock and
deducts it from common equity at the cost of the shares.
For the years 1996, 1995 and 1994, changes in long-term debt and preferred
stock outstanding, including normal maturities and elective redemptions, were
as follows:
<TABLE>
- --------------------------------------------------------
<C> <C> <C> <C>
(Millions of dollars) 1996 1995 1994
- ---------------------------------------------------------
Bonds $ (132) $ (5) $ (10)
Other long-term debt (22) - (100)
Preferred stock 71 (135) 6
- ---------------------------------------------------------
Total decrease $ (83) $ (140) $ (104)
- ---------------------------------------------------------
</TABLE>
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 IP's 1943
Mortgage and Deed of Trust. For additional information, see "Note 8 - Long-
Term Debt of Subsidiary" and "Note 9 - Preferred Stock of Subsidiary" of the
"Notes to Consolidated Financial Statements."
During 1996, IP redeemed $2.2 million of Adjustable Rate Series A serial
preferred stock, $20.5 million (all of the remaining) Adjustable Rate Series
B serial preferred stock and $6.7 million of 7.75% serial preferred stock.
During the year, IP also retired $62.9 million of 8.75% First Mortgage Bonds
due 2021, $6.0 million of 8% New Mortgage Bonds due 2023 and $23 million of
7.5% New Mortgage Bonds due 2025. The $40 million of 5.85% First Mortgage
Bonds matured and were retired. In addition, $21.5 million of medium-term notes
matured and were retired.
In February 1995, IP redeemed $12 million of 8.00% mandatorily redeemable
serial preferred stock. In May 1995, IP redeemed the remaining $24 million of
8.00% mandatorily redeemable serial preferred stock. In March 1995, IP redeemed
$.2 million of 7.56% serial preferred stock and $3 million of 8.24% serial
preferred stock. In August 1995, IP purchased $5 million of 8.75% First
Mortgage Bonds. In December 1995, IP redeemed $34.7 million of 8.00% serial
preferred stock, $33.6 million of 7.56% serial preferred stock and $27
million of 8.24% serial preferred stock.
In February 1994, IP redeemed $12 million of 8.00% 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 1994, IP retired $35.6
million of First Mortgage Bonds, 11 5/8% Series due 2014 (Pollution Control
Series D) with the proceeds of the debt issuance. In August 1994, IP retired
$100 million of 8 1/2% debt securities.
Illinois Power Financing I (IPFI) is a statutory business trust in which IP
serves as sponsor. IPFI issued $100 million of trust originated preferred
securities (TOPrS) at 8% (4.8% after-tax rate) in January 1996. The TOPrS
were issued by IPFI, which invested the proceeds in an equivalent amount of
IP subordinated debentures due in 2045. The proceeds were used by IP to repay
short-term indebtedness on varying dates on or before March 1, 1996. IP
incurred the indebtedness in December 1995 to redeem $95.3 million (principal
value) of higher-cost outstanding preferred stock of IP.
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 $97 million (principal value) of higher-cost outstanding preferred
stock of IP.
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 were used to retire $84.1 million of First Mortgage Bonds, 103/4%
Series due 2015 (Pollution Control Series E).
In 1992, IP executed a new general obligation mortgage (New Mortgage) to
replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage).
Both mortgages are secured by liens on substantially all of IP's properties.
A corresponding issue of First Mortgage bonds, under the First Mortgage,
secures any bonds issued under the New Mortgage. IP anticipates that during
1997 the 1943 mortgage will be amended to be consistent with the 1992 mortgage.
At December 31, 1996, based on the most restrictive earnings test contained
in the First Mortgage, IP could issue approximately $1.3 billion of additional
First Mortgage bonds for other than refunding purposes. Also at December 31,
1996, the unused portion of bank lines of credit was
$354 million. The amount of available unsecured borrowing capacity totaled
$222 million at December 31, 1996.
On February 12, 1997, the Board of Directors approved a change to the
Articles of Incorporation to remove the limitation on the amount of unsecured
debt that IP can issue. The purpose of the change is to give IP more financial
flexibility in the changing environment of a competitive marketplace. The
change will be voted on by the preferred stockholders at a special meeting
planned to be held in 1997.
Construction expenditures for the years 1994 through 1996 were approximately
$590.3 million, including $21.8 million of AFUDC. IP estimates that it
will spend $200 million for construction expenditures in 1997, as
detailed at right. Construction expenditures for the period 1997 through
2001 are expected to total no more than $1 billion, including $100 million
for expenditures related to Phase II Clean Air Act compliance requirements.
IP's capital expenditures for the years 1997 through 2001, in addition
to construction expenditures, are expected to include $140 million for
nuclear fuel and $300 million for mandatory debt retirement.
<TABLE>
- ---------------------------------------------------------------
<C> <C>
(Millions of dollars) 1997
- ----------------------------------------------------------------
IP construction requirements
Electric generating facilities $ 77
Electric transmission and distribution facilities 65
General plant 33
Gas facilities 25
- ----------------------------------------------------------------
Total construction requirements 200
Nuclear fuel 38
Debt retirements 11
- -----------------------------------------------------------------
Total $ 249
- -----------------------------------------------------------------
</TABLE>
See "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated
Financial Statements" for additional information. Internal cash generation
will meet substantially all construction and capital requirements.
Environmental Matters
See "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated
Financial Statements" for a discussion of environmental matters that impact
or could potentially impact IP.
Tax Matters
See "Note 6 - Income Taxes" of the "Notes to Consolidated Financial
Statements" for a discussion of effective tax rates and other tax issues.
Accounting Matters
The FASB continues to review the accounting for liabilities related to closure
and removal of long-lived assets, including decommissioning. See "Note 3 -
Commitments and Contingencies" of the "Notes to Consolidated Financial
Statements" for a discussion of decommissioning.
ILLINOIS POWER COMPANY
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 Illinois
Power's financial position, results of operations and cash flows.
Illinois Power believes that its 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 Illinois Power'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, Illinois Power 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 Illinois Power. 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,
Illinois Power's 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
Larry D. Haab
Chairman, President
and Chief Executive Officer
/s/ Larry F. Altenbaumer
Larry F. Altenbaumer
Senior Vice President
and Chief Financial Officer
ILLINOIS POWER COMPANY
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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Illinois Power'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.
Price Waterhouse LLP
St. Louis, Missouri
February 7, 1997
<TABLE>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
(Millions of dollars except per share amounts)
- -----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996 1995 1994
Operating Revenues
Electric $ 1,202.9 $ 1,252.6 $ 1,177.5
Electric interchange 137.6 116.3 110.0
Gas 348.2 272.5 302.0
- ----------------------------------------------------------------------------------------------------------
Total 1,688.7 1,641.4 1,589.5
- ----------------------------------------------------------------------------------------------------------
Operating Expenses and Taxes
Fuel for electric plants 248.1 273.9 266.6
Power purchased 65.2 59.5 52.6
Gas purchased for resale 202.6 138.8 172.4
Other operating expenses 249.9 259.7 260.0
Maintenance 99.7 100.0 89.6
Enhanced retirement and severance - 37.8 -
Depreciation and amortization 190.0 186.5 179.3
General taxes 131.3 135.0 130.3
Income taxes 140.5 125.8 118.3
- ----------------------------------------------------------------------------------------------------------
Total 1,327.3 1,317.0 1,269.1
- ----------------------------------------------------------------------------------------------------------
Operating income 361.4 324.4 320.4
- ----------------------------------------------------------------------------------------------------------
Other Income and Deductions
Allowance for equity funds used during construction - - 3.8
Miscellaneous-net ( 6.3) .3 (5.5)
- -----------------------------------------------------------------------------------------------------------
Total ( 6.3) .3 (1.7)
- -----------------------------------------------------------------------------------------------------------
Income before interest charges 355.1 324.7 318.7
- -----------------------------------------------------------------------------------------------------------
Interest Charges
Interest expense 133.0 148.0 143.9
Allowance for borrowed funds used during construction (6.5) (6.0) (5.5)
- -----------------------------------------------------------------------------------------------------------
Total 126.5 142.0 138.4
- -----------------------------------------------------------------------------------------------------------
Net income 228.6 182.7 180.3
Less - Preferred dividend requirements 22.3 23.7 24.9
Plus - Carrying amount over (under) consideration
paid for redeemed preferred stock (.7) (3.5) 6.4
- -----------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 205.6 $ 155.5 $ 161.8
===========================================================================================================
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
<TABLE>
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
<C> <C> <C>
- ---------------------------------------------------------------------------------------------------
(Millions of dollars)
- ----------------------------------------------------------------------------------------------------
December 31, 1996 1995
Assets
Utility Plant, At Original Cost
Electric (includes construction work in progress of
$212.5 million and $199.8 million, respectively) $ 6,335.4 $ 6,189.0
Gas (includes construction work in progress of $21.2 million
and $10.2 million, respectively) 646.1 625.9
- -----------------------------------------------------------------------------------------------------
6,981.5 6,814.9
Less - accumulated depreciation 2,419.7 2,251.7
- ------------------------------------------------------------------------------------------------------
4,561.8 4,563.2
Nuclear fuel in process 5.3 5.7
Nuclear fuel under capital lease 96.4 95.2
- ------------------------------------------------------------------------------------------------------
4,663.5 4,664.1
- ------------------------------------------------------------------------------------------------------
Investments and Other Assets 14.5 16.4
- ------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 12.5 4.3
Accounts receivable (less allowance for doubtful accounts of $3 million)
Service 138.8 129.4
Other 51.1 18.2
Accrued unbilled revenue 106.0 89.1
Materials and supplies, at average cost
Fossil fuel 7.9 9.9
Gas in underground storage 27.2 18.5
Operating materials 77.1 82.7
Prepaid and refundable income taxes - 19.6
Prepayments and other 23.7 20.8
- -------------------------------------------------------------------------------------------------------
444.3 392.5
- -------------------------------------------------------------------------------------------------------
Deferred Charges
Deferred Clinton costs 103.9 107.3
Recoverable income taxes 101.3 128.7
Other 241.0 258.2
- -------------------------------------------------------------------------------------------------------
446.2 494.2
- --------------------------------------------------------------------------------------------------------
$ 5,568.5 $5,567.2
========================================================================================================
Capital and Liabilities
Capitalization
Common stock - No par value, 200,000,000 shares authorized; 75,681,937 and
75,643,937 shares outstanding, respectively, stated at $ 1,424.6 $1,424.6
Retained Earnings 245.9 129.6
Less - Capital stock expense 8.2 8.8
Less - 3,410,897 and 2,696,086 shares of common stock in treasury,
respectively, at cost 86.2 67.3
- --------------------------------------------------------------------------------------------------------
Total common stock equity 1,576.1 1,478.1
Preferred stock 96.2 125.6
Mandatorily redeemable preferred stock 197.0 97.0
Long-term debt 1,636.4 1,739.3
- -------------------------------------------------------------------------------------------------------
Total capitalization 3,505.7 3,440.0
- -------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable 149.7 119.9
Notes payable 310.0 359.6
Long-term debt and lease obligations maturing within one year 47.7 95.0
Dividends declared 24.7 23.0
Taxes accrued 46.0 44.8
Interest accrued 34.3 39.0
Other 43.1 66.2
- --------------------------------------------------------------------------------------------------------
655.5 747.5
- --------------------------------------------------------------------------------------------------------
Deferred Credits
Accumulated deferred income taxes 1,048.0 1,019.1
Accumulated deferred investment tax credits 215.5 222.8
Other 143.8 137.8
- --------------------------------------------------------------------------------------------------------
1,407.3 1,379.7
- -------------------------------------------------------------------------------------------------------
$ 5,568.5 $5,567.2
(Commitments and Contingencies Note 3)
See notes to consolidated financial statements which are an integral part of
these statements.
</TABLE>
<TABLE>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
(Millions of dollars)
- ----------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996 1995 1994
Cash Flows from Operating Activities
Net income $ 228.6 $ 182.7 $ 180.3
Items not requiring (providing) cash -
Depreciation and amortization 195.3 190.0 182.3
Allowance for funds used during construction (6.5) (6.0) (9.3)
Deferred income taxes 64.2 42.0 38.9
Enhanced retirement and severance - 37.8 -
Changes in assets and liabilities -
Accounts and notes receivable (35.2) 38.7 (40.2)
Accrued unbilled revenue (16.9) (10.2) (29.9)
Materials and supplies (1.2) 22.8 ( 2.3)
Accounts payable 29.8 (14.0) (19.7)
Interest accrued and other, net (14.8) (10.1) (19.9)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 443.3 473.7 280.2
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Construction expenditures (187.3) (209.3) (193.7)
Allowance for funds used during construction 6.5 6.0 9.3
Other investing activities 5.0 (7.5) (2.4)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (175.8) (210.8) (186.8)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Dividends on common stock and preferred stock (107.9) (100.5) ( 86.6)
Redemptions -
Short-term debt (355.8) (213.6) (258.2)
Long-term debt (153.7) (5.2) (230.0)
Preferred stock (29.5) (134.5) (91.0)
Common Stock (18.9) (67.3) -
Issuances -
Short-term debt 306.2 209.5 404.7
Long-term debt - - 119.8
Preferred stock 100.0 - 97.0
Premium paid on redemption of long-term debt - - (2.8)
Other financing activities .3 5.1 (7.7)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (259.3) (306.5) ( 54.8)
- ------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 8.2 (43.6) 38.6
Cash and cash equivalents at beginning of year 4.3 47.9 9.3
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 12.5 $ 4.3 $ 47.9
===================================================================================================================
</TABLE>
<TABLE>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
- --------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
(Millions of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996 1995 1994
Balance (deficit) at beginning of year $ 129.6 $ 51.5 $(71.0)
Net income before dividends 228.6 182.7 180.3
- ----------------------------------------------------------------------------------------------------------------------------
358.2 233.8 109.3
- ----------------------------------------------------------------------------------------------------------------------------
Less -
Dividends -
Preferred stock 22.6 23.6 11.1
Common stock 86.6 77.1 53.5
Investment transfer to Illinova 2.4 - -
Plus -
Carrying amount over (under) consideration paid for redeemed preferred stock (.7) (3.5) 6.4
- ------------------------------------------------------------------------------------------------------------------------------
(112.3) (104.2) (58.2)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 245.9 $129.6 $ 51.1
==============================================================================================================================
</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 1994 Consolidated Statement of Retained Earnings
as a component of common stock dividend. 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,
Illinois Power Capital, L.P. and Illinois Power Financing I. See "Note 9 -
Preferred Stock" of the "Notes to Consolidated Financial Statements" for
additional information. All significant intercompany balances and
transactions have been eliminated from the consolidated financial statements.
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 requires 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. It is reasonable to assume that significant changes will be
made to state laws governing IP's electric operations, but impossible to
predict what those changes will be. 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 cover 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
FAS71, an extraordinary non-cash 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 FAS71 would
likely have a material adverse effect on IP's consolidated financial position
and results of operations. IP's principal accounting policies are:
Regulatory Assets Regulatory assets represent probable future revenues to
IP associated with certain costs that are expected to be recovered from
customers through the ratemaking process. Significant regulatory assets are
as follows:
<TABLE>
- -------------------------------------------------------------------
<C> <C>
(Millions of dollars) 1996
- -------------------------------------------------------------------
Deferred Clinton Power Station (Clinton)
post-construction costs $ 103.9
Recoverable income taxes $ 101.3
Unamortized losses on reacquired debt $ 87.7
Manufactured-gas plant site cleanup costs $ 69.1
- -------------------------------------------------------------------
</TABLE>
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.
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. In 1996, 1995 and 1994, the pre-tax rate used for all
construction projects was 5.8%, 6.5% and 7.0%, 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 1996, 1995 and 1994,
provisions for depreciation were 2.8% of the average depreciable cost for
Clinton. Provisions for depreciation for all other electric plant were 2.6%
in 1996, 1995 and 1994. Provisions for depreciation of gas utility plant, as
a percentage of the average depreciable cost, were 3.9% in 1996, 1995 and
1994.
Amortization of Nuclear Fuel IP leases nuclear fuel from Illinois Power
Fuel Company (Fuel Company) under a capital lease. Amortization of nuclear
fuel (including related financing costs) is determined on a unit of production
basis. A provision for spent fuel disposal costs is charged to fuel expense
based on kilowatt-hours generated. See "Note 3 - Commitments and
Contingencies" of the "Notes to Consolidated Financial Statements" for
discussion of decommissioning and nuclear fuel disposal costs.
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 began. 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.
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 amount of $68 million in 1996 and $66 million in each of the
years 1995 and 1994. 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 gas base rates. The increase to customers is 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
FA109.
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" of the "Notes to the Consolidated Financial Statements" for
additional discussion.
Preferred Dividend Requirements of Subsidiary Preferred dividend
requirements reflected in the Consolidated Statements of Income are
recorded on the accrual basis.
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 flows
increased by $31 million, $19 million and $28 million during 1996, 1995 and
1994, respectively. Income taxes and interest paid are as follows:
<TABLE>
Years ended December 31,
<C> <C> <C> <C>
- ------------------------------------------------------------------------------
(Millions of dollars) 1996 1995 1994
Income taxes $ 65.9 $ 65.7 $ 72.1
Interest $ 147.4 $ 152.4 $ 165.9
- ------------------------------------------------------------------------------
</TABLE>
Interest Rate Cap Generally, premiums paid for purchased interest rate
cap agreements are being amortized to interest expense over the terms of the
caps. Unamortized premiums are included in Current Assets, "Prepayments and
other," in the Consolidated Balance Sheets. Amounts to be received under the
cap agreements 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, IP provided approximately
$81 million, $34 million and $20 million in funds to Illinova for operations
and investments during 1996, 1995, and 1994, respectively. 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 $14.3 million, $18.4 million, and
$23.5 million in 1996, 1995, and 1994, respectively, 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" of the "Notes to Consolidated Financial Statements" 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 and Soyland have entered
into an agreement to transfer Soyland's 13.2% ownership of Clinton to IP
contingent upon approval by the NRC. (See sub-caption "Soyland" of "Note 3 -
Commitments and Contingencies" of the "Notes to Consolidated Financial
Statements"). 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 50% of
Illinova's total assets at December 31, 1996. IP's 86.8% share of Clinton-
related costs represented 35% of Illinova's total 1996 other operating,
maintenance and depreciation expenses. Clinton's equivalent availability was
66%, 76%, and 92% for 1996, 1995, and 1994, 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 prevent IP from doing so, Illinova
and IP would be materially adversely affected. See "Note 3 - Commitments and
Contingencies" of the "Notes to Consolidated Financial Statements" for
additional information.
Note 3 - Commitments and Contingencies
Commitments
Estimated capital requirements for IP in 1997 are $249 million.
The 1997 capital expenditures for IP include $142 million for electric
facilities, $25 million for gas facilities, $38 million
for nuclear fuel, $33 million for general plant and $11 million for mandatory
debt retirement. Construction expenditures for IP for the 1997 through 2001
period are expected to be no more than $1 billion, including $100 million of
expenditures to meet Phase II Clean Air Act Compliance requirements.
IP's capital expenditures for the years 1997 through 2001, in addition
to the IP construction expenditures, are expected to include $140 million
for nuclear fuel, $300 million for mandatory debt retirement. These
expenditures reflect IP's share of Clinton (ownership share under negotiation
- -- see sub-caption "Soyland" under Contingencies below).
In addition, IP has substantial commitments for the purchase of coal under
long-term contracts. Estimated coal contract commitments for 1997 through
2001 are $560 million (excluding price escalation provisions). Total coal
purchases for 1996, 1995 and 1994 were $184 million, $168 million and $191
million, respectively. IP has contracts with various natural gas suppliers
and interstate pipelines to provide natural gas supply, transportation and
leased storage. Estimated committed natural gas, transportation and leased
storage costs (including pipeline transition costs) for 1997 through 2001
total $92 million. Total natural gas purchased for 1996, 1995 and 1994 was
$207 million, $150 million and $168 million, respectively. IP's share
(ownership share under negotiation -- see sub-caption "Soyland" under
Contingencies below) of estimated nuclear fuel commitments for Clinton is
approximately $19 million for uranium concentrates through 2001, $5 million
for conversion services through 1999 and $198 million for fabrication services
through 2016. IP is committed to purchase approximately $52 million of
emission allowances through 1999. IP anticipates that all of these costs
will be recoverable under IP's electric fuel and purchased gas adjustment
clauses.
Insurance IP maintains insurance on behalf of IP and Soyland for certain
losses involving the operation of Clinton. For physical damage to the plant,
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 for a total
coverage of $1.6 billion. In the event of an accident with an estimated cost
of reactor stabilization and site decontamination exceeding $100 million, 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, and
second, to decontaminate the reactor station site. The insurers also provide
coverage for the shortfall in the Decommissioning Trust Fund caused by the
premature decommissioning of the reactor due to an accident. In the event
insurance limits are not exhausted by the above, the remaining coverage will
be applied to property damage and 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 accident should occur, the claims for property
damage and other costs could materially exceed the limits of current or
available insurance coverage. In the event of an extended shutdown of
Clinton due to accidental property damage, IP also purchases approximately
$.9 million per week of business interruption insurance coverage for its
ownership share of Clinton through an industry-owned mutual insurance
company. This insurance does not provide coverage until Clinton has been
out of service for 21 weeks. (Ownership share under negotiation -- see
sub-caption "Soyland" under Contingencies below.)
All United States nuclear power station operators are subject to the Price-
Anderson Act. This act currently limits public liability for a nuclear
incident to $8.9 billion. Private insurance covers the first $200 million.
Retrospective premium assessments against each licensed nuclear reactor in
the United States provide excess coverage. 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 for workers whose initial radiation exposure occurred on
or after January 1, 1988. The policy has an aggregate limit of $200 million
that applies to the commercial nuclear industry as a whole. A provision
provides for automatic reinstatement of policy limits up to an additional
$200 million.
IP may be subject to other risks that 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 coverage at its present level. Under those
circumstances, such losses or liabilities may have a substantial adverse
effect on IP's financial position.
Decommissioning and Nuclear Fuel Disposal Costs IP is responsible for
its ownership share (ownership share under negotiation - see sub-caption
"Soyland" under Contingencies below) of the costs of decommissioning Clinton
and for spent nuclear fuel disposal costs. IP is collecting future
decommissioning costs through its electric 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 estimates
its 86.8% share (ownership share under negotiation - see sub-caption "Soyland"
under Contingencies below) of Clinton decommissioning costs to be approximately
$381 million (1996 dollars) or $687 million (2026 dollars, assuming a 2%
inflation factor). The NRC bases the minimum only on the cost of removing
radioactive plant structures. IP concluded a site-specific study in 1996 to
estimate the costs of dismantlement, removal and disposal of Clinton. This
study resulted in projected decommissioning costs of $473 million (1996
dollars) or $853 million (2026 dollars, assuming a 2% inflation factor) for
IP. Regulatory approval for funding of this increased decommissioning cost
is expected during the third quarter of 1997.
External decommissioning trusts, as prescribed under Illinois law and
authorized by the ICC, accumulate funds for the future decommissioning of
Clinton based on the expected service life of the plant. For the years 1996,
1995 and 1994, IP contributed $3.9 million, $5.0 million and $5.5 million,
respectively, to its external nuclear decommissioning trust funds. The
balances in these nuclear decommissioning funds at December 31, 1996, and
1995 were $41.4 million and $32.7 million, respectively. Decommissioning funds
are recorded as assets on the balance sheet. A decommissioning liability
approximately equivalent to trust assets was also recorded. IP recognizes
earnings and expenses from the trust fund as changes in its assets and
liabilities relating to these funds.
The Financial Accounting Standards Board (FASB) is reviewing the accounting
for closure and removal costs of long-lived assets. Changes to current
electric utility industry accounting practices for decommissioning may result
in recording the estimated total cost for decommissioning as a liability and
an increase to plant balances, depreciating the increased plant balances, and
reporting trust fund income from the external decommissioning trusts as
investment income rather than as a reduction to decommissioning expense.
Based on current information, IP believes that these changes will not have an
adverse effect on 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 shareholders or its customers. If Soyland were to
fail to meet these or other obligations related to its ownership of Clinton,
then IP could become liable for such payments. (See sub-caption "Soyland"
under Contingencies below.)
Under the Nuclear Waste Policy Act of 1982, the Department of Energy (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. In 1996, the D.C. Circuit Court of Appeals
issued an order, at the behest of nuclear-owning utilities and state
regulatory agencies, confirming DOE's unconditional obligation to take
responsibility for spent nuclear fuel commencing in 1998, even if it has no
permanent repository at that time. Notwithstanding this decision, which the
DOE did not appeal, the DOE has indicated to all nuclear utilities that it
may experience delay in performance. The impact of any such delay on IP
will depend on many factors, including the duration of such delay and the
cost and feasibility of interim, on-site storage.
Environmental Matters
Clean Air Act In August 1992, IP announced that it had suspended
construction of two scrubbers at the Baldwin Power Station (Baldwin). At
December 31, 1996, approximately $24 million in costs for the suspended
Baldwin program continue to be carried by IP as plant held for future use.
To comply with the sulfur dioxide (SO2) emission reduction requirements of
Phase I (1995-1999) of the 1990 Clean Air Act Amendments, IP continues to
purchase emission allowances. An emission allowance is the authorization by
the United States Environmental Protection Agency (U.S. EPA) to emit one ton
of SO2. The ICC approved IP's Phase I Clean Air Act compliance plan in
September 1993, and IP is continuing to implement that plan. IP has acquired
sufficient emission allowances to meet most of its anticipated needs for
1997 and will purchase the remainder on the spot market. 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 included 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 SO2 emission reductions.
Phase II (2000 and beyond) SO2 emission requirements of the Clean Air Act
could require additional actions and may result in capital expenditures and
the purchase of emission allowances.
To comply with the Phase I nitrogen-oxide (NOx) emission reduction
requirements of the acid rain provisions of the Clean Air Act, IP installed
low-NOx burners at Baldwin Unit 3 and Vermilion Unit 2. On November 29, 1994,
the Phase I NOx rules were remanded to the U.S. EPA. On April 13, 1995, the
U.S. EPA reinstated, with some modifications, the Phase I NOx rules effective
January 1, 1996. IP was positioned to comply with these revised rules without
additional modifications to any of its generating plants.
The U.S. EPA issued revised Phase II NOx emission limits on December 10, 1996.
IP has prepared a Phase II Compliance Plan. Litigation over the scope and
legality of these Phase II NOx limits precludes a precise quantification of
anticipated capital cost for compliance; however, capital expenditures for
IP's NOx program, which includes upgrading two air heaters at Baldwin, are
expected to be $100 million prior to the year 2000.
IP is monitoring the development of several emerging clean air compliance
issues which could have a significant impact on its fossil-fueled generating
plants. These issues include global climate change (theorized to result from
emissions of "greenhouse gases" such as carbon dioxide), controls on
"hazardous air pollutants," potential requirements to further reduce NOx
emissions from IP plants to help achieve compliance with the air quality
standards in the St. Louis and Chicago metropolitan areas and new standards
for fine particulates, ozone and SO2. Compliance with potential new
regulations in these areas may require significant additional expenditures
after 2000.
Manufactured-Gas Plant (MGP) IP's estimated liability for MGP site
remediation is $69 million. This amount represents IP's current best estimate
of the costs that it will incur in remediation of the 24 MGP sites for which
it is responsible. Because of the unknown and unique characteristics at each
site, IP cannot presently determine its ultimate liability for remediation of
the sites.
IP is currently recovering MGP site remediation through tariff riders approved
by the ICC. Accordingly, IP has recorded a regulatory asset on its balance
sheet totaling $69 million as of December 31, 1996. Management expects that
cleanup costs will be fully recovered from IP's customers.
To offset the burden imposed on its customers, IP has initiated litigation
against a number of insurance carriers. Any settlement proceeds or damages
recovered from the carriers will be credited to IP's customers through the
tariff rider mechanism which the ICC previously approved.
Electric and Magnetic Fields (EMF) The possibility that exposure to 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. The National Research Council (Council) of the National Academy of
Sciences released a report in 1996 which concluded there is "no conclusive
and consistent evidence" that exposure to residential EMF presents a health
hazard. The Council's conclusion is based on a review of more than 500
studies conducted worldwide over the last 17 years. Additional research is
being conducted to attempt to resolve continuing scientific uncertainties.
It is too soon to tell what, if any, impact these actions may have on
IP's consolidated financial position.
Other
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 the
consolidated financial position or the results of operations.
Accounts Receivable IP sells electric energy and natural gas to residential,
commercial and industrial customers throughout Illinois. At December 31,
1996, 68%, 20% and 12% of Accounts receivable - Service were from residential,
commercial and industrial customers, respectively. IP maintains reserves for
potential credit losses and such losses have been within management's
expectations.
Contingencies
Soyland IP and Soyland have entered into an agreement to transfer Soyland's
13.2% ownership of Clinton to IP contingent on approval by the NRC. The NRC
is expected to act on IP's request during the first quarter of 1997.
IP and Soyland have renegotiated the existing Power Coordination Agreement.
This agreement is expected to result in a reduction of rates for Soyland
while IP will be assured a long-term sales agreement for 10 to 20 years. IP
is expected to file with FERC a request for approval of this agreement in
February 1997.
FERC Audit In 1996 FERC conducted an audit of IP's financial books and
records for the years 1992 through 1995 and preliminarily identified a number
of issues. IP responded to the issues raised. FERC has taken no action
regarding disposition of these matters. At this time, the outcome of the
audit cannot be determined; however, management does not expect that
resolution of the audit will have a material adverse effect on IP's
consolidated financial position or results of operations.
IRS Audit The Internal Revenue Service is currently auditing IP's federal
income tax returns for the years 1991 through 1993. At this time, the outcome
of the audit cannot be determined; however, management does not expect that
the results will have a material adverse effect on IP's consolidated financial
position or results of operations. For a detailed discussion of income taxes,
see "Note 6 - Income Taxes" of the "Notes to Consolidated Financial
Statements."
Note 4 - Lines of Credit and Short-Term Loans
IP has total lines of credit represented by bank commitments amounting to
$354 million, all of which were unused at December 31, 1996. These lines of
credit are renewable in May 1997, August 1997 and May 2001. 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 .15% per annum on $350 million of the total lines
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 $206 million and pays fees up to .45% per
annum on the unused amount of credit.
In addition, IP and IP Fuel Company have a short-term financing option to
obtain funds not to exceed $30 million. IP and IP Fuel Company pay no fees
for this uncommitted facility and funding is subject to availability upon
request.
For the years 1996, 1995, and 1994, 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:
<TABLE>
- ------------------------------------------------------------------------------
<C> <C> <C> <C>
(Millions of dollars, except rates) 1996 1995 1994
- ------------------------------------------------------------------------------
Short-term borrowings
at December 31, $ 310.0 $ 359.6 $ 238.8
Weighted average interest
rate at December 31, 5.7% 6.0% 6.2%
Maximum amount outstanding
at any month end $ 310.0 $ 359.6 $ 238.8
Average daily borrowings
outstanding during
the year $ 261.9 $ 306.5 $ 165.4
Weighted average interest
rate during the year 5.6% 6.2% 4.6%
- ------------------------------------------------------------------------------
</TABLE>
Interest rate cap agreements are used to reduce the potential impact of
increases in interest rates on floating-rate debt. IP's three variable rate
interest rate cap agreements cover up to $289 million of commercial paper.
These agreements entitle 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. On December 31,
1996, the cap rates were set at 6.0%, 6.25% and 7.0% while the current market
rate available to IP was 5.7%.
Note 5 - Facilities Agreements
IP and Soyland share ownership of Clinton, with IP owning 86.8% (ownership
share under negotiation - see sub-caption "Soyland" of "Note 3 - Commitments
and Contingencies" of the "Notes to Consolidated Financial Statements" for
additional information) 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 is required to provide Soyland
with 12.0% (436 megawatts) of the electrical capacity from its fossil-fueled
generating plants 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-fueledplants, 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. At any time after December 31, 2004, either IP or Soyland may
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 12 months after receiving notice. See "Note 3 -- Commitments and
Contingencies" of the "Notes to Consolidated Financial Statements" for
discussion of the Clean Air Act.
Note 6 - Income Taxes
Deferred tax assets and liabilities were comprised of the following:
<TABLE>
Balances as of December 31,
- ------------------------------------------------------------------------------
<C> <C> <C>
(Millions of dollars) 1996 1995
- ------------------------------------------------------------------------------
Deferred tax assets:
- ------------------------------------------------------------------------------
Current:
Misc. book/tax recognition differences $ 7.7 $ 26.1
- ------------------------------------------------------------------------------
Noncurrent:
Depreciation and other property related 42.0 45.5
Alternative minimum tax 198.5 184.1
Tax credit and net operating loss
carryforward 32.8 32.4
Unamortized investment tax credit 120.9 126.1
Misc. book/tax recognition differences 65.8 59.4
- ------------------------------------------------------------------------------
460.0 447.5
- ------------------------------------------------------------------------------
Total deferred tax assets $ 467.7 473.6
==============================================================================
Deferred tax liabilities:
- ------------------------------------------------------------------------------
Current:
Misc. book/tax recognition differences $ 11.3 $ 6.5
- ------------------------------------------------------------------------------
Noncurrent:
Depreciation and other property related 1,350.1 1,303.5
Deferred Clinton costs 58.2 60.1
Misc. book/tax recognition differences 99.7 103.0
- ------------------------------------------------------------------------------
1,508.0 1,466.6
- ------------------------------------------------------------------------------
Total deferred tax liabilities $ 1,519.3 $ 1,473.1
==============================================================================
</TABLE>
Income taxes included in the Consolidated Statements of Income consist of the
following components:
<TABLE>
Years Ended December 31,
- ------------------------------------------------------------------------------
<C> <C> <C> <C>
(Millions of dollars) 1996 1995 1994
- ------------------------------------------------------------------------------
Current taxes-
Included in operating
expenses and taxes $ 79.2 $ 98.6 $ 58.3
Included in other income
and deductions (14.5) (20.3) -
- ------------------------------------------------------------------------------
Total current taxes 64.7 78.3 58.3
- ------------------------------------------------------------------------------
Deferred taxes-
Included in operating
expenses and taxes
Property related differences 60.4 62.2 60.0
Alternative minimum tax 1.1 2.9 (50.4)
Gain/loss on reacquired debt (1.6) (1.9) -
Net operating loss
carryforward - (.2) 62.0
Enhanced retirement
and severance 2.6 (15.0) -
Misc. book/tax recognition
differences 6.1 (13.9) (7.8)
Internal Revenue Service
interest on tax issues - - 7.5
Included in other income
and deductions
Property related differences 10.2 9.7 10.0
Net operating loss
carryforward - - (17.4)
Misc. book/tax recognition
differences 1.7 2.2 1.9
- ------------------------------------------------------------------------------
Total deferred taxes 80.5 46.0 65.8
- -------------------------------------------------------------------------------
Deferred investment
tax credit-net
Included in operating
expenses and taxes (7.3) (6.9) (11.3)
Included in other income
and deductions - - (.3)
- ------------------------------------------------------------------------------
Total investment tax credit (7.3) (6.9) (11.6)
- ------------------------------------------------------------------------------
Total income taxes $ 137.9 $ 117.4 $ 112.5
==============================================================================
</TABLE>
The reconciliations of income tax expense to amounts computed by applying the
statutory tax rate to reported pretax results for the period are set below:
<TABLE>
Years Ended December 31,
- ------------------------------------------------------------------------------
<C> <C> <C> <C>
(Millions of dollars) 1996 1995 1994
- ------------------------------------------------------------------------------
Income tax expense at the
federal statutory tax rate $ 128.3 $ 105.0 $ 102.5
Increases/(decreases) in taxes
resulting from-
State taxes,
net of federal effect 13.7 14.0 13.8
Investment tax credit
amortization (7.3) (6.9) (7.8)
Depreciation not normalized 9.4 7.4 4.3
Interest expenses on preferred securities (6.9) (3.7) (.9)
Other-net .7 1.6 .6
- ------------------------------------------------------------------------------
Total income taxes $ 137.9 $ 117.4 $ 112.5
==============================================================================
</TABLE>
Combined federal and state effective income tax rates were 37.6%, 39.1% and
38.4% for the years 1996, 1995 and 1994, respectively.
IP is subject to the provisions of the Alternative Minimum Tax System
(AMT). As a result, IP has an AMT credit carryforward at December 31,
1996, of approximately $198.5 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 is currently auditing IP's consolidated federal
income tax returns for the years 1991 through 1993. At this time, the outcome
of the audit cannot be determined. However, the results of the audit are not
expected to have a material adverse 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 1996, 1995 and 1994 were $35 million, $41 million and
$52 million, respectively, including financing costs of $5 million, $7 million
and $7 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" of the "Notes to Consolidated
Financial Statements" 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, 1996 and 1995, current obligations under capital lease for
nuclear fuel are $36.9 million and $33.3 million, respectively.
Over the next five years estimated payments under capital leases are as
follows:
<TABLE>
- --------------------------------------------------
(Millions of dollars)
<C> <C>
- --------------------------------------------------
1997 $ 39.7
1998 28.5
1999 18.6
2000 11.6
2001 5.1
Thereafter 2.6
- -------------------------------------------------
106.1
Less: Interest 9.7
- -------------------------------------------------
Total $ 96.4
=================================================
</TABLE>
Note 8 - Long-Term Debt
<TABLE>
(Millions of dollars)
- -------------------------------------------------------------------------------
<C> <C> <C>
December 31, 1996 1995
First mortgage bonds-
5.85% series due 1996 $ - $ 40.0
61/2 %series due 1999 72.0 72.0
6.60% series due 2004 (Pollution Control Series A) 6.5 6.8
7.95% series due 2004 72.0 72.0
6% series due 2007 (Pollution Control Series B) 18.7 18.7
75/8% series due 2016 (Pollution Control Series F, G and H) 150.0 150.0
8.30% series due 2017 (Pollution Control Series I) 33.8 33.8
73/8% series due 2021 (Pollution Control Series J) 84.7 84.7
83/4% series due 2021 57.1 120.0
5.70% series due 2024 (Pollution Control Series K) 35.6 35.6
7.40% series due 2024 (Pollution Control Series L) 84.1 84.1
- ------------------------------------------------------------------------------
Total first mortgage bonds 614.5 717.7
- ------------------------------------------------------------------------------
New mortgage bonds-
61/8% series due 2000 40.0 40.0
5.625%series due 2000 110.0 110.0
61/2% series due 2003 100.0 100.0
63/4% series due 2005 70.0 70.0
8% series due 2023 229.0 235.0
71/2% series due 2025 177.0 200.0
Adjustable rate series due 2028 (Pollution Control
Series M, N and O) 111.8 111.8
- ------------------------------------------------------------------------------
Total new mortgage bonds 837.8 866.8
- ------------------------------------------------------------------------------
Total mortgage bonds 1,452.3 1,584.5
- ------------------------------------------------------------------------------
Medium-term notes, series A 78.5 100.0
Variable rate long-term debt due 2017 75.0 75.0
- ------------------------------------------------------------------------------
Total other long-term debt 153.5 175.0
- ------------------------------------------------------------------------------
1,605.8 1,759.5
Unamortized discount on debt (18.1) (20.3)
- ------------------------------------------------------------------------------
Total long-term debt excluding capital lease obligations 1,587.7 1,739.2
Obligations under capital leases 96.4 95.1
- ------------------------------------------------------------------------------
1,684.1 1,834.3
Long-term debt and lease obligations maturing within
one year (47.7) (95.0)
- -------------------------------------------------------------------------------
Total long-term debt $ 1,636.4 $ 1,739.3
===============================================================================
</TABLE>
In 1996, a total of $62.9 million of 83/4% First Mortgage Bonds due 2021 was
purchased at various times on the open market. In April 1996, $23.0 million
of 71/2% New Mortgage Bonds due 2025 was purchased on the open market. In
June 1996, $6.0 million of 8% New Mortgage Bonds due 2023 was purchased on
the open market.
In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At
December 31, 1996, the maturity dates on these notes ranged from 1997 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 3.0% to 3.3% at
December 31, 1996.
For the years 1997, 1998, 1999, 2000 and 2001, IP has long-term debt
maturities and cash sinking fund requirements in the aggregate of (in
millions) $10.8, $68.8, $72.8, $150.8 and $.8, respectively. These amounts
exclude capital lease requirements. See "Note 7 - Capital Leases" of the
"Notes to Consolidated Financial Statements." Certain supplemental indentures
to the First Mortgage require that IP make annual deposits, as a sinking and
property fund, in amounts not to exceed $1.8 million in each of the years
1997 through 2001. These amounts are subject to reduction and historically
have been met by pleding property additions, as permitted by the First
Mortgage.
At December 31, 1996, the aggregate total of unamortized debt expense and
unamortized loss on reacquired debt was approximately $105.3 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. IP anticipates that during 1997 the 1943 mortgage
will be amended to be consistent with the 1992 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, 1996, was approximately $1.5 billion.
Note 9 - Preferred Stock
<TABLE>
(Millions of dollars)
- ------------------------------------------------------------------------------
<C> <C> <C>
December 31, 1996 1995
Serial Preferred Stock, cumulative,
$50 par value-
Authorized 5,000,000 shares; 1,221,700 and 1,356,800
shares outstanding, respectively
Series Shares 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
7.75% 241,700 50.00 after July 1, 2003 12.1 18.8
Net premium on preferred stock .2 .2
- -----------------------------------------------------------------------------
Total Preferred Stock, $50 par value $ 61.3 $ 68.0
- -----------------------------------------------------------------------------
Serial Preferred Stock, cumulative,
without par value-
Authorized 5,000,000 shares; 698,200 and 1,152,550
shares outstanding, respectively
Series Shares Redemption Prices
A 698,200 $ 50.00 $ 34.9 $ 37.1
B - - - 20.5
- -----------------------------------------------------------------------------
Total Preferred Stock, without par value $ 34.9 $ 57.6
- -----------------------------------------------------------------------------
Preference Stock, cumulative,
without par value-
Authorized 5,000,000 shares; none outstanding - -
- ------------------------------------------------------------------------------
Total Serial Preferred Stock, Preference Stock and
Preferred Securities $ 96.2 $ 125.6
==============================================================================
Company Obligated Mandatorily Redeemable Preferred
Securities of:
Illinois Power Capital, L.P.
Monthly Income Preferred Securities, cumulative,
$25 liquidation preference-
3,880,000 shares authorized and outstanding $ 97.0 $ 97.0
Illinois Power Financing I
Trust Originated Preferred Securities, cumulative,
$25 liquidation preference-
4,000,000 shares authorized and outstanding 100.0 -
- -----------------------------------------------------------------------------
Total Mandatorily Redeemable Preferred
Stock $ 197.0 $ 97.0
=============================================================================
Serial Preferred Stock ($50 par value) is redeemable at the option of IP in
whole or in part at any time with 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 1996 and 1995 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.
Illinois Power Capital, L.P. is a limited partnership in which IP serves as a
general partner. Illinois Power Capital issued (1994) $97 million of tax-
advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after-
tax rate) with a liquidation preference of $25 per share. IP consolidates the
accounts of Illinois Power Capital.
Illinois Power Financing I (IPFI) is a statutory business trust in which IP
serves as sponsor. IPFI issued $100 million of trust originated preferred
securities (TOPrS) at 8% (4.8% after-tax rate) in January 1996. IPFI issued
the TOPrS and invested the proceeds in an equivalent amount of IP subordinated
debentures due in 2045. IP used the proceeds to repay short-term indebtedness
on varying dates on or before March 1, 1996. IP incurred the indebtedness in
December 1995, to redeem $95.3 million (principal value) of higher-cost
outstanding preferred stock of IP.
On April 15, 1996, IP issued a notice of redemption to all holders of its
Adjustable Rate Series B Preferred Stock. All 410,250 shares outstanding were
redeemed on May 15, 1996, at the redemption price of $50 per share.
In 1996, IP redeemed $6.7 million of the 7.75% Serial Preferred Stock, $2.2
million of its Series A Serial Preferred Stock and the remaining $20.5 million
of its Series B Serial Preferred Stock. The carrying amount was $.7 million
under consideration paid and was recorded in equity and included in Net
income applicable to common stock.
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.
In 1996, IP repurchased 714,811 shares of its common stock from Illinova.
In 1995, IP repurchased 2,696,086 shares of its common stock from Illinova.
Under Illinois law, such shares may be held as treasury stock and treated as
authorized but unissued, or may be cancelled by resolution of the Board of
Directors. IP holds the common stock as treasury stock and deducts it from
common equity at the cost of the shares.
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,
1996.
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 common stock were designated
for issuance at December 31, 1996.
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, which 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 with the
formation of Illinova 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, 1996, 69,367 common shares were allocated to
salaried employees and 62,975 shares to employees covered under the Collective
Bargaining Agreement through the matching contribution feature of the ESOP
arrangement. Under the incentive compensation feature, 83,300 common shares
were allocated to employees for the year ended December 31, 1996. During 1996,
IP contributed $5.2 million to the ESOP and using the shares allocated method,
recognized $1.6 million of expense. Interest paid on the ESOP debt was
approximately $1.6 million in 1996 and dividends used for debt services were
approximately $2.2 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:
</TABLE>
<TABLE>
- --------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Year Options Grant Year Expiration Options
Granted Granted Price Exercisable Date Exercised
- ---------------------------------------------------------------------------
1992 62,000 $ 23 3/8 1996 6/10/01 38,000
1993 73,500 $ 24 1/4 1997 6/9/02 -
1994 82,650 $ 20 7/8 1997 6/8/03 -
1995 69,300 $ 24 7/8 1998 6/14/04 -
1996 80,500 $ 29 3/4 1999 2/7/05 -
============================================================================
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), effective for fiscal years beginning after December
15, 1995. If the accounting provisions of FAS 123 had been adopted as of the
beginning of 1996, the effect on 1996 net earnings would have been immaterial.
Further, based on current and anticipated use of stock options, it is not
envisioned that the impact of FAS 123 accounting provisions would be material
in any future period. IP continues to account for its stock options in
accordance with Accounting Principle Board Opinion No. 25.
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, 1996. 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
Illinova offers certain benefit plans to the employees of all of its
subsidiaries. IP is sponsor and administrator of all the benefit plans.
IP is reimbursed by the other Illinova subsidiaries for their shares of the
expenses of the benefit plans. The discussion and values below represent the
plans in total, including the amounts attributable to the other subsidiaries.
IP sponsors 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 1996, 1995 and
1994, include the following components:
<TABLE>
Years Ended December 31,
- ------------------------------------------------------------------------------
<C> <C> <C> <C>
(Millions of Dollars) 1996 1995 1994
- ------------------------------------------------------------------------------
Service cost on benefits
earned during the year $ 10.2 $ 10.4 $ 11.9
Interest cost on projected
benefit obligation 26.8 23.6 21.8
Return on plan assets (42.2) (58.3) (7.9)
Net amortization and deferral 9.4 29.6 (19.2)
Effect of enhanced retirement
program - 15.7 -
- --------------------------------------------------------------------------------
Net periodic pension cost $ 4.2 $ 21.0 $ 6.6
================================================================================
</TABLE>
The estimated funded status of the plans at December 31, 1996 and 1995, using
discount rates of 8.0% and 7.75%, respectively, and future compensation
increases of 4.5% was as follows:
<TABLE>
Balances as of December 31,
- -----------------------------------------------------------------------------
<C> <C> <C>
(Millions of Dollars) 1996 1995
- -----------------------------------------------------------------------------
Acturial present value of:
Vested benefit obligation $ (291.7) $ (276.8)
- -----------------------------------------------------------------------------
Accumulated benefit obligation (312.5) (297.5)
- -----------------------------------------------------------------------------
Projected benefit obligation (361.5) (343.6)
Plan assets at fair value 357.2 331.5
- -----------------------------------------------------------------------------
Funded Status (4.3) (12.1)
Unrecognized net (gain)/loss (13.8) (5.1)
Unrecognized net asset at transition (30.3) (34.6)
Unrecognized prior service cost 19.3 21.2
- -----------------------------------------------------------------------------
Accrued pension cost included in
accounts payable $ (29.1) $ (30.6)
=============================================================================
</TABLE>
The plan's assets consist primarily of common stocks, fixed income securities,
cash equivalents and real estate. The acturial present value of accumulated
plan benefits at January 1, 1996 and 1995, were $361 million and $258 million,
respectively, including vested benefits of $337 million and $239 million,
respectively. The pension cost for 1996, 1995 and 1994 was calculated using
a discount rate of 7.75%, 8.75% and 7.75%, respectively; future compensation
increases of 4.5% for 1996, 1995 and 1994; and a return on assets of 9.5% for
1996, 9.0% for 1995 and 1994. The unrecognized net asset at transition and
unrecognized prior service cost 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 made cash contributions of $6 million in 1996,
$2 million and $10 million in 1994.
IP sponsors health care and life insurance benefits for certain retired
employees, including their eligible dependents, who attain specified ages
and years of service under the terms of the defined-benefit plans. Post-
retirement benefits, a portion of which have been capitalized, for 1996 and
1995 included the following components:
<TABLE>
Years Ended December 31,
- ----------------------------------------------------------------------------
<C> <C> <C>
(Millions of Dollars) 1996 1995
- ----------------------------------------------------------------------------
Service cost on benefits earned
during the year $ 2.2 $ 2.1
Interest cost on projected
benefit obligation 6.1 5.5
Return on plan assets (5.9) (4.7)
Amortization of unrecognized
transition obligation 6.4 6.3
Effect of enhanced retirement program - 9.5
- ---------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 8.8 $ 18.7
===========================================================================
</TABLE>
The net periodic postretirement benefit cost in the preceding table includes
amortization of the previously unrecognized accumulated postretirement benefit
plan obligation, which was $44.2 million and $52.3 million as of January 1,
1996 and 1995, 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. The plan assets consist of
common stocks and fixed income securities at December 31, 1996 and 1995. The
estimated funded status of the plans at December 31, 1996 and 1995, using
weighted average discount rates of 8.0% and 7.75%, respectively, and a return
on assets of 9.0% was as follows:
<TABLE>
Balances as of December 31,
- ----------------------------------------------------------------------------
<C> <C> <C>
(Millions of Dollars) 1996 1995
- -----------------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees $ (49.6) $ (54.5)
Other fully eligible participants (3.5) (3.0)
Other active plan participants (28.6) (27.5)
- -----------------------------------------------------------------------------
Total benefit obligation (81.7) (85.0)
Plan assets at fair value 34.4 25.6
- -----------------------------------------------------------------------------
Funded status (47.3) (59.4)
Unrecognized transition obligation 41.5 44.2
Unrecognized net (gain)/loss (9.2) -
- -----------------------------------------------------------------------------
Accrued postretirement benefit cost
included in accounts payable $ (15.0) $ (15.2)
=============================================================================
</TABLE>
The pre-65 health-care-cost trend rate decreases from 7.3% to 5.5% over nine
years and the post-65 health-care-cost trend rate is level at 1.5%. A 1%
increase in each future year's assumed health-care-cost trend rates increases
the service and interest cost form $8.3 million to $9.3 million and the
accumulated postretirement benefit obligation from $81.7 million to $89.6
million.
Enhanced Retirement
In December 1994, IP announced plans for voluntary enhanced retirement
programs. During the fourth quarter of 1995, enhanced retirement and
severance reduced the number of employees by 492 and 235, respectively. The
combined enhanced retirement and severance programs generated pre-tax charges
of approximately $26 million and $12 million, respectively, against fourth
quarter 1995 earnings.
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>
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C>
1996 1995 1994
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Total Total
Electric Gas Corporation Electric Gas Corporation Electric Gas Corporation
- -------------------------------------------------------------------------------------------------------------------------------
Operation information -
Operating revenues $ 1,340.5 $ 348.2 $ 1,688.7 $ 1,368.9 $ 272.5 1,641.4 $ 1,287.5 $ 302.0 $ 1,589.5
Operating expenses,
excluding provision for
income taxes 886.2 300.5 1,186.7 946.2 245.0 1,191.2 876.1 274.7 1,150.8
- -------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income 454.3 47.7 502.0 422.7 27.5 450.2 411.4 27.3 438.7
Allowance for funds used
during construction (AFUDC) 6.3 .2 6.5 5.5 .5 6.0 8.9 .4 9.3
- -------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income,
including AFUDC $ 460.6 $ 47.9 $ 508.5 $ 428.2 $28.0 $ 456.2 $ 420.3 $ 27.7 $ 448.0
- ----------------------------------------------- ------------------ -------------------
Other deductions, net 9.0 8.1 11.3
Interest charges 133.0 148.0 143.9
Provision for income taxes 137.9 117.4 112.5
- ------------------------------------------------------------------------------------------------------------------------------
Net income 228.6 182.7 180.3
Preferred dividend requirements (22.3) (23.7) (24.9)
Carrying value over (under)
consideration paid for redeemed
preferred stock (.7) (3.5) 6.4
- -------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 205.6 $ 155.5 $ 161.8
===============================================================================================================================
Other information -
Depreciation $ 164.0 $ 22.5 $ 186.5 $ 161.4 $ 21.6 $ 183.0 $ 156.1 $ 21.1 $ 177.2
- -------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 164.0 $ 23.3 $ 187.3 $ 185.7 $ 23.6 $ 209.3 $ 173.1 $ 20.6 $ 193.7
- -------------------------------------------------------------------------------------------------------------------------------
Investment information -
Identifiable assets* $ 4,577.1 $ 481.9 $ 5,059.0 $4,580.4 $ 446.3 $ 5,026.7 $ 4,589.0 $ 442.6 5,031.6
------------------------------------------ --------------------- --------------------
Nonutility plant and
other investments 14.3 16.2 15.2
Assets utilized for
overall operations 495.2 524.3 549.0
- -------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 5,568.5 $ 5,567.2 $5,595.8
===============================================================================================================================
*Utility plant, nuclear fuel, materials and supplies, deferred Clinton costs
and prepaid and deferred energy costs.
Note 13 - Fair Value of Financial Instruments
</TABLE>
<TABLE>
<C> <C>
1996 1995
- ---------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Carrying Fair Carrying Fair
(Millions of dollars) Value Value Value Value
- ----------------------------------------------------------------------------
Nuclear decommissioning
trust funds $ 41.4 $ 41.4 $ 32.7 $ 32.7
Cash and cash equivalents 12.5 12.5 4.3 4.3
Mandatorily redeemable
preferred stock 197.0 199.3 97.0 108.2
Long-term debt 1,587.7 1,629.3 1,739.2 1,855.8
Notes payable 310.0 310.0 359.6 359.6
============================================================================
</TABLE>
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)
<TABLE>
(Millions of dollars except per common share amounts)
- -----------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
First Quarter Second Quarter Third Quarter Fourth Quarter
1996 1996 1996 1996
- -----------------------------------------------------------------------------------------------------------------
Operating revenues $ 446.7 $ 365.7 $ 458.4 $ 417.9
Operating income 88.1 74.9 133.3 65.1
Net income 49.1 48.7 100.6 30.2
Net income applicable to common stock 43.5 42.5 94.8 24.8
Cash dividends declared on common stock 21.2 21.2 21.2 23.5
Cash dividends paid on common stock 21.2 21.2 21.2 21.2
First Quarter Second Quarter Third Quarter Fourth Quarter
1995 1995 1995 1995
- ----------------------------------------------------------------------------------------------------------------
Operating revenues $ 425.5 $ 344.3 $ 486.1 $ 385.5
Operating income 78.3 67.1 137.2 41.8
Net income 41.7 34.5 98.2 8.3
Net income (loss) applicable to common stock 35.3 35.1 95.9 (10.8)
Cash dividends declared on common stock 18.9 18.9 18.9 21.2
Cash dividends paid on common stock 18.9 18.6 18.9 18.9
The 1995 fourth quarter earnings include $(23) million for the enhanced
retirement and severance program and $(3.5) million for the carrying amount
under consideration paid for redeemed preferred stock.
</TABLE>
<TABLE>
ILLINOIS POWER COMPANY
SELECTED CONSOLIDATED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
(Millions of dollars)
1996 1995 1994 1993 1992 1986
- ---------------------------------------------------------------------------------------------------------------------------
Operating revenues
Electric $ 1,202.9 $ 1,252.6 $ 1,177.5 $ 1,135.6 $ 1,117.9 $ 814.1
Electric interchange 137.6 116.3 110.0 130.8 73.0 76.6
Gas 348.2 272.5 302.0 314.8 288.6 369.7
- ---------------------------------------------------------------------------------------------------------------------------
Total operating revenues $ 1,688.7 $ 1,641.4 $ 1,589.5 $ 1,581.2 $ 1,479.5 $ 1,260.4
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 228.6 182.7 180.3 (56.1) 122.1 292.7
Effective income tax rate 37.6% 39.1% 38.4% (72.4%) 39.4% 20.5%
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 205.6 151.5 161.8 (82.2) 93.2 256.5
Cash dividends declared on common stock 87.1 77.9 49.1 30.2 105.9 171.1
Cash dividends paid on common stock 84.8 75.3 60.5 60.5 60.5 168.6
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,568.5 5,567.2 5,595.8 5,445.1 5,331.7 5,622.8*
- -----------------------------------------------------------------------------------------------------------------------------
Capitalization
Common stock equity $ 1,576.1 $1,478.1 $1,466.0 $1,342.8 $ 1,454.0 $1,691.9
Preferred stock 96.2 125.6 224.7 303.7 303.1 315.2
Mandatorily redeemable preferred stock 197.0 97.0 133.0 48.0 100.0 196.0
Long-term debt 1,636.4 1,739.3 1,946.1 1,926.3 2,017.4 2,241.0*
- -----------------------------------------------------------------------------------------------------------------------------
Total capitalization $ 3,505.7 $3,440.0 $3,769.8 $3,620.8 $ 3,874.5 $4,444.1*
- -----------------------------------------------------------------------------------------------------------------------------
Embedded cost of long-term debt 8.0% 7.9% 7.6% 7.5% 8.3% 9.1%
- ------------------------------------------------------------------------------------------------------------------------------
Retained earnings (deficit) $ 245.9 129.6 51.1 (71.0) 41.0 481.2
- ------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 187.3 $ 209.3 $ 193.7 $ 277.7 $ 244.4 $ 710.1
Cash flows from operations $ 443.4 473.7 280.2 396.6 374.5 212.3
AFUDC as a percent of earnings applicable to common stock 3.2% 3.9% 5.7% N/A 5.6% 85.5%
Return on average common equity 12.0% 9.9% 11.4% (6.0)% 6.5% 15.9%
Ratio of earnings to fixed charges 3.40 2.77 2.73 .80 2.02 2.57
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Restated for the effect of capitalized nuclear fuel lease.
<TABLE>
ILLINOIS POWER COMPANY
SELECTED STATISTICS
<C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1986
- ------------------------------------------------------------------------------------------------------------
Electric Sales in KWH (Millions)
Residential 4,782 4,754 4,537 4,546 4,138 4,198
Commercial 3,894 3,804 3,517 3,246 3,055 2,821
Industrial 8,493 8,670 8,685 8,120 8,083 7,341
Other 367 367 536 337 466 875
- -------------------------------------------------------------------------------------------------------------
Sales to ultimate consumers 17,536 17,595 17,275 16,249 15,742 15,235
Interchange 5,454 4,444 4,837 6,015 2,807 2,726
Wheeling 928 642 622 569 402 -
- -------------------------------------------------------------------------------------------------------------
Total electric sales 23,918 22,681 22,734 22,833 18,951 17,961
- -------------------------------------------------------------------------------------------------------------
Electric Revenues (Millions)
Residential $ 483 $ 500 $ 471 $ 463 $ 435 $ 293
Commercial 318 321 295 269 263 187
Industrial 360 392 378 360 381 290
Other 38 37 30 40 38 44
- ------------------------------------------------------------------------------------------------------------
Revenues from ultimate consumers 1,199 1,250 1,174 1,132 1,117 814
Interchange 138 116 110 131 73 77
Wheeling 4 3 3 3 1 -
- ------------------------------------------------------------------------------------------------------------
Total electric revenues $ 1,341 $ 1,369 $ 1,287 $ 1,266 $ 1,191 891
- ------------------------------------------------------------------------------------------------------------
Gas Sales in Therms (Millions)
Residential 427 356 359 371 339 357
Commercial 177 144 144 148 138 161
Industrial 99 88 81 78 136 198
- ------------------------------------------------------------------------------------------------------------
Sales to ultimate consumers 703 588 584 597 613 716
Transportation of customer-owned gas 251 273 262 229 204 253
- ------------------------------------------------------------------------------------------------------------
Total gas sold and transported 954 861 846 826 817 969
Interdepartmental sales 9 21 5 7 12 1
- -------------------------------------------------------------------------------------------------------------
Total gas delivered 963 882 851 833 829 970
- -------------------------------------------------------------------------------------------------------------
Gas Revenues (Millions)
Residential $ 216 $ 173 $ 192 $ 200 $ 181 $ 206
Commercial 79 60 66 68 61 78
Industrial 40 24 31 34 37 73
- -------------------------------------------------------------------------------------------------------------
Revenues to ultimate consumers 335 257 289 302 279 357
Transportation of customer-owned gas 7 8 9 8 7 11
Miscellaneous 6 7 4 5 3 2
- ------------------------------------------------------------------------------------------------------------
Total gas revenues $ 348 $ 272 $ 302 $ 315 $ 289 $ 370
- ------------------------------------------------------------------------------------------------------------
System peak demand (native load) in kw (thousands) 3,492 3,667 3,395 3,415 3,109 3,176
Firm peak demand (native load) in kw (thousands) 3,381 3,576 3,232 3,254 2,925 2,949
Net generating capability in kw (thousands) 4,148 3,862 4,121 4,045 4,052 3,397
- -------------------------------------------------------------------------------------------------------------
Electric customers (end of year) 549,957 529,966 553,869 554,270 549,391 540,595
Gas customers (end of year) 389,223 374,299 388,170 394,379 386,261 383,201
Employees (end of year) 3,635 3,559 4,350 4,540 4,624 4,593
- ------------------------------------------------------------------------------------------------------------
Illinois Power 500 South 27th Street, Decatur, Illinois 62525
http://www.illinova.com
</TABLE>
